ICD Capital, LLC. v. Codesmart Holdings, Inc. et al
Filing
92
OPINION & ORDER re: 83 LETTER MOTION for Leave to File Second Amended Complaint addressed to Judge John F. Keenan from Joseph M. Pastore III dated 3/20/2020. filed by ICD Capital, LLC (individually), ICD Capital, LLC., ICD Cap ital, LLC (derivatively on behalf of nominal defendant CodeSmart Holdings, Inc.). For the reasons set forth above, Plaintiffs' motion for leave to file a second amended complaint is DENIED. It is FURTHER ORDERED that, because Plaintiffs have ha d a full opportunity to amend their complaint to make it viable, Plaintiffs' claims against Franey and CodeSmart are dismissed with prejudice. The Clerk of Court is directed to terminate the motion docketed at ECF No. 83 and close this case. (As further set forth in this Order.) (Signed by Judge John F. Keenan on 7/13/2020) (cf)
Case 1:14-cv-08355-JFK Document 92 Filed 07/13/20 Page 1 of 26
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: 07/13/2020
nominal defendant CodeSmart
:
UNITED STATES DISTRICT COURT
Holdings, Inc.,
:
SOUTHERN DISTRICT OF NEW YORK
:
-----------------------------------------------------------x
Plaintiff,
:
No.Civ. 7831 (PAC)
In re FANNIE MAE 2008 SECURITIES
:
08 14 Civ. 8355 (JFK)
:
LITIGATION
:
09 MD 2013 (PAC)
-against:
OPINION & ORDER
:
:
:
OPINION & ORDER
CODESMART HOLDINGS, INC. and
:
-----------------------------------------------------------x
SHARON FRANEY,
:
:
Defendants.
:
------------------------------- X District Judge:
HONORABLE PAUL A. CROTTY, United States
APPEARANCES
1
BACKGROUND
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
Thomas P. McEvoy
subprime mortgages (high credit risk loans) and Alt-A mortgages (low-documentation loans)
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
Plaintiff ICD Capital, LLC (“ICD”), a Texas investment
available in the future. Lending discipline was lacking in the system. Mortgage originators did
company, brings a motion for leave to file a second amended
not hold these high-risk mortgage loans. Rather than carry the rising risk on their books, the
complaint (“the SAC”) following the Court’s February 19, 2020
originators sold their loans into the secondary mortgage market, often as securitized packages
Opinion & Order (“the MTD Order”) that dismissed without
known as mortgage-backed securities (“MBSs”). MBS markets grew almost exponentially.
prejudice ICD’s first amended complaint (“the FAC”) against
But then the housing bubble burst. In 2006, the demand for housing dropped abruptly
Defendants CodeSmart Holdings, Inc. (“CodeSmart”), a Florida
and home prices began to fall. In light of the changing housing market, banks modified their
medical insurance coding education and training company, and
lending practices and became unwilling to refinance home mortgages without refinancing.
Sharon Franey (“Franey”), a co-founder of CodeSmart and one of
its two executive officers and board members.
1
For the reasons
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
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set forth below, ICD’s motion is DENIED, its claims are
dismissed with prejudice, and this case is closed.
I.
Background
The Court presumes familiarity with ICD’s first attempt to
bring suit against CodeSmart and Franey as discussed in the MTD
Order. See ICD Capital, LLC v. CodeSmart Holdings, Inc., No. 14
Civ. 8355 (JFK), 2020 WL 815733 (S.D.N.Y. Feb. 19, 2020).
To
briefly summarize, ICD brings this action individually,
derivatively, and on behalf of other aggrieved parties (together
with ICD, “Plaintiffs”) against CodeSmart and Franey for
negligent misrepresentation, breach of fiduciary duties, and
aiding and abetting fraud.
Plaintiffs allege that they
purchased approximately $2.1 million worth of CodeSmart
securities in reliance on materially false and misleading
statements the company provided in a private placement
memorandum dated June 17, 2013 (“the PPM”), certain of the
company’s press releases and filings with the U.S. Securities
and Exchange Commission (“the SEC”), and public and private
statements by non-party Ira Shapiro (“Shapiro”).
