FIH, LLC v. Foundation Capital Partners, L.P. et al

Filing 63

ORDER granting in part and denying in part 46 Motion to Dismiss; granting in part and denying in part 47 Motion to Dismiss; granting in part and denying in part 49 Motion to Dismiss; granting in part and denying in part 51 Motion to Dismiss. Signed by Judge Janet Bond Arterton on 3/30/16. (Harris, J)

UNITED STATES DISTRICT COURT
DISTRICT OF CONNECTICUT
FIH, LLC,
Civil No. 3:15cv785 (JBA)
Plaintiff,
v.
FOUNDATION CAPITAL PARTNERS LLC, f/k/a
FOUNDATION MANAGING MEMBER LLC;
DEAN BARR; JOSEPH MEEHAN; and JOSEPH
March 30, 2016
ELMLINGER,
Defendants.
RULING ON DEFENDANTS’ MOTIONS TO DISMISS
This is an action brought by Plaintiff FIH, LLC against Defendants Foundation
Capital Partners, LLC (“Foundation”), Dean Barr, Joseph Meehan, Thomas Ward, and
Joseph Elmlinger, alleging: violations of § 10(b) of the Security Exchange Act, 15 U.S.C.
§ 78j(b) (Count I); violations of the Connecticut Uniform Securities Act (“CUSA”), Conn.
Gen. Stat. §§ 36b-29(a), (c) (Count II); intentional misrepresentation (Count III);
fraudulent inducement (Count IV); negligent misrepresentation (Count V); and unjust
enrichment (Count VI), all arising out of FIH’s investment in Foundation on the basis of
representations by the individual defendants that FIH now claims to have been false or
misleading. Defendants Barr [Doc. # 46], Ward [Doc. # 47], Meehan [Doc. # 51], and
Elmlinger [Doc. # 49] each move to dismiss. Oral argument was held on February 9, 2016.
For the following reasons, Defendants’ motions are granted in part and denied in part.

Table of Contents
I.

Facts Alleged ............................................................................................................... 4
A.

Defendants’ Alleged Representations............................................................................ 5
1.

Barr’s Skills, Experience and Contacts ...................................................................... 5

2.

Barr and Meehan’s Relationship................................................................................ 7

3.

The Pipeline and Expectations regarding Performance ......................................... 7

4.

Barr’s Personal Spending ............................................................................................ 9

B.

FIH’s Investment ........................................................................................................... 10

C.

Project Activity Logs ..................................................................................................... 10

D.

Project Soothsayer and Emails ..................................................................................... 11

E.

Evidence of Misrepresentations ................................................................................... 12
1.

Barr’s Skills, Experience and Contacts .................................................................... 12

2.

Barr and Meehan’s Relationship.............................................................................. 14

3.

The Pipeline and Expectations regarding Performance ....................................... 15

4.

Barr’s Personal Spending .......................................................................................... 16

F.

Request for Rescission ................................................................................................... 18

II. Discussion ................................................................................................................. 19
A.

Securities and Exchange Act § 10(b) (Count I) ......................................................... 20
1.

Liability for Misrepresentations .............................................................................. 22
a.

Due Diligence Materials, Portfolio Model, General Partner Forecast ......... 22

b.

Other Statements ................................................................................................ 26

2.

Materially False/Misleading ..................................................................................... 27
a.

Barr’s Skills, Experience and Contacts ............................................................. 28

b.

The Pipeline and Expectations Regarding Performance ............................... 32
i.

Misrepresentations ............................................................................................. 33

ii.

Omissions ........................................................................................................ 37

iii.

Materiality of Misrepresentations and Omissions...................................... 41

c. Barr and Meehan’s Relationship ........................................................................... 47
d.

Barr’s Personal Spending ................................................................................... 50
i.

Salary Draw .......................................................................................................... 50
2

ii.

Emerald Investment ....................................................................................... 51

iii.

In the Control Room ...................................................................................... 52

3.

Reasonable Reliance .................................................................................................. 54

4.

Scienter ....................................................................................................................... 55
a.

Pipeline Continues to Expand & Pipeline has Become Increasingly Active 58

b.

Project Apex ........................................................................................................ 58

c. Nothing FIH Needed to Know .............................................................................. 58
d.
5.
B.

No Threat to Barr and Meehan’s Ability to Work Together ......................... 60
Loss Causation ........................................................................................................... 60

State Law Claims ............................................................................................................ 63
1.

CUSA, Conn. Gen. Stat. §§ 36b-29(a) and (c) (Count II) .................................... 64

2. Intentional and Negligent Misrepresentation and Fraudulent Inducement
(Counts III, IV & V) .......................................................................................................... 65
3.

Unjust Enrichment (Count VI) ............................................................................... 66

III. Conclusion ................................................................................................................ 68

3

I.

Facts Alleged 1
Plaintiff alleges the following facts in its Amended Complaint [Doc. # 43].

Foundation was founded in 2009 by Defendants Dean Barr and Joseph Meehan as a startup company. (Am. Compl. ¶ 29.) The company’s “business plan was to make three to
four yearly minority investments of up to 25% in the management companies of large,
well-established hedge funds.” (Id. ¶ 28.) Foundation “asserted to potential investors that
it expected to raise $4,000,000,000 to pursue this type of investment and that it was to
yield substantial returns.” (Id.)
Dean Barr served as the managing partner and managing principal of Foundation
(id. ¶ 20); Joseph Meehan was a partner, managing principal and the Chief Operating
Officer (id. ¶ 21); Thomas Ward was a partner, principal, manager, and Head of
Distribution (id. ¶ 22); and Joseph Elmlinger was a partner, principal, and Head of Risk
Structuring (id. ¶ 23).

1

The exhibits referenced here are attached to either the Amended Complaint or
one of Defendants’ motions to dismiss and referenced in the Amended Complaint. See
Holloway v. King, 161 F. App’x 122, 124 (2d Cir. 2005) (“[A] complaint ‘is deemed to
include any written instrument attached to it as an exhibit or any statements or
documents incorporated in it by reference.’ ‘Even where a document is not incorporated
by reference, the court may nevertheless consider it where the complaint relies heavily
upon its terms and effect, which renders the document integral to the complaint.’”
(quoting Chambers v. Time Warner, Inc., 282 F.3d 147, 152 (2d Cir. 2002)) (internal
citations omitted)). These include Barr’s Exhibits D, E, F, G, H, I and part of Exhibit B,
and Meehan’s Exhibits B, C, and D. Barr’s Exhibits A (the Subscription Agreement), C, J,
and those parts of Exhibit B not mentioned or relied upon in the Amended Complaint,
however, are not properly attached and will not be considered by the Court. Likewise,
Meehan’s Exhibit A (which is identical to Barr’s Exhibit A) and part of Meehan’s Exhibit
E (which is identical to Barr’s Exhibit B) are neither mentioned nor relied upon in the
Amended Complaint and will not be considered by the Court.
4

In September 2013, FIH, an investment company, was introduced to Foundation.
(Id. ¶ 37.) “The initial call between the representatives of FIH and Foundation took place
in October 2013.” (Id.) Over the next five months, “Foundation, through the individual
defendants, engaged in extensive communications with representatives of FIH to
persuade them to make a substantial investment in Foundation. (Id. ¶ 38.) Among these
communications were: (1) Preliminary Due Diligence Materials “drafted and/or approved
by the individual defendants,” prepared as of September 2013 and February 2014 (id.
¶ 40); (2) phone calls, emails and meetings; (3) a Portfolio Model (id. ¶ 77); and (4) a
General Partner Forecast (id. ¶ 78; see Forecast, Ex. D to Barr Mot. to Dismiss). In these
communications, Defendants made a number of representations to Plaintiff that Plaintiff
now alleges were false or misleading. These representations are outlined below.
A. Defendants’ Alleged Representations
1. Barr’s Skills, Experience and Contacts
Many of the representations alleged to have been made by Defendants to FIH
concerned Barr’s experience, skills, and contacts in the investment industry. These
statements include the following:
•

“The principals . . . have deep experience launching and managing investment
businesses. Collectively, the team has over 100 years of experience in the
alternative investment industry, having built/managed a number of successful
asset management businesses, managed nearly $1 trillion in assets, and
participated in dozens of growth capital investments. The principals believe that
these experiences in successfully building alternative investment firms will enable
[Foundation] to enjoy a strong start and long term success.” (Due Diligence Sept.
2013 at 6; Due Diligence Feb. 2014 at 6).

•

“[Foundation’s] team maintains extensive relationships with leading managers,
prime brokers and operations/administrative servicing professionals that will
5

assist the firm with deal sourcing and execution.” (Due Diligence Sept. 2013 at 26;
Due Diligence Feb. 2014 at 26.)
•

“The Investment Manager plans to source deals directly through personal
relationships and direct contact with targeted leading managers in the alternative
investment industry. The firm’s partners maintain close working relationships
with prime brokerage firms, investment banks, key funds-of-funds, and strategic
limited partners who represent some of the world’s largest investors in hedge
funds. . . . The firm will use the extensive experience and relationships Mr. Barr
cultivated at Citi Alternative Investments . . . . [Foundation] will use his
background and experience in its discussions surrounding investment
opportunities [with] Large Hedge Fund Managers.” (Due Diligence Sept. 2013 at
26; Due Diligence Feb. 2014 at 26.)
The Due Diligence Materials additionally asserted that “[a] third party diligence

group was retained to conduct professional and personal background checks on the
managing principals of the General Partner,” and its findings “validated the work history
and achievements of Mr. Barr and Mr. Meehan.” (Due Diligence Sept. 2013 at 14; Due
Diligence Feb. 2014 at 14.) Furthermore, the Materials stated, the third party found “no
negative legal or personal judgments involving these principals.” (Due Diligence Sept.
2013 at 14; Due Diligence Feb. 2014 at 14.) Barr similarly asserted on December 4, 2013, 2
during a meeting at which all of the individual defendants were present, that there was
nothing “FIH needed to know about [his] background or personality” and no other
matters concerning him that FIH should know about before proceeding with an
investment. (Am. Compl. ¶ 91.)

2

The Amended Complaint actually states the date as December 4, 2014. This
appears to be a typographical error.
6

2. Barr and Meehan’s Relationship
Several of Defendants’ alleged representations to FIH concerned Barr’s
relationship with Meehan. The Due Diligence Materials for example, stated that “Mr.
Barr and Mr. Meehan have known each other for 16 years, meeting through family
relationships in 1997,” and “[b]oth have worked closely together since the concept for
Foundation Capital Partners was created in 2007.” (Due Diligence Sept. 2013 at 13; Due
Diligence Feb. 2014 at 13.) The Materials additionally asserted that the partners did “not
believe they ha[d] any potential conflicts of interest with [Foundation].” (Due Diligence
Sept. 2013 at 14; Due Diligence Feb. 2014 at 14.) In the lead-up to Barr’s divorce from
Meehan’s wife’s sister, Barr and Meehan each represented to FIH, in separate phone calls
on December 5, 2013, that “their relationship as brothers in law” posed no “threat to their
ability to work together.” (Am. Compl. ¶¶ 83–84.)
3. The Pipeline and Expectations regarding Performance
FIH also alleges that Defendants made a number of representations to it
concerning investments in Foundation’s pipeline and Defendants’ expectations about
Foundation’s performance. These include the following statements:
•

As of September 2013:
o The Due Diligence Materials indicated that fifteen projects were in
Foundation’s pipeline, “including those with which the firm is in active
discussions” (Projects Delta, Lake, California, and Corvette, and Funds
Nos. 5–15). (Due Diligence Sept. 2013 at 27.)

•

December 2, 2013:
o Barr circulated to FIH a document “drafted and/or approved by the
individual defendants,” entitled “[Foundation] Portfolio Model,” which
showed that “Foundation would close on four hedge fund GP minority
interest transactions by June 30, 2014.” (Am. Compl. ¶ 77.)
7

o The Portfolio Model “indicated Projects Lake and Granite would close by
March of 2014 and Projects California and Corvette by June 2014.” (Id.)
•

•

December 19, 2013:
o Director of Mergers and Acquisitions, Hall O’Donnell emailed to FIH,
copying Defendants Barr, Meehan, and Elmlinger, a document entitled
“Project Foundation General Partner Forecast,” which “was drafted and/or
approved by the individual defendants.” (Id. ¶ 78.) The document showed
that Foundation “was in a position to close on four deals [Projects Lake,
Granite, California, and Corvette] by June 30, 2014.” (Id.; see Forecast at
8.)
December 30, 2013:
o In an email to FIH, Barr stated: “Starting Jan 5th, we have four possible
transactions in the works” (Dec. 30 Email, Ex. E to Barr Mot. to Dismiss
[Doc. # 46]), referring to Projects Bronco, Corvette, Lake, and Centaur
(Am. Compl. ¶ 72).

•

January 22, 2014:
o In an email to FIH, on which Meehan was copied, Barr reported: “We had
a comprehensive call with a $5 bn London based Hedge Fund” (Project
Apex) and “[w]e have a ‘green light’ to pursue a deal. . . . I believe we can
move expeditiously on this deal.” (Jan. 22, 2014 Email, Ex. F to Barr Mot.
to Dismiss; Am. Compl. ¶ 73.)

•

As of February 2014:
o In an email to FIH, on which Meehan was copied, Barr stated: “We have
some reasonably good intel that suggests that [the] offer [for Project Pilot]
would be given serious consideration. Our pipeline continues to expand
with real, immediate deals.” (Feb. 3, 2014 Email, Ex. G to Barr Mot. to
Dismiss; Am. Compl. ¶ 74.)
o The Due Diligence Materials represented: “[Foundation] expects to close
on three to four transactions each year.” (Due Diligence Feb. 2014 at 4; see
also Due Diligence Sept. 2013 at 4.)
o According to the Due Diligence Materials, “the current representative
[Foundation] pipeline . . . has become increasingly active in recent months
. . . .” (Due Diligence Feb. 2014 at 27; see also Due Diligence Sept. 2013 at
27.)

8

o The Due Diligence Materials showed fourteen projects in the pipeline, 3
“including those with which the firm is in active discussions” (Projects
Lake, Apex, Corvette, Granite, Breakout, Pilot, Centaur, Pound, Tensor,
Mainstay, Yale, Halo, Gun, and Bronco). (Due Diligence Feb. 2014 at 27.)
o The Due Diligence Materials represented that non-disclosure agreements
(“NDAs”) were signed in Projects Apex, Granite, Lake, and Centaur. (Id.)
4. Barr’s Personal Spending
Finally, a number of Defendants’ representations pertained to Barr’s spending
habits and their likely effect, if any, on Foundation.
In January 2014, FIH read a news article which stated that Barr had lost a $1
million investment in a deep sea treasure hunting fraud. (Am. Compl. ¶ 103.) “Concerned
about Barr’s judgment, FIH inquired of Barr whether the story was true.” (Id.) In an email
dated January 16, 2014, Barr responded that his “investment was $200,000,” and “[t]he $1
million number represents other investors in the hoax.” (Jan. 16 Email, Ex. I to Barr Mot.
to Dismiss.)
Several days later, on January 20, 2014, Barr emailed FIH, copying Defendants
Meehan, Ward, and Elmlinger, to ask if FIH was “comfortable with allowing the Partners
to make the monthly Jan. salary draw and conduct normal business travel as needed.”
(Jan. 20 Email, Ex. B to Barr Mot. to Dismiss; Am. Compl. ¶ 93.) According to FIH, “[i]n
making that request, Barr effectively was representing to FIH that Barr’s request to draw
his salary was fiscally responsible and in the company’s best interests.” (Am. Compl.
¶ 93.)

