Jana Master Fund, Ltd. v JPMorgan Chase & Co.
Annotate this CaseDecided on March 12, 2008
Supreme Court, New York County
Jana Master Fund, Ltd., Jana Piranha Master Fund, Ltd., Springfield Associates LLC, and Kensington International Limited, Plaintiffs,
against
JPMorgan Chase & Co., Damian Berry, Christopher Janes, Terry Martin, and Chase Securities, Inc., Defendants.
604005/06
Plaintiff:
QUINN EMANUEL URQUHART OLIVER & HEDGES, LLP
51 Madison Avenue
New York, NY 10010
By: Peter E. Calamari, Esq.
Defendants:
WINSTON & STRAWN LLP
200 Park Avenue
New York, NY 10166-4193
By: David E. Mollon, Esq.
Ruth A Braun, Esq.
Bernard J. Fried, J.
This action is before me in connection with defendant Christopher Janes' motion to dismiss for lack of personal jurisdiction, motion sequence No.004, and the combined defendants' motion to dismiss for failure to state a cause of action, and based on plaintiffs' lack of standing, motion sequence #005. [*2]
Motion sequences #004 and #005 are consolidated for disposition.
Plaintiffs (collectively, Jana Funds), a group of four hedge funds that specialize in buying up debt securities of financially distressed or insolvent issuers, are known in the trade as "vulture funds." See Gryphon Domestic VI, LLC v APP Intl. Finance Co., B.V., 41 AD3d 25 (1st Dept 2007). Three of the plaintiff funds are Cayman Islands exempted companies. The fourth fund is a Delaware limited liability corporation. All four funds have their principal place of business in New York. After these funds acquire distressed assets, plaintiffs then sue "deep-pocket" defendants in order to recover a better return on their investment than the one that they bargained for at the time the securities were purchased at distressed prices.
This action appears to have been commenced by these vulture funds in furtherance of this type of aggressive, high-stakes, winner-take-all litigation strategy.The complaint alleges that Jana Funds acquired ownership of a series of notes that had been issued by Sons of Gwalia (Gwalia), an Australian mining company, after Gwalia had entered into bankruptcy. Jana Funds did not purchase these notes directly from Gwalia, but, rather, from third parties who had originally invested in Gwalia, and who then sold the notes to Jana Funds at rates far below their original value.
Jana Funds alleges that defendants are related to Gwalia's original lender on the notes: JPMorgan Chase & Co. (Chase), formerly known as The Chase Manhattan Corporation (Chase Corporation), is alleged to have directed its subsidiary, Chase Securities, Inc. (Chase Securities) to conduct two private placements in the United States totaling $170 million in senior Gwalia notes. The first private placement is alleged to have occurred in November 2000, in the total amount of $120 million. The second private placement is alleged to have occurred in January 2002, resulting in the placement of notes totaling $50 million.
The record contains the following relevant facts: Gwalia was a corporation chartered under the laws of Australia and based in Perth, Australia. Its business consisted of mining gold and industrial minerals from several mines in Western Australia. Gwalia allegedly obtained commercial loans from a non-party lender, which eventually became Chase, the defendant in this action. Chase is also alleged to have entered into some derivative contracts with Gwalia that hedged the delivery of gold or U.S. dollars. The individual defendants, Damian Berry (Berry) and Christopher Janes (Janes), are alleged to have been employees of an affiliate of non-party Chase Bank, beginning in 1998.
The individual defendant Terry Martin (Martin) is alleged to have been the managing director of Chase Securities, and to have been primarily responsible for the promotion and sale of the notes in issue.
The complaint alleges five causes of action, in fraud, negligent misrepresentation, aiding and abetting fraud, aiding and abetting breach of fiduciary duty, and civil conspiracy. Jana Funds seek the amount due and outstanding on the notes and the note purchase agreements, plus unspecified compensatory damages allegedly incurred, not by these plaintiffs, but by the original purchasers of the Gwalia notes, and punitive damages.
