Tecku et al v. YieldStreet Inc. et al
DECISION AND ORDER: For the reasons stated above, it is hereby ORDERED that the motion so deemed by the Court as filed by defendants Yieldstreet Inc., Yieldstreet Management LLC, YS Altnotes I LLC, YS Altnotes II LLS, and Michael Weisz pursuant to R ule 12(b)(6) and Rule 12(b)(1) of the Federal Rules of Civil Procedure (see Dkt No. 24) is DENIED IN PART and GRANTED IN PART as set forth above. In particular, Counts I and II are DISMISSED without prejudice, but Count III remains; and it is furthe r hereby ORDERED that Plaintiffs either file an amended complaint or notify the Court that it wishes to rest on the complaint as filed within twenty (20) days of the date of this Order. SO ORDERED. (Signed by Judge Victor Marrero on 4/26/2021) (mml)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
MICHAEL TECKU, et al.,
20 Civ. 7327 (VM)
- against :
YIELDSTREET, INC., et al.,
DECISION AND ORDER
VICTOR MARRERO, United States District Judge.
Plaintiffs Michael Tecku, David Finkelstein, Lawrence
Tjok, and Adrienne Cerulo, on behalf of themselves and all
others similarly situated (collectively, “Plaintiffs”), bring
this action against Yieldstreet Inc., Yieldstreet Management
LLC, YS Altnotes I LLC, YS Altnotes II LLS (collectively,
“Yieldstreet”), and Michael Weisz (“Weisz,” and together with
Yieldstreet, “Defendants”), alleging three causes of action
stemming from alleged monetary loss after Plaintiffs invested
in Defendants’ security offerings. (See “Complaint,” Dkt No.
4). Now before the Court is Defendants’ premotion letter for
dismissal of the Complaint (see “Motion,” Dkt. No. 23.), which
the Court construes as a motion to dismiss the Complaint
12(b)(6). 1 For the reasons discussed below, Defendants’ Motion
is granted in part and denied in part.
FACTUAL BACKGROUND 2
Defendant Yieldstreet is an investment company that
investment products, mainly debt instruments, through an
Yieldstreet has prescreened and selected for sale on its
Yieldstreet’s investment products.
Yieldstreet’s investment-product portfolio is largely
dependent notes (“BPDNs”), or debt obligations tied to the
Yieldstreet created special purpose vehicle (“SPV”) formed in
See Kapitalforeningen Lægernes Invest. v. United Techs. Corp., 779 F.
App’x 69, 70 (2d Cir. 2019) (affirming the district court ruling deeming
an exchange of letters as a motion to dismiss).
The factual background below, except as otherwise noted, derives from
the Complaint and the facts pleaded therein, which the Court accepts as
true for the purposes of ruling on a motion to dismiss. See Spool v. World
Child Int’l Adoption Agency, 520 F.3d 178, 180 (2d Cir. 2008) (citing GICC
Capital Corp. v. Tech. Fin. Grp., Inc., 67 F.3d 463, 465 (2d Cir.
1995)); see also Chambers v. Time Warner, Inc., 282 F.3d 147, 152 (2d
Cir. 2002). Except when specifically quoted, no further citation will be
made to the Complaint or the documents referred to therein.
connection with the offering. In essence, the SPV raises funds
from investors through Yieldstreet and then lends the funds
raised to an undisclosed borrower in the industry advertised
by Yieldstreet for that particular BPDN. In the investor’s
ideal world, that borrower would then use the funds to buy a
specific asset that generates funds sufficient to repay the
SPV, including interest, ultimately generating a profit for
investors in the BPDN.
Yieldstreet does not offer its investors access to the
particular investment on the Yieldstreet platform. Investors
selecting the borrower and potential investment. Investors
transmitting any material information to potential investors
in the summary of the investment opportunity.
transparent in its communications to potential investors.
