ICD Capital, LLC. v. Codesmart Holdings, Inc. et al

Filing 80

OPINION AND ORDER re: 74 FIRST MOTION to Dismiss the Amended Complaint pursuant to Rule 12(b)(6) filed by Codesmart Holdings, Inc., Sharon Franey.Before the Court is a motion by CodeSmart and Franey (together, "Defendants") to dismiss the First Amended Complaint (the FAC) pursuant to Federal Rules of Civil Procedure 12(b)(6) and 9(b). (As further set forth in this Order.) For the reasons stated above, Defendants' motion to dismiss the amended complaint is GRANTED. The Clerk of Court is directed to terminate the motion docketed at ECF No. 74. (Signed by Judge John F. Keenan on 2/19/2020) (cf) Transmission to Orders and Judgments Clerk for processing.

Case 1:09-md-02013-PAC Document 57

Filed 09/30/10 Page 1 of 45

UNITED STATES DISTRICT COURT
USDC SDNY
SOUTHERN DISTRICT OF NEW YORK
DOCUMENT
------------------------------- X
ELECTRONICALLY FILED
ICD CAPITAL, LLC, individually :
DOC #: _________________
and derivatively on behalf of
:
DATE FILED: 02/19/2020
nominal defendant CodeSmart
:
UNITED STATES DISTRICT COURT
Holdings, Inc.,
:
SOUTHERN DISTRICT OF NEW YORK
:
-----------------------------------------------------------x
Plaintiff,
::
In re FANNIE MAE 2008 SECURITIES
08 14 Civ. 8355
No. Civ. 7831 (PAC) (JFK)
:
LITIGATION
:
09 MD 2013 (PAC)
OPINION & ORDER
-against:
:
:
:
OPINION & ORDER
CODESMART HOLDINGS, INC. and
:
-----------------------------------------------------------x
SHARON FRANEY,
:
:
Defendants.
:
------------------------------- X District Judge:
HONORABLE PAUL A. CROTTY, United States
APPEARANCES
BACKGROUND1
FOR PLAINTIFF ICD CAPITAL, LLC:
Joseph M. Pastore III
The early years of this decade saw a boom in home financing which was fueled, among
PASTORE & DAILEY LLC
other things, by low interest rates and lax credit conditions. New lending instruments, such as
FOR DEFENDANTS CODESMART HOLDINGS, INC. and SHARON FRANEY:
Sameer Rastogi
subprime mortgages (high credit risk loans) and Alt-A mortgages (low-documentation loans)
Thomas P. McEvoy
SICHENZIA ROSS FERENCE LLP
kept the boom going. Borrowers played a role too; they took on unmanageable risks on the
JOHN F. KEENAN, United States District Judge:
assumption that the market would continue to rise and that refinancing options would always be
ICD Capital, LLC (“ICD”), a Texas investment company,
available in the future. Lending discipline was lacking in the system. Mortgage originators did
brings suit individually, derivatively, and on behalf of other
not hold these high-risk mortgage loans. Rather than carry the rising risk on their books, the
aggrieved parties (together with ICD, “Plaintiffs”) against
originators sold their loans into the secondary mortgage market, often as securitized packages
CodeSmart Holdings, Inc. (“CodeSmart”), a Florida medical
known as mortgage-backed securities (“MBSs”). MBS markets grew almost exponentially.
insurance coding education and training company, and Sharon
But then the housing bubble burst. In 2006, the demand for housing dropped abruptly
Franey (“Franey”), a co-founder of CodeSmart and one of its two
and home prices began to fall. In light of the changing housing market, banks modified their
executive officers and board members, for negligent
lending practices and became unwilling to refinance home mortgages without refinancing.
misrepresentation, breach of fiduciary duties, and aiding and
1

Unless otherwise indicated, all references cited as “(¶ _)” or to the “Complaint” are to the Amended Complaint,
1
dated June 22, 2009. For purposes of this Motion, all allegations in the Amended Complaint are taken as true.

1

abetting fraud.

CodeSmart’s other co-founder, executive

officer, and board member, non-party Ira Shapiro (“Shapiro”), is
under indictment by the U.S. Attorney’s Office for the Eastern
District of New York for related conduct.

After a more than

four-year delay while this action was stayed pending resolution
of the criminal case and related investigations, Plaintiffs
elected to withdraw their claims against Shapiro to allow this
action to proceed against CodeSmart and Franey.

Jurisdiction is

based on diversity of citizenship pursuant to 28 U.S.C. §
1332(a).

Before the Court is a motion by CodeSmart and Franey

(together, “Defendants”) to dismiss the First Amended Complaint
(“the FAC”) pursuant to Federal Rules of Civil Procedure
12(b)(6) and 9(b).

For the reasons set forth below, the motion

is GRANTED.
I.

Background
A.

Factual Background

The Court takes the following facts and allegations from
the FAC and deems them to be true for the purpose of this
motion.
CodeSmart is a Florida corporation with its principal place
of business in New York, New York.
71, ¶ 6.)

(Am. Compl. (“FAC”), ECF No.

Franey is the company’s Chief Operating Officer

(“COO”); she resides in Mohnton, Pennsylvania.

(Id. ¶ 7.)
---

Shapiro was the Chief Executive Officer (“CEO”), Chairman of the
2

Board of Directors (“Chairman”), and, along with Franey, cofounder of CodeSmart; he resides in Congers, New York.
8.)

