Menaldi v. Och-Ziff Capital Management Group LLC et al
Filing
39
MEMORANDUM AND OPINION re: #23 MOTION to Dismiss / Motion to Dismiss Plaintiffs' Consolidated Amended Class Action Complaint. filed by Daniel S. Och, Joel M. Frank, Och-Ziff Capital Management Group LLC, #26 MOTION to Dismiss the Amended Class Action Complaint. filed by Michael Cohen. For the foregoing reasons, Defendant Michael Cohen's motion to dismiss is GRANTED, and the remaining Defendants' motion to dismiss is GRANTED in part and DENIED in part. Plaintiffs' Rule 10b-5(b) claim against Defendant Cohen is dismissed in its entirety. Plaintiffs' Rule 10b-5(b) claim against Defendants Och-Ziff, Och, and Frank is dismissed insofar as it relies on a duty to disclose uncharged wrongdoing, but the motion to dismiss is denied insofar as Plaintiffs allege Rule 10b-5(b) violations with respect to statements about pending regulatory proceedings. Plaintiffs' scheme liability claim is dismissed as to all Defendants. Plaintiffs' control person liability claim is dismissed as to Defendant Cohen, but the motion to dismiss is denied as to alleged 20(a) violations by Defendants Och and Frank. Defendants are instructed to file responses to the claims that remain on or before March 9, 2016. The Clerk of Court is directed to close the motions at docket numbers 23 and 26. (As further set forth in this Order.) (Signed by Judge J. Paul Oetken on 2/17/2016) (kgo)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
-------------------------------------------------------------X
ARTHUR MENALDI, individually and on
:
behalf of all others similarly situated,
:
:
Plaintiff,
:
:
-v:
:
:
OCH-ZIFF CAPITAL MANAGEMENT
GROUP LLC, DANIEL S. OCH, JOEL M.
:
:
FRANK, and MICHAEL COHEN,
:
Defendants.
:
------------------------------------------------------------ X
14-CV-3251 (JPO)
OPINION AND ORDER
J. PAUL OETKEN, District Judge:
Lead Plaintiffs Ralph Langstadt and Julie Lemond (“Plaintiffs”) bring this action on
behalf of a putative class of investors who purchased securities in Och-Ziff Capital Management
Group LLC (“Och-Ziff”) between February 9, 2012, and August 22, 2014. (Dkt. No. 17.)
Plaintiffs allege that Defendants violated the Securities Exchange Act of 1934 (the “Exchange
Act”) by misleading investors about an investigation by the Securities and Exchange
Commission (“SEC”) and the Department of Justice (“DOJ”) into Och-Ziff’s investments in
Africa. Defendants Och-Ziff, Daniel Och, and Joel Frank have filed a joint motion to dismiss
(Dkt. No. 23) and Defendant Michael Cohen has filed a separate motion to dismiss. (Dkt. No.
26.) For the reasons that follow, the motion filed by Cohen is granted and the motion filed by
Och-Ziff, Och, and Frank is granted in part and denied in part.
I.
Background
The following facts are taken from the Consolidated Amended Class Action Complaint
(the “Complaint”) and are assumed true for the purpose of this motion. (See Dkt. No. 17
(“Compl.”).)
1
Och-Ziff is a publicly traded asset management firm. (Compl. ¶ 22.) It was founded in
1994 by Daniel Och, who currently serves as the company’s Chief Executive Officer (“CEO”).
(Id. ¶ 16.) Joel Frank is Och-Ziff’s Chief Financial Officer (“CFO”). (Id. ¶ 17.) Michael Cohen
is a former Och-Ziff employee. (Id. ¶ 115.) Prior to his resignation in 2013, Cohen managed
Och-Ziff’s African investments. (Id.)
This dispute concerns investments Och-Ziff allegedly made in Zimbabwe, Libya, and the
Democratic Republic of the Congo (the “Congo”). Plaintiffs contend that Defendants violated
the Exchange Act both by misrepresenting an SEC and DOJ investigation into Och-Ziff and by
failing to disclose that Och-Ziff’s investments contravened the Foreign Corrupt Practices Act
(“FCPA”) and United States sanctions.
A.
Och-Ziff’s Investments in Africa
Plaintiffs’ allegations involve three deals: (1) a loan to secure platinum mining rights in
Zimbabwe; (2) loans to acquire control of oil and mines in the Congo; and (3) transactions with
Libya’s sovereign wealth fund. These deals (collectively, the “African Transactions”) took place
between 2008 and 2011.
1.
Platinum Mining Rights in Zimbabwe
According to Plaintiffs, Zimbabwean President Robert Mugabe financed his 2008 reelection by seizing and selling the rights to develop the country’s richest platinum claims. (Id.
¶¶ 44-45, 53.) Plaintiffs contend that an Och-Ziff subsidiary provided a loan to the company that
acquired the platinum rights and thus gave material support to the Mugabe regime. (Id. ¶¶ 44,
51.)
The alleged loan deal involves three companies: the Central African Mining and
Exploration Company (“CAMEC”); Todal Mining Ltd. (“Todal”); and Lefever Finance Ltd.
(“Lefever”). CAMEC is a corporation that invests in African mining operations. (Id. ¶ 45.)
2
Todal is a Zimbabwean company that held platinum mining rights prior to the alleged deal. (Id.
¶ 46.) Lefever is a corporation that owned sixty percent of Todal. (Id.) The other forty percent
of Todal was held by the Zimbabwean Mining Development Corporation (“ZMDC”), an entity
owned by the Zimbabwean government. (Id.)
CAMEC acquired Lefever in April 2008, several months before the presidential runoff
election in Zimbabwe. (Id. ¶¶ 48, 52, 56 n.3.) CAMEC paid for Lefever—and by extension a
stake in Todal’s platinum rights—with a combination of cash, stock, and a $100 million nointerest loan. (Id. ¶ 48.) Plaintiffs allege that an Och-Ziff subsidiary financed the loan. (Id.
¶¶ 47-49.) Specifically, they assert that an Och-Ziff subsidiary purchased 150 million shares in
CAMEC for $100 million in March 2008, several weeks before CAMEC acquired Lefever. (Id.
¶¶ 48-49.) Plaintiffs appear to allege that Lefever gave the $100 million it received from
CAMEC to the government of Zimbabwe, which “is synonymous with the Mugabe . . . regime.”
(Id. ¶¶ 46, 51.)
2. Oil and Mining Deals in the Congo
Plaintiffs’ second set of allegations involves loans to “Israeli mining magnate” Daniel
Gertler. (Id. ¶¶ 6, 60-61.) In “the spring of 2008,” Och-Ziff and another company gave Gertler a
$115 million loan, followed by an additional $9 million loan. (Id. ¶ 61.) Gertler allegedly used
those loans to finance a deal for “a valuable copper and cobalt mine in southern Congo called
Kalukundi.” (Id.) Plaintiffs also allege that Och-Ziff made a $110 million loan to Gertler in
November 2010. (Id. ¶ 65.) Gertler allegedly used the third loan “to start developing an oil
concession . . . on Lake Albert between Congo and Uganda.” (Id.)
