The opinion of the court was delivered by: Spatt, District Judge.
MEMORANDUM OF DECISION AND ORDER
This Document Relates to: All Actions
ADRIANNE CLARKE, TL HORIZONS LLC, MAXIMILIAN ENTERPRISES LLC and EQUITY TRUST COMPANY CUSTODIAN fbo Adrianne Clark IRA, Plaintiffs, v. NICHOLAS COSMO, AGAPE WORLD INC., AGAPE MERCHANT ADVANCE LLC, AGAPE WORLD LLC, ANTHONY MASSARO, DAVID PETRY, HUGO LEON ARIAS, SEBASTIAN TAUZ, MARTY HARTMANN, SR., MARTY HARTMANN, JR., ELIZABETH (last name unknown), LAURIE SAVARESE, BANK OF AMERICA, N.A., ALARON TRADING CORPORATION d/b/a ALARON FUTURES & OPTIONS, XYZ CORPS 1-10, JOHN DOE 1-10, JANE DOE 8A, COMPANY 1, COMPANY 2, and JOHN DOES 11-200, Defendants.
Investors in a Ponzi scheme orchestrated by Nicholas Cosmo ("Cosmo") through Agape Merchant Advance LLC, Agape World Bridges, LLC, and Agape World Inc. (collectively "Agape") commenced these two cases, In re Agape Litigation, 09-CV-1606 (the "Class Action Plaintiffs") and Clarke v. Cosmo, 09-CV-1782 (the "Clarke Plaintiffs" and together with the Class Action Plaintiffs "the Plaintiffs"), against various defendants alleged to be complicit in the fraudulent scheme. One of the defendants named in the originally filed first amended complaints in both actions (the "Initial Complaints") was Bank of America, N.A. ("BOA"). The Plaintiffs contend that BOA aided and abetted Cosmo and Agape in orchestrating the fraud and breaching their fiduciary duties to investors.
In In re Agape Litigation ("Agape I"), 681 F. Supp. 2d 352 (E.D.N.Y. 2010), this Court dismissed the claims asserted in the Initial Complaints against BOA. However, the Court afforded the Plaintiffs an opportunity to amend their complaints as against BOA with respect to the causes of action for aiding and abetting fraud and aiding and abetting breach of fiduciary duty. In accordance with the Court's rulings in Agape I, on March 31, 2010 the Class Action Plaintiffs filed a second amended complaint (the "SAC"), and on April 6, 2010 the Clarke Plaintiffs filed a second amended complaint (the "Clarke SAC" and together with the SAC the "Second Amended Complaints"). The Second Amended Complaints assert claims against BOA for aiding and abetting fraud, aiding and abetting breach of fiduciary duty, and aiding and abetting conversion.
Presently before the Court is BOA's motion to dismiss the Second Amended Complaints in their entirety for failure to state a claim under Federal Rule of Civil Procedure 12(b) and for failure to plead with specificity under Federal Rule of Civil Procedure 9(b). For the reasons set forth below, the motion is granted in its entirety.
A. The Ponzi Scheme Operated by Nicholas Cosmo
The allegations in the Second Amended Complaints with respect to the nature of the Ponzi scheme are substantively identical to those stated in the Initial Complaints. The Court summarized the factual background of the Ponzi scheme in Agape I as follows:
On January 15, 1999, this Court sentenced Cosmo to 21-months imprisonment and three years of supervised release after he pleaded guilty to fraud. As a result of his conviction, Cosmo, then a stock-broker, was stripped of his license to deal securities and was barred from associating with any investment broker-dealer. Not long after completing his term of supervised release, Cosmo formed Agape World, Inc. ("Agape").
From October of 2003 through his most recent arrest in January of 2009, Cosmo devised and orchestrated a Ponzi scheme through Agape and various other entities under his control. Agape held itself out as a company that provided short-term bridge loans to businesses and individuals that were unable to obtain financing from commercial banks. Through direct solicitation and various brokers, Agape was able to raise an estimated $400 million by promising investors enticing short-term returns of 12 to 15%.
In actuality, although Agape received approximately $400 million from investors between October of 2003 and January of 2009, the company made only approximately $25 million in loans.
