Stanley v. Skowron III
Filing
17
OPINION AND ORDER re: 4 FIRST MOTION to Dismiss filed by Joseph F. Skowron III. In light of the foregoing, Skowron's motion is granted with respect to Morgan Stanley's contribution and breach of fiduciary duty claims, and denied with resp ect to the fraud claim. The Clerk of the Court is directed to close this motion (Dkt. No.4). A status conference is scheduled for Wednesday, July 31, 2013 at 4:30 p.m. (Status Conference set for 7/31/2013 at 04:30 PM before Judge Shira A. Scheindlin.) (Signed by Judge Shira A. Scheindlin on 7/23/2013) (ft)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
._--------------------------------------------------
)(
MORGAN STANLEY,
Plaintiff,
OPINION AND ORDER
- againstJOSEPH F. "CHIP" SKOWRON III,
12 Civ. 8016
Defendant .
.
_--------------------------------------------------
)(
SHIRA A. SCHEINDLIN, U.S.D.J.:
I.
INTRODUCTION
Morgan Stanley brings this action for compensatory and punitive
damages, disgorgement, reimbursement, contribution, and attorneys' fees and costs
against Joseph "Chip" Skowron III, a former Managing Director of Morgan
Stanley.l Skowron moves to dismiss Count Three (fraud), Five (contribution), and
a portion of Count Two (breach of fiduciary duty) of the Complaint under Federal
Rule of Civil Procedure 12(b)(6) on various grounds. For the following reasons,
Skowron's motion is granted in part and denied in part.
This Court has subject matter jurisdiction under 28 U.S.C. § 1332
since complete diversity of citizenship exists between the parties and the amount in
controversy exceeds $75,000. See Complaint ("Comp!.") , 9.
1
II.
BACKGROUND2
Skowron – a medical doctor with a degree from Yale – left his
orthopedic residency at Harvard in 2001 to pursue a career in finance.3 Two years
later, Skowron joined FrontPoint, a then-leading hedge fund acquired by Morgan
Stanley in 2006.4 Between 2007 and 2010, Morgan Stanley paid Skowron
$32,555,456, a significant portion of which consisted of performance-based
management and incentive fees tied to the healthcare funds co-managed by
Skowron.5
In April 2006, FrontPoint hired an expert networking firm (“the
Firm”).6 FrontPoint employees met with medical experts provided by the Firm,
including Yves Benhamou, M.D., a French medical doctor and clinical
investigative physician for Human Genome Sciences, Inc. (“HGSI”), a publicly2
The facts stated below are drawn from the Complaint and the
documents referenced therein, namely, the Amended Complaint in SEC v.
Skowron, No. 10 Civ. 8266 (S.D.N.Y. filed April 12, 2011) (“SEC Action”), Ex. A
to the Complaint; the Final Judgment as to Joseph F. “Chip” Skowron III filed in
the SEC Action, Ex. B. to the Complaint (“SEC Judgment”); and the Opinion and
Order dated March 20, 2012 in United States v. Skowron, 839 F. Supp. 2d 740
(S.D.N.Y. 2012), aff’d, — Fed. App’x — (2d Cir. 2013) (“Restitution Order”).
3
See Compl. ¶¶ 8, 11.
4
See id. ¶¶ 6, 13-14.
5
See id. ¶¶ 13-16.
6
See id. ¶¶ 20-21.
2
traded biopharmaceutical company.7 Benhamou was involved in clinical trials for
Albuferon, a drug developed by HGSI for the treatment of hepatitis C.8 Beginning
in 2006, Skowron began meeting and conversing with Benhamou, and by April
2007 the two began circumventing the Firm and communicating directly with one
another.9
A.
The Albuferon Trials and Sale of HGSI Stock
Between February and December 2007, FrontPoint purchased about
$65 million in HGSI common stock at an average price of $10.32 based largely on
Skowron’s belief that the stock was undervalued and would increase in value as a
result of the development of Albuferon.10 But in November 2007, two patients in
the Albuferon clinical trials suffered serious adverse events (“SAEs”), with one
patient eventually dying of such complications.11 As part of the Steering
Committee for the trials, Benhamou became aware of the SAEs and knew that such
events would be reported to the trial’s safety committee.12 Knowing that the safety
7
See id. ¶¶ 18, 21.