In the complaint, the Chase subsidiary, defendant Chase Securities, is alleged to have [*3]conducted the private placements while having actual knowledge that Gwalia had undisclosed contingent liabilities in excess of $443 million, and to have prepared a private placement memorandum (PPM) for each of the two private placements. It is these PPMs which form the crux of the Jana Funds' lawsuit.
The text of the PPMs are referenced in the complaint, and attached as an exhibit to the defendants' moving papers.
The record shows that each PPM contained a disclaimer which admonished potential investors against relying on statements, financial projections or other forecasts made by the placement agent or its representatives, and disclaimed liability from any third parties' reliance on such statements. Additional disclaimer language stated:
The securities are being offered only to a limited number of institutional accredited investors
that are willing and able to conduct an independent investigation of the risks associated with
ownership of the securities. By accepting delivery of this memorandum, prospective investors
will be deemed to have acknowledged the need to conduct their own thorough investigation of
the company and to exercise their own due diligence before considering an investment in the
securities.
Affirmation of Ruth A. Braun dated July 19, 2007, exh.s B and C, referenced at
Complaint, ¶¶ 61 and 108.
Despite this strong cautionary language, Jana Funds alleges that certain original note purchasers, from whom Jana Funds purchased, relied upon the PPMs, and were injured by alleged misrepresentations and omissions in the disclosures in that document.
Jana Funds alleges that Gwalia had entered into gold hedging contracts, called "indexed put options" (IGPOs); that Gwalia had restructured its foreign currency hedging contracts; and that Gwalia's chief financial officer had been terminated for engaging in unauthorized treasury trading. This misconduct is alleged to have led to Gwalia filing for bankruptcy in 2004 (several years after the two PPMs had been issued, in 2000 and 2002). Plaintiffs also allege that Gwalia was operating in an insolvent condition as early as 2000.
In support of the defendants' motion to dismiss the complaint, defendants claim that plaintiffs lack standing to prosecute the instant claims because they have failed to properly allege standing with sufficient particularity. "Whether a person seeking relief is a proper party to request an adjudication is an aspect of justiciability which must be considered at the outset of any litigation." Matter of Dairylea Coop. v Walkley, 38 NY2d 6, 9 (1975).
Standing to sue requires an interest in the lawsuit that the law will recognize as a sufficient predicate for determining the issue. Caprer v Nussbaum, 36 AD3d 176 (2nd Dept 2006). The relevant inquiry is whether the plaintiffs' status in relation to each asserted claim permits them to present some or all of their grievances for judicial review. Id. Plaintiffs may not proceed in the absence of standing, since standing goes to the jurisdictional basis of a court's authority to adjudicate a dispute. See Stark v. Goldberg, 297 AD2d 203, 204, (1st [*4]Dept 2002).
Plaintiffs have allegations are sufficient to support their relationship to each of the asserted claims, for purposes of this motion to dismiss, by alleging that they obtained Gwalia notes through assignments from original owners, and they identify the original owners in the complaint (cf. Bluebird Paratners, L.P. v. First Fidelity Bank, N.A., 97 NY2d 456 [2002]). This satisfies the requirement for pleading a relationship to the claims asserted. Although defendants would place a burden of pleading standing with the same particularity that is required for a fraud claim, neither the CPLR, nor any of the cases cited by defendants imposes such a high burden of pleading on plaintiffs. The fact that plaintiffs have not alleged that the assignments were executed in accordance with New York law, and that other states may have regulations which prohibit the assignments in issue, has no bearing on the issue of standing.
The cases cited by defendants to support a finding of lack of standing arose in disputes involving the statutory automatic assignment of bonds, under General Obligations Law § 13-107. See Racepoint Partners, LLC v JPMorgan Chase Bank, 2006 US Dist LEXIS 78046, 2006 WL 3044416, (SD NY 2006); Semi-Tech Litig., LLC v Bankers Trust Co., 272 F Supp2d 319, 330 (SD NY 2003). These cases are not directly applicable to the contractual assignment of notes at issue here. Gwalia's notes were not traded on an open market, and were not governed by a deed of trust.
That branch of the motion which seeks dismissal of the complaint based on plaintiffs' lack of standing is denied. However, the complaint fails to state a cause of action, and it is this issue which is dispositive of this lawsuit.
