Walsh v. Rigas et al
Filing
69
MEMORANDUM AND ORDER: granting 59 Motion to Dismiss. For the foregoing reasons, defendants' motion to dismiss is granted in its entirety and with prejudice. Although plaintiff makes a perfunctory request for leave to amend in his opposition b rief [Pl.'s Opp. Br. at 25], he does so in conclusory fashion without providing an explanation of what he would allege in a second amended complaint to cure the FAC's significant deficiencies, and we therefore deny his request. See Campo v. Sears Holdings Corp., 371 F. App'x 212, 218 (2d Cir. 2010) (summary order) (upholding denial of leave to amend where "plaintiffs provide[d] no explanation of what they would allege in an amended complaint to save their claims"); see a lso Metz v. U.S. Life Ins. Co. in City of New York, 662 F.3d 600, 603 (2d Cir. 2011). The Clerk of Court is respectfully directed to enter Judgment for defendants and terminate this case and any motions pending therein. SO ORDERED. (Signed by Judge Naomi Reice Buchwald on 1/23/2019) (ama) Transmission to Orders and Judgments Clerk for processing.
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
--------------------------------------X
GRAHAM WALSH, individually and
derivatively as a minority
shareholder of GSMI,
Plaintiff,
- against MEMORANDUM AND ORDER
IONNAIS P RIGAS, DANIEL STANDEN,
ALEXANDER LOUCOPOULOS, GOLDEN SCIENS
MARINE INVESTMENT MANAGEMENT CO.,
LTD, GOLDEN SCIENS HOLDINGS, LLC,
SCIENS CAPITAL MANAGEMENT,
SCIENS INSTITUTIONAL SERVICES, LLC,
and SMH MANAGEMENT, LTD,
17 Civ. 4089 (NRB)
Defendants,
GOLDEN SCIENS MARINE INVESTMENTS,
LTD.,
Nominal Defendant.
--------------------------------------X
NAOMI REICE BUCHWALD
UNITED STATES DISTRICT JUDGE
Plaintiff Graham Walsh (“Walsh” or “plaintiff”) brings this
action against Golden Sciens Marine Investments Ltd (“GSMI” or the
“Fund”) and eight affiliated entities or individuals, asserting
the
following
sixteen
causes
of
action:
(1)
direct
and/or
derivative violations of Section 10(b) of the Securities Exchange
Act of 1934 (“Exchange Act”) and Rule 10b–5 against all defendants
(Counts I and II); (2) control person liability against defendants
John Rigas, Daniel Standen, and Sciens Capital Management (“SCM”
or “Sciens Capital”) under Section 20(a) and (b) of the Exchange
1
Act (Counts III through V); (3) breach of fiduciary duty against
all defendants except for GSMI and Golden Sciens Holdings, LLC
(the “Intermediary”), brought directly and derivatively (Counts VI
and VII); (4) intentional misrepresentation by all defendants
(Counts VIII and IX);
(5) fraud in the inducement against Rigas
and SCM (Count X); (6) negligent misrepresentation against all
defendants except for GSMI, brought directly and derivatively
(Counts XI and XII); (7) respondeat superior against SCM (Count
XIII);
(8)
breach
of
contract
against
SMH
Management
(the
“Investment Manager”), GSMI Management (the “Portfolio Manager”),
and Sciens Institutional Services (the “Administrator”) (Count
XIV); (9) breach of third-party beneficiary contract against SCM,
the
Investment
Manager,
Portfolio
Manager,
and
Administrator
(Count XV); and (10) unjust enrichment against all defendants
except for GSMI and the Intermediary (Count XVI).
Presently before the Court is defendants’ motion to dismiss
plaintiff’s
First
Amended
Complaint
(“FAC”)
in
its
entirety
pursuant to Rules 8 and 12(b)(6) of the Federal Rules of Civil
Procedure.
For the reasons that follow, defendants’ motion to
dismiss is granted.
2
I.
Factual Background 1
A. Parties
Plaintiff Graham Walsh is a participating shareholder in
GSMI, an offshore investment vehicle created by Sciens Capital
offering investors an opportunity to participate in the market for
dry bulk shipping vessels. 2
FAC ¶¶ 2, 10, 14.
Beginning in 2014,
GSMI issued securities in the form of participating shares to fund
the
acquisition
of
a
fleet
of
both
newbuild
and
second-hand
shipping vessels at a perceived low point in the market.
GSMI’s
basic strategy was to charter the vessels and then sell them for
a profit once the market improved.
Ex. D, ECF No. 60-4.
FAC ¶¶ 14, 32–33; Shepard Decl.
Although the precise amount of capital raised
by GSMI to date is unclear from the pleading, it initially sought
capital commitments of somewhere between $210 million and $300
million.
See FAC ¶¶ 34, 48.
GSMI delegated its day-to-day administration and investment
management to the Investment Manager, Administrator, and Portfolio
1
The facts are largely drawn from the FAC and are assumed to be true
for the purposes of this motion. See Glob. Network Commc’ns, Inc. v. City of
New York, 458 F.3d 150, 154 (2d Cir. 2006). We also consider documents possessed
by or known to plaintiff upon which he relied in bringing this action, ATSI
Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir. 2007), including:
(1) GSMI’s Confidential Private Offering Memorandum (“POM”), Declaration of
Jonathan T. Shepard (“Shepard Decl.”) Ex. A, Mar. 1, 2018, ECF No. 60-1; (2)
Walsh’s Subscription Agreement (the “Subscription Agreement”), id. Ex. B, ECF
No. 60-2; and (3) Memorandum and Articles of Association of GSMI (the
“Articles”), id. Ex. C, ECF No. 60-3.
2
Dry bulk shipping involves the marine transport of unpackaged bulk
cargo such as grain, coal, or ore.
3
Manager
(collectively,
along
with
representatives, the “Sponsor Group”).
their
affiliates
FAC ¶¶ 19–21.
and
GSMI also
owned an intermediate holding company, the Intermediary, that
warehoused assets for the Fund.
FAC ¶¶ 17.
Individual defendants
Rigas, Standen, and Loucopolous held executive or board-level
positions at some or all of the aformentioned entities.
FAC ¶¶
11–13.
B. Marketing of the Fund and Walsh’s Investment
To generate interest in the Fund, GSMI issued a “Confidential
Private
Offering
Memorandum”
(“POM”)
in
December
of
2013,
providing potential investors with detailed descriptions of the
strategy, governance, and myriad risk factors associated with the
venture.
See Shepard Decl. Ex. A.
The Fund held its first closing on March 25, 2014, yielding
$63.325 million in capital commitments, including approximately
$30 million contributed by members of the Sponsor Group.
37,
38.
Sometime
representative
Wilkinson
after
affiliated
contacted
Walsh
this
initial
with
Sciens
and
offered
closing,
Capital
him
an
named
a
FAC ¶¶
sales
Timothy
opportunity
to
participate in GSMI’s second closing, which was scheduled to occur
at the end of June 2014.
FAC ¶¶ 38, 41–42.
Walsh was provided
with the POM and other written marketing materials, and also
discussed aspects of the venture with Wilkinson prior to making
his investment decision.
See, e.g., FAC ¶¶ 36, 38, 39, 41–45, 47.
4
During a telephone conversation in April 2014, Wilkinson
informed Walsh that Sciens Capital and an entity called Golden
Union Shipping (the “Vessel Manager”) were contributing up to $30
million to the Fund, an assertion echoed in the POM and other
marketing materials.
FAC ¶ 38.
According to the POM, the Vessel
Manager was also expecting to contribute (at no cost to the Fund)
options to purchase three new ice-class vessels, which expired at
the end of March 2014.
Shepard Decl. Ex. A at 6.
Wilkinson
informed Walsh that the vessels themselves were then trading in
excess of $15 million higher than the purchase price in the option
contracts, providing GSMI with “a very good start and a nice
cushion to have.”
FAC ¶ 47.
Wilkinson warned Walsh, however, of
the possibility of these unrealized trading “profits” turning into
losses.
Id.
In response to separate concerns raised by Walsh regarding
vessel prices, Wilkinson stated that “we just bought [a Cape size
vessel] for GSMI for $56mm,” apparently referring to the ship “Hull
2695”
which,
according
to
a
GSMI
marketing
document,
had
an
estimated net asset value (or “NAV”) of $56 million as of an
undisclosed date in March 2014.
FAC ¶¶ 36, 43, 44.
