FILED: NEW YORK COUNTY CLERK 05/10/2019 02:43 PM
`NYSCEF DOC. NO. 1
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`INDEX NO. 652836/2019
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`RECEIVED NYSCEF: 05/10/2019
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`Index No.
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`SUMMONS
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`SUPREME COURT OF NEW YORK
`COUNTY OF NEW YORK
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`LAMORNA INVESTMENTS LIMITED S.A.
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`Plaintiff,
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`-against-
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`MG CAPITAL MANAGEMENT
`RESIDENTIAL FUND III L.P., MG CAPITAL
`MANAGEMENT, L.P., ECAM III, LLC, MG
`GP III, L.P., and ERIC MALLEY,
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`Defendants.
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`---------------------------------------------------------X
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`TO THE ABOVE-NAMED DEFENDANTS:
`YOU ARE HEREBY SUMMONED to answer the complaint in this action and to
`serve a copy of your answer on the plaintiff’s attorneys within 20 days after the service of this
`summons, exclusive of the day of service (or within 30 days after the service is complete if the
`summons is not personally delivered to you within the State of New York); and in case of your
`failure to appear or answer, judgment will be taken against you by default for the relief demanded
`herein.
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`The plaintiff designates New York County as the place of trial based on the residence of
`the defendants pursuant to CPLR § 503.
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`Dated: New York, New York
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`May 10, 2019
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`MICHELMAN & ROBINSON, LLP
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`By: /s/ Jon Schuyler Brooks
` Jon Schuyler Brooks
` Brooke K. Haley
`800 Third Avenue, 24th Floor
` New York, New York 10022
` (212) 730-7700
` jbrooks@mrllp.com
` bhaley@mrllp.com
` Attorneys for Plaintiff
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`FILED: NEW YORK COUNTY CLERK 05/10/2019 02:43 PM
`NYSCEF DOC. NO. 1
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`INDEX NO. 652836/2019
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`RECEIVED NYSCEF: 05/10/2019
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`SUPREME COURT OF NEW YORK
`COUNTY OF NEW YORK
`---------------------------------------------------------X
`LAMORNA INVESTMENTS LIMITED S.A.
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`Plaintiff,
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`-against-
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`MG CAPITAL MANAGEMENT
`RESIDENTIAL FUND III L.P., MG CAPITAL
`MANAGEMENT, L.P., ECAM III, LLC, MG
`GP III, L.P., and ERIC MALLEY,
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`Defendants.
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`---------------------------------------------------------X
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`Index No.
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`COMPLAINT
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`Plaintiff Lamorna Investments Limited S.A. (“Lamorna” or “Plaintiff”), by and through its
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`undersigned counsel, Michelman & Robinson, LLP, brings this action against Defendants, MG
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`Capital Management Residential Fund III L.P (“Fund III”) and MG Capital Management, L.P.
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`(“MG Capital”), ECAM III, LLC (“ECAM III”), MG GP III, L.P. (“MG GP”) and Eric Malley
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`(“Malley,” and together with Fund, MG Capital, ECAM III, and MG GP, the “Defendants”) and
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`alleges the following:
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`PRELIMINARY STATEMENT
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`1.
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`In reliance on offering materials which touted Defendants’ history of above-market
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`performance and successful fundraising of substantial funds, Plaintiff invested $1,000,000 in Fund
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`III on or about October 25, 2015. In reality, Defendants’ storied “history” was an intentionally
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`fraudulent and manufactured work of absolute fiction.
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`2.
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`Lying to Lamorna to induce it to invest in Fund III is just the first thread in
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`Defendants’ spiderweb of deception. In a desperate attempt to conceal their longtime fraud and
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`nefarious conduct, Defendants have consistently misrepresented the performance of Fund III,
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`FILED: NEW YORK COUNTY CLERK 05/10/2019 02:43 PM
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`INDEX NO. 652836/2019
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`failed to make promised distributions, and denied Lamorna access to Fund III information to which
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`Lamorna is entitled. Despite Lamorna’s voiced concerns regarding the validity and performance
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`of Fund III and its management, Defendants continue to hold Lamorna’s investment - induced by
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`fraud - hostage in the failing Fund III.
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`3.
