Summary
denying defendant broker's motion to dismiss claim based on respondeat superior
Summary of this case from Compudyne Corp. v. ShaneOpinion
01 Civ. 0781 (JFK)
September 18, 2003
Eric J. Grannis, Esq., LAW OFFICES OF ERIC J. GRANNIS, New York, New York, for Plaintiffs
Howard Wilson, Esq., Andy S. Oh, Esq., PROSKAUER ROSE LLP, New York, New York, for Defendant Fahnestock and Co.
Marvin G. Pickholz, Esq., Jason Pickholz, Esq., PICKHOLZ LAW FIRM LLP, New York, New York, for Defendant Raymond Minicucci
OPINION AND ORDER
Preliminary Statement
This action was commenced by plaintiffs in January 2001 against Fahnestock and Co. ("Fahnestock"), an investment bank; Raymond Minicucci ("Minicucci"), a banker/account executive at Fahnestock; and Aurielo Vuono ("Vouno") and Tarek Elhamoui ("Elhamoui"), officers of Rayvon, Inc. ("Rayvon"). Following discovery, which lasted nearly two years, plaintiffs dismissed Elhamoui as a defendant. In their complaint, plaintiffs claim to be the victims of common law fraud, negligent misrepresentation, breach of contract and unjust enrichment. Now before the Court are two motions for Summary Judgment; one motion is offered by Fahnestock and the other by Minicucci.
Facts
This case involves what each of the parties concedes was a "Prime Bank Fraud." A Prime Bank Fraud is one in which investors are promised inordinately large returns on what they are told is a risk-free investment. A hallmark of these scams are complex loan funding mechanisms designed to confuse unsophisticated investors and lead them to believe the scheme is legitimate. In this case, the plaintiffs were enticed by the promise of a 6-7% monthly (72-84% annual) return on their investment.
In the context of this Opinion and Order, references to "parties" is confined to the plaintiffs, Fahnestock and Minicucci.
Plaintiffs are four Canadian software programmers — Frederick W. Crigger ("Crigger"), David S. McKee ("McKee"), Jack Schueler ("Schueler") and Terry Wilkinson ("Wilkinson"), the wife of one of the programmers and two investment corporations owned by two of the individual plaintiffs. Each of the programmers was employed by Watcom, a small educational software company at the University of Waterloo in Canada. In 1994, Watcom was purchased by another company. Shares of Watcom stock that the programmers had purchased as employees instantly became worth millions of dollars. The company that acquired Watcom was, itself, acquired by yet another company in 1995. See Minicucci Rule 56.1 Statement ¶ 4 . As a result of the Watcom purchase, each of the programmers' networth jumped to at least $3 million. See PI. Rule 56.1 Resp. to Fahnestock ¶¶ l, 23, 50, 76.
After selling his Watcom stock, Crigger went in search of investment advice. Crigger met with an investment advisor by the name of Jeffrey Mason ("Mason") . Crigger had first met Mason at a conference in 1992 and had since made a handful of investments through him. Fahnestock Rule 56.1 Statement ¶ 5. In January of 1995, Mason alerted Crigger to an investment possibility that he had learned of from Sydney Capland ("Capland"). The investment was in a New York company by the name of Rayvon, Inc. ("Rayvon"). Rayvon, Mason told Crigger, purchased bank instruments at a discount and sold them in other markets at a premium. The program developed by Rayvon and its founder, Vuono, offered a risk-free investment that would generate a monthly return of at least 6% (72% annually). See Pl. Mem in Opp. Summ. J., at 15-16.
Crigger had several meetings and phone conversations with Mason. The overwhelming majority of Mason's sales presentation to Crigger was given orally. Mason did provide Crigger with a one page document with redacted names of investors who Mason led Crigger to believe had recently invested in Rayvon. Mason also provided Crigger with a copy of Fahnestock's annual report, and told Crigger that the Rayvon investment would be made through an account at Fahnestock. Mason did not, however, present Crigger with a prospectus or a formal offering memorandum. Fahnestock Rule 56.1 Statement ¶¶ 7, 8. Instead, Mason gave Crigger a one page sheet that set forth the basic mechanics of the "investment programme." Pl. Rule 56.1 Resp. to Fahnestock ¶ 7.
The mechanics of the investment, as explained by Mason and set forth in the fact sheet, included the investor opening a brokerage account with Fahnestock, in which the investor was to place a minimum investment of $3 million. Rayvon, using this investment, would purchase a US Treasury Bill for a one year term. Using the treasury bill, a line of credit would be established with the brokerage firm. The line of credit would then be used to purchase a "Bank Certificate of Deposit" at a discount, which in turn would be sold to a bank in a different country. "Thus, an interest rate `spread' or profit is generated." The investor would receive a 6% monthly return (paid monthly) and a 72% return over the course of the one year investment. The investor, meanwhile, would be protected by "Standing Instructions" placed on the brokerage account at Fahnestock directing the return of the initial investment, unencumbered, upon written notice to do so. If the investor did not receive the 6% return, he could cancel the investment at any time by simply writing to demand the return of his initial funds.See Pl. Mem. in Opp. Summ. J., at 14-15.
Although Crigger believed that the possibility of a 6% monthly return might be "too good to be true," he believed that the Standing Instructions provided enough protection to make the investment risk-free.See Pl. Rule 56.1 Resp. to Fahnestock ¶ 6. Crigger believed the Standing Instructions would insure that, at the very least, he got his initial investment back. Comfortable with the protection provided by the Standing Instructions, Crigger entered into an agreement (the "Funding Agreement") on February 4, 1995 to invest $3 million in the Rayvon investment program. The Funding Agreement provided that Crigger would transfer $3 million to an account he would open at Fahnestock and then instruct Fahnestock to transfer the funds from his account to Rayvon's account at Fahnestock for the purchase of treasury bills.See Pl. Mem. in Opp. Summ. J., at 16.
