*670 MEMORANDUM ORDER
On August 27, 2008, defendants Biosafe Laboratories, Inc., Biosafe Medical Technologies, Inc. (collectively, “Biosafe”), Labl23, Inc. (“Labl23”), Henry A. Warner, and Robert Trumpy answered the Amended Complaint in the above-captioned action, and filed two counterclaims alleging that plaintiff Barron Partners, LP (“Barron”) (1) fraudulently induced Labl23 to execute a Stock Purchase Agreement (“SPA”) by failing to disclose its managing partner’s prior criminal record and related prior misconduct, or (2) at a minimum, engaged in negligent misrepresentation by failing to disclose same. Barron now moves, pursuant to Fed. R.Civ.P. 12(b)(6) and 9(b), to dismiss defendants’ fraudulent inducement and negligent misrepresentation counterclaims.
According to defendants’ pleadings, Bio-safe’s CEO Henry Warner and Barron’s CEO Andrew Worden began in May 2006 discussing a potential business deal pursuant to which Barron would invest in a new entity, Labl23. Defendants’ First Amended Answer, Affirmative Defenses and Counterclaims (“Answer”) ¶¶ 239-40, 242. Worden insisted that Labl23 be formed as a public company, but Warner responded that he had no prior experience in creating or managing public companies. Id. ¶¶ 242-43. In response, Worden assured Warner that Barron, a private investment fund, was an “expert” in taking companies public and would assist defendants in the creation of a new publicly traded company. Id. ¶¶ 244, 279-80. Thereafter, in a May 11, 2006 e-mail, Worden referred Warner to Barron’s website, which noted that Barron “assists and invests in private companies that commit to immediately go public.” Id. ¶¶ 245, 247. The website also stated that Barron helps companies go public “by introducing them to proven professionals including lawyers and accountants to navigate through the going public process cost effectively and painlessly,” id., and that Worden had “over 20 years of experience founding, managing, planning, analyzing, and investing with public companies.” Id. ¶ 248.
Defendants allege that, based on Barron’s claimed expertise, defendants relied on Barron to assist Labl23 in going public and to identify experts to assist in the process, including the law firm Gusov Of-sink, LLC and the accounting firm Mar-cum & Kliegman, LLP. Id. ¶¶ 254-58, 280-86. Barron did not tell Warner, and Barron’s website did not disclose, however, that (1) Worden engaged in a free-riding trading scheme in 1989; (2) Worden entered into a consent decree with the SEC in 1992 because of that scheme; and (3) Worden pleaded guilty in 1995 to one count of wire fraud relating to that scheme. Id. ¶¶ 249-53; Ex. 3 at 2, 7; Ex. 4 at 1. Defendants contend that they did not learn of Worden’s criminal record until after Barron commenced this lawsuit, id. ¶ 253, and that they would not have executed the SPA if they had known of Worden’s criminal history. Id. ¶¶273, 275. Although, Barron, as a result of entering into the SPA, invested $2 million in Labl23, nevertheless defendants contend that, because of the alleged fraudulent inducement and/or negligent misrepresentation, defendants incurred substantial damages, in excess of $1 million, including the cost of incorporating Labl23 and the cost of hiring and paying Labl23 employees. Id. ¶¶ 276, 291, 293.
Turning, first, to defendants’ claim for fraudulent inducement, “[a]t the vely threshold” defendants must allege a misrepresentation or material omission on which they relied that induced defendants to enter into an agreement.
New York Univ. v. Cont’l Ins. Co.,
Ordinarily, however, no such relationship exists between the sellers and buyers of corporate stock when dealing at arms length. 2 New York Pattern Jury Instructions 166 (2d ed. 2008).
See Rothmiller v. Stein,
Here, Barron and Labl23 were, respectively, buyer and seller of corporate stock, and were thus parties to a transaction that ordinarily would not give rise to a confidential or fiduciary relationship. By the express terms of the SPA, the only action Barron agreed to undertake was to purchase Labl23 stock for $2 million, and its only affirmative representation was that, at the time of the parties’ transaction, Labl23 was already “a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware.”
See
Declaration of David S. Rich (“Rich Decl.”) Ex. C §§ 2.1(a), 4.1.
1
On these facts, defendants’ acceptance of Barron’s offer to buy stock in Labl23 was no more than a “simple business transaction between a potential investor and a company soliciting such investors.”
Elliott,
Moreover, the primary statements allegedly giving rise to a confidential or fiduciary relationship between the parties were made on Barron’s website. Answer ¶¶ 245-50. Patently, these statements were not confidential; and if such widely-disseminated and readily available statements were sufficient to give rise to a fiduciary relationship, the exception would swallow the rule that no fiduciary relationship exists between the sellers and buyers of corporate stock, and virtually every investor would owe a fiduciary duty to the companies in which it invests.
Cf. McGill v. GM Corp.,
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Greenberg v. Chrust
is instructive. In that case, plaintiff, the largest shareholder in a corporation, met with defendant investor “on at least six occasions” to discuss the development of that corporation’s business plan and to assist in that corporation’s financing and business development.