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`As set forth herein, Defendants fraudulently induced Lamorna to execute the
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`subscription agreement based upon false statements in Defendants’ offering materials, engaged in
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`other fraudulent conduct, and have been unjustly enriched at Plaintiff’s expense. As a direct result
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`of Defendants’ malfeasance, Lamorna has suffered, and will continue to suffer damages absent
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`rescission of the Subscription Agreement.
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`JURISDICTION AND VENUE
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`4.
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`Jurisdiction is proper herein pursuant to CPLR §§ 301 and 302, and venue is proper
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`pursuant to CPLR § 503.
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`PARTIES
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`5.
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`Plaintiff Lamorna is a Panamanian limited liability company with its principal place
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`of business located in Panama City, Panama.
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`6.
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`Defendant Fund III is a Delaware limited partnership that does business in New
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`York, with its principal place of business located at 405 Park Avenue, Suite 500, New York, New
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`York.
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`7.
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`Defendant MG Capital is a Delaware limited partnership that serves as the
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`investment manager and promoter for all of the MG Capital funds, including Fund III. MG Capital
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`does business in New York, with its principal place of business located at 405 Park Avenue, Suite
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`500, New York, New York.
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`FILED: NEW YORK COUNTY CLERK 05/10/2019 02:43 PM
`NYSCEF DOC. NO. 1
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`INDEX NO. 652836/2019
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`RECEIVED NYSCEF: 05/10/2019
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`8.
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`Defendant MG GP is a Delaware limited partnership that does business in New
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`York, with its principal place of business located at 405 Park Avenue, Suite 500, New York, New
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`York. MG GP serves as the general partner for Fund III.
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`9.
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`Defendant ECAM III is a Delaware limited liability company that serves as the
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`general partner of both MG Capital and MG GP. Upon information and belief, ECAM III does
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`business in New York, with its principal place of business located at 405 Park Avenue, Suite 500,
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`New York, New York.
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`10.
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`Defendant, Eric Malley, is a resident of New York and is president and founder of
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`MG Capital Management L.P. and managing member of ECAM III.
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`FACTUAL BACKGROUND
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`11.
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`Prior to its investment in Fund III, MG Capital provided Lamorna with, among
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`other documents: (1) a private placement memorandum prepared by MG Capital (“PPM”); (2) a
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`subscription agreement by and among Fund III, MG GP, and Lamorna (“Subscription
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`Agreement”); (3) a firm profile (“Firm Profile”); and (4) an investor presentation (“Investor
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`Presentation”) (collectively the “Offering Materials”), upon each of which Lamorna reasonably
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`relied in deciding to make its investment in Fund III.
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`12.
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`Based upon explicit representations in the Offering Materials, Dr. Ravi Mehrotra,
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`on behalf of Lamorna, executed the Subscription Agreement on or about August 19, 2015.
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`Lamorna wired its $1,000,00 investment to Fund III on or about October 25, 2015.
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`13.
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`On behalf of Fund III, the Subscription Agreement was executed by Malley, as
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`managing member of ECAM III, the general partner of MG GP, the general partner of Fund III.
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`Malley also executed the Subscription Agreement on behalf of MG GP, in his capacity as
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`managing member of ECAM III, general partner of MG GP.
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`FILED: NEW YORK COUNTY CLERK 05/10/2019 02:43 PM
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`RECEIVED NYSCEF: 05/10/2019
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`14.
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` Plaintiff’s investment in Fund III and its execution of the Subscription Agreement
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`were made in reliance upon MG Capital’s claimed history of above-market performance and
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`successful fundraising, as reflected by the historical performance of Fund I and Fund II, which
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`served as the basis for the representations made in the Offering Materials.
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`15.
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`Since Lamorna’s investment in Fund III, a number of events have occurred that
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`raised concerns about the quality and legitimacy of Fund III, and Defendants’ related ventures. In
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`addition, Lamorna has become aware that certain representations in the Offering Materials, upon
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`which Lamorna relied in making its investment in Fund III, were false.
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`16.
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`Critical language relating Defendants’ fundraising experience is found in the PPM,
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`which discusses the investment manager team and its experience. With respect to the experience
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`of Malley, the managing member of ECAM III, LLC, which is the general partner of MG Capital
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`and MG GP (the general partner of MG Capital), the PPM expressly represented that Malley and
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`MG Capital had experience in forming investment entities (Fund I and Fund II) and successfully
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`promoting defined capital raises ($350 million during a 12-month subscription period for Fund I
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`and $55 million following a 30-day subscription period for Fund II). Similarly, the Investor
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`Presentation relied on the same intentionally misrepresentative information regarding the previous
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`performance of Fund I and Fund II, as well as Malley’s and MG Capital’s investment experience.
