Marram v. Kobrick Offshore Fund, Ltd.

• Citation: 809 NE 2d 1017,442 Mass. 43
• Parties: EDWARD MARRAM, trustee, v. KOBRICK OFFSHORE FUND, LTD., & others.
• Decision Date: 03 February 2004
• Court: United States State Supreme Judicial Court of Massachusetts

442 Mass. 43

809 NE 2d 1017

EDWARD MARRAM, trustee,¹ v. KOBRICK OFFSHORE FUND, LTD., & others.²

Supreme Court of Massachusetts, Suffolk.

February 3, 2004.

June 10, 2004.

Present: MARSHALL, C.J., GREANEY, IRELAND, SPINA, COWIN, SOSMAN, & CORDY, JJ.

Philip Y. Brown (Edward F. Whitesell, Jr., with him) for the plaintiff.

Patrick J. Sharkey for the defendants.

MARSHALL, C.J.

We review a judgment entered in the Superior Court dismissing an action commenced by an investor for violation of the Uniform Securities Act, G. L. c. 110A, § 410 (a) (2)³; negligent misrepresentation; and unfair and deceptive trade practices, G. L. c. 93A, § 11, against a mutual fund, its investment manager, and its corporate managing entity, on allegations that the manager made materially misleading statements to the plaintiff before and after the plaintiff's investment in the fund, and that the plaintiff sustained losses on its investment. Edward Marram, as trustee for Geo-Centers, Inc. Profit Sharing Plan and Trust (plan), maintained that Frederick R. Kobrick (Kobrick) made misleading statements concerning Kobrick Offshore Fund (offshore fund), which Kobrick controlled, in an effort to attract and retain the plan as an investor. The defendants countered that the express terms of the offshore fund's offering memorandum and subscription agreement, which Marram acknowledged having received, read, and understood in full, precluded Marram from bringing his claims. The defendants placed particular emphasis on the terms of an integration clause in the subscription agreement, which we discuss below. A judge in the Superior Court allowed the defendants' motion to dismiss all claims pursuant Mass. R. Civ. P. 12 (b) (6), 365 Mass. 754 (1974), which the defendants filed ten days after the action commenced. Marram appealed, and we transferred this case from the Appeals Court on our own motion. We conclude that, in the circumstances of this case, the complaint in its entirety must survive the defendants' motion to dismiss. We vacate the judgment and remand the case to the Superior Court for further proceedings consistent with this opinion.

1. Standard of review. The standard of review for a motion to dismiss pursuant to rule 12 (b) (6) is well settled. We take as true " `the allegations of the complaint, as well as such inferences as may be drawn therefrom in the plaintiff's favor . . .' Blank v. Chelmsford Ob/Gyn, P.C., 420 Mass. 404, 407 (1995). In evaluating the allowance of a motion to dismiss, we are guided by the principle that a complaint is sufficient `unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.' Nader v. Citron, 372 Mass. 96, 98 (1977), quoting Conley v. Gibson, 355 U.S. 41, 45-46 (1957)." Warner-Lambert Co. v. Execuquest Corp., 427 Mass. 46, 47 (1998). Although errors of law based on the facts alleged will not surmount a rule 12 (b) (6) challenge, the plaintiff's burden is "relatively light." Id., citing Gibbs Ford, Inc. v. United Truck Leasing Corp., 399 Mass. 8, 13 (1987). Under the "generous principles" governing our review in this matter, Connerty v. Metropolitan Dist. Comm'n, 398 Mass. 140, 143 (1986), we summarize the facts alleged in the unverified complaint and in uncontested documents of record.⁴

2. Alleged facts. The plan is a profit-sharing plan for employees of Geo-Centers, Inc., a high technology and professional services firm headquartered in Massachusetts. The offshore fund is a hedge fund⁵ that solicits business in Massachusetts. It is incorporated under the mutual fund laws of the Cayman Islands.⁶

The complaint alleges that, on December 17, 1999, Marram and Kobrick met to discuss the possibility of the plan investing in one of Kobrick's mutual funds. Marram told Kobrick that the plan was seeking to invest in a diversified fund that would preserve capital. Kobrick touted his "long history of success as a fund manager," represented that the offshore fund was "diversified" and "invested in a variety of industries," and "represented that the stock of high technology companies did not constitute a majority of the [offshore fund's] holdings and that he managed the [offshore fund] in such a way that it would not be a volatile investment vehicle." After the meeting, Kobrick forwarded to Marram a private offering memorandum and a subscription agreement for the offshore fund. The documents contain numerous representations and covenants. We summarize some of the pertinent terms here, reserving others for later discussion.⁷

