USDC SDNY DOCUMENT ELECTRONICALLY FILED UNITED STATES DISTRICT COURT DOC 03729724 SOUTHERN DISTRICT OF NEW YORK DATE FILED: = □ =f MICHAEL TECKU, et al. 20 Civ. 07327 (VM) Plaintiffs, DECISION AND ORDER —- against - YIELDSTREET, INC., et al, Defendants.
VICTOR MARRERO, United States District Judge. Before the Court are objections filed by Defendants YieldStreet, Inc., YieldStreet Management, LLC, YS ALTNOTES I, LLC, YS ALTNOTES II, LLC, and Michael Weisz to a Report and Recommendation issued by Magistrate Judge Stewart D. Aaron, recommending that the Court grant in part and deny in part a motion (see Dkt. No. 87 [hereinafter “Motion”]) for class certification filed by Plaintiff Lawrence Tjok (“T4 ok”) . For the reasons stated below, the Court agrees with the Report and Recommendation except to the extent it relies on the evidentiary presumption recognized by the United States Supreme Court in Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128 (1972). Because the conclusions of the Report and Recommendation are supported by reasoning independent of the Affiliated Ute doctrine, the Court otherwise accepts and adopts in full Magistrate Judge Aaron’s
findings and recommendations concerning class certification. The Court therefore GRANTS the Motion in part and DENIES it in part. I. BACKGROUND1 Plaintiffs Michael Tecku (“Tecku”), David Finkelstein
(“Finkelstein”), and Lawrence Tjok (“Tjok,” (and together with Tecku and Finkelstein, “Plaintiffs”)), brought this putative class action against Defendants YieldStreet, Inc., YieldStreet Management, LLC, YS ALTNOTES I, LLC, YS ALTNOTES II, LLC (together, “YieldStreet”), and Michael Weisz (“Weisz,” and together with YieldStreet, “Defendants”). Plaintiffs alleged common law fraudulent inducement, aiding and abetting fraud, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, and negligent misrepresentation, as well as violations of the federal securities laws. (See Corrected Amended Class Action Complaint, Dkt. No. 51 [hereinafter “CAC”].)
A. THE PARTIES Co-founded by Weisz in or around 2013, YieldStreet is an investment company that has offered accredited investors “asset-based investment opportunities in idiosyncratic
1 The Court draws these facts from the evidentiary submissions of the parties, as set forth below in Section III. Where necessary to explain background context of this dispute, the Court also draws from the Corrected Amended Class Action Complaint. (See Dkt. No. 51.) markets not typically available to the investing public at large, such as fine arts, commercial real estate, or vessel deconstruction.” (CAC ¶¶ 1, 36-37.) YieldStreet provides a “one-stop shop” online investment portal through which investors can self-accredit, browse investment opportunities,
and make investments. (Id. ¶ 2.) Plaintiffs are individual investors who bought YieldStreet’s offerings. (See Id. ¶¶ 142-147.) Plaintiffs’ claims arise out of their purchases of borrower payment dependent notes (“BPDNs”) from YieldStreet investment funds. BPDNs are “debt obligations tied to the performance of an underlying loan made by a special purpose vehicle.” (Id. ¶¶ 3, 42.) In effect, YieldStreet raises capital for its investment funds by issuing BPDNs to investors; YieldStreet uses the capital raised from BPDN sales to issue asset-based loans to third-party businesses. (see id. ¶ 3; see also Centner Ex. 1 at 1; Centner Ex. 2 at 1.)2 Then, YieldStreet
uses the proceeds of those loans to pay returns to the BPDN investors. (See CAC ¶ 3; see also Centner Ex. 1 at 1; Centner Ex. 2 at 1.)