Shapiro is
CodeSmart’s former Chief Executive Officer (“CEO”), Chairman of
its Board of Directors (“Chairman”), and, along with Franey, the
company’s other co-founder.
In October 2017, Shapiro pleaded
guilty in the Eastern District of New York to conspiracy to
commit securities fraud for conduct related to Plaintiffs’
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claims in this action; Shapiro’s sentencing has been adjourned
sine die because of the COVID-19 pandemic. See United States v.
Discala, et al., 14 Cr. 399 (ENV) (E.D.N.Y.).
Franey and
Shapiro founded CodeSmart together, they were the company’s only
officers and board members, and they conducted the business out
of their homes in Pennsylvania and New York, respectively.
The SAC asserts 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 that she
owed to the company and aiding and abetting Shapiro’s breach of
similar fiduciary duties.
The SAC adds some new facts to
Plaintiffs’ original allegations, but the claims are, in
essence, substantially the same as the FAC.
Plaintiffs argue
that justice requires granting them leave to amend because
Plaintiffs believe that Shapiro is likely indigent and they will
not receive adequate repayment from him in the criminal action
pursuant to the Mandatory Victims Restitution Act, 18 U.S.C. §§
3663A, 3664(f)(1)(A), and because Franey is likely covered by
Directors and Officers insurance.
A.
Factual Allegations
The following is drawn from Plaintiffs’ proposed SAC.
(Proposed Second Am. Compl. (“SAC”), ECF No. 85.)
For the
purposes of this motion, all of the SAC’s non-conclusory factual
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allegations are accepted as true and all reasonable inferences
are drawn in Plaintiffs’ favor. Lynch v. City of New York, 952
F.3d 67, 74–76 (2d Cir. 2020).
Plaintiffs allege that, as the Chief Operating Officer
(“COO”) of CodeSmart and its only other board member, Franey
“knew or should have known” that the following statements were
materially false or misleading because Franey had extensive
business experience prior to joining CodeSmart, she devoted
“100% of her work time to the company,” and she had access to
information about the company and its finances and the
responsibility to confirm the accuracy of information that
CodeSmart disseminated to potential investors.
The PPM.
In 2013, CodeSmart attempted to raise
approximately $4 million by means of a private investment in a
public entity transaction (“the PIPE”).
(SAC ¶¶ 16, 18.)
To
facilitate the PIPE, CodeSmart drafted and disseminated the PPM
to interested investors to provide them with information about
the company.
(Id. ¶ 17.)
Plaintiffs allege that the PPM
included the following false statements, which Franey knew or
should have known were false: (1) CodeSmart had entered into
several consulting agreements and had established extensive
relationships with strategic partners around the country; (2)
CodeSmart had distribution arrangements with major companies
which gave CodeSmart widespread reach and immediate access to
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hundreds of thousands of potential students; (3) CodeSmart had
entered into a long-term agreement with one of the country’s
largest hospital group purchasing organizations; (4) CodeSmart
had been endorsed by two regional extension centers in Florida;
and (5) CodeSmart provided consulting services.
(Id. ¶¶ 21–35.)
As in the FAC, however, Plaintiffs once again assert “upon
information and belief” that each of these factual statements
were false.
Plaintiffs also once again allege that the PPM
omitted “key facts” and did not accurately present the company’s
financial condition, which Franey knew or should have known.
(Id. ¶¶ 36–38.)
May 2013 press release.
On May 28, 2013, CodeSmart issued
a press release stating that the company was the “exclusive
strategic partner” to Binghamton University for certain medical
coding education and consulting services relating to “ICD-10,”
an industry classification system that was to become effective
in October 2014.
(Id. ¶¶ 14, 40.)
Plaintiffs allege, “based on
conversations and email communications with representatives of
Binghamton University,” that the press release was false because
CodeSmart’s agreement with Binghamton University was not an
exclusive relationship.