3. Development Deals in Libya
The third set of allegations concerns transactions with the Libyan Investment Authority
(“LIA”), a sovereign wealth fund controlled by the son of Colonel Moammar Gaddafi. (Id. ¶
3
69.) According to Plaintiffs, Och-Ziff “persuaded the LIA to invest hundreds of millions of
dollars” in Och-Ziff funds. (Id. ¶ 75.) Plaintiffs also allege that, between 2008 and 2009, OchZiff secured a contract to build “an expensive luxury hotel in Tripoli” by using a “fixer” named
Mohamad Ajami, who helped to broker the deal. (Id. ¶ 72.) Plaintiffs also allege that Magna
Holdings, a corporation in which Och-Ziff owns shares, won contracts from the Libyan
government “to build office blocks in Tripoli” at some unspecified date. (Id. ¶ 74.)
B.
SEC and DOJ Investigation
The SEC and DOJ began to investigate Och-Ziff’s investments in Africa (the “SEC-DOJ
Investigation” or “Investigation”) in or before 2011. (Id. ¶ 112.) Beginning in 2011, Och-Ziff
started to receive “subpoenas from the SEC” and “requests for information” from DOJ in
connection with the Investigation. (Id.) According to Plaintiffs, the Investigation “prob[es] OchZiff’s transactions with the Government of Zimbabwe, Och-Ziff’s involvement in Congolese oil
and mine deals, and Och-Ziff’s transactions with the [LIA].” (Id. ¶ 4.) To date, the details of the
Investigation are not public and neither agency has filed suit against Och-Ziff. (Dkt. No. 24
(“First Def.’s Mem.”) at 2.)
C.
Och-Ziff’s Statements to Investors
This action concerns four statements that Och-Ziff made in SEC filings. The first
statement appeared in Och-Ziff’s annual Form 10-K filing on February 27, 2012:
We are not currently subject to any pending judicial, administrative or arbitration
proceedings that we expect to have a material impact on our results of operations or
financial condition. We may from time to time be involved in litigation and claims
incidental to the conduct of our business. Like other businesses in our industry, we are
subject to scrutiny by the regulatory agencies that have or may in the future have
regulatory authority over us and our business activities, which results in regulatory
agency investigations and litigation related to regulatory compliance matters.
4
(Id. ¶ 78.) The February 2012 filing also included assertions about Och-Ziff’s transparency and
risk management practices. Specifically, under the heading “competitive strengths,” Och-Ziff
listed “transparency” and reported that it “provide[s] [its] fund investors with comprehensive
reporting about each portfolio on a regular basis.” 1 (Id. ¶¶ 80.) The filing also stated: “Risk
management is also central to how we manage the operations of our business. We actively
manage the operational risks of our business, including liquidity, counterparty exposures, legal
and reputational risks.” (Compl. ¶ 82.)
The second statement appeared in Och-Ziff’s quarterly report on May 2, 2012. That
report contained a slightly different statement on pending investigations:
The Company is currently not subject to any pending judicial, administrative or
arbitration proceedings that are expected to have a material impact on the Company’s
consolidated financial statements. From time to time, the Company is involved in
litigation and claims incidental to the conduct of the Company’s business. The Company
is also subject to extensive scrutiny by the regulatory agencies globally that have or may
in the future have regulatory authority over the Company and its business activities. This
has resulted or may in the future result in regulatory agency investigations, litigation and
subpoenas.
(Id. ¶ 85.) Och-Ziff repeated this statement in its February 2013 quarterly filing. 2
The third statement appeared in Och-Ziff’s quarterly report on August 2, 2012. It read:
1
All SEC filings discussed in this Opinion are incorporated into the complaint by reference and
are, independently, public documents of which the Court may take judicial notice. See ATSI
Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir. 2007); In re Scottish Re Grp. Sec.
Litig., 524 F. Supp. 2d 370, 382 (S.D.N.Y. 2007).
2
The statement on pending investigations in Och-Ziff’s May 2012 and February 2013 filings are
nearly identical. (See id. ¶¶ 93-94.) The February 2013 statement differs in two respects: (1) it
is written in the first person; and (2) it contains the phrases “like other businesses in our
industry” and “subpoenas and related costs.” (Id. ¶ 94 (emphasis added).) The February 2013
filing also states that Och-Ziff provides “fund investors with comprehensive reporting about each
portfolio on a regular basis.” (Id. ¶ 96.)
5
From time to time, the Company is involved in litigation and claims incidental to the
conduct of the Company’s business. The Company is also subject to extensive scrutiny
by regulatory agencies globally that have or may in the future have regulatory authority
over the Company and its business activities. This has resulted or may in the future result
in regulatory agency investigations, litigation and subpoenas and costs related to each.
The Company is currently not subject to any pending judicial, administrative or
arbitration proceedings that are expected to have a material impact on the Company’s
consolidated financial statements.
(Id. ¶ 88.) Och-Ziff repeated this statement in four SEC filings between November 2012 and
November 2013. 3
Och-Ziff made the fourth statement after an article on its investments appeared in Wall
Street Journal. On February 2, 2014, the Wall Street Journal reported that DOJ was
investigating Och-Ziff “regarding possible violations of the FCPA in connection with its dealings
with the LIA.” (Id. ¶ 109.) On March 14, 2014, Och-Ziff “filed a [F]orm 8-K with the SEC
announcing that some of its previously issued financial statements should be restated and should
not be relied upon.” (Id. ¶ 111.) Four days later, Och-Ziff filed a restated Form 10-K amending
its 2013 annual report. It stated:
Beginning in 2011, and from time to time thereafter, we have received subpoenas from
the SEC and requests for information from the U.S. Department of Justice (“DOJ”) in
connection with an investigation involving the FCPA and related laws. The investigation
concerns an investment by a foreign sovereign wealth fund in some of our funds in 2007
and investments by some of our funds, both directly and indirectly, in a number of
companies in Africa. At this time, we are unable to determine how the investigation will
be resolved and what impact, if any, it will have. An adverse outcome could have a
material effect on our business, financial condition or results of operations.
(Id. ¶ 112.)
3
Och-Ziff repeated the statement from its August 2012 filing in quarterly filings on November 5,
2012, May 2, 2013, August 2, 2013, and November 5, 2013. (Id. ¶¶ 90-91, 100-101, 103-104,
106-107.)
6
II.
Procedural History
This action was filed on May 5, 2014. (Dkt. No. 2.) The Court issued an Order
appointing Lead Plaintiffs on September 24, 2014, and Plaintiffs filed an Amended Complaint on
November 24, 2014. (Dkt. Nos. 16-17.) In two separate motions, Defendants moved to dismiss
on March 16, 2015. (Dkt. Nos. 23, 27.)
