disfavored motion which should be rarely granted the six motion to dismiss for failure to state a climb up on which relief can be granted the standard of review is therefore as the court which means that the role of the district court opinion is one of reference but not of deference the standard for this review is familiar to the court but i think it's important to just resize it nonetheless because sometimes out in the field it seems like it is not followed and i would submit this was one of those instances all the facts in the complaint must be assumed as true the facts must be construed in the light most favorable to the point that all inferences must be drawn favorable to the plaintiff the complaint must be read sympathetically to the plaintiff when just because the court may believe that it may not ultimately be proved is not a grounds for grant the motion now i may only remember one thing that a professor of mine said in law school verbatim and it was my civil procedure professor who said what makes a good complaint well you can't just drool on the page the united states supreme court has ultimately adopted that in the ball in cases which provide that you must plead sufficient facts to sta a claim for relief that's plausible on its face plausible on its face here this complaint is chock full of facts that go well beyond the plausibility standard why do those facts say what kind of picture today portray we had a trading agreement between a fund and an advisor  pursuant to which simply stated once the fund decided to terminate the program the advisor went rogue he started trading wildly against the express instructions of the client in  expressed terms of the trading agreement and not only did he go rogue he lied about it to the client ultimately the client terminated the agreement and brought this action on the complaint was attacked really in two ways the first way was an argument that all damages had been waived by a provision in the trading advisory agreement and the second was even if some damages were recoverable that the causes of action had not been sufficiently play now throughout the case the damages component has been argued and dealt with first i think it may make more sense to go first to the adequacy of the pleading of the causes of action the cause of action pled were for gross negligence frog fraud by omission and breach of contract we readily of sand that under section eight of the trading and by jury agreement in order to hold the advisor liable we must show that these losses were caused by the gross negligence or willful misconduct the adviser we must start did you play that in the play we did indeed we played it very expressively your honor multiple times and one of the things that the district court did especially with regard to the gross negligence crime was concluded that we had not sufficiently pled malice which is required by kentucky law the phelps first level water company case for example to support a claim of gross negligence which seventy one seventy seven of the complaint but we didn't want much more than that use that word malice or gesture that we did use the word malice so we satisfied the general a very standard which really ought to be enough but we down the complaint sixty four seventy one and seventy seven ok that's correct yes i see malice in seventy one profumo see it in seventy seven yes and really it was on was all that you that should be  enough under the rule but we we went well beyond that under the ball standard in that we play a fax from which an inference of malice could also be drawn and the court didn't draw that inference in our favor as is required under law for example the court in this is something that the district court just flat missed said that there could be no malice because we might share in the upside of this rogue trading well perhaps we could share in the upside but we were the only party that would have the downside the advisor got a twenty percent of the upside but had no liability for the downside so we  definitely draw an inference of malice from the fact that he was told his program was being indicted and then he goes rogue saying well what the heck you know i've only got the potential for the upside here i'm go roll the dice and try and make a big hit in the program is that the whole everything the advisor was doing or where does this quote embedded tale come in the program really relevant  such a great phrase i trying to figure out what it was actually the embedded tale hedge is relevant and it was part of the program that was presented to the client in that and by program we mean here are the elements  trading strategy and one of them is going to be this imbedded tale hedge which basically means that the investments will perform well if the equities markets don't and that was an affirmative representation well when things start going bad and the client starts confronting the advisor with the fact that margin has busted through the contractual limits that the losses dated a losses  mounting and that instructions are not being followed one of the things he says oh well there's the embedded tale hedge there so will be protected but that turns out not to be true and that's one of the fraudulent statements as part of it going rogue is not just what he did do but you're saying part of what he didn't do definitely definitely your honor and that goes to the both fraud because he told us certain things and it also goes to the breach of contract claim we allege the district court's opinion doesn't contain any analysis really whatsoever of one of the breach of contract claim it just says it was inadequately pled but the complaint plead specific provisions that the margin threshold had been exceeded that it hadn't been corrected within the time period required by the contract that the elements of the trading program had been materially changed and now your honor we know from the the commodities futures trading commission action in the northern district of illinois which admittedly was commenced after the dismissal here we've cited the courts to authorities which would the court can take judicial notice of this and in an abundance of caution yesterday we file motion admittedly late the judgment that's been entered in that action which provides additional evidence of