(Id. ¶¶ 41–45.)
June 2013 press release.
On June 4, 2013, CodeSmart issued
a press release stating that the company was “the exclusive
strategic partner for ICD-10 education and consulting services
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to Ramapo College.”
(Id. ¶ 50.)
Plaintiffs allege that this
statement was false, and that Franey knew that Ramapo College
had not finalized such an agreement with CodeSmart at that time,
because on the same day the press release was issued, an
individual at Ramapo College emailed representatives of
CodeSmart, including Franey, to complain about the unauthorized
press release.
(Id. ¶¶ 51–53.)
Plaintiffs further allege that
the individual stated that she was “very concerned” about the
press release and said, “as you know, we are not yet approved .
. . to proceed with a contract for this program.”
(Id. ¶ 53.)
The individual requested that CodeSmart “halt any further
communications/promotions about a partnership with Ramapo
College.”
(Id.)
The SAC alleges that Franey responded to the individual and
apologized for the press release stating, “Ruth Patterson and I
[Franey] were not aware that this was to be released” and “no
further releases mentioning Ramapo will be issued without your
consent.”
(Id. ¶ 54.)
Shapiro also responded to the individual
and apologized for the press release stating, “this is all done
in the spirit of promoting business opportunities for you as a
partner.”
(Id. ¶ 56.)
Neither Franey, Shapiro, nor CodeSmart
ever issued a revised or amended press release regarding the
company’s relationship with Ramapo College.
(Id. ¶ 59.)
Plaintiffs allege, however, only “upon information and belief”
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that CodeSmart never finalized a contract with Ramapo College.
(Id. ¶ 55.)
Forbes article.
On June 25, 2013, Forbes published an
article in which 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. ¶ 62.)
Plaintiffs allege that CodeSmart did
not have affiliations with the colleges and universities, and
they once again assert “upon information and belief” that
CodeSmart did not have an exclusive agreement with the hospital
group.
(Id. ¶¶ 63, 66.)
SEC filings.
On July 3, 2013, CodeSmart filed a Form 8-K
with the SEC stating that Shapiro, in his capacity as
CodeSmart’s CEO and Chairman, presented at an online investor
conference and projected that CodeSmart’s gross revenue and net
income would increase dramatically over the following three
years.
(Id. ¶ 67.)
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.
(Id. ¶ 68.)
Private statements by Shapiro.
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
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“great,” and it would likely double and split again “very soon.”
(Id. ¶ 71.)
Relying on these representations, Plaintiffs executed
subscription agreements to purchase CodeSmart’s common stock at
$1.50 per share.
(Id. ¶ 73.)
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. ¶ 90.)
Accordingly, the subscription agreements obligated
CodeSmart to file a registration statement and to ensure that it
was declared effective.
(Id. ¶¶ 92–96.)
However, neither
CodeSmart, Shapiro, nor Franey complied with the requirement,
which caused CodeSmart to breach its contractual obligations to
Plaintiffs.
(Id.)
As a result, Plaintiffs were not able to
transfer or sell their shares on a public market to mitigate
their losses, and Plaintiffs’ approximately $2.1 million
investment became worthless when the stock price sank from a
high of $6.94 per share in July 2013, to $0.01 per share the
following year.
(Id. ¶¶ 69, 97–100.)
The SEC ultimately
suspended trading in CodeSmart stock in 2015 and revoked its
registration in 2016.
(Id. ¶¶ 101–02.)
Plaintiffs allege that,
at the time they purchased their shares, Franey’s ownership
interest was valued at over $20 million.
8
(Id. ¶ 15.)
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B.
Procedural Background
Plaintiffs initiated this action in October 2014, by filing
a complaint against CodeSmart, Franey, and Shapiro.
1.)
(ECF No.
The following year, the Court stayed these proceedings
until final disposition of the criminal action against Shapiro
and related investigations into CodeSmart and Franey.
39.)
(ECF No.
