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United States District Court, Southern District of New York

January 13, 2003


The opinion of the court was delivered by: John G. Koeltl, United States District Judge:


This is a motion brought, pursuant to Fed.R.Civ.P. 12(b)(6) by Keefe, Bruyette & Woods, Inc. ("KBW"), KBW's former Chief Executive Officer, James J. McDermott, Jr. ("McDermott") and a former KBW employee David Berry ("Berry"), (collectively "the defendants") to dismiss two of the six causes of action alleged by the plaintiff, Teresa N. Dooner, in her Second Amended Complaint ("SAC"). The plaintiff raises six causes of action in the Second Amended Complaint. The first cause of action is a claim for common law fraud, alleging that KBW and McDermott committed fraud by misrepresenting and failing to disclose certain facts related to a purported initial public offering ("IPO") of KBW stock. The second through fifth causes of action, respectively, are claims for hostile work environment, discriminatory disparate treatment, and retaliation, and are raised against KBW and Berry and arise out of the alleged treatment of the plaintiff by Berry who served as her supervisor. The plaintiff's sixth and final cause of action, raised against KBW and Berry, is for defamation, and arises out of a statement allegedly made by Berry at a meeting of KBW's board of directors. The defendants now move to dismiss the plaintiff's first and sixth causes of action for fraud and defamation.*fn1


On a motion to dismiss, the allegations in the Second Amended Complaint are accepted as true. See Grandon v. Merrill Lynch & Co., 147 F.3d 184, 188 (2d Cir. 1998). In deciding a motion to dismiss, all reasonable inferences are drawn in the plaintiff's favor. See Gant v. Wallingford Bd. of Educ., 69 F.3d 669, 673 (2d Cir. 1995); Cosmas v. Hassett, 886 F.2d 8, 11 (2d Cir. 1989). The Court's function on a motion to dismiss is "not to weigh the evidence that might be presented at trial but merely to determine whether the complaint itself is legally sufficient." Goldman v. Belden, 754 F.2d 1059, 1067 (2d Cir. 1985). Therefore, the defendant's motion to dismiss should only be granted if it appears that the plaintiff can prove no set of facts in support of his claim that would entitle him to relief. See Swierkiewicz v. Sorema, N.A., 122 S.Ct. 992, 998 (2002); Conley v. Gibson, 355 U.S. 41, 45-46 (1957); Grandon, 147 F.3d at 188; Goldman, 754 F.2d at 1065.


The defendants first move to dismiss the plaintiff's first cause of action, for common law fraud.

The plaintiff first filed a complaint in this action on January 27, 2000. The defendants moved to dismiss various causes of action in the complaint pursuant to Fed.R.Civ.P. 12(b)(6) By order dated October 19, 2000, the plaintiff was granted leave to file an amended complaint.

After the filing of the First Amended Complaint, the defendants moved to dismiss, among other things, the plaintiff's fraud claims. In a prior Opinion and Order issued by this Court, dated August 20, 2001, the Court dismissed the plaintiff's causes of action for fraud without prejudice to repleading. Dooner v. Keefe, Bruyette, & Woods, Inc., 157 F. Supp.2d 265, 286 (S.D.N.Y. 2001). Subsequently, the plaintiff filed the Second Amended Complaint.

It is true that "[w]here a party's complaint has been dismissed for failure to adequately to set forth an element of his claim, and he is given leave to replead in an effort to cure the deficiency, it is to be expected that the amended complaint will repeat the other allegations found in the original complaint." Stern v. Leucadia Nat'l Corp., LNC, 844 F.2d 997, 1005 (2d Cir. 1988). However, in this case a plain reading of the two complaints indicates that the allegations with respect to the fraud claim are substantially similar, if not identical, in the two complaints. The plaintiff has not alleged any new facts to remedy the pleading deficiencies in the First Amended Complaint that caused the dismissal of the fraud claims based on the representations regarding KBW's IPO. Consequently, for the reasons explained below and in this Court's prior opinion, the defendants' motion to dismiss the first cause of action for fraud is granted.

