The opinion of the court was delivered by: Kimba M. Wood, U.S.D.J.
Plaintiffs, thirteen individuals and four limited liability corporations, invested in a tax-shelter scheme promoted by Defendants Andrew D. Beer ("Beer") and Samyak C. Veera ("Veera"). Defendants allegedly advised Plaintiffs that the scheme would generate both real profits and lawful capital losses. The IRS disallowed Plaintiffs' claimed tax savings, however, and the IRS forced Plaintiffs to pay a substantial settlement.
Plaintiffs filed suit, alleging unjust enrichment, breach of fiduciary duty, fraud, negligent misrepresentation, and civil conspiracy. The Court dismissed Plaintiffs' breach of fiduciary duty, fraud, negligent misrepresentation, and civil conspiracy claims by Order dated February 22, 2007 (the "2007 Order"). (D.E. 26.) Plaintiffs amended their complaint, alleging unjust enrichment, fraud, and civil conspiracy ("Amended Complaint").*fn1
Both Defendants move to dismiss the fraud claim, and Veera also moves to dismiss the unjust enrichment claim, pursuant to Federal Rules of Civil Procedure 9(b) and 12(b)(6). (D.E. 31.*fn2
As explained in further detail below, the Court DENIES Defendants' motions as to all claims. However, the Court agrees with Defendants that Plaintiffs have failed to sufficiently plead Defendants' vicarious liability for fraud based on a theory of agency.
The Court assumes the following facts, drawn from the Amended Complaint and from agreements signed by both Plaintiffs and companies created by Defendants,*fn3 to be true for purposes of these motions to dismiss.
Plaintiffs are individuals and corporations residing in California, Delaware, Florida, North Dakota, Oregon, Texas, and Canada. (Am. Compl. ¶¶ 4-12.) Plaintiffs refer to themselves as the Green, Janssen, Maletis, Ingstad, and Dunigan Plaintiffs.
In 2000, associates of Defendants who were employees of various accounting firms, including BDO Seidman, LLP; RSM McGladrey, Inc.; Condley & Company; and Arthur Andersen, LLP,*fn4 approached Plaintiffs with a tax strategy known as the "COINS Strategy."*fn5 (Id. at ¶¶ 15 n.2, 38.)
After Plaintiffs expressed initial interest, Defendants' associates arranged meetings between most of the Plaintiffs and Defendants to explain the strategy in greater detail.*fn6 (Id. at ¶¶ 38, 40, 43, 49, 51.) Between May and September 2000, Defendants communicated in person, by phone, or via their associates with Plaintiffs or Plaintiffs' agents. (Id. at ¶¶ 40, 43, 45, 49, 50-51.) In these conversations, Defendants (or their associates) explained how the COINS Strategy worked, including that:
(1) Plaintiffs (or entities they created to engage in the Strategy) would buy and sell pairs of foreign currency options with "extremely close strike prices, in almost identical amounts," designed so that their costs and sale premiums would "largely (though not entirely) offset each other," (id. at ¶ 37);
(2) Plaintiffs would contribute their options to a partnership created by Defendants, (id.);
(3) Plaintiffs would ask to be redeemed out of the partnership with their interest paid in stock after their offsetting options expired, (id.);
(4) Plaintiffs would then sell these stocks, (id.); and
(5) these sales would realize "large losses" that the Plaintiffs could apply against their capital gains for that year. (Id. at ¶ 40.)
In addition, Defendants or their associates told the Green, Janssen, and Ingstad Plaintiffs, either directly or through these Plaintiffs' agents, that the COINS Strategy transactions had little risk of loss, and potentially could generate a substantial profit. (Id. at ¶¶ 41, 43, 51.) Defendants knew that, in reality, the COINS Strategy was a transaction that had no reasonable possibility of turning a profit. (Id. at ¶¶ 28, 103-104.)
