1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 SOUTHERN DISTRICT OF CALIFORNIA 10 11 ANGELICA GAVALDON, et al., Case No.: 16cv590-LAB (MDD)
12 Plaintiffs, ORDER GRANTING IN PART 13 v. MOTION TO DISMISS; AND
14 STANDARD CHARTERED BANK ORDER PERMITTING BRIEFING INTERNATIONAL (AMERICAS) 15 ON SUPPLEMENTAL LTD. JURISDICTION AND REMAND 16 Defendant. 17
18 This is the latest of several cases involving securities claims connected with 19 the Bernie Madoff investments scandal. Plaintiff Angelica Gavaldon is an individual 20 investor who alleges Defendants misled her and her late husband Sergio about 21 investments, causing them to lose money. Plaintiffs S&A Investments, Inc. and 22 Harley Invest Ltd. are Cayman Island pass-through entities that the Gavaldons 23 formed in order to invest. Plaintiffs, who are represented by counsel, have formally 24 amended three times, and have been given specific instructions about the 25 deficiencies in their pleadings. (See Docket nos. 20, 28, 31, and 33.) 26 After the second dismissal, the Court required Plaintiffs to seek leave to 27 amend, attaching their proposed second amended complaint along with a redline 28 showing changes they proposed to make. They filed an ex parte motion, attaching 1 a proposed 82-page second amended complaint. (Docket no. 29, Ex. A.) In a 2 detailed order, the Court granted the motion in part. (Docket no. 31.) The order 3 pointed out numerous defects in their proposed second amended complaint, 4 directing them to amend it, and set a deadline for doing so. They then filed another 5 82-page proposed second amended complaint slightly late. The Court sua sponte 6 struck this, pointing out that they had not complied with its instructions regarding 7 amendment, directing them to amend and refile, and cautioning them to take care 8 that the newly-filed second amended complaint complied fully with the Court’s 9 previous order. (See Docket no. 33.) After additional minor difficulties and delays, 10 prompting an order to show cause, Plaintiffs filed their corrected second amended 11 complaint. (Docket no. 36, the “SAC”). In all, they have submitted or filed four 12 drafts of the proposed second amended complaint. 13 Defendant Standard Chartered Bank International (“SCBI”) then moved to 14 dismiss, both for lack of prosecution and for failure to state a claim. That motion 15 is now fully briefed and ready for adjudication. 16 Motion to Dismiss 17 The motion correctly points out that Plaintiffs have had several opportunities 18 to draft a complaint that meets federal pleading requirements. It also correctly 19 points out that the latest SAC did not limit the scope of claims as directed by the 20 Court’s order granting in part leave to amend and did not correct all the defects the 21 Court’s order pointed out. In particular, the SAC includes theories that Plaintiffs 22 were directed not to include at all, such as claims of fraud other than those based 23 on the Fairfield Sentry (Madoff/Sentry) investments. At the early stages of litigation, 24 pleading defects are more excusable. But at this point, Plaintiffs have filed or 25 submitted seven versions of the complaint. Dismissal for failure to prosecute and 26 for failure to obey the Court’s orders would not be unreasonable. 27 That being said, “[c]ases should be decided on the merits whenever 28 reasonably possible.” Eitel v. McCool, 782 F.2d 1470, 1472 (9th Cir. 1986) 1 (citation omitted). Rather than treating failure to amend as a default, the Court finds 2 it more appropriate to construe failure to amend as a tacit admission that further 3 amendment is not possible. See Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 4 981, 1007 (9th Cir. 2009), as amended (Feb. 10, 2009) (court’s discretion to deny 5 leave is “particularly broad” where a plaintiff has already been given leave to 6 amend, and has “failed to add the requisite particularity to its claims”). See also 7 Covert v. City of San Diego, 2017 WL 1094020, at *4 (S.D. Cal., Mar. 23, 2017) 8 (construing failure to amend as plaintiff’s admission that he cannot plead more 9 facts to cure the complaint’s defects). When claims are dismissed for repeated 10 failures to cure pleading deficiencies, dismissal with prejudice is appropriate. 11 Neubronner v. Milken, 6 F.3d 666, 672 (9th Cir. 1993). And to the extent the SAC 12 has included claims or theories that Plaintiffs were ordered to omit, the Court can 13 construe the complaint to correct these defects. 14 Previous Rulings and Law of the Case 15 The Court’s previous orders (particularly Docket nos. 20, 28, 31, and 33) are 16 law of the case. In the order dismissing the first amended complaint, the Court 17 permitted Plaintiffs to include only one fraud claim: “a claim against SCBI based 18 on representations that SCBI had performed robust due diligence on Fairfield 19 Security before recommending it as a safe and secure investment.” (Docket no. 20 31 at 15:13–15.) The Court also permitted Plaintiffs to include negligence and 21 breach of fiduciary duty claims against SCBI, but expressly forbade any other fraud 22 claims, and forbade Plaintiffs to expand the fraud claim beyond what the order 23 permitted. (Id. at 15:15–18.) 24 Plaintiffs represent that the SAC complies with the Court’s order. Taking 25 them at their word, the Court construes the SAC as abandoning all fraud and fraud- 26 based claims, except the “due diligence” misrepresentation claim in connection 27 with sales of Madoff/Sentry. The first claim (for Fraud) and the second claim (for 28 Deceit), while enumerated as separate claims, are based on the same alleged 1 misstatements regarding due diligence. Rather than striking one of them as 2 unauthorized, the Court construes them as the same claim. 