Kraus v. Lee et al

Filing 43

ORDER granting 28 Motion to Dismiss for Failure to State a Claim. For the reasons set forth in the attached Memorandum and Order, defendant's motion to dismiss is granted. To the extent plaintiff seeks to amend the Complaint, he should prov ide to the Court via a letter the specific factual allegations it proposes would cure the deficiencies discussed above within thirty (30) days of this Order. Failure to do so will result in dismissal of the action against Interactive. Ordered by Judge Denis R. Hurley on 5/15/2015. (Kaley, Regina) Modified on 5/15/2015 (Lundy, Lisa).

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK
-----------------------------------------------------------X
PAUL KRAUS,
Plaintiff,

MEMORANDUM AND ORDER
14 CV 4143 (DRH) (AKT)

- against KENNETH C. LEE a/k/a KENNETH LEE,
REDLINE CAPITAL, LLC, INTERACTIVE
BROKERS, LLC, PATRICIA LEE a/k/a PATRICIA
JU, JOHN DOES #1 THROUGH 10,
Defendants.
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APPEARANCES:
KENNETH S. PELSINGER, PC
Attorneys for Plaintiff
3601 Hempstead Turnpike, Suite 410
Levittown, NY 11756
By:
Kenneth S. Pelsinger, Esq.
HOFFNER PLLC
Attorneys for Defendant Interactive Brokers LLC
800 Third Avenue, 13th Floor
New York, NY 10022
By:
David S. Hoffner, Esq.

HURLEY, Senior District Judge:
Plaintiff Paul Kraus (“plaintiff” or “Kraus”) brings this action against defendants
Kenneth C. Lee (“Lee”), Patricia Lee, Redline Capital, LLC (“Redline”), Interactive Brokers
LLC (“defendant” or “Interactive”), and John Does #1-10 alleging claims of fraud, conversion,
and negligence. Presently before the Court is defendant Interactive’s 1 motion to dismiss the
claims against it pursuant to Federal Rule of Civil Procedure (“Rule”) 12(b)(6) for failure to state

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Plaintiff’s motion for default judgment against all other defendants is currently pending
before Magistrate Judge Tomlinson.
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a claim upon which relief may be granted. For the reasons set forth below, defendant’s motion is
granted.
BACKGROUND
The following facts are taken from plaintiff’s Complaint and are presumed to be true for
purposes of defendant’s present Motion.
Plaintiff alleges that Lee and Redline enticed him “to provide investment funds by
making numerous power point presentations describing their trading and banking systems
operations.” (Compl. ¶ 14.) Thereafter, on or about March 8, 2013, plaintiff electronically
transferred by wire $200,000.00 to defendants Lee, Redline, and Interactive “to establish an
equity option trading account for the benefit of the Plaintiff.” (Id. ¶ 15.) Plaintiff alleges that
Lee “was to make equity option butterfly spread trades using” the transferred funds, “but only
after making full disclosure of any trades to Plaintiff prior to initiating and executing each and
every trade.” (Id. ¶ 16.) Moreover, Lee guaranteed that all trades would be approved by the
plaintiff (Id. ¶ 17), and Lee, Redline, and Interactive “agreed to provide Plaintiff with full
banking and trading authority with respect to Plaintiff’s funds” (Id. ¶ 18). Plaintiff claims,
however, that defendants “failed to provide [him] with banking and trading authority over his
account.” (Id. ¶ 20.)
Plaintiff also claims that Lee and Redline “specifically represented to [him that he] would
receive a minimum return on any and all monies” provided to defendants. (Id. ¶ 21.) Beginning
on March 8, 2013, plaintiff made written and oral requests to Lee, Redline, and Interactive for
account statements and trading records related to plaintiff’s funds, however, to date, defendants
have refused to provide plaintiff with any responsive documentation. On March 22, 2013, Lee
informed plaintiff that all of his funds had been lost in the market.
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Plaintiff claims that “at the time of Defendant’s solicitation of Plaintiff’s investment,
Kenneth Lee and Redline, failed to properly disclose the terms and conditions of the proposed
investment to Plaintiff as required under applicable state and federal securities laws and further
failed to have Plaintiff execute a subscription agreement.” (Id. ¶ 24.) Moreover, plaintiff
contends that “all the representations made by Kenneth Lee and Redline to Plaintiff with respect
to the funds in the amount of $200,000 were deliberately and intentionally false and solely made
to disguise the fact that Defendants intended to convert and misappropriate Plaintiff’s
investment.” (Id. ¶ 26.) Furthermore, plaintiff alleges that Lee, Redline, and Interactive
“misappropriated/converted all of the funds” plaintiff provided to them and were “engaged in a
‘Ponzi scheme’ wherein Plaintiff’s investment was used to pay back unrelated investors.” (Id. ¶¶
27-28.)
DISCUSSION
I.