Large returns paid to early investors simply came from money paid by subsequent investors. Cosmo used the investments to finance a lavish lifestyle and pay Agape brokers handsome commissions for soliciting new investors. In order to compensate for the lack of revenue from legitimate loans, Cosmo used investor money to make risky bets in the commodities market. In the process, he lost approximately $80 million. 681 F. Supp. 2d 352, 357 (E.D.N.Y. 2010). Subsequent to the Court's decision in Agape I, on October 29, 2010, Cosmo pled guilty in a criminal proceeding to eleven counts of mail and wire fraud. See United States v. Cosmo, 09-CR-255, Docket # 98 (E.D.N.Y. Oct. 29, 2010).
B. Allegations against Bank of America in the Initial Complaints
In the Initial Complaints, the Plaintiffs primarily focused on suspicious activity in the Agape accounts and the existence of what they referred to as the "Agape Branch" to support their contention that BOA knowingly aided and abetted the Agape Ponzi scheme and thus contributed to the Plaintiffs' injuries. According to the Plaintiffs, BOA established an "Agape Branch" at Agape's headquarters in Hauppauge, New York. BOA staffed the Agape Branch with an unnamed BOA employee, and occasionally additional unnamed BOA representatives The staff had full access to BOA's systems and possessed the ordinary capabilities of a conventional BOA branch. In addition to describing the services provided at the Agape Branch, the Plaintiffs cited to two specific examples of occasions where the BOA employee(s) at the Agape Branch provided substantial assistance to the fraud.
First, on December 24, 2008, an unnamed investor went to the Agape offices and demanded that Agape return his $200,000 investment. An unnamed broker, acting on the investors behalf, approached Cosmo about returning the money, and was directed to the BOA employee at the Agape Branch. At Cosmo's request, the BOA employee issued to the investor a check for $162,500, which was then signed by Cosmo and delivered to the investor. Second, the Plaintiffs alleged that at some point, Cosmo informed an unnamed broker that an investor's withdrawal request was delayed because Agape was waiting for a $28 million payment from BOA in connection with a project in Maine. When the unnamed broker approached a BOA representative, he was told the payment had not yet been made, but was not told that the scheduled payment was actually for $1 million.
With respect to Agape's account activity, the Initial Complaints stated that a review of Agape's 13 BOA accounts: would have shown that Agape utilized the investor deposits it received for: (a) Its own operating expenses including lucrative payments to its referring brokers; (b) wires and transfers totaling $100 million or more out to the FCMs for speculation in the commodities market; (c) payments to Cosmo for his own lavish personal expenses; and (d) the issuance of interest payments or redemptions to investors. (Class Action Compl., ¶ 70.) Accordingly, with this knowledge, the Plaintiffs asserted that BOA substantially assisted the facilitation of the fraud by: (1) allowing Cosmo, who was a convicted felon, to open, direct, control and have access to at least two dozen accounts under different names; (2) enabling Cosmo and Agape to transfer investor funds from 12 separate named accounts into one main account and commingle investor money with no segregation by name or bridge loan; (3) sharing proprietary customer account information with Agape to help them solicit investors; (4) regularly approving and advancing wire transfers of up to $100 million to commodities and futures trading firms; and (5) lending its name, reputation, and endorsement to Agape.
Based on these factual allegations, the Plaintiffs asserted claims against BOA for aiding and abetting commodities fraud; aiding and abetting common law fraud; aiding and abetting breach of fiduciary duty; and negligence. In addition, the Clarke Plaintiffs alleged that BOA violated provisions of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1961 et seq. ("RICO").
C. The Decision Dismissing the Initial Complaints Against Bank of America
The Court's decision in Agape I, among other issues, addressed BOA's motion to dismiss the above stated causes of action. The Court dismissed the negligence claim because the Plaintiffs "failed to allege that BOA breached a cognizable legal duty" and dismissed the aiding and abetting commodities fraud claim for lack of standing. 681 F. Supp. 2d at 361, 368--69. In addition, the Court dismissed the RICO claim because the allegations were "insufficient to show that BOA directed or operated Cosmo's scheme." Id. at 369--70.
With respect to the causes of action for aiding and abetting fraud and aiding and abetting a breach of fiduciary duty, the Court dismissed the claims. The Court held that the Plaintiffs had not plausibly alleged that BOA had actual knowledge of the underlying fraudulent scheme or had rendered substantial assistance to the underlying scheme. The specifics of this decision are discussed in greater detail in the discussion portion of this opinion. With respect to granting leave to amend the aiding and abetting causes of action, the Court stated as follows:
Although the Court has serious doubts about whether the Plaintiffs can offer factual allegations that would give rise to the strong inference that BOA had actual knowledge of or provided substantial assistance to Cosmo's scheme, the Court will afford the Plaintiffs one opportunity to amend only these two claims. Accordingly, the Court grants the Plaintiffs leave to file amended pleadings for the limited purpose of adding or amplifying factual allegations that bear on their claims against BOA for aiding and abetting fraud and aiding and abetting a breach of fiduciary.