2 Tjok’s attorney, Daniel Centner, submitted a declaration in support of Tjok’s Motion. (See Dkt. No. 89 [hereinafter “Centner Declaration”].) The Court refers to the numbered exhibits attached to the Centner Declaration as “Centner Ex. __.” YieldStreet makes its investment offerings as separate investments funds. The five funds at issue in this action are called Vessel Deconstruction I, Vessel Deconstruction Fund III, Vessel Deconstruction Fund IV, Vessel Deconstruction Fund VI, and Louisiana Oil & Gas. (See CAC ¶¶ 3, 142-147.) B. ALLEGED MISREPRESENTATIONS AND OMISSIONS
Plaintiffs allege that YieldStreet was not always transparent in communications with investors. Investors received information from YieldStreet in the form of private placement memoranda (“PPMs”) and Series Note Supplements (“SNSs”). (See CAC ¶¶ 51, 52, 57; see also Centner Ex. 9; Centner Ex. 10.) Investors who ultimately purchased BPDNs executed subscription agreements, confirming that they had read and relied on the PPMs and the SNSs in deciding to make a BPDN investment. (Centner Ex. 6 at ¶ 2(a); Centner Ex. 7 at ¶ 2(a); Centner Ex. 8 at ¶ 2(a)) This case primarily concerns YieldStreet’s alleged
misrepresentations and omissions concerning its vessel deconstruction funds.3 YieldStreet’s vessel deconstruction funds raised capital from investors like Plaintiffs to extend loans to borrowers in the business of “extract[ing] raw materials for resale from non-operational vessels.” (Centner
3 Plaintiffs have alleged substantially identical misrepresentations and omissions with respect to one YieldStreet Louisiana Oil & Gas Offering. (See, e.g., Centner Ex. 6.) Ex. 9 at 3; Centner Ex. 10 at 3; see also CAC ¶ 69.) The borrowers used the principal of such loans to “facilitate[] vessels’ purchase, transportation and sale to a shipbreaker,” with the loans secured by the vessels, which were destined for scrap. (Centner Ex. 9 at 3; Centner Ex. 10 at 3.)
Plaintiffs allege several distinct types of misrepresentations and omissions relating to the vessel deconstruction funds. First, the PPMs touted YieldStreet’s use of “asset class” experts to source and structure the underlying loans, including by stating that YieldStreet “works with and relies on experienced Originators” (Centner Ex. 1 at 27; Centner Ex. 2 at 27) to identify suitable borrowers based on “the Originator’s expertise in the sector or asset class area” (Centner Ex. 1 at 28; Centner Ex. 2 at 28). Plaintiffs allege — and have now substantiated their allegations in discovery — that YieldStreet acted contrary to the advice of its own asset class expert in vessel
deconstruction. (See, e.g., Centner Ex. 13; Centner Ex. 14; Centner Ex. 17.)4 Next, Plaintiffs allege that the PPMs and SNSs described the diligence process by which YieldStreet extended asset-
4 The deposition testimony of a representative of Defendants’ vessel- deconstruction expert, Four Wood Capital (d/b/a Global Marine Transport Capital), identifies specific loan terms and operational hazards that rendered Defendants’ loans unacceptably risky in the expert’s view, based loans to borrowers, again touting reliance on expert advice in each niche lending market. (Centner Ex. 9 at 6-7; Centner Ex. 10 at 6-7.) YieldStreet stated that it would convene a credit committee to discuss the findings and recommendations of the expert, with the expert’s
“underwriting process [serving as] the framework under which all transactions are reviewed . . . .” (Centner Ex. 9 at 6- 7; Centner Ex. 10 at 6-7.) The diligence process also included general investor safeguards like lien priority, requirements for adequate collateralization, and insurance for the loans extended by YieldStreet. (See Centner Ex. 1 at 28; Centner Ex. 2 at 28; Centner Ex. 10 at 1.) Again, Plaintiffs have alleged and now substantiated that — rather than employ the expert’s standards as the framework for credit decisions — YieldStreet’s lending decisions were driven by its ability to sell corresponding BPDNs to investors and by any fee-based remuneration that YieldStreet would generate therefrom. (See,
e.g., Centner Ex. 13; Centner Ex. 19; Centner Ex. 21.) Moreover, the credit committee consisted only of YieldStreet’s two co-founders; other YieldStreet employees
including an unconventionally short loan term for the industry, the risk of fraudulent borrowers, and an industry hazard that vessels could be broken down and sold for scrap without regard to valid liens on the vessel. (See, e.g., Centner Ex. 13.) Those concerns, according to the Four Wood Capital representative’s testimony, were communicated to Defendants and largely disregarded. (See id.) and expert consultants knowledgeable about the risks of vessel deconstruction loans were not permitted to vote at credit committee meetings, limiting the credit committee’s ability to screen loans for an appropriate level of risk. (See Centner Ex. 13; Centner Ex. 15; see also Centner Ex.