Wilkinson and
Walsh also discussed the value of earnings streams in the event
that charter rates decreased, with Wilkinson describing a strategy
intended to ensure positive cashflow by locking in forward charter
5
rates and keeping operating expenses and insurance costs low.
FAC
¶¶ 43, 45.
Walsh ultimately decided to invest $750,000 in exchange for
participating
shares
in
GSMI,
signing
and
submitting
Subscription Agreement on or about July 3, 2014.
the
On July 8, 2014,
the Investment Manager for the Fund notified plaintiff that his
subscription had been accepted and made its first capital call of
Walsh in the amount of $640,371.90.
FAC ¶ 49, 50.
To date, Walsh
has only satisfied $606,000 of his original $750,000 commitment. 3
FAC ¶ 97; Oral Argument Transcript (“Tr.”) at 3:18–4:4.
C. Disclosures and Disclaimers
As
part
of
the
Subscription
Agreement,
Walsh
disclaimed
reliance on the representations made by Wilkinson and any marketing
documents other than the POM, confirming that he was “relying
solely on the facts and terms set forth in the [Subscription
Agreement, POM, and the Articles of Association of GSMI]” in making
his investment decision.
As
these
documents
Shepard Decl. Ex. B at 7.
made
clear,
GSMI
was
a
“blind-pool”
offering in that the Fund had not yet acquired most of its assets
and participating shareholders would not have the opportunity to
3
While Walsh received subsequent capital calls seeking some or all
of the balance of his $750,000 commitment over the following two years, there
is no indication that he satisfied these requests. The fact that Walsh only
contributed approximately $606,000 – less than the amount of the initial capital
call, and significantly less than the sum of all alleged capital calls, see ¶¶
50, 61, 68, 92, 93, 94 - suggests that he did not.
6
evaluate investments before they were made.
at 29.
Shepard Decl. Ex. A
Walsh agreed that he “must rely entirely on the management
ability of the Investment Manager, the Portfolio Manager, the
Vessel Manager, the Administrator and the Company’s other service
providers,” id., and that GSMI “directly or through one or more
subsidiaries” would enter into management agreements pursuant to
which the Vessel Manager would provide the entities that directly
owned the vessels.
Id. at 4.
GSMI disclosed in detail the
management fees to be paid to the Sponsor Group and Vessel Manager
in exchange for performing these services.
Id. at 21.
GSMI’s
Articles of Association underscore that Walsh would “not have any
right to inspect any accounting record or book or document of
[GSMI] except as conferred by law or authorised by the Directors
or by the Members by Ordinary Resolution.”
Shepard Decl. Ex. C ¶
222.
In
addition
to
describing
the
corporate
governance
and
structure of GSMI, the POM devoted over twenty-five pages to
describing
risk
factors
attendant
to
investments
in
the
“inherently risky” international shipping industry, such as the
risk
that
GSMI
acquisition
might
costs,
or
overpay
pay
outstripped charter rates.
for
investments,
operating
and
underestimate
other
costs
that
Shepard Decl. Ex. A at 29–54.
GSMI
also warned of, inter alia, potential conflicts of interest between
the
Sponsor
Group
and
GSMI,
chartering
7
risks,
global
market
deterioration,
extensive
capital
outlays,
increased
costs, and unfavorable fluctuations in exchange rates.
operating
Id.
Walsh, a former hedge fund manager 4 with “knowledge, expertise
and experience in financial matters,” averred that he was “aware
of the risks inherent in investing in [GSMI’s] assets . . . and
the method by which the assets” were held and operated and could
“bear the risk of loss of [his] entire investment.”
Shepard Dec.
Ex. B at 8.
D. Subsequent Closings
Following Walsh’s investment in July of 2014, GSMI held two
additional
closings.
The
third
closing
did
not
occur
until
December of 2014 and was conducted during a significant write down
in the NAVs of at least some of GSMI’s assets.
FAC ¶ 53.
GSMI
wrote down the values of its assets a second time in May of 2015.
FAC ¶ 66.
The fourth and final close, occurring at the end of September
2015,
was
different
from
prior
closings
in
that
it
offered
additional participating shares to then-existing investors on a
pro rata basis using the audited values of GSMI’s vessels as of
December 31, 2014, which, due to the twice-reduced NAVs, provided
a lower point of entry for these investors than available in
earlier closings. FAC ¶ 64. Participating shareholders like Walsh
4
Tr. 3:4–10.
8
thus faced a choice:
they could either invest additional funds at
this lower entry point or risk dilution of their investment should
other investors participate in the offering.
Id.
On September 23, 2015, Rigas’s assistant, Cecilia Santos,
informed plaintiff that “many of the largest investors have agreed
to participate [in the in the pro rata closing], including Sciens
and
[the
Vessel
Manager]
investors in the Fund.”
and
the
FAC ¶ 78.
two
largest
institutional
She also made clear that
Walsh’s participation level in the investment would be diluted by
either 8.3% (if only $10 million were raised), or 29% (if $45
million were raised), should he choose not to participate.
Id.
On September 24, plaintiff responded to Santos that the fourth
closing “appears to be a tactic to enhance the returns of the
insiders, namely Sciens and Golden Union,” as there was “far from
full
participation
investors.”
FAC ¶ 79.
from
existing
investors”
and
“no
new
In a subsequent exchange between Wilkinson
and Walsh concerning how many current investors were participating
in the additional fund raise, Wilkinson conceded that it “seems
like it is all about the two largest holders,” and informed Walsh
that he was “determined to find out whether any ‘friends of Sciens’
are invited to subscribe at these sharply discounted levels for
their
first
subscription.”
FAC
¶
81.
Shortly
thereafter,
Wilkinson wrote to Walsh that the fact that Walsh was not given
9
such information [about the “friends of Scien”] was “a disgrace –
and it has been reported this side of the pond.”
FAC ¶ 82.
Walsh ultimately declined to participate in the pro rata
fourth closing. 5
FAC ¶¶ 83.
E. Allegations of Corporate Malfeasance
Plaintiff’s
complaint
includes
several
other
allegations
relating to the Sponsor Group’s interaction with the Fund.
Walsh’s
allegations
as
true,
defendants
did
not
Taking
disclose
information about the management fees collected by members of the
Vessel Manager, FAC ¶ 139, and calculated management fees using
NAVs marked at cost while simultaneously reducing NAVs for purposes
of diluting other shareholders, FAC ¶ 141.
Defendants allegedly
failed to disclose financial information about the three ice-class
shipping vessels, FAC ¶ 108, made inconsistent or insufficient
disclosures about its use of funds and assets under management,
see, e.g., FAC ¶¶ 112, 125, 126, and characterized certain realized
losses as “unrealized” in their year-end financial statements, FAC
¶¶ 132–35.
Plaintiff also takes issue with the strategy employed
by GSMI and its delegatees with respect to acquiring assets for
the Fund.
II.
See, e.g., FAC ¶ 113.
Procedural Posture
5
Defendants contend that every other investor in GSMI participated
in the pro rata close. ECF No. 61 at 8. Plaintiff disputes this. Pl.’s Opp.
Br. at 5 n.4.
10
Plaintiff filed his 114-page initial complaint on May 31,
2017.
ECF No. 1.
Following an exchange of letters by the parties,
the Court granted plaintiff leave to amend, and on November 1,
2017, plaintiff filed the even lengthier 139-page FAC.
44, 46, 48, 52.
ECF Nos.
On March 1, 2018, defendants filed the motion
presently before the court seeking dismissal of the FAC in its
entirety.
III.
ECF No. 59.
Discussion of Federal Securities Law Claims
Counts I through V of the FAC allege violations of either
Section 10(b) or Section 20 of the Exchange Act.
We first set
forth the standards governing our consideration of the pending
motion to dismiss those causes of action before turning to the
sufficiency of the specific allegations in the complaint.
A. Legal Standards
i. Motion to Dismiss Under Rule 12(b)(6)
On a motion to dismiss under Rule 12(b)(6), we must accept as
true all factual allegations in the plaintiff’s complaint and draw
all reasonable inferences in plaintiff’s favor. City of Providence
v. BATS Glob. Mkts., Inc., 878 F.3d 36, 48 (2d Cir. 2017). However,
we “are not bound to accept as true a legal conclusion couched as
a factual allegation,” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)
(quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)),
and “[t]hreadbare recitals of the elements of a cause of action,
supported by mere conclusory statements, do not suffice.”
