Opinion
No. 10 Civ. 1586 (CM) (FM)
11-23-2011
OLIVIER ROLIN JACQUEMYNS And ELISABETH DE BEAUMONT, Plaintiffs, v. SPARTAN MULLEN ET CIE, S.A., et al., Defendants.
MEMORANDUM DECISION AND ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS' MOTION TO DISMISS PLAINTIFFS' SECOND AMENDED COMPLAINT :
Defendants Jason Beckman and Jason Colodne (collectively, "Defendants" or "Moving Defendants") have moved to dismiss the Second Amended Complaint in this action, which was filed by leave of the Court. Plaintiffs Olivier Rolin Jacquemyns ("Rolin") and Elisabeth de Beaumont ("de Beaumont") (collectively, "Plaintiffs") have managed to remedy some of the deficiencies identified by this Court in its Memorandum Decision and Order filed February 1, 2011. Jacquemyns v. Spartan Mullen Et Cie, S.A., No. 10 Civ. 1586, 2011 WL 348452 (S.D.N.Y. Feb. 1, 2011) (the "Decision").
In dismissing the fraud allegations in Plaintiffs' First Amended Complaint (the "FAC"), this Court stressed:
The Amended Complaint does not attribute a single specific misrepresentation to either Colodne or Beckman. It alleges that these two individuals met with Rolin to discuss the investment he had already made in [defendant Chimay Capital Management, Inc. ("CCM")] and to solicit additional money from him, but it does not plead what, if anything, they said in order to induce Rolin to put more money into the [Bridge Loan Facility ("BLF")]. The complaint alleges only that the Moving Defendants
held themselves out as "partners or executives" of CCM and that they solicited Rolin's investment in a fund that Colodne and Beckman were forming, called the Colbeck Fund. It then alleges, in purely conclusory terms, that "Based on the representations of the Defendants and his meeting with Defendants Beckman and Colodne in December 2008 . . . Rolin executed documents . . . and invested another $2 million in the [BLF]." . . . . The pleading does not identify Colodne or Beckman as the "defendants" who made the representations on which Rolin relied. For that reason, Rolin's pleading fails to satisfy the requirements of Rule 9(b).Decision at *7. The Decision also emphasized that Plaintiffs did not "sufficiently" allege scienter in the FAC. Id.
The SAC manages to allege a single misrepresentation attributable to these Defendants. It also alleges facts giving rise to an inference of scienter. Therefore, Defendants' motion to dismiss is GRANTED in part and DENIED in part.
Procedural and Factual Background
A. The Allegations of the Complaint
(i) The Parties
Named as defendants in the SAC, in addition to Beckman and Colodne, are Guy Albert de Chimay ("Chimay"), described as an "owner, partner . . . and . . . investment manager of CCM" (SAC ¶ 18); Spartan Mullen Chimay, Ltd. ("SMC Ltd."), "an investment fund . . ." (id. ¶ 15); Spartan Mullen Et Cie, S.A. ("Spartan Mullen") (id. ¶ 14); Chimay Capital Management (Int'l) LLC ("CCM Int'l"), "the promoter and/or investment manager of CCM and SMC Ltd." (id. ¶ 17); CCM itself, "the promoter and/or investment manager of SMC Ltd." (id. ¶ 16); and Philippe de Chimay, the "Vice Chairman of CCM," who does not play a role in this motion (id. ¶ 19).
After the events at issue in this action, defendant Chimay was indicted in June 2010 by a Grand Jury in New York County. He later pleaded guilty to various state criminal offenses. At the same time he was indicted, Chimay, together with CCM, was named on June 11, 2010 as a defendant in a civil enforcement action entitled SEC v. Chimay Capital Mgmt., Inc., 10 Civ. 4582 (WHP) (S.D.N.Y.). At the outset of that action, the Securities and Exchange Commission (the "SEC") asked Colodne to provide a declaration in support of the SEC's motion for injunctive relief. Colodne did so. (See Batista Decl. Ex 3.) All of this is interesting; none of it is germane to this motion to dismiss.
