UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK
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AMENDED COMPLAINT 04 CV 1409 (NGG) (VVP) |
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK
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THE CITY OF NEW YORK,
Plaintiff,
- against -
SMOKES-SPIRITS.COM, INC. MICHAEL
KLEE, WWW.SMOKINCHEAP.COM,
NATIONAL WHOLESALE, LLC, VINCENT
KLEE III, NATALIE SAALFELD, C4LESS, LLC
and JOHN DOES 1-100,
Defendants.
AMENDED
COMPLAINT
04 CV 1409 (NGG) (VVP)
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Plaintiff the City of New York (the “City”), by its counsel Michael A. Cardozo,
Corporation Counsel of the City of New York, as and for its complaint against the defendants,
respectfully alleges, with knowledge of its own actions and on information and belief as to the
actions of others, as follows:
INTRODUCTION
1. The City brings this civil action: i) under the Racketeer Influenced and
Corrupt Organizations Act, 18 U.S.C. § 1961 et seq., (“RICO”) to recover damages caused by
defendants’ scheme to defraud the City of tax revenues through the sale of cigarettes over the
Internet; and (ii) under state law for damages caused by defendants’ fraud.
2. Defendants are cigarette sellers that have advertised and sold cigarettes
over the Internet to New York City residents. Each defendant has received orders over the
Internet from City residents and shipped cigarettes by common carrier or United States Postal
Service into New York City.
3. Defendants intentionally fail to notify New York State’s tobacco tax
administrator of defendants’ cigarette shipments into New York City, contrary to the
requirements of the Jenkins Act, 15 U.S.C. § 375 et seq ., thereby violating the mail and wire
fraud statutes, 18 U.S.C. §§ 1341 and 1343.
4. Defendants’ business relies on the fact that the State of New York imposes
combined excise and sales taxes of $33.30 on every carton of cigarettes sold in stores located
within the City, an amount substantially in excess of the cigarette tax of most other States.
Cigarette sellers in states with tax rates lower than New York’s are accordingly able to sell
cigarettes at prices well below the prices offered by New York City stores. For example, a
carton of premium brand cigarettes may be purchased in a state such as Virginia, where the
cigarette tax is negligible for approximately $30.00, while the same carton purchased in New
York City sells for approximately $70.00.
5. The price difference between cigarettes purchased in the two states is
almost entirely attributable to the fact that cigarette sellers physically located outside of New
York State are not required to, and do not, collect New York taxes in a sale to a New York
purchaser. The taxes are accordingly not included in the sales price, and the sales price is
therefore lower than the New York sales price, by an amount equivalent to the New York taxes.
6. Internet cigarette sellers thus are able to offer cigarettes to New York City
residents at approximately half of the price prevailing in New York stores. While geography
previously limited the ability to profit from this cross-border tax differential, the advent of the
Internet has eliminated many of the obstacles to sales by sellers in “low-tax” states to buyers in
“high tax” states.
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7. Cigarette tax evasion over the Internet is merely the latest variant of what
is referred to as the “cross-border” excise tax problem. The problem has affected cigarette tax
revenues for as long as significant interstate differences among cigarette tax rates have existed,
as evidenced by Congress’ passage of the Jenkins Act nearly fifty years ago.
8. The Jenkins Act was passed to protect state tax revenues from the effect of
cross-border tax differences, by requiring out-of-state cigarette sellers to notify state tax
administrators whenever the seller ships cigarettes into the administrator’s state. Cigarette
sellers that ship in interstate commerce must register with and file with the tobacco tax
administrator of each state to which they ship a monthly report containing the name and address
of each state resident to whom the seller shipped cigarettes.
9. Jenkins Act reports derive their significance from the fact that under the
cigarette tax laws of every jurisdiction that imposes such a tax, purchasers remains liable for the
tax regardless of where the purchase was made, once the cigarettes arrive in the purchasers’
jurisdiction. Jenkins Act reports alert state tax administrators to out-of-state purchases on which
taxes are owed, thereby permitting collection of the tax. When Jenkins Act reports are not filed,
state tax administrators have virtually no ability to detect out-of-state purchases.
10. Internet offers of cheap cigarettes that reach New York thus exemplify the
adage that “a deal that sounds too good to be true probably isn’t.” While the out-of-state Internet
seller need not collect the cigarette tax from a New York purchaser, the purchaser still owes the
taxes. Upon receipt of the cigarettes by the New York purchaser, a “use” tax must be paid, in the
same amount as the purchaser would have paid had the cigarettes been purchased in a New York
store. The illusory “discount” offered by the Internet seller consists almost entirely of the unpaid
taxes that the New York purchaser remains obligated to pay. The “savings” realized by the
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purchaser is largely, if not entirely, accomplished solely if the purchaser fails to pay the taxes
owed.