8
See id. ¶ 19.
9
See id. ¶ 22.
10
See id. ¶¶ 25-26.
11
See id. ¶ 30.
12
See id. ¶¶ 31-32.
3
committee was considering modifying the Albuferon trials, Benhamou contacted
Skowron and informed him of both the SAEs and the potential impact of those
SAEs on the trials.13 Such information was non-public at the time.14 Based on the
information improperly disclosed by Benhamou, Skowron instructed traders at
FrontPoint to sell a large portion of their HGSI stock.15 Benhamou continued to
provide inside information to Skowron through January 2008, including on
January 22, when Benhamou notified Skowron that HGSI planned to issue a press
release regarding the negative developments in the Albuferon trial.16 FrontPoint
made a large sale of HGSI stock that same day.17 By the close of business on
January 23, 2008 – the day HGSI issued its press release – its stock had dropped
from $10.02 per share to $5.62 per share.18 Because FrontPoint sold all its HGSI
stock prior to the press release, its funds avoided losses of $30 million.19
13
See id. ¶¶ 34-36.
14
See id.
15
See id. ¶¶ 35-36.
16
See id. ¶¶ 38-39.
17
See id. ¶ 39.
18
See id. ¶¶ 40-41.
19
See id. ¶ 42.
4
B.
The SEC Investigation
The SEC began investigating the January 22 sale of HGSI stock
shortly thereafter and interviewed Skowron in February 2008.20 About a week
before the SEC interview, Skowron contacted Benhamou and told him that
Skowron’s attorneys wanted to interview Benhamou.21 Accordingly, Skowron
asked Benhamou to lie by stating that he (Benhamou) had never given Skowron
any non-public information about the trials.22 Benhamou agreed to participate in
the cover-up.23 During his interview, Skowron assured the SEC – and his lawyers
at Morgan Stanley and FrontPoint24 – that he had not received or traded on nonpublic information; that he did not have any interaction with Benhamou other than
in the context of Benhamou’s role as a consultant for the Firm; and that he never
provided Benhamou with improper benefits.25
Between February 2008 and December 2010, Skowron continued to
20
See id. ¶¶ 45-46.
21
See id. ¶ 53.
22
See id.
23
See id. ¶ 54.
24
Morgan Stanley provided Skowron with a lawyer and advanced
attorneys’ fees and legal costs to him prior to discovering his criminal activity. See
id. ¶ 80.
25
See id. ¶ 50.
5
lie to Morgan Stanley, its attorneys, the SEC, federal prosecutors, and the FBI
about the circumstances of the HGSI sales and about his relationship with
Benhamou.26 Meanwhile, on several occasions Skowron offered Benhamou cash
payments and other benefits, apparently to encourage Benhamou to continue lying
about their illegal conduct.27 Morgan Stanley terminated Skowron in December
2010.28
C.
The SEC Action
The SEC filed a civil action, Securities and Exchange Commission v.
Benhamou (“SEC Action”),29 in which Skowron was eventually named as a
defendant.30 The SEC alleged that Skowron violated several securities laws,
including Rule 10b-5,31 and named six FrontPoint healthcare funds as Relief
Defendants in the action.32 The SEC Action did not allege any securities violations
26
See id. ¶¶ 50, 61-63.
27
See id. ¶¶ 56, 58-59. On one such occasion, Skowron met Benhamou
at a hotel bar in Milan, Italy and gave him an envelope containing $10,000 in cash.
See id. ¶ 58.
28
See id. ¶ 64.
29
No. 10 Civ. 8266. An amended complaint was filed on April 13,
30
See Compl. ¶ 82.
31
17 C.F.R. § 240.10b-5.
32
See Compl. ¶ 83.
2011.
6
by the funds, FrontPoint, or Morgan Stanley.33 Just before the amended complaint
was filed, Morgan Stanley and FrontPoint settled with the SEC as to the claims
against Skowron (“SEC Settlement”).34 FrontPoint agreed to pay the SEC
$29,017,156 in disgorgement, which represented “the profits gained and/or losses
avoided as a result of the conduct alleged in the [SEC Action],”35 as well as
$4,003,669 in prejudgment interest (together, “Settlement Amount”).36 In
accordance with an indemnification obligation arising out of Morgan Stanley’s sale
of a majority interest in FrontPoint back to its managers in March 2011, Morgan
Stanley was obligated to indemnify FrontPoint for the Settlement Amount.37
D.
