CIT Dismisses Penalty Case Against Importer's Owner, Says Facts Need to Tie Specific Conduct to Fraud

Greenlight Organic and its owner, Parambir Singh “Sonny” Aulakh, allegedly misclassified and undervalued shipments of wearing apparel imported from Vietnam in 122 entries from 2007 through 2011, the government said. In its complaint, the government alleged that “Greenlight, under the direction of Aulakh and other Greenlight agents,” misclassified knit apparel as woven apparel to save on duty and understated its value by creating a second set of invoices, subtracting supported freight and insurance costs and failing to declare assists.

The penalty suit sought $238,516.56 in unpaid duties, and CIT has said in previous rulings in the case that the government also sought $3.5 million in penalties for fraudulent violations of 19 USC 1592 (see 1811290012).

Aulakh argued the case should be dismissed because the government only made general allegations about Aulakh’s connection to the fraud. “Nowhere in the complaint does the Government identify the who, what, when, where, and how supporting the fraud claim and, to that end, identify the entries for which Aulakh allegedly directed the material false statements that perpetrated the fraudulent misclassification and undervaluation scheme,” Aulakh said, according to CIT.

CIT agreed, finding the government’s arguments “lack the factual precision or substantiation required” under CIT rules. “Nowhere in or attached to the complaint does the Government identify necessary and relevant information needed to substantiate a plausible fraud claim, such as identifying with specificity the ‘approximately 122 entries of wearing apparel’ at issue here, a loss of revenue calculation, and the applicable HTSUS provision,” CIT said. “And nowhere does Plaintiff identify or attribute to a specific Defendant who made what statements that were false and material, or critically, the degree of each Defendant’s participation in the fraudulent scheme.”

Instead, the government’s complaint combines Greenlight, Aulakh, and “other Greenlight agents” together to allege that they knowingly “made material false statements” about the classification and value of the subject merchandise, CIT said.

“The complaint is replete with allegations that, because of his high-level role as Greenlight’s owner and president, Aulakh must have directed Greenlight to make materially false and misleading statements,” CIT said. “Absent adequate facts supporting the fraud allegations, Plaintiff cannot impute knowledge to Aulakh merely by virtue of his position of power and influence over Greenlight.”

Though CIT granted Aulakh’s motion to dismiss, it declined to immediately issue judgment in the case, instead giving the government 45 days to amend its complaint with more detail, per the government’s request. And it warned Greenlight, which has been without a lawyer and hasn’t defended itself in the case since February, that it may lose the case by default if it doesn’t hire a lawyer and mount a defense. The government has not yet filed a motion for default judgment against Greenlight, the court noted.

CIT's decision mirrors another issued in 2010 in a penalty case against Tip Top Pants and its owner, Saad Nigri, wherein the trade court ruled that “it's insufficient to just plead that someone is the President of a company and hold them liable for a 592 penalty,” customs lawyer John Peterson of Neville Peterson said. Here, not only did the government's complaint lack “the sufficient nexus to tie the individual corporate officer to the wrongdoing of the company,” but it also lacked the specificity needed to support any fraud pleading: “who, what, when, where, why needs to be spelled out with specificity,” Peterson said. “It will be interesting to see whether, when the government re-pleads, they can overcome the Tip Top Pants problem.”

The court's ruling “might give upper management some level of comfort that they will not be pulled into a customs fraud case in which they played no direct role,” customs lawyer Larry Friedman of Barnes Richardson said. "Judge Choe-Groves is not willing to accept the mere assertion that the defendant was in charge of the company as sufficient to state a claim that the defendant directed the material false statements,” he said. For lawyers, “the decision is a reminder for both sides that pleadings are important and neither side should assume the Court will let the case go forward until it knows there is really a case to be decided,” he said. “That should not be new information, but it is a good reminder from the Court to the bar.”

(U.S. v. Greenlight Organic, Inc.; Slip Op. 19-147; CIT # 17-00031; dated 11/25/19; Judge Choe-Groves)

(Attorneys: William Kanellis for plaintiff U.S. government; Robert Silverman of Grunfeld Desiderio for defendant Parambir Singh Aulakh)