The opinion of the court was delivered by: Richard J. Sullivan, District Judge
Plaintiff Lloyd J. Heller ("Heller" or "Plaintiff") brings this action against Defendants Goldin Restructuring Fund, L.P. ("Goldin Fund" or the "Fund"); Goldin Capital Partners, L.P. ("Goldin Partners"), the Fund's general partner; Goldin Capital Management, L.P. ("Goldin Management"), the Fund's manager; Goldin Associates, L.L.C. ("Goldin Associates"), a financial and strategic advice firm associated with the Fund; and individual defendants Harrison J. Goldin ("Harrison"), David Pauker ("Pauker"), and Lawrence J. Krule ("Krule"), who are the principals of Goldin Partners. (Compl. ¶ 1.)*fn1 Heller brings a common law claim for breach of fiduciary duty, as well as a statutory claim for a violation of section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78(j)(b) (the "Exchange Act"), and Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder.
Before the Court is Defendants' motion to dismiss the Complaint pursuant to Rules 12(b)(6) and 9(b) of the Federal Rules of Civil Procedure and Sections 21D and 21E of the Private Securities Litigation Reform Act, 15 U.S.C. § 78u-4(b) (the "PSLRA"). For the reasons that follow, Defendants' motion is granted in part and denied in part.
Plaintiff Heller is a New York resident and the president of H. Heller & Co., a "plastics raw materials manufacturing business." (Compl. ¶ 11.) Although experienced in "broker discretionary" accounts, Heller labels himself an "investing neophyte." (Id.) Defendants are a set of interrelated individuals and entities involved or associated with managing and operating the Goldin Fund. (Id. ¶¶ 11-18.)*fn3 The instant case arises out of events surrounding Heller's capital commitment to the Goldin Fund, which resulted in the loss of $443,769 in cash. (Id. ¶ 73.)
1. The Goldin Fund's Objectives and Formation
The Goldin Fund was an investment fund established in 2004 to invest in distressed and underperforming companies. (Id. ¶¶ 12, 22.) To finance this plan, the Fund intended to raise capital commitments of $200 million, which it would use to manage a diverse portfolio of eight to twelve investments, making individual investments of up to a maximum of 20% of committed capital in each underperforming company. (Id. ¶ 24.) These investment objectives were intended to ensure "a measure of risk diversification." (Id.)
Goldin Partners, the Fund's general partner, planned to raise the $200 million in a two-stage process. (Id. ¶ 25.) Initially, it would seek capital commitments until the "First Closing Date," the date on which the Fund would close on these initial investors' capital commitments and commence its operations. (Id.) After the "First Closing Date," Goldin Partners would continue to seek additional capital commitments from new and existing investors until the "Final Closing Date," when the Fund would close on these subsequent commitments and no longer accept any further capital commitments. (Id.) Investors would be locked into their capital commitments from the time the Fund closed on their commitment until three years after the Final Closing Date, and would be required to make cash contributions as called on by the Fund during that time. (Id.)
Plaintiff alleges that "prospective investors greeted the Fund with a marked lack of enthusiasm." (Id. ¶ 26.) By the originally planned First Closing Date of July 31, 2004, the Fund had raised less than $40 million of the $200 million target. (Id.) As a result, Defendants chose to delay the First Closing Date, and thereby the commencement of the Fund's operations, by six months, until January 31, 2005. (Id. ¶ 27.) The Fund failed to raise any additional capital during these additional months, and by February 2005, the Goldin Fund had still only raised approximately $40 million, well short of its goal of raising $200 million in capital commitments. (Id. ¶ 28.)
