Court Opinion

ID: 2734042
Source: CourtListenerOpinion
Date Created: 2014-09-18 15:00:18.220649+00
Date Added: 2024-06-11T10:03:28.474022
License: Public Domain

13-3250-cv
         Pope Investments II, LLC v. Deheng Law Firm

                                      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.

 1               At a stated term of the United States Court of Appeals for the Second Circuit, held at the
 2       Thurgood Marshall United States Courthouse, 40 Foley Square, in the City of New York, on the
 3       18th day of September, two thousand and fourteen.
 4
 5       PRESENT:
 6                   DEBRA ANN LIVINGSTON,
 7                   CHRISTOPHER F. DRONEY,
 8                         Circuit Judges,
 9                   ALISON J. NATHAN,*
10                         District Judge.
11       _______________________________________________
12
13       POPE INVESTMENTS II, LLC, JAYHAWK PRIVATE EQUITY
14       FUND, L.P., GUERRILLA PARTNERS, LLC, ALDER CAPITAL
15       PARTNERS, L.P., ALDER OFFSHORE MASTER FUND, L.P.,
16       PARAGON CAPITAL, L.P., DAYBREAK SPECIAL SITUATIONS
17       MASTER FUND, LTD., AAMAXEN TRANSPORT GROUP, INC.,
18       ASIA BUSINESS MANAGEMENT GROUP, LTD., SHANGHAI
19       ANHANTE (BEIJING) MEDICAL TECHNOLOGY CO., LTD.,
20
21                                         Plaintiffs-Appellants,
22

23                        - v. -                                                      No. 13-3250-cv
24
25       DEHENG LAW FIRM,

26                                         Defendant-Appellee,

                 *
1                Judge Alison J. Nathan, of the United States District Court for the Southern District of New
2        York, sitting by designation.

                                                                1
 1   BELMONT PARTNERS LLC, ROSEWOOD SECURITIES, LLC, JOSEPH MEUSE, GUZOV OFSINK LLC,
 2   DARREN L. OFSINK, HELEN LV, WILLIAM H. LUCKMAN, SOUTHERN TRUST SECURITIES HOLDING
 3   CORP.,
 4
 5                           Defendants.
 6   _______________________________________________

 7
 8                                               Theodore Eder, SEGAL MCCAMBRIDGE SINGER &
 9                                               MAHONEY, LTD., New York, NY, Andrew B.
10                                               Protzman, PROTZMAN LAW FIRM, LLC, Kansas
11                                               City, MO, and Jim McMullen, SHAPIRO &
12                                               MCMULLEN, P.A., Leawood, KS, for Plaintiffs-
13                                               Appellants.

14                                               Harry H. Rimm, Esq. (Karen E. Abravanel, on the
15                                               brief), SULLIVAN & WORCESTER LLP, New York,
16                                               NY, for Defendant-Appellee.

17                 UPON DUE CONSIDERATION, it is hereby ORDERED, ADJUDGED, and

18   DECREED that the judgment of the district court is AFFIRMED.

19          Plaintiffs-Appellants Pope Investments II, LLC, Jayhawk Private Equity Fund, L.P.,

20   Guerrilla Partners, LLC, Alder Capital Partners, L.P., Alder Offshore Master Fund, L.P., Paragon

21   Capital, L.P., Daybreak Special Situations Master Fund, Ltd., Aamaxen Transport Group, Inc., Asia

22   Business Management Group, Ltd., and Shanghai Anhante (Beijing) Medical Technology Co., Ltd.

23   (“Appellants”) filed a complaint against Defendant-Appellee Deheng Law Firm (“Appellee”), and

24   Belmont Partners LLC, Rosewood Securities, LLC, Joseph Meuse, Guzov Ofsink LLC, Darren L.

25   Ofsink, Helen Lv (“Lv”), William H. Luckman, and Southern Trust Securities Holding Corp.

26   (“Defendants”), alleging violations of Section 10(b) of the Securities Exchange Act of 1934, 15

27   U.S.C. § 78a et seq., (“Exchange Act”) and Securities and Exchange Commission Rule 10b-5, 17

28   C.F.R. § 240.10b-5, and also alleging various state law claims, including negligent

                                                    2
 1   misrepresentation, breach of fiduciary duty, conversion, rescission, and legal malpractice.

 2   Appellants amended their complaint three times. After dismissing Appellants’ first two amended

 3   complaints with leave to replead, the United States District Court for the Southern District of New

 4   York (Stanton, J.) dismissed Appellants’ third amended complaint without leave to replead. The

 5   district court dismissed the complaint pursuant to Federal Rule of Civil Procedure 12(b)(6) for

 6   failure adequately to allege the scienter necessary to make out a claim under Section 10(b) of the

 7   Exchange Act and Rule 10b-5. It declined to exercise supplemental jurisdiction over the state law

 8   claims because it had dismissed all of the federal law claims. We assume the parties’ familiarity

 9   with the underlying facts and procedural history of the case, and with the issues on appeal.

