Summary
holding that actual knowledge of fraud was adequately pled where plaintiff alleged that the perpetrator of the fraud repeatedly told the defendant banks "that he was requesting that information be omitted from daily trade confirmations, monthly reports, and communications between [the defendant banks and one of the plaintiff's subsidiaries] because he sought to conceal such information from his employer"
Summary of this case from In re Agape LitigationOpinion
03 Civ. 3748 (DAB).
January 31, 2006
MEMORANDUM ORDER
Plaintiff Allied Irish Banks, P.L.C. ("AIB") brings suit against Defendants Bank of America, N.A. ("BofA") and Citibank, N.A. ("Citibank"). The suit arises out of Defendants' alleged participation in a rogue-trading scheme with one of AIB's former employees. Their alleged scheme caused substantial losses to Plaintiff's former subsidiary, Allfirst Bank ("Allfirst").
AIB asserts six claims against Defendants: (1) fraudulent concealment; (2) aiding and abetting fraud; (3) aiding and abetting breach of fiduciary duty and duty of loyalty; (4) rescission and restitution for lack of authority and lack of consideration; (5) money had and received; and (6) unjust enrichment. Defendants each move separately to dismiss all claims pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. Each Defendant further moves to dismiss on the basis of Plaintiff's lack of standing. Finally, Defendant BofA moves to strike Plaintiff's demand for punitive damages.
For the reasons stated below, Defendants' Motions to Dismiss are GRANTED in part and DENIED in part.
I. BACKGROUND
A. The Parties
Plaintiff AIB is an Irish corporation with its principal place of business in Dublin, Ireland. (Compl. ¶ 6.) From 1997 until September 2002, Plaintiff was the sole owner of Allfirst Financial, Inc., a Delaware corporation with its principal place of business in Maryland. Plaintiff also was the sole owner of Allfirst Financial's wholly owned subsidiary, Allfirst Bank. (Id.) Allfirst Bank was chartered in Maryland.
On or about April 1, 2003, Plaintiff AIB sold Allfirst Financial to an unrelated party. (Id. ¶ 7.) In connection with this sale, Allfirst Bank assigned all of its rights and interests arising out of the matters in this suit to its parent, AIB. (Id.)
Defendant BofA is a national banking association with its principal place of business in Charlotte, North Carolina. (Id. ¶ 8.) Defendant Citibank is a national banking association with its principal place of business in New York, New York. (Id. ¶ 9.)
B. John Rusnak's Relationship with BofA and Citibank
From 1997 until early 2002, John Rusnak, a foreign exchange trader employed by Allfirst, orchestrated a rogue — trading scheme that caused AIB to lose approximately $691 million. (Compl. ¶ 1.) Rusnak pleaded guilty to bank fraud and is serving seven and a half years in prison. (Id.)
As a foreign-exchange trader, Rusnak obtained and traded foreign currencies for Allfirst. (Id. ¶ 12.) A foreign-exchange trader's goal is to profit from fluctuations in currency values through speculation or arbitage. (Id.)
Foreign exchange traders typically conduct three general types of transactions. (Compl. ¶ 12.) "Spot" transactions involve the purchase of one currency with another currency, and are settled within two business days of the trade. (Id. ¶ 13.) "Forward" transactions also involve the purchase of one currency with another currency, except the transactions "prompt" or "settle" at some point in the future. For example, one party will agree to purchase yen with dollars at a prearranged price (say, 100 yen to the dollar) thirty days in the future. (Id. ¶ 14.) The parties may exchange the currencies at settlement, or, at some point between the "trade date" and the thirty-day "prompt date," the parties may enter into an offsetting forward transaction in the same currency pair at the market price on that date. (Id.) "Foreign exchange options" provide purchasers with the right, but not the obligation, either to buy or sell a currency at a particular "strike price" on or by a particular "expiration" date, regardless of the market price on that date. (Id. ¶ 15.)
Before September 2000, Rusnak traded with Defendants on a principal-to-principal basis. (Id. ¶ 24.) That is, Defendants traded directly with Rusnak. (Id.) But in or about 2000, BofA and Citibank began offering foreign-exchange prime brokerage services to Allfirst and their other customers. (Id. ¶ 28.)
When opening an account with a prime broker, a customer trades with a large number of counterparties on the prime broker's credit. First, the customer conducts trades directly with various counterparties. (Id. ¶ 17.) These counterparties then "give up" the trades to the prime broker, who books each trade as two back-to-back trades — one between its customer and the prime broker, and the other between the prime broker and the counterparty. (Id.)
After the trade has been booked and placed in the prime brokerage account, the prime broker handles subsequent administration of the trade, including confirming the trade with the customer and the counterparty. (Id.) The customer will often place any offsetting trades with the prime broker directly, rather than with the counterparty, and will settle the account directly with the prime broker. (Id.) Thus, the customer makes all payments to (or receives all payments from) the prime broker. (Id.)
In early September 2000, BofA and Citibank each agreed to open a prime brokerage account for Rusnak. Through these accounts, Rusnak could trade large volumes of foreign currency with counterparties. (Id. ¶ 32.) Broadly speaking, Plaintiff alleges that Defendants: (1) misrepresented to, and withheld information from, Allfirst about the risks and results of Rusnak's trading (Id. ¶¶ 28-71); (2) used $200 million in funding fraudulently disguised as foreign exchange options to cover up Rusnak's trading losses (Id. ¶¶ 72-100); and (3) engaged in other misconduct to subvert Allfirst's internal controls (Id. ¶¶ 101-125).
(1) Misrepresenting to Allfirst the Risks and Results of Rusnak's Trading
Prime brokers customarily send daily trade confirmations to their customers. (Compl. ¶ 35.) Daily trade confirmations typically contain extensive information concerning, among other things, a customer's trading and transfer activities. (Id.) In September 2000, Rusnak allegedly asked BofA and Citibank to stop sending daily trade confirmations to Allfirst. (Id. ¶¶ 37-38.) According to the Complaint, Rusnak instead asked Defendants to submit "daily trade recaps" in a format Rusnak had created himself, and Defendants agreed to do so. (Id.)