The Criminal Plea and Restitution to Morgan Stanley
In August 2011, Skowron pleaded guilty in the Southern District of
33
See id.
34
See id. ¶ 84.
35
SEC Judgment at 3.
36
See Compl. ¶ 86. The entire amount of the SEC Settlement is
$33,020,825. See id.
37
See id. ¶¶ 87-88. Morgan Stanley also funded FrontPoint’s defense in
a civil class action filed on January 4, 2011 in the District of Connecticut. See
Brodzinsky v. FrontPoint Partner LLC, No. 3:11-cv-10; Compl. ¶ 90. Morgan
Stanley paid $53,020 of the $70,000 settlement in that action pursuant to its
indemnification agreement with FrontPoint. See Compl. ¶ 90.
7
New York to conspiracy to commit securities fraud and to obstruct justice.38
Skowron admitted, in relevant part, to the following: First, that he received
material, non-public information regarding HGSI from Benhamou prior to the
January 2008 sale of FrontPoint’s remaining HGSI stock; second, that Skowron
and Benhamou had agreed to mislead the SEC by lying about the insider trading;
third, that Skowron asked Benhamou to lie to Morgan Stanley and FrontPoint’s
counsel about the fact that Benhamou provided non-public material information to
Skowron.39 Skowron is currently serving a five year sentence for his crimes.40
In December 2011 Morgan Stanley submitted a claim for restitution to
the District Court in the Criminal Action41 pursuant to the Mandatory Victims
Restitution Act (“MVRA”).42 Morgan Stanley requested $44,873,878.49,
representing: (1) the $33 million Settlement Amount; (2) approximately $3 million
for legal fees and costs incurred by Morgan Stanley in connection with the SEC
and criminal investigations; (3) approximately $8 million, representing 25% of the
38
See Compl. ¶ 65; United States v. Skowron, No. 11-CR-0699, (filed
April 12, 2011) (“Criminal Action”).
39
See Compl. ¶¶ 66- 69.
40
See id. ¶ 1.
41
See id. ¶ 95.
42
18 U.S.C. § 3663A.
8
compensation Morgan Stanley paid to Skowron between 2007 and 2010.43 The
court awarded Morgan Stanley the entire amount of legal fees and costs requested,
along with 20% of the compensation paid to Skowron in the relevant time period.44
The Restitution Order recognized that “Skowron actively deceived Morgan Stanley
and frustrated its internal investigation and its attempts to cooperate with the SEC.
This conduct had the effect of prolonging the period during which Skowron
received generous compensation from Morgan Stanley.”45
Notwithstanding this recognition, the court denied Morgan Stanley’s
request for the $33 million Settlement Amount.46 The court stated:
the amount of the SEC settlement payment represents the
disgorgement of losses that FrontPoint avoided as a result of
Skowron’s insider trading. This was not money that FrontPoint
was legally entitled to retain. . . . It cannot be said, therefore,
that the SEC disgorgement represented any loss of money to
which FrontPoint or Morgan Stanley was ultimately entitled by
law.47
43
See Compl. ¶ 95.
44
See id. ¶ 96.
45
See Skowron, 839 F. Supp. 2d at 750.
46
See id. at 746-47.
47
Id.
9
E.
The Present Action
Skowron argues that the fraud claim fails because Morgan Stanley’s
reliance on Skowron’s denials of wrongdoing was not reasonable; that Morgan
Stanley cannot recover the Settlement Amount because it was never entitled to
retain that money and was, therefore, not damaged by the disgorgement of the
Settlement Amount to the SEC;48 and that the contribution claim fails because
Morgan Stanley does not allege that it knowingly participated in Skowron’s
violations of the securities laws.49
III.
LEGAL STANDARD
A.
Motion to Dismiss Standard
In deciding a motion to dismiss pursuant to Rule 12(b)(6), the court
must “accept[ ] all factual allegations in the complaint as true, and draw[ ] all
reasonable inferences in the plaintiff's favor.”50 The court evaluates the sufficiency
of a complaint under the “two-pronged approach” advocated by the Supreme Court
48
Morgan Stanley seeks, among other damages, the value of the
Settlement Amount already denied by the trial court in the Criminal Action. See
Compl. ¶ 95.