3

Plaintiff claims the pipeline included fifteen projects. In fact, though, there are
fourteen projects on the list. (See Due Diligence Materials Feb. 2014.)
9

On February 20, 2014, “at a dinner in a Greenwich, Connecticut restaurant . . .
Meehan and Elmlinger assured FIH’s representative that there were strong spending
controls in place,” stating: “You’re looking at the control room. Nothing happens without
us” and “[w]e will not spend your money foolishly.” (Id. ¶¶ 99–101.)
B. FIH’s Investment
FIH ultimately invested $6.75 million in Foundation. (Id. ¶ 3.) The investment
was made in four phases, the last of which took place on February 27, 2014. (Id. ¶ 109.)
“The final transaction entailed: (1) FIH’s direct purchase from Foundation of an interest
in Foundation for $3 [m]illion; (2) FIH’s direct purchase from Foundation of a previous
investor’s interest in Foundation for a planned $4.2 [m]illion, of which $2.1 [m]illion was
paid; (3) FIH’s purchase of another previous investor’s interest for $1.15 [m]illion; and
(4) FIH’s purchase of some of Barr’s interest in Foundation for $500,000.” (Id.)
After FIH invested in Foundation, however, it obtained information from several
sources indicating that some of the representations that had been made by Defendants to
FIH were untrue. These sources included: (1) Project Activity Logs; (2) Project
Soothsayer; and (3) Emails from Meehan and Elmlinger. Each of these sources is
described below.
C. Project Activity Logs
On March 4, 2014, FIH received copies of internal Foundation documents entitled
“Project Activity Logs.” (Id. ¶¶ 143, 144.) The Logs “listed hedge fund targets in
Foundation’s pipeline under three categories: Live Deals, Prospects, and Dead Projects.”
(Id. ¶ 143.) “For each hedge fund target, the Project Activity Log was updated to reflect
the progress in columns named ‘recent activity/notes,’ ‘next steps’ and ‘process
10

milestones.’” (Id.) “The Project Activity Logs served as an internal diary of the progress
made by Foundation on each of the targets to date and also catalogued the historical
progress with each target to date.” (Id.) “Thus, each Project Activity Log version built
upon the previous version and added additional information but did not delete prior
progress notes.” (Id.) The Logs “were distributed to Foundation’s employees—including
the individual defendants—for discussion at weekly meetings to discuss movement on the
pipeline as demonstrated in the Project Activity Logs.” (Id.) The Log FIH received on
March 4, 2014 was dated March 3, 2014, and it “included historical information on all of
Foundation’s prospects up to that date.” (Id. ¶ 144.)
D. Project Soothsayer and Emails
On March 14, 2014, ten days after FIH received the Project Activity Logs, Meehan
and Elmlinger contacted FIH and made “oral statements . . . to the effect that Barr was
dishonest, incompetent, and a disaster to Foundation who must be removed if
Foundation was to survive.” (Id. ¶ 115.) They promised to provide FIH with a written
“briefing” explaining why Barr needed to be removed from the company. (Id.) On March
21, 2014, Meehan emailed FIH, copying Elmlinger, stating: “I am finishing my stab at the
previously mentioned briefing. Elm[linger] has landed, and I have debriefed him. He will
take a thorough read and will add and edit where necessary.” (Id. ¶ 116.)
On March 28, 2014, FIH received a package bearing the return address of Joseph
Elmlinger which contained “183 pages of emails printed out from both Meehan’s and
Elmlinger’s Microsoft Outlook accounts,” “covering a period from February 19, 2012 to
March 26, 2014,” which supported Meehan’s and Elmlinger’s allegations about Barr’s
character and performance. (Id. ¶¶ 121, 124; see Soothsayer Emails, Ex. D to Am. Compl.;
11

Mar. 26–27 Emails, Ex. E to Am. Compl.) On April 1, 2014, FIH additionally received the
written “briefing” promised by Meehan and Elmlinger. (Id. ¶ 119.) Entitled “Project
Soothsayer,” the document “spelled out in detail,” for ten pages, “the writers’ belief in the
fundamental dishonesty, lack of experience, business contacts and appallingly poor
business and personal judgment of Barr and detail[s] those qualities’ disastrous effect on
Foundation’s performance in the past and its prospects for the future.” (Id. ¶¶ 122–23; see
Project Soothsayer, Ex. C to Am. Compl.)
E. Evidence of Misrepresentations
Project Soothsayer, the package of emails delivered to FIH by Meehan/Elmlinger,
and the Project Activity Logs included a number of statements that FIH claims
demonstrate the falsity of Defendants’ prior assertions to FIH regarding Barr’s skills,
experience, and contacts; Barr and Meehan’s relationship; the pipeline and Defendants’
expectations regarding Foundation’s performance; and Barr’s personal spending. These
representations are enumerated below.
1. Barr’s Skills, Experience and Contacts
In emails exchanged with one another on July 17, 2013, Meehan revealed to
Elmlinger that he viewed Barr as an “amateur,” and Elmlinger stated that he did not
believe Barr was “capable of delivering on anything” and that Barr was going to “ruin
th[e] firm.” (Soothsayer Emails at 2.) In Project Soothsayer, they lamented that Barr had
no fundraising abilities at all, and that he “demonstrates a reckless disregard for
confidentiality” agreements (Project Soothsayer at 10), which they feared would prevent
Foundation from closing deals (id. at 3).

12

Another common refrain in Project Soothsayer was Meehan and Elmlinger’s
belief that Barr had “[e]xceptionally poor” judgment. (Id. at 2.) In this regard, they noted:
[Barr] [m]akes exceedingly rash decisions without consideration of the
opinions of [Foundation] staff, or the consequences. [He] [r]efuses to
follow pre-agreed plans for negotiations . . . . He rarely conducts a
thorough investigation and analysis of facts and almost never consults his
colleagues for their opinions. . . . He is drawn to the easy money solution
and rarely asks questions.
(Id. at 2, 9.)
Relatedly, Meehan and Elmlinger recalled that in September 2013:
[Barr told a] reporter that Foundation had $2.3 billion of LP capital raised
and expected to raise another $2 billion in the next 6–12 months [which
was not true]. . . . By speaking with the reporter and lying to him about
Foundation, [Barr] put the firm at risk of violating securities laws. . . . It
was an embarrassing moment for the firm that further undermined our
credibility in the marketplace.
(Id. at 9–10.)
Project Soothsayer also put great emphasis on what Meehan and Elmlinger term
Barr’s “functional inability to tell [the] truth.” (Id. at 4). Meehan and Elmlinger
complained that Barr “lies to prospective investors and hedge fund partners” (id. at 10),
and that he lies about scheduling meetings with potential investors (id. at 4), once going
so far as to produce a fake email purporting to discuss a commitment by a potential
investor (Soothsayer emails at 3). They added that “[o]ften [Barr] notes that he knows [a
potential investor] and will therefore make a call—several times we have caught him
stating that a call was made and a meeting will be set up, and no call was in fact made.”
(Project Soothsayer at 3–4.) According to Meehan and Elmlinger, Barr’s lies had become
so frequent that “most people assume that whatever [he] says is not true.” (Id. at 10.)
13

Moreover, on at least one occasion, Barr’s lies to prospective investors “could have had a
catastrophic impact on the firm’s ability to close a transaction.” (Id. at 10–11.)
Finally, and critically, Project Soothsayer asserted that Barr’s “[s]table of
[a]lternative [i]nvestment [i]ndustry [l]eader [c]ontacts” included few to no contacts, and
no critical or irreplaceable contacts. (Id. at 2.) Meehan and Elmlinger observed that
although “[Barr] claims to personally know just about every founder of every major hedge
fund[,] [i]n fact, it seems that he knows very few of them.” (Id. at 9; see also id. at 3 (“[Barr
makes] comments like – ‘I know (hedge fund owner/banker/potential investor) really
well’; this is never the case (e.g., a meeting attended by [Barr] & [Elmlinger] with John
Angelo. [Barr] told team that he knew Angelo well; Angelo had no idea who he was.”); id.
at 9 (“[Barr] has overstated the extent of his relationship with (and ability to get a meeting
with) the founders of, amongst others: Appaloosa, Angelo Gordon, Carlson Capital, Elliot
Management, Greenlight, Hillhouse, Perry Capital, and Two Sigma.”).) Indeed, they
believed that Barr’s departure from Foundation was not likely to cause any investors or
firms (with one exception) to opt not to work with Foundation. (Id. at 7). They concluded
that because “[Barr] is regarded, where he is known, as having a somewhat tarnished
reputation . . . [w]e are of the opinion that the market would see [Barr’s removal] as
‘addition by subtraction.’” (Id.)
2. Barr and Meehan’s Relationship
A series of emails from September 2013 to February 2014 tracks the deterioration
of Barr and Meehan’s relationship. On September 25, 2013, in an email from Barr to
Elmlinger and Ward and copied to Meehan, entitled “working with Joe M,” Barr wrote: “I
am truly sorry but I am not sure I can work with Joe going forward.” (Soothsayer Emails
14

at 9). A week later, on October 1, 2013, Barr emailed Meehan: “I know you dislike me
intensely and there is no trust.” (Am. Compl. ¶ 170.) Finally, on February 3, 2014, Barr
emailed Meehan, copying Elmlinger and Ward: “Joe, we are officially broken from each
other.” (Id. ¶ 171.) This sentiment was echoed by Meehan in Project Soothsayer, which
stated: “[Meehan] is [u]nlikely to stay under [the] current model. [He] [s]ees no potential
for change in [Barr]’s behavior, or anything but degradation of [Meehan’s] reputation
from working with [Barr] without a fundamental change in [Barr’s] role/responsibilities.”
(Project Soothsayer at 5.)
3. The Pipeline and Expectations regarding Performance
In Project Soothsayer and in their emails, Meehan and Elmlinger repeatedly
emphasized the importance of the pipeline. As Meehan told Hall O’Donnell on March 27,
2014, “getting a solid pipeline is critical to the long term success of the firm.” (Mar. 26–27
Emails at 2). Moreover, they recognized that they “need[ed] a number of deals in the
pipeline to get a chance at closing even one.” (Project Soothsayer at 3).
But, they worried about Barr’s prominent role in soliciting investors for the
pipeline. They noted that during pipeline meetings, “Barr insisted on taking responsibility
for reaching out to all manner of [hedge fund] targets” (id. at 3), including “the vast
majority of target hedge funds on the pipeline list” (id. at 9), but he “rarely follow[ed] up”
(id. at 3), and had “made contact with very few” of the targets (id. at 9). As a result,
Meehan and Elmlinger concluded that “[t]he transaction pipeline presented on a nonames basis in the investor pitchbook strains credibility.” (Id. at 9.)
Hall O’Donnell reached a similar conclusion in his March 26, 2014 email to Barr,
Elmlinger, Meehan, and Ward, writing: “Per the attachment, you can see our pipeline
15

beyond Apex is pretty crappy. I consider Project Lake to be about one short step ahead of
square one. Other than that, we have nothing.” (Mar. 26–27 Emails at 4.) Barr responded:
“I know our situation too.” (Id.)
On March 27, 2015, Hall reiterated the point to Meehan:
Let me state what I have been stating for months, the sorry state of the M
& A pipeline is the single biggest problem in the firm. Based on the timing
before the firm runs out of cash, this issue may not even be fixable at this
point without some indication from [General Partner] backers that the
runway might be extended.
(Mar. 26–27 Emails at 2–3.)
Indeed, the March 3, 2014 Project Activity Logs revealed that Project Apex, of
which Barr was in charge (Am. Compl. ¶ 162), was the “only . . . target in the ‘Live Deals’
category . . . . And even that target had only progressed to the point of ‘ongoing [due
diligence] dialogue’” (id. ¶ 146). Further, of the forty targets listed in the pipeline at that
time, “only five had even progressed to the point of introductory meetings; of those, two
had gone stale before Foundation ever met with FIH. The rest of the targets listed in the
‘Prospects’ category had ‘no [recent] activity’ or were still waiting for the initial call or
introduction to be made. . . .” (Id.)
4. Barr’s Personal Spending
Project Soothsayer and Defendants’ emails also reveal a great deal about Barr’s
personal spending habits, and Meehan and Elmlinger’s concerns about the effect those
habits could have on Foundation. Elmlinger and Meehan commented:
•

“As a general rule, recent and long-term experience confirms [Barr] is a
spendthrift, burning through cash exceptionally quickly . . . .” (Project Soothsayer
at 2.)
16

•

“History demonstrates that [Barr] rapidly burns through cash . . . and when
pressed hard enough by financial distress he will do a distressed deal.” (Id.)

•

“[Barr] spends an extraordinary amount of money. . . . When he runs out of
money, he threatens to declare bankruptcy (and ruin the firm) if he is not allowed
to sell more [Foundation] equity.” (Id. at 10.)

•

“[Barr] has a strong tendency to desire to use corporate accounts for personal
matters when his cash draws low. Despite this, we have rigorously reviewed
expenses, and prevented unauthorized use of corporate assets for personal gain.”
(Id. at 4.)

•

“[Barr] has, in all likelihood, not accounted for the capital gains on his many sales
of [Foundation] equity. . . . Obviously, IRS issues for [Barr] would have a terrible
effect on [Foundation].” (Id. at 5.)