Plaintiffs allege that Yieldstreet misrepresented material
Yieldstreet made false statements in Yieldstreet’s April 5,
2018 (“ALTNOTES I”) and January 16, 2019 (“ALTNOTES II”)
Plaintiffs allege that Yieldstreet falsely told its investors
“that none of the investments offered on YieldStreet’s online
platform had ever lost any principal.” (Complaint ¶ 50.) In
addition to more general statements, Plaintiffs contend that
numerous false or misleading statements.
Vessel Deconstruction Funds
investor-generated balance to a borrower who would purchase
a particular vessel for deconstruction with the goal of
selling the scrap for profit.
industry is a particularly volatile one requiring a high
degree of industry knowledge to successfully navigate. For
example, Plaintiffs allege that “the deconstruction process
developing nations that lack stable infrastructures. As a
result, the process is often complicated, and slowed, by
external factors ranging from catastrophic weather conditions
to civil turmoil.” (Id. ¶ 60.) Thus, prior to Yieldstreet,
Plaintiffs allege individual investors could not passively
invest in this industry which otherwise required “significant
capital beyond the reach of most any individual investor; an
vessel purchase itself; an ability to structure a deal that
adequately accounts for typical industry risks while still
preserving the opportunity for a return on investment; and,
critically, an ability to deal with the externalities that
can and will arise during the demolition process.” (Id. ¶
invest in this volatile industry though false or misleading
statements regarding their three-step vetting process for the
vessel-deconstruction funds. In the first step, Yieldstreet
deconstruction opportunities. Global Marine purportedly had
contacts necessary to identify attractive investments.
Deals that survived Global Marine’s vetting went on the
examining “the background and experience of the borrower;
necessary collateralization of the loan to protect investors
contend that neither the first nor second step were performed
as promised and that key facts developed through steps one
misrepresented to potential investors during the third step,
the “investor education” phase.
Specifically, Plaintiffs allege that after the high
offering, Yieldstreet abandoned the industry-standard model
for loans in this space -- revolving credit facilities with
one-to-four year lifespans -- for much higher-risk short-term
loans, a model championed by Weisz. Plaintiffs allege that
the industry-standard loans make sense in this space and
Yieldstreet moved away from that model because it did not
generate large management fees. Instead, the high-risk shortterm model brought more lucrative fees for Yieldstreet.
Plaintiffs allege that Global Marine advised Weisz that
this short-term lending model was a structural mismatch for
vessel deconstruction and that the short time-frame to pay
back these loans was impractical in such a volatile industry
ignored this advice. In October 2018, Weisz flew to Dubai for
a closed-door meeting with the North Star Group (“North
deconstruction offering. Global Marine was not invited and
did not attend. At this meeting, Weisz and North Star agreed
to future investments, concentrated through North Star, using
the short-term lending model.
In late 2018, Global Marine again warned Weisz of the
risks associated with a short-term loan structure and further
warned Weisz that this risk was magnified by funneling those
products through a single borrower: North Star. Global Marine
was familiar with North Star and therefore well-positioned to
opine on the risks of over-exposure. Weisz again ignored this
In a series of new vessel-deconstruction offerings,
Plaintiffs contend that this series of events rendered a
number of the disclosures in the private placement memoranda
false or misleading. Specifically, Plaintiffs contend the
omitted from the offering documents:
Yieldstreet was using an unproven lending model.
explicitly warned against using that model.
Weisz would act as a one-man credit committee.
concentrated with the same borrower group.
Yieldstreet, while disclosing other instances of
inexperience, did not disclose that its team did
structure a vessel-deconstruction loan -- and in
fact, had never been involved in any such loans
before joining Yieldstreet.
Plaintiffs allege that the foregoing were material facts and
should have been disclosed when forming and marketing five
vessel deconstruction investment opportunities from December
18, 2018 to September 11, 2019.
