Cotter v. Gwyn et al
ORDER AND REASONS granting in part 45 Motion to Dismiss. Plaintiff's claims under Louisiana Revised Statutes 51:714(b) and for breach of fiduciary duty are DISMISSED WITHOUT PREJUDICE. In addition, Plaintiff's claims under Florida and Illinois securities law are DISMISSED WITH PREJUDICE. Plaintiff shall amend his Complaint within 20 days of this Order to the extent that he can remedy the deficiencies identified herein. Signed by Judge Jane Triche Milazzo. (ecm)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF LOUISIANA
PATRICK C. COTTER
BRUCE A. GWYN ET AL.
ORDER AND REASONS
Before the Court is Defendant Kaplan & Company’s Motion to Dismiss
(Doc. 45). For the following reasons, the Motion is GRANTED IN PART.
General factual and procedural background
This matter arises out of the failure of a “commodity pool,” a type of
hedge fund that trades in commodities futures contracts. Level III Trading
Partners, L.P. (“Level III” or “the Fund”) was a commodity pool created in
February 2007 by Defendant Bruce A. Gwyn (“Gwyn”).
According to the
Complaint, the Fund attracted approximately $ 2.7 million in investments
from its inception in 2007 to its filing for bankruptcy in 2013. From 2007 to
2010, the fund successfully and profitably operated as a commodity pool.
Beginning in 2010, however, Gwyn allegedly began divesting the fund of
commodities futures and investing its assets in companies controlled by Gwyn
and his close business associate, Defendant Andrew V. Reid. The Complaint
claims that “[t]his scheme involved [transfers] in the guise of loans, purchases
of stock, and purchases of limited liability company membership interests.” 1
These transfers were allegedly part of a larger fraudulent scheme to artificially
inflate the stock prices of two public companies, Defendants Treaty Energy
Corporation (“Treaty”) and Orpheum Properties, Inc. (“Orpheum”). Gwyn and
Reid were officers and directors of Treaty and Orpheum, and they maintained
substantial financial interests in both companies. The Complaint also claims
that Gwyn misappropriated money from the fund by diverting cash for his own
personal use and by improperly charging the fund for fictitious administrative
services purportedly performed by Gwyn and his wife, defendant Anne Marie
In order to hide his self-dealing and the depletion of the fund’s assets
from its investors, the Complaint alleges that Gwyn disclosed false investment
performance reports, false asset values, and fraudulent account statements to
the fund’s investors.
Many of these reports to investors were allegedly
prepared and sent by Defendants Turn Key Hedge Funds, Inc. (“Turn Key”)
and Michael Lapat. In addition to hiding Level III’s value and the nature of
its investments from current investors, Gwyn allegedly continued to accept
additional investments from current investors, as well as limited partner
subscriptions to the Fund from new investors looking to invest in a commodity
After Level III’s investors learned of the scheme, they filed an
involuntary petition for relief under Chapter 7 of the Bankruptcy Code on
Doc. 1, at 2.
August 2, 2013. 2
The bankruptcy court later converted the matter into a
voluntary petition for bankruptcy pursuant to Chapter 11. 3 On July 11, 2014,
the bankruptcy court confirmed a Chapter 11 plan for reorganization and
established a “Litigation Trust.” It appointed Plaintiff, Patrick C. Cotter (“the
Trustee”) as the “Trustee of the Litigation Trust created by the plan.” 4 The
litigation trustee represents the bankruptcy estate by assuming the obligation
to prosecute the bankruptcy estate’s claims for the benefit of creditors. 5 The
Chapter 11 plan in this case authorizes the trustee to bring all claims on behalf
of the bankrupt debtor’s estate. 6
On September 28, 2015, Cotter filed this action in this Court in his
capacity as trustee of the Level III Trading Partners, L.P. Litigation Trust.
The Trustee’s Complaint asserts seventeen claims for relief against eleven
defendants, and he seeks to avoid various pre-petition transactions on behalf
of the debtor. The matter was initially referred to the bankruptcy court, but
the referral was withdrawn on March 9, 2016. Defendant Kaplan & Company
(“Kaplan”) has filed the instant Motion to Dismiss the claims against it. Prior
to addressing the merits of this Motion, this Court will discuss the Complaint’s
allegations involving Kaplan.
Specific allegations against Kaplan & Company
The Complaint alleges that Kaplan, a CPA firm, was retained by Gwyn
at the recommendation of Defendant Turn Key to provide accounting and
auditing work for the Fund. Kaplan was responsible for preparing monthly
capital and performance reports that were provided to the fund’s investors. It
also audited financial statements and prepared partnership tax information.
In re Level III Trading Partners, L.P., No. 13-12120 (Bankr. E.D. La. Aug. 2, 2013).
In re Level III Trading Partners, L.P., No. 13-12120 (Bankr. E.D. La. Oct. 1, 2013).