3 While the first amended complaint mentioned in passing that unidentified 4 Defendants failed to disclose “certain facts,” (Docket no. 21, ¶ 422), the SAC adds 5 legal conclusions regarding SCBI’s fiduciary duties, and suggests Plaintiffs are 6 adding a claim of fraud by omission. (See, e.g., SAC, ¶¶ 420–21 (alleging a duty 7 of good faith, a duty to disclose conflicts of interest, and an ongoing duty to disclose 8 other material facts).) Ordinarily the Court would grant leave to amend to add 9 claims, but there is no reason to do so when amendment would be futile or would 10 unduly prejudice the Defendant. See Chappel v. Laboratory Corp. of Am., 232 F.3d 11 719, 725–26 (9th Cir. 2000). Although fraud by omission may be somewhat easier 12 to plead, because Plaintiffs need not specify the circumstances of a 13 misrepresentation, the SAC still fails to plead enough facts to show when SCBI 14 knew the facts it should have disclosed. If Plaintiffs’ theories about duties to 15 disclose conflicts of interest and other facts are correct, they can recover just as 16 easily — or perhaps more easily — under a breach of fiduciary theory. There is no 17 reason to add new half-formed and inadequately pled theories of fraud at this point. 18 Such an amendment would only cause delay and impose undue costs and burdens 19 on SCBI. 20 While the SAC still includes various other allegations of misrepresentations 21 and deception, the Court will treat them as background, intended to make the one 22 authorized fraud claim more plausible — for example, by showing motive or 23 general business practices. And to the extent this order discusses the pleading of 24 those claims, this discussion is intended to illustrate the general state of the 25 pleading. Discussion is not intended as reconsideration: Plaintiffs did not seek 26 reconsideration, and the Court is not reconsidering its earlier orders. 27 Governing substantive law has not yet been determined. The parties argue 28 that either California or Florida substantive law applies. Which, if either, applies 1 depends on a fact-based determination of whether the parties entered into an 2 agreement with a valid choice-of-law provision. And the differing statutes of 3 limitations and accrual provisions will likely affect the viability of several claims. 4 But in any event, federal pleading standards apply. See Kearns v. Ford 5 Motor Co., 567 F.3d 1120, 1125 (9th Cir. 2009). These orders cited Rule 9(b)’s 6 pleading requirements, and pointed out how those earlier complaints failed to 7 satisfy these requirements. These and other rulings constitute law of the case, and 8 are binding on the parties. To the extent the SAC still fails to meet pleading 9 requirements, the implication is that additional attempts at amendment would be 10 futile. 11 Among other things, the Court directed Plaintiffs to allege who made 12 particular representations, rather than referring to SCBI generally. (Docket no. 28 13 at 11:23–27.) This is particularly appropriate when the Gavaldons were meeting or 14 talking with someone they knew, either in person or by phone, or when they 15 received written communications from an identifiable person. The Court directed 16 Plaintiffs to identify when particular representations were made, rather than 17 referring to a span of time, to show SCBI knew at the time that what it was saying 18 to the Gavaldons was false, misleading, or unreliable. (Id. at 11:27–12:4.) The 19 Court also pointed out that, to constitute fraud, misrepresentations or other 20 deceptive communications must have been made to the Gavaldons so that the 21 Gavaldons could rely on them. Internal communications and statements to the 22 public that Plaintiffs do not allege they heard directly or indirectly or relied on 23 cannot give rise to fraud claims. See Mirkin v. Wasserman, 5 Cal.4th 1082, 1098– 24 1100 (1993). Therefore, Plaintiffs were required to allege that they heard or learned 25 of the allegedly fraudulent representations, and when they did so. 26 The Court directed Plaintiffs to plead facts in context, rather than relying on 27 isolated or stray remarks, or alleging their own conclusions as facts. See Kearns, 28 567 F.3d 1126 (holding that plaintiff should have alleged what advertisements and 1 sales material specifically stated). For example, Plaintiffs’ allegations that 2 undisclosed trailer fees amounted to kickbacks were insufficient, even if someone 3 connected with SCBI used this term. (Id. at 12:10–11; Docket no. 20 at 10:16–23.) 4 “The context in which they were described as kickbacks should also be alleged, in 5 order to show that the payments actually were kickbacks and not permitted and 6 appropriate fees of some kind.” (Id. at 10:21–23.) Using jargon that sounds to 7 outsiders like something nefarious does not reasonably show that it is.1 Plaintiffs 8 did not plead facts showing that the fees were in fact illicit. And while a firm’s 9 desire to collect fees and thereby increase its profits might be a motive for fraud, it 10 is also consistent with ordinary business objectives and is in itself unremarkable. 11 See Lipton v. Pathogenesis Corp., 284 F.3d 1027, 1038 (9th Cir. 2002). 12 The SAC says or implies that certain terms, such as “due diligence,” have 13 recognized meanings within the industry, and also says that these or similar terms 14 were mentioned in conversations with the Gavaldons. With regard to fraud claims, 15 these allegations are not particularly helpful unless coupled with allegations 16 showing the Gavaldons knew what these meanings were and relied on them. The 17 SAC makes clear the Gavaldons were unsophisticated and had almost no 18 knowledge of investing. (See, e.g., SAC, ¶¶ 5, 77, 153, 166.) Whatever they were 19 told must be examined in light of this, not in light of a level of sophistication they 20 lacked, or information they did not have. 21 The context of representations or communications is also important, for 22 several reasons. Statements in the course of oral presentations cannot be 23
