Crigger v. Fahnestock and Co., Inc.

• Citation: 443 F.3d 230
• Decision Date: 29 March 2006
• Docket Number: Docket No. 05-2428 CV.
• Parties: Frederick W. CRIGGER, DSMcKee Investments Inc., Jack Schueler, Eva Schueler and Csdesign, Inc., Plaintiffs-Counter-Defendants-Appellants, v. FAHNESTOCK AND COMPANY, INC. and Aurelio Vuono, Defendants-Appellees, Raymond Minicucci, Defendant, David S. McKee and Terry Wilkinson, Plaintiffs-Counter-Defendants, Momentum Investments Ltd., Plaintiff.
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

443 F.3d 230

Frederick W. CRIGGER, DSMcKee Investments Inc., Jack Schueler, Eva Schueler and Csdesign, Inc., Plaintiffs-Counter-Defendants-Appellants, v. FAHNESTOCK AND COMPANY, INC. and Aurelio Vuono, Defendants-Appellees Raymond Minicucci, Defendant David S. McKee and Terry Wilkinson, Plaintiffs-Counter-Defendants Momentum Investments Ltd., Plaintiff.

Docket No. 05-2428 CV.

United States Court of Appeals, Second Circuit.

Argued: December 19, 2005.

Decided: March 29, 2006.

COPYRIGHT MATERIAL OMITTED

Eric J. Grannis, Law Offices of Eric J. Grannis, New York, NY, for Plaintiffs-Counter-Defendants-Appellants.

Howard Wilson, Proskauer Rose LLP, New York, NY, for Defendant-Appellee Fahnestock and Company, Inc.

Before: JACOBS, STRAUB, and POOLER, Circuit Judges.

DENNIS JACOBS, Circuit Judge.

Victims of a Ponzi scheme brought suit for common law fraud against the schemers — Aurelio Vuono and Raymond Minicucci — and Fahnestock & Co. ("Fahnestock"), a financial institution that employed Minicucci and was used by him and Vuono as a financial intermediary. Although Minicucci had settled, his role was contested at trial in the context of Fahnestock's liability under the doctrine of respondeat superior. The jury found that plaintiffs failed to show by clear and convincing evidence that Vuono or Minicucci was liable for fraud; and having found no fraud by Minicucci, the jury did not reach the respondeat superior claim against Fahnestock. On April 25, 2005, the United States District Court for the Southern District of New York (Keenan, J.) entered judgment dismissing the complaint.

On appeal, plaintiffs Frederick W. Crigger, Jack Schueler, Eva Schueler, DS McKee Investments Inc., and CS Design Inc. challenge the jury charge on the grounds that (1) it erroneously stated that plaintiffs had a duty of investigation triggered by their relative financial sophistication and by what they were told about the investment; and (2) it erroneously omitted an instruction on conspiracy to defraud and on aiding and abetting. In addition, they contest the receipt into evidence of a "memo to file" in which an accountant of one of the plaintiffs recorded his advice that the transaction should be approached with caution.

We affirm as to Fahnestock on the ground that the jury charge was sound and because the evidence richly supports a finding that plaintiffs failed to make inquiries commensurate with their sophistication, notwithstanding telltale signs that the investment was a Ponzi scheme or some other implausible kind of bonanza. We affirm as to Vuono on the same ground.

Moreover, we conclude that the district court properly chose to include no instruction on conspiracy or on aiding and abetting, and did not abuse its discretion by admitting the accountant's memorandum.

I

Four Canadian computer programmers — Frederick Crigger, David McKee, Jack Schueler, and Terrence Wilkinson — became millionaires overnight in 1994 when their educational-software company was bought out. Prior to their (aggregate) investment of $8 million in the Ponzi scheme, the four invested actively in a variety of advanced financial products. Crigger, who in 1995 had a net worth of CAN$8 million, traded in options and commodities (including silver, soybeans, wheat, and corn), and invested in several real-estate and film-production tax shelters. McKee, who in 1995 had a net worth of CAN$3 million and had been an active investor for over ten years, invested in tax shelters, bought and sold equities on margin, invested in options contracts, bought shares at least once from a cold-calling broker, and (on the advice of his accountants) set up an investment company: DS McKee Investments Inc. Schueler, who in 1995 had a net worth of CAN$7 million, invested in stocks, certificates of deposit, mutual funds, tax shelters and a real-estate limited partnership. Wilkinson, who in 1995 had a net worth of CAN$3 million, worked with several stockbrokers, invested in mutual funds, speculated in stocks and commodities, and set up CS Design Inc. as his personal-investment company.

