(2d Cir. 1997), for instance, the Second Circuit affirmed the dismissal of
a common law fraud claim after trial, not where, as here, we must accept
as true the allegations in the complaint. See Laser Mortgage Management,
Inc. v. Asset Securitization Corp., No. 00 Civ. 8100 (NRB), 2001 WL
1029407, at *10 nn. 10, 12 (S.D.N.Y. Sept. 6, 2001) (distinguishing
Schlaifer from cases decided at the pleading stage and further noting
that even if a plaintiff has sufficient access to relevant information
and an opportunity to detect a fraud, "these are but two of the factors
that we require to consider in determining whether the plaintiff was
reckless."). In Sado v. Ellis, 882 F. Supp. 1401, 1407 (S.D.N.Y. 1995),
also cited to by Chrust, parties were at the summary judgment stage
before the court found no reliance because the document at issue was
publically available. See also Waltree Ltd. v. Ing. Furman Selz LLC,
97 F. Supp.2d 464, 469 (S.D.N Y 2000) (implausibility of investor's
alleged reliance "unavailing" at the motion to dismiss stage).
Finally, Chrust argues that Greenberg has failed to satisfy the
pleading requirements of the Federal Rules of Civil Procedure. Under Rule
9(b), Fed. R. Civ. P., a complaint alleging fraud 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." Lewis v. Rosenfeld,
138 F. Supp.2d 466, 478 (S.D.N Y 2001) (quoting Stevelman v. Alias
Research Inc., 174 F.3d 79, 84 (2d Cir. 1999)) (internal quotations
Greenberg has, with sufficient particularity, specified the statements
made by defendant which were fraudulent, identified who made the
statements, when they were made (to plaintiff and others on various
occasions prior to defendant's retention as chairman of the board) and
why they were fraudulent. See, e.g., Lewis, 138 F. Supp.2d at 478-79;
cf. In re AnnTaylor Stores Securities Litigation, 807 F. Supp. 990, 1004
(S.D.N.Y. 1992) (complaint alleging securities fraud supplied "as much
detail of the alleged fraud as can be expected before discovery
commences" and was thus pled with the required particularity).
B. Misrepresentations as to Future Acts
Greenberg's complaint also alleges that Chrust made certain
misrepresentations regarding his future plans for Worlds.com, namely that
he would locate and help install a new president, chief executive officer
and chief financial officer, and that he would raise the capital
necessary to permit Worlds.com to pursue its business plan and
The Court of Appeals has stated that "the failure to fulfill a promise
to perform future acts is not grounds for a fraud action." Cohen v.
Koenig, 25 F.3d 1168, 1172 (2d Cir. 1994). While the failure to perform
future acts can serve as the basis for a fraud claim where there "existed
an intent not to perform at the time the promise was made," id. at 1172,
fraud cannot be established by mere allegations that a party failed to
perform a promise adequately. Perma Research & Dev. Co. v. Singer Co.,
410 F.2d 572, 576 (2d Cir. 1969) ("[R]epeated references to [defendant's]
unsatisfactory performance" fails to establish "an intention not to
Greenberg's allegation that the representations were false at the time
they were made does not save the claim. Drexel Burnham Lambert, Inc. v.
Saxony Heights Realty, 777 F. Supp. 228, 235 (S.D.N.Y. 1991) ("[A]n
attempt to convert a contract claim into a tort by the additional naked
assertion that the breaching party never intended to perform is doomed to
fail"); Hotel Constr., Inc. v. Seagrave Corp., 574 F. Supp. 384, 388
(S.D.N.Y. 1983) ("A purely conclusory allegation that defendant never
intended to perform, standing alone, could not convert a claim for breach
of contract into one for fraudulent inducement to contract"). Nor is it
sufficient that Greenberg claims Chrust did not interview enough people
or act quickly enough to fill the positions of CEO and CFO for
Worlds.com. See Singer, 410 F.2d at 576 ("Except for repeated references
to [defendant's] unsatisfactory performance under the . . . contract,
[plaintiff] was unable to point to any evidence of an intention not to
perform, and . . . actionable fraud depends on more than a showing of
non-performance."); see also Philips Credit Corp. v. Regent Health
Group, Inc., 953 F. Supp. 482 (S.D.N Y 1997) (holding that fraudulent
intent cannot be inferred merely from the non-performance of a party's
The fraud claim is dismissed insofar as it relates to Chrust's alleged
promises to perform future acts.
II. The Claims for Negligent Misrepresentation as to Future
Performance and Breach of Fiduciary Duty are Dismissed
"Under New York law, the elements for a negligent misrepresentation
claim are that (1) the defendant had a duty, as a result of a special
relationship, to give correct information; (2) the defendant made a false
representation that he or she should have known was incorrect; (3) the
information supplied in the representation was known by the defendant to
be desired by the plaintiff for a serious purpose; (4) the plaintiff
intended to rely and act upon it; and (5) the plaintiff reasonably relied
on it to his or her detriment. However, the alleged misrepresentation
must be factual in nature and not promissory or relating to future events
that might never come to fruition." Hydro Investors, Inc. v. Trafalgar
Power Inc., 227 F.3d 8, 20 (2d Cir. 2000) (citations omitted); see also
Lewis, 138 F. Supp.2d at 479-80.