24 25 1 Insider jargon or industry-specific terms do not necessarily mean what they do to others. The jargon used in the context of securities, investments, and finance is 26 replete with colorful terms not intended literally. By way of example, “junk bonds” 27 are bonds rated below “investment” grade. Despite the evocative names, junk bonds are not considered valueless, and both “junk” and “investment grade” bonds 28 1 considered in isolation but must be viewed in the context of the whole presentation. 2 Casella v. Webb, 883 F.2d 805, 808 (9th Cir. 1989). To show that a statement is 3 material and intended to induce reliance, rather than amounting to mere puffery, 4 see id., the context must be alleged so that the Court can consider it. The situation 5 in which remarks are made informs their intended meaning, and the recipient’s 6 likely interpretation. See Xu v. Chiacache Int’l Holdings Ltd., 2016 WL 4370030, at 7 *5 (C.D. Cal., Aug. 15, 2016) (citing In re Syntex Corp. Securities Litigation, 95 8 F.3d 922, 929 (9th Cir. 1996)). In a pleading, omitting context that would normally 9 be included, or failing to plead enough facts to put particular remarks in context at 10 all may deprive the allegations of the required particularity or plausibility. See 11 Dyson, Inc. v. Garry Vacuum, LLC, 2011 WL 13268002, at *13 (C.D. Cal., Jan. 4, 12 2011) (holding that, because falsity is determined by examining statements in 13 context, plaintiff’s failure to plead context meant the complaint did not satisfy Fed. 14 R. Civ. P. 8). 15 Claims Not Sounding in Fraud 16 The Court earlier identified only two claims as not sounding in fraud and thus 17 not subject to Rule 9(b)’s pleading requirements: negligence, and breach of 18 fiduciary duty. As pled in the SAC, the sixth claim for unjust enrichment2 is based 19 on SCBI’s alleged “misdeeds” in connection with recommending Madoff/Sentry. 20 This claim could be construed as arising from fraud, breach of fiduciary duty, or 21 both. Because Plaintiffs were not permitted to expand fraud claims or add new 22 fraud claims, and because they represent that they have not attempted to do so, 23
24 25 2 Although the SAC lists it as a cause of action, unjust enrichment merely refers to restitution. See Durell v. Sharp Healthcare, 183 Cal. App. 4th 1350, 1370 (Cal. 26 App. 4 Dist. 2010) (citations and quotation marks omitted) (“There is no cause of 27 action in California for unjust enrichment . . . . Unjust enrichment is synonymous with restitution.”) The Court construes the sixth claim as a theory of recovery for 28 1 the Court construes this claim as based solely on breach of fiduciary duty, not 2 fraud. The Court also accepts Plaintiffs’ representation that they disclaim any 3 fraud-based theory of unjust enrichment. 4 The SAC 5 As pled, Plaintiffs’ claims all arise under state common law. Although 6 plaintiffs in similar lawsuits have elected to bring claims under federal statutes, 7 Plaintiffs have chosen to rest their claims solely on state causes of action. See 8 Hunter v. Philip Morris USA, 582 F.3d 1039, 1042 (9th Cir. 2009). While precedent 9 dealing with federal securities fraud claims under federal law may be helpful in 10 addressing pleading standards, the elements of their claims are different. 11 The Court has diligently compared the proposed second amended complaint 12 it previously found inadequate (Docket no. 29, Ex. A) and the latest SAC. The bulk 13 of Plaintiffs’ amendments are pro forma, cosmetic, or insubstantial, or represent 14 mere reiterations of other existing allegations. Of the remainder, most merely 15 eliminate claims or theories already dismissed, or add conclusions without any new 16 facts to support them. Certain facts offered in support of claims dismissed without 17 leave to amend are re-alleged, including the recommendation of a life insurance 18 policy. The Court construes these allegations as supporting the remaining claims 19 only. The notable new allegations are: 20 Paragraph 32: Certain investment specialists who communicated with the Gavaldons at various times are identified by name. 21
22 Paragraph 85: When the Gavaldons’ son Angel asked Luisa Serena to provide the family with a list of highly-rated corporate bonds, the SAC now 23 alleges she was the assigned relationship manager at the time. 24 Paragraphs 114 and 115: SCBI allegedly never told the Gavaldons their 25 investments in the GEMSTB fund was risky rather than safe, conservative, 26 and appropriate to their needs.
27 / / /
28 / / / 1 Paragraphs 237 and 260: Carlos Gadala-Maria is alleged to have told the Gavaldons in about March of 2004 that a full due-diligence review had been 2 conducted on Madoff/Sentry. 3 Paragraphs 243–248: SCBI allegedly never told the Gavaldons that it had 4 failed to follow its own internal due diligence policy with regard to site visits 5 to fund managers when recommending Madoff/Sentry.