4 In re Level III Trading Partners, L.P., No. 13-12120, at *2 (Bankr. E.D. La. July 11, 2014).
5 In re Railworks Corp., 325 B.R. 709, 719 (Bankr. D. Md. 2005).
6 In re Level III Trading Partners, L.P., No. 13-12120, at *9 (Bankr. E.D. La. May 27, 2014).
The Complaint alleges that beginning in 2010, Kaplan had frequent problems
completing its monthly reports “because of untimely, problematic, and
inconsistent information and documentation” provided to it by Gwyn. Despite
these ongoing issues, Kaplan allegedly “never disclosed any of the problems,
irregularities, or inconsistencies to the partnership or its limited partners.”
confirming the accuracy of Turn Key’s calculations of the Fund’s net asset
value. In doing so, it reviewed documents relating to the entities in which the
Fund had invested and therefore allegedly knew that Gwyn held an interest in
or was otherwise affiliated with those entities and that the entities had no
appreciable assets or performed no real business. The Complaint alleges that
Kaplan was aware of Gwyn’s self-dealing and fraud. In addition, it alleges that
Kaplan knew that Gwyn was using the Fund for personal expenses.
By late 2010, Kaplan had stopped preparing monthly reports or
verifying monthly partner capital account statements because it was unable to
verify the value of the fund’s private investments.
It sought supporting
documentation from Gwyn and Turn Key to verify the Fund’s net asset value
but never received such. In addition, it had difficulty preparing the annual
statement for 2010 for the same reasons. Kaplan allegedly did not at that time
explain to the limited partners the reason for the delay or relay its belief that
the Fund’s private investments were actually worthless.
Kaplan ultimately issued the financial statements for 2009 and 2010 on
October 13, 2011, stating that it was unable to verify the valuation of the
investments. These statements were not provided to the limited partners.
In light of these facts, the Trustee alleges that Kaplan aided Gwyn in
misappropriating investor funds and misleading investors regarding the value
of their investments. It failed to communicate to the limited partners its
assessment of the value of the Fund’s investments and thus assisted Gwyn in
perpetuating the scheme. The Trustee brings claims against Kaplan for (1)
violation of § 10 of the 1934 Securities Exchange Act, (2) violation of state
securities laws, (3) professional malpractices and negligence, (4) aiding and
abetting Gwyn, (5) breach of contract, (6) civil conspiracy, and (7)
misrepresentation and omission. In its Motion, Kaplan seeks the dismissal of
each of these claims.
To survive a Rule 12(b)(6) motion to dismiss, a plaintiff must plead
enough facts “to state a claim for relief that is plausible on its face.” 7 A claim
is “plausible on its face” when the pleaded facts allow the court to “draw
reasonable inference that the defendant is liable for the misconduct alleged.” 8
A court must accept the complaint’s factual allegations as true and must “draw
all reasonable inferences in the plaintiff’s favor.” 9 The court need not, however,
accept as true legal conclusions couched as factual allegations. 10 To be legally
sufficient, a complaint must establish more than a “sheer possibility” that the
plaintiff’s claims are true. 11 If it is apparent from the face of the complaint
that an insurmountable bar to relief exists and the plaintiff is not entitled to
relief, the court must dismiss the claim. 12 The court’s review is limited to the
complaint and any documents attached to the motion to dismiss that are
central to the claim and referenced by the complaint. 13
Ashcroft v. Iqbal, 556 U.S. 662 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 547
9 Lormand v. U.S. Unwired, Inc., 565 F.3d 228, 232 (5th Cir. 2009).
10 Iqbal, 556 U.S. at 678.
12 Lormand, 565 F.3d at 255–57.
13 Collins v. Morgan Stanley Dean Witter, 224 F.3d 496, 498 (5th Cir. 2000).
LAW AND ANALYSIS
This Court will consider each of Kaplan’s arguments in turn.
Breach of Contract
At the outset, Kaplan argues that the Trustee cannot succeed on its
breach of contract claim. It argues that Louisiana law applies to this claim
and that under Louisiana law allegations that an accountant breached its
duties sounds in tort, not contract. The Trustee rebuts that it is impossible for
the Court to engage in a fact-intensive choice of law analysis at this stage.
While the parties dispute which choice of law provision applies to this
claim, this Court agrees with the Trustee that Louisiana Civil Code article
3537, which specifically addresses which law applies to issues of conventional
obligations, applies here. 14 Article 3537 states that:
Except as otherwise provided in this Title, an issue of
conventional obligations is governed by the law of the state whose
policies would be most seriously impaired if its law were not
applied to that issue.
