Friedman v. JP Morgan Chase & Co.
| Decision Date | 18 May 2016 |
| Docket Number | 15-cv-5899 (JGK) |
| Parties | RICHARD FRIEDMAN and CARLA HIRSCHORN, ET AL., Plaintiffs, v. JP MORGAN CHASE & CO., JP MORGAN CHASE BANK, N.A., J.P. MORGAN SECURITIES LLC, and J.P. MORGAN SECURITIES LTD.; JOHN HOGAN and RICHARD CASSA, Defendants. |
| Court | U.S. District Court — Southern District of New York |
This is a class action brought by Richard Friedman and Carla Hirschorn on behalf of investors in Bernard L. Madoff's Ponzi scheme who withdrew more money from the Ponzi scheme than they invested (the "plaintiffs" or "net winners"). The plaintiffs bring the case against JP Morgan Chase & Co., JP Morgan Chase Bank, J.P. Morgan Securities LLC, and J.P. Morgan Securities, Ltd. (together "JP Morgan"), and two JP Morgan employees, John Hogan and Richard Cassa (the "individual defendants"). On March 28, 2014, the plaintiffs filed this action in the District of New Jersey, alleging that the defendants were actively complicit in the illegal conduct of Madoff and Bernard L. Madoff Investment Securities LLC ("BLMIS"). This case was transferred to the Southern District of New York on July 28, 2015. The defendants now move to dismiss all the claims.
The Second Amended Complaint ("SAC"), filed October 3, 2014, Dkt. No. 33, alleges that Madoff and BLMIS violated Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (the "Exchange Act"), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, and asserts that the defendants, as control persons of BLMIS and Madoff, are liable for BLMIS's and Madoff's Section 10(b) and Rule 10b-5 violations pursuant to Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a) () and the New Jersey Uniform Securities Law, N.J.S.A. §§ 49:3-47, et seq. (). The SAC also asserts several additional state law causes of action against the defendants: Counts 3 through 8 allege claims of aiding and abetting Madoff's embezzlement and breach of fiduciary duty, unjust enrichment, breach of fiduciary duty, commercial bad faith, and gross negligence. The plaintiffs also allege that the defendants violated the Federal Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. §§ 1961 et seq. ("Count 9" or the "Federal RICO Claim") and New Jersey's Racketeer Influenced and Corrupt Organizations Act, N.J.S.A. 2C:41-2 et seq. ("Count 10" or the "New Jersey RICO Claim").
This court has subject matter jurisdiction pursuant to 15 U.S.C. § 78aa, 18 U.S.C. § 1964, 28 U.S.C. § 1331, and 28 U.S.C. § 1367. Pursuant to Federal Rules of Civil Procedure 9(b), 12 (b)(1), and 12(b)(6), the Private Securities Litigation Reform Act of 1995, 15 U.S.C. §§ 78u-4 et seq. ("PSLRA"), and the Securities Litigation Uniform Standards Act of 1998, 15 U.S.C. § 78bb(f)(1) et seq. ("SLUSA"), the defendants move to dismiss the SAC.1 The defendants argue, among other bases for dismissal, that the federal claims are time-barred and fail to state a claim, and that the state claims are barred by SLUSA and that the Court should, in any event, decline to exercise supplemental jurisdiction over them. For the reasons explained below, the motion is granted.
In deciding a motion to dismiss pursuant to Rule 12(b)(6), the allegations in the complaint are accepted as true, and all reasonable inferences must be drawn in the plaintiff's favor. McCarthy v. Dun & Bradstreet Corp., 482 F.3d 184, 191 (2d Cir. 2007). The Court's function on a motion to dismiss is "not toweigh the evidence that might be presented at a trial but merely to determine whether the complaint itself is legally sufficient." Goldman v. Belden, 754 F.2d 1059, 1067 (2d Cir. 1985). A complaint should not be dismissed if the plaintiff has stated "enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 57 (2007). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). While factual allegations should be construed in the light most favorable to the plaintiff, "the tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions." Id.
Claims under the Exchange Act that sound in fraud must meet the pleading requirements of Rule 9(b) of the Federal Rules of Civil Procedure and of the PSLRA, 15 U.S.C. § 78u-4(b). Rule 9(b) requires that the complaint "(1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent." ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 99 (2d Cir. 2007). The PSLRA similarly requires that a complaint in a private action inwhich the plaintiff may recover damages based on the defendant's state of mind "specify each statement alleged to have been misleading [and] the reason or reasons why the statement is misleading," and it adds the requirement that "if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed." 15 U.S.C. § 78u-4(b)(1)-(2); ATSI, 493 F.3d at 99.