16.) Finally, Plaintiffs allege that the PPMs misrepresented that YieldStreet’s offerings had “suffered no principal loss.” (Centner Ex. 1 at 40; Centner Ex. 2 at 40.) Plaintiffs have now identified YieldStreet offerings that had, indeed, lost principal at the time YieldStreet distributed the PPMs. (See Centner Ex. 27.) In addition, Plaintiffs identified at least one instance in which YieldStreet’s auditors predicted that YieldStreet would recover $0 from a borrower in default, making principal loss near certain. (See Centner Ex. 26 at 4.) Despite these circumstances, YieldStreet consistently maintained to investors that it had never lost principal on
any of its investment opportunities, which Plaintiffs contend was demonstrably untrue. C. PROCEDURAL HISTORY Plaintiffs filed the operative complaint on March 31, 2022. (See CAC.) The CAC has seven causes of action: fraudulent inducement (Count I); aiding and abetting fraud (Count II); violation of Section 10(b) of the 1934 Securities and Exchange Act (the “Exchange Act”) and Rule 10b-5 (Count III); violation of Section 20(a) of the Exchange Act against Weisz only (Count IV); breach of fiduciary duty against YieldStreet, Inc. and YieldStreet Management, LLC only (Count V); aiding and abetting breach of fiduciary duty against Weisz
only (Count VI); and negligent misrepresentation against all Defendants except Weisz (Count VII). The Court denied Defendants’ motion to dismiss the CAC (see Dkt. No. 52), and Defendants thereafter answered the CAC (see Dkt. No. 59). The parties have since been in discovery. (See Dkt. No. 65.) In May 2022, Tecku, Finkelstein, and Tjok filed a motion to be appointed lead plaintiffs in this action and to approve their choice of lead counsel for a putative class. (See Dkt. No. 55.) The Court denied the motion to appoint Tecku and Finkelstein lead plaintiffs, but otherwise granted the motion to appoint Tjok lead plaintiff and to appoint Tjok’s choice of counsel as class counsel. (See Dkt. No. 67.)
In February 2023, Tjok filed the motion now pending before the Court, seeking class certification and appointment as class representative pursuant to Federal Rule of Civil Procedure 23 (“Rule 23”). (See Motion at 1.) Tjok sought certification and appointment as class representative for the following class: All persons who purchased a Borrower Payment Dependent Note (BPDN) issued by YS ALTNOTES I or YS ALTNOTES II in connection with the following offerings:
1. Vessel Deconstruction I; 2. Vessel Deconstruction Fund III; 3. Vessel Deconstruction Fund IV; 4. Vessel Deconstruction Fund VI; and 5. Louisiana Oil & Gas.
