Opinion
No. 600871/08.
2010-08-9
Jamie B.W. Stecher, Esq. and Jaclyn J. Leader, Esq. of Tannenbaum Helpern Syracuse & Hirschtritt LLP, for Defendants. Joel M. Wolosky, Esq. and Jillian M. Searles, Esq. of Hodgson Russ LLP, for Plaintiff.
Jamie B.W. Stecher, Esq. and Jaclyn J. Leader, Esq. of Tannenbaum Helpern Syracuse & Hirschtritt LLP, for Defendants. Joel M. Wolosky, Esq. and Jillian M. Searles, Esq. of Hodgson Russ LLP, for Plaintiff.
EILEEN BRANSTEN, J.
Defendants Dutch Book Funds SPC, Ltd (the “Fund”), Dutch Book Partners, LLC (“Partners”) and Stanley R. Jonas (collectively with the Fund and Partners, “Defendants”) move, pursuant to CPLR 3211(a)(1), (a)(7) and 3016(b), for an order dismissing the Complaint. Plaintiff Barnelli & Cie S.A. (“B & C”) opposes the motion.
BACKGROUND
B & C is a Panamanian corporation with an office located in the Republic of Panama. Stecher Affirmation in Support of Defendants' Motion to Dismiss, Ex. 1, the Amended Complaint (“Amended Complaint”), at ¶ 1. The Fund is a Cayman Islands corporation with an office located in New York, New York. Amended Complaint at ¶ 2. Partners is a Delaware Limited Liability Company with an office located in New York,
* The court would like to acknowledge and thank intern Alyssa J. Astiz, Fordham University School of Law
J.D. Candidate 2012, for her able assistance with the instant decision.
New York. Id. at ¶ 3. Jonas is a New York resident and a director of the Fund, as well as the Chief Executive Officer and Chief Financial Officer of Partners. Id. at ¶ 4. The parties do not contest that this action is properly before this court.
The Fund is a segregated portfolio company that offered shares in various investment portfolios. Id. at ¶ 5. Each portfolio constitutes a separate pool of assets in which the holders of shares therein have an interest in the net assets of that portfolio only. Id. at ¶ 5. The Fund offered shares in the Dutch Book Segregated Portfolio I (the “Portfolio”) pursuant to an Information Memorandum dated July 1, 2006 (the “Memorandum”). Amended Complaint ¶ 6.
B & C alleges in its amended complaint that Jonas, on behalf of himself, Partners and the Fund, provided B & C with a copy of the Memorandum. Id. at ¶ 10. The Memorandum stated that the Fund, through Partners, will “seek to create a Dutch Book' on the movement of market expectations.” Id. The Memorandum defined a “Dutch Book” as “a set of positions betting' on a particular action that, in sum, earns a positive return for the owner of the Dutch Book' regardless of the outcome.” Id. In pursuit of this positive return, the Memorandum represented: (i) that the Fund had “developed a proprietary set of algorithms based on standard probability theory;” (ii) that the algorithms were “arithmetic,” “based on standard probability axioms” and had been “successfully used by [Defendants] in the past;” and (iii) that the Portfolio “is structured by the Investment Adviser to make money whether the Federal Reserve raises, raises a lot, lowers, lowers a lot, or stays put” and “earns a positive return regardless of the outcome on market expectations regarding central bank activity.” Id. at ¶ 11.
Pursuant to a July 21, 2006, written Subscription Agreement (the “Subscription Agreement”), B & C purchased 50,000 shares in the Portfolio for an aggregate purchase price of $50,000,000. Amended Complaint ¶ 7. B & C was the Portfolio's only investor. Id. The Fund retained Partners as an investment adviser for the Portfolio pursuant to an Investor Adviser Agreement dated July 1, 2006. Id. at ¶ 8.
B & C now alleges that the Defendants made representations in the Memorandum that were materially false and misleading and known by the Defendants to be materially false and misleading when made. Id. at ¶ 12. B & C alleges that the Defendants knew, but failed to disclose: (i) that they had no “proprietary set of algorithms” and therefore could not and would not create a Dutch Book; (ii) that the Fund could not be structured so as to create a Dutch Book in accordance with the investment strategy set forth in the Memorandum, therefore exposing B & C to an undisclosed amount of risk; and (iii) that Partners could not have possibly used the proprietary algorithms in the past since Partners had been organized on April 28, 2006, less than two months before the Fund's inception. Id. at ¶¶ 13–14, 16. B & C, however, does not provide the Fund's inception date in its Amended Complaint.
B & C further alleges that, despite the exercise of reasonable due diligence, it could not have discovered the truth regarding Defendants' misrepresentations because the nature and existence of the proprietary algorithms were peculiarly within the Defendants' knowledge and technical expertise. Id. at ¶ 20.