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`In addition, the Firm Profile fraudulently induced Lamorna to rely on fabricated annual return on
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`investment (“ROI”) data for both Fund I and Fund II.
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`17.
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`18.
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`These representations were false.
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`Plaintiff believes the true facts to be as follows:
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`a. There is no registration in Delaware for MG Capital Fund I;
`b. No investment entity was created in advance of the alleged fundraising for Fund I;
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`INDEX NO. 652836/2019
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`RECEIVED NYSCEF: 05/10/2019
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`c. No actual fundraising was performed for Fund I;
`d. There is no registration in Delaware for MG Capital Fund II; and
`e. MG Capital had no fundraising experience and no fundraising team for Fund I..
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`19.
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`Upon information and belief, rather than being a defined fund that commenced
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`fundraising in 2007, Fund I was, at best, some type of aggregation of existing clients and their real
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`estate investments that Malley or his affiliates were managing on behalf of the property owners.
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`Thus, contrary to the representations in the Offering Materials, nothing about Fund I demonstrated
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`MG Capital's ability to raise $525 million in new capital, which was the stated goal of Fund III.
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`And contrary to representations in the Offering Materials, nothing about Fund I demonstrated MG
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`Capital's ability to start an investment fund from ground zero, using only investor capital to
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`purchase real estate assets and generate sufficient rent revenue to generate positive income for the
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`Fund III limited partners.
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`20.
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`Defendants’ projected capital raise of $525 million for Fund III was a manufactured
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`number designed to empower Malley to claim (and to fraudulently induce Lamorna to rely on the
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`claim) he raised $1 billion in total fundraising between his alleged prior Funds and Fund III.
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`However, Fund III did not even come close to raising $525 million.
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`21.
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`Defendants also fraudulently misrepresented to Lamorna that Fund III would make
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`annual distributions of rental proceeds and would provide access to robust financial accounting.
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`Neither representation was true at the time it was made, or thereafter.
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`22.
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`In fact, Fund III has failed to produce audited financial statements at the end of each
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`fiscal year for any of 2014, 2015, or 2016, and has completely failed to provide quarterly unaudited
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`financial statements for any year.
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`23.
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`In addition, Fund III has never made rental proceeds distributions to its limited
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`partners, which at odds with Fund III’s objectives and the anticipated breakdown of performance
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`relied upon by Lamorna as set forth in Defendants’ Offering Materials.
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`24.
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`During a January 2018 performance call conducted by Malley, Malley reported to
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`the limited partners there would be no rental proceed distributions for 2017 because of an increase
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`of professional services costs.
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`25.
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`However, the limited audited financial reports made accessible to Lamorna reflect
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`dramatic decreases in revenue despite significant increases in capital investment. These financials
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`demonstrate the representations made by the Fund III general partner during the Performance Call
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`had been entirely false. While Malley had blamed the inability to distribute rent revenue on
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`increases in professional fees, the fees were actually lower in 2016 than 2017.
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`26.
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`Notwithstanding more than four years of operation, Fund III claims it is unable to
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`make any rental proceeds distributions because expenses are largely outstripping revenues. Unless
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`there is some type of unreported underutilization issue relating to the leasing of portfolio real
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`estate, this pattern of expenses greatly exceeding rent revenue was likely foreseeable and should
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`have been (but was not) disclosed in the Offering Materials.
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`27.
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`This performance cannot be reconciled with MG Capital’s representations in the
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`Offering Materials regarding its demonstrated ability to support annual distributions from rental
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`revenue.  
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`28.
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`The tandem failure to provide the required annual audits and the required unaudited
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`quarterly reports has consistently deprived Lamorna of the ability to monitor the (increasingly
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`poor) performance of its investment and to assess the otherwise unsubstantiated claim that
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`expenses are increasing and substantially exceed rent revenue.
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`INDEX NO. 652836/2019
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`RECEIVED NYSCEF: 05/10/2019
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`29.
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`On March 28, 2018, Fund III presented the limited partners with a Rollover
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`Transaction Letter (“RTL”) describing certain details of a “proposed liquidity transaction.” As
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`stated in the RTL, the Rollover Transaction was intended to “provide the Limited Partners with
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`cash liquidity and the opportunity to roll over their Fund III net capital commitments into Fund IV
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`….”
