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JP MORGAN CHASE BANK v. WINNICK

August 15, 2005.

JP MORGAN CHASE BANK, in its capacity as Administrative Agent under the Credit Agreement, Plaintiff,
v.
GARY WINNICK, DAN J. COHRS, LODWRICK M. COOK, HANK MILLNER JAMES C. GORTON, JOSEPH CLAYTON, THOMAS J. CASEY, S. WALLACE DAWSON JR., SUSAN DULLABH, THOMAS ROBERSHAW, DAVID A WALSH JOSEPH P. PERRONE, ROBIN WRIGHT, PATRICK JOGGERST, BRIAN FITZPATRICK, DAVID CARREY, JACKIE ARMSTRONG, MARK ATTANASIO, DAVID L. LEE, GEOFFREY J.W. KENT, ERIC HIPPEAU, NORMAN BROWNSTEIN, WILLIAM E. CONWAY, JR., Defendants.



The opinion of the court was delivered by: GERARD E. LYNCH, District Judge

OPINION AND ORDER

Plaintiff JP Morgan Chase Bank brings this action on behalf of a syndicate of commercial banks ("the Banks") against various officers, directors, and employees of telecommunications company Global Crossing Ltd. ("GC") in connection with a series of loans extended to GC between August 17, 2001, and September 28, 2001, pursuant to a credit agreement entered into in August 2000 (the "Credit Agreement"). Certain defendants previously moved for dismissal of, or in the alternative, for summary judgment against, the plaintiffs' claims. The motion to dismiss was granted as to plaintiffs' negligent misrepresentation claims (fifth, sixth, and seventh causes of action), and denied as to plaintiffs' fraud claims (first through fourth causes of action), while the motion for summary judgment on the surviving claims was denied. See JP Morgan Chase Bank v. Winnick, 350 F. Supp. 2d 393 (S.D.N.Y. 2004).*fn1 Individual defendants Jackie Armstrong and James C. Gorton now move separately to dismiss plaintiffs' third (aiding and abetting fraud) and fourth (conspiracy to commit fraud) claims as against themselves.

  Details of plaintiffs' allegations of fraud are set forth in this Court's prior opinion. Id. at 396-97. Briefly stated, the Credit Agreement authorized GC to draw down funds from a credit facility, provided a GC officer certified that the company was in compliance with the covenants and other terms of the Credit Agreement at the time of each borrowing. Compliance, in turn, was measured in part by GC's maintenance of a low ratio of debt to earnings ("Total Leverage Ratio"). The Banks allege that GC artificially kept the Total Leverage Ratio within bounds by inflating its earnings through bogus swaps with other telecommunications providers for capacity on their respective fiber-optic networks. These swaps typically involved the sale of capacity to another provider in exchange for that provider's agreement to purchase capacity from GC of an equivalent stated value, thus permitting GC to book revenue (and deflate the Total Leverage Ratio through increased earnings) from the sale, even though the capacity purchased was unnecessary and the income generated by the sale was wholly artificial. The Banks allege that inclusion of this artificial income in GC's earnings rendered GC's certifications of compliance with the Credit Agreement false, perpetrating a fraud on the Banks in that they were deceived into permitting GC to draw down funds to which they were not entitled.

  For the sake of these motions, Armstrong, in-house counsel at GC (Compl. ¶ 33), and Gorton, GC's then-general counsel (id. ¶ 21), concede that the Banks have adequately alleged a fraud in connection with the transactions and representations described above. But these defendants move to dismiss the Complaint for failure to adequately allege the claims against them with the particularity required under Fed.R.Civ.P. 9(b). The motions will be denied.

  DISCUSSION

  On a motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(6), the Court must accept as true all well-pleaded factual allegations in the Complaint and view them in the light most favorable to the plaintiff, drawing all reasonable inferences in its favor. Leeds v. Meltz, 85 F.3d 51, 53 (2d Cir. 1996).*fn2 Beyond the facts in the Complaint, the Court may consider "any written instrument attached to it as an exhibit or any statements or documents incorporated in it by reference." Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42, 47 (2d Cir. 1991).