49
See Skowron’s Memorandum of Law in Support of Its Motion to
Dismiss (“Skowron Mem.”) at 12.
50
Wilson v. Merrill Lynch & Co., 671 F.3d 120, 128 (2d Cir. 2011)
(quotation marks omitted).
10
in Ashcroft v. Iqbal.51 First, “[a] court ‘can choose to begin by identifying
pleadings that, because they are no more than conclusions, are not entitled to the
assumption of truth.’”52 “Threadbare recitals of the elements of a cause of action,
supported by mere conclusory statements, do not suffice” to withstand a motion to
dismiss.53 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 for relief.”54
To survive a Rule 12(b)(6) motion to dismiss, the allegations in the
complaint must meet a standard of “plausibility.”55 A claim is facially plausible
“when the plaintiff pleads factual content that allows the court to draw the
reasonable inference that the defendant is liable for the misconduct alleged.”56
Plausibility “is not akin to a probability requirement;” rather, plausibility requires
51
556 U.S. 662, 679 (2009).
52
Hayden v. Paterson, 594 F.3d 150, 161 (2d Cir. 2010) (quoting
Ashcroft v. Iqbal, 556 U.S. 662, 664 (2009)). Accord Ruston v. Town Bd. for Town
of Skaneateles, 610 F.3d 55, 59 (2d Cir. 2010).
53
Iqbal, 556 U.S. at 663 (citing Bell Atl. Corp. v. Twombly, 550 U.S.
544, 555 (2007)).
54
Id. at 670. Accord Kiobel v. Royal Dutch Petroleum Co., 621 F.3d
111, 124 (2d Cir. 2010).
55
Twombly, 550 U.S. at 564.
56
Iqbal, 556 U.S. at 678 (quotation marks omitted).
11
“more than a sheer possibility that a defendant has acted unlawfully.”57 For the
purposes of a 12(b)(6) motion, “. . . a district court may consider the facts alleged
in the complaint, documents attached to the complaint as exhibits, and documents
incorporated by reference in the complaint.”58
IV.
APPLICABLE LAW
A.
New York Law Governs the Fraud and Breach of Fiduciary Duty
Claims59
“[A] federal court exercising diversity jurisdiction generally must
apply the choice-of-law rules of the state in which the court sits.”60 In New York,
“the first step in any case presenting a potential choice of law issue is to determine
57
Id. (quotation marks omitted).
58
DiFolco v. MSNBC Cable LLC, 622 F.3d 104, 111 (2d Cir. 2010)
(citing Chambers v. Time Warner, Inc., 282 F.3d 147, 153 (2d Cir. 2002)).
59
Morgan Stanley’s contribution claim is a federal claim since it is
based entirely on the federal securities laws. See Picard v. JPMorgan Chase &
Co., 460 B.R. 84, 99 (S.D.N.Y. 2011) (“[W]here the liability that is the basis for
the contribution claim is entirely a creature of federal statute, the [plaintiff] must
rely on federal, not state, contribution law”) (quotations omitted). Morgan Stanley
argues that it sufficiently alleges a right to contribution under state law because
Skowron’s improper and criminal conduct gives rights to several state causes of
action. See Morgan Stanley Mem. at 23. The relevant inquiry, however, is not
whether Skowron’s conduct gives rise to state law claims; the question is whether
Morgan Stanley’s contribution claim is based solely on violations of federal law.
See Compl. ¶¶ 135-136.
60
Liberty Synergistics Inc. v. Microflo Ltd., No. 11 Civ. 523, 2013 WL
2361042, at *9 (2d Cir. May 31, 2013).
12
whether there is an actual conflict between the laws of the jurisdictions
involved.”61 An actual conflict exists when “the applicable law from each
jurisdiction provides different substantive rules. . . . In the absence of substantive
difference, however, a New York court will dispense with choice of law analysis;
and if New York law is among the relevant choices, New York courts are free to
apply it.”62
There is no conflict between Connecticut and New York law
governing the fraud and breach of fiduciary duty claims.63 First, the basis of
Skowron’s motion as to the fraud claim is that the Complaint does not adequately
allege reasonable reliance,64 a necessary element of a fraud claim under both New
York and Connecticut Law.65 Second, the basis of Skowron’s motion as to breach
61
GlobalNet Financial.Com, Inc. v. Frank Crystal & Co., 449 F.3d 377,
382 (2d Cir. 2006) (quotations omitted).
