Waltree Ltd. v. Ing Furman Selz LLC, 99 CIV 9935 SAS.

Citation97 F.Supp.2d 464
Decision Date10 May 2000
Docket NumberNo. 99 CIV 9935 SAS.,99 CIV 9935 SAS.
PartiesWALTREE LIMITED, Plaintiff, v. ING FURMAN SELZ LLC, ING Bank N.V. and Stuart Kasdin, Defendants.
CourtUnited States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York

Amy W. Schulman, Rita C. Burghardt, Piper, Marbury Rudnick & Wolfe L.L.P., New York City, for plaintiff.

Peter E. Calamari, David E. Mollon, Winston & Strawn, New York City, for defendants.


SCHEINDLIN, District Judge.

This is a securities fraud action in which plaintiff Waltree Limited ("Waltree") alleges that defendants ING Barings LLC ("ING Barings")1, ING Bank N.V. ("ING Bank") and Stuart Kasdin fraudulently induced it to purchase certain high-yield debt instruments in violation of section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78j(b), Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, and section 12(a)(2) of the Securities Act of 1933 (the "1933 Act"), 15 U.S.C. § 77l(a)(2). Plaintiff also brings a related state law fraud claim.

Defendants now move to dismiss the First Amended Complaint ("Complaint") pursuant to Federal Rule of Civil Procedure 12(b)(6), for failure to state a claim upon which relief may be granted, and pursuant to Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act of 1995 (the "Reform Act"), 15 U.S.C. § 78u-4 (1999), for failure to plead fraud with particularity.2 With one exception, defendants' motion is denied.

I. Legal Standard

Dismissal of a complaint for failure to state a claim pursuant to Rule 12(b)(6) is proper only where "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim that would entitle him to relief." Harris v. City of N.Y., 186 F.3d 243, 247 (2d Cir.1999). "The task of the court in ruling on a Rule 12(b)(6) motion is merely to assess the legal feasibility of the complaint, not to assay the weight of the evidence which might be offered in support thereof." Cooper v. Parsky, 140 F.3d 433, 440 (2d Cir. 1998) (internal quotations omitted). To properly rule on such a motion, the court must accept as true all material facts alleged in the complaint and draw all reasonable inferences in the nonmovant's favor. See Harris, 186 F.3d at 247.

Rule 9(b) sets forth additional pleading requirements with respect to allegations of fraud. Rule 9(b) requires that "in all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." But, under Rule 9(b), "malice, intent, knowledge and other condition of mind of a person may be averred generally."

Securities fraud actions are subject to the requirements of Rule 9(b). See Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1127 (2d Cir.1994). However, the Reform Act heightened that Rule's requirement for pleading scienter. See 15 U.S.C. § 78u-4(b)(3)(A); see also Press v. Chemical Inv. Servs. Corp., 166 F.3d 529, 537-38 (2d Cir.1999). As a result, in securities fraud actions, scienter may not be averred generally. Rather, plaintiffs must "`state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.'" Press, 166 F.3d at 538 (quoting 15 U.S.C. § 78u-4(b)(3)(A)).

II. Background

The Complaint describes a complicated series of business transactions involving plaintiff, defendants and the Republic of Tatarstan ("Tatarstan"). For purposes of resolving defendants' pending motion, it is unnecessary to recount the challenged transactions in detail. Rather, a brief summary suffices at this preliminary stage.3

Plaintiff Waltree is a limited liability company incorporated under the laws of Ireland. Complaint ¶ 1. Defendant ING Bank is a Netherlands corporation with its principal place of business in Amsterdam. Id. ¶ 2. The bank also maintains an office in New York, New York. Id. Defendant ING Barings is a Delaware corporation with its principal place of business in New York, New York. Id.4 At all relevant times, defendant Kasdin was a Vice President of either ING Bank or ING Barings. Id. ¶¶ 2, 6.5

In early 1998, ING Bank agreed to loan $100,000,000 to Tatarstan (the "Loan"). Id. ¶¶ 8-9. In order to finance the Loan, ING Bank and ING Barings planned to issue a series of high-yield debt instruments (the "Notes"). Id. The Notes were to be issued by ING Bank and placed by ING Barings. Id. ¶ 8.

In May 1998, Kasdin, at the direction of either ING Bank or ING Barings, contacted Waltree and made a sales pitch regarding the Notes. Id. ¶¶ 8, 10-12. Kasdin informed Waltree that the Notes would bear interest at a rate of 14.5% per annum and mature within six months of investment. Id. ¶ 11. Kasdin and others at the ING entities described the Notes as a "good", "stable" and "safe" investment because, among other things, the time to maturity was less than six months. Id. ¶ 12. On May 20, 1998, relying on Kasdin's representations and the representations of others at the ING entities, Waltree invested $2.3 million in the Notes. Id. ¶ 19.

