683 F. App'x 497
6th Cir.2017Background
- RQSI (investment fund) entered a Trading Advisory Agreement (TAA) with Aperçu (advisor) in Jan 2015; Aperçu later assumed discretionary trading control. Aperçu principal: Alvin Wilkinson.
- The TAA limited Aperçu liability to losses caused by gross negligence or willful misconduct and set an initial margin limit (IMR) of $1,000,000 with an obligation to reduce margin above that level.
- Trading on margin and large options spreads led to rising VaR and IMR through July–August 2015; portfolio positions grew from ~6–8k spreads to ~25k spreads.
- A market drop in late August 2015 generated a $42.6M VaR-based margin call from Société Générale; RQSI met the call, revoked Aperçu’s power of attorney, began liquidating, and sued.
- RQSI pleaded gross negligence, fraudulent misrepresentation and omission, and breach of contract; district court dismissed all claims under Rule 12(b)(6). Court of Appeals reverses in part, affirms in part, and remands.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Gross negligence (extra-contractual duty / malice) | Aperçu ignored RQSI instructions, increased risky positions despite knowledge — implies malice/willfulness; TAA liability cap should not bar claim | Fee arrangement (20% of gains, no downside) shows no motive for malice; dismissal proper | Reversed: Allegations plausibly plead implied malice given discretionary control and asymmetric risk; gross-negligence claim should survive motion to dismiss |
| Fraudulent misrep — statements denying increased risk | Wilkinson said increased margin was temporary/only due to volatility; RQSI: statement was false about objective risk | Defendants: statements were opinion about relative risk, nonspecific, and not actionable | Affirmed dismissal: statements are opinion-style and not sufficiently definite factual misrepresentations |
| Fraudulent misrep — ‘‘embedded tail hedge’’ reports | RQSI: Wilkinson relayed internal reports claiming a tail hedge when portfolio lacked one; outside reports show internal reports could not be true | Defendants: relaying internal reports is nonactionable reporting of unsound analysis | Reversed: Allegation that Wilkinson knew reports were false yet relayed them plausibly pleads actionable misrepresentation under falsified-fact exception |
| Fraudulent misrep — ‘‘ample liquidity’’ | RQSI: repeated assurances of ample liquidity were false; illiquidity made gains unrealizable | Defendants: terms like "ample" and "efficiently" are vague opinions, not objective facts | Affirmed dismissal: claim is conclusory and concerns degrees (opinion), not an objectively false factual statement |
| Fraudulent omission | RQSI: failed to disclose increased risk, oversized positions, and market manipulation / illiquidity | Defendants: omitted matters are opinions or too vague; some overlap with breach/gross negligence | Mostly affirmed dismissal: omission about unverifiable risk and alleged market manipulation too conclusory; oversized-position omission insufficiently concrete to be actionable as omission (may support gross negligence) |
| Breach of contract — IMR limit, investment objectives, notification | RQSI: Aperçu breached explicit TAA obligations (kept IMR > $1M, ignored investment instructions, changed strategy without notice) | Aperçu: IMR cap not a hard limit; RQSI waived remedies; some obligations permissive | Reversed in part: complaint plausibly pleads breaches of IMR limit, failure to pursue RQSI objectives, and failure to notify; these claims survive 12(b)(6) and may support liability if gross negligence/willful misconduct proven |
| Damages & exculpatory waivers | RQSI: seeks trading losses, VaR-call-related losses, liquidation costs, lost opportunity, market-impact damages | Aperçu: §2 waiver (custodian/margin payments) precludes margin-account-related damages; §8 limits liability only to gross negligence/willful misconduct | Mixed: Court held §2 (maintenance of assets/margin payments) is the specific waiver that controls over general §8; district court must determine on remand which alleged damages are barred versus recoverable (loss of invested funds, certain liquidation costs, and other non-margin damages can be recovered if tied to gross negligence) |
Key Cases Cited
- Agema v. City of Allegan, 826 F.3d 326 (6th Cir. 2016) (standard of review for Rule 12(b)(6))
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) (plausibility pleading standard)
- Flegles, Inc. v. TruServ Corp., 289 S.W.3d 544 (Ky. 2009) (elements and limits of fraudulent misrepresentation; opinion vs. falsified-fact exception)
- SEC v. Blavin, 760 F.2d 706 (6th Cir. 1985) (fiduciary duty and obligations of investment advisors)
- Republic Bank & Trust Co. v. Bear Stearns & Co., 683 F.3d 239 (6th Cir. 2012) (Rule 9(b) and fraud pleading requirements)
- Phelps v. Louisville Water Co., 103 S.W.3d 46 (Ky. 2003) (gross negligence definition under Kentucky law)
- Cumberland Valley Contractors, Inc. v. Bell Cty. Coal Corp., 238 S.W.3d 644 (Ky. 2007) (narrow construction of exculpatory clauses and clarity required to waive liability)