McBeth v. Porges

• Citation: 171 F.Supp.3d 216
• Decision Date: 21 March 2016
• Docket Number: 15-CV-2742 (JMF)
• Parties: Donald F. McBeth, Plaintiff, v. Gregory I. Porges, et al., Defendants.
• Court: U.S. District Court — Southern District of New York

171 F.Supp.3d 216

Donald F. McBeth, Plaintiff,

v.Gregory I. Porges, et al., Defendants.

15-CV-2742 (JMF)

United States District Court, S.D. New York.

Signed March 21, 2016

James Francis Valentino, Lindsey Rudd Skibell, Jonathan Andrew Harris, Harris, O'Brien, St. Laurent & Chaudhry LLP, New York, NY, for Plaintiff.

Howard Schiffman, Schulte, Roth & Zabel LLP, Washington, DC, Robert Emmett Griffin, III, Schulte Roth & Zabel LLP, New York, NY, for Defendants.

OPINION AND ORDER

JESSE M. FURMAN

, United States District Judge

Approximately five years ago, Plaintiff Donald F. McBeth invested $5 million in a hedge fund called Spectra Opportunities Fund LLC (the “Spectra Fund” or “Fund”). Within ten months, the Fund had lost all of its assets—including McBeth's entire investment. Crying foul, McBeth now brings claims against two entities associated with the Spectra Fund—namely, Spectra Financial Group LLC (“Spectra Financial”) and Spectra Investment Group LLC (“Spectra Investment”)—and the principal and Chief Executive Officer of those entities, Gregory I. Porges. Specifically, McBeth alleges misrepresentation, contract and quasi-contract claims, breach of fiduciary duty, and promissory estoppel. Defendants move, pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure

, to dismiss all of McBeth's claims. For the reasons discussed below, Defendants' motion is granted in part and denied in part.

BACKGROUND

In considering a Rule 12(b)(6)

motion, a court is limited to the facts alleged in the complaint and is required to accept those facts as true. See, e.g ., LaFaro v. N.Y. Cardiothoracic Grp., PLLC , 570 F.3d 471, 475 (2d Cir.2009). A court may, however, consider documents attached to the complaint; statements or documents incorporated into the complaint by reference; matters of which judicial notice may be taken, such as public records; and documents that the plaintiff either possessed or knew about, and relied upon, in bringing the suit. See, e.g. , Kleinman v. Elan Corp. , 706 F.3d 145, 152 (2d Cir.2013) ; Chambers v. Time Warner, Inc ., 282 F.3d 147, 153 (2d Cir.2002) (applying that rule to district courts). Accordingly, the following facts are taken from the Second Amended Complaint (“Complaint” or “SAC”), exhibits incorporated by reference therein, and documents of which the Court may take judicial notice.

The relevant facts are relatively straightforward. McBeth is a retired business executive now living in Florida. (SAC (Docket No. 18) ¶¶ 1, 10). Spectra Investment and Spectra Financial are the managing member and investment manager of the Spectra Fund, respectively, and Porges is the principal and Chief Executive Officer of both entities. (Id. ¶¶ 11-13). The Complaint alleges that Porges completely dominated Spectra Financial, Spectra Investment, and the Spectra Fund and, accordingly, that each entity is his alter ego. (Id. ¶¶ 11, 14, 76-78). McBeth first heard of the Spectra Fund through a distant relative and “a person he trusted,” Deborah Rose, who served as Spectra Financial's Chief Operating Officer and a member of Spectra Investment. (Id. ¶¶ 1, 12). Rose broached the subject of McBeth's investing in the Fund at a family dinner in December 2008, and thereafter sent him marketing and informational materials about the Fund. (Id. ¶ 22). About a year and a half later, Rose gave McBeth another set of marketing and informational materials. (Id. ¶ 29). In those materials, and subsequent discussions with McBeth and his son—who works in finance—Defendants represented that the Fund was “conservative” and employed a “risk-conscious approach” and that Porges had a history of successful investment. (Id. ¶¶ 1, 31, 33). Relying on those representations, McBeth invested $5 million in the Fund—specifically, $2 million on November 1, 2010, and another $3 million on December 1, 2010. (Id. ¶ 2).

When he invested in the Fund, McBeth entered into an agreement governed by three different documents (the “Offering Papers”). (Id. ¶ 40). First, he entered into the Limited Liability Company Agreement of the Spectra Opportunities Fund LLC (the “LLC Agreement”). (Id. ¶ 40; see id. , Ex. 6 (LLC Agreement)). Second, pursuant to the LLC Agreement, Defendants agreed to manage the Fund in accordance with the Confidential Private Offering Memorandum (the “Memorandum”). (Id. ¶ 40; see id. , Ex. 7 (Memorandum)). Third, McBeth executed subscription papers that incorporated the Memorandum and LLC Agreement by reference and contained an investor suitability questionnaire (the “Subscription Documents”). (Id. ¶ 40; see Decl. Robert E. Griffin Supp. Defs.' Mot. To Dismiss Sec. Am. Compl. (Docket No. 21), Ex. 1 (Subscription Documents)). In the Subscription Documents, McBeth affirmed that he was “experienced in investments of this kind,” “own[ed] and invest[ed] on a discretionary basis at least $25,000,000 in investments,” was “capable of evaluating the merits and risks of this investment,” and was responsible for “mak[ing his] own investment decisions.” (Subscription Documents ¶ 11; id. at 19, 22). In addition, the Offering Papers required Defendants to provide investors with monthly statements and annual audited financial statements. (SAC ¶ 47).