•

“[Barr] is actively destroying value for [Foundation’s] members due [in part] to
his rampant financial difficulties.” (Id. at 2.)
Among the examples of Barr’s irresponsible spending listed in Project Soothsayer

was Barr’s foray into “emerald treasure hunting,” which became “a major, but not total,
sinkhole of cash for him.” (Id. at 3.) In that respect, Barr worried in a November 15, 2012
email to Meehan that “the emerald fraud litigation was ‘spinning out of control’ and . . .
he was at risk of ‘go[ing] bankrupt from legal fees to protect all of [Foundation and its
partners’] interests.’” (Am. Compl. ¶ 188.) Indeed, FIH learned after investing in
Foundation that “Barr had listed a $1.875 million note receivable from the emerald fraud
on his personal financial statement as part of a mortgage refinancing effort.” (Id. ¶ 187.)
Barr’s spending was a frequent source of tension between Defendants, as revealed
by their emails. In a September 23, 2013 email, for example, Meehan chastised Barr for
using the corporate credit card for personal expenses, writing: “I just looked at the
September corporate Amex and you have a $14,700+ charge on our corporate credit card.
17

You need to switch that [to] your personal credit card right away or write a check for the
total amount of personal charges from the Corporate Amex, which is close to $17,000.”
(Soothsayer Emails at 8.) When Barr responded, “Joe, I can’t cover it right now,”
Elmlinger, to whom Meehan had forwarded the email, angrily declared that “the
partnership [would] no longer enable [Barr’s] spending disease.” (Id. at 7.)
Two days later, Barr emailed Elmlinger and Ward, copying Meehan: “I am unable
to pay the mortgages or personal amex bill this month. I believe that our corporate cards
are linked to my personal acct and they probably will be shut off. In addition, my credit
rating is part of due diligence conducted by our LP’s. . . . Sorry, but this is now a
Partnership issue and unavoidable.” (Id. at 9.) Indeed, on several occasions “during the
course of 2013–2014,” “[t]he firm’s corporate credit card were suspended . . . as a result of
Barr’s irresponsible spending,” including on December 3, 2013, when the firm’s corporate
Amex card was declined for a mere eleven dollar purchase. (Am. Compl. ¶ 180.)
F. Request for Rescission
On August 14, 2014, five months after it had received Project Soothsayer, FIH
emailed Barr and Meehan “seeking rescission of FIH’s Investment and reimbursement for
legal fees incurred.” (Id. ¶ 200.) Meehan denied FIH’s request the following day. (Id.
¶ 201.) “That same date, Foundation sent an email to its members notifying them that,
given the lack of capital, the responsible path would be to wind down the firm.” (Id.
¶ 202.) “Shortly afterwards, Elmlinger, Meehan, and others resigned from Foundation.”
(Id. ¶ 203.)

18

II.

Discussion 4
FIH alleges that Defendants made material misrepresentations and omissions to

FIH in order to induce it to invest in Foundation; that in reliance on these
representations, FIH did invest; and as a result of its reliance on Defendants’
representations, FIH lost money.

4

“To survive a motion to dismiss, a complaint must contain sufficient factual
matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’” Ashcroft v.
Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570
(2007)). Although detailed allegations are not required, a claim will be found facially
plausible only if “the plaintiff pleads factual content that allows the court to draw the
reasonable inference that the defendant is liable for the misconduct alleged.” Id. Plaintiffs
alleging fraud must satisfy Rule 9(b)’s “heightened pleading” standard, AllGood Entm’t,
Inc. v. Dileo Entm’t & Touring, Inc., 726 F. Supp. 2d 307, 322 (S.D.N.Y. 2010), which
requires the plaintiff to “state with particularity the circumstances constituting fraud,”
Cafasso, U.S. ex rel. v. Gen. Dynamics C4 Sys., Inc., 637 F.3d 1047, 1054–55 (9th Cir. 2011)
(internal quotation marks and brackets omitted).
Plaintiffs alleging violations of § 10(b) of the Securities Exchange Act must,
pursuant to the Private Securities Litigation Reform Act (“PSLRA”), also “specify each
statement alleged to have been misleading, the reason or reasons 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)(2). Thus, to survive a motion to dismiss under the
PSLRA, a complaint 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.” Novak v. Kasaks, 216 F.3d 300, 306
(2d Cir. 2000), cert. denied, 531 U.S. 1012 (2000).
19

A. Securities and Exchange Act § 10(b) (Count I)
To state a claim for securities fraud under section 10(b) 5 of the Securities and
Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b–5, 6 17 C.F.R. § 240.10b–5(b), a plaintiff
must plead that the defendant “(1) made a material misrepresentation or a material
omission as to which he had a duty to speak, or used a fraudulent device; (2) with
scienter; (3) in connection with the purchase or sale of securities.” S.E.C. v. Pentagon
Capital Mgmt. PLC, 725 F.3d 279, 285 (2d Cir. 2013) (quoting SEC v. Monarch Funding
Corp., 192 F.3d 295, 308 (2d Cir. 1999)). Thus, “[i]n a typical § 10(b) private action a
plaintiff must prove (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;
5

Section 10(b) makes it unlawful for any person to “use or employ, in connection
with the purchase or sale of any security registered on a national securities exchange . . .
any manipulative or deceptive device or contrivance in contravention of such rules and
regulations as the Commission may prescribe.” 15 U.S.C. § 78j(b).
6

Rule 10b–5, implementing Section 10(b), provides:

It shall be unlawful for any person, directly or indirectly, by the use of any
means or instrumentality of interstate commerce, or of the mails or of any
facility of any national securities exchange,
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to
state a material fact necessary in order to make the statements
made, in light of the circumstances under which they were made,
not misleading, or
(c) To engage in any act, practice, or course of business which
operates or would operate as a fraud or deceit upon any person,
in connection with the purchase or sale of any security.
17 C.F.R. § 240.10b–5 (2013).
20

and (6) loss causation.” Stoneridge Inv. Partners, LLC v. Sci.-Atlanta, 552 U.S. 148, 157
(2008); see IBEW Local Union No. 58 Pension Trust Fund & Annuity Fund v. Royal Bank
of Scotland Grp., PLC, 783 F.3d 383, 389 (2d Cir. 2015) (same).
“A statement or omission is material if there is a substantial likelihood that a
reasonable shareholder would consider it important in deciding how to act.” IBEW, 783
F.3d at 389 (internal quotation marks and citations omitted). “In other words, for the
misstatement to be material, there must be a substantial likelihood that the disclosure of
the omitted fact would have been viewed by the reasonable investor as having
significantly altered the ‘total mix’ of information made available.” Id. at 389–90 (internal
quotation marks and alterations omitted). Thus, “[o]n a motion to dismiss, a complaint
may not be properly dismissed unless the misstatements are so obviously unimportant to
a reasonable investor that reasonable minds could not differ on the question of their
importance.” IBEW, 783 F.3d at 390 (internal quotation marks omitted).
Statements of opinion may be deemed misleading if the alleged omission
demonstrates that the speaker “lacked the basis for making the statements that a
reasonable investor would expect.” Omnicare, Inc. v. Laborers Dist. Council Constr. Indus.
Pension Fund, 135 S.Ct. 1318, 1333 (2015). 7 A reasonable investor is entitled to expect

Although Omnicare concerns § 11 of the Securities Act (relating to
misstatements and omissions in registration statements), “courts have presumed that its
holding also applies to claims brought under § 10(b) of the Exchange Act.” Menaldi v.
Och-Ziff Capital Mgmt. Grp. LLC, No. 14-CV-3251 (JPO), 2016 WL 634079, at *9 n.8
(S.D.N.Y. Feb. 17, 2016) (citing In re BioScrip, Inc. Sec. Litig., 95 F. Supp. 3d 711, 726
(S.D.N.Y. 2015)); see also Tongue, 2016 WL 851797, at *7–12 (applying Omnicare to
claims brought under § 10(b)); Perrigo Co. PLC v. Mylan N.V., No. 15 CIV. 7341 (NRB),
2015 WL 9916726, at *9 n.5 (S.D.N.Y. Oct. 29, 2015) (“While the Supreme Court's
7

21

“not just that the [speaker] believes the opinion (however irrationally), but that it fairly
aligns with the information in the [speaker’s] possession at the time.” Id. at 1329. Thus,
“liability for making a false statement of opinion may lie if either ‘the speaker did not
hold the belief she professed’ or ‘the supporting facts he supplied were untrue.’” Tongue v.
Sanofi, No. 15-588-CV, 2016 WL 851797, at *7 (2d Cir. Mar. 4, 2016) (quoting Omnicare,
135 S.Ct. at 1327). “An opinion statement, however, is not necessarily misleading when
[the speaker] knows, but fails to disclose, some fact cutting the other way.” Omnicare, 135
S.Ct. at 1329. “Reasonable investors understand that opinions sometimes rest on a
weighing of competing facts; indeed, the presence of such facts is one reason why [a
speaker] may frame a statement as an opinion, thus conveying uncertainty.” Id.
Defendants move to dismiss the claims against them on the grounds that: (1) they
are not liable for the misrepresentations and omissions attributed to them; (2) FIH did
not adequately plead that the alleged misrepresentations were in fact false or misleading;
(3) the alleged misrepresentations were not material; (4) it was not reasonable for FIH to
have relied on the alleged misrepresentations; (5) FIH failed to adequately plead that the
defendants had the required scienter to violate § 10(b); and (6) FIH did not plead loss
causation.
1. Liability for Misrepresentations
a. Due Diligence Materials, Portfolio Model, General Partner Forecast
As a preliminary matter, Ward, Elmlinger, and Meehan contend that Plaintiff’s
complaint should be dismissed because Defendants are not liable for the statements in the
decision in Omnicare dealt with claims under Section 11 of the Securities Act of 1933, its
reasoning has been applied to claims brought under Section 10(b) of the Exchange Act.”).
22

Due Diligence Materials, Portfolio Model, and General Partner Forecast solely by virtue
of their positions at Foundation. 8 (See Ward Mem. Supp. Mot. to Dismiss [Doc. # 47-1] at
6, 10–11, 20–21; Elmlinger Mem. Supp. Mot. to Dismiss [Doc. #50] at 10 n.4; Elmlinger
Reply [Doc. # 61] at 3 n.3, 5; Meehan Mem. Supp. Mot. to Dismiss [Doc. # 52] at 16.) In
so arguing, Defendants rely on the Supreme Court’s decision in Janus Capital Grp., Inc. v.
First Derivative Traders, 131 S.Ct. 2296 (2011), which held that “[f]or 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. . . . One who
prepares or publishes a statement on behalf of another is not its maker.” Id. at 2302. On
this basis, the Supreme Court concluded that a third party mutual fund investment
adviser could not be held liable for “making” statements in its clients’ investment fund
prospectuses, at the clients’ direction. Id.
Although Janus did not directly hold that corporate insiders cannot be held liable
as the “makers” of statements in group-published documents, 9 a few district courts in this

8

Elmlinger additionally argued in his Reply brief and at oral argument that he
cannot be held liable for statements in the Due Diligence Materials because his
“membership interest in Foundation was only 2.105% management percentage” and he
“did not even have a swing vote.” (Elmlinger Reply at 4.) However, these arguments are
based on the Subscription Agreement which, as already noted, will not be considered in
relation to these motions to dismiss, as it was neither attached to the Amended
Complaint, referenced in the Amended Complaint, nor obviously relied on by Plaintiff in
drafting the Amended Complaint.
9

Under the “group pleading doctrine,” group-published documents “such as
statements in prospectuses, registration statements, annual reports, and press releases are
attributable to individuals with direct involvement in the everyday business of the
company, who either were or acted like corporate insiders.” In re Barrick Gold Sec. Litig.,
23

Circuit have held that such a holding is implicit in the decision. See, e.g., Livingston v.
Cablevision Sys. Corp., 966 F. Supp. 2d 208, 221 (E.D.N.Y. 2013) (“[O]nly those officers
whose signatures appear on misleading statements may be liable as the ‘makers’ of those
statements.” (internal quotation marks omitted)); In re Smith Barney Transfer Agent
Litig., 884 F. Supp. 2d 152, 165 (S.D.N.Y. 2012) (same); In re UBS AG Sec. Litig., No. 07
Civ. 11225 (RJS), 2012 WL 4471265, at *10 (S.D.N.Y. Sept. 28, 2012) (“[A] theory of
liability premised on treating corporate insiders as a group cannot survive a plain reading
of the Janus decision.”).
However, the majority of courts in the Second Circuit have held otherwise. As
Judge Jed Rakoff explained in City of Pontiac General Employees Retirement System v.
Lockheed Martin Corporation, 875 F. Supp. 2d 359 (S.D.N.Y. 2012):
. . . Janus Capital . . . addressed only whether third parties can be held
liable for statements made by their clients. Its logic rested on the
distinction between secondary liability and primary liability and has no
bearing on how corporate officers who work together in the same entity
can be held jointly responsible on a theory of primary liability. It is not
inconsistent with Janus Capital to presume that multiple people in a single
corporation have the joint authority to “make” an SEC filing, such that a
misstatement has more than one “maker.”
Moreover, as to the PSLRA’s requirement that a plaintiff plead securities
fraud with specificity as to each defendant, there is no tension between
requiring a plaintiff to allege specific facts for individual defendants and
presuming that multiple corporate officers may work as a group to
produce particular documents. It is for this reason that . . . most judges in
this District have continued to conclude that group pleading is alive and
well.

No. 13 Civ. 3851 (SAS), 2015 WL 3486045, at *2 (S.D.N.Y. Jun. 2, 2015) (internal
quotation marks and brackets omitted).
24

Id. at 374 (internal citations omitted); see also In re Barrick Gold Sec. Litig., 2015 WL
3486045, at *2 (same); Levy v. Maggiore, 48 F. Supp. 3d 428, 449 n.16 (E.D.N.Y. 2014)
(same); In re Satyam Computer Servs. Ltd. Sec. Litig., 915 F. Supp. 2d 450, 477 n.16
(S.D.N.Y. 2013) (same); In re Pfizer Inc. Sec. Litig., 936 F. Supp. 2d 252, 268–69 (S.D.N.Y.
2013) (same). This Court agrees.
Plaintiff has adequately pled that Defendants are each liable as “makers” of the
Due Diligence Materials, the Portfolio Model, and the General Partner Forecast under the
group pleading doctrine. The Amended Complaint alleges that Defendants were
corporate insiders “intimately involved with [Foundation’s] day to day activities,” and
this is borne out by the job descriptions of each Defendant included in the Due Diligence
Materials and the Amended Complaint. (Am. Compl. ¶ 42; see Due Diligence Feb. 2014 at
8; Due Diligence Sept. 2013 at 8; Am. Compl. ¶¶ 20–23, 41, 44–45, 48–50.) Further, the
Due Diligence Materials themselves state that they were “prepared by” Foundation, and
they direct questions about the Materials to “the principals,” identified as including each
of the defendants. (Due Diligence Feb. 2014 at ii, iv, 8; Due Diligence Sept. 2013 at ii, iv, 8;
see also Am. Compl. ¶¶ 20–23.) These allegations suffice, for pleading purposes, to state a
claim against Defendants as the “makers” of the Due Diligence Materials, the Portfolio
Model, and the General Partner Forecast. See In re Barrick Gold Sec. Litig., 2015 WL
3486045, at *2 (“Here, plaintiffs have pleaded that Potter, Kinver, and Gonzales, as highlevel officers, were corporate insiders involved in the everyday business of the company,
and that the statements were made in group-published documents, such as press releases
and annual reports. For pleading purposes, they have adequately alleged that these
defendants were the ‘makers’ of the statements.”).
25