That state is determined by evaluating the strength and
pertinence of the relevant policies of the involved states in the
light of: (1) the pertinent contacts of each state to the parties and
the transaction, including the place of negotiation, formation, and
performance of the contract, the location of the object of the
contract, and the place of domicile, habitual residence, or
business of the parties; (2) the nature, type, and purpose of the
contract; and (3) the policies referred to in Article 3515, as well
as the policies of facilitating the orderly planning of transactions,
of promoting multistate commercial intercourse, and of
protecting one party from undue imposition by the other.
24 LA. CIV. L. TREATISE, SALES § 1:12 (“Article 3515 acts as the general and residual article
applicable ‘[e]xcept as otherwise provided.’ Most of the remaining articles in Book IV do in
fact displace article 3515 by providing narrower and more specific rules adapted to particular
substantive areas of law.”).
This Court agrees with the Trustee that such a determination at this stage
would be premature. This Court has not been provided with sufficient facts to
engage in the analysis mandated by article 3537. For instance, the Complaint
does not provide any information regarding the negotiation or formation of the
contract between Kaplan and Level III, nor has the contract been provided to
this Court for consideration. For these reasons, Kaplan’s request for dismissal
of the Trustee’s breach of contract claim is denied.
Peremption of Tort Claims
Kaplan next argues that the Trustee’s claims sounding in tort, such as
those for malpractice, misrepresentations, and breach of fiduciary duty, are
perempted. It argues that Louisiana law applies, and under Louisiana law,
claims against accountants are subject to two peremptive periods set forth in
Louisiana Revised Statutes § 9:5604, which states that:
No action for damages against any accountant duly licensed under
the laws of this state, or any firm as defined in R.S. 37:71, whether
based upon tort, or breach of contract, or otherwise, arising out of
an engagement to provide professional accounting service shall be
brought unless filed in a court of competent jurisdiction and proper
venue within one year from the date of the alleged act, omission,
or neglect, or within one year from the date that the alleged act,
omission, or neglect is discovered or should have been discovered;
however, even as to actions filed within one year from the date of
such discovery, in all events such actions shall be filed at the latest
within three years from the date of the alleged act, omission, or
Applicability of Louisiana law aside, this Court is unable to make a
determination regarding the passing of peremption without a factual
determination regarding when the claim arose. Even Kaplan points out that
“Plaintiff’s Complaint fails to point to a specific action or date on which Kaplan
allegedly committed an action or omission which would form the basis of
Plaintiff’s” claims. In addition, it is not clear when Plaintiff should have been
aware of the claim. Kaplan argues that certainly the Plaintiff should have
been on notice of its claim against Kaplan by June 12, 2012 when the National
Futures Association (“NFA”) took emergency action against Level III and
Gwyn. The Trustee points out, however, that nothing in the NFA’s notice
suggests that Kaplan was engaged in any wrongful conduct. Regardless, a
finding of when Plaintiff should have discovered his claim against Kaplan is a
factual determination inappropriate for resolution at this stage. Accordingly,
this Court cannot say that Plaintiff’s claims are perempted by Louisiana’s oneyear peremptive period.
Likewise, this Court does not find that Plaintiff’s claims are perempted
by the three-year period. As Kaplan points out, the Complaint alleges that
Kaplan stopped providing accounting services for the Fund in June of 2012.
The bankruptcy proceeding began on August 2, 2013, and, on October 1, 2013,
the Trustee was given an additional two years within which to bring any claims
that were actionable at the time of the filing of the bankruptcy. 15 Accordingly,
the Trustee’s claims are likewise not perempted on the face of the Complaint
by the three-year period.
Accountant Review Panel
Kaplan next argues that the claims alleging that it breached its duties
of professional care are premature because they have not yet been submitted
See, e.g., 11 U.S.C. § 108; Andres Holding Corp. v. Villaje Del Rio, Ltd., 2011 WL 860529,
at *11 (W.D. Tex. Mar. 8, 2011) (gathering cases); Stanley ex rel. Estate of Hale v. Trinchard,
579 F.3d 515, 519 (5th Cir. 2009) (“Congress drew no distinction among the state law vehicles
that govern time limits for filing suit, whether statutes of limitations or prescription, repose
or peremption. The language of Section 108(a) compels the conclusion that Congress
expressly extended the time for pursuing any action that would otherwise be time-barred
under state law.”).
to a public accountant review panel. Louisiana Revised Statutes § 37:105(a)
[N]o action against a certified public accountant or firm or his
insurer may be commenced in any court before the claimant’s
request for review has been presented to a public accountant
review panel established pursuant to this Part and the panel has
issued a written opinion. Compliance with the requirements of this
Part is not to be deemed optional.
Kaplan argues that this law is procedural and this Court must therefore apply
it to this matter regardless of which state’s substantive law applies. The
Trustee rebuts on two grounds. First, he argues that the law is substantive,
not procedural, and that since Illinois substantive law applies to this dispute,
it is inapplicable here. Second, he argues that even if Louisiana law applies,
he is not required to comply with this statute because Kaplan is licensed in
Illinois, not Louisiana.
