MEMORANDUM AND ORDER
Plаintiffs Ronald D. Kassover, Chris Jones, Stephen M. Mittman, Ronald E. *30 Klokke, Jan Schneider, Marjorie Elliott, Mark Theissman, Rita Tubis and Helena Tubis (collectively “Plaintiffs”) on behalf of themselves and others similarly situated brought the present action against UBS Financial Services, Inc. (“UBS FS”) and UBS AG (collectively “Defendants” or “UBS”) for federal securities law and state statutory and common law violations stemming from Defendants’ conduct in the marketing and sale of auction rate securities (“ARS”) and in their failure to continue to provide liquidity in the ARS market. Plaintiffs assert claims against UBS FS for violations of the Investment Advisers Act of 1940, 15 U.S.C. § 80b-l et seq., and the New York General Business Law § 849 and common law claims for negligent misrepresentation, breach of fiduciary duty, breach of the implied covenant of good faith and fair dealing, and negligence. Plaintiffs assert claims against UBS AG for aiding and abetting UBS FS’ alleged breach of fiduciary duty.
Defendants here move to dismiss all Plaintiffs’ claims pursuant to Rules 12(b)(6) and 9(b) of the Federal Rules of Civil Procedure for failure to state a claim upon which relief can be granted and for failure to plead fraud with particularity.
I. FACTUAL BACKGROUND
The following recitation of facts reflects Plaintiffs’ allegations, as pleaded in the Amended Class Aсtion Complaint. The allegations are taken as true for purposes of this motion, but do not constitute this Court’s factual determinations.
ARS are long-term debt securities that offered investors the liquidity of short-term investments through regularly scheduled auctions where ARS could be sold, if demand for the securities was sufficient. (Complaint ¶¶ 2, 3.) ARS were considered conservative investments — usually preferred stock or bonds issued by municipalities, public funds or otherwise creditworthy .institutions. (Complaint ¶ 32.) The liquidity of these investments proved to be illusory because a successful auction, one where investors could sell their ARS, deрended upon sufficient demand in the ARS market. (Complaint ¶ 2.) Though not disclosed to Plaintiffs, successful auctions were entirely dependent upon certain financial institutions’ support of the ARS market, including that of UBS FS. (Id.) UBS was one of the largest underwriters of ARS and garnered significant fees for managing the auctions for ARS that they sold. (Complaint ¶ 33.)
UBS FS financial advisors 1 engaged in a campaign designed to induce Plaintiffs to purchase ARS for which UBS was a primary auction participant by falsely marketing them as higher-yield cash equivalents. (Complaint ¶¶ 3, 34, 55.) Plaintiffs’ financial advisors failed to inform them about potential illiquidity that would result from failed auctions and encouraged Plaintiffs to invest without advising them to review prospectuses or registration statements filed with the SEC. (Complaint ¶¶ 3, 34.) UBS FS financial advisors also did not inform Plaintiffs of the substantial revenue UBS garnered from auction-related fees or the resulting conflict of interest. (Id.)
Beginning in February of 2008, UBS FS determined that it was no longer in its financial interest to continue to support ARS auctions and ceased its participation. (Complaint ¶ 5.) As a result, an increasing number of ARS auctions failed, which prevented clients from liquidating their ARS holdings. (Complaint ¶¶ 5, 40, 41.) The THIS market collapsed, and Plaintiffs’ only *31 option was to sell their ARS in the secondary market at substantial discounts. (Complaint ¶ 41.)
II. DISCUSSION
A. Motion to Dismiss Standard
A complaint should be dismissed if it “fail[s] to state a claim upon which relief can be granted.” Fed.R.Civ.P. 12(b)(6). “In deciding a motion to dismiss, the Court ordinarily accepts as true all well-pleaded factual allegations and draws all reasonable inferences in the plaintiffs favor.”