(Id. ¶

Franey and Shapiro were the only officers, board members,

and founders of CodeSmart, and they conducted the business out
of their homes in Pennsylvania and New York, respectively.

(Id.

¶¶ 2, 11.)
Beginning in or around May 2013, CodeSmart attempted to
raise approximately $4 million through the sale of approximately
2.7 million shares of the company’s common stock by means of a
private investment in a public entity transaction (“the PIPE”).
(Id. ¶¶ 3, 16, 18.)
(Id. ¶ 19.)

The purchase price was $1.50 per share.

In order to effectuate the PIPE, CodeSmart prepared

a private placement memorandum dated June 17, 2013 (“the PPM”).
(Id. ¶¶ 3, 17.)

The PPM was disseminated to accredited

investors, including ICD, a Texas limited liability company with
its principal place of business in Graham, Texas. 1
17.)

(Id. ¶¶ 5,

Over the next three months, ICD and other investors

purchased more than $2.1 million of CodeSmart’s securities in
reliance on statements and information that the company provided
in the PPM, its press releases and filings with the U.S.

1

ICD asserts that complete diversity exists because no member of ICD
nor any individual who assigned their claims to it for prosecution in
this action is a resident of New York, Pennsylvania, or Florida. (FAC
¶ 10.)

3

Securities and Exchange Commission (“the SEC”), and public and
private statements by Shapiro.

(Id. ¶ 3.)

Plaintiffs allege that, as the COO of CodeSmart, Franey had
access to information about the company and its finances, and
she had the responsibility to confirm the accuracy of the
information that the company disseminated to potential
investors.

(Id. ¶¶ 2, 95–100.)

Franey, however, failed to

fulfill this important duty because many of the statements on
which Plaintiffs relied contained materially false and
misleading information and deliberately misrepresented
CodeSmart’s business and financial condition.

(Id. ¶¶ 2–3, 11.)

When CodeSmart’s share price plummeted the following year,
Plaintiffs’ $2.1 million investment became worthless.

(Id. ¶¶

3, 74–78.)
Plaintiffs specifically allege that the following false
statements and fraudulent conduct caused their loss:
1.

The PPM.

To facilitate the PIPE, CodeSmart drafted and

disseminated the PPM to interested investors to provide them
with information about the company, including statements that
CodeSmart (1) had entered into several consulting agreements and
had established extensive relationships with strategic partners
around the country; (2) had distribution arrangements with major
companies which gave CodeSmart widespread reach and immediate
access to hundreds of thousands of potential students; (3) had
4

entered into a long-term agreement with one of the country’s
largest hospital group purchasing organizations; (4) had been
endorsed by two regional extension centers in Florida; and (5)
provided consulting services.
31.)

(Id. ¶¶ 3, 17, 21, 24, 27, 29,

Plaintiffs, however, assert “upon information and belief”

that each of these factual statements were false.
23, 25–26, 28, 30, 32.)

(Id. ¶¶ 22–

Plaintiffs also allege that the PPM

omitted “key facts” and did not accurately present the company’s
financial condition.
2.

(Id. ¶¶ 35–37.)

Press Releases.

In May and June 2013, CodeSmart issued

press releases stating that the company was an “exclusive
strategic partner” to certain universities, which offered
CodeSmart substantial growth and business opportunities.
¶¶ 38, 40.)

(Id.

Upon information and belief, however, CodeSmart did

not have such relationships.

(Id. ¶¶ 39, 41.)

Additionally, in

a June 2013 Forbes article, Shapiro stated that CodeSmart had
affiliations with more than 60 colleges and universities and it
had signed an exclusive agreement with one of the largest
hospital groups in the country.

(Id. ¶ 42.)

and belief, this too was false.

(Id. ¶¶ 43–44.)

3.

SEC Filings.

Upon information

In early-July 2013, CodeSmart filed a

Form 8-K with the SEC stating that Shapiro, in his capacity as
Chairman and CEO, presented at an online investor conference and
projected that CodeSmart’s gross revenue and net income would
5

increase dramatically over the following three years.
45.)

(Id. ¶

Nine days later, CodeSmart filed an amended Form 8-K in

which the company estimated that it would earn approximately $10
million in revenues over the next 12 months.
4.

Private statements by Shapiro.

(Id. ¶ 46.)

Finally, in or around

mid-July 2013, Shapiro told two potential PIPE investors, one of
whom was a member of ICD, that CodeSmart’s stock was doing
“great,” and it would likely double and split again “very soon.”
(Id. ¶ 47.)
Relying on these representations, Plaintiffs executed
subscription agreements by which they purchased CodeSmart’s
common stock for $1.50 per share.

(Id. ¶ 48.)

The shares were

sold as “restricted securities,” which meant that they could not
be resold or transferred by Plaintiffs until the shares were
registered for sale with the SEC or covered by an exemption.
(Id. ¶ 65.)

Accordingly, the subscription agreements obligated

CodeSmart to file a registration statement and ensure it was
declared effective.

(Id. ¶¶ 66–68, 70.)

Neither CodeSmart, nor

Shapiro or Franey, however, complied with the requirement, which
caused CodeSmart to breach its contractual obligations to
Plaintiffs.

(Id. ¶¶ 69, 71–72.)

As a result, Plaintiffs were

not able to transfer or sell their shares on a public market to
mitigate their losses, and Plaintiffs’ investments became
worthless when the stock price sank to $0.01 per share in July
6

2014, and the SEC suspended trading in CodeSmart stock in 2015
and revoked its registration in 2016.

