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concluding that the Second Circuit applies PSLRA standards for pleading securities fraud to claims for common law fraud
Summary of this case from Weisfelner v. Fund 1 (In re Lyondell Chem. Co.)Opinion
No. 05 CIV. 6748 (HB).
February 16, 2006
OPINION ORDER
Plaintiff Yelena Serova ("Serova") brought this action against defendants Philip H. Teplen ("Teplen"), and Michael and Barbara Eden ("the Edens") alleging: (i) legal malpractice (against Teplen only); (ii) breach of fiduciary duty (against Teplen only); (iii) violation of New York Judiciary Law § 487 (against Teplen only); (iv) disgorgement of legal fees (against Teplen only); (v) securities fraud under the Securities Exchange Act of 1934 Section 10(b), 15 U.S.C. Section 78j(b), and Rule 10b-5, 17 C.F.R. Section 240.10b-5; (vi) common law fraud; (vii) negligent misrepresentation; (viii) corporate waste and mismanagement; and (ix) violation of the Business Corporation Law of the State of New York and Shareholders Agreement (against the Edens only). This Court has jurisdiction over this action pursuant to 15 U.S.C. Section 78aa and 28 U.S.C. Section 1332(a)(2). Serova's claims arise from actions taken by Teplen as Serova's attorney, and by the Edens as members of the Board of Directors of a company in which Serova invested. All defendants now move to dismiss all but the first claim pursuant to 15 U.S.C. Section 78u-4(b) and Rules 12(b)(6), 9(b), and 23.1 of the Federal Rules of Civil Procedure. For the reasons set forth below, defendants' motion to dismiss is GRANTED.
I. BACKGROUND
The following facts are taken from the allegations of the amended complaint unless otherwise stated.
A. The Parties
Serova is a citizen and resident of the country of Russia. 09/29/2005 Amended Complaint ("Am. Compl.") ¶ 12. While a student at Touro College, New York, Serova sought to obtain permanent residency in the United States. Id. ¶ 16. Serova is a 30% shareholder in a company now known as Allarus Technology Management, Inc. ("Allarus"). Id. ¶ 13.
Teplen is a resident of the State of New York and an attorney practicing in New York who holds himself out as an expert in immigration matters. Id. ¶ 14, 16. While generally his conduct is less than exemplary, some of the alleged conflicts of interest are blatant and reprehensible. Nonetheless and without adequate knowledge of the facts, Serova not only retained Teplen to assist her in obtaining permanent resident status in the United States but to provide other legal services as well. Id. ¶ 16.
Michael Eden is the founder and chief executive officer of Allarus, a New York corporation formerly known as Rupert Technologies Group, Inc. ("Rupert"). Id. Prior to the events at issue, Barbara Eden, Michael Eden's wife, wholly owned the corporation's common stock. Id. The Edens are both members of the Board of Directors of Allarus. Id. ¶ 15.
B. Events Leading to the Litigation
In September 2001, Serova, a student at Touro College, contacted Teplen about obtaining permanent residency in the United States. Id. ¶ 16. Teplen advised Serova to apply for an EB-5 immigrant investor visa, which requires the petitioner to invest at least $500,000 in a United States business. Id. ¶ 17. Teplen advised Serova that the then United States Immigration and Naturalization Service ("INS") looked unfavorably on investments that merely met the minimum requirement and recommended that Serova invest over $1 million. Id. ¶ 18. Pursuant to a retainer agreement dated October 2, 2001, Serova retained Teplen to "assist in development for acquisition or establishment of business, negotiate transaction, draft purchase agreements and shareholder agreements" as well as to facilitate the visa application. Id. ¶ 19. Although the retainer agreement stated that Teplen did not guarantee any particular outcome, Teplen told Serova at the time the agreement was concluded and at all times thereafter until the visa application was denied that if she invested over $1 million, she was virtually certain to obtain an EB-5 visa. Id. ¶¶ 20, 29. Teplen also told Serova that he would find a suitable investment opportunity for her. Id. ¶ 21.