Excluded from the Class are Defendants, any entities in which Defendants have a controlling interest, Defendants’ agents and employees, and any judge to whom this action is assigned and any member of such judge’s staff and immediate family. (Id.) Tjok filed a memorandum of law (see Dkt. No. 88 [hereinafter “Memorandum” or “Mem.”]),5 and Tjok’s attorney filed a declaration with thirty-three attached exhibits (see Centner Decl.)6 in support of the Motion. In opposition, Defendants filed a memorandum of law (see Dkt. No. 97 [hereinafter “Opposition” or “Opp.”]), and Defendants’ attorney filed a declaration with seventeen attached exhibits (see Dkt. No. 98 [hereinafter “Tiefenbrun Decl.”]). Tjok then filed a memorandum of law in reply. (See Dkt. No. 99
5 The Memorandum is sealed. A public version of the Memorandum with redactions is available at Dkt. No. 91. 6 The Centner Declaration is sealed. A public version of the Centner Declaration with redactions, along with any unsealed exhibits attached thereto, are available at Dkt. No. 90. [hereinafter “Reply”].) This Court referred the Motion to Magistrate Judge Aaron for a Report and Recommendation. (See Dkt. No. 101.) Magistrate Judge Aaron recommended that the Court grant in part and deny in part Tjok’s Motion. (See Report and
Recommendation, Dkt. No. 109 [hereinafter “R&R”] at 27.) Specifically, Magistrate Judge Aaron recommended that the Court certify the following class (the “Proposed Class”), with respect to Count I, Count II, Count III, Count IV, and Count VII of the CAC: All persons who purchased a Borrower Payment Dependent Note (BPDN) issued by YS ALTNOTES I in connection with the following offerings: (1) Vessel Deconstruction Fund I; (2) Vessel Deconstruction Fund III; and (3) Louisiana Oil & Gas Fund, excluding Defendants, any entities in which Defendants have a controlling interest, Defendants’ agents and employees, and any judge to whom this action is assigned and any member of such judge’s staff and immediate family. (R&R at 27.) Magistrate Judge Aaron recommended against certification with respect to two of the funds at issue (Vessel Deconstruction Fund IV and Vessel Deconstruction Fund VI) for lack of standing. (See R&R at 13-15.) Magistrate Judge Aaron also recommended against certification of any class with respect to the fiduciary duty claims (Count V and Count VI), on the basis that common questions of fact or law would not predominate over individual questions of fact or law raised by those claims pursuant to Rule 23(b)(3). (See R&R at 26.)7 Defendants filed timely objections to the R&R, arguing that Magistrate Judge Aaron erred in certifying any class at all. (See Dkt. No. 110 [hereinafter “Objections” or
“Objns.”].) Tjok thereafter responded to the Objections. (See Dkt. No. 111 [hereinafter “Response” or “Resp.”].) II. STANDARD OF REVIEW Under 28 U.S.C. § 636(b)(1)(B) and Federal Rule of Civil Procedure 72(b), the Court may designate a magistrate judge to submit proposed findings of fact and recommendations for the disposition of certain motions, including a motion to maintain a class action. A party may object in writing to the magistrate judge’s recommendations, and the Court “shall make a de novo determination of those portions of the report or specified proposed findings or recommendations to which objection is
made.” 28 U.S.C. § 636(b)(1); see Fed. R. Civ. P. 72(b)(3).
7 Also before Magistrate Judge Aaron was a motion to strike a declaration, with three attached exhibits, that Tjok’s attorney filed contemporaneously with Tjok’s Reply. (See Dkt. Nos. 100 (declaration), 102 (motion to strike).) The parties fully briefed the motion to strike. (See Dkt. Nos. 103–105). In the R&R, Magistrate Judge Aaron acknowledged that the declaration submitted on reply was improper rebuttal material and ought not be considered in deciding Tjok’s motion, but the R&R nevertheless recommended that the Court deny the motion to strike the declaration from the record entirely. (See R&R at 26-27.) No party objected to the R&R’s findings and recommendation on the motion to strike, so the Court accepts and adopts the R&R in this regard. Accordingly, the Court neither considers nor strikes Tjok’s improper rebuttal material. “However, when the objections simply reiterate previous arguments or make only conclusory statements, the Court should review the report for clear error.” Brown v. Colvin, 73 F. Supp. 3d 193, 197 (S.D.N.Y. 2014). “[A]n error is clear when the reviewing court is left with a definite and firm
conviction that a mistake has been committed.” Levinson v. U.S. Fed. Bureau of Prisons, 594 F. Supp. 3d 559, 563 (S.D.N.Y. 2022) (quotation marks omitted). Defendants make three discrete objections. The Court finds that the first objection — that no class can be certified with respect to the negligent misrepresentation claims for the same reasons that no class can be certified with respect to the fiduciary duty claims — is subject to clear error review because it simply rehashes arguments made before Magistrate Judge Aaron. (See Objns. at 5-6; cf. Opp. at 10-11.) The remaining objections are sufficiently specific to warrant de novo review.