Attached to the draft Funding Agreement Crigger initially received for his review were sample Standing Instructions. The sample instructions stated that "upon maturity of said Treasury Bill . . . said $3,000,000 will be returned to [Crigger] unencumbered." The final agreement signed by Crigger contained a different set of Standing Instructions, however. Instead of stating that $3 million was to be returned to Crigger, the new instructions provided that "[u]pon maturity of the Treasury Bill, the proceeds are to be transferred to Mr. Frederick Crigger's account at Fahnestock." (emphasis added). Also, and importantly, the instructions were no longer to be signed by Crigger but were instead to be signed by Rayvon. See Pl. Mem. in Opp. Summ. J., at 16-17. The result of these changes was to render the Standing Instructions essentially useless as a protection device. As the signatory of the Standing Instructions, Rayvon had the power to revoke the instructions at any time. Even if the instructions remained in place, the term "proceeds" was far more ambiguous than $3 million and susceptible to multiple interpretations. Crigger claims that no one ever explained the importance of these changes to him.
Crigger's dealings regarding the Rayvon investment were almost exclusively with Mason. Fahnestock Rule 56.1 Statement ¶ 10. Crigger was aware that Rayvon was owned by Vuono, but Crigger never met with him prior to agreeing to invest in Rayvon. Nor did Crigger ask Mason for information about Vuono or his company. Fahnestock Rule 56.1 Statement ¶¶ 12, 13. Crigger was told that Minicucci would be his contact and the broker of his and the Rayvon accounts at Fahnestock. See Fahnestock Rule 56.1 Statement ¶ 10. Crigger first spoke with Minicucci shortly after he signed the Funding Agreement; prior to his transferring the $3 million investment to Fahnestock. According to Crigger, Minicucci and Capland called him to discuss the terms of the Rayvon investment. Minicucci, Crigger claims, was familiar with the Rayvon investment program and explained to him that he would be transferring money to the Rayvon account and that Rayvon would then be engaging in trading. See Pl. Rule 56.1 Resp. to Fahnestock ¶ 10.
That Minicucci would be familiar with the Rayvon investment program is far from surprising. Beyond the obvious fact that Minicucci was the Fahnestock broker in charge of the Rayvon account, Minicucci has other personal connections with Rayvon. Minicucci and Rayvon founder Vuono are long-time friends. In fact, Minicucci served as the bestman at Vuono's wedding. The two friends had also worked at more than one investment bank together. And, when Vouno incorporated Rayvon, Minicucci signed the Certificate of Incorporation as Vuono's witness. Plaintiffs were unaware of these facts prior to entering into their respective Funding Agreements and opening their Fahnestock accounts. See Pl. Mem. in Opp. Summ. J., at 9-8; Compl. Ex. A.
Crigger transferred $3 million to his newly opened Fahnestock account on February 10, 1995. Fahnestock Rule 56.1 Statement ¶ 17. On March 2, 1995, Crigger received the first return on his Rayvon investment, a payment of $210,000. See Minicucci Rule 56.1 Statement ¶ 29. Crigger had previously told Schueler and McKee about the Rayvon opportunity. Now that he believed he was beginning to reap the promised benefits from his investment, Crigger passed this information on to his two friends. McKee, in turn, told Wilkinson about the Rayvon program and Crigger's payment. Excited by the prospect of a risk-free investment that was apparently generating a large return, Schueler, McKee and Wilkinson sought meetings with Mason. Schueler met with Mason at his home, and McKee and Wilkinson met with Mason in Toronto. The sales presentation given to the three of them was almost identical in form and substance to the one given to Crigger. Most of the presentation was oral, the potential investors each received a page of blacked-out names of other investors, a copy of the Standing Instructions and a Fahnestock brochure/annual report. See Pl. Mem. in Opp. Summ. J., at 18-19.
Eventually, after doing some research and asking certain questions of Mason and Minicucci, the remaining plaintiffs invested. Schueler, along with his wife, invested $3 million in Rayvon and McKee and Wilkinson each invested $1 million. McKee and Wilkinson each invested through personal investment corporations they own. As with Crigger, each plaintiff signed Funding Agreements, opened accounts at Fahnestock, transferred funds to those accounts, received Standing Instructions adorned with a Fahnestock stamp and a confirmation in writing from Minicucci that the Standing Instructions had been placed on Rayvon's account. Id.; see also Minicucci Rule 56.1 Statement ¶ 24.
On June 23, 1995, each plaintiff received a letter from Rayvon stating that it was becoming a public company. As part of its effort to go public, the company informed the plaintiffs that they would be issued shares of preferred stock valued at $25 a share in an amount equal to the value of their respective investments in Rayvon. Not sure what to make of the letter or if their investments were impacted, several of the plaintiffs had conversations with Capland, Mason and Minicucci. The plaintiffs claim they were assured that the stock issuance would not affect their investments. The one tangential impact the stock issuance would have on their investment arrangements, plaintiffs were told, is that upon the termination of their contracts they would be required to return their stock to the company in order to get the funds they invested back. Otherwise, plaintiffs were told that the stock issuance was entirely a bookkeeping matter related to the company's effort to go public. Plaintiffs concerns were further allayed when they received their monthly payments on July 17, 1995. See Fahnestock Rule 56.1 Statement ¶ 20; Pl. Rule 56.1 Resp. to Fahnestock ¶ 20; Pl. Mem. in Opp. Summ. J., at 20-21.
