SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF NEW YORK: COMMERCIAL PART 53
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THE PEOPLF, OF THE STATE OF NEW YORK
by DENNIS C. VACCO, Attorney General
of the State of New York
Petitioner,
-against-
WORLD INTERACTIVE GAMING CORPORATION,
GOLDEN CHIPS CASINO, INC.,
JEFFREY BURTON a/k/a JIM STEVENS,
CYNTHIA BURTON, LAWRENCE BLOCKER a/k/a STEVEN SANDERS, individually
and d/b/a JAYES LAWRENCE & ASSOCIATES,
GREGORY FLEMMING, SR.,
a/k/a GREG JOHNSON, individually
and d/b/a MALLORY ENTERPRISES, INC.,
GERALD VARLAND a/k/a JERRY VARLAND,
individually and d/b/a JDV ASSOCIATES, INC.,
and HOWARD TOOMER, Individually
and d/b/a H.E. TOOMER & ASSOCIATES.
Respondents.
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Index No. 404428/98
CHARLES EDWARD RAMOS, J.S.C.:
This proceeding is brought by the Attorney General of the estate of New York (the "Attorney General" or the "State of New York") , pursuant to New York's Executive Law § 63 (12) and General Business Law Article 23-A, to enjoin the respondents, World Interactive Gaming Corporation ("WIGC"), Golden Chips Casino, Inc. ("GCC"), and their principals, officers, and directors from operating within or offering to residents of the State of New York State gambling over the Internet. The State also seeks to enjoin respondents from selling unregistered securities in violation of New York State's General Business Law § 352 (also known as "The Martin Act"),
The central issue here is whether the State of New York can enjoin a foreign corporation legally licensed to operate a casino offshore from offering gambling to Internet users in New York. At issue is Section 9(1), Article 1 of the New York State' Constitution which contains an express prohibition against any kind of gambling not authorized by the state legislature. The prohibition represents a deep-rooted policy of the state against unauthorized gambling (Intercontinental Hotel Corp. v. Golden, 18 AD2d 45 [1st Dept 1963]; revd on other grounds, 15 NY2d 9 [1964]).
WIGC is a Delaware corporation that maintains corporate offices in New York. WIGC wholly owns GCC, an Antiguan subsidiary corporation which acquired a license from the government of Antigua to operate a land-based casino. Through contracts executed by WTGC, GCC developed interactive software, and purchased computer servers which were installed in Antigua to allow users around the world to gamble from their home computers. GCC promoted its casino at its website, advertised on the Internet and in a national gambling magazine. The promotion was targeted nationally anid was viewed by New York residents.
In February 1998, the Attorney General commenced an investigation into the practices of WIGC. The investigation was prompted by an inquiry from the Texas State Securities Board which informed the Attorney General that WICC was making unsolicited telephone calls to the public and disseminating offering materials for WIGC's securities. The petition alleges that were attempting to sell what they termed a "private subscription offering," which consisted of 700,000 shares of "convertible preferred stock" at a price of $5.00 per share. The respondent's primary method of selling units of WIGC stock involved cold-calling prospective investors. The prospective investors were located throughout the United State, including New York. Respondents do not dispute that the calls originated from WIGC's headquarters in Bohemia, New York. At no time was this offering or the cold-callers registered with New York state as required by law.
During telephone solicitation, respondents claimed that investors would earn twenty percent (20%) annual dividend on their investment, twenty-five percent (25%) profit sharing and an initial public offering ("IPO") of WIGC's stock, which would likely take place within one year.
Respondents also compared WIGC's projected stock price and earnings to that of land-based casinos. Respondents represented the profit margins of other Internet casinos at around eighty to eighty-five percent (80-85%). Respondents told investors that WIGC would earn an estimate of up to $100,000.00 in revenue during the first year, Respondents claimed that the investment was conservative.
Together, respondents sold approximately $1,843,665.00 worth of shares to approximately 114 investors throughout the country, including approximately $125,000.00 worth of shares to 10 New York state residents.
In June 1998, the Attorney General furthered its investigation by logging onto respondents, website, downloading the gambling software, and in July 1998, placed the first of several bets. Users who wished to gamble in the GCC Internet casino were directed to wire money to open a bank account in Antigua and download additional software from GCC's website. In opening an account, users were asked to enter their permanent address. A user which submitted a permanent address in a state that permitted land-based gambling, such as Nevada, was granted permission to gamble. Although a user which entered a state such as New York, which does not permit land-based gaming, was denied permission to gamble, because the software does not verify the user's actual location, a user initially denied access, could easily circumvent the denial by changing the state entered to that of Nevada, while remaining physically in New York State. The user could then log onto the GCC casino and play virtual slots, blackjack or roulette. This raises the question if this constitutes a good faith effort not to engage in gambling in New York.