In re Parmalat Sec. Litig.,
Plaintiffs claims are also subject to the heightened pleading standard of Rule 9(b). “By its terms, Rule 9(b) applies to ‘all averments of fraud.’ ”
Rombach v. Chang,
Generally, “the court is not permitted to consider factual matters submitted outside of the complaint unless the parties are given notice that the motion to dismiss is being converted to a motion for summary judgment under Rule 56 and are afforded an opportunity to submit additional affidavits.”
Campo v. 1st Nationwide Bank,
B. Advisers Act Claim
Plaintiffs allege that UBS FS violated § 80b-6(2) of the Investment Advisers Act of 1940 (“Advisers Act”), 15 U.S.C. §§ 80b-l et seq., which provides:
It shall be unlawful for any investment adviser, by use of the mails or any means or instrumentality of interstate commerce, directly or indirectly ... to engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client.
15 U.S.C. § 80b-6(2). Plaintiffs’ Advisers Act claim is based on three allegations. First, Plaintiffs allege that UBS FS breached duties owеd Plaintiffs by misrep *32 resenting that ARS was a cash equivalent. (Complaint ¶ 62.) Second, they allege that UBS FS failed to disclose “conflicts of interest inherent in the ARS investment and that the liquidity of the ARS investment depended upon UBS Financial acting for the benefit of their clients as opposed to those of UBS Financial itself.” (Id.) Finally, Plaintiffs allege that UBS FS “failed to continue to support Plaintiffs’ ARS by failing to appear, provide bids and otherwise participate in regularly scheduled ARS auctions wiping out the liquidity of Plaintiffs’ ARS holdings.” (Id.) Plaintiffs seek “a declaratory judgment that the ARS transactions with Plaintiffs and the Class are void” — in effect that Plaintiffs be refunded all monies they invested in ARS — and “disgorgement of monies realized by UBS as a result of the ARS transactions.” (Complaint ¶ 64. See also Plaintiffs’ Memorandum of Law in Opposition to Defendants’ Motion to Dismiss (“Pl.’s Mem.”) p. 9.)
Defendant moves to dismiss Plaintiffs’ Advisers Act claim on the basis that UBS FS, acting as a broker and without engaging in an investment advisory contract with Plaintiffs, is not covered by the Advisers Act. (Defendants’ Memorandum of Law in Support of Motion to Dismiss Amended Class Action Complaint p. 5.) Defendants also argue that Plaintiffs seek remedies unavailable under the Advisers Act. 2 (Id.) Defendants are correct on both counts.
First, Plaintiffs have not pled facts sufficient to suggest UBS FS acted as an “investmеnt adviser,” such that the Advisers Act would apply. Section 202(a)(11) of the Advisers Act defines an “investment adviser” as “any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities.” 15 U.S.C. § 80b-2(a)(11). Courts have required plaintiffs to allege that the parties entered into an investment advisory contract in order for the Advisers Act to apply.
See e.g., Bogart v. Shearson Lehman Bros., Inc.,
In this instance, Plaintiffs allege that UBS FS “entered into contracts with Plaintiffs and other members of the Class to provide financial advice.” (Complaint ¶ 59.) Plaintiffs go on to allege that UBS FS advised them “either directly or through publications or writings, as to the value of ‘securities’ or as to the advisability of investing in, purchasing or selling ‘securitiess’....” (Id.) But the contracts Plaintiffs entered into and the only ones referred to in the Amended Complaint (and *33 therefore properly considered in a motion to dismiss) are “brokerage” agreements. (See e.g., Complaint ¶ 13; Pl.’s Mem. p. 8.) These applications for “Resource Management” accounts are denoted in the agreements as non-discretionary “brokerage” accounts “except when executed in connection with opening an advisory account.” (Ex. B, Sullivan Decl. 1.) So, Plaintiffs have not pointed to any facts supporting their allegation that they entered into contracts for UBS FS to provide them with investment advice.