(Id. ¶¶ 73–78.)

Plaintiffs allege that at the time they purchased their shares
pursuant to the PPM, Franey’s ownership interest was valued at
over $20 million.

(Id. ¶ 15.)

In 2013 and 2014, the SEC and the U.S. Department of
Justice launched investigations into CodeSmart, Shapiro, Franey,
and others for suspected fraudulent manipulation of CodeSmart’s
share price and improper sales of CodeSmart stock in a “pumpand-dump” scheme.

(Id. ¶ 79.)

Plaintiffs allege that the

investigations determined that Shapiro and other unnamed
individuals fraudulently received millions of dollars in profits
during the scheme.

(Id. ¶ 81.)

In 2014, Shapiro and his co-

conspirators were indicted in the Eastern District of New York
on various fraud and conspiracy charges related to the market
manipulation of four publicly traded companies, including
CodeSmart.

(Id. ¶ 82.)

The SEC also initiated proceedings

against Shapiro and his co-conspirators.

(Id. ¶ 83.)

The

criminal and SEC complaints allege that Shapiro issued company
press releases and made public filings, several of which
contained false and misleading information, and that CodeSmart’s
stock price in July 2013 did not reflect the economic reality of
the company.

(Id. ¶¶ 85, 88.)

In 2017, Shapiro pleaded guilty

to conspiracy to commit securities fraud.
7

(Id. ¶ 91.)

Shapiro’s sentencing is currently scheduled for April 17, 2020.
See United States v. Discala, et al., 14 Cr. 399 (ENV)
(E.D.N.Y.).
B.

Procedural Background

Plaintiffs initiated this action in October 2014, by filing
a complaint against CodeSmart, Franey, and Shapiro pursuant to
Section 10(b) of the Securities Exchange Act of 1944 and Rule
10b-5 promulgated thereunder by the SEC.

(ECF No. 1.)

The

complaint asserted three counts against all three defendants for
violation of Section 10(b), fraudulent inducement, and negligent
misrepresentation; and one count only against CodeSmart for
breach of contract.

(Id.)

Franey and CodeSmart each moved to

stay the proceedings until final disposition of the criminal
action, which the Court granted on August 21, 2015.

(ECF No.

39.)
On January 29, 2019, CodeSmart and Franey consented to
lifting the stay and reinstating the case.

(ECF No. 68.)

On

February 4, 2019, Plaintiffs filed the FAC, which removed
Shapiro as a defendant and asserted two direct claims against
Franey for negligent misrepresentation and aiding and abetting
fraud, and two derivative claims against her, brought by
Plaintiffs on behalf of CodeSmart, for breach of fiduciary
duties and aiding and abetting Shapiro’s breach of fiduciary
duties that he owed to CodeSmart.
8

(ECF No. 71.)

The FAC

asserted that ICD was not required to make a demand on the
CodeSmart Board of Directors—i.e., Shapiro and Franey—before
pursuing the derivative claims because such a demand would have
been futile.

(FAC ¶ 101.)

On April 19, 2019, CodeSmart and

Franey moved to dismiss the FAC pursuant to Federal Rules of
Civil Procedure 12(b)(6) and 9(b).
II.

(ECF No. 74.)

Legal Standard
A.

Rule 12(b)(6) Motion to Dismiss

To survive a motion to dismiss under Rule 12(b)(6), “a
complaint must contain sufficient factual matter . . . to ‘state
a claim to relief that is plausible on its face.’” Ashcroft v.
Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v.
Twombly, 550 U.S. 544, 570 (2007)).

A claim is plausible “when

the plaintiff pleads factual content that allows the court to
draw the reasonable inference that the defendant is liable for
the misconduct alleged.” Id. (citing Twombly, 550 U.S. at 556).
On a motion to dismiss, the Court must accept the factual
allegations in the complaint as true and draw all reasonable
inferences in the plaintiff’s favor. Chambers v. Time Warner,
Inc., 282 F.3d 147, 152 (2d Cir. 2002).

However, the Court may

not credit “‘naked assertions’ devoid of ‘further factual
enhancement,’” Iqbal, 556 U.S. at 678 (brackets omitted)
(quoting Twombly, 550 U.S. at 557), nor “conclusory allegations
or legal conclusions couched as factual allegations,” Rothstein
9

v. UBS AG, 708 F.3d 82, 94 (2d Cir. 2013).

“[T]he purpose of

Federal Rule of Civil Procedure 12(b)(6) ‘is to test, in a
streamlined fashion, the formal sufficiency of the plaintiff’s
statement of a claim for relief without resolving a contest
regarding its substantive merits.’” Halebian v. Berv, 644 F.3d
122, 130 (2d Cir. 2011) (quoting Glob. Network Commc’ns, Inc. v.
City of New York, 458 F.3d 150, 155 (2d Cir. 2006)).
B.

Rule 9(b) Heightened Pleading Standard

In addition to the requirements of Rule 12(b)(6), a
complaint alleging fraud must satisfy the heightened pleading
requirements of Federal Rule of Civil Procedure 9(b) by stating
the circumstances constituting fraud “with particularity.” ATSI
Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 99 (2d Cir.
2007).

To satisfy this requirement, the complaint must “(1)

detail the statements (or omissions) that the plaintiff contends
are fraudulent, (2) identify the speaker, (3) state where and
when the statements (or omissions) were made, and (4) explain
why the statements (or omissions) are fraudulent.” Eternity
Global Master Fund Ltd. v. Morgan Guar. Trust Co., 375 F.3d 168,
187 (2d Cir. 2004) (quotation marks omitted).

