Broyles v. Cantor Fitzgerald & Co. et al

Filing 274

RULING granting #193 Motion to Dismiss Plaintiffs' Fifth Amended Complaint. Signed by Judge James J. Brady on 12/8/2014. (NLT)

UNITED STATES DISTRICT COURT
MIDDLE DISTRICT OF LOUISIANA
JOSEPH N. BROYLES, ET AL.
CIVIL ACTION
VERSUS
NO. 10-854-JJB-SCR
CANTOR FITZGERALD & CO., ET AL.
THIS APPLIES TO CIVIL ACTION NO. 3:10-CV-00854-JJB-SCR
RULING ON MOTION TO DISMISS
Before this Court is a Motion to Dismiss Plaintiff-Investors’ Fifth Amended Complaint.
(Doc. 184). Plaintiff-Investors include twelve individuals and three retirement systems. The
motion was filed by three of the five Defendants, Stone & Youngberg LLC, Stifel Financial
Corporation, and Stifel, Nicolaus & Company, Inc. (collectively “S&Y Parties”). (Doc. 193).
This Court considered the motion and all responsive briefs.
FACTUAL ALLEGATIONS
Commonwealth Advisers, Inc. (“Commonwealth”) and its CEO Walter Morales
(“Morales”) solicited Plaintiffs to invest in one or more “pooled asset” hedge funds that were
created and controlled by Commonwealth. (Doc. 59 at 10). Plaintiffs collectively invested
millions to acquire a membership interest in these funds, which were supposed to each have
individual investment strategies. Plaintiffs allege that all the funds had essentially the same
investment strategy of investing in collateralized debt obligations (CDO) (referred to as
“Collybus notes”). (Doc. 59 at 11). Plaintiffs allege that S&Y Parties acted as major participants
in Morales’ scheme by providing Morales with a continuing stream of inflated price quotes for
bonds and acting to facilitate the transfer of certain devalued bonds from accounts maintained by
certain customers of Morales to the CDO. (Doc. 184 at 4). Plaintiff alleges that S&Y Parties

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warehoused bonds that were going to be contributed to the CDO and conducted transactions at
inflated values between Commonwealth and Commonwealth’s clients. (Doc. 184 at 4). Once the
CDO transaction was complete, Morales engaged in several other fraudulent transactions, with
the assistance of S&Y Parties, intending to overstate the value of certain bonds and securities.
(Doc. 184 at 5). The effect of Morales overstating the performance of the funds was two-fold: (1)
investors would not try to redeem their seemingly successful investments and (2) investors
would be encouraged to make additional investments based upon exaggerated reported returns.
(Doc. 184 at 5). S&Y Parties are alleged to be knowing-participants because Morales’ CDO
agreed to purchase the distressed mortgage-backed securities bonds of S&Y Parties at grossly
inflated prices. This purchase allowed S&Y Parties to avoid millions in losses and enjoy
handsome commissions on such fraudulent transactions. (Doc. 184 at 5).
Plaintiff, Joseph Broyles, filed two suits, which this Court has consolidated. The first, No.
10-854, filed on September 16, 2010, and removed to this Court, contains class allegations
against Commonwealth Advisors, Inc., Walter A. Morales, and S&Y Parties. Plaintiffs allege
that Plaintiff-Investors were harmed by misrepresentations and breaches of fiduciary obligations
related to decisions made by Morales and Commonwealth about their investment accounts. The
second action, No. 10-857, was filed in the name of the Funds on November 8, 2010. The motion
to dismiss at issue herein is with regard to the Plaintiff-Investor suit, No. 10-854.
STANDARD OF REVIEW
S&Y Parties filed the motion to dismiss pursuant to Federal Rules of Civil Procedure
12(b)(6) and 9(b). S&Y raised two principal arguments in support of its motion. First, S&Y
Parties assert that Plaintiffs lack standing to bring a direct suit against S&Y Parties because (1)
the injury they claim is one that must have affected the CA Funds as a whole, (2) the Funds have