Under New York law, a claim for fraud based on false statements must allege the following elements: (1) a material false representation of an existing fact; (2) made with knowledge of its falsity; (3) with an intent to defraud; (4) reasonable reliance; and (5) damages. See, e.g., Cohen v. Koenig, 25 F.3d 1168, 1172 (2d Cir. 1994); Four Finger Art Factory, Inc. v. Dinicola, No. 99 Civ. 1259, 2001 WL 21248, at *3 (S.D.N.Y. Jan. 9, 2001); Channel Master Corp. v. Aluminimum Ltd. Sales, Inc., 151 N.E.2d 833, 835 (N.Y. 1958).

The plaintiff first alleges that the defendants committed fraud by assuring the plaintiff that the IPO was a "sure thing", a "done deal," and that she would "make a lot of money out of [the IPO]." (SAC ¶¶ 151, 157.) Additionally, the plaintiff alleges that the defendants "knew of no set of facts or circumstances" as to why the IPO would not occur. (SAC ¶ 153.) (emphasis in original). For many of the same reasons stated in this Court's previous opinion, these allegations fail to state adequately a cause of action for common law fraud.

First, these allegations fail to satisfy the first element of fraud because they still do not allege a material false representation with respect to an existing fact. The allegations all relate to the defendants' representations about an impending IPO and the probable financial success the plaintiff was likely to achieve. These statements of prophecy cannot be the basis of a fraud claim, precisely because IPO plans are not certain, and are subject to the vagaries of the market and the perceptions of investors. Statements with respect to an IPO, such as those alleged by the plaintiff, reflect only speculative optimism about future events, and cannot satisfy the first element of a fraud claim. See Dooner, 157 F. Supp.2d at 278-79.

The plaintiff's attempt to cure the deficiencies with respect to this first element, by asserting in a conclusory manner, that the defendants asserted that they knew of "no set of facts or circumstances" that would prevent the IPO from going forward, also fails. (SAC ¶ 58) This allegation still fails to allege a misstatement about an existing fact, because the alleged statement still refers to circumstances relating to a future event, the IPO.

Moreover, to the extent the alleged representation by the defendants that they knew of "no facts or circumstances" to call the IPO into doubt is one of a present fact, this representation cannot be the basis of a claim for fraud because it fails to allege facts with sufficient particularity. The plaintiff's allegation that McDermott made such a representation "in words or substance," (SAC ¶ 58.), is insufficiently precise so as to provide the factual foundation required by Rule 9(b). There are no facts alleged with respect to the substance, timing, or place of any of the purported conversations between the plaintiff and the McDermott regarding the IPO, see Feigenbaum v. Marble of Am., Inc., 735 F. Supp. 79, 82 (S.D.N.Y. 1990), and insufficient facts from which to discern how McDermott was so clairvoyant as to know that the IPO would fall apart before it was completed and thus rendering his statements inaccurate. See Stern, 844 F.2d at 1003.

Second, the plaintiff's allegations fail to satisfy the third element of a fraud claim, requiring that the fraudulent statement be made with an intent to defraud. Under Fed.R. Civ. P. 9(b), a plaintiff can allege fraudulent intent generally, but a plaintiff must allege facts that give rise to a strong inference of fraudulent intent. Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1128 (2d Cir. 1994). The strong inference can be established either by "(a) by alleging facts to show that the defendants had both motive and opportunity to commit fraud, or (b) by alleging facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness." Id.; See Four Finger Art Factory, Inc., 2001 WL 21248, at *5.

The plaintiff alleges that the defendants made the representations regarding the certainty of the IPO in order to induce the plaintiff to tender her shares into the IPO, although the plaintiff also alleges that the IPO was oversubscribed. (SAC ¶¶ 155-56, 160.) This was the identical motive alleged in the First Amended Complaint, and the plaintiff has still failed to cure its deficiencies. There are still no facts alleged to suggest that McDermott or KBW had such a motive, or that the plaintiff's shares were so substantial that the defendants would have cared whether these shares were tendered pursuant to the IPO. See Dooner, 157 F. Supp.2d at 279.