Defendants or their associates described the COINS Strategy to Plaintiffs or Plaintiffs' agents as a legitimate foreign currency transaction. (Id. at ¶¶ 40-51.) Defendants or their associates (1) offered Plaintiffs or Plaintiffs' agents an "independent" opinion letter from a tax law firm, and (2) told Plaintiffs or their agents that this letter would confirm the legality of the transaction and insulate the Plaintiffs from any possible IRS penalties. (Id. at ¶¶ 40-51.) The letter Plaintiffs received stated that, to the extent that the COINS Strategy had "an expectation of a 'speculative, but substantial profit,'" such profit would result only from the "small chance" that a profitable trade would occur without being offset by a losing trade. (Id. at ¶ 24, n.8.) The letter also stated that it was "'more likely than not'" that the Plaintiffs would be able to claim the capital losses promised by Defendants without running afoul of a number of IRS Codes and Regulations. (Id. at ¶ 79.) Finally the letter advised Plaintiffs that they need not disclose the COINS Strategy transactions as a tax shelter on their tax returns. (Id.)
Relying on Defendants' or their associates' assurances as to the substance and legality of the COINS transactions, Plaintiffs then agreed to engage in the COINS Strategy. (Id. at ¶¶ 29, 38-39.) Plaintiffs signed CMAs and IMAs (collectively, "Agreements") with Bricolage and Equilibrium ("B and E").*fn7 The Agreements provided that B and E may pay a portion of Plaintiffs' fees to B and E's "affiliates, and others, who introduced the Client [Plaintiffs] to [Defendants] or who may provide supplemental and client-related services." (See, e.g., Beer Aff. Ex. 1 at 2.) The agreements also stated that B and E or their "affiliates or related persons may profit as principal or receive fees or other compensation in respect of such transactions and contracts." (See, e.g., id. at 3)
Plaintiffs engaged in the COINS Strategy between June and December 2000, executing various options contracts with Deutsche Bank, with which Defendants were also associated, and following the steps of the COINS Strategy according to directions from Defendants and others. (Am. Compl. ¶¶ 52-69.)
At the time the above events occurred, Defendants knew that the United States Internal Revenue Service ("IRS") considered the COINS Strategy improper and would disallow Plaintiffs' claimed tax losses. (Id. at ¶¶ 71, 74, 103-104.) The IRS had issued Notice 1999-59 (the "1999 IRS Notice") in December 1999, which "alert[ed] taxpayers and their representatives that . . . claimed tax losses for capital outlays that they have in fact recovered . . . [are] not allowable for Federal income tax purposes." (Id. at ¶ 70.) In August 2000, the IRS issued Notice 2000-44 (the "2000 IRS Notice"), which described the series of transactions in the COINS Strategy and stated that the "'purported losses from these transactions . . . are not allowable as deductions for Federal income tax purposes.'" (Id. at ¶ 73.) Soon after the 2000 IRS Notice was issued, accounting firms that were associates of Defendants and that had initially referred some Plaintiffs to Defendants, wrote to some Plaintiffs to reassure them that the COINS Strategy would withstand IRS scrutiny. (Id. at ¶ 75.) The Defendants knew of these reassurances. (Id.) Two years later, Defendants and their associates failed to advise Plaintiffs to take advantage of an IRS amnesty program that would have, inter alia, allowed Plaintiffs to avoid penalties for underpaying their taxes, in exchange for Plaintiffs disclosing their involvement in the COINS Strategy to the IRS. (Id. at ¶ 84.)
Plaintiffs were ultimately audited by the IRS. (Id. at ¶ 82.) They settled with the IRS in 2004 for the full amount of back taxes owed plus penalties. (Id. at ¶ 96.)
In order to survive a motion to dismiss, a plaintiff must provide factual allegations sufficient "to raise a right to relief above the speculative level." Bell Atl. Corp. v. Twombly, 127 S.Ct. 1955, 1965 (2007); see also ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir. 2007) (finding Twombly's motion to dismiss standard generally applicable). In assessing whether Plaintiffs have met this standard, the Court must "constru[e] the complaint liberally, accepting all factual allegations . . . as true, and drawing all reasonable inferences in the plaintiff[s'] favor." Goldstein v. Pataki, 516 F.3d 50, 56 (2d Cir. 2008).
