United States District Court, S.D. New York
DR. DAVID BEACH and CHRISTOPHER KELLY, individually and on behalf of all similarly situated persons, Plaintiffs,
CITIGROUP ALTERNATIVE INVESTMENTS LLC, CITIGROUP, INC., JOHN PICKETT, and CCA CREDIT EUROPE LIMITED, Defendants.
MEMORANDUM AND ORDER
P. KEVIN CASTEL, District Judge.
Plaintiffs Dr. David Beach and Christopher Kelly bring this putative class action complaint against defendants Citigroup Alternative Investments LLC ("CAI"), Citigroup, Inc., John Pickett, and CCA Credit Europe Limited, f/k/a CSO Partners Limited ("CPL"). They invoke this Court's class action diversity jurisdiction under the Class Action Fairness Act ("CAFA"), 28 U.S.C. § 1332(d), and assert only state law claims for fraud, fraudulent concealment, and negligent misrepresentation. CAI and Citigroup move to dismiss the claims against them for failure to state a claim pursuant to Rule 12(b)(6), Fed.R.Civ.P. (Docket # 65.) Pickett and CPL move to dismiss the claims against them for lack of personal jurisdiction pursuant to Rule 12(b)(2), Fed. R. Civ. P., and in the alterative, join CAI and Citigroup's motion to dismiss. (Docket # 69, 76.)
The principal claims are that CPL negligently or fraudulently misled the investor-plaintiffs with respect to their investment in a fund investing in stressed, distressed, and special situation debt obligations, and that defendants Citigroup, CAI, and Pickett were either actively involved in CPL's actions, or aided and abetted those actions. For reasons explained, the Court concludes that there is no personal jurisdiction over defendants CPL, a United Kingdom limited liability company with its principal place of business in London, and Pickett, a citizen of the United Kingdom. For reasons further explained, CAI and Citigroup's motion to dismiss for failure to state a claim is granted, except with respect to the claims against Citigroup and CAI arising out of statements in the PPM, and the claims against CAI arising out of CPL's communications to investors.
The following facts are taken from the Third Amended Complaint (the "TAC"), documents incorporated by reference in the TAC, and matters of which judicial notice may appropriately be taken. See Chambers v. Time Warner, Inc. , 282 F.3d 147, 152-53 (2d Cir. 2002). All facts are assumed to be true for the purpose of deciding defendants' motions to dismiss. All reasonable inferences are drawn in favor of the plaintiffs as non-movants. See In re Elevator Antitrust Litig. , 502 F.3d 47, 50-51 (2d Cir. 2007) (per curiam).
Corporate Special Opportunities ("CSO") was an investment business established in 1999 by defendant Citigroup, through its subsidiary, defendant CAI, to manage Citigroup's proprietary capital in investment markets. (Third Am. Compl. ("TAC") ¶¶ 29-30, 34.) In 2004, Citigroup established Corporate Special Opportunities Ltd., a fund which acted as a common investment vehicle to allow Citigroup clients to access CSO's investments. (Id. ¶¶ 25, 34.) Citigroup also established two other funds, CSO Ltd. and CSO U.S. Ltd., as feeder funds for Corporate Special Opportunities Ltd. (Id. ¶ 25.) All three entities (collectively the "Fund") were CAI subsidiaries incorporated in the Cayman Islands. (Id. ¶ 34; Soloway Decl. Ex. 2, at 18; Tom Decl. Ex. 2, at 7.)
According to the private placement memorandum ("PPM"), the Fund's stated investment objective was "to generate attractive risk-adjusted returns with low volatility." (Soloway Decl. Ex. 2, at 20.) Its investment strategy was "to invest principally in stressed, distressed and special situations debt obligations of corporations incorporated predominantly in the United States, the United Kingdom and the rest of the European Union (including the accession States)." (Id.)
In detailing risk factors to Fund investors, the PPM noted that it might engage in leveraged investing, which could increase volatility. (Id. at 75.) The PPM further noted that though there was no maximum permitted leverage, Citigroup's internal risk management would monitor investment activities to ensure they were "consistent" with the Fund's investment restrictions. (Id.) Internally, maximum leverage was set at six times the Net Asset Value ("NAV") of the Fund. (TAC ¶ 38.) The NAV was calculated "at the close of business in New York on or as of each Valuation Day or at such other times as the Directors may determine" by the Fund administrator, GlobeOp Financial Services (Cayman) Limited, a Cayman Islands corporation with its principal place of business there. (Soloway Decl. Ex. 2, at 37-38, 51.)