The Attorney General commenced this action pursuant to Executive Law § 63 (12) and General Business Law Article 23-A. Petitioner seeks; (1) to enjoin respondents from conducting a business within the State of New York until they are properly registered with the Secretary of State to conduct business in New York; (2) to enjoin respondents from running any aspect of their internet gambling Business within the State of New York; (3) to be awarded restitution and damages to injured inve5tor8; and (4) to be awarded penalties and costs to the State of New York for violations of New York State's Securities Law (GBL § 352 also known as "The Martin Act"), federal and state laws prohibiting gambling, and New York State's Executive Law.
Respondents move to dismiss the petition on the grounds that (i) the Attorney General lacks the authority to bring a proceeding under Executive Law § 63(12), where a pattern of repeated or persistent fraud or illegal conduct is absent; (2) lack of personal jurisdiction over WIGC and GCC; and (3) lack of subject matter jurisdiction to prosecute alleged violations of the Federal Interstate Wire Act IS USC S 1084(a)("The Wire Act"), the Interstate and Foreign Travel or Transportation in Aid of Racketeering Enterprising Act 18 USC 5 1952 ("The Travel Act"), and the Wagering and Paraphernalia Act is USC § 1953 ("The Paraphernalia Act").
Respondents contend that the transactions occurred offshore and that no state or federal law regulates Internet gambling. They claim that they were operating a duly licensed legitimate business fully authorized by the government of Antigua and in compliance with that country's rules and regulations of a land-based casino. They further argue that the federal and state laws upon which the State relies either do not apply to the activities of WTGC or are too vague and ambiguous to criminalize the activity of internet gambling, when such activity is offshore in Antigua.
Executive Law
Executive Law § 63(12) authorizes the Attorney General to bring a special proceeding against a person or business committing repeated or persistent fraudulent or illegal acts. Any conduct which violates state or federal law or regulation is actionable under this provision (see State v. Ford, 74 NY2d 495 [19891). Under Executive Law § 63(12), fraud has been interpreted broadly requiring only a showing that the action has a potential to deceive (See People v. Apple Health & Sports Clubs, 206 AD2d 266, 267 [1st Depart 19943]). In order for fraudulent or illegal acts to be actionable under Executive Law § 63(12), respondents' activities must be repeated, (See State v. Princess Prestige Co., Inc., 42 NY2d 104, 107-108 (1977) finding that Executive Law § 63(12) does not require a large number of repeated illegal or fraudulent acts).
In order to defeat the petition, respondent must present facts having probative value "sufficient to demonstrate an unresolved material issue which can be determined only at a plenary trial." (State v, Waterfine Water Conditioning Co. of New York, Inc., 87 Misc. 2d 18, 19 [NY Sup Ct 1975]; Compare, Lefowitz McMillen, 57 AD2d 979 [3rd Dept 1977]). Respondents have failed to submit evidence of any probative value to refute the allegation of the petition.
Personal Jurisdiction Over WIGC and GCC
Although at first glance, Internet transactions may appear novel, traditional jurisdictional standards have proved to be sufficient to resolve all civil Internet jurisdictional issues" (People v. Lipsitz, 174 Misc 2d 571, 578 (Sup Ct New York County 1997]).
The Internet is at least a medium through which individuals may obtain and transmit text, sound, pictures, moving video images, and interactive services using various methods. The Internet also allows individuals to trade securities, execute banking transactions, purchase consumer merchandise, and engage in many other types of business and personal dealings not poz3sible using more traditional means. What makes Internet transactions shed their novelty for jurisdictional purposes, is that similar to their traditional counterparts, they are all executed by and between individuals or corporate entities which are subject to a court's jurisdiction.