However, "on a motion to dismiss, courts 'are not bound to accept as true a legal conclusion couched as a factual allegation.'" Sharkey v. Quarantillo, 541 F.3d 75, 83 (2d Cir. 2008) (quoting Papasan v. Allain , 478 U.S. 265, 286 (1986)). More than "labels and conclusions" are required, and "a formulaic recitation of the elements of a cause of action will not do." Twombly, 127 S.Ct. at 1965.
Furthermore, any "conclusory allegations need not be credited . . . when they are belied by more specific allegations of the complaint." Hirsch v. Arthur Anderson & Co., 72 F.3d 1085, 1092 (2d Cir. 1995); see also Fisk v. Letterman , 401 F. Supp. 362, 368 (S.D.N.Y. 2005) (dismissing complaint where Plaintiff's own assertions refuted the theory of her claim); Colodney v. Continuum Health Partners, No. 03 Civ. 7276, 2004 WL 829158, *7 (S.D.N.Y. April 15, 2004) (dismissing cause of action where a complaint alleged facts that demonstrated that an allegedly false statement was true).
Where a court deciding a motion to dismiss is considering materials extrinsic to the complaint, and the contents of these materials conflict with allegations in the complaint, "those allegations are insufficient to defeat a motion to dismiss." Matusovsky v. Merrill Lynch, 186 F. Supp. 2d 397, 400 (S.D.N.Y. 2002). However, courts are cautioned that extrinsic materials are to be considered "for what they contain, not to prove the truth of their contents." Roth v. Jennings, 489 F.3d 499, 511 (2d Cir. 2007) (internal quotations omitted).
The First Claim of the Amended Complaint alleges that Defendants' receipt of fees from Plaintiffs constitutes unjust enrichment because Defendants recommended that Plaintiffs employ the COINS Strategy even though they knew it would not turn a profit or pass muster with the IRS. (Am. Compl. ¶¶ 99-100.) The Court DENIES Veera's motion to dismiss as to this claim.*fn8
"To prevail on a claim of unjust enrichment, a party must show that (1) the other party was enriched, (2) at that party's expense, and (3) that 'it is against equity and good conscience to permit [the other party] to retain what is sought to be recovered.'" Citibank, N.A. v. Walker, 787 N.Y.S.2d 48, 49 (2d Dep't 2004), abrogated on other grounds by Butler v. Catinella, 868 N.Y.S.2d 101, 105 (2d Dep't 2008), (quoting Paramount Film Distrib. Corp. v. State, 285 N.E.2d 695, 698 (N.Y. 1972)) (alteration in original). Unjust enrichment does not depend on performance of a wrongful act, however, and even innocent parties may be unjustly enriched. Cruz v. McAneney, 816 N.Y.S.2d 486, 491 (2d Dep't 2006).
The Court's 2007 Order found that Plaintiffs' original complaint sufficiently pled their unjust enrichment claim. (2007 Order 5.) However, Veera contends that Plaintiffs' amended complaint alleges that Plaintiffs paid fees only to B and E, not directly to Veera, and thus does not allege Veera's individual liability. (Veera's Mem. L. Supp. Mot. Dismiss ("Veera's Mem. L.") 17-20; Veera's Reply 10.)
The Court finds this claim without merit. As an initial matter, the Court has already found that whether Plaintiffs' fees benefitted Defendants directly or indirectly is irrelevant to Plaintiffs' unjust enrichment claim. (2007 Order 6 n.6.) Furthermore, even if Plaintiffs had to allege that Veera benefitted directly in order for their unjust enrichment claim to survive, they have done so. (See, e.g., Am. Compl. ¶ 95 (alleging that the ten individual Plaintiffs "paid fees to the Defendants" and others); see also ¶¶ 36, 53, 87, and 105.)*fn9
Accordingly, the Court DENIES Veera's motion to dismiss as to Plaintiffs' ...