(ii) The Investment Allegations
The SAC alleges that, beginning in October 2008, defendant Chimay "presented" Rolin and de Beaumont with the BLF, "a short term guaranteed investment opportunity." (SAC ¶ 38.) Chimay, in an October 9, 2008 email to de Beaumont, confirmed that he had discussed the BLF with her. (See SAC Ex. 2.) Chimay is alleged to have "told Plaintiffs" in October 2008 that, among other things, (i) "the BLF investment was a safe short term investment;" (ii) "the BLF investment would pay a 2% origination fee within 5 days of funding;" (iii) "the BLF would pay [fixed] interest on the principal investment;" (iv) "the . . . BLF investment was guaranteed by CCM and Spartan Mullen;" and (v) "the Belgium princely family of de Caraman Chimay had also invested in the BLF investment." (SAC ¶ 39.) Chimay also allegedly provided written marketing materials to Plaintiffs describing the BLF before Plaintiffs ever invested in the BLF. (Id. ¶ 40.)
Significantly, not one of these alleged statements by Chimay in October 2008 is attributed to either Beckman or Colodne. Neither of them is alleged to have received the October 9, 2008 email from Chimay to de Beaumont, and neither is mentioned in the email, which is attached to the SAC and thereby incorporated into the pleading by reference.
Rolin made his initial investment of $2 million in the BLF on October 13, 2008. (Id. ¶ 43.) That initial investment, according to the SAC, is reflected in documents between Rolin and Chimay, all dated October 13, 2008. (See id.) Not one of those documents, which are also annexed to the SAC, refers to Beckman or Colodne. In fact, the SAC, like its predecessor, fails to identify a single statement made by either Beckman or Colodne to Rolin prior to Rolin's initial investment.
Although they did not allege it in the FAC, Plaintiffs assert in the SAC that, before Rolin's initial investment, Chimay mentioned Beckman and Colodne in connection with a "new fund" to focus "on distressed credit opportunities," not in connection with the BLF. (See SAC ¶ 41.)
The other plaintiff, de Beaumont, allegedly had "numerous communications with Chimay, Beckman and Colodne" (SAC ¶ 45) before she "invested $200,000" in BLF on December 9, 2008 (id.). However, the SAC contains no information about what, if anything, the Moving Defendants said to her, where they said it, or the circumstances under which they said it. It alleges that, "Following Rolin's" initial investment in the BLF in October 2008, "Chimay, Beckman and Colodne" contacted plaintiffs in November 2008 "to set up a meeting" in Paris (see id. ¶¶ 47-48). At this meeting — which took place on an unspecified date in December 2008 — Beckman and Colodne allegedly "acknowledged that they knew that Rolin had already invested $3 million with CCM," (id. ¶ 51), and "told Rolin and de Beaumont that CCM was a respectable and honest company" (id. ¶ 52). Because the date on which the meeting took place is not pleaded, it is impossible to ascertain whether it preceded or postdated de Beaumont's initial investment in the BLF. And the SAC does not contain any suggestion that either Beckman or Colodne said anything to de Beaumont during the meeting about BLF.
After the Paris meeting, CCM allegedly sent de Beaumont and Rolin, by email dated December 19, 2008, documents describing the "organizational structure of CCM, CCM's distressed credit strategies and the business references for Beckman and Colodne." (Id. ¶ 55.) The documents to which these allegations refer (SAC Ex. 7) do not mention the BLF. Indeed, on their face, the documents describe a proposal for a "distressed credit fund," not the BLF or any form of "bridge loan facility." The focus on distressed credit funds is consistent with the "CCM Team Biographies," that were also sent to plaintiffs; they describe Colodne as "the President and board member of Chimay Capital Management (Int'l), LLC" and "Portfolio Manager of the Distressed Credit Strategies" and Beckman as the "Chief Operating Officer" of "Chimay Capital Management (Int'l) LLC" and co-manager of the Distressed Credit Strategies. (Id.)
The SAC repeatedly refers to the Moving Defendants as "partners" of and "principals and executive officers of CCM" (see, e.g., SAC ¶ 50.). As Plaintiffs and their counsel must know, the allegations that Beckman and Colodne were "partners," "principals" and "executives" of CCM are false. Exhibit 7 to the SAC identifies them as officers of CCM Int'l, the entity that was involved with the proposed distressed credit fund, not of CCM, the entity associated with the BLF.
Citing "the customs and business practices in Europe" (SAC ¶ 57), de Beaumont and Rolin allegedly "assumed and relied" on the "fact" that "Colodne and Beckman were knowledgeable and aware of the business of CCM." (Id.) According to the SAC, plaintiffs "Based" their decision "to make additional investments with CCM in the BLF" on (i) "the representations of the [sic] Beckman and Colodne[] concerning the honorable business practices of [the] experienced management team at CCM, including Beckman, Colodne and Chimay, during the meeting in France in December 2008," (ii) "the representations of Chimay concerning the BLF," and (iii) "the documents of CCM and CCM describing the BLF . . ." (Id. ¶ 58.)