III.
Legal Standards
Plaintiffs bring suit under the Exchange Act and SEC Rules promulgated thereunder. 15
U.S.C. § 78j(b); 15 U.S.C. § 78t(a); 17 C.F.R. § 240.10b-5. They assert three claims: (1) a
securities fraud claim pursuant to Exchange Act § 10(b) and Rule 10b-5(b) against all
Defendants except Michael Cohen; (2) a scheme liability claim pursuant to Exchange Act
§ 10(b) and Rule 10b-5(a) and (c) against all Defendants; and (3) a control person claim pursuant
to Exchange Act § 20(a) against all Defendants except Och-Ziff.
Each of these claims is subject to a slightly different pleading standard. 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 Atl. 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 omitted).
While Federal Rule of Civil Procedure 8(a) requires only a “short and plain statement
showing that the pleader is entitled to relief,” claims for securities fraud are subject to the
7
heightened pleading standards of the Private Securities Litigation Reform Act (“PSLRA”) and
Federal Rule of Civil Procedure Rule 9(b). Fed. R. Civ. P. 8(a), 9(b); 15 U.S.C. § 78u-4. Most
securities fraud claims are brought under §10(b) and Rule 10b-5(b) for misleading statements or
omissions. See In re Glob. Crossings, Ltd. Sec. Litig., 322 F. Supp. 2d 319, 328 (S.D.N.Y.
2004). To state a claim under these provisions, a plaintiff must show “(1) a material
misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the
misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the
misrepresentation or omission; (5) economic loss; and (6) loss causation.” Stoneridge Inv.
Partners, LLC v. Scientific-Atlanta, 552 U.S. 148, 157 (2008) (citation omitted).
Under the PSLRA, securities fraud complainants must “state with particularity facts
giving rise to a strong inference that the defendant acted with the required state of mind.”
Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 321 (2007) (citing 15 U.S.C. § 78u4(b)(1)-(2)). A complaint alleging securities fraud must also “specify each statement or omission
alleged to have been misleading . . . [and] the reason or reasons why the statement or omission is
misleading . . . .” In re BioScrip, Inc. Sec. Litig., 95 F. Supp. 3d 711, 725 (S.D.N.Y. 2015)
(Nathan, J.) (citing 15 U.S.C. § 78u-4(b)(1)) (alterations omitted). Rule 9(b) “imposes a
comparable requirement” on securities fraud plaintiffs. Id. (citing Fed. R. Civ. P. 9(b) (“In
alleging fraud or mistake, a party must state with particularity the circumstances constituting
fraud or mistake.”)); see also Rombach v. Chang, 355 F.3d 164, 170 (2d Cir. 2004).
In this case, Plaintiffs allege liability not only under subsection (b) of Rule 10b-5, which
prohibits material misrepresentations and omissions, but also under subsections (a) and (c),
which prohibit schemes to defraud investors. See 17 C.F.R. § 240.10b-5. 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
8
scienter, and (4) reliance.” In re Alstom SA Sec. Litig., 406 F. Supp. 2d 433, 474 (S.D.N.Y.
2005). Because scheme liability “does not require an allegation that the defendant made a
statement,” claims brought under Rule 10b-5(a) and (c) “need not comport with Subsection
(b)(1) of the PSLRA, which requires that a plaintiff set forth each statement alleged to have been
misleading, and facts giving rise to this belief.” Id. at 474-75. Scheme liability claims are,
however, subject to the PSLRA pleading standard with respect to scienter. Id. at 475. 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. Pursuant to
Federal Rule of Civil Procedure 9(b), plaintiffs must also 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).
The final claim in this action arises under § 20(a) of the Exchange Act. Section 20(a)
imposes liability on “every person who, directly or indirectly, controls any person liable” for
securities fraud. 4 15 U.S.C. § 78t(a). As a general rule, there can be no control person liability
without a “primary violation” of the Exchange Act. Wilson, 671 F.3d at 139 (citation omitted).
Plaintiffs’ third claim thus derives from their first two.
IV.
Discussion
Plaintiffs argue that Och-Ziff’s SEC filings misled investors about the risks of the
company’s investment practices, and as a result, artificially inflated the value of Och-Ziff stock.
Based on this allegation, Plaintiffs assert three separate claims, each against different sets of
Defendants. The Court considers them in turn.
4
While a defendant “ultimately may not be held liable as both a primary violator and a
controlling person,” a plaintiff may plead alternative theories of liability in the complaint. In re
Parmalat, 375 F. Supp. 2d at 310; see also In re BioScrip, 95 F. Supp. 3d at 741 n.8.
9
A.
Securities Fraud under Rule 10b-5(b)
The first—and core—claim in this suit is that all Defendants except Cohen (the
“Management Defendants”) violated § 10(b) and Rule 10b-5(b) by making material
misstatements or omissions. Plaintiffs contend that the Management Defendants are liable both
for failing to disclose that the African Transactions were illegal and for failing to disclose that
the SEC and DOJ were investigating those transactions.
The Management Defendants move to dismiss on several grounds. With respect to
nondisclosure of alleged legal violations, they argue that Plaintiffs have failed to plead facts
showing that Och-Ziff engaged in any illegal conduct and that the company had no duty to
accuse itself of wrongdoing. (First Def.’s Mem. at 1, 12, 15, 17.) With respect to nondisclosure
of the SEC-DOJ Investigation, they argue that Och-Ziff had no duty to disclose an ongoing
regulatory inquiry. (Id. at 15.) The Management Defendants also contend that Plaintiffs have
failed to plead scienter on both versions of its securities fraud claim. (Id. at 17.)
1.
Duty to Disclose Uncharged Illegal Conduct
The Court begins with allegation that the Management Defendants failed to disclose
illegal conduct. Plaintiffs contend that the African Transactions violated the anti-bribery
provisions of the FCPA and United States sanctions, specifically, Executive Orders 13288,
13391, and 13469, which prohibit transactions with named “Specially Designated Nationals”
(“SDNs”). See 15 U.S.C. §§ 78dd-1 et seq.; Exec. Order No. 13288, 68 Fed. Reg. 11457 (Mar.
6, 2003); Exec. Order 13391, 70 Fed. Reg. 71201 (Nov. 22, 2005); Exec. Order 13469, 73 Fed.
Reg. 43841 (July 25, 2008); see also Chevron Corp. v. Donzinger, 974 F. Supp. 2d 362, 596
(S.D.N.Y. 2014) (stating the elements of the FCPA’s anti-bribery provisions). Plaintiffs’
argument is, in essence, that Och-Ziff should have announced that it was violating the law.