These daily trade recaps, Plaintiff alleges, omitted much of the information that ordinarily would have appeared in the daily trade confirmations. (Id. ¶ 39.) For example, Plaintiff contends that Rusnak's format summarized the notional dollar amount of his open position in each currency, rather than outline the price of that position, the risk of that position, and its current mark-to-market value. (Id.) Also, these "recaps" allegedly omitted information on transfer activity and on profits and losses. (Id.)
Plaintiff alleges that Defendants stopped sending monthly prime brokerage account statements to Allfirst. (Id. ¶ 42.) According to the Complaint, the prime brokers' failure to disclose this information advanced Rusnak's misrepresentations about his actual risks, mark-to-market positions, and profit-and-loss numbers to Plaintiff. (Id. ¶ 44.)
Plaintiff alleges that Defendants further agreed with Rusnak not to notify Allfirst about their prime brokerage websites. (Id. ¶¶ 45-48.) These websites furnished full details on Rusnak's trading activity. (Id.) During numerous communications between Defendants and Allfirst, Defendants allegedly never mentioned the websites, even though Allfirst's accessing them could have resolved many of Plaintiff's inquiries. (Id. ¶ 49-50.)
The Complaint further alleges that Defendants disregarded standard industry practice when they agreed not to confirm every trade conducted by Rusnak, but instead to confirm only a single netted trade for each currency pair at the end of each day. (Id. ¶ 52.) Rusnak and Citibank allegedly agreed to "suppress" phone or "Swift" confirmations for all foreign exchange transactions. (Id. ¶ 54.) BofA allegedly agreed to "eliminate the verbal confirmation on Prime Brokerage related trades" (Id. ¶ 53).
Defendants allegedly agreed with Rusnak to withhold important information on Rusnak's mark-to-market gains and losses, too. (Id. ¶¶ 59-62.) Defendants also deferred Allfirst's monthly settlement payments to the end of 2000 without adequate authorization from Allfirst. (Id. ¶¶ 63-71). According to Plaintiff, each of these — the unauthorized deferral of payments, the withholding of information, and the agreements to submit unconventional reports to Allfirst was a way for Defendants to misrepresent the risks and results of Rusnak's trading.
(2) Providing Rusnak with Disguised Funding
By February 2001, Rusnak had incurred more than $200 million in trading losses. To hide these trading losses, Rusnak sought more than $200 million in disguised funding from his prime brokers.
In February and March 2001, Plaintiff claims that Defendants lent Rusnak a combined total of $200 million. (Id. ¶ 72-88.) Though the loans were denominated as foreign exchange options, Plaintiff argues that, in substance, the moniker "option" falsely described these transactions. (Id.)
The Complaint explains that these "options" permitted Defendants, on a certain date, to purchase yen at a rate strikingly lower than the current market rate. (Id.) Because the yen purchase rates under the options were remarkably low, Plaintiff contends that Defendants inevitably would exercise the options. (Id.) These options effectively were lose-lose situations for Allfirst.
Plaintiff argues that the money Defendants paid for the option more accurately may be described as funding meant to disguise Rusnak's ongoing losses. (Id.) Since these transactions were recorded as options rather than loans, the $200 million ultimately was booked as profit on Allfirst's records. (Id. ¶ 90.) But this fake profit allegedly hid a significant amount of Rusnak's trading losses. (Id. ¶¶ 72, 90.)
Plaintiff contends that the prime brokers provided this funding based on Rusnak's authorization alone, despite knowing that a borrowing of this magnitude required approval of other Allfirst employees. (Id. ¶¶ 73-88.) Plaintiff further asserts that Defendants charged Rusnak an exorbitant interest rate on these transactions, and therefore knew or should have known that the transactions were designed to hide his ongoing trading losses. (Id. ¶¶ 76-77, 82-83.) The alleged fabrication of these transactions not only helped Rusnak misrepresent to Allfirst that he was earning money, but also generated combined losses of $79 million. (Id. ¶¶ 72, 92-93.) Plaintiff posits that in April 2001 Defendants and Rusnak collaborated to create fake forward trades, in addition to their fake option trades. (Id. ¶¶ 94-100.) (See FN 2, supra, for discussion of "forward" trades.) To facilitate the illusion of these forward trades, Rusnak instructed Defendants to send false confirmations of them to Allfirst's back office. (Id. ¶¶ 96-97.) Defendants, the Complaint alleges, followed these instructions on or around May 9, 2001. (Id. ¶¶ 97-98.)
(3) Subverting Allfirst's Internal Controls
Plaintiff alleges that Defendants engaged in several other types of misconduct to subvert Allfirst's internal controls. (Id. ¶ 101-25.) For instance, Rusnak used "same-day" options to manage his losses and credit exposure. Same-day options expire on the same day that the trades are conducted. (Id. ¶ 101.) The same-day options allegedly orchestrated by Rusnak and Defendants were "deep-in-the-money" just hours before the expiration date, and thus were certain to be exercised. In total, Defendant BofA conducted about $90 million in same-day options, and Defendant Citibank conducted about $80 million in same-day options. (Id. ¶ 109.) Plaintiff claims that these options had no purpose but to camouflage Rusnak's spiraling losses. (Id. ¶¶ 101-09.)
An option is "deep-in-the-money" when the strike price is very favorable relative to the market price. (Compl. ¶ 15.)
In addition, Plaintiff asserts that Defendants deviated from their written policy — and from industry custom — to conduct off-market transactions only after obtaining explicit authorization and satisfactory explanation from their customer's management. (Id. ¶¶ 110-11.) For example, on August 22 and 23, 2001, Defendants conducted unauthorized, off-market trades in which the prices were 20% and 40% less than the market price. (Id. ¶ 112-113.) Overall, such off-market trades caused Allfirst losses of more than $50 million.
(4) Discovery of Rusnak's Scheme
Allfirst finally discovered this scheme in February 2002. (Compl. ¶ 122.) By that time, Allfirst had lost approximately $691 million. (Id.) Most of those losses occurred after Defendants allegedly began assisting Rusnak, and included more than $400 million on prime brokerage trades and more than $80 million on disguised funding transactions. (Id.)