By early 2002, Teplen had introduced Serova to Michael Eden, Teplen's client and long-time friend, for the purpose of developing an investment opportunity. Id. ¶ 22. At that time and at all times thereafter, Teplen and Mr. Eden only disclosed that Mr. Eden was Teplen's "friend" and neither disclosed that Teplen had in the past represented the Edens or their company, Rupert. Id. Mr. Eden was then running Rupert, a small computer services business, which was renamed Allarus once the Serova investment was made. Id. Teplen discouraged Serova from investing in any ventures other than Rupert/Allarus. Id. ¶ 23.
Serova attended three or four meetings with Michael Eden regarding a possible investment in Allarus. Id. ¶ 24. At those meetings, Allarus was not represented by an attorney and Mr. Eden acted as an agent for his wife, Barbara Eden. Id. Teplen was present at each of those meetings as Serova's attorney but he failed to negotiate any of the terms of the investment on her behalf and, indeed, had private discussions with Mr. Eden regarding the investment. Id. ¶¶ 24, 25. Thereafter, Teplen acted as the sole attorney in the transaction and drafted all the closing papers. Id. ¶ 26. Serova was informed on numerous occasions that Teplen had no involvement with Allarus. Id.
Pursuant to an agreement dated June 28, 2002 among Serova, Allarus, and Barbara Eden (the "Investment Agreement"), Serova invested $1,162,000 in Allarus and received 30% of its stock. Id. ¶ 27. At all relevant times Mr. Eden acted as the representative officer of Allarus and agent for his wife. Id. Under the Investment Agreement, Allarus used $240,000 of Serova's funds to redeem thirty of the existing hundred shares from Mrs. Eden.Id. ¶ 27. The purchase price paid for the redemption of Mrs. Eden's stock was deposited in an account jointly owned by the Edens. Id. There was also a separate Shareholders Agreement dated June 28, 2002 between Serova and Mrs. Eden. Id. ¶ 28; Shareholders Agreement, Ex. D to 10/14/2005 Affidavit of Defendant Philip H. Teplen ("Teplen Aff."). Serova alleges that the Shareholders Agreement was one-sided in favor of the Edens/Allarus and that the terms were never the subject of a negotiation. Am. Compl. ¶ 40. The Shareholders Agreement identifies Teplen as an officer of the company. Shareholders Agreement, Ex. D to Teplen Aff., at 3.
On August 10, 2003, Serova's EB-5 visa application was denied. Am. Compl. ¶ 30; Department of Homeland Security Notice of Decision ("Notice of Decision"), Ex. C to Teplen Aff. After Serova's visa was denied, Teplen advised Serova to refile her application. Am. Compl. ¶ 31. Serova declined to do so because she had consulted another attorney and learned that less than 15% of EB-5 visas are actually granted. Id.; see 10/14/2005 Mem. of Law of Defendant Philip H. Teplen in Supp. of Mot. to Dismiss ("Teplen Mem.") at 4, n. 3. Had Serova known that fact from the outset, she would not have invested in Allarus. Am. Compl. ¶ 31. Teplen did not advise Serova about many of the requirements for obtaining an EB-5 visa until after she had invested in Allarus.Id. ¶ 32. One example was the requirement that Serova file tax returns from the previous five years. Id. ¶ 35. Teplen knew that Serova's parents would fund the investment, however, and that as they are Russian citizens, they would be unlikely to have the required tax documentation. Id. Had Serova known about the tax return requirement, she would not have invested in Allarus. Id. ¶ 32.
Neither Teplen nor the Edens disclosed to Serova that Teplen became an executive vice president of Allarus at about the time Teplen submitted Serova's EB-5 visa application to the INS. Id. ¶ 37. Nor did Teplen or the Edens disclose the fact that within days after her investment, Teplen and Allarus jointly leased space in the Empire State Building. Id. ¶ 38. Serova alleges that Teplen and the Edens had to have negotiated the lease prior to her investment but that they did not disclose this fact to her.Id. ¶ 39. Pursuant to the lease, the annual rent for the space was $195,300 for the first two years, which was approximately half Allarus' gross annual sales in the preceding year. Id.
