THE PRUDENTIAL INSURANCE COMPANY OF AMERICA et al v. GOLDMAN, SACHS & COMPANY et al
Filing
32
OPINION fld. Signed by Judge Susan D. Wigenton on 4/9/13. (sr, )
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW JERSEY
THE PRUDENTIAL INSURANCE
COMPANY OF AMERICA; PARK PLACE
COMMERCE INVESTMENTS, LLC;
COMMERCE STREET INVESTMENTS,
LLC; PRU ALPHA FIXED INCOME
OPPORTUNITY MASTER FUND I, L.P.;
PRUDENTIAL TRUST COMPANY; and
PRUDENTIAL INVESTMENT
PORTFOLIOS 2,
Civil Action No. 12-6590
(SDW)(MCA)
OPINION
April 9, 2013
Plaintiffs,
v.
GOLDMAN, SACHS & COMPANY;
GOLDMAN SACHS MORTGAGE
COMPANY; and GS MORTGAGE
SECURITIES CORPORATION,
Defendants.
WIGENTON, District Judge.
Before the Court is Defendants Goldman, Sachs & Company; Goldman Sachs Mortgage
Company; and GS Mortgage Securities Corporation’s (collectively “Defendants”) Motion to
Dismiss the First Amended Complaint (“Motion to Dismiss”) of The Prudential Insurance
Company of America; Park Place Commerce Investments, LLC; Commerce Street Investments,
LLC; Pru Alpha Fixed Income Opportunity Master Fund I, L.P.; Prudential Trust Company; and
Prudential Investment Portfolios 2 (collectively “Plaintiffs”) pursuant to Federal Rules of Civil
Procedure 9(b) and 12(b)(6).
1
The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1332. Venue is
proper under 28 U.S.C. § 1391. This Court, having considered the parties’ submissions, decides
this matter without oral argument pursuant to Federal Rule of Civil Procedure 78. For the
reasons stated below, Defendants’ Motion to Dismiss is DENIED.
FACTUAL HISTORY
Parties
Plaintiff Prudential Insurance (“Prudential”) is an insurance company headquartered in
New Jersey. (Am. Compl. ¶ 13.) The remaining Plaintiffs—Park Place Commerce Investments,
LLC, Commerce Street Investments, LLC, Pru Alpha Fixed Income Opportunity Master Fund I,
L.P., Prudential Trust Company, and Prudential Investment Portfolios 2—are Prudential-related
entities. (Am. Compl. ¶¶ 14-18.) For the purposes of this motion, Prudential and its related
entities will be collectively referred to as “Plaintiffs.” Plaintiffs “managed an extensive portfolio
of investment assets” and were significantly involved in the mortgage market. (Defs. Br. 5.) As
of September 2007, Plaintiffs held approximately $13.5 billion in residential mortgage-backed
securities (“RMBS”) and $241.1 billion in total investments. (Defs. Br. 5.)
Defendant Goldman Sachs & Company (“Goldman”) is a New York-based investment
firm that was extensively involved in the mortgage market from 2004 to 2008. (Am. Compl. ¶
22.)
The remaining Defendants—Goldman Sachs Mortgage Company and GS Mortgage
Securities Corporation—are Goldman-related entities. (Am. Compl. ¶¶ 20-24.) For the purposes
of this motion, Goldman and its related entities will be collectively referred to as “Defendants.”
Defendants engaged in buying and pooling together mortgage loans, underwriting securities, and
selling securities to Plaintiffs and other investors. (Am. Compl. ¶¶ 20-25.) In 2006 and 2007,
2
Defendants “created and underwrote 93 RMBS and 27 mortgage-related [collateralized debt
obligations (“CDO”)] securitizations, totaling approximately $100 billion.” (Am. Compl. ¶ 20.)
Mortgage Securitization Background
Mortgage securitization is a multi-step process that involves several players.
(Am.
Compl. ¶¶ 32-33.) First, mortgage loans are created by “originators.” (Am. Compl. ¶ 33.)
These loans are then pooled into groups by “sponsors”—usually Wall Street investment banks.
(Am. Compl. ¶ 33.) Sponsors then transfer the pooled loans to “depositors”—usually specialpurpose affiliates of the sponsors that receive and pass on the rights to the pooled loans. (Am.
Compl. ¶ 34.) Depositors transfer the acquired pooled loans to an issuing trust. (Am. Compl. ¶
35.) The pooled loans in the issuing trust are securitized—a process by which “the rights to the
cash-flows from the pool can be sold to investors . . . [and] structured such that the risk of loss is
divided among different levels of investment, or ‘tranches.’” (Am. Compl. ¶ 35.) After the
tranches are established, the securities are passed back from the issuing trust to the depositor.
(Am Compl. ¶ 36.) Underwriters then purchase the securities from the depositor and offer and
sell the securities to investors. (Am. Compl. ¶ 36.)
In the process of selling securities, underwriters inform investors of the loans in the pools
through “offering materials.” (Am. Compl. ¶ 37.) The offering materials include information
regarding the credit quality of the loans based on loan files created by the originators. (Am.
Compl. ¶ 39.) Investors rely heavily on information in the offering materials in determining
whether to purchase the securities, especially where the investors do not have access to the
underlying loan files. (Am. Compl. ¶¶ 40-41.)
All of the players involved in the mortgage loan securitization process—the originators,
sponsors, depositors, and underwriters—earn fees for their services. (Am. Compl. ¶¶ 51-52.)
3
Unlike the traditional model for mortgage loans, with mortgage loan securitization, “originators
sell residential mortgages and transfer credit risk to investors through the issuance and sale of
RMBS” rather than holding the loans until maturity. (Am. Compl. ¶ 44.)
Plaintiffs’ Substantive Allegations
Defendants were involved in the mortgage loan market in many capacities. Defendants
played the role of the sponsor, depositor, and underwriter of the RMBS, and purchased loans
from other originators. (Am. Compl. ¶ 57.) Between February 11, 2004 and December 17,
2008, Plaintiffs purchased more than $375 million worth of RMBS from Defendants across
sixteen different securitizations. (Am. Compl. ¶ 10.) The materials used by Defendants to solicit
the purchases—the “RMBS Offering Materials”—included, among other things, information
regarding the loan underwriting guidelines, appraisal standards and procedures, and information
verification processes. (See Am. Compl. ¶ 2.)