In early February 2002, just after the discovery of the scheme, Allfirst and Plaintiff AIB retained a team of lawyers and financial consultants to investigate the fraud. (Pl.'s Mem. at 11.) This team produced the "Ludwig Report," which identified certain internal control deficiencies at Allfirst, and made various recommendations for ameliorating them. (Id.) Allfirst and Plaintiff AIB filed the Ludwig Report with the SEC as part of Allfirst's March 15, 2002 Form 8-K and Plaintiff AIB's April 1, 2002 Form 6-K. (Id. at 12.)
The Ludwig Report, it should be noted, was not incorporated by, nor did it accompany, Plaintiff's Complaint.
II. DISCUSSION
A. Legal Standard
Pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, each Defendant has filed a motion to dismiss Plaintiff's claims. Rule 12(b)(6) permits dismissal when the Complaint fails to state a claim upon which relief can be granted.
A complaint should not be dismissed under Rule 12(b)(6) unless it is entirely clear that the plaintiff is unable to prove any set of facts that would support the claim and thereby grant him relief. Conley v. Gibson, 355 U.S. 41, 45-46, 78 S. Ct. 99, 102 (1957). The complaint must be read "generously, accepting as true the factual allegations in the complaint and drawing all inferences in favor of the pleader." Bolt Elec., Inc. v. City of New York, 534 F.3d 465, 469 (2d Cir. 1995); Mills v. Polar Molecular Corp., 12 F.3d 1170, 1174 (2d Cir. 1993). A court should grant the motion to dismiss only "if, after viewing a plaintiff'2s allegations in this most favorable light, it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Walker v. City of New York, 974 F.2d 293, 298 (2d Cir. 1992) (quoting Ricciutti v. New York City Transit Auth., 941 F.2d 119 (2d Cir. 1991)). The Court "is not to weigh the evidence that might be presented at trial but merely to determine whether the complaint itself is legally sufficient." Goldman v. Belden, 754 F.2d 1059, 1067 (2d Cir. 1985). In ruling on a 12(b)(6) motion, a court may consider the complaint as well as any additional documents incorporated into or appended to the complaint. See Tarshis v. Riese Org., 211 F.3d 30, 39 (2d Cir. 2000).
B. Standing
Before addressing Defendants' Motions to Dismiss each individual claim, the Court will consider Defendants' argument that Plaintiff's entire suit should be dismissed for lack of standing. Defendants argue that Plaintiff has no standing, because the claims it asserts are dependent on Allfirst's rights under the prime brokerage agreements, which include "no assignment" provisions. (BofA Br. at 35; Citibank Br. at 34-35.) Pursuant to those provisions, Allfirst was required to obtain Defendants' consent before assigning its "rights or obligations" under the contracts to the Plaintiff. (BofA Br. at 35; Citibank Br. at 34-35.)
If a plaintiff has no standing, the Court lacks jurisdiction to hear the subject matter of the plaintiff's case.See, e.g., Lujan v. Defenders of Wildlife, 504 U.S. 555, 561, 112 S. Ct. 2130 (1992). Therefore, the Court construes this part of each Defendant's motion as a 12(b)(1) motion to dismiss for lack of subject matter jurisdiction, not as a 12(b)(6) motion to dismiss for failure to state a claim upon which relief can be granted. When resolving issues surrounding its subject matter jurisdiction, a district court is not confined to the Complaint and may refer to evidence outside the pleadings, such as affidavits. Makarova v. United States, 201 F.3d 110, 113 (2d Cir. 2000) (citing Kamen v. American Telephone Telegraph Co., 791 F.2d 1006, 1011 (2d Cir. 1986)). For this part of Defendants' motions, the Court will therefore consider the non-assignment clauses previously agreed upon by the parties.
Plaintiff argues that the "no assignment" provisions do not restrict Allfirst's right to assign claims not arising under the contract. (Pl.'s Memo at 44.)
The Court agrees with Plaintiff. Under New York law, no-assignment clauses do not apply to claims not arising under the contract. See, e.g., State of Cal. Pub. Employees' Retirement Sys. v. Shearman Sterling, 95 N.Y.2d 427, 435-36 (2000) (assignment of "rights and interests" under loan documents did not include assignment of legal malpractice action involving the preparation of loan documents). Also, New York courts have indicated that "no assignment" clauses do not apply to assignment of claims after loss has occurred. See, e.g., Tenneco Chemicals, Inc. v. Employers Mut. Liab. Ins. Co. of Wis., No. 76 Civ. 809, 1977 U.S. Dist. LEXIS 16759, at *7 (S.D.N.Y. Mar. 23, 1977) (placing contractual limitations on assignments after loss has occurred is contrary to the public policy of New York in the context of an insurance claim); Ardon Constr. Corp v. Firemen's Ins. Co. of Newark, N.J., 185 N.Y.S.2d 483, 488 (1959) ("It has long been the doctrine of this State that rights under a policy of insurance may be assigned after loss, notwithstanding a clause in the policy forbidding assignments.").
For these reasons, Defendants' Motions to Dismiss Plaintiff's entire action for lack of standing are DENIED.
C. Fraudulent Concealment
Both Defendants move to dismiss Plaintiff's fraudulent concealment claim. It is well established under Rule 9(b) of the Federal Rules of Civil Procedure ("Rule 9(b)") that in complaints of fraud, "the circumstances constituting fraud . . . shall be stated with particularity." Fed.R.Civ.P. 9(b). This heightened pleading requirement is designed to (1) provide a defendant with enough notice to prepare a proper defense; (2) protect a defendant against harm to her reputation or goodwill; and (3) deter strike suits. See DiVittorio v. Equidyne Extractive Indus. Inc., 822 F.2d 1242, 1247 (2d Cir. 1987). Because Rule 9(b) requires a plaintiff to state on the record the specific nature of the fraud, fraud allegations may not be based upon information and belief. DiVittorio, 822 F.2d at 1247. However, when the facts underlying the fraud are peculiarly within opposing party's knowledge, a complaint may be based upon information and belief. Id. Even in those circumstances, the plaintiff still bears the burden of alleging the facts upon which her or his belief is founded. Id. at 1248.
Defendants argue that Plaintiff's fraudulent concealment claim should be dismissed since the Complaint fails to allege each element of fraudulent concealment with sufficient particularity. The Court disagrees.