Starting on August 18, 2006, defendant CPL, a Citigroup subsidiary incorporated as a limited liability company in the United Kingdom, with its principal place of business in London, assumed the role of investment manager for the Fund. (Id. ¶ 31.) As investment manager, CPL was in charge of investing the Fund's assets "in a manner consistent" with its "investment objective, strategy and restrictions." (Soloway Decl. Ex. 2, at 31.) At that time, defendant John Pickett, a resident of London, was CPL's CEO. (TAC ¶ 32; Pickett Decl. ¶ 5.) Pickett's responsibilities included choosing investments for the Fund and communicating with its investors. (TAC ¶ 32.) The PPM designated Pickett as a "key man" and provided a mechanism for investor redemption of shares, including a method of determining their value, should he "cease to be employed by or otherwise affiliated with" CPL. (TAC ¶ 41; Soloway Decl. Ex. 2, at 44, 47-49.)
In advertising the Fund, CAI published sales materials, including a booklet detailing the Fund's historical performance and investment strategies. (TAC ¶¶ 64-65.) Similar to statements in the PPM, the sales materials stated the Fund's investment goals were "to capture high returns with a low degree of volatility, market correlation and draw downs." (Id. ¶ 65.) The marketing materials further stated that CAI exercised supervisory authority and independent risk management over the CPL and the Fund. (Id. ¶ 70.) CPL and CAI also had ties outside of their relationship through the Fund. From February 2006, they had the same General Counsel, and, later, the same managing director. (Id. ¶¶ 50-51.)
In order to invest in the Fund, investors were required to sign a subscription agreement with either CSO Ltd. (for investors outside the United States), or CSO U.S. Ltd. (for investors inside the United States), which incorporated the PPM by reference into its terms. (Soloway Decl. Ex. 3, at 7; Tom Decl. Ex. 1, at 1.) By signing the subscription agreements, investors warranted that they had relied solely on the PPM and their own independent investigations in making the decision to invest. (Soloway Decl. Ex. 3, at 3; Tom Decl. Ex. 1, at 4.) Investors further warranted that they did not rely on "the Fund, the Investment Manager, the Administrator, the Placement Agent, ..., or any other person or entity" in making their decisions to invest. (Soloway Decl. Ex. 3, at 3; Tom Decl. Ex. 1, at 4.)
Both the CSO Ltd. and CSO U.S. Ltd. subscription agreements contained a forum selection clause which stated, in relevant part,
This Agreement shall be construed in accordance with and governed by the laws of the State of New York without regard to its conflicts of law rules, notwithstanding the place where this Agreement may be executed by any party. The courts of the State of New York shall have exclusive jurisdiction over any action, suit or proceeding with respect to this Subscription Agreement....
(Soloway Decl. Ex. 3, at 7; Tom Decl. Ex. 1, at 8.)
On January 29, 2007, plaintiff David Beach, a citizen and resident of the United Kingdom, in reliance on the PPM and subscription agreement, purchased interests in CSO Ltd. (TAC ¶ 27.) Plaintiff Christopher Kelly, a citizen and resident of the State of New Jersey, in reliance on the PPM and subscription agreement, purchased interests in CSO U.S. Ltd. on February 14, 2007. (Id. ¶¶ 28; Tom Decl. Ex. 1, at 11.)
In or about May 2007, Michael Micko, an investment manager at CPL, as well as a CAI executive, made an oral offer to the Managing Lead Arrangers ("MLAs") of a syndicated loan to ProSieben, a German broadcast company, offering to purchase approximately 1.25 billion of a 7.2 billion loan. (TAC ¶¶ 51, 74.) Beach and Kelly allege that Micko acted on Pickett's instruction and authority. (Id. ¶ 74.) The commitment requested was multiple times the total NAV of the Fund. (Id.)