6 Paragraph 340: This paragraph alleges that Madoff/Sentry was a hedge 7 fund, which requires more due diligence.
8 Legal Standards 9 A motion to dismiss challenges the legal sufficiency of a complaint. Navarro 10 v. Block, 250 F.3d 729, 732 (9th Cir. 2001). The Court must accept all factual 11 allegations as true and construe them in the light most favorable to Plaintiffs. 12 Cedars Sinai Med. Ctr. v. Nat'l League of Postmasters of U.S., 497 F.3d 972, 975 13 (9th Cir. 2007). But the Court will not supply facts not pled. See Ivey v. Board of 14 Regents of Univ. of Alaska, 673 F.2d 266, 268 (9th Cir. 1982). “Nor is the [C]ourt 15 required to accept as true allegations that are merely conclusory, unwarranted 16 deductions of fact, or unreasonable inferences.” See Sprewell v. Golden State 17 Warriors, 266 F.3d 979, 988 (9th Cir. 2001). 18 While the Court does not weigh evidence or make credibility determinations, 19 Acosta v. City of Costa Mesa, 718 F.3d 800, 828 (9th Cir. 2013), the complaint 20 must meet the plausibility standard set forth in Ashcroft v. Iqbal, 556 U.S. 662 21 (2009). The well-pleaded facts must do more than permit the Court to infer “the 22 mere possibility of misconduct”; they must show that the pleader is entitled to relief. 23 Id. at 679. To defeat a motion to dismiss, the factual allegations must be sufficient 24 to “raise a right to relief above the speculative level . . . .” Bell Atl. Corp. v. Twombly, 25 550 U.S. 544, 555 (2007). 26 The SAC, like any amended pleading, is required to be complete in itself, 27 without reference to previous versions of the complaint or other documents. See 28 1 Civil Local Rule 15.1(a). Although this order may discuss earlier versions of the 2 complaint, its focus is on the sufficiency of the SAC as filed. See Song v. Drenberg, 3 2019 WL 1998944, at *1 (N.D. Cal., May 6, 2019) (court may consider prior 4 allegations as part of its plausibility inquiry). 5 In federal court, fraud claims — including those arising under state law — 6 must be pled with particularity as required by Fed. R. Civ. P. 9(b). Vess v. Ciba- 7 Geigy Corp. USA, 317 F.3d 1097, 1102 (9th Cir. 2003). This pleading standard 8 applies to any claims grounded in fraud or sounding in fraud, including claims for 9 fraudulent nondisclosure. Kearns, 567 F.3d at 1225–26. 10 The Rule 9(b) standard requires Plaintiffs to allege who made the 11 misrepresentations, how the misrepresentations were conveyed to them, and 12 under what circumstances. Cooper v. Pickett, 137 F.3d 616, 627 (9th Cir. 1998). 13 The complaint must allege the “who, what, when, where, and how” of the charged 14 misconduct. Ebeid ex rel. United States v. Lungwitz, 616 F.3d 993, 998 (9th Cir. 15 2010). The allegations must include the “time, place, and specific content of the 16 false representations as well as the identities of the parties to the 17 misrepresentations.” Swartz v. KPMG LLP, 476 F.3d 756, 764 (9th Cir. 2007). 18 When determining whether the standard is met, the Court considers the complaint 19 as a whole. See United States v. United Healthcare Ins. Co., 848 F.3d 1161, 1181 20 (9th Cir. 2016) (finding that allegations “in the context of the complaint as a whole” 21 adequately alleged details of fraudulent conduct). 22 In a limited class of cases, Rule 9(b)’s pleading requirements may be relaxed 23 pending discovery, if the evidence needed to make those allegations is within a 24 defendant’s exclusive possession. Ebeid, 616 F.3d at 999. While this might apply 25 to some of SCBI’s internal communications or records, it cannot apply — at least, 26 not in full — to material the SAC quotes, such as SCBI’s publications or other 27 public statements. In the case of institutionally-authored materials or statements, 28 the person behind the remarks may not always be known, but most other 1 information (e.g., the time, manner of communication, and context) is known, and 2 should be alleged. And a relaxed pleading standard does not apply at all to any of 3 the alleged in-person or telephonic communications with or representations to the 4 Gavaldons. To the extent this relaxed standard applies, Plaintiffs must still state 5 the factual basis for their beliefs. See Neubronner, 6 F.3d at 672; DiVittorio v. 6 Equidyne Extractive Industries, Inc., 822 F.2d 1242, 1247 (9th Cir. 1987). 7 Discussion: Fraud Claim 8 The elements of common law fraud are misrepresentation (e.g., by false 9 representation, concealment, or nondisclosure), knowledge of its falsity (or 10 scienter), intent to induce reliance, justifiable reliance, and resulting damage. 11 Lazar v. Superior Court, 12 Cal.4th 631, 638 (1996). Although the issue of agency 12 was not raised or briefed, the Court’s working assumption is that acts of SCBI’s 13 employees acting within the scope of their duties are imputed to SCBI. See In re 14 ChinaCast Educ. Corp. Securities Litigation, 809 F.3d 471, 474 (9th Cir. 2015). 15 That said, the person making a representation or promise should be identified, if 16 possible. 17 In the context of fraud, mere “puffery” — that is, generalized, vague, or 18 unspecific assertions; optimistic statements amounting to merely subjective 19 assessments; or a statements of opinion rather than knowingly false statements of 20 fact — is not actionable. See Retail Wholesale & Dept. Store Union Local 338 21 Retirement Fund v. Hewlett-Packard Co., 845 F.3d 1268, 1275 (9th Cir. 2017). 22 This is so, in part, because investors do not reasonably rely on such statements. 23 Ore. Pub. Employees Retirement Fund v. Apollo Group, Inc., 774 F.3d 598, 606 24 (9th Cir. 2014); City of Roseville Employees’ Retirement Sys. v. Sterling Fin’l Corp., 25 963 F. Supp. 2d 1092, 1120 (E.D. Wash., 2013), aff’d 691 Fed. Appx. 393 (9th Cir. 26 2017). 27 While the SAC continues to allege numerous communications, most of these 28 allegations are far too vague, and illustrate why the fraud claims based on them 1 were dismissed. Allegations describing a person communicating with the 2 Gavaldons only as “SCBI” do not satisfy the “who” prong. See Kearns, 567 F.3d at 3 1126 (pointing out that the plaintiff had not alleged who made allegedly fraudulent 4 statement on behalf of the company). Although the SAC alleges personnel who 5 filled various roles over time, it generally avoids saying these were the people who 6 communicated with the Gavaldons. In addition, the “when” allegations are 7 generally too vague to be of much help, even if it were clear who worked with the 8 Gavaldons during particular periods of time. In addition, the allegations are not in 9 clear chronological order, making it difficult to know what descriptive words such 10 as “thereafter” mean. Very few allegations identify a specific date on which 11 communications were made. (See ¶¶ 86, 110, 223.) Several identify at least a 12 month and year. But most allege either a very general time period or a large span 13 of time. (See, e.g., id., ¶¶ 32 (“periodically met or otherwise communicated”); 70 14 (“Occasionally”); 111 (“Throughout this time period,” referring to June 2005 through 15 January 2008); 128 (“By 2008”); 140 (“thereafter,” i.e., after events in August, 16 2008); 155 (“over time”); 203 (“in approximately 2007”).) 