Menaldi v. Och-Ziff Capital Management Group LLC et al
OPINION AND ORDER: re: 103 MOTION to Dismiss Consolidated Second Amended Class Action Complaint filed by Daniel S. Och, 96 MOTION to Dismiss defendant Och-Ziff Capital Management Group LLC's Notice of Motion to Dismiss those Portions of th e Second Amended Complaint that Seek to Revive Previously Dismissed Claims or Assert New Claims filed by Och-Ziff Capital Management Group LLC, 100 MOTION to Dismiss Second Amended Complaint filed by Joel M. Frank, 86 MOTION to Amend/Correct PL AINTIFFS NOTICE OF MOTION FOR LEAVE TO AMEND THE COMPLAINT TO RENEW CLAIMS AGAINST DEFENDANT MICHAEL COHEN filed by Julie Lemond, Ralph Langstadt. For the foregoing reasons, the claims that survived Menaldi I remain; the others are dismissed. Accord ingly, Plaintiffs' motion to renew claims against Cohen is DENIED. The motions to dismiss by Och-Ziff, Och, and Frank are GRANTED insofar as they seek to dismiss the new or renewed claims in the New Complaint. The Clerk of Court is directed to d ismiss Cohen from this suit and close the motions at Docket Numbers 86, 96, 100, and 103.The parties shall comply with the deadlines set forth in the Stipulation and Order at Docket Number 71. The remaining Defendants shall file answers to the surviving claims of the Consolidated Second Amended Class Action Complaint within 30 days of the date of this Opinion and Order. SO ORDERED. (Signed by Judge J. Paul Oetken on 9/29/2017) (ama)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
ARTHUR MENALDI, individually and on
behalf of all others similarly situated,
OCH-ZIFF CAPITAL MANAGEMENT
GROUP LLC, DANIEL S. OCH, JOEL M.
FRANK, and MICHAEL COHEN,
OPINION AND ORDER
J. PAUL OETKEN, District Judge:
This is a sequel to this Court’s opinion in Menaldi v. Och-Ziff Capital Management
Group LLC, 164 F. Supp. 3d 568 (S.D.N.Y. 2016) (“Menaldi I”). And like many a sequel, we
unravel old plots and rehash familiar themes, only to end up right back where we started. In
Menaldi I, this Court dismissed some of Plaintiffs’ claims of securities fraud, and dismissed all
claims against Defendant Michael Cohen. Plaintiffs have now filed an amended complaint,
seeking (1) to revive previously dismissed claims, (2) to revive claims against Cohen, and (3) to
assert new claims. All three attempts fail, leaving Plaintiffs with the claims previously allowed
to go forward in Menaldi I.
Lead Plaintiffs Ralph Langstadt and Julie Lemond bring this action on behalf of a
putative class of investors who purchased securities in Och-Ziff Capital Management Group
LLC (“Och-Ziff”) between November 18, 2011, and April 11, 2016. The following facts are
taken from the Consolidated Amended Class Action Complaint (“the Old Complaint”) and the
Consolidated Second Amended Class Action Complaint (“New Complaint” or “Compl.”). (Dkt.
The Menaldi I Motion to Dismiss
Upon a motion to dismiss, this Court in Menaldi I dismissed some of the claims against
some Defendants and dismissed all of the claims against Cohen.
First, the Court held that the Old Complaint failed to state a claim under Rule 10b-5(b)
based on failure to disclose the then-uncharged FCPA and sanctions violations. The Court
concluded that (1) the Old Complaint did not plausibly allege that any laws were actually broken,
and (2) even if laws were broken, the Old Complaint failed to plead facts establishing that OchZiff had a duty to disclose the uncharged illegal conduct. Menaldi I, 164 F. Supp. 3d at 578.
The Court noted that the Old Complaint’s FCPA allegations were “conclusory” because they did
not identify any actual bribes and only hinted at various improprieties. Id. Moreover, the Court
held that even if FCPA violations had occurred, the connection between Och-Ziff’s public
statements and the alleged criminal conduct was too tenuous to give rise to a duty to disclose the
Second, the Court held that the Old Complaint did state a claim under Rule 10b-5(b)
against Och-Ziff, Och, and Frank for misrepresenting the SEC-DOJ investigation in Och-Ziff’s
public filings. Specifically, the Court held that “Plaintiffs have plausibly alleged that Och-Ziff
misled investors by suggesting that the company was not facing an investigation that could have
a material impact on its business, when, in fact, it was facing such an investigation.” Menaldi I,
164 F. Supp. 3d at 584. The Court likewise held that the Old Complaint adequately alleged
scienter, concluding that “Plaintiffs have plausibly alleged that [Och and Frank] were reckless in
opting to misrepresent their exposure to civil and criminal liability.” Id. at 585.