11
Brown
v. Daikin Am., Inc., 756 F.3d 219, 225 (2d Cir. 2014) (quoting
Iqbal, 556 U.S. at 678).
ii. Fraud Pleading Under Rule 9(b) and the PSLRA
“It is well-settled in this Circuit that a complaint alleging
securities fraud must satisfy the pleading requirements of Rule
9(b) of the Federal Rules of Civil Procedure.”
Ganino v. Citizens
Utils. Co., 228 F.3d 154, 168 (2d Cir.2000).
Rule 9(b) provides
that “[i]n alleging fraud or mistake, a party must state with
particularity the circumstances constituting fraud or mistake.”
Fed.R.Civ.P. 9(b).
“This pleading constraint serves to provide a
defendant with fair notice of a plaintiff’s claim, safeguard his
reputation from improvident charges of wrongdoing, and protect him
against
strike
“Allegations
suits.”
that
are
ATSI
Commc’ns,
conclusory
assertions are insufficient.”
or
493
F.3d
unsupported
by
at
99.
factual
Id.
In order to satisfy Rule 9(b), a plaintiff alleging fraudulent
misstatements or omissions must: “(1) specify the statements that
the plaintiff contends were fraudulent, (2) identify the speaker,
(3) state where and when the statements were made, and (4) explain
why the statements were fraudulent.”
164, 170 (2d Cir. 2004).
Rombach v. Chang, 355 F.3d
Similarly, the PSLRA requires that
complaints must “specify each statement alleged to have been
misleading”
and
“the
reason
or
reasons
why
the
statement
is
misleading,” and, “if an allegation regarding the statement or
12
omission is made on information and belief . . . state with
particularity all facts on which that belief is formed.”
Id.
15
U.S.C. § 78u-4(b)(1).
iii. Section 10(b) and Rule 10b–5
Section 10(b) of the Exchange Act of 1934 prohibits the use
or
employment
of
“any
manipulative
or
deceptive
device
or
contrivance” in connection with the purchase or sale of a security
and in contravention of rules and regulation prescribed by the
Securities and Exchange Commission (“SEC”).
15 U.S.C.A. § 78j(b).
SEC Rule 10b-5(a) and (c) makes it “unlawful for any person
. . . [t]o employ any device, scheme, or artifice to defraud . .
. or [t]o engage in any act, practice, or course of business which
operates or would operate as a fraud or deceit upon any person.”
17
C.F.R.
§
240.10b-5(a)
and
(c).
To
state
a
claim
under
subsections (a) and (c), plaintiff must, in addition to satisfying
the pleading strictures of Rule 9(b) and the PSLRA, allege that a
defendant “(1) committed a deceptive or manipulative act, (2)
with scienter, that (3) the act affected the market for securities
or was otherwise in connection with their purchase or sale, and
that (4) defendants’ actions caused the plaintiffs’ injuries.”
In
re Parmalat Sec. Litig., 376 F. Supp. 2d 472, 491–92 (S.D.N.Y.
2005).
Subsection (b) of the Rule makes it “unlawful for any person
. . . [t]o make any untrue statement of a material fact or to omit
13
to state a material fact necessary in order to make the statements
made, in the light of the circumstances under which they were made,
not misleading.”
claim
under
17 C.F.R. § 240.10b-5(b).
subsection
(b)
of
the
Rule,
In order to state a
“a
plaintiff
must
[plausibly allege] (1) a material misrepresentation or omission by
the
defendant;
(2)
misrepresentation
or
scienter;
omission
(3)
and
a
the
connection
purchase
between
or
sale
the
of
a
security; (4) reliance upon the misrepresentation or omission; (5)
economic loss; and (6) loss causation.”
Halliburton Co. v. Erica
P. John Fund, Inc., 573 U.S. 258, 267 (2014) (internal quotation
marks omitted).
1. Scienter
The PSLRA requires that a plaintiff “state with particularity
facts giving rise to a strong inference that the defendant[s] acted
with the required state of mind.”
15 U.S.C.A. § 78u-4(b)(2).
“The
requisite state of mind in a Section 10(b) and Rule 10b–5 action
is an intent ‘to deceive, manipulate, or defraud.’”
ECA & Local
134 IBEW Joint Pension Trust of Chi. v. JP Morgan Chase Co.
(“ECA”), 553 F.3d 187, 197 (2d Cir. 2009) (quoting Tellabs, Inc.
v. Makor Issues & Rights, Ltd., 551 U.S. 308, 319 (2007)).
The
inference must be more than merely reasonable or permissible; it
must be “cogent and compelling,” i.e., “strong in light of other
explanations.”
Tellabs, 551 U.S. at 324.
“A complaint will
survive . . . only if a reasonable person would deem the inference
14
of scienter cogent and at least as compelling as any opposing
inference one could draw from the facts alleged.”
Id.
A strong inference of fraud may be established by alleging
facts
demonstrating
“that
defendants
opportunity to commit fraud.”
had
the
ECA, 553 F.3d at 198.
motive
and
To raise a
strong inference of scienter through “motive and opportunity,” a
plaintiff must allege that the defendant “benefitted in some
concrete and personal way from the purported fraud.” Id. (internal
quotation
marks
omitted).
For
example,
the
“desire
to
earn
management fees is a motive generally possessed by hedge fund
managers, and as such, does not suffice to allege a ‘concrete and
personal benefit’ resulting from fraud.”
Edison Fund v. Cogent
Inv. Strategies Fund, Ltd., 551 F. Supp. 2d 210, 227 (S.D.N.Y.
2008); see also In re Citigroup Auction Rate Sec. Litig., 700
F.Supp.2d
294,
305
(S.D.N.Y.
2009)
(“Courts
have
repeatedly
rejected conclusory allegations regarding the motivation to earn
unspecified fees as a basis for inferring scienter”).
A plaintiff may also establish a strong inference of scienter
by alleging facts that show “strong circumstantial evidence of
conscious misbehavior or recklessness.”
ECA, 553 F.3d at 198.
Recklessness in this context has been defined as conduct that is
“highly unreasonable and which represents an extreme departure
from the standards of ordinary care to the extent that the danger
was either known to the defendant or so obvious that the defendant
15
must have been aware of it.”
S. Cherry St., LLC v. Hennessee Grp.
LLC, 573 F.3d 98, 109 (2d Cir. 2009) (internal quotation marks and
alteration
omitted).
The
Second
Circuit
has
clarified
that
recklessness here is “a state of mind approximating actual intent,
and not merely a heightened form of negligence.”
Id. (internal
quotation marks and alteration omitted).
2. Material Misrepresentation or Omission
With respect to plaintiff’s Rule 10b-5(b) claims, plaintiff
“must show that the challenged statements were false when made in
order to demonstrate the existence of misstatements under Section
10(b) and Rule 10b–5.”
Supp.
3d
60,
89
Sharette v. Credit Suisse Int’l, 127 F.
(S.D.N.Y.
2015).
In
evaluating
an
alleged
misrepresentation or omission, a statement is measured not by its
literal truth, but rather by its ability “to accurately inform
rather
than
mislead
prospective
buyers.”
McMahan
&
Co.
v.
Wherehouse Entm’t, Inc., 900 F.2d 576, 579 (2d Cir. 1990).
“A fact is material if there is a substantial likelihood
that a reasonable shareholder would consider it important in
deciding how to act.”
F.3d
479,
485
(2d
alteration omitted).
Hutchison v. Deutsche Bank Sec. Inc., 647
Cir.
2011)
(internal
quotation
marks
and
“[T]he determination of whether an alleged
misrepresentation is material necessarily depends on all relevant
circumstances.”
ECA, 553 F.3d at 197.
While a bright line
percentage cannot substitute for a full consideration of all
16
relevant considerations, “the use of a percentage as a numerical
threshold such as 5%, may provide the basis for a preliminary
assumption of materiality.”
Hutchison, 647 F.3d at 485 (internal
quotation omitted) (citing SEC Staff Accounting Bulletin No. 99,
64 Fed. Reg. 45, 150 (1999)).
consider
at
the
motion
Additional qualitative factors to
to
dismiss
stage
include
whether
a
misstatement concerns an important segment of the business at issue
or whether management “expects that the misstatement will result
in a significant market reaction.”
Id.
Omissions are considered material if there is “a substantial
likelihood that the disclosure of the omitted fact would have been
viewed by the reasonable investor as having significantly altered
the ‘total mix’ of information made available.”
Levinson,
485
U.S.
224,
232
(1988).
The
Basic Inc. v.
