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finding that, under Janus, plaintiff's allegations were insufficient to survive dismissal when they failed to allege that the prospectuses at issue were issued by investment-adviser defendants or that "the statements therein came from those defendants"
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13 CV 5804 (VB)
12-15-2014
DIETMAR ROSE, KUPIAN FROLOV a/k/a SKIP FROLOV, HAROLD RODENBEIKER, TOM SCHNEIDER, DAVID PETERSON, LEWIS NORMAN FERRIER, GARY FRITZ, MERLE GILBERTSON, JAMES KELLER, DORAYN KEMMITZ, PAULA KOCHON, RALPH MARTIN, JOHN VIGLUCCI JR., Plaintiffs, v. RAHFCO MANAGEMENT GROUP, LLC, ANTHONY JOHN JOHNSON, RANDAL KENT HANSEN a/k/a RANDY HANSEN, BRUCE HAGER, TARA HANSEN-LEINEN, VINCENT PUMA, KEVIN NUGENT, WARD ONSA, HUDSON PARTNERS NYC LLC a/k/a HUDSON CAPITAL PARTNERS CORPORATION, Defendants.
MEMORANDUM DECISION :
Plaintiffs, the alleged victims of a Ponzi scheme perpetrated by defendant Randal Hansen, bring this action against Hansen and others allegedly involved in the scheme, asserting claims under federal securities laws and New York law. Defendants Tara Hansen-Leinen, Vincent Puma, and Hudson Partners NYC LLC ("Hudson Partners"), have moved to dismiss the complaint. (Docs. ##46, 50). Puma and Hudson Partners have also moved to dismiss the cross- claim brought against them by defendant Rahfco Management Group, LLC ("Rahfco Management"). (Doc. #78). For the following reasons, all motions are GRANTED.
On January 22, 2014, after a jury trial in the District of South Dakota, Hansen was convicted of conspiracy, mail fraud, and wire fraud. He was sentenced to a term of 108 months' imprisonment and ordered to pay more than $17 million in restitution. United States v. Hansen, 13 CR 40053 (D.S.D.) (Doc. #77). He filed for bankruptcy in May 2014. Accordingly, this case is currently stayed as against him. See 11 U.S.C. § 362(a).
This action is related to another case brought by different plaintiffs alleging nearly the same claims against many of the same defendants. See Krasner v. Rahfco Funds LP, 11 CV 4092 (S.D.N.Y.) (VB). By separate Memorandum Decisions dated August 9, 2012, the Court granted in part and denied in part Hansen-Leinen's motion to dismiss the amended complaint in Krasner (11 CV 4092, Doc. #191), and granted the motion to dismiss filed by Puma and Hudson Partners (11 CV 4092, Doc. #193). Familiarity with those decisions is presumed.
Puma and Hudson Partners' motion to dismiss the cross-claim is unopposed.
The Court has subject matter jurisdiction pursuant to 28 U.S.C. §§ 1331 and 1367.
BACKGROUND
In deciding the pending motions, the Court accepts as true all well-pleaded factual allegations and draws all reasonable inferences in favor of the non-moving parties.
From at least November 2004 through May 2011, Hansen and defendant Anthony Johnson convinced plaintiffs and other investors to invest in multiple hedge funds (collectively, the "Rahfco Investment Vehicles"). Hansen was the "Founder, Managing Member and President of each general partner in each of the Rahfco Investment Vehicles." (Compl. ¶ 31). As such, he "control[led] all of [the] Rahfco Investment Vehicles' operations and activities." (Id.). Rahfco Management, of which Hansen owned 100 percent, was the general partner of certain of the Rahfco Investment Vehicles. Rahfco Management managed those hedge funds and had discretionary authority to invest their assets.
Johnson, like Hansen, is currently in prison, albeit for conduct largely unrelated to the Ponzi scheme giving rise to this case. In 2008 Johnson pleaded guilty in the Eastern District of New York to conspiracy to commit securities, mail, and wire fraud. He was later sentenced to eighteen months' imprisonment. He pleaded guilty again in 2011 in the Eastern District of New York to an unrelated wire fraud charge and was sentenced to 102 months' imprisonment to be served consecutively with his prior eighteen-month sentence.