B & C alleges that, rather than creating a Dutch Book, Defendants engaged in an excessive number of transactions in speculative investments that were incompatible with the investment strategy set forth in the Memorandum. Id. at ¶ 18. The Portfolio lost approximately $4,000,000 as of October 31, 2006. Id. B & C then withdrew $30,000,000 from the Portfolio. Id. Thereafter, the Portfolio continued to incur losses, and in a period of less than one year, lost in excess of $8,000,000 while generating fees and commissions in excess of $2,000,000. Id.
B & C commenced this action on March 25, 2008, and amended its complaint on February 9, 2009.
In its Amended Complaint, B & C asserts causes of action for (i) breach of contract; (ii) breach of fiduciary duty; (iii) negligence; (iv) fraud; and (v) personal liability against Jonas based upon an alter ego theory.
During oral argument for the original complaint, the Defendants agreed to produce documentary evidence regarding the algorithms in accordance with a discovery agreement. On April 14, 2009, this Court issued a Decision and Order granting Defendants' motion to dismiss the original complaint. On May 20, 2009, after the parties notified the Court that B & C had filed its Amended Complaint on March 10, 2009, this Court recalled and vacated that Decision and Order and restored B & C's action.
Defendants now move for an order dismissing the Amended Complaint.
ANALYSIS
In a CPLR 3211 motion to dismiss, the scope of a court's inquiry is “narrowly circumscribed.” P.T. Bank Cent. Asia v. ABN AMRO Bank N.V., 301 A.D.2d 373, 376, 754 N.Y.S.2d 245 (1st Dep't 2003). On a motion to dismiss pursuant to CPLR 3211(a)(7), “the court must afford the pleadings a liberal construction, accept the allegations of the complaint as true and provide plaintiff the benefit of every possible favorable inference.” AG Capital Funding Partners, L.P. v. State St. Bank & Trust Co., 5 N.Y.3d 582, 591, 808 N.Y.S.2d 573, 842 N.E.2d 471 (2005). “[O]ur sole criterion is whether the pleading states a cause of action, and if from its four corners factual allegations are discerned which taken together manifest any cause of action cognizable at law a motion for dismissal will fail.' “ Polonetsky v. Better Homes Depot, Inc., 97 N.Y.2d 46, 54, 735 N.Y.S.2d 479, 760 N.E.2d 1274 (2001), quoting Guggenheimer v. Ginzburg, 43 N.Y.2d 268, 277, 401 N.Y.S.2d 182, 372 N.E.2d 17 (1977). The court “must accept as true the facts as alleged in the complaint and submissions in opposition to the motion and determine only whether the facts as alleged fit within any cognizable legal theory.” Sokoloff v. Harriman Estates Dev. Corp., 96 N.Y.2d 409, 414, 729 N.Y.S.2d 425, 754 N.E.2d 184 (2001). A motion brought pursuant to CPLR 3211(a)(1) “may be granted where documentary evidence submitted conclusively establishes a defense to the asserted claims as a matter of law.” Held v. Kaufman, 91 N.Y.2d 425, 430–31, 671 N.Y.S.2d 429, 694 N.E.2d 430 (1998).
1. Breach of Contract
B & C asserts its first cause of action for breach of contract against Partners and the Fund. B & C alleges that the Memorandum created contractual obligations between B & C and Partners and the Fund that required Partners and the Fund to invest B & C's money in the manner set forth in the Memorandum. Amended Complaint at ¶ 22. B & C contends that Partners and the Fund breached the contract in failing to invest the money in accordance with the strategy set forth in the Memorandum. Id. at ¶ 23, 671 N.Y.S.2d 429, 694 N.E.2d 430.
To state a cause of action for breach of contract, a plaintiff must allege the existence of a contract, performance by the plaintiff, breach by the defendant, and damages resulting from the breach. Kraus v. Visa Int'l Serv. Ass'n, 304 A.D.2d 408, 408, 756 N.Y.S.2d 853 (1st Dep't 2003).
The Fund
In moving to dismiss B & C's breach of contract claim against the Fund, Defendants argue that the Subscription Agreement did not impose an obligation upon the Fund to create a Dutch Book. Rather, Defendants contend the Memorandum contains aspirational statements that Partners was to “seek to create” a Dutch Book and that Partners “believe[d] it [could] create and manage a Dutch Book.' “ Memorandum at iii, iv, v. Defendants assert that the Memorandum further provides that “THERE CAN BE NO ASSURANCE THAT THE INVESTMENT OBJECTIVE OF THE DUTCH BOOK SEGREGATED PORTFOLIO I OR ANY OTHER PORTFOLIO OF THE FUND WILL BE ACHIEVED.” Id. at v (emphasis in original).
B & C's allegation that the Fund breached its contractual obligation by failing to create a Dutch Book is plainly contradicted by the Memorandum. The Fund was not required to achieve the investment objective of the Dutch Book, but merely to attempt to do so. Documentary evidence provides the Fund a defense as a matter of law. Robinson v. Robinson, 303 A.D.2d 234, 235, 757 N.Y.S.2d 13 (1st Dep't 2003). The breach of contract cause of action against the Fund must therefore be dismissed. CPLR 3211(a)(1); Robinson, 303 A.D.2d at 235, 757 N.Y.S.2d 13.