Franey was never indicted, and on January 29, 2019, she
and CodeSmart consented to lifting the stay and reinstating this
case.
(ECF No. 68.)
On February 4, 2019, Plaintiffs filed the FAC, which
removed Shapiro as a defendant and asserted direct and
derivative claims against Franey.
(ECF No. 71.)
On April 19,
2019, CodeSmart and Franey (together, “Defendants”) moved to
dismiss the FAC for failure to state a claim upon which relief
may be granted.
(ECF No. 74.)
The Court granted Defendants’
motion on February 19, 2020, (ECF No. 80), but allowed
Plaintiffs the opportunity to cure “their woefully inadequate
first attempt to bring suit against Franey” by demonstrating how
a second amended complaint “would survive a comparable motion to
dismiss brought by Defendants.” ICD Capital, 2020 WL 815733, at
*9.
On March 20, 2020, Plaintiffs filed the instant motion,
(ECF Nos. 83–85), which was heard during a telephonic argument
on July 1, 2020.
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II. Legal Standards Governing Motions Under Rules 12(b)(6)
and 9(b)
Leave to amend should be freely granted when justice so
requires. Fed. R. Civ. P. 15(a)(2); Lucente v. Int’l Bus. Machs.
Corp., 310 F.3d 243, 258 (2d Cir. 2002).
“Nonetheless, the
Court may deny leave if the amendment (1) has been delayed
unduly, (2) is sought for dilatory purposes or is made in bad
faith, (3) the opposing party would be prejudiced, or (4) would
be futile.” Lee v. Regal Cruises, Ltd., 916 F. Supp. 300, 303
(S.D.N.Y. 1996) (citing Foman v. Davis, 371 U.S. 178, 182
(1962)).
“An amendment to a pleading is futile if the proposed
claim could not withstand a motion to dismiss pursuant to Fed.
R. Civ. P. 12(b)(6).” Lucente, 310 F.3d at 258.
“Thus, the
standard for denying leave to amend based on futility is the
same as the standard for granting a motion to dismiss.” IBEW
Local Union No. 58 Pension Tr. Fund & Annuity Fund v. Royal Bank
of Scotland Grp., PLC, 783 F.3d 383, 389 (2d Cir. 2015).
“[I]n deciding a Rule 12(b)(6) motion to dismiss a
complaint, [the Court] is required to accept all ‘well-pleaded
factual allegations’ in the complaint as true.” Lynch, 952 F.3d
at 74–75 (quoting Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009)).
The Court, however, may not credit “‘naked assertions’ devoid of
‘further factual enhancement,’” Iqbal, 556 U.S. at 678 (brackets
omitted) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544,
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557 (2007)), nor “conclusory allegations or legal conclusions
couched as factual allegations,” Rothstein v. UBS AG, 708 F.3d
82, 94 (2d Cir. 2013).
“Although allegations that are
conclusory are not entitled to be assumed true, when there are
well-pleaded factual allegations, a court should assume their
veracity and then determine whether they plausibly give rise to
an entitlement to relief.” Lynch, 952 F.3d at 75 (alterations,
citations, and internal quotation marks omitted).
“The
assessment of whether a complaint’s factual allegations
plausibly give rise to an entitlement to relief ‘does not impose
a probability requirement at the pleading stage; it simply calls
for enough fact to raise a reasonable expectation that discovery
will reveal evidence of illegal’ conduct.” Id. (quoting Twombly,
550 U.S. at 556).
In addition to the requirements of Rule 12(b)(6), a
complaint alleging fraud must satisfy the heightened pleading
requirements of Rule 9(b) by stating the circumstances
constituting fraud “with particularity.” Loreley Fin. (Jersey)
No. 3 Ltd. v. Wells Fargo Sec., LLC, 797 F.3d 160, 174 (2d Cir.
2015).
“Rule 9(b)’s heightened particularity requirement does
not apply to allegations regarding fraudulent intent, also known
as scienter, which may be alleged generally.” Minnie Rose LLC v.
