Court Opinion

ID: 802071
Source: CourtListenerOpinion
Date Created: 2012-06-12 14:17:53+00
Date Added: 2024-06-11T18:00:02.636623
License: Public Domain

11-265-cv
Saltz v. First Frontier
                            UNITED STATES COURT OF APPEALS
                                FOR THE SECOND CIRCUIT

                                       SUMMARY ORDER

RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A
SUMMARY ORDER FILED ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED BY
FEDERAL RULE OF APPELLATE PROCEDURE 32.1 AND THIS COURT’S LOCAL RULE 32.1.1 . WHEN
CITING A SUMMARY ORDER IN A DOCUMENT FILED WITH THIS COURT, A PARTY MUST CITE
EITHER THE FEDERAL APPENDIX OR AN ELECTRONIC DATABASE (WITH THE NOTATION
“SUMMARY ORDER”). A PARTY CITING A SUMMARY ORDER MUST SERVE A COPY OF IT ON ANY
PARTY NOT REPRESENTED BY COUNSEL.

        At a stated Term of the United States Court of Appeals for the Second Circuit, held at the
Daniel Patrick Moynihan United States Courthouse, 500 Pearl Street, in the City of New York,
on the 12th day of June, two thousand twelve,

Present:    ROSEMARY S. POOLER,
            DEBRA ANN LIVINGSTON,
                        Circuit Judges.
            BRIAN M. COGAN,*
                        District Judge.
_____________________________________________________

JACK SALTZ, AS TRUSTEE OF SUSAN SALTZ CHARITABLE
LEAD ANNUITY TRUST, SUSAN SALTZ, SUSAN SALTZ
DESCENDANTS TRUST,

                                Plaintiffs-Appellants,

                          -v-                                              11-265-cv

FIRST FRONTIER, L.P., FRONTIER CAPITAL MANAGEMENT,
 LLC, FRONTIER ADVISORS CORPORATION, MARK OSTROFF,
“FNU” OSTROFF, BEACON ASSOCIATES LLC I, BEACON
ASSOCIATES MANAGEMENT CORPORATION, IVY ASSET
MANAGEMENT CORPORATION, THE BANK OF NEW YORK
MELLON CORPORATION, JOEL DANZIGER, HARRIS MARKHOFF,
ANCHIN, BLOCK & ANCHIN, LLP, PARENTEBEARD LLC, JOHN DOES 1-100,

                                Defendants-Appellees.

           *
        The Honorable Brian M. Cogan, United States District Court for the Southern District
of New York, sitting by designation.
Appearing for Appellants Susan Saltz Charitable Lead Annuity Trust, Susan Saltz, Susan Saltz
Descendants Trust:
                                           Bernard V. Kleinman, Aitken Berlin, LLP, White
                                           Plains, N.Y.

Appearing for Appellees First Frontier, L.P., Frontier Capital Management, Frontier Advisors
Corp., Mark Ostroff, "FNU" Ostroff:
                                             Jeffrey Q. Smith, Steven G. Brody, Regina A.
                                             Lennox, Bingham McCutchen LLP, New York,
                                             N.Y.

Appearing for Appellees Beacon Associates Management Corporation, Joel Danziger, Harris
Markhoff:

                                               Tab K. Rosenfeld, Steven M. Kaplan, Rosenfeld &
                                               Kaplan, LLP, New York, N.Y.

Appearing for Appellees Ivy Asset Management Corporation, The Bank of New York Mellon
Corporation:
                                         Lewis J. Liman, Jeffrey A. Rosenthal, Cleary
                                         Gottlieb Steen & Hamilton LLP, New York, N.Y.

Appearing for Appellees Anchin, Block & Anchin LLP:

                                               John H. Eickemeyer, Daniel C. Green, Vedder Price
                                               P.C., New York, N.Y.

       Appeal from the United States District Court for the Southern District of New York
(Sand, J.).

     ON CONSIDERATION WHEREOF, IT IS HEREBY ORDERED, ADJUDGED,
AND DECREED that the judgment of said District Court be and it hereby is AFFIRMED.