Finally, even though the plaintiff now alleges that the defendants attempted to get the plaintiff to tender her shares "in case they were able to push the IPO through at some point," (SAC ¶ 160.), the plaintiff still has no explanation for this alleged motive. Acting in such a manner is clearly self-defeating, if not irrational. There is no explanation as to why the defendants would falsely predict that the IPO would succeed, if in fact they thought or knew that the IPO would fail. If the IPO failed, the fact that the plaintiff had attempted to participate in the IPO would hardly have benefitted the defendants. The only motive alleged by the plaintiff is entirely inconsistent with the material fact that forms the basis of the plaintiff's fraud claim. The plaintiff alleges that the defendants misrepresented that the IPO was a "sure thing" when they knew in fact that the IPO was not to go forward. Yet, at the same time, the plaintiff alleges that the defendants made such statements in order to induce the plaintiff to tender shares into the IPO. Its strains logic to understand why the defendants would induce the plaintiff to tender shares into an IPO that they knew was not going to go forward.

There are also no specific facts that allege circumstances indicating conscious misbehavior or recklessness on the part of the defendants with respect to representations regarding the potential success of the IPO. If, as the plaintiff alleges, the defendants knew the IPO would fail, then there would be no basis for them to go through the effort and expense of promoting the IPO. The circumstances undercut any claim that they acted in a knowingly false or reckless way. Under these circumstances, the Second Amended Complaint does not allege sufficient facts to infer that the defendants acted with fraudulent intent.

Third, the plaintiff has failed to allege reasonable reliance. One of the bases for dismissing the First Amended Complaint was the fact that no reasonable investor could have relied on future statements about an IPO, including statements that an IPO was a "sure thing." See Dooner, 157 F. Supp.2d at 279. The plaintiff does not allege any new facts that would explain how or why a reasonable investor could have relied on the statements made by the defendants. Moreover, the plaintiff now alleges that the defendants' assertions about the certainty of the IPO were "patently implausible." (SAC ¶ 25.) While the plaintiff alleged at oral argument that the alleged misstatements were only "patently implausible" to the defendants, that is a strained reading of the Second Amended Complaint. The plaintiff has thus pleaded that any reliance by the plaintiff would have been unreasonable.

For the reasons explained above, and because the plaintiff has failed to correct many of the pleading deficiencies that existed in the First Amended Complaint, the defendants' motion to dismiss the first cause of action for fraud is granted.

Ordinarily, dismissal based on failure to plead a claim for fraud is without prejudice to a plaintiff's ability to file an amended complaint to cure the deficient pleading. See Acito v. IMCERA Group, Inc., 47 F.3d 47, 54-55 (2d Cir. 1995) ("Leave to amend should be freely granted, especially where dismissal of the complaint [is] based on Rule 9(b)."); Luce v. Edelstein, 802 F.2d 49, 56-57 (2d Cir. 1986) ("Complaints dismissed under Rule 9(b) are `almost always' dismissed with leave to amend." (citation omitted)).

Nevertheless, it is not appropriate to dismiss the plaintiff's claim for fraud without prejudice to repleading, because this claim is also dismissed pursuant to Fed.R.Civ.P. 12(b)(6) for failure to state a claim on which relief may be granted. Moreover, this is the plaintiff's third complaint. Three bites at the apple is enough. See In re Hyperion Sec. Litig., No. 93 Civ. 7179, 1995 WL 422480, at *8 (S.D.N.Y. July 14, 1995), aff'd sub nom, Olkey v. Hyperion 1999 Term Trust, Inc., 98 F.3d 2 (2d Cir. 1996); see also In re Am. Express Co. Shareholder Litig., 39 F.3d 395, 402 (2d Cir. 1994); Fisher v. Offerman & Co., Inc., No. 95 Civ. 2566, 1996 WL 563141, at *9 (S.D.N.Y. Oct. 2, 1996). Therefore, the plaintiff's first cause of action for fraud is dismissed with prejudice.


The defendants also move to dismiss the plaintiff's sixth cause of action for defamation. The plaintiff alleges that on or about May 17, 1999 at a KBW board meeting, Berry announced that the plaintiff would be "resigning like Jim McDermott." (SAC ¶ 227.) The plaintiff's allegation is that this comment was an attempt to denigrate the plaintiff by connecting her to McDermott, who had left KBW amid an ongoing criminal inquiry investigating the allegedly illegal transfer of insider information from McDermott to an adult film star. (SAC ¶ 56, 62, 228.) As a result of this statement, the plaintiff alleges she suffered injury to her professional reputation. (SAC ¶ 230.)

