Zhao v. Jpmorgan Chase & Co.
| Decision Date | 13 March 2019 |
| Docket Number | 17 Civ. 8570 (NRB) |
| Parties | HONGYING ZHAO, et al., Plaintiffs, v. JPMORGAN CHASE & CO. and JPMORGAN CHASE BANK, N.A., Defendants. |
| Court | U.S. District Court — Southern District of New York |
Hongying Zhao and 244 other individuals ("plaintiffs") bring this action against JPMorgan Chase Bank, N.A. ("JPMC") and its holding company JP Morgan Chase & Co. ("JPMC Holding Company") (together, "defendants"). The First Amended Complaint ("FAC") asserts the following claims against both defendants: (1) knowing participation in a breach of trust, (2) aiding and abetting embezzlement, (3) aiding and abetting breach of fiduciary duty, (4) aiding and abetting conversion, (5) aiding and abetting fraud, (6) unjust enrichment, (7) commercial bad faith, and (8) gross negligence.
Presently before the Court is defendants' motion to dismiss the FAC pursuant to Federal Rule of Civil Procedure 9(b) and 12(b)(6) or, in the alternative, to strike certain allegations pursuant to Rule 12(f). For the reasons set forth below, defendants' motion to dismiss is granted. Defendants' motion to strike is denied as moot.
The Complaint's primary allegation is that defendants knew or were willfully blind to the fact that non-party Renwick Haddow and his company "Bar Works" were perpetrating a fraud on their investors. Bar Works ostensibly owned and rented out co-working stations in retail spaces across the United States, leasing specific stations to investors in exchange for monthly payments. FAC Ex. A, ECF 24-1 ¶¶ 7-8, 18, 39, 47-83. In reality, Haddow operated a Ponzi scheme in which Haddow solicited investments for Bar Works locations that did not exist and paid returns using the contributions of new investors. Id. ¶¶ 27-29.
Haddow began soliciting investments for Bar Works in early 2016 under the fictitious alias "Jonathan Black." Id. ¶¶ 10, 26. Plaintiffs allege that Haddow adopted this alias on account of his well-publicized history as a corporate fraudster. According to the FAC, publicization of Haddow's checkered past began in or about November 2008, when the Companies Investigation Branch of the Insolvency Service of the United Kingdom disqualified Haddow from serving as a director of any company registered in the U.K. on account of his involvement in a deceptive corporate scheme. Id. ¶ 12. Later, in July 2013, the U.K. Financial Conduct Authority brought a civil action against Haddow and others for allegedly running various unauthorized collective investment schemes. A U.K. court ruled against Haddow and an appeals court dismissed his appeal - decisions that were publicized in the British press. Id.
On or about February 4, 2016, Haddow opened depository bank accounts for two Bar Works entities at JPMC (the "622 account" or the "379 account")2 and in the process disclosed his true identity to at least one JPMC employee. FAC ¶ 13. At some point, defendants saw the private placement memorandum ("PPM") Haddow provided to plaintiffs to generate interest in Bar Works investments. Id. ¶ 130. Haddow used the accounts to receive funds from investors, requesting that each plaintiff send their contributions via wire transfer to either the 622 or the 379 account.
Plaintiffs cite several examples of account activity that they allege alerted or should have alerted JPMC to the fraudulent nature of the Bar Works enterprise. For one, money was co-mingled and Haddow was allowed to withdraw the funds without limitation, id. ¶¶ 14, 25, which he did to pay for lavish personal expenses, including luxury car purchases, id. ¶ 75. Nearly $4,000,000 in investor money was wired into the 379 or 622 accounts and immediately transferred to "known overseas money laundering havens such as Mauritus, the Seychelles and Morocco." Id. ¶¶ 18, 58. On one occasion in March of 2017, an individual plaintiff attempted to send a $35,000 investment to Bar Works Inc., but the funds were not properly routed to the JPMC accounts. Id. ¶ 78. Shortly thereafter, plaintiff became aware of Haddow's involvement in the Bar Works scheme and his bank put in a recall request to JPMC. Rather than return the money, JPMC held the funds for three weeks before releasing them to Haddow. Id. The FAC alleges that these actions violated various internal JPMC policies and triggered unspecified bank monitoring systems.3 FAC ¶¶ 26, 69-70, 74-75, 89, 105, and 122.