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`30.
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`The essential elements of the Feeder Fund structure proposed in the RTL were that
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`Fund III limited partners would receive distributions of their unrealized gains and notional interest
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`from money raised by Fund IV in exchange for locking up the capital contributions of Fund III
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`limited partners for two to three years longer than would be otherwise required under the terms of
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`Fund III (up to 2025) by exchanging their Fund III interest for interest in a Feeder Fund LP that
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`would then invest all of its assets in Fund IV.
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`31.
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`The Fund III limited partners were asked to vote either “yes” or “no” to the
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`proposed Rollover Transaction by no later than April 17, 2018, with 85% of the capital interests
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`of Fund III necessary to approve the transaction.
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`32.
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`The RTL further advised that any limited partner’s failure to vote would be deemed
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`a “yes” vote.
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`33.
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`On March 29, 2018, MG Capital emailed all limited partners and advised that the
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`General Partner would be conducting a Rollup Liquidity Transaction Call to review the transaction
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`and address questions from limited partners. The call was set for April 4, 2018.
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`34.
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`However, the ability for any limited partner to assess the actual economic value of
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`the proposed transaction was severely compromised and required the limited partners to waive
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`significant rights in order to pursue the Rollover opportunity. For example, while limited partners
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`were provided with a summary of the transaction, they were not provided with the Rollover Fund
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`limited partnership agreement and therefore were not provided with an ability to assess whether
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`there were any objectionable terms in the as-yet-undrafted Rollover Fund LPA, and valuation for
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`each limited partner’s respective interest in Fund III would not be available prior to the vote.
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`35.
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`In the days leading up the call, Malley apparently got cold feet at the prospect of
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`having to explain away all of the deficiencies in the RTL and the benefits to the general partner
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`and cancelled the call.
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`36.
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`First, on April 2, MG Capital emailed the limited partners and claimed that a
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`majority of the Fund III limited partners had requested a postponement of the call and represented
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`the call would be rescheduled to a later date.
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`37.
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`On April 9, MG Capital emailed the limited partners and claimed there was no need
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`for a call, because the General Partner had received only consent forms from limited partners and
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`no queries related to the Rollover Transaction.
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`38.
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`On April 10, 2018, Dr. Amer Al-Baho, agent of Lamorna, requested a telephone
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`call with Malley in order to discuss the Rollover Transaction and the performance of Fund III. In
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`response, Malley informed Dr. Al-Baho the call was postponed because no inquiries regarding the
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`opportunity for a liquidation event were received, but scheduled a telephone call for Friday, April
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`13, 2018.
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`39.
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`On or about April 12, 2018, Lamorna submitted its proxy voting against the
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`Rollover Transaction. Almost immediately upon receipt of Lamorna’s proxy, Malley attempted
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`to dissuade Lamorna’s negative vote.
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`40.
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`On April 13, 2018, Malley and Dr. Al-Baho discussed the Rollover Transaction by
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`telephone, with Malley representing to Dr. Al-Baho the payout Lamorna would receive if it
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`changed its voting proxy. Dr. Al-Baho then requested Malley send an email to that effect.
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`FILED: NEW YORK COUNTY CLERK 05/10/2019 02:43 PM
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`RECEIVED NYSCEF: 05/10/2019
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`However, Malley refused to do so on the fictional grounds that Fund III is regulated by the
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`Securities and Exchange Commission (“SEC”), which would not allow the conveyance of such
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`information. Malley further warned Dr. Al-Baho that Lamorna, out of 65 partners in Fund III,
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`was the only limited partner voting against the Rollover Transaction. This was false, and Malley
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`knew it to be false.
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`41.
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`On April 13, 2018, Lamorna advised Malley it would not be changing its proxy and
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`requested Malley make preparations for Lamorna to exit the Fund.
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`42.
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`The vote proceeded as scheduled.
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`43. Malley’s claim to Dr. Al-Baho that the Rollover Transaction had been almost
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`unanimously approved (save Lamorna’s negative vote) was difficult to reconcile with the next
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`communication Lamorna received from MG GP.
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`44.