Plaintiffs allege that “[t]he [RMBS] Offering Materials, relied on by Prudential, did not
reflect what Goldman Sachs knew regarding the true characteristics of Prudential’s investments.”
(Am. Compl. ¶ 59.) Specifically, Plaintiffs allege that the RMBS Offering Materials contained
several material misrepresentations regarding underwriting standards and practices, due
diligence, owner-occupancy, appraisal processes, loan-to-value ratios, assignments to the trusts,
credit ratings, underwriting exceptions, and degree of risk. (Am. Compl. ¶¶ 53-58, 76-106.)
Plaintiffs provide support for each of the alleged misrepresentations by way of analyses,
statistical information, reports, and examples of false or misleading statements. 1 (See Am.
Compl. ¶¶ 43-157.)
1
For instance, Plaintiffs conducted their own loan-level analysis of true owner-occupancy rates on mortgage loans
underlying the certificates issued by Defendants. (Am. Compl. ¶¶ 112-21.) Plaintiffs’ analysis allegedly
demonstrated that the certificates failed multiple tests and a much higher percentage of borrowers did not occupy the
4
Plaintiffs further claim that because Defendants were in a unique position to access the
underlying loan information and the originators’ practices, Defendants must have known that the
RMBS Offering Materials contained false and misleading statements. (Am. Compl. ¶¶ 300-15.)
Additionally, Plaintiffs allege that third-party due diligence confirms that Defendants were
routinely made aware of problems with the underlying mortgage loans. (Am. Compl. ¶¶ 32560.)
Plaintiffs assert that a substantial part of their decision to purchase the RMBS from
Defendants was because Defendants “acted as the sponsor, depositor and underwriter of the
RMBS.” (Am. Compl. ¶ 57.) As Plaintiffs were not given access to the underlying loan files,
they relied significantly on Defendants’ representations and assurances regarding the securities
and loans. (Am. Compl. ¶¶ 40-41, 57-75, 424-432.) Plaintiffs allege that they suffered damages
based on their detrimental reliance on these misrepresentations. (Am. Compl. ¶¶ 437-40.)
Specifically, Plaintiffs allege that “[b]ut for the misrepresentations and omissions in the Offering
Materials, Prudential would not have purchased or acquired the Certificates that it ultimately did,
because those representations and omissions were material to its decision to acquire the
Certificates.” (Am. Compl. ¶ 438.) Plaintiffs now seek rescission or a damages award. (Am.
Compl. ¶ 444.)
PROCEDURAL HISTORY
On October 16, 2012, pursuant to 28 U.S.C. §§ 1441, 1446, and 1452, the instant case
was removed from the Superior Court of New Jersey, Law Division, Essex County, to the United
States District Court for the District of New Jersey. On October 26, 2012, Plaintiffs filed an
Amended Complaint alleging five counts: (1) common law fraud; (2) aiding and abetting fraud,
mortgaged properties. (Am. Compl. ¶¶ 112-21.) Accordingly, Plaintiffs claim that the owner-occupancy statistics
were false and misleading. (Am. Compl. ¶¶ 112-21.)
5
(3) equitable fraud; (4) negligent misrepresentation; and (5) violations of New Jersey
Racketeering Influenced and Corrupt Organizations (“RICO”) statute. On December 10, 2012
Defendants moved to dismiss the Amended Complaint.
LEGAL STANDARD
Motion to Dismiss
The adequacy of pleadings is governed by Fed. R. Civ. P. 8(a)(2), which requires that a
complaint allege “a short and plain statement of the claim showing that the pleader is entitled to
relief.” This Rule “requires more than labels and conclusions, and a formulaic recitation of the
elements of a cause of action will not do. Factual allegations must be enough to raise a right to
relief above the speculative level.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)
(internal citations omitted); see also Phillips v. Cnty. of Allegheny, 515 F.3d 224, 231 (3d Cir.
2008) (stating that Rule 8 “requires a ‘showing’ rather than a blanket assertion of an entitlement
to relief”).
In considering a Motion to Dismiss under Fed. R. Civ. P. 12(b)(6), the Court must
“‘accept all factual allegations as true, construe the complaint in the light most favorable to the
plaintiff, and determine whether, under any reasonable reading of the complaint, the plaintiff
may be entitled to relief.”’ Phillips, 515 F.3d at 231 (quoting Pinker v. Roche Holdings Ltd.,
292 F.3d 361, 374 n.7 (3d Cir. 2002)). However, “the tenet that a court must accept as true all of
the allegations contained in a complaint is inapplicable to legal conclusions. Threadbare recitals
of the elements of a cause of action, supported by mere conclusory statements, do not suffice.”
Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009) (citing Twombly, 550 U.S. at 555). If the “wellpleaded facts do not permit the court to infer more than the mere possibility of misconduct,” the
6
complaint should be dismissed for failing to “show[ ] that the pleader is entitled to relief” as
required by Rule 8(a)(2). Id. at 1950.
According to the Supreme Court in Twombly, “[w]hile a complaint attacked by a Rule
12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiff’s obligation to
provide the ‘grounds’ of his[/her] ‘entitle[ment] to relief’ requires more than labels and
conclusions, and a formulaic recitation of the elements of a cause of action will not do.” 550
U.S. at 555 (internal citations omitted). The Third Circuit summarized the Twombly pleading
standard as follows: “‘stating . . . a claim requires a complaint with enough factual matter (taken
as true) to suggest’ the required element.” Phillips, 515 F.3d at 234 (quoting Twombly, 550 U.S.
at 556).
In Fowler v. UPMC Shadyside, the Third Circuit directed district courts to conduct a twopart analysis. 578 F.3d 203, 210 (3d Cir. 2009). First, the court must separate the factual
elements from the legal conclusions. Id. The court “must accept all of the complaint’s wellpleaded facts as true, but may disregard any legal conclusions.” Id. at 210-11. Second, the court
must determine if “the facts alleged in the complaint are sufficient to show that the plaintiff has a
‘plausible claim for relief.’” Id. (quoting Iqbal, 566 U.S. at 679). “In other words, a complaint
must do more than allege the plaintiff’s entitlement to relief. A complaint has to ‘show’ such an
entitlement with its facts.” Id. (citing Phillips, 515 F.3d at 234-35.)