11. Defendants’ business plan depends upon concealing their customers’
purchases from state tax authorities. If defendants’ customers were identified and required by
their home states to pay the customers’ home state taxes, virtually all of the economic incentive
for the Internet purchase would disappear, to the detriment of defendants’ businesses.
12. To protect their customers from assessments by tax authorities, and to
encourage further purchases by their customers, the defendants intentionally do not report their
sales into New York to New York tax authorities.
13. Defendants’ sales are also accomplished by deception. Defendants know
that their customers owe state taxes on cigarettes purchased at defendants’ websites. However,
defendants conceal that fact in order to mislead their customers as to the actual price of the
cigarettes sold by defendants.
14. The sale of cigarettes without complying with the Jenkins Act and by
means of deceptive prices violates the mail and wire fraud statutes, 18 U.S.C. §§ 1341 and 1343.
Defendants’ actions are intended to and do have the effect of concealing from New York tax
authorities cigarette purchases by New York residents, so that the taxes owing on the purchases
cannot be collected. New York City is thereby defrauded of tax revenues owed by those City
residents who have purchased cigarettes at defendants’ Internet sites.
15. Defendants use of an “enterprise,” as defined by 18 U.S.C. § 1961 et seq .,
to commit mail and wire fraud violates the federal racketeering laws.
PARTIES
16. Plaintiff the City of New York (the “City”) is a municipal corporation
organized under the laws of the State of New York.
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17. Defendant Smokes-Spirits.com, Inc. is a corporation formed under the
laws of the State of Kentucky, with a principal place of business at 501 West 11 th Street,
Newport , Kentucky 41071 .
18. Defendant Michael Klee is a resident of the State of Kentucky and is
associated with Smokes-Spirits.com. Michael Klee maintains a business or residence address at
501 West 11 th Street , Newport, Kentucky 41071 .
19. Defendant www.smokincheap.com is a Kentucky business entity whose
form of organization is presently unknown to the City, located at 886 Rosewood Drive, Villa
Hills KY 41017.
20. Defendant Natalie Saalfeld is a resident of the State of Kentucky and is
associated with www.smokincheap.com. Natalie Saalfeld maintains a business or residence
address at 886 Rosewood Drive, Villa Hills KY 41017.
21. Defendant Vincent Klee III is a resident of the State of Kentucky and is
associated with www.smokincheap.com. Vincent Klee III maintains a business or residence
address at 886 Rosewood Drive, Villa Hills KY 41017.
22. Defendant National Wholesale LLC is a limited liability company formed
under the laws of the State of Kentucky, with a principal place of business at 886 Rosewood
Drive, Villa Hills KY 41017.
23. Defendant C4less, LLC is a limited liability company formed under the
laws of the State of Kentucky, with a principal place of business at 1000 Middle Road, Fulton,
KY 42041.
As Yet Unnamed Co-Conspirators and Doe Defendants
24. Various other entities, individuals, partnerships, sole proprietors,
companies, and corporations, presently unknown to the City and not expressly named as
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defendants in this complaint but identified as John Does participated as co-conspirators in the
violations alleged in this complaint and performed acts and made statements in furtherance
thereof. Such John Does as co-conspirators and aided, abetted, or participated as associates of
the enterprises identified below in the commission of the wrongful acts alleged herein or
otherwise caused the damages suffered by the City.
25. As to the persons sued as Does 1-100, the City is ignorant of the true
names, capacities, nature and extent of participation in the course of conduct alleged here and
therefore, sues these defendants by such fictitious names. The City will if necessary seek leave
of Court to amend this Complaint to reflect the true names and capacities of the defendants
designated herein as John Does when their identities become known.
JURISDICTION AND VENUE
26. The City’s federal claims allege violations of 18 U.S.C. § 1961 et seq.
27. The court has jurisdiction over the subject matter of this action pursuant to
18 U.S.C. § 1964 and 28 U.S.C. §§ 1331, 1332, 1337 and 1367.
28. Venue is proper in this district under 18 U.S.C. § 1965(a) and (b) and 28
U.S.C. § 1391(b) because a substantial part of the events and omissions giving rise to the claims
occurred in this district.
