FILED NEW YORK COUNTY CLERK 07/13/2015 1200 PM INDEX NO. 651708/2015 NYSCEF DOC. NO. 23 RECEIVED NYSCEF 07/13/2015 SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK MDW FUNDING LLC and VERSANT FUNDING LLC, vs. Plaintiffs, DARDEN MEDIA GROUP, LLC, DARDEN MEDIAL HOLDINGS, LLC, CALVIN DARDEN, CALVIN DARDEN, JR., FOREFRONT CAPITAL MARKETS, LLC, MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED, BRENT ALLEN WATSON, Defendants. Index No. 651708/2015 Oral Argument Requested REPLY MEMORANDUM OF LAW IN FURTHER SUPPORT OF MERRILL LYNCH S MOTION TO DISMISS THE COMPLAINT July 13, 2015 SIDLEY AUSTIN LLP 787 Seventh Avenue New York, NY 10019 Telephone (212) 839-5300 Facsimile (212) 839-5599 Attorneys for Defendant Merrill Lynch, Pierce, Fenner & Smith Incorporated
Table of Contents Page PRELIMINARY STATEMENT...1 ARGUMENT...1 I. PLAINTIFFS FAIL TO ADEQUATELY PLEAD SCIENTER FOR A FRAUD CLAIM...1 II. PLAINTIFFS FAIL TO ADEQUATELY PLEAD A SPECIAL RELATIONSHIP FOR A NEGLIGENT MISREPRESENTATION CLAIM...2 III. PLAINTIFFS FAIL TO PLEAD RELIANCE...3 IV. PLAINTIFFS FAIL TO PLEAD PROXIMATE CAUSE...4 V. PLAINTIFFS HAVE NOT ADEQUATELY PLED THAT WATSON S ACTIONS ARE IMPUTABLE TO MERRILL LYNCH OR THAT MERRILL LYNCH IS VICARIOUSLY LIABLE FOR WATSON S ACTIONS...5 A. Plaintiffs fail to adequately allege that Watson had actual or apparent authority to make the purported misrepresentations....5 B. Plaintiffs fail to allege a basis for vicarious liability....7 CONCLUSION...8
TABLE OF AUTHORITIES Page(s) Cases ACA Fin. Guaranty Corp. v. Goldman, Sachs & Co., 25 N.Y.3d 1043 (2015)...4 Amusement Industry Inc. v. Stern, 693 F. Supp. 2d 327 (S.D.N.Y. 2010)...5 Citibank, N.A. v. K-H Corp., 968 F.2d 1489 (2d Cir. 1992)...5 People ex rel. Cuomo v. Wells Fargo Ins. Servs. Inc., 2008 WL 162147 (1st Dep t Jan. 14, 2008)...2 EED Holdings v. Palmer Johnson Acquisition Corp., 387 F. Supp. 2d 265 (S.D.N.Y. 2004)...3 ER Holdings, LLC v. 122 W.P.R. Corp., 65 A.D.3d 1275 (2d Dep t 2009)...6 Essig v United States, 675 F. Supp. 84 (E.D.N.Y. 1987)...7 Friedman v. Anderson, 23 A.D.3d 163 (1st Dep t 2005)...5 Glidepath Holding B.V. v. Spherion Corp., 590 F. Supp. 435 (S.D.N.Y. 2007)...7 Greenberg, Trager & Herbst, LLP v. HSBC Bank USA, 17 N.Y.3d 565 (2011)...2 Imburgio v. Toby, 82 A.D.3d 653 (1st Dep t 2011)...6 JPMorgan Chase Bank v. Winnick, 350 F. Supp. 2d 393 (S.D.N.Y. 2004)...3 Judith M. v. Sisters of Charity Hospital, 93 N.Y.2d 932 (1999)...7 Kirschner v. KPMG LLP, 15 N.Y.3d 446 (2010)...6, 7 ii
Laub v. Faessel, 297 A.D.2d 28 (1st Dep t 2002)...5 Loreley Fin. (Jersey) No. 4 Ltd. v. UBS Ltd., 978 N.Y.S.2d 615 (N.Y. Sup. Ct. 2013)...4 Riviello v. Waldron, 47 N.Y.2d 297 (1979)...7 Ryan v. Prescott, 2013 N.Y. Slip Op. 50388(U), (N.Y. Sup. Ct. Feb. 14, 2013)...5 Shea v. Hambros PLC, 244 A.D.2d 39 (1st Dep t 1998)...4 Yuco Mgt., Inc. v. Cheung, 2010 N.Y. Misc. LEXIS 4487 (N.Y. Sup. Ct. Sept. 15, 2010)...8 Zutty v. Rye Select Broad Mkt. Prime Fund, 2011 WL 5962804 (N.Y. Sup. Ct. Apr. 15, 2011)...2 Statutes CPLR 3211(a)(7)...1 CPLR 3016(b)...1 iii
Defendant Merrill Lynch respectfully submits this reply memorandum of law in further support of its motion to dismiss Plaintiffs Complaint pursuant to CPLR 3211(a)(7) and 3016(b). PRELIMINARY STATEMENT Plaintiffs opposition only serves to underscore the ironic gravamen of their claims against Merrill Lynch they are suing Merrill Lynch because one of its employees was fooled by the very same individuals and misrepresentations that led to Plaintiffs almost being defrauded to the tune of $5.5 million. Of course, Plaintiffs scarcely even acknowledge two essential points that (i) they were strangers to Merrill Lynch, having had no relationship before reaching out to establish the control account that was supposed to (but never