Heightened Pleading Standard under Fed. R. Civ. P. 9(b) for Fraud Claims
Fed. R. Civ. P. 9(b) requires that “[i]n alleging fraud or mistake, a party must state with
particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and
other conditions of a person’s mind may be alleged generally.” Fed. R. Civ. P. 9(b). Plaintiffs
“alleging fraud must state the circumstances of the alleged fraud[ulent act] with sufficient
7
particularity to place the defendant on notice of the ‘precise misconduct with which [it is]
charged.’” Park v. M&T Bank Corp., No. 09-cv-02921, 2010 WL 1032649, at *5 (D.N.J. Mar.
16, 2010) (citing Lum v. Bank of America, 361 F.3d 217, 223-24 (3d Cir. 2004)). Plaintiffs can
satisfy this standard by alleging dates, times, places and other facts with precision. Park, 2010
WL 1032649, at *5.
DISCUSSION
I.
Choice-of-Law Determination
As a preliminary matter, the parties dispute which state law applies to all of the claims at
issue. A federal court sitting in diversity jurisdiction must apply the forum state’s choice-of-law
rules. Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496-97 (1941); Gen. Star Nat’l Ins.
Co. v. Liberty Mutual Ins. Co., 960 F.2d 377, 379 (3d Cir. 1992). New Jersey courts apply the
two-pronged “most significant relationship” test of the Restatement (Second) of Conflict of
Laws. P.V. v. Camp Jaycee, 197 N.J. 132, 142-43 (2008).
The first prong of the analysis requires courts to examine the substance of the potentially
applicable laws to determine if an actual conflict exists. Camp Jaycee, 197 N.J. at 143-44 (citing
Lebegern v. Forman, 471 F.3d 424, 430 (3d Cir. 2006)). If there is no actual conflict, the
analysis ends and the law of the forum state applies. See In re Ford Motor Co., 110 F.3d 954,
965 (3d Cir. 1997); Rowe v. Hoffman–La Roche, Inc., 189 N.J. 615, 621 (2007). If a conflict
does exist, the court must then determine which jurisdiction has the “most significant
relationship” to the claim. Camp Jaycee, 197 N.J. at 136. This requires the court to weigh the
factors enumerated in the Restatement sections corresponding to a plaintiff's cause of action.
Arcand v. Brother Int’l Corp., 673 F. Supp. 2d 282, 293 (D.N.J. 2009)
8
Fraud Claims
Plaintiffs’ common law claims—common law fraud, aiding and abetting fraud, equitable
fraud, and negligent misrepresentation—all rely on state law. Defendants argue that a conflict of
law exists between New York and New Jersey—the potentially applicable state laws—with
respect to the statute of limitations for common law claims. (Defs. Br. 11.) Restatement § 148
applies specifically to fraud claims and identifies factors that courts should consider when
making choice-of-law determinations. See Restatement § 148(2). 2 The factors identified in
Restatement § 145 apply broadly to tort claims and are also considered in fraud cases. 3
Defendants argue that New York law should apply because Defendants are New Yorkbased entities, Defendants’ materials were drafted in and disseminated from New York, and that
Plaintiffs failed to identify an act by Defendants outside of New York. (Defs. Br. 11.) On the
2
Restatement § 148(2) states, in pertinent part:
When the plaintiff’s action in reliance took place in whole or in part in a state other than that
where the false representations were made, the forum will consider such of the following contacts,
among others, as may be present in the particular case in determining the state which, with respect
to the particular issue, has the most significant relationship to the occurrence and the parties:
(a) the place, or places, where the plaintiff acted in reliance upon the defendant’s
representations,
(b) the place where the plaintiff received the representations,
(c) the place where the defendant made the representations,
(d) the domicil[e], residence, nationality, place of incorporation and place of business of the
parties,
(e) the place where a tangible thing which is the subject of the transaction between the parties
was situated at the time, and
(f) the place where the plaintiff is to render performance under a contract which he has been
induced to enter by the false representations of the defendant.
Restatement (Second) of Conflict of Laws § 148.
3
Restatement § 145 states:
(1) The rights and liabilities of the parties with respect to an issue in tort are determined by the local law of
the state which, with respect to that issue, has the most significant relationship to the occurrence and the
parties under the principles stated in § 6.
(2) Contacts to be taken into account in applying the principles of § 6 to determine the law applicable to an
issue include:
(a) the place where the injury occurred,
(b) the place where the conduct causing the injury occurred,
(c) the domicil[e], residence, nationality, place of incorporation and place of business of the parties,
and
(d) the place where the relationship, if any, between the parties is centered.
These contacts are to be evaluated according to their relative importance with respect to the particular issue.
Restatement (Second) of Conflict of Laws § 145.
9
other hand, Plaintiffs argue that New Jersey law should apply because Plaintiffs received
Defendants’ materials in New Jersey, relied on Defendants’ representations in New Jersey, and
incurred losses in New Jersey. (Pls. Opp. 3.)
This Court finds that determining a choice of law at this stage is premature regarding
Plaintiffs’ fraud-based claims. 4 This Court does not have sufficient facts to thoroughly analyze
the various considerations required to adequately address a choice-of-law determination. See
Arcand, 673 F. Supp. 2d at 295-96 (finding that choice-of-law analysis could not be undertaken
based on the record before the court, but recognizing that it may be appropriate to determine
choice of law on a motion to dismiss in other cases); Harper v. LG Electronics USA, Inc., 595 F.
Supp. 2d 486, 490 (D.N.J. 2009) (“The Court is unable to make the fact-intensive choice-of-law
determination on the record before it. As the New Jersey Supreme Court has noted, [choice-oflaw] analysis must be undertaken on an issue-by-issue basis.”) In order to appropriately weigh
each state’s contacts in the context of this case, this Court will benefit from acquiring further
details regarding—for instance—where the alleged misrepresentations were made, where the
alleged misrepresentations were relied on, Defendants’ actions outside New York, Plaintiffs’
actions outside New Jersey, and locations of meetings and/or transactions among the parties.