Yu, 169 F. Supp. 3d 504, 511 (S.D.N.Y. 2016).
Plaintiffs,
however, “are still required to plead the factual basis which
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gives rise to a ‘strong inference’ of fraudulent intent.”
Stephenson v. PricewaterhouseCoopers, LLP, 482 F. App’x 618, 622
(2d Cir. 2012) (summary order) (emphasis omitted) (quoting
Wexner v. First Manhattan Co., 902 F.2d 169, 172 (2d Cir.
1990)).
“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 Fin., 797 F.3d at 176–77 (quoting
Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 324
(2007)).
III.
Discussion
As a preliminary matter, it is worth noting that
Plaintiffs’ claims once again suffer from the following two
significant deficiencies, which the MTD Order previously
identified and discussed at length.
First, Plaintiffs continue to assert “upon information and
belief” that certain statements were false or misleading.
The
MTD Order explained that Plaintiffs may allege such facts in
this manner, but the heightened pleading requirements of Rule
9(b) require that Plaintiffs set forth the factual basis for
their “information and belief.” See ICD Capital, 2020 WL 815733,
at *4–5, *7.
The SAC, however, fails to articulate a factual
basis for any of Plaintiffs’ “upon information and belief”
allegations, and the Court, once again, will not treat them as
true.
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Second, the SAC is once again riddled with conclusory
allegations relating to Franey’s conduct and her awareness of,
or involvement in, the false and misleading statements allegedly
issued by CodeSmart and Shapiro.
The MTD Order pointedly
explained that such allegations are insufficient. See id. at *7
(finding “the FAC’s utter lack of specifics with respect to
actions by Franey is the fundamental flaw with Plaintiffs’
entire pleading,” and “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”)
(emphasis in original).
As discussed below, the SAC only adds
one new, non-conclusory allegation against Franey:
Regarding
the June 2013 press release, Plaintiffs now allege that Franey
received and responded to an email from Ramapo College that
voiced concern about the accuracy of CodeSmart’s June 4, 2013
press release, but Franey personally took no action in response.
(SAC ¶¶ 50–59.)
Although this gives rise to the inference that
Franey was put on notice that the press release contained a
false statement, the allegation of wrongful conduct by Franey—
i.e., that she failed to issue a corrective press release—relies
on Plaintiffs’ unsupported and speculative assertion that, “upon
information and belief,” CodeSmart never finalized a contract
with Ramapo College.
(Id. ¶ 55.)
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A.
Negligent Misrepresentation
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
also Pilkington N. Am., Inc. v. Mitsui Sumitomo Ins. Co. of Am.,
420 F. Supp. 3d 123, 141–42 (S.D.N.Y. 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, 420
F. Supp. 3d at 142 (quoting Riker v. Premier Capital, LLC, No.
15 Civ. 8293 (ALC), 2016 WL 5334980, at *6 (S.D.N.Y. Sept. 22,
2016)).
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Plaintiffs argue that a special or privity-like
relationship existed between Plaintiffs and Franey based on the
nature of Plaintiffs’ investment in CodeSmart, Franey’s role as
an officer and director of the company, and Franey’s prior
experience in a commercial enterprise that included a global
healthcare consulting division.
The Court disagrees.
First, Plaintiffs did not even argue in their opening brief
that the SAC’s negligent misrepresentation claim is now
sufficiently pleaded, and they belatedly raise a defense of the
claim only in their reply brief.
Second, Plaintiffs cite no
authority in support of their argument that Franey’s position at
CodeSmart, together with her prior experience, somehow
establishes a special relationship between her and Plaintiffs.
Indeed, unlike Plaintiffs’ allegations regarding false
statements by Shapiro, Plaintiffs do not allege any
communications between themselves and Franey.