On a motion to dismiss for failure to state a cause of action, every fact alleged must be assumed to be true, and the complaint is to be liberally construed. M. Sobol, Inc. v Goldman, 259 AD2d 526 (2nd Dept 1999). A complaint should not be dismissed so long as a cause of action exists. Id.
The material elements which must be alleged to sufficiently plead a claim of fraud are allegations of defendants' misrepresentation of a material fact, falsity of that misrepresentation, the defendants' scienter, the plaintiff's justifiable reliance on the misrepresentation, and plaintiff's injury occasioned by the misrepresentation. Small v Lorillard Tobacco Co., 94 NY2d 43, 57 (1999).
A claim of aiding and abetting fraud requires all of the allegations of a claim for fraud, with the additional allegation of a fiduciary duty owed by defendant(s) to plaintiff(s).
Where liability for fraud is to be extended beyond the principal actors, to those who, although not participants in the fraudulent scheme, are said to have aided in and encouraged its commission, it is especially important that the command of CPLR 3016(b) be strictly adhered to.
National Westminster Bank USA v
Weksel, 124 AD2d 144, 149 (1st Dept 1987).
Because reasonable reliance upon a misrepresentation is an essential element of a cause of action for fraud, it must always be pleaded with "sufficient specificity." Goldstein v CIBC World Mkts. Corp., 6 AD3d 295, 296 (1st Dept 2004). [*5]
Due to the " more stringent standard of pleading'"
imposed by CPLR 3016 (b), conclusory allegations fail to satisfy the statutory requirement of
pleading with specificity. Megaris Furs, Inc. v Gimbel Bros., Inc., 172 AD2d 209, 210
(1st
Dept 1991)(citation omitted).
The complaint summarizes categories of misrepresentations allegedly made by Chase in the PPM, including: a representation in the PPM that Gwalia's hedging in the gold market amounted to "classic hedging," when it is alleged that Gwalia engaged in unreasonable and highly risky speculation in gold; a characterization, in the PPM, of foreign exchange fund hedge contracts as insurance against the risk of adverse currency movements, when it is alleged that Gwalia was placing speculative bets on future currency exchange rates; and a characterization in the PPM that Gwalia was involved in off-balance sheet risk in the normal course of business, when it is alleged that Gwalia's CFO was engaged in unauthorized trading activities for which he was ultimately fired.
The allegations of defendants' scienter may be found in paragraph 58 - 61 of the Complaint:
As part of its scheme to squeeze every penny from [Gwalia] while reducing its exposure to the failing company, Chase directed its subsidiary, Chase Securities, to assist Gwalia in raising capital through a private placement of senior notes to U.S. institutional investors ... . In order to induce potential U.S. investors to purchase the notes, Chase Securities knowingly and fraudulently misrepresented the true state of affairs at [Gwalia] ... .
With respect to reasonable reliance, plaintiffs alleged that the language of the PPMs, the road show presentations, and various other "conversations and correspondence with prospective purchasers" consisted of intentional misrepresentations. However, nowhere do plaintiffs particularize the reasonableness of any purchaser's reliance on anything said or communicated by defendants, other than in these generalized allegations of reasonable reliance.
All of these allegations have been pleaded in a conclusory fashion. The plaintiffs' failure to allege any of the terms or details of Jana Funds' alleged purchases of Gwalia's notes from the original purchasers of those notes, their failure to specify the details of the alleged fraud by either on information and belief, or by someone with personal knowledge of the facts, the failure to sufficiently allege a confidential, fiduciary, or special relationship between the defendants and the original note purchasers, all constitute substantial omissions in pleading the first and third causes of action. The claims for fraud, and for aiding and abetting fraud, found in the first and third causes of action are, therefore, dismissed.
A claim for negligent misrepresentation requires allegations that defendant owed plaintiffs a duty of reasonable care in supplying information to them; that the representations made were false; and that the plaintiffs reasonably relied on the information to their detriment. Heard v City of New York, 82 NY2d 66, 74 (1993). [*6]
"[t]he relationship of the parties, arising out of contract or
otherwise, must be such that in morals and good conscience the one has the right to rely upon the
other for information, and the other giving the information owes a duty to give it with care."