did) hold shares to serve as collateral for their loan to the Dardens; and (ii) because those shares never made their way into a Merrill Lynch account, the contemplated loan was not consummated and Plaintiffs received back all of their money. Plaintiffs chose to do business with individuals and companies whom they now label as fraudsters. That decision had nothing to do with Merrill Lynch, and their claims against Merrill Lynch cannot be sustained. As discussed in the moving memorandum and further explained below, the Complaint should be dismissed as to Merrill Lynch because Plaintiffs have failed to plead adequately (1) the element of scienter to support their fraud claim; (2) a special relationship sufficient to support a negligent misrepresentation claim; (3) reasonable reliance; (4) that Merrill Lynch s conduct proximately caused injury (if any) to Plaintiffs; and (5) that Watson s actions can be imputed to Merrill Lynch. Therefore, the claims against Merrill Lynch must be dismissed. ARGUMENT I. PLAINTIFFS FAIL TO ADEQUATELY PLEAD SCIENTER FOR A FRAUD CLAIM As explained in the moving memorandum, Plaintiffs must allege specific instance[s] of
[plaintiffs] justifiably relying upon a material misrepresentation known by the maker to be false rather than generalized allegations of what a defendant knew or should have known. People ex rel. Cuomo v. Wells Fargo Ins. Servs. Inc., 2008 WL 162147, at *3 (1st Dep t Jan. 14, 2008); Zutty v. Rye Select Broad Mkt. Prime Fund, 2011 WL 5962804, at *14 (N.Y. Sup. Ct. Apr. 15, 2011). In response, Plaintiffs rely exclusively on Merrill Lynch s filing with its regulator, FINRA, noting that Watson accept[ed] instructions from an unauthorized family member, and they argue that this somehow suffices to allege that Watson had knowlege of the alleged fraudulent scheme or the criminal history of Darden, Jr. Plaintiffs Memorandum of Law in Opposition to Merrill Lynch s Motion to Dismiss the Complaint ( Opp. Br. ) at 17; Cpl. 61. No reasonable inference of scienter can be made from these conclusory allegations and arguments. II. PLAINTIFFS FAIL TO ADEQUATELY PLEAD A SPECIAL RELATIONSHIP FOR A NEGLIGENT MISREPRESENTATION CLAIM Merrill Lynch demonstrated in the opening memorandum that Plaintiffs have failed to plead that Merrill Lynch had a special relationship with Plaintiffs, such that Merrill Lynch possessed unique or specialized expertise 1 or was in a special position of confidence and trust with Plaintiffs. See Memorandum of Law in Support of Merrill Lynch s Motion to Dismiss the Complaint ( Mem. ) at 6-9; Greenberg, Trager & Herbst, LLP v. HSBC Bank USA, 17 N.Y.3d 565, 578 (2011). In response, Plaintiffs argue that Merrill Lynch and MDW were in privity of contract pursuant to the Control Agreement. Opp. Br. at 19. However, even if the inclusion of MDW as a creditor on the face of the Control Agreement were sufficient to make MDW a party to the agreement, privity of contract or near-privity in the commercial context involving 1 Plaintiffs also argue that Watson had the exclusive knowledge that he was aiding a convicted felon. Opp. Br. at 20. Again, Plaintiffs allege no facts supporting a conclusion that Watson had this information. 2
an arms length transaction is not on its own sufficient to create a special relationship without an additional duty to provide correct information. See EED Holdings v. Palmer Johnson Acquisition Corp., 387 F. Supp. 2d 265, 281 (S.D.N.Y. 2004) ( The next step in New York s negligent misrepresentation analysis is to determine whether this near-privity relationship imparted a duty on [defendant] to provide correct information. Under New York law, a statement made in the context of an arms-length commercial transaction, without more, cannot give rise to such a duty. ) (citing