29. Personal jurisdiction is proper under 18.U.S.C. § 1965 and also proper
under CPLR § 302 because each defendant, in person or through an agent, transacts or has
transacted business within New York and in this district, or contracts or has contracted to supply
goods or services within New York or in this district, or has committed a tortious act within New
York or in this district. All defendants did and continue to do business within New York and this
district, made contracts to be performed in whole or in part in New York and this district, and/or
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performed tortious acts reasonably expected to have consequences in New York and in this
district while deriving substantial revenue from interstate or international commerce.
FACTS
Cigarette Taxation in New York
30. The authority to impose taxes on cigarettes in New York, the amount of
the tax and the disposition of the revenue is governed by New York State statute. The State of
New York imposes an excise tax on all cigarettes possessed for sale or use in the State. New
York State Tax Law (“N.Y. Tax Law”) §§ 471 and 471-a. The State also imposes a tax collected
only on cigarette sales made in New York City. N.Y. Unconsol. L., Ch 288, §§ 1, 2;
Administrative Code of the City of New York (“Admin. Code”) § 11-1302(a) (1) and (2).
31. By State statute, New York City has been delegated the administrative
responsibilities for collection of cigarette taxes imposed pursuant to Admin. Code § 11-1302(a)
(1) and (2), New York State Tax Law §§ 471 and 471-a, and Unconsol. L., Ch 288, §§ 1. In
connection with its collection responsibilities, the New York City Department of Finance and the
New York State Department of Taxation and Finance by agreement provide one another with all
information relevant to the collection of cigarette taxes.
Internet Cigarette Tax Evasion
32. The cigarette taxes of other states are generally lower than New York’s.
For example, the States of Virginia and Kentucky have cigarette taxes of, respectively, $.025 and
$.03 per pack. Cigarette sellers physically located outside of New York are not required to
collect New York taxes from a New York purchaser. Such out-of-state sellers are thus able to
sell cigarettes to New Yorkers at prices far lower than the same brand and style of cigarettes sells
for in a New York “brick and mortar” store, where New York taxes must be collected by the
seller.
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33. Out-of-state sellers can now easily communicate with New York City
residents through the Internet, and vice versa. A New York City resident may purchase
cigarettes from an Internet seller located, for example, in Virginia or Kentucky, paying a price
that represents an apparent savings of approximately $30 per carton over the New York City
price. That “savings” is made possible by the fact that New York taxes are not included in the
out-of-state purchase price.
34. The typical Internet cigarette purchase is accomplished by the buyer
accessing an Internet website that sells cigarettes. The sites are easily located using Internet
search engines. A November 2002 survey located approximately 400 Internet sites that sell
cigarettes.
35. Having accessed an Internet cigarette website, the purchaser electronically
selects the brand and style desired and proceeds to the “check-out” area. The purchaser provides
his or her name, address, e-mail address, and telephone number and selects a payment method,
including credit cards. Payment is usually made electronically through a credit card account,
although other payment methods are often accepted. The purchaser selects a shipment method,
including the United States Postal Service or a common carrier, such as UPS. The cigarettes are
delivered to the purchaser’s door within a few days or weeks.
36. Although the amount paid over the Internet by a New York purchaser may
be as much as $35 less than the amount paid in a New York store, the true savings to City
residents who purchase over the Internet is illusory. Pursuant to N.Y. Tax Law § 471-a and
Admin. Code § 11-1302 (a)(2), cigarettes purchased outside of New York that are possessed in
New York City are subject to “use” taxes, which must be paid by the purchaser. If Internet
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purchasers were to pay the use tax, however, most of the “discount” gained through the Internet
purchase would evaporate.
37. The underlying assumption of the Internet cigarette business, and the
principal basis of its profitability, is that purchasers will evade (or be unaware of) the tax
imposed by their home states. It is therefore crucial to the success of defendants’ businesses for
defendants to conceal from New York’s tax authorities defendants’ sales to New York residents.
Absent concealment, the tax authorities could collect the tax from defendants’ customers,
thereby destroying the economic incentive that provides the motive for the purchase. A recent
report, Buying Cigarettes Over the Internet , Prudential Financial Research (September 24, 2002)
concludes that the primary reason for the growth of Internet cigarette sales is tax avoidance, and
that consumers who elect to purchase cigarettes over the Internet do so to avoid state and local
taxes. Prudential Report at 3, 18.