62
International Bus. Mach. Corp. v. Liberty Mut. Ins. Co., 363 F.3d 137,
143 (2d Cir. 2004) (quotations and citations omitted).
63
Neither side argues that there is any actual conflict between New York
and Connecticut law as it relates to fraud or breach of fiduciary duty. See Skowron
Mem. at 15, n.4; Morgan Stanley’s Memorandum in Opposition to Skowron’s
Motion to Dismiss (“Morgan Stanley Mem.”) at 11-21.
64
See Skowron Mem. at 18-19.
65
See, e.g., Abbey v. Skokos, 509 Fed. App’x 92, 93 (2d Cir. 2013) (New
York common law fraud claim); Aviamax Aviation Ltd. v. Bombardier Aerospace
Corp., No. 3:08 CV 1958, 2010 WL 1882316, at *6 (D. Conn. May 10, 2010)
(Connecticut common law fraud claim).
13
of fiduciary duty is that the disgorgement of the Settlement Amount did not cause
Morgan Stanley to suffer any legally cognizable harm, i.e., Morgan Stanley
suffered no damages,66 a required element of a breach of fiduciary duty claim in
both Connecticut and New York.67 Because there is no substantive difference
between Connecticut and New York law as it relates to the fraud and breach of
fiduciary duty claims at issue in this motion, I will apply New York law.
A.
Fraud
“Under New York law, to state a claim for fraud a plaintiff must
demonstrate: (1) a misrepresentation or omission of material fact; (2) which the
defendant knew to be false; (3) which the defendant made with the intention of
inducing reliance; (4) upon which the plaintiff reasonably relied; and (5) which
caused injury to the plaintiff.”68
66
See Skowron Mem. at 15-16.
67
See, e.g., Johnson v. Nextel Commc’ns, Inc., 660 F.3d 131, 138 (2d
Cir. 2011) (New York breach of fiduciary duty claim consists of (1) existence of a
fiduciary duty; (2) a knowing breach of such duty; and (3) damages resulting from
breach); Powerweb Energy, Inc. v. Hubbell Lighting, Inc., No. 3:12 CV 220, 2012
WL 5835392, at *5 (D. Conn. Nov. 16, 2012) (Connecticut breach of fiduciary
duty claim consists of (1) existence of a fiduciary duty; (2) breach of such duty; (3)
damages sustained by plaintiff; (4) that such damages were proximately caused by
the fiduciary’s breach of his duty).
68
Solow v. Citigroup, Inc., 507 Fed. App’x 81, 83 (2d Cir. 2013).
14
1.
Reasonable Reliance
“The question of whether a party’s reliance was reasonable is always
nettlesome because it is so fact-intensive, and ordinarily a question of fact to be
determined at trial.”69 Nevertheless, a sophisticated party’s reliance on
misrepresentations may be unreasonable as a matter of law where, for instance, “a
party has been put on notice of the existence of material facts which have not been
documented and he nevertheless proceeds with a transaction without securing the
available documentation. . . . [There,] the failure to insert [protective] language
into the contract – by itself – renders reliance on the misrepresentation
unreasonable as a matter of law.”70 In such a situation – where a sophisticated
party enjoys “access to critical information but fail[s] to take advantage of that
access”71 – that party “may truly be said to have willingly assumed the business
risk that the facts may not be as represented.”72
69
In re Eugenia VI Venture Holdings, Ltd. Litig., 649 F. Supp. 2d 105,
119 (S.D.N.Y. 2008) (citing Schlaifer Nance & Co. v. Estate of Warhol, 119 F.3d
91, 98-99 (2d Cir. 1997)).
70
Century Pacific, Inc. v. Hilton Hotels Corp., 354 Fed. App’x 496, 498
(2d Cir. 2009) (quotations omitted).
71
Lazard Freres & Co. v. Protective Life Ins. Co., 108 F.3d 1531, 1541
(2d Cir. 1997).