17 The SAC attempts to establish SCBI’s knowledge that its representations 18 were false by alleging numerous internal communications in which individuals 19 questioned SCBI’s practices. Here, alleging dissent among SCBI’s ranks is not 20 enough; to the contrary, internal disagreement implies that SCBI had no single 21 settled view. Merely alleging that SCBI made representations to the public or other 22 investors might help show scienter, but it is not enough to satisfy the 23 “misrepresentation” prong, unless the Gavaldons heard or read, and relied on the 24 representations. This is particularly true when the time and circumstances of the 25 representations are not specified (which is the case with most allegations). Of the 26 few factual allegations made with the requisite specificity, none reasonably show 27 that SCBI in fact knew at the time its statements were false. They may show 28 carelessness, but that is not the same as fraud. 1 Turning to the one fraud claim Plaintiffs are still pursuing, the SAC claims 2 SCBI falsely represented it had conducted due diligence on Madoff/Sentry 3 securities. The SAC is replete with allegations of SCBI’s failure to notice warning 4 signs, and to the extent their claims are based on negligence, the SAC is sufficient. 5 The SAC also alleges SCBI’s failure to disclose that it had not conducted due 6 diligence on the Madoff/Sentry securities. But the SAC mentions representations 7 to the Gavaldons about due diligence only a few times, and those allegations are 8 almost devoid of particulars. The only paragraphs alleging that a particular person 9 (rather than “SCBI” generally) communicated something particular to them about 10 due diligence are 70, 213–14, 217, 237, 260, and possibly 274. These all point to 11 a meeting in March of 2004 when the SAC alleges Gadala-Maria told the 12 Gavaldons over the phone that a full due diligence review had been conducted on 13 the Madoff/Sentry investments, and that SCBI’s recommendation of Madoff/Sentry 14 followed a robust due diligence process. (SAC, ¶¶ 237, 258, 260, 271.) The SAC 15 says this was part of Gadala-Maria’s recommendation of the investment, and was 16 accompanied by assurances that it was safe, secure, and consistent with a 17 conservative investment approach. (Id. ¶ 259, 274.) 18 The SAC also alleges that Ray Garnica and Luisa Serena reiterated these 19 representations afterwards “on an ongoing basis,” without mentioning any dates, 20 time frame, or context. SCBI recommended purchases of Madoff/Sentry to the 21 Gavaldons twice: once through Gadala-Maria (apparently in March of 2004), and 22 later through Luisa Serena (apparently in January of 2008). (Id., ¶¶ 218, 295, 305.) 23 These apparently were the only two occasions when the Gavaldons purchased the 24 fund. Someone allegedly recommended in July of 2007 that the Gavaldons 25 maintain their position in Madoff/Sentry, but the SAC does not say who. (SAC, 26 ¶ 294.) While Serena or someone else might have made representations about 27 due diligence at these times, the SAC does not say so. While the SAC suggests 28 that Serena probably said something to the Gavaldons about due diligence in 1 January of 2008, the Court has had to piece together disparate paragraphs to 2 come up with this conclusion. And even then, the SAC does not provide a context 3 or say what in particular she said, other than to conclude it amounted to the same 4 kind of representation the Gavaldons had heard more than four years earlier. 5 Allegations about what the Gavaldons may have been told at any time other than 6 in March of 2004 do not meet Rule 9’s pleading standards. 7 The SAC says SCBI performed only very limited due diligence of its own on 8 the Madoff/Sentry fund, and its continued efforts to perform more were 9 unsuccessful. It says SCBI carelessly relied on assessments by the investment 10 firm Fairfield Greenwich Group (“FGG”), without knowing how reliable that 11 assessment was or what due diligence if any FGG had conducted on 12 Madoff/Sentry. (See SAC, ¶ 322.) It is clear FGG had some way of assessing 13 Madoff/Sentry, because it made disclosures regarding the riskiness of the Fairfield 14 Sentry fund, which changed over time. (Id., ¶ 223.) 15 The SAC says SCBI did cursory due diligence on FGG, or relied on Fairfield 16 to conduct its due diligence. (SAC, ¶¶ 328, 336, 371, 372, 374–75). And it says 17 SCBI had in its files a due diligence report on Fairfield Sentry in 2004. (Id., ¶ 377.) 18 While the SAC alleges that SCBI’s representatives told the Gavaldons in March of 19 2004 that SCBI’s recommendation of the fund was the product of a robust due 20 diligence process, the alleged facts do not show that in March of 2004 SCBI or its 21 representatives knew no one had done due diligence on Madoff/Sentry. 22 Although the SAC suggests that SCBI gave the Gavaldons the impression 23 that it had performed due diligence entirely by itself, in-house, no factual allegation 24 shows that anyone ever told them this. The SAC merely alleges they were told that 25 a due diligence process existed, and that robust due diligence procedures had 26 been followed. What this meant, and what the Gavaldons could reasonably have 27 understood it to mean at the time, is not alleged. The SAC alleges that SCBI made 28 representations to the public in general implying it had conducted its own in-house 1 due diligence. (SAC, ¶¶ 69, 259–61.) And it alleges SCBI’s own internal rules 2 required it conduct due diligence in-house. (Id., 373.) But the SAC does not allege 3 that the Gavaldons heard or relied on these representations to the public, or that 4 they knew what SCBI’s internal rules were. See, e.g., Kearns, 567 F.3d at 1126 5 (finding fraud pleadings deficient, in part, because the plaintiff failed to allege when 6 he was exposed to alleged misrepresentations, which ones he found material, or 7 which he relied on). 