38. Data compiled by the New York City Department of Health is consistent
with this conclusion. Annexed hereto as Exhibit A is a graph of sales made by an Internet
cigarette seller located in Virginia from August 2002 to August 2003. The graph illustrates the
number of sales made to residents of various states plotted against the amount of the purchaser’s
state cigarette tax: the number of purchases from a particular state increases as the size of the
State’s tax increases. The Internet cigarette seller received most of its business from states with
high cigarette taxes.
The Jenkins Act
39. Long before the invention of the Internet or overnight delivery, Congress
passed the Jenkins Act, 15 U.S.C. § 375-378 (1949), to remedy the problem of cross-border
cigarette tax evasion now posed by Internet sales, as then accomplished by telephone. The 1949
and 1955 legislative histories of the Jenkins Act describe the “large and increasing loss of
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revenue to the States caused by the evasion of sales and use taxes on cigarettes shipped in
interstate commerce to consumers.” Congress was troubled by the “discrimination caused by
this evasion against sellers of cigarettes in States having a higher tax than the tax of the seller
States” and “the fact that this evasion was accomplished through the use of the United States
mail.” S. Rep. No. 1147, 84th Cong., 1st Sess., U.S. Code Cong. and Admin. News p. 2883
(1955) .
40. Congress stated that “certain individuals and organizations are using the
United States mails to circumvent State laws,” and that “[a]dvertisements of organizations
specializing in this business cite the availability and use of the United States mails as proof of
legality of their operations.” Congress believed that “respect for the laws of the sovereign States
will be furthered … and ... the public interest will be served by [a] bill eliminating any inference
that the Federal Government approves of the circumventing of State laws.” S. Rep. No. 644, 81st
Cong., 1st Sess., U.S. Code Cong. and Admin. News pp. 2158, 2159-60 (1949).
41. The Jenkins Act sought to “level the playing field” among the States with
respect to interstate differences in cigarette taxation. The Act requires state tobacco tax
administrators to be informed of cigarette imports into their states, so that the taxes owed on outof-
state purchases by resident purchasers can be collected. Under the Act, cigarette vendors who
sell and ship cigarettes in interstate commerce (other than to a licensed distributor), must register
with the tobacco tax administrator of each state shipped to, and, on a monthly basis, report (1)
the name and address of the persons to whom cigarette shipments were made, (2) the brands of
cigarettes shipped, and (3) the quantities of cigarettes shipped. Reports must be filed no later
than the 10th day of each calendar month, reporting each and every cigarette shipment made to
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the state during the previous calendar month. The seller’s registration must list the seller’s name,
trade name, and the address of all business locations.
42. The United States General Accounting Office, in a report entitled Internet
Cigarette Sales: Giving ATF Investigative Authority May Improve Reporting and Enforcement ,
GAO Report 02-742 (August 2002) (“ GAO Report ”), examined 147 Internet websites offering
cigarettes for sale. None of the sites stated that they complied with the Jenkins Act. GAO
Report at 16. To the contrary, 78% of the sites expressly stated that they do not report cigarette
sales to state tax administrators, or that they maintain customer information as “private,” or that
they are not required to comply with the Jenkins Act. The remaining 22% of the sites gave no
indication one way or the other whether or not they complied with the Jenkins Act. GAO Report
at 16.
43. Smokes-Spirits.com, Inc. maintains a website located at www.smokesspirits.
com that is accessible to residents of New York City.
44. A domain name search performed on the www.thebigwhois.com website
indicates that the Smokes-Spirits domain name registrant is Michael Klee.
45. On numerous dates unknown to the City, but to be determined through
discovery, residents of the City of New York accessed the Smokes-Spirits.com website and
placed orders for cigarettes, paying by credit card. On numerous dates unknown to the City but
to be determined through discovery, cigarettes were delivered to addresses within New York
City in fulfillment of those orders.
46. No Jenkins Act reports were filed in connection with the aforementioned
orders from the Smokes-Spirits website.
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47. C4L, LLC maintains a website located at www.cigarettesforless.com that
is accessible to residents of New York City.
48. A domain name search performed on the www.thebigwhois.com website
indicates that the Cigarettesforless domain name registrant is C4L, LLC.
49. On numerous dates unknown to the City, but to be determined through
discovery, residents of the City of New York accessed the Cigarettesforless website, and placed
orders for cigarettes, paying by credit card. On numerous dates unknown to the City, but to be
determined through discovery, cigarettes were delivered to addresses within New York City in
fulfillment of those orders.
50. No Jenkins Act reports were filed in connection with the aforementioned
orders from the Cigarettesforless website.
51. SmokinCheap.com maintains a website located at www.smokincheap.com
that is accessible to residents of New York City.