At the outset, this Court agrees with the Trustee that the accountant
review panel requirement is a substantive law. 16 As a result, the accountant
review panel requirement applies only if Louisiana substantive law applies to
the Trustee’s claims against Kaplan.
The choice of law for claims of
professional malpractice are determined by Louisiana Civil Code article 3543,
which states that:
Issues pertaining to standards of conduct and safety are governed
by the law of the state in which the conduct that caused the injury
occurred, if the injury occurred in that state or in another state
whose law did not provide for a higher standard of conduct.
See Seoane v. Ortho Pharm., Inc., 472 F. Supp. 468, 471 (E.D. La. 1979), aff’d, 660 F.2d 146
(5th Cir. 1981) (“The federal courts which have considered this question, with one exception,
have concluded that medical malpractice review panel provisions of state laws are
substantive rules of law of the forum which must be applied by a federal court in a diversity
case.”); Thompson v. Ackal, No. 15-02288, 2016 WL 1394352, at *14 (W.D. La. Mar. 9, 2016),
report and recommendation adopted, No. 15-02288, 2016 WL 1391047 (W.D. La. Apr. 6,
In all other cases, those issues are governed by the law of the state
in which the injury occurred, provided that the person whose
conduct caused the injury should have foreseen its occurrence in
The preceding paragraph does not apply to cases in which the
conduct that caused the injury occurred in this state and was
caused by a person who was domiciled in, or had another
significant connection with, this state. These cases are governed
by the law of this state.
The conduct that caused the alleged injury—Kaplan’s malpractice and breach
of professional duties—occurred at its offices in Illinois. The injury was felt by
Level III and its investors in Louisiana. Therefore, the law of Illinois applies
only if the law of Louisiana does not provide for a higher standard of conduct.
“In Illinois, the established standard of care for all professionals is stated as
the use of the same degree of knowledge, skill and ability as an ordinarily
careful professional would exercise under similar circumstances.” 17 Similarly,
in Louisiana accountants are obligated to exercise at least the degree of care,
skill, and diligence that is exercised by prudent practicing accountants in their
locality. 18 Since Louisiana does not require a higher standard of conduct for
accountants than Illinois, Illinois law applies to Plaintiff’s professional
Louisiana’s accountant review panel law is therefore
inapplicable to this case. Plaintiff’s motion is denied with respect to these
Aiding and Abetting
Plaintiff’s Complaint alleges that Kaplan is liable for aiding and abetting
the breaches of fiduciary duty, breaches of partnership agreement, and
Advincula v. United Blood Servs., 678 N.E.2d 1009, 1020 (Ill. 1996).
Gantt v. Boone, Wellford, Clark, Langschmidt & Pemberton, 559 F. Supp. 1219, 1227 (M.D.
La. 1983), aff’d sub nom. Gantt v. Boone, Wellford, Clark, 742 F.2d 1451 (5th Cir. 1984).
conversion of partnership property committed by Level III and Gwyn. Kaplan
argues that there is no cause of action for aiding and abetting under Louisiana
law, and these claims should therefore be dismissed. This Court agrees that
Louisiana does not recognize an independent cause of action for aiding and
abetting; 19 however, Illinois law applies to these claims just as it does to
Plaintiff’s professional malpractice claims. Under Louisiana Civil Code article
3543, Illinois law will apply unless Louisiana law provides for a higher
standard of conduct. Louisiana law does not recognize an independent cause
of action for aiding and abetting. “If Louisiana law does not provide a cause
of action for aiding and abetting breach of fiduciary duty, then the law of the
place of the conduct prescribes a higher standard of conduct and would apply
for that reason.” 20 Accordingly, Illinois law applies to Plaintiff’s aiding and
abetting claims. Illinois law specifically provides for the cause of action of
aiding and abetting. 21 Kaplan’s argument for dismissal of Plaintiff’s aiding
and abetting claims therefore fails.
Securities Exchange Act Claims
In his Complaint, the Trustee alleges that Kaplan has violated § 10 of
the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5.