8 In the securities fraud context, general statements to the effect that advisors 9 had conducted six months of extensive and even exhaustive due diligence have 10 been characterized as mere puffery. See City of Austin Police Retirement Sys. v. 11 Kinross Gold Corp., 957 F. Supp. 2d 277, 297 (S.D. N.Y. 2013). Here, descriptors 12 such as “robust” and “best in the business” imply opinions or value judgments, not 13 verifiable factual assertions. And even assuming SCBI told others the particular 14 investigatory steps it was taking (see SAC, ¶ 71), it only vaguely told the Gavaldons 15 its due diligence amounted to a “process.” (Id., ¶ 257.) By contrast, where both 16 parties understand due diligence to have a definite meaning, representations about 17 it may amount to factual assertions rather than puffery. See CMFG Life Ins. Co. 18 v. RBS Securities, Inc., 799 F.3d 729, 745–46 (7th Cir. 2015). Even assuming “due 19 diligence” has a definite meaning within the investment industry — at least, with 20 regard to hedge funds such as Madoff/Sentry3 — the SAC does not allege the 21
22 23 3 “Due diligence” generally refers to an appropriate level of background investigation. Here, it means the kind of investigation that would have been 24 appropriate or necessary before SCBI recommended or sold Madoff/Sentry 25 investments or other hedge funds. Not surprisingly, the meaning of “due diligence” can vary depending on the investment under consideration. See Due Diligence, 26 DICTIONARY OF BUSINESS TERMS (3d ed. 2000) (describing due diligence as aimed 27 at various characteristics of a proposed investment); Due Diligence, DICTIONARY OF INTERNATIONAL INVESTMENT TERMS (2001) (giving examples of the types of 28 1 Gavaldons knew what that was, or could have interpreted Gadala-Maria’s remarks 2 as pertaining to industry standards or regulatory requirements being met. 3 The SAC also refers to Gadala-Maria’s misrepresentation to the Gavaldons 4 that Madoff/Sentry and perhaps other investments were “safe” or “secure,” and 5 appropriate for conservative investors even though they were rated as risky. 6 Because these allegations are connected with the “due diligence” claim, the Court 7 will analyze them as such, rather than treat them as an expanded theory of fraud. 8 While misrepresentation of risks can amount to actionable fraud, mere 9 puffery will not suffice. According to the SAC, the ratings were apparently either 10 internal and generated by SCBI (SAC, ¶ 66), or possibly were provided by FGG. 11 (Id., ¶ 233). The SAC’s allegations make clear that the Gavaldons, who were 12 unsophisticated investors, would not have been asking about analysts’ ratings, but 13 rather were seeking advice about how to invest. 14 Two decisions are instructive here. In City of Roseville, the plaintiff alleged 15 that the defendant had falsely identified its banking practices as “safe and sound.” 16 Even assuming “safe” and “sound” had an established meaning in the banking 17 sector, the complaint provided no factual support for the suggestion that they had 18 any specific, well-understood meaning among investors. City of Roseville, 963 F. 19 Supp. 2d at 1121. Casella, by contrast, dealt with a situation where an advisor had 20 described an investment as a “sure thing.” In context, this was held not to be mere 21 puffery, because she had coupled it with “specific misrepresentations of fact” about 22 the investment’s profitability and tax benefits, which were intended to induce 23 reliance. 883 F.3d at 808. In the context of the entire presentation, Casella 24 explains, what might otherwise be puffery or a mere statement of opinion may be 25 actionable. Id. But allegations that the investment was said to be “safe,” or 26 “secure,” with little or no discussion of the context in which the remark was made, 27 are not enough. 28 / / / 1 The SAC does not allege the source of or basis for these ratings generally, 2 except to argue that it was insufficient, or allege facts showing Gadala-Maria 3 agreed with this rating. Furthermore, insider terms do not necessarily mean what 4 they do to others. See supra note 1. The alleged facts do not reasonably show that 5 an investment product internally rated as risky was in fact risky or dangerous as 6 outsiders (such as the Gavaldons) would understand the term. Because the 7 Gavaldons were unsophisticated investors, it is unclear what they would have 8 made of the internal ratings even if they had known what they were. And though 9 the SAC refers to the ratings, particular SCBI communications, and FGG’s legal 10 disclosure pages, it does little more than characterize them. 11 In the securities fraud context, the Ninth Circuit has treated similarly 12 generalized references to internal records or conclusions as insufficient. In In re 13 Silicon Graphics Inc. Securities Litigation, the plaintiff alleged that company 14 officers received internal reports notifying them of serious production and sales 15 problems with a particular product, and that in spite of this they continued to make 16 positive representations to investors. 183 F.3d 970, 984 (9th Cir. 1999). The panel 17 held that the complaint lacked sufficient detail and foundation necessary to plead 18 a claim with particularity. For example, the complaint failed to plead facts relating 19 to the reports, including the contents, who prepared and reviewed them, and where 20 the information in them came from. Id. 21 Similarly, in Lipton, 284 F.3d at 1035–36, plaintiffs alleged that defendants 22 had access to data informing them that demand for a product was flat and would 23 not increase. Although the plaintiffs referred to the existence of the data and made 24 a “general assertion about what they think the data shows,” id. at 1036, their own 25 negative characterization was not enough. Although these cases were brought 26 under different provisions of law, the principle that plaintiffs must plead factual 27 information, not merely their own conclusions about the facts, is the same. 28 / / / 1 To an extent, the context in which advisors reassured the Gavaldons of 2 various investments’ suitability and safety can be pieced together from the 3 remainder of the complaint, but it is not entirely favorable to them. They contend 4 they “did not want or need anything but safe investments producing modest 5 investment returns,” and that at all relevant times SCBI knew these were their 6 goals. (SAC, ¶¶ 80–84.) 