Beach and Kelly assert that neither the offer, nor its confirmation, was recorded by CPL or CAL (Id. ¶¶ 75-77.) Furthermore, the order exceeded the Fund's internal trading limits on leverage. (Id. ¶ 78.) After confirming the offer, the MLAs allocated approximately 558 million of debt to the Fund and notified CPL of the allocation on June 29, 2007. (Id. ¶ 79.) Initially, Pickett refused to honor the allocation notice, viewing it as a material change in the terms of the agreement. (Id. ¶ 80.) However, CAI and Citigroup executives, including John Havens, CAI's CEO, intervened and ordered Pickett to consunmlate the deal. (Id. ¶¶ 81-83.) In late November, or early December, 2007, after prolonged negotiations, CAI and the MLAs agreed to the Fund taking an allocation of 512 million in the ProSieben transaction. (Id. ¶ 89.) Soon after the deal had been completed, Pickett was fired. (Id. ¶ 7.) Picket was replaced by Micko, who reported to the co-head CAI's global fixed income group. (Id. ¶ 94.)
On December 14, 2007, CPL sent a letter to Fund investors informing them of the ProSieben settlement and its impact on the Fund, but did not mention ProSieben by name. (Id. ¶¶ 90-91.) The letter noted that the Fund was down 12.6% on a gross basis, but the quality of the portfolio was "fundamentally sound." (Id. ¶¶ 91, 95.) The letter also informed investors of Pickett's departure, but discouraged them from redeeming their shares under the "key man" provision of the PPM. (Id. ¶ 95.) The letter was signed by Micko, and was sent on CAI letterhead, bearing a London address. (Id. ¶¶ 90, 93; Soloway Decl. Ex. 4, at 1.)
On December 19, 2007, CPL officially notified investors that Pickett's departure triggered a "Key Man Event" and gave them a 90-day period during which they could elect to redeem their shares. (TAC ¶ 96.) On January 23, 2008, CPL issued a Monthly Performance Report for the Fund, which mentioned ProSieben by name. (Id. ¶ 100.) The Report indicated that the Fund's leverage was 7.58 times the NAV. (Id.) According to Beach and Kelly, this was the first time investors ever saw the name "ProSieben." (Id.) Two days later, CPL notified investors that "redemptions of all shares [had] been temporarily suspended until such time as the boards resolve otherwise." (Id. ¶ 105.) The letter was signed by Micko on behalf of CPL and written on CAI letterhead. (Id.) Thus, the period between December 19, 2007, and January 25, 2008, was the investors' "last clear chance" to redeem their investment. (Id. ¶ 97.)
On January 31, 2008, CPL sent investors a letter, on CAI letterhead, informing them that the Fund had lost 31% of its value on a gross basis. (Id. ¶ 107.) According to the letter, the valuation reflected "the performance of the [F]und and the adjustment to the reserve for the settlement of a syndicated loan trade dispute." (Id.) CPL assured investors that it "continue[d] to have strong faith in the quality of [the Fund's] underlying positions despite these painful mark-to-market price moves." (Id.)
Beach and Kelly allege that, while CPL was assuring investors of the quality of the underlying positions, CAI and Citigroup made equity investments in a "last-ditch bailout' effort... to avoid the Fund's implosion." (Id. ¶ 109.) Despite Citigroup's investments, the Fund's NAV continued to drop. (Id. ¶ 117.) In a letter dated November 18, 2008, on CAI letterhead, CPL informed investors that a forced redemption would occur. (Id.) Ultimately, investors received three cents for each dollar initially invested. (Id. ¶ 118.)
Beach initially filed a putative class action suit on October 16, 2012. (Compl., Docket # 1.) In response to perceived jurisdictional deficiencies outlined by Pickett in a June 10, 2013, motion to dismiss, Kelly was joined as a plaintiff in a September 9, 2013, amended complaint. (See Docket # 50, 51, 63.) In the TAC, Beach and Kelly allege that through the Fund's PPM, the subscription agreement, and CPL's subsequent letters, CPL made false and misleading statements to investors regarding, inter alia, the Fund's investment strategy, the level of oversight over it, its assets, and the effects of the ProSieben transaction, which led to the loss of their investments. (TAC ¶¶ 145-50.) They further allege that CPL had a duty to disclose the terms of the ProSieben transaction and fraudulently concealed the information from investors, ultimately leading to the loss of their investments. (Id. ¶¶ 152-62.) Beach and Kelly also allege that Citigroup, CAI, and Pickett were either actively involved, or aided CPL in its actions. (Id. ¶¶ 145-62; 172-78.) Finally, Beach and Kelly allege that Citigroup, CAI, and CPL violated their duties of care, and truthfulness and candor by failing to disclose the Fund's leverage to investors, leading to the loss of their investments. (Id. ¶¶ 163-70.)