Supreme
Court
has
cautioned, however, that “[Section] 10(b) and Rule 10b–5(b) do not
create
an
affirmative
information.
duty
to
disclose
any
and
all
material
Disclosure is required under these provisions only
when necessary to make statements made, in the light of the
circumstances under which they were made, not misleading.” Matrixx
Initiatives,
Inc.
v.
Siracusano,
563
U.S.
27,
44–45
(2011)
(internal quotation marks and alteration omitted).
3. Reliance
“A showing of justifiable reliance is essential to sustain a
securities fraud claim.”
Abbey v. 3F Therapeutics, Inc., No. 0617
cv-409 (KMW), 2011 WL 651416, at *7 (S.D.N.Y. Feb. 22, 2011)
(internal quotation marks omitted), aff’d sub nom. Abbey v. Skokos,
509 Fed.Appx. 92 (2d Cir. 2013); see Steed Fin. LDC v. Nomura Sec.
Int’l, Inc., No. 00-cv-8058 (NRB), 2004 WL 2072536, at *8 (S.D.N.Y.
Sept. 14, 2004) (“Federal securities law . . . require[s] a
plaintiff to demonstrate justifiable reliance upon the alleged
misrepresentation
action.”).
that
forms
the
basis
of
the
plaintiff’s
Simply alleging that plaintiff relied on defendants’
alleged misrepresentation is insufficient; plaintiff’s reliance
must have been reasonable in order for their claim to proceed.
See First Lincoln Holdings, Inc. v. Equitable Life Assurance Soc.
of U.S., 43 Fed.Appx. 462, 464 (2d Cir. 2002) (summary order)
(citing Harsco Corp. v. Segui, 91 F.3d 337, 342 (2d Cir. 1996)).
In evaluating the reasonableness of plaintiff’s reliance, “we
consider the entire context of the transaction, including factors
such as its complexity and magnitude, the sophistication of the
parties, and the content of any agreements between them.” Emergent
Capital Inv. Mgmt., LLC v. Stonepath Grp., Inc., 343 F.3d 189, 195
(2d Cir. 2003).
“[T]he plaintiff’s sophistication and expertise
is a principal consideration.”
Emergent Capital Inv. Mgmt., LLC
v. Stonepath Grp., Inc., 165 F. Supp. 2d 615, 623 (S.D.N.Y. 2001).
“Where the plaintiff is a sophisticated investor and an integrated
agreement
between
misrepresentation
the
at
parties
issue,
the
18
does
plaintiff
not
include
cannot
the
establish
reasonable reliance on that misrepresentation.”
493 F.3d at 105.
ATSI Commc’ns,
Moreover, “[a]n investor may not justifiably
rely on a misrepresentation if, through minimal diligence, the
investor would have discovered the truth.”
Ashland Inc. v. Morgan
Stanley & Co., 652 F.3d 333, 337-38 (2d Cir. 2011) (quoting Brown
v. E.F. Hutton Grp., Inc., 991 F.2d 1020, 1032 (2d Cir. 1993)).
B. Analysis of Rule 10b-5(b) Claims
i. Post-Investment Representations or Omissions
Walsh’s Rule 10b-5(b) claims are predicated in part upon
allegations of misstatements or omissions made after GSMI accepted
Walsh’s $750,000 commitment on July 8, 2014, upon which the parties
became
contractually
Agreement.
omissions
bound
to
These
are
plaintiff’s
alleged
not
actionable
manifest
the
terms
of
post-investment
under
inability
to
Rule
plead
the
Subscription
misstatements
10b-5
on
reliance
account
on
or
of
those
representations or omissions in making his investment decision,
among other deficiencies.
See Vacold LLC v. Cerami, 545 F.3d 114,
122 (2d Cir. 2008); see also Mills v. Polar Molecular Corp., 12
F.3d 1170, 1175 (2d Cir. 1993) (“A statement cannot be fraudulent
if it did not affect an investment decision of the plaintiff.”);
Egan v. TradingScreen, Inc., 2011 WL 1672066, at *11 (S.D.N.Y. May
4,
2011)
(“Plaintiff
cannot
assert
loss
causation
where
the
misrepresentations or omissions he pleads took place after he
allegedly purchased the securities at issue.”).
19
Plaintiff’s argument that each capital call constitutes an
additional securities transaction elides well-settled law that a
securities transaction “take[s] place when the parties become
bound to effectuate the transaction.”
Absolute Activist Value
Master Fund Ltd. v. Ficeto, 677 F.3d 60, 67 (2d Cir. 2012); see
also Vacold LLC, 545 F.3d at 122.
Even assuming, arguendo, that
Walsh paid for his participating shares in installments (which is
far from clear, as discussed supra), that does not give rise to
new or continuing obligations under federal securities law. 6
Plaintiff’s securities fraud claims against defendants are
therefore dismissed insofar as they relate to representations made
after the parties became bound on July 8, 2014.
ii. Statements Made Outside of the Integrated Agreement
Walsh also relies upon several allegations of misstatements
or omissions made outside of the Subscription Agreement, POM, and
6
Plaintiff also contends that the Subscription Agreement constituted
a “contract to buy, purchase or otherwise acquire” an additional interest in
GSMI as part of the fourth closing, giving him standing to sue for fraudulent
statements and conduct relating to that closing.
But his reliance on the
“aborted buyer-seller doctrine” described in Mount Clemens Indus. v. Bell, 464
F.2d 339, 346 (9th Cir. 1972) is inapposite, of questionable vitality, and, in
any event, not controlling. See also Weiner v. Rooney, Pace Inc., No. 86-cv6718 (EW), 1987 WL 11281, at *2 (S.D.N.Y. Feb. 20, 1987) (“great weight of
[post-Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975)] authority”
holds that aborted sales or purchases are insufficient to state a claim under
Section 10(b)); Goldman v. A.G. Becker Inc., No. 81-cv-6748, 1983 WL 1302, at
*2 (S.D.N.Y. Apr. 20, 1983).
Moreover, the “aborted buyers” in this line of cases allege profitable
purchases that they would have made but for some misrepresentation of a
defendant. These plaintiffs are readily distinguishable from Walsh, who was
fully informed of the consequences of his decision not to participate in the
fourth closing and, given his own characterization of GSMI as a losing venture,
cannot assert a lost profit opportunity based upon his decision not to acquire
an additional interest in the Fund.
20
Articles of Association in stating his Rule 10b-5(b) claim.
On
this point, the Subscription Agreement is clear and unambiguous:
Walsh, a former hedge fund manager and self-averred “sophisticated
investor” with “knowledge, expertise and experience in financial
matters,” entered into the Subscription Agreement “relying solely
on the facts and terms set forth in this Subscription Agreement,
the [POM] and the Articles [of Association.]”
Shepard Decl. Ex.
B at 7.
As it is apparent from the face of the pleading and
governing
agreements
negotiated
at
arm’s
that
the
length,
parties
are
plaintiff’s
sophisticated
alleged
and
reliance
on
extrinsic statements made by Wilkinson or contained within nonPOM marketing materials was unreasonable as a matter of law.
See
Harsco Corp., 91 F.3d at 344.
Plaintiff challenges the enforcement of the Agreement’s nonreliance
clause
by
citing
a
provision
in
the
POM
inviting
prospective investors to ask questions of and receive answers from
GSMI’s representatives regarding the terms of the offering.
from
vitiating
the
Subscription
Agreement’s
integration,
Far
this
provision, along with the non-reliance clause, incentivized Walsh
to
request
that
defendants
incorporate
any
extrinsic
representations that he deemed sufficiently important into the
Subscription Agreement.
See, e.g., Emergent, 343 F.3d at 196
(“[Plaintiff] should have protected itself by insisting that this
representation be included in the stock purchase agreement.”);
21
Carlin Equities Corp. v. Offman, No. 07-cv-359 (SHS), 2008 WL
4387328, at *6 (S.D.N.Y. Sept. 24, 2008) (“This is, of course, a
sensible rule — a merger clause such as the one at issue here
should alert a sophisticated party represented by sophisticated
counsel
that
it
cannot
rely
on
included in the final contract.”).
representations
that
are
not
Walsh chose to not to do so
and “will not be heard to complain that he has been defrauded when
it is his own evident lack of due care which is responsible for
this predicament.”
Emergent, 343 F.3d at 195 (quoting Rodas v.
Manitaras, 552 N.Y.S.2d 618, 620 (1st Dep’t 1990)).