Finally,
Plaintiffs’ conclusory allegations do not overcome the general
rule that a special relationship “requires a closer degree of
trust than an ordinary business relationship,” and that such
relationships “must be different from the arms-length, business
relationship the parties had.” ICD Capital, 2020 WL 815733, at
*5 (citing 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),
and Busino v. Meachem, 270 A.D.2d 606, 608 (3d Dep’t 2000)); see
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also Naughright v. Weiss, 857 F. Supp. 2d 462, 470–71 (S.D.N.Y.
2012) (explaining that “[t]o allege a special relationship, [a
plaintiff] must establish something beyond an ordinary arm’s
length transaction,” and “a fiduciary relationship cannot be
formed merely by a plaintiff’s subjective decision to repose
trust in the defendant”).
Accordingly, leave to amend Count I
is denied as futile.
B.
Aiding and Abetting Fraud
“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.,
Inc., 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).
“Plaintiffs must allege a strong inference of actual knowledge
or conscious avoidance; reckless disregard will not suffice.”
Anwar v. Fairfield Greenwich Ltd., 728 F. Supp. 2d 372, 442
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(S.D.N.Y. 2010).
“While actual knowledge of the underlying
fraud may be averred generally under Rule 9(b), the plaintiff
must accompany the general allegation with allegations of
specific ‘facts giving rise to a strong inference of actual
knowledge regarding the underlying fraud.’” Berman, 2011 WL
1002683, at *10 (citing Lerner v. Fleet Bank, N.A., 459 F.3d
273, 293 (2d Cir. 2006)).
The MTD Order ruled that the FAC’s allegations regarding
the existence of an underlying fraud failed to satisfy the
requirements of Rule 9(b). See ICD Capital, 2020 WL 815733, at
*6–7.
Assuming arguendo that Shapiro’s guilty plea conviction
plausibly established the existence of a fraud that Franey then
aided and abetted—which the MTD Order noted was doubtful because
Franey was not indicted as a co-conspirator—the Court ruled that
the FAC’s conclusory allegations of misconduct by Franey “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.” Id. at *7.
As discussed above, the SAC adds only one new, nonconclusory allegation regarding Franey: that she was put on
notice that the June 2013 press release was inaccurate and she
did not issue a corrective statement in response.
Even if this
allegation was sufficiently pleaded—which, again, it is not
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because Plaintiffs do not provide any factual basis for their
“information and belief” that CodeSmart never finalized a
contract with Ramapo College, and hence, that a corrective
statement was necessary—Plaintiffs’ allegations concerning
Franey still fail to satisfy the knowledge and substantial
assistance pleading requirements for a permissible claim of
aiding and abetting fraud.
Accordingly, leave to amend Count II
is denied as futile.
First, even when construed in the light most favorable to
Plaintiffs, Franey’s response to the individual at Ramapo
College—i.e., that she and another “were not aware that [the
announcement] was to be released” and “no further releases
mentioning Ramapo will be issued without [Ramapo’s] consent”—
gives rise to the inference that Franey did not intend for the
issuance of a false press release.
This cuts against inferring
Franey’s actual knowledge of the underlying fraud. See, e.g.,
Berman, 2011 WL 1002683, at *10–13 (dismissing aiding and
abetting fraud claim where plaintiffs’ non-conclusory
allegations were “based upon conjecture and surmise” and “at
most speak to whether [defendant] should have known of the
fraud; they do not reflect actual knowledge of fraud”); see also
In re Agape Litig., 773 F. Supp. 2d 298, 313 (E.D.N.Y. 2011)
(“Under Second Circuit case law, [defendant]’s knowledge that
[company] was acting improperly in one capacity does not raise a
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strong inference that [defendant] had actual knowledge of the
underlying fraudulent scheme.”).
“[W]here the well-pleaded
facts do not permit the court to infer more than the mere
possibility of misconduct, the complaint has alleged—but it has
not ‘show[n]’—‘that the pleader is entitled to relief.’” Lynch,
952 F.3d at 74 (quoting Iqbal, 556 U.S. at 679) (emphasis in
original).
“To present a plausible claim, the pleading must
contain something more than a statement of facts that merely
creates a suspicion of a legally cognizable right of action.”