b. Other Statements
Elmlinger and Meehan additionally contend that several statements attributed to
both of them are not sufficiently specific because it is not clear which of the two of them
made the statements, nor to whom the statements were made. (Elmlinger Mem. Supp. at
8–9; Meehan Mem. Supp. at 17.) The disputed statements are as follows:
[A]t a dinner in a Greenwich, Connecticut restaurant on February 20,
2014, Meehan and Elmlinger assured FIH’s representative that there were
strong spending controls in place. They stated at that time: “You’re
looking at the control room. Nothing happens without us.”
Over the course of the dinner, both Meehan and Elmlinger repeated that
they were in the “control room.” In this context, Meehan and Elmlinger
were referring to their proclaimed ability to control what they knew to be
Barr’s propensity towards spending, and impulsiveness, which was not
disclosed or known to FIH. Essentially, Elmlinger and Meehan told FIH
that Barr did not pose a threat to Foundation.
In another reference to controls at the same meeting, Elmlinger and
Meehan stated, “We will not spend your money foolishly.” What they
intended to convey to FIH was that they had control of the purse strings
and that there were adequate controls at Foundation to ensure that the
money invested by FIH would be used to further the Investment
objectives, and not on Barr’s personal spending or other wasteful
spending.
(Am. Compl. ¶¶ 99–101.)
As Plaintiff notes, the Amended Complaint does not lump Elmlinger and Meehan
together, but rather alleges that each “repeated” “[o]ver the course of the dinner” that
they were in the “control room” and that they would “not spend [FIH’s] money
foolishly.” There is nothing in the PSLRA that prohibits a plaintiff from claiming that two
individuals made the same statements. As to who the listener was, Defendants cite no
26

authority for the proposition that a complaint that refers to the listener as a representative
of a corporate plaintiff, rather than using an individual’s name, is inadequate as a matter
of law. The requirement that a complaint state “who heard the statement” exists for the
purpose of enabling a court “to determine if Plaintiff could have relied on any of the
purported misstatements.” Gavin/Solmonese LLC v. D’Arnaud-Taylor, 68 F. Supp. 3d 530,
540 (S.D.N.Y. 2014). Because this purpose can be met where the complaint alleges that
the listener was a representative of the corporate plaintiff, Plaintiff’s allegations here are
not insufficiently specific.
2. Materially False/Misleading
Defendants argue that FIH’s claims should be dismissed because FIH has not
adequately alleged that they are liable for making materially false or misleading
statements. FIH’s allegations of misrepresentations by Defendants can be grouped into
four categories: (1) misrepresentations about Barr’s skills, experiences, and contacts; (2)
misrepresentations regarding Barr and Meehan’s relationship; (3) misrepresentations
regarding

the

pipeline

and

Defendants’

expectations

regarding

Foundation’s

performance; and (4) misrepresentations regarding Barr’s personal spending habits and
their effect on Foundation.

27

a. Barr’s Skills, Experience and Contacts
Plaintiff claims the following statements about Barr’s skills, experience, and
contacts were false or misleading:
Statement
Defendants’ prior “experiences in successfully building alternative
investment firms will enable [Foundation] to enjoy a strong start and
long term success.” 10

Speaker
All Defs.

“[Defendants’] extensive relationships with leading managers, prime
brokers and operations/administrative servicing professionals . . . will
assist the firm with deal sourcing and execution.”11

All Defs.

Defendants will “source deals directly through personal relationships
and direct contact with targeted leading managers in the alternative
investment industry.” 12

All Defs.

Foundation will use Barr’s “extensive experience and relationships . . .
cultivated at Citi Alternative Investments . . . in its discussions
surrounding investment opportunities [with] Large Hedge Fund
Managers.”13
There is nothing “FIH needed to know about Barr’s background or
personality” and no other matters concerning him that FIH should
know about before proceeding with an investment. 14
“A third party diligence group was retained to conduct professional
and personal background checks on the managing principals of the
General Partner,” and found “no negative legal or personal judgments
involving [Barr].”15

All Defs.

Barr (all Defs.
were present)
All Defs.

10

(Due Diligence Sept. 2013 at 6; Due Diligence Feb. 2014 at 6.)

11

(Due Diligence Sept. 2013 at 26; Due Diligence Feb. 2014 at 26.)

12

(Due Diligence Sept. 2013 at 26; Due Diligence Feb. 2014 at 26.)

13

(Id.)

14

(Am. Compl. ¶ 91.)

15

(Due Diligence Sept. 2013 at 14; Due Diligence Feb. 2014 at 14.)
28

Plaintiff alleges these statements were false or misleading based on the following:
•

Meehan, whom the Due Diligence Materials represent as having known Barr for
sixteen years and worked closely with him since 2007, believed Barr was an
“amateur”16;

•

Elmlinger, who had worked with Barr since 2005, did not believe Barr was
“capable of delivering on anything” and that Barr was going to “ruin th[e] firm” 17;

•

Meehan and Elmlinger believed that Barr had no fundraising abilities at all, and
that he “demonstrates a reckless disregard for confidentiality” agreements, 18
which they feared would prevent Foundation from closing deals 19;
Meehan and Elmlinger thought Barr had “[e]xceptionally poor” judgment, which
they demonstrated with at least one concrete example 20;

•

•

Meehan and Elmlinger stated that Barr had a “functional inability to tell [the]
truth,” and supported this conclusion with at least one concrete example 21; and

•

Meehan and Elmlinger stated that based on their experience working with Barr,
he had few to no contacts in the alternative investment industry, and they offered
multiple examples of Barr claiming to know someone he did not in fact know. 22
Defendants contend that Plaintiff’s claim regarding Barr’s skills, experience, and

contacts is not actionable because “[t]he alleged material omissions—that Defendants
failed to disclose each and every Barr transgression—are akin to a failure to disclose
mismanagement,” and “claims of mismanagement and failures to disclose such
16

(Soothsayer Emails at 2.)

17

(Id.)

18

(Project Soothsayer at 10)

19

(Id. at 3.)

20

(Id. at 2, 9–10.)

21

(Id. at 4, 10–11.)

22

(Id. at 2, 3, 9)
29

mismanagement do not state claims for securities fraud.” (Meehan Mem. Supp. at 29; see
Meehan Reply [Doc. # 60] at 7–8; Ward Mem. Supp. at 9; Barr Mem. Supp. Mot. to
Dismiss [Doc. # 46-1] at 25; Elmlinger Mem. Supp. at 16 n.7.)
In support of this argument, Meehan cites the Supreme Court’s decision in Santa
Fe Industries, Inc. v. Green, 430 U.S. 462 (1977), where the Court held that the Securities
and Exchange Act was not intended to prohibit conduct not involving manipulation or
deception, such as claims that “shareholders were treated unfairly by a fiduciary.” Id. at
477. “Following Santa Fe, courts repeatedly have found that allegations constituting
nothing more than assertions of general mismanagement, or nondisclosure of
mismanagement, cannot support claims under § 10(b) of the Exchange Act . . . .” In re
Donna Karan Int’l Sec. Litig., No. 97cv2011 (CBA), 1998 WL 637547, at *9 (E.D.N.Y. Aug.
14, 1998); see Poptech, L.P. v. Stewardship v. Advisors LLC, 849 F. Supp. 2d 249, 268 (D.
Conn. 2012) (“Claims of mismanagement and failures to disclose such mismanagement
do not state claims for fraud.”).
The majority of Plaintiff’s claims about Barr’s skills, experience, and contacts,
“which expressly assail the conduct, judgment, and abilities” of Foundation’s
management, “fall within the scope of the Santa Fe rule,” and as such are not actionable
under the Securities and Exchange Act. In re Donna Karan Int’l Sec. Litig., 1998 WL
637547, at *10; see id. at *6, 10 (finding inactionable under Santa Fe claims that Donna
Karan International failed to disclose Karan’s poor management skills and poor
judgment). 23
23

“[A] contrary finding with regard to the alleged material omissions concerning
[Foundation’s] management—allegations that essentially assert that [Foundation] should
30

However, as Plaintiff notes, “‘the mere fact that . . . conduct . . . arguably
constitutes mismanagement will not preclude a claim . . . if the defendant made a
statement of material fact wholly inconsistent with known existing mismanagement or
failed to disclose a specific material fact resulting from that mismanagement.’”
Freudenberg v. E*Trade Fin. Corp., 712 F. Supp. 2d 171, 192 (S.D.N.Y. 2010) (quoting In
re Donna Karan Int’l Sec. Litig., 1998 WL 637547, at *10). Because Barr’s statement that
there was nothing “FIH needed to know about [his] background or personality” and no
other matters concerning him that FIH should know about before proceeding with an
investment (Am. Compl. ¶ 91) was “wholly inconsistent with” what Plaintiff has alleged
to have been “known existing mismanagement,” it is actionable. 24
Therefore, Plaintiff’s claims regarding Barr’s skills, experience, and contacts are
dismissed, except with respect to Barr’s statement that there was nothing “FIH needed to
know about [his] background or personality” and no other matters concerning him that
FIH should know about before proceeding with an investment. (Am. Compl. ¶ 91.)

have disclosed that [Barr], the company’s [co-]founder and [managing partner], was an
impulsive, stubborn, and incompetent manager—also would run afoul of the accepted
view that the securities laws do not require corporate management ‘to direct conclusory
accusations at itself or to characterize its behavior in a pejorative manner.’” In re Donna
Karan Int’l Sec. Litig., 1998 WL 637547, at *10 (quoting Ballan v. Wilfred American Educ.
Corp., 720 F. Supp. 241, 249 (E.D.N.Y. 1989)).
24

The claims against the other Defendants, who did not make the statement (that
that there was nothing “FIH needed to know about Barr’s background or personality” and
no other matters concerning him that FIH should know about before proceeding with an
investment), however, are dismissed. See Rose, 2014 WL 7389900, at *5; Oneida Sav.
Bank, 2014 WL 4678046, at *12; Ho, 887 F. Supp. 2d at 572 n.13.
31

b. The Pipeline and Expectations Regarding Performance
Plaintiff alleges that the following statements are misrepresentations or created a
duty to disclose on the part of Defendants:
Statement
As of September 2013, fifteen projects were in Foundation’s pipeline,
“including those with which the firm is in active discussions”25
As of February 2014, fourteen projects were in Foundation’s pipeline, 26
“including those with which the firm is in active discussions”27
Foundation’s Portfolio Model shows that “Foundation would close on
four hedge fund GP minority interest transactions by June 30, 2014”
(Projects Lake and Granite would close by March 2014 and Projects
California and Corvette would close by June 2014) 28
General Partner Forecast shows four projects were projected to close by
June 2014 (Projects Lake and Granite would close by March 2014 and
Projects California and Corvette would close by June 2014) 29
“Starting Jan 5th, we have four possible transactions in the works”
(Projects Bronco, Corvette, Lake, and Centaur) 30
“We had a comprehensive call with a $5 bn London based Hedge Fund
[Project Apex] this morning. We have a ‘green light’ to pursue a deal.
The good news is that we have already gone over terms such as reps and
warranties, put triggers etc. that normally take place during the term
sheet negotiation and definitive agreement stage. We are receiving
financials and the contract with Deutsche Bank today or tomorrow. I
believe we can move expeditiously on this deal.”31
25

Speaker
All Defs.
All Defs.
All Defs.

All Defs.

Barr
Barr

(Due Diligence Sept. 2013 at 27.)

26

Plaintiff claims the pipeline included fifteen projects. In fact, though, there are
fourteen projects on the list. (See Due Diligence Materials Feb. 2014.)
27

(Due Diligence Feb. 2014 at 27.)

28

(Am. Compl. ¶ 77.)

29

(Am. Compl. ¶ 78; see Forecast at 8.)

30

(Dec. 30 Email; Am. Compl. ¶ 72.)

31

(Jan. 22 Email; Am. Compl. ¶ 73.)
32

“Just thought you’d like to see a draft of the Petershill Letter of Intent
that is under review at Fortress. Should the transaction occur, it would
be a large deal ($600 m). We have some reasonably good intel that
suggests that this offer would be given serious consideration. Our
pipeline continues to expand with real, immediate deals.”32
“[Foundation] expects to close on three to four transactions each year.”33
“[T]he current representative [Foundation] pipeline . . . has become
increasingly active in recent months”34
Non-disclosure agreements (“NDAs”) were signed in Projects Apex,
Granite, Lake, and Centaur 35 as of February 2014

Barr

All Defs.
All Defs.
All Defs.

i. Misrepresentations
Defendants assert that the alleged misrepresentations (listed above) in Barr’s
emails and in the Due Diligence Materials about the pipeline and Defendants’
expectations about Foundation’s performance were not false or misleading. The Court
agrees with respect to most, but not all of the claimed misrepresentations.
In ¶ 148 of the Amended Complaint, Plaintiff lists five representations made to
FIH, alongside the “truth” with regard to each representation, but the “truths” in this
chart do not explain why Plaintiff believes the representations to be false.
The first representation, that the “current representative [Foundation] pipeline”
has fourteen projects including Projects Pilot, Centaur, Pound, and Bronco, comes from
the Due Diligence Materials stated to have been “prepared as of February 2014.” (Due
Diligence Feb. 2014 at ii.) Next to this representation, Plaintiff notes that the March 3,

32

(Feb. 3 Email; Am. Compl. ¶ 74.)

33

(Due Diligence Feb. 2014 at 4; Due Diligence Sept. 2013 at 4.)

34

(Due Diligence Feb. 2014 at 27; Due Diligence Sept. 2013 at 27.)