malice which could be considered on remand of this case in that in a in a separate matter mr wilkinson the appellee that you just said it could be considered on remained but not in deciding whether to remove no i would submit it can be considered in that under twenty eight u s c twenty one zero six the grant of specific facts if i was just saying he's a bad guy he's a bad guy with nothing supporting this provides another basis for an inference of malice because he had this ponzi scheme blowing up at the same time that is the subject matter of the see if you see action and the judgment in the northern district of illinois which is another reason why he decides to take the gamble and go rogue shooting for the the up side only now i should probably term briefly to the second argument on which the complaint was attacked and that has to do with what damages are recoverable so presume we've met the pleading threshold on our causes action the second argument advanced by the defendants was that all the damages have been waived by section two of the trading advisory agreement that section  says that we cannot recover damages related to basically the margin call that occurred we argue that section eight later in the agreement contain a carve out for that if the damages were caused by the gross negligence or willful misconduct of the defendant the district court basically decided to split the difference on this  appellee say we can't recover any damages we say we can recover all the damage was we claim including the margin call the district court said you can't recover for the margin call but you can recover your other claim damages for trading losses lost management the costs of cleaning up the mess opportunity cost setter and i will concede that while we are arguing for a broader interpretation of the contract the district court's  contract is a reasonable one we simply continue that all the damages we claim which include the margin call are covered under section eight section to section eight it's not a textbook example of great drafting perhaps but when you work to harmonize the two sections we believe that the gross negligence willful misconduct provision in section eight is a car and we can claim any damages including for the margin call if they were caused by the gross negligence or willful misconduct so your your honour's our primary claim here is that the district court did not correctly apply the standard for review of a motion to dismiss for failure to state a claim we didn't get the benefit of the favorable reading of the complaint we didn't get the benefit of airing malice generally we didn't get the favorable inferences that are required we have pled well beyond the plausibility threshold of it ball and we also believe that the court was right that we can recover all damages other than the margin call we believe that did not go far enough that we can actually recover the margin call as well but at minimum the court was correct in the siding that we can recover the other damages that we've called i do i do have just one  to the extent we must examine whether some sort of action or inaction was risky do we just look at the general definition of the term risky do we look at  the do we look at the industry in general does that make sense yes indeed it does and for purposes of this motion your honor i think you would except our allegations as to risk as correct but there are two more or less objective sources of evidence on risk that will be presented upon remain and when the matter proceeds to the merits one is the the margin agent the trading agent society generale had a measure  value at risk and you'll hear appellee say oh well their guy didn't know anything about that but he also had his own internal risk report so there are at least two quantifiable ways that documents are not in the record yet themselves but they are play ed and i believe that even the pallies will concede that mr wilkinson at pursuit maintained internal risk reports and the time in cases involving you know trading and securities vestments but positions that are excessively large same sort of answer in terms of to which we would look  to how to understand those those gone are i understand i think you're getting at the fact that there may be an inherent subjectivity in some of those yeah that turn arms and that may go to the whether the fraud claim can be sustained because of representations as to facts but on virtually all of these things and if you look at the charts that attach to the first minute complaint there are methods by which the people who are involved in this industry quantify and compare those things and at this stage of the proceeding i think our pleadings to that point should be accepted as true ok may please the court my name is jeff mode and i represent apper says mr wilkinson in this matter the district court properly dismissed all claims in this dispute between sophisticated parties a contract governing a high risk trading trading strategy for three different reasons the first is that fraud claims require facts objective past or present concrete  internal risk report was inaccurate that's the allegation not that it was falsified not that anything anybody did anything to deceive anyone they share their internal risk reports which showed that in the future the strategy would be profitable in a large market downturn that turned out to be incorrect but there's no allegation that wilkinson or rapper sue misstated that misstated the contents of the report or that anyone doctored any a bird about in the internal report in no place else i thought there was an explicit representation or they say there was that they would use this strategy where there's a good strategy or not i don't know but that it said they would do it and they didn't do it what were my missing that i'm not exactly sure where where your talking about the allegations concerning the embedded tillage are in paragraph sixty seven and sixty nine of the complaint yeah because i thought that was one of the sort of positive big represented to this is sixty seven wilkinson represented the fine that internal risk reports supported the claims that the strategy contained in embedded had such that it would be profitable correct and there's no allegation that that statement was was incorrect