“[T]he adequacy

of particularized allegations under Rule 9(b) is case- and
context-specific.” United States ex rel. Chorches for Bankr.
Estate of Fabula v. Am. Med. Response, Inc., 865 F.3d 71, 81 (2d
Cir. 2017) (quotation marks and ellipsis omitted).
10

Rule 9(b)’s particularity requirement does not apply to
allegations regarding intent, knowledge, or other conditions of
the mind. Lerner v. Fleet Bank, N.A., 459 F.3d 273, 290 (2d Cir.
2006).

However, “[w]hile Rule 9(b) allows mental states to be

‘alleged generally,’ this relaxation of the heightened pleading
requirement is not to be mistaken ‘for a license to base claims
of fraud on speculation and conclusory allegations.’” Loreley
Fin. (Jersey) No. 3 Ltd. v. Wells Fargo Sec., LLC, 797 F.3d 160,
176 (2d Cir. 2015) (quoting Lerner, 459 F.3d at 290).
Accordingly, “[i]n addition to alleging the particular details
of a fraud, ‘the plaintiffs must allege facts that give rise to
a strong inference of fraudulent intent.’” First Capital Asset
Mgmt., Inc. v. Satinwood, Inc., 385 F.3d 159, 179 (2d Cir. 2004)
(quoting Moore v. PaineWebber, Inc., 189 F.3d 165, 173 (2d Cir.
1999)).

“An inference is ‘strong’ if it is ‘cogent and at least

as compelling as any opposing inference one could draw from the
facts alleged.’” Loreley, 797 F.3d at 176–77 (quoting Tellabs,
Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 324 (2007)).
III.

Discussion

Plaintiffs assert two derivative claims against Franey for
damages she allegedly caused to CodeSmart, and two direct claims
against her for damages she allegedly caused to Plaintiffs
themselves.

The Court begins with the direct claims.

11

A.

Negligent Misrepresentation

Plaintiffs allege that “CodeSmart and Franey, individually
and collectively, had a duty, as an issuer of securities in a
transaction for the purchase or sale of securities, to provide
Plaintiff[s] with information that was neither false nor
misleading as to any material facts, and a duty not to omit
material facts whose omission would cause certain statements
made to be false and misleading.”

(FAC ¶ 103.)

Further, Franey

had a duty to verify the information that CodeSmart and Shapiro
provided, which she breached by negligently allowing the company
to issue the PPM with its false statements and omissions of
material fact.

(Id. ¶¶ 104–10.)

To state a cause of action for negligent misrepresentation,
“a plaintiff must show ‘(1) the existence of a special or
privity-like relationship imposing a duty on the defendant to
impart correct information to the plaintiff; (2) that the
information was incorrect; and (3) reasonable reliance on the
information.’” Crawford v. Franklin Credit Mgmt. Corp., 758 F.3d
473, 490 (2d Cir. 2014).

Where a negligent misrepresentation

claim sounds in fraud, courts generally require that the claim
satisfy the heightened pleading requirements of Rule 9(b). See
PetEdge, Inc. v. Garg, 234 F. Supp. 3d 477, 496 (S.D.N.Y. 2017)
(“A claim for negligent misrepresentation ‘must be pled in
accordance with the specificity criteria of Rule 9(b).’”); see
12

also Pilkington N. Am., Inc. v. Mitsui Sumitomo Ins. Co. of Am.,
--- F. Supp. 3d ---, No. 18 Civ. 8152 (JFK), 2019 WL 5595042, at
*12 (S.D.N.Y. Oct. 30, 2019).

However, “[i]f it were shown that

the facts were peculiarly within the possession and control of
the opposing party, then it is true that [a plaintiff] could
plead facts ‘upon information and belief.’

But even then, ‘the

plaintiff still bears the burden of alleging facts upon which
her or his belief is founded.’” Pilkington, 2019 WL 5595042, at
*12 (quoting Riker v. Premier Capital, LLC, No. 15 Civ. 8293
(ALC), 2016 WL 5334980, at *6 (S.D.N.Y. Sept. 22, 2016)).
Defendants argue that the FAC’s negligent misrepresentation
claim fails to satisfy Rules 12(b)(6) and 9(b).

The Court

agrees.
First, the FAC does not sufficiently plead any sort of
special or privity-like relationship between Franey and
Plaintiffs.

Here, the FAC merely asserts one wholly conclusory

allegation that “Franey and [Plaintiffs] were in a special
relationship with regard to the stock purchases made pursuant to
the PPM.”

(FAC ¶ 105.)

Aside from this lone allegation,

Plaintiffs do not offer any facts to plausibly suggest that
there was any type of relationship, special or otherwise,
actually between themselves and Franey.

Indeed, even between

Plaintiffs and CodeSmart the claim would fail because a special
relationship “must be different from the arms-length, business
13

relationship the parties had.” Toledo Fund, LLC v. HSBC Bank
USA, Nat. Ass’n, No. 11 Civ. 7686 (KBF), 2012 WL 364045, at *6
(S.D.N.Y. Feb. 3, 2012) (citing Busino v. Meachem, 270 A.D.2d
606, 608 (3d Dep’t 2000) (“A ‘special relationship’ requires a
closer degree of trust than an ordinary business
relationship.”)).