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asserted the same claims against the same Defendants, and (3) these claims asserted against S&Y
Parties are derivative, not direct. (Doc. 193 at 2-3). Second, S&Y Parties assert that the Fifth
Amended Complaint (doc. 184) does not assert a claim against S&Y Parties and fails to meet the
heightened pleading requirements of Federal Rule of Civil Procedure 9(b), which governs the
pleading standards for claims based on fraud.
“To survive a motion to dismiss, a complaint must contain sufficient factual matter,
accepted as true, to state a claim for relief that is plausible on its face.” Ashcroft v. Iqbal, 556
U.S. 662, 678 (2009) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007)). “In
reviewing a Rule 12(b)(6) motion, the Court must accept all well-pleaded facts in the complaint
as true and view them in the light most favorable to the plaintiff.” Davis v. Bellsouth Telecomm.,
2012 WL 2064699, at *1 (M.D. La. June 7, 2012) (citing Baker v. Putnal, 75 F.3d 190, 196 (5th
Cir. 1996)). All claims of fraud must satisfy the heightened pleading standard of Federal Rule of
Civil Procedure 9(b) by “stat[ing] with particularity the circumstances constituting fraud or
mistake.” Fed. R. Civ. Proc. 9(b).
The movant generally bears the burden in a motion to dismiss. However, the burden rests
with the party asserting standing to clearly allege facts demonstrating that is a “proper party to
invoke judicial resolution of the dispute.” Krys v. Sugrue (In re Refco Inc. Securities Litigation)
No. 07-mdl-1902, 2010 WL 1375946, *6, report and recommendation, (S.D.N.Y. Feb. 3, 2010),
entered 2010 WL 1404198 (S.D.N.Y. Mar. 31, 2010) (Rakoff, J.))
ANALYSIS
Defendants argue that Plaintiffs lack constitutional standing, the requirements of which
are (1) an “injury in fact” that is “concrete and particularized” and “actual or imminent,” (2) a
“causal connection between the injury and the conduct complained of—the injury has to be fairly

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traceable to the challenged action of the defendant, and not the result of the independent action
of some third party not before the court,” and (3) the injury must be “likely” as opposed to
merely “speculative.” Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-61 (1992). The
particularized injury is one that “affect[s] the plaintiff in a personal and individual way.” Arizona
Christian School Tuition Org. v. Winn, 131 S. Ct. 1436, 1442 (2011).
Both parties agree that whether the claims alleged by Plaintiffs against Defendants are
direct or derivative affects whether Plaintiffs have standing. Defendants cite to this Court’s prior
ruling on a prior defendant’s motion to dismiss. Broyles v. Cantor Fitzgerald & Co., 2013 WL
1681150. The prior ruling was in response to the motion to dismiss of a prior-defendant, Cantor,
as filed to dismiss the claims of these same Investor-Plaintiffs. Id. at 1, n. 1. Despite the
complaint being filed by the Investor-Plaintiffs, this Court found that “the Funds are Delaware
limited liability companies and Cayman Island companies and…Delaware law and Cayman law
govern the issue of whether the claims asserted are direct or derivative.” Id. at *6, citing Smith v.
Waste Management, Inc., 407 F.3d 381, 384 n. 1 (5th Cir. 2005). The Plaintiffs cite to the same
Delaware approach for determining if a claim is derivative or direct that this Court relied on in
its prior ruling. The Delaware approach instructed that “a court should look to the nature of the
wrong and to whom the relief should go.” Id. at 6, citing Tooley v. Donaldson, Lufkin & Jenrette,
Inc., 845 A.2d 1031, 1033 (Del. 2004). Further, this Court found as a requirement that “the
injury must be direct to the Plaintiffs and that the injury must be independent of any injury to
the corporation.” Id. at *7 (emphasis added).
Defendants argue that the same types of claims alleged by Plaintiffs in the complaint are
routinely found by courts to belong to the corporation, not the investors. (Doc. 193-1 at 7).
Defendants urge that Plaintiffs do not have standing “because their injury is not personal and