10
When a securities fraud action rests on the failure to disclose uncharged illegal conduct,
the complaint must state a plausible claim that the underlying conduct occurred. 5 See In re Axis
Capital Holdings, Ltd. Sec. Litig., 456 F. Supp. 2d 576, 585 (S.D.N.Y. 2006) (“If the complaint
fails to allege facts which would establish such an illegal scheme, then the securities law claims
premised on the nondisclosure of the alleged scheme are fatally flawed.”) (emphasis in original);
In re Yukos Oil Co. Secs. Litig., No. 04-CV-5243, 2006 WL 3026024, at *14 (S.D.N.Y. Oct. 25,
2006) (“[T]he Complaint fails to plead with particularity sufficient facts demonstrating that
[Defendant’s] tax strategy violated Article 40 of the Russian Federation Tax Code”); In re JP
Morgan Chase Secs. Litig., 363 F. Supp. 2d 595, 632 (S.D.N.Y. 2005) (“Plaintiffs contend that
[Defendant] made material omissions in failing to disclose its violations of 18 U.S.C. Sections
215 and 1005. Plaintiffs have failed to allege with particularity that [Defendant] or its agents
violated these statutes.”).
Plaintiffs have not stated a plausible claim that Och-Ziff violated any law. As to the
alleged violation of U.S. sanctions, Plaintiffs have not explained how investing in CAMEC
violated the Executive Orders they invoke. The only individual subject to sanctions under an
Executive Order at the time that Och-Ziff invested in CAMEC was Robert Mugabe. 6 But the
5
The parties dispute whether, in securities fraud actions premised on a failure to disclose
underlying criminal conduct, the underlying conduct is subject to heightened pleading standards
or plausibility pleading analysis. The Court need not decide this issue because, in this case,
Plaintiffs have failed to meet either standard.
6
Robert Mugabe was designated an SDN in Executive Order 13288, which was issued in March
2003. Exec. Order No. 13288, 68 Fed. Reg. 11457 (Mar. 6, 2003). Plaintiffs contend that two
other entities were subject to sanctions and involved in the alleged deal for Zimbabwean
platinum rights: (1) ZMDC, a company that owned platinum rights in Todal; and (2) Billy
Rautenbach, an individual “who has been associated with” Meryweather Investments Ltd., the
company that sold Lefever to CAMEC. (Compl. ¶¶ 50, 58.) The Complaint does not explain
what role Rautenbach played in the alleged deal, nor does it identify any business transactions
with ZMDC. In addition, even if it did contain such factual allegations, ZMDC was not added to
the “SDN list” until July 25, 2008, and Rautenbach was not placed on the sanctions list until
November 2008. (Id.) Both of those dates are after the allegedly unlawful deal.
11
Complaint does not allege any direct transactions with Mugabe; it simply states that Mugabe
“received the [$100 million] ‘loan’ through a series of related transactions originating with OchZiff.” (Compl. ¶ 44.) Plaintiffs appear to assert that Mugabe sold platinum rights to Lefever,
and that CAMEC’s loan to Lefever—paid with money from Och-Ziff—went to the Mugabe
regime. This series of transactions may (or may not) violate an Executive Order. To plead facts
establishing that it does, Plaintiffs must present a plausible theory of how the Order applies to the
facts of this case.
Plaintiffs’ allegations of FCPA liability are also conclusory. Plaintiffs contend that all
three African Transactions violate the FCPA’s anti-bribery provisions. However, beyond stating
that the FCPA is “deliberately broad in scope” and imposes liability in cases of “willful
blindness,” Plaintiffs do not explain how the FCPA prohibits Och-Ziff’s conduct. (Dkt. No. 32
(“Pl.’s Opp.”) at 19.) Plaintiffs do not, for instance, identify how investments by the LIA in
Och-Ziff funds would violate the FCPA, nor do they allege bribes or other promises to any
Libyan government officials. The Complaint suggests that Och-Ziff’s use of a “fixer” to broker
the Libyan deals resulted in unlawful payments to Libya’s Intelligence Chief. But Plaintiffs do
not allege such a payment; they simply state that the fixer in question “maintains a close
relationship with the Libyan Intelligence Chief.” (Compl. ¶ 23.) Similarly, the Complaint cites
Daniel Gertler’s “close relationship with Joseph Kabila,” President of the Congo, but nowhere
alleges that Gertler offered Kabila anything of value in exchange for access to Congolese oil and
mines. (Compl. ¶ 67.) See Chevron Corp, 974 F. Supp. 2d at 597 (construing the term
“anything of value” in the FCPA). The same deficiencies exist with respect to Plaintiffs’
allegations about how, when, and whether Och-Ziff’s investments in CAMEC got from Och-Ziff
to any Zimbabwean official.
12
In response to the assertion that their factual allegations are insufficient, Plaintiffs cite
only one case, S.E.C. v. Jackson, 908 F. Supp. 2d 834 (S.D. Tex. 2012). In that case, an SEC
enforcement action, the factual assertions were much more comprehensive, and the SEC offered
a detailed theory as to how defendants’ conduct violated the FCPA. The SEC alleged, for
example, that defendants had “authorized a customs agent to pay bribes to Nigerian government
officials in order to obtain false documentation [they] needed” to obtain permits to drill in
Nigerian waters without paying import duties. Jackson, 908 F. Supp. 2d at 839. The agency
also alleged that defendants had approved specific payments to the Nigerian government in order
to obtain false paperwork. Id. at 839-40. As the Jackson court noted, “the SEC . . . pled pages
upon pages of factual support for its allegations.” Id. at 852. No such support is present here.
Without additional factual allegations, and a theory connecting those allegations to the elements
of an FCPA claim, Plaintiffs’ repeated assertions that Och-Ziff violated the FCPA remain
speculative.
Plaintiffs have also failed to plead facts establishing that Och-Ziff had a duty to disclose
any uncharged illegal conduct. As a general rule, omissions are actionable under § 10(b) only
when a corporation has a duty to disclose. In re BioScrip, 95 F. Supp. 3d at 727 (citing StratteMcClure v. Morgan Stanley, 776 F. Supp. 3d 94, 101 (2d Cir. 2015)). Such a duty arises when
(1) a statute or regulation requires disclosure or (2) disclosure is necessary to avoid rendering
existing statements misleading by failing to disclose material facts. Id. (citing In re Lululemon
Sec. Litig., 14 F. Supp. 3d 533, 572 (S.D.N.Y. 2014)); see also Menkes v. Stolt-Nielsen, S.A., No.
3:03-CV-409, 2005 WL 3050970, at *6-7 (D. Conn. Nov. 10, 2005). A fact is material when
there is a substantial likelihood that its disclosure “would have been viewed by the reasonable
investor as having significantly altered the ‘total mix’ of information available.” Basic. Inc. v.
13
Levinson, 485 U.S. 224, 231-32 (1988) (citation omitted); see also In re Morgan Stanley Info.
Fund Sec. Litig., 592 F.3d 347, 360 (2d Cir. 2010).