2. Heller's Investment in the Goldin Fund
Heller and Harrison first met socially in January 2005. Heller subsequently met with all three individual Defendants on February 1, 2005, to discuss investing in the Goldin Fund (the "February 1 Meeting" or the "Meeting"). (Id. ¶ 29.) At the February 1 Meeting, the individual Defendants made various oral representations about the Goldin Fund, and also provided Heller with a set of written documents describing the Fund (the "Solicitation Documents"). (Id. ¶ 33.) The Solicitation Documents included, inter alia, the Fund's Confidential Offering Memorandum, dated June 2004 (the "Offering Memorandum"); an unexecuted draft of the Fund's Amended and Restated Limited Partnership Agreement, dated June 8, 2004 (the "Draft LP Agreement"); a printed presentation on the Fund in the form of a slideshow, dated January 2005 (the "Presentation"); and the Fund's Subscription Documents (the "Subscription Documents"), including a Subscription Agreement. (Id.)*fn4
During the February 1 Meeting, the individual Defendants explained the Goldin Fund's investment objectives, particularly emphasizing the Fund's targeted $200 million capitalization and goal of achieving portfolio diversification. The individual Defendants made these representations orally (id. ¶¶ 30- 31) and through the written materials provided to Heller. For example, the first paragraph of the first page of the Offering Memorandum provided that "[t]he Fund is seeking to raise capital commitments of $200 million, which will be used to make individual investments, each up to a maximum of 20% of committed capital." (See id. ¶ 35; see also Defs.' Mem. Ex. A. at 1.) The Offering Memorandum later expanded on the Fund's investment objectives, highlighting the Fund's goal of achieving portfolio diversification with its $200 million capital commitment. (See Compl. ¶ 36; see also Defs.' Mem. Ex. A. at 10.) The Presentation began by noting the Fund's "Target $200M in invested capital," and addressed portfolio diversification in a later slide entitled "Investment Objectives," which stated that the Fund's objectives included, inter alia, "[b]uild[ing] a portfolio with specific limits on single-company and industry concentration" and "[c]omplet[ing] 8-12 transactions during a 3-year investment period, with an average investment of $15-25 million and a minimum investment of $5 million." (Compl. ¶¶ 37-38.)
Plaintiff alleges that - in conjunction with these written and oral representations concerning the Fund's capitalization and investment goals - the individual Defendants made several material misrepresentations and omissions at the February 1 Meeting. Specifically, Plaintiff alleges that the individual Defendants, inter alia, (1) failed to disclose that the Fund had been unable to raise more than $40 million in capital commitments (id. ¶ 40); (2) did not disclose that the Fund had managed to raise only this amount even after engaging in lengthy and prolonged fund raising efforts, and that therefore, the Fund was unlikely to "be rescued by additional investors" (id. ¶¶ 40, 50-52, 82); (3) failed to explain the possible effect that such a capital shortfall would have on the Fund's ability to diversify its portfolio and meet its other stated investment objectives (id. ¶¶ 44-47, 82); (4) misrepresented that a prominent investor and businessman had committed approximately $40 million to the Goldin Fund (id. ¶¶ 42-43, 82); (5) misled Heller into believing that he would lose the opportunity to invest in the Fund if he did not do so immediately, when, in fact, the Fund would actually remain open to new capital commitments for at least another nine to twelve months after the February 1 Meeting (id. ¶¶ 53-54, 82); and (6) did not reveal that the Securities and Exchange Commission had investigated Harrison in the 1970s (id. ¶¶ 56-62, 82).*fn5
"Relying on the truth and completeness" of Defendants' written and oral representations, Heller purchased a limited partnership interest in the Goldin Fund with a capital commitment of $1 million "shortly after" the February 1 Meeting. (Id. ¶ 64.) Heller did not learn about the Fund's undercapitalization until he received a letter and accompanying financial statement from Harrison, dated August 15, 2005, disclosing that the Fund had been operating during the first quarter of 2005 with capital commitments totaling only $40,750,000 - "barely 20% of the Fund's $200 million target." (Id. ¶ 68.)
3. The Goldin Fund's Subsequent Investment and Heller's Losses
By June 2005, approximately five months after the actual First Closing Date of January 30, 2005, the Goldin Fund still possessed only $40 million in capital commitments. (Id. ¶ 66.) In that same month, the Fund decided to invest $15 million in a medical spa company. (Id. ¶ 67.) In November 2005, the Fund invested an additional $2 million more into the company, for a total investment of $17 million. (Id.) By so doing, Defendants invested 42% of the Goldin Fund's total capital commitment in a single venture. (Id.) The Fund did not make any other investments during this time period.