Third, the Court held that the Old Complaint failed to state a claim for scheme liability
under subsections (a) and (c) of Rule 10b-5. Id. at 586. The Court rejected a claim of scheme
liability based on the then-uncharged FCPA violations because (1) that conduct had been
inadequately pleaded, as discussed above, and (2) those violations took place before the class
period. The Court also rejected a claim of scheme liability based on misrepresentations in the
Och-Ziff filings concerning the SEC investigations, because the Old Complaint did not identify
an additional “deceptive act” as required for scheme liability. Id.
Fourth, the Court held that the Old Complaint failed to state a control-person claim under
§ 20(a) against Cohen. Control person liability requires a predicate primary violation, and since
the only other claim against Cohen—scheme liability—had been dismissed, the Court held that
the control person claim must be dismissed as well. Id. at 587.
Finally, the Court held that the Old Complaint did state a control-person claim against
Och and Frank because it alleged that both were aware of the existence and scope of the SECDOJ Investigation and were responsible for the allegedly misleading filings. Id.
In sum, Menaldi I left two claims standing: (1) a 10b-5(b) claim against Och-Ziff, Och,
and Frank based on allegedly misleading statements regarding the SEC-DOJ investigation, and
(2) a § 20(a) control person claim against Och and Frank, also based on the filings relating that
investigation. As both claims against Cohen were dismissed, he was dismissed from the case
The DOJ Deferred Prosecution Agreement
Five months after Menaldi I, Och-Ziff entered into a Deferred Prosecution Agreement
with DOJ. (See Dkt No. 76, Ex. B (“DPA”).) According to the terms of the DPA, Och-Ziff
agreed to the filing of two counts of violating the FCPA’s anti-bribery provisions, one count of
violating the FCPA’s books and records provisions, and one count of violating the FCPA’s
Ex. A (the “SEC Settlement”).) The SEC Settlement reiterated the allegations in the DPA. 2
However, unlike Och-Ziff, the individual Defendants Och and Frank did not admit (or deny) the
SEC Settlement’s factual allegations. (SEC Settlement at 2.)
The SEC Settlement heaps the lion’s share of the blame onto Cohen, who allegedly knew
from the start that bribery was Gertler’s competitive edge. (Id. ¶ 43.) It also says, however, that
“[o]thers within Och-Ziff, including Och and Frank, were aware of corruption accusations
against [Gertler] as well as the high corruption risk when doing business in the DRC.” (Id. ¶ 45.)
It recounts an Och-Ziff due-diligence report, received by Frank and other high-ranking Och-Ziff
employees, containing a laundry list of bribery accusations against Gertler. (Id. ¶ 46.) Frank and
a senior Och-Ziff attorney went to Och with their concerns. (Id. ¶ 47.) “Och was told that
although it was not illegal to transact with [Gertler], nonetheless both Frank and the senior OchZiff attorney expressed the view that Och-Ziff should not enter into any transaction with him
because of the significant corruption risk.” (Id.) Och decided to move forward anyway. (Id.)
The SEC Settlement concluded that although Och-Ziff had a formal anti-corruption
policy since 2008, it failed to follow its own guidelines and entered into transactions and
business relationships without proper due diligence. (Id. ¶¶ 94–101.) It also concluded that
Och-Ziff violated the books and records provisions and the accounting provisions of the FCPA.
(Id. ¶¶ 102–03.)
As to the individual Defendants, the SEC settlement concluded that “Och was aware of
the risk of corruption in the transactions with [Gertler], and contrary to the recommendation of
his legal and compliance team, he approved the use of Och-Ziff investor funds in those
The naming structure, however, is different. Thus, “Och-Ziff Employee A” in the
SEC Settlement is Cohen.
transactions. As a consequence, Och caused Och-Ziff’s [FCPA books and records violations].”
(Id. ¶ 104.) As to Frank, it concluded that he had ultimate responsibility for maintaining OchZiff’s books and records, for authorizing all uses of Och-Ziff funds, and for overseeing OchZiff’s legal and compliance departments. As such, “Frank was responsible for ensuring that all
transactions were recorded accurately and in accordance with generally acceptable accounting
procedures and was likewise responsible for devising and maintaining Och-Ziff’s internal
accounting controls.” (Id. ¶ 105.)
As part of the SEC Settlement, Och-Ziff agreed to disgorge an additional
$199,045,167.00, and Och agreed to disgorge $2,173,718.00. (Id. at 35.) The SEC Settlement
did not impose a monetary penalty on Frank, but he agreed that penalties may be imposed
against him at a later date. (Id. at 34.)