so wilkinson represented that after sue's internal report supported that there was an internal tale or that there was an embedded edge there's no allegation that the reports didn't actually support that so you're saying that the they weren't they they weren't going to do it they didn't do it but they did have a risk report that said they were going to do it there's no allegation that there was an action that they were going to sixty nine says wilkinson is representations turned out to be falls right but there's no statement that could have been true he shared read it he can too supported  claim you're saying will regardless of what we said in the report were ok if we never intended to do it we never did do it that's all they allege it's not that we never intended to do anything and we never did anything they're saying that is a quality of the strategy that makes it such that the strategy would profit during a large mock market downturn in the future the allegation is that we shared the actual contents of our own internal risk reports and that our reports just in the future with hindsight based on their own experts reviews turned out to be or it turned out that that could have been accurate but i don't think there's any allegation that the issue is the embedded tale heads just shows that the strategy should be profitable in a large market downturn and they're saying that i think they're trying to use the falsified facts exception to state state a fraud claim there because well i mean if i just if you're my security analyst security not securities and you say i'm going to protect your house by putting these sensors in the lawn and here's our report that shows we have an internal report that shows that this will protect you and then they never do it isn't this isn't the representation that this is in our plan a representation that we're going to do it i don't i don't know that the analogy between something that you plan to do to somebody say house and something that is present in a strategy hold up the embedded tale hedge was something that should have existed according to our reports as alleged by the complaint should have existed by market factors it was wilkinson and his team's after suit teams interpretation of market factors that showed that there was an embed tail edge that sometime in the future if there was a large market downturn the strategy would have been profitable we didn't just have a lever that showed that we didn't have a lever we could pull that in the event that the market turned down that we would just make money i think the allegation was saying is that the allegation and the risk report sound specific would it really isn't that it's just the same as saying it will make you money it's the same thing we see on t v this strategy will make you money an up market or a down market that's correct there's no specificity beyond that that's correct and ok and i also think it's just not a false statement we shared our reports our reports turned out to be inaccurate our reading of market factors turned out to be inac moving on to a couple of these other fraudulent misrepresentation claims the first claim concerns wilkinson's interpretation again of market factors that calls in crease and margin he believed it was a temporary issue with valuation and he thought that we needed to add more hedging trades that belief in prediction with hindsight turned out to be incorrect but as the court because  important the decision determined business people and investors need to be able to analyze market the factors and make a judgment about what's going to happen in the future or what's happening now so that first statement fails because it's not a concrete fact and it doesn't contain specific past or present allegations that are testable capable of being true or false the third allegation i believe was touched on a little bit in my posing counsel's discussion and that's about ample liquidity existing as judge simpson's opinion pointed out whether ample liquidity exists is not something that can be proven true or false it's not testable it's a matter of opinion judge simpson properly dismissed that claim for two different reasons number one whether liquidity is ample is a subjective opinion and number two whether a position can be exit over the course of a few weeks is also a subjective opinion quickly moving on to the fraudulent omission claims there are two of them one is that wilkinson was aggressively adding to the risk this is another thing that came up during my opposing counsel's argument there's no measure here alleged in the complaint that was objective lee and testability misrepresented were omitted wilkinson did not omit the level of the risk because well first off and in the terms of the t a a they acknowledged everyone acknowledged that this was a risky strategy that they could have lost more than their initial investment  in addition if i could risk they mean initial margin requirement which is something that came up in their briefs and wasn't talked about in the argument there's no allegation that they didn't have access to real time knowledge of the initial margin requirement on on every day i initial margin requirement is that the same as the margin limit the million dollar margin limit yes and isn't there an allegation that that was breached that's right and that's a that's one of their breach of contract allegations breach of schedule a and the allegation there is that because margin executed a million dollars then we should liable for any damages that result because of that well if you read schedule a million dollars million dollar margin that was not a hard cap by any means r q assad maintained the authority to let it rise let it fall and while they allege that they never gave the specific instruction that that margin should be increased in fact they allege the opposite they did allege that they are the ones who discovered the margin was rising in july and they're the ones who had real time knowledge of the margin requirement as it was rise they also allege that their profits were rising the same period so basically they're watching this margin go up for months and they're watching their profits rise with it our position is that they cannot sit back and watch their margins rise with the profits when the strategy