On March 24, 2006, nine months after the initial investment in the medical spa company, the Goldin Fund sold the company to another investor. (Id. ¶ 71.) In this sale, the Fund's entire investment in the medical spa company was effectively lost, apart from a residual equity stake in the acquirer, an amount valued at "zero to ten percent" of the original investment. (Id.)
Heller, after making various capital contributions,*fn6 lost a total of $443,769 in cash on Goldin Fund's failed medical spa investment. (Id. ¶¶ 72-73.) Heller also attests that he remains obligated to the Fund for $556,231, the remainder of his $1 million capital commitment. (Id. ¶ 73.)*fn7
Heller filed his Complaint against Defendants on May 10, 2007, bringing a common law claim for breach of fiduciary duty, as well as a statutory claim for a violation of section 10(b) of the Exchange Act, and Rule 10b-5, promulgated thereunder. On May 22, 2007, the case was reassigned from the Honorable Robert W. Sweet, District Judge, to the Honorable Kenneth M. Karas, District Judge. On September 4, 2007, the case was reassigned to the undersigned.
Defendants filed their motion to dismiss on October 22, 2007. Plaintiff filed his Opposition on November 28, 2007. Defendants filed their Reply on December 12, 2007.
In resolving Defendants' motion to dismiss the Complaint, the Court examines each of Plaintiff's claims in turn. The Court first considers Defendants' argument that the Court should dismiss Plaintiff's claim for breach of fiduciary duty. The Court finds it unnecessary to address all of Defendants' various arguments with respect to this claim, as the Court concludes that Plaintiff's claim for breach of fiduciary duty is preempted by the Martin Act. Second, the Court rejects Defendants' argument that Plaintiff has failed to allege key elements of a claim for securities fraud, and holds that Plaintiff has adequately pleaded the necessary elements of a securities fraud action for purposes of section 10(b) and Rule 10b-5. So finding, the Court grants Defendants' motion to dismiss the claim for breach of fiduciary duty and denies Defendants' motion to dismiss the claim for securities fraud.
On a motion to dismiss under Rule 12(b)(6) of the Federal Rules of Civil Procedure, the Court must accept as true all of the factual allegations in the Complaint and draw all reasonable inferences in Plaintiff's favor. ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir. 2007); Grandon v. Merrill Lynch & Co., 147 F.3d 184, 188 (2d Cir. 1998). Nonetheless, "[f]actual allegations must be enough to raise a right of relief above the speculative level, on the assumption that all of the allegations in the complaint are true." Bell Atl. Corp. v. Twombly, 127 S.Ct. 1955, 1965 (2007) (citation omitted). Ultimately, the Plaintiff must allege "enough facts to state a claim to relief that is plausible on its face." Id. at 1974. The Complaint must therefore satisfy "a flexible `plausibility standard,' which obliges a pleader to amplify a claim with some factual allegations in those contexts where such amplification is needed to render the claim plausible." Iqbal v. Hasty, 490 F.3d 143, 157-58 (2d Cir. 2007). If Plaintiff "ha[s] not nudged [his] claims across the line from conceivable to plausible, [his] complaint must be dismissed." Twombly, 127 S.Ct. at 1974.
While the rules of pleading in federal court usually require only "a short and plain statement" of the plaintiff's claim for relief, Fed. R. Civ. P. 8, averments of fraud must be "stated with particularity," Fed. R. Civ. P. 9(b). To comply with the requirements of Rule 9(b), a plaintiff 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.'" Rombach v. Chang, 355 F.3d 164, 170 (2d Cir. 2004) (quoting Mills v. Polar Molecular Corp., 12 F.3d 1170, 1175 (2d Cir. 1993)).
In the context of securities fraud complaints, the PSLRA has expanded on Rule 9(b)'s pleading requirements. See 15 U.S.C. § 78u-4(b). "The statute insists that securities fraud complaints `specify' each misleading statement; that they set forth the facts `on which [a] belief' that a statement is misleading was `formed'; and that they `state with particularity facts giving rise to a strong inference that the defendant acted with the required state of ...