The opinion of the court was delivered by: Kimba M. Wood, U.S.D.J.
OPINION AND ORDER ON MOTION TO DISMISS
Plaintiff Arthur N. Abbey ("Plaintiff") brings claims against Defendant 3F Therapeutics, Inc. ("3FTI") based on federal securities fraud law and New York State law of common law fraud and negligent misrepresentation. Defendant moves to dismiss the Amended Complaint, arguing that: (1) Plaintiff lacks standing to assert his federal securities fraud claim; (2) Plaintiff fails to sufficiently allege the elements of any of his claims; and (3) Plaintiff's negligent misrepresentation claim is preempted by New York State's Martin Act. Defendant requests that the Amended Complaint be dismissed with prejudice.
For the reasons discussed below, the motion to dismiss is DENIED insofar as the Court finds that Plaintiff has standing to bring his federal securities fraud claim against Defendant. The motion is GRANTED with respect to the negligent misrepresentation claim, which is preempted by New York State's Martin Act.With respect to Defendant's arguments on the specific elements of Plaintiff's federal and state law fraud claims, the Court finds that consideration of materials outside the pleadings is required.Conversion of the instant motion to dismiss to one for summary judgment is therefore warranted. See Kopec v. Coughlin, 922 F.2d 152, 154 (2d Cir. 1991); Fed. R. Civ. P. 12(d). Notice of the conversion and a reasonable opportunity to present additional materials pertinent to the motion must be provided to the parties. Kopec, 922 F.2d at 154. Accordingly, limited discovery and supplemental briefing on the motion for summary judgment shall be permitted in light of this Opinion and Order.
II. Procedural Background
In January 2006, Plaintiff filed suit against Defendants Theodore C. Skokos ("Skokos"), 3F Partners Limited Partnership II ("3F Partners"), 3F Management II, LLC ("3F Management"), and 3FTI, alleging that: (1) Defendants violated Section 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5; (2) Defendants committed common law fraud under New York State law; and (3) Defendants made negligent misrepresentations that induced Plaintiff to purchase a limited partnership interest in 3FTI in violation of New York State law.
Defendants moved to dismiss or transfer the case. On August 6, 2007, the Court dismissed all claims against Skokos, 3F Partners and 3F Management on the ground that the forum selection clause in the parties' 3F Limited Partnership Agreement required that those claims be litigated in Texas. The federal securities fraud claim against 3FTI was dismissed on the ground that Plaintiff had failed to plead that 3FTI made any misstatements or omissions of material fact. The Court held that any alleged misrepresentations were made by Skokos and that Plaintiff did not sufficiently allege that Skokos was acting as an agent of 3FTI when he made the statements at issue. With the federal claim dismissed, the Court declined to exercise supplemental jurisdiction over the state law fraud and negligent misrepresentation claims.
Plaintiff appealed the Court's dismissal of all claims. On December 18, 2008, the Court of Appeals for the Second Circuit issued a Summary Order affirming in part and vacating in part the Court's judgment. The Second Circuit affirmed the Court's finding that (1) the forum selection clause contained in the 3F Limited Partnership Agreement precluded Plaintiff from bringing his claims against Skokos, 3F Partners, and 3F Management in the Southern District of New York; and (2) Plaintiff failed to plead that Skokos was an agent of 3FTI at the time of the alleged fraud. The Second Circuit held that Plaintiff should be granted the opportunity to amend the Complaint in order to establish an agency relationship between Skokos and 3FTI at the time of the relevant conduct. The case was remanded, and the district court was directed to grant leave to amend. See Summary Order, Jan. 8, 2009, Docket Entry ("DE") 35.
On January 13, 2009, in accordance with the decision of the Court of Appeals for the Second Circuit, the Court granted Plaintiff leave to amend. On February 13, 2009, Plaintiff filed his Amended Complaint, in which 3FTI is the only named defendant. On April 1, 2009, Defendant 3FTI filed the instant motion to dismiss the Amended Complaint.
III. Plaintiff's Factual Allegations
Plaintiff sets forth the following allegations in his Amended Complaint. In February 2005, Skokos contacted Plaintiff, a business acquaintance, and told him about an investment opportunity with 3FTI, a company that develops cardiac and circulatory medical products. Am. Compl. ¶ 7. Skokos represented to Plaintiff that he was in charge of promoting the sale of 3FTI. He told Plaintiff that two companies were interested in purchasing 3FTI and had made "firm offers to purchase all of [3FTI] or its equity securities for '9 figures,' or not less than $6 per share for some 15 million shares outstanding." Id. ¶ 7. He stated that the sale could be facilitated if 3FTI could strengthen its balance sheet, which at the time included $8 million of debt. Id. ¶¶ 8-9. He assured Plaintiff that 3FTI had sufficient capital to maintain its business operations for the foreseeable future and required further financial backing only for the purpose of negotiating with prospective acquirers "from a position of strength." Id. ¶ 8.
Skokos encouraged Plaintiff to purchase 1.8 million shares of 3FTI's equity stock at $2.25 per share, for a total of approximately $4 million. Id. ¶¶ 8, 11. He represented that Plaintiff's investment would be short-term, carry no financial risk, and result in a substantial profit upon sale of the company. Id. ¶¶ 10-11. Plaintiff allegedly agreed to Skokos' proposal based on these representations and on the understanding that his investment was necessary only to create a stronger financial image for the company, not to provide 3FTI with "working capital." Id. ¶¶ 12, 13, 15. Skokos asked that, as part of the deal, he receive twenty percent of whatever profit Plaintiff made on his investment. Id. ¶ 14. Plaintiff approved this profit-sharing arrangement. Id. ¶¶ 14, 17.