That Plaintiffs allege that UBS FS’ financial advisers recommended Plaintiffs invest in ARS is insufficient to infer an investment advisory agreement in the context of a non-discretionary brokerage account.
See Bogart,
Even if Plaintiffs had sufficiently pled that UBS FS entered into an investment advisory agreement that brought them within the Advisers Act’s definition of an “investment adviser,” Plaintiffs fail to adequately plead that UBS FS does not fall within the broker-dealer exemption from this definition. Absent certain circumstances, Congress specifically exempted broker-dealers from the Advisers Act definition of “investment advisers.”
See
15 U.S.C. § 80b—2(a)(11)(C). Section 202(a)(11)(C) of the Advisers Act exempts from the Act’s coverage “any broker or dealer whose performance of such services is solely incidental to the conduct of his business as a broker or dealer and who receives no special compensation therefore.” So, unless Plaintiffs allege that some special compensation was paid to UBS FS’ financial advisors for the provision of investment advice and that any such advice was not solely incidental to the maintenance of Plaintiffs’ brokerage accounts, UBS FS would still not come within the Advisers Act.
See Hall,
As to whether the investment advice UBS FS provided to Plaintiffs was “solely incidental” to the maintenance of their brokerage accounts, Plаintiffs allege only that “the provision of an auction market by UBS and the fees obtained as a result thereof are not incidental to the conduct of their usual brokerage business.” (Complaint ¶ 60.) This allegation reflects Plaintiffs’ misunderstanding of the proper inquiry as to the broker-dealer exemption. Consistent with the plain language of the exemption and with the statute’s purpose of regulating only those who are “paid for advising others about securities,”
Abrahamson v. Fleschner,
In addition, to be exempt from the Advisers Act, UBS FS must not have received any “special compensation” for the provision of investment advisory services.
See
15 U.S.C. § 80b-2(a)(11) (C);
Bogart,
While Plaintiffs correctly note that they need not have paid UBS FS the “special compensation”, the “special compensation” must have been paid to UBS FS for providing investment advisory sеrvices to Plaintiffs.
See Hall,
In sum, as Plaintiffs (1) fail to allege that an investment advisory contract existed between themselves and UBS FS, (2) fail to allege that UBS FS was paid any special compensation for providing Plaintiffs with investment advice, and (3) fail to allege that thе investment advice provided to Plaintiffs was not solely incidental to the maintenance of their brokerage accounts, Plaintiffs have not adequately pled that UBS FS acted as an “investment adviser” whose actions would be governed by the Advisers Act.
It should also be noted that Plaintiffs seek remedies that are not provided for under the Act. Plaintiffs seek disgorgement of “monies realized by UBS as a result of the ARS transactions” and “the voiding of Plaintiffs’ ARS transactions.” (Pl.’s Mem. p. 9.)
In
Transamerica Mortgage Advisors, Inc. v. Lewis,
In sum, as Plaintiffs fail to allege that UBS FS was an “investment adviser” covered by the Advisers Act, Defendants’ motion to dismiss Plaintiffs’ Advisers Act claim is GRANTED. Plaintiffs are granted leavе to amend the Advisers Act claim within thirty days of the date of this MEMORANDUM and ORDER, if the defects set forth in the foregoing analysis can be remedied through repleading.
C. State Law Claims
In Plaintiffs’ claims 2 through 7, they allege various violations of New York statutory and common law. (See Complaint ¶¶ 65-97.) In Count 2, Plaintiffs Mittman, Klokke and Elliott 3 allege that UBS FS’ financial advisors induced Plaintiffs to purchase ARS and falsely represented to Plaintiffs that UBS financial advisors were bound by duties as investment advisers “who would primarily advance the financial interests of their clients.” (Complaint ¶ 67.) Count 2 further alleges that “Defendants breached such duties by failing to continue to support Plаintiffs’ ARS by failing to appear, provide bids and otherwise participate in regularly scheduled ARS auctions, thereby freezing the ARS holdings of the Class in order to advance the financial interests of defendants at their clients’ expense.” (Id.) Plaintiffs allege that these actions constitute “deceptive business practices” in violation of New York’s consumer protection law General Business Law § 349 (“GBL § 349”), which provides that “deceptive acts or practices in the conduct of business, trade, or commerce or in the furnishing of any service in this state are hereby declared unlawful.” N.Y. Gen. Bus. Law § 349(а).