Here, the nature of the parties’ alleged relationship is even more tenuous than that alleged in Greenberg, and Barron’s identification of “professionals” to assist defendants in creating Labl23 and taking it public pales in comparison to the efforts made by defendant in that case. Indeed, as in Greenberg, defendants have failed to allege any facts sufficient to demonstrate that Barron possessed any “special” or “unique” experience that differentiated it from any other investment fund, or that Barron would have been aware of any use to which information concerning Worden’s guilty plea would be put. Thus, because defendants have failed to allege any facts sufficient to demonstrate that the relationship between the parties was anything other than arm’s-length, defendants’ fraudulent inducement claim, premised on nondisclosure, must be dismissed with prejudice.
Independently, defendants’ fraudulent inducement claim also must be dismissed because the alleged omission was immaterial. An omission of fact is material if “a reasonable man would attach importance to its existence or nonexistence in determining his choice of action in the transaction in question,” or “the maker of the representation knows or has reason to know that its recipient regards or is likely to regard the matter as important in determining his choice of action, although a reasonable man would not so regard it.”
Chase Manhattan Bank v. Motorola, Inc.,
On its face, however, the consent decree expressly provides that Worden neither admitted nor denied the allegations contained in the Securities and Exchange Commission’s complaint.
See
Answer Ex. 4. Accordingly, because Worden’s consent decree was not a “true adjudication [ ] of the underlying issues,”
Lipsky v. Commonwealth United Corp.,
Nor have defendants alleged any facts sufficient to support an inference that Worden’s guilty plea was material to defendants’ decision to accept Barron’s $2 million investment. As an initial matter, Worden’s 1995 plea related to conduct that occurred approximately 17 years before Barron’s alleged nondisclosure and the parties’ execution of the SPA. Given the temporal remoteness of these events, Worden’s plea would have been, at most, of marginal relevance. More fundamentally, although the prior guilty plea of an issuer may be relevant in some circumstances to a reasonable investor when evaluating the “total mix of information” available concerning a company,
Basic Inc. v. Levinson,
In this respect, it is clear from the face of defendants’ counterclaim that defendants entered into the SPA based on Barron’s supposed expertise, and not based on any representations concerning— or understanding of—Barron’s integrity or character for truthfulness. Indeed, defendants’ counterclaim is entirely bereft of any facts demonstrating that knowledge of Worden’s guilty plea would have raised any legitimate concerns regarding the risks of accepting Barron’s investment. The irrelevance of Worden’s plea to defendants’ decision to accept Barron’s investment is further underscored by the fact that the SPA recites no representations or warranties regarding the backgrounds of Worden or any other of Barron’s partners or key personnel. See Rich Decl. Ex. C §§ 5.1-5.10. 2
Finally, and critically, defendants have failed to point to any caselaw standing for the proposition that a decade-old conviction of the managing partner of an investor would be material to a seller of stock, and the caselaw upon which defendants rely is inapposite. In
Emergent Capital Investment Management, LLC v. Stonepath Group, Inc.,
for instance, the Second Circuit considered securities claims brought by an investor, not an issuer, and did not directly address the materiality of a defendant’s association with a person
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barred from the securities industry.
Turning to defendants’ counterclaim for negligent misrepresentation, that must be dismissed for many of the same reasons as their counterclaim for fraudulent inducement. The elements of a negligent misrepresentation claim under New York law are that “(1) the defendant had a duty, as a result of a special relationship, to give correct information; (2) the defendant made a false representation that he or she should have known was incorrect; (3) the information supplied in the representation was known by the defendant to be desired by the plaintiff for a serious purpose; (4) the plaintiff intended to rely and act upon it; and (5) the plaintiff reasonably relied on it to his or her detriment.”
Hydro Investors, Inc. v. Trafalgar Power, Inc.,
As an initial matter, “[u]nder New York law, a plaintiff may not recover for negligent misrepresentation in the absence of a special relationship of trust or confidence between the parties.”
Banque Arabe et Internationale D’Investissement v. Maryland Nat’l Bank,
Accordingly, because Barron and Labl23 were merely a buyer and seller of corporate stock, defendants’ claim for negligent misrepresentation must be dismissed.
See Phillips v. Am. Int’l Group, Inc.,
Moreover, it is well-established that a claim for negligent misrepresentation may stand only “where there is actual privity of contract between the parties or a relationship so close as to approach that of privity.”
Ossining Union Free Sch. Dist. v. Anderson,
For all of the foregoing reasons, any amendment to defendants’ counterclaims would be futile, and both counterclaims must be, and hereby are, dismissed in their entirety, with prejudice. 4
SO ORDERED.
Notes
. The SPA was incorporated by reference into defendants’ Counterclaims, was relied upon by defendants in asserting such claims, and is thus properly considered on Barron’s motion to dismiss.
See Chambers v. Time Warner, Inc.,
. Defendants allege that Barron sought information regarding the criminal history of Labl23's officers and directors, Answer ¶¶ 263-68, and argues that this somehow demonstrates the materiality of Worden’s guilty plea. As noted above, however, an investor and an issuer of stock stand in demonstrably different positions, and information that might be material to a reasonable investor would not necessarily be material to the seller of the stock.
. Defendants Biosafe, Warner, and Trumpy cannot maintain a fraudulent inducement claim against Barron for the separate and additional reason that Barron and Labl23 are the only parties to the SPA. Under New York law, in order to state a claim for fraudulent inducement, “the person making the representations must be, or acting on behalf of, the other party to the contract. Fraud by a third party is not effective to vitiate contractual obligations.”
Nat’l Union Fire Ins. Co. v. Worley,
. The Court therefore need not consider Barron's alternative arguments as to why defendants' counterclaims must be dismissed.