On August 17, 2022, Judge Steven D. Grimberg of the United
States District Court for the Northern District of Georgia granted
a motion to dismiss a putative class action alleging an investment
bank (the "Company"), certain of its advisors (the
"Advisor Defendants"), and certain of its external
accountants (the "Accounting Defendants") aided and
abetted one of the Company's former advisors (the
"Individual Defendant") in facilitating an alleged
decade-long Ponzi scheme. 6694 Dawson Blvd, LLC v. Oppenheimer
& Co., Inc., et al., 1:21-cv-03625. (N.D. Geo. Aug. 17,
2022). Plaintiffs alleged that defendants misrepresented or
concealed material facts that, had plaintiffs known, would have
caused them not to purchase allegedly "bogus" securities
from the Individual Defendant.
According to the complaint, plaintiffs are victims of an alleged
decade-long Ponzi scheme operated by the Individual Defendant, who
allegedly persuaded clients to invest in the securities at issue
from January 2003 to December 2016. Plaintiffs alleged that the
Company aided the Individual Defendant from sometime in 2008 to
December 31, 2016, after which the Company allegedly "took
steps to conceal the Ponzi scheme from the regulators and investing
public by permitting [the Individual Defendant] to quietly resign
from the Bank without reporting the wrongdoing to regulators and
the investing public." Plaintiffs also alleged that the
Company aided the Individual Defendant even after he left the
Company by concealing and misrepresenting on a FINRA form it filed
for the Individual Defendant upon his termination the fact that the
Individual Defendant had been accused of wrongdoing, on which
plaintiffs allegedly relied in purchasing securities, and by
failing to amend the form as the purported scheme continued.
Plaintiffs further alleged that the Advisor Defendants
"violated a host of securities laws" and "breached
fiduciary duties owed to all of their customers" by joining
the sales team at the Individual Defendant's new company after
he left the Company. With respect to the Accounting Defendants,
plaintiffs alleged that they acted as agents involved in
perpetuating the purported Ponzi scheme by, among other things,
preparing fraudulent IRS forms. On August 20, 2021, the SEC brought
a civil action against the Individual Defendant and related
entities not named in plaintiffs' lawsuit, and plaintiffs filed
their complaint just days later.
The Court began by addressing defendants' contention that the
Securities Litigation Uniform Standards Act ("SLUSA")
bars the Complaint because it asserts a state law class action
based on alleged misrepresentations or omissions in connection with
the sale of a SLUSA-covered security. The Court agreed with
defendants that the securities at issue were "covered
securities" under SLUSA, rejecting plaintiffs' argument
that defendants did not argue that one of the securities at issue
was not a covered security. The Court noted that the Supreme
Court's decision in Chadbourne & Parke LLP v.
Troice, 571 U.S. 377 (2014)—the case relied on
by plaintiffs—was different in that "the bank's
misrepresentations about its holdings in covered securities, which
allegedly led its customers to buy uncovered securities, did not
trigger SLUSA's 'in connection with' element,"
whereas defendants in this case "did not dispute whether CDs
were covered securities," but only whether the security at
issue was a "covered security under the meaning of
SLUSA." The Court found that defendants argued the security at
issue was a covered security in both the motion to dismiss and its
reply brief, and that the securities—government stocks and
bonds—were nonetheless covered securities under SLUSA as a
matter of law. Plaintiffs' fraud-based Georgia RICO and
"conspiracy and/or procurement of breach of fiduciary
duty" claims were therefore precluded under SLUSA.
The Court next turned to plaintiffs' negligent
misrepresentation and "aiding and abetting fraud" claims,
finding that they were also precluded by SLUSA and that plaintiffs
attempted to create a private right of action where none exists.
The Court noted that in Cochran v. Penn Mut. Life Ins.
Co., No. 1:19-CV-00564-JPB, 2020 WL 13328617, at *3 (N.D. Ga.
Aug. 12, 2020), aff'd, 35 F.4th 1310 (11th Cir. 2022),
"[t]he Eleventh Circuit instructed that, when determining
whether SLUSA applies, the 'focus is on the substance of the
complaint, and not on the artful way a plaintiff words his
allegations.'" Therefore, the Court concluded, it did not
matter that plaintiffs did not label the state law claims as fraud
"because the complaint's gravamen hung on a material
misrepresentation or omission in connection with a covered
security," and SLUSA precluded plaintiffs' negligent
misrepresentation and aiding and abetting claims. The Court also
dismissed plaintiffs' claim that defendants breached their
fiduciary duties by failing to follow FINRA rules requiring them to
investigate the Individual Defendant, noting that "[h]owever,
important as FINRA's [form] rule may be, there is no private
right of action arising out of a violation of this or any other
FINRA rule." The Court also cited multiple cases for the
proposition that "[c]ourts have consistently disallowed
violations of FINRA and other exchange rules to be pled as state
common law causes of action."
Moreover, the Court also dismissed plaintiffs' fraud-based
claims against the Advisor Defendants and the Accounting
Defendants, and all claims jointly implicating the Company and any
other defendant, noting that they arose entirely out of the same
brand of fraudulent conduct the Company allegedly engaged in, and
thus warranted dismissal under Cochran. Finally, the Court
dismissed plaintiffs' claims for punitive damages and
attorneys' fees, noting that they were derivative in nature to
plaintiffs' fraud-based claims, which were precluded under
SLUSA. The Court, however, granted plaintiffs' leave to amend
their complaint, noting that SLUSA did not prevent them from
repleading state law claims on an individual basis or new federal
securities claims either as an individual or as a class
representative.
6694 Dawson Blvd, LLC v. Oppenheimer & Co., Inc., et al.
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