We also reject Walsh’s misplaced argument that a non-reliance
clause
must
contain
specific
disclaimers
of
representations forming the basis of his claims.
the
particular
Where, as here,
the parties are sophisticated, courts require no such specificity
under Rule 10b-5(b). 7
See, e.g., One Commc’ns Corp. v. JP Morgan
7
We reach the same conclusion applying New York law to Walsh’s common
law fraud claims. Under New York law, while merger clauses generally must track
representations made outside of the agreement in order to warrant their
exclusion as parol evidence, see Danann Realty Corp. v. Harris, 157 N.E.2d 597
(N.Y. 1959), subsequent courts have relaxed the specificity requirement where
“the contracting parties are ‘sophisticated business people,’ and the disclaimer
clause is the result of negotiations between them.” Aetna Cas. & Sur. Co. v.
Aniero Concrete Co., 404 F.3d 566, 576 (2d Cir. 2005) (citing Citibank, N.A. v.
Plapinger, 485 N.E.2d 974 (N.Y. 1985)) (party’s “sophistication and the armslength nature of the transaction compel application of the relaxed specificity
requirements . . . .”); see also Axginc Corp. v. Plaza Automall, Ltd., No. 173934, 2018 WL 6767297, at *3 (2d Cir. Dec. 26, 2018) (summary order); McBeth,
171 F. Supp. 3d at 228 (S.D.N.Y. 2016) (addressing similar provisions and
concluding that plaintiff’s common law fraud claims were barred by general
merger clause). Plaintiff’s reliance on Le Metier Beauty Inv. Partners LLC v.
Metier Tribeca, LLC, No. 13-cv-4650 (JFK), 2015 WL 769573 (S.D.N.Y. Feb. 24,
2015), in which the district court declined to dismiss fraud claims on account
of an analogous non-reliance clause, is unavailing in light of the greater
weight of authority giving effect to the clear terms of agreements negotiated
at arm’s length by sophisticated business parties.
22
SBIC LLC, 381 F. App’x 75, 79 (2d Cir. 2010) (summary order)
(quoting ATSI, 493 F.3d at 105); San Diego Cty., 749 F. Supp. 2d
104, 121 (S.D.N.Y. 2010) (enforcing an analogous non-reliance
clause and dismissing plaintiff’s Rule 10b-5(b) claims based upon
extrinsic representations); Carlin Equities Corp. v. Offman, No.
07-cv-359 (SHS), 2008 WL 4387328, at *8 (S.D.N.Y. Sept. 24, 2008)
(under
federal
sophisticated
securities
party’s
laws,
reliance
“the
reasonableness
on
of
a
extra-contractual
representations in the face of a merger clause does not turn on
whether the merger clause refers to the specific representations
in dispute”); Matana v. Merkin, 989 F. Supp. 2d 313, 319 (S.D.N.Y.
2013); McBeth v. Porges, 171 F. Supp. 3d 216, 225 (S.D.N.Y. 2016).
Plaintiff’s securities fraud claims against defendants are
therefore also dismissed insofar as they relate to representations
Even if we were to find that the merger clause at issue here lacked
sufficient specificity under New York law — which, considering the
sophistication of the parties involved and the nature of the transaction, we do
not — any claims based upon extrinsic representations fail for several
additional reasons.
First, separate and apart from the merger clause, as a
self-averred sophisticated investor in a “highly speculative” company,
plaintiff knew or had reason to know that projections of forward charter rates
or ship valuations were speculative, and therefore cannot claim justifiable
reliance on oral representations concerning these subject matters. Axginc Corp.
at *3; see also Shepard Decl. Ex. A at 29.
Moreover, plaintiff fails to allege that Wilkinson’s description of the
ice-class options was false when made (or at any time thereafter, for that
matter). While Wilkinson described the $15 million in “profit” as a “cushion,”
he never told Walsh that this profit was realized — in fact, he specifically
noted that “it is possible to experience trading losses” and that the figure
was based on where the vessels were “currently trading.” FAC ¶ 47. Similarly,
the FAC is devoid of allegations that GSMI or Wilkinson’s pre-investment
decision representations regarding the estimated value of Hull 2695 were false
when made. With respect to each of these representations, plaintiff further
fails to satisfy the requirements of Rule 9(b) or plead any connection between
the representations and a resulting injury.
23
made outside of the Subscription Agreement, POM, or Articles of
Association.
iii. The Sponsor Group’s Initial Contribution
Walsh alleges that GSMI misled potential investors regarding
the nature of the Sponsor Group’s initial contribution.
According
to the POM, the Sponsor Group (in conjunction with the Vessel
Manager) expected to contribute “15% of the aggregate Capital
Commitments of all Participating Shareholder,” up to $30 million.
Shepard Decl. Ex. A at 15.
Rather than make the contribution in
cash (as plaintiff now asserts he expected), the Sponsor Group
made its contribution in-kind (in the form of either Hull 2695 or
the
purchase
contract
for
Hull
2695)
and
then
distributions on the basis of that in-kind contribution.
received
See FAC
¶¶ 55, 56, 152.
The only reference to Hull 2695 in the POM unequivocally
provides
for
its
participating shares:
in-kind
contribution
in
exchange
for
“On or about the Initial Closing Date
(defined below), [the Sponsor Group] will contribute the Harpoon
Shares [the entity owning Hull 2695] to the Company at their then
current value, as determined in accordance with the valuation
policy set forth below, in exchange for Participating Shares in
the Company.” 8
Shepard Decl. Ex. A at 6; ¶ 99.
8
Glaringly absent
The POM also provides that “[t]he Sponsor Group will contribute
[assets acquired before the initial closing] that are acquired or contracted
for acquisition to the Company (directly or indirectly) at their then current
24
from the FAC is any allegation of a misstatement concerning the
nature of the Sponsor Group’s initial contribution, let alone any
representation that was knowingly false or so unreasonable as to
constitute recklessness.
Moreover, Walsh fails to allege any
material difference between $30 million in cash and $30 million
worth of a vessel, particularly given GSMI’s raison d’etre of
raising cash to buy vessels. 9
iv. Ice-Class Vessel Options
Walsh also takes issue with GSMI’s description of the Sponsor
Group’s contribution of options to purchase ice-class vessels,
citing the fact that the options had already been exercised by the
time Walsh made his investment.
However, it is undisputed that
the Sponsor Group did in fact contribute the options at issue to
GSMI at no cost to the Fund, and, given the POM’s unambiguous
disclosure that the options “must be exercised in the first quarter
of 2014,” Walsh knew (or should have known) that GSMI had either
exercised the options or let them expire by the time he made his
investment in July of 2014.
Notwithstanding Walsh’s feigned
value in exchange for Participating Shares (which may be nil for certain
assets).” Shepard Decl. Ex. A at 23.
9
Walsh’s allegation that the nature of the in-kind contribution was
not shares of an entity (Harpoon Shares) as described in ¶ 99 of the POM, but
rather an actual vessel (Hull 2695), ¶ 102, or a purchase contract for a vessel,
¶ 152, fails for the same reason. The POM describes Harpoon Shares as a “company
that has executed a contract to acquire a newbuild Capesize vessel” and Walsh
fails to allege that it was anything more (or ever represented as anything more)
than a holding company for Hull 2695. Shepard Decl. Ex. A at 6.
25
surprise at GSMI’s decision to exercise the options and pay the
necessary
deposits,
the
POM’s
description
of
the
options
“accurately informed rather than mis[led] prospective buyers.”
McMahan, 900 F.2d at 579.
Walsh also falls well short of pleading
a strong inference of scienter: the far more compelling inference
to draw from his allegations is that the Fund had not updated the
POM since its publication in December of 2013.
v. Intermediate Holding Company
Walsh’s allegation that defendants failed to disclose the
existence of the Intermediary almost bears omission from this
opinion.
Section I of the POM, under “General Information,”
expressly provides that “The Company (directly or through one or
more subsidiaries) will also enter into management agreements . .
.
pursuant to which [the Vessel Manager or its affiliates] . . .
will provide the entities that directly own the vessels . . . .”
Shepard Dec. Ex. A at 4 (emphasis added).
The Intermediary is
such a “subsidiary.” 10
For the foregoing reasons, plaintiff’s Rule 10b-5(b) claims
must be dismissed.
C. Analysis of Rule 10b–5(a) and (c) Claims
10
To the extent that plaintiff alleges that any defendant violated
Rule 10b-5(a) and (c) by “warehousing” losses in the Intermediary, he fails to
allege a deceptive act for the same reason.