52. A domain name search performed on the www.thebigwhois.com website
indicates that the SmokinCheap domain name registrant is Smokincheap.com.
53. On numerous dates unknown to the City, but to be determined through
discovery, residents of the City of New York accessed the SmokinCheap website, and placed
orders for cigarettes, paying by credit card. On numerous dates unknown to the City but to be
determined through discovery, cigarettes were delivered to addresses within New York City in
fulfillment of those orders.
54. No Jenkins Act reports were filed in connection with the aforementioned
orders from the SmokinCheap website.
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ALLEGATIONS RELATED TO THE RICO CLAIMS
The Enterprises
55. Smokes-Spirits.com, Inc., Michael Klee, and John Does No 1-5 operate
and control a website known as “Smokes-Spirits.com,” that sells cigarettes over the Internet
through a website accessible to residents of the City of New York. The website is located at
www.smokes-spirits.com. Smokes-Spirits.com, Inc., Michael Klee, and John Does No 1-5 are
hereafter referred to as the “Smokes-Spirits Enterprise.” Smokes-Spirits.com, Inc., Michael
Klee, and John Does No 1-5 are each an associate of the Smokes-Spirits Enterprise.
56. www.smokincheap.com, Vincent Klee III, Natalie Saalfeld, National
Wholesale, LLC and John Does 6-10 operate and control a retail cigarette outlet known as
“SmokinCheap.com” that sells cigarettes over the Internet through a website accessible to
residents of the City of New York. The website is located at www.smokincheap.com.
www.smokincheap.com, Natalie Saalfeld, National Wholesale, LLC and John Does 6-10 are
hereafter referred to as the “SmokinCheap Enterprise.” www.smokincheap.com, Vincent Klee
III, Natalie Saalfeld, National Wholesale, LLC and John Does 6-10 are each an associate of the
SmokinCheap Enterprise.
57. C4less, LLC and John Does 11-15 operate and control a retail cigarette
outlet known as “Cigarettesforless.com” that sells cigarettes over the Internet through a website
accessible to residents of the City of New York. The website is located at
www.cigarettesforless.com. C4less, LLC and John Does 11-15 are hereafter referred to as the
“Cigarettesforless Enterprise.” C4less, LLC and John Does 11-15 are each an associate of the
Cigarettesforless Enterprise.
58. At all times relevant to this complaint, each enterprise named above, i.e.,
the Cigarettesforless Enterprise, the SmokinCheap Enterprise, and the Smokes-Spirits Enterprise
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(when referred to collectively, the “Internet Cigarette Enterprises”) constituted an “enterprise”
within the meaning of 18 U.S.C. § 1961 (4). Each Internet Cigarette Enterprise is an entity that
engages in activities affecting interstate commerce.
59. Each Internet Cigarette Enterprise is an on-going association-in-fact
enterprise composed of individuals with a common purpose, a continuity of structure and
personnel, and a consensual decision-making structure that is used to engage in a common
course of conduct, both legal and illegal.
60. The affairs of each Internet Cigarette Enterprise are conducted through a
pattern of racketeering activity within the meaning of 18 U.S.C. § 1961 (1) (B), consisting
principally of multiple and continuing instances of mail and wire fraud in violation of 18 U.S.C.
§ 1341 and 18 U.S.C. § 1343.
61. Each Internet Cigarette Enterprise exists separate and apart from the
pattern of unlawful activity within the meaning of 18 U.S.C. § 1961 (1) (B), because each
enterprise engages in other lawful activity beyond the commission of the predicate offenses. The
structure of each enterprise is beyond that required for the commission of the pattern of unlawful
activity. Each enterprise would continue to exist even in the absence of the predicate offenses
and the common activities of each enterprise extend beyond the minimal association necessary to
sustain the pattern of racketeering. The associates of each enterprise have common links other
than the racketeering activity.
62. The personnel and structure of each Internet Cigarette Enterprise has
remained constant over time. The associates of each enterprise contemplate its indefinite
existence. Each enterprise has operated in the past, continues to operate and can be expected to
continue operating in the future.
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Defendants’ Racketeering Activity
63. At all times relevant to this complaint, each defendant identified above as
associated with an Internet Cigarette Enterprise used that enterprise to defraud New York City of
tax revenues.
64. Defendants accomplished that fraud by shipping cigarettes to New York
City residents while intentionally withholding from the New York State Department of Taxation
and Finance the Jenkins Act reports that documented the enterprise’s sales of cigarettes to New
Yorkers.