“Congress enacted § 10(b) to insure honest securities markets and thereby
promote investor confidence.” 22 Section 10(b) makes it unlawful for a person
use or employ, in connection with the purchase or sale of any
security . . . any manipulative or deceptive device or contrivance in
Thomas v. N. 40 Land Dev., Inc., 894 So.2d 1160, 1174 (La. App. 4 Cir. 2005) ) (“Absent a
conspiracy, Louisiana law does not recognize a distinct cause of action for aiding and
20 Babin v. Caddo E. Estates I, Ltd., 517 B.R. 649, 654 (E.D. La. 2014).
21 See Thornwood, Inc. v. Jenner & Block, 799 N.E.2d 756, 767 (Ill. App. 1 Cir. 2003).
22 Chadbourne & Parke LLP v. Troice, 134 S. Ct. 1058, 1075 (2014).
contravention of such rules and regulations as the [U.S. Securities
and Exchange Commission (“SEC”)] may prescribe as necessary or
appropriate in the public interest or for the protection of
The SEC, pursuant to this section, promulgated Rule 10b–5, which 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 the 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. 24
“To state a claim based on conduct violating Rule 10b–5(a) and (c), [a]
plaintiff must allege (1) that the defendant committed a deceptive or
manipulative act, (2) in furtherance of the alleged scheme to defraud, (3) with
scienter, and (4) reliance.” 25 In order to state a claim under Rule 10b–5(b) the
Trustee must allege: (1) a material misrepresentation or omission by the
defendant; (2) scienter; (3) a connection between the misrepresentation or
omission and the purchase or sale of a security; (4) reliance upon the
misrepresentation or omission; (5) economic loss; and (6) loss causation. 26
The Private Securities Litigation Reform Act of 1995 (“PSLRA”), 15
U.S.C § 78u et seq., requires heightened pleading standard for plaintiffs
15 U.S.C. § 78j(b).
17 C.F.R. § 240.10b–5.
25 In re Alstom SA, 406 F. Supp. 2d 433, 474 (S.D.N.Y. 2005); see also In re Enron Corp. Sec.,
Derivative & ERISA Litig., No. H-01-3624, 2006 WL 6892915, at *3 n.8 (S.D. Tex. Dec. 4,
26 Amgen Inc. v. Connecticut Ret. Plans & Trust Funds, 133 S. Ct. 1184, 1207 (2013).
bringing private securities fraud actions. 27 The PSLRA provides two distinct
pleading requirements, both of which must be met in order for a complaint to
survive a motion to dismiss. 28
First, under 15 U.S.C. § 78u–4(b)(1), the
complaint must specify each allegedly misleading statement, why the
statement was misleading, and, if an allegation is made on information and
belief, all facts supporting that belief with particularity. Second, the complaint
must, “with respect to each act or omission alleged to violate this chapter, state
with particularity facts giving rise to a strong inference that the defendant
acted with the required state of mind.” 29
Kaplan argues that Plaintiff cannot succeed in its securities claims
against it because he has failed to allege the misstatements or omissions with
particularity, has failed to allege the requisite scienter, and has failed to allege
reliance. 30 This Court will consider each argument in turn. 31
Kaplan argues that the Complaint fails to point to any specific
misrepresentation or omission or allege which private placement memoranda
contained the statement. The Trustee responds with numerous instances in
the Complaint in which he points out specific misrepresentations made by
Kaplan. For instance, the Complaint alleges that Kaplan misrepresented the
value of the Fund to its investors in monthly statements, performance reports,
SEC v. Blackburn, No. 15-2451, 2015 WL 9459976, at *6 (E.D. La. Dec. 28, 2015).
See Lormand, 565 F.3d at 239; 15 U.S.C. § 78u–4(b)(3)(A).
29 15 U.S.C. § 78u–4(b)(2).
30 The following analysis likewise applies to Kaplan’s argument that Plaintiff has failed to
adequately plead scienter, reliance, or with particularity his claims of misrepresentation or
31 In its reply, Kaplan argues for the first time that Plaintiff’s federal securities claims are
prescribed by 28 U.S.C. § 1658. However, “[i]t is the practice of [the Fifth Circuit] and the
district courts to refuse to consider arguments raised for the first time in reply briefs.”
Gillaspy v. Dall. Indep. Sch. Dist., 278 Fed.Appx. 307, 315 (5th Cir. 2008). Accordingly, this
Court declines to address those arguments.
and financial statements sent in 2010 and 2011. This Court agrees that these
assertions are sufficient to satisfy the heightened pleading standard.
Next Kaplan argues that the Complaint fails to establish the requisite
scienter. A plaintiff may satisfy the heightened scienter pleading requirement
by alleging facts showing a motive to commit fraud and a clear opportunity to
do so, or by identifying circumstances indicating conscious or reckless
behavior, so long as the totality of allegations raises a strong inference of
fraudulent intent. 32 “To adequately plead recklessness as the basis for scienter
as to an auditor, a plaintiff must show ‘conduct that is highly unreasonable,
representing an extreme departure from the standards of ordinary care,’ and
that ‘approximate[s] an actual intent to aid in the fraud being perpetrated by
the audited company.’” 33 “With regard to sufficiently alleging scienter against
auditors, courts have held that in assessing the totality of the circumstances
the following may each contribute in supplying an inference that an auditor
performed a reckless or fraudulent audit: 1) red flags regarding accounting
matters, 2) restated financial statements, 3) an auditor’s failure to obtain
sufficient support for account balances, and 4) an auditor’s failure to follow-up
on known accounting errors.” 34 “The fact that an auditor ignored red flags
constitutes strong evidence of intentional or reckless conduct.” 35 “A ‘red flag’
is a sign consciously disregarded by the auditor that ‘would place a reasonable
Firefighters Pension & Relief Fund of the City of New Orleans v. Bulmahn, No. 13-3935,
2015 WL 7454598, at *9 (E.D. La. Nov. 23, 2015) (Vance, J.) (citing Tuchman v. DSC
Commc’ns Corp., 14 F.3d 1061, 1068 (5th Cir. 1994)).