Kimmell v. Schaefer, 89 N.Y.2d 257 (1996)); JPMorgan Chase Bank v. Winnick, 350 F. Supp. 2d 393, 400-401 (S.D.N.Y. 2004) ( A special relationship may be brought about by either privity of contract between the parties or a relationship so close as to approach that of privity. However, where the duty arises in commercial contexts in which a contract exists, the duty attendant to that special relationship must spring from circumstances extraneous to, and not constituting elements of the contract, although it may be connected with and dependent on that contract. ) (citation omitted). III. PLAINTIFFS FAIL TO PLEAD RELIANCE As explained in the moving memorandum, Plaintiffs have not pled reasonable reliance on Merrill Lynch; to the contrary, the Complaint makes clear that Plaintiffs relied upon their direct communications with the Dardens and their agents. See, e.g., Mem. at 9-10; Cpl 33 ( Forefront s Senior Managing Director, Chris Thomas ( Thomas ), aggressively solicited MDW to loan $5.5 million to the Darden Defendants. ); Cpl. 51 ( Later that same afternoon, Mr. Weinberg received a purported email from Darden attaching a communication from Alma at BOA... confirming the transfer of the Shares. ). Rather than attempting to refute this point, Plaintiffs argue that they had no duty to prosecute an investigation or conduct due diligence regarding Watson s representations. But Merrill Lynch does not argue that Plaintiffs had a duty to conduct an investigation, but rather that Plaintiffs have not sufficiently alleged that they 3
reasonably relied upon any information passed on by Watson. Plaintiffs have alleged that they relied on Alma s direct statement to MDW that the shares were transferred, and they have alleged no facts indicating any connection between Watson and Alma, nor any basis to conclude that Watson knew more about Alma than Plaintiffs did. Cpl. 51. Thus, Plaintiffs allegations confirm that they did not act in reliance upon Merrill Lynch s (or Watson s) representations. See Shea v. Hambros PLC, 244 A.D.2d 39, 46-47 (1st Dep t 1998) ( To show reliance, [Plaintiffs] must demonstrate that [they were] induced to act or refrain from acting to [their] detriment by virtue of the alleged misrepresentation or omission. ). Plaintiffs cite ACA Fin. Guaranty Corp. v. Goldman, Sachs & Co., 25 N.Y.3d 1043, 1045 (2015), for the holding that the question of what constitutes reasonable realiance is not generally a question to be resolved as a matter of law on a motion to dismiss. ACA, however, provides further support for dismissal as the Court emphasized that the plaintiff had satisfied the justifiable reliance element only because it had alleged that it relied specifically on defendant s alleged affirmative misrepresentations and would not have moved forward without the representations. Id. at 1044-1045. Here, no such allegation could be made because Plaintiffs have alleged that they moved forward following the email received directly from Alma. IV. PLAINTIFFS FAIL TO PLEAD PROXIMATE CAUSE To sufficiently plead proximate cause, Plaintiffs must allege both transaction and loss causation; in other words, that but for Merrill Lynch s representations the transaction would not have come about and that the representations directly caused a loss. See Loreley Fin. (Jersey) No. 4 Ltd. v. UBS Ltd., 978 N.Y.S.2d 615, 620 (N.Y. Sup. Ct. 2013). Plaintiffs all but ignore loss causation and address transaction causation unconvincingly. First, Plaintiffs concede that they received back all the funds paid into escrow so the link between Merrill Lynch and any damages Plaintiffs could have incurred is even more attenuated. Second, Plaintiffs argument 4