(iii) The Alleged Transfers of Funds
The balance of the SAC describes an alleged distribution of some of the funds placed by Rolin and de Beaumont in the BLF to J Capital Management and Colbeck Capital Management, two entities controlled by Colodne and Beckman. The SAC asserts that $1 million of "the [p]laintiffs [sic] money invested in [BLF] was diverted to J Captial [sic] Management and Colbeck Capital Management for the benefit of Chimay, Beckman and Colodne." (Id. ¶ 72.) To support this assertion, the SAC cites a declaration of a Staff Accountant at the SEC prepared in connection with the SEC's civil action against Chimay and CCM ("SEC affidavit"). In the declaration, which is attached as Exhibit 12 to the SAC, and so is incorporated into the pleading, the SEC accountant states that he reviewed records of Chimay and the entities he controlled. The accountant concluded that Chimay, in addition to wire-transferring funds derived from Rolin to a variety of entities, including the law firm representing him in divorce proceedings, directed approximately $1 million to J Capital and Colbeck Management. (SAC Ex. 12 ¶ 17.) While the SAC highlights this transfer, it fails to mention other information that can be read in the accountant's report — and that is incorporated into the SAC to which the report is appended — including the accountant's statements that the transfers to J Capital and Colbeck Capital Management "were made pursuant to Chimay's commitment to provide operating expenses to J Capital/Colbeck, and did not represent BLF investments." (Id. (emphasis added).) However, this statement by the accountant was predicated solely on a review of the transcript of the deposition of Colodne taken by the SEC, not on any independent investigation by the Commission. (Id.)
I.
THE MOTION TO DISMISS THE SECURITIES FRAUD AND THE
COMMON LAW FRAUD CLAIMS IS DENIED
Plaintiffs' SAC overcomes the defects in the FAC and adequately pleads federal securities fraud (see "First Claim for Relief," SAC ¶¶ 91-105) and state common law fraud (see "Second Claim for Relief," SAC ¶¶ 106-19).
In deciding a motion to dismiss pursuant to Rule 12(b)(6), the Court must liberally construe all claims, accept all factual allegations in the complaint as true, and draw all reasonable inferences in favor of the plaintiff. See Cargo Partner AG v. Albatrans, Inc., 352 F.3d 41, 44 (2d Cir. 2003); see also Roth v. Jennings, 489 F.3d 499, 510 (2d Cir. 2007).
However, to survive a motion to dismiss, "a complaint must contain sufficient factual matter . . . to 'state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009) (quoting Bell Atl Corp. v. Twombly, 550 U.S. 544, 570 (2007)). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. (citing Twombly, 550 U.S. at 556). "While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiff's obligation to provide the grounds of his entitlement to relief requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Twombly, 550 U.S. at 555 (internal quotations, citations, and alterations omitted). Thus, unless a plaintiff's well-pleaded allegations have "nudged [its] claims across the line from conceivable to plausible, [the plaintiff's] complaint must be dismissed." Id. at 570; Iqbal, 129 S. Ct. at 1950-51.
Finally, in deciding a motion to dismiss, this Court may consider the full text of documents that are quoted in or attached to the complaint, or documents that the plaintiff either possessed or knew about and relied upon in bringing the suit. Rothman v. Gregor, 220 F.3d 81, 88-89 (2d Cir. 2000) (citing Cortec Indus. Inc. v. Sum Holding L.P., 949 F.2d 42 (2d Cir. 1991), cert. denied, 503 U.S. 960 (1992)).
A. The Motion to Dismiss Count One (Securities Fraud) Is DENIED
(i) Legal Standard
The elements of a private action under Rule 10b-5 are "(1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation." Stoneridge Invest. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148, 157 (2008).
Section 10(b) and Rule 10b-5 claims are subject to the heightened pleading requirements of the Private Securities Litigation Reform Act ("PSLRA"), 15 U.S.C. §§ 77z-1, 78u-4, and Fed. R. Civ. P. 9(b). Rule 9(b) states: "In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." Fed. R. Civ. P. 9(b). The PSLRA, which essentially codified Rule 9(b), provides that if the plaintiff alleges a misstatement or omission of material fact, "the complaint shall specify each statement alleged to have been misleading, the reason why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed." 15 U.S.C. § 78u-4(b). Thus, pursuant to Rule 9(b), a complaint pleading a claim under Section 10(b) and Rule 10b-5 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." Plumbers and Pipefitters Local Union No. 630 Pension-Annuity Trust Fund v. Arbitron Inc., 741 F. Supp. 2d 474, 478 (S.D.N.Y. 2010) (quoting ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 99 (2d Cir. 2007)).