Id. (quoting Twombly, 550 U.S. at 555) (alterations and internal
quotation marks omitted).
Plaintiffs argue that Franey’s extensive business
experience prior to joining CodeSmart and their allegation that
she devoted “100% of her work time to the company” plausibly
alleges that she must have known or consciously avoided knowing
of Shapiro’s fraud.
This argument is not persuasive.
Aside
from the June 2013 press release discussed above, Plaintiffs do
not offer any non-conclusory factual assertions regarding
Franey’s involvement in drafting the relevant issuances, or her
awareness that the issuances included materially false or
misleading information.
As explained in the MTD Order,
“[a]llegations that are conclusory or unsupported by factual
assertions are insufficient.” ICD Capital, 2020 WL 815733, at *7
(citing ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 99
19
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(2d Cir. 2007)); see also Berman, 2011 WL 1002683, at *10
(“Allegations that a defendant was reckless in not knowing of
the fraudulent conduct are not sufficient to plead aiding and
abetting fraud with particularity.”); cf. Anwar, 728 F. Supp. 2d
at 443 (finding a strong inference of conscious avoidance where
“Plaintiffs allege[d] that [defendants] were aware of the roles
consolidated in [the Ponzi scheme operated by Bernard Madoff],
the lack of transparency into his operations, his family
members’ involvement in key positions at his firm, his lack of
segregation of important functions, his use of an unknown
auditing firm, his use of paper trading records, and his
implausibly consistent investment returns”).
Second, the SAC’s non-conclusory allegations also fail to
demonstrate how Franey substantially assisted Shapiro’s fraud.
“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.’” Berman, 2011 WL
1002683, at *10 (quoting UniCredito Italiano SPA v. JPMorgan
Chase Bank, 288 F. Supp. 2d 485, 502 (S.D.N.Y. 2003)).
Regarding Franey’s failure to correct the June 2013 press
release—which, as discussed above, merely speculates that such
action was necessary—Plaintiffs’ conclusory assertion that
20
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“corrective action would have been a red flag or warning,” (SAC
¶¶ 60, 145, 163), is not sufficient, on its own, to allege
proximate cause of their decision to purchase CodeSmart
securities because the SAC also alleges that CodeSmart issued
numerous other press releases during the relevant time period,
(id. ¶ 61), and there were numerous other significant and false
communications that were issued after the June 2013 press
release, such as the PPM and SEC filings.
Likewise, Plaintiffs’ other non-conclusory allegation—that
neither Franey, CodeSmart, or Shapiro filed a registration
statement with the SEC—fails to demonstrate how Franey enabled
the fraud to succeed because, as the SAC repeatedly makes clear,
the fraud was to induce Plaintiffs to purchase CodeSmart stock
via the PIPE.
Franey’s failure to file the registration
statement after the purchases were complete had nothing to do
with whether or not the fraud would succeed.
Indeed, by that
point, Plaintiffs allege that it already had.
C.
Derivative Claims
1.
Choice of Law
As with the FAC, the parties do not dispute that Florida
law governs Plaintiffs’ derivative claims against Franey because
Florida is CodeSmart’s state of incorporation.
Accordingly, the
Court once again applies Florida law to its analysis of the
sufficiency of Counts III and IV.
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Under Florida law, “a district court may properly deny
leave to amend [a] complaint under Rule 15(a) when such
amendment would be futile.” Hall v. United Ins. Co. of Am., 367
F.3d 1255, 1262–63 (11th Cir. 2004).
“[D]enial of leave to
amend is justified by futility when the complaint as amended is
still subject to dismissal.” Id. (quotation marks omitted).
2. Franey’s Breach of Fiduciary Duties Owed to
CodeSmart
In Florida, “[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)).
“[A]ctual damage to the corporation must be alleged in
the complaint to substantiate a stockholders’ derivative
action.” Schein v. Chasen, 313 So. 2d 739, 746 (Fla. 1975).
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,
22
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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).
