MINNEAPOLIS (CN) – A federal judge ruled Monday that Costco is not responsible for the millions of dollars an investment company lost in a resale plan devised by a convicted Ponzi schemer.
Ritchie Capital Management Ltd. and Ritchie Special Credit Investments sued Costco Wholesale Corporation in April, claiming it formed relationships with middlemen who obtain luxury goods from authorized dealers and divert those goods to the retailer.
The lawsuit was initially filed in Hennepin County District Court, but was later removed to federal court.
Ritchie claimed Costco used the middlemen to hide the source of luxury goods for its treasure-hunt promotions, since many luxury manufacturers won’t sell directly to the retailer out of fear that doing so will tarnish the luxury image of their brands.
Costco is accused of “sanitizing” the luxury goods by removing or falsifying their packaging, shipping labels, inventory numbers and paper work.
Because of this process, consumers essentially purchased counterfeit goods from Costco, according to Ritchie Capital. The investment company says Costco violated the Minnesota Uniform Deceptive Trade Practices Act and Minnesota Consumer Fraud Act.
In March 2008, Ritchie Capital and Ritchie Special Credit loaned $31 million to Tom Petters so that he could purchase 232,500 Sony PlayStation 3 video-game consoles for sale to Costco, according to the complaint.
However, Petters used a fabricated purchase order to falsely state that Costco placed the orders.
Ritchie Capital says it was unable to obtain the promised security interest in the video-game consoles because of Costco’s practice of hiding the true origin of the goods through the “sanitation process.”
The investment company alleges it lost the $31 million as a direct result of Costco’s “sanitation fraud” after Petters was busted by the FBI. Petters was convicted of 20 counts of fraud in 2010 and is now serving a 50-year sentence in federal prison.
Costco filed a motion to dismiss Ritchie’s lawsuit, which was granted by U.S. District Judge Donovan W. Frank on Monday.
Even assuming that Costco’s alleged sanitizing fraud violated Minnesota law, the judge found, Ritchie failed to show a connection between its loss and the alleged violation.
Frank ruled that the investment company was injured by Petters’ conduct, not Costco’s.
He also found that Ritchie’s claims under the Minnesota Uniform Deceptive Trade Practices Act and Minnesota Consumer Fraud Act were not filed in time. The six-year statute of limitations on those claims began in late 2008, when the FBI raided Petters’ offices and Ritchie learned of the Ponzi scheme, according to the ruling.
“Plaintiffs’ claims are based on Petters’ fraud in 2008 and Costco’s sanitizing fraud; all of which plaintiffs knew by the time Petters was sentenced in 2010. Plaintiffs have therefore failed to plausibly plead a basis to toll the statute of limitations,” Frank wrote.
Frank also ruled that Ritchie Capital and Ritchie Special Credit did not prove that they are likely to be injured again by Costco’s alleged sanitizing practices.
“Plaintiffs cannot show that a fraudster will be able to convince them that he has a purchase order with Costco without plaintiffs confirming the order with Costco,” the judge wrote.