Thus, this Court will defer its choice-of-law decision until the parties present a full factual
record. Accordingly, this Court will also defer a determination regarding Defendants’ statute of
limitations arguments until more facts are ascertained.
For the purposes of this motion, this Court will apply New Jersey law to Plaintiffs’
common law claims. See Snyder v. Farnam Companies, Inc., 792 F. Supp. 2d 712, 721 (D.N.J.
2011) (after determining that a choice-of-law analysis was premature, court noted that “[s]ince
4
This Court recognizes that a choice of law determination is generally made on an issue-by-issue basis. See e.g.,
Montich v. Miele USA, Inc., 849 F. Supp. 2d 439, 445 (D.N.J. 2012). Because this Court is deferring a choice of
law decision to a later stage, a comprehensive analysis for each issue is not warranted.
10
Plaintiffs have made their allegations under New Jersey law, the Court will apply New Jersey
law for the purpose of examining Plaintiffs’ claim under the Rule 12(b)(6) standard”); Harper,
595 F. Supp. at 491 (deferring choice-of-law determination and applying New Jersey law for
purposes of motion to dismiss because “Plaintiffs have presented a set of facts where New Jersey
law governs this action”); Arcand, 673 F. Supp. 2d at 296 (same).
New Jersey RICO, N.J.S.A. 2C:41-1, et. seq.
In the Amended Complaint, Plaintiffs allege that Defendants violated New Jersey’s RICO
statute.
(Am. Compl. Count V.) In support of this cause of action, Plaintiffs allege that
Defendants engaged in various acts of racketeering including violations of the following statutes:
(1) New Jersey Uniform Securities Act, N.J.S.A. 49:3-47, et seq.; (2) Deceptive Business
Practices, N.J.S.A. 2C:21-7i; (3) Theft by Deception, N.J.S.A. 2C:20-4; and (4) Falsifying
Records, N.J.S.A. 2C:21-4(a). (Am Compl. ¶¶ 499-547.) Defendants argue that New York’s
RICO statute should apply rather than New Jersey’s statute. Defendants further argue that a
conflict of law exists between New Jersey and New York because New York does not provide a
private right of action under its RICO statute. (Defs. Br. 11.)
The Court’s first step in determining whether a choice-of-law determination is necessary
is if an actual conflict of law exists. Camp Jaycee, 197 N.J. at 143-44 (citing Lebegern v.
Forman, 471 F.3d 424, 430 (3d Cir. 2006)). As defendants correctly point out, application of the
New York RICO statute would effectively dispose of Plaintiff’s RICO claim because a private
cause of action is not recognized. 5 See N.Y. Penal Law § 460.50. On the other hand, in New
5
New York RICO states that “a charge of enterprise corruption may be prosecuted by: (a) the district attorney of
any county with jurisdiction over the offense pursuant to section 460.40 of this article; (b) the deputy attorney
general in charge of the statewide organized crime task force when authorized by subdivision seven of section
seventy-a of the executive law; or (c) the attorney general when he is otherwise authorized by law to prosecute each
of the criminal acts specifically included in the pattern of criminal activity alleged in the enterprise corruption
charge.” N.Y. Penal Law § 460.50.
11
Jersey, any person may sue for damages sustained to his business or property by reason of a New
Jersey RICO violation. 6 See N.J. Stat. Ann. § 2C:41-4. As a result, this Court finds that an
actual conflict of law exists between New Jersey and New York’s RICO statute. 7
Because a conflict of law exists, this Court must determine which jurisdiction has the
“most significant relationship” to Plaintiffs’ RICO claim. Camp Jaycee, 197 N.J. at 136. In
support of their respective choices of law for the RICO claim, both parties rely on the same fraud
facts and arguments with respect to the fraud choice-of-law analysis as discussed above. (Defs.
Br. 25.) In addition, Defendants argue that “[b]ecause the alleged conduct occurred in New
York, New York has a stronger interest in having its RICO statute apply to deter such conduct
from occurring within its borders.” (Defs. Br. 26.) Defendants also claim that “the alleged
‘enterprise’ consisted entirely of New York entities operating in New York” and that Plaintiffs
failed to allege that securities were sold in New Jersey, that meetings were held in New Jersey,
that misrepresentations were made in New Jersey, or that any underlying assets were located in
New Jersey. (Defs. Br. 28 (emphasis in original).) Plaintiffs argue that New Jersey law should
apply “regardless of generally choice of law principles where, as here, the state legislature
intended for a broad application.” (Pls. Opp. 5-6.)
This Court recognizes that a choice-of-law determination regarding Plaintiffs’ RICO
claim is significant because it affects the claim’s viability and is outcome-determinative.
Because of the fact-sensitive nature of this decision, this Court finds that the currently available
6
New Jersey RICO states that “[a]ny person damaged in his business or property by reason of a violation of N.J.S.
2C:41-2 may sue therefor in any appropriate court and shall recover threefold any damages he sustains and the cost
of the suit, including a reasonable attorney’s fee, costs of investigation and litigation.” N.J. Stat. Ann. § 2C:41-4
(emphasis added).
7
See also Ferris, Baker Watts, Inc. v. Deutsche Bank Sec. Ltd., No. 02-3682, 2004 WL 2501563 (D. Minn. Nov. 5,
2004) (holding that where Minnesota’s RICO statute provided a private cause of action and New Jersey did not, a
conflict of law existed).
12
information is insufficient to make a choice-of-law determination. Accordingly, this Court
defers determining whether New York RICO or New Jersey RICO applies until more facts are
obtained. 8 Additionally, this Court finds it inappropriate to rule on Defendants’ statute of
limitations argument because it is premature.
Thus, a decision regarding the statute of
limitations argument until more facts are established on the record is deferred.
For the purposes of this motion, New Jersey law will apply to Plaintiffs’ RICO claim.
See Snyder, 792 F. Supp. at 721; Harper, 595 F. Supp. 2d at 491; Arcand, 673 F. Supp. 2d at
296.
II.