Hansen and Johnson were the "public faces" of the Rahfco Investment Vehicles, making presentations to and answering questions from potential and current investors. (Compl. ¶ 8). Hansen and Johnson misled investors by telling them the Rahfco Investment Vehicles made sufficient earnings through trading activity to pay investors, when in reality the hedge funds did not follow any trading strategy and investors were paid using money from other investors. Plaintiffs allege they lost millions of dollars as a result of this Ponzi scheme.
Tara Hansen-Leinen is Hansen's daughter. She was the Vice President of Operations for Rahfco Management, in which role she "aided in processing the intake of new investors to Rahfco Investment Vehicles, worked in conjunction with agents of Hansen and Johnson, and regularly communicated and informed investors [about] the status of their investments." (Compl. ¶ 34). She oversaw the "distribution and dissemination of information for the day-to-day operations of Rahfco Management and financial statements directly to investors. Her supervisory role also gave her control over the release of statements and updates to investors." (See, e.g., id. ¶ 51). False and misleading information allegedly was distributed under her control and supervision. Plaintiffs also allege Hansen-Leinen failed to disclose to potential and current investors (i) the existence of "litigation [that] had the potential to drastically and adversely affect their investments," (ii) "Johnson's past and current involvement in each Rahfco Investment Vehicle[]," and (iii) Johnson's criminal convictions. (See, e.g., id. ¶¶ 431-33).
Hudson Partners served as an investment advisor to the Rahfco Investment Vehicles. Hudson Partners was responsible for managing the Rahfco Investment Vehicles' portfolios, executing trades, providing information and advice, carrying out research, and providing analyses and recommendations to the general partners of the Rahfco Investment Vehicles.
Puma was Hudson Partners' manager and controlling member. Plaintiffs allege Puma "repeatedly provided false, inflated information regarding the value of the funds and the funds' trading performance information to Hansen, Johnson, or the general partners of the respective Rahfco Investment Vehicles." (Compl. ¶ 11). "In turn, these false trading returns and valuations were reported on [a] monthly and quarterly basis to investors." (Id.).
Plaintiffs further allege "Puma had supervisory control of the content of the Rahfco Investment Vehicles' prospectuses as it relates to the section entitled, 'Investment Program.'" (Compl. ¶ 57). But "the stated investment strategies within the Rahfco Investment Vehicles' prospectuses do not, in fact, actually state the means with which investor funds were actually used." (Id. ¶ 58). Plaintiffs allege "[a]ll or some" of their investments "were fraudulently conveyed" to Puma, Hudson Partners, "other individual defendants, or other investors in furtherance of the underlying Ponzi scheme." (See, e.g., id. ¶¶ 58, 74).
Plaintiffs also accuse Puma and Hudson Partners of failing to disclose the same material information Hansen-Leinen allegedly hid from plaintiffs, as well as "when and by what measure" Puma, Hudson Partners, and their traders "deviated from the investment strategy and plan within the Rahfco Investment Vehicles' prospectuses." (See, e.g., Compl. ¶¶ 441-44, 470-73).
Plaintiffs' complaint asserts claims for: (i) violations of Section 10b of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Securities and Exchange Commission ("SEC") Rule 10b-5, 17 C.F.R. § 240.10b-5; (ii) violations of Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a); (iii) conversion; (iv) unjust enrichment; (v) a constructive trust; (vi) an accounting; (vii) breach of fiduciary duty; (viii) negligence; and (ix) agency liability.
On May 30, 2014, Rahfco Management answered the complaint and asserted a cross-claim for contribution against Puma, Hudson Partners, and defendant Ward Onsa, a former trader for the Rahfco Investment Vehicles. Rahfco Management's cross-claim states, in its entirety:
Defendant incorporates by reference its answers as set forth above. If Plaintiffs recover against the defendants named in this action, then Defendant RAHFCO Management Group LLC will be entitled to an apportionment of responsibility for damages from co-defendants Vincent Puma, Ward Onsa and Hudson Partners NYC LLC, and will also be entitled to recover from Vincent Puma, Ward Onsa and Hudson Partners NYC LLC for their proportional share commensurate with any judgment that may be awarded to Plaintiffs.(Doc. #66).
DISCUSSION
Although Hudson Partners has also moved to dismiss under Rule 12(b)(5) for insufficient service of process, the Court need not consider whether service on Hudson Partners was proper because plaintiffs' claims fail on the merits. See United States v. Vazquez, 145 F.3d 74, 80 (2d Cir. 1998) (assuming but not deciding defendant was properly served "[b]ecause the merits of the case against [him] are easily resolved"); Taylor v. Westor Capital Group, 943 F. Supp. 2d 397, 400 (S.D.N.Y. 2013) ("[D]ismissal under Rule 12(b)(6) renders unnecessary any further consideration of the parties' dispute over service of process under Rule 12(b)(5).").