35

(Due Diligence Feb. 2014 at 27.)
33

2014 Project Activity Log showed Project Bronco to be non-viable as of January 29, 2014,
Project Centaur to be non-viable as of February 7, 2014, Project Pound to be non-viable
as of February 10, 2014, and Project Pilot to be non-viable as of February 24, 2014. (Am.
Compl. ¶ 148.) This does not, however, suffice to demonstrate any falsity with respect to
Projects Centaur, Pound, and Pilot, which were viable “as of” February 2014, when the
Due Diligence Materials were prepared.
The second representation Plaintiff alleges to be false is a statement in the
February 2014 Due Diligence Materials that a non-disclosure agreement had been signed
in Projects Bronco and Lake. (Am. Compl. ¶ 148.) However, the February 2014 Due
Diligence Materials do not state that a non-disclosure agreement had been signed for
Project Bronco. (See Due Diligence Feb. 2014 at 27.)
Next, Plaintiff alleges that Barr’s representation in his December 30, 2013 email
that Projects Bronco, Pilot, and Centaur were “in the works,” was false, based on the fact
that Project Bronco was non-viable as of January 29, 2014, Project Centaur was nonviable as of February 7, 2014, and Project Pilot was non-viable as of February 24, 2014.
(Am. Compl. ¶ 14.) These allegations are inadequate for two reasons. First, Barr did not
mention Project Pilot in his December 30 email. (See id. ¶ 72.) Second, the inference
Plaintiff asks the Court to draw regarding the truth of Barr’s statements about Bronco and
Centaur is not reasonable; just because the projects became non-viable in late January and
early February 2014 does not mean that they were not “in the works” at the end of
December 2013.
Plaintiff also claims that Barr’s representation that Project Bronco was “in the
works” was false because “Foundation did not have an introductory call or meeting with
34

Project Bronco until January 7, 2014.” (Id. ¶ 148.) But, in light of the fact that Barr’s full
statement in the email was “[s]tarting Jan 5th, we have four possible transactions in the
works,” he can hardly be said to have made a material misrepresentation solely because
the introductory call did not occur until January 7. (Dec. 30 Email.)
Plaintiff additionally alleges that Barr’s statement that Projects Lake and Corvette
were “in the works” was false because “[a]s of that date, Projects Corvette and Lake had
not progressed beyond the point of preliminary emails or phone calls – let alone any
definitive term sheets signed” and “Project Corvette was put on hold until May 2014.”
(Am. Compl. ¶ 148.) Again, just because the projects had not progressed beyond
preliminary stages, does not mean that they were not “possible projects” “in the works.”
(Dec. 30 Email.)
Plaintiff also asserts that Barr’s February 3, 2014 statement to FIH that “[o]ur
pipeline continues to expand with real, immediate deals” (Feb. 3, 2014 Email) was false.
Barr responds that the statement was not false, as is clear from the December 19, 2013
Forecast, which shows that “Barr had advanced four new targets (Bronco, Centaur, Apex
and Pilot).” (Barr Reply at 6.) However, as Plaintiff noted at oral argument, Barr’s
statement runs up against Hall O’Donnell’s March 26 and 27 emails in which he
reiterated what he had “been stating for months,” namely “the sorry state” of the pipeline,
and the fact that only one project in the pipeline appeared promising (see Mar. 26–27
Emails at 2–4). A reasonable inference can be drawn from O’Donnell’s statement that
Barr’s early February 2014 assertion that the pipeline was continuing to expand with
“real, immediate deals” was false when made.
For the same reason, the statements in the Due Diligence Materials that
35

“[Foundation] expects to close on three to four transactions each year” (Due Diligence
Feb. 2014 at 4); and that “the current representative [Foundation] pipeline . . . has become
increasingly active in recent months”36 (id. at 27) has been sufficiently pled to be false.
Finally, Plaintiff claims that the following representations are false: (a) the
representation in the Portfolio Model, circulated to FIH by Barr on December 2, 2013
that “Foundation would close on four hedge fund GP minority interest transactions by
June 30, 2014” (Am. Compl. ¶ 77); and (b) the representation in the General Partner
Forecast emailed to FIH by Hall O’Donnell on December 19, 2013, that Foundation “was
in a position to close on four deals by June 30, 2014” (id. ¶ 78). (See Opp’n at 19.) But,
Plaintiff puts forth no facts from which it can plausibly be inferred that these statements
were untrue when made. (See Ward Mem. Supp. at 20.) That by late March 2014 Hall
O’Donnell had been stating for months that the pipeline was “pretty crappy” provides no
reasonable basis for inferring that the same was true in early and mid-December.
That leaves Plaintiff with five potentially viable claims of false statements by
Defendants: (1) the statement in the Due Diligence Materials that Project Bronco was in
the pipeline as of February 2014 (Due Diligence Feb. 2014 at 27), though in fact, Project
Bronco was deemed non-viable as of January 29, 2014 (Am. Compl. ¶ 148); (2) the
statement in the Due Diligence Materials that a non-disclosure agreement had been
signed for Project Lake as of February 2014 (Due Diligence Feb. 2014 at 27), though the

36

In its reiteration of this statement in ¶ 148 of the Amended Complaint, Plaintiff
incorrectly quotes the Due Diligence Materials as stating that all of the projects in the
pipeline were “increasingly active.”
36

March 3, 2014 Project Activity Log showed otherwise 37 (Am. Compl. ¶ 148); (3) Barr’s
February 3, 2014 statement to FIH that “[o]ur pipeline continues to expand with real,
immediate deals” (Feb. 3, 2014 Email), though by March 2014 O’Donnell claimed to have
been telling Defendants for months that the pipeline was in a “sorry state” (Mar. 26–27
Emails at 2–4); (4) the statement in the Due Diligence Materials that “[Foundation]
expects to close on three to four transactions each year” (Due Diligence Feb. 2014 at 4), in
spite of O’Donnell’s March 2014 statements (Mar. 26–27 Emails at 2–4); and (5) the
statement in the Due Diligence Materials that “the current representative [Foundation]
pipeline . . . has become increasingly active in recent months” (id. at 27), in spite of
O’Donnell’s March 2014 statements (Mar. 26–27 Emails at 2–4).
ii. Omissions
Plaintiff contends that Defendants are also liable for material omissions about the
pipeline. Specifically, Plaintiff asserts that Defendants had a duty to update FIH as the
projects mentioned in Defendants’ emails to FIH and in the Due Diligence Materials
became non-viable. (Opp’n at 26–28.) Plaintiff argues, for instance, that Defendants
should have “follow[ed] up with FIH to correct the statement” in Barr’s December 30,
2013 email that “certain projects were ‘in the works’” and that Defendants should have
“apprise[d] FIH when deals touted as ‘current’ on Foundation’s pipeline became non-

37

Barr, misconstruing the purpose of a motion to dismiss, attaches an exhibit to
his motion to dismiss purporting to show that Foundation in fact did enter into a nondisclosure agreement for Project Lake. (See Ex. J to Barr Mot. to Dismiss.) However,
unlike in the summary judgment context, at the motion to dismiss stage, factual
allegations in a complaint are “accepted as true.” Iqbal, 556 U.S. at 678. As such, the
Court will not consider the improperly attached Exhibit J at this stage.
37

viable.” (Id. at 26, 28.)
With respect to Barr’s email statements, Elmlinger and Ward respond that they
cannot be held liable for a failure to update because they were not the individuals who
made the initial statements that required updating. (See Ward Mem. Supp. at 7; Elmlinger
Mem. Supp. at 12.) FIH conceded at oral argument that this is a correct statement of the
law. For this reason, only Barr may be held liable for omissions arising out of his emails.
Meehan, Elmlinger, and Ward further contend that even with respect to the Due
Diligence Materials, Portfolio Model, and General Partner Forecast (group-published
documents for which they are legally liable) they had no duty to update FIH. (See
Elmlinger Mem. Supp. at 12–13; Ward Mem. Supp. at 12; Meehan Mem. Supp. at 30.)
FIH argues to the contrary. (See Opp’n at 26, 28.)
“A duty to update may exist when a statement, reasonable at the time it is made,
becomes misleading because of a subsequent event.” In re Int’l Bus. Machines Corp.
[“IBM”] Sec. Litig., 163 F.3d 102, 110 (2d Cir. 1998) (internal quotation marks omitted);
see In re NovaGold Res. Inc. Sec. Litig., 629 F. Supp. 2d 272, 301 (S.D.N.Y. 2009) (same).
“However, there is no duty to update vague statements of optimism or expressions of
opinion.” In re IBM Sec. Litig., 163 F.3d at 110. “There is also no need to update when the
original statement was not forward looking and does not contain some factual
representation that remains ‘alive’ in the minds of investors as a continuing
representation, or if the original statements are not material.” Id. (internal citations
omitted).
Thus, the Second Circuit found no duty to update: where the original statements
“suggest[ed] only the hope of a[] company, embarking on talks with multiple partners,
38

that the talks would go well,” rather than a statement by a defendant that “he thought
deals would be struck by a certain date,” In re Time Warner Inc. Sec. Litig., 9 F.3d 259, 267
(2d Cir. 1993); and where the original statements were “general comments, such as the
company ‘should deliver income growth consistent with its historically superior
performance’ and ‘we are optimistic about 1993,’” which reflected “hope, adequately
tinged with caution,” San Leandro Emerg. Med. Grp. Profit Sharing Plan v. Philip Morris
Cos., Inc., 75 F.3d 801, 811 (2d Cir. 1996).
However, a duty to update was found: where a company stated: “[we] hope to
have an amendment . . . within the next few weeks”; “[w]e believe we have an agreement
in principle”; and “[w]e’re very confident we should have this amendment signed in the
not too distant future,” and then failed to update investors when it became clear that an
amendment agreement would not be signed, Ill. State Bd. of Inv. v. Authentidate Holding
Corp., 369 F. App’x 260, 263–64 (2d Cir. 2010); and where a company announced a
schedule for the commencement of a construction project but failed to update investors
when it became aware that the schedule was unrealistic, City of Austin Police Ret. Sys. v.
Kinross Gold Corp., 957 F. Supp. 2d 277, 308 (S.D.N.Y. 2013).
Some of the statements at issue here are “‘the sort of definite positive
projection[s]’ that the Second Circuit has found ‘require[] later correction when
intervening events render [them] misleading’” id. (quoting Ill. State Bd. of Inv., 369 F.
App’x at 263 n.2), while others are merely “vague, forward-looking expressions of
optimism,” In re Quintel Entm’t Inc. Sec. Litig., 72 F. Supp. 2d 283, 292 (S.D.N.Y. 1999),
“which are not sufficiently concrete, specific or material to impose a duty to update,” In re
IBM Sec. Litig., 163 F.3d at 110.
39

The following statements fall into the latter, non-actionable category: (1) As of
September 2013, fifteen projects were in Foundation’s pipeline, “including those with
which the firm is in active discussions” (Due Diligence Sept. 2013 at 27); (2) As of
February 2014, fourteen projects were in Foundation’s pipeline, “including those with
which the firm is in active discussions” (Due Diligence Feb. 2014 at 27); (3) “Starting Jan
5th, we have four possible transactions in the works” (Projects Bronco, Corvette, Lake,
and Centaur) (Dec. 30 Email; Am. Compl. ¶ 72); and (4) Non-disclosure agreements
(“NDAs”) were signed in Projects Apex, Granite, Lake, and Centaur as of February 2014
(Due Diligence Feb. 2014 at 27).
Statements that did create a duty to update include: (1) the Portfolio Model and
General Partner Forecast’s projections that “Foundation would close on four hedge fund
GP minority interest transactions by June 30, 2014” (Projects Lake and Granite would
close by March 2014 and Projects California and Corvette would close by June 2014)
(Am. Compl. ¶ 77; see Forecast at 8); and (2) Barr’s January 22, 2014 statement that: “We
had a comprehensive call with a $5 bn London based Hedge Fund [Project Apex] this
morning. We have a ‘green light’ to pursue a deal. The good news is that we have already
gone over terms such as reps and warranties, put triggers etc. that normally take place
during the term sheet negotiation and definitive agreement stage. We are receiving
financials and the contract with Deutsche Bank today or tomorrow. I believe we can
move expeditiously on this deal” (Jan. 22, 2014 Email).
The first of these statements became misleading by mid-to-late February 2014, by
which time it must have been apparent to Defendants that Projects Lake and Granite
would not close by March 2014. Indeed, the March 3, 2014 Project Activity Log listed
40

neither Project Lake nor Granite as a “live deal” (see Am. Compl. ¶¶ 146, 162) and even
by March 26, 2014 Project Lake was only “about one short step ahead of square one”
while Project Granite does not appear to have progressed at all (see Mar. 26–27 Emails at
4 (“[O]ur pipeline beyond Apex is pretty crappy. I consider Project Lake to be about one
short step ahead of square one. Other than that, we have nothing.”)).
The second statement became misleading by late February because by March 3,
2014, more than a month after Barr made the original statement, the project “had only
progressed to the point of ongoing [due diligence] dialogue.” (Am. Compl. ¶¶ 146, 162.)
iii. Materiality of Misrepresentations and Omissions
Even where a statement constitutes a misrepresentation or omission, however, it
is not actionable if it is not material.
Of the five misrepresentations Plaintiff adequately pled, 38 two are not material on
their face: Plaintiff’s belief that (a) one possible project, about which it knew nothing
(including the real name of the potential investor), was viable as of February 2014, and
38

(1) The statement in the Due Diligence Materials that Project Bronco was in the
pipeline as of February 2014 (Due Diligence Feb. 2014 at 27), though in fact, Project
Bronco was deemed non-viable as of January 29, 2014 (Am. Compl. ¶ 148); (2) the
statement in the Due Diligence Materials that a non-disclosure agreement had been
signed for Project Lake as of February 2014 (Due Diligence Feb. 2014 at 27), though the
March 3, 2014 Project Activity Log showed otherwise (Am. Compl. ¶ 148); (3) Barr’s
February 3, 2014 statement to FIH that “[o]ur pipeline continues to expand with real,
immediate deals” (Feb. 3, 2014 Email), though by March 2014 O’Donnell claimed to have
been telling Defendants for months that the pipeline was in a “sorry state” (Mar. 26–27
Emails at 2–4); (4) the statement in the Due Diligence Materials that “[Foundation]
expects to close on three to four transactions each year” (Due Diligence Feb. 2014 at 4);
and (5) the statement in the Due Diligence Materials that “the current representative
[Foundation] pipeline . . . has become increasingly active in recent months” (id. at 27), in
spite of O’Donnell’s March 2014 statements (Mar. 26–27 Emails at 2–4).
41

that (b) Foundation had signed a non-disclosure agreement in another possible project
about which FIH knew nothing, was not likely to have altered Plaintiff’s decision about
whether to invest in Foundation. (See Meehan Mem. Supp. at 28.) Indeed, these two
representations were “so obviously unimportant to a reasonable investor that reasonable
minds could not differ on the question of their importance.” IBEW, 783 F.3d at 390. They
are therefore non-actionable, and Plaintiff’s claim is dismissed as to them.
However, the same cannot be said of the third, fourth, and fifth alleged
misrepresentations or the two alleged omissions, 39 which bear on Foundation’s likelihood
of success.
Defendants nonetheless argue that the alleged misrepresentation in the Due
Diligence Materials that Foundation “expects to close on three to four transactions each
year” is immaterial because it is protected by the “bespeaks caution” doctrine, the
PSLRA’s “safe harbor” provision, or is non-actionable puffery. 40 (See Meehan Mem. Supp.