Cohen was not a party to the DOJ or SEC agreements. On January 26, 2017—after the
New Complaint was filed—the SEC filed a civil suit against Cohen and another Och-Ziff
employee in the Eastern District of New York. (See Dkt. No. 117.) The SEC complaint alleges
FCPA violations and securities fraud. 3
The New Complaint
The New Complaint was filed on November 18, 2016. (Dkt. No. 76.) The key difference
between the factual allegations in the Old Complaint and those in the New Complaint is the level
of detail regarding Och-Ziff’s dubious dealings in Africa. Of great help are the DPA and the
SEC Settlement, both of which are incorporated into the New Complaint.
The SEC complaint was filed after the New Complaint, but Plaintiffs ask the court
to take judicial notice of it. (Dkt. Nos. 117, 119.) Cohen opposes this request. (Dkt. No. 118.)
Ultimately, however, the SEC complaint adds little, if anything, of relevance to the allegations in
the New Complaint, and does not affect the outcome of the pending motions.
The New Complaint restates the claims dismissed in Menaldi I and adds three new
theories of liability: (1) that Och-Ziff made misleading statements when it described its FCPA
compliance program; (2) that Och-Ziff filed false financial statements by failing to comply with
Generally Accepted Accounting Principles, and (3) that Och’s and Frank’s Sarbanes-Oxley
certifications were misleading. It also seeks to renew the dismissed claims against Cohen.
Before the Court now are four motions: Plaintiffs’ motion seeking to renew claims
against Cohen, and three separate motions to dismiss—one each by Och-Ziff, Och, and Frank.
(Dkt. Nos. 86, 96, 100, 103.)
In general, to survive a motion to dismiss pursuant to Federal Rule of Civil Procedure
12(b)(6), “a complaint must contain sufficient factual matter . . . to state a claim to relief that is
plausible on its face.” Wilson v. Merrill Lynch & Co, Inc., 671 F.3d 120, 128 (2d Cir. 2011)
(quoting Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)). “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.” Id. In assessing a motion to dismiss, courts
assume that all “factual allegations contained in the complaint” are true, Bell Atlantic Corp. v.
Twombly, 550 U.S. 544, 572 (2007), and draw “all inferences in the light most favorable to the
non-moving party.” In re NYSE Specialists Sec. Litig., 503 F.3d 89, 95 (2d Cir. 2007) (citation
Claims for securities fraud, however, are subject to the heightened pleading standards of
the Private Securities Litigation Reform Act (“PSLRA”) and Federal Rule of Civil Procedure
Rule 9(b). Under the PSLRA, securities fraud complainants must: “(1) ‘specify each statement
alleged to have been misleading [and] the reason or reasons why the statement is misleading,’ 15
U.S.C. § 78u–4(b)(1); and (2) ‘state with particularity facts giving rise to a strong inference that
the defendant acted with the required state of mind,’ § 78u–4(b)(2).” Tellabs, Inc. v. Makor
Issues & Rights, Ltd., 551 U.S. 308, 321 (2007). Rule 9(b) “imposes a comparable requirement”
on securities fraud plaintiffs. In re BioScrip, Inc. Sec. Litig., 95 F. Supp. 3d 711, 725 (S.D.N.Y.
2015) (“In alleging fraud or mistake, a party must state with particularity the circumstances
constituting fraud or mistake.”) (quoting Fed. R. Civ. P. 9(b)).
Och’s and Ziff’s Knowledge of Bribery
As a threshold matter, the Court analyzes the effect of the SEC’s finding that “neither
Och nor Frank knew that bribes would be paid.” (SEC Settlement ¶ 6.) Defendants argue that
Plaintiffs cannot adopt the SEC’s allegations as their own without also incorporating this
exculpatory finding. (See, e.g., Dkt. No. 102 at 6–7.)
When deciding a motion to dismiss, “courts must consider the complaint in its entirety, as
well as other sources courts ordinarily examine when ruling on Rule 12(b)(6) motions to dismiss,
in particular, documents incorporated into the complaint by reference . . . .” Tellabs, 551 U.S. at
322. “If the allegations of a pleading ‘are contradicted by documents made a part thereof, the
document controls and the court need not accept as true the allegations of the [pleading].’” In re
Trusteeships Created by Tropic CDO I Ltd., 92 F. Supp. 3d 163, 171 (S.D.N.Y. 2015) (quoting
Sazerac Co. v. Falk, 861 F. Supp. 253, 257 (S.D.N.Y. 1994)).
Accordingly, the Court considers the SEC’s exculpatory finding as if it were in the
complaint itself, and accepts it as true. Of course, this is not the end of the story. As Plaintiffs
point out, even if Och and Ziff did not know of actual bribery, Defendants could still be liable if
their conduct was reckless. Defendants could also be liable for claims that do not hinge on actual
knowledge of bribery. Nevertheless, as discussed below, the lack of actual knowledge of bribery
weighs down the New Complaint’s allegations, particularly when it comes to scienter.