Defendants’ Motion To Dismiss the Amended Complaint
A. Count One: Common Law Fraud/Fraudulent Inducement Against All
Defendants
Under New Jersey law, the elements required to establish a claim of common law fraud,
fraudulent misrepresentation, and fraudulent inducement are identical: “(1) a material
misrepresentation of a presently existing or past fact; (2) knowledge or belief by the defendant of
its falsity; (3) an intention that the other person rely on it; (4) reasonable reliance thereon by the
other person; and (5) resulting damages.” Banco Popular N. Am. v. Gandi, 184 N.J. 161, 172-73
(2005) (quoting Gennari v. Weichert Co. Realtors, 148 N.J. 582, 610 (1997)); see also Jewish
Center of Sussex County v. Whale, 86 N.J. 619, 624-25 (1981).
Additionally, fraud claims must meet the requirements of Fed R. Civ. P. 9(b) which
imposes a heightened pleading requirement with respect to allegations of fraud, over and above
that required by Rule 8(a). Rule 9(b) states “[i]n alleging fraud or mistake, a party must state
with particularity the circumstances constituting fraud or mistake.” Fed. R. Civ. P. 9(b).
8
This Court notes Defendants’ contention that Plaintiffs’ RICO claims fail to the extent that Pennsylvania or
Delaware apply. For the purposes of this motion, this will not be addressed as the full choice-of-law determination
is deferred to a later stage.
13
“Plaintiffs may satisfy this requirement by pleading the ‘date, place or time’ of the fraud, or
through ‘alternative means of injecting precision and some measure of substantiation into their
allegations of fraud.’” Lum v. Bank of Am., 361 F.3d 217, 224 (3d Cir. 2004) (quoting Seville
Indus. Mach. Corp. v. Southmost Mach. Corp., 742 F.2d 786, 791 (3d Cir. 1984)). “Plaintiffs
also must allege who made a misrepresentation to whom and the general content of the
misrepresentation.” Id.
Defendants vigorously argue that Plaintiffs fail to meet each element required to establish
fraud. Notably, several of Defendants’ arguments relate to the merits of Plaintiffs’ claim rather
than the sufficiency of the pleadings. Among several other arguments, Defendants contend that
they did not make any of the alleged statements regarding underwriting standards, LTV/CLTV
statistics, or borrower occupancy rates. (Defs. Br. 15.) Defendants claim that the underwriting
information “was provided by the unaffiliated originator” and that “Defendants expressly
disclaimed any responsibility for such statements.” (Defs. Br. 15.) Defendants argue that
Plaintiffs’ allegations do not meet Rule 9(b)’s heightened pleading standard in failing to identify
any specific loans that did not comply with the underwriting guidelines.
(Defs. Br. 17.)
Defendants also contend that Plaintiffs fail to allege reasonable reliance and loss causation.
(Defs. Br. 21-23)
This Court finds that Plaintiffs have sufficiently pled factual allegations in the Amended
Complaint to establish a viable fraud claim. First, Plaintiffs allege several specific statements
relating to Defendants’ alleged material misrepresentations. For example, Plaintiffs contend that
Defendants abandoned their underwriting guidelines despite representing to investors that due
diligence was conducted on the mortgage originators and loan underwriting guidelines before
purchasing the loans for securitization.
(Am. Compl. ¶¶ 57-75, 107-299.)
14
Additionally,
Plaintiffs provided detailed factual allegations in their Amended Complaint relating to
Defendants’ misrepresentations of owner-occupancy statistics, LTV and CLTV rations, and
transfer of title. (Am. Compl. ¶¶ 119-21, 132-34, 142.) Based on Plaintiffs’ own analysis of the
mortgage loans which revealed misrepresentations by “large margins,” Plaintiffs contend that “it
is impossible to believe Goldman could have conducted this due diligence on the Mortgage
Loans in the pools without concluding that a very high percentage of the Mortgage Loans in the
pools did not comply with the underwriting standards disclosed in the Offering Materials.” (Am.
Compl. ¶¶ 300-07.) Plaintiffs also extensively allege reliance on Defendants’ “representations
and assurances regarding the quality of the mortgage collateral underlying the Certificates” and
subsequent damages. (Am. Compl. ¶¶ 308-309, 422-24.) Accordingly, the Court finds that
Plaintiffs adequately pled a cause of action for fraud in its Amended Complaint.
B. Count Two: Aiding and Abetting Fraud Against All Defendants
Defendants do not raise any independent arguments relating to Plaintiffs’ claim for aiding
and abetting fraud. Thus, Defendants’ motion is denied as to Count Two.
C. Count Three: Equitable Fraud As To All Defendants
Plaintiffs set forth a cause of action for equitable fraud for the same reasons discussed
with respect to common law fraud. “To recover based on equitable fraud the plaintiff must prove
his or her reasonable reliance on a material misrepresentation of fact.” Daibo v. Kirsch, 316 N.J.
Super. 580, 588 (App. Div. 1998). “Equitable fraud is similar [to common law fraud], but does
not require knowledge of the falsity and an intent to obtain an undue advantage.” Weil v.
Express Container Corp., 360 N.J. Super. 599, 613 (App. Div. 2003). In other words, “the key
distinction between legal and equitable fraud is that legal fraud requires proof of intent while
equitable fraud does not.” Dutton Rd. Associates LP v. Sunray Solar, Inc., No. 10-5478, 2011
15
WL 1375681, at *2 (D.N.J. Apr. 12, 2011). “Even an innocent misrepresentation can constitute
equitable fraud justifying rescission.” Ledley v. William Penn Life Ins. Co., 138 N.J. 627, 635
(1995).
Defendants argue that Plaintiffs’ equitable fraud claim fails because Plaintiffs did not rely
on Defendants for investment purposes. (Defs. Br. 23.) As previously discussed, this Court
finds that Plaintiffs have adequately pled reasonable reliance on Defendants’ alleged
misrepresentations.
Defendants further argue that Plaintiffs equitable fraud claim seeks
recession which is not available without an allegation that damages would be inadequate. (Defs.