Standard of Review for Motion to Dismiss
Rule 8(a) provides that a pleading shall contain “a short and plain statement of the claim

showing that the pleader is entitled to relief.” FED. R. CIV. P. 8(a)(2). In recent years, the
Supreme Court has clarified the pleading standard applicable in evaluating a motion to dismiss
under Rule 12(b)(6).
First, in Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007), the Court disavowed the wellknown statement in Conley v. Gibson, 355 U.S. 41, 45–46 (1957) that “a complaint should not be
dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove
no set of facts in support of his claim which would entitle him to relief.” Twombly, 550 U.S. at
561. Instead, to survive a motion to dismiss under Twombly, a plaintiff must allege “only
enough facts to state a claim to relief that is plausible on its face.” Id. at 570.
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While 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
entitlement to relief 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, on the assumption
that all the allegations in the complaint are true (even if doubtful in fact).
Id. at 555 (citations and internal quotation marks omitted).
More recently, in Ashcroft v. Iqbal, 556 U.S. 662 (2009), the Supreme Court provided
further guidance, setting a two-pronged approach for courts considering a motion to dismiss.
First, a court should “begin by identifying pleadings that, because they are no more than
conclusions, are not entitled to the assumption of truth.” Id. at 679. “While legal conclusions
can provide the framework of a complaint, they must be supported by factual allegations.” Id.
Thus, “[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory
statements, do not suffice.” Id. at 678 (citing Twombly, 550 U.S. at 555).
Second, “[w]hen there are well-pleaded factual allegations a court should assume their
veracity and then determine whether they plausibly give rise to an entitlement to relief.” Id. at
679. “Determining whether a complaint states a plausible claim for relief [is] . . . a contextspecific task that requires the reviewing court to draw on its judicial experience and common
sense.” Id. The Court defined plausibility as follows:
A claim has facial plausibility when the plaintiff pleads factual content that allows
the court to draw the reasonable inference that the defendant is liable for the
misconduct alleged. The plausibility standard is not akin to a “probability
requirement,” but it asks for more than a sheer possibility that a defendant has
acted unlawfully. Where a complaint pleads facts that are “merely consistent
with” a defendant’s liability, it “stops short of the line between possibility and
plausibility of ‘entitlement to relief.’ ”
Id. at 678 (quoting and citing Twombly, 550 U.S. at 556–57) (internal citations omitted).

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In other words, “where the well-pleaded facts do not permit the court to infer more than
the mere possibility of misconduct, the complaint has alleged—but it has not ‘show[n]’—that the
pleader is entitled to relief.” Id. at 679 (quoting FED. R. CIV. P. 8(a)(2)).
II.

Plaintiff’s Fraud Claims
Plaintiff alleges three fraud claims against Interactive. In his first cause of action,

plaintiff alleges common law fraudulent misrepresentation against Lee, Redline, and Interactive.
In his fourth cause of action, he alleges that Lee, Redline, and Interactive violated “the Securities
Act of 1933, Uniform Securities Act and New York Securities Act.” (Compl. ¶ 43.) Finally,
plaintiff’s fifth 2 cause of action for fraudulent inducement alleges that Lee, Redline, and
Interactive “intended that Plaintiff would be induced into action by relying upon the [false]
statements of fact made to him by Defendants.” (Compl. ¶ 49.)
Defendant argues that plaintiff’s fraud claims should be dismissed because they do not
meet the standard set forth in Rule 9(b). Rule 9(b) states that “[i]n alleging fraud or mistake, a
party must state with particularity the circumstances constituting fraud or mistake.” The Second
Circuit has stated that this rule requires that the complaint “(1) specify the statements that the
plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the
statements were made, and (4) explain why the statements were fraudulent.” Mills v. Polar
Molecular Corp., 12 F.3d 1170, 1175 (2d Cir. 1993).
Plaintiff’s common law fraud/misrepresentation claim fails to meet this standard with
regard to Interactive because the Complaint does not specify any statements that plaintiff alleges
Interactive fraudulently made, let alone where and when they were made. Plaintiff’s allegation
that defendants “agreed to provide Plaintiff with full banking and trading authority with respect
2

Plaintiff’s Complaint has labeled two claims as the “fifth” cause of action. The
fraudulent inducement claim is the first of these two.
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to [his] funds,” (Compl. ¶ 18), is “entirely conclusory and unsupported by assertions of facts”
describing the content of the statement and where and when the statement was made. Luce v.
Edelstein, 802 F.2d 49, 54 (2d Cir. 1986). Moreover, his fraudulent inducement claim is
deficient because he has not alleged any specific statements that Interactive made that induced
him to invest the money at issue.
With respect to plaintiff’s securities law claims, he fails to name either in the Complaint
or in his opposition papers the specific laws that he alleges defendants violated. Plaintiff fails to
specify the portion of the Securities Act of 1933 that he alleges was violated, and it is unclear
what statute plaintiff is referring to as the “New York Securities Act.” 3 Plaintiff’s failure to
provide a statutory basis for his securities law claims violates Rule 8’s requirement that the
complaint “give the defendant fair notice of what the . . . claim is and the grounds upon which it
rests.” Twombly, 550 U.S. at 555. Moreover, as defendant points out, the Uniform Securities
Act is a model statute and cannot give rise to a claim. (Def.’s Mem. in Supp. at 6.) As a result,
plaintiff’s fourth cause of action for violations of the federal and state securities laws is
dismissed.
III.