that it is sufficient for Watson s misrepresentations to be one of the inducing causes of the transaction misses the point. Opp. Br. at 23. Under New York law, separate from the transaction causation point, Plaintiffs must properly allege that Watson s misrepresentations actually caused the subject losses. See Friedman v. Anderson, 23 A.D.3d 163, 167 (1st Dep t 2005); Laub v. Faessel, 297 A.D.2d 28, 31 (1st Dep t 2002). Plaintiffs have made no attempt to do this, nor could they. The case Plaintiffs cite, Amusement Industry Inc. v. Stern, 693 F. Supp. 2d 327 (S.D.N.Y. 2010), makes this distinction. The court explained that Amusement alleges that Safrin and Egert induced it to hand over money that Safrin and Egert themselves (among others) used for their own benefit. Thus, unlike the situation in [Citibank, N.A. v. K-H Corp., 968 F.2d 1489 (2d Cir. 1992)], here the fraud and injury are connected; it appears in an appreciable sense that damage flowed from fraud as proximate and not remote cause. Amusement Industry, 692 F. Supp. 2d at 353 (emphasis added) (quotations and alterations omitted). Plaintiffs have failed to allege that their purported damages flowed as a proximate, not remote, cause from information passed on by Watson, rather than other conduct. V. PLAINTIFFS HAVE NOT ADEQUATELY PLED THAT WATSON S ACTIONS ARE IMPUTABLE TO MERRILL LYNCH OR THAT MERRILL LYNCH IS VICARIOUSLY LIABLE FOR WATSON S ACTIONS A. Plaintiffs fail to adequately allege that Watson had actual or apparent authority to make the purported misrepresentations. Merrill Lynch demonstrated in the moving memorandum that Plaintiffs have failed to plead that Watson had the authority actual or apparent to make the alleged misrepresentations to MDW. Actual authority only exists when an agent has the power to do an act or to conduct a transaction on account of the principal which, with respect to the principal, he is privileged to do because of the principal s manifestations to him. Ryan v. Prescott, 2013 N.Y. Slip Op. 5
50388(U), at *7 (N.Y. Sup. Ct. Feb. 14, 2013) (quoting Minskoff v. Am. Exp. Travel Relates Servs. Co., Inc., 98 F.3d 703, 708 (2d Cir. 1996)). Similarly, to plead apparent authority, Plaintiffs must plead facts showing that Merrill Lynch imbued Watson with such authority. See ER Holdings, LLC v. 122 W.P.R. Corp., 65 A.D.3d 1275, 1277 (2d Dep t 2009) (quoting Hallock v. State of New York, 64 N.Y.2d 224, 231 (1984)); Imburgio v. Toby, 82 A.D.3d 653, 653 (1st Dep t 2011). Although Watson may have had authority to take actions with respect to Merrill Lynch customers, there is no basis pled for any such authority with respect to MDW. 2 Plaintiffs cite Kirschner v. KPMG LLP, 15 N.Y.3d 446 (2010), for the proposition that Watson was acting within the scope of his corporate authority by setting up the Control Account and that undeniably, Merrill Lynch authorized Watson to issue representations relating to the Control Account.... Opp. Br. at 8-9. First, there is no allegation that the establishment of a control account was improper or fraudulent in any respect. Indeed, if the Dardens had transferred into the control account the shares that had been promised, Plaintiffs presumably would have moved forward with their planned transaction. It was only because Darden, Jr. allegedly forged an instruction to release funds without the shares having been received in the control account that Plaintiffs were at risk of loss. Cpl. 53. Second, as Plaintiffs themselves acknowledge, the control agreement was signed by a different, more senior Merrill Lynch employee, not Watson, so at most the control agreement gave the signing employee rather than Watson actual authority regarding that account. 