In September of 1995, Vouno told Minicucci to remove the Standing Instructions from the Rayvon account. Plaintiffs claim not have been informed of the removal of the Standing Instructions until they attempted to cancel their investments and get their funds back. Minicucci claims that he marked "VOID" across the Stand Instructions on file with Fahnestock and sent a copy of the voided instructions to Capland. Minicucci argues that Capland was an authorized agent of the plaintiffs and that is why he sent the voided instructions to him. Plaintiffs vehemently dispute that Capland was their agent, in fact they claim him to have been a coconspirator of Minicucci, Mason and Vuono's. Furthermore, they contest that the voided instructions were even sent to Capland.
On September 26, 1995, plaintiffs received what would turn out to be the last payments they would see from the Rayvon investment. Concerned that they were no longer receiving payments from Rayvon, some of the plaintiffs contacted Minicucci to express their concern. The plaintiffs allege that Minicucci attempted to assuage their concerns by telling them that he had known Vuono for a long time and that Vuono was a "solid citizen" who "always landed on his feet." Minicucci did not, however, tell the plaintiffs that Vuono had been barred by the SEC in an administrative proceeding "from association with any broker, dealer, investment company, investment adviser or municipal securities dealer" for having violated securities laws. See Pl. Mem. in Opp. Summ. J., at 21-22; Minicucci Rule 56.1 Statement ¶ 64.
When the plaintiffs were unable to have their principal returned, as set forth in their Funding Agreements, plaintiffs became even more concerned. This concern prompted several more calls and e-mails to Minicucci, Vuono, Mason and Capland. Plaintiffs allege to have received the run-around from the defendants. They claim they were constantly being led to believe that Rayvon had experienced certain unanticipated complications with its investments, but that all would soon be remedied and the plaintiffs would eventually get their funds back. In May of 1996, Minicucci set up a meeting at Fahnestock's New York office for McKee, Wilkinson, Vuono, Capland and Elhamoui. Minicucci took McKee and Wilkinson on a tour of Fahnestock's offices before the meeting, but did not attend the meeting itself. At the meeting, the plaintiffs received the same story and assurances they had received for many months. Minicucci Rule 56.1 Statement ¶ 62.
In reality, the Rayvon investment program was a fraud. None of the trading promised ever took place. Instead, the funds were withdrawn from the Fahnestock account by Vuono and used for personal expenditures. In addition, nearly $2 million of the Rayvon investment funds were given to Capland, Mason and their associate Meyer Feldman to compensate them for promoting the investment. Vuono also directed $200,000 of the funds to Minicucci. Plaintiffs contend the $200,000 was a bribe to induce Minicucci to assist the fraud. Minicucci claims the money was simply repayment of a loan that Minicucci had made to his good friend Vuono years earlier. What neither side seems to dispute is that the funds came from the money that the plaintiffs invested and should have been used for trading.
Discussion
I. Standard of Review
This Court may grant summary judgment only if the moving party is entitled to judgment as a matter of law because there is no genuine dispute as to any material fact. See Silver v. City Univ. of New York, 947 F.2d 1021, 1022 (2d Cir. 1991); Montana v. First Fed. Sav. Loan Ass'n, 869 F.2d 100, 103 (2d Cir. 1989);Knicfht v. U.S. Fire Insur. Co., 804 F.2d 9, 11 (2d Cir. 1986). The role of the Court on such a motion "is not to resolve disputed issues of fact but to assess whether there are any factual issues to be tried, while resolving ambiguities and drawing reasonable inferences against the moving party." Knight, 804 F.2d at 11; see also First Fed. Sav. Loan Ass'n, 869 F.2d at 103 (stating that to resolve a summary judgment motion properly, a court must conclude that there are no genuine issues of material fact, and that all inferences must be drawn in favor of the non-moving party).
The movant bears the initial burden of informing the court of the basis for its motion and identifying those portions of the "pleadings, depositions, answers to interrogatories, and admissions to file, together with affidavits, if any," that show the absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). If the movant meets this initial burden, the party opposing the motion must then demonstrate that there exists a genuine dispute as to the material facts. See id.; Silver, 947 F.2d at 1022.
The opposing party may not solely rely on its pleadings, on conclusory factual allegations, or on conjecture as to the facts that discovery might disclose. See Gray v. Darien, 927 F.2d 69, 74 (2d Cir. 1991). Rather, the opposing party must present specific evidence supporting its contention that there is a genuine material issue of fact.See Celotex Corp., 477 U.S. at 324; Twin Lab. Inc. v. Weider Health Fitness, 900 F.2d 566, 568 (2d Cir. 1990). To show such a "genuine dispute," the opposing party must come forward with enough evidence to allow a reasonable jury to return a verdict in its favor. See Anderson v. Liberty Lobby. Inc., 477 U.S. 242, 248 (1986);Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586-87 (1986); Cinema North Corp. v. Plaza at Latham Assocs., 867 F.2d 135, 138 (2d Cir. 1989). If "the party opposing summary judgment propounds a reasonable conflicting interpretation of a material disputed fact," then summary judgment must be denied.Schering Corp. v. Home Insur. Co., 712 F.2d 4, 9-10 (2d Cir. 1983).