"In short, under the heightened pleading requirements of Rule 9(b) and the PSLRA, Plaintiffs must allege the first two elements of a securities fraud claim — fraudulent acts and scienter — with particularity." Camofi Master LDC v. Riptide Worldwide, Inc., No. 10 Civ. 4020 (CM), 2011 WL 1197659, at *6 (S.D.N.Y. Mar. 25, 2011).
(ii) Material Misrepresentation or Omission
1. Statements Made by Chimay are not Attributable to Defendants
Under Rule 10b-5, it is "unlawful for any person, directly or indirectly . . . To make any untrue statement of a material fact" in connection with the purchase or sale of securities. 17 C.F.R. § 240.10b-5(b) (emphasis added). Thus, in order to state a claim for securities fraud, Plaintiffs must specify material misrepresentations (or omissions) made by Defendants. Stoneridge Invest. Partners, 552 U.S. at 157. For the purposes of Rule 10b-5, the Supreme Court recently held that "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 Grp., Inc. v. First Derivative Traders, 131 S. Ct. 2296 (2011).
In Janus Capital, the Supreme Court considered whether a mutual fund investment adviser could be held liable in a private action under Rule 10b-5 for false statements included in its client's mutual funds prospectuses, where the investment adviser was significantly involved in preparing the prospectuses. The Court concluded that the investment adviser could not be held liable because the investment advisor did not "make" the statements in the prospectuses.
In interpreting Rule 10b-5, the Supreme Court first turned to the Oxford English Dictionary, and observed that "The phrase at issue in Rule 10b-5, 'To make any . . . statement,' is . . . the approximate equivalent of 'to state.'" Id. at 2302. Thus:
For purposes of 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. Without control, a person or entity can merely suggest what to say, not "make" a statement in its own right. One who prepares or publishes a statement on behalf of another is not its maker. And in the ordinary case, attribution within a statement or implicit from surrounding circumstances is strong evidence that a statement was made by — and only by — the party to whom it is attributed. This rule might best be exemplified by the relationship between a speechwriter and
a speaker. Even when a speechwriter drafts a speech, the content is entirely within the control of the person who delivers it. And it is the speaker who takes credit — or blame — for what is ultimately said.Id. The issue becomes, then, whether Moving Defendants themselves made any statements to Plaintiffs.
Plaintiffs attempt to attribute Chimay's misrepresentations to Colodne and Beckman by accusing them — in entirely conclusory fashion — of entering into a conspiracy with Chimay, and by invoking the "group pleading" doctrine. Whether the Supreme Court's decision in Janus Capital abrogated these doctrines — thus leaving Plaintiffs with no recourse — is an open question. The Court does not need to resolve these issues today, however, because Plaintiffs fail to adequately plead the applicability of those doctrines.
The allegation of conspiracy is a holdover from the FAC. In the decision dismissing that pleading I admonished plaintiffs that they could not rely on "wholly conclusory" allegations of conspiracy to "salvage their otherwise defective pleading." Decision at *7. This statement seems to have made no impression; in the SAC, as in the FAC, plaintiffs make only "[b]are allegations of conspiracy . . . ." Id. Apparently they want the Court (and ultimately the jury) to infer the existence of a conspiracy from the fact that Colodne and Beckman were officers of CCM. However, as every jury in a conspiracy case is told, a person's mere association with someone who is committing a crime is insufficient to give rise to an inference of conspiracy between them. Hoffman v. Herdman's Ltd., 41 F.R.D. 275, 277 (S.D.N.Y. 1996) ("Mere association does not constitute a conspiracy."); In re Crazy Eddie, Inc., No. 89B11313-11457 (TLB), 1992 WL 406543, at *10 (Bankr. S.D.N.Y. Dec. 17, 1992) (citing Hoffman, 41 F.R.D. at 277); cf. United States v. Salameh, 152 F.3d 88, 151 (2d Cir. 1998) ("Mere association with conspirators and suspicious circumstances, however, are insufficient bases for a conspiracy conviction."). Moreover, plaintiffs still do not plead facts from which one might plausibly infer the existence of a specific agreement among Chimay and the moving defendants to commit securities fraud — or for that matter common law fraud. Iqbal, 129 S. Ct. at 1949 (citing Twombly, 550 U.S. 544). Plaintiffs do not even assert a cause of action for conspiracy to commit fraud! The SAC's superficial, throw-away allegations of conspiracy are blatantly insufficient. See Arar v. Ashcroft, 585 F.3d 559, 569 (2d Cir. 2009); Nweke v. Prudential Ins. Co. of Am., 25 F. Supp. 2d 203, 219 (S.D.N.Y. 1998).