Plaintiffs contend that the Management Defendants incurred a duty to disclose the
“illegal conduct—even though uncharged—because such disclosure was necessary to prevent
statements the corporation did make from misleading the public.” (Dkt. No. 32 (“Pl.’s Opp.”) at
21.) They cite two different types of statements made by Och-Ziff: (1) assertions about integrity
and transparency in the company’s February 27, 2012 SEC filing; and (2) statements about
regulatory investigations that appeared, in various forms, in Och-Ziff’s SEC filings between
February 27, 2012 and February 2, 2014. Plaintiffs argue that both types of statements were
materially misleading because, at the time they were made, Och-Ziff was engaged “in a web of
questionable deals in violation of the [FCPA] and U.S. sanctions.” (Compl. ¶ 3.)
The first category of statements is inactionable as a matter of law. In its February 2012
SEC filing, Och-Ziff stated that its “transparency” was a “competitive strength” and that it
actively managed “reputational risks.” (Id. ¶ 82.) The filing made no more specific
representations or guarantees. Under Second Circuit precedent, such statements constitute
inactionable “puffery.” City of Pontiac Policeman’s & Fireman’s Ret. Sys. v. UBS AG, 752 F.3d
173, 183 (2d Cir. 2014) (“It is well-established that general statements about reputation,
integrity, and compliance with ethical norms are inactionable ‘puffery’. . . .”); Boca Raton
Firefighters & Police Pension Fund v. Bahash, 506 F. App’x 32, 37 (2d Cir. 2012) (“The
‘puffery’ designation . . . stems from the generic, indefinite nature of the statements at issue, not
their scope. Otherwise, we would bring within the sweep of federal securities laws many routine
representations made by investment institutions.”) (citation omitted)); ECA, Local 143 IBEW
Joint Pension Tr. of Chicago v. JP Morgan Chase Co., 553 F.3d 187, 206 (2d Cir. 2009) (“The
statements highlighted by Plaintiffs are no more than ‘puffery’ . . . . [They] did not, and could
14
not amount to a guarantee that its choices would prevent failures in its risk management
practices.”) (citations omitted)).
Statements regarding compliance with regulatory investigations, in contrast, can give rise
to liability. See, e.g., In re BioScrip, 95 F. Supp. 3d at 732. But on the facts alleged, Och-Ziff
had no duty to announce to investors that it was violating the law. Corporations do not, as a
general matter, have a duty “to disclose uncharged, unadjudicated wrongdoing.” City of Pontiac,
752 F.3d at 184 (quoting Ciresi v. Citicorp, 782 F. Supp. 819, 823 (S.D.N.Y. 1991), aff’d 956
F.2d 1161 (2d Cir. 1992)); see also Menkes, 2005 WL 3050970, at *6 (D. Conn. Nov. 10, 2005)
(“Rule 10b-5 generally does not require management to accuse itself of antisocial or illegal
policies . . . .”) (citations and internal quotation marks omitted)).
The Second Circuit has also explicitly rejected Plaintiffs’ argument in the context of
claims brought under § 11 of the Securities Act of 1933 (the “Securities Act”). 7 In City of
Pontiac, plaintiffs alleged that the defendant, UBS, violated § 11 by failing to disclose uncharged
criminal conduct that was being investigated by DOJ. 752 F.3d at 184. The Pontiac plaintiffs
argued that, “in addition to disclosing the existence of an investigation, defendants were required
to disclose that [they were], in fact, engaged in an ongoing tax evasion scheme.” Id. The court
declined to impose such an expansive duty to disclose. Instead, the Second Circuit held that
“UBS [had] complied with its disclosure obligations” by making public statements about the
substantial risks the investigation posed. Id.
Section 11 imposes civil liability on issuers and signatories “of a registration statement that
‘contained an untrue statement of a material fact or omitted to state a material fact . . . necessary
to make the statements therein not misleading.’” Rombach, 355 F.3d at 168 n.2 (citing 15 U.S.C.
§ 77k). Unlike claims brought under § 10(b) of the Exchange Act, Section 11 claims can be
premised on allegations of negligence, id. at 170, and § 11 plaintiffs need not allege scienter,
reliance, or loss causation, id. at 169 n.4; see also In re Morgan Stanley Info. Fund. Sec. Litig.,
592 F. 3d 347, 359-60 (2d Cir. 2010). Section 11 claims thus “give rise to liability more readily”
than § 10(b) claims. In re Morgan, 592 F.3d at 360.
15
7
District court cases on § 10(b) liability are consistent with Pontiac. A number of courts
in this District have addressed when § 10(b) requires disclosure of uncharged criminal conduct.
See, e.g., In re FBR Sec. Litig., 544 F. Supp. 2d 346, 353 (S.D.N.Y. 2008); In re Van der Moolen
Holding N.V. Sec. Litig., 405 F. Supp. 2d 388, 400-401 (S.D.N.Y. 2005); In re Sotheby’s
Holdings, Inc., No. 00-CV-1041, 2000 WL 1234601, at *4 (S.D.N.Y. Aug. 31, 2000). Under
this line of cases, a corporation may be compelled to disclose uncharged wrongdoing if its
statements are or become materially misleading in the absence of disclosure. Menkes, 2005 WL
3050970, at *6. 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.”
In re FBR, 544 F. Supp. 2d at 357 (citation omitted).
District courts have identified such a connection in three circumstances. First, a duty to
disclose uncharged wrongdoing can arise 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.” Id. at 358; see In re Van der Moolen, 405 F. Supp. 2d at 401 (holding that a
corporation subjected itself to liability when it discussed the sources of its revenue but allegedly
failed to disclose that the “true source[]” of such revenue was illegal trading). Second, a duty to
disclose may arise when a defendant makes a statement that can be understood, by a reasonable
investor, to deny that the illegal conduct is occurring. See In re FBR, 544 F. Supp. 2d at 358
(collecting cases); In re Sotheby’s Holdings, 2000 WL 1234601, at *4 (declining to dismiss a
securities fraud claim where a corporation stated that competition with its “primary auction
competitor” was “intense” when in fact the two corporations had entered into a price-fixing
agreement).
16
Third, a duty to disclose can arise when a defendant states an opinion that, absent
disclosure, misleads investors about material facts underlying that belief. See Omnicare, Inc. v.
Laborers Dist. Council Const. Indus. Pension Fund, 135 S. Ct. 1318, 1329 (2015) (holding that a
statement of opinion is actionable when it omits material facts concerning the speaker’s basis for
the opinion, which, if disclosed, would “conflict with what a reasonable investor would take
from the statement”); 8 In re IBM Corporate Sec. Litig., 163 F.3d 102, 107 (2d Cir. 1998)
(“[P]rojections of future performance may be actionable under Section 10(b) and Rule 10b-5 if
they are worded as guarantees or are supported by specific statements of fact or if the speaker
does not genuinely or reasonably believe them.”) (citation omitted); Novak v. Kasaks, 216 F.3d
300, 315 (2d Cir. 2000) (holding that defendants exposed themselves to liability where they
“stated that the inventory situation was ‘in good shape’ or ‘under control’ while they allegedly
knew the contrary was true”).