26
Clearly unable to maintain a traditional Rule 10b-5(b) claim,
Walsh adopts an “everything but the kitchen sink” approach to
pleading violations of subsections (a) and (c), half-heartedly
ascribing
fraudulent
intent
decision made by defendants.
to
nearly
every
post-investment
Decker v. Massey-Ferguson, Ltd., 681
F.2d 111, 114 (2d Cir. 1982).
We note at the outset that these
types of allegations are not cognizable under any subsection of
Rule 10b-5 or Section 10(b) of the Exchange Act, which prohibit
only the perpetration of frauds coinciding with the purchase or
sale of securities.
S.E.C. v. Zandford, 535 U.S. 813, 822 (2002).
“Post-stock-purchase
fiduciary
duty
may
corporate
be
just
mismanagement
as
reprehensible
or
as
breach
a
of
misleading
statement regarding the value of a security to be sold, but the
former
is
not
actionable.”
proscribed
by
§
10(b),
while
the
latter
is
Suez Equity Inv’rs, L.P. v. Toronto-Dominion Bank,
250 F.3d 87, 99 (2d Cir. 2001); see also Panos v. Island Gem
Enterprises, Ltd., N.V., 880 F. Supp. 169, 179 (S.D.N.Y. 1995)
(“The purpose of § 10(b) is not to remunerate plaintiffs for all
losses
they
incur
in
their
securities
investments
due
to
a
defendant’s wrongful conduct.”) (citing Marine Bank v. Weaver, 455
U.S. 551, 556 (1982)).
While the failure to allege a connection between deceptive
conduct and Walsh’s purchase of participating shares is fatal to
27
all of his subsection (a) and (c) claims, they must also be
dismissed for several additional reasons, as set forth below.
i. Valuation Manipulation
Plaintiff alleges that, sometime in or before March 2014,
defendants inflated the purchase price of Hull 2695 by $5.5 million
in order to award themselves more equity as part of the initial
closing, and also deflated the NAVs of newly-built vessels in
connection with the fourth and final closing.
3–4, ECF No. 65.
Pl.’s Opp. Br. at
But Walsh fails to plausibly allege that the
defendants deviated from the valuation procedures prescribed by
the POM or that GSMI’s vessel valuations had any impact whatsoever
on Walsh’s purchase of participating shares, 11 and the valuations
themselves remain uncontroverted by any external or third-party
sources.
The mere fact that NAVs changed over time does not give
rise to liability under Section § 10(b). 12
11 At oral argument, plaintiff’s counsel was unable to articulate any
connection between a change in the estimated valuation of Hull 2695 from $56
million to $61.5 million and the amount of participating shares that Walsh (or
even the Sponsor Group) received. We see no basis for such a connection in
light of the fact that the Sponsor Group’s initial contribution, according to
plaintiff’s own allegations, was limited to approximately $30 million. FAC ¶
37.
12 To the extent that Walsh styles these allegations as misrepresentations
of valuations under Rule 10b-5(b), any estimated valuations of vessels alleged
in the FAC were made outside of the integrated agreement and therefore fail as
a matter of law for the reasons stated above. Even if Walsh did reasonably
rely on the valuation – which he did not - a misrepresentation concerning
between 1.8% and 2.6% of the total value of the Fund ($5.5 million for a fund
intending to raise $210 to $300 million) is immaterial as a matter of law given
the absence of any mitigating qualitative factors cutting in plaintiff’s favor.
See Hutchison, 647 F.3d at 485.
28
ii. Dilution
Walsh’s characterization of the fourth and final closing as
a deceptive scheme to dilute his investment is belied by the clear
language of the POM 13 and the simple fact that the opportunity to
purchase additional shares was given to every GSMI investor on the
same basis and with full disclosure of the terms of the offering.
The failure to disclose whether additional “friends of Scien” were
invited to participate in the closing – without any particularized
allegation that such “friends” did, in fact, participate – is
insufficient to state a claim for securities fraud.
iii. Distributions
Plaintiff’s counsel conceded at oral argument that he has no
knowledge of any distribution made to the Sponsor Group other than
those attributable to the Sponsor Group’s status as participating
shareholders.
Tr.
41:1–5.
Still,
Walsh
quibbles
with
the
management fees paid to the Sponsor Group, suggesting that it was
inappropriate for defendants to collect fees in advance, FAC ¶
137, or to calculate them based on capital commitments as opposed
to at cost, FAC ¶ 138, or at cost as opposed to at reduced NAVs,
FAC ¶ 141.
There are no plausible allegations that defendants
13
While the POM indicates that investments will generally be valued
at cost for purposes of determining proportionate interests of new shareholders
and existing shareholders, it also makes clear that if the Investment or
Portfolio Manager determines that it would be inappropriate for new shareholders
to participate in a closing at a given time, they may, “in their sole
discretion,” “adjust the amount of Capital Contributions to be made . . . to
reflect such different valuation . . . .” Shepard Decl. Ex. A at 16–17.
29
conduct was at all inconsistent with the detailed provisions of
the POM describing the payment procedures for and calculation of
management fees. 14
See Shepard Decl. Ex. A at 21.
Post-hoc
objections to contractual terms disclosed to and agreed upon by
the parties do not constitute cognizable claims under subsections
(a) or (c).
iv. Lack of Transparency
Walsh correctly notes that paragraph 222 of the Articles
plainly precludes shareholders from inspecting the Fund’s books or
accounts, a provision in complete conformance with Cayman Islands
corporate law.
Compare Shepard Decl. Ex. C at ¶ 222 with Cayman
Islands Companies Law Schedule 1, § 98 (“no member (not being a
director) shall have any right of inspecting any account, book or
document of the company except as conferred by law or authorised
by the directors or by the company in general meeting”).
Walsh
invested in a Cayman Islands private equity fund with a clear-eyed
understanding that he would not enjoy the same rights and benefits
as investors in companies incorporated in more investor-friendly
jurisdictions, and cannot conjure up a valid securities fraud claim
14
The fact that GSMI’s 2015 financial statements described management
fees calculated at cost is entirely consistent with fact that the “commitment
period” (during which management fees were to be calculated using the cost of
assets, as opposed to committed capital) ran through the end of September 2015.
See FAC ¶ 138; Shepard Decl. Ex. A at 21.
30
by now complaining of the Fund’s adherence to its own founding
documents. 15
v. Misrepresentation or Omissions
In the Second Circuit, a plaintiff cannot make out a claim
under Rule 10b–5(a) or (c) where the sole bases for such claims
are alleged misrepresentations or omissions. 16
Lentell v. Merrill
Lynch & Co., 396 F.3d 161, 177 (2d Cir. 2005); see also 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.”); In re Smith Barney Transfer Agent
Litig., 884 F.Supp.2d 152, 161 (S.D.N.Y. 2012) (“[T]he three
subsections of Rule 10b–5 are distinct, and courts must scrutinize
pleadings to ensure that misrepresentation or omission claims do
not proceed under the scheme liability rubric.”).
15
Counsel for plaintiff’s acknowledgement that documents essential to
verifying his allegations were “prohibited to us under Cayman law” underscores
a broader issue with the FAC.
Tr. 10:11–23.
On several occasions at oral
argument, plaintiff’s counsel was unable to respond to simple questions about
factual allegations crucial to the survival of his claims. See, e.g., Tr. 3:16–
18 (whether Walsh ever satisfied $750,000 commitment); 4:14–16 (whether Walsh
was obligated to invest more than $750,000); 6:12–17 (whether Walsh received
capital demands after the fourth closing); 10:6–11:15 (whether the valuation of
Hull 2695 impacted shares received by the Sponsor Group); 41:1–5 (whether the
Sponsor Group received any exclusive distributions).
Yet, despite his
ignorance, Walsh did not hesitate to file two complaints in this action accusing
the nine defendants of rampant securities fraud and violations of various common
law duties. Given the requirements of Rule 11 (let alone Rule 9(b)) and the
Court’s prior admonition to comply with Rule 11 in its letter granting plaintiff
leave to file an amended complaint, we are, to put it mildly, troubled by the
casualness of Walsh’s assertions.
16
This issue is currently before the Supreme Court in Lorenzo v.
S.E.C., No. 17-1077.
31
D. Analysis of Section 20(a) and (b) Claims
Plaintiff also alleges that defendants Sciens Capital and
Rigas are liable under Section 20(a) of the Exchange Act because
they
acted
as
“controlling
persons”
of
all
other
defendants
(including one another) who participated in the alleged securities
fraud.