In Count 3, for negligent misrepresentation, Plaintiffs Mittman, Klokke and Elliott allege that UBS FS’ financial advisors misrepresented to Plaintiffs or omitted to inform them that investment in ARS involved liquidity risks and therefore ARS are not properly designated as cash equivalents. (Complaint ¶ 73.)
In Count 4, Plaintiffs allege UBS FS “through their agents and representatives, held themselves out as financial advisors to Plaintiffs and other Class Members, and as such owed fiduciary duties to Plaintiffs and the other Class members.” (Complaint ¶ 78.) Plaintiffs allege that UBS FS breached its fiduciary duties to Plaintiffs by failing to support ARS auctions by providing bids or otherwise participating in regularly schеduled auctions and that UBS FS instead acted to advance its own financial interests, rather than those of Plaintiffs. (Id.)
In Count 5, Plaintiffs allege that UBS AG aided and abetted UBS FS’ breach of fiduciary duties when UBS AG, for its own financial benefit, initially directed UBS FS to participate in the ARS auctions and then later allowed UBS FS to cease its support of the ARS auctions. (Complaint ¶ 83.)
*36 In Count 6, Plaintiffs allege that UBS FS breached the implied covenant of good faith and fair dealing that arose “in connection with the retention of UBS Financial Services as a financial or investment adviser or broker-dealer.” (Complaint ¶¶88, 89.) UBS FS аllegedly breached the covenant of good faith and fair dealing by failing to continue to support Plaintiffs’ ARS by ending its participation in ARS auctions. (Complaint ¶ 89.) Plaintiffs allege that UBS FS acted in its own financial interests and at Plaintiffs’ expense. (Id.)
In Count 7, Plaintiffs allege that UBS FS was negligent and breached its duty of care to Plaintiffs by failing to participate in the ARS auctions. (Complaint ¶ 94.) Plaintiffs allege that UBS FS’ duty of care included the duty “not to take steps to undermine the liquidity of Plaintiffs ARS holdings and to continue to participate in regularly scheduled ARS auctions.” (Complaint ¶ 93.) This duty allegedly arose because “Defendаnts’ [sic] held themselves out to be investment and financial advisers....” (Id.)
In Counts 4 through 7, Plaintiffs explicitly “exclude any and all allegations that Defendants made material misrepresentations and omission [sic] in connection with the purchase and sale of ARS securities set forth in ¶¶ 3, 34-35.” (Complaint ¶¶ 77, 81, 87, 92.) Despite this attempt to position these claims outside the scope of New York’s blue sky law the Martin Act, N.Y. Gen. Bus. L. § 352-c (2003), all of Plaintiffs state law claims are dismissed as preempted by that statute.
“The Martin Act prohibits various fraudulent and deceitful practices in the distribution, exchange, sale, and purchase of securities but does not require proof of intent to defraud or scienter.”
Granite Partners, L.P. v. Bear, Stearns & Co. Inc.,
Accordingly, courts have routinely dismissed private state law securities claims sounding in fraud or deception that do not require pleading or proof of intent, reasoning that allowing them to proceed would be, in effect, allowing private causes of action under the Martin Act.
See Dover Limited v. A.B. Watley, Inc.,
To the extent that Plaintiffs allege that UBS engaged in fraudulent and deceptive practices in the sale of ARS under claims that do not require proof of scienter, their claims are preempted by the Act.