In their brief opposing the motion to dismiss, Plaintiffs also invoke the "group pleading" doctrine, and refer the Court to a "written presentation setting forth the details of the BLF investment" from March 2009. (SAC ¶ 40 & Ex. 3.) Plaintiffs "cannot locate the document that was provided to them in 2008" prior to investing in BLF, but assert that it was a "similar version" of the March 2009 presentation. (SAC ¶ 40.) As in the FAC, plaintiffs fail to indicate when exactly it was sent and by whom.
The group pleading doctrine mitigates the rigors of Rule 9(b) by allowing plaintiffs to "rely on a presumption that statements in prospectuses, registration statements, annual reports, press releases, or other group-published information, are the collective work of those individuals with direct involvement in the everyday business of the company." In re BISYS Sec. Litig., 397 F. Supp. 2d 430, 438 (S.D.N.Y. 2005).
Although the doctrine was "alive and well" in this jurisdiction, id. at 439 — at least prior to Janus Capital — it does not apply in the present case. Under the group pleading doctrine, Plaintiffs still need to allege facts to support at least an inference of scienter for each Moving Defendant. Id. at 440 & n.44 (citing cases). Thus, while misstatements may be attributed to the individual defendants, plaintiffs "must also allege facts sufficient to show that the defendants had knowledge that the statements were false at the time they were made." Id. (quoting In re Citigroup, Inc. Sec. Litig., 330 F. Supp. 2d 367, 381 (S.D.N.Y.2004)). Here, Plaintiffs have failed to provide specific facts or plausibly allege that Defendants had knowledge that the statements made in the 2008 presentation were false, and therefore may not invoke the group pleading doctrine.
2. Plaintiffs Only Allege Defendants Made One Misstatement
We are left to consider whether a lone allegation — "Colodne and Beckman told Rolin and de Beaumont that CCM was a reputable and honest company that had a very good future based on, among other things, the new distressed credit opportunities fund that CCM was about to launch, and that such funds were to be managed by Beckman and Colodne" (SAC ¶ 52) — qualifies as a "material misrepresentation" for the purposes of a federal securities law claim.
I will pass over for the purposes of this motion Moving Defendants' arguments about whether the various documents attached to the SAC establish that Beckman and Colodne were involved solely with Chimay's distressed credit operations and knew nothing about the BLF. Such arguments, it seems to me, are better addressed in connection with a motion for summary judgment.
Two thirds of this allegation affords no basis for relief under any theory of federal securities fraud. The prediction of a "very good future" is the sort of "puffing" that cannot form the basis for a claim of fraud. Rombach v. Chang, 355 F.3d 164, 174 (2d Cir. 2004) ("Expressions of puffery and corporate optimism do not give rise to securities violations." (citation omitted)); In re QLT Inc. Sec. Litig., 312 F. Supp. 2d 526, 532 (S.D.N.Y. 2004) ("The PSLRA deems generalized expressions of corporate optimism immaterial as a matter of law and therefore insufficient as the basis for an action alleging securities fraud.").
As a result, we are down to the words "CCM was a reputable and honest company," (SAC ¶ 52.) Apparently it was not, according to the SAC and the SEC; Chimay looted the company for his own purposes. However, before we can infer fraud on the part of Beckman or Colodne, the SAC must contain allegations of scienter.
(ii) Scienter
The Supreme Court has defined "scienter" as "a mental state embracing intent to deceive, manipulate, or defraud." Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 319 (2007) (quoting Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193-94 (1976)). To satisfy the pleading requirements of § 10(b) and Rule 10b-5 with respect to scienter, Plaintiffs must "alleg[e] facts; (1) showing that the defendants had both motive and opportunity to commit the fraud; or (2) constituting strong circumstantial evidence of conscious misbehavior or recklessness." ATSI Commc'ns, 493 F.3d at 99. Plaintiffs are required to state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind — an inference that is "cogent and at least as compelling as any opposing inference of nonfraudulent intent." Tellabs, Inc., 551 U.S. at 314. "While Rule 9(b) permits scienter to be demonstrated by inference, this 'must not be mistaken for license to base claims of fraud on speculation and conclusory allegations.'" O'Brien v. Nat'l Prop. Analysts Partners, 936 F.2d 674, 676 (2d Cir. 1991) (quoting Wexner v. First Manhattan Co., 902 F.2d 169, 172 (2d Cir. 1990)).