To succeed in a fraudulent concealment claim under New York law, a plaintiff must demonstrate that: "(1) the defendant made a material false representation, (2) the defendant intended to defraud the plaintiff thereby, (3) the plaintiff reasonably relied upon the representation, and (4) the plaintiff suffered damage as a result of such reliance." Banque Arabe et Internationale D'Investissement v. Maryland Nat'l Bank, 57 F.3d 146, 153 (2d Cir. 1995); see also Albert Apt. Corp. v. Corbo Co., 182 A.D.2d 500, 500 (N.Y.Sup.Ct. 1992) ("The essential elements of a cause of action for common-law fraud include the representation of a material existing fact, falsity, scienter, reliance and injury."). For fraudulent concealment claims, a plaintiff also must show that a defendant had a duty to disclose the material information. Banque Arabe, 57 F.3d at 153; Aaron Ferer Sons Ltd. v. Chase Manhattan Bank, 731 F.2d 112, 122-23 (citing Goldsmith v. Nat'l Container Inc., 287 N.Y. 438 (1942)).
(1) Omission of a Material Fact
Defendants contend that the Complaint inadequately alleges omissions of material fact with sufficient particularity because Plaintiff has not pleaded every misrepresentation made to Allfirst. But Rusnak's scheme involved thousands of misrepresentations made on a daily basis over several years. An exacting allegation as to each of these transactions is unnecessary in the Complaint.
In its Complaint, Plaintiff alleges that Defendants omitted material information from documents. Plaintiff also alleges when and where these omissions occurred. Specifically, Plaintiff claimed that Defendants agreed both to omit material information from the daily trade recaps, and to provide no monthly trade statements. (Compl. ¶ 35-42.) Plaintiff also averred that Defendants doctored their trade confirmations to aid Rusnak's efforts to disguise his earlier fictitious trades. Id.
Plaintiff's Complaint alleges more than enough to give Defendants notice of the specific claims against them.
Defendants further contend that Plaintiff had received all of the material facts it claims not to have known. But when deciding a Rule 12(b)(6) motion, the Court must accept as true the factual allegations in the Complaint. See Bolt Elec., Inc., 53 F.3d at 469; Mills 12 F.3d at 1174. Despite Defendants' arguments to the contrary, Plaintiff alleges repeatedly that Allfirst did not receive all material facts. Plaintiff's allegations regarding omissions of material fact, therefore, satisfy the particularity requirements of Rule 9(b).
(2) Scienter
To allege fraudulent concealment, a plaintiff secondly must allege facts indicating the defendant's intent to defraud.Banque Arabe, 57 F.3d at 153. Rule 9(b) imposes no particularity threshold on complainants' scienter allegations.See Fed.R.Civ.P. 9(b) ("[M]alice, intent, knowledge, and other condition of mind of a person may be averred generally."). A plaintiff is required only to plead a "minimal factual basis for their conclusory allegations of scienter." Cohen v. Koenig, 25 F.3d 1168, 1173 (2d Cir. 1994). But "plaintiffs are still required to plead the factual basis which gives rise to a strong inference of fraudulent intent." Wexner v. First Manhattan Co., 902 F.2d 169, 172 (2d Cir. 1990)). "Such a basis may be shown through allegations of a motive to deceive and access to accurate information." Cohen, 25 F.3d at 1173-74.
Defendants contend that the complaint does not allege scienter adequately because it merely claims that the prime brokerage accounts were profitable. (Citibank Br. at 21; BofA Br. at 26.) But the Complaint states that Defendants earned unusually large brokerage fees by allowing Rusnak "to trade high volumes of foreign exchange" (Compl. ¶ 2) and by charging "exorbitant" amounts of interest on the disguised funding transactions (Id. ¶ 76). In addition, Plaintiff alleged that Defendants accommodated Rusnak because they were under pressure to bring in major clients. (Id. ¶¶ 20, 31.)
The Complaint also contains allegations indicating that Defendants had access to accurate information. Both BofA and Citibank allegedly had more information than was conveyed in the reports submitted to Plaintiff in lieu of the daily trade confirmations. (Id. ¶ 39-40.) Among the accurate information Defendants knew but withheld was mark-to-market values profit-and-loss numbers. (Id. ¶ 43.) That the Defendants maintained websites with accurate information, but did not notify Plaintiff of its existence also indicates that Defendants had some motive to fraudulently conceal information on that website. (Id. ¶ 50.) Defendants also allegedly stopped sending accurate information to Plaintiff via the usual phone and Swift confirmations, even though they had the means to offer that information. (Id. ¶¶ 53-58.)
Together, these allegations are sufficient to plead 'a motive to deceive and access to accurate information', thereby sufficiently alleging a financial motive to conceal information fraudulently from Allfirst. See Cohen, 25 F.3d 1174 (buyers' alleged desire to induce sellers to extend credit on their purchase indicated sufficient scienter to survive a motion to dismiss).
(3) Reasonable Reliance
As "an essential element of a cause of action for fraud, . . . [justifiable] reliance must be pleaded with particularity' pursuant to [Federal Rule of Civil Procedure] 9(b)." Lutin v. New Jersey Steel Corp., No. 93 Civ. 6612, 1996 WL 636037, at * 7 (S.D.N.Y. Nov. 1, 1996) (quoting Learning Works, Inc. v. The Learning Annex, Inc., 830 F.2d 541, 546 (4th Cir. 1987)); see also Manning v. Utilities Mutual Ins. Co., 254 F.3d 387, 400-01 (2d Cir. 2001) (affirming district court's dismissal of New York fraud claim for failure to plead reasonable reliance with sufficient particularity as required by Rule 9(b)). Although reasonable reliance is a fact-specific inquiry "generally considered inappropriate for determination on a motion to dismiss," Doehla v. Wathne Ltd., Inc., No. 98 Civ. 6087, 199 U.S. Dist. LEXIS 11787, at *10 (S.D.N.Y. Aug. 3, 1999), "whether a plaintiff has adequately pleaded justifiable reliance can be a proper subject for a motion to dismiss" in certain circumstances.Granite Partners, L.P. v. Bear Stearns Co., 58 F. Supp. 2d 228, 259 (S.D.N.Y. 1999).