According to the FAC, transaction activity from Haddow's accounts at JPMC generated tens of thousands of dollars in transaction fees for the bank. Id. ¶ 30. Plaintiffs further allege that fees associated with the transactions constituted a "large percentage of the wired amount." Id. ¶ 31. As a result of JPMC's actions, plaintiffs allege that they lost nearly $17 million in capital that they had invested in Bar Works.
On June 25, 2017, 27 plaintiffs in the present action filed a lawsuit against Bar Works and three individual defendants in New York State Supreme Court, New York County asserting various state law causes of action, including, inter alia, fraud and breach of fiduciary duty. See FAC Ex. A ("State Court Complaint"), ECF No. 26-1; see also Zhao v. Bar Works USA LLC, etc. et al., Index No. 155530/2017. The state court action resulted in default judgment against Haddow and others. Id., NYSCEF Docket No. 162. On June 30, 2017, the SEC filed a securities fraud action against Haddow and Bar Works entities. Securities and Exchange Commission v. Haddow et al, 1:17-cv-04950.
The initial complaint in this action was filed by a subset of 27 of the current plaintiffs on November 6, 2017. See Compl., ECF No. 1. Plaintiffs subsequently filed the FAC on February 7, 2018, adding an additional 218 plaintiffs. See FAC, ECF No. 24. On May 14, 2018, defendants filed the motion pending before the Court. ECF No. 36. Oral argument was held on February 6, 2019. See Feb. 6, 2019 Hr'g Tr., ECF No. 50.
On a motion to dismiss under Rule 12(b)(6), we must accept as true all factual allegations in the complaint and draw all reasonable inferences in plaintiffs' favor. City of Providence v. BATS Glob. Mkts., Inc., 878 F.3d 36, 48 (2d Cir. 2017). To survive a motion to dismiss, a complaint must include "enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S 544, 570 (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).
In asserting a claim sounding in fraud, plaintiffs must satisfy the heightened pleading standards of Federal Rule of Civil Procedure 9(b) by Fed. R. Civ. P. 9(b). "Plaintiffs must allege facts that give rise to a strong inference of fraudulent intent." Acito v. IMCERA Group, Inc., 47 F.3d 47, 52 (2d Cir. 1995) (internal quotation marks and citation omitted). Rombach v. Chang, 355 F.3d 164, 171 (2d Cir. 2004) (internal citation omitted). "Claims of commercial bad faith, like claims of fraud, are governed by the heightened pleading requirements of Federal Rule of Civil Procedure 9(b)." Lerner v. Fleet Bank, N.A., 459 F.3d 273, 293 (2d Cir. 2006).
As an initial matter, defendants move to dismiss all claims against the JPMC Holding Company, as none of the allegations of wrongdoing relate to that entity. See ECF No. 37 at 10. Here, plaintiffs fail to respond to defendants' Holding Company arguments by submitting a "partial response" to the motion to dismiss that "may be deemed an abandonment of the unmentioned claims." Jackson v. Fed. Exp., 766 F.3d 189, 195 (2d Cir. 2014) (); see also Felske v. Hirschmann, No. 10 Civ. 8899 (RMB), 2012 WL 716632, at *3 (S.D.N.Y. Mar. 1, 2012) ().
The FAC's sole allegation against the holding company is that it created and implemented Anti-Money Laundering ("AML") policies governing how JPMC managed and monitored the 622 and 379 bank accounts. FAC ¶ 37. But creation and implementation of AML policies here is not sufficient to bring claims against a party that was not involved in any alleged non-compliance with those policies. See Hershfeld v. JM Woodworth Risk Retention Grp., Inc., No. 16 Civ. 6369 (BMC), 2017 WL 1628886, at *4 (); see also In re WorldCom, Inc. Sec. Litig., No. 02 Civ. 3288 (DLC), 2004 WL 1097786, at *3 () (internal citations omitted). Accordingly, the Court dismisses all claims against the JPMC Holding Company. We now proceed to a discussion of the merits of plaintiffs' claims as to JPMC.
We first turn to plaintiffs' knowing participation in a breach of trust (Count I) and aiding and abetting breach of fiduciary duty (Count III) claims, which are substantially identical for purposes of our analysis. See In re Sharp Int'l Corp., 403 F.3d 43, 49 (2d Cir. 2005) (...
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