In this case, Plaintiffs contend that the Court can infer that Moving Defendants acted with the requisite scienter because they had both a motive and opportunity to defraud Plaintiffs. (SAC ¶ 104.) Plaintiffs allege that the Defendants' motive to defraud them about CCM's honesty was to fund Defendants' operations of their distressed credit strategies fund and their individual investment funds — J Capital Management and Colbeck Capital Management. (Opp'n at 20-21.) Plaintiffs allege that Defendants had the opportunity to defraud Plaintiffs based on Defendants role as CCM insiders. Plaintiffs further allege that Defendants acted with conscious misbehavior or recklessness because, as partners and executive officers of CCM, they did not investigate the management of the BLF. (Opp'n at 21.) I find that Plaintiffs have successfully pleaded scienter under the motive and opportunity prong.
Plaintiffs adequately plead that Defendants had an opportunity to defraud Plaintiffs as insiders of CCM, et al. Courts often assume, with respect to this prong, that "corporate officers, and corporate directors would have the opportunity to commit fraud if they so desired." Pension Comm. of Univ. of Montreal Pension Plan v. Banc of Am. Sec., LLC, 446 F. Supp. 2d 163, 181 (S.D.N.Y. 2006). Additionally, the SEC affidavit supports this allegation, and states that money was diverted from Plaintiffs' BLF investments to J Capital and Colbeck Capital Management.
To support its allegations of motive, Plaintiffs claim, upon information and belief, that $1 million of Plaintiffs' money intended for the BLF was diverted to "J Captial [sic] Management and Colbeck Capital Management for the benefit of Beckman and Colodne." (SAC ¶ 72.) Plaintiffs further claim, also upon information and belief, that "some of [Plaintiffs] money invested in the BLF's [sic] was dirivted [sic] to CCM and CCM Int'l for the benefit of Chimay, Beckman and Colodne." (Id. ¶ 72.) I must assume this allegation to be true for purposes of a motion to dismiss, and so cannot consider any of the evidentiary material provided by the Moving Defendants to explain that the money actually did not come from the BLF, as I could on a motion for summary judgment. I can, however, consider documents appended to the SAC as exhibits, and one of those exhibits — Exhibit 12 — suggests that the SEC found no evidence of any improper use of funds that were invested in the BLF. However, a careful reading of that affidavit reveals that the SEC accountant simply relied on defendant Colodne's statement to that effect; it does not suggest that he conducted any independent investigation into the facts. (See SAC Ex. 12 ¶ 17.) At this point in the proceedings, I am no more able to rely indirectly on Colodne's affidavit via Exhibit 12 than I am able to rely directly on the contents of Colodne's affidavit. Therefore, I must presume true the allegation that Colodne and Beckman received BLF funds from Chimay.
I find Plaintiffs' allegation that Beckman and Colodne diverted Plaintiffs' BLF money for their "own personal use" (SAC ¶ 70) to be too conclusory to merit discussion. There is nothing in the SEC affidavit that supports this position. --------
By introducing the SEC affidavit in the SAC, Plaintiffs alleges facts supporting a motive to commit fraud from which this Court can infer scienter — specifically, that Defendants' fund J Capital and Colbeck Capital Management received $1 million (or at least approximately $125,000) of money misappropriated from Plaintiffs, money that was intended for investment in the BLF. Furthermore, by tracing the flow of money in the SEC affidavit, Plaintiffs adequately allege that J Capital received approximately $80,000 of Rolins' first $2 million BLF investment (see SAC Ex. 12 ¶¶ 12-16) and $45,000 of de Beaumont's $200,000 BLF investment (see id. ¶¶ 31-36). These sufficiently particular allegations directly contradict Colodne's affidavit, and lend support to Plaintiffs' contention that J Capital received at least a portion of Plaintiffs' BLF investment.
While "General profit-making motive alone is generally disclaimed as a sign of fraudulent intent," see Chill v. General Elec. Co., 101 F.3d 263, 268 (2d Cir. 1996) (noting that "generalized motive . . . which could be imputed to any publicly-owned, for-profit endeavor, is not sufficiently concrete for purposes of inferring scienter"), misappropriating approximately $1 million is not the same as a desire for mere legal profits. It is a plausible inference from the facts alleged in the SAC that Defendants had an intent "to deceive, manipulate, or defraud" Plaintiffs in exchange for $1 million.