“The use of the merely conclusory allegation

that such a relationship existed is insufficient as a matter of
law.” Id.
Second, even if the Court could credit Plaintiffs’
conclusory assertion that a special relationship existed because
of the PPM—which the Court cannot do, see Iqbal, 556 U.S. at 678
(citing Twombly, 550 U.S. at 555) (“Threadbare recitals of the
elements of a cause of action, supported by mere conclusory
statements, do not suffice.”)—Plaintiffs nonetheless have failed
to sufficiently allege how the PPM’s purportedly false and
misleading statements were inaccurate.

With the exception of

the PPM’s failure to include “key facts” regarding CodeSmart’s
financial condition, (FAC ¶ 36), every other statement that
Plaintiffs identify as false is only alleged to be so “upon
information and belief,” (id. ¶¶ 22–23, 25–26, 28, 30, 32).

The

FAC, however, does not set forth any factual basis for any of
these alleged information and beliefs.

Accordingly, these

factual assertions fail to meet the heightened pleading
requirements of Rule 9(b). See Pilkington, 2019 WL 5595042, at
14

*13 (dismissing negligent misrepresentation claims where the
complaint failed to offer sufficient facts even on “information
and belief”); Riker, 2016 WL 5334980, at *6 (same).

Plaintiffs’

remaining allegation regarding the omission of “key” financial
information also fails because, although they allege new facts
that should have been included in the PPM, Plaintiffs do not
contrast the new facts with the purported misleading facts in
the PPM or otherwise explain how the omitted facts were
necessary to make the PPM not false or misleading.
Finally, Plaintiffs’ reliance on Franey’s position as COO,
co-founder, and member of CodeSmart’s Board of Directors is not
sufficient, on its own, to plausibly plead a special
relationship between Franey and Plaintiffs, or to automatically
attribute the PPM’s purportedly false statements to her as an
individual.

“The group pleading doctrine permits a court to

presume, at the motion-to-dismiss stage, that ‘group-published’
documents such as ‘statements in prospectuses, registration
statements, annual reports, [and] press releases’ are
attributable to ‘individuals with direct involvement in the
everyday business of the company.’” DeAngelis v. Corzine, 17 F.
Supp. 3d 270, 281 (S.D.N.Y. 2014) (quoting In re BISYS Sec.
Litig., 397 F. Supp. 2d 430, 438 (S.D.N.Y. 2005)).

Although

some courts have ruled that written, group-published statements
may be attributable to a “corporate insider” by virtue of her
15

high-level position, see In re BISYS, 397 F. Supp. 2d at 441, an
individual’s title does not mechanically establish a special
relationship between that corporate insider and an outside
entity.

Further, the group-pleading doctrine generally requires

non-conclusory allegations that give rise to the inference that
the individual defendant was involved in the development of the
misleading document—allegations which are conspicuously absent
from the FAC. See, e.g., Levy v. Maggiore, 48 F. Supp. 3d 428,
451 (E.D.N.Y. 2014) (“Absent any factual allegations with
respect to [the defendant], other than his title, the group
pleading doctrine does not encompass [him].”); DeAngelis, 17 F.
Supp. 3d at 281–82 (“In a case involving multiple defendants,
plaintiffs must plead circumstances providing a factual basis
for scienter for each defendant; guilt by association is
impermissible.”) (quoting In re DDAVP Direct Purchaser Antitrust
Litig., 585 F.3d 677, 695 (2d Cir. 2009)).

Indeed, Plaintiffs’

assertion that Shapiro conducted the business out of his home in
New York, while Franey conducted the business out of her home in
Pennsylvania, (FAC ¶ 11), cuts against the inference that Franey
would have automatically known of Shapiro’s misconduct and false
statements even under a solely “corporate insider” theory of
liability.
Accordingly, Count I must be dismissed.

16

B.

Aiding and Abetting Fraud

The FAC next alleges that Franey knew, or was reckless in
not knowing, that Shapiro engaged in a fraudulent scheme to
manipulate CodeSmart’s share price and deceive Plaintiffs into
purchasing its fraudulently inflated stock, and that she
provided substantial assistance to the scheme in her capacity as
COO and CodeSmart board member.

(FAC ¶¶ 114–117, 119.)

“To state a claim for aiding and abetting fraud, Plaintiffs
must allege ‘(1) the existence of an underlying fraud; (2)
knowledge of this fraud on the part of the aider and abettor;
and (3) substantial assistance by the aider and abettor in
achievement of the fraud.’” HSH Nordbank AG v. RBS Holdings USA
Inc., No. 13 Civ. 3303 (PGG), 2015 WL 1307189, at *15 (S.D.N.Y.
Mar. 23, 2015) (quoting Stanfield Offshore Leveraged Assets,
Ltd. v. Metro. Life Ins. Co., 64 A.D.3d 472, 476 (1st Dep’t
2009)).

“A plaintiff alleging aiding and abetting claims

sounding in fraud must also plead the elements of aiding and
abetting with particularity.” Berman v. Morgan Keegan & Co., No.
10 Civ. 5866 (PKC), 2011 WL 1002683, at *7 (S.D.N.Y. Mar. 14,
2011), aff’d, 455 F. App’x 92 (2d Cir. 2012).