In deciding a Rule 12(b)(6) motion to dismiss, the Court evaluates the sufficiency of the operative complaint under the "two-pronged approach" announced by the Supreme Court in Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009). First, plaintiff's legal conclusions and "[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements," are not entitled to the assumption of truth and are thus not sufficient to withstand a motion to dismiss. Id. at 678; Hayden v. Paterson, 594 F.3d 150, 161 (2d Cir. 2010). Second, "[w]hen there are well-pleaded factual allegations, a court should assume their veracity and then determine whether they plausibly give rise to an entitlement to relief." Ashcroft v. Iqbal, 556 U.S. at 679.
To survive a Rule 12(b)(6) motion, the allegations in the complaint must meet a standard of "plausibility." Id. at 678; Bell Atl. Corp. v. Twombly, 550 U.S. 544, 564 (2007). A claim is facially plausible "when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 556 U.S. at 678. "The plausibility standard is not akin to a 'probability requirement,' but it asks for more than a sheer possibility that a defendant has acted unlawfully." Id.
II. Federal Claims
A. Section 10b and Rule 10b-5
"To state a claim under § 10(b) and Rule 10b-5, plaintiffs must allege that [defendants] (1) made misstatements or omissions of material fact; (2) with scienter; (3) in connection with the purchase or sale of securities; (4) upon which plaintiffs relied; and (5) that plaintiffs' reliance was the proximate cause of their injury." Lattanzio v. Deloitte & Touche LLP, 476 F.3d 147, 153 (2d Cir. 2007) (internal quotation marks omitted).
Plaintiffs' allegations must satisfy the heightened pleading requirements of Federal Rule of Civil Procedure 9(b), Stevelman v. Alias Research Inc., 174 F.3d 79, 84 (2d Cir. 1999), and the Private Securities Litigation Reform Act of 1995 ("PSLRA"), Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 321 (2007).
Relying on EP Medsystems, Inc. v. EchoCath, Inc., 235 F.3d 865 (3d Cir. 2000), plaintiffs ask the Court to relax the PSLRA's pleading standard because all of the information concerning the alleged fraud is purportedly within defendants' knowledge and control. But the court in EP Medsystems noted it had eased the pleading standards only "[i]n cases prior to" the passage of the PSLRA, and the court acknowledged the PSLRA's "heightened pleading requirement" applied in that case. Id. at 882. The Court therefore will apply the more stringent pleading standard of the PSLRA here.
Rule 9(b) requires a plaintiff to "state with particularity the circumstances constituting fraud or mistake." Fed. R. Civ. P. 9(b). Under the Rule, a plaintiff must "(1) detail the statements (or omissions) that the plaintiff contends are fraudulent, (2) identify the speaker, (3) state where and when the statements (or omissions) were made, and (4) explain why the statements (or omissions) are fraudulent." Eternity Global Master Fund Ltd. v. Morgan Guar. Trust Co. of N.Y., 375 F.3d 168, 187 (2d Cir. 2004) (internal quotation marks omitted).
The PSLRA sets the standard for pleading scienter, which is "a mental state embracing intent to deceive, manipulate, or defraud." Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. at 319 (internal quotation marks omitted). Under the PSLRA, plaintiffs must plead facts giving rise to a "'strong inference' of fraudulent intent." Kleinman v. Elan Corp., plc, 706 F.3d 145, 152 (2d Cir. 2013) (quoting 15 U.S.C. § 78u-4(b)(2)(A)). "This strong inference of scienter can be established by alleging either (1) that defendants had the motive and opportunity to commit fraud, or (2) strong circumstantial evidence of conscious misbehavior or recklessness." Capital Mgmt Select Fund Ltd. v. Bennett, 680 F.3d 214, 225 (2d Cir. 2012) (internal quotation marks omitted). A "strong inference" of fraudulent intent is one that is not "merely 'reasonable' or 'permissible,'" but one "a reasonable person would deem . . . cogent and at least as compelling as any opposing inference one could draw from the facts alleged." Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. at 324.
1. Hansen-Leinen
Plaintiffs have failed to state a Section 10(b) or Rule 10b-5 claim against Hansen-Leinen because the complaint does not adequately plead her scienter.