By September 2011, within ten months of McBeth's investment, the Spectra Fund had lost all of its assets.¹ Plaintiff does not purport to know precisely why the Fund went bust, but alleges that the drastic losses could have resulted only from behavior—such as risky, reckless trading or misappropriation—that violated the Fund's investment strategy (as described in both the Offering Papers and in the marketing materials). (Id. ¶¶ 48, 50-51). In addition, Plaintiff alleges that Defendants never provided him with annual audited financial statements and delayed sending him the monthly statements for August and September 2011, misrepresenting that the delay related to the Fund's involvement in the bankruptcy of MF Global Holdings Ltd. (Id. ¶¶ 49, 53-57). Rose broke the news to McBeth that his investment was gone in a meeting on January 20, 2012. (Id. ¶ 58). She also disclosed that Porges had previously “lost a significant portion of the investment capital provided to him by outside investors.” (Id. ¶ 59). Plaintiff alleges he would not have invested his money in the Fund had he known that at the outset. (Id. ).

At the same January 20, 2012 meeting, Rose promised, “on behalf of Defendants, that they would fully repay his $5 million investment.” (Id. ¶ 60). Relying on that promise, McBeth did not “assert any legal claims against Defendants.” (Id. ¶ 61). McBeth had further discussions with Rose and Porges about repayment, and McBeth ultimately received $200,000. (Id. ¶¶ 62, 70-73). In the subsequent discussions, Rose and Porges also provided some potential insights into how the Fund lost its money. Porges stated that he “normally holds only 20 to 40 positions, and if he believes in the attractiveness of a particular stock he will make it as much as 20% of the portfolio.” (Id. ¶ 64). Porges would also use options. (Id. ¶ 65). Finally, Rose revealed that the Securities and Exchange Commission (“SEC”) was investigating “unusual activity in accounts controlled by Spectra, including trades where Spectra was taking contrary positions ... buying a security in one account, and selling the same security in another account.” (Id. ¶ 67). Plaintiff alleges that these revelations could explain how the Fund collapsed, but “that is only a possibility” and that Defendants “may have simply misappropriated” his money. (Id. ¶ 66).

LEGAL STANDARDS

In evaluating a motion to dismiss, a court must accept all facts set forth in the complaint as true and draw all reasonable inferences in the plaintiff's favor. See, e.g. , Burch v. Pioneer Credit Recovery, Inc. , 551 F.3d 122, 124 (2d Cir.2008)

(per curiam). A claim will survive a Rule 12(b)(6) motion, however, only if the plaintiff alleges facts sufficient “to state a claim to relief that is plausible on its face.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). A claim is facially plausible “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, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (citing Twombly , 550 U.S. at 556, 127 S.Ct. 1955 ). A plaintiff must show “more than a sheer possibility that a defendant has acted unlawfully,” id. and cannot rely on mere “labels and conclusions” to support a claim, Twombly , 550 U.S. at 555, 127 S.Ct. 1955. If the plaintiff's pleadings “have not nudged [his or her] claims across the line from conceivable to plausible, [the] complaint must be dismissed.” Id. at 570, 127 S.Ct. 1955. Finally, to the extent that a plaintiff alleges fraud, Rule 9(b) requires the plaintiff to plead his claims “with particularity,” specifying “the circumstances constituting fraud.” Fed. R. Civ. P. 9(b). In particular, “the complaint must: (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.” Lerner v. Fleet Bank, N.A. , 459 F.3d 273, 290 (2d Cir.2006) (internal quotation marks omitted). Failure to satisfy the Rule 9(b) standard, if applicable, is grounds for dismissal. See, e.g. , id. at 293 ; Slayton v. Am. Express Co. , 604 F.3d 758, 766 (2d Cir.2010).

DISCUSSION

Plaintiff brings claims for fraudulent misrepresentation (Count One), negligent misrepresentation (Count Two), breach of contract (Count Three), breach of fiduciary duty (Count Four), promissory estoppel (Count Five), and unjust enrichment (Count Six). (SAC ¶¶ 79-106). Further, he alleges that Porges should be held liable as the alter ego of the Spectra entities. (Id. ¶¶ 76-78). The Court will address each claim, largely but not entirely in order.

A. Choice of Law

Before turning to the merits of...