Partners
Defendants argue that there are no contractual obligations between B & C and Partners. Defendants contend that the cause of action against Partners should therefore be dismissed.
B & C contends that Partners' contractual obligations are derived from the Memorandum, which indicates that Partners will be the “sole investment adviser” of the Portfolio. Memorandum at 7. B & C asserts that Partners was charged with creating a Dutch Book on behalf of the Fund through the Subscription Agreement. Amended Complaint at ¶ 22.
The Subscription Agreement is between B & C and the Fund. Affidavit of Stanley R. Jonas in Support of Defendants' Motion to Dismiss, (“Jonas Aff.”), Ex. 2. The Memorandum is incorporated into, and thus a part of, the Subscription Agreement. The Memorandum specifically states that Partners has been retained by the Fund in accordance with a July 1, 2006, Investment Adviser Agreement. Jonas Aff., Ex. 3, at 7. Partners' contractual obligations, therefore, are owed only to the Fund. B & C has alleged no facts placing it in privity with Partners. In the absence of a valid and binding contract between B & C and Partners, B & C has pleaded no basis upon which it may assert a breach of contract cause of action against Partners. Leonard v. Gateway II, 68 A.D.2d 408, 409 (1st Dep't 2009).
Furthermore, even if Partners did owe contractual obligations to B & C, B & C's breach of contract claim against Partners would be unable to be sustained, based on documentary evidence that provides Partners a defense as a matter of law. B & C's allegation that Partners breached its contractual obligation by failing to invest in accordance with the investment strategy set forth in the Memorandum is plainly contradicted by the terms of the Memorandum. The Memorandum states that “the Investment Adviser may pursue additional strategies, in its sole discretion” in pursuit of the Fund's investment objective. Memorandum at 5. Partners, therefore, was not contractually bound to follow any particular strategy in its attempt to create a Dutch Book. Additionally, B & C's allegation that Partners breached its contractual obligation by failing to create a Dutch Book is contradicted by the Memorandum's aspirational statements.
B & C's first cause of action for breach of contract against Partners is therefore dismissed.
2. Breach of Fiduciary Duty
B & C asserts its second cause of action for breach of fiduciary duty against all Defendants. B & C contends that because it was the only investor in the Fund, Defendants stood as fiduciaries to B & C. Amended Complaint at ¶ 27. B & C contends that due to the fiduciary relationship, Defendants were required to invest in accordance with the investment strategy set forth in the Memorandum. Id. at ¶ 28. B & C alleges that Defendants breached their duty by mismanaging the investment and failing to create a Dutch Book, thereby damaging B & C in an amount not less than $10,000,000. Id. at ¶¶ 29–31.
Defendants contend that the detailed Subscription Agreement, which incorporated the Memorandum, contained no provision regarding fiduciary or fiduciary-like obligations toward B & C. Defendants argue that the Subscription Agreement therefore precludes imposition of a fiduciary duty upon the Fund. Defendants further argue that B & C, as a shareholder of the Fund, cannot assert a cause of action against Partners in Partners' capacity as investment adviser. Defendants also contend that Jonas has no fiduciary obligation to B & C because his dealings with B & C were completed solely in his capacity as a Fund/Partners corporate representative.
“A fiduciary relationship arises between two persons when one of them is under a duty to act for or to give advice for the benefit of another upon matters within the scope of the relation.' “ Eurycleia Partners, LP v. Seward & Kissel, LLP, 12 N.Y.3d 553, 561, 883 N.Y.S.2d 147, 910 N.E.2d 976 (2009)quoting EBC I v. Goldman Sachs & Co., 5 N.Y.3d 11, 19, 799 N.Y.S.2d 170, 832 N.E.2d 26 (2005). Such a relationship is grounded on a “higher trust” than normally present in the marketplace between those involved in arm's length business transactions. HF Mgmt. Servs., LLC v. Pistone, 34 A.D.3d 82, 85, 818 N.Y.S.2d 40 (1st Dep't 2006). Under North Shore Bottling Company v. C. Schmidt & Sons, Inc., “a contracting party may be charged with a separate tort liability arising from a breach of a duty distinct from, or in addition to, the breach of contract.” North Shore Bottling Company v. C. Schmidt & Sons, Inc., 22 N.Y.2d 171, 179, 292 N.Y.S.2d 86, 239 N.E.2d 189 (1968). It is fundamental, however, that fiduciary liability is not dependent solely upon an agreement or contractual relation. Kassover v. Prism Venture Partners, LLC, 53 A.D.3d 444, 449, 862 N.Y.S.2d 493 (1st Dep't 2008). If the parties to a contract “do not create their own relationship of higher trust, courts should not ordinarily transport them to the higher realm of relationship and fashion the stricter duty for them.” Northeast Gen. Corp. v. Wellington Advertising, 82 N.Y.2d 158, 162, 604 N.Y.S.2d 1, 624 N.E.2d 129 (1993).