The MTD Order dismissed Plaintiffs’ breach of fiduciary
duty claim because (1) the FAC failed to allege non-conclusory
and particularized facts regarding breach—i.e., Franey’s
purported wrongful conduct—in relation to the false statements
communicated to outside investors; and (2) Plaintiffs’ only nonconclusory allegation regarding a possible breach by Franey—
i.e., her failure to file a registration statement—was only
alleged to have caused damages to Plaintiffs, not CodeSmart. ICD
Capital, 2020 WL 815733, at *8–9.
As before, setting aside Plaintiffs’ insufficiently pleaded
allegations, the SAC’s remaining non-conclusory assertions once
again do not plausibly allege the damages element of a
permissible derivative cause of action.
Accordingly, leave to
amend Count III is denied as futile.
First, the SAC does not plausibly allege that Franey’s
failure to correct the June 2013 press release harmed CodeSmart
by, for example, causing the company to lose customers or to
incur additional expenses.
Plaintiffs argue that CodeSmart’s
stock price plummeted to $0.01 because of Franey’s failure to
act (and Shapiro’s fraud), but Plaintiffs’ argument is fatally
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undermined by the SAC’s other allegations that CodeSmart already
was a failing business by July and August 2013, when the
company’s stock began its freefall.
(SAC ¶ 114 (stating that on
July 12, 2013, CodeSmart filed an amended Form 8-K listing only
$6,000 in total assets, $7,600 in revenue and a net loss of
$103,141); id. ¶ 70 (stating that in August 2013, “CodeSmart
file[d] a Form 10-Q with the SEC stating that the company did
‘not have sufficient funds to fully implement its business plan’
and that if they did not obtain the funds, CodeSmart ‘may need
to curtail or cease its operations until such time as it has
sufficient funds’”).)
Instead, the SAC focuses on the harm that
Franey’s (and Shapiro’s) alleged misconduct caused to
Plaintiffs—indeed, both derivative counts assert that, “[a]s a
result of Franey’s actions, Plaintiff[s] [not CodeSmart]
suffered damages in an amount to be determined at trial.”
(SAC
¶¶ 199, 215.)
Second, as discussed in the MTD Order and above, Plaintiffs
are the only entities alleged to have suffered damages as a
result of Franey’s (and CodeSmart’s) failure to file a
registration statement. See ICD Capital, 2020 WL 815733, at *9.
The SAC adds no new allegations of harm to CodeSmart because of
the failure to fulfill this contractual obligation.
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3. Aiding and Abetting Shapiro’s Breach of
Fiduciary Duties
“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) (alterations, citations, and internal quotation
marks omitted), aff’d, 749 F.3d 938 (11th Cir. 2014).
As discussed in the MTD Order and above, Plaintiffs’
conclusory allegations fail to plausibly allege that Franey had
actual knowledge of Shapiro’s misconduct or that she
affirmatively assisted or encouraged his wrongdoing. See ICD
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Case 1:14-cv-08355-JFK Document 92 Filed 07/13/20 Page 26 of 26
Capital, 2020 WL 815733, at *9.
Accordingly, leave to amend
Count IV is denied as futile.
D.
Claims Against CodeSmart
Having denied leave to amend Plaintiffs’ derivative claims
against Franey, the Court also must deny leave to amend
Plaintiffs’ claims as to nominal defendant CodeSmart because
Plaintiffs do not bring any direct claims against the company
and no derivative causes of action survive. See id. (dismissing
claims against CodeSmart).
IV.
Conclusion
For the reasons set forth above, Plaintiffs’ motion for
leave to file a second amended complaint is DENIED.
It is FURTHER ORDERED that, because Plaintiffs have had a
full opportunity to amend their complaint to make it viable,
Plaintiffs’ claims against Franey and CodeSmart are dismissed
with prejudice.
The Clerk of Court is directed to terminate the motion
docketed at ECF No. 83 and close this case.
SO ORDERED.
Dated:
New York, New York
July 13, 2020
26
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