72
Century Pacific, 354 Fed. App’x at 498 (quotations omitted).
15
B.
Breach of Fiduciary Duty
“The elements of a claim for breach of fiduciary obligation are: (i) the
existence of a fiduciary duty; (ii) a knowing breach of that duty; and (iii) damages
resulting therefrom.”73 A breach of fiduciary duty claim will be dismissed where
the complaint does not allege a but for connection between the defendant’s conduct
and the loss of money to which plaintiff was legally entitled.74
C.
Contribution
“Contribution provides that one of two or more joint wrongdoers
should not be required to pay more than its share of a common burden.”75 The
Supreme Court found an implied right to contribution under Section 10(b), stating
that the “parties against whom contribution is sought [here, Skowron] are, by
definition, persons or entities alleged to have violated existing securities laws and
who share joint liability for that wrong.”76 Accordingly, “contribution is allowed
73
Johnson, 660 F.3d at 138.
74
See Trautenberg v. Paul, Weiss, Rifkind, Wharton & Garrison LLP,
629 F. Supp. 2d 259, 264 (S.D.N.Y. 2007), aff’d, 351 Fed. App’x 472 (2d Cir.
2009).
75
In re Motel 6 Sec. Litig., No. 93 Civ. 2183, 2000 WL 322782, at *3
(S.D.N.Y. Mar. 28, 2000) (quotations omitted) (citing Fromer v. Yogel, 50 F.
Supp. 2d 227, 234 (S.D.N.Y. 1999)).
76
Musick, Peeler & Garrett v. Employers Ins. Of Wausau, 508 U.S. 286,
292 (1993).
16
only among joint tortfeasors under federal securities laws,”77 and “such a claim
must be based on allegations that all the parties [i.e., plaintiffs and defendants]
violated securities laws, not based on allegations that the [d]efendants defrauded
[p]laintiffs.”78 “To present a valid claim that the parties are joint tortfeasors subject
to contribution . . . [a]ll that is required are allegations that the parties were joint
participants in the fraud alleged.”79
V.
DISCUSSION
A.
Fraud
Skowron argues that Morgan Stanley’s fraud claim must be dismissed
because the allegation of reasonable reliance is no more than a “bald, conclusory
statement”80 which is at odds with the facts set forth in the Complaint.81 Skowron
maintains that Morgan Stanley’s reliance on Skowron’s denials of wrongdoing was
unreasonable as a matter of law.82 Specifically, Skowron’s argument is that (1) “red
flags” existed that should have tipped Morgan Stanley to Skowron’s deceit and (2)
77
In re Motel 6, 2000 WL 322782 at *3 (citing Fromer, 50 F. Supp. 2d
at 235).
78
Fromer, 50 F. Supp. 2d at 235.
79
Id.
80
Skowron Mem. at 19.
81
See id. at 18-19.
82
See id.
17
as a sophisticated investor, Morgan Stanley bore an increased burden to protect
itself against fraud by thoroughly investigating the truthfulness of Skowron’s
statements.83 Morgan Stanley responds that it has adequately pled reasonable
reliance since the Complaint (1) pleads in detail Skowron’s extensive efforts to hide
his wrongdoing from both Morgan Stanley and the government and (2) pleads
reasonable reliance on those misrepresentations.84
Because Skowron asks this court to impose on sophisticated investors a
sweeping duty to investigate the representations of its employees with the skill and
vigor equivalent to that of a prosecutor, his argument fails. Sophisticated investors
have a duty to protect themselves against fraud by availing themselves of readily
accessible information regarding a party’s representations in the context of a
business transaction.85 But the representations made by Skowron – i.e., that he did
83
See id. at 21.
84
See Morgan Stanley Mem. at 11-12.
85
The legal authority relied on by Skowron is not to the contrary. In
those cases, sophisticated investors sued defendants for fraud, and the investors’
reliance upon representations made by defendants in the context of major business
transactions was deemed unreasonable as a matter of law because the investors
could easily have uncovered the misrepresentation by consulting information
readily available to them. See, e.g., Emergent Capital Inv. Mgmt., LLC v.