When presented with a motion to dismiss pursuant to Rule 12(b)(6), the Court may consider documents that are referenced in the complaint, documents that the plaintiff relied on in bringing suit and that are either in the plaintiff's possession or that the plaintiff knew of when bringing suit, or matters of which judicial notice may be taken. See Chambers v. Time Warner, Inc., 282 F.3d 147, 153 (2d Cir. 2002); see also Plumbers & Pipefitters Nat'l Pension Fund v. Orthofix Int'l N.V., 89 F. Supp. 3d 602, 607-08 (S.D.N.Y. 2015).
The following facts alleged in the SAC are accepted as true for purposes of the defendants' motion to dismiss.
The SAC incorporates, among other things, the Statement of Facts from JP Morgan's global settlement with the United States Attorney's Office for the Southern District of New York. As partof the global settlement, JP Morgan entered into a Deferred Prosecution Agreement to resolve charges against JP Morgan brought under the Currency and Foreign Transactions Reporting Act of 1970, 31 U.S.C. § 5311 et seq. (). SAC, Ex. C.
It is now common knowledge that Madoff ran the largest Ponzi scheme in history through BLMIS and its predecessors and affiliates. At the time of its collapse in December 2008, BLMIS maintained more than 4,000 investment advisory client accounts and purported to have a balance of approximately $65 billion under management. In reality, BLMIS only had approximately $300 million in assets, including $234 million in a JP Morgan bank account. SAC, Ex. C ¶ 7. Madoff and BLMIS had a continuous banking relationship with JP Morgan and its predecessor institutions. SAC, Ex. C ¶ 8. Madoff originally opened an account at Chemical Bank, a JP Morgan predecessor, in 1986, and for decades in the course of the Ponzi scheme, Madoff and BLMIS deposited billions of dollars from investors in an account at JP Morgan known as the 703 Account. SAC ¶¶ 5, 184; SAC, Ex. C ¶ 9. The funds in the 703 Account were not used for the purchase and sale of stocks, bonds, options or other securities. SAC, Ex. C. ¶ 10.
JP Morgan Chase is a financial holding company incorporated under Delaware law with its principal place of business in New York. SAC ¶ 17. The other JP Morgan defendants are subsidiaries of JP Morgan Chase: (1) JP Morgan Chase Bank has its principal place of business in Ohio, SAC ¶ 18; (2) J.P. Morgan Securities LLC is organized under Delaware law and is the principal non-bank subsidiary of JP Morgan Chase, SAC ¶ 19; (3) J.P. Morgan Securities Ltd. is organized under English law and is the investment banking arm of JP Morgan Chase in the United Kingdom, SAC ¶ 21. John Hogan is a JP Morgan employee who held several positions in which he oversaw the risk of Chase's Investment Bank's credit business, rising to the level of Chief Risk Officer and later Chairman of Risk for all JP Morgan Chase. SAC ¶ 22. Richard Cassa was the sponsor or Client Relationship Manager for one of the Madoff and BLMIS accounts from 1993 to March 2008 when he retired. SAC ¶ 23.
The SAC alleges that Cassa received reports from other JP Morgan employees that revealed irregularities in the Madoff account, including unexplained checks between Norman Levy and Madoff for huge sums of money, and that Cassa was aware of misrepresentations made by BLMIS in reports to the SEC. SAC ¶ 23. The SAC also alleges that Hogan knew Madoff was rumored to be operating a Ponzi scheme and that Cassa knew that the BLMISaccount did not hold as much money as it was purported to hold. SAC ¶ 23.
The SAC alleges that JP Morgan had certain obligations under the Bank Secrecy Act, to monitor customer transactions, report suspicious activities, and guard against money laundering. SAC ¶ 66; 31 U.S.C. § 5318(a)(2). The Bank Secrecy Act provides that banks must implement a compliance program to monitor customer transactions and report suspicious transactions relevant to a possible violation of law or regulation. Id. § 5318(g)(1), (h)(1). The SAC alleges that JP Morgan failed to comply with its duties under the Bank Secrecy Act, and did not file suspicious activity reports related to Madoff's business until after Madoff was arrested in December 2008. SAC ¶ 112. The SAC also enumerates the different settlements JP Morgan has entered into with the United States Government, other regulatory agencies and governments, and private litigants, arguing that these settlements show that JP Morgan has a corporate culture of thievery. SAC ¶¶ 69-97.
According to the SAC, Madoff and BLMIS deposited funds in the 703 JP Morgan Account, and embezzled...
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