Plaintiffs allege that in March 2020, the investments
went into default as a result of the overleveraged borrower
(presumably North Star) being unable to repay the short-term
loans. Now, Plaintiffs allege $90 million in these vesseldeconstruction loans are in default. Defendants dispute that
these investments are in default.
Other Yieldstreet Investments
Plaintiffs allege that the vessel-deconstruction loans
represent only a small portion of Yieldstreet’s portfolio,
example, Plaintiffs allege that a Louisiana Oil and Gas fund,
formed under ALTNOTES I, lent money for the purchase of an
oil and gas well. The offering documents stated that “current
equivalent (BOE) from 21 producing O&G wells.” (Id. ¶ 114.)
Plaintiffs allege this was false, and Yieldstreet itself
stated “in September 2018, production volume was nearly half
[its projection]: 11.3 million cubic feet per day.” (Id. ¶
material because production volume generates the cash flow,
which in turn supports repayment of the loan.
Just as with the vessel-deconstruction loans, Plaintiffs
again allege that the Louisiana Oil and Gas fund suffered
from a similar mismanaged and misrepresented vetting process
that resulted in incomplete and incorrect date informing the
investment. The fund is also now in default.
On September 10, 2020, Plaintiffs filed the instant
Complaint on behalf of themselves and all those persons who
purchased BPDNs subject to ALTNOTES I and ALTNOTES II in one
of Yieldstreet’s defaulted funds from 2018 to present. By
Plaintiffs of alleged deficiencies in the Complaint and noted
their intent to move to dismiss. (See Dkt. No. 24-1.) By
Defendant’s letter. (See Dkt. No. 24-2.)
Unable to come to an agreement, Defendants wrote to the
Court on January 8, 2021 outlining the dispute and requesting
leave to file a motion to dismiss. (See Motion.) On January
28, 2021, the Court directed Plaintiffs to respond to the
arguments raised Defendants’ January 8 letter. (See Dkt. No.
25.) Plaintiffs submitted a response on February 5, 2021.
(“Opposition,” Dkt. No. 26.) Defendants replied on February
12, 2021, including various declarations and exhibits for the
Plaintiffs filed a sur-reply on February 16, 2021. (“Surreply,” Dkt. No. 33.) The Court has considered each of these
submissions in connection with this Decision and Order.
THE PARTIES’ ARGUMENTS
Defendants argue that, as a threshold matter, Plaintiffs
lack Article III standing because the notes in which they
invested are not in default, and therefore, Plaintiffs have
not yet suffered loss. Second, Defendants contend that the
Delaware Securities Act, under which Plaintiffs bring two of
their three claims, does not govern Plaintiffs’ investments.
Third, Plaintiffs’ Delaware Section 73-605(a) claims against
Yieldstreet Inc. and Yieldstreet Management fail because the
Complaint does not show either entity offered or sold the
Yieldstreet Management did not owe Plaintiffs any fiduciary
duty. Fifth, Defendants argue that the Complaint does not
identify material misrepresentations or omissions for the
majority of the investments they claim were improper. And
finally, Plaintiffs lack class standing to assert claims
regarding investment offerings in which no named plaintiff
Plaintiffs respond that they have adequately pled their
investments generally and the vessel-deconstruction and oiland-gas fund specifically. Plaintiffs contend that they have
standing because their suit is for recission, which is not
premised on the securities being in default. Next, Plaintiffs
argue Delaware law applies because a “substantial nexus” to
Delaware exists in the formation, offering, and sale of the
various securities. Plaintiffs argue that Yieldstreet Inc.
and Yieldstreet Management offered or sold the securities
under Section 73-605(a) because they successfully solicited
their sale and were motivated by a desire to serve their own
Management had a fiduciary duty to Plaintiffs as a registered
investment advisor and conveyed analysis and recommendations
through various documents.