Br. 24.) See Walter v. Holiday Inns, Inc., 784 F. Supp. 1159, 1166 (D.N.J. 1992). Plaintiffs
allege that they sustained damages proximately caused by the alleged misrepresentations. In the
Amended Complaint, Plaintiffs request rescission or rescissory damages to the extent there is no
adequate remedy at law. (Am. Compl. ¶¶ 444, 468-69, 486-87.) For the purpose of pleadings,
this Court is satisfied that the equitable fraud claim contains sufficient factual allegations.
Accordingly, Plaintiffs’ equitable fraud claim survives this motion.
D. Count Four: Negligent Misrepresentation Against All Defendants
To state a claim for negligent misrepresentation under New Jersey law, a plaintiff must
allege that “1) the defendant negligently provided false information; 2) the plaintiff was a
reasonably foreseeable recipient of that information; 3) the plaintiff justifiably relied on the
information; and 4) the false statements were a proximate cause of the plaintiff’s damages.”
McCall v. Metro. Life Ins. Co., 956 F. Supp. 1172, 1186 (D.N.J. 1996).
A negligent
misrepresentation claim may be based on an affirmative misrepresentation or an omission. See
e.g., Highlands Ins. Co. v. Hobbs Group, LLC., 373 F.3d 347, 355 (3d Cir. 2004).
16
Most of Defendants’ arguments relating to Plaintiffs’ negligent misrepresentation claim
address the “special relationship” requirement that exists to state a claim under New York law.
(Defs. Br. 23-24.) For the purposes of this motion, because the Court is applying New Jersey
law wherein the “special relationship” element does not exist, these arguments are moot. See
Highlands Ins. Co., 373 F.3d at 355 (noting that under New Jersey law, a negligent
misrepresentation claim “is not limited to special relationship situations”).
As with any negligence-based claim, the defendant must owe a duty of disclosure to the
plaintiff. Singer v. Beach Trading Co., Inc., 379 N.J. Super. 63, 74 (App. Div. 2005). The duty,
however, need not be based on a special relationship; “the guiding principle for the imposition of
liability is fairness to both the party making the representation and to the party aggrieved by its
dissemination.” Id. “The question of whether a duty exists is a matter of law properly decided
by the court, not the jury.” Carter v. Lincoln–Mercury, Inc. v. EMAR Group, Inc., 135 N.J. 182,
194 (1994). As the Third Circuit noted, the “required duty of disclosure may [ ] arise in any
situation called for by good faith and common decency.” Highlands, 373 F.3d at 355.
In this case, Plaintiffs argue that Defendants owed them a duty based on their “exclusive
control over the documentary evidence . . . and stood in a long-standing relationship of trust with
Prudential.” (Pls. Br. 32-33.) Plaintiffs allege that they were “heavily reliant on Defendants’
unique, special, and superior knowledge regarding the Mortgage Loans” in light of the fact that
Plaintiffs could not evaluate the loan files underlying the certificates. (Am. Compl. ¶ 491.)
Plaintiffs further allege that “Defendants were in the business of providing information for use
by others, including Prudential.” (Am. Compl. ¶ 493.)
In response, Defendants state that Plaintiffs fail to cite to any case law supporting its
proposition that the duty of disclosure exists between sophisticated commercial entities engaging
17
in arm’s length transactions. (Defs. Br. 15-16.) Specifically, Defendants rely on Commerce
Bancorp, Inc. v. BK Int’l Ins. Brokers, Ltd. to argue that “two parties to a contract, who
negotiated at arms-length to achieve the acquisition of a business” does not constitute a negligent
misrepresentation case. 490 F. Supp. 2d 556, 564 (D.N.J. 2007). This Court finds that the facts
of Commerce Bancorp, Inc. are distinguishable from the instant case.
In Commerce Bancorp,
Inc., “[plaintiff] d[id] not allege that [defendant] made the alleged assurances for [plaintiff’s]
‘benefit and guidance’” and instead defendant “made the assurances to further its own interests,
to the detriment of [plaintiff].” 490 F. Supp. 2d at 564. To the contrary, in this case, Plaintiffs
specifically allege that Defendants made representations and assurances for Plaintiffs benefit and
guidance knowing that Plaintiffs would rely on the information. (See Am. Compl. ¶¶ 490-97.)
Accordingly, this Court finds that Defendants owed a duty of care to Plaintiffs.
The remaining elements of a negligent misrepresentation claim are substantially similar
to a common law fraud claim. This Court’s previous discussion of the relevant facts establishes
that Plaintiffs have sufficiently pled Defendants’ alleged misrepresentations, that Plaintiffs were
reasonable recipients of the misrepresentations, that Plaintiffs reasonably relied on the
information, and that Plaintiffs suffered damages as a result of the misrepresentations.
Accordingly, this Court finds that Plaintiffs have sufficiently pled a claim for negligent
misrepresentation.
E. Count Five: Violation of New Jersey RICO, N.J.S.A. 2C:41-1, et. seq.
Under New Jersey’s RICO statute, it is “unlawful for any person [to] receive[] any
income derived, directly or indirectly, from a pattern of racketeering activity . . . [and] to use or
invest, directly or indirectly, any part of the income, or the proceeds of the income, in acquisition
of any interest in, or the establishment or operation of any enterprise which is engaged in or the
18
activities of which affect trade or commerce.” N.J. Stat. Ann. § 2C:41-2. The statute defines a
“person” as “any individual or entity or enterprise . . . holding or capable of holding a legal or
beneficial interest in property.” Id.
Plaintiffs must establish “five elements in a substantive [New Jersey] RICO offense: (1)
the existence of an enterprise; (2) that the enterprise engaged in or its activities affected trade or
commerce; (3) that defendant was employed by, or associated with the enterprise; (4) that he or
she participated in the conduct of the affairs of the enterprise; and (5) that he or she participated
through a pattern of racketeering activity.” State v. Ball, 141 N.J. 142, 181 (1995).
1. Existence of An Enterprise
Defendants argue that the “enterprise” element is not satisfied because “corporate
affiliates, such as a parent corporation and its subsidiaries, cannot associate with each other to
form an ‘enterprise’ for purposes of federal RICO.” (Defs. Br. 27 (emphasis added).)