The Previously Upheld Claims
As another preliminary matter, the Court holds that the New Complaint does not affect
the claims that survived Menaldi I. Those claims are the 10b-5(b) claim against Och-Ziff, Och,
and Frank based on allegedly misleading statements regarding the SEC-DOJ investigation, and
the § 20(a) control person claim against Och and Frank, also based on the filings relating to the
While Och-Ziff seeks to dismiss only the revived and newly asserted claims, Frank and
Och style their briefs as motions to dismiss the New Complaint in its entirety—presumably
including those claims that survived Menaldi I. Och and Frank also argue that that the SEC
Settlement specifically says that neither of them knew of the bribery, and that, as a result, they
lacked scienter for the statements about the SEC-DOJ investigation.
The Court is unconvinced. The holding in Menaldi I did not hinge on whether Och and
Frank knew of the underlying bribery. Instead, Menaldi I noted that “[Och and Frank] knew
about the SEC-DOJ Investigation from 2011 onward, but waited to disclose its potential impact,
which Och-Ziff later described as material, until after the Wall Street Journal published an
article about the African Transactions. With these allegations assumed to be true, Plaintiffs have
plausibly alleged that [Och and Frank] were reckless in opting to misrepresent their exposure to
civil and criminal liability.” Menaldi I, 164 F. Supp. 3d at 585 (citations omitted). The SEC’s
finding that Och and Frank lacked actual knowledge of bribes does not change that conclusion.
Indeed, the SEC-DOJ investigation could have had a materially adverse outcome even if there
were no bribery at all—for instance if it uncovered books and records violations (as it did).
Accordingly, the 10b-5(b) and § 20(a) claims upheld in Menaldi I remain viable.
The Renewed Claim for Failure to Disclose The Illegal Conduct
Menaldi I also held that Och-Ziff’s failure to disclose the FCPA violations was not
actionable because (1) the Old Complaint did not plausibly allege that federal laws were actually
violated, and, alternatively, (2) there was no duty to disclose the then-uncharged illegal conduct.
The first part of the Menaldi I holding is clearly obsolete, as it is now clear that laws were indeed
broken. The second part of that holding, however, still stands.
Menaldi I discussed a line of cases holding that “a corporation may be compelled to
disclose uncharged wrongdoing if its statements are or become materially misleading in the
absence of disclosure.” Menaldi I, 164 F. Supp. 3d at 581. “For such a duty to arise, however,
there must be a connection between the illegal conduct and the misleading statements ‘beyond
the simple fact that a criminal conviction would have an adverse impact upon the corporation’s
operations in general or the bottom line.’” Id. (citing In re FBR Sec. Litig., 544 F. Supp. 2d 346,
357 (S.D.N.Y. 2008). Three situations can create such a connection: (1) “when a corporation
puts the reasons for its success at issue but fails to disclose that a material source of its success is
the use of improper or illegal business practices”; (2) “when a defendant makes a statement that
can be understood, by a reasonable investor, to deny that the illegal conduct is occurring”; or (3)
“when a defendant states an opinion that, absent disclosure, misleads investors about material
facts underlying that belief.” Id. (collecting cases) (citations omitted).
Nothing in the New Complaint changes Menaldi I’s conclusion that the connection
between Och-Ziff’s public statements and the criminal conduct is “too tenuous to give rise to a
duty to disclose criminal wrongdoing.” Id. at 582. This holding was based on the same
statements at issue in the New Complaint—i.e., statements about Och-Ziff’s not being subject to
proceedings expected to have a material impact, and statements about being subject to
government investigations from time to time. “These statements do not address the sources of
Och-Ziff’s success, nor do they deny illegal conduct that has been charged, admitted, or
adequately pleaded. And while Och-Ziff made projections about the impact of pending
regulatory proceedings, those projections required, at most, that Och-Ziff disclose material
information about the investigation. To hold otherwise would be to subject corporations to a
preemptive duty to ‘confess’ as soon as a regulatory agency begins an investigation.” Id. (citing
City of Pontiac Policemen’s & Firemen’s Ret. Sys. v. UBS AG, 752 F.3d 173, 184 (2d Cir. 2014)
(“[D]isclosure is not a rite of confession . . . .”)).
Accordingly, the holding in Menaldi I still stands: There was no duty to disclose the
then-uncharged illegal conduct.
The New Claim for Statements about Och-Ziff’s Compliance Program
Menaldi I also held that Och-Ziff’s statements touting its compliance program were not
actionable. 164 F. Supp. 3d at 580. These included Och-Ziff statements that its “transparency”
was a “competitive strength” and that it actively managed “reputational risks.” Id.; see also City
of Pontiac, 752 F.3d at 183 (“It is well-established that general statements about reputation,
integrity, and compliance with ethical norms are inactionable ‘puffery’. . . .”).