33 Levy v. Maggiore, 48 F. Supp. 3d 428, 458 (E.D.N.Y. 2014).
34 In re Fleming Companies Inc. Sec. & Derivative Litig., 2004 WL 5278716, at *37 (E.D. Tex.
June 16, 2004).
auditor on notice that the audited company was engaging in wrongdoing to the
detriment of its investors.’” 36
Kaplan alleges that the only possible red flag identified by Plaintiff’s
Complaint is the Fund’s 2010 shift from commodities trading to almost entirely
private investments in light of the December 2009 disclosure statement which
stated that only 0 to 10% of the fund assets would be invested in private
companies. Kaplan points out that the disclosure statement also states that
the 0 to 10 “percentage may be substantially more or less at the discretion of
the Partnership’s Investment Manager.” Kaplan argues that it “cannot be said
to have ‘disregarded’ the ‘red flag’ of Bruce Gwyn moving the [F]und toward a
majority of private investments as such action was authorized” by the
disclosures provided to investors.
Plaintiff’s response, however, points to several other red flags identified
by his Complaint. Namely, the Complaint describes “frequent and detailed
questions relating to problems, inconsistencies, and irregularities” identified
by Kaplan in auditing Level III’s accounting and bank records; Kaplan’s
knowledge that Gywn had an interest in many of the entities in which the Fund
invested and that many of those entities had no assets or performed no real
business; Kaplan’s knowledge that Gwyn regularly used the Fund’s cash for
personal expenses; Gwyn’s inability to furnish sufficient documentation to
explain expenses or answer Kaplan’s questions; and Kaplan’s knowledge that
no side pockets had been established for the investments and that redemption
requests were being met based on the inflated values assigned to the
investments. Plaintiff alleges that these suspicious acts were sufficient to put
Kaplan on notice of Gwyn’s wrongdoing but that Kaplan failed to do anything
to alert investors to these red flags.
Levy, 48 F. Supp. 3d at 459.
Instead, Plaintiff alleges, Kaplan
continued to issue reports even if all of its questions had not been answered.
Plaintiff identifies Kaplan’s motive as its partnership with Defendant Turn
Key. Plaintiff’s allegations, which are outlined in significant detail in the
Complaint, give rise to a strong inference of scienter that is at least as
compelling as any opposing inference that one could draw from the facts
alleged. Even if Kaplan did not intentionally engage in deceptive conduct, the
allegations are sufficient to indicate reckless disregard in reporting false
information to investors. Defendants’ argument that the Trustee failed to meet
the heightened pleading requirements for scienter therefore fails.
Finally, Kaplan argues that the Plaintiff has failed to adequately allege
that investors relied on its misrepresentations or omissions in investing in
This Court disagrees.
As Plaintiff points out, his Complaint
expressly alleges that Kaplan prepared financial reports and statements,
private placement memoranda, and disclosure documents for the benefit of
investors and potential investors and that Kaplan knew that investors would
rely on that information in deciding whether to invest in Level III. These
statements allegedly grossly inflated Level III’s value, causing investors to rely
on them to their detriment.
Accordingly, Kaplan’s arguments seeking the dismissal of Plaintiff’s
claims under the Exchange Act fail.
State Law Securities Claims
Kaplan next argues that Plaintiff’s state securities law claims, under
Louisiana, Florida, Alabama, and Illinois law, fail as a matter of law. Plaintiff
does not oppose the dismissal of his claims under Florida or Illinois law.
Accordingly, this Court will consider only the viability of his claims under
Louisiana and Alabama law.
First, Kaplan argues that it is not a “seller” under the terms of Louisiana
Revised Statutes § 51:712(a)(2), which states that:
It shall be unlawful for any person [t]o offer to sell or to sell a
security by means of any oral or written untrue statement of a
material fact or any omission to state a material fact necessary in
order to make the statements made, in the light of the
circumstances under which they are made, not misleading, the
buyer not knowing of the untruth or omission, if such person in the
exercise of reasonable care could not have known of the untruth or
Both parties rely on Solow v. Heard McElroy & Vestal LLP to support their
position. 37 In Solow, the Louisiana Second Circuit Court of Appeal stated that
“merely participating in the events leading up to the transaction is not enough
to make one a seller.” 38 It goes on to suggest that a defendant may be liable as
a “seller” if its participation in the transaction was a substantial factor in
causing the sale to take place. 39 The court ultimately found that the defendant,
an accounting firm, was not a seller because it had not authorized the
dissemination of its draft audit opinion and its involvement in the transaction
was limited to a review of the sale agreement and due diligence reports. 40 The
court held that: “There is no evidence to support the claim that [the accounting
firm] offered to sell or sold securities or was a substantial factor in the sale . .