II. Plaintiffs' Fraud Claim
A. Compliance with Rule 9(b)
Rule 9(b) of the Federal Rules of Civil Procedure require a plaintiff asserting a fraud claim to do so with particularity. See Fed.R.Civ.P. 9(b). A complaint containing a claim of fraud must "(1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent." Mills v. Polar Molecular Corp., 12 F.3d 1170, 1175 (2d Cir. 1993) (citingCosmas v. Hassett, 886 F.2d 8, 11 (2d Cir. 1989)). "Malice, intent, knowledge, and other condition of mind of a person may be averred generally." Fed.R.Civ.P. 9(b). Plaintiffs must, however, allege facts that give rise to a strong inference of fraudulent intent. See Dooner v. Keefe, Bruyette Woods. Inc., 2003 WL 135706, at *3 (S.D.N.Y. Jan. 17, 2003). The strong inference can be demonstrated either "(a) by alleging facts to show that the defendant had both motive and opportunity to commit fraud, or (b) by alleging facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness." Four Fingers Art Factory. Inc. v. Dinicola, 2001 WL 21248, at *5 (S.D.N.Y. Jan. 9, 2001);see also Shields v. Citytrust Bancorp. Inc., 25 F.3d 1124, 1128 (2d Cir. 1994).
Minicucci argues that the plaintiffs have failed to meet their burden to plead fraud with particularity. In particular, Minicucci states that the plaintiffs did not point, with particularity, to a single statement made by him prior to the plaintiffs' investments that was materially or knowingly false. Minicucci's focus on statements made prior to the investments is inappropriately narrow. Plaintiffs' claim is not confined to fraud-in-the-inducement, rather their claim is that Minicucci was involved in perpetrating a fraud upon them. Plaintiffs have pointed to several statements made by Minicucci that may well have helped perpetuate the fraud by continuing the deception of the plaintiffs. For example, plaintiffs allege that Minicucci made statements during a 1995 phone conversation that were designed to assuage their fears that Vuono had scammed them. See Compl. ¶ 52. Plaintiffs also allege that Minicucci assured them that they would receive repayment of their principal and that the treasury bills were still in Rayvon's Fahnestock account, despite knowing both statements to be untrue. See Compl. ¶¶ 54, 56. These are just two examples of assertions made by the plaintiffs that meet the particularity standard of Rule 9(b). In addition, allegations such as the $200,000 payment to Minicucci and Minicucci's friendship with Vuono are enough to create a strong inference of fraudulent intent.
Whether these statements were fraudulent is, at this point, not relevant. The issue before the Court is not whether the statements were actually fraudulent, but rather whether plaintiffs have pled the cause of action with the necessary particularity. "The primary purpose of Rule 9(b) is to afford the defendant fair notice of the plaintiff's claim and the factual ground upon which it is based." Ross v. Bolton, 904 F.2d 819, 823 (2d Cir. 1990). The substance of plaintiffs' complaint plainly satisfies this purpose. Thus, the request for summary judgment based on the alleged failure to comply with Rule 9(b) is denied.
B. Burden of Proof and Standard of Reliance in Fraud Claims
The movants contend that plaintiffs' claim of fraud should be dismissed because they did not exercise the necessary level of due diligence prior to making their investments that a fraud claim demands. "To prove common law fraud under New York law, a plaintiff must show that (1) the defendant made a material false representation, (2) the defendant intended to defraud the plaintiff thereby, (3) the plaintiff reasonably relied upon the representation, and (4) the plaintiff suffered damage as a result of such reliance." Banque Arabe et Internationale v. Maryland Nat'l Bank, 57 F.3d 146, 153 (2d Cir. 1995); see also The Indep. Order of Foresters v. Donald, Lufkin Jenrette, Inc., 157 F.3d 933, 940 (2d Cir. 1998); May Dep't Stores Co. v. Int'I Leasing Corp., Inc., 1 F.3d 138, 141 (2d Cir. 1993). Minicucci and Fahnestock argue that the plaintiffs did not do enough to investigate the investment before entering into it to satisfy the reasonable reliance requirement.
The gravamen of defendant's argument is that it is not enough that plaintiffs simply relied upon the alleged representations by Minicucci, their reliance must have been reasonable. See, e.g.,Bancrue Arabe, 57 F.3d at 156 (requiring the plaintiff to demonstrate that it actually relied on defendant's misrepresentation, and that such reliance was reasonable). In order for plaintiffs reliance to have been reasonable, they must have done more than simply rely on what they were told by those promoting the investment. Plaintiffs bear a personal responsibility to engage in some form of due diligence prior to entering into an investment. See Granite Partners. L.P. v. Bear, Stearns Co. Inc., 58 F. Supp.2d 228, 259 (S.D.N.Y. 1999) ("Reasonable reliance may be found wanting where the plaintiff failed to conduct its own diligent research into the risks or benefits of a particular transaction."). In fact, the more sophisticated the investor and the more resources available to the investor, the greater the burden on the investor to act to protect itself. See id.; Stuart Silver Assocs., Inc. v. Baco Dev. Corp., 245 A.D.2d 96, 98-99 (1st Dep't 1997) ("Where a party has the means to discover the true nature of the transaction by the exercise of ordinary intelligence, and fails to make use of those means, he cannot claim justifiable reliance on defendant's misrepresentations.").