Stonepath Grp., Inc., 343 F.3d 189, 195-96 (2d Cir. 2003) (dismissing fraud claim
where plaintiff, a sophisticated investor, relied on defendant’s oral representations
regarding a particular investment without requiring that those representations be
reflected in the written stock purchase agreement between the parties); Terra Sec.
Asa Konkursbo v. Citigroup, Inc., 740 F. Supp. 2d 441, 449-450 (S.D.N.Y. 2010)
18
not receive or trade on non-public information and that he never had an
inappropriate relationship with Benhamou86 – were not assertions that could be
readily verified or disproved by Morgan Stanley. Indeed, it took the SEC three
years to investigate Skowron’s misconduct and file an action against him.87
Moreover, Skowron’s lies did not relate to business transactions about which
Morgan Stanley is an expert. Rather, the lies concerned the relationship between
Benhamou and Skowron and what Skowron chose to do with information he
obtained via that relationship. And the one person who could have revealed
Skowron’s lies to Morgan Stanley – Benhamou – was part of the cover-up.88 I
decline to impose on Morgan Stanley the duty to ferret out the truth from a man
who lied for years not only to Morgan Stanley but also to his own lawyers and to
the government.
The Complaint pleads facts sufficient to raise an inference that Morgan
Stanley reasonably relied on Skowron’s denials of wrongdoing. The Complaint
(dismissing fraud claim where plaintiffs, sophisticated investors, relied on an
allegedly misleading graph presented by defendant, but the information
underpinning that graph was “public and readily available to [plaintiffs] before
their entering the securities transaction at issue.”).
86
See Compl. ¶ 50.
87
See id. ¶¶ 46, 82.
88
See id. ¶¶ 52-61.
19
includes a detailed list of Skowron’s misrepresentations – all of which relate to
Skowron’s relationship with Benhamou and the circumstances surrounding the sale
of HGSI stock – and alleges that Morgan Stanley’s reliance upon such lies was
reasonable.89 That reliance was not unreasonable as a matter of law based on the
facts pleaded in the Complaint. Accordingly, Skowron’s motion to dismiss the
fraud claim is denied.
B.
Breach of Fiduciary Duty
Skowron urges dismissal of Morgan Stanley’s breach of fiduciary duty
claim insofar as it seeks to recover the Settlement Amount from the SEC Action.90
Morgan Stanley was not damaged by the disgorgement of the Settlement Amount to
the SEC, Skowron argues, because the Settlement Amount represented the losses
avoided by FrontPoint as a result of Skowron’s criminal misconduct and, as such,
was not money that Morgan Stanley was ever entitled to retain.91 Morgan Stanley
argues that it is entitled to payment of the Settlement Amount as damages caused by
Skowron because it paid that amount on behalf of FrontPoint pursuant to an
indemnification agreement out of funds “lawfully held in the normal course of
89
See Compl. ¶¶ 119, 122.
90
See Skowron Mem. at 15.
91
See id. at 15-17.
20
business.”92 Morgan Stanley insists that although the trial court in the Criminal
Action already found that Morgan Stanley was not entitled to the Settlement
Amount, that decision is irrelevant here since it only addressed Morgan Stanley’s
right to restitution under the MVRA.93
Morgan Stanley’s argument ignores the fact that neither FrontPoint nor
Morgan Stanley were ever entitled to retain the money represented by the
Settlement Amount. The fact that Morgan Stanley paid the Settlement Amount
because of an indemnification agreement with FrontPoint – as opposed to being
compelled to pay it under the SEC Judgment – is irrelevant. As both the trial court
and Morgan Stanley recognized, Morgan Stanley voluntarily agreed to indemnify
FrontPoint for any liabilities “including third-party claims brought by governmental
entities arising out of the alleged violations of the law relating to Skowron’s HGSI
trades.”94 As such, Morgan Stanley “effectively stands in FrontPoint’s shoes.”95
That the losses were avoided because of Skowron’s insider trading and
not Morgan Stanley’s wrongdoing does not alter the conclusion that the Settlement
Amount represented money which FrontPoint and Morgan Stanley were never
92
Morgan Stanley Mem. at 19-20.
93
See id. at 21.
94
Compl. ¶ 88. See also Skowron, 839 F. Supp. 2d at 474.
95
Skowron, 839 F. Supp. 2d at 474.