Plaintiffs invoke the "conscious misbehavior or recklessness" theory of scienter. (Pls.' Mem. (Doc. #71) at 17-19). Under this theory, plaintiffs must allege, "at the least, conduct which is highly unreasonable and which represents an extreme departure from the standards of ordinary care to the extent that the danger was either known to the defendant or so obvious that the defendant must have been aware of it." ECA, Local 134 IBEW Joint Pension Trust of Chicago v. JP Morgan Chase Co., 553 F.3d 187, 202-03 (2d Cir. 2009). Allegations that a defendant "knew facts or had access to information suggesting that [her] public statements were not accurate," or "failed to check information [she] had a duty to monitor," are generally required. See id. at 199 (internal quotation marks omitted). "Where plaintiffs contend defendants had access to contrary facts, they must specifically identify the reports or statements containing this information." Novak v. Kasaks, 216 F.3d 300, 309 (2d Cir. 2000).
Plaintiffs argue their allegations allow an inference that Hansen-Leinen must have known about the Ponzi scheme—and, therefore, must have known facts contradicting the financial statements and updates she provided to plaintiffs—because the complaint alleges (i) the scheme lasted for years and resulted in the loss of millions of dollars; (ii) she was Rahfco Management's Vice President of Operations; and (iii) her own father perpetrated the fraud. (See Pls.' Mem. (Doc. #71) at 18). But these allegations are too general to create the requisite "strong inference" of scienter. Capital Mgmt. Select Fund Ltd. v. Bennett, 680 F.3d at 225. Indeed, plaintiffs do not "specifically identify the reports or statements" that should have tipped Hansen-Leinen off that the financial statements and updates she sent to plaintiffs were false. Novak v. Kasaks, 216 F.3d at 309. Absent such specific allegations, Hansen-Leinen's "job title of senior management," In re Health Mgmt., Inc. Secs. Litig., 970 F. Supp. 192, 204 (E.D.N.Y. 1997), "the size of the fraud," In re BISYS Secs. Litig., 397 F. Supp. 2d 430, 447 (S.D.N.Y. 2005) (internal quotation marks omitted), and the fact that her father committed fraud, see In re DDAVP Direct Purchaser Antitrust Litig., 585 F.3d 677, 695 (2d Cir. 2009) (rejecting "guilt by association" theory), are insufficient to plead scienter.
Accordingly, plaintiffs' Section 10(b) and Rule 10b-5 claim against Hansen-Leinen is dismissed.
2. Puma and Hudson Partners
Plaintiffs have failed to state a Section 10(b) or Rule 10b-5 claim against Puma and Hudson Partners because plaintiffs have not adequately alleged those defendants "made" any misstatements or omissions of material fact.
a. Misstatements
Under Section 10(b) and Rule 10b-5, the "maker" of a statement is "the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it." Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296, 2302 (2011). In Janus, the Supreme Court considered whether an investment advisor was liable for "making" false statements in a client's prospectuses when the advisor was "significantly involved in preparing the prospectuses," but did not file them with the SEC. Id. at 2299, 2305. The Court held that only the named filer of a prospectus "makes" the statements therein, absent allegations that either (i) another party actually filed the prospectus and falsely attributed its statements to the named filer, or (ii) there is evidence on the face of the prospectus the statements therein came from another party. Id. at 2304-05. Because there were no allegations the advisor in Janus filed the prospectuses, and the prospectuses did not indicate any statements came from the advisor, the Court held the advisor was not liable under Section 10(b) or Rule 10b-5. Id.
Janus is dispositive here. The complaint does not allege either Puma or Hudson Partners filed the Rahfco Investment Vehicles' prospectuses; nor does it allege the prospectuses indicate the statements therein came from those defendants. Accordingly, even assuming Puma and Hudson Partners "provided knowing and substantial assistance in . . . facilitating the [Rahfco] fraud," they are not liable under Section 10b or Rule 10b-5. Fezzani v. Bear, Stearns & Co., 716 F.3d 18, 25 (2d Cir. 2013); see also id. at 24 ("[A]n allegation of acts facilitating or even indispensable to a fraud is not sufficient to state a claim if those acts were not the particular misrepresentations that deceived the investor.").
b. Omissions
If a party does not "make" any statements under Section 10b or Rule 10b-5, it cannot be liable under an omission theory. See Floyd v. Liechtung, 2013 WL 1195114, at *4 (S.D.N.Y. Mar. 25, 2013) ("As Plaintiff has not alleged that [defendants] made any representations to [him], they could not have had a duty to disclose on this basis."); accord Ho v. Duoyuan Global Water, Inc., 887 F. Supp. 2d 547, 572 n.13 (S.D.N.Y. 2012) (defendant not liable under Section 10b or Rule 10b-5 for failing to correct false statements by others); Oneida Savings Bank v. Uni-Ter Underwriting Mgmt. Corp., 2014 WL 4678046, at *12 (N.D.N.Y. Sept. 18, 2014) (same).