Plaintiffs contend that defendants seek to hold them to a greater standard than is required by New York law. It is plaintiffs' position that their reliance need only be "justified," not "reasonable." Justifiable reliance they insist is a less stringent standard than reasonable reliance. The Second Circuit has stated, "[t]he proper test of reliance in a fraud case is not `reasonable' reliance, it is `justiable' reliance, a clearly less burdensome test." Gordon Co. v. Ross, 84 F.3d 542, 546 (2d Cir. 1996). Nonetheless, at other times the Second Circuit has stated the test as one of reasonable reliance.See, e.g., Indep. Order of Foresters, 157 F.3d at 940; May Dep't Stores Co., 1 F.3d at 141. In reality, courts — including the Second Circuit — have used the terms interchangeably. What is clear is that in order to establish the existence of a fraud the plaintiff must demonstrate that there was some basis for it to have relied on the misrepresentations. The degree to which a plaintiff must have acted independently to protect itself increases with the level of sophistication of the investor. A neophyte investor with few resources is not expected to have engaged in the same level of due diligence as is a more seasoned and affluent investor. See Abrahami v. UPC Constr. Co., Inc., 224 A.D.2d 231, 234 (1st Dep't 1996); see also Lazard Freres Co. v. Protective Life Ins. Co., 108 F.3d 1531, 1541 (2d Cir. 1997) ("Where sophisticated investors engaged in major transactions enjoy access to critical information but fail to take advantage of that access, New York courts are particularly disinclined to entertain claims of justifiable reliance." (internal citation and quotation marks omitted)).
In this case, the plaintiffs were by no means expert or institutional investors. The plaintiffs, as discussed, were software programmers who had experienced an economic windfall as the result of being in the right place at the right time. Nonetheless, each of the plaintiffs did have some prior investment experience. Certainly enough experience that the risk-free nature and high rate of return promised them should have occasioned an investigation. See Heffernan v. Marine Midland Bank, 267 A.D.2d 83, 84 (1st Dep't 1999) (requiring plaintiffs to make a "reasonable inquiry" where the promised return on risk-free bank notes was extraordinary). Each also had a networth in excess of $3 million which should have allowed them to engage in some degree of due diligence prior to investing in Rayvon. Although defendants claim plaintiffs did no due diligence, the undisputed facts are that the plaintiffs did engage in some investigation. Plaintiffs, among other things, performed a computer search for information about Fahnestock; asked questions of Minicucci; and demanded certain documents.See Pl. Mem. in Opp. Motion for Summ. J., at 46. Whether plaintiffs engaged in enough due diligence relative to their networths and the resources potentially at their disposal to satisfy their burden is a question of fact for a jury to decide. See Granite Partners. L.P. v. Bear, Stearns Co. Inc., 17 F. Supp.2d 275, 290 (stating that the reasonableness of a plaintiff's reliance is a question of fact); Stratford Group. Ltd, v. Interstate Bakeries Corp., 590 F. Supp. 859, 865 (S.D.N.Y. 1984) ("Whether or not reliance was justifiable is ordinarily a question of fact to be determined by the trier of fact on all of the facts and circumstances proven at trial."). As whether plaintiffs did enough is a highly disputed question of fact, the Court is not in a position to grant summary judgment based on failure to investigate as is requested by the movants.
C. Facts Supporting the Fraud Claim Against Minicucci
Minicucci believes he is entitled to summary judgment on the fraud claim against him because the plaintiffs, he argues, have failed to demonstrate that he made either a material false Statement or omission. Nor, Minicucci claims, have the plaintiffs offered any evidence that he acted knowingly and with the requisite scienter. Plaintiffs, naturally, disagree. Plaintiffs claim Minicucci assured them that they would receive repayment of their principal and that the treasury bills were still in Rayvon's Fahnestock account, despite knowing both statements to be untrue. See Compl. ¶¶ 54, 56. Plaintiffs raise other examples of what they allege were misrepresentations by Minicucci, but their strongest argument that Minicucci made fraudulent misrepresentations on which they relied is with respect to the Standing Instructions. Plaintiffs allege that Minicucci repeatedly assured them that the money they invested would be protected because the Standing Instructions would be followed to the letter. According to the plaintiffs, Minicucci deliberately misled them with respect to the level of protection the Standing Instructions provided.See Pl. Mem. in Opp. Motion for Summ. J., at 50-51.
As discussed, Minicucci makes much of the fact that he did not meet or speak to any of the plaintiffs until after they had already agreed to invest in the Rayvon program. This argument is not persuasive. If Minicucci purposefully misled the plaintiffs into believing their money was safe when he knew otherwise and as a result the plaintiffs lost money, he committed fraud. Minicucci contests that he misled the plaintiffs. He claims that Mr. Schueler is the only plaintiff he personally assured that the Standing Instructions would be followed. Minicucci contends, that his statement reflected a hoped for future occurrence, and as such, cannot sustain a fraud claim. See Minicucci Reply, at 13. Schueler claims otherwise. It is his contention that Minicucci's statement was one of unequivocal assurance, not mere hope. Although the Court is inclined to side with Schueler, that determination is one to be left for a jury.See SEC v. Hasho, 784 F. Supp. 1059, 1106 (S.D.N.Y. 1992) ("The issue of the existence of misrepresentation or omission, or other fraudulent device is a question of fact.").
The fact that Schueler is the only person Minicucci told directly that the Standing Instructions would be followed does not, as Minicucci argues, prevent the other plaintiffs from claiming he made fraudulent misrepresentations about the Standing Instructions to them. Plaintiffs claim that Minicucci improperly placed a Fahnestock stamp and seal on the Standing Instructions with the intention of misleading the plaintiffs into believing they carried a greater degree of protection than was actually the case. See Pl. Mem. in Opp. Motion for Summ. J., at 50-51. Placing a stamp and a seal on the instructions can constitute a misrepresentation. According to the Restatement (Second) of Torts § 525, "`Misrepresentation' . . . denote[s] not only words spoken or written but also any other conduct that amounts to an assertion not in accordance with the truth." Thus, if Minicucci placed the stamp and seal on the Standing Instructions with the intention of misleading the plaintiffs, he may be liable for fraud.
