-
Georgia District Court Grants Motion To Dismiss Class Action Against Investment Bank For Aiding And Abetting Fraud, Finding That Alleged Investments At Issue Were A “Covered Security” Under SLUSA
08/23/2022On August 17, 2022, Judge Steven D. Grimberg of the United States District Court for the Northern District of Georgia granted a motion to dismiss a putative class action alleging an investment bank (the “Company”), certain of its advisors (the “Advisor Defendants”), and certain of its external accountants (the “Accounting Defendants”) aided and abetted one of the Company’s former advisors (the “Individual Defendant”) in facilitating an alleged decade-long Ponzi scheme. 6694 Dawson Blvd, LLC v. Oppenheimer & Co., Inc., et al., 1:21-cv-03625. (N.D. Geo. Aug. 17, 2022). Plaintiffs alleged that defendants misrepresented or concealed material facts that, had plaintiffs known, would have caused them not to purchase allegedly “bogus” securities from the Individual Defendant.
According to the complaint, plaintiffs are victims of an alleged decade-long Ponzi scheme operated by the Individual Defendant, who allegedly persuaded clients to invest in the securities at issue from January 2003 to December 2016. Plaintiffs alleged that the Company aided the Individual Defendant from sometime in 2008 to December 31, 2016, after which the Company allegedly “took steps to conceal the Ponzi scheme from the regulators and investing public by permitting [the Individual Defendant] to quietly resign from the Bank without reporting the wrongdoing to regulators and the investing public.” Plaintiffs also alleged that the Company aided the Individual Defendant even after he left the Company by concealing and misrepresenting on a FINRA form it filed for the Individual Defendant upon his termination the fact that the Individual Defendant had been accused of wrongdoing, on which plaintiffs allegedly relied in purchasing securities, and by failing to amend the form as the purported scheme continued.
Plaintiffs further alleged that the Advisor Defendants “violated a host of securities laws” and “breached fiduciary duties owed to all of their customers” by joining the sales team at the Individual Defendant’s new company after he left the Company. With respect to the Accounting Defendants, plaintiffs alleged that they acted as agents involved in perpetuating the purported Ponzi scheme by, among other things, preparing fraudulent IRS forms. On August 20, 2021, the SEC brought a civil action against the Individual Defendant and related entities not named in plaintiffs’ lawsuit, and plaintiffs filed their complaint just days later.
The Court began by addressing defendants’ contention that the Securities Litigation Uniform Standards Act (“SLUSA”) bars the Complaint because it asserts a state law class action based on alleged misrepresentations or omissions in connection with the sale of a SLUSA-covered security. The Court agreed with defendants that the securities at issue were “covered securities” under SLUSA, rejecting plaintiffs’ argument that defendants did not argue that one of the securities at issue was not a covered security. The Court noted that the Supreme Court’s decision in Chadbourne & Parke LLP v. Troice, 571 U.S. 377 (2014)—the case relied on by plaintiffs—was different in that “the bank’s misrepresentations about its holdings in covered securities, which allegedly led its customers to buy uncovered securities, did not trigger SLUSA’s ‘in connection with’ element,” whereas defendants in this case “did not dispute whether CDs were covered securities,” but only whether the security at issue was a “covered security under the meaning of SLUSA.” The Court found that defendants argued the security at issue was a covered security in both the motion to dismiss and its reply brief, and that the securities—government stocks and bonds—were nonetheless covered securities under SLUSA as a matter of law. Plaintiffs’ fraud-based Georgia RICO and “conspiracy and/or procurement of breach of fiduciary duty” claims were therefore precluded under SLUSA.
The Court next turned to plaintiffs’ negligent misrepresentation and “aiding and abetting fraud” claims, finding that they were also precluded by SLUSA and that plaintiffs attempted to create a private right of action where none exists. The Court noted that in Cochran v. Penn Mut. Life Ins. Co., No. 1:19-CV-00564-JPB, 2020 WL 13328617, at *3 (N.D. Ga. Aug. 12, 2020), aff’d, 35 F.4th 1310 (11th Cir. 2022), “[t]he Eleventh Circuit instructed that, when determining whether SLUSA applies, the ‘focus is on the substance of the complaint, and not on the artful way a plaintiff words his allegations.’” Therefore, the Court concluded, it did not matter that plaintiffs did not label the state law claims as fraud “because the complaint’s gravamen hung on a material misrepresentation or omission in connection with a covered security,” and SLUSA precluded plaintiffs’ negligent misrepresentation and aiding and abetting claims. The Court also dismissed plaintiffs’ claim that defendants breached their fiduciary duties by failing to follow FINRA rules requiring them to investigate the Individual Defendant, noting that “[h]owever, important as FINRA’s [form] rule may be, there is no private right of action arising out of a violation of this or any other FINRA rule.” The Court also cited multiple cases for the proposition that “[c]ourts have consistently disallowed violations of FINRA and other exchange rules to be pled as state common law causes of action.”
Moreover, the Court also dismissed plaintiffs’ fraud-based claims against the Advisor Defendants and the Accounting Defendants, and all claims jointly implicating the Company and any other defendant, noting that they arose entirely out of the same brand of fraudulent conduct the Company allegedly engaged in, and thus warranted dismissal under Cochran. Finally, the Court dismissed plaintiffs’ claims for punitive damages and attorneys’ fees, noting that they were derivative in nature to plaintiffs’ fraud-based claims, which were precluded under SLUSA. The Court, however, granted plaintiffs’ leave to amend their complaint, noting that SLUSA did not prevent them from repleading state law claims on an individual basis or new federal securities claims either as an individual or as a class representative.