Defendants offer two reasons that Plaintiff could not have justifiably relied on their omissions. First, Defendants contend that Allfirst, as a sophisticated party, had the facility to recognize when reports given them were insufficient. (BofA Br. at 13-14; Citibank Br. at 18-19.) Second, Defendant BofA contends that there is no dispute that BofA confirmed all material details of each and every trade executed. (BofA Br. at 13.)
New York law imposes an affirmative duty on sophisticated investors to protect themselves from misrepresentations made during business acquisitions by investigating the details of the transactions and the businesses they are acquiring. Gruman Allied Indus., Inc. v. Rohr Indus., Inc., 748 F.2d 729, 737 (2d Cir. 1984) ("Where sophisticated businessmen [sic] engaged in major transactions enjoy access to critical information but fail to take advantage of that access, New York courts are particularly disinclined to entertain claims of justifiable reliance."); Abrahami v. UPC Construction Co., Inc., 224 A.D.2d 231, 234 (N.Y.App.Div. 1st Dep't 1996) ("Plaintiffs, who are all sophisticated businessmen, had a duty to exercise ordinary diligence and conduct independent appraisal of the risk they were assuming. . . .") (citations omitted). These expectations on sophisticated businesses notwithstanding, "when matters are held to be peculiarly within defendant's knowledge, it is said plaintiff may rely without prosecuting an investigation, as he has no independent means for ascertaining the truth." Lazard Freres Co. v. Protective Life Ins. Co., 108 F.3d 1531, 1542 (2d Cir. 1997)) (citations omitted).
Defendants BofA and Citibank, in their motions to dismiss, chiefly rely on cases where sophisticated plaintiffs easily could have discovered the fraud had they reviewed specific documents that were the subject of misrepresentations. For example, Defendants refer the Court to Lazard Freres Co., 108 F.3d at 1534, Belin v. Weissler, No. 97 Civ. 8787, 1998 WL 391114, at *7 (S.D.N.Y. Jul. 14, 1998), Waksman v. Cohen, No. 00 Civ. 9005, 2002 WL 31466417, at *7 (S.D.N.Y. Nov. 4, 2002). But these cases are inapposite to Plaintiff's Complaint. See, e.g., Lazard Freres Co., 108 F.3d at 1534 (reliance on verbal representation that a memo contained certain information was not reasonable, where sophisticated player in the bank debt market easily could have insisted on examining the letter); Belin, 1998 WL 391114, at *7 (holding that reliance on oral representation regarding insurance amount was unreasonable where investor could have asked to see policy); Waksman v. Cohen, No. 00 Civ. 9005, 2002 WL 31466417, at *7 (S.D.N.Y. Nov. 4, 2002) (finding that reliance on defendant's omission was unreasonable where plaintiff cursorily scanned memoranda with information reasonably indicating defendant's fraud).
Here, unlike in the other cases, Plaintiff did not rely on cursory scans or on verbal representations of reports given them. Plaintiff read the reports given to them; rather, Defendants allegedly omitted information from those reports that should have been included. According to the Complaint, Defendants made hundreds of fraudulent omissions particularly within their knowledge: They allegedly omitted information from daily trade recaps, failed to provide monthly account statements, and concealed the existence of their websites. Under these alleged circumstances, Plaintiff could not have insisted easily on examining data that immediately would have revealed Defendants' misrepresentations, since Plaintiff was not alerted to that data in the first instance.
Defendants also argued that Allfirst did not justifiably rely on Defendants' reports because Allfirst confirmed all material details of each and every trade executed. But this contention patently contradicts allegations in the Complaint. As one example, Plaintiff alleges that the daily trade recap format created by Rusnak and used by Defendants to report information on Rusnak's trades "omitted much of the information that would have ordinarily been included in the daily trade confirmations," including the price of Rusnak's dollar position, the risk in that position, and the position's mark-to-market value. (Compl. ¶ 39.) If, as Plaintiff alleges, information was not included in the confirmation reports, that information could not have been confirmed.
The Court accordingly finds that Plaintiff satisfactorily alleged justifiable reliance to survive the threat of dismissal.
(4) Proximate Causation
Rule 9(b) further requires that the damage to plaintiff from reliance on the defendant's concealment. This is the causation prong. New York law generally applies a "proximate causation" analysis. See, e.g., Banque Arabe et Internationale D'Investissement v. Maryland Nat. Bank, 57 F.3d 146, 151 (2d Cir. 1995); Lehman Bros. v. Minmetals Int'l Non-Ferrous Metals Trading Co., No 94 Civ. 8301, 1995 WL 608323, at *4 (S.D.N.Y. Oct. 16, 1995) (finding that plaintiff must allege damage "as a direct and proximate result" of the defendants' fraud); Barrett v. Huff, 776 N.Y.S.2d 678, 681 (2004).
Defendants primarily rely on matters outside the Complaint's four corners — namely, the Ludwig Report — to argue that proximate causation has not been pleaded with particularity. The Ludwig Report was assembled in response to Allfirst's and AIB's discovery in 2002 of Rusnak's fraud. (Pl.'s Opp. Br. at 11.) A team of lawyers and financial consultants, headed by Eugene Ludwig, gathered information to investigate the fraud. (Id.) The Report identified internal control deficiencies at Allfirst, and made various recommendations for improving Allfirst's controls. (Id.)
Defendants contend that the Ludwig Report constituted an admission by Plaintiff that its internal control deficiencies were the cause of its injuries. (BofA Br. at 22-23; Citibank Br. at 22-23.) But the Ludwig Report was researched and written in thirty days and expressly excluded any investigation into the activities of Allfirst's prime brokers. Moreover, although the report was filed with a government agency, such documents are not admissible for the truth of the matters asserted in them. See, e.g., Kramer v. Time Warner, Inc., 937 F.2d, 767, 774 (observing that courts routinely take judicial notice of public documents, not for the truth of the matter asserted in them, but rather to establish the fact of such filing); In re Livent, Inc., Noteholders Securities Litigation, 174 F. Supp. 2d 144, 158 (S.D.N.Y. 2001). Rule 9(b)'s particularity requirement notwithstanding, the Court's role is not to determine whether external documents render the plaintiff's complaint unbelievable, but to determine the sufficiency of the Complaint, and the Complaint alone.