  Ordinarily, a complaint will not be dismissed for failure to state a claim "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim that would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46 (1957). But where, as here, claims based on allegations of fraud are concerned, some courts have applied the heightened pleading requirements of Fed.R.Civ.P. 9(b). See, e.g., Filler v. Hanvit, Nos. 01 Civ. 9510 (MGC) and 02 Civ. 8251 (MCG), 2003 WL 22110773, at *3 (S.D.N.Y. Sept. 12, 2003) ("Plaintiffs' claims of aiding and abetting common law fraud and conspiracy to defraud are subject to the same pleading requirements under Rule 9(b) as their claims of common law fraud.").*fn3 This heightened pleading standard serves three functions: (1) enabling a defendant to identify the allegedly fraudulent behavior in order to mount a defense with regard to those actions; (2) protecting defendant by prohibiting a complainant from making character-damaging allegations that have no basis in provable fact; and (3) reducing the number of strike suits. See Di Vittorio v. Equidyne Extractive Indus., Inc., 822 F.2d 1242, 1247 (2d Cir. 1987). On this view, a Complaint may also be dismissed for failure to state "the circumstances constituting fraud . . . with particularity," Fed.R.Civ.P. 9(b), although "malice, intent, knowledge, and other condition of mind of a person may be averred generally," id., provided a factual basis is pled "which gives rise to a `strong inference' of fraudulent intent." Wexner v. First Manhattan Co., 902 F.2d 169, 172 (2d Cir. 1990). Moreover, the Complaint must aver with the required particularity the specific, alleged participation of each defendant against whom a fraud claim is pressed. Di Vittorio, 822 F.2d at 1247.

  I. Aiding and Abetting Fraud

  To establish liability under New York law for aiding and abetting fraud, the Banks must prove: "(1) the existence of a fraud; (2) a defendant's knowledge of the fraud; and (3) that the defendant provided substantial assistance to advance the fraud's commission." Filler, 2003 WL 2210773, at *2, citing Wight v. Bankamerica Corp., 219 F.3d 79, 91 (2d Cir. 2000). On this motion, Armstrong and Gorton concede that the Banks have adequately alleged a fraud, but dispute the adequacy of the allegations as to the second — knowledge — and third — substantial assistance — elements.

  A. Actual Knowledge

  The knowledge requirement of an aiding and abetting fraud claim is satisfied by alleging actual knowledge of the underlying fraud.*fn4 See Kolbeck v. LIT America, Inc., 939 F. Supp. 240, 246 (S.D.N.Y. 1996) ("New York courts and federal courts in this district have required actual knowledge"); see also In re WorldCom Inc., 2005 WL 701092, at *8; Filler v. Hanvit Bank, 339 F. Supp. 2d 553, 557 (S.D.N.Y. 2004); Steed Fin. LDC v. Laser Advisers, Inc., 258 F. Supp. 2d 272, 282 (S.D.N.Y. 2003); Renner v. Chase Manhattan Bank, No. 98 Civ. 926 (CSH), 2000 WL 781081, at *5 (S.D.N.Y. June 16, 2000), aff'd by summary order, 85 Fed. Appx. 782 (2d Cir. 2004). As to both Armstrong and Gorton, the Banks have adequately alleged facts giving rise to a strong inference of actual knowledge regarding the underlying fraud.

  First, the specific allegations against Armstrong and Gorton are made in the context of an underlying fraud, which the Banks have alleged was massive, and the objectives and mechanics of which they likewise allege were widely known within GC. The Banks allege that GC management pressured employees to meet quarterly revenue targets by "clos[ing] any and all possible deals, even if they had to be reciprocal, even if they would not be profitable or beneficial to [GC], and even if [GC] had no defensible business purpose for acquiring the additional capacity," (Compl. ¶ 172) and that by early 2001, many within GC were already expressing concern about reliance on swaps. (Id. ¶ 181.) The network engineers in particular had to be "sold" on the strategy because their help was needed in supplying post-hoc "business cases" (i.e., "tool[s] prepared by sales, marketing, technical, finance, and operations people to support planning and decision-making . . . generally designed to analyze financial and operational consequences of a particular decision," id. ¶ 87) for the swaps that management had already approved. (Id. ¶¶ 181-189.) The relevance of meeting revenue targets to maintaining access to the credit facility provided by the Banks was also allegedly well-known: As detailed in the Complaint, emails exchanged among various defendants in May 2001 referencing the debt ratio provided for in the Credit Agreement led to the subsequent execution of allegedly improper swaps at a "frantic pace," fueled by a change in the compensation structure for "upper management paid salespeople" that rewarded swaps and straight sales in an equivalent manner. (Id. ¶¶ 228-234.) Exhortations to salespeople to simulate revenue by concluding reciprocal transactions continued and by the end of summer 2001, the Banks allege that "the lack of business purpose underlying the reciprocal transactions, the impropriety of the accounting methods employed, and [GC's] vulnerability to regulatory scrutiny, was [sic] well-known within the Company" (id. ¶ 288), supporting this allegation with references to emails and calls among various GC employees continuing to query or express concern about the legitimacy of the swaps (id. ¶ 288-291). Armstrong correctly notes that these allegations about what was known within the company or to other defendants can not suffice on their own to satisfy the requirement of Rule 9(b) that allegations be pled with specificity as to each defendant. (Armstrong Mem. 9.) See Di Vittorio, 822 F.2d at 1247. Nonetheless, they do shade in the contours of those allegations pressed specifically against Armstrong and Gorton.