65. By reason of the information sharing agreement between the New York
State Department of Taxation and Finance and the New York City Department of Finance, New
York City would as a matter of course receive from New York State any Jenkins Act reports
filed by the defendants.
66. By reason of the fact that defendants fail to file Jenkins Act reports,
defendants make it impossible to learn of the taxable sales made by defendants to their
customers. The City is accordingly unable to collect the taxes owed, in the amount of
approximately $35 per carton.
67. Defendants also accomplished that fraud by concealing facts necessary to
make representations made on their websites not misleading. None of the defendants inform
New York customers that the customers must pay New York taxes on the cigarettes purchased.
None of the defendants inform their New York customers that the cost of the cigarettes
purchased by the customers must pay is far higher than the costs advertised by defendants on
their websites, by the amount of the tax owed by the customers on the purchases. Accordingly,
the prices listed on defendants’ websites are all false and misleading.
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68. By reason of defendants misrepresentations of the costs to their customers,
the prices on defendants’ websites appear to be lower than prices prevailing in “brick and
mortar” stores located in New York. Defendants are thereby able to cause New York residents
to purchase from defendants rather than from New York retail locations at which taxes must be
collected. The effect of defendants’ misrepresentation is to lure away customers from New York
City stores and deprive the City of tax revenues.
69. At all times relevant to this complaint, each defendant identified above as
associated with an Internet Cigarette Enterprise conducted the management and operation of the
affairs of the enterprise directly or indirectly through a pattern of racketeering activity within the
meaning of 18 U.S.C. §§ 1961 (1) (B), 1961 (5) and 1962 (c), in violation of 18 U.S.C. § 1962
(c), namely, by committing multiple and continuing acts of mail and wire fraud in violation of 18
U.S.C. § 1341 and 18 U.S.C. § 1343 by the means described below.
70. At all times relevant to this complaint, each defendant identified above as
associated with an Internet Cigarette Enterprise conspired to violate the provisions of 18 U.S.C.
§ 1962(d) by agreeing to conduct the affairs of their respective Internet Cigarette Enterprise
through a pattern of racketeering activity, to wit, the shipment of cigarettes to New York City
residents without filing Jenkins Act reports. Each defendant agreed to further an endeavor of the
enterprise that, when completed, amounted to the criminal offense of mail and wire fraud, in
violation of 18 U.S.C. § 1341 and 18 U.S.C. § 1343.
71. At all times relevant to this complaint, each defendant identified above as
associated with an Internet Cigarette Enterprise intentionally furthered the acts of the enterprise
by receiving Internet orders for cigarettes from New York City residents, by shipping cigarettes
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to New York City residents, by failing to file Jenkins Act reports and by making misleading
statements on their websites.
72. At all times relevant to this complaint, each defendant identified above as
associated with an Internet Cigarette Enterprise agreed to a plan whereby cigarettes would be
sold to New York City residents without informing New York’s tax authorities of the sales.
Each defendant has recognized that an essential element of this plan consists of multiple
violations of 18 U.S.C. § 1341 and § 1345, in that the mails and the wires would be used in
furtherance of a scheme or artifice to defraud New York City of tax revenue. Each defendant has
agreed that certain associates of their respective Internet Cigarette Enterprise would commit such
violations while other associates of the enterprise would provide services intended to support and
facilitate the violations.
73. At all times relevant to this complaint, each defendant identified above as
associated with an Internet Cigarette Enterprise agreed to a plan whereby cigarettes would be
sold to New York City residents without informing them that taxes were owed on the purchases,
and without informing them that the price of the cigarettes sold be defendants was actually far
higher that the customers believed. Each defendant has recognized that an essential element of
this plan consists of multiple violations of 18 U.S.C. § 1341 and § 1345, in that the mails and the
wires would be used in furtherance of a scheme or artifice to defraud New York City of tax
revenue. Each defendant has agreed that certain associates of their respective Internet Cigarette
Enterprise would commit such violations while other associates of the enterprise would provide
services intended to support and facilitate the violations.
74. At all times relevant to this complaint, the purpose of the each Internet
Cigarette Enterprise was (1) to maintain and advertise Internet sites where New York City
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residents could purchase cigarettes; (2) to receive orders for cigarettes from New York City
residents over the Internet; (3) to sell cigarettes to New York City residents at prices made
possible by the fact that the enterprises need not collect New York State and City cigarette taxes;
(4) to sell cigarettes to New York City residents without providing the New York State
Department of Taxation and Finance with Jenkins Act reports; (6) to sell cigarettes to New York
City residents by means of false and misleading statements; and (7) to defraud New York City of
tax revenues by intentionally withholding Jenkins Act reports from New York tax authorities; (8)
to defraud New York City of tax revenues by intentionally withholding from customers the fact
that the customers would owe taxes on the cigarettes purchased.