The Court does not review the findings and recommendations of the R&R, to which no party has made an objection, and accordingly accepts and adopts those recommendations in full. See Thomas v. Arn, 474 U.S. 140, 149 (1985); Gosain v. Texplas India Priv. Ltd., 393 F. Supp. 3d 368, 372 (S.D.N.Y. 2019). III. LEGAL STANDARD UNDER RULE 23 “Class actions under Rule 23 of the Federal Rules of Civil Procedure are an exception to the general rule that one
person cannot litigate injuries on behalf of another.” Langan v. Johnson & Johnson Consumer Cos., Inc., 897 F.3d 88, 93 (2d Cir. 2018) (citing Wal-Mart Stores, Inc. v. Dukes, 564 U.S. 338, 348 (2011)). “Through Rule 23, Congress has authorized plaintiffs to bring, under limited circumstances, a suit in federal court on behalf of, not just themselves, but others who were similarly injured.” Id. Under Rule 23, a District Court must determine “[a]t an early practicable time” after initiation of suit “whether to certify the action as a class action,” whereby the Court “must define the class and the class claims, issues, or defenses, and must appoint class counsel.” Rule 23(c)(1)(A)-(B).
Certification formally allows the named plaintiffs in a class action to proceed as representatives of absent class members, and therefore “certification of a suit as a class action has important consequences for the unnamed members of the class,” as well as for the defendants who may be liable to named and unnamed members of the class. United States v. Sanchez-Gomez, 584 U.S. 381, 387 (2018); see Langan, 897 F.3d at 93-94. “Rule 23 does not set forth a mere pleading standard.” Wal-Mart, 564 U.S. at 350. Class certification is appropriate where the Proposed Class meets, by a preponderance of the
evidence following “rigorous analysis,” the requirements of Rule 23(a) and the requirements of one of the three types of classes enumerated in Rule 23(b). Id. at 350-51; see also In re Flag Telecom Holdings, Ltd. Sec. Litig., 574 F.3d 29, 35 (2d Cir. 2009) (standard of proof applicable to evidence proffered to meet requirements of Rule 23 is preponderance of the evidence). The District Court must “make a definitive assessment of Rule 23 requirements, notwithstanding their overlap with merits issues, must resolve material factual disputes relevant to each Rule 23 requirement, and must find that each requirement is established by at least a preponderance of the
evidence.” In re U.S. Foodservice Inc. Pricing Litig., 729 F.3d 108, 117 (2d Cir. 2013) (quotation marks and alterations omitted). Stated differently, the Court must “receive enough evidence, by affidavits, documents, or testimony, to be satisfied that each Rule 23 requirement has been met.” Teamsters Local 445 Freight Div. Pension Fund v. Bombardier Inc., 546 F.3d 196, 204 (2d Cir. 2008). The four requirements of Rule 23(a) are that “(1) the class is so numerous that joinder of all members is impracticable; (2) there are questions of law or fact common
to the class; (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class; and (4) the representative parties will fairly and adequately protect the interests of the class.” Rule 23(a). Of the three types of class actions contemplated by Rule 23(b), the only one relevant here is defined in Rule 23(b)(3), which provides for class certification where “the court finds that the questions of law or fact common to class members predominate over any questions affecting only individual members, and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy.” Rule 23(b)(3).