Although actual

knowledge may be alleged generally at the pre-discovery stage
where fraudulent intent is inferable from the surrounding
circumstances, HSH Nordbank, 2015 WL 1307189, at *16, “[m]ere
allegations of constructive knowledge or recklessness are
17

insufficient to satisfy the knowledge requirement,” Berman, 2011
WL 1002683, at *10 (internal quotation marks omitted).
“Substantial assistance exists where ‘(1) a defendant
affirmatively assists, helps conceal, or by virtue of failing to
act when required to do so enables the fraud to proceed, and (2)
the actions of the aider/abettor proximately caused the harm on
which the primary liability is predicated.’” Id. (quoting
UniCredito Italiano SPA v. JPMorgan Chase Bank, 288 F. Supp. 2d
485, 502 (S.D.N.Y. 2003)).
Defendants argue that the FAC’s aiding and abetting claim
fails to meet the pleading requirements of Rules 12(b)(6) and
9(b) because Plaintiffs have failed to plead with the requisite
particularity an underlying fraud cause of action, Franey’s
knowledge of the fraud, and her substantial assistance to
Shapiro.

The Court agrees.
1.

Underlying Fraud

Under New York law, a fraud claim requires: “[1] a
misrepresentation or a material omission of fact which was false
and known to be false by defendant, [2] made for the purpose of
inducing the other party to rely upon it, [3] justifiable
reliance of the other party on the misrepresentation or material
omission, and [4] injury.” Premium Mortg. Corp. v. Equifax,
Inc., 583 F.3d 103, 108 (2d Cir. 2009) (quotation marks
omitted).

As discussed above, the FAC’s allegations regarding
18

the PPM fail under Rule 9(b).

Turning to the other false

statements that Plaintiffs allege—i.e., the press releases,
Forbes article, SEC filings, and statements by Shapiro—the Court
finds that these purported misrepresentations also fail to
satisfy Rule 9(b) for substantially the same reasons.
Accordingly, Plaintiffs have failed to plead the first element
of a claim for aiding and abetting fraud, and Count II must be
dismissed.
First, as with the PPM, Plaintiffs’ allegations relating to
the false press releases and Forbes article do not satisfy Rule
9(b) because Plaintiffs do not set forth any factual basis for
their assertions of falsity, which are only made “upon
information and belief.” See Pilkington, 2019 WL 5595042, at
*13; Riker, 2016 WL 5334980, at *6.
Next, the SEC filings and statements by Shapiro to
potential investors fail under Rule 12(b)(6) because the
purportedly false statements are in fact forward-looking
predictions, not material misrepresentations of a presently
existing or past fact.

Predictive, forward-looking statements,

standing alone, are not actionable. See Hydro Inv’rs, Inc. v.
Trafalgar Power Inc., 227 F.3d 8, 20–21 (2d Cir. 2000) (“[T]he
alleged misrepresentation must be factual in nature and not
promissory or relating to future events that might never come to
fruition.”); see also HDtracks.com, LLC v. 7digital Grp. PLC,
19

No. 18 Civ. 5823 (JFK), 2019 WL 6170838, at *10 (S.D.N.Y. Nov.
19, 2019) (dismissing fraudulent inducement claim that was
premised on forward-looking predictions); Matsumura v. Benihana
Nat. Corp., 542 F. Supp. 2d 245, 252 (S.D.N.Y. 2008) (dismissing
complaint where the plaintiff failed to plead specific facts to
support their assertion that the defendants’ intentions negated
the truth of their forward-looking statements).
2.

Knowledge and Substantial Assistance

Assuming arguendo that Shapiro’s guilty plea conviction
plausibly alleges the existence of an underlying fraud that
Franey then aided and abetted—which in itself is doubtful
because Franey was not indicted as a co-conspirator—the FAC’s
purely conclusory allegations of her misconduct do not give rise
to an inference, much less a plausible one, that Franey had
knowledge of Shapiro’s fraud or that she affirmatively assisted,
helped conceal, or enabled it to proceed.

Indeed, the FAC’s

utter lack of specifics with respect to actions by Franey is the
fundamental flaw with Plaintiffs’ entire pleading: the only nonconclusory allegation that they assert with respect to Franey is
that neither she, nor CodeSmart or Shapiro filed a registration
statement with the SEC as they were contractually obligated to
do under the terms of the subscription agreements.
71.)

(FAC ¶¶ 69,

Every other allegation concerning Franey, for example that

she “provided substantial assistance to Shapiro by approving and
20

making false and misleading statements to shareholders as an
executive officer and board member of CodeSmart,” is nothing
more than an impermissible legal conclusion couched as a factual
assertion—Plaintiffs do not allege anything that, on its own,
gives rise to an inference of wrongdoing by Franey, to say
nothing of Rule 9(b)’s heightened pleading requirement. 2 See ATSI
Commc’ns, 493 F.3d at 99 (“Allegations that are conclusory or
unsupported by factual assertions are insufficient.”); see also
Inspired Capital, LLC v. Condé Nast, --- F. App’x ---, No. 192057-CV, 2020 WL 704856, at *3 (2d Cir. Feb. 12, 2020) (summary
order) (“We have repeatedly explained that Rule 9(b)’s
heightened pleading requirement ‘serves to provide a defendant
with fair notice of a plaintiff’s claim, safeguard h[er]
reputation from improvident charges of wrongdoing, and protect
h[er] against strike suits.’”).
Accordingly, Plaintiffs’ direct claims against Franey must
be dismissed for failure to state a claim upon which relief may
be granted.
C.