7 The SAC alleges that Gadala-Maria lied to SCBI about their investment goals 8 and experience and other characteristics, in order to evade SCBI’s internal 9 safeguards that would otherwise have prevented them from investing in Madoff 10 securities. (SAC, ¶¶ 277–89.) It also alleges that an unnamed person at SCBI, in 11 violation of SCBI’s requirements, induced Sergio Gavaldon in March of 2004 to 12 sign a document authorizing the purchase of Madoff securities, without providing 13 him the private placement memorandum that would have told him the shares were 14 speculative and risky. (Id. 290–92.)4 Both sets of allegations are somewhat helpful 15 to the Gavaldons, in that they are at least somewhat specific and point to 16 dishonesty. SCBI might be vicariously liable for Gadala-Maria’s acts, even though 17 he was allegedly acting against SCBI’s instructions. That said, his alleged lies were 18 to SCBI, not the Gavaldons. With regard to the product placement memorandum, 19 the SAC fails to allege who induced Sergio Gavaldon to sign the document. 20 Bearing in mind that this person too is alleged to have been acting contrary to 21 SCBI’s instructions and might have been trying to avoid detection, Plaintiffs were 22 in a superior position to identify who this was. 23 / / / 24 25 4 For unknown reasons, Fairfield removed this warning from the legal disclosure 26 pages in 2005, prompting SCBI to ask why, and suggesting it might add the 27 disclosure itself. (SAC, ¶ 223.) The SAC makes clear the memorandum included pages of legal disclosures, and neither party has provided a copy of it, so it is 28 1 The SAC alleges SCBI personnel talked with the Gavaldons about such 2 issues as the degree to which their investments were leveraged, their liquidity, and 3 the goal of increasing their returns. In July, 2003, an unnamed SCBI employee 4 had a discussion with Angel Gavaldon, recommending that his parents take a more 5 aggressive position to improve portfolio performance. (SAC, ¶ 108.) In March, 6 2005, the Gavaldons and Ray Garnica discussed the degree of leverage in their 7 portfolio, and whether improved returns justified keeping the leverage there. (Id., ¶ 8 193.). In a September, 2006 meeting, Gadala-Maria and others discussed the cost 9 of leverage and status of structured notes with the Gavaldons. (Id., ¶ 92.) Around 10 July 6, 2007, Luisa Serena met with the Gavaldons, and they told her both that 11 they thought they could sell GEMSB shares to raise money, and that they were 12 aware of an upcoming loan payment on their life insurance policy. (Id., ¶ 131.) 13 These more specific allegations undermine the broad and generalized allegation 14 that the only goals the Gavaldons ever agreed to pursue were safe and 15 conservative investments and modest income. 16 It is also clear the Gavaldons needed more than just a modest income to live 17 on, at least towards the end of the time at issue here, and that they were assigned 18 a more aggressive risk rating as a result. (SAC, ¶ 80.) They knew they were 19 borrowing money for investments and for the life insurance policy. (Id., ¶¶ 189, 20 191, 201.) Although the SAC implies that the Gavaldons were unaware that they 21 would need more income than before to pay for the cost of interest and insurance 22 premiums, it is clear they did know this. (Id., ¶¶ 131, 205, 210.) The SAC’s 23 conclusion that the conservative Gavaldons believed they were investing in 24 products as low-risk (and low-return) as CDs or bonds (id., ¶ 96) and would never 25 have been interested in seeking higher returns is unsupported by the factual 26 allegations. 27 Even if the Gavaldons had known the risk ratings that had been internally 28 assigned to the investments, it is unclear what meaning they could have assigned. 1 They apparently knew they were taking an increasingly aggressive approach in 2 exchange for greater returns. If they were defrauded in spite of this knowledge, the 3 SAC does not allege particular facts to show it. 4 Whether the Gavaldons should ever have been advised to borrow money, or 5 to buy the life insurance policy is another question. But SCBI’s recommendations 6 of the insurance policy and margin purchases of securities are the subject of 7 different claims: negligence or breach of fiduciary duty, not fraud. (SAC, ¶¶ 180 8 (alleging negligence), 195–209 (alleging sale of an unsuitable insurance policy).)5 9 In other words, SCBI’s negligence or breach of fiduciary duty might have created 10 the need for the Gavaldons to take on higher-risk investments. But the SAC does 11 not plead facts showing that SCBI committed fraud in later selling them those 12 investments, particularly the Madoff/Sentry investments that are the subject of 13 Plaintiffs’ one surviving fraud claim. 14 Fraud can also be premised on concealment, or on non-disclosure when 15 there is a fiduciary or buyer-seller relationship between the parties. Lazar, 12 16 Cal.4th at 638; LiMandri v. Judkins, 52 Cal. App. 4th 326, 336–37 (Cal. App. 4 Dist. 17 1997). But even under such a theory, the claim must be pled with particularity in 18 federal court. The closest the SAC comes to meeting the standard is in connection 19 with the Madoff securities and failure to provide the private placement 20 memorandum. But even if Plaintiffs were authorized to add a new theory of fraud, 21
22 23 5 The SAC alleges that SCBI sold the insurance policy in order to obtain fees and commissions, and not to help the Gavaldons, and that SCBI never disclosed the 24 size of the commissions. (SAC, ¶ 209.) But failure to disclose the amount of 25 insurance commissions is not ordinarily fraudulent. Most people buying insurance realize that the broker or seller must be earning a commission, and that the amount 26 of the commission affects the cost. See, e.g., Kennedy v. Jackson Nat’l Life Ins. 27 Co., 2010 WL 4123994, at *10 (N.D. Cal., Oct. 6, 2010) (insurer had no duty to disclose amount of commissions to purchasers). The SAC never alleges that the 28 1 their failure to identify who induced Sergio Gavaldon to sign the agreement while 2 withholding the memorandum renders it insufficient. And allegations about due 3 diligence and other information Plaintiffs claim SCBI was obligated to disclose are 4 not specific enough. Under this theory, and other theories Plaintiffs have 5 advanced, the SAC’s pleadings of fraud fail to meet Rule 9’s standards. 