Jurisdiction is based on partial diversity of citizenship in a class action under CAFA, 28 U.S.C. § 1332(d).
1. Motion to Dismiss for Lack of Personal Jurisdiction
On a motion to dismiss for lack of personal jurisdiction, the plaintiff bears the burden of demonstrating that the court has personal jurisdiction over the defendant. In re Magnetic Audiotape Antitrust Litig. , 334 F.3d 204, 206 (2d Cir. 2003) (per curiam). "[T]he nature of the plaintiffs obligation varies depending on the procedural posture of the litigation." Ball v. Metallurgie Hoboken-Overpelt, S.A. , 902 F.2d 194, 197 (2d Cir. 1990). If the court considers only the pleadings and affidavits on the motion to dismiss, "the plaintiff need only make a prima facie showing of personal jurisdiction over defendant." CutCo Industries, Inc. v. Naughton , 806 F.2d 361, 364 (2d Cir. 1986). On a motion pursuant to Rule 12(b)(2), courts may rely upon materials that are outside the pleadings. See Distefano v. Carozzi N. Am., Inc. , 286 F.3d 81, 84 (2d Cir. 2001).
Personal jurisdiction may be exercised over any defendant "who is subject to the jurisdiction of a court of general jurisdiction in the state where the district court is located." Rule 4(k)(1)(A), Fed.R.Civ.P. If plaintiff is able to establish a factual predicate for jurisdiction under the laws of the forum state-here, New York-then the court must consider whether the exercise of jurisdiction violates due process. Wiwa v. Royal Dutch Petroleum Co. , 226 F.3d 88, 94 (2d Cir. 2000).
II. Motion to Dismiss for Failure to State a Claim
To survive a motion to dismiss for failure to state a claim upon which relief can be granted, "a complaint must contain... sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face.'" Ashcroft v. Igbal , 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly , 550 U.S. 544, 570 (2007)). In assessing a complaint, courts draw all reasonable inferences in favor of the non-movant. See Elevator Antitrust Litig. , 502 F.3d at 50. Legal conclusions, however, are not entitled to any presumption of truth, and a court assessing the sufficiency of a complaint disregards them. Iqbal, 556 U.S. at 678. Instead, the court must examine only the well-pleaded factual allegations, if any, "and then determine whether they plausibly give rise to an entitlement to relief." Id. at 679.
In addition to the pleading requirements of Rule 12(b)(6), a complaint alleging fraud must satisfy the heightened pleading requirements of Rule 9(b), Fed. R. Civ. P., that requires a party alleging fraud to "state with particularity the circumstances constituting fraud." Requiring particularity serves to give a defendant notice of the plaintiff's claim and safeguards a defendant's reputation from "improvident" charges. See ATSI Comm., Inc. v. Shaar Fund, Ltd. , 493 F.3d 87, 99 (2d Cir. 2007). To satisfy this pleading threshold, the complaint 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.'" Novak v. Kasaks , 216 F.3d 300, 306 (2d Cir. 2000) (quoting Shields v. Citytrust Bancom, Inc. , 25 F.3d 1124, 1128 (2d Cir. 1994)).