Derivative Claims

On behalf of CodeSmart, Plaintiffs assert two derivative
claims against Franey alleging that she breached fiduciary

2

Indeed, Rule 9(b) requires Plaintiffs to set forth the “what, when,
where, and how” of Franey’s alleged failure to stop Shapiro’s fraud or
her affirmative assistance to him. See Pilkington, 2019 WL 5595042, at
*15; Minnie Rose LLC v. Yu, 169 F. Supp. 3d 504, 511 (S.D.N.Y. 2016).

21

duties she owed to CodeSmart, and she aided and abetted
Shapiro’s breach of fiduciary duties that he owed to the
company.

Defendants move to dismiss the derivative claims by

arguing that an impermissible conflict of interest arises when
such claims are comingled with direct claims, and that the FAC
fails to adequately plead demand futility or to satisfy the
heightened pleading standards that apply to claims brought
against a company officer.

Because the Court finds that the

FAC’s derivative claims fail for substantially the same reasons
as its direct claims, the Court does not address Defendants’
conflict of interest, demand futility, or Caremark defenses at
this time.
1.

Choice of Law

As a preliminary matter, Defendants assert that Florida law
governs Plaintiffs’ derivative claims because Florida is
CodeSmart’s state of incorporation.

(Defs.’ Mem. of Law in

Supp. Mot. to Dismiss, ECF No. 76, at 7 n.4; FAC ¶ 13.)
Plaintiffs do not contest this and they also cite Florida case
law in their opposition brief.

Accordingly, the Court applies

Florida law to Plaintiffs’ derivative claims. See Steinberg ex
rel. Bank of Am. Corp. v. Mozilo, 135 F. Supp. 3d 178, 182
(S.D.N.Y. 2015) (“In a diversity action, a federal court applies
the choice of law rules of the forum state.

New York law looks

to the law of the state of incorporation in adjudicating a
22

corporation’s ‘internal affairs,’ including a shareholder
derivative action.”) (citations, internal quotation marks, and
ellipsis omitted); see also Galef v. Alexander, 615 F.2d 51, 58
(2d Cir. 1980).
2.

Breach of Fiduciary Duty

Under Florida law, “[t]he elements of a cause of action for
breach of fiduciary duty are: (1) the existence of a duty; (2)
breach of that duty; and (3) damages flowing from the breach.”
Lee Mem’l Health Sys. v. Blue Cross & Blue Shield of Fla., Inc.,
248 F. Supp. 3d 1304, 1316 (M.D. Fla. 2017) (citing Cassedy v.
Alland Inv. Corp., 128 So.3d 976, 978 (Fla. 1st Dist. Ct. App.
2014)).

Where a claim sounds in fraud, “courts have

consistently found that Rule 9(b) is also applicable,” even “to
torts that are not even necessarily fraudulent—such as a breach
of fiduciary duty—as long as their underlying factual
allegations include averments of fraud.” Ctr. for Individual
Rights v. Chevaldina, No. 16 Civ. 20905 (EGT), 2018 WL 1795470,
at *7 (S.D. Fla. Feb. 21, 2018) (collecting cases), report and
recommendation adopted, No. 16 Civ. 20905 (JLK), 2018 WL 3687559
(S.D. Fla. May 24, 2018).

“The failure to satisfy Rule 9(b) is

a ground for dismissal of a complaint.” U.S., ex rel., Shurick
v. Boeing Co., 330 F. App’x 781, 783 (11th Cir. 2009) (per
curiam).

23

Plaintiffs’ derivative claim for breach of fiduciary duty
must be dismissed for failure to plead the claim with the
requisite particularity.

First, as discussed above, the FAC

utterly fails to allege sufficient, non-conclusory facts
regarding (1) Franey’s purported wrongful conduct, and (2) the
false statements that she and Shapiro are summarily alleged to
have communicated to outside investors via the PPM, press
releases, and other statements.

The FAC is replete with

assertions such as “Franey did not act in good faith and acted
with gross negligence and with complete disregard of her
obligation to use due care and employ reasonable and prudent
investment standards,” but it does not offer any factual
allegations that, standing alone, would support or give rise to
such a conclusion by, for example, articulating how Franey did
not act in good faith, or where and when she disregarded her
obligation to use due care. See In re Takata Airbag Prod. Liab.
Litig., 396 F. Supp. 3d 1101, 1159 (S.D. Fla. 2019) (“[T]he
plaintiff must allege particular facts with respect to each
defendant’s participation in the fraud.

In other words, a

plaintiff is required to set forth specific allegations as to
each defendant that will fulfill the ‘who, what, when, where,
and how’ pertaining to the underlying fraud.

At bottom, the

purpose of the particularity rule is to alert defendants to

24

their precise misconduct and protect them against baseless
charges of fraudulent behavior.”) (citations omitted).
Second, Plaintiffs’ lone assertion that neither Franey,
CodeSmart, nor Shapiro filed a registration statement with the
SEC, (FAC ¶¶ 69, 71, 131), is not sufficient to establish a
derivative breach of fiduciary duty claim where the FAC also
fails to allege how any such breach caused damages to CodeSmart.
See Schein v. Chasen, 313 So.2d 739, 746 (Fla. 1975) (“[A]ctual
damage to the corporation must be alleged in the complaint to
substantiate a stockholders’ derivative action.”).

Plaintiffs

argue that their allegations of damages encompass harm suffered
by CodeSmart because the company is “named nominally.”

(Pls.’

Opp’n to Defs.’ Mot. to Dismiss, ECF No. 77, at 9–10.)