Teplen represented Michael Eden, Barbara Eden, or their business before, during, and after Teplen represented Serova.Id. ¶ 41. Serova maintains that Teplen's independence in representing her interests was compromised as a result of his relationship with the Edens and, consequently, Serova's investment was made on "legal terms that were decidedly one-sided in favor of Allarus." Id. ¶¶ 41-43. She alleges that Teplen had a motive to commit fraud and other misdeeds alleged in the complaint for "enhanced legal fees from a complicated visa application" and representation in the subject transaction, and for "unwarranted and excessive compensation" from the investment.Id. ¶¶ 51, 53. She further alleges that the Edens had a motive to commit fraud for "immediate financial gain from the sale of Mrs. Edenl's [sic] stock, the capitalization of the company which had no operating capital and minimal profits from operations," and for excessive compensation from the investment. Id. ¶¶ 51, 53.
Serova claims that the defendants squandered her investment within eighteen months. Id. ¶ 56. The unaudited financial statements of Allarus show that as of December 31, 2002, a mere six months after Serova's investment, Allarus had shareholders' equity of only $517,443. Id. ¶ 54. This diminution in shareholder equity resulted from Allarus's net loss of $406,283 for the period from June 28 through December 31, 2002. Id. ¶ 54. For the year ended December 31, 2003, Allarus lost $426,584 and had only $36,223 on hand. Id. ¶ 55. Serova alleges that her losses were proximately and substantially caused by: (i) the unwarranted and excessive compensation given to the defendants after her investment was made; (ii) Allarus' financial obligation under the undisclosed joint lease; and (iii) the reckless financial projections made or endorsed by the defendants that were not achievable in light of all the circumstances, including the undisclosed lease and planned excessive compensation. Id. ¶ 53.
Although Serova was on the Board of Directors and only the Board could set executive compensation, no board meetings were convened despite her repeated demands and, therefore, no board action was taken to set the compensation received by the Edens or Teplen. Id. ¶ 57. Serova alleges that she has suffered and will continue to suffer substantial monetary damages including, but not limited to, the loss of her investment in Allarus. Id. ¶ 77.
II. STANDARD OF REVIEW
When ruling on a motion to dismiss pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, the court must construe all factual allegations in the complaint in favor of the non-moving party. See Krimstock v. Kelly, 306 F.3d 40, 47-48 (2d Cir. 2002). The court may consider the following materials in deciding a Rule 12(b)(6) motion: "(1) facts alleged in the complaint and documents attached to it or incorporated in it by reference, (2) documents `integral' to the complaint and relied upon in it, even if not attached or incorporated by reference, (3) documents or information contained in defendant's motion papers if plaintiff has knowledge or possession of the material and relied on it in framing the complaint, (4) public disclosure documents required by law to be, and that have been, filed with the Securities and Exchange Commission, and (5) facts of which judicial notice may properly be taken under Rule 201 of the Federal Rules of Evidence." In re Merrill Lynch Co., Inc., 273 F. Supp. 2d 351, 356-57 (S.D.N.Y. 2003). A motion to dismiss should not be granted "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Shakur v. Selsky, 391 F.3d 106, 112 (2d Cir. 2004) (quoting Conley v. Gibson, 355 U.S. 41, 45-46 (1957)).
A document is "integral" to the complaint when the complaint relies heavily upon its terms and effects. See Chambers v. Time Warner, Inc., 282 F.3d 147, 153 (2d Cir. 2002).
Serova objects that the defendants' Rule 12(b)(6) motion directs the court to documents and facts that fall outside this enumerated list when there has been little discovery in the case and no depositions taken. These facts and documents include sublease agreements between the defendants and other entities, and a pre-investment meeting between the defendants, Serova's father, and his investment adviser from Credit Suisse. See Pl.'s Mem. of Law in Opp'n to Mot. to Dismiss ("Pl.'s Mem.") at 2-5. I have not considered these materials in reaching my decision.
III. DISCUSSION
A. Duplicative Claims
Teplen argues that the claims for breach of fiduciary duty, disgorgement of fees, securities fraud, common law fraud, and negligent misrepresentation should be dismissed as duplicative of the claim for legal malpractice.