Here, the connection between Och-Ziff’s public statements and the alleged criminal
conduct is too tenuous to give rise to a duty to disclose criminal wrongdoing. In SEC filings
8
The Supreme Court’s recent holding in Omnicare appears to extend securities fraud liability to
statements of opinion that are subjectively believed when made, but nonetheless materially
misleading. As other courts in this District have noted, this holding conflicts with Second
Circuit precedent under which defendants can be liable for securities fraud only to the extent that
their statements of opinion are “both objectively false and disbelieved by the defendant at the
time [they are] expressed.” Fait v. Regions Fin. Corp., 655 F.3d 105, 110 (2d Cir. 2011) (stating
the standard for actionable statements of opinion); In re BioScrip, 95 F. Supp. 3d at 728-29
(noting that Omnicare may call Fait into question). While Omnicare concerns § 11 of the
Securities Act, courts have presumed that its holding also applies to claims brought under § 10(b)
of the Exchange Act, e.g. In re BioScrip, 95 F. Supp. 3d at 725-29, and in Fait, the prevailing
precedent before Omnicare, the Second Circuit articulated a standard that appeared to apply to
both types of securities claims, Fait, 655 F.3d at 112 (discussing actionable statements of
opinion under both the “the 1933 [and] 1934 Acts”). However, insofar as Omnicare supplants
Fait, the distinction between the two standards may be less salient in § 10(b) cases, because in
those cases—as opposed to § 11 cases—Plaintiffs must allege scienter. Because pleading
scienter requires plaintiffs to address a defendant’s state of mind, eliminating the subjective
prong of Fait may have less impact on analysis of whether a § 10(b) claim survives a motion to
dismiss.
17
before February 2013, Och-Ziff stated that it was “subject to scrutiny by regulatory agencies”
and that it did not expect “pending judicial, administrative or arbitration proceedings” to have “a
material impact on the Company’s consolidated financial statements.” (Compl. ¶¶ 78, 85.) In
February 2013 and thereafter, Och-Ziff reported that “extensive scrutiny by regulatory agencies .
. . ha[d] resulted in, or may in the future result in, regulatory agency investigations, litigation,
and subpoenas and related costs.” (Compl. ¶¶ 94, 101, 104, 107.) 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. City of Pontiac, 752 F.3d at 184 (“[D]isclosure is not a rite of confession . . . .”).
Given the content of the statements at issue, the speculative nature of Plaintiffs’ factual
allegations as to the underlying criminal conduct, and precedents indicating a cabined duty to
disclose uncharged wrongdoing, the Court concludes that the Complaint fails to state a claim
based on Defendants’ failure to disclose their alleged violations of the law.
2.
Duty to Disclose the SEC-DOJ Investigation
Plaintiffs also allege that the Management Defendants violated § 10(b) by
misrepresenting the SEC-DOJ Investigation. 9 (Pl.’s Opp. at 21-22.) They argue that Och-Ziff
incurred a duty to disclose the Investigation when it made misleading statements about pending
regulatory proceedings. (Id.)
9
Plaintiffs also argue that Och-Ziff had a duty to disclose the Investigation under Item 303 of
Regulation S-K, 17 C.F.R. § 229.303(a)(3)(ii), and that failure to do so constitutes an actionable
omission. (Pl.’s Opp. at 26.) Because Och-Ziff chose to discuss regulatory proceedings, and had
a duty to speak truthfully once it made that choice, the Court need not decide whether the
company had an independent duty to disclose the Investigation.
18
Like all companies subject to the securities laws, Och-Ziff had a duty to ensure that the
statements it made to investors were “both accurate and complete.” Meyer v. Jinkosolar
Holdings Co., 761 F.3d 245, 250 (2d Cir. 2014) (citing Caiola v. Citibank, N.A., N.Y., 295 F.3d
312, 331 (2d Cir. 2002)). “Even where there is no existing independent duty to disclose
information, once a company speaks on an issue or topic, there is a duty to tell the whole truth.”
Id. at 250; see also Operating Local 649 Annuity Tr. Fund v. Smith Barney Fund. Mgmt., LLC,
595 F.3d 86, 92 (2d Cir. 2010) (“The veracity of a statement or omission is measured not by its
literal truth, but by its ability to accurately inform rather than mislead prospective buyers”).
Plaintiffs allege that Och-Ziff made several different types of misleading statements.
They allege § 10(b) liability based on: (1) statements about Och-Ziff’s transparency and
integrity; (2) statements of fact about pending regulatory proceedings; and (3) statements of
opinion about the likely impact of those regulatory proceedings. For the reasons discussed
above, the statements about transparency are inactionable “puffery.” City of Pontiac, 752 F.3d at
183. The statements of fact are actionable if they are materially misleading. Operating Local
649, 595 F.3d at 91; Rombach, 355 F.3d at 172 n.7. The statements of opinion are actionable if
they omit material facts about the basis for the speaker’s opinion that, if disclosed, would likely
“conflict with what a reasonable investor would take from the statement itself.” Omnicare, 135
S.Ct. at 1329. 10
The statements of fact at issue in this case include: “Like other business in our industry,
we are subject to scrutiny by regulatory agencies”; “From time to time, the Company is involved
in litigation and claims incidental to the conduct of the Company’s business”; and “This
10
For reasons already stated, the standard for actionable statements of opinion in Omnicare
displaces the standard stated in Fait v. Regions Fin. Corp., 655 F.3d 105, 110 (2d Cir. 2011). In
this case, however, Plaintiffs’ claim survives under either standard, because Plaintiffs have
adequately alleged that Defendants knew at the time they made the relevant SEC filings that the
SEC-DOJ Investigation could have a material impact on Och-Ziff’s financial performance.
19
[scrutiny] has resulted or may in the future result in regulatory agency investigations, litigation,
and subpoenas.” (Compl. ¶¶ 78, 85, 88.) The statements of opinion include three slightly
different versions of the sentence: “We are not currently subject to any pending regulatory,
administrative or arbitration proceedings that we expect to have a material impact on our results
of operations or financial condition.” (Compl. ¶ 78.) Plaintiffs contend that these statements,
which were made after Och-Ziff had received subpoenas from the SEC and requests for
information from DOJ, “deliberately obfuscated the truth” about the existence and scope of the
SEC-DOJ Investigation. (Pl.’s Opp. at 22.) They argue that the Management Defendants
downplayed the Investigation by presenting as boilerplate what was in fact a material risk of
exposure to “reputational” harm and criminal liability. (Id. at 23.)