This

argument, however, does not hold up where the only actual injury
alleged in all 142 paragraphs is the $2.1 million loss that
Plaintiffs suffered when their CodeSmart shares became
worthless.

(FAC ¶¶ 3, 49–64.)

Indeed, with respect to the one

plausible allegation of breach—i.e., Franey’s failure to file a
registration statement—the only damages flowing from the
purported misconduct are alleged to be suffered by ICD alone.
(FAC ¶¶ 71–73 (stating the failure to timely file an effective
registration statement “caused substantial damage to ICD”

25

because “ICD Capital was not able to transfer or sell its shares
on a public market and thereby mitigate its losses”).)
Accordingly, Count III must be dismissed.
3. Aiding and Abetting Shapiro’s Breach of
Fiduciary Duty
“Under Florida law, the elements of a claim for aiding and
abetting breach of fiduciary duty are: (1) a fiduciary duty on
the part of the primary wrongdoer; (2) a breach of that duty;
(3) knowledge of the breach by the alleged aider and abettor;
and (4) substantial assistance or encouragement of the
wrongdoing by the alleged aider and abettor.” Am. Axess Inc. v.
Ochoa, No. 18 Civ. 360 (GAP), 2018 WL 2197693, at *2 (M.D. Fla.
May 14, 2018).
In order for a claim of aiding and abetting to survive
a motion to dismiss, the plaintiff must allege that the
defendant had actual knowledge of the underlying
wrongdoing. While the element of actual knowledge may
be alleged generally, the plaintiff still must accompany
that general allegation with allegations of specific
facts that give rise to a strong inference of actual
knowledge regarding the underlying fraud.
Conclusory
statements
that
a
defendant
actually
knew
are
insufficient to support an aiding and abetting claim
where the facts in the complaint only suggest that the
defendant should have known that something was amiss.
Lamm v. State St. Bank & Tr. Co., 889 F. Supp. 2d 1321, 1332
(S.D. Fla. 2012) (citations, quotation marks, and brackets
omitted), aff’d, 749 F.3d 938 (11th Cir. 2014).
As discussed above, the FAC’s purely conclusory allegations
fail to plausibly allege that Franey had knowledge of Shapiro’s
26

misconduct or that she affirmatively assisted or encouraged his
wrongdoing.

Accordingly, Plaintiffs’ derivative claim for

aiding and abetting breach of fiduciary duty, Count IV, must be
dismissed.
D.

Claims Against CodeSmart

Having dismissed Plaintiffs’ derivative claims in their
entirety, the Court also must dismiss the FAC in its entirety as
to nominal defendant CodeSmart because Plaintiffs do not bring
any direct claims against the company and no derivative causes
of action survive. See, e.g., Kramer v. Miller, No. 94 Civ. 3439
(JFK), 1995 WL 699794, at *4 (S.D.N.Y. Nov. 24, 1995).
IV.

Leave to Amend

Plaintiffs have not sought, nor requested, leave to amend.
In view of their woefully inadequate first attempt to bring suit
against Franey, the Court does not envision any purpose to be
served by offering Plaintiffs the opportunity to amend the FAC.
Nevertheless, in the Second Circuit “plaintiffs must be allowed
an opportunity to amend to remedy deficiencies under Rule 9(b).”
Luce v. Edelstein, 802 F.2d 49, 57 (2d Cir. 1986); see also
Pilkington, 2019 WL 5595042, at *21.

Although Federal Rule of

Civil Procedure 15 instructs courts to “freely give leave” to
amend “when justice so requires,” Fed. R. Civ. P. 15(a)(2),
“amendment is not warranted absent some indication as to what
[Plaintiffs] might add to their complaint in order to make it
27

viable,” Shemian v. Research In Motion Ltd., 570 F. App’x 32, 37
(2d Cir. 2014) (summary order) (quoting Horoshko v. Citibank,
N.A., 373 F.3d 248, 249 (2d Cir. 2004) (per curiam)).
Accordingly, should Plaintiffs wish to amend the FAC to salvage
their questionable claims against Franey, they must demonstrate
how they will cure their pleading deficiencies by filing (1) a
proposed second amended complaint (“the PSAC”) with a redline
comparing the PSAC to the FAC; and (2) a memorandum of law
explaining how the PSAC would survive a comparable motion to
dismiss brought by Defendants, and how justice requires granting
leave to amend where Plaintiffs are likely entitled to full
recovery in the criminal action against Shapiro pursuant to the
Mandatory Victims Restitution Act, 18 U.S.C. §§ 3663A,
3664(f)(1)(A), see Discala, 14 Cr. 399 (ENV) (E.D.N.Y. Jan. 4,
2019), Dkt. No. 691 (imposing an approximately $2.33 million
award of restitution against one of Shapiro’s co-conspirators
who, like Shapiro, pleaded guilty to one count of conspiracy to
commit securities fraud).

Such demonstration shall be filed

within 30 days of the date of this Opinion & Order.

Defendants’

opposition brief, if any, is due no later than 14 days after
Plaintiffs’ motion is filed; Plaintiffs’ reply brief, if any, is
due no later than seven days after Defendants’ opposition.

28

V.

Conclusion

For the reasons stated above, Defendants' motion to dismiss
the amended complaint is GRANTED.
The Clerk of Court is directed to terminate the motion
docketed at ECF No. 74.
SO ORDERED.

Dated:

New York, New York
February 19, 2020

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John
States District Judge