        Plaintiffs-Appellants Jack Saltz, as Trustee of Susan Saltz Charitable Lead Annuity
Trust, Susan Saltz, Susan Saltz Descendants Trust (hereinafter, “Saltz”) brought an action in the
Southern District of New York against the above-named defendants in this case, alleging
violations of Sections 10(b) and 20(a) of the Securities Act of 1934 as well as various state law
claims, arising out of the investments made by First Frontier into Bernard L. Madoff Investment
Securities. Defendants-appellees moved to dismiss the amended complaint pursuant to Federal
Rule of Civil Procedure 12(b)(6), which was granted. Saltz now appeals that dismissal. We
assume the parties’ familiarity with the underlying facts, procedural history, and specification of
issues for review.

         We review a district court's grant of a motion to dismiss under Rule 12(b)(6) de novo.
Simmons v. Roundup Funding, LLC, 622 F.3d 93, 95 (2d Cir. 2010). “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. A claim has facial plausibility when the plaintiff pleads factual

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content that allows the court to draw the reasonable inference that the defendant is liable for the
misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (internal quotation marks and
citation omitted). Both Saltz’s federal securities claims and common law fraud claims are subject
to a heightened pleading standard. Under Rule 9(b), plaintiffs pleading fraud must “state with
particularity the circumstances constituting fraud,” though they may allege the state of mind of
the defendant generally. Fed. R. Civ. P. 9(b). The Private Securities Litigation Reform Act
(“PSLRA”) also imposes a heightened pleading burden on plaintiffs. The complaint must
“specify each statement alleged to have been misleading [and] the reason or reasons why the
statement is misleading” and “state with particularity facts giving rise to a strong inference that
the defendant acted with the required state of mind.” 15 U.S.C. §§ 78u–4(b)(1), (2). “Therefore,
[w]hile we normally draw reasonable inferences in the non-movant's favor on a motion to
dismiss, the PSLRA establishes a more stringent rule for inferences involving scienter because
the PSLRA requires particular allegations giving rise to a strong inference of scienter.” ECA,
Local 134 IBEW Joint Pension Trust of Chicago v. JP Morgan Chase Co., 553 F.3d 187, 196 (2d
Cir. 2009) (internal quotation marks omitted). A complaint alleging a violation of Section 10(b)
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.” Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1128 (2d Cir.1994) (internal
quotation marks omitted).

       Section 10(b) of the Securities Exchange Act makes it

       unlawful for any person, directly or indirectly, by the use of any means or instrumentality
       of interstate commerce or of the mails, or of any facility of any national securities
       exchange ... [t]o use or employ, in connection with the purchase or sale of any security ...
       any manipulative or deceptive device or contrivance . . . .

 15 U.S.C. § 78j. “In a typical § 10(b) private action a plaintiff must prove (1) a material
misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the
misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the
misrepresentation or omission; (5) economic loss; and (6) loss causation.” Stoneridge Inv.
Partners, LLC v. Scientific-Atlanta, 552 U.S. 148, 158 (2008). Saltz alleged that First Frontier,
L.P., Frontier Capital Management, Frontier Advisors Corp., Mark Ostroff, “FNU” Ostroff
(collectively, “First Frontier”); Beacon Associates Management Corporation, Joel Danziger,
Harris Markhoff (collectively, “Beacon”); and Ivy Asset Management Corporation, The Bank of
New York Mellon Corporation (collectively, “Ivy”) violated Section 10(b).

        The district court dismissed all of these claims. As to First Frontier, the district court
dismissed for failure to allege scienter. Scienter can be demonstrated by either demonstrating
that a defendant had the motive and opportunity to commit fraud or by providing evidence of
conscious recklessness. South Cherry St., LLC v. Hennessee Grp. LLC, 573 F.3d 98, 108–09 (2d
Cir. 2009). As noted, under the PSLRA, a private securities complaint must “state with
particularity facts giving rise to a strong inference that the defendant acted with the required
state of mind.” PSLRA § 78u–4(b)(2) (emphasis added). In Tellabs, Inc. v. Makor Issues &
Rights, Ltd., the Supreme Court held that to be a strong inference under the PSLRA, “an
inference of scienter must be more than merely plausible or reasonable—it must be cogent and at
least as compelling as any opposing inference of nonfraudulent intent.” 551 U.S. 308, 314

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(2007). The question the Court directed us to ask is: “When the allegations are accepted as true
and taken collectively, would a reasonable person deem the inference of scienter at least as
strong as any opposing inference?” Id. at 326.