  Second, those specific allegations, particularly when viewed against this backdrop, are sufficient to give rise to an inference of Armstrong and Gorton's actual knowledge of the fraud. Armstrong is identified in the Complaint as "Counsel at [GC] during the relevant period. Armstrong actively participated in negotiating transactions and drafting contracts for the Improper Swaps. Armstrong assisted the fraud on . . . the Banks." (Compl. ¶ 33.) While this does not provide a factual basis for Armstrong's knowledge of the fraud, the Complaint goes on to reference three emails of which Armstrong was a recipient. The emails, the full texts of which were submitted in opposition to this motion and as documents referenced within the Complaint are thus properly considered, Brass v. Am. Film Techs., Inc., 987 F.2d 142, 150 (2d Cir. 1993), contain language which could reasonably be understood to demonstrate Armstrong's actual knowledge of the true purpose of the swaps. The first from Robin Wright, GC's vice-president of carrier sales from 1998 through 2001 (Compl. ¶ 29), dated March 9, 2001, outlining some of the details of a Qwest swap, and copied to Armstrong, includes the following statement: "And before you say it, I know buying wavelengths is something we'd prefer not to do. We're with you. But I think we may have to do it if we are going to hit the revenue target." (Miller Decl. (Armstrong) Ex. A, at 2.) The second, dated March 12, 2001, again from Wright, and copied to Armstrong, contains similar language: "[W]e are buying waves, local loops, co-lo, whatever to come to parity. We are swapping $100M checks this quarter." (Miller Decl. (Armstrong) Ex. B, at 1.) The language of the third email, dated June 25, 2001 — this time from Wright to employees at Qwest, but again copied to Armstrong — is even more revealing: "As we've agreed, because we are both being delivered what we probably don't want in the long term, we have agreed, on both sides, that the repurchase price is the actual amount paid, not the fair market value. You both know the issue, we are taking capacity in order to help with revenue recognition issues." (Miller Decl. (Armstrong) Ex. C, at 1.) Accordingly, the Banks have not just pled that Armstrong participated in transactions which were at the core of the fraudulent scheme, but that she received emails which could be understood to have informed her, almost in so many words, of the fraud's existence.

  Armstrong argues that these emails can and should be read differently. She points out that "corporations are supposed to do deals that enable them to hit their revenue targets," and argues that the third email specifying a repurchase price of actual amount paid substantiates a legitimate business case for the Qwest transaction, i.e., providing GC with the option in the future of exchanging unwanted, purchased capacity for capacity it did want. Finally, she points to language in yet another email in which she explains this as her understanding of the business purpose of the Qwest transaction. (Armstrong Reply Mem. 6-7; Miller Decl. (Armstrong) Ex. F, at 2.) Perhaps Wright's three emails can and will be read by the factfinder in the manner suggested by Armstrong, but at this early stage of the litigation it is sufficient that they can also be read to inform her of the fraudulent purpose of the transactions. A more substantial factual basis is not required to give rise to a strong inference of Armstrong's actual knowledge.*fn5 The Banks have marshaled an even more extensive array of facts in the Complaint which give rise to a strong inference of Gorton's actual knowledge. (P. Gorton Opp. Mem. 13-14.) Gorton argues that these facts, and particularly his receipt, as general counsel, of a letter from Roy L. Olofson, a former vice president of finance at GC, detailing the booking of swaps as cash transactions and the resulting inflation of revenue (Compl. ¶¶ 301-304), cannot support an inference of his actual knowledge. Gorton is correct that the Olofson letter, showing at most that Gorton was put on notice of potential misconduct, does not suffice; suspicion, without confirmation, does not satisfy the actual knowledge requirement for a claim of aiding and abetting fraud. See Ryan v. Hunton & Williams, ...


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