See Granite Partners,
“To make out a prima facie case under Section 349, a plaintiff must demonstrate that (1) the defendant’s deceptive acts were directed at consumers, (2) the acts are misleading in a material way, and (3) the plaintiff has been injured as a result.”
Maurizio v. Goldsmith,
Similarly, Count 3 for negligent misrepresentation is dismissed as preempted by the Martin Act.
See Dover Ltd. v. A.B. Watley, Inc.,
In Counts 5 through 7, Plaintiffs allege aiding and abetting breach of fiduciary duty (against UBS AG), breach of the imрlied covenants of good faith and fair dealing, and negligence, respectively. In each claim, “Plaintiffs repeat and reiterate the allegations as set forth above except to exclude any and all allegations that Defendants made material misrepresentations and omissions in connection with the purchase and sale of ARS securities.... ” (Complaint ¶¶ 77, 81, 87, 92.) Notably, these claims attempt to obscure what oth *38 erwise seems clear to this court — Plaintiffs’ allegations support Martin Act claims. Plaintiffs admit as much in their briefs, writing “claims 2 through 7 are individual state law claims whose facts merely could support Martin Act claims by the Attorney General.” (Pl.’s Mem. p. 10.)
Consistent with preserving the Attorney General’s exclusive jurisdiction over Martin Act claims, it has been held that “[p]rivate plaintiffs will not be permitted through artful pleading to press any claim based on the sort of wrong given over to the Attorney-General under the Martin Act.”
Kramer v. W10Z/515 Real Estate Ltd. Partnership,
Here too, Plaintiffs will not be allowed through mere avoidance of the words “misrepresentation,” “omission,” and “deception” to assert claims based on factual circumstances that support Martin Act claims.
See Whitehall,
Plaintiffs argue that a recent Appellate Division Case,
Caboara v. Babybn Cove Dev., LLC,
In
Caboara,
plaintiffs, who purchased units in a condominium project, alleged breach of contract and common law fraud against the project sponsor and members.
Caboara,
Plaintiffs’ reliance on
Caboara
is unavailing for two reasons. First,
Caboara
appears to overlook a long-standing distinction between courts’ treatment of common law fraud claims and that of other state law claims based on deceptive practices. “Courts concerned with preserving the Attorney General’s exclusive domain therefore preclude claims which essentially mimic the Martin Act, but permit common law fraud claims, which require an additional element.”
Nanopierce,
Second, to the extent that
Caboara
is persuasive, and again, this court is not convinced that it is, its holding need not be extended beyond its facts. At issue in
Caboara
were common law fraud and breach of contract claims.
See Caboara,
III. ORDER
For the foregoing reasons, Defendants’ Motion to Dismiss is GRANTED. Plaintiffs are granted leave to replead the Advisers Act claim within thirty days of the date of this MEMORANDUM and ORDER.
SO ORDERED.
Notes
. For consistency, this court refers to UBS FS' brokers as "financial advisers," as do the parties. The terminology does not indicate any legal determination.
. In the context of defending against a charge that the brokerage agreement is unconscionable, Defendants argue that ''[wjhile Plaintiffs claim that the brokerage agreement left them with 'no remedies,' the agreements contain an arbitration clause which specifies the forum ■ |or resolving disputes (which ultimately is the proper venue for thе claims in this case).” This court does not reach the question of whether the agreement is unconscionable; nor does it reach the issue of whether arbitration is the proper forum for the parties' dispute. At this time, it appears that neither party is attempting to compel arbitration; therefore, the court reserves consideration of the issue.
. Only Plaintiffs Mittman, Klokke and Elliott allege Counts 2 (violation of GBL § 349) and 3 (negligent misrepresentation) on their behalf and on behalf of similarly-situated holders of ARS that were not filed or registered under the Investment Company Act of 1940.
. Furthermore, it is well-established that Section 349 does not apply to securities transactions.
See e.g., Spirit Partners,