Daniel Boone Area School Dist. v. Lehman Brothers, Inc.

• Decision Date: 05 February 2002
• Docket Number: No. 01-CV-74 J.,01-CV-74 J.
• Parties: DANIEL BOONE AREA SCHOOL DISTRICT, individually and on behalf of others similarly situated, Plaintiffs, v. LEHMAN BROTHERS, INC. and Lisa Vioni, Defendants.
• Court: U.S. District Court — Western District of Pennsylvania

Page 400

187 F.Supp.2d 400

DANIEL BOONE AREA SCHOOL DISTRICT, individually and on behalf of others similarly situated, Plaintiffs, v. LEHMAN BROTHERS, INC. and Lisa Vioni, Defendants.

No. 01-CV-74 J.

United States District Court, W.D. Pennsylvania.

February 5, 2002.

Richard A. Finberg, Malakoff, Doyle & Finberg, Pittsburgh, PA, David A. Gradwohl, Fox, Rothschild, O'Brien & Frankel, Landsdale, PA, for Plaintiffs.

Roy A. Powell, Megan E. Farrell, Dana Baiocco, Jones, Day, Reavis & Pogue, Pittsburgh, PA, Patrick R. Kingsley, Stadley, Ronon, Stevens & Young, Philadelphia, PA, David L. Carden, Jones, Day, Reavis & Pogue, New York City, Robert C. Micheletto, Jones, Day, Reavis & Pogue, Chicago, IL, Celeste A. Pometto, Leboeuf, Lamb, Green & MacRae, Pittsburgh, PA, for Lehman Brothers, Inc.

John H. Rirorda, Jr., Polito & Smock, Pittsburgh, PA, Michael Q. Carey, Carey & Associates, New York City, for Lisa Vioni.

OPINION AND ORDER

D. BROOKS SMITH, Chief Judge.

This class action concerns the largest municipal fraud in Pennsylvania history, in which John Gardner Black defrauded various school districts and local government units, including lead plaintiff Daniel Boone Area School District, losing approximately $70 million of public funds. The plaintiffs now seek to hold Lehman Brothers and its employee Lisa Vioni responsible for their role in Blacks fraudulent scheme. See dkt. no. 24. Before me now are the defendants motions to dismiss the plaintiffs amended complaint. Dkt. nos. 29, 31.

I.

The fraudulent scheme to which Daniel Boone Area School District (Daniel Boone) and other school districts¹ fell victim was revealed for the first time on September 26, 1997, when the Securities and Exchange Commission began a civil enforcement action against John Gardner Black (Black) and two companies he controlled, Devon Capital Management, Inc. (Devon) and Financial Management Sciences, Inc. (FMS).² Black operated as an independent investment advisor for many school districts in the Commonwealth of Pennsylvania. Black, through Devon, entered into Investment Advisory Agreements with Daniel Boone pursuant to which he would deposit school district funds in Mid State Bank and then use those funds to invest on behalf of Daniel Boone. Dkt. 24 ¶¶ 44-49.

Facing stiff competition from other municipal investment advisors, Black devised the Collateralized Investment Agreement (CIA) in late 1993 and early 1994, hoping to increase his rate of return. Id. ¶ 55. CIAs were agreements entered into by Devon, purportedly on behalf of Daniel Boone, and FMS, pursuant to which FMS agreed to pay Daniel Boone principal and interest over a fixed term. Id. ¶ 56. FMS held all of the funds entrusted to it pursuant to the CIAs in a pooled account in Mid State Bank, and its payment obligations were collateralized by other securities on deposit in FMSs Pooled Account. Id. Although the CIAs explicitly provided that FMS would hold as collateral only those securities authorized for public investment under Pennsylvania law, FMS actually invested Daniel Boones funds in speculative derivative securities, which were not authorized investments. Id. ¶¶ 60-62. Blacks investments in derivative securities pursuant to the CIAs ultimately suffered substantial losses. See, e.g., id. ¶ 67. As trading losses mounted, Black began a Ponzi scheme to keep his operations going, attracting new school district clients whose initial investments were used to pay prior investors.³ Id. ¶ 75. By the end of September 1997, Blacks losses totaled approximately $70 million.⁴

Daniel Boone now seeks to recover from Lehman Brothers (Lehman) and Lisa Vioni (Vioni)⁵ for their alleged role in Blacks scheme. Black purchased derivative securities from Lehman, and Vioni was the Lehman salesperson for the Black/Devon account. Id. ¶ 62. According to Daniel Boone, Lehman knew of Blacks extensive losses in trading derivatives, id. ¶ 64, and at some time in 1995, a lawyer employed by Lehman raised questions about whether it was proper for Black to invest in derivatives on behalf of Daniel Boone. Id. ¶ 69. Lehman allegedly continued to sell derivatives to Black even though it knew such investments were not authorized under Pennsylvania law. Id. ¶ 74.

On the basis of Lehmans knowledge of Blacks investment scheme and Lehmans role in selling derivative securities, Daniel Boone commenced this action against Lehman. Daniel Boone asserts six counts against Lehman. Some of these counts allege that Lehman is primarily liable for its own tortious conduct. Other counts are more inchoate, alleging that Lehman is liable for aiding and abetting, acting in concert with, and conspiring with Black. Because I conclude that, for five of its counts, there are no facts that would entitle Daniel Boone to relief against Lehman, I will grant the motions to dismiss with respect to those claims. However, because Daniel Boone asserts a viable civil conspiracy claim against Lehman, I will deny the motions to dismiss with respect to that single count.