Under New York law, to state a prima facie case of slander, a plaintiff must satisfy the following seven elements:*fn2

(1) a defamatory statement of fact; (2) that is false; (3) published to a third party; (4) "of and concerning" the plaintiff; (5) made with the applicable level of fault on the part of the speaker; (6) either causing special harm or constituting slander per se; and (7) not protected by privilege.
Albert v. Loksen, 239 F.3d 256, 265-66 (2d Cir. 2001).

The plaintiff's claim must be dismissed because the Second Amended Complaint fails to allege a defamatory statement of fact. Whether statements are susceptible of defamatory connotation is a threshold legal determination to be made by the court. Id. at 267 (collecting cases). A statement may be considered defamatory if, among other things, it tends to "expose [the plaintiff] to public hatred, shame . . . aversion, . . . disgrace, or . . . induces an evil opinion of one in the minds of right-thinking persons." Id. at 266 n. 6 (quotations omitted).

In this case, the alleged statement made by the defendant Berry does not rise to the level of a defamatory statement. While the plaintiff alleges that she had previously decided to resign (SAC ¶¶ 57, 64), she alleges that she rescinded her retirement letter on May 12, 1999 before the May 17, 1999 Board meeting. (SAC ¶¶ 95.) However, that simply raised a contractual dispute as to whether the plaintiff had resigned. There is nothing opprobrious about resigning and the plaintiff had been prepared to do so, according to the plaintiff, before the IPO collapsed. The plaintiff attempts to link this statement about retirement to the moral cloud under which McDermott resigned: "This false statement was made by individuals who were knowledgeable of McDermott's transgressions and thus were poignantly aware of the negative connotations being directed at Dooner." (SAC ¶ 229.) The statement bears no such connotation. McDermott resigned amid a scandal over allegedly giving inside information to an adult film star. There is simply nothing in the statement to suggest that such allegations were being made against the plaintiff.

Moreover, the plaintiff's defamation claim does not satisfy the sixth element, requiring either that the statement cause special harm or constitute slander per se. "Special harm" is the "`loss of something having economic or pecuniary value.'" Id. at 271 (quoting Liberman v. Gelstein, 605 N.E.2d 344, 347 (N.Y. 1992)). The plaintiff does not allege that as a result of this statement she was unable to seek new employment, or that her career prospects suffered, or that she suffered any specific financial harm. Therefore, there is no allegation in the Second Amended Complaint of any "special harm" suffered by the plaintiff. To plead "special harm" the plaintiff must plead specific damages and pleading damages in the round amounts of $2 million and punitive damages of $5 million are inconsistent with a claim of "special damages." See, e.g., Penn-Ohio Steel Corp. v. Allis—Chalmers Mfg. Co., 184 N.Y.S.2d 58, 62 (1959); Zausner v. Fotochrome, Inc., 231 N.Y.S.2d 667, 668 (1962); Ravich v. Kling, 187 N.Y.S.2d 272, 274 (1959); see also PI, Inc. v. Ogle, No. 95 Civ. 1723, 1997 WL 37941, at *3 (S.D.N.Y. Jan. 30, 1997) (round sums without any attempt at itemization are insufficient to plead special damages).

The plaintiff, therefore, must allege that the defamatory statement constituted slander per se. Statements that have historically been defined as slander per se are those that (1) charge the plaintiff with a serious crime; (2) tend to injure the plaintiff in his or her trade, business or profession; (3) imply that the plaintiff has a loathsome disease; or (4) impute unchastity to a woman. Albert, 239 F.3d at 271. The alleged statement by the defendant does not fall within any one of these four categories. The defendants did not charge the plaintiff with committing any crime, and merely stated that she had resigned. Moreover, the statement makes no mention of the alleged acts or impropriety committed by McDermott, and it is difficult to see how anyone would impute the misbehavior or wrongdoing of McDermott to the plaintiff. There is also no reasonable basis from which to conclude that the statement imputed unchastity to the plaintiff. Berry simply was informing the other board members of the plaintiff's decision to resign. Any argument that this statement constitutes slander per se is without merit.

Because multiple elements of a claim of slander cannot be satisfied, the plaintiff's sixth cause of action is dismissed.


For the reasons explained above, the defendants' motion to dismiss the plaintiff's first cause of action, for fraud, and sixth cause of action, for defamation, is granted.*fn3


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