In New York, a claim for breach of fiduciary duty that is "premised on the same facts and seek[s] the identical relief" sought in a malpractice cause of action is "redundant" and should be dismissed. Weil, Gotshal Manges, LLP v. Fashion Boutique of Short Hills, Inc., 780 N.Y.S.2d 593, 596 (N.Y.App.Div. 2004). Similarly, a claim for disgorgement of legal fees that is predicated on the same facts as a malpractice claim and seeks the same damages must be dismissed as duplicative. See Mecca v. Shang, 685 N.Y.S.2d 458, 460 (N.Y.App.Div. 1999). Claims for common law fraud and negligent misrepresentation that are based on the same factual allegations as a legal malpractice claim and do not allege distinct damages are also duplicative of that cause of action. See id.
Here, Serova's claims for breach of fiduciary duty, disgorgement of fees, common law fraud, and negligent misrepresentation against Teplen are all based on the same operative facts as her malpractice claim: namely, that by omitting to disclose his prior representation of the Edens and ongoing business relationship with them, Teplen materially misrepresented his interest in Serova's investment and failed to exercise the standard of care expected of attorneys engaged to provide similar services. Moreover, the damages Serova seeks for these causes of action — at least $1.25 million consisting of legal fees paid to Teplen and the loss of her investment in Allarus, as well as punitive damages — are the same as for the malpractice claim. See Am. Compl. Prayer for Relief. Accordingly, the claims for breach of fiduciary duty, disgorgement of fees, common law fraud, and negligent misrepresentation are dismissed as duplicative of the legal malpractice claim.
Serova contends that these claims are not duplicative of the malpractice claim because she has alleged that Teplen conspired with the Edens and benefited from the fraud all three perpetrated. See Pl.'s Mem. at 7. Serova fails to cite any authority that is on point. Moreover, because Serova alleges that the Edens failed to disclose the same information as Teplen — that Teplen had previously represented the Edens and continued to have a business relationship with them — imputing the Edens' alleged misrepresentations to Teplen would not change the fact that the breach of fiduciary duty, disgorgement, common law fraud, and negligent misrepresentation claims arise from the same factual allegations as the malpractice claim.
Teplen admits, however, that there are no prior decisions that hold that a securities fraud claim may be dismissed as duplicative of a malpractice claim. See Teplen Mem. at 9. Given the dearth of authority, and that the securities fraud claim is dismissed on other grounds, this Court declines to be the first to do so. See Section III.C infra. B. Judiciary Law Section 487
Teplen asserts that Serova's claim pursuant to New York Judiciary Law Section 487 should be dismissed as inapplicable to this action. That statute provides, in pertinent part, that an attorney who "[i]s guilty of any deceit or collusion, or consents to any deceit or collusion, with intent to deceive the court or any party" is guilty of a misdemeanor and is liable to the injured party for treble damages in a civil action. N.Y. Judiciary Law § 487 (McKinney 2005). The alleged deceit, if not directed at a court, "must occur during the course of a `pending judicial proceeding.'" Costalas v. Amalfitano, 760 N.Y.S.2d 422, 424 (N.Y.App.Div. 2003). Teplen argues that because he did not represent Serova in any litigation or before any court, Serova has no cause of action against him under Section 487.
Serova responds that Section 487 is not limited to misconduct during court proceedings, but applies to any deceitful conduct engaged in by an attorney in his or her role as an attorney. In support of this contention, Serova cites to N. Trust Bank of Florida/Sarasota, N.A. v. Coleman, 632 F. Supp. 648 (S.D.N.Y. 1986). While the court stated that "Section 487 is aimed at actions by an attorney in his or her role as an attorney," read in context it would appear that the court was simply emphasizing that a wrongdoer may not be held liable under Section 487 simply because he is an attorney. Id. at 650. There is no indication that the court intended to extend the reach of Section 487 to action taken outside of judicial proceedings. Indeed, there, the misconduct at issue involved the defendant's delay in bringing suit. See id. Serova also cites to Hyams v. Mehlman, 540 N.Y.S.2d 191 (N.Y.App.Div. 1989), in which the court allowed the defendant to assert a counterclaim under Section 487 for actions the plaintiff attorney took when he negotiated an escrow arrangement. Id. at 191. The escrow arrangement at issue, however, was related to an action to enforce a money judgment.See id. Further, the same court in a later case affirmed that Section 487 "only applies to wrongful conduct by an attorney in a suit actually pending." Henry v. Brenner, 706 N.Y.S.2d 465, 466 (N.Y.App.Div. 2000).