As explained above, plaintiffs have not alleged Puma or Hudson Partners "made" any misstatements. Thus, they are not liable under Section 10b or Rule 10b-5 for any omissions.
B. Section 20(a)
In addition to alleging movants violated Section 10(b) and Rule 10b-5, plaintiffs also seek to hold movants liable as "control persons" under Section 20(a) of the Exchange Act. "Control person" liability is a form of secondary liability, meaning a defendant can be held liable under Section 20(a) for another person's violations of Section 10(b) or Rule 10b-5. See Suez Equity Investors, L.P. v. Toronto-Dominion Bank, 250 F.3d 87, 101 (2d Cir. 2001).
Section 20(a) provides, in pertinent part: "Every person who, directly or indirectly, controls any person liable under any provision of this chapter or of any rule or regulation thereunder shall also be liable jointly and severally with and to the same extent as such controlled person." 15 U.S.C. § 78t(a). To state a claim for "control person" liability under Section 20(a), plaintiffs must allege "(1) a primary violation [of Section 10b or Rule 10b-5] by the controlled person, (2) control of the primary violator by the defendant, and (3) that the defendant was, in some meaningful sense, a culpable participant in the controlled person's fraud." ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 108 (2d Cir. 2007).
The Second Circuit has defined "control" as "the power to direct or cause the direction of the management and policies of the primary violators, whether through the ownership of voting securities, by contract, or otherwise." In re Lehman Bros. Mortgage-Backed Secs. Litig., 650 F.3d 167, 185 (2d Cir. 2011). "Officer or director status alone does not constitute control." In re Livent, Inc. Secs. Litig., 78 F. Supp. 2d 194, 221 (S.D.N.Y. 1999).
Although plaintiffs allege Hansen-Leinen "controlled all defendants in this action" (Compl. ¶ 1257), the only defendant she even arguably controlled was Rahfco Management, as she held a senior position at the company. But even with respect to Rahfco Management, plaintiffs have not plausibly alleged Hansen-Leinen's control. Plaintiffs allege Hansen-Leinen "aided in processing the intake of new investors to [the] Rahfco Investment Vehicles, worked in conjunction with agents of Hansen and Johnson, and regularly communicated and informed investors [about] the status of their investments." (Compl. ¶ 34; see also id. ¶ 51 (Hansen-Leinen oversaw "the distribution and dissemination of information for the day-to-day operations of Rahfco Management directly to investors.")). Even assuming Rahfco Management is liable as a primary violator under Section 10b and Rule 10b-5, Hansen-Leinen's job title and role as a liaison with investors are simply not enough to permit an inference she could direct or cause the direction of the management and policies of the company—especially considering the allegation her father owed 100 percent of it.
The complaint's allegations are likewise insufficient to state a claim for control liability against Puma and Hudson Partners. Assuming Puma "controlled" Hudson Partners, the complaint does not plausibly allege Hudson Partners violated Section 10b or Rule 10b-5 because, as with Puma, the complaint fails to allege Hudson Partners "made" misstatements or omissions of material fact. See Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. at 2302-05; see also ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d at 108 ("a primary violation by the controlled person" is an element of control liability). And the complaint lacks allegations sufficient to give rise to the inference that Hudson Partners, as an advisor, "controlled" an entity liable under Section 10(b) or Rule 10b-5. Indeed, the complaint alleges Hansen "control[led] all of [the] Rahfco Investment Vehicles' operations and activities." (Compl. ¶ 31).
Accordingly, plaintiffs' Section 20(a) claim against movants is dismissed.
III. State Law Claims
In the interest of judicial economy, the Court will retain supplemental jurisdiction over plaintiffs' state law claims against movants. The Court has not dismissed plaintiffs' federal claims against all defendants, and plaintiffs' state law claims arise out of the same facts as their federal claims. See In re Sterling Foster & Co., Inc. Sec. Litig., 222 F. Supp. 2d 216, 283 (E.D.N.Y. 2002) (retaining jurisdiction over state law claims after dismissing federal claims against some defendants but not others).