B & C argues that the “ongoing conduct between the parties,” B & C's investment and the Defendants' role as investment adviser and manager, gives rise to a fiduciary relationship between plaintiff and each defendant. B & C alleges that Defendants retained complete control over its investment and described Jonas as a “renowned industry expert” and the “key” person making investment decisions. B & C contends that Defendants therefore acted in a role which imposed fiduciary obligations independent of any contractual relationship.
The Fund
B & C cites to Sergeants Benevolent Association Annuity Fund v. Renck in support of its argument that Defendants owed B & C a fiduciary duty. Sergeants Benevolent Association Annuity Fund v. Renck, 19 A.D.3d 107, 796 N.Y.S.2d 77 (1st Dep't 2005). Unlike the plaintiffs in Sergeants, however, B & C is a sophisticated investor. Cf. id . at 110, 796 N.Y.S.2d 77 (reversing the dismissal of a breach of fiduciary duty claim asserted by trustees against an investment adviser based on allegations that the trustees, who lacked “sophisticated knowledge of investment management,” relied on the adviser's statements regarding his expertise). B & C acknowledged its sophistication in the Subscription Agreement and allowed that it possessed the requisite knowledge and experience to properly evaluate the investment decision.
Furthermore, B & C alleges that Defendants' fiduciary duty is based on B & C's investment in the Portfolio, pursuant to the Subscription Agreement. A cause of action for breach of fiduciary duty cannot stand when there is a “formal written agreement covering the precise subject matter of the alleged fiduciary duty” and a breach of contract claim has been asserted based on that agreement. Fesseha v. TD Waterhouse Investor Servs., 305 A.D.2d 268, 269, 761 N.Y.S.2d 22 (1st Dep't 2003). Because the Subscription Agreement covers the precise subject matter of the alleged fiduciary duty, and B & C does not allege a separate tort liability independent from or in addition to the contract claim, B & C's breach of fiduciary duty claim against the Fund must be dismissed. See Celle v. Barclays Bank PLC, 48 A.D.3d 301, 301, 851 N.Y.S.2d 500 (1st Dep't 2008).
Jonas
B & C further relies on Sergeants Benevolent Association Annuity Fund for its fiduciary duty claim against Jonas. In Sergeants, the court reinstated a breach of fiduciary duty claim against individual Defendants who were the president and vice president of an investment advisory and management firm and who had “held themselves out as experienced in the field of investment consulting and management.” Sergeants Benevolent Association Annuity Fund, 19 A.D.3d at 109, 796 N.Y.S.2d 77. As noted above, the Sergeants court determined that there was an issue of fact whether a fiduciary relationship existed because the plaintiffs-trustees lacked “sophisticated knowledge of investment management.” Id. at 110, 796 N.Y.S.2d 77. B & C's admitted sophistication in the investment arena precludes its analogy to Sergeants. For this reason, and because B & C does not allege facts that Jonas acted at any time outside of his capacity as corporate representative, the cause of action for breach of fiduciary duty against Jonas must therefore be dismissed. See Solow v. New Northern Brokerage Facilities, Inc., 255 A.D.2d 198, 198, 680 N.Y.S.2d 92 (1st Dep't 1998).
Partners
In support of its breach of fiduciary duty claim against Partners, B & C relies primarily on Bullmore v. Ernst & Young Cayman Island, 45 A.D.3d 461, 846 N.Y.S.2d 145 (1st Dep't 2007). Bullmore involved a breach of fiduciary duty action asserted by liquidators on behalf of a collapsed hedge fund against the fund's managing investment advisers. Id. at 463, 846 N.Y.S.2d 145. The liquidators alleged that the advisers failed to disclose the extent of the hedge fund's losses during its five year existence and misrepresented the fund's valuation procedures. Id. at 462, 846 N.Y.S.2d 145. The court found that the investment advisers owed a fiduciary duty to the hedge fund. Id. at 463, 846 N.Y.S.2d 145.
Unlike the liquidator plaintiffs in Bullmore, who sued the advisers on the fund's behalf, B & C asserts its fiduciary duty claim in its capacity as a shareholder of the Fund. While a fiduciary duty may exist between an investment adviser and client, B & C is not Partners' client: rather, the Fund is Partners' client. B & C has no direct relationship with Partners, therefore Partners owes B & C no fiduciary duty. B & C's cause of action for breach of fiduciary duty against Partners must therefore be dismissed. See Northeast Gen. Corp., 82 N.Y.2d at 162, 604 N.Y.S.2d 1, 624 N.E.2d 129.