FAC ¶¶ 266–282.
To establish a prima facie case of
control-person liability under sections 20(a), a plaintiff must
sufficiently allege a primary violation by the controlled person.
See ATSI, 493 F.3d at 108.
Because Walsh has failed to plead a
primary violation by any defendant, his Section 20(a) claims
necessarily fail.
See Slayton, 604 F.3d at 778.
Walsh’s Section
20(b) claim against defendants Rigas and Standen fails for the
same reason.
See Shemian v. Research In Motion Ltd., 570 F. App’x
32, 35 (2d Cir. 2014) (summary order).
For the foregoing reasons, we grant defendants’ motion to
dismiss Counts I through V as to all defendants.
IV.
Discussion of Common Law Claims
Having dismissed all claims upon which this Court has original
jurisdiction, 17 we must determine whether to exercise supplemental
jurisdiction
over
the
remaining
17
state
law
claims.
After
Although the parties agree that complete diversity exists between
plaintiff and defendants, Tr. 19:12–17, and plaintiff invokes diversity
jurisdiction in the FAC at ¶ 28, plaintiff fails to specify the citizenship of
several defendants.
“Naked allegations that the parties are citizens of
different states, absent an averment of the particular states of which the
parties are citizens, are insufficient to meet the pleading requirement.” Ganoe
v. Lummis, 662 F.Supp. 718, 723 (S.D.N.Y.1987), aff’d, 841 F.2d 1116 (2d Cir.).
32
considering the relevant factors we have concluded that this is an
appropriate
jurisdiction.
case
for
this
Court
to
exercise
supplemental
See Kolari v. New York-Presbyterian Hosp., 455 F.3d
118, 122 (2d Cir. 2006).
As such, we now proceed to a discussion
of plaintiff’s state law causes of action.
A. Choice of Law
The parties agree that the law of the Cayman Islands, as the
jurisdiction
of
GSMI’s
incorporation,
applies
plaintiff brings derivatively on behalf of GSMI.
to
the
claims
See also Winn v.
Schafer, 499 F. Supp. 2d 390, 393 (S.D.N.Y. 2007).
With respect
to plaintiff’s direct claims, the parties’ briefs assume that New
York law applies, which constitutes “implied consent” and “is
sufficient to establish choice of law.”
Santalucia v. Sebright
Transp., Inc., 232 F.3d 293, 296 (2d Cir. 2000).
We note that we
arrive at the same conclusion applying the relevant analytical
frameworks under New York’s choice-of-law rules, given that “the
core facts implicated by every cause of action . . . center on
conduct that occurred in New York.”
See Anwar v. Fairfield
Greenwich Ltd., 728 F. Supp. 2d 372, 399–400 (S.D.N.Y. 2010)
(citing cases); FAC ¶ 23.
B. Common Law Fraud and Negligent Misrepresentation (Counts
VIII through XII)
“Because [the elements of common law fraud] are substantially
identical to those governing § 10(b), the identical analysis
33
applies
here.”
Morse
(S.D.N.Y. 1991).
v.
Weingarten,
777
F.
Supp.
312,
319
Thus, Claims VIII through XII, which are common
law fraud or negligent misrepresentation claims, fail for same
reasons that plaintiff’s securities claims failed. 18
C. Direct Breach of Fiduciary Duty by Rigas, Standen,
Loucopoulos, Sciens Capital, the Investment Manager, the
Portfolio Manager, and the Administrator (Count VI)
“It is black letter law that a stockholder has no individual
cause of action against a person or entity that has injured the
corporation.”
2014).
breached
Serino v. Lipper, 994 N.Y.S.2d 64, 68 (1st Dep’t
A “narrow exception” exists “where the wrongdoer has
a
duty
owed
directly
to
the
shareholder
which
is
independent of any duty owing to the corporation,” but “even where
an individual harm is claimed, if it is confused with or embedded
in the harm to the corporation, it cannot separately stand.”
Id.
at 69; see also, e.g., Abrams v. Donati, 489 N.E.2d 751, 752 (N.Y.
1985) (“[A]llegations of mismanagement or diversion of assets by
officers or directors to their own enrichment, without more, plead
a wrong to the corporation only, for which a shareholder may sue
derivatively but not individually.”).
18
Counts XI and XII fail for the additional reason that “recovery may
be had for pecuniary loss arising from negligent representations where there is
actual privity of contract between the parties or a relationship so close as to
approach that of privity.” Ossining Union Free Sch. Dist. v. Anderson LaRocca
Anderson, 539 N.E.2d 91, 94 (N.Y. 1989). Walsh omits GSMI from Counts XI and
XII and pleads none of the elements required to sustain these claims absent
actual privity.
34
To support his claim, Walsh relies on allegations relating to
defendants’ asset valuations, distributions, pro rata closing, use
of an intermediate holding company, and post-investment lack of
transparency.
Sounding primarily in mismanagement of the Fund or
diversion of its assets, these are paradigmatic derivative claims,
and this Court has “no basis for finding that [Walsh’s] losses are
not reflective of a diminution in the value of Fund shares or are
otherwise
asymmetrical
shareholders.”
to
the
losses
of
the
Funds
and
other
In re Kingate Mgmt. Ltd. Litig., No. 09-cv-5386
(DAB), 2016 WL 5339538, at *39 (S.D.N.Y. Sept. 21, 2016), aff’d,
No. 16-3450, 2018 WL 3954217 (2d Cir. Aug. 17, 2018); see also
Serino, 994 N.Y.S.2d at 69 (holding that claims were derivative
where “damages are no different from losses suffered by any other
investor in the funds and the claims are supported by the same
proof”).
Any claim that a defendant’s pre-investment interaction with
Walsh created and breached a fiduciary duty “fails because there
is no basis for inferring that the trust and confidence [Walsh]
reposed in [any defendant] was anything more than the type parties
normally seek before entering an arm’s-length transaction, and
there is no basis for concluding that the transaction was not made
at arm’s-length.”
Supp.
2d
224,
Atlantis Info. Tech., GmbH v. CA, Inc., 485 F.
232
(E.D.N.Y.
2007)
(internal
quotation
marks
omitted); VTech Holdings, Ltd. v. Pricewaterhouse Coopers, LLP,
35
348 F. Supp. 2d 255, 268 (S.D.N.Y. 2004) (“A fiduciary relationship
may arise when one has reposed trust or confidence in the integrity
or fidelity on another . . .”).
Far from “trust and repose,”
Walsh, a sophisticated investor, explicitly disclaimed reliance on
extrinsic
pre-investment
representations
and
agreed
to
rely
entirely on the stated terms of the integrated agreement.
Plaintiff’s broader inability to allege inducement (for many
of the same reasons we discussed at length in our analysis of
plaintiff’s federal securities law claims) distinguishes this case
from Anwar, where the Court rejected defendants’ argument that
plaintiffs’ common law claims “essentially amounted to corporate
mismanagement” and allowed direct claims for breach of fiduciary
duty to proceed on the grounds that the core of plaintiffs’ claims
were “representations that led Plaintiffs to make and maintain
investments.”
728 F. Supp. 2d at 400–01 (where, unlike in the
instant action, “plaintiffs were free to invest any amount of money
in the Funds and free, with some restriction, to redeem the
appreciation in their investment”).
Unlike the plaintiffs in
Anwar, Walsh does not adequately allege “inducement such that
recovery . . . would only flow to those individuals . . . who were
so induced.”
(S.D.N.Y.)
In re Optimal U.S. Litig., 813 F. Supp. 2d 351, 379
(internal
quotation
marks
omitted)
(distinguishing
Fraternity Fund Limited v. Beacon Hill Asset Management LLC, 376
F.Supp.2d 385 (S.D.N.Y. 2005) on the same grounds).
36
For these reasons, plaintiff does not have standing to bring
his breach of fiduciary duty claims directly.
defendants’
plaintiff
motion
to
properly
derivatively.
dismiss
pleaded
Count
a
We therefore grant
VI
and
breach
of
consider
whether
fiduciary
duty
See Abrams, 489 N.E.2d at 752.
D. Derivative Breach of Fiduciary Duty (Count VII)
Under Cayman Islands law, a shareholder is generally not
permitted to bring a derivative action on behalf of a company.
See Winn, 499 F. Supp. 2d at 396 (citing Foss v. Harbottle, 2 Hare
461 (Eng. 1843)).