Here, Teplen's alleged deceit occurred in connection with Serova's visa application and investment transaction, neither of which qualifies as a pending judicial proceeding. Consequently, Serova may not rely on Section 487 to assert a cause of action against Teplen for treble damages.
Serova asserts that Teplen's misconduct — presumably in relation to the visa application — occurred in connection with a quasi-judicial proceeding before the "BCIS." See Pl.'s Mem. at 12. Serova has not, however, alleged this fact in the Amended Complaint. Further, Serova admits that she has found no case construing whether a quasi-judicial proceeding qualifies under Section 487.
C. Securities Fraud
All defendants contend that Serova's claim of securities fraud under Rule 10b-5 of the Securities Exchange Act of 1934 should be dismissed pursuant to Rules 12(b)(6) and 9(b) of the Federal Rules of Civil Procedure and the Private Securities Litigation Reform Act of 1995 ("PSLRA"), 15 U.S.C. Section 78u-4(b), because Serova has failed to state a claim upon which relief may be granted and has failed to plead fraud with particularity. In addition, the Edens assert that the securities fraud claim against them is time-barred.
To state a cause of action under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, "a plaintiff must plead that in connection with the purchase or sale of securities, the defendant, acting with scienter, made a false material representation or omitted to disclose material information and that [the] plaintiff's reliance on the defendant's action caused [the plaintiff] injury." Stevelman v. Alias Research Inc., 174 F.3d 79, 83 (2d Cir. 1999). Federal Rule of Civil Procedure 9(b) requires that allegations of fraud be pleaded with particularity.See Eternity Global Master Fund Ltd. v. Morgan Guar. Trust Co. of New York, 375 F.3d 168, 187 (2d Cir. 2004). This requirement means that the complaint must "(1) detail the statements (or omissions) that the plaintiff contends are fraudulent, (2) identify the speaker, (3) state where and when the statements (or omissions) were made, and (4) explain why the statements (or omissions) are fraudulent. Id. (quoting Harsco Corp. v. Segui, 91 F.3d 337, 347 (2d Cir. 1996)). The PSLRA codified the heightened pleading requirements of Rule 9(b) insofar as it "requires particularity in the pleading of the requisite mental state." Dresner v. Utility.com, Inc., 371 F. Supp. 2d 476, 489 (S.D.N.Y. 2005) (citing Novak v. Kasaks, 216 F.3d 300, 310 (2d Cir. 2000)).
The amended complaint alleges the following misrepresentations and omissions by the defendants in relation to Serova's purchase of a 30% share of Allarus: (i) Teplen misrepresented to Serova her chances of obtaining an EB-5 visa if she invested in Allarus; (ii) Teplen and the Edens failed to inform Serova that they were planning to jointly lease space after she made her investment; (iii) Teplen and the Edens failed to disclose their past and ongoing business relationship; and (iv) Teplen and the Edens failed to disclose that they planned to derive "excessive" compensation from Allarus.
As to the first alleged misrepresentation, Serova admits in the amended complaint that the retainer agreement disclaims any guarantee of a successful outcome, and this Court gives greater credence to that document than to Serova's contrary allegations.See In re Aegon N.V. Sec. Litig., No. 03 Civ. 0603, 2004 WL 1415973, at *5 (S.D.N.Y. June 23, 2004) ("The truth of factual allegations that are contradicted by documents properly considered on a motion to dismiss need not be accepted."). Further, Teplen's assurances as to the visa are at best an expression of opinion, and to state a claim for misrepresentation of an opinion under the securities laws, the plaintiff must "allege with particularity that defendants did not sincerely believe the opinion they purported to hold." Podany v. Robertson Stephens, Inc., 318 F. Supp. 2d 146, 154 (S.D.N.Y. 2004). It is insufficient to allege that defendants could have reached a different opinion based on available information, or that the defendant's opinion was unreasonable. See id. Here, Serova fails to allege — let alone allege with particularity — that Teplen did not sincerely believe that she was virtually certain to obtain an EB-5 visa if she invested over $1 million in a United States enterprise. Therefore, Serova's securities fraud claim cannot rest on Teplen's alleged misrepresentations to Serova about her chances of obtaining a visa.