A. Conversion
To state a conversion claim under New York law, "a plaintiff must show legal ownership or an immediate superior right of possession to a specific identifiable thing and must show that the defendant exercised an unauthorized dominion over the thing in question to the exclusion of the plaintiff's rights." Martinez v. Capital One, N.A., 863 F. Supp. 2d 256, 266 (S.D.N.Y. 2012) (internal quotation marks omitted). Money may be the subject of a conversion action, but "the action must be for recovery of a particular and definite sum of money." Thys v. Fortis Secs. LLC, 74 A.D.3d 546, 547 (1st Dep't 2010).
Plaintiffs have failed to allege conversion of "a particular and definite sum of money." Id. They allege only that "[a]ll or some" of their investment money was converted. (See, e.g., Compl. ¶¶ 58, 74).
Accordingly, plaintiffs' conversion claim against movants is dismissed.
B. Unjust Enrichment
Under New York law, an unjust enrichment claim lies when "the defendant has obtained a benefit which in equity and good conscience should be paid to the plaintiff." Corsello v. Verizon N.Y., Inc., 18 N.Y.3d 777, 790 (2012) (internal quotation marks omitted). Unjust enrichment, however, "is not a catchall cause of action to be used when others fail." Id. The claim "is not available where it simply duplicates, or replaces, a conventional contract or tort claim." Id. Rather, unjust enrichment typically arises when "the defendant, though guilty of no wrongdoing, has received money to which he or she is not entitled." Id.
But not every innocent party who receives wrongfully obtained money is liable for unjust enrichment. Only "gratuitous donees," that is, those who "profit[] without doing any work," are unjustly enriched under New York law. Georgia Malone & Co., Inc. v Rieder, 19 N.Y.3d 511, 518-19 (2012) (discussing Simonds v. Simonds, 45 N.Y.2d 233, 242 (1978)); cf. Marini v. Adamo, 995 F. Supp. 2d 155, 204 (E.D.N.Y. 2014) (defendant "could be liable for unjust enrichment as a gratuitous donee of some of the wrongfully acquired funds").
The complaint fails to state an unjust enrichment claim against movants. Plaintiffs allege movants unjustly enriched themselves through their "conscious, intentional, willful, and tort[i]ous conduct." (Compl. ¶ 1267). It therefore cannot be said plaintiffs allege movants are "guilty of no wrongdoing." Corsello v. Verizon N.Y., Inc., 18 N.Y.3d at 790.
And even if plaintiffs had alleged movants innocently possessed fraudulently obtained money (by, for example, being paid for their work with money from plaintiffs' investment accounts), the complaint does not allege movants were "gratuitous donees" of the money.
Accordingly, plaintiffs' unjust enrichment claim against movants is dismissed.
C. Constructive Trust, Accounting, Breach of Fiduciary Duty, and Negligence
Plaintiffs have failed to state a claim against movants for a constructive trust, an accounting, breach of fiduciary duty, and negligence.
A confidential or fiduciary relationship between plaintiff and defendant is an element of claims for a constructive trust, an accounting, and breach of fiduciary duty. Krasner v. Rahfco Funds LP, 2012 WL 4069294, at *8-9 (S.D.N.Y. Aug. 9, 2012). Plaintiffs have not alleged they had such a relationship with either Hansen-Leinen, see Barron Partners, LP v. LAB123, Inc., 593 F. Supp. 2d 667, 671 (S.D.N.Y. 2009) ("widely-disseminated" statements insufficient to give rise to confidential or fiduciary relationship), or Puma and Hudson Partners. S.E.C. v. Northshore Asset Mgmt., 2008 WL 1968299, at *6 (S.D.N.Y. May 5, 2008) ("[A]n investment adviser to a hedge fund owes fiduciary duties only to the hedge fund," not to hedge fund investors.); Goldstein v. SEC, 451 F.3d 873, 881 (D.C. Cir. 2006) ("It simply cannot be the case that investment advisers are the servants of two masters.").
Accordingly, plaintiffs' claims for a constructive trust, an accounting, and breach of fiduciary duty against movants are dismissed.
