(Reuters) – Five investors who claim they were promised lavish returns for backing businesses that generate mass torts cases have filed a fraud suit in federal court in Ft. Lauderdale, alleging that they were duped about the prospects of the investment vehicle, TRC Funding.
The plaintiffs say they invested $3 million in TRC Funding to capitalize a family of related companies that purported to find plaintiffs and vet prospective cases in mass product liability litigation, including cases involving pelvic mesh, talc and the drugs Xarelto, Risperdal and Pradaxa.
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TRC Funding’s January 2017 offering memo, which was produced in related litigation, said that in a best-case scenario, those underlying businesses could generate as many as 100,000 mass tort cases by 2019, resulting in projected revenue of between $100 million and $500 million.
The investors claim that the defendants – Diane and Ghen Sugimoto and David and Mitchell Hammer – assured them that they had developed a foolproof model for generating mass tort cases. Lonny Bramzon, a plaintiffs’ lawyer whose firm Bramzon & Associates Specialty Litigation handled cases generated by TRC Funding’s underlying businesses, said in an April 2017 guaranty of the $3 million investment that he had an active docket of about 15,000 cases in “various stages of the settlement process.” According to the investors’ complaint, they were told that settlement proceeds would be used to redeem their investment.
One of the investors now suing for fraud, Kevin Friedman, was a childhood friend of Ghen Sugimoto, who is Diane Sugimoto’s son, and Bramzon. The investors’ complaint said Friedman considered Ghen Sugimoto one of his best friends and had know Diane Sugimoto for almost his entire life. Friedman said he “had the utmost trust in their representations that the investment was ‘zero risk.’”
But according to the investors’ complaint, the defendants fraudulently failed to disclose that the underlying businesses were millions of dollars in debt and that their business model was not stable. The investors, represented by Weinberg Wheeler Hudgins Gunn & Dial, claim they have lost their entire $3 million.
On Tuesday, one of the defendants in the Ft. Lauderdale suit, David Hammer, filed a motion seeking sanctions against the investors for filing a frivolous suit. Hammer’s motion said the allegations were “demonstrably false.” Hammer claims that Friedman, who recruited the other investors and was paid a consulting fee, was aware of facts his complaint now alleges he did not know. Moreover, according to Hammer’s motion, there was no fraud: The investors’ returns were contingent on TRC Fundings’ profits, and because the company has not yet earned profits, the investors are not entitled to payment.
The other defendants said in emails responding to my requests for comment that they stand by David Hammer’s motion describing the investor allegations as false and frivolous.
Aaron Cohn and David Matthews of Weinberg Wheeler did not immediately respond to a request for comment on Hammer’s motion.
The five TRC Funding investors have also sued Bramzon, the plaintiffs’ lawyer who guaranteed their investment, in a separate case in federal court in Tampa.
In that suit, filed last February, Bramzon has denied the fraud allegations. He argued in an answer to the plaintiffs’ complaint that the investors voluntarily assumed the risk of the transaction and chose not to verify representations in the offering documents. Bramzon did not respond to emails and phone messages. His attorney, Paul DeCailly of the DeCailly Law Group, was not available for comment.
TRC Funding’s promises to investors were based on the purported success of a predecessor mass torts lead generator, Law Firm HQ, in which Ghen Sugimoto and Mitchell Hammer were high-ranking executives. TRC Funding’s January 2017 offering memo described Law Firm HQ’s origination of more than 14,000 pelvic mesh cases in only 11 months in 2014 and 2015. Law Firm HQ, according to TRC Funding’s offering memo, earned $17 million when those mesh cases were eventually transferred to the Texas plaintiffs’ firm Akin Mears for nearly $40 million in 2015.
The TRC Funding offering memo said that new businesses started by the Hammers and Sugimotos had “combined their efforts” with Law Firm HQ “to become one of the largest service providers” of client leads and case management services.” The memo presented purported financial statements on Law Firm HQ showing that the company grossed nearly $25 million in just two years of operation.
The investors’ suit does not delve deeply into the defendants’ alleged misrepresentations about their business prospects, asserting just that TRC Funding’s assets were encumbered by more than $8 million in debt and that in 2016 Mitchell Hammer specifically described the model of obtaining proceeds from the settlement of mass tort cases as “unstable.” (The complaint did not spell out the context of Mitchell Hammer’s alleged comments.)
Law Firm HQ, which TRC Funding presented as a role model in its offering memo, ran into controversy in 2016, after its affiliated law firms transferred more than 14,000 mesh cases to Akin Mears. (These are not the same cases that were referenced in the Bramzon guaranty to TRC Funding investors in April 2017.) Mesh defendants, as I reported at the time, began questioning the origin of those cases, some of which had been generated by overseas call centers. In July 2017, Akin Mears filed a demand for arbitration against law firms affiliated with Law Firm HQ, claiming more than $18 million because thousands of mesh cases generated by Law Firm HQ turned out to be duds. (Akin Mears counsel Jared Levinthal of Levinthal Wilkins declined to comment on the outcome of the confidential arbitration.)
Nor did the TRC Funding offering memo disclose that Diane Sugimoto, who allegedly assured investor Kevin Friedman that the opportunity presented no risks, was formerly the CFO of a Law Firm HQ sister company that went bankrupt. Diane Sugimoto has since been sued for breach of fiduciary duty by the bankruptcy trustee in that case, Scott Brown of Bast Amron. Brown has obtained more than $5 million in judgments from the other fiduciaries; his case against Sugimoto is on hold while those judgments are appealed. Sugimoto has denied wrongdoing.
The TRC Funding investors’ suit against Bramzon, the plaintiffs’ lawyer who signed a guaranty of their investment in April 2017, alleged that his firm owed millions of dollars to the Texas litigation support firm Strategic Litigation Partners, which filed a series of 2017 liens based on claims that it had not been paid for working up Bramzon’s mass tort files.
Several months after signing the guaranty for the TRC Funding investors, Bramzon’s firm sued SLP in federal court in Washington, D.C., for filing false liens. SLP countersued for the approximately $4 million it was allegedly owed. In March 2018, after both sides moved for summary judgment, Bramzon’s firm voluntarily dismissed its suit. (SLP counsel Ellen Marcus of Holmes Costin & Marcus did not respond to a phone message requesting comment on the case.)
The TRC Fund investors allege that they were not informed of any competing claims on the proceeds of mass tort cases generated by the Sugimoto and Hammer businesses and filed by Bramzon’s firm. “The entire scheme,” they alleged, “was fraudulent.”
This story has been updated to indicate that Bramzon counsel Paul DeCailly was not available for comment.