Serova's securities fraud claim also fails for lack of particularity in alleging why the defendants' failures to disclose information were fraudulent. For instance, Serova does not explain how the defendants' failure to disclose their plans to enter a joint lease agreement was materially misleading in connection with her investment in Allarus. At most, the allegations demonstrate that Teplen and the Edens had a close relationship such that they agreed to lease office space together. Serova already knew, however, that Teplen and the Edens were friends, and the Shareholders Agreement disclosed that Teplen was to be an officer of Allarus. Similarly, Serova fails to explain how the defendants' failure to disclose that Teplen had previously represented the Edens or Rupert constituted a false material misrepresentation or omission. Serova alleges no facts that indicate that Teplen's prior representation of the Edens or Rupert gave rise to a conflict of interest in his representation of Serova in the investment transaction. See Kaufman v. Tudor Realty Servs. Corp., 772 N.Y.S.2d 265, 266 (N.Y.App.Div. 2004) (holding that mere fact of a prior representation without allegation that it was adverse to later representation does not give rise to conflict of interest). Finally, Serova fails to explain why the compensation that Teplen and the Edens were to derive from Allarus was "excessive."
Moreover, Serova fails to allege scienter with particularity as to the alleged failures to disclose. In this Circuit, a plaintiff may show that a defendant acted with the required state of mind in one of two ways: (i) "by alleging facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness," or (ii) "by alleging facts to show that defendants had both motive and opportunity to commit fraud." Stevelman, 174 F.3d at 84. Serova conclusorily alleges that the defendants acted "knowingly" or "recklessly" in omitting to inform her of the joint lease, prior representation, or excessive compensation. She fails to allege facts, however, that would give rise to a strong inference that Teplen or the Edens acted consciously or recklessly. For instance, Serova fails to explain why Teplen would reveal that the Edens were his friends, yet intentionally fail to tell her that he had previously represented them or that they had arranged to lease space together.
As to motive and opportunity, Serova alleges that Teplen stood to gain enhanced legal fees from a complicated visa application and representation of Serova in the investment transaction, and that the Edens would gain from the sale of Barbara Eden's stock in Rupert and capitalization of a company that had no operating capital and minimal profits from operations. Serova further alleges that all the defendants would gain by their joint lease of space and ability to derive or increase their executive compensation from Allarus. Serova fails to explain why Teplen's legal fees were "enhanced." In any event, this Court will not assume that a professional will intentionally commit fraud and risk his or her reputation simply to earn a fee. See Whalen v. Hibernia Foods PLC, No. 04 Civ. 3182, 2005 WL 1799370, at *2 (S.D.N.Y. Aug. 1, 2005) (Baer, J.). As to the Edens' alleged prospective gains, Serova fails to allege that the stock she bought from Barbara Eden was worth less than the amount she paid for it. Serova alleges only that Rupert had "virtually no working capital or profit" at the time she made her investment, but fails to specify what that minimal capital or profit was. Likewise, Serova fails to allege what benefits Teplen and the Edens would gain from the joint lease that Teplen could not have achieved by leasing an alternative space on his own, or that would not also benefit Allarus. Finally, Serova fails to allege why the prospect of deriving or increasing executive compensation from Allarus would have motivated the defendants to defraud her. This Circuit has declined to predicate allegations of fraud on incentive compensation alone because doing so would subject virtually all corporate executives to charges of fraud. See Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1130 (2d Cir. 1994).