I find this inference at least as "cogent and at least as compelling as any opposing inference of nonfraudulent intent." Tellabs, Inc., 551 U.S. at 314. Since I am unable to consider Defendants' evidentiary material at this stage, Plaintiffs' inference is supported by the facts alleged in the SAC. Discovery may explain why Defendants' funds ended up with Plaintiffs' BLF investment (if this is indeed the case). Should the factual issue be as easy to resolve as Defendants claim, they are free to make a summary judgment motion. I will note, however, that, from the SEC affidavit's tracking of the money trail, that there is at least a serious question as to the matter on the facts before me.
(iii) Reliance
Plaintiffs' securities fraud claim against Defendants is limited, however, to investments made after Defendants' allegedly fraudulent statements about Chimay's ostensibly honest business.
"Reliance by the plaintiff upon the defendant's deceptive acts is an essential element of the § 10(b) private cause of action." Stoneridge Invest. Partners, 552 U.S. at 159. This is because proof of reliance ensures that there is a proper "connection between a defendant's misrepresentation and a plaintiff's injury." Basic Inc. v. Levinson, 485 U.S. 224, 243 (1988). "The traditional (and most direct) way a plaintiff can demonstrate reliance is by showing that he was aware of a company's statement and engaged in a relevant transaction . . . based on that specific misrepresentation . . . In that situation, the plaintiff plainly would have relied on the company's deceptive conduct." Erica P. John Fund, Inc. v. Halliburton Co., 131 S. Ct. 2179, 2185 (2011).
Like the FAC, the SAC specifically pleads that Rolin made his initial investment in the BLF in reliance on representations made to him by Chimay; the SAC does not so much as suggest that Rolin spoke to either of the Moving Defendants before parting with his initial investment in October 2008. And while the SAC alleges that (1) de Beaumont made her first investment with Chimay on December 9, 2008, and (2) de Beaumont met with Beckman and Colodne on an unspecified date in December 2008, at which time they told her that Chimay's operation was reliable, the pleading fails to place that meeting before December 9, 2008. Indeed, documents appended to the SAC indicate that Defendants' alleged misrepresentation occurred after de Beaumont's initial investment.
This is confirmed by Exhibit 7 to the SAC, which is an email sent from an employee of Chimay Capital to Gilles Seurat and Guillaume Merle (and copied to de Beaumont), thanking them for "taking time to meet with us during our visit to Paris last week." The email was sent on December 19; December 9, the date of de Beaumont's initial investment, fell before the "last week" when Colodne and Beckman were in Paris! So the fair inference to be drawn, from (1) the SAC's silence about the date when defendants met with de Beaumont, and (2) the reference to that meeting in SAC Ex. 7, is that the meeting post-dated de Beaumont's original investment in BLF, and that nothing said at that meeting could possibly have caused her to make that investment.
The SAC, however, specifically alleges that both Rolin and de Beaumont specifically relied on, inter alia, representations of legitimacy made by Beckman and Colodne before making their "additional investments" in the BLF (SAC ¶ 58). Thus, to the extent that Plaintiffs do allege that Moving Defendants made material misstatements, these misstatements can only go to Plaintiffs' additional investments in the BLF of $2 million for Rolin (id. ¶ 59) and $20,000 for de Beaumont (id. ¶ 60).
***
The parties do not dispute that Plaintiffs adequately allege the remainder of the elements of a federal securities fraud claim, and I find no reason to rule differently. Therefore, I find that Defendants' motion to dismiss this cause of action is DENIED.
B. The Motion to Dismiss Count Four (Common Law Fraud) Is DENIED
Under New York law, a plaintiff alleging fraud must satisfy each of these requirements: "(1) defendant made a representation as to a material fact; (2) such representation was false; (3) defendant intended to deceive plaintiff; (4) plaintiff believed and justifiably relied upon a statement and was influenced by it to engage in a certain course of conduct; and (5) as a result of such reliance plaintiff sustained pecuniary loss." Ross v. Louise Wise Services, 8 N.Y.3d 478, 488 (N.Y. 2007). Common law fraud is also subject to Fed. R. Civ. P. 9(b) requirement, and must be pleaded with particularity.
For the same reasons that Plaintiffs adequately plead securities fraud, they also state a claim for common law fraud. Gruntal & Co., Inc. v. San Diego Bancorp, 901 F. Supp. 607, 615 (S.D.N.Y. 1995) ("The constituent elements of this claim are in essence the same as those of a section 10(b) claim. Because plaintiff's allegations are sufficient to survive the initial attack on his section 10(b) claim, a substantively identical second challenge must also fail.").