Minicucci contends that even if a question of fact exists as to whether or not he misled the investors, the plaintiffs have failed to provide sufficient evidence of his intent to defraud them to put the question of fraud before a jury. In order for Minicucci to be found liable, the plaintiffs must demonstrate that he intended to defraud them.See Dooner, 2003 WL 135706, at *3. "Fraud is rarely susceptible to direct proof and must ordinarily be established by circumstantial evidence and legitimate inferences arising therefrom."See Goshen Litho, Inc. v. Kohl's, 582 F. Supp. 1561, 1564 (S.D.N.Y. 1983). Plaintiffs point to the $200,000 that was funneled from their Fahnestock accounts to Minicucci and Minicucci's long-standing friendship with Vuono as circumstantial evidence of Minicucci's involvement and intent. See Pl. Mem. in Opp. Motion for Summ. J., at 49. Plaintiffs have raised enough suspicion to avoid summary judgment and warrant allowing a jury to determine whether Miniccuci intentionally misled them.
III. Plaintiff's Negligent Misrepresentation Claim
Plaintiffs' second cause of action is for negligent misrepresentation. Minicucci and Fahnestock seek summary judgment on the basis that plaintiffs have failed, as a matter of law, to satisfy the elements of a negligent misrepresentation claim. For plaintiffs' claim to be successful they must establish that Minicucci and Fahnestock each had "a duty to use reasonable care to impart correct information due to a special relationship existing between the parties, that the information provided by [the defendants] was incorrect or false, and that defendants reasonably relied upon the information." Fleet Bank v. Pine Knoll Corp., 290 A.D.2d 792, 795 (3d Dep't 2002). Having already determined that legitimate questions of fact exist as to whether the defendants misled the plaintiffs and whether the plaintiffs reliance on those representations was reliable, the lone issue to be addressed is whether the defendants and plaintiffs had the necessary relationship to sustain a negligent misrepresentation claim.
"A claim for negligent misrepresentation can only stand where there is a special relationship of trust or confidence which creates a duty for one party to impart correct information to another." Hudson River Club v. Consol. Edison Co. of N.Y., Inc., 275 A.D.2d 218, 220 (1st Dep't 2000). In determining whether a special relationship exists, New York courts consider "whether the person making the representation held or appeared to hold unique or special expertise; whether a special relationship of trust or confidence existed between the parties; and whether the speaker was aware of the use to which the information would be put and supplied it for that purpose." Kimmell v. Schaefer, 89 N.Y.2d 257, 264 (1996). Although a broker-client relationship can evolve into a special relationship, see Haniv v. SEC, 415 F.2d 589, 596 (2d Cir. 1969), the mere fact that Minicucci and the plaintiffs had a broker-client relationship does not in and of itself create a special or fiduciary relationship. See Rush v. Oppenheimer Co., Inc., 681 F. Supp. 1045, 1055 (S.D.N.Y. 1988). Where the broker is not recommending investments to the client, but rather acting primarily as a banker, as in the case at bar, a fiduciary duty is not created.
In light of the fact that a special relationship did not exist between the movants and the plaintiffs, plaintiffs claim of negligent misrepresentation must fail as a matter of law. Thus, the Court grants movants' request for summary judgment in their favor on plaintiffs second cause of action.
IV. Breach of Contract Claim
Plaintiffs' third claim for relief is for breach of contract. In the complaint, the breach of contract claim is premised on the allegation that Minicucci promised at least one of the investors that he would follow the Standing Instructions and return his investment within a year. Compl. ¶ 92. Assuming for the sake of this summary judgment motion, that Minicucci gave the alleged assurances to at least one of the plaintiffs, plaintiffs cannot rely on those statements as a basis for a breach of contract claim. As such, plaintiffs third cause of action must be dismissed.
In order to state a valid claim for breach of contract, plaintiffs must establish (1) the existence of a contract, (2) performance of the contract by the plaintiffs, (3) a failure on the part of the defendants to perform their duties under the contract, and (4) damages to the plaintiffs resulting from the breach. See K. Bell Assocs., Inc. v. Lloyd's Underwriters, 827 F. Supp. 985, 988 (S.D.N.Y. 1993); Nordic Bank PLC v. The Trend Group. Ltd., 619 F. Supp. 542, 561 (S.D.N.Y. 1985). In this case, plaintiffs have failed to establish the most fundamental element of a breach of contract claim, the existence of a contract. Basic contract law dictates that a contract can only exist where there has been a meeting of the parties' minds indicating their mutual intent to be bound by a contract. Oscar Prods., Inc. v. Zacharius, 893 F. Supp. 250, 255 (S.D.N.Y. 1995).
Minicucci's alleged assurances simply do not give rise to the formation of a contract. Minicucci's assurances were given in response to questions from an investor seeking comfort.
At the time of the exchange, the investor, Schueler, had already signed his Funding Agreement. The Funding Agreement, to which neither Minicucci nor Fahnestock were signatories, set forth that Schueler would open an account with Fahnestock. Considering this fact, and the nature of Schueler's questions, it cannot be argued that Schueler was making a contract offer to Minicucci. As such, Minicucci cannot be considered to have accepted an offer.