Predicate Acts
75. At all times relevant to this complaint, each defendant identified above as
associated with an Internet Cigarette Enterprise devised, intended to devise, carried out and
intended to carry out a scheme or artifice to defraud New York City of property in the form of
cigarette tax revenues owed by New York City residents who had purchased cigarettes from the
Internet Cigarette Enterprises. To execute this scheme, and to receive the financial benefits of
this scheme, each defendant identified above as associated with an Internet Cigarette Enterprise
repeatedly used the mails and wires to ship, transport, sell, distribute, or transfer cigarettes to
New York City purchasers while intentionally concealing the sales from the New York State tax
authorities.
76. Under the settled law of this and other circuits, the failure to file Jenkins
Act reports following interstate sales of cigarettes constitutes mail or wire fraud, in that the mails
or wires are used in connection with a scheme or artifice to defraud the states of property,
namely, the right to collect taxes.
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77. The defendants thus engage in unlawful activity within the meaning of 18
U.S.C. § 1961 (1) (B), consisting of predicate acts of mail and wire fraud in violation of 18
U.S.C. §§ 1341 and 1343 .
78. A separate instance of mail or wire fraud occurs each time that an
enterprise uses the mails or wires to effect a sale of cigarettes to a New York City resident and
does not report that sale to the New York State tax authorities.
FIRST CLAIM FOR RELIEF
(Violation of § 1962(c))
79. The City realleges paragraphs 1-75 above as if fully set forth herein.
80. New York City is a “person” under 18 U.S.C. §§ 1961 (3) and 1962 (c).
81. Each defendant identified above as associated with an Internet Cigarette
Enterprise is a “person” as defined in 18 U.S.C. §§ 1961 (3) and 1962 (c).
82. Each Internet Cigarette Enterprise identified above is an “enterprise”
within the meaning of 1961 (4) and 1962 (c). Each Internet Cigarette Enterprise engages in
activities affecting interstate commerce at all times relevant to the complaint.
83. Each of the defendants is associated with one of the Internet Cigarette
Enterprises and has conducted or participated, directly or indirectly, in the management and
operation of the affairs of the enterprise through a pattern of racketeering activity within the
meaning of 18 U.S.C. §§ 1961 (1) (B) and 1961 (5) and 1962 (c), to wit, multiple and repeated
acts of mail and wire fraud, consisting of the shipment of cigarettes to New York City residents
without filing Jenkins Act reports, in violation of 18 U.S.C. §§ 1341and 1343.
84. The predicate acts of mail and wire fraud constitute a pattern of unlawful
activity within the meaning of 18 U.S.C. § 1961 (1) (B). The predicate acts are both related and
continuous. The acts are connected to one another as part of a scheme to accomplish a uniform
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purpose, which is the making of a profit from the sale of cigarettes by concealing taxes owed on
the sales. The repeated nature of the conduct during the period of the scheme and the threat of
similar conduct occurring in the future makes the acts continuous.
85. New York City has suffered injury to its business or property within the
meaning of 18 U.S.C. § 1964 (c) by reason of defendants’ violation of 18 U.S.C. § 1962 (c)
because each carton of cigarettes sold to a New York City resident without the filing of a Jenkins
Act report deprives the City of cigarette excise and sales taxes, in an amount to be determined at
trial.
SECOND CLAIM FOR RELIEF
(Violation of § 1962(d))
86. The City realleges paragraphs 1-75 above as if fully set forth herein.
87. New York City is a “person” under 18 U.S.C. §§ 1961 (3) and 1962 (c).
88. Each defendant identified above as associated with an Internet Cigarette
Enterprise is a “person” as defined in 18 U.S.C. §§ 1961 (3) and 1962 (c).
89. Each Internet Cigarette Enterprise identified above is an “enterprise”
within the meaning of 18 U.S.C. § 1961 (4) and 18 U.S.C. § 1962 (c). Each enterprise engaged in
activities affecting interstate commerce at all times relevant to this complaint.