The private offering memorandum describes the offshore fund's objectives as follows: "to achieve above-market growth in shareholders' capital, principally through investment in equity securities and equity related instruments while seeking to control risk." It further states:

"The Fund will hold a diversified portfolio of securities, use leverage in pursuit of additional return and hold short positions as a hedge and potential source of additional return. . . . The Fund expects to invest in companies of all sizes and a variety of industries. However, the Fund does not have fixed guidelines for diversification and may concentrate investments in specific industries or companies if the Investment Manager believes that such concentration will offer optimal opportunity for risk adjusted capital appreciation. . . . In general, the Fund's investment program has been broadly structured to provide the Investment Manager with maximum flexibility to achieve the Fund's investment objective."⁸

Elsewhere, the private offering memorandum describes the offshore fund as "speculative" and entailing "a high degree of risk."⁹

The subscription agreement directs the investor to "the risk factors referred to in the [m]emorandum." Two statements in the subscription agreement are particularly germane here. The first represents:

"The Investor has received and read a copy of the Memorandum outlining, among other things, the organization and investment objectives and policies of, and the risks and expenses of an investment in, the Fund. The Investor acknowledges that in making a decision to subscribe for Shares the Investor has relied solely upon the Memorandum, the other Fund Documents and independent investigations made by the Investor. The Investor understands the investment objectives and policies of, and the investment strategies which may be pursued by, the Fund. The Investor's investment in the Shares is consistent with the investment purposes and objectives and cash flow requirements of the Investor and will not adversely affect the Investor's overall need for diversification and liquidity. The investor acknowledges that it has had the opportunity to ask questions of the Investment Manager, prior to the sale of the Shares and to obtain any additional information to the extent the Fund possesses such information or could acquire it without unreasonable effort or expense, necessary to verify the accuracy of the information contained in the Memorandum."¹⁰

The second is an integration (or merger) clause, whereby the investor acknowledges: "This Subscription Agreement constitutes the entire arrangement and understanding between the parties hereto regarding its subject matter, and supersedes any prior or contemporaneous agreements, arrangements and understandings, written or oral, between the parties regarding the same."¹¹

On January 1, 2000, shortly after Marram executed and submitted the subscription agreement, the plan purchased 1,500 shares of Series 2 stock for $1.5 million. On March 1, 2000, the plan invested an additional $500,000 in the offshore fund, purchasing 500 shares of Series 4 stock. On March 23, 2000, three months after the plan's initial investment, Marram received the offshore fund's audited financial statements for the year ending December 31, 1999. The report stated that the offshore fund was not diversified and was heavily invested in high technology stock.¹²

Beginning in March, 2000, the offshore fund's value declined precipitously. Thereafter, Kobrick made numerous, almost monthly, reassuring statements to Marram, by letter, by telephone, and by facsimile transmission, that the offshore fund's losses would be recouped and that the market situation worked well for Kobrick's investment style.¹³ When the two men met on October 19, 2000, Kobrick urged Marram to maintain the plan's investment, telling him that no investors had left the offshore fund and that new money was coming into it. While declining to provide Marram with a list of securities in the offshore fund's portfolio, Kobrick told Marram that the offshore fund was diversified, that the "economy plays well into [his] philosophy," and that the economy was rebounding. Yet share value continued to fall. By November 30, 2000, the Series 2 stock had declined 60.67%, and the Series 4 stock had declined 67.60%.

On December 11, 2000, Marram directed the offshore fund, by letter, to liquidate the account. Kobrick asked Marram to reconsider. In a telephone conversation with Marram on December 27, 2000, he urged Marram to stay with the offshore fund. Kobrick stated that he was "very confident" that, in doing so, the plan would reap the "highest reward[s]." Kobrick also promised to provide Marram with a list of companies the offshore fund held, an analysis of the sectors that caused the offshore fund's losses, and an analysis of the sectors that would recover losses. Kobrick allegedly told Marram that the offshore fund had started to do better, and that it was not invested in any "dot.coms." After this conversation, Marram rescinded the December 11, 2000, liquidation order.

Marram never received the information Kobrick promised. On April 3, 2001, Marram again requested that the plan's investment be liquidated. While it is unclear from the complaint exactly when the shares were liquidated,¹⁴ Marram alleges that, in total, the plan invested $2 million in the...