II.

When considering a motion to dismiss for failure to state a claim under Fed. R.Civ.P. 12(b)(6), I must accept as true all facts alleged in the complaint and view them in the light most favorable to the plaintiff. Independent Enterprises, Inc. v. Pittsburgh Water & Sewer Auth., 103 F.3d 1165, 1168 (3d Cir.1997); Markowitz v. Northeast Land Co., 906 F.2d 100, 103 (3d Cir.1990); D.P. Enterprises, Inc. v. Bucks County Community College, 725 F.2d 943, 944 (3d Cir.1984). In order to prevail on a Rule 12(b)(6) motion, the movant must establish that no relief could be granted under any set of facts that the plaintiff could prove. Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957); Trump Hotels & Casino Resorts v. Mirage Resorts, Inc., 140 F.3d 478, 483 (3d Cir. 1998); Ransom v. Marrazzo, 848 F.2d 398, 401 (3d Cir.1988). In deciding a motion to dismiss, courts generally may consider only the allegations contained in the complaint, exhibits attached thereto, and matters of public record. Pension Benefit Guar. Corp. v. White Consol. Indus., Inc., 998 F.2d 1192, 1196 (3d Cir.1993). Finally, I must presume at the pleading stage that general factual allegations embrace those specific facts necessary to support the claim. Lujan v. Natl. Wildlife Fed., 497 U.S. 871, 889, 110 S.Ct. 3177, 111 L.Ed.2d 695 (1990); National Org. for Women, Inc. v. Scheidler, 510 U.S. 249, 256, 114 S.Ct. 798, 127 L.Ed.2d 99 (1994).

III.

Lehmans primary argument is that Daniel Boone lacks standing to assert its claims against Lehman. Lehman asserts that Daniel Boone lacks an injury-in-fact, as required for standing under Article III. See Lujan v. Defenders of Wildlife, 504 U.S. 555, 560, 112 S.Ct. 2130, 119 L.Ed.2d 351 (1992); The Pitt News v. Fisher, 215 F.3d 354, 360 (3d Cir.2000). However, Daniel Boones substantial losses in this case are surely a constitutionally adequate injury-in-fact. Lehmans real complaint against Daniel Boones standing is that those losses are not causally connected to the conduct of Lehman. See Defenders of Wildlife, 504 U.S. at 560, 112 S.Ct. 2130 (the injury has to be fairly ... trace[able] to the challenged action of the defendant, and not ... th[e] result [of] the independent action of some third party not before the court. (internal quotation marks omitted)); The Pitt News, 215 F.3d at 360-61. In arguing that Daniel Boone lacks standing because of the traceability requirement, however, Lehman is on shaky ground. As Wright and Miller explain in their discussion of the causation requirement for standing, causation may be misused as an excuse to avoid decision. 13 CHARLES ALAN WRIGHT, ARTHUR R. MILLER & EDWARD H. COOPER, FEDERAL PRACTICE AND PROCEDURE: JURISDICTION 2D § 3531.5 (1984). Lehmans standing argument is not a fortiori from any case it cites, and because I do not wish to enter unnecessarily into the sea of uncertainty surrounding this issue, id., I will defer any discussion of Lehmans standing argument—the success of which would require dismissal of all of Daniel Boones claims—until after reaching a decision regarding the alleged defects in each of Daniel Boones separate counts. See infra Part IV.A.

I turn, then, to Lehmans arguments that each of Daniel Boones six counts is defective on its merits and must be dismissed. In its amended complaint, Daniel Boone asserts the following six counts against Lehman: (1) tortious conduct in concert with others pursuant to RESTATEMENT (SECOND) OF TORTS § 876(a); (2) aiding and abetting a breach of fiduciary duty in violation of RESTATEMENT (SECOND) OF TORTS § 876(b); (3) civil conspiracy; (4) aiding and abetting a violation of the Pennsylvania Securities Act under § 503 of that Act; (5) common law fraud; and (6) negligence and negligence per se. See generally dkt. no. 30. Because the counts alleging the primary liability of Lehman are logically prior to the inchoate torts Daniel Boone also asserts, I begin my analysis with Daniel Boones negligence and fraud claims. After addressing those counts, I then consider Daniel Boones aiding and abetting, civil conspiracy, and acting in concert claims.

A.

In Count VI of its amended complaint, dkt. no. 30, Daniel Boone asserts negligence and negligence per se claims against Lehman. Daniel Boone cites Pennsylvania statutes and administrative regulations to establish that Lehman had a duty of care with respect to Daniel Boone. See id., ¶¶ 141-49. Daniel Boone also argues in its brief that the foreseeability of its injury created a duty of care on the part of Lehman. See dkt. no. 38, at 11. In addition, Daniel Boone invokes the doctrine of negligence per se in claiming that Lehman is liable for breaching its duties under the relevant statutes. See dkt. no. 30, ¶ 150. I take up each of these claims separately.

1.

Daniel Boone partly bases all its claims, including its claims of negligence and negligence per se, on provisions of the Pennsylvania Public School Code, 24 PA....