Whether the exercise of personal jurisdiction comports with due process requirements depends, as in any case, upon a finding that respondent has purposefully engaged in significant activities such that he has "availed himself of the privilege of conducting business [in the forum state]." (Burger King Corp v. Rudzewicz, 472 US 462, 475-76 [1985]). "The test, though not "precise" is a simple pragmatic one (cites omitted]: it's the aggregate of the corporation's activities in the State such that it may be said to be "present" in the State, "not occasionally or casually, but with a fair measure of permanence and continuity[.]" (Laufer v. Ostrow, 55 NY2d 305, 310 [1982], citing: Tauza v. Susquehanna Coal Co., 220 NY 259 [1917]; see also, American Dental Co-op v. Attorney General, 127 AD2d 274, 280 [1st Dept 1987]).
Respondents in this case are clearly doing business in New York for purposes of acquiring personal jurisdiction. Although WTGC was incorporated in Delaware, WIGC operated its entire business from its corporate headquarters in Bohemia, New York, All administrative and executive decisions as well as the computer research and development of the Internet gambling website were made in New York. The cold-calls to investors to buy WIGC stock were made by WIGC agents employed and operating from this location. Thereafter, respondents sent its prospectus and other solicitation materials about Internet gambling from the Bohemia, New York location, WIGC's continuous and systematic contacts with New York established their physical presence in New York.
Moreover, even without physical presence in New York, WIGC's activities are sufficient. to meet the minimum contact requirement of International Shoe Co. v. Washington, 326 US 310, 316 [1945]. The nature and quality of the defendant's activity must be such that "the defendant purposefully avails itself of the privilege of conducting activities within the forum state, thus invoking the benefits and protections of its laws" (Agrashell, Inc. v. Bernard Sirotta Co.), 344 F2d 583, 591 [2nd Cir 1965]). The use of the Internet is more than the mere transmission of communications between an out-of-state defendant and a plaintiff within the jurisdiction.
WICC and the other respondents are doing business in New York. They worked from New York in conjunction with another New York-based company Imajix Studios, to design the graphics for their Internet gambling casino. From their Now York corporate headquarters, they downloaded, viewed, and edited their Internet casino website. Furthermore, respondents engaged in an advertising campaign all over the country to induce people to visit their website and gamble. knowing that their ads were reaching thousands of New Yorkers, respondents made no attempt to exclude identifiable New Yorkers from the propaganda, phone logo from respondents, toll-free number (available to casino visitors on the GCC website) indicate that respondents had received phone calls from New Yorkers. Respondents cannot dispute that they do business in New York and that the acts complained of are subject to this courts jurisdiction.
To establish in personam jurisdiction over GCC, the petitioner must show that GCC functioned merely as the alter ego of WIGC. The corporate term will be pierced only if one corporation is so controlled by the other as to be a mere agent, department or alter ago of the other. See, e.g., Frummer v. Hilton Hotels International, 19 NY2d 533, 537 (1967); See also Gonzalez v. Amtek, 50 Misc. 2d 62, 25-67 (4th Dept 1966); ASKO Industries, Inc. v. Lennon, 52 AD25 435, 440 (1st Dept 1976). There must be soma proof that the parent company dominates or controls the daily activities of the subsidiary (Delagi v. Volkswagenwerk, 29 NY2d 426 [1972]; Taca International Airlines, S.A. v. Rolls-Royce of England, Ltd., 15 NY2d 97 [1965]; Billy v. Consolidated Machine Tool Corporation, 51 NY2d 152 [1980]).
The evidence indicates that GCC is a corporation completely dominated by WIGC. Aside from it being a wholly owned subsidiary of WIGC, GCC,s primary asset, the website, was purchased by WIGC pursuant to a corporate decision by WIGC's CEO respondent Mr. Burton, The use of the GCC casino website was handled from WIGC's corporate headquarters. From WIGC's New York office, respondents also actively solicited investors to buy WIGC shares, Although WIGC was conducting operations from New York, WIGC failed to register with the State; as a foreign corporation doing business in New York, the stock offering, the brokers, dealers, issuers, or salespersons for the offering. All GCC top employees were hired by and reported to WIGC. WIGC itself contracted to buy GGC casinos website servers from AIE. Whenever GCC's servers required servicing, AIE provided GCC with services pursuant to a contract executed between WICC and AIE. Furthermore, the licensing agreement with AIE was executed by respondent as CEO of WIGC and GCC. At no time were any formalities observed to maintain a financial distinction between the two entities. GCC did not repay WIGC for the purchase of computer servers, nor did GCC execute any formal documents to commemorate the transfer sale of the servers. Therefore, the corporate form is disregarded and GCC will he deemed an alter ego of WIGC.
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