Lastly, Serova fails to allege with particularity that the defendants' acts and omissions caused her injury. To satisfy the causation requirement in a securities fraud claim, the plaintiff must allege both that "the fraud caused the plaintiff to engage in the transaction and that it also caused the harm actually suffered." Suez Equity Investors, L.P. v. Toronto-Dominion Bank, 250 F.3d 87, 96 (2d Cir. 2001). The first concept of causation, transaction causation, refers to the plaintiff's reliance on the defendant's misrepresentations or omissions; "that is, but for such conduct by the defendant, the plaintiff would not have acted to his detriment." Id. The second concept of causation, loss causation, requires the plaintiff to prove that "the damages it suffered were a foreseeable consequence of the misrepresentation." Id. To establish loss causation, the plaintiff must allege that "the misstatement or omission concealed something from the market that, when disclosed, negatively affected the value of the security." Lentell v. Merrill Lynch Co. Inc., 396 F.3d 161, 173 (2d Cir. 2005). In other words, the loss must be "caused by the materialization of the concealed risk." Id.
Here, the amended complaint fails to allege loss causation. Serova nowhere alleges how the concealment of the defendants' compensation and joint lease, or misrepresentation of Allarus' financial projections caused her loss. She maintains merely that the annual rent under the lease was about 20% of Allarus' capital after her investment and that Teplen's concealed conflict of interest removed safeguards that could have been placed in the Investment Agreement. See Pl.'s Mem. at 27. Leaving aside the fact that these assertions were not made in the amended complaint, they fail to establish how the concealed information, when disclosed, had a detrimental effect on the value of Serova's investment.
Serova's securities fraud claim is dismissed for failure to adequately allege scienter, loss causation, and how the misrepresentations and omissions at issue were fraudulent. D. Common Law Fraud
Because I dismiss the claim against the Edens on these grounds, I do not reach their argument that the claim is time barred.
The elements of fraud under New York law are "essentially the same as those for a claim of securities fraud under Section 10(b) and Rule 10b-5." Nairobi Holdings Ltd. v. Brown Bros. Harriman Co., No. 02 Civ. 1230, 2004 WL 1124660, at *2 (S.D.N.Y. May 20, 2004). Further, a plaintiff must meet the heightened pleading requirements of Rule 9(b) of the Federal Rules of Civil Procedure when pleading common law fraud. See id. This Circuit applies the same standard to pleading fraudulent intent under common law fraud as to pleading scienter in securities fraud. See id. (stating standard for alleging fraudulent intent that mirrors PSLRA standard for pleading scienter). Accordingly, my conclusion that Serova has failed to meet the heightened pleading requirements of Rule 9(b) in pleading securities fraud is equally fatal to her claim of common law fraud. The defendants' motion to dismiss this claim is granted. E. Negligent Misrepresentation
I have also dismissed the claim of common law fraud against Teplen on the ground that it is duplicative of Serova's legal malpractice claim against him. See Section III.A supra.
I have already dismissed the claim of negligent misrepresentation against Teplen as being duplicative of Serova's legal malpractice claim. The Edens argue that this claim should also be dismissed against them because, among other reasons, the Edens did not owe a duty to Serova that arose from a special relationship between them.
To make out a claim for negligent misrepresentation under New York law, a plaintiff must establish that "the defendant had a duty to use reasonable care to convey correct information due to the existence of a `special relationship,' that the information provided was incorrect or false, and that the plaintiff reasonably relied upon the information." Citibank, N.A. v. Itochu Int'l Inc., No. 01 Civ. 6007, 2003 WL 1797848, at *5 (S.D.N.Y. Apr. 4, 2003). Liability for negligent misrepresentation is generally "imposed only on those persons who possess unique or specialized expertise," such as professionals like lawyers and engineers. Kimmel v. Schaefer, 675 N.E.2d 450, 454 (N.Y. 1996). When the person making representations is not a professional, the following factors should be weighed in determining whether a special relationship exists: (i) "whether the person making the representation held or appeared to hold unique or special expertise;" (ii) "whether a special relationship of trust or confidence existed between the parties;" and (iii) "whether the speaker was aware of the use to which the information would be put and supplied it for that purpose." Id.