The evidence showed that Vuono was a principal in a company called Rayvon, and that he and Minicucci promoted the company to Crigger in Canada through Crigger's investment advisor, Jeffrey Mason, who (curiously) was not named as a defendant. Mason approached Crigger in January 1995, touting Rayvon as a safe investment with a guaranteed return of principal and an assured income stream of six to seven percent a month. Mason explained that this surefire arrangement was based on a hitherto undiscovered arbitrage opportunity that defendants had identified: Rayvon would use one-year U.S. Treasury bills as security for a loan from a brokerage firm (here, Fahnestock), the proceeds of which they would use to buy and sell certificates of deposit ("CDs") to banks in different countries; profit would be generated by arbitraging the spread in interest rates of the CDs.¹ Mason emphasized to Crigger that the return of principal was guaranteed because Fahnestock would hold Crigger's proposed investment in a Fahnestock brokerage account pursuant to "Standing Instructions" that his investment would not be removed from the account and that Crigger could seek the return of his funds at any time.

Crigger invested $3 million in Rayvon the next month, even though Mason gave Crigger no prospectus or offering memorandum (or any other written materials), and even though the Standing Instructions that Crigger executed (1) gave Rayvon control of Crigger's Fahnestock account; (2) contained no assurance that his $3 million would be returned; and (3) provided only that he would receive the "proceeds" from the sale of the Treasury bills — i.e., what was left in his account after all the buying and selling of the CDs. Crigger undertook no independent inquiry and sought no outside financial counsel prior to investing.

In March 1995, the front end of the Ponzi scheme netted Crigger $210,000. Gratified, Crigger shared his business opportunity with two of his programmer-friends, McKee and Schueler; later, McKee shared the good news with Wilkinson. None of these individuals or their investment companies were given any more information about Rayvon than Crigger had received, but some took a closer look. Schueler and Wilkinson talked to Minicucci directly about the investment; and Wilkinson noticed that the Standing Instructions could be revoked and obtained an added clause. McKee discussed the Rayvon opportunity with his accountant, Jim McIlwham, who was alarmed by its speculative nature. In the end, Schueler invested $3 million, and McKee and Wilkinson each invested $1 million — all told, the plaintiffs invested $8 million.

The plaintiffs' periodic payments from the Rayvon investment ended in October 1995; soon after, they learned that their investment had disappeared. In January 2001, they filed suit in the United States District Court for the Southern District of New York. In April 2005, a jury trial was conducted on plaintiffs' common law fraud claim (the only claim that remained following partial grants of summary judgment), and the jury returned a verdict in favor of defendants.

II

Under New York law, the five elements of a fraud claim must be shown by clear and convincing evidence: (1) a material misrepresentation or omission of fact (2) made by defendant with knowledge of its falsity (3) and intent to defraud; (4) reasonable reliance on the part of the plaintiff; and (5) resulting damage to the plaintiff. See Schlaifer Nance & Co. v. Estate of Warhol, 119 F.3d 91, 98 (2d Cir.1997).

Here, only the fourth element of common law fraud is at issue. Reasonable reliance entails a duty to investigate the legitimacy of an investment opportunity where "plaintiff was placed on guard or practically faced with the facts." Mallis v. Bankers Trust Co., 615 F.2d 68, 81 (2d Cir.1980), abrogated in part on other grounds by Peltz v. SHB Commodities, 115 F.3d 1082, 1090 (2d Cir.1997). Only "[w]hen matters are held to be peculiarly within defendant's knowledge[] [is it] said that plaintiff may rely without prosecuting an investigation, as he ha[d] no independent means of ascertaining the truth." Id. at 80. A plaintiff cannot close his eyes to an obvious fraud, and cannot demonstrate reasonable reliance without making inquiry and investigation if he has the ability, through ordinary intelligence, to ferret out the reliability or truth about an investment:

Circumstances may be so suspicious as to suggest to a reasonably prudent plaintiff that the defendants' representations may be false, and that the plaintiff cannot reasonably rely on those representations, but rather must "make additional inquiry to determine their accuracy." Put another way, if the plaintiff "has the means of knowing, by the exercise of ordinary intelligence, the truth, or the real quality of the subject of the representation, he must make use of those means, or he will not be heard to complain that he was induced to enter into the transaction by misrepresentations."

Estate of Warhol, 119 F.3d at 98 (quoting Keywell Corp. v. Weinstein, 33 F.3d 159, 164 (2d Cir.1994); Mallis, 615 F.2d at 80-81).

The law is indulgent of the simple or untutored; but the greater the sophistication of the investor, the more inquiry that is required. "Where sophisticated businessmen engaged in major transactions enjoy access to critical information but fail to take advantage of that access, New York courts are particularly disinclined to entertain claims of justifiable reliance." Grumman Allied Indus., Inc. v. Rohr Indus., Inc., 748 F.2d 729, 737 (2d Cir.1984). "In assessing the reasonableness of a plaintiff's alleged reliance, we consider the entire context of the transaction, including factors such as its complexity and magnitude, the sophistication of the parties, and the content of any agreements between them." Emergent Capital Inv. Mgmt., LLC v. Stonepath Group, Inc., 343 F.3d 189,...