"[T]he complaint is deemed to include any written instrument attached to it as an exhibit or any statements or documents incorporated in it by reference." Chambers v. Time Warner, Inc. , 282 F.3d 147, 152 (2d Cir. 2002) (quoting Int'l Audiotext Network, Inc. v. Am. Tel. & Tel. Co. , 62 F.3d 69, 72 (2d Cir. 1995) (per curiam)). "Where a document is not incorporated by reference, the court may nevertheless consider it where the complaint relies heavily upon its terms and effect, ' thereby rendering the document integral' to the complaint." DiFolco v. MSNBC Cable L.L.C. , 622 F.3d 104, 111 (2d Cir. 2010) (quoting Mangiafico v. Blumenthal , 471 F.3d 391, 398 (2d Cir. 2006) (quoting Chambers , 282 F.3d at 152-53). "[A] plaintiffs reliance on the terms and effect of a document in drafting the complaint is a necessary prerequisite to the court's consideration of the document on a dismissal motion; mere notice or possession is not enough." Chambers , 282 F.3d at 153. "[E]ven if a document is integral to the complaint, it must be clear on the record that no dispute exists regarding the authenticity or accuracy of the document." DiFolco , 622 F.3d at 111 (internal quotation marks and citation omitted).
CHOICE OF LAW
The parties present arguments based on the application of New York law, the law of the forum state. Accordingly, the Court will apply New York law. See., e.g., Tehran-Berkeley Civil and Envtl. Eng'rs v. Tippetts-Abbett-McCatihy-Stratton , 888 F.2d 239, 242 (2d Cir.1989) ("consent to use a forum's law is sufficient to establish choice of law").
I. There Is No Personal Jurisdiction over CPL or Pickett.
When there are challenges made to a court's personal jurisdiction over a defendant, the Court must address them before reaching the merits of a claim. Arrowsmith v. United Press Int'l , 320 F.2d 219, 221 (2d Cir. 1963). In an action brought as a class action, personal jurisdiction is based on a defendant's contacts with the forum state and actions giving rise to the named plaintiffs' causes of action. See Selman v. Harvard Med. Sch. , 494 F.Supp. 603, 613 n.6 (S.D.N.Y. 1980) (citing Mintz v. Mathers Fund. Inc. , 463 F.2d 495, 499 (7th Cir. 1972). Contacts with unnamed class members may not be used as a jurisdictional basis, especially before a class has been certified. Id.
i. There Is No Personal Jurisdiction under CPLR § 301.
Plaintiffs first invoke personal jurisdiction under New York's general jurisdiction provision, CPLR § 301. Under CPLR § 301, a defendant may be subject to general jurisdiction by virtue of its physical presence, domicile, consent, or "doing business" in New York. CPLR § 301, 2011 Practice Commentaries C301:2-10.
A nondomiciliary corporate defendant will only be deemed to be "doing business" in a forum when its "affiliations with the State are so continuous and systematic' as to render [it] essentially at home in the forum State." Goodyear Dunlop Tires Operations, S.A. v. Brown , 131 S.Ct. 2846, 2851 (2011). The locations where a corporation is "at home" are, absent exceptional circumstances, limited to its principal place of business and place of incorporation. Daimler AG v. Bauman , 134 S.Ct. 746, 761 & n.19 (2014). The ultimate determination as to where a corporation is "at home" "calls for an appraisal of a corporation's activities in their entirety, nationwide and worldwide." Id. at 762 n.20. Notwithstanding these limitations, a corporation may consent to jurisdiction in New York under CPLR § 301 by registering as a foreign corporation and designating a local agent. See Neirbo Co. v. Bethlehem Shipbuilding Corp. , 308 U.S. 165, 170, 175 (1939); Application of Amarnick , 558 F.2d 110, 113 (2d Cir. 1977); Rockefeller Univ. v. Ligand Pharm. Inc. , 581 F.Supp.2d 461, 466 (S.D.N.Y. 2008).
CPL is incorporated under the laws of the United Kingdom with its principal place of business there and is not registered to do business in New York. (See TAC ¶ 31.) It has no office or employees in New York, or any other systematic and continuous presence here. (See id.) It therefore does not have a domicile or physical presence in the state. The TAC alleges that actions were taken on the Fund's behalf outside of the United States and communication with investors in the United States, including one investor in New York. (See TAC ¶ 141.) These communications are not sufficient, in context, to render CPL "at home" in New York for jurisdictional purposes.
Beach and Kelly assert that CPL was a "mere alter-ego" of Citigroup, its parent company. They argue that because Citigroup is a New York-based company and subject to jurisdiction here, CPL is also subject to jurisdiction. A finding of personal jurisdiction on an alter-ego theory requires an analysis analogous to piercing ...