Plaintiff’s Conversion Claim
Under New York law, “[a] conversion takes place when someone, intentionally and

without authority, assumes or exercises control over personal property belonging to someone
else, interfering with that person’s right of possession.” Colavito v. N.Y. Organ Donor Network,
Inc., 8 N.Y.3d 43, 49 (2006). Defendant argues that plaintiff’s claim is deficient because it does
not allege “that Interactive Brokers exercised control over the funds at issue without authority,”
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The Court notes that the Martin Act, N.Y. General Business Law § 352, et seq, New
York’s statute that regulates the purchase and sale of securities, is inapplicable here because it
does not provide for a private right of action. Ajamian v. Zakarian, 2014 WL 4247784, at *7 n.8
(N.D.N.Y. Aug. 26, 2014).
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but it “alleges that Plaintiff voluntarily transferred the relevant funds to the trading account
(Compl. ¶ 15).” (Def.’s Mem. in Supp. at 7.) Plaintiff does not respond to this argument, nor
does he even mention the conversion claim in his opposition. Defendant is correct that the facts
alleged do not suggest that defendant held plaintiff’s funds without authority but rather that he
willingly transferred his funds to the defendants. “If a person’s original possession is lawful, that
person is generally not liable for conversion until the true owner demands a return of the
property.” Davimos v. Halle, 2006 WL 859368, at *5 (S.D.N.Y. Mar. 31, 2006) (citing
Leveraged Leasing Admin. Corp. v. PacifiCorp Capital, Inc., 87 F.3d 44, 49 (2d Cir. 1996)).
Here, plaintiff has not alleged that he asked for the return of his funds at any point. As a result,
plaintiff’s conversion claim against Interactive is dismissed.
IV.

Plaintiff’s Negligence Claim
Plaintiff claims that defendants “undertook a fiduciary duty to [him] to solicit and

manage the personal assets entrusted to [them] by Plaintiff in a manner consistent with the
applicable standard of due care.” (Compl. ¶ 38.) Moreover, plaintiff claims that defendants
“were reckless and negligent in their solicitation and management of personal assets entrusted to
Defendants by Plaintiff.” (Id. ¶ 39.)
“To establish a cause of action sounding in negligence, a plaintiff must establish the
existence of a duty on defendant’s part to plaintiff, breach of the duty and damages.” Greenberg,
Trager & Herbst, LLP v. HSBC Bank USA, 17 N.Y.3d 565, 576 (2011). Defendant claims that
plaintiff’s claim must be dismissed because “Plaintiff has not and cannot allege adequately that

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Interactive Brokers owed him, a non-customer, 4 any recognized duty of care.” (Def.’s Mem. in
Supp. at 8.) Plaintiff does not respond to this argument.
As defendant points out, “[i]t is well-established that brokers . . . do not owe a general
duty of care to the public at large.” In re Agape Litig., 681 F. Supp. 2d 352, 361 (E.D.N.Y.
2010). “Rather, [a] duty of care arises only when the broker does business with the plaintiff.”
Id. (internal quotation marks and citation omitted). Moreover, “banks and brokerage houses
generally do not owe a duty to non-customers and thus generally may not be held liable for the
torts of their clients.” Barkany Asset Recovery & Mgmt. v. Sw. Sec. Inc., 972 N.Y.S.2d 458, 462
(N.Y. Sup. 2013); see also MLSMK Inv. Co. v. JP Morgan Chase & Co., 431 F. App’x 17, 20
(2d Cir. 2011) (“Banks generally do not owe non-customers a duty to protect them from fraud
perpetrated by customers.”); Renner v. Chase, 1999 WL 47239 (S.D.N.Y. Feb. 3, 1999) (holding
that bank had no duty to prevent its customer from defrauding the plaintiff, a non-customer).
Here, the Complaint fails to contain any facts sufficient to support a claim that Interactive owed
a duty to plaintiff since plaintiff has not alleged that he was a customer of Interactive. Moreover,
to the extent the Complaint could be construed to allege that Lee and/or Redline were customers
of Interactive, Interactive did not have a duty to prevent them from defrauding plaintiff.
Accordingly, plaintiff’s negligence claim is dismissed.
CONCLUSION
For the foregoing reasons, defendant’s motion to dismiss is granted. To the extent
plaintiff seeks to amend the Complaint, he should provide to the Court via a letter the specific

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Defendant in its brief states that Lee and/or Redline deposited plaintiff’s money into an
account they opened with Interactive and that plaintiff “had no contractual relationship with
Interactive Brokers” and “was not designated as a customer with respect to the account.” (Def.’s
Mem. in Supp. at 3.) Plaintiff does not contest this point in his opposition.
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factual allegations it proposes would cure the deficiencies discussed above within thirty (30)
days of this Order.

SO ORDERED.
Dated: Central Islip, New York
May 15, 2015
/s/
_
Denis R. Hurley
Unites States District Judge

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