Some SEC-filed documents may be considered on a 12(b)(6) motion because "no serious question as to their authenticity can exist."In re Integrated Res. Real Estate Ltd. Partnerships Securities Litigation, 850 F. Supp. 1105, 1126-27 (S.D.N.Y. 1993) (quoting Kramer, 937 F.2d at 774). But even if the Ludwig Report established Plaintiff's negligence, this would not necessarily preclude a finding that Defendants' conduct was a proximate cause of Plaintiff's damages. See Hydro Investors, Inc. v. Trafalgar Power, Inc., 227 F.3d 8, 15 (2d Cir. 2000) ("[a] proximate cause determination does not require a jury to identify the liable party as the sole cause of harm; it only asks that the identified cause be a substantial factor in bringing about the injury") (citations omitted). The allegations in the Complaint certainly suggest that, even were Allfirst's internal control deficiencies partly responsible for its injuries, Defendants' fraudulent reporting and concealment also facilitated the injury.
Defendants inappropriately raise the in pari delicto defense. That defense is meant to bar a claim by a plaintiff who is an "active, voluntary participant in the unlawful activity that is the subject of the suit." Pinter v. Dahl, 486 U.S. 622, 635-36, 108 S. Ct. 2063 (1988). "Plaintiffs who are truly in pari delicto are those who have themselves violated the law in cooperation with the defendant." Id. Allfirst did not fraudulently conceal information from itself; Allfirst thus was not the "active, voluntary participant" that the in pari delicto defense would require it to have been.
Rusnak's conduct is not imputed to Allfirst for purposes of thein pari delicto defense. "Under New York law, the adverse interest exception rebuts the usual presumption that the acts and knowledge of an agent acting within the scope of employment are imputed to the principal." Wight v. BankAmerica Corp., 219 F.3d 79, 87 (2d Cir. 2000) (citing Center v. Hampton Affiliates, 66 N.Y.2d 782, 497 N.Y.S.2d 898, 899-900, 488 N.E.2d 828 (1985)). "The theory is that 'where an agent, though ostensibly acting in the business of the principal, is really committing a fraud for his own benefit, he is acting outside of the scope of his agency, and it would therefore be most unjust to charge the principal with knowledge of it.'" Wight, 219 F.3d at 87 (quoting Munroe v. Harriman, 85 F.2d 493, 495 (2d Cir. 1936)).
Accordingly, the causation element of fraudulent concealment has been pleaded sufficiently by the Plaintiff.
(5) Duty to Disclose
New York law imposes a duty to disclose material facts, for purposes of fraudulent concealment (1) when there is "a fiduciary or confidential relationship"; (2) "when a party makes a partial or ambiguous statement that requires clarification"; or (3) "when one party has superior knowledge of certain information that is not readily available to the other party and the first party knows that the second party is acting on the basis of mistaken knowledge." TVT Records v. The Island Def Jam Music Group, 279 F. Supp. 2d 366, 380 (S.D.N.Y. 2003). See also Banque Arabe, 57 F.3d at 155.
According to AIB's Complaint, Defendants BofA and Citibank certainly made statements requiring clarification. The daily trade confirmations, for one, proffered only a few of many figures vital to Allfirst's financial health. (Compl. ¶ 35.) Plaintiff also alleges facts indicating that Defendants knew they held superior knowledge about Rusnak's trading scheme. During communications between Rusnak and Defendants, Rusnak often intimated that his requests to omit information from Defendants' reports were to avert Allfirst from discovering his scheme. (See, e.g., Compl. ¶¶ 45, 56, 105.) What is more, Plaintiff alleges that Defendants knew they were providing Rusnak with disguised funding and that Allfirst was allowing Rusnak to conduct the transactions based on Allfirst's mistaken understanding that the transactions were genuine options. (Compl. ¶ 72-88.)
Consequently, Plaintiff's Complaint satisfactorily alleges the five elements of fraudulent concealment, even under Rule 9(b)'s rigorous particularity requirements. Defendants' Motions to Dismiss Plaintiff's fraudulent concealment claim are hereby DENIED.
D. Aiding and Abetting Fraud
"Under New York law, the elements for a claim of aiding and abetting fraud are: (1) an existing fraud, (2) knowledge of the fraud, and (3) substantial assistance to advance the fraud's commission." McDaniel v. Bear Stearns Co., Inc., 196 F. Supp. 2d 343, 352 (S.D.N.Y. 2002) (citations omitted). See also Wight, 219 F.3d at 91 (citing Fidelity Funding of Calif., Inc. v. Reinhold, 79 F. Supp. 2d 110, 122 (E.D.N.Y. 1997));Franco v. English, 620 N.Y.S.2d 156, 159 (3d Dep't 1994). Rule 9(b)'s particularity standards, as Defendants rightfully point out, apply to claims of aiding and abetting fraud. See Wight, 219 F.3d at 91-92.
(1) The First and Second Elements: Existing Fraud and Knowledge of the Fraud
The Complaint satisfies the first of the three elements: That an underlying fraud existed is clear because Rusnak has pleaded guilty to fraud charges.
The second element — knowledge of the fraud and what level of scienter (actual knowledge, constructive knowledge, or willful blindness) the law requires of aiders and abettors — is an issue in dispute.
New York has not adopted a constructive knowledge test for aiding and abetting liability. Rather, actual knowledge is required. See, e.g., H2O Swimwear, Ltd. v. Lomas, 164 A.D.2d 804, 560 N.Y.S.2d 19 (1st Dep't 1990) (holding that defendants could not be subject to aiding and abetting liability since there was "ambiguity in the allegations of [defendant's] knowledge of [the primary violator's] wrongdoing."); see also Wight, 219 F.3d at 91-92 (citing Franco v. English, 620 N.Y.S.2d 156, 159 (3d Dep't 1994) and Prudential-Bache Sec., Inc. v. Citibank, N.A., 539 N.Y.S.2d 699, 705-07 (1989), for the actual knowledge standard).