Under this standard, Greenberg's negligent misrepresentation claims
must be dismissed for the same reasons his fraud claims are dismissed
insofar as they rely on Chrust's failure to perform future acts. As in
the case of fraud, discussed above, "[n]o action for negligent
misrepresentation lies where the alleged misrepresentation is promissory
rather than factual." U.S. West Financial Services, Inc. v. Tollman,
786 F. Supp. 333, 344 (S.D. N Y 1992) (citations omitted). Thus, the
alleged failure by Chrust to undertake locate and install officers or
raise capital for Worlds.com's business objectives cannot serve as the
basis for a negligent misrepresentation claim.
As to Greenberg's claim that Chrust was negligent in providing
misrepresentations as to his background and business acumen, there
remains the issue of whether Greenberg has sufficiently alleged that
Chrust owed him a duty to provide correct information. The New York Court
of Appeals has held that the special duty giving rise to a negligent
misrepresentation claim must arise out of contract or some aspect of the
relationship approaching that of privity of contract. Parrott v. Coopers
& Lybrand, L.L.P., 95 N.Y.2d 479, 483, 741 N.E.2d 506, 718 N.Y.S.2d 709
(2000) ("We have reiterated time and again that before a party may
recover in tort for pecuniary loss sustained as a result of another's
negligent misrepresentations there must be a showing that there was
either actual privity of contract between the parties or a relationship
so close as to approach that of privity."). This standard was clarified
in the case of Kimmell v. Schaefer, 89 N.Y.2d 257,
652 N.Y.S.2d 715, 675
N.E.2d 450 (1996), where the court found that the existence of a special
relationship outside the context of professionals is generally governed
by the weighing of three factors: "whether the person making the
representation held or appeared to hold unique or special expertise;
whether a special relationship of trust or confidence existed between the
parties; and whether the speaker was aware of the use to which the
information would be put and supplied it for that purpose." Id. at 264.
"Although the precise contours of this special relationship escape easy
definition, courts have held that the parties must enjoy a relationship
of trust and reliance closer than that of the ordinary buyer and seller,
and an arm's length business relationship is not enough to create that
relationship." Nasik Breeding & Research Farm Ltd. v. Merck & Co., Inc.,
165 F. Supp.2d 514, 536 (S.D.N.Y. 2001) (citing Goodman Mfg. Co. L.P. v.
Raytheon Co., No. 98 Civ. 2774 (LAP), 1999 WL 681382, at *14 (S.D.N Y
Aug.31, 1999); Dimon Inc. v. Folium, Inc., 48 F. Supp.2d 359, 373
(S.D.N.Y. 1999)); see also McCoy v. Goldberg, 883 F. Supp. 927, 941
(S.D. N.Y. 1995) ("[A]n ordinary contractual relationship is often
insufficient to establish a special relationship . . . while a continuing
or potentially long-term contractual relationship may do so.")).
Greenberg has not alleged that any actual privity of contract between
Chrust existed which may have given rise to a duty to provide correct
information. Nor has he alleged any facts that suggest a relationship
approaching privity or amounting to anything other than an arm's length
business relationship between two sophisticated parties. Rather, the only
basis Greenberg has identified for the required duty is an alleged
fiduciary relationship with Greenberg arising out of the negotiations
leading to Chrust's appointment as director. However, no duty can be
found based on this allegation.
While Greenberg contends that he was part of the negotiations for
Chrust's retention by Worlds.com and that as part of such negotiations he
agreed to contribute his 881,750 shares of Worlds.com stock and support
Chrust's retention, parties to arms length commercial contracts do not
owe each other a fiduciary obligation. Beneficial Commercial Corp. v.
Murray Glick Datsun Inc., 601 F. Supp. 770, 772 (S.D.N.Y. 1985) ("No
fiduciary relationship exists under the facts alleged in the pleadings
which show that the two parties were acting and contracting at arms
length."); Compania Sud. Americana de Vapores, S.A. v. IBJ Schroder Bank
& Trust Co., 785 F. Supp. 421, 426 (S.D.N.Y. 1992) ("[W]here parties deal
at arms length in a commercial transaction, no relation of confidence or
trust sufficient to find the existence of a fiduciary relationship will
arise absent extraordinary circumstances.") (internal quotations and
citations omitted). Further, "conclusory statements about the existence
of a fiduciary relationship" are insufficient to establish such a
relationship. Compania, 785 F. Supp. at 425-26 (finding no fiduciary
relationship when plaintiff failed to establish "that the dealings
between the parties were not arms length"); ESI, Inc. v. Coastal Power
Production Co., 995 F. Supp. 419, 434 (S.D.N.Y. 1998) (holding that a
conventional business relationship does not become a fiduciary
relationship merely by allegation). The fact that Chrust eventually
became a director of Worlds.com in and of itself does not give rise to a
fiduciary obligation owed to Greenberg, a shareholder.
