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Fagan v. First Security Investments

September 15, 2006


The opinion of the court was delivered by: Laura Taylor Swain, Usdj


Plaintiffs Peter G. Fagan ("Fagan") and Comanche Investment, L.L.C. ("Comanche") (collectively "Plaintiffs") bring this action, alleging conversion, breach of fiduciary duties, breach of contract, negligence, fraud, civil conspiracy and securities law violations in connection with the loss of one million dollars Plaintiffs invested in the Vault Consortium Investment Club ("Vault"). Plaintiffs pursue these claims against Defendants First Security Investments, Inc. ("First Security"); Martin J. McGrath ("McGrath"), a senior investment consultant for First Security; and Lidio Rancharan ("Rancharan") and Mark Segovia ("Segovia"), both individuals associated with Vault. Plaintiffs' claims against the other Defendants named in the First Amended Complaint (the "Complaint") -- Wachovia Corporation, First Union National Bank, First Union Securities, Inc., and First Clearing Corporation -- were voluntarily dismissed with prejudice.

Defendants First Security and McGrath move to dismiss the action. First Security's motion papers,*fn1 which variously invoke Rule 56 of the Federal Rules of Civil Procedure, standards applicable under Rules 9(b) and 12(b)(6) of those Rules, and the pleading provisions of the Private Securities Litigation Reform Act ("PSLRA"), argue principally that Plaintiffs have failed adequately to plead their causes of action. In their opposition papers, Plaintiffs assert the sufficiency of their existing pleading and request leave to replead any claims found deficient by the Court. The Court has subject matter jurisdiction of this action pursuant to 28 U.S.C. §§ 1331 and 1367. Plaintiffs also invoke 28 U.S.C. § 1332 as a basis for subject matter jurisdiction, although they fail to plead facts sufficient to enable the Court to determine the citizenship of all of the parties.

For the reasons that follow, the instant motion to dismiss is denied as to Plaintiff Fagan's conversion and civil conspiracy claims. The motion is, however, granted, with leave to replead, as to all of Plaintiffs' remaining claims.


The facts alleged in Plaintiff's Amended Complaint are taken as true for the purposes of this motion. See Blue Tree Hotels Inv. (Canada), Ltd. v. Starwood Hotels & Resorts Worldwide, Inc., 369 F.3d 212, 217 (2d Cir. 2004). In April of 2002, Plaintiff Fagan communicated with Defendants Rancharan and Segovia, principals of Vault, about investing in Vault. (Compl. 12-13.) Rancharan and Segovia informed Fagan that Vault was "associated with" Defendant First Security and that First Security was a licensed securities broker and dealer and would be the primary broker/dealer for the Vault program. (Id. ¶ 13.) Rancharan and Segovia also told Fagan that all investment funds in Vault would be placed in separate sub-accounts maintained with First Union National Bank, First Union Securities, Inc. and/or First Clearing Corporation.*fn2 (Id.)

On April 27, 2002, Plaintiff traveled to New York City to meet with Rancharan and Segovia at the office of First Security, where Defendant McGrath introduced himself as a Senior Investment Consultant with First Security and an "associate" of Rancharan and Segovia. ¶ 15.) At that meeting, Fagan was told "that as a member of Vault, he would receive a 25% return per month on his investment," and also that the principal amount invested could not be removed from a separate sub-account created under First Security's bank and brokerage accounts without the investor's written permission. (1d. ¶ 16.) Plaintiff then met separately with McGrath, who told him that he and First Security were "closely associated" with Vault, but not owners of it, that he would oversee the trading accounts maintained at First Union Securities, that he "vouched for" the honesty and trustworthiness of Defendant Segovia, whom he had known for approximately four years, and that he would be in a position to "look out for" Fagan. ¶ 17.)

Following these meetings, Fagan contacted First Union Bank and confirmed the information he had been provided by Defendants Rancharan, Segovia and McGrath. 18.) Based on those confirmations, Fagan executed an asset management agreement with Defendants Rancharan and Segovia and an investment club account agreement with First Union Securities, Inc. The asset management agreement, which is annexed to the Complaint, denominates Rancharan and Segovia as "Asset Managers," provides that Fagan would wire transfer $1,000,000.00 "in the name of VAULT CONSORTIUM INVESTMENT CLUB in FIRST UNION NATIONAL BANK... FOR TRADING FROM PROFIT WITHOUT LOSS OF CAPITAL VALUE," and provided for trading in the account by the Asset Managers. (Compl. Exh. A (emphasis in original).) The agreement characterizes the arrangement as a "vehicle of cooperative enterprise" and provides for "the benefit 50% for Principal and 50% for Asset Manager." (IA 2 and ¶ 1.)

On or about May 10, 2002, Fagan wire-transferred $1,000,000.00 to First Union Bank. Plaintiff learned, in early June 2002, that the investment funds had allegedly been transferred to a bank in Switzerland. (Compl. ¶¶ 20-22.) Fagan questioned Rancharan and Segovia about the transfer of funds, and was told that Defendants McGrath and First Security had approved the transfer. (Id. 23.) Defendants have refused to return the funds and have reported that other individuals have absconded with them. (Id. 24.)


In considering a motion to dismiss a complaint pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, the Court is obliged to accept as true the allegations in the complaint and draw all reasonable inferences in favor of the non-moving party. Blue Tree Hotels Inv. v. Starwood Hotels and Resorts Worldwide, Inc., 369 F.3d 212, 217 (2d Cir. 2004). Rule 8(a) of the Federal Rules of Civil Procedure requires only that a complaint include a "short and plain statement of the claim showing that the pleader is entitled to relief." Leatherman v. Tarrant County Narcotics Intelligence & Coordination Unit, 507 U.S. 163, 168 (1993). A court should not dismiss a complaint 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 which would entitled him to relief."

Conley v. Gibson, 355 U.S. 41, 45-46 (1957).

The Court's review is "limited to the facts and allegations that are contained in the complaint and in any documents that are either incorporated into the complaint by reference or attached to the complaint as exhibits." Id. See also Sable v. Southmark/Envicon Capital Corp., 819 F. Supp. 324, 328 (S.D.N.Y. 1993) (in deciding a motion to dismiss, a court "may consider documents which form the basis of allegations of fraud if the documents are 'integral to the complaint.") (internal citations omitted)). The Court may grant a Rule 12(b)(6) motion "only if it is clear that no relief could be granted under any set of facts that could be proved consistent with the allegations" in the complaint. Swierkiewicz v. Sorema, 534 U.S. 506, 514 (2002). Furthermore, the "simplified ...

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