II.
THE "CONVERSION" AND "UNJUST ENRICHMENT" CLAIMS
A. The Motion to Dismiss Count Five (Conversion) is GRANTED
In full, Plaintiffs' claim for conversion alleges that "Defendants took Plaintiffs [sic] $4,220,000 for investment in the BLFs [sic], but defendants never invested Plaintiffs [sic] money . . . Based on the above it is submitted that the Defendants converted Plaintiffs [sic] money that was invested in the BLFs " (See SAC ¶¶ 140-45.)
Plaintiffs' attempt to plead conversion fails. In New York, an action for the conversion of monies is "insufficient as a matter of law unless it is alleged that the money converted was in specific tangible funds of which claimant was the owner and entitled to immediate possession." In re Musicland Holding Corp., 386 B.R. 428, 440 (S.D.N.Y. 2008) (quoting Ehrlich v. Howe, 848 F. Supp. 482, 492 (S.D.N.Y. 1994)). The money "must be part of a separate, identifiable, segregated fund in order to bring an action for conversion." United Republic Ins. Co. v. Chase Manhattan Bank, 168 F. Supp. 2d 8, 19 (N.D.N.Y. 2001) (citing High View Fund, L.P. v. Hall, 27 F. Supp. 2d 420, 429 (S.D.N.Y. 1998)).
Plaintiffs fail to allege that the money they seek is part of a "separate, identifiable, segregated fund," id., of which Plaintiffs are the owner. Instead, the SAC establishes that Plaintiffs' funds are "now so dispersed that they are not identifiable or segregated." Id. Specifically, the SEC affidavit outlines how the money that Plaintiffs attempted to put into the BLF was comingled with other funds and split up and wired into different accounts. (E.g., SAC Ex. 12 ¶¶ 13, 23-28.) Therefore, Plaintiffs' claim for conversion is dismissed.
B. The Motion to Dismiss Count Six (Unjust Enrichment) is DENIED
The Sixth Claim for relief asserts as follows:
147. By their wrongful acts and omissions, Defendants were unjustly enriched at the expense of and to the detriment of Plaintiffs.(SAC ¶¶ 147-149.) Plaintiffs' moving papers specify that "Colodne and Beckman were unjustly enriched based upon the fact that more than $1,000,000 of plaintiffs [sic] investment of $4,220,000 into the BLF . . . was diverted to J Capital Management and the Colbek [sic] Fund for the benefit of Colodne and Beckman." (Opp'n at 24.) Plaintiffs further assert that Colodne and Beckman financially benefited from the sale of the BLF investment because they are partners of CCM. (Id.)
148. Plaintiffs seek restitution from the Defendants . . . .
149. Based on the foregoing[,] the Plaintiffs respectfully requests [sic] a judgment holding the Defendants, jointly and severally, liable in an amount to be determined at trial, but at least $4,500,000.
"To recover for unjust enrichment under New York law, a plaintiff must show that (1) the defendant was enriched, (2) the enrichment was at the plaintiff's expense, and (3) the circumstances were such that equity and good conscience require defendant to make restitution." Violette v. Armonk Assocs., L.P., 872 F. Supp. 1279, 1282 (S.D.N.Y. 1995). The "essence" of an unjust enrichment claim is that "one party has received money or a benefit at the expense of another." Kaye v. Grossman, 202 F.3d 611, 616 (2d Cir. 2000). "Courts will look to see if the benefit remained with the defendant, it will also look to see if defendant's conduct was tortious or fraudulent." Merrill Lynch, Pierce, Fenner & Smith v. Chipetine, 634 N.Y.S. 2d 469, 471 (N.Y. App. Div. 1995).
Plaintiffs have adequately alleged a claim for unjust enrichment, and, if the allegations are proved true, equity and good conscience would require Beckman and Colodne to pay restitution. Thus, Defendants' motion to dismiss Plaintiffs' claim for unjust enrichment is DENIED.
CONCLUSION
For the reasons discussed, Defendants' motion to dismiss with respect to claims one, two, and six is DENIED. Defendants' motion to dismiss claim five is GRANTED. The claim is dismissed with prejudice.
The Clerk is directed to remove the motion at Docket #37 from the Court's list of outstanding motions. Dated: November 23, 2011
/s/_________
U.S.D.J. BY ECF TO ALL COUNSEL