New Jersey broadly construes the “enterprise” element, unlike the federal statutory
counterpart. See e.g., Maxim Sewerage Corp. v. Monmouth Ridings, 273 N.J. Super. 84, 95
(Sup. Ct. 1993) (“New Jersey RICO [ ] defines “person” more broadly than the federal statute.”)
The New Jersey Supreme Court has held that the “‘enterprise’ element will be satisfied if there
exists a group of people, no matter how loosely associated, whose existence or association
provides or implements the common purpose of committing two or more predicate acts.” Ball,
141 N.J. at 160. The element is also satisfied if the enterprise “is no more than the sum of the
racketeering acts.” Id. Therefore, the “‘enterprise’ does not have to be an organization whose
purpose is greater than the predicate acts, nor does it have to evidence any definable structure.”
Id.
In light of New Jersey’s broad and expansive construction of the “enterprise” element,
19
this Court finds that Plaintiffs have sufficiently pled the existence of an enterprise. In the
Amended Complaint, Plaintiffs provide allegations regarding the members of the “Goldman
Enterprise,” the purpose of the enterprise, the management of the enterprise, and structure of the
enterprise. (See Am. Compl. ¶¶ 502-04; see also Am. Compl. ¶¶ 20-26, 31-37, 42, 51-52, 5760.)
2. Enterprise Affected New Jersey Trade Or Commerce
The second element that Plaintiffs must establish for a New Jersey RICO claim is “that
defendant was employed by or associated with a racketeering enterprise which engaged in trade
or commerce in New Jersey or affected trade or commerce in New Jersey.” State v. Casilla, 362
N.J. Super. 554, 565 (App. Div. 2003). Under New Jersey RICO, “trade or commerce” includes
“all economic activity involving or relating to any commodity or service.” N.J. Stat. Ann.
2C:41-1(h).
Defendants argue that their activities did not affect trade or commerce in New Jersey
because the conduct alleged “did not take place in New Jersey or have any effect in New Jersey.”
(Defs. Br. 28.) Defendants also claim that “the alleged ‘enterprise’ consisted entirely of New
York entities operating in New York” and that Plaintiffs failed to allege that securities were sold
in New Jersey, that meetings were held in New Jersey, that misrepresentations were made in
New Jersey, or that any underlying assets were located in New Jersey. (Defs. Br. 28 (emphasis
in original).)
This Court finds that the Amended Complaint contains sufficient allegations regarding
Defendants’ enterprise affecting trade or commerce in New Jersey. Specifically, Plaintiffs allege
that the RMBS purchases “were all made from New Jersey, and the decisions to purchase,
including reliance on the Offering Materials, also took place in New Jersey.” (Am. Compl. ¶
20
19.) Plaintiffs also allege that Defendants caused economic harm to New Jersey residents. (Am.
Compl. ¶¶ 13-16, 18.) Thus, Plaintiffs satisfy the second element.
3. Defendant Was Employed By, Or Associated With the Enterprise
“Under N.J.S.A. 2C:41-2c, a person is ‘employed by or associated with an enterprise’ if
he or she has a position or a functional connection with the enterprise that enables him or her to
engage or participate directly or indirectly in the affairs of the enterprise.” Ball, 141 N.J. at 175.
“[T]he threshold showing of ‘association’ is not difficult to establish: it is satisfied by proof that
the defendant was ‘aware of at least the general existence of the enterprise.’” United States v.
Parise, 159 F.3d 790, 796 (3d Cir. 1998) (quoting United States v. Eufrasio, 935 F.2d 553, 577 n.
29 (3d Cir. 1991)).
The parties do not dispute this element. This Court finds that the Amended Complaint
sufficiently satisfies this element.
4. Defendants Participated in the Conduct of the Affairs of the Enterprise
“Unlike the federal RICO statute, NJ RICO does not require ‘operation or management,’
and instead participation is defined as acting ‘purposefully and knowingly in the affairs of the
enterprise in the sense of engaging in activities that seek to further, assist or help effectuate the
goals of the enterprise.’” Szelc v. Stanger, No. 08-4782, 2011 U.S. Dist. LEXIS 41827, at *2829 (D.N.J. Apr. 15, 2011) (internal citation omitted). These “activities may include acts that are
managerial or supervisory or exercise control and direction over the goals, or over the methods
used to achieve the goals, of the enterprise.” Ball, 141 N.J. at 175. However, this is not to say
that participatory conduct or activities are only limited to those acts that are managerial or
supervisory. The activities also includes “acts that are below the managerial or supervisory
level, and do not exert control or direction over the affairs of the enterprise, as long as the actor,
21
directly or indirectly, knowingly seeks to carry out, assist, or further the operations of the
enterprise or otherwise seeks to implement or execute managerial or supervisory decisions.” Id.
The parties do not dispute this element. This Court finds that the Amended Complaint
sufficiently satisfies this element.
5. Defendants Engaged in a Pattern of Racketeering Activity
The final element requires Plaintiffs to also establish the existence of a pattern of
racketeering activity. New Jersey RICO defines “racketeering activity” as any of the listed
“crimes under the laws of New Jersey or [] equivalent crimes under the laws of any other
jurisdiction.” N.J. Stat. Ann. § 2C:41-1. New Jersey RICO defines “a pattern of racketeering
activity” as:
(1) Engaging in at least two incidents of racketeering conduct one of which shall
have occurred after the effective date of this act and the last of which shall
have occurred within 10 years (excluding any period of imprisonment) after a
prior incident of racketeering activity; and
(2) A showing that the incidents of racketeering activity embrace criminal
conduct that has either the same or similar purposes, results, participants or
victims or methods of commission or are otherwise interrelated by
distinguishing characteristics and are not isolated incidents.
Id. The primary inquiry in determining whether a pattern of racketeering activity exists is
“relatedness.” Ball, 141 N.J. at 169. Relatedness “calls for the application of a broad standard
involving the totality of all relevant circumstances, which may include ‘continuity.’” Id.