In Kimmel, the court affirmed the finding of a special relationship because the defendant possessed expertise in his business by virtue of his position as chairman of the board and chief financial officer. See id. at 454. Moreover, the defendant had sought to induce the plaintiffs to invest in his project, had represented that his financial projections were updated and well-researched, and expected the plaintiffs to rely on his projections in making their investment decisions. See id. at 454-55. Here, while it is arguable that the Edens held special expertise in the operations of their business and that they were aware that information they gave to Serova would factor in her decision whether to invest in Rupert/Allarus, there is no basis to conclude that a relationship of trust or confidence existed between Serova and the Edens. The amended complaint does not allege that the Edens sought to induce Serova to invest in their company, but rather that Teplen recommended the investment to her. Moreover, there is no allegation that the Edens represented their financial projections for Allarus as being sound and reliable. Indeed, Serova does not allege that the Edens made any representations about their financial projections to her at all.
Serova argues that a special relationship nonetheless existed here because "the relationship of the parties . . . [is] such that in morals and good conscience the one has the right to rely upon the other for information." Id. at 454. She contends that the morals of the market imposed a duty of full disclosure on the Edens because she was an unsophisticated college student and they were introduced to her as her attorney's friends. The Second Circuit in Dallas Aerospace, Inc. v. CIS Air Corp., however, rejected the argument that New York had adopted a new "morals of the marketplace" test for finding a special relationship. See id., 352 F.3d 775, 788 (2d Cir. 2003).
Because I find that no special relationship existed between Serova and the Edens, the negligent misrepresentation claim against them must be dismissed.
F. Derivative Claims
The defendants contend that Serova's claims for corporate waste and mismanagement and for violations of the New York Business Corporation Law and the Shareholders Agreement must be dismissed because they can only be brought derivatively and Serova has failed to join Allarus as a party.
The Edens also assert that the claim for corporate waste and mismanagement is brought both individually and derivatively and that under New York law, the mingling of derivative and individual claims requires dismissal of the causes of action so affected. I can find no allegation in the amended complaint, however, that purports to bring this claim both individually and derivatively.
Allegations of corporate waste and mismanagement "plead a wrong to the corporation only, for which a shareholder may sue derivatively but not individually." Abrams v. Donati, 489 N.E.2d 751, 752 (N.Y. 1985). "[A] shareholder derivative action brought pursuant to Federal Rule of Civil Procedure 23.1 cannot proceed in the absence of the corporation whose rights are being asserted." Tuscano v. Tuscano, 403 F. Supp. 2d 214, 225 (E.D.N.Y. 2005) (citing Ross v. Bernhard, 396 U.S. 531, 538 (1970) and collecting cases). Here, Allarus has not been joined in the action. Therefore, the derivative claims are dismissed under Federal Rule of Civil Procedure 12(b)(7) for failure to join a necessary party.
G. Punitive Damages
Serova seeks punitive damages with respect to her claims for legal malpractice, breach of fiduciary duty, securities fraud, common law fraud, and negligent misrepresentation. The punitive damage issue is moot as to all claims I have dismissed. It is premature to dismiss Serova's demand for punitive damages in relation to the malpractice claim as the parties have not discussed the merits of that claim in the papers submitted for consideration on this motion.
IV. CONCLUSION
The defendants' motion to dismiss Serova's claims for breach of fiduciary duty, violation of Judiciary Law Section 487, disgorgement of fees, securities fraud, common law fraud, negligent misrepresentation, corporate waste and mismanagement, violation of New York Business Corporation Law and violation of the Shareholders Agreement is granted. Accordingly, all claims against the Edens are dismissed and only the malpractice claim against Teplen survives. This discussion is sufficiently detailed not only to express the applicable law but to provide a basis for the plaintiff, if she chooses, to replead. This must be done within 20 days from the date hereof and in no event will it delay the October 2006 trial of the malpractice claim against Teplen. Fully briefed dispositive motions, if any, are due on or before June 15, 2006. The Clerk of the Court is instructed to close this motion and remove it from my docket.IT IS SO ORDERED.