STANDARD OF REVIEW
“To survive a motion to dismiss [pursuant to Federal
Rule 12(b)(6)], a complaint must contain sufficient factual
matter, accepted as true, to ‘state a claim to relief that is
plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678
(2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570
(2007)). This standard is met “when the plaintiff pleads
factual content that allows the court to draw the reasonable
inference that the defendant is liable for the misconduct
alleged.” Id. A court should not dismiss a complaint for
sufficiently “raise a right to relief above the speculative
level.” Twombly, 550 U.S. at 555. The task of the Court in
feasibility of the complaint, not to assay the weight of the
evidence which might be offered in support thereof.” In re
Initial Pub. Offering Sec. Litig., 383 F. Supp. 2d 566, 574
(S.D.N.Y. 2005) (internal quotation marks omitted). The Court
Complaint as true and draw all reasonable inferences in
Plaintiffs’ favor. See Chambers, 282 F.3d at 152 (citing
Gregory v. Daly, 243 F.3d 687, 691 (2d Cir. 2011)).
First, the Court will address the threshold issue of
standing. Defendants argue that Plaintiffs lack standing to
bring this lawsuit because their investments are not in
recission, do not require the investments to be in default.
The Court is persuaded that Plaintiffs have standing to assert
claims for recission.
While it does seem from the material presented to the
Court that these investments do not yet appear to be in
default, as active collection is ongoing for many of the
BDPNs, ultimately this fact does not defeat standing. Both
federal and state securities laws contemplate recission as a
remedy for violations. See Randall v. Loftsgaarden, 478 U.S.
647, 655-56 (1986); Commercial Union Assur. Co., plc v.
Milken, 17 F.3d 608, 615 (2d Cir. 1994); see also Del. Code
§ 73-605(a)(2). Plaintiffs both implicitly and expressly seek
rescissory damages. (See Complaint ¶¶ 157, 166 & Page 41.)
This is sufficient to confer standing. Commercial Union, 17
F.3d at 615; Dornberger v. Metro. Life Ins. Co., 961 F. Supp.
506, 543 (S.D.N.Y. 1997); Lenz v. Associated Inns & Rests.
Co. of Am., 833 F. Supp. 362, 370 (S.D.N.Y. 1993).
The Court agrees with Defendants that any amount of
recovery on these investments will work to offset the amount
of damages Plaintiffs may ultimately recover in this action.
Indeed, the action may eventually be dismissed because there
are no damages. See Commercial Union, 17 F.3d at 615. But at
this stage, Plaintiffs have adequately pled an injury such
that standing exists.
APPLICATION OF DELAWARE LAW
The Court now turns to a second threshold issue raised
in Defendant’s Motion: the application of Delaware law. There
is “a presumption that a law is not intended to apply outside
the territorial jurisdiction of the State in which it is
enacted. . . and that principle is applicable to a Blue Sky
Law.” See Singer v. Magnavox Co., 380 A.2d 969, 981 (Del.
1977), overruled on other grounds by Weinberger v. UOP, Inc.,
securities law to apply here, there must be a sufficient nexus
between the transactions at issue and the state. Id. The Court
is not persuaded that a sufficient nexus exists between the
transactions at issue and Delaware.
Plaintiffs rest their argument that Delaware law applies
on three allegations: (1) the security purchases at issue
require the involvement of a Delaware trustee “in virtually
every aspect of Yieldstreet’s secured note offerings” subject
to an indenture agreement; (2) the Yieldstreet companies are
incorporated in Delaware; and (3) the Subscription Agreement
includes a Delaware choice-of-law provision. (See Opposition
at 3.) But these three allegations, even in tandem, do not
amount to the nexus required.
First, Delaware law makes clear that the incorporation
in Delaware does not subject a corporation to suit under
Delaware Blue Sky laws. FdG Logistics LLC v. A&R Logistics
Holdings, Inc., 131 A.3d 842, 855-56 (Del. Ch. 2016) (“The
sole connection that [Plaintiff] can draw to Delaware -- that
the merger parties were incorporated here -- is insufficient
under Singer and its progeny to demonstrate the required
nexus.”); see also SEC v. Bronson, 756 F. App’x 38, 40 (2d
Cir. 2018). Second, a choice-of-law provision in a contract
related to the security sale at issue does not allow for the
extraterritorial application of Delaware’s Blue Sky Laws.