3. Negligence
B & C asserts its third cause of action for negligence against all Defendants. B & C alleges that each of the Defendants owed a “duty to manage the Portfolio in a skillful, prudent, reasonable, and professionally expert manner.” Amended Complaint at ¶ 33. B & C contends that Defendants breached this duty when they “imprudently, negligently, and recklessly failed to invest in accordance with the investment strategy set forth in the Memorandum” and engaged in transactions “that were incompatible with the investment strategy set forth in the Memorandum.” Id. at ¶ 34, 604 N.Y.S.2d 1, 624 N.E.2d 129.
Defendants contend that the negligence cause of action should be dismissed because it is a breach of contract claim improperly recast as a tort claim. Defendants further contend that B & C, as a shareholder of the Fund, cannot assert a cause of action against Partners in its capacity as investment adviser. Defendants also argue that Jonas, in his capacity as a Fund officer, cannot be liable in a negligence action against the Fund because he does not owe a duty directly to B & C.
To plead a cause of action for negligence, a plaintiff must show that a defendant owed a duty to the plaintiff, that defendant breached the duty, and that plaintiff was injured as a proximate result of defendant's breach. See Freidman v. Anderson, 23 A.D.3d 163, 165, 803 N.Y.S.2d 514 (1st Dep't 2005). “[A] claim arising out of an alleged breach of contract may not be converted into a tort action absent the violation of a legal duty independent of that created in the contract.” Givoldi, Inc. v. UPS, 286 A.D.2d 220, 221, 729 N.Y.S.2d 25 (1st Dep't 2001). “This legal duty must spring from circumstances extraneous to, and not constituting elements of, the contract, although it may be connected with and dependent on the contract.” Clark–Fitzpatrick, Inc. v. Long Island R. Co., 70 N.Y.2d 382, 389, 521 N.Y.S.2d 653, 516 N.E.2d 190 (1987).
The Fund
B & C argues that negligent performance of a contract may give rise to a tort claim in addition to a breach of contract claim. B & C cites to Clark–Fitzpatrick for the proposition that negligence and breach of contract claims may coexist. B & C has not, however, provided any factual support for its allegation that the Fund owes B & C a legal duty beyond the terms of the Memorandum. B & C's negligence allegations are based solely on the terms of the Memorandum and are thus duplicative of its contract claim. B & C attempts to assert a cause of action for negligent breach of contract, which New York law does not recognize. Megaris Furs, Inc. v. Gimbel Brothers, Inc., 172 A.D.2d 209, 211, 568 N.Y.S.2d 581 (1st Dep't 1991). The negligence cause of action against the Fund must therefore be dismissed.
Partners
B & C relies primarily on Bullmore v. Ernst & Young Cayman Island in support of its negligence claim against Partners. Bullmore v. Ernst & Young Cayman Island, 45 A.D.3d 461, 846 N.Y.S.2d 145 (1st Dep't 2007). In Bullmore, the court sustained the liquidators' negligence claim and found that the advisers had fiduciary obligations to the fund which gave rise to a duty to exercise reasonable care independent of the contractual obligations. Id. at 463, 846 N.Y.S.2d 145. Here, there is no basis for a fiduciary duty between B & C and any of the three Defendants. As discussed with regard to B & C's breach of fiduciary duty claim against Partners, Partners owes no legal duty to B & C. Partner's client is the Fund, not B & C. The negligence cause of action against Partners must therefore be dismissed.
Jonas
In support of its negligence action against Jonas, B & C argues that Jonas beyond a capacity as merely a director or principal of the Fund or Partners. B & C points to the Memorandum which described Jonas as the “key” person at Partners providing investment advice and a “renowned industry expert” who developed many of the “leading strategies and instruments in the derivatives marketplace.” Memorandum at 5–6. These statements, however, relate to Jonas' contractual obligations as a director of the Fund or principal of Partners. The statements do not show that Jonas undertook a duty independent of the Subscription Agreement between B & C and the Fund or the Investment Adviser Agreement between the Fund and Partners. The negligence cause of action against Jonas must therefore be dismissed.
4. Fraud
B & C asserts its fourth cause of action for fraud against all Defendants. B & C alleges that in order to induce B & C to invest in the Fund, the Defendants represented that previously successful proprietary algorithms would be used to manage the investment. Amended Complaint at ¶ 11b.
B & C alleges that these representations were materially false when made and Defendants knew, but concealed, that they had no proprietary algorithms. Id. at ¶ 38, 846 N.Y.S.2d 145. B & C contends that the Defendants made these representations with the intent to deceive B & C and that it relied to its detriment on Defendants' representations ( id. at ¶¶ 39–40, 846 N.Y.S.2d 145).
In ¶ 37 of the fraud allegations in the Amended Complaint, B & C alleges that the Defendants represented that the algorithms had been “unsuccessful used” in the past. Because B & C alleges in ¶ 11b that Defendants represented that the algorithms had been “successfully used” in the past, and the parties brief the fraud cause of action in accordance with the allegations as stated in ¶ 11b, the court similarly addresses the fraud allegations in accordance with ¶ 11b.
