455 F. App'x 92
2d Cir.2012Background
- Plaintiffs Annie and Edward Berman allege a wide fraudulent scheme by Derivium Capital involving a 90% loan program to defer taxes.
- Derivium allegedly sold plaintiffs’ securities at the outset and funded a sham loan with 90% of proceeds, funneling 10% to Cathcart’s ventures.
- Plaintiffs claim Morgan Keegan aided and abetted fraud, conversion, and fiduciary breach by Derivium (a broker-dealer).
- District court dismissed the complaint for failure to state a claim; later denied leave to amend; plaintiffs appealed.
- Court reviews de novo Rule 12(b)(6) dismissal and Rule 9(b) heightened pleading for fraud-based claims.
- Court holds that plaintiffs failed to plead Morgan Keegan’s actual knowledge or substantial assistance; affirming dismissal.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Did plaintiffs plead facts showing Morgan Keegan knew of the fraud? | Berman asserts knowledge through Derivium documents and monitoring obligations. | Morgan Keegan did not have actual knowledge; documents show marketing, not fraud; no strong inference. | No actual knowledge pleaded; dismissal affirmed. |
| Does Know-Your-Customer monitoring create strong inference of fraud knowledge? | KYC rules imply close monitoring would reveal fraud. | Even if monitored, inference is insufficient for actual knowledge; would imply liability in all cases. | Insufficient to show actual knowledge; affirmed. |
| Whether Derivium’s sale of collateral within/without the loan term supports knowledge or substantial assistance? | Sales timing should indicate awareness of fraud. | Timing of sales not tied to Derivium’s fraud information in the Complaint. | Lack of inferable awareness; insufficient for substantial assistance. |
| Does the release agreement between Morgan Keegan and Derivium indicate knowledge of fraud? | Release implies awareness of Derivium’s wrongdoing. | Release merely waives certain claims and is not indicative of fraud knowledge. | Release not evidence of actual knowledge; hence no substantial assistance. |
| Should the case be dismissed for failure to state a claim regardless of knowledge findings? | Rule 9(b) pleading should be adequate for fraud-based aiding and abetting. | Even assuming Rule 9(b) sufficiency, claims fail for lack of substantial assistance. | Dismissal affirmed on failure to state a claim. |
Key Cases Cited
- Acito v. IMCERA Group. Inc., 47 F.3d 47 (2d Cir. 1995) (strong inference of fraudulent intent required)
- Chill v. Gen. Elec. Co., 101 F.3d 263 (2d Cir. 1996) (motive/opportunity or strong circumstantial evidence standard)
- Lerner v. Fleet Bank, N.A., 459 F.3d 273 (2d Cir. 2006) (Rule 9(b) pleading requirements apply to aiding and abetting fraud)
- S. E. C. v. Lee, 720 F. Supp. 2d 305 (S.D.N.Y. 2010) (aiding and abetting fraud requires strong inference)
- S & K Sales Co. v. Nike, Inc., 816 F.2d 843 (2d Cir. 1987) (strong inference standard for aiding and abetting fraud)
- UniCredito Italiano SpA v. JPMorgan Chase Bank, 288 F. Supp. 2d 485 (S.D.N.Y. 2003) (substantial assistance standard in fraud case)
- Baker v. Dorfman, 239 F.3d 415 (2d Cir. 2000) (abuse of discretion standard for denial of leave to amend)