. . [The accounting firm] had no contact with [the seller] and was not involved
with the negotiations between [the parties].” 41 The Louisiana Supreme Court,
however, “has not addressed the issue of whether liability under La. R.S.
Solow v. Heard McElroy & Vestal, L.L.P., 7 So. 3d 1269 (La. App. 2 Cir. 2009).
Id. at 1281.
51:712A extends to one who is shown to be a substantial factor in bringing
about the sale of securities.” 42
Kaplan argues that, like the accounting firm in Solow, it was not
involved with the negotiations or sales of interests in Level III and therefore
cannot be said to be a seller. Plaintiff rebuts that Solow indicates that in
considering whether an accounting firm was a substantial factor in a sale, a
court should look to “whether the auditor authorized use of its reports and
statements in public filings and had contact with potential investors.” 43
Plaintiff points to the allegations of its Complaint that Kaplan either provided
its reports to potential investors or knew that they were being provided to
potential investors and that potential and existing investors purchased
interests in Level III in reliance on those statements. This Court agrees that
such allegations are sufficient to state a claim under Louisiana Revised
Statutes § 51:712(a)(2). Indeed, the determination of whether Kaplan was a
“seller” is a finding of fact inappropriate at this stage.
Kaplan next argues that it cannot be liable under Louisiana Revised
Statutes § 51:714(b) because it is not a “control person.” Section 714(b) states
Every person who directly or indirectly controls a person liable
under Subsection A of this Section, every general partner,
executive officer, or director of such person liable under Subsection
A of this Section, every person occupying a similar status or
performing similar functions, and every dealer or salesman who
participates in any material way in the sale is liable jointly and
severally with and to the same extent as the person liable under
Subsection A of this Section unless the person whose liability
arises under this Subsection sustains the burden of proof that he
did not know and in the exercise of reasonable care could not have
known of the existence of the facts by reason of which liability is
Firefighters’ Ret. Sys. v. Citco Grp. Ltd., No. 13-373, 2016 WL 5799298, at *14 (M.D. La.
Sept. 30, 2016).
43 Doc. 53, p.33.
alleged to exist. There is contribution as in the case of contract
among several persons so liable.
For purposes of this statute, “control” is defined as “the possession, direct or
indirect, of the power to direct or cause the direction of the management and
policies of a person, whether through the ownership of voting securities, by
contract, or otherwise.” 44 Kaplan argues that it did not have the power to
direct Level III’s actions, and it therefore cannot be considered a control
Plaintiff argues that his allegations are sufficient to support a claim for
control person liability in light of Heck v. Triche. 45 In Heck, the Fifth Circuit
looked to federal law for instruction on who constitutes a control person. 46
Plaintiff points to its holding that an accountant could be held liable as a
control person when he prepared a prospectus used to solicit investments in
which he omitted the financial condition of the company’s creator or that the
creator could pledge the company’s inventory to an entity with a priority lien. 47
This case is easily distinguishable from the issue here, however. The Fifth
Circuit went on to say that the accountant’s involvement in the sale of the
investments in the company, Antique Investment Group, LLC (“AIG”), “went
far beyond” mere auditing services. 48
The Fifth Circuit noted that the
company’s creator “would not have created AIG, solicited investments, or
pledged the inventory promised to the investors to First Bank without [the
accountant’s] instruction or approval.” 49
No such facts have been alleged
regarding Kaplan’s involvement in the sale of interests in Level III. Heck does
La. Rev. Stat. § 51:702.
Heck v. Triche, 775 F.3d 265 (5th Cir. 2014).
46 Id. at 283.
48 Id. at 285.
not stand for the proposition, as Plaintiff suggests, that merely creating false
or misleading documents regarding the financial situation of a company is
sufficient to create control person liability. Plaintiff has not provided the Court
with any other case to support its argument for control person liability against
Kaplan. Accordingly, Plaintiff’s claims under Louisiana Revised Statutes §
51:714(b) are dismissed. 50
Kaplan next argues that Plaintiff cannot succeed on his claim under
Alabama’s securities law, which states that:
Every person who directly or indirectly controls a person liable
under subsections (a) or (b) of this section, including every partner,
officer, or director of such a person, every person occupying a
similar status or performing similar functions, every employee of
such a person who materially aids in the conduct giving rise to the
liability, and every dealer or agent who materially aids in such
conduct is also liable jointly and severally with and to the same
extent as the person liable under subsection (a) or (b), unless he is
able to sustain the burden of proof that he did not know, and in
exercise of reasonable care could not have known, of the existence
of the facts by reason of which the liability is alleged to exist. 51
Kaplan argues that the Complaint does not support a claim that it materially
aided in selling interests in Level III.