gave them the schedule and gave them the right to cancel the agreement and hire someone else to handle it the moment the agreement one above a million dollars so they decided not to exercise that the issue here is about the terms of schedule way the terms of schedule a say give them the explicit right to when you say the terms of schedule a is that keyed to a portion of your grimmett itself that's correct schedule a is attached it's after the paragraphs into the agreement but then is there something that says and therefore you know you shall look to schedule a well this is that includes the million that's right and then it just is all right and so would you rely on the may be increased to as much as three million or more or less or decrease but increased or decreased sounds like something you put in a document or at least a phone call right but so but what we're what we're talking about here is that schedule a also says that in the event that margin exceeds a million dollars we're to take or to use our best efforts and if we're unable to get it below a million dollars and they allege that we were either unwilling or unable to do so with within one trading day rather than one trading day then their remedy was to terminate the t a a and it's our position that it could not be intentional misconduct or gross negligence for us to continue trading with the margins rising  they declined to exercise their right to terminate the contract saying they had to do it soon as they saw it that day that day or any time thereafter i'm saying they can't wait until the most volatile week in the s and p five hundred and you know a period of years to lose some money and then sue us for it doesn't say that they must do this or it's waived it's in fact in pretty passive voice failure to the advisor may result in the application the allocation being temporarily suspended or permanently terminated doesn't say that they have to doesn't say when or how they do it again this your adversary may have been right when he said this was of the best drafted agreement and you probably say the signing that's right and we can't dispute that but our position is that that still has to be but that's what that's really the sentence you're relying on and it says hey you guys have all the the power here and if you don't do it we'll just keep doing a very sophisticated party and you can only sue us for gross gross negligence or willful misconduct it's like i have less than a minute left i'd like to make just a couple quick points number one their gross negligence vendetta theory that we as soon as they figured out that we they were canceling the agreement we went rogue and started adding risk immediately thereafter the timeline doesn't add up they decided to cancel the agreement in april we found out about it in may and the strategy remained they allege that the strategy remained even for about a year to number two the c f t c allegations can't be considered at this point direct the court to the contract as i understood it they could terminate it in general and that's that this doesn't a right to the client and maybe that's why it's couch so passively it's it's more of a warning to you that if you do this it may cause them to invoke rights they already have i think it is or i think it's a warning to both parties if the if the initial margin exceeds a million dollars they have the right to terminate the contract and well as you agree they have the right to terminate the contract anyway that's right but but we have once again section eight i think ties in with schedule a in section eight says they can only sue for a living through a phone thank you thank you all ok as is so often the case on rebuttal i'll start at the end and work back up judge bugs the key to note there on the interplay of schedule a and section ten of the trading advisory agreement is that terminations for a material breach such as violating the one million dollar margin limit is immediate where is terminations under section ten while you either party can terminate it there is a three day notice requirement so while the difference is slight there is a material difference on that whether the timeline adds up is a question of fact that should be determined remain when the case is tried on the merits but there were certainly no waiting for a year or two because this was an agreement in january that was terminated by the the end of august and terminations clear was clearly was an optional right it was not mandatory and we alternately did it when he repeatedly refused to correct the breaches and when we determined that we were being lied to we alternately did it but terminations of an arrangement like this is not something to be done lightly it's kind of like the declaration of independence you don't lightly sever the bonds that bind you to another people because damages occur when you have a disruption in an arrangement like the elders pleaded no and your complaint of the declaration of the what is definitely pled judge seiler is that we never approved margin above one million and that we ordered the margin brought back below one million within one day as required by the agreement and it wasn't done as far as the embedded tale hedge if you will look at i don't think the description of counsel is quite accurate if you look at paragraph fifteen of the first amended complaint it says wilkinson represented that the strategy contained an embedded tail hit meaning it would be profitable in an extreme stock market downturns that's not couched in terms of his in turn no reports or anything he said it was there then if you go to paragraph sixty nine about four lines down the market actions in trading losses stablished that the trading strategy did not contain the embedded tale hedge that was claimed by wilkinson and risk reports by outside experts confirmed that so there was a factual representation and it was not true it wasn't anything subjective and then your honour's finally if you would consult pages page thirty one of our primary brief in pages twelve and thirteen of our reply brief you will see cases from this circuit and others in which representations just the sort that we allege were determined to be factual representations that would support a fraud claim and my time is up if your honour's have no question