D. The Allegations Against Bank of America in the Second Amended Complaints
In accordance with the Court's ruling in Agape I, the Plaintiffs filed the Second Amended Complaints. Aside from the section describing the nature of the Ponzi scheme, the two complaints include almost identical allegations. However, both the Class Action Plaintiffs and the Clarke Plaintiffs failed to follow the Court's instructions with respect to amending the complaint. In particular, the Clarke Plaintiffs included the same RICO claims that this Court dismissed in Agape I with prejudice, and both the Class Action Plaintiffs and the Clarke Plaintiffs added a new cause of action for aiding and abetting conversion. The Court will not revisit the previously dismissed RICO claims, and later in this decision, the Court will address the propriety of adding a new cause of action for aiding and abetting conversion.
According to the Plaintiffs, the Second Amended Complaints are the result of a "renewed and tireless factual investigation informed by thousands of pages of banking records recently obtained from the Court-appointed Bankruptcy Trustee." (Pls.' Mem. at 3.) In the Second Amended Complaints, the Plaintiffs provide additional factual detail to the previously pled allegations with respect to the "Agape Branch", including identifying the previously "unnamed" BOA employee as Rebecca Campagnuolo ("Campagnuolo"), and alleging that: (1) at some point in late 2008 she became the de facto Controller of Agape; (2) she made false representations to investors to prevent them from removing their money from Agape; and (3) between December 2007 and March 2008 Agape made payments totaling $32,120.68 to Campagnuolo's husband, Anthony Campagnuolo. In addition, the Plaintiffs amplified their allegations with respect to the pattern of activity in the Agape accounts by providing a chart showing that the monthly withdrawals, deposits, and balances for the main Agape account from June 2006 until January 2009 are consistent with a Ponzi scheme and inconsistent with a company purporting to provide bridge loans.
Furthermore, the Plaintiffs added new categories of factual allegations with respect to:
(1) initial due diligence that BOA performed in association with opening the Cosmo and Agape accounts and BOA's extension of personal and commercial lines of credit to Cosmo and Agape;
(2) BOA's role in structuring and monitoring Agape and Cosmo's accounts; and (3) actual reports about Agape's fraud from an unnamed investor to BOA Vice President Gregory Bowes and the Office of the Controller of the Currency. The following facts from the Second Amended Complaints set forth the basis for the Plaintiffs allegations with respect to BOA's due diligence and role in structuring and monitoring the Agape and Cosmo accounts.
In October of 2003, shortly after completing a twenty-month prison sentence for felony investor fraud, Cosmo applied for a bank account with BOA's predecessor Fleet Bank. As part of the industry's "Know-Your-Customer" rules, Fleet conducted a background check of Cosmo and learned: (1) that Cosmo had a recent felony conviction; (2) that he purported to run a financial firm; and (3) that his business would be located in Long Island, which has been designated under federal law as a "high-impact area" for financial crimes. (SAC ¶ 34, Clarke SAC ¶ 134.) The existence of these factors triggered "Enhanced Due Diligence" and required Fleet to fulfill the requirements of its "Customer Identification Program". (SAC ¶ 35; Clarke SAC ¶ 135.) Subsequently, at an unidentified date in 2006, BOA extended personal and commercial lines of credit to Cosmo and Agape. In conjunction with providing this credit, BOA conducted due diligence into the source of Cosmo's assets and the nature of Agape's business. This due diligence revealed "a lack of any legitimate business enterprise and the illegality of the scheme" and provided BOA with "actual knowledge" of Agape's fraud. (SAC ¶ 38; Clarke SAC ¶ 138.)