Plaintiff has alleged repeatedly that Rusnak told Defendants that he was requesting that information be omitted from daily trade confirmations, monthly reports, and communications between Defendants and Allfirst because he sought to conceal such information from his employer. (Compl. ¶ 45, 56, 105.) Accordingly, Defendants have no basis for stating that the Complaint fails to indicate BofA's and Citibank's actual knowledge of Rusnak's fraud.
(2) The Third Element: Substantial Assistance
The parties also disagree over what level of assistance qualifies as "substantial" under New York law. "Substantial assistance" exists where a defendant "affirmatively assists, helps conceal, or by virtue of failing to act when required to do so enables the fraud to proceed." Cromer v. Berger, 137 F. Supp. 2d 452, 470 (S.D.N.Y. 2001) (citing Diduck v. Kaszycki Sons Contractors, Inc., 974 F.2d 270, 284 (2d Cir. 1992)). The parties also dispute whether "mere inaction" or "deliberate concealment" is required for a party to have substantially assisted in the commission of a fraud. See McDaniel, 196 F. Supp. 2d at 351 (determining that mere inaction is sufficient only when the parties are in a fiduciary relationship; otherwise, deliberate concealment must be alleged).
Under either standard, however, Plaintiff's Complaint is sufficient. Plaintiff has alleged that Defendants failed to report certain information and that they concealed information by withholding information and by actively and deliberately altering documents. Defendants' alleged misconduct satisfies both the deliberate concealment standard and the mere inaction standard, and therefore satisfies the substantial assistance prong of this tort.
Accordingly, Defendants' Motions to Dismiss Plaintiff's aiding and abetting fraud claim are DENIED.
E. Aiding and Abetting Breach of Fiduciary Duty
New York law generally applies the law of the state of incorporation to decide claims pertaining to the "internal affairs" of a corporation. See BBS Norwalk One, Inc. v. Raccolta, Inc., 60 F. Supp. 2d 123, 129 (S.D.N.Y. 1999) (citing Hart v. General Motors Corp., 517 N.Y.S.2d 490, 494 (1st Dep't 1987)). Aiding and abetting the breach of a fiduciary duty is one such internal affair. See, e.g., BBS Norwalk, 60 F. Supp. 2d at 129; Official Comm. Of the Unsecured Creditors of Color Tile, Inc. v. Investcorp, S.A., 80 F. Supp. 2d 129, 135 (S.D.N.Y. 1999); Lou v. Belzberg, 728 F. Supp. 1010, 1023 (S.D.N.Y. 1990).
As Defendants point out, Maryland law applies to Plaintiff's aiding and abetting breach of fiduciary duty claim because Allfirst was incorporated in Maryland. Defendants also are correct to point out that Maryland law does not recognize an independent tort for breach of fiduciary duty. In Kann v. Kann, 690 A.2d 509 (Md. 1997), the Maryland Court of Appeals held that "there was no universal or omnibus tort for the redress of breach of fiduciary duty by any and all fiduciaries." Id. at 521;BEP, Inc. v. Atkinson, 174 F. Supp. 2d 400, 405 (D. Md. 2001) (holding that Kann did not preclude breach of fiduciary duty claim in case where no other independent causes of action were available). Maryland courts have repeatedly held that wherever other remedies exist, a separate claim for aiding and abetting breach of fiduciary duty may not be brought. See e.g., Vinogradova v. Suntrust Bank, Inc., 875 A.2d 222, 231 (Md Ct. App. 2005) (dismissing plaintiff's breach of fiduciary duty claim where negligence claim also viable). See also Swedish Civil Aviation Admin. v. Project Mgmt. Enterprises, Inc., 190 F. Supp. 2d 785, 801 (D. Md. 2002) (citing Kann, 690 A.2d at 520 and Bresnahan v. Bresnahan, 693 A.2d 1, 5 (Md.App. 1997)) ("[i]n light ofKann, it is doubtful that [Maryland's previous] creation of an independent tort of breach of fiduciary tort has survived.");Kerby v. Mortgage Funding Corp., 992 F. Supp. 787, 803 (D. Md. 1998) (no universal torts of either breach of fiduciary duty or of aiding and abetting breach of fiduciary duty recognized under Maryland law, at least where other remedies exist).
Here, Plaintiff alleges several other claims. Therefore, Defendants' Motions to Dismiss the aiding and abetting breach of fiduciary duty claim are GRANTED.
F. Rescission
Plaintiff alleges that the disguised funding transactions between BofA and Allfirst on March 7, 2001, and between Citibank and Allfirst on February 20, 2001, as well as the off-market transactions between Defendants and Plaintiff on August 22 and 23, 2001, should be rescinded. (Compl. ¶¶ 110-11, 150-51.) Rescission is appropriate, Plaintiff pleads, because of lack of consideration and because Defendants knew or should have known Rusnak was not authorized by Allfirst to engage in the transactions. (Id. ¶¶ 80, 86, 110-11, 150-51.) Cf. Mason Tenders Dist. Council Welfare Fund v. All Union, Inc., No. 01 Civ. 0152, 2002 WL 31115181, at *3 (S.D.N.Y. Sept. 23, 2002) (transaction voided when agent who entered into it was not authorized to do so, and the other party knew or should have known of agent's lack of authority). "Where an agent, though ostensibly acting in the business of the principal, is really committing a fraud for his own benefit, he is acting outside the scope of his agency. . . ." Wight v. BankAmerica Corp., 219 F.3d 79, 87 (2d Cir. 2000) (citing Munroe v. Harriman, 85 F.2d 493, 495 (2d Cir. 1936)).
Defendants further contend that rescission is unavailable because the Plaintiff alleges an adequate legal remedy. (BofA Br. at 31; Citibank Br. at 32.) However, as Plaintiff correctly points out, tort and rescission claims may be pleaded simultaneously as alternative causes of action. Morse/Diesel, Inc. v. Fidelity and Deposit Co. of Maryland, 768 F. Supp. 115, 117 (S.D.N.Y. 1991) ("Under New York law, fraud and rescission are separate causes of action, which may be pleaded in the alternative even though legally inconsistent."); Prudential Ins. Co. v. BMC Indus., Inc., 630 F. Supp. 1298, 1301 n. 1 (S.D.N.Y. 1986); see also Fed.R.Civ.P. 8(a), 8(e)(2).