Defendants contend that plaintiff's fraud claim should be dismissed because: (a) the Memorandum contains only aspirational statements regarding the creation of a Dutch Book; (b) the Memorandum's risk disclosures negate any claim of reliance; (c) B & C acknowledged that it had the opportunity to ask questions regarding the Memorandum's terms and obtain information necessary to evaluate the investment, and B & C's failure to request to see the allegedly non-existent algorithms is fatal to the fraud claim; and (d) B & C's fraud allegations are duplicative of its contract claim.
To posit a claim of fraud, the complaint must allege a representation of material fact, falsity, scienter, reliance and injury. Small v. Lorillard Tobacco Co., Inc., 94 N.Y.2d 43, 57, 698 N.Y.S.2d 615, 720 N.E.2d 892 (1999). Because Defendants do not address B & C's fraud allegations toward each individual defendant, the court applies B & C's allegations and Defendants' arguments in support of its motion to dismiss to all Defendants as a class.
(a) “Aspirational Statements”
Defendants contend that the Memorandum's assertions of “forward-looking hopes” do not support a claim of fraud. Defendants' Memorandum in Support of Their Motion to Dismiss the Amended Complaint (“Def. Mem in Support”), at 11. Defendants contend that statements that are merely “speculation and expressions of hope for the future do not constitute actionable representations of fact.” Citing Zaref v. Berk Michaels, P.C., 192 A.D.2d 346, 348–49, 595 N.Y.S.2d 772 (1st Dep't 1993).
In opposition, B & C points to the allegations set forth in the complaint. B & C alleges that Defendants misrepresented that the proprietary algorithms had been successfully used in the past. Amended Complaint at ¶¶ 11b, 38. Additionally, B & C alleges that the Defendants knew, but concealed, that there were no proprietary algorithms. Id. at ¶ 38, 595 N.Y.S.2d 772. B & C asserts that the Defendants knew that without the proprietary algorithms, the Portfolio could not and would not be “structured” so as to create a Dutch Book. Id.
Contrary to Defendants' contentions, these alleged misrepresentations are not merely aspirational, but, rather, are statements concerning the existence of the proprietary algorithms that, “taken together and in context,” may have mislead a reasonable investor. Hunt v. Alliance North Am. Gov't Income Trust, Inc., 159 F.3d 723, 728 (2d Cir.1998) (applying New York law and holding that alleged misrepresentations contained in a written prospectus regarding the intended use of hedging techniques constituted an actionable claim for misrepresentation). The Defendants' statements regarding the algorithms can be characterized as alleged misrepresentations of existing material fact purportedly known by Defendants to be false when made. On a motion to dismiss, these allegations must be accepted as true and may serve as the basis for a fraud claim. Houbigant, Inc. v. Deloitte & Touche LLP, 303 A.D.2d 92, 753 N.Y.S.2d 493 (1st Dep't.2003).
(b) Risk Disclosures
Next, Defendants argue that the Memorandum's risk disclosures, provided in pages 22–30 of the Memorandum, stated that there was “no assurance” that the investment objective would be achieved and that the investment presented a high degree of risk. Defendants contend that these risk disclosures negate any claim of reliance.
The cases Defendants cite for support arise under different factual circumstances than the case at bar, and, thus, are inapposite. Defendants' cases do not address B & C's allegations that Defendants knowingly misrepresented that proprietary algorithms existed. “While the use of cautionary language in offering materials may render any alleged misrepresentations immaterial as a matter of law,” cautionary language will not insulate a defendant who has failed to disclose current conditions adverse to the offering from liability. Ackerman v. Price Waterhouse, 252 A.D.2d 179, 683 N.Y.S.2d 179 (1st Dep't 1998); see also Scantek Med. Inc. v. Sabella, 583 F.Supp.2d 477, 496 (S.D.N.Y.2008) (applying New York law). B & C alleges that Defendants knowingly misrepresented current conditions related to the existence of the algorithms and their past performance, and that these conditions were adverse to the Fund's likelihood of success. Amended Complaint at ¶¶ 11b, 38.
Furthermore, B & C's allegations that it relied on the existence of the proprietary algorithms in making its investment decision involve more than allegations that the Fund failed to perform as expected. Hunt, 159 F.3d at 729 (applying New York law and explaining that the defendant was not afforded a defense to a fraud claim based on cautionary language contained in a prospectus because such language “warned that the Fund's hedging maneuvers might fail, not that the Fund would have no opportunity to use hedging maneuvers That the prospectus disclosed the possible inefficacy of hedges does not shield the Fund from liability for misrepresenting the availability of hedging opportunities”). In addition, a disclaimer is generally enforceable only if it tracks the substance of the alleged misrepresentation. JP Morgan Chase ex rel. Mahonia Ltd. v. Liberty Mut. Ins. Co., 189 F.Supp.2d 24, 27 (S.D.N.Y.2002) (applying New York law and noting that a disclaimer must be sufficiently specific to provide a “clear indication that the disclaiming party has knowingly disclaimed reliance on the specific representations that form the basis of the fraud claim”). Here, the Defendants point to the Memorandum's risk disclosures in support of its motion to dismiss the fraud claim, but none of these disclosures even mention the algorithms.