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`Rather than truthfully reporting the proposal had been defeated, on April 18, 2018,
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`MG GP wrote the limited partners and stated:
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` “To date, we have received a significant number of responses from Limited
`Partners supporting the rollover transaction along the terms set out in the Rollover
`Transaction Letter. However, after careful consideration of the feedback received
`from Limited Partners both for and against the rollover transaction, we have
`decided not to proceed with the transaction at this time.
`MG remains committed to managing Fund III and maximizing returns for the
`Limited Partners. MG will seek opportunities to exit Fund III’s investments as its
`term continues and approaches its conclusion, including the potential for re-visiting
`the rollover transaction at a later date.”
`45.
`By this communication, MG GP (under Malley’s control) was attempting to
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`persuade the limited partners that notwithstanding significant support for the Rollover Transaction
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`it was electing to voluntarily withdraw the Rollover proposal. But the truth was that the proposal
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`had been defeated. Malley needed the support of at least 85% of the limited partnership interests
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`to sustain a yes vote, but over 25% of the limited partnership interests voted no.
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`46.
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`By claiming he had voluntarily withdrawn the Rollover Proposal, Malley was
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`preserving the option at a later date to try and bully individual limited partners to voting in favor
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`of the already defeated proposal, in contravention of the general partner’s duties to the Fund III
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`limited partners and in violation of applicable securities laws.
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`47.
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`After receiving MG GP’s communication regarding the Rollover Transaction, on
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`April 20, 2018, Lamorna, through Dr. Al-Baho, requested the results of the consent vote, in an
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`effort to promote honesty and transparency. Dr. Al-Baho further requested an explanation
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`regarding Malley’s representation the Fund was regulated by the SEC, and again requested that
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`Lamorna withdraw from Fund III.
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`48.
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`Rather than making any offer to provide the requested information, Fund III’s
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`counsel, Jeffrey Simes of Goodwin Proctor, LLC, sent a letter to Dr. Al-Baho on April 27, 2018,
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`advising him the only information to which limited partners of Fund III are entitled to, and will
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`receive, is limited to that information posted to the Fund’s investor portal. It comes as no surprise
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`the information Dr. Al-Baho requested, related to Fund III’s performance and the anticipated Fund
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`IV rollover payout, is not available on the investor portal.
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`49.
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`By email, dated May 17, 2018, Mr. Simes confirmed Lamorna’s suspicion that
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`Fund III is not an SEC-regulated entity, and there is no SEC restriction on information flow from
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`Fund III.
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`50.
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`In the following months, Lamorna reiterated its request to exit Fund III, to no avail.
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`Most recently, by letter, dated January 31, 2019, Lamorna reiterated its concern regarding
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`Lamorna’s non-performing and failed investment in MG Capital, as well as Defendants’
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`misrepresentations and violations.
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`51.
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`Rather than address Lamorna’s legitimate concerns, Fund III’s counsel, Quinn
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`Emanuel Urquhart & Sullivan, expressed it was “perplexed” by Lamorna’s demand and this time
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`threatened legal action against Lamorna.
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`52.
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`On March 21, 2019, Michelman & Robinson, LLP, as counsel for Lamorna, sent a
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`letter to Malley requesting documents and information related to Fund III’s performance and real
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`estate holdings.
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`53.
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`Counsel for MG Capital responded that all required financial statements, reports,
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`and other related information to which Lamorna is entitled, is available on the investor portal,
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`however,not surprisingly, Lamorna’s requested information is not available on the investor portal.
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`54.
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`Fund III has generated no net revenue and has refused to provide information that
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`would allow Lamorna to ascertain whether it will ever generate net revenue. Instead, Defendants
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`have advocated a scheme that would result in limited disbursements using new investor capital
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`from Fund IV, while locking up Lamorna’s Fund III’s capital contributions for longer than the
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`investment period represented to Plaintiff. The failure to generate any revenue of its own coupled
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`with a scheme that uses new investor money to delay demonstrating the actual performance of the
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`Fund raises serious concerns about the legitimacy of Fund III’s operations.
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`AS AND FOR A FIRST CAUSE OF ACTION
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`(Fraud)
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`55.
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`Plaintiff repeats and realleges the allegations set forth in paragraphs 1 through 54,
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`as if fully set forth herein.
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`56.
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`The Subscription Agreement governs Lamorna’s acquisition of its limited
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`partnership interest in Fund III.
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`57.