2. BOA's Role in Structuring and Monitoring Agape and Cosmo's Accounts
Tom Sullivan ("Sullivan"), a Senior Client Manager within the Business Banking Department was the BOA account representative assigned to the Cosmo and Agape accounts. In this capacity, Sullivan had frequent lunch meetings with Cosmo, where they discussed the nature of Agape's business and the account activity. At an unidentified time, Sullivan recommended to Cosmo that Agape utilize an account structure that included one main operating account and twelve sub-accounts (the "Agape account structure"). Subsequently, Cosmo structured the Agape accounts consistent with Sullivan's recommendation. However, instead of segregating investor funds in the sub-accounts, at the end of each day, Agape would "sweep" all of the funds into the main operating account. According to the Plaintiffs, the Agape account structure "facilitated the rapid flow of funds into the scheme and allowed Cosmo to quickly ramp up the scheme's revenues." (SAC ¶ 60; Clarke SAC ¶ 160.)
Furthermore, beginning in June 2006, BOA began charging Agape an "account management fee" to "actively monitor and analyze Agape's network of accounts." (SAC ¶ 39; Clarke SAC ¶ 139.) At first this fee was charged quarterly, but at an unidentified time BOA began charging this fee monthly. Although it is unclear from the Second Amended Complaints what was involved in monitoring and analyzing the Agape accounts, over the course of time BOA received a total of $70,000 for providing this service. In addition to the quarterly and then monthly account monitoring, BOA also monitored the Agape account activity on a day-to-day basis through a computer system known as "Connection", which provided Sullivan with daily updates regarding major deposits and wire transfers in the Agape accounts. In addition, client wire transfers for more than $10,000 were required to be approved by either Sullivan or another officer of BOA and Agape wired funds greater than $10,000 several times each month. According to the Plaintiffs, BOA's frequent review of the Agape account activity "leads to one inference and one inference alone: Agape was running a Ponzi scheme . . . and Bank of America knew it." (SAC ¶ 1; Clarke SAC ¶ 1.)
Finally, in March 2008, Sullivan recommended to Cosmo that Agape seek to obtain a Bank of America Remote Depository System ("RDS"). An RDS is a service that allows commercial customers to deposit large batches of checks from their own headquarters in order to enable more efficient handling of high-velocity deposits. (SAC ¶ 62; Clarke SAC ¶ 162.) In order to obtain the RDS, Agape had to be recommended by a BOA employee. After receiving the recommendation from Sullivan, BOA officials conducted an extensive internal review in order to assess Agape's fraud risk. BOA also had the option to conduct an audit in association with the approval process, but declined to exercise that option. According to the Plaintiffs, in addition to "telltale signals" of fraud, this review process had to reveal that:
Cosmo was a felon convicted of financial fraud, now running a financial firm; Agape's operating account simply acted as a pass-through, with billions of investor dollars coming in and going out to fund Cosmo's commodities trading habit, pay brokers outlandish commissions, pay "interest" to early investors and to fund the lifestyles of himself, his family and his associates; and its escrow account sat empty despite consistent claims to the investing public and to Sullivan that Agape funded loans for discrete construction projects. (SAC ¶ 67; Clarke SAC ¶ 167 (emphasis in original).) Despite this information, Agape received the required approval for the RDS by Sullivan and multiple BOA risk officers. The Plaintiffs contend that the RDS "enabled the fraud to grow stronger, work more efficiently and further defraud innocent investors." (SAC ¶ 68; Clarke SAC ¶ 168.)
Based on the amplified and new factual allegations in the Second Amended Complaints, the Plaintiffs contend that they have plausibly alleged that BOA aided and abetted Cosmo and Agape in the facilitation of the Ponzi scheme.
A Rule 12(b)(6) motion to dismiss is reviewed under the Twomblyplausibility standard, where a complaint should be dismissed only if it does not contain enough allegations of fact to state a claim for relief that is "plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). The Second Circuit held that, after Twombly, the Court's inquiry under Rule 12(b)(6) is guided by two principles. Harris v. Mills, 572 F.3d 66 (2d Cir. 2009) (citing Ashcroft v. Iqbal, --- U.S. ----, 129 S. Ct. 1937, 1949, 173 L.Ed.2d 868 (2009)).
"First, although 'a court must accept as true all of the allegations contained in a complaint,' that 'tenet' 'is inapplicable to legal conclusions,' and '[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.'" Id. (quoting Iqbal, 129 S. Ct. at 1949). "'Second, only a complaint that states a plausible claim for relief survives a motion to dismiss' and '[d]etermining whether a complaint states a plausible claim for relief will ... be a context-specific task that requires the reviewing court to draw on its judicial experience and common sense.'" Id. (quoting Iqbal, 129 S. Ct. at 1950). Thus, "[w]hen there are ...