39

(1) the Portfolio Model and General Partner Forecast’s projections that
“Foundation would close on four hedge fund GP minority interest transactions by June
30, 2014” (Projects Lake and Granite would close by March 2014 and Projects California
and Corvette would close by June 2014) (Am. Compl. ¶ 77; see Forecast at 8); and (2)
Barr’s January 22, 2014 statement that: “We had a comprehensive call with a $5 bn
London based Hedge Fund [Project Apex] this morning. We have a ‘green light’ to
pursue a deal. The good news is that we have already gone over terms such as reps and
warranties, put triggers etc. that normally take place during the term sheet negotiation
and definitive agreement stage. We are receiving financials and the contract with
Deutsche Bank today or tomorrow. I believe we can move expeditiously on this deal”
(Jan. 22, 2014 Email).
40

Elmlinger and Ward additionally rely on a disclaimer in the Subscription
Agreement to argue that all of their statements to Plaintiff were protected by the
“bespeaks caution” doctrine. (See Elmlinger Mem. Supp. at 18; Ward Mem. Supp. at 20.)
42

at 19–20, 24–25; Ward Mem. Supp. at 8–9; Barr Mem. Supp. at 20–23; Elmlinger Mem.
Supp. at 15–16; Elmlinger Reply at 4.)
Under the “bespeaks caution” doctrine, “certain forward-looking statements” are
deemed “‘immaterial as a matter of law because it cannot be said that any reasonable
investor could consider them important in light of adequate cautionary language set out
in the same offering.’” Ill. State Bd. of Inv., 369 F. App’x at 263 (quoting Halperin v.
eBanker USA.com, Inc., 295 F.3d 352, 357 (2d Cir. 2002)). “When there is cautionary
language in the disclosure, the Court analyzes the allegedly fraudulent materials in their
entirety to determine whether a reasonable investor would have been misled.” Rombach,
355 F.3d at 173 (internal quotation marks omitted). “The touchstone of the inquiry is not
whether isolated statements within a document were true, but whether defendants’
representations or omissions, considered together and in context, would affect the total
mix of information and thereby mislead a reasonable investor regarding the nature of the
securities offered.” Id. (internal quotation marks omitted).
The PSLRA’s “safe harbor” provision similarly provides that an issuer “shall not
be liable with respect to any forward-looking statement . . . if and to the extent that . . . the
forward-looking statement is (i) identified as a forward-looking statement, and is
accompanied by meaningful cautionary statements identifying important factors that
could cause actual results to differ materially from those in the forward-looking
statement; or (ii) immaterial. . . .” 15 U.S.C. §§ 77z-2(a) & (c)(1), 78u-5(a) & (c)(1).

As previously noted, however, the Subscription Agreement will not be considered at this
stage.
43

Relatedly, the Second Circuit has held that mere puffery or statements of
corporate optimism are not actionable because “[c]ompanies must be permitted to
operate with a hopeful outlook: People in charge of an enterprise are not required to take
a gloomy, fearful or defeatist view of the future; subject to what current data indicates,
they can be expected to be confident about their stewardship and the prospects of the
business they manage.” Rombach, 355 F.3d at 174 (internal quotation marks omitted).
Defendants contend that the statement in the Due Diligence Materials 41 “at best
constitute[s] [a] statement[] of optimism and corporate confidence.” (Ward Mem. Supp.
at 8.) Moreover, “[t]he express language ‘expects to close’ undermines FIH’s position that
this statement is a material statement of fact.” (Id.)
Defendants additionally note that the Due Diligence Materials includes the
following cautionary language:
The information in this document has been provided by Foundation, does
not purport to be comprehensive, has not been independently verified and
should not be relied on as a promise or representation as to the future. . . .
In particular . . . no representations . . . are given as to (i) the achievement
or reasonableness of, and no reliance should be placed on, any projections,
estimates, opinions, forecasts, prospects, returns or targets contained
herein; or ii) the accuracy and completeness of any information contained
in this document, any other written or oral information provided in
connection therewith or any data which such information generates. Any
projections, estimates, opinions, forecasts, targets, prospects and returns
contained herein are not a reliable indicator of future performance and are
based on various assumptions concerning anticipated results which may
or may not prove to be correct.

41

To the extent Defendants argue that other of the remaining alleged
misrepresentations are non-actionable statements of optimism, the Court disagrees
because they are not forward-looking statements.
44

(Due Diligence Sept. 2013 at ii; Due Diligence Feb. 2014 at ii.)
Plaintiff responds that this disclaimer is ineffective because it is not “specific to the
misrepresentations alleged by FIH” and does “not track the misrepresentations alleged by
FIH,” but is instead a “classic, general, boilerplate disclaimer.” (Opp’n at 45.)
Plaintiff is clearly correct that the language in the Due Diligence Materials is
boilerplate, and that such language does not suffice to insulate a defendant from a claim
of fraud. See Halperin, 295 F.3d at 359 (“Cautionary language in securities offerings is just
about universal. Thus, the key question a district court must decide when determining
whether to grant a motion to dismiss a securities fraud complaint is whether plaintiffs
have overcome the existence of such language. Plaintiffs may do this by showing, for
example, that the cautionary language did not expressly warn of or did not directly relate
to the risk that brought about plaintiffs’ loss.”).
Nonetheless, no reasonable investor reading the statement in the context of the
Due Diligence Materials “could have been misled into thinking that the risk that
materialized and resulted in [FIH’s] loss”—namely, the risk of poor management—“did
not actually exist.” Id. A defendant “is not liable for securities fraud simply because the
investment did not turn out as the investor hoped.” Id. at 361. For this reason, Plaintiff’s
claim is dismissed as to the Due Diligence Materials’ statement that Foundation “expects
to close on three to four transactions each year.”
Turning to the materiality of the alleged omissions, Barr contends that his
statement regarding Project Apex (“I believe we can move expeditiously on this deal”)
was not material because no reasonable investor would have relied on “these brief
comments about targets when it closed on its investment” when it had “a full right to
45

perform due diligence and to make inquiries.” (Barr Mem. Supp. at 23.) The Court
disagrees. Barr’s statement, which made it sound like Project Apex, a deal involving a “$5
bn London based Hedge Fund” would close in the near future, was not “so obviously
unimportant to a reasonable investor that reasonable minds could not differ on the
question of their importance.” IBEW, 783 F.3d at 390 (internal quotation marks omitted).
With respect to the Portfolio Model and General Partner Forecast’s projections
that “Foundation would close on four hedge fund GP minority interest transactions by
June 30, 2014,” however, the Court is persuaded by Barr’s argument that the statements
were not material omissions because Foundation updated FIH about the projects in the
Portfolio Model and Forecast, such that continued reliance on them was not reasonable.
(See Barr Reply at 6.) The Forecast and Portfolio Model, which FIH received in December
2013, projects that four deals would close by June 2014: Projects Lake, Granite, California,
and Corvette. (Am. Compl. ¶¶ 77–78; see Forecast at 8.) However, the Due Diligence
Materials that FIH received thereafter, which were accurate “as of” February 2014, show
that no progress had been made on Project Corvette, and Project California was not even
in the pipeline anymore. (See Due Diligence Feb. 2014 at 27.) In light of this information,
it was not reasonable for FIH to continue to rely on the clearly outdated Forecast and
Portfolio Model in deciding whether to invest in Foundation in late February 2014.
Plaintiff’s claim regarding the Portfolio Model and Forecast are therefore dismissed.
In sum, Plaintiff’s claim that Defendants materially misrepresented or omitted
facts about the pipeline and Foundation’s prospects is dismissed except as to: (1) Barr’s
statement that “[o]ur pipeline continues to expand with real, immediate deals” (Feb. 3,
2014 Email); (2) the statement in the February Due Diligence Materials that “the current
46

representative [Foundation] pipeline . . . has become increasingly active in recent months
(Due Diligence Feb. 2014 at 27); and (3) Barr’s statement that “[w]e have a ‘green light’ to
pursue a deal [with Project Apex]. . . . I believe we can move expeditiously on this deal”
(Jan. 22, 2014 Email; Am. Compl. ¶ 73).
c. Barr and Meehan’s Relationship
Barr, Elmlinger, and Meehan assert that Plaintiff has failed to put forth facts from
which it can be inferred that Defendants’ representations about Barr and Meehan’s
relationship were false. (Elmlinger Mem. Supp. at 13; Meehan Mem. Supp. at 27; Meehan
Reply at 5; Barr Reply [Doc. # 58] at 8.) Plaintiff claims that Defendants made the
following misrepresentations:
Statement
“Mr. Barr and Mr. Meehan have known each other for 16 years,
meeting through family relationships in 1997,” and “[b]oth have
worked closely together since the concept for Foundation Capital
Partners was created in 2007.” 42
The partners do “not believe they have any potential conflicts of
interest with [Foundation].”43
Dec. 5, 2013: Barr and Meehan’s “relationship as brothers in law”
poses no “threat to their ability to work together.”44

Speaker
All Defs.

All Defs.
Barr, Meehan

Plaintiff alleges that the above statements were false because:
•

Barr informed Elmlinger, Ward, and Meehan on September 25, 2013 that he was
“not sure” he could “work with [Meehan] going forward” 45;

42

(Due Diligence Sept. 2013 at 13; Due Diligence Feb. 2014 at 13.)

43

(Due Diligence Sept. 2013 at 14; Due Diligence Feb. 2014 at 14.)

44

(Am. Compl. ¶¶ 83–84.)

45

(Soothsayer Emails at 9.)
47

•

Barr emailed Meehan on October 1, 2013: “I know you dislike me intensely and
there is no trust” 46;

•

On February 3, 2014, Barr told Meehan, Elmlinger, and Ward that he and Meehan
were “officially broken from each other”47; and

•

Meehan stated in Project Soothsayer that he was “[u]nlikely to stay under [the]
current model” because he saw “no potential for change in [Barr]’s behavior, or
anything but degradation of [Meehan’s] reputation from working with [Barr].” 48
It is apparent that the Amended Complaint inadequately alleges that the first two

claimed misrepresentations are false. Plaintiff does not assert that Barr and Meehan have
not known each other for sixteen years, nor that they have not worked closely together
since Foundation was created in 2007. Further, as Barr and Meehan note, the
representation in the Due Diligence Materials that the partners had no potential conflicts
of interest with Foundation “relates to business activities that conflict with the business
interests of Foundation,” and “[n]o reasonable investor would interpret the term to
include Barr’s divorce from Meehan’s sister-in-law.” (Meehan Reply at 5; see Barr Reply
at 9.)
As to the third alleged misrepresentation, Plaintiff does not claim that the
statement was made by Ward or Elmlinger, and therefore to the extent Plaintiff seeks to
hold them liable, Plaintiff’s claim fails. See Rose v. Rahfco Mgmt. Grp., LLC, No. 13 CV
5804 (VB), 2014 WL 7389900, at *5 (S.D.N.Y. Dec. 15, 2014) (“If a party does not ‘make’
any statements under Section 10b or Rule 10b–5, it cannot be liable under an omission
46

(Am. Compl. ¶ 170.)

47

(Id. ¶ 171.)

48

(Project Soothsayer at 5.)
48

theory.”); Oneida Sav. Bank v. Uni-Ter Underwriting Mgmt. Corp., No. 5:13-CV-746
(MAD) (ATB), 2014 WL 4678046, at *12 (N.D.N.Y. Sept. 18, 2014) (“[A holding] that
high-ranking company officials can be held liable for failing to correct statements made
in their presence and known to be false . . . would be in tension with the Supreme Court’s
decision in Janus . . . that only the person who ‘makes’ the misstatement is ultimately
liable for a section 10(b) violation.”); Ho v. Duoyuan Glob. Water, Inc., 887 F. Supp. 2d
547, 572 n.13 (S.D.N.Y. 2012) (“Holding Park liable for Guo’s alleged false statements
based on a failure to correct, or omission, would be in tension with the Supreme Court’s
recent decision [in Janus]. . . . Since each party is liable only for their own misstatements,
Janus implies that each party is only liable for their own omissions as well.”)
Barr asserts that the claim should be dismissed as to him as well because his
December 2013 statement was not a misrepresentation. Specifically, Barr contends that as
of December 5, 2013, he still believed that he could work professionally with Meehan, and
“[t]here is absolutely nothing to suggest that Barr’s opinion as of that date was to the
contrary.” (Barr Reply at 8.) That argument is, however, belied by Barr’s September 25,
2013 email in which he admitted that he was “not sure” he could “work with [Meehan]
going forward” (Soothsayer Emails at 9), and his October 1, 2013 email to Meehan in
which he stated: “I know you dislike me intensely and there is no trust.” (Am. Compl.
¶ 170).
Meehan contends that the claim should be dismissed as to him because “no
reasonable investor relies on pro forma statements regarding the relationship between
members of a company” (Meehan Mem. Supp. at 26), but Meehan does not address his

49

oral statement to FIH that his relationship with Barr posed no “threat to their ability to
work together,” which was not a “pro forma statement.”
As to materiality, the Court cannot conclude that the misstatement, concerning
the relationship between the two founding partners and key principals of a company, was
“so obviously unimportant to a reasonable investor that reasonable minds could not
differ on the question of their importance,” IBEW, 783 F.3d at 390 (internal quotation
marks omitted). Dismissal on the grounds of failure to allege falsity or materiality is
therefore not appropriate.
In sum, Plaintiff’s claim that Defendants misrepresented Barr and Meehan’s
relationship are dismissed as to Elmlinger and Ward, and as to Barr and Meehan with
regard to the statements in the Due Diligence Materials, but not with regard to their
December 2013 statement that their “relationship as brothers in law” posed no “threat to
their ability to work together.”
d. Barr’s Personal Spending
Finally, Defendants contend that Plaintiff’s allegations regarding Barr’s spending
habits should be dismissed because he did not make material misrepresentations. Each of
the alleged misrepresentations is discussed below.
i. Salary Draw
FIH alleges that Barr’s January 20, 2014 request for his January salary draw was
“effectively” a misrepresentation “to FIH that Barr’s request to draw his salary was fiscally
responsible and in the company’s best interests.” (Am. Compl. ¶ 93.) Plaintiff claims that
all of the defendants are liable for this misrepresentation because Ward, Elmlinger, and

50

Meehan failed to inform FIH that Barr’s request for a salary draw was “part and parcel of
. . . Barr’s spending disease.” (Opp’n at 29.)
However, as Barr argues, 49 on its face, the email is clear; it cannot plausibly be read
as a representation of fact regarding whether Barr’s request was fiscally responsible and in
the company’s best interest. (Barr Mem. Supp. at 14; see also Barr Reply at 9.) Moreover,
as discussed earlier, individuals may not be held liable for statements they did not
“make.” See Rose, 2014 WL 7389900, at *5; Oneida Sav. Bank, 2014 WL 4678046, at *12;
Ho, 887 F. Supp. 2d at 572 n.13.
ii. Emerald Investment
FIH next asserts that Barr misrepresented to FIH the extent of his loss in the
emerald investment, alleging that his “investment was $200,000” (Jan. 16 Email; Am.
Compl. ¶ 103), when in fact he “listed a $1.875 million note receivable from the emerald
fraud on his personal financial statement as part of a mortgage refinancing effort” (id.
¶ 187). Barr, in response, distinguishes his “investment” from his “loss,” arguing that the
fact that “he might subsequently recover $1.875 million from parties who had defrauded
him does not make his January 16, 2014 e-mail false or misleading, because that email in
49