6 Other Claims 7 Even after being given multiple opportunities to amend, Plaintiffs have 8 failed to plead any claim sounding in fraud. SCBI’s motion does not, however, 9 show that their non-fraud claims are inadequately pled. Their claims for 10 negligence, breach of fiduciary duty, and unjust enrichment (based on breach of 11 fiduciary duty, not fraud) survive. 12 Jurisdiction and Remand 13 In the notice of removal, Defendants identified both diversity and federal 14 question jurisdiction under the Edge Act as the basis for removal. Because federal 15 question jurisdiction was present, diversity was merely an alternate theory and the 16 Court did not scrutinize the allegations closely or require amendment of the notice. 17 But in light of this case’s procedural posture, it appears remand may be in order. 18 The notice of removal implies that the Gavaldons should be treated as 19 citizens of Mexico, and that their trust entities should be treated as citizens of the 20 Cayman Islands. The Court previously suggested that the Gavaldons were not 21 admitted as permanent residents, and no party corrected that impression. But 22 through the course of this litigation, it has become apparent that the Gavaldons 23 are not merely frequent visitors to the United States. Rather, they remain here for 24 a good part of the year and own a house here. If either or both of them were 25 admitted as permanent residents at the time of removal, diversity would be 26 destroyed as provided by 28 U.S.C. § 1332(a)(2). Furthermore, no facts were 27 alleged to show either of the trust entities’ citizenship. See Laroach v. BridgePoint 28 Healthcare, LLC, 2018 WL 6434768, at *2 (D.D.C. Dec. 7, 2018) (describing 1 considerations for determining a trust entity’s citizenship); In re A.H. Robins Co., 2 Inc., 197 B.R. 575, 577 (E.D. Va. 1995) (outlining factors for determining 3 citizenship of trusts). Bearing in mind that “SCBI and/or its agents” served as the 4 trustees (SAC, ¶ 9), it is likely the Plaintiff trusts are not diverse from Defendant 5 SCBI. 6 While Edge Act jurisdiction was present at the time of removal, with the 7 dismissal of multiple claims, it has now disappeared. The Edge Act provides for 8 federal jurisdiction over claims against an Edge Act entity (SCBI) arising from a 9 transaction or series of transactions involving international banking or other 10 international financial operations. 12 U.S.C. § 632. The “international” prong is 11 satisfied only if the suit arises out of an offshore transaction of the Edge Act 12 corporation. American International Group, Inc. v. Bank of America Corporation, 13 712 F.3d 775, 784 (2nd Cir. 2013). The surviving claims (particularly following 14 dismissal of all fraud-based claims) have almost nothing to do with international or 15 foreign banking or international financial operations. SCBI’s management, 16 regulatory, and compliance functions were maintained in and operated from New 17 York. (SAC, ¶ 29.) The SAC makes clear the two trust entities were ignored, and 18 SCBI dealt directly with the Gavaldons. (Id., ¶¶ 11, 17). It did this in San Diego, not 19 overseas. (Id., ¶¶ 6, 26, 34, 35.) The investments and other products the 20 Gavaldons invested in were purchased in U.S. markets and held in U.S. accounts, 21 and the agreements between the Gavaldons and the banks were governed by U.S. 22 law and regulated by U.S. entities such as NASD and FINRA. (Id., ¶¶ 20–22, 43.) 23 The only mention of any international involvement is an allegation that SCBI 24 maintained its due diligence functions in Switzerland. (SAC, ¶ 29.) But any 25 subjects of due diligence relevant to this action — FGG, Madoff, and Sentry — 26 were located and did business in the U.S. No banking or financial transactions are 27 alleged to have been undertaken in Switzerland or any other foreign country. 28 / / / 1 The fact that some foreign parties were involved does not transform what 2 would otherwise be a state law claim into an Edge Act case. See generally Allstate 3 Ins. Co. v. Citimortgage, Inc., 2012 WL 967582 *3 (S.D.N. Y. March 13, 2012) 4 (“[T]he Edge Act does not confer jurisdiction merely because there was a federally 5 chartered bank involved, there were banking-related activities, and there were 6 foreign parties . . . . Instead, courts must carefully examine the nature of the 7 transaction said to ground § 632 jurisdiction, [citations omitted]”). 8 While the Ninth Circuit has recognized that the Edge Act amounts to a “broad 9 grant of jurisdiction,” City & Cnty. of San Francisco v. Assessment Appeals Bd., 10 122 F.3d 1274, 1276 (9th Cir. 1997), “broad” does not mean absolute. People v. 11 Wells Fargo & Co., 2015 WL 4886391, at *6 (C.D. Cal., Aug. 13, 2015) (recognizing 12 that uniformly resolving questions in favor of Edge Act jurisdiction “would lead to 13 absurd results”). 14 With the issuance of this order, Plaintiffs’ claims amount to common law 15 claims arising out of the recommendation and sale of investments with no real 16 international financial or banking element. Neither the sales nor the financial 17 advice occurred overseas or involved international banking or financial 18 transactions. 19 Under 28 U.S.C. § 1367, the Court has discretion to decline to exercise 20 supplemental jurisdiction over claims if all claims the Court had original jurisdiction 21 over have been dismissed, or the remaining claims raise novel or complex issues 22 of state law. Both of these apply here. Although the Court had jurisdiction when 23 the case was removed, all Edge Act claims have been dismissed. And the 24 remaining claims involve lingering and complex choice of law issues that require 25 application of state law to resolve. The Court has discussed these in previous 26 orders. 27 / / / 28 / / / 1 || Conclusion and Order 2 All claims are DISMISSED WITH PREJUDICE, except Plaintiffs’ claims for 3 ||negligence, breach of fiduciary duty, and unjust enrichment (based on a breach of 4 fiduciary duty theory). 5 The Court proposes to decline to exercise supplemental jurisdiction over 6 these remaining claims, and to remand them. If any party believes the Court can 7 |{and should continue to exercise jurisdiction over them, they should file a 8 memorandum of points and authorities not longer than ten pages, within 14 9 || calendar days of the date this order is issued. 10 11 IT IS SO ORDERED. 12 ||Dated: February 20, 2020 13 ‘yu A lA, Wy 14 Hon. Larry Alan Burns 45 Chief United States District Judge 16 17 18 19 20 21 22 23 24 25 26 27 28