90. Each defendant is associated with one or more of the Internet Cigarette
Enterprises identified above and conspired within the meaning of 18 U.S.C. § 1962 (d) to violate
18 U.S.C. § 1962 (c). Each defendant agreed and intended to participate in the affairs of the
enterprise through a pattern of racketeering by furthering or facilitating an endeavor of the
enterprise that, when completed, would satisfy all of the elements of a criminal offense, to wit,
multiple and repeated acts of wire and mail fraud, consisting of the shipment of cigarettes to
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New York City residents without filing Jenkins Act reports, in violation of 18 U.S.C. §§ 1341
and 1343.
91. With knowledge that an Internet Cigarette Enterprise engaged in multiple
and repeated acts of mail and wire fraud in violation of 18 U.S.C. §§ 1341 and 1343, each
defendant associated with that enterprise agreed to facilitate those acts of other enterprise
associates that are necessary to the success of the scheme to conceal sales of cigarettes to New
York City residents.
92. New York City suffered injury to its business or property within the
meaning of 18 U.S.C. § 1964 (c) by reason of defendants’ violation of 18 U.S.C. § 1962 (d)
because each carton of cigarettes sold to a New York City resident without the filing of a Jenkins
Act report deprives the City of cigarette excise and sales taxes, in an amount to be determined at
trial.
THIRD CLAIM FOR RELIEF
( Violation of GBL §349)
93. The City re-alleges paragraphs 1-75 above as if fully set forth herein.
94. Defendants materially mislead New York customers by omitting to inform
them that the customers must pay taxes on all cigarettes purchased.
95. Defendants materially mislead customers by stating cigarette prices to
customers that intentionally omit the amounts that the customers will have to pay to New York
City and New York State in taxes.
96. By reason of defendants’ deceptive and misleading conduct, the City has
been injured in that it has been unable to collect taxes owed to it, in an amount to be determined
at trial.
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FOURTH CLAIM FOR RELIEF
( Common Law Fraud)
97. The City re-alleges paragraphs 1-75 above as if fully set forth herein.
98. Defendants have a statutory duty under the Jenkins Act to provide New
York taxing authorities with reports of out-of-state purchases of cigarettes by New York City
residents.
99. Defendants intentionally fail to provide Jenkins Act reports to New York
tax authorities in order to conceal cigarette sales on which taxes are owed to the City and State of
New York .
100. Defendants materially mislead customers by stating cigarette prices to
customers that omit the amounts that the customers will have to pay to New York City and New
York State in taxes.
101. As a result of defendants’ intentional omissions to state material facts, the
City has been injured in that it has been unable to collect taxes owed to it, the amount to be
determined at trial.
WHEREFORE , New York City respectfully prays that the Court grant judgment
against the defendants as follows:
a. On the First Claim For Relief, pursuant to 18 U.S.C. 1964 (c), as against
each defendant named herein and each of them jointly and severally,
award the City three times its excise and sales taxes lost as a result of each
defendant’s violation of 18 U.S.C. § 1962(c).
b. On the Second Claim For Relief, pursuant to 18 U.S.C. 1964 (d), as
against each defendant named herein and each of them jointly and
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severally, award the City three times its excise and sales taxes lost as a
result of each defendant’s violation of 18 U.S.C. § 1962(d);
c. On the First and Second Claims For Relief, enjoin defendants’ further
violation of 18 U.S.C. § 1962 (c) and (d) by: i) requiring defendants to file
Jenkins Act reports with New York’s taxing authorities, ii) requiring
defendants to inform their customers that defendants do file Jenkins Act reports,
and iii) requiring defendants to inform their New York City customers that taxes
are due on all cigarette purchases;
d. On the Third Claim for Relief, award the City its actual damages caused by
defendants’ violation of GBL § 349 and enjoin further violations thereof;
e. On the Fourth Claim For Relief, as against each defendant named therein and
each of them jointly and severally, award the City its damages caused by
defendants’ fraud.
f. Award the City its attorney’s fees, pursuant to 18 U.S.C. § 1964 (c).
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g. Award such other and further relief, as the Court may deem appropriate.
JURY DEMAND
Plaintiff hereby demands a jury trial as to all issues in this suit.
Dated: New York, New York
April 12, 2004
MICHAEL A. CARDOZO
Corporation Counsel of the
City of New York
Attorney for Plaintiff The City of New York
100 Church Street , Room 3-158
New York , New York 10007
(212) 788-1324
By:
Eric Proshansky (EP 1777)
Gail Rubin (GR 2833)
Assistant Corporation Counsel24
Action on Smoking and Health
(ASH)
701 4th St. NW / Washington, DC
20001 / (202) 659-4310
A national nonprofit, scientific and educational organization founded
in 1967.
All donations are fully tax deductible.