        Despite being over sixty pages long, the complaint fails to allege any facts which would
lead a reasonable person to deem the inference of scienter to be at least as strong as any opposing
inference. Starting with motive and opportunity, the only relevant allegation in the complaint is
that First Frontier collected an annual management fee of 0.125%.. But we have consistently
rejected such a generic motive as sufficient to meet this test. Motive must be “concrete and
personal,” and “[m]otives that are common to most corporate officers, such as the desire for the
corporation to appear profitable and the desire to keep stock prices high to increase officer
compensation, do not constitute ‘motive’ for purposes of this inquiry.” ECA, 553 F.3d at 198.
Without any allegation that such a fee was unusual in some way, we cannot say this is a strong
inference of scienter. In Acito v. IMECERA Group Inc., we wrote

       Plaintiffs’ allegation that defendants were motivated to defraud the public because an
       inflated stock price would increase their compensation is without merit. If scienter could
       be pleaded on that basis alone, virtually every company in the United States that
       experiences a downturn in stock price could be forced to defend securities fraud actions.
       [I]ncentive compensation can hardly be the basis on which an allegation of fraud is
       predicated.

47 F.3d 47, 54 (2d Cir. 1995) (internal quotation marks omitted). The same is true here: if a
fully disclosed and otherwise unremarkable fee earned in the ordinary course of business is
sufficient to allege motive, then no company would be free from aspersions of fraud. This
allegation is not sufficient to support a strong inference of scienter.

        The other means of alleging scienter is alleging conscious recklessness. Conscious
recklessness is “a state of mind approximating actual intent, and not merely a heightened form of
negligence.” South Cherry, 573 F.3d at 109, quoting Novak v. Kasaks, 216 F.3d 300, 312 (2d
Cir. 2000). Since Saltz failed to make a motive showing, “the strength of the circumstantial
allegations [of conscious recklessness] must be correspondingly greater. . . .” ECA, 553 F.3d at
199. In our circuit,

       At least four circumstances may give rise to a strong inference of the requisite scienter:
       where the complaint sufficiently alleges that the defendants (1) benefitted in a concrete
       and personal way from the purported fraud; (2) engaged in deliberately illegal behavior;
       (3) knew facts or had access to information suggesting that their public statements were
       not accurate; or (4) failed to check information they had a duty to monitor.

Id., citing Novak, 216 F.3d at 311 (internal quotation marks omitted). Saltz does not make any
allegation in the first three categories; with respect to the fourth category, he argues that “there is
a presumed duty . . . to be aware of what is going on.” But he provides no support for such a
generalized duty. The only argument Saltz makes on this point is his suggestion that there were
red flags around Madoff so obvious that continued investment in light of those flags supports a
finding of scienter. But these red flags are insufficient to plead the required strong inference, in
part because Saltz makes no allegation supporting the conclusion that First Frontier was aware of

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them. To the extent that Saltz is alleging that because red flags existed that would or should
have warned off First Frontier had they conducted even basic due diligence, First Frontier had
the requisite scienter, this allegation, without more, is insufficient to establish scienter under our
precedent. See South Cherry, 573 F.3d at 111-113.

        The Section 10(b) claims against Beacon and Ivy are likewise defectively pleaded. As
the district court found, no omission or misstatement was alleged by either of these defendants.
“[R]eliance is the critical element in private actions under Rule 10b–5.” Pacific Inv.
Management Co. LLC v. Mayer Brown LLP, 603 F.3d 144, 156 (2d Cir. 2010). Without making
any allegations supporting reliance on a material misstatement or of an omission by one with a
duty to speak, there can be no Section 10(b) liability. Such is the case here. Saltz has entirely
failed to plead Section 10(b) claims against these defendants.

        We have examined the remainder of appellant’s arguments, including his state law claims
against all defendants, and find them to be without merit.

       Accordingly, the judgment of the district court hereby is AFFIRMED.

                                                       FOR THE COURT:
                                                       Catherine O’Hagan Wolfe, Clerk

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