3 Opp. Br. at 4. In Kirschner the most senior 2 Plaintiffs also claim that Merrill Lynch unconvincingly argues that the adverse interest exception to the general rule of imputation applies to sever the principal-agent relationship between Merrill Lynch and Watson. Opp. Br. at 10-11. Merrill Lynch has made no such argument; rather, Merrill Lynch argued that it is not liable for Watson s actions because his actions were not in furtherance of Merrill Lynch s business. Mem. at 11-12. As discussed in Section V.B. below, Plaintiffs have not successfully refuted that argument. 3 For the same reason, Plaintiffs allegation that Merrill Lynch confirmed that Watson had the authority to issue representations to MDW about the Control Account through a Merrill Lynch Director signing off on the Control Account (Opp. Br. at 12) provides no support to the contention that Watson had apparent authority. 6
officers of two corporations intentionally made misrepresentations in the course of their duties, including representing the financial condition of the corporation to the public, regulators, and their investors. 15 N.Y.3d at 457-58, 462. In sharp contrast, to the extent Watson is alleged to have made representations about the Dardens to MDW, he was not carry[ing] out the everyday activities of Merrill Lynch or acting within the scope of [his] authority, as explained in Kirschner. 4 B. Plaintiffs fail to allege a basis for vicarious liability. Plaintiffs concede that Merrill Lynch may only be held liable for Watson s actions that are generally foreseeable and a natural incident of his employment and may not be held liable for Watson s actions that constitute an abandonment of his service. See Judith M. v. Sisters of Charity Hospital, 93 N.Y.2d 932, 933 (1999). Plaintiffs cite several inapposite cases to argue that employers have been held liable for the tortious acts of their employees that could have been reasonably anticipated. Opp. Br. at 14. However, in all of these cases the employer had knowledge of the activity that the employee was engaged in and the employee committed tortious conduct while carrying out that activity. 5 Here, Plaintiffs have pled no facts establishing 4 Similarly, Glidepath Holding B.V. v. Spherion Corp., 590 F. Supp. 435 (S.D.N.Y. 2007), is distinguishable as it involved a managing director of a corporation fraudulently inducing an investor to purchase a business. Id. at 443. Even though the court held that an employer does not have to approve or be aware of a representation made by the employee, it explained that the representations must be made within the scope of the agent s employment. Id. at 453. The court found that Plaintiffs had properly alleged that the managing director was instructed to find potential buyers by the defendant company and had alleged and provided documentation that his representations were made during the course of duties. Id. Here, Plaintiffs have not alleged that Merrill Lynch instructed Watson to communicate with MDW or Weinberg, and there are no other facts alleged to support a conclusion that any such communications would have been within the scope of his employment. As discussed above, the creation of the control account itself may have been within the scope of Merrill Lynch s employee, but it was signed by a different Merrill Lynch employee. 5 See, e.g., Essig v United States, 675 F. Supp. 84 (E.D.N.Y. 1987) ( The government granted Hamill permission to use the car for official business as well as to commute to and from his home and office.... There is no question that the government was aware that Hamill would be driving the vehicle.... ); Riviello v. Waldron, 47 N.Y.2d 297 (1979) (explaining that [t]here was also proof that, in the time he had been there, when not preparing or serving food or relieving the bartender, he would follow the practice of mingling with patrons, which made his conduct of injuring a patron with a knife reasonably foreseeable). 7