Plaintiffs' negligence claim against movants fails for a similar reason. To hold a defendant liable for negligence under New York law, a plaintiff must allege the defendant owed the plaintiff a duty of care. Stagl v. Delta Airlines, 52 F.3d 463, 467 (2d Cir. 1995). The complaint does not contain any facts from which the Court could infer movants owed a duty of care to plaintiffs. Plaintiffs' negligence claim against movants is therefore dismissed.
Plaintiffs assert that Hansen-Leinen's "motion does not raise any pleading issues/seek dismissal of Plaintiffs' claims for breach of fiduciary duty, negligence and agency" and, therefore, the Court should not dismiss those claims. (Pls.' Mem. (Doc. #71) at 27). Although Hansen-Leinen did not address plaintiffs' breach of fiduciary duty, negligence, and agency claims in her brief, she did move to dismiss the complaint in its entirety. (Doc. #46). In any event, the Court has the power to dismiss those claims sua sponte. Fitzgerald v. First E. Seventh St. Tenants Corp., 221 F.3d 362, 364 (2d Cir. 2000) (per curiam). --------
D. Agency Liability
Under New York law, "a principal, even if innocent, is liable for acts of fraud that are within the scope of an agent's actual or apparent authority." Chubb & Son Inc. v. Consoli, 283 A.D.2d 297, 298 (1st Dep't 2001). Relying on this "well-settled rule," id., plaintiffs contend movants are liable as principals for Hansen's and Johnson's fraudulent acts.
But the complaint does not allege facts from which the Court can infer Hansen or Johnson acted as agents for movants. If anything, the complaint alleges just the opposite, as it was Hansen and Johnson who allegedly were the "public faces" of the Rahfco Investment Vehicles, convincing plaintiffs and others to invest in those hedge funds. (Compl. ¶ 8).
Plaintiffs therefore have failed to state a claim for agency liability against movants.
IV. Cross-Claim
Rahfco Management's cross-claim incorporates its answer to the complaint and seeks contribution from Puma and Hudson Partners should Rahfco Management be found liable to plaintiffs. (Doc. #66). The cross-claim is entirely conclusory and, therefore, is insufficient to state a claim. See Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009); Energy Brands, Inc. v. Jorgensen, 2011 WL 282354, at *7 (W.D.N.Y. Jan. 25, 2011) ("[T]he cross-claims are devoid of any factual assertions and merely state that if [cross-claimants] are found liable to plaintiff, [cross-claim] defendants are liable to [cross-claimants] under a theory of contribution or indemnification.").
In any event, "[a] claim for contribution will not lie unless all of the essential elements of a cause of action against the proposed contributor can be made out." Steinberg v. Sherman, 2008 WL 2156726, at *6 (S.D.N.Y. May 8, 2008) (internal quotation marks omitted). Because plaintiffs have failed to state a claim against either Puma or Hudson Partners, Rahfco Management's cross-claim against those defendants must be dismissed as well.
V. Dismissal With Prejudice
Plaintiffs' claims against Hansen-Leinen, Puma, and Hudson Partners are dismissed with prejudice. This action essentially mirrors Krasner v. Rahfco Funds LP, a case in which the plaintiffs have already filed an amended complaint and were denied leave to replead their claims against movants. See Krasner v. Rahfco Funds LP, 11 CV 4092 (Docs. ##191, 193). The Court will not allow what, in effect, would be a fourth chance to plead claims against movants.
VI. Rule 11(b) Findings
The PSLRA requires a district court, at the conclusion of any private securities action, to "include in the record specific findings regarding compliance by each party and each attorney representing any party with each requirement of Rule 11(b)." 15 U.S.C. § 78u-4(c)(1). Before finding a violation of Rule 11, the Court must give the offending party or attorney notice and an opportunity to respond. Id. § 78u-4(c)(2). In addition, if the Court determines the rule has been violated, it must impose sanctions. Id.
The Court does not believe sanctions are warranted in this case. Nonetheless, the Court will permit defendants to submit papers on the appropriateness of sanctions after this action has concluded. As other defendants and claims remain in the case, the Court will not entertain a motion for fees and costs at this time.
CONCLUSION
The complaint is dismissed as to defendants Tara Hansen-Leinen, Vincent Puma, and Hudson Partners NYC LLC.
Defendant Rahfco Management LLC's cross-claim is dismissed as to defendants Puma and Hudson Partners.
The Clerk is instructed to terminate the motions. (Docs. ##46, 50, 78). Dated: December 15, 2014
White Plains, NY
SO ORDERED:
/s/
Vincent L. Briccetti
United States District Judge