The New Complaint doubles down on this claim. It points to two statements made in
Och-Ziff’s SEC filings and which were not included in the Old Complaint. The first one, made
in a 10-K filing on February 27, 2012, reads:
We have implemented a global compliance program to address
the legal and regulatory requirements that apply to our
company-wide operations . . . . Our compliance program
includes comprehensive policies and supervisory procedures
that have been implemented to monitor compliance with these
requirements. All employees attend mandatory compliance
training to remain informed of our policies related to matters
such as the handling of material non-public information and
employee securities trading. In addition to a robust internal
compliance framework, we have strong relationships with a
global network of local attorneys specializing in compliance
matters to help us quickly identify and address compliance
issues as they arise.
(Compl. ¶ 177.) The second one, made in a 10-K filing on February 28, 2013, reads:
In recent years, the U.S. Department of Justice (the “DOJ”)
and the SEC have devoted greater resources to enforcement
of the FCPA. . . . While we have developed and implemented
policies and procedures designed to ensure strict compliance
by us and our personnel with the FCPA, such policies and
procedures may not be effective in all instances to prevent
violations. Any determination that we have violated the
FCPA or other applicable anti-bribery laws could subject us
to, among other things, civil and criminal penalties, material
fines, profit disgorgement, injunctions on future conduct,
securities litigation and a general loss of investor confidence,
any one of which could adversely affect our business
prospects, financial position or the market value of our Class
(Compl. ¶ 190).
In analyzing this new claim, the key issues are (1) whether these statements were
misleading and (2) if so, whether Defendants acted with scienter.
Plaintiffs argue that “Defendants’ statements that adequate controls were in place were
explicitly intended to allay investor concerns regarding increased regulatory scrutiny and the
Company’s exposure to regulatory risk” while, at the same time, “Defendants were not only
aware of rampant corruption and the lack of any meaningful compliance function, but they
themselves had circumvented and/or ignored the Company’s internal controls and approved
illicit transactions despite warnings that bribes would likely be paid.” (Dkt. No. 126 at 42–43.)
In response, Och-Ziff argues that these statements are too generalized to be actionable.
(Dkt. No. 99 at 22–23.) It also argues that they were not misleading because “Och-Ziff
specifically cautioned investors that its FCPA compliance controls ‘may not be effective in all
instances to prevent violations’ and that ‘[a]ny determination that we have violated the FCPA or
other applicable anti-bribery laws could subject us to, among other things, civil and criminal
penalties.’” (Id. at 23.) Och and Frank also argue that the complaint inadequately pleads
scienter as to them.
The Court concludes that the New Complaint does not adequately plead that the two
statements were misleading. To begin with, the New Complaint does not allege that the
statements contain literal untruths. Och-Ziff had indeed implemented a compliance program and
issued policies and procedures aiming to ensure FCPA compliance. Also important is that these
statements do not profess an opinion on the efficacy of Och-Ziff’s compliance program. See
Lapin v. Goldman Sachs Grp., Inc., 506 F. Supp. 2d 221, 239 (S.D.N.Y. 2006) (“[O]ptimistic
statements may be actionable upon a showing that the defendants did not genuinely or
reasonably believe the positive opinions they touted (i.e., the opinion was without a basis in fact
or the speakers were aware of facts undermining the positive statements), or that the opinions
imply certainty.”). 4
Nor does the New Complaint adequately allege that the statements were misleading
because they described Och-Ziff’s compliance program while omitting the FCPA violations. It
is true that “[t]he literal truth of an isolated statement is insufficient; the proper inquiry requires
an examination of defendants’ representations, taken together and in context. Thus, when an
offering participant makes a disclosure about a particular topic, whether voluntary or required,
the representation must be complete and accurate.” In re Morgan Stanley Info. Fund Sec. Litig.,
While the description of the compliance program as “robust” (Compl. ¶ 177),
arguably constitutes an opinion, Plaintiffs do not make that argument. In any event, this one
adjective—and a vague one at that—is not enough to constitute a false opinion.
592 F.3d 347, 366 (2d Cir. 2010) (internal citations and quotation marks omitted). The Court
nevertheless concludes that the above two statements were not so incomplete as to be
The case most favorable to Plaintiffs is Meyer v. Jinkosolar Holdings Co., 761 F.3d 245
(2d Cir. 2014), in which the Second Circuit held that a Chinese company’s description of a
compliance program could be misleading if it omits known pollution problems. The court
reasoned that “the description of pollution-preventing equipment and 24-hour monitoring teams
gave comfort to investors that reasonably effective steps were being taken to comply with
applicable environmental regulations.” Id. at 251. And even though “these descriptions did not
guarantee 100% compliance 100% of the time,” investors would be misled by a statement
describing the company’s compliance efforts “if in fact the equipment and 24-hour team were
then failing to prevent substantial violations of the Chinese regulations.” Id.