Defendant, through Skokos, proposed that Plaintiff's $4 million investment in 3FTI be made indirectly through a limited partnership rather than by means of a direct purchase of 3FTI securities. Id. ¶ 16. Plaintiff consented to this investment structure based on Skokos' assurances that such an arrangement would not "adversely affect" Plaintiff's ability to make a substantial profit in the short term, with no financial risk. Id. ¶¶ 17-18. On March 23, 2005, Skokos sent to Plaintiff a 3F Partners Limited Partnership II Agreement, which was signed by Skokos as the general partner. Id. ¶ 19. On March 29, 2005, Skokos provided Plaintiff 3FTI financial statements and represented that they evidenced the company's strong financial position. Id. ¶ 20. Plaintiff then obtained a $4 million loan and wired that money to the account of the 3F Limited Partnership. Id. ¶¶ 13, 21. His investment constituted a purchase of a 66% interest in the partnership. See Morrison Aff. Ex. C at 76. The entire $6 million invested through the partnership entity was transferred to 3FTI on April 18, 2005, approximately twenty days after Plaintiff wired the money into the 3F Limited Partnership account. Am. Compl. ¶ 35.
On June 12, 2005, Skokos transmitted a memorandum to Plaintiff, which stated that: (1) 3FTI had received two letters of intent from potential acquirers but no deal had been proposed that was acceptable to 3FTI; (2) 3FTI had entered into a contract-restructuring deal with another company, through which 3FTI received $23 million in cash along with the promise of $2 million upon execution of a medical supply agreement; and (3) Skokos had recently been named Chairman of the 3FTI Board of Directors. Id. ¶ 22.
Plaintiff inquired on multiple occasions about 3FTI's plans for distribution of the $25 million that the company was to receive pursuant to the contract-restructuring deal. Id. ¶ 23. On September 22, 2005, Plaintiff sent an e-mail inquiry to Skokos that stated the following:
Where do we stand regarding selling the Company? . . . As you know, I borrowed the $ million from the bank to pay for 3F. It was based upon your representations that a sale transaction was imminent and that it would be very helpful to have a balance sheet showing sufficient cash so that a buyer would not try to take advantage of the situation. It is a number of months since I sent you the money and I need to know where things stand. I have the utmost faith in you and that was the sole basis for giving you the money.
Id. ¶ 23. Skokos responded with assurances that a sale was forthcoming and Plaintiff would soon enjoy a profit. Id. ¶¶ 24-25.
In December 2005, Plaintiff again inquired about the sale of 3FTI and learned that the company was experiencing substantial financial difficulties and that a sale was not imminent. Id. ¶¶ 26-28. On April 18, 2006, a disclosure was made to the Securities and Exchange Commission by ATS Medical, the company that would later acquire 3FTI, which stated:
From January 2005 through May 2005, 3F Therapeutics management contacted a number of companies regarding a potential strategic partnership or acquisition. Although a few companies expressed interest and conducted due diligence, 3F Therapeutics did not enter into any nondisclosure agreements or other similar agreements with any of these companies regarding potential acquisition transactions.
The 3FTI company was sold to ATS Medical in or around August 2006; Plaintiff's investments were converted to illiquid restricted stocks. Id. ¶ 42.
Plaintiff alleges four material misrepresentations made by Skokos, who, Plaintiff contends, acted as an agent and director of 3FTI: (1) 3FTI had two "firm offers" from companies who were interested in acquiring 3FTI for cash in February 2005; (2) a cash sale of 3FTI for "9 figures," or no less than $6 per share, was imminent; (3) Plaintiff's investment in 3FTI would be short-term and without risk, and would result in a substantial profit; and (4) 3FTI was in good financial condition and did not need Plaintiff's cash for "working capital" but rather to negotiate the sale "from a position of strength." Id. ¶ 30.
Plaintiff claims that he relied on these representations and would not have agreed to invest in the company had he been provided with information about the true circumstances of the company and negotiations for its sale. Id. ¶¶ 31-33. He asserts that the 3F Limited Partnership, which served as the vehicle for his investment, was a "single-purpose entity that was designed solely to further 3FTI's scheme to take Plaintiff's money" and to "prevent Plaintiff from liquidating his investment when the truth [about the company's financial situation] was revealed." Id. ¶¶ 34-35. Plaintiff seeks damages based on Defendant's wrongful conduct that caused his $4 million investment to be "substantially depleted," alleging that his investment was in part "burned through" by the company and that the value of the ATS Medical shares provided to him was diminished "due to their illiquidity." Id. ¶ 42.
IV. Legal Standard for Motion to Dismiss
"To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). On a motion to dismiss pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, a plaintiff's factual allegations must be accepted as true, and all reasonable inferences are drawn in plaintiff's favor. See Cleveland v. Caplaw Enters., 448 F.3d 518, 521 (2d Cir. 2006); Nechis v. Oxford Health Plans, Inc., 421 F.3d 96, 100 (2d Cir. 2005). "Facial plausibility" exists where the "plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Iqbal, 129 S.Ct. at 1949. Although a complaint need not set forth detailed factual allegations, it must provide "more than labels and conclusions . . . . [A] formulaic recitation of the elements of a cause of action" does not ...