Id., at 74 (citation omitted).
Although plaintiffs have pleaded a duty of care owed to the original purchasers, these allegations are entirely conclusory as they are based on plaintiffs' conjecture as to what the relationship was between the original purchasers and defendants when the PPMs were issued. The express language of the PPM admonished potential investors against relying on statements, financial projections or other forecasts made by the placement agent or its representatives, and disclaimed liability from any third parties' reliance on such statements.
The PPMs are referred to in the complaint, and their provisions, even when read in the light most favorable to plaintiffs, directly contradict the conclusory claims of a duty owed to the original purchasers. The second cause of action, for negligent misrepresentation is, therefore, dismissed.
The claim for aiding and abetting breach of fiduciary duty requires allegations of a breach of fiduciary obligations to another, that the defendant knowingly induced or participated in the breach, and, that the plaintiff suffered damage as a result of the breach, must be dismissed based on the conclusory nature of the pleadings. See Kaufman v Cohen, 307 AD2d 113 (1st Dept 2003). This claim is also dismissed, since plaintiffs' failures with respect to pleading the existence of a fiduciary duty, are equally fatal to this claim.
The Martin Act, New York General Business Law Art. 23-A, § 352, et seq., provides a further ground for dismissal of the claims for negligent misrepresentation and aiding and abetting breach of fiduciary duty. The Martin Act prohibits various deceitful practices in the distribution, exchange, sale and purchase of securities which do not involve proof of scienter, and confers exclusive jurisdiction on the state's Attorney General to regulate and enforce its provisions. GBL § 352-c (1). There is no implied private right of action under the Martin Act. CPC Intl. Inc. v McKesson Corp., 70 NY2d 268 (1987); Rego Park Gardens Owners, Inc. v Rego Park Gardens Assocs., 191 AD2d 621 (2nd Dept 1993). Thus, the Act bars private common-law claims where the facts alleged would provide the Attorney General with grounds for instituting an action. See Keh Ksin Shen v Astoria Fed. Sav. & Loan, 295 AD2d 319 (2d Dept 2002).
Claims for negligent misrepresentation and breach of fiduciary duty in connection with the
purchase and sale of securities have been found to be barred by the Martin Act. See Horn v
440 East 57th Co., 151 AD2d 112 (1st Dept 1989). Here, the claims for negligent
misrepresentation and aiding and abetting breach of fiduciary duty allege that the defendants
negligently misrepresented and concealed material from unspecified original note purchasers
regarding Gwalia's true financial condition, inducing the note purchasers to enter into the
purchases, and that defendants facilitated the issuance of the notes even though they knew [*7]the true state of Gwalia's finances. These claims clearly fall within
the purview of the Martin Act, and are, therefore, dismissed.
Civil conspiracy claims are only permitted to proceed in New York for the limited
purpose of connecting the actions of separate defendants with an otherwise actionable tort, and to
show that those acts flowed from a common scheme or plan. American Baptist Churches of
Metropolitan New York v Galloway, 271 AD2d 92 (1st Dept 2000). Here, the plaintiffs have
alleged that all of the defendants participated in the underlying torts, and the claim for civil
conspiracy is merely repetitive of those other causes of action and must be dismissed. See
Blue Cross & Blue Shield of Western New York, Inc. v Preferred Assurance Co., 212 AD2d
888 (3d Dept 1995).
Defendant Janes's motion to dismiss is denied, as moot.Accordingly, it is ordered
ORDERED that motion sequence #004 is denied, as moot; and it is further
ORDERED that motion sequence #005 is granted, and the complaint is dismissed, with prejudice; and it is further
ORDERED that the motion to dismiss is granted and the complaint is dismissed with costs and disbursements to defendant as taxed by the Clerk of the Court; and it is further
ORDERED that the Clerk is directed to enter judgment accordingly.
Dated:_______________________
ENTER:
___________________________
J.S.C
.
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