But, crucially, Och-Ziff’s statements are far more generalized. The company in
Jinkosolar described, for example, specific “pollution abatement equipment . . . to process,
reduce, treat, and where feasible, recycle the waste materials before disposal” and
“environmental teams at each of our manufacturing facilities to monitor waste treatment and
ensure that [these] waste emissions comply with [Chinese law].” Jinkosolar, 761 F.3d at 247.
Given these statements, the court held, “the failure to disclose that the prophylactic steps were
then failing to prevent serious ongoing pollution problems rendered that description misleading.”
Id. at 250.
In contrast, Och-Ziff’s 2012 statement described a “global compliance program,”
“comprehensive policies and supervisory procedures,” “mandatory compliance training,” and
“strong relationships with a global network of local attorneys.” (Compl. ¶ 177.) It did not
describe specific regions, specific initiatives, or make any assurances of efficacy. If this type of
milquetoast corporate-speak required disclosure of all potential FCPA violations then known to
the company, then “any company that has a compliance program and discloses that program in
even the most austere terms would be required, ipso facto, to disclose any possible deviation that
came to its attention.” In re FBR Inc. Sec. Litig., 544 F. Supp. 2d 346, 360 (S.D.N.Y. 2008).
The FBR court—in evaluating similarly generalized statements—reached the same result.
The 2013 Och-Ziff statement likewise differs significantly from those in Jinkosolar
because it explicitly says that “[Och-Ziff’s] policies and procedures may not be effective in all
instances to prevent violations.” (Compl. ¶ 190.) By comparison, the statement in Jinkosolar
does not appear to have had such a disclaimer. Notably, one of the few cases in this district
discussing Jinkosolar likewise distinguished the facts of that case because “[u]nlike the company
in Jinkosolar, [defendant] did not represent that its efforts to comply with the law were
particularly effective, let alone foolproof.” Christine Asia Co. v. Alibaba Grp. Holding Ltd., 192
F. Supp. 3d 456, 474 (S.D.N.Y. 2016).
Accordingly, the holding in Menaldi I still stands: The statements about Och-Ziff’s
compliance program are not actionable.
The New Claim for Fraudulent Financial Statements
The New Complaint asserts another new claim: that Och-Ziff committed “fraudulent
financial reporting” because it did not disclose the potential financial impact of the SEC-DOJ
investigation, in violation of Generally Accepted Accounting Principles (“GAAP”).
(Compl. ¶¶ 111–60.) “SEC regulations dictate that where financial statements are not prepared
in compliance with GAAP, they are presumed to be misleading.” Pennsylvania Pub. Sch.
an ASC 450 violation because the complaint alleged that defendants knew or should have known
that products would be recalled).
By comparison, Och and Frank did not know of actual bribery, and the New Complaint
does not allege any contemporaneous events besides the subpoenas showing what Och and Frank
knew about the extent of the scheme. “[T]he existence of a subpoena does not, without more,
give rise to a strong inference of scienter on the part of senior management.” Godinez, 2017 WL
3623160, at *1. While Cohen may very well have known about bribery, his state of mind is not
relevant to the question of scienter for GAAP omissions, as he was not involved in any filings.
Nor does the New Complaint adequately allege that Defendants exhibited “reckless
disregard for a known or obvious duty.” In re Bank of Am. AIG Disclosure Sec. Litig., 980 F.
Supp. 2d 564, 586 (S.D.N.Y. 2013), aff’d, 566 F. App’x 93 (2d Cir. 2014). Contrary to
Plaintiffs’ argument, ASC 450 is not a “reasonably simple and straightforward accounting rule.”
(Dkt. No. 126 at 39.) The rule requires many judgment calls in deciding how to respond to
contingencies. And unlike Och-Ziff’s statements about the SEC-DOJ investigation—for which
the Court concluded that Plaintiffs adequately alleged scienter—this claim involves an omission
that is based on a qualitative accounting rule rather than an affirmative misstatement about a
pending investigation. “[R]eckless conduct is, at the least, conduct which is highly unreasonable
and which represents an extreme departure from the standards of ordinary care . . . to the extent
that the danger was either known to the defendant or so obvious that the defendant must have
been aware of it.” In re Eletrobras Sec. Litig., 245 F. Supp. 3d 450, 2017 WL 1157138, at *10
(S.D.N.Y. 2017) (quoting Chill, 101 F.3d at 269) (quotation marks omitted). Given the
heightened pleading standards of Rule 9(b) and the PSLRA, Plaintiffs’ allegations fall short of
adequately pleading scienter.
Accordingly, the New Complaint fails to state a claim relating to ASC 450.
