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Seghers v. Morgan Stanley DW

May 10, 2007


The opinion of the court was delivered by: Gerard E. Lynch, District Judge


Plaintiff Conrad P. Seghers, founder and senior manager of hedge funds for Integral Investment Management, L.P. ("Integral"), brings this action against defendant Morgan Stanley DW, Inc., alleging fraud and other tortious conduct arising out of a failed investment brokerage relationship. Defendant moves to dismiss on several grounds, including that plaintiff's claims are time-barred. For the reasons set forth below, defendant's motion will be granted.


Plaintiff's Second Amended Complaint ("Am. Compl.") alleges the following facts, which must be taken as true for purposes of the motion to dismiss.

In 1999, Integral and Integral Hedging Offshore, Ltd. (IHO) (collectively, the "Integral funds"), entered into an agreement with the Galileo Fund, L.P. and Galileo Fund Offshore, L.P. (collectively, the "Galileo funds"), controlled and operated by Samer M. el Bizri. Under the agreement, Bizri managed the Integral funds' assets, which were invested in the Galileo funds. (Am. Compl. ¶¶ 19-20.) In March 1999 and February 2001, Seghers and Bizri, on behalf of the Integral and Galileo funds, entered into agreements with defendant, employing defendant as the principal broker for the Galileo funds. (Id. ¶ 26.) The decision to open the accounts with defendant was largely based on the assertion by Morgan Stanley, through its Los Angeles-based employee M. Sonny Matharu, that it would execute Seghers's and Bizri's trading orders accurately and in a timely manner via its prime brokerage department in New York. (Id. ¶¶ 21, 27.) The conversations with Matharu were followed by several conversations with New York-based Morgan Stanley prime brokerage employees, who confirmed that the New York department would manage and monitor the Galileo accounts. (Id. ¶ 24.)

Contrary to these discussions, the accounts were established and managed solely at the Morgan Stanley branch in Burbank, California. (Id. ¶ 29.) Moreover, the computer system used to manage the funds was inferior to that used for prime brokerage accounts. (Id. ¶ 30.) In February and March of 2001, Seghers and Bizri became aware of errors in their account statements. (Id. ¶ 32.) Upon inquiry, Morgan Stanley employees said there was a "glitch" in the system that would be repaired immediately. (Id. ¶¶ 32-34.) In May 2001, Seghers visited the New York office and learned that the prime brokerage computer system was not being utilized to manage the Galileo funds. (Id. ¶¶ 36-37.) Nonetheless, defendant assured Seghers that the problems only affected the account statements, not the actual transactions or the underlying status of the funds, and that the errors were being corrected. (Id. ¶¶ 37-38.)

However, the underlying errors were in fact much more serious, and had come to the attention of Morgan Stanley as early as February 2001. (Id. ¶¶ 40, 46.) In the summer and fall of that year, Bizri and Seghers discovered that over 25% of the trades they had placed via phone with Matharu had actually been placed "with the wrong option, or at the wrong strike price, or at the wrong expiration, or not at all." (Id. ¶¶ 43, 44.) Bizri and Seghers confronted Morgan Stanley about the errors in June 2001, and Matharu "confess[ed]" to the seriousness of the errors. (Id. ¶ 46.) More errors were uncovered throughout June, resulting in losses to the funds via the involuntary liquidation of account holdings to satisfy margin calls, as well as the use of capital to attempt to correct errors that would otherwise have been used for profitable trades. (Id. ¶¶ 47-52.) As a result, Bizri and Seghers closed the Morgan Stanley accounts in July 2001. (Id. ¶ 54; see Def. Ex. C.)

Plaintiff filed this action against Morgan Stanley on June 15, 2006, alleging two causes of action. First, plaintiff claims that Morgan Stanley engaged in fraud by knowingly and falsely representing that (1) all trades were properly placed in accordance with the plaintiff's instructions; (2) errors in the account statements were easily correctable and only errors in the statements themselves; and (3) the value of the hedge funds' assets, as reported to Bizri and relied upon by Seghers, were correct. (Am. Compl. ¶ 55.) Plaintiff alleges he suffered at least $35,000,000 in damages as a direct consequence of the fraud, in addition to $30,000,000 in damages as a result of the destruction to his business. (Id. ¶ 67.)

Second, plaintiff claims that defendant's conduct destroyed his business, name, and reputation. In support of this claim, he alleges that, in 2001, Morgan Stanley employees communicated with the National Futures Association (NFA), the Securities and Exchange Commission (SEC), and the National Association of Securities Dealers (NASD), and conveyed to those organizations false information about the failed investments, causing the SEC to initiate a lawsuit against him, the NASD to initiate an arbitration action against him, and the NFA to file a complaint against him.*fn1 (Id. ¶¶ 70, 72-74; see Def. Exs. H, J, L.) According to plaintiff, in 2001, Morgan Stanley also inquired into Seghers' dealings with the Art Institute of Chicago, an investor in the Integral funds that later brought suit against Seghers. (Am. Compl. ¶ 71; see Def. Ex. E.) As a result of that litigation, Seghers lost control over the Integral funds in 2002. (Am. Compl. ¶ 62; see Def. Exs. E-F.) Plaintiff alleges that Morgan Stanley's conduct was the result of its failure to accept responsibility for its actions and making him the "fall guy for its multi-million dollar error, mistakes, losses, and fraud." (Am. Compl. ¶ 64.) As a result of the investigations, litigation, and false statements made by defendant, plaintiff claims that his business and reputation have been ruined. (Id. ¶ 75.)


I. Legal Standard

On a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6), the Court must accept "as true the facts alleged in the complaint," Jackson Nat'l Life Ins. Co. v. Merrill Lynch & Co., 32 F.3d 697, 699 (2d Cir. 1994), and may grant the motion only if "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Thomas v. City of New York, 143 F.3d 31, 36-37 (2d Cir. 1998) (internal quotation marks and citation omitted). The question for the Court "is not whether a plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support the claims." Bernheim v. Litt, 79 F.3d 318, 321 (2d Cir. 1996) (internal quotation marks and citation omitted). All reasonable inferences are to be drawn in the plaintiff's favor, which often makes it "difficult to resolve [the claims] as a matter of law." In re Indep. Energy Holdings PLC, 154 F. Supp. 2d 741, 747 (S.D.N.Y. 2001).

The task of a court in ruling on a 12(b)(6) motion is "merely to assess the legal feasibility of the complaint, not to assay the weight of the evidence which might be offered in support thereof." Sims v. Artuz, 230 F.3d 14, 20 (2d Cir. 2000) (internal quotation marks and citation omitted). However, in analyzing the feasibility of the complaint, the court also may rely on documents attached to, incorporated by reference in, or "integral to the complaint . . . without converting the proceeding to one for ...

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