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Dr. Salomon Melgen, a West Palm Beach, Fla., ophthalmologist, never got over being swindled in the $194 million KL Group Ponzi scheme. He unsuccessfully sued a Palm Beach socialite who allegedly attracted him to KL. But his courtroom failure may stand as a precedent for investors trying to recover from other investors. In the end, Melgen may end up losing more money — attorney fees for the Palm Beach socialite he sued. Senior U.S. District Judge Kenneth Ryskamp dismissed Melgen’s latest lawsuit with prejudice. “The judge’s order is very significant,” said Jeffrey Schneider, who represented Jerome Fisher, the Palm Beacher who was sued. “It squashed the ability of the investor to sue another investor. It will have precedential value all over the country.” Long before Bernard Madoff and Scott Rothstein raised the bar for fraud in South Florida, Jung Bae Kim was working a con with two partners through bogus hedge funds. Kim, who is serving an 18-year prison sentence, targeted the affluent on the island of Palm Beach, where word-of-mouth about investments spreads fast. Former U.S. Attorney Guy Lewis, now a partner with Lewis Tein in Miami, was appointed receiver for KL Group, which had offices in West Palm Beach and Irvine, Calif. He said about $10 million was recovered for cheated investors. “Frankly, I thought we did better than I expected,” Lewis said. His work did little to assuage Melgen, who in federal court claimed $15 million in losses. His first lawsuit targeted Banc of America Securities, his brokerage, but Ryskamp dismissed that lawsuit with prejudice in 2007. Ryskamp found Banc of America Securities, or BAS, did not owe any fiduciary duty to Melgen or his corporation, SFM Holdings, even if Melgen mistakenly thought Kim was an agent of the brokerage. Three KL principals controlled Irvine-based Shoreland Trading, a broker-dealer that collected the KL investments. Schenider said KL deposited victim funds at BAS, and BAS said in a motion that its only role was executing trades directed by KL. After losing in federal court, Melgen hoped he would fare better in Palm Beach Circuit Court, filing a similar lawsuit in 2008 against Banc of America Securities, but adding a twist by listing Fisher, co-founder of the Nine West shoe chain, as a defendant. “Fisher had nothing to do with this,” said Schneider, a partner with Miami’s Levine Kellogg Lehman Schneider + Grossman. “In fact, he was a victim himself.” If investors are allowed to sue other investors when they get a tip and end up with a loss, there would be a free-for-all in the courts, he said. “You have here an investor who is unhappy with the returns he got with the receivership, so he’s looking to augment it by going after a third party,” Schneider said. “The whole reason for a receivership is to avoid a multiplicity of lawsuits, which would accomplish nothing except create total and utter chaos.” Melgen claimed Fisher encouraged him to open an account at Banc of America Securities and praised Kim’s skill and acumen as a trader and money maker. The Securities and Exchange Commission claimed Kim promised annual returns of 125 percent to 150 percent. Melgen, who plans to appeal, said Friday that he would appeal. He argued Ryskamp failed to address key evidence and said his decision “seems like he was ruling on another case even though we have a lot of evidence. I don’t think that is justice.” Two of Melgen’s attorneys had no comment on the case. Melgen alleged Fisher lied about making money with Kim. Schneider said his client ended up losing “a few million” with KL Group. Ryskamp was not amused with the end-around by Melgen when the state case ended up before him. The judge also oversaw the KL Group receivership, the SEC civil action and the KL criminal cases. Now he was seeing a lawsuit similar to the one he had dismissed but with an additional defendant. He dismissed Banc of America from the new lawsuit and gave Melgen one more chance to make his case against Fisher. Melgen failed fabulously. Ryskamp began his April 22 dismissal order by writing: “This pleading needs no introduction. This court is well aware of the plaintiff’s litigation misconduct.” He said an amended complaint was a bundle of inconsistencies and the allegations were belied by other documents filed in the case. “Indeed, the allegations in the amended complaint are even internally inconsistent,” the judge stated. Ryskamp said Lewis, known as an aggressive litigator, the SEC and the U.S. Attorney’s Office would have uncovered something if Fisher or the brokerage were KL promoters. Furthermore, records show Melgen invested with Kim before his interactions with Fisher, the judge noted. Ryskamp concluded in his 15-page order that there could not be any significance to Fisher’s alleged ringing endorsement, “It’s time for this litigation to end,” the judge said. Lewis said it’s the receiver’s job to examine culpability among investors who promote a Ponzi scheme beyond casual conversation and cash out before it collapses. “There has to be some kind of organized, coherent method where you can try to distinguish legitimate claims from culpable parties,” he said. “As the receiver, I can’t go on in and represent a singular interest recovering a certain amount of money. I represented all investors.” The final chapter in Melgen’s case has not been written. Fisher is seeking attorney fees and costs. “Never before had the undersigned counsel seen such patently unreasonable, vexatious multiplication of proceedings involving a meritless claim,” Schneider wrote in his June 1 motion. “It became irresponsible. It became outrageous,” Schneider said.

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