Barr goes on to argue that emails exchanged between Defendants and FIH that
were in the same email chain—but not the same email—as the salary draw request,
demonstrate that FIH knew that Foundation was short on funds. However, these emails,
which were not attached to the complaint nor relied upon by FIH in the complaint, are
not properly attached to Barr’s opposition and will not be considered by the Court. (See
Barr Mem. Supp. at 14–15; Ex. B to Barr Mot. to Dismiss.) Likewise, Barr’s argument that
it is “highly misleading for Plaintiff to suggest it had no idea about Barr’s spending needs
and the financial pressure he was under from his divorce” because “Barr was very upfront
about his divorce with [FIH]” relies on an email between FIH and Barr neither attached
to nor relied upon in the complaint, and thus will not be considered by the Court. (Barr
Mem. Supp. at 15; see Ex. C to Barr Mot. to Dismiss.)
51

no way references his claims against the emerald fraud perpetrators and their allies.”
(Barr Mem. Supp. at 25; see also Barr Reply at 7–8.) Because, as Barr argues, the amount
he recovered from the litigation might not be the same as the amount of his loss, the fact
that he recovered nearly two million dollars from the litigation does not, on its face, show
that his statement that he invested $200,000 was false. 50
iii. In the Control Room
Finally, FIH contends that Defendants are liable for Elmlinger and Meehan’s
statements at a February 20, 2014 dinner that they were “the control room”; that “nothing
happens without [them]”; and they “will not spend [FIH’s] money foolishly.” (Am.
Compl. ¶¶ 99–101.) But, FIH offers no facts from which a reasonable juror could
conclude that these statements were false and known to be false when made. 51
Accordingly, this claim is dismissed as to all Defendants.
In sum, all of Plaintiff’s claims of misrepresentations about Barr’s personal
spending are dismissed except for Plaintiff’s claim regarding Barr’s December 4, 2013
statement that there was nothing “FIH needed to know about [his] background or
50

Barr additionally argues that his statement was not material and that Plaintiff
has not sufficiently pled reliance and loss causation. (See Barr Mem. Supp. at 26.) The
Court does not reach these arguments.
51

Elmlinger additionally argues that FIH could not have relied on these
statements because they were made after FIH invested. (Elmlinger Mem. Supp. at 18;
Elmlinger Reply at 8.) This allegation, which relies on the date of the initial investment
listed in the Subscription Agreement (February 11, 2013), finds no support in the
Amended Complaint, which states that FIH completed its investment on February 27,
2013, and does not indicate the date on which FIH initiated the first phase of investment.
(See Am. Compl. ¶ 109.) Because, as discussed above, the Subscription Agreement will
not be considered at this juncture, Elmlinger’s argument is not appropriately considered
at the motion to dismiss stage.
52

personality” and no other matters concerning him that FIH should know about before
proceeding with an investment.
The

following

alleged misrepresentations

or omissions

remain under

consideration as the Court moves to the next step of its analysis:
Statement
“We had a comprehensive call with a $5 bn London based Hedge Fund
[Project Apex] this morning. We have a ‘green light’ to pursue a deal. The
good news is that we have already gone over terms such as reps and
warranties, put triggers etc. that normally take place during the term sheet
negotiation and definitive agreement stage. We are receiving financials
and the contract with Deutsche Bank today or tomorrow. I believe we can
move expeditiously on this deal.” 52
“Just thought you’d like to see a draft of the Petershill Letter of Intent that
is under review at Fortress. Should the transaction occur, it would be a
large deal ($600 m). We have some reasonably good intel that suggests
that this offer would be given serious consideration. Our pipeline
continues to expand with real, immediate deals.” 53
“[T]he current representative [Foundation] pipeline . . . has become
increasingly active in recent months”54
Barr and Meehan’s “relationship as brothers in law” poses no “threat to
their ability to work together.” 55
There is nothing “FIH needed to know about Barr’s background or
personality” and no other matters concerning him that FIH should know
about before proceeding with an investment. 56

52

(Jan. 22 Email; Am. Compl. ¶ 73.)

53

(Feb. 3 Email; Am. Compl. ¶ 74.)

54

(Due Diligence Feb. 2014 at 27; Due Diligence Sept. 2013 at 27.)

55

(Am. Compl. ¶¶ 83–84.)

56

(Id. ¶ 91.)
53

Speaker
Barr

Barr

All Defs.
Barr,
Meehan
Barr

3. Reasonable Reliance
Defendants next contend that FIH’s claims should be dismissed for failure to
allege that FIH reasonably relied on Defendants’ claimed misrepresentations. “A plaintiff
claiming securities fraud under Section 10(b) and Rule 10b–5 must . . . establish that it
reasonably relied on the defendant’s alleged misrepresentations . . . .” Van Dongen v.
CNinsure Inc., 951 F. Supp. 2d 457, 469 (S.D.N.Y. 2013) (citing Emergent Capital Inv.
Mgmt., LLC v. Stonepath Grp., Inc., 343 F.3d 189, 195 (2d Cir. 2003)); see Stoneridge Inv.
Partners, LLC, 552 U.S. at 159 (“Reliance by the plaintiff upon the defendant’s deceptive
acts is an essential element of the § 10(b) private cause of action.”). “‘In assessing the
reasonableness of a plaintiff’s alleged reliance, [courts] consider the entire context of the
transaction, including factors such as its complexity and magnitude, the sophistication of
the parties, and the content of any agreements between them.’” Van Dongen, 951 F. Supp.
2d at 469 (quoting Emergent Capital Inv. Mgmt., 343 F.3d at 195).
Elmlinger, Meehan and Barr argue that FIH’s claimed reliance was not reasonable
because the misrepresentations and omissions alleged are too general for a reasonable
investor to have relied upon. (See Elmlinger Mem. Supp. at 9, 18; Meehan Mem. Supp. at
22–23, 26; Barr Mem. Supp. at 20.) Meehan adds: “Any reasonable investor relying on
statements such as [those in the Due Diligence Materials] as material terms forming the
basis of a significant multi-million dollar investment, would have sought out the
necessary details to confirm, for example, the actual identities of the targets, the status of
the negotiations, and the elements of the transactions.” (Meehan Mem. Supp. at 23.)
Plaintiff responds only that “there is no record of facts” here “upon which the Court

54

could plausibly determine” whether Plaintiff’s claim of reliance was reasonable. (Opp’n at
43.)
The Court is not persuaded by Defendants’ arguments. The remaining alleged
misrepresentations and omissions are not so general that a reasonable investor would not
have relied upon them, and at least for purposes of a motion to dismiss, Plaintiff has
adequately alleged reliance. 57
4. Scienter
To plead scienter in a securities fraud claim, a plaintiff’s complaint must “state
with particularity facts giving rise to a strong inference that the defendant acted with the
required state of mind.” 15 U.S.C. § 78u-4(b)(2). “[T]o qualify as ‘strong,’ an ‘inference of
scienter must be more than merely plausible or reasonable—it must be cogent and at least
as compelling as any opposing inference of nonfraudulent intent.’” Teamsters Local 445
Freight Div. Pension Fund v. Dynex Capital, Inc., 531 F.3d 190, 194 (2d Cir. 2008)
(quoting Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 314 (2007)). The
Supreme Court has defined the “required state of mind” as “‘a mental state embracing
intent to deceive, manipulate, or defraud.’” Id. (quoting Tellabs, Inc., 551 U.S. at 319). In
addition, the Second Circuit has held that “recklessness is a sufficiently culpable mental

57

Further, with respect to the alleged omission, though not cited by Plaintiff, the
Supreme Court’s determination that there is “a rebuttable presumption of reliance” where
liability for an omission is alleged, appears determinative here. See Stoneridge Inv.
Partners, LLC, 552 U.S. at 159 (citing Affiliated Ute Citizens of Utah v. United States, 406
U.S. 128 (1972)); see also In re Smith Barney Transfer Agent Litig., 884 F. Supp. 2d at 162
(S.D.N.Y. 2012) (citing Affiliated Ute, 406 U.S. at 153–54). Where, as here, an omission is
claimed, “[a]ll that is necessary” to show reliance “is that the facts withheld [were]
material.” Affiliated Ute, 406 U.S. at 153–54.
55

state in the securities fraud context.” Id. (citing Novak, 216 F.3d at 308–09). Thus, “[t]he
requisite scienter can be established by alleging facts to show either (1) that defendants
had the motive and opportunity to commit fraud, or (2) strong circumstantial evidence of
conscious misbehavior or recklessness.” ECA, Local 134 IBEW Joint Pension Trust of
Chicago v. JP Morgan Chase Co., 553 F.3d 187, 198 (2d Cir. 2009).
“At least four circumstances may give rise to a strong inference of the requisite
scienter: where the complaint sufficiently alleges that the defendants (1) ‘benefitted in a
concrete and personal way from the purported fraud’; (2) ‘engaged in deliberately illegal
behavior’; (3) ‘knew facts or had access to information suggesting that their public
statements were not accurate’; or (4) ‘failed to check information they had a duty to
monitor.’” Id. (quoting Novak, 216 F.3d at 311.)
Plaintiff here puts forth two theories of scienter: (1) strong circumstantial
evidence of conscious misbehavior or recklessness, demonstrated by the fact that
Defendants “knew facts or had access to information suggesting that their public
statements were not accurate”; and (2) motive and opportunity (as to Defendants
Elmlinger, Barr, and Meehan). (See Opp’n at 46–49.) Because the Court finds merit in the
first theory, it does not reach the second.
“[S]ecurities fraud claims typically have sufficed to state a claim based on
recklessness when they have specifically alleged defendants’ knowledge of facts or access
to information contradicting their public statements.” Novak, 216 F.3d at 308. Under
such circumstances
defendants knew or, more importantly, should have known that they were
misrepresenting material facts related to the corporation. Thus, for
example, the pleading standard was met where the plaintiffs alleged that
56

the defendants made or authorized statements that sales to China would
be “an important new source of revenue” when they knew or should have
known that Chinese import restrictions in place at the time would severely
limit such sales. Similarly, the pleading standard was met where the
plaintiffs alleged that the defendants released to the investing public
several highly positive predictions about the marketing prospects of a
computer system to record hotel guests’ long-distance telephone calls
when they knew or should have known several facts about the system and
its consumers that revealed “grave uncertainties and problems concerning
future sales of” the system.
Id. (internal citations omitted).
Here, as discussed below, Plaintiff has adequately alleged facts from which a
strong inference could reasonably be drawn that Defendants knew their statements to
FIH were false or misleading. 58 Each statement or omission not already dismissed is
analyzed below.

58

Ward appears to argue that mere knowledge of falsity does “not rise to the level
of deliberate illegal behavior or highly unreasonable conduct or an extreme departure
from the standards of ordinary care.” (Ward Mem. Supp. at 14.) In so arguing, Ward
purports to rely on Sinay v. CNOOC Ltd., No. 12 CIV. 1513 (KBF), 2013 WL 1890291, at
*7 (S.D.N.Y. May 6, 2013) and Harris v. AmTrust Fin. Servs., Inc., No. 14-CV-736 (VEC),
2015 WL 5707235, at *12 (S.D.N.Y. Sept. 29, 2015), but neither case stands for the
proposition for which Ward cites it. Rather, both Sinay and Harris recognize that a
plaintiff may plead scienter on the basis that defendants “knew facts or had access to
information contradicting their public statements.” See Sinay, 2013 WL 1890291, at *7
(“Plaintiffs argue that CNOOC’s safety investigations must have revealed to CNOOC that
its oil rigs were being operated in an unsafe manner. Such allegations require that
plaintiffs specifically allege defendants’ knowledge of facts or access to information
contradicting defendants’ public statements.” (internal quotation marks omitted));
Harris, 2015 WL 5707235, at *12 (“In order adequately to plead scienter on the basis that
defendants knew facts or had access to information suggesting that their public
statements were not accurate, plaintiffs must specifically identify the reports or
statements containing this information.” (internal quotation marks omitted)).
57

a. Pipeline Continues to Expand & Pipeline has Become Increasingly
Active
Plaintiff has adequately alleged that Defendants knew the statement in the Due
Diligence Materials that “the current representative [Foundation] pipeline . . . has become
increasingly active in recent months” (Due Diligence Feb. 2014 at 27) was false, and that
Barr knew the statement that “[o]ur pipeline continues to expand with real, immediate
deals” (Feb. 3, 2014 Email) was false. A strong inference of knowledge can be drawn from
(a) the March 26 and 27, 2014 emails in which O’Donnell asserted that he had been
telling Defendants for months that the “pipeline beyond Apex,” was “pretty crappy,”
“Project Lake [was] about one short step ahead of square one,” and “[o]ther than that, we
have nothing”; and (b) Meehan and Elmlinger’s March 2014 statement in Project
Soothsayer that “[t]he transaction pipeline presented on a no-names basis in the investor
pitchbook strains credibility.”
b. Project Apex
Plaintiff has also adequately pled that Barr knew his statement that Project Apex
was moving “expeditiously” was false when he made it. A strong inference of knowledge
can be drawn from Barr’s knowledge of the Project Activity Log, which stated that as of
March 3, 2014, Project Apex “had only progressed to the point of ongoing [due diligence]
dialogue.” (Am. Compl. ¶¶ 146, 162.)
c. Nothing FIH Needed to Know
Plaintiff has additionally adequately alleged scienter with respect to Barr’s
December 4, 2013 statement that there was nothing “FIH needed to know about [his]

58

background or personality” and no other matters concerning him that FIH should know
about before proceeding with an investment, with the following allegations:
•

Barr “required a two-month advance on his partner draw till year end (Oct – Dec
2013); prior to that, he had been paid in advance most months since [Foundation]
started paying salaries and draws in Sept 2012” (Project Soothsayer at 3);

•

“[Barr] maintains a very expensive 3-bedroom apartment in Stamford which he
has furnished expensively (see mention of the $15,000 rug). He travels frequently
and spends lavishly. He does not seem to have any ability to budget his expenses
and, as a result, runs out of money every few months. When he runs out of
money, he threatens to declare bankruptcy (and ruin the firm) if he is not allowed
to see more [Foundation] equity” (id. at 10);

•

In September 2013, Meehan emailed Barr about charging nearly $17,000 of
personal expenses on Foundation’s corporate credit card, to which Barr replied
that he did not have the funds to cover his bill (Soothsayer Emails at 7–8);

•

Several days later in September 2013, Barr stated that he was unable to pay his
mortgage or personal credit card bill for the month and since the corporate credit
cards were “linked to [his] personal acct . . . they probably [would] be shut off” (id.
at 9);

•

On several occasions “during the course of 2013–2014,” “[t]he firm’s corporate
credit card were suspended . . . as a result of Barr’s irresponsible spending,”
including on December 3, 2013, when the firm’s corporate Amex card was
declined for a mere $11 purchase (Am. Compl. ¶ 180);

•

Barr “demonstrate[d] a reckless disregard for confidentiality” agreements (Project
Soothsayer at 10);

•

Barr frequently lied to his co-workers and potential investors (id. at 3–4, 9–11;
Am. Compl. ¶ 134; Soothsayer Emails at 3); and

•

Barr’s contacts in the alternative investment industry were not as extensive as he
led others to believe (id. at 2, 3, 9; Am. Compl. ¶ 134; Soothsayer Emails at 3).