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individual.” Plaintiffs in response do not contest this standard, but disagree about the claims
Plaintiffs have alleged against Defendants. Plaintiffs argue that they were injured “when they
made investment decisions in reliance on these fraudulent values,” valuations allegedly made
possible because of fraud and conspiracy by S&Y Parties, Morales, and Commonwealth. (Doc.
223 at 4). Plaintiffs urge that they are the “real victims of Morales and Commonwealth’s
valuation fraud.” (Doc. 223 at 11). Plaintiffs’ additional injury allegedly occurred when they
made investment decisions in reliance on these fraudulent values. (Doc. 223 at 4). Plaintiffs
argue that their injury is an additional ground for damages independent of injury to CA Funds,
who “arguably benefited from Defendants’ valuation fraud.” (Doc. 223 at 5).
Defendants cite to a Louisiana Appeals Court ruling finding fraud claims brought by
shareholders, comparable to those brought here, were derivative. Crochet v. Cisco Systems, Inc.,
847 So. 2d 252, 256 (La. App. 3d Cir. 2003), writ denied, 855 So. 2d 765 (La. 2003). The
plaintiffs in Crochet brought an action against certain lenders for providing excessive loans and
pressuring the company to use loans for the purchase of unfavorable assets, all of which caused a
merger transaction to fail. Id. at 254. The court found that the shareholders lacked a “personal
right to sue to recover for acts committed against, or causing damage to the corporation.” Id. at
255-56. Defendants continue, in a footnote, to explore other similarities between InvestorPlaintiffs and the Crochet plaintiffs: The Louisiana appeals court emphasized that the plaintiffs
did not have “any direct dealings with the [] defendants,” which Defendants urge is also the case
here. Investor-Plaintiffs never dealt directly with S&Y Parties, and make no allegation stating
otherwise.
Plaintiff urges that they, as Investor-Plaintiffs, have a distinct and direct injury. (Doc. 223
at 5). Plaintiffs allege that S&Y Parties fraudulently overstated the values of certain assets, which

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they allege caused a direct injury to Investor-Plaintiffs, not the Funds. (Doc. 223 at 6-7).
Plaintiffs rely on an opinion applying New York law where the fraud was also alleged to be
valuation fraud. The court for the Southern District of New York found the “principal wrong
appears to have been a valuation fraud that injured plaintiffs, not the Funds.” Fraternity Fund
Ltd. V. Beacon Hill Asset Mgmt., LLC, 376 F.Supp.2d 385, 409 (S.D.N.Y. 2005). Plaintiffs urge
that because the claims of fraud against S&Y Parties do include allegations of overstating the
asset values, that Beacon Hill does support Plaintiffs’ argument that the injuries alleged here are
direct, not derivative.
Finally, Defendants’ reply argues that Plaintiffs have abandoned their argument for
compensatory damages based on Plaintiffs’ opposition that focuses of rescissionary damages.
(Doc. 247 at 5). Defendants interpret this as a concession on behalf of Plaintiffs that
compensatory damages sought by Investors would create a risk of duplicative recovery if the CA
Funds too recovered compensatory damages. If Plaintiffs do intend to pursue only claims for
rescissionary damages against S&Y Parties, Defendants urge that such recovery is not possible
against S&Y, who acted as an alleged third party to the fraudulent transactions at issue. (Doc.
247 at 6). In fact, under Louisiana law, the right to rescind a purchase or force rescission due to
fraud extends only against the other party to the transaction, here that would not include S&Y
Parties. (Doc. 247 at 6, citing La. Civ. Code art. 1958 cmt (c)). Further, Defendants argue that
the “damages” Plaintiffs, if successful, would be entitled to under the Louisiana Civil Code are
the same that the CA Funds would be entitled to against S&Y Parties. Reiterating the argument
made in the Defendants’ original motion to dismiss, they conclude that double recovery is
inevitable if both the Investor-Plaintiffs and Fund-Plaintiffs proceed. (Doc. 247 at 6).

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Investor-Plaintiffs attempt to allege an injury separate and distinct from that allegedly
imposed on the Fund-Plaintiffs. Investors point to only their reliance on valuation fraud allegedly
committed by S&Y Parties. However, fraud is one of the many claims alleged by Fund-Plaintiffs
against S&Y Parties in the consolidated action. Plaintiffs fail to point to distinct injury that
would not risk duplicative recovery if both sets of Plaintiffs succeeded with their claims.
Defendants have sufficiently demonstrated a risk of double recovery, another principle that the
standing requirement is meant to avoid. Therefore, the Investor-Plaintiffs have failed to satisfy
their burden to prove that they have standing to sue the Defendants.
CONCLUSION
This Court has considered the Motion to Dismiss filed by S&Y Parties (doc. 193),
Investor-Plaintiffs’ Opposition (doc. 223), and the Reply filed by S&Y Parties. This Court finds
Investor-Plaintiffs have failed to prove that they possess standing to sue the S&Y Parties when
these same claims are asserted against the Fund-Plaintiffs.
Therefore, the Motion to Dismiss the Investor-Plaintiffs’ claims because of a lack of
standing is GRANTED.

Signed in Baton Rouge, Louisiana, on December 8, 2014.

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JUDGE JAMES J. BRADY
UNITED STATES DISTRICT COURT
MIDDLE DISTRICT OF LOUISIANA

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