The New Claims Regarding the Sarbanes-Oxley Certifications
The New Complaint also alleges that some of Och-Ziff’s 10-K and 10-Q filings
contained Sarbanes-Oxley (“SOX”) certifications by Och and Frank certifying that the report
“does not contain any untrue statement of material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which the statements were
made, not misleading.” (Dkt. No. 126 at 16.) Plaintiffs argue that these certifications were
materially false and misleading because Och and Frank knew that Och-Ziff committed FCPA
violations and knew that its financial statements did not accurately reflect the bribes paid. (Id.)
But while signing the SOX certifications might be indicative of scienter, see In re
Eletrobras Sec. Litig., 2017 WL 1157138, at *11, the New Complaint does not state a standalone
claim based on the SOX certifications. To the extent that it alleges that Och and Frank
misrepresented Och-Ziff’s compliance with GAAP, the Court has already held that the New
Complaint inadequately alleges scienter. To the extent that it alleges that Och and Frank
misrepresented their knowledge of the then-uncharged conduct, the Court has likewise held that
there was no affirmative duty to disclose that conduct. And to the extent that the New Complaint
alleges that Och and Frank misrepresented the potential impact of the SEC-DOJ investigation or
constituted “control persons” for § 20(a) liability, the Court has already held in Menaldi I that
Plaintiffs have adequately stated those claims.
Moreover, the SOX certifications contained an important qualification that the certifying
officer’s statements are true “based on [his] knowledge.” (Compl. ¶ 171.) And since, as
discussed above, the New Complaint does not adequately allege that Och and Frank had actual
knowledge of bribery, it undermines the allegations that they knew that the SOX certifications
were false. Cf. Eletrobras, 2017 WL 1157138, at *11 (concluding that SOX certifications were
indicative of scienter because the signing officers knew that an internal audit contradicted the
Accordingly, while the SOX certifications remain relevant to this action, they do not
constitute a standalone basis for liability.
The Renewed Claim for Scheme Liability
To state a claim for scheme liability, a plaintiff must present facts showing “(1) that the
defendant committed a deceptive or manipulative act, (2) in furtherance of the alleged scheme
to defraud, (3) with scienter, and (4) reliance.” In re Alstom SA Sec. Litig., 406 F. Supp. 2d 433,
474 (S.D.N.Y. 2005). Moreover, the alleged scheme must be “in connection with the purchase
or sale of any security.” 17 C.F.R. § 240.10b–5.
Scheme liability claims are subject to the PSLRA pleading standard with respect to
scienter. Thus, to state a scheme liability claim, a plaintiff must plead facts demonstrating “a
strong inference that the defendant acted with the required state of mind.” Tellabs, 551 U.S. at
321 (quoting 15 U.S.C. § 78u–4(b)(2)). Rule 9(b) also requires that plaintiffs state with
particularity “what deceptive or manipulative acts were performed, which defendants performed
them, when the acts were performed, and the effect the scheme had on investors in the securities
at issue.” In re Parmalat Sec. Litig., 383 F. Supp. 2d 616, 622 (S.D.N.Y. 2005).
In Menaldi I, the Court dismissed the scheme liability claim because (1) the underlying
FCPA violations happened years before the class period, and (2) the Old Complaint did not point
to an additional “deceptive act” as required for scheme liability. Menaldi I, 164 F. Supp. 3d at
586. In an effort to salvage the scheme liability claim, the New Complaint extends the class
period and points to new deceptive acts. Here, it is useful to separate the analysis into two parts:
Och-Ziff (1) covered up its bribe payments by categorizing them as “investments” or
“convertible loans”; (2) “falsified documents related to bribery payments and personal benefits
derived from the illicit transactions”; (3) “withheld documents requested by regulators”; (4)
“allowed [Och-Ziff’s] financial statements to continue to reflect improper entries throughout the
Class Period intended to disguise Defendants’ illegal conduct”; (5) “continued to record and
personally benefit from profits derived from the illegal transactions”; and (6) “failed to take a
loss contingency that would have alerted investors to the existence of and risks posed by the
initiation of a regulatory investigation.” (Dkt. No. 126 at 65–66.)
None of these allegations, however, furnish the necessary deceptive act. First, the
underlying bribery is not a proper basis for a scheme liability claim. As the Court concluded in
Menaldi I, “those legal violations . . . occurred years before the putative class period. The [Old]
Complaint thus fails to explain how the ‘proscribed schemes or acts [were] done in connection
with the purchase or sale of any security.’” 164 F. Supp. 3d at 586 (quoting Taylor v. Westor
Capital Grp., 943 F. Supp. 2d 397, 402 (S.D.N.Y. 2013)).