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`As set forth above, Defendants made fraudulent misrepresentations in Offering
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`Materials in order to induce Plaintiff to acquire a limited partnership interest in Fund III in the
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`amount of $1,000,000.
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`58.
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`For example, the Offering Materials misrepresent that (1) Fund I was an organized
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`fund (where the true facts are that no entity was created to hold the investments of Fund I in 2007)
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`and (2) Fund I and Fund II were subscribed investment funds with defined subscription periods
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`and capital raises (where the true facts are that no fundraising took place in support of Fund I).
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`59.
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`Defendants further mispresented the Funds’ historical performance, thereby
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`inducing Plaintiff to reasonably believe it would receive annual distributions, as well as access to
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`robust financial reporting.
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`60.
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`Upon information and belief, Fund I was not a real fund, no fundraising actually
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`occurred with respect to Fund I and Fund II, and Funds I and II pursued an undisclosed investment
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`strategy that was materially different from the strategy pursued in Fund III.
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`61.
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`Such material misrepresentations and material omissions of fact were false and
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`known to be false by Defendants.
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`62.
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`Defendants made these material misrepresentations and material omissions with the
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`intent of inducing Lamorna’s reliance.
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`63.
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`Plaintiff’s execution of the Subscription Agreement was made in reliance upon MG
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`Capital’s claimed history of above-market performance and successful fundraising.
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`64.
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`Lamorna reasonably relied upon the knowingly false misrepresentations in the
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`Offering Materials to its detriment by investing in a Fund in which Lamorna would not have
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`invested had it known the true facts.
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`12
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`13 of 15
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`FILED: NEW YORK COUNTY CLERK 05/10/2019 02:43 PM
`NYSCEF DOC. NO. 1
`
`INDEX NO. 652836/2019
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`RECEIVED NYSCEF: 05/10/2019
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`65.
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`Lamorna has been injured as a result of Lamorna’s material misrepresentations and
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`material omissions of fact.
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`66.
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`Based upon the foregoing conduct, Lamorna is entitled to rescission of the
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`Subscription Agreement. Alternatively, in the event a rescission is not awarded, Plaintiff seeks
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`compensatory damages in an amount to be determined at trial, but in any event no less than
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`$1,000,000, plus punitive damages, and interest.
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`AS AND FOR A SECOND CAUSE OF ACTION
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`(Unjust Enrichment)
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`67.
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`Plaintiff repeats and realleges the allegations set forth in paragraphs 1 through 66,
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`as if fully set forth herein.
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`68.
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`By reason of the foregoing, Defendants have unfairly and improperly obtained, and
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`continue to unfairly and improperly retain, substantial benefits at Plaintiff’s expense.
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`69.
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`Defendants have been unjustly enriched by, among other misconduct, improperly
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`withholding Lamorna’s investment in Fund III, which was induced by fraud.
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`70.
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`It is against equity and good conscience to permit Defendants to retain the value
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`conferred to them as a result of their misdeeds.
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`71.
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`Accordingly, Plaintiff is entitled to damages in an amount to be determined at a
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`hearing of this matter.
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`14 of 15
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`FILED: NEW YORK COUNTY CLERK 05/10/2019 02:43 PM
`NYSCEF DOC. NO. 1
`
`INDEX NO. 652836/2019
`
`RECEIVED NYSCEF: 05/10/2019
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`PRAYER FOR RELIEF
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`WHEREFORE, Plaintiff respectfully prays for relief against Defendant as follows:
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`A. On the First Cause of Action, for fraud in the inducement, rescission of the Subscription
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`Agreement, or in the alternative, if rescission is not available, damages in an amount to be
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`determined at trial but in any event not less than $1,000,000, plus punitive damages, and
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`interest;
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`B. On the Second Cause of Action, for unjust enrichment, damages in an amount to be
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`determined at trial but in any event not less than $1,000,000;
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`C. Costs; and
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`D. Such other and further relief as the Court deems just and proper.
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`Dated: New York, New York
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`May 10, 2019
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`MICHELMAN & ROBINSON, LLP
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`By: /s/ Jon Schuyler Brooks
` Jon Schuyler Brooks
` Brooke K. Haley
`800 Third Avenue, 24th Floor
` New York, New York 10022
` (212) 730-7700
` jbrooks@mrllp.com
` bhaley@mrllp.com
` Attorneys for Plaintiff
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`15 of 15
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