21
entitled to retain. The SEC Judgment makes clear that the Settlement Amount
represented the “profits gained and/or losses avoided [by FrontPoint] as a result of
the conduct alleged in the [c]omplaint,” i.e., Skowron’s insider trading,96 not profits
to which either FrontPoint or Morgan Stanley were entitled.97 Morgan Stanley’s
claim for breach of fiduciary duty is dismissed insofar as its damages are based on
the Settlement Amount.98
C.
Contribution
Skowron argues that Morgan Stanley’s contribution claim fails because
the Complaint does not allege that Morgan Stanley and Skowron were joint
tortfeasors, as is required to assert such a claim under Section 10(b).99 Morgan
Stanley responds that the SEC Judgment’s finding of joint and several liability
96
SEC Judgment at 3.
97
I am not the first judge in this district to reach this conclusion. See
Skowron, 839 F. Supp. 2d at 746-47. Morgan Stanley’s argument that this decision
is irrelevant is without merit. While it is true that Skowron considered only
restitution under the MVRA, Morgan Stanley sought the same payment (the
Settlement Amount) from the same party (Skowron). See id. at 742. Moreover,
restitution was refused for the very same reasons as stated infra Part IV.B. See id.
at 746-47.
98
Morgan Stanley seeks other damages for breach of fiduciary duty,
including, for example, attorneys’ fees and costs related to investigations by the
United States Attorneys Office, the SEC, and Morgan Stanley itself. See Compl. ¶
114. Accordingly, the breach of fiduciary duty claim is not dismissed in its
entirety.
99
See Skowron Mem. at 12-13.
22
amongst Skowron and FrontPoint obviates the need for Morgan Stanley to make
such an allegation.100
Morgan Stanley conflates a finding of joint and several liability among
Skowron and FrontPoint with an allegation that the parties were joint tortfeasors.
Though FrontPoint and Skowron were held jointly and severally liable for the
Settlement Amount in the SEC Action,101 Morgan Stanley does not allege joint
misconduct either between FrontPoint and Skowron or between Morgan Stanley
and Skowron.102 Rather, its contribution claim is based entirely on the allegation
that Skowron violated federal securities laws and that Morgan Stanley was harmed
as a result.103 Just as in Fromer v. Yogel,104 “nothing in the Complaint [] can be read
as an allegation of fraudulent conduct by” Morgan Stanley or by FrontPoint, whom
Morgan Stanley was required to indemnify.105 As such, Morgan Stanley’s
100
See Morgan Stanley Mem. at 22.
101
See SEC Judgment at 3.
102
See Compl. ¶¶ 134-135.
103
See id. ¶¶ 135-142.
104
50 F. Supp. 2d 227 (S.D.N.Y. 1999).
105
Id. at 235. See also Compl. ¶ 134. It is possible that Morgan
Stanley’s claim could survive if it alleged that Skowron and FrontPoint were joint
tortfeasors, since in that situation Morgan Stanley would be arguing that it should
not be required to pay more than its share of the common burden of one of two
joint wrongdoers, i.e., FrontPoint and Skowron. Such allegations were not made in
the Complaint, though, since the SEC never alleged joint wrongdoing between
23
contribution claim fails as a matter of law.
VI.
CONCLUSION
In light of the foregoing, Skowron's motion is granted with respect to
Morgan Stanley's contribution and breach of fiduciary duty claims, and denied with
respect to the fraud claim. The Clerk of the Court is directed to close this motion
(Dkt. No.4). A status conference is scheduled for Wednesday, July 31, 2013 at
4:30 p.m.
Dated:
New York, New York
July 23, 2013
Skowron and FrontPoint. See CompI. ~~ 135-137; Amended Complaint in SEC v.
Skowron, No. 10 Civ. 8266 (S.D.N.Y. filed April 12, 2011) (naming the FrontPoint
funds only as relief defendants).
24
- Appearances For Plaintiff Morgan Stanley:
John A. Boyle, Esq.
Kevin H. Marino, Esq.
Marino Tortorella & Boyle, P.C.
437 Southern Boulevard
Chatham, NJ 07928
(973) 824-9300
For Defendant Joseph Skowron III:
Joshua H. Epstein, Esq.
Sorinrand LLP
515 Madison Avenue, 13th Floor
New York, NY 10022
(212) 600-2085
25
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