Reading Och-Ziff’s statements in context, and construing all inferences in Plaintiffs’
favor, the Court concludes that Plaintiffs have adequately alleged that Och-Ziff made actionable
misstatements about the existence and risks of regulatory proceedings. 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. In its early SEC filings, Och-Ziff presented its exposure to civil and criminal
liability as routine and unlikely to affect the company’s financial condition. When it filed its
restated 10-K, in contrast, Och-Ziff stated that “an adverse outcome [of the SEC-DOJ
Investigation] could have a material effect on our business, financial condition or results of our
operations.” (Compl. ¶ 112.) The restated 10-K also described the nature of the Investigation in
some detail. (Id. (“The investigation concerns an investment by a foreign sovereign wealth fund
in some of our funds in 2007 and investments by some of our funds, both directly and indirectly,
in a number of companies in Africa.”)).
20
The Management Defendants argue that Och-Ziff’s restated 10-K exceeded its disclosure
duties, and that all earlier filings complied with legal obligations. But the question here is not
whether Och-Ziff had an independent duty to announce the SEC-DOJ Investigation; it is
whether, in light of that Investigation, the statements Och-Ziff chose to make were materially
misleading. Given Och-Ziff’s explicit acknowledgement that the Investigation “could have
material effect” on its business, and the other facts alleged, Plaintiffs have plausibly pleaded that,
in its earlier SEC filings, Och-Ziff opted to speak on the subject of investigations, but “did not
speak in an accurate and complete manner.” In re BioScrip, 95 F. Supp. 3d at 727 (citing Caiola,
295 F.3d at 331) (internal quotation marks omitted). For largely the same reasons, Plaintiffs
have plausibly alleged that Och-Ziff’s projections about the likely impact of regulatory
proceedings were based on omitted facts that, if disclosed, would have conflicted with what a
reasonable investor would have taken from Och-Ziff’s statements themselves. Id. at 730 (citing
Omnicare, 135 S. Ct. at 1328-29.)
The Court thus determines that Och-Ziff’s statements, excluding the puffery outlined
above, are actionable under § 10(b). This conclusion is consistent with precedent from other
courts in this District. See, e.g., In re BioScrip, 95 F. Supp. 3d at 727 (holding that plaintiffs had
plausibly alleged that boilerplate legal compliance statements were misleading where they
suggested that the defendant “routinely responded to investigatory requests from the
Government, but was not presently in the process of responding to such a request”); City of
Westland Police & Fire Ret. Sys., 928 F. Supp. 2d 705, 718-19 (S.D.N.Y. 2013) (holding that
defendants’ statements about, inter alia, “the strength of the life insurance business” were
21
actionable where defendants were under a nationwide investigation into whether its business
practices violated state laws). 11
The conclusion that Och-Ziff’s statements are actionable is also consistent with Second
Circuit precedent. The Second Circuit has repeatedly stated that “materiality is a mixed question
of law and fact,” which should not be decided on a motion to dismiss unless the alleged
misstatements or omissions are “so obviously unimportant to a reasonable investor that
reasonable minds could not differ on the question of their importance.” ECA, 553 F.3d at 197
(quoting Ganino v. Citizens Utils. Co., 228 F.3d 154, 162 (2d Cir. 2000)); see also U.S. v. Litvak,
808 F. 3d 160, 174 (2d. Cir. 2015) (“Determination of materiality under the securities laws is a
mixed question of law and fact that the Supreme Court has identified as especially well suited for
jury determination.”) (citation and internal quotation marks omitted). Whether Och-Ziff’s
statements are actionable depends on whether those statements contained material
misrepresentations or omitted material information about pending regulatory proceedings. This
is, at base, a question of materiality on which “reasonable minds” could disagree. ECA, 553 F.3d
at 197. Accordingly, dismissal is inappropriate at this stage.
3.
Scienter
Having determined that Plaintiffs have plausibly alleged material misstatements and
omissions about the SEC-DOJ Investigation, the Court turns to the question whether Plaintiffs
11
The Management Defendants cite Richman v. Goldman Sachs Grp., 868 F. Supp. 2d 261
(S.D.N.Y. 2012), in support of their argument that Och-Ziff’s statements are inactionable. In
that case, the court held that defendant Goldman Sachs was not under a duty to disclose the
receipt of “Wells Notices” indicating an SEC enforcement action. Id. at 273. But in Richman,
the defendants had already disclosed that they were under investigation when they received the
Wells Notices. Id. at 270. The Richman court concluded that disclosure of the notices would
merely “indicate[] that the governmental investigations were indeed ongoing,” and thus, was not
required to prevent the earlier statements from being misleading. Id. at 274. Here, in contrast,
Och-Ziff made no earlier disclosure about a potentially material investigation into its business
practices. Richman also precedes relevant Second Circuit cases on materiality. See, e.g.,
Jinkosolar, 761 F.3d at 250-251 (defining material omissions).
22
have adequately pleaded scienter. To plead scienter under § 10(b) and Rule 10b-5, Plaintiffs
must “state with particularity facts giving rise to a strong inference that the defendant acted with
the required state of mind.” Tellabs, 551 U.S. at 321. “A strong inference of fraudulent intent
may be established either (a) by alleging facts to show that defendants had both motive and
opportunity to commit fraud, or (b) by alleging facts that constitute strong circumstantial
evidence of conscious misbehavior or recklessness.” IKB Int’l S.A. v. Bank of Am. Corp., 584 F.
App’x 26, 27-28 (2d Cir. 2014) (citation and internal quotation marks omitted).
Construing all inferences in Plaintiff’s favor, the Court concludes that Plaintiffs have
adequately alleged scienter as to Och-Ziff’s statements of fact and opinion about pending
regulatory investigations. 12 According to the Complaint, the Management Defendants 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. (See Compl. ¶¶ 4, 77, 112, 144.) With these allegations
assumed to be true, Plaintiffs have plausibly alleged that the Management Defendants were
reckless in opting to misrepresent their exposure to civil and criminal liability. See ECA, 553
F.3d at 198 (circumstances that “may give rise to a strong inference of the requisite scienter”
include “where the complaint sufficiently alleges that the defendants . . . knew facts or had
access to information suggesting that their public statements were not accurate”); In re BioScrip,
95 F. Supp. 3d at 733 (plaintiffs adequately alleged that defendant “was reckless in electing to
withhold knowledge of [a civil investigative demand], despite its significant role in formulating a
basis of belief that [the company] was in legal compliance.”).
12
The Court need not consider whether Plaintiffs adequately allege scienter with respect to OchZiff’s statements about transparency, which are inactionable, nor with respect to the omission of
any facts concerning uncharged criminal conduct, which Defendants had no duty to disclose.
23
B.