Here, Plaintiffs allege that Defendants violated the New Jersey Uniform Securities Act, 9
engaged in Deceptive Practices, 10 committed Theft by Deception, 11 and Falsified Records. 12 As
9
The New Jersey Uniform Securities Act provides civil liability against any person who, inter alia,
(2) offers, sells or purchases a security by means of any untrue statement of material fact or any
omission to state a material fact necessary in order to make the statements made, in light of the
circumstances under which they are made, not misleading (the buyer not knowing of the untruth or
omission), or
(3) offers, sells or purchases a security by employing any device, scheme, or artifice to defraud, or
(4) offers, sells or purchases a security by engaging in any act, practice or course of business
which operates or would operate as a fraud or deceit upon any person, or
22
Defendants correctly point out, the alleged predicate acts stem from the same conduct underlying
Plaintiffs’ claims for common law fraud, equitable fraud, and negligent misrepresentation.
Defendants do not provide any independent arguments as to why the predicate acts fail. Instead,
Defendants rely on their arguments relating to Plaintiffs’ failure to sufficiently plead their
common law claims.
This Court finds that Defendants’ previous arguments are not persuasive in defeating the
sufficiency of Plaintiffs’ alleged predicate acts. For the same reasons previously articulated with
respect to Plaintiffs’ common law claims, Defendants’ arguments fail. All of Plaintiffs’ common
law claims are sufficiently pled. Additionally, the Court finds that Plaintiffs pled the predicate
acts in their Amended Complaint sufficiently to survive Defendant’s Motion.
(5) engages in the business of advising others, for compensation, either directly or through
publications or writings, as to the value of securities, or as to the advisability of investing in,
purchasing or selling securities, or who, for compensation and as a part of a regular business,
issues or promulgates analyses or reports concerning securities.
N.J. Stat. Ann. § 49:3-71.
10
Under the Deceptive Practices Act, “[a] person commits an offense if in the course of business he . . . [ m]akes a
false or misleading written statement for the purpose of promoting the sale of securities, or omits information
required by law to be disclosed in written documents relating to securities.” N.J.S.A. 2C:21-7i.
11
Under the Theft by Deception statute:
[a] person is guilty of theft if he purposely obtains property of another by deception. A person deceives if
he purposely:
a. Creates or reinforces a false impression, including false impressions as to law, value,
intention or other state of mind, and including, but not limited to, a false impression that the
person is soliciting or collecting funds for a charitable purpose; but deception as to a person's
intention to perform a promise shall not be inferred from the fact alone that he did not
subsequently perform the promise;
b. Prevents another from acquiring information which would affect his judgment of a
transaction; or
c. Fails to correct a false impression which the deceiver previously created or reinforced, or
which the deceiver knows to be influencing another to whom he stands in a fiduciary or
confidential relationship.
N.J. Stat. Ann. § 2C:20-4.
12
Under the Falsifying Record statute, “a person commits a crime of the fourth degree if he falsifies, destroys,
removes, conceals any writing or record, or utters any writing or record knowing that it contains a false statement or
information, with purpose to deceive or injure anyone or to conceal any wrongdoing.”
N.J. Stat. Ann. § 2C:21-4 (a).
23
6. Defendants Engaged in a New Jersey RICO Conspiracy
New Jersey’s RICO statute makes it unlawful for any person to conspire to violate any of
the statute’s prohibited activities provision. See N.J. Stat. Ann. § 2C:41-2(d). As the New Jersey
Supreme Court has articulated, conspiracy under RICO requires two elements:
[A]n agreement to violate RICO and the existence of an enterprise. The
agreement to violate RICO itself has two aspects. One involves the agreement
proper, that is, an agreement to conduct or participate in the conduct or the affairs
of the enterprise. The other involves an agreement to the commission of at least
two predicate acts. If either agreement is lacking, the defendant has not embraced
the objective of the conspiracy-the substantive violation of the RICO Act-that is
required for any conspiracy conviction under classic conspiracy law.
Ball, 141 N.J. at 176. Claims for conspiracy are held to the pleadings standard under Rule 8
rather than the stringent pleading standard under Rule 9(b). See e.g., Miller v. P.G. Lewis &
Assoc., No. 05-5641, 2007 WL 316446 (D.N.J. Jan. 30, 2007) (“Claims of conspiracy and aiding
and abetting in relation to a RICO violation are not subject to the more stringent Rule 9(b)
requirements regarding pleadings, but rather, the general notice-pleading standard of Rule 8.”)
Plaintiffs allege in their Amended Complaint that “Defendants also violated N.J.S.A.
2C:41-2(d) by conspiring with others, including but not limited to the other members of the
Goldman Enterprises, to violate N.J.S.A. 2C:41-2(c).
In furtherance of that conspiracy,
Defendants committed overt acts that include but are not limited to the racketeering activity
alleged above.” (Am. Compl. ¶ 547.) Having concluded that Plaintiffs have sufficiently pled the
existence of an enterprise and a viable RICO claim, the only element Plaintiffs must establish is
an agreement to violate RICO.
Defendants primarily contend that Plaintiffs’ New Jersey RICO conspiracy claim fails
because corporate affiliates cannot engage in an intra-corporate conspiracy as a matter of law.
(Defs. Br. 30.) However, in support of this contention, Defendants rely only on case law
24
interpreting the federal RICO statute and not New Jersey’s RICO statute. See e.g., Dist. 1199P
Health & Welfare Plan v. Janssen, L.P., No. 06-3044, 2008 WL 5413105, at *14 (D.N.J. Dec.
23, 2008) (“The majority of courts within this Circuit agree that a corporation cannot conspire
with its agents and/or employees under § 1962(d) of RICO.”) The Court notes that Plaintiffs
allege that Defendants conspired with “others, including, but not limited to the other members of
the Goldman Enterprises.” (Am. Compl. ¶ 547.) Because Plaintiffs have pled their RICO
allegation to include “others” who are not limited to the Goldman Enterprise members, Plaintiffs
do not allege merely an intra-corporate conspiracy. (See Am. Compl. ¶ 547.) At this stage, the
Complaint, viewed in its entirety, contains enough allegations to satisfy this element.
Accordingly, this Court finds that Plaintiffs have sufficiently pled a New Jersey RICO
conspiracy claim.
CONCLUSION
For the reasons set forth above, Defendants’ Motion to Dismiss is DENIED.
s/Susan D. Wigenton, U.S.D.J.
Cc:
Madeline Cox Arleo, U.S.M.J.
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