Because Greenberg has not alleged facts that suggest he and Chrust
established anything beyond an arms length business
negligent misrepresentation claim will be dismissed. Because no fiduciary
relationship has been found, the claim for breach of fiduciary duty is
III. The Section 10(b) and Rule lob-S Claim is Dismissed
"To state a claim for relief under Rule 10b-5, a plaintiff must allege
that, in connection with the purchase or sale of securities, the
defendant, acting with scienter, made a false material representation or
omitted to disclose material information and that plaintiff's reliance on
defendant's action caused [plaintiff] injury." Press v. Chem. Invest.
Servs. Corp., 166 F.3d 529, 534 (2d Cir. 1999) (internal quotations and
Chrust has asserted that Greenberg's allegations fail to meet the "in
connection" requirement of a Section 10(b) claim. Courts in this Circuit
have held that "[m]isrepresentations or omissions involved in a
securities transaction but not pertaining to the securities themselves
cannot form the basis of a violation of Section 10(b) or Rule 10b-5."
Manufacturers Hanover Trust Co. v. Smith Barney, Harris Upham & Co.,
770 F. Supp. 176, 181 (S.D. N Y 1991); Chemical Bank v. Arthur Andersen &
Co., 726 F.2d 930, 943 (2d Cir. 1984) (misrepresentations must pertain to
the securities themselves to form a basis of a § 10(b) or Rule 10b-5
Here, no misrepresentations were made with respect to Worlds.com.
Greenberg has merely alleged that without Chrust's misrepresentations,
Greenberg would not have contributed his 881,750 shares to the company.
He makes no allegations of misrepresentations with respect to the
characteristics and attributes of the shares. This claim, even if taken
as true, does not "relate to the value of the security." Press, 988 F.
Supp. at 389; see also Chemical Bank, 726 F.2d at 943 ("The Act and Rule
[§ 10(b) and Rule 10b-5] impose liability for a proscribed act in
connection with the purchase or sale of a security; it is not sufficient
to allege that a defendant has committed a proscribed act in a
transaction of which the pledge of a security is a part."); Bernstein v.
Misk, 948 F. Supp. 228, 243 (E.D.N.Y. 1997) ("[T]he in connection with
requirement mandates that the alleged fraud concern the fundamental
nature of the securities: namely, characteristics and attributes that
would induce investors to buy or sell the particular security").
Further, there is no allegation of loss causation, a necessary element
of a Section 10(b) claim. As the Court of Appeals has explained:
Causation in this context has two elements: transaction
causation and loss causation. Loss causation is causation in the
traditional "proximate cause" sense — the allegedly unlawful
conduct caused the economic harm. Transaction causation means
that the violations in question caused the appellant to engage
in the transaction in question. Transaction causation has been
analogized to reliance.
AUSA, 206 F.3d at 209 (internal quotations and citations omitted).
Greenberg alleges that but for Chrust's misrepresentations concerning his
prior employment history, business background, and actions to be
undertaken on behalf of Worlds.com, Greenberg would not have contributed
his shares of stock to the company as part of Chrust's retention. While
this contention is sufficient for a pleading of transaction causation,
there is no indication from the complaint that Greenberg has alleged that
the injury suffered was a "foreseeable consequence" of Chrust's
misrepresentation. Citibank, N.A. v. K-H Corp., 968 F.2d 1489, 1495 (2d
Cir. 1992) ([I]n order to
establish loss causation, a plaintiff must
prove that the damage suffered a foreseeable consequence of the
The Section 10(b) claim is accordingly dismissed.
IV. Chrust's Request to Strike Portions of the Complaint
Chrust has requested that several paragraphs of the complaint relating
to events after April 13, 1999 be stricken as irrelevant to Greenberg's
claims. This request is denied.
The Second Circuit has stated that "district courts should be wary when
deciding whether to grant a Rule 12(f) motion on the ground that the
matter is impertinent or immaterial." Lipsky v. Commonwealth United
Corp., 551 F.2d 887, 893 (2d Cir. 1976); see also Barcher v. New York
Univ. School of Law, 993 F. Supp. 177, 181 (S.D.N.Y. 1998). Thus, a
motion to strike should generally not be granted unless it can be shown
that "no evidence in support of the allegation would be admissible."
Weiss v. La Suisse, Societe D' Assurances Sur La Vie, 131 F. Supp.2d 446,
450 (S.D.N.Y. 2001) (quoting Lipsky, 551 F.2d at 893).
Here, the allegations contained in the disputed paragraphs, although
relating to events taking place after Greenberg contributed his 881,750
shares of Worlds.com stock back to the company, describe several
instances of alleged misconduct which may help substantiate Greenberg's
claims. In particular, the paragraphs detail the motivation behind the
fraud that has been alleged and may provide other support as to
Greenberg's surviving cause of action. Accordingly, there is no basis to
strike portions of Greenberg's complaint.
The motion to dismiss the causes of action for negligent
misrepresentation, breach of fiduciary duty, and securities fraud are
granted. The motion to dismiss the causes of action for common law fraud
is granted as to future conduct, and is otherwise denied. Chrust's
request to strike portions of the complaint is denied.
Greenberg is granted leave to replead within twenty (20) days hereof.
It is so ordered.
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