Waltree now claims that defendants failed to disclose the following material information in connection with the Notes:

(1) The Notes were linked to other debts of Tatarstan and subject to a "Cross-Default" provision. Under the Cross-Default provision, if Tatarstan defaulted on any debt in an aggregate amount of $10,000,000, such default would be considered an "Event of Default" under the Notes. Id. ¶ 14.

(2) The Notes were subject to a "Recovery Amount" clause which provided that, upon occurrence of an Event of Default, defendants had sole discretion to redeem the Notes at a recovery amount based on present market value. Id. ¶ 15.

(3) At the time it issued and placed the Notes, ING Bank and ING Barings served as financial advisors to Tatarstan. ING Bank and ING Barings received fees for their services. Id. ¶ 16.

Waltree alleges that defendants failed to disclose this information during oral discussions leading up to Waltree's decision to invest in the Notes. Id. ¶¶ 14-16. Waltree also alleges that "it did not receive an Offering Circular, Term Sheet or other informational documents about the Notes" until January 14, 1999—almost eight months after Waltree purchased the Notes. Id. ¶ 17.

Following plaintiff's purchase of the Notes, the ING entities advised plaintiff that a financial crisis in the Russian Federation necessitated a restructuring of payments due on the Notes. Id. ¶ 20. On October 14, 1998, plaintiff and the other Noteholders agreed to the proposed restructuring. Id. ¶ 21. The Complaint alleges that during this time period, ING Bank and ING Barings continued to perform "the dual and conflicting roles of providing financial advice to [Tatarstan] while purportedly working with the Noteholders to shape an acceptable restructuring of the Loan." Id. ¶ 22.

On November 19, 1998, the Prime Minister of Tatarstan sent plaintiff and the other Noteholders a letter stating that Tatarstan was unable to repay the Loan either as scheduled or under the proposed restructuring. Id. ¶ 24. The Prime Minister blamed Tatarstan's inability to meet its debt obligations on flawed assumptions and projections underlying the Loan. Id. The ING entities' role in formulating those flawed projections, or in Tatarstan's decision not to proceed with the restructuring, was never disclosed. Id.

Four days later, on November 24, 1998, the ING entities notified plaintiff that they had set the default Recovery Amount at $2,000 per $100,000 Note. Id. ¶ 27. Pursuant to this determination, the ING entities tendered payment of $46,0000 to Waltree in full satisfaction of the Notes. Id. ¶ 28. The $46,000 payment represented 2% of Waltree's initial $2.3 million investment. Id.

In January 1999, in an apparent attempt to recoup their losses, Waltree and the other Noteholders again agreed to participate in a restructured loan to Tatarstan. Id. ¶ 29. The restructuring was set forth in a "Participation Agreement" between ING Bank and the Noteholders. Id. The Complaint alleges that the ING entities' undisclosed relationship with Tatarstan improperly influenced the terms of the Participation Agreement. Id. ¶¶ 29-31. Specifically, the Complaint asserts that the Participation Agreement was drafted by attorneys for the ING entities, and that it included terms that were more favorable to Tatarstan and the ING entities than to the Noteholders. Id. Plaintiff alleges that had it known of the ING entities' dual role, it would not have entered into the Participation Agreement. Id. ¶ 31.

On November 19, 1999, plaintiff filed the instant Complaint alleging violations of § 10(b) and § 12(a)(2) as well as common law fraud. The gravamen of the Complaint is that defendants purposefully failed to disclose material information in connection with the Notes and the Participation Agreement in order to induce plaintiff to invest in those transactions. Id. ¶¶ 33-34. The Complaint alleges that defendants' bad acts defrauded and harmed plaintiff while benefitting defendants and Tatarstan. Id. ¶ 32. Plaintiff seeks compensatory and punitive damages together with recission of its Note purchases.

III. Discussion
A. Claim I: Section 10(b) and Rule 10b-5

To state a claim under § 10(b) and Rule 10b-5, plaintiff must allege that in connection with the purchase or sale of securities: (1) defendants made a false material representation or omitted to disclose material information; (2) defendants acted with scienter; and (3) plaintiff detrimentally relied upon defendants' fraudulent acts. See Press, 166 F.3d at 534. In addition, plaintiff must allege elements one and two—fraudulent acts and scienter— with particularity in order to meet the heightened pleading requirements set forth in Rule 9(b) and the Reform Act.

After carefully reviewing the Complaint, I conclude that, at this nascent stage of the litigation, plaintiff has adequately stated a claim under § 10(b) and Rule 10b-5. Among other things, the Complaint alleges that in...

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