A recognized exception to the Foss rule applies
if the alleged wrongful conduct qualifies as a “fraud on the
minority,” which requires plaintiff to allege that defendants (1)
controlled GSMI, and (2) committed fraud in the form of selfdealing.
See Seghers v. Thompson, No. 06-cv-308 (RMB), 2006 WL
2807203, at *4 (S.D.N.Y. Sept. 27, 2006) (“English law, unlike its
American counterpart, does not permit a derivative action to be
maintained to remedy a breach of fiduciary duty that does not
involve self-dealing by those in control.”).
Plaintiff alleges the following instances of self-dealing by
defendants: (1) the in-kind contribution in exchange for which the
shareholders
received
shares
and
future
distributions;
(2)
fraudulent NAV practices; and (3) the dilutive fourth and final
offering.
Pl.’s Opp. Br. at 22–23.
The changes in the NAVs of
assets already owned by GSMI and the dilutive fourth and final
37
closing — which was conducted pursuant to a provision in the POM
and offered to all participating shareholders — plainly do not
constitute benefits inuring to defendants beyond their status as
shareholders in GSMI.
See Shenwick v. HM Ruby Fund, L.P., 966
N.Y.S.2d 69, 71 (1st Dep’t 2013) (allegations that managers,
directors, and investment advisors “engaged in self-dealing by
artificially inflating the value of assets held by the fund” do
not satisfy the “fraud in the minority” exception).
Moreover, as
discussed infra, the Sponsor Group’s in-kind contribution was
disclosed
and
permitted
articulate
a
connection
by
the
POM
between
and
the
Walsh
alleged
is
unable
to
pre-investment
manipulation of Hull 2695’s value and the allocation of shares to
either Walsh or the Sponsor Group. 19
FAC ¶ 37; Tr. 10:5–11:15.
Any alleged benefits received by defendants thus did not come “in
some special way, at the expense of shareholders,” Shenwick, 966
N.Y.S.2d at 71, and do not constitute the sort of allegations
“sufficient to underpin the [fraud on the minority] exception.”
City of Harper Woods Employees’ Ret. Sys. v. Olver, 577 F. Supp.
2d 124, 135 (D.D.C. 2008).
19
Even assuming, arguendo, that Walsh had properly pleaded such a
connection, he does not allege with the requisite particularity that the value
of the initial contribution was inaccurate at the time it was made or calculated
in a manner inconsistent with the procedures set forth in the POM. DeBlasio v.
Merrill Lynch & Co., No. 07-cv-318 (RJS), 2009 WL 2242605, at *14 (S.D.N.Y.
July 27, 2009) (applying Rule 9(b) to plaintiffs’ fiduciary duty claims sounding
in fraud).
38
Because, under Cayman Islands law, plaintiff’s fiduciary duty
claims are GSMI’s to prosecute, Walsh is barred from maintaining
these claims derivatively and we grant defendants’ motion to
dismiss Count VII. 20
E. Breach of Contract by the Investment Manager, the Portfolio
Manager, and the Administrator (Count XIV)
The Investment Manager, Portfolio Manager, and Administrator
were not parties to the Subscription Agreement or POM and cannot
be held liable for breaches of the terms thereof.
See, e.g.,
Castillo v. Tyson, 701 N.Y.S.2d 423, 424 (1st Dep’t 2000).
F. Breach of Third Party Beneficiary Contract by Sciens
Capital, the Investment Manager, the Portfolio Managers,
and the Administrator (Count XV)
“New York law requires that plaintiffs alleging that they are
third-party beneficiaries to a contract establish that the parties
to the contract intended to confer a benefit on the third-party.”
Abu Dhabi Commercial Bank v. Morgan Stanley & Co. Inc., 651 F.
Supp.
2d
omitted).
155,
173
(S.D.N.Y.
2009)
(internal
quotation
marks
“To create a third party right to enforce a contract,
the language of the contract must clearly evidence an intent to
permit enforcement by the third party.”
Consol. Edison, Inc. v.
Ne. Utilities, 426 F.3d 524, 528 (2d Cir. 2005) (internal quotation
marks omitted)); see also Anwar, 728 F. Supp. 2d at 418 (“New York
20
Walsh’s fiduciary claims fail for the additional reason that the
alleged misconduct underpinning Counts VI and VII was disclosed in or expressly
permitted by the Subscription Agreement, POM, or Articles. See Guerrand Hermes
v. J.P. Morgan & Co. Inc., 769 N.Y.S.2d 240, 241–42 (1st Dep’t 2003).
39
law requires that the parties’ intent to benefit a third-party be
shown on the face of the contract.”).
“Absent clear contractual
language evincing such intent, New York courts have demonstrated
a
reluctance
intent.”
to
interpret
circumstances
to
construe
such
an
LaSalle Nat’l Bank v. Ernst & Young LLP, 729 N.Y.S.2d
671, 676 (1st Dep’t 2001) (internal citation omitted).
Walsh fails to plead that any of the specific terms of the
relevant third-party contracts evince a breach of those contracts
or an intent to permit enforcement by a third party.
357–365.
See FAC ¶¶
Indeed, counsel for Walsh conceded at oral argument that
he had never seen the relevant agreements before counsel for
defendants
filed
a
declaration
attaching
connection with this motion to dismiss.
the
contracts
Tr. 39:12–19.
in
These
deficiencies make the instant action easily distinguishable from
Anwar, upon which Walsh urges us to rely, where plaintiffs pleaded
the
existence
of
specific
contractual
evincing intent to benefit plaintiffs.
language
sufficiently
728 F. Supp. 2d at 419.
Without pleading the existence of such language in any of the
third-party agreements, Walsh fails to state a claim under Rule
12(b)(6) and we grant defendants’ motion to dismiss Count XV.
G. Unjust Enrichment by Rigas, Standen, Loucopoulos, and
“Advisor Defendants” (Count XVI)
Walsh brings a derivative claim for unjust enrichment on the
basis
of
the
Sponsor
Group’s
40
receipt
of
(1)
distributions
proportionate to their equity investment, and (2) management fees.
FAC ¶¶ 366–73.
Neither fall into the “fraud on the minority”
exception in Foss and therefore must be dismissed.
These claims
are also duplicative of other flawed causes of action, and where
“other claims are defective, an unjust enrichment claim cannot
remedy the defects.”
Corsello v. Verizon New York, Inc., 967
N.E.2d 1177, 1185 (N.Y. 2012) (“[U]njust enrichment is not a
catchall cause of action to be used when others fail.”).
H. Respondeat Superior by Sciens Capital (Count XIII)
It is black letter law that a “viable cause of action against
the employee . . . is a condition precedent to imputing vicarious
liability
.
.
.
to
respondeat superior.”
the
employer
pursuant
to
the
theory
of
San Diego Cty., 749 F. Supp. 2d at 129.
Absent any viable cause of action against an employee of Sciens
Capital, Count XIII fails to state a claim. 21
V.
Conclusion
For the foregoing reasons, defendants’ motion to dismiss is
granted in its entirety and with prejudice.
Although plaintiff
makes a perfunctory request for leave to amend in his opposition
brief [Pl.’s Opp. Br. at 25], he does so in conclusory fashion
21
The FAC is no paragon of pleading and defendants’ Rule 8 motion is
far from frivolously brought.
Indeed, plaintiff’s scattershot approach to
stating his claims placed an enormous burden on both defendants and this Court.
Nonetheless, having expended the considerable time and effort necessary to
discern plaintiff’s causes of action, and given that plaintiff’s memorandum of
law was coherently organized, little purpose would be served dismissing the FAC
on Rule 8 grounds and we deny defendants’ motion as moot.
41
without
providing an explanation of what he would allege
second
amended
deficiencies,
complaint
to
cure
the
FAC's
and we therefore deny his request.
significant
See Campo v.
Sears Holdings Corp., 371 F. App'x 212, 218 (2d Cir. 2010)
order)
(upholding
denial
of
leave
to
amend
where
in a
(summary
"plaintiffs
provide[d] no explanation of what they would allege in an amended
complaint to save their claims"); see also Metz v. U.S. Life Ins.
Co. in City of New York,
662 F.3d 600,
603 (2d Cir. 2011).
The Clerk of Court is respectfully directed to enter Judgment
for defendants and terminate this case and any motions pending
therein.
SO ORDERED.
Dated:
New York, New York
January 23, 2019
,t::!ii?:xJi!!f;~(
UNITED STATES DISTRICT JUDGE
42
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