In their brief opposing summary judgment, plaintiffs focus on what it claims are numerous examples of failures by Fahnestock to comply with National Association of Securities Dealers regulations. The implication is that by failing to comply with the regulations, Fahnestock breached a brokerage agreement with the plaintiffs as customers. This claim was not advanced in plaintiffs' complaint. As discussed, the complaint focused solely on the assurances Minicucci offered Schueler. The theory that the breach was of the brokerage agreement comes from leftfield and was not advanced until after the movants had already engaged in two years of discovery and briefed their summary judgment motions. Thus, the Court will not entertain this new theory.
The Court did receive a request from plaintiffs on September 2, 2003, dated August 29, 2003, for leave to amend the complaint to include a basis for breach of the brokerage agreement. That request is hereby denied. The request was made nearly 28 months after the Court issued a scheduling order requiring any amendments to the complaint to be filed by September 14, 2001. The current request to amend comes approximately two years after the Court's deadline and after these summary judgment motions have been fully briefed and argued. The request is untimely and the Court does not believe good cause exists to grant it.
V. Unlust Enrichment
As their fourth cause of action, plaintiffs allege the defendants were each unjustly enriched at their expense. In order for plaintiffs to prevail upon their unjust enrichment claim, they must demonstrate that (1) the defendant was enriched (2) at plaintiffs' expense, (3) and allowing the defendants to retain the benefit would be against equity and good conscience. See Something Old, Something New, Inc. v. OVC, Inc., 1999 WL 1125063, at *13 (S.D.N.Y. Dec. 8, 1999); Clark v. Daby, 300 A.D.2d 732, 732 (3rd Dep't 2002). The general theory behind unjust enrichment is that one party should not be allowed to enrich himself at the expense of another.Reprosystem, B.V. v. SCM Corp., 727 F.2d 257, 263 (2d Cir. 1984).
Plaintiffs claim is based on the premise that Minicucci and Fahnestook each received compensation for the roles they played with respect to the plaintiffs' investments. According to the plaintiffs, Minicucci received $200,000 from the funds that were invested by them and another $95,000 in commissions. Pl. Mem. in Opp. Motion for Summ. J., at 77. Fahnestock, plaintiffs assert, received $150,000 in commissions from its handling of the Rayvon and investors accounts. Id. To allow the defendants to keep the money they received for their association with a prime bank fraud, plaintiffs argue, would be unjust.
Plaintiffs unjust enrichment claim is little more than a recasting of its common law fraud claim in the guise of an equity proceeding. Typically, where a remedy at law will provide an adequate action for compensatory damages, a court will not allow a claim in equity. See Strom v. Goldman. Sachs Co., 202 F.3d 138, 144 n. 6 (2d Cir. 1999); Restatement (Restitution) § 160, cmt. e. In this instance, plaintiffs' fraud claim provides an adequate remedy at law and removes the need to entertain a claim in equity. Thus, plaintiffs' unjust enrichment claim is dismissed.
VI. Respondeat Superior
Plaintiffs seek to hold Fahnestock jointly liable for the actions of Minicucci under the doctrine of respondeat superior. The doctrine of respondeat superior renders an employer vicariously liable for a tort committed by its employee while acting within the scope of his employment. Riviello v. Waldron, 47 N.Y.2d 297, 302 (1979). "Pursuant to this doctrine, the employer may be liable when the employee acts negligently or intentionally, so long as the tortious conduct is generally foreseeable and a natural incident of the employment."Judith M. v. Sisters of Charity Hosp., 93 N.Y.2d 932, 933 (1999). The doctrine allows a broker-dealer to be held liable for the misdeeds of its employee broker. See Marbury Mgmt. Inc. v. Kohn, 629 F.2d 705, 711-13 (2d Cir. 1980).
In determining whether an employer should be vicariously liable for the acts of its employee, the critical issue invariably becomes whether the employee acted within the scope of his employment. See In re Laser Arms Corp. Sec. Litig., 794 F. Supp. 475, 485 (S.D.N.Y. 1989). Liability inures to the employer when the employee "is doing something in furtherance of the duties he owes to his employer and where the employer is, or could be, exercising some control, directly or indirectly, over the employee's activities." Lundberg v. State of New York, 25 N.Y.2d467, 470 (1969). "If, however, an employee for purposes of his own departs from the line of his duty so that for the time being his acts constitute an abandonment of his service, the master is not liable." Judith M., 93 N.Y.2d at 933 (internal quotation marks omitted). It is the plaintiffs' burden to allege facts sufficient to infer that the employee was acting within the scope of his employment and not on a "frolic and detour." See Energy Factors Inc. v. Nuevo Energy Co., 1992 WL 170683, at *6 (S.D.N.Y. July 7, 1992).
The New York Court of Appeals has set forth some guidelines for considering whether the employee acted within the scope of his employment.
Among the factors to be weighed are: the connection between the time, place and occasion for the act; the history of the relationship between employer and employee as spelled out in actual practice; whether the act is one commonly done by such an employee; the extent of departure from normal methods of performance; and whether the specific act was one that the employer could reasonably have anticipated.Riviello, 47 N.Y.2d at 303. Plaintiffs' claim that on their face, Minicucci's actions fit squarely within the scope of his employment. Minicucci, they argue, did for them some of the things brokers typically do: opening up brokerage accounts, accepting funds for deposit, transferring funds and advising clients. Miniccuci acted from Fahnestock's offices during normal business hours and hosted a meeting with plaintiffs in its office.