Plaintiff alleges facts sufficient to claim the alternative remedy of rescission. Defendants' Motions to Dismiss Plaintiff's rescission claim therefore are DENIED.
G. Money Had And Received and Unjust Enrichment
To plead a claim for money had and received under New York law, a plaintiff must allege that: (1) the defendant received money belonging to the plaintiff; (2) the defendant benefited from the receipt of money; and (3) under principles of equity and good conscience, the defendant should not be permitted to keep the money. Aaron Ferer Sons Ltd. v. Chase Manhattan Bank Nat'l Ass'n, 731 F.2d 112, 125 (2d Cir. 1984) (citing Miller v. Schloss, 218 N.Y. 400, 407 (1916). To plead an unjust enrichment claim under New York law, a plaintiff must allege that 1) the defendant was enriched; 2) the enrichment was at the plaintiff's expense; and 3) the circumstances are such that in equity and in good conscience the defendant should return the money or property to the plaintiff. Golden Pacific Bancorp v. F.D.I.C., 273 F.3d 509, 519 (2d Cir. 2001) (citing generally New York v. Barclays Bank of New York, N.A., 561 N.Y.S.2d 697, 701 (1990)).
Defendants' chief reason for moving to dismiss Plaintiff's claims for money had and received and for unjust enrichment is that the allegedly fraudulent transactions are governed by agreements signed by the parties — namely, the Foreign Exchange and Options Master Agreement ("FEOMA"), the Advisor Authorization Agreement ("AAA"), and the Prime Broker Agreements (PBAs). As Defendants point out, "payments made pursuant to the express terms of a contract cannot be recovered via unjust enrichment theory." See Granite Partners, L.P. v. Bear, Stearns Co., 17 F. Supp. 2d 275, 312 (S.D.N.Y. 1998) (citing Harris Trust Savs. Bank v. John Hancock Mut. Life Ins. Co., 767 F. Supp. 1269, 1284 (S.D.N.Y. 1991) ("[b]argained-for benefits cannot be deemed to unjustly enrich a contracting party")). According to Defendants, Plaintiff's money had and received and unjust enrichment claims should be dismissed because the fees, interests, and spreads urged to be disgorged are governed under the FEOMA, AAA, and PBAs.
However, consideration of the FEOMA, the AAA, the PBA, or any other relevant written agreement is improper at this phase of litigation. On a motion to dismiss, "the complaint is deemed to include any written instrument attached to it as an exhibit or any statements or documents incorporated in it by reference."Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42, 47 (2d Cir. 1991), cert. denied, 503 U.S. 960, 112 S. Ct. 1561, 118 L.Ed.2d 208 (1992). Otherwise, the Court only may consider documents that are "integral" to the Complaint. International Audiotext Network, Inc. v. American Tel. Tel. Co., 62 F.3d 69, 72 (2d Cir. 1995) ("[W]hen a plaintiff chooses not to attach to complaint or incorporate by reference a [document] upon which it solely relies and which is integral to complaint, the court may take the document into consideration in deciding the defendant's motion to dismiss. . . ." (citations omitted)). A document is integral to a complaint, when a plaintiff relies heavily on its "terms and effect" to state a claim. Chambers v. Time Warner, Inc., 292 F. 3d 147, 153 (2d Cir. 2002).
Here, Plaintiff has neither attached nor incorporated by reference any such written agreement as the FEOMA or the AAA to the Complaint. Nor has Plaintiff averred anything to render these documents integral to the Complaint — Plaintiff has included no breach of contract claim in its Complaint, and Plaintiff has not referred expressly to any of these documents in its Complaint. The FEOMA, the AAA, and the PBAs are not "integral" to Plaintiff's claims.
What is more, Plaintiff alleges facts that sufficiently indicate each of the elements of money had and received and of unjust enrichment. (Compl. ¶¶ 153-160.) As to money had and received, Defendants allegedly received payment from Plaintiff in the form of fees (Compl. ¶ 154); Defendant benefitted from the money, and Defendants should not be permitted to keep money that they obtained through a fraudulent scheme. As to unjust enrichment, Defendants allegedly were enriched by, for example, the options they fabricated and subsequently exercised; the enrichment was at Allfirst's expense because Allfirst lost money when Defendants exercised those options; and Defendants should be required to return money they obtained through fraudulent means. Accordingly, Defendants' Motions to Dismiss these claims are DENIED.
H. Punitive Damages
Defendant BofA's final contention is that Plaintiff's demand for punitive damages should be stricken. (BofA's Br. at 33.) "[I]t is well settled that the determination whether to award punitive damages lies in the discretion of the trier of the facts." Pepe v. Maklansy, 67 F. Supp. 2d 186, 188 (S.D.N.Y. 1999) (quoting Collins v. Willcox Inc., 600 N.Y.S.2d 884, 887 (N.Y.Sup.Ct. 1992)). Punitive damages have "been awarded and upheld in cases involving intentional torts. . . ." Pepe, 67 F. Supp. 2d at 188 (quoting Laurie Marie M. v. Jeffrey T.M., 559 N.Y.S.2d 336, 340 (1990), aff'd, 571 N.Y.S.2d 907 (1991)). The Court believes that the determination of whether to award punitive damages should be reserved for the fact trier.
Accordingly, Defendant BofA's Motion to Strike Plaintiff's demand for punitive damages is DENIED.
III. CONCLUSION
Defendants' Motions to Dismiss are GRANTED IN PART and DENIED IN PART as follows:
(1) Defendants' Motions against Plaintiff's claims for fraudulent concealment and for aiding and abetting fraud are DENIED;
(2) Defendants' Motions against Plaintiff's claims for rescission, for money had and received, and for unjust enrichment are DENIED;
(3) Defendants' Motions against Plaintiff's claim for aiding and abetting breach of fiduciary duty are GRANTED;
(4) Defendant BofA's Motions against Plaintiff's demand for punitive damages is DENIED.
Defendants are directed to answer Plaintiff's remaining causes of action within twenty (2) days of the date of this Order.
SO ORDERED.