Eurofins Panlabs, Inc. v. Ricerca Biosciences, LLC, No. 8431,
2014 WL 2457515, at *18 (Del. Ch. May 30, 2014); see also FdG
Logistics, 131 A.3d at 855-56.
Finally, although Defendants allege that the Delaware
trustee is involved in many parts of the actual function and
itself. The trustee is not named as a party, and there is no
allegation that the trustee acted inappropriately. Further,
the trustee’s involvement with these securities is subject to
an indenture agreement that is not alleged to contain any of
the misrepresentations that give rise to this suit. Thus,
while the trustee might be relevant to day-to-day practical
aspects of offering the security, it has essentially no
relevance to the instant lawsuit. See FdG Logistics, 131 A.3d
underlying fraudulent business practices or violations is
alleged to have occurred in Delaware”). Thus, the fact that
the trustee is a Delaware company is insufficient to establish
the necessary nexus.
Because the Court has determined that Delaware law does
not apply to this action, Counts I and II are dismissed
without prejudice. The Court does not reach the parties’
remaining arguments as to the substance of these counts.
Plaintiffs bring a claim for breach of fiduciary duty
against only Yieldstreet Management. Defendants argue this
claim should be dismissed because Yieldstreet Management did
not owe Plaintiffs any fiduciary duty. Yieldstreet Management
is alleged to be a registered financial advisor, and therefore
does owe its clients fiduciary duties. (See Complaint ¶¶ 31,
176.) The relevant question therefore is whether Plaintiffs
have adequately alleged that they are clients of Yieldstreet
Management such that they are owed a duty.
“The existence of a fiduciary duty is a question of fact
that depends on the circumstances, principally the nature of
the advice given.” Saunwin Int’l Equities Fund LLC v Donville
Kent Asset Mgmt. Inc., No. 17 Civ. 11585, 2018 WL 3543533, at
*11 (D. Mass. July 20, 2018). Generally, an investment advisor
owes a fiduciary duty to a person if the advisor “provide[s]
personalized advice attuned to a client’s concerns, whether
by written or verbal communication.” Lowe v. SEC, 472 U.S.
181, 208 (1985).
While the Court is skeptical that Yieldstreet Management
owed a fiduciary duty to Plaintiffs, at this early stage of
plausible. In SEC v. Lauer, the Sixth Circuit concluded that
a hedge fund manager owed a fiduciary duty to investors “when
he suggested in the Funds’ newsletter that his market strategy
could beat market returns.” 478 F. App’x 550, 557 (6th Cir.
economic benefits of the investment products and encouraging
members of the public to invest. (See Complaint ¶¶ 44-46,
Yieldstreet Management and Plaintiffs, including the specific
communications made by Yieldstreet Management, if any, may
show a lack of “personalized advice” such that no fiduciary
duty was owed. However, at this initial stage, the claim
Dismissal of this claim is therefore inappropriate.
For the reasons stated above, it is hereby
ORDERED that the motion so deemed by the Court as filed
by defendants Yieldstreet Inc., Yieldstreet Management LLC,
YS Altnotes I LLC, YS Altnotes II LLS, and Michael Weisz
pursuant to Rule 12(b)(6) and Rule 12(b)(1) of the Federal
Rules of Civil Procedure (see Dkt No. 24) is DENIED IN PART
and GRANTED IN PART as set forth above. In particular, Counts
I and II are DISMISSED without prejudice, but Count III
remains; and it is further hereby
ORDERED that Plaintiffs either file an amended complaint
or notify the Court that it wishes to rest on the complaint
as filed within twenty (20) days of the date of this Order.
Dated: New York, New York
26 April 2021
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