Fahnestock argues that Minicucci was acting outside the scope of his employment. Fahnestock claims that Minicucci cannot be considered to have been acting within the scope of his employment because his acts were not in furtherance of the company's business. A principal may, however, be liable for its agent's fraud even though the fraud was not committed in furtherance of the principal's business if the agent acted with apparent authority. See Am. Soc'y of Mech. Eng'rs, Inc. v. Hydrolevel Corp., 456 U.S. 556, 566 (1982) (stating that liability is premised on the fact that the agent's position facilitates the consummation of the fraud). Fahnestock contends that this fact is trumped by the fact that the adverse interest exception applies. "Under the [adverse interest] exception, management misconduct will not be imputed to the [employer] if the [employee] acted entirely in his own interests and adversely to the interests of the [employer]." Wight v. BankAmerica Corp., 219 F.3d 79, 87 (2d Cir. 2000). This argument has been rejected by other courts. "lt is well established that an employer, whose employee acts with apparent authority, may be held liable for the misrepresentations of his employee, even though the employer received no benefit from the employee's action, even though the employee was acting entirely for his own purposes, and even though the employee was acting against the interests of the principal." In re CitiSource, Inc. Sec. Litig., 694 F. Supp. 1069, 1078 (S.D.N.Y. 1988) (citing several cases in support of the stated proposition).
Apparent authority exists where a third party believes, and has reason to believe, that the agent with whom it is dealing is acting within the scope of his authority. See Strip Clean Floor Refinishing v. N.Y. Dist. Council No. 9 Bhd of Painters, 333 F. Supp. 385, 395 (E.D.N.Y. 1971). Critical to the creation of apparent authority are the words and conduct of the principal. The principal must in some manner lead the third party to believe the agent is acting within the scope of his authority. See Hallock v. N.Y., 64 N.Y.2d 224, 231 (1984). Furthermore, the third party's reliance on the apparent authority of the agent must be reasonable given the circumstances.See Strip Clean Floor Refinishing, 333 F. Supp. at 396; see also Hallockf, 64 N.Y.2d at 231;McGarry v. Miller, 158 A.D.2d 327, 328 (1st Dep't 1990).
Fahnestock suggests that apparent authority cannot be found to exist in this case because the plaintiffs failed in their duty to investigate whether Minicucci was acting outside of his authority. It is true that in certain instances plaintiffs bear a duty of diligence to determine that the agent is not acting beyond the scope of his authority. That responsibility emerges, however, "where the facts and circumstances are such as to put [plaintiff] on inquiry as to the power and good faith of the agent." Strip Clean Floor Refinishing, 333 F. Supp. at 396 (italics omitted). In the case at bar, Minicucci's actions seemed, on the surface, to be entirely consistent with the duties of a broker and, therefore, well within his scope. To require a client to ask the management of his broker's firm whether the broker had the authority to open brokerage accounts, accept funds for deposit and transfer funds among accounts seems a bit unreasonable. And, the reasonableness of the reliance without investigation is most certainly a question for a jury to decide, not the Court in the confines of a summary judgment motion. Similarly, the more basic question of whether Minicucci was acting within the scope of his employment — thereby possibly obviating the need to determine whether apparent authority exists — is one for a jury to answer.See Riviello, 47 N.Y.2d at 303 ("[B]ecause the determination of whether a particular act was within the scope of the servant's employment is so heavily dependent on factual considerations, the question is ordinarily one for the jury.")
VII. Punitive Damages
Minicucci seeks to have plaintiffs' request for punitive damages dismissed. Punitive damages are intended to act as a deterrent and punishment for the offender, while also serving as a warning to others who might consider engaging in similar actions. See Home Ins. Co. v. Am. Home Prod. Corp., 75 N.Y.2d 196, 203 (1990). In general, punitive damages are not available to remedy private wrongs.See Rocanova v. Equitable Life Assurance Soc'y of the U.S., 83 N.Y.2d 603, 613 (1994) . Rather punitive damages in fraud actions are reserved for instances in which the fraud is "aimed at the public generally, is gross and involves high moral culpability."Walker v. Sheldon, 10 N.Y.2d 401, 405 (1961).
In this case the fraud was not aimed at the public generally. Plaintiffs contend that ponzi schemes by their very nature are aimed at the public. Although the complaint adequately alleges a fraud, it was not a ponzi scheme aimed at the public in general. This alleged fraud was perpetrated against four individuals, and no evidence has been offered to demonstrate that the target of the fraud went beyond the instant plaintiffs. Thus, plaintiffs have failed to establish that they are entitled to punitive damages and the jury will not be asked to award them.
VIII. Claim of Failure to Mitigate
Minicucci also seeks to prevent plaintiffs from recovering any damages incurred after May 1995. Minicucci argues that the plaintiffs were aware as early as May 1995 that their investment was not generating the promised for returns and should have acted to mitigate their damages at that point. This argument is foolish. There is no indication that plaintiffs were aware as early as May 1995 that they could not get their principal back. Moreover, considering the fact that their money had in essence been stolen, there was little they could have done to mitigate.
Conclusion
Plaintiffs' first cause of action, for common law fraud, is not dismissed. Plaintiffs' second, third and fourth causes of action — for negligent misrepresentation, breach of contract and unjust enrichment, respectively — are dismissed for the reasons set forth above. Plaintiffs may seek to have a jury hold Fahnestock liable under a theory of respondeat superior. Plaintiffs may not seek punitive damages, but may seek compensatory damages for losses related to their first cause of action regardless of whether they occurred subsequent to May 1995.
All parties, including those not involved in these summary judgment motions, are directed to appear before the Court on October 22, 2003 at 10:15 a.m. for a pretrial conference at which a ready for trial date will be set.
SO ORDERED.