10          We review a district court’s Rule 12(b)(6) dismissal of a complaint de novo. Goldstein v.

11   Pataki, 516 F.3d 50, 56 (2d Cir. 2008). The complaint must plead “enough facts to state a claim to

12   relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). Although

13   all allegations contained in the complaint are assumed to be true, this tenet is “inapplicable to legal

14   conclusions.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). “A claim has facial plausibility when

15   the plaintiff pleads factual content that allows the court to draw the reasonable inference that the

16   defendant is liable for the misconduct alleged.” Id. “Any complaint alleging securities fraud must

17   satisfy the heightened pleading requirements of the [Private Securities Litigation Reform Act

18   (“PSLRA”)] and [Federal Rule of Civil Procedure] 9(b) by stating with particularity the

19   circumstances constituting fraud.” ECA & Local 134 IBEW Joint Pension Trust of Chi. v. JP

20   Morgan Chase Co., 553 F.3d 187, 196 (2d Cir. 2009).

21          Under the PSLRA, scienter is adequately pled “only if a reasonable person would deem the

22   inference of scienter cogent and at least as compelling as any opposing inference one could draw

                                                       3
 1   from the facts alleged.” Matrixx Initiatives, Inc. v. Siracusano, 131 S. Ct. 1309, 1324 (2011)

 2   (internal quotation marks omitted). Scienter “can be established either (a) by alleging facts to show

 3   that defendants had both motive and opportunity to commit fraud, or (b) by alleging facts that

 4   constitute strong circumstantial evidence of conscious misbehavior or recklessness.” Ganino v.

 5   Citizens Utils. Co., 228 F.3d 154, 168-69 (2d Cir. 2000) (internal quotation mark omitted).

 6          We agree with the district court that Appellants have not alleged sufficient facts to establish

 7   scienter under this standard. Appellants implicitly argue that Appellee is liable for the actions of

 8   Lv, alleging that Appellee had motive because embezzled funds were deposited into (1) an account

 9   of Jerga Management Limited, a company in which Appellee’s supposed agent, Lv, was a director,

10   and (2) accounts owned by Shao Gan Hua (“Shao”), who Appellants allege is now Lv’s husband.

11   But, as the district court explained, Appellants’ allegations regarding the deposit into the account

12   of Jerga Management Limited are not sufficient to establish motive because Appellants gave “no

13   indication of how many other directors than Lv are on its board, the extent to which Lv is involved

14   in company management, whether she had personal access to any company funds, or the relative size

15   of the deposit in comparison to Jerga Management Limited’s other assets.” J.A. 430. Thus, “there

16   is no possible way to speculate about whether she was even aware of the deposit.” Id. And

17   Appellants’ allegations regarding the deposits into Shao’s accounts are not sufficient to establish

18   motive because Appellants have not alleged facts showing that Lv was married to Shao at the time

19   of the alleged misrepresentation. By Appellants’ own admission, at the time the transactions at issue

20   closed, Lv was only “close personal friends with Shao.” J.A. 75.

21          Appellants also have not alleged specific facts showing conscious misbehavior or

22   recklessness by Appellee. While Appellants make several conclusory allegations, as the district

                                                      4
 1   court stated, they do not “specifically identify any report or statement from which defendants should

 2   have learned that Shao intended to embezzle the money or that the [transactions at issue] were a

 3   sham, or that the invested funds were not flowing as intended.” J.A. 427.

 4          Appellants argue that Lv’s knowledge that the funds would be embezzled can be inferred

 5   from an email she sent on September 4, 2008, asking brokers who helped bring the parties together

 6   “to act as a bridge between Kamick [the entity from which Shao withdrew the funds] and the

 7   Investors [the parties who invested the funds that were allegedly embezzled] to avoid legal action

 8   and help negotiate a compromise.” Appellants Br. at 12. But Appellants’ allegations do not contain

 9   any information about the dispute for which Lv was suggesting a compromise. It is not at all clear

10   from the facts of the complaint whether this email was based on Lv’s knowledge of Shao’s

11   embezzlement, or whether it instead pertained to some other facet of the deal over which there could

12   have been a dispute. Furthermore, the email was sent well after the alleged misrepresentation

13   occurred. Thus, even if it did pertain to Shao’s embezzlement of funds, it would not necessarily

14   indicate knowledge that Shao planned to embezzle the funds at the time of the alleged

15   misrepresentation. Given these facts, the inference that the email indicates Lv’s knowledge of the

16   scheme is not “at least as compelling” as the inference Lv did not know that the funds would be

17   embezzled at the time of the alleged misrepresentation. Matrixx, 131 S. Ct. at 1324.

18          Because we find that Appellants have not alleged sufficient facts to make out a violation of

19   Section 10(b) of the Exchange Act and Rule 10b-5 even if Appellee could be held liable for Lv’s

20   actions, we do not need to reach the question of whether Appellee can be held liable for Lv’s actions

21   in this case. Because the district court properly dismissed Appellants’ federal law claims, it did not

                                                       5
1   err in declining to exercise supplemental jurisdiction over Appellants’ state law claims. See 28

2   U.S.C. § 1367(c)(3).

3          We have reviewed Appellant’s remaining arguments and find them to be without merit.

4   For the foregoing reasons, the judgment of the district court is AFFIRMED.

5                                                      FOR THE COURT:
6                                                      Catherine O’Hagan Wolfe, Clerk

                                                   6