As a result, taking B & C's allegations as true on this motion to dismiss, the risk disclosures do not negate a claim of reasonable reliance on Defendants' statements regarding the existence and efficacy of the algorithms. Hunt, 159 F.3d at 729.
(c) Plaintiff's Sophistication as an Investor
B & C asserts that, despite its representations in the Subscription Agreement regarding its sophistication and ability to evaluate the investment decision, it should not be precluded from claiming reliance on Defendants' alleged misrepresentations. B & C contends that its reliance on Defendants' misrepresentations was reasonable because knowledge regarding the nature and existence of the proprietary algorithms was peculiarly the Defendants.
Defendants contend that, even if the algorithms do not exist, B & C's own representations in the Subscription Agreement (1) that it “possesses requisite knowledge and experience in financial matters such that it is capable of evaluating the risks and merits” of the investment, Subscription Agreement at S–10, ¶ (e), and (2) that it had the “opportunity to ask questions of and receive answers” concerning the terms of the investment and “obtain any additional information necessary to verify the information” it received regarding the investment, id. at ¶ (h), preclude its fraud claim. Defendants argue that when a party has access to all relevant information, there can be no reliance on alleged misrepresentations.
Despite B & C's representations, B & C may have justifiably relied upon Defendants' alleged misrepresentations regarding the algorithms. See National Western Life Ins. Co. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 89 F. App'x 287, 294–95 (2d Cir.2004) (applying New York law and noting that “sophisticated' entities can justifiably rely on fraudulent statements,” and whether such entities did so in a particular case “is a genuine issue of material fact”). The Amended Complaint alleges that, despite the exercise of reasonable due diligence, B & C could not have discovered the truth regarding Defendants' misrepresentations because the nature and existence of the algorithms was peculiarly within the Defendants' knowledge. Amended Complaint at ¶ 20. B & C further contends that it did not have the technical training or required expertise in algorithms or probability theory to determine whether the algorithms existed. Id. B & C alleges that it relied on the Defendants' statements for these reasons and because of Jonas' purported status as a “renowned industry expert in the field of global derivatives.” Id.
Accepting these allegations as true, B & C's reliance, particularly where the Defendants were in exclusive possession of details regarding the algorithms, can be characterized as reasonable. See Fraternity Fund Ltd. v. Beacon Hill Asset Mgmt. LLC, 376 F.Supp.2d 385, 411 (S.D.N.Y.2005) (applying New York law and noting that a hedge fund investor could reasonably rely on information provided by the defendants concerning the fund's performance because defendants were “uniquely positioned to know” the fund's value). Thus, it is not apparent at this early stage of the litigation that details about the proprietary algorithms would have been revealed upon B & C's inspection. While the evidence might ultimately demonstrate that Defendants did not have any special knowledge or that B & C could have ascertained information about the algorithms by exercising reasonable diligence, these issues are “inappropriate to determine as a matter of law solely on the allegations in [the] complaint.” P.T. Bank Cent. Asia, N.Y. Branch, 301 A.D.2d at 383, 753 N.Y.S.2d 463.
(d) Fraud as Duplicative of Breach of Contract Claim
Defendants next, and finally, argue that B & C's fraud claim is based solely on the Memorandum and Subscription Agreement, the documents that underlie B & C's breach of contract claim. Defendants contend that B & C's fraud claim should therefore be dismissed because it is duplicative of B & C's breach of contract claim. Defendants are incorrect. “If a plaintiff alleges that it was induced to enter into a transaction because a defendant misrepresented material facts, the plaintiff has stated a claim for fraud even though the same circumstances also give rise to the plaintiff's breach of contract claim.” First Bank of the Ams. v. Motor Car Funding, Inc., 257 A.D.2d 287, 291–92, 690 N.Y.S.2d 17 (1st Dep't 1999) (reinstating plaintiff's fraud claim because the allegations of misrepresentation were not regarding a future intent to perform, but were related to pertinent facts about individual loans plaintiff purchased through a written agreement). B & C's fraud claim is premised on allegations that the algorithms Defendants represented to have “successfully used in the past” simply do not exist. Amended Complaint at ¶¶ 11b, 38. B & C's allegations that Defendants misrepresented existing material facts does not relate to future performance, and the allegations are sufficiently independent from its contract claim to stand on their own. See First Bank of the Ams., 257 A.D.2d at 291–92, 690 N.Y.S.2d 17.
For the above reasons Defendants' motion to dismiss B & C's fraud claim is therefore denied.