Second, Och-Ziff’s misrepresentations or omissions in its public filings are not a proper
basis for a scheme liability claim. “[T]he three subsections of Rule 10b–5 are distinct, and courts
must scrutinize pleadings to ensure that misrepresentation or omission claims do not proceed
under the scheme liability rubric.” In re Smith Barney Transfer Agent Litig., 884 F. Supp. 2d
152, 161 (S.D.N.Y. 2012). Therefore, Och-Ziff’s statements about the investigation, Och-Ziff’s
failure to disclose the then-uncharged conduct, and Och-Ziff’s failure to disclose or accrue a loss
contingency do not constitute deceptive acts for the purpose of scheme liability. See Lentell v.
Merrill Lynch & Co., 396 F.3d 161, 177 (2d Cir. 2005) (“[W]here the sole basis for [scheme
liability] claims is alleged misrepresentations or omissions, plaintiffs have not made out a market
manipulation claim under Rule 10b–5(a) and (c).”); S.E.C. v. Kelly, 817 F. Supp. 2d 340, 343
(S.D.N.Y. 2011) (“[W]here the primary purpose and effect of a purported scheme is to make a
public misrepresentation or omission, courts have routinely rejected the SEC’s attempt to bypass
the elements necessary to impose ‘misstatement’ liability under subsection (b) by labeling the
alleged misconduct a ‘scheme’ rather than a ‘misstatement.’”) (citations omitted)).
Finally, Plaintiffs argue that Defendants engaged in a general, “multi-faceted cover-up
to conceal the illegal bribery scheme.” (Dkt. No. 126 at 66.) However, the New Complaint
does not contain plausible allegations of a deceptive cover-up aside from the underlying bribery
and the alleged misrepresentations. Plaintiffs point to the Eighth Circuit’s decision in West
Virginia Pipe Trades Health & Welfare Fund v. Medtronic, Inc., 845 F.3d 384 (8th Cir. 2016),
but the deceptive act in that case was pleaded in far more detail than those pleaded in the New
Complaint. There, the court held that the company’s management “allege[d] conduct beyond
mere misrepresentations or omissions actionable under Rule 10b-5(b)”―namely, that the
company paid doctors to manipulate medical data. Id. at 393. That is not the case here,
however, where the scheme-liability allegations merely repackage the misrepresentation
Accordingly, the New Complaint does not adequately plead a scheme liability claim
against Och-Ziff, Och, and Frank.
The Renewed Claim for Control Person Liability
The final claim in this suit arises under § 20(a) of the Exchange Act. To state a § 20(a)
claim, a Plaintiff must allege facts showing “(1) an underlying primary violation of the securities
laws by the controlled person; (2) control over the controlled person; and (3) that the controlling
person was, in some meaningful sense, a culpable participant in the controlled person’s primary
violation.” In re Deutsche Telekom AG Sec. Litig., No 00 Civ. 9475, 2002 WL 244597, at *6
(S.D.N.Y Feb. 20, 2002) (citing Ganino v. Citizens Utils. Co., 228 F.3d 154, 170 (2d Cir. 2000)).
As to Och and Frank, the New Complaint does not adequately allege any new primary
violations on which to base a § 20(a) claim. Accordingly, the sole viable § 20(a) claim against
them is the one that survived Menaldi I.
As to Cohen, the control person claim against him fails for the same reasons discussed in
Menaldi I—namely, the lack of a primary violation. Since the New Complaint fails to state a
primary violation—scheme liability—against Cohen, the control person claim fails too. And
since both claims against Cohen fail, the Court concludes that renewing the claims against him
would be futile. Accordingly, Cohen is dismissed from this suit. 7
Leave to Amend
Plaintiffs ask for leave to amend the New Complaint in the event any of its claims fail.
(Dkt. No. 126 at 69 n.43.) That request is denied. Plaintiff have already had the opportunity to
amend their complaint after Menaldi I. After three years, multiple amendments, and a forest’s
worth of briefing, it is time to move past the pleading stage.
For the foregoing reasons, the claims that survived Menaldi I remain; the others are
dismissed. Accordingly, Plaintiffs’ motion to renew claims against Cohen is DENIED. The
motions to dismiss by Och-Ziff, Och, and Frank are GRANTED insofar as they seek to dismiss
the new or renewed claims in the New Complaint. The Clerk of Court is directed to dismiss
Cohen from this suit and close the motions at Docket Numbers 86, 96, 100, and 103.
Since the claims against Cohen are dismissed on futility grounds, the Court need
not express an opinion on the remaining arguments made in the parties’ briefs on the issue of
The parties shall comply with the deadlines set forth in the Stipulation and Order at
Docket Number 71. The remaining Defendants shall file answers to the surviving claims of the
Consolidated Second Amended Class Action Complaint within 30 days of the date of this
Opinion and Order.
Dated: September 29, 2017
New York, New York
J. PAUL OETKEN
United States District Judge
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