The Alabama Supreme Court has
established that the phrase “materially aids” expands “liability to groups of
persons beyond the [actual] seller of the security.” 52 It also held that “the test
for ‘materially aiding’ in the sale of securities is less stringent than whether
Kaplan also argues that, to the extent that Plaintiff is asserting a claim under Louisiana
Revised Statutes § 51:712(d), no cause of action for civil liability under that statute exists.
Plaintiff has confirmed that it is not pursing a claim under that statute.
51 Ala. Code § 8-6-19.
52 Foster v. Jesup and Lamont Securities Co., Inc., 482 So.2d 1201, 1206 (Ala.1986).
the entity was a ‘substantial factor’ in the sale of such securities.” 53 This Court
has already held that Plaintiff’s allegations are sufficient to state a claim under
a substantial factor test. Accordingly, it likewise holds that the allegations of
the Complaint are sufficient to state a claim under Alabama’s more lenient
Civil Conspiracy Claims
Kaplan argues that Plaintiff cannot succeed on his civil conspiracy
claims because he has not adequately plead an underlying tort or wrong.
However, this Court has previously declined to dismiss Plaintiff’s claims of
professional malpractice and breach of contract. Accordingly, Plaintiff’s claim
of civil conspiracy is properly supported by those underlying claims.
Breach of Fiduciary Duty
Finally, Kaplan argues that Plaintiff’s breach of fiduciary duty claim
should fail because the law does not recognize a fiduciary relationship between
an auditor and its client. This Court has already held that Illinois law applies
to claims involving Kaplan’s standard of conduct pursuant to Louisiana Civil
Code article 3543 unless the law of Louisiana provides for a higher standard
of conduct. The parties agree that Louisiana law does not recognize a fiduciary
duty between an accountant and its client and therefore does not provide for a
higher standard of conduct. Therefore, Illinois law applies to Plaintiff’s breach
of fiduciary claim.
Illinois law recognizes a fiduciary duty between an auditor and his client
under some circumstances. While an auditor-client relationship typically does
not establish a fiduciary duty, “fiduciary duties are sometimes imposed on an
San Francisco Residence Club, Inc. v. Park Tower, LLC, No. 5:08-CV-1423-AKK, 2012 WL
8169890, at *7 (N.D. Ala. Jan. 12, 2012) (citing Foster, 482 So.2d 1201).
ad hoc basis.” 54 “If a person solicits another to trust him in matters in which
he represents himself to be expert as well as trustworthy and the other is not
expert and accepts the offer and reposes complete trust in him, a fiduciary
relation is established.” 55
In McMahan v. Deutsche Bank AG, on which
Plaintiff relies, the Northern District of Illinois held that the plaintiff had
alleged a claim for breach of fiduciary duty against his accounting firm when
“[t]he fiduciary relationship was based on Plaintiffs’ long-term relationship
with [his CPA], and the fact that [the CPA] advised Plaintiffs to participate in,
and vouched for the legitimacy of, a complex tax-shelter scheme.” 56 Plaintiff
argues that, here too, Kaplan’s relationship with Level III was more than that
of an annual auditor. He points out that Kaplan was continuously involved
with Level III through “monthly accounting and preparation of partner capital
reports and fund performance reports.” This Court holds that such allegations
are insufficient to establish a fiduciary relationship between Kaplan and Level
III. Plaintiff does not make any allegations supporting a finding that Level III
put its trust in Kaplan to advise it on its financial decisions. Indeed, there are
no allegations that Kaplan advised Level III in any capacity. Accordingly,
Plaintiff’s breach of fiduciary duty claim fails.
For the foregoing reasons, Kaplan’s Motion is GRANTED IN PART.
Plaintiff’s claims under Louisiana Revised Statutes § 51:714(b) and for breach
of fiduciary duty are DISMISSED WITHOUT PREJUDICE.
Plaintiff’s claims under Florida and Illinois securities law are DISMISSED
Burdett v. Miller, 957 F.2d 1375, 1381 (7th Cir. 1992), as amended on denial of reh’g (May
56 McMahan v. Deutsche Bank AG, 938 F. Supp. 2d 795, 805 (N.D. Ill. 2013).
WITH PREJUDICE. Plaintiff shall amend his Complaint within 20 days of
this Order to the extent that he can remedy the deficiencies identified herein.
New Orleans, Louisiana this 13th day of February, 2017.
JANE TRICHE MILAZZO
UNITED STATES DISTRICT JUDGE
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