59

A strong inference can be drawn from these alleged facts that Barr knew about his lavish
spending habits and its impact on Foundation, his poor judgment, tendency to lie, and
weak contact network.
d. No Threat to Barr and Meehan’s Ability to Work Together
Finally, Plaintiff has alleged sufficient facts from which a strong inference of
scienter can be drawn with respect to Barr and Meehan’s December 5, 2013 statement
that their “relationship as brothers in law” posed no “threat to their ability to work
together.” Barr’s statements in September and October 2013 that he was not sure he could
work with Meehan going forward, that he knew Meehan disliked him “intensely,” and
there was “no trust” between them lay an adequate foundation for inferring scienter.
5. Loss Causation
Loss causation is “‘the causal link between the alleged misconduct and the
economic harm ultimately suffered by the plaintiff.”59 GE Inv’rs v. Gen. Elec. Co., 447 F.
App’x 229, 231 (2d Cir. 2011) (quoting Lentell v. Merrill Lynch & Co., 396 F.3d 161, 172
(2d Cir. 2005)). It is “related to the tort law concept of proximate cause: it ‘is intended to
fix a legal limit on a person’s responsibility even for wrongful acts,’ and it requires that
the plaintiff’s loss be foreseeable.” Plumbers, Pipefitters & MES Local Union No. 392
Pension Fund v. Fairfax Fin. Holdings Ltd., 886 F. Supp. 2d 328, 337 (S.D.N.Y. 2012)
(quoting Lentell, 396 F.3d at 174). A defendant’s misstatement “is the ‘proximate cause’ of
an investment loss if the risk that caused the loss was within the zone of risk concealed by
59

Transaction causation, by contrast, “is akin to reliance, and requires only an
allegation that but for the claimed misrepresentation or omissions, the plaintiff would not
have entered into the detrimental securities transaction.” Lentell, 396 F.3d at 172 (internal
quotation marks omitted).
60

the misrepresentations and omissions alleged by a disappointed investor.” Lentell, 396
F.3d at 173. “Thus to establish loss causation, a plaintiff must allege . . . that the subject of
the fraudulent statement or omission was the cause of the actual loss suffered . . . .” Id.
(internal quotation marks omitted).
Here, FIH’s theory of loss causation is that
FIH’s loss was a result of the demise of Foundation, which demise was a
function of the truths that the defendants misrepresented and hid from
FIH, i.e., that Barr was a spendthrift with no industry contacts and a
“functional inability to tell the truth,” that there was a standstill at the
leadership level because of internal hatred, that Foundation’s pipeline had
no movement and no real prospects, and that Foundation did not have the
capacity to close on the number of deals it promised to investors. In
essence . . . defendants misrepresented to FIH that Foundation had a
viable business—and it was this lack of viable business that caused plaintiff
to suffer its loss.
(Opp’n at 49–50.)
Ward, Elmlinger, and Meehan’s response is three-fold. They argue that (1) FIH’s
theory does not allege loss causation but rather transaction causation because Plaintiff
argues essentially that it would not have made the investment but for the
misrepresentations (see Ward Mem. Supp. at 15; Elmlinger Mem. Supp. at 22); (2) by
admitting that the loss was caused by market forces, FIH undermines its claim of loss
causation (see Meehan Mem. Supp. at 36; Elmlinger Reply at 9); and (3) by waiting six
months after it learned the truth about the misrepresentations to seek rescission, FIH
undermined its claim of loss causation (see Meehan Mem. Supp. at 37; Elmlinger Mem.
Supp. at 22; Elmlinger Reply at 9–10).

61

These arguments however, appear to run counter to the Second Circuit’s
reasoning in Suez Equity Inv’rs, L.P. v. Toronto-Dominion Bank, 250 F.3d 87 (2d Cir.
2001). The plaintiffs in Suez invested three million dollars in SAM Group, in reliance on a
due diligence report provided to them by SAM Group about J. Christopher Mallick, its
founder, principal executive, and controlling shareholder. Id. at 93, 94. Although the
report stated that no bankruptcy filings by, or civil suits against, Mallick were found, in
fact Mallick had filed for bankruptcy, three civil suits were pending against him, three tax
liens were filed against him, and several lawsuits had been decided against him. Id. at 94.
“Within seven weeks of plaintiffs’ investment, SAM Group suffered a cash flow crisis
from which it did not recover.” Id.
The plaintiffs attributed “that failure to Mallick’s lack of ‘sound business, financial
management and organizational skills, sound judgment, character, honesty, commitment
and diligence.’” Id. The Second Circuit held that the plaintiffs had adequately alleged loss
causation under two related theories: (1) “the plaintiffs suffered a loss at the time of
purchase since the value of the securities was less than that represented by defendants”60;
and (2) “Mallick’s concealed lack of managerial ability induced SAM Group’s failure”
because SAM Group “was involved in highly sophisticated financial transactions in which
the expertise of a skilled executive officer was essential.” Id. at 98.

60

The court reasoned that the defendants’ misrepresentations were relevant to the
“investment quality of SAM Group securities, as the defendants allegedly concealed a lack
of skills and expertise on the part of the company’s principal that, if revealed, would
directly affect the plaintiffs’ valuation of their investment in the company.” Suez, 250 F.3d
at 98.
62

As in Suez, a “liberal reading of the complaint” in this case “reveals allegations that
the misrepresentations” and omissions made by Defendants “led [P]laintiff[] to appraise
the value of [Foundation] securities incorrectly by assuming the competency of” Barr,
Foundation’s Managing Partner, the ability of the principals to work together, and the
existence of more viable deals in the pipeline than were in fact present. Id. at 96. Thus,
Plaintiff (1) “suffered a loss at the time of purchase since the value of the securities was
less than that represented by defendants,” id. at 98; and (2) Barr’s “concealed lack of
managerial ability,” skills, and contacts “induced [Foundation’s] failure,” id. at 98,
because Foundation’s “business model was solely comprised of making investments in . . .
hedge fund GP minority interests” (Am. Compl. ¶ 47) and therefore Barr’s “ability to
generate leads in the industry” (id. ¶¶ 46–47) and to “[develop] a solid pipeline” (Mar.
26–27 Emails at 2) “was integral to the success of Foundation” (Am. Compl. ¶ 47). These
allegations are sufficient to survive a motion to dismiss on the ground of failure to
sufficiently plead loss causation.
B. State Law Claims
Only Elmlinger and Ward put forward grounds for the dismissal of Plaintiff’s state
law claims should Plaintiff’s federal law claim succeed. Their arguments, which largely
mirror their claims with regard to the federal claim, are discussed below.

63

1. CUSA, Conn. Gen. Stat. §§ 36b-29(a) and (c) (Count II) 61
Section 36b-29(a)(2) of CUSA gives buyers a right of action against:
Any person who . . . [1] offers or sells or materially assists any person who
offers or sells a security [2] by means of any untrue statement of a material
fact or any omission to state a material fact . . . [3] who knew or in the
exercise of reasonable care should have known of the untruth or omission,
[4] the buyer not knowing the untruth or omission. . . .
C.G.S. § 36b-29(a)(2). Subsection (c) extends liability to “[e]very person who directly or
indirectly controls a person liable under subsection[] (a).” Id. § 36b-29(c).
Ward contends that the CUSA claim against him should be dismissed because: (1)
FIH does not allege that “Ward was involved, in any respect, in making any explicit
representations about Foundation or its financial health or its capacity to close deals or
the deals in the pipeline”; and (2) Plaintiff has not sufficiently alleged that Ward made
any “untrue statements of material fact or omission.” (Ward Mem. Supp. at 17.)
Elmlinger argues that for all of the reasons he put forward in support of dismissal of the
federal securities claim, the CUSA claim against him should be dismissed.
However, for the reasons discussed in subsection (A) above, Plaintiff has
adequately alleged that Ward and Elmlinger are liable for the statement in the February
Due Diligence Materials that “the current representative [Foundation] pipeline . . . has
become increasingly active in recent months. (Due Diligence Feb. 2014 at 27.) Plaintiff’s
CUSA claims are therefore dismissed as to Ward and Elmlinger to the same extent as its

61

The parties agreed at oral argument that if a statement is “material” for purposes
of the federal Securities and Exchange Act, it is also material for purposes of CUSA.
64

federal claims. 62
2. Intentional and Negligent Misrepresentation
Inducement (Counts III, IV & V)

and

Fraudulent

In Connecticut, a plaintiff claiming fraudulent inducement or intentional
misrepresentation must allege: “(1) [t]hat a false representation was made as a statement
of fact; (2) that it was untrue and known to be untrue by the party making it; (3) that it
was made to induce the other party to act on it; and (4) that the latter did so act on it to
his injury.” Peterson v. McAndrew, 160 Conn. App. 180, 204 (2015) (internal quotation
marks omitted). “‘[A]n action for negligent misrepresentation requires the plaintiff to
establish (1) that the defendant made a misrepresentation of fact (2) that the defendant
knew or should have known was false, and (3) that the plaintiff reasonably relied on the
misrepresentation, and (4) suffered pecuniary harm as a result.’” Id. (quoting Nazami v.
Patrons Mutual Ins. Co., 280 Conn. 619, 626 (2006)).
Ward contends that Counts III, IV, and V should be dismissed as to him because
the allegations in the Amended Complaint are not sufficiently specific to satisfy Rule 9(b)
(see Ward Mem. Supp. at 18–22), and Plaintiff has failed to adequately plead material
statements or omissions made by Ward or reasonable reliance (see id. at 23). Elmlinger
likewise claims that Plaintiff has failed to allege that Elmlinger made an untrue statement
with the requisite intent or that FIH reasonably relied on such a statement and that such
statements caused FIH to suffer a loss. (Elmlinger Mem. Supp. at 25.)
62

Plaintiff claims that the federal and state securities acts differ as to scienter (state
law does not require a showing of scienter). But, since the scienter analysis does not
eliminate any of the federal claims, this difference is of no consequence for resolution of
Defendants’ motions.
65

These claims fail as to Ward and Elmlinger’s representations in the Due Diligence
Materials for the same reasons enumerated with respect to Plaintiff’s federal law claim.
Therefore, Plaintiff’s intentional and negligent misrepresentation and fraudulent
inducement claims are dismissed as to Ward and Elmlinger to the same extent as its
federal claims.
3. Unjust Enrichment (Count VI)
Unjust enrichment is a cause of action in equity that “applies wherever justice
requires compensation to be given for property or services rendered under a contract,
and no remedy is available by an action on the contract.” Vertex, Inc. v. City of
Waterbury, 278 Conn. 557, 573 (2006). To state a claim of unjust enrichment in
Connecticut, a plaintiff must plausibly allege “(1) that the defendants were benefited, (2)
that the defendants unjustly did not pay the plaintiffs for the benefits, and (3) that the
failure of payment was to the plaintiffs’ detriment.” Id.
Ward and Elmlinger argue that Count VI should be dismissed because Plaintiff
has not adequately alleged that they personally received any benefit from Plaintiff’s
investment, that they unjustly failed to repay Plaintiff, or that such failure was to FIH’s
detriment. (See Ward Mem. Supp. at 223; Elmlinger Mem. Supp. at 26.)
These arguments are not persuasive. Unlike Section 10(b), an unjust enrichment
claim does not require a plaintiff to allege that it received some benefit that was not
common to other corporate officers. Rather, under Connecticut law, “unjust enrichment
[i]s a very broad and flexible equitable doctrine,” applied when it would be “contrary to
equity and good conscience for the defendant to retain a benefit which has come to him

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at the expense of the plaintiff.” Ramondetta v. Amenta, 97 Conn. App. 151, 166 (2006)
(internal quotation marks omitted).
Here, Plaintiff has alleged that Defendants unjustly and fraudulently induced it to
invest in Foundation (Am. Compl. ¶¶ 2–5); that had FIH not invested, “Foundation
would have had to wind up its business and liquidate” (id. ¶¶ 32, 34); that Defendants
were partners and principals of Foundation (id. ¶ 50; see Due Diligence Sept. 2013 at 6;
Due Diligence Feb. 2014 at 6); that FIH purchased “some of Barr’s interest in Foundation
for $500,000” (Am. Compl. ¶ 109); that after FIH’s investment, Foundation had enough
capital to continue to operate for another six months (see id. ¶ 202); and that “FIH was
impoverished as a result of its Investment in Foundation (id. ¶ 297). Together, these
allegations suffice to plead that Defendants (principals of Foundation, who by virtue of
their positions, benefited from the continued operation of Foundation), and Barr (whose
interest FIH purchased directly) in particular, benefited from FIH’s investment, that FIH
unjustly did not receive the benefit of its investment, and that FIH suffered a loss as a
result. Therefore, Count VI is not dismissed.

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III.

Conclusion
For the foregoing reasons, Defendants’ motions to dismiss [Doc. ## 46, 47, 49, 51]

are GRANTED in part and DENIED in part as follows:
1. Ward’s Motion to Dismiss [Doc. # 47] is DENIED as to Count VI, and as to
Counts I to V with respect to the statement in the February Due Diligence
Materials that “the current representative [Foundation] pipeline . . . has
become increasingly active in recent months.”
2. Elmlinger’s Motion to Dismiss [Doc. # 49] is DENIED as to Count VI, and as
to Counts I to V with respect to the statement in the February Due Diligence
Materials that “the current representative [Foundation] pipeline . . . has
become increasingly active in recent months.”
3. Barr’s Motion to Dismiss [Doc. # 46] is DENIED as to Count I with respect to:
a. The statement in the February Due Diligence Materials that “the
current representative [Foundation] pipeline . . . has become
increasingly active in recent months”;
b. Barr’s alleged failure to update FIH regarding his statement that
Foundation had a green light to pursue Project Apex and he believed
Foundation could “move expeditiously on this deal”;
c. Barr’s statement that “[o]ur pipeline continues to expand with real,
immediate deals”;
d. Barr’s statement that there was nothing “FIH needed to know about
[his] background or personality” and no other matters concerning him

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that FIH should know about before proceeding with an investment;
and
e. Barr’s statement that his relationship with Meehan posed no threat to
his ability to work with Meehan.
4. Meehan’s Motion to Dismiss [Doc. # 51] is DENIED as to Count I with
respect to:
a. The statement in the February Due Diligence Materials that “the
current representative [Foundation] pipeline . . . has become
increasingly active in recent months”; and
b. His alleged misrepresentation that his relationship with Barr posed no
threat to his ability to work with Barr.
5. Defendants’ motions to dismiss are GRANTED as to all other claims.
Thus, the following claims remain for adjudication:
1. Count I:
a. against all Defendants with respect to the statement in the February Due
Diligence Materials that “the current representative [Foundation] pipeline
. . . has become increasingly active in recent months”;
b. against Barr and Meehan with respect to their statement that their
relationship with one another posed no threat to their ability to work
together; and
c. against Barr with respect to: his alleged failure to update FIH regarding his
statement that Foundation had a green light to pursue Project Apex and he
believed Foundation could “move expeditiously on this deal”; his
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statement that “[o]ur pipeline continues to expand with real, immediate
deals”; and his statement that there was nothing “FIH needed to know
about [his] background or personality” and no other matters concerning
him that FIH should know about before proceeding with an investment.
2. Counts II to V against Barr and Meehan with respect to all claims; and
3. Count VI against all Defendants.
IT IS SO ORDERED.
/s/
Janet Bond Arterton, U.S.D.J.
Dated at New Haven, Connecticut this 30th day of March 2016.

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