5. Alter Ego
B & C alleges that Jonas is personally liable as the alter ego of Partners because he “exercised complete domination and control of the operation, management, and financial affairs of Partners” and that he “used his power over Partners to further his personal interests and comingled the assets and economic activity of Partners with his own.” Amended Complaint at ¶¶ 44–45. B & C alleges that in doing so Jonas repeatedly disregarded the required corporate formalities. Id. at ¶ 46, 690 N.Y.S.2d 17. B & C further alleges that Jonas left Partners undercapitalized and unable to meet its debts. Id. at ¶ 47, 690 N.Y.S.2d 17.
Defendants contend that B & C's alter ego allegations are insufficient under CPLR 3016(b) to support the cause of action because they fail to plead with particularity the manner in which Jonas used complete domination to commit wrongdoing against the bank.
To state a cause of action for alter ego liability, a plaintiff must allege that “the owner exercised complete domination of the corporation in respect to the transaction attacked, and that such domination was used to commit a fraud or a wrong against the plaintiff which resulted in plaintiff's injury.” Teachers Ins. Annuity Assn. of Am. v. Cohen's Fashion Opt. of 485 Lexington Ave. Inc., 45 A.D.3d 317, 318, 847 N.Y.S.2d 2 (1st Dep't 2007)citing Matter of Morris v. New York State Dep't of Taxation and Fin., 82 N.Y.2d 135, 141, 603 N.Y.S.2d 807, 623 N.E.2d 1157 (1993). While wholly conclusory allegations are insufficient to maintain a cause of action for alter ego liability, Andejo Corp. v. South Street Seaport Ltd. Partnership Corp., 40 A.D.3d 407, 407, 836 N.Y.S.2d 571 (1st Dep't 2007), on a motion to dismiss the “sole criterion is whether the pleading states a cause of action and if from its four corners factual allegations are discerned with taken together manifest any cause of action cognizable at law.” Polonetsky, 97 N.Y.2d at 54, 735 N.Y.S.2d 479, 760 N.E.2d 1274.
Viewing the complaint in the light most favorable to B & C, as required on a motion to dismiss, and taking the complaint as a whole, B & C has sufficiently raised material issues of fact as to whether Jonas was an alter ego of Partners. See Trans Int'l Corp. v. Clear View Techs., 278 A.D.2d 1, 2, 717 N.Y.S.2d 146 (1st Dep't 2000). B & C alleges that Jonas was a director of the Fund, as well as the Chief Executive Officer and Chief Financial Officer of Partners, and that Partners' place of business was located at Jonas' New York residence. Amended Complaint at ¶¶ 3–4. B & C further alleges that Jonas provided B & C with a copy of the Memorandum and arranged for B & C to execute the Subscription Agreement. Id. at ¶ 3, 717 N.Y.S.2d 146. Following execution of the Subscription Agreement, B & C alleges that Jonas communicated directly with B & C regarding its investment in the Portfolio. Id. Additionally, the Memorandum designates Jonas as one of only three of the Fund's directors, the other two individuals being employees of Ogier Fiduciary Services Limited, a Cayman Island based company, retained by the Fund for an annual fee of $5,000 per director. Memorandum at 5–6. The Memorandum also designates Jonas as one of only two of the “key persons” of Partners, the Fund-appointed Investment Adviser. Id. at 7, 717 N.Y.S.2d 146. As such, on this motion to dismiss, B & C's allegations have resulted in a “fact-laden claim to pierce the corporate veil” that is unsuited for addressing at this early stage in the litigation. Ledy v. Wilson, 38 A.D.3d 214, 215, 831 N.Y.S.2d 61 (1st Dep't 2007). Defendants' motion to dismiss the alter ego claim against Jonas must therefore be denied. See Kralic v. Helmsley, 294 AD3d 234, 236 (1st Dep't 2002).
Accordingly, it is hereby
ORDERED that Defendants Dutch Book Funds SPC, Ltd, Dutch Book Partners, LLC, and Stanley R. Jonas's motion to dismiss the complaint is granted as to:
(a) B & C's breach of contract claim against Dutch Book Funds SPC, Ltd;
(b) B & C's breach of contract claim against Dutch Book Partners, LLC;
(c) B & C's breach of fiduciary duty claim against Dutch Book Funds SPC, Ltd;
(d) B & C's breach of fiduciary duty claim against Dutch Book Partners, LLC;
(e) B & C's breach of fiduciary duty claim against Stanley R. Jonas;
(f) B & C's breach of negligence claim against Dutch Book Funds SPC, Ltd;
(g) B & C's breach of negligence claim against Dutch Book Partners, LLC; and
(h) B & C's breach of negligence claim against Stanley R. Jonas; and it is further
ORDERED that Defendants Dutch Book Funds SPC, Ltd, Dutch Book Partners, LLC, and Stanley R. Jonas's motion to dismiss is otherwise denied, and it is further;
ORDERED that Defendants Dutch Book Funds SPC, Ltd, Dutch Book Partners, LLC, and Stanley R. Jonas are directed to answer the remaining claims in the Amended Complaint within ten (10) days after the service of a copy of this order with notice of entry.
This constitutes the decision and order of the Court.