Scheme Liability
The second claim in this suit arises under § 10(b) and subsections (a) and (c) of Rule 10b5, which govern scheme liability. Plaintiffs contend that all Defendants, including Cohen, are
liable under these provisions because they engaged in a scheme to “portray[] Och-Ziff as a more
conservative, compliant company” than it actually is. (Pl.’s Opp. at 37.) Plaintiffs also argue
that Defendants participated in a “deceptive scheme of covering up the illegal investing activity
that Cohen orchestrated and oversaw.” (Id. at 38.)
To the extent that Plaintiffs allege scheme liability based on underlying uncharged
criminal conduct, Plaintiffs’ claim fails because, for reasons already stated, that conduct has not
been plausibly pleaded. Moreover, even if Plaintiffs had plausibly alleged violations of the
FCPA and U.S. sanctions, given the timeline alleged in the Complaint, those legal violations
would have occurred years before the putative class period. The Complaint thus fails to explain
how the “proscribed schemes or acts [were] done in connection with the purchase or sale of any
security.” Taylor v. Westor Capital Grp., 943 F. Supp. 2d 397, 402 (S.D.N.Y. 2013) (citation
and internal quotation marks omitted).
To the extent that Plaintiffs allege a scheme to misrepresent Och-Ziff in SEC filings,
Plaintiffs’ claim fails because they have not identified any “deceptive act” apart from the alleged
misrepresentation. SEC v. Kelly, 817 F. Supp. 2d 340, 344 (S.D.N.Y. 2011) (“Scheme liability
under subsections (a) and (c) of Rule 10b–5 hinges on the performance of an inherently
deceptive act that is distinct from an alleged misstatement.”); see also Lentell v. Merrill Lynch &
Co. Inc., 396 F.3d 161, 177 (2d Cir. 2005) (“[P]laintiffs cast their claims in terms of market
manipulation, pursuant to Rule 10b–5(a) and (c). We hold that where the sole basis for such
claims is alleged misrepresentations or omissions, plaintiffs have not made out a market
manipulation claim under Rule 10b–5(a) and (c) . . . .”); In re Alstom, 406 F. Supp. 2d at 475
24
(“Courts have held that a plaintiff may not cast claims of misrepresentations as claims under
Rule 10b–5(a) and (c) and thus evade the pleading requirements imposed in misrepresentation
cases.”).
Accordingly, on either theory of scheme liability, Plaintiffs’ second claim fails. The Rule
10b-5(a) and (c) claim is therefore dismissed.
C.
Control Person Liability
The third and 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-CV-9475, 2002 WL
244597, at *6 (S.D.N.Y Feb. 20, 2002) (citing Ganino, 228 F.3d at 170); see also ATSI
Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 108 (2d Cir. 2007) (stating the elements of a §
20(a) claim). Plaintiffs argue that all Defendants except Och-Ziff are control persons for
purposes of § 20(a). 15 U.S.C. §78t(a).
This argument succeeds as to Defendants Och and Frank, but fails as to Defendant
Cohen. To allege control person liability, plaintiffs must adequately plead a “primary violation”
of the securities laws. Wilson, 671 F.3d at 139. Because Plaintiffs have not alleged facts
sufficient to state a plausible scheme liability claim, and because scheme liability is the only
primary claim asserted against Cohen, there is no plausible § 20(a) claim against Cohen in this
case. Plaintiffs have, in contrast, plausibly alleged a primary violation of § 10(b) and Rule 10b5(b) by Defendants Och and Frank. They have thus pleaded the first element of control person
liability as to those two Defendants.
25
The question remains whether Plaintiffs have adequately pleaded the second and third
elements of their control person claim. As a general rule, “[d]etermining an individual
defendant’s liability as a control person is a ‘fact-intensive inquiry that . . . should not be
resolved on a motion to dismiss.’” In re BioScrip, 95 F. Supp. 3d at 741 (quoting In re Tronox,
Inc. Sec. Litig., 769 F. Supp. 2d 202, 208 (S.D.N.Y. 2011). In this case, Defendants Och and
Frank do not present objections to the second prong of control person liability, “control over the
controlled person.” In re Deutsche Telekom, 2002 WL 244597, at *6. Instead, they argue that
Plaintiffs have failed to plead “culpable participation,” the requirement for prong three. Id.
Courts in this District disagree about whether culpable participation must be pleaded with
particularity, or instead, is an affirmative defense in which the burden to establish the absence of
culpable conduct shifts to the defense. See In re Parmalat Sec. Litig., 594 F. Supp. 2d 444, 449
n.32 (S.D.N.Y. 2009) (collecting cases); see also In re BioScrip, 95 F. Supp. 3d at 741
(describing the pleading standard with respect to the third prong of § 20(a) liability as “a matter
of ongoing debate”). That debate need not be resolved here because Plaintiffs have plausibly
alleged culpable participation by Defendants Och and Frank under either pleading standard.
Plaintiffs allege that Och, the founder and CEO of Och-Ziff, and Frank, the company’s
CFO, were aware of the existence and scope of the SEC-DOJ Investigation. (Compl. ¶ 4.) They
also allege that one or both of these Defendants signed all of the relevant SEC filings, and as a
general matter, that both corporate officers were responsible for the content of those filings.
(Compl. ¶¶ 4, 77, 84, 87, 90, 93, 100, 103, 106.) At this stage of the litigation, these allegations
are sufficient to sustain Plaintiffs’ § 20(a) claim against Och and Frank. See In re BioScrip, 95
F. Supp. 3d at 741 (denying a motion to dismiss a § 20(a) claim where “each of the Defendants
was responsible for reviewing [the company’s] SEC filings”); City of Westland, 928 F. Supp. 2d
26
at 721 (“[W]here a plaintiff alleges that the directors and officers participated in the alleged
primary conduct, that is sufficient to state a claim for control person liability”).
V.
Conclusion
For the foregoing reasons, Defendant Michael Cohen’s motion to dismiss is GRANTED,
and the remaining Defendants’ motion to dismiss is GRANTED in part and DENIED in part.
Plaintiffs’ Rule 10b-5(b) claim against Defendant Cohen is dismissed in its entirety.
Plaintiffs’ Rule 10b-5(b) claim against Defendants Och-Ziff, Och, and Frank is dismissed insofar
as it relies on a duty to disclose uncharged wrongdoing, but the motion to dismiss is denied
insofar as Plaintiffs allege Rule 10b-5(b) violations with respect to statements about pending
regulatory proceedings.
Plaintiffs’ scheme liability claim is dismissed as to all Defendants. Plaintiffs’ control
person liability claim is dismissed as to Defendant Cohen, but the motion to dismiss is denied as
to alleged § 20(a) violations by Defendants Och and Frank.
Defendants are instructed to file responses to the claims that remain on or before March
9, 2016. The Clerk of Court is directed to close the motions at docket numbers 23 and 26.
SO ORDERED.
Dated: February 17, 2016
New York, New York
____________________________________
J. PAUL OETKEN
United States District Judge
27
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?