IV. DISCUSSION Defendants’ Objections challenge the R&R’s conclusions with respect to Rule 23(b)(3), contending that the R&R erred in its conclusion that “the questions of law or fact common to class members predominate over any questions affecting only individual members” of the Proposed Class. Rule 23(b)(3). (See also Objns.) This aspect of Rule 23 has come to be known as the “predominance” requirement. Predominance “tests whether Proposed Classes are sufficiently cohesive to warrant adjudication by representation.” Myers v. Hertz Corp., 624 F.3d 537, 547 (2d
Cir. 2010). The predominance requirement is satisfied “if resolution of some of the legal or factual questions that qualify each class member’s case as a genuine controversy can be achieved through generalized proof, and if these particular issues are more substantial than the issues subject only to individualized proof.” Id. “Considering whether questions of law or fact common to class members predominate begins, of course, with the elements of the underlying cause of action.” Erica P. John Fund, Inc. v. Halliburton Co., 563 U.S. 804, 809 (2011) (quotation marks omitted) With these principles in mind, the Court now addresses
each of Defendants’ Objections. A. OBJECTION I: NEGLIGENT MISREPRESENTATION CLAIMS Defendants first object that the R&R erred in recommending class certification as to Count VII for negligent misrepresentation. (See Objns. at 5-6.) Defendants believe that the negligent misrepresentation claims, like the fiduciary duty claims, “require plaintiffs to establish that they were owed a ‘duty’ by Defendants and determining whether such a relationship existed necessarily requires individualized, personalized inquiries that predominate over any common issues.” (Id. at 5; see also R&R at 26.) As noted above, the Court reviews Magistrate Judge Aaron’s
recommendation in this respect for clear error and finds no clear error in the R&R. For background, the R&R recommends that no class can be certified with respect to Plaintiffs’ fiduciary duty claims because those claims would require individualized proof that YieldStreet “provide[d] personalized advice attuned to a client’s concerns, whether by written or verbal communication” and because “[t]he issues regarding whether a fiduciary duty exists for each investor requires an individualized, personalized inquiry for each investor.” (See R&R at 26.) Therefore, questions of fact common to the class would not predominate over individual questions of fact. (See
id.) No party challenges this conclusion. Defendants argue that the claims for negligent misrepresentation, too, require a plaintiff to show the existence of a fiduciary duty, citing the Second Circuit decision in Stewart v. Jackson & Nash, 976 F.2d 86 (2d Cir. 1992). (See Objns. at 6 (citing Stewart, 976 F.2d at 90 (“[U]nder New York law, a plaintiff may recover for negligent misrepresentation only where the defendant owes her a fiduciary duty.”)); see also Opp. at 11.) However, four years after the Second Circuit’s holding in Stewart, the New York Court of Appeals clarified in Kimmell v. Schaefer that a plaintiff in a negligent misrepresentation
action need only allege the defendant’s “duty to speak with care,” without mentioning the necessity of a fiduciary relationship. 675 N.E.2d 450, 454 (N.Y. 1996). In fact, Kimmell involved circumstances similar to those alleged here. In that case, a company officer had a duty to speak with care when making “deliberate representation[s]” about the company to potential investors, thus inducing the investors to forego independent due diligence efforts. 675 N.E.2d at 454-55. Federal courts in New York have since acknowledged the shift in the law that Kimmell represents, holding that “deliberate representation[s]” between commercial transactors can give rise to a duty to speak with care in
some circumstances. Suez Equity Inv’rs, L.P. v. Toronto- Dominion Bank, 250 F.3d 87, 103 (2d Cir. 2001); see also Century Pac., Inc. v. Hilton Hotels Corp., No. 03 Civ. 8258, 2004 WL 868211, at *8 (S.D.N.Y. Apr. 21, 2004) (“Courts have found a special relationship and duty, for example, where defendants sought to induce plaintiffs into a business transaction by making certain statements or providing specific information with the intent that plaintiffs rely on those statements or information.”). Here, the misrepresentations in the PPMs and SNSs are sufficiently deliberate to give rise to a duty to speak with care. (See Centner Ex. 1; Centner Ex. 2; Centner Ex. 9,
Centner Ex. 10.). The existence of that duty — as to every member of the Proposed Class — can be established through generalized proof, given that the PPMs and SNSs were distributed to all investors. (See Centner Ex. 6, Centner Ex. 7, Centner Ex. 8.) Accordingly, notwithstanding the R&R’s conclusion as to the fiduciary duty claims, there is no clear error in Magistrate Judge Aaron’s finding that the negligent misrepresentation claims here are susceptible to proof of common questions of fact, which predominate over individual issues. B. OBJECTION II: COMMON LAW CLAIMS Defendants next object that the R&R erred in
recommending class certification with respect to the common law claims: fraudulent inducement (Count I), aiding and abetting fraud (Count II), and negligent misrepresentation (Count VII). (See Objns. at 7-8.) Defendants correctly identify that Tjok must show that Proposed Class members reasonably relied on Defendants’ misrepresentations or omissions, and that such reliance can be established with generalized proof. (See R&R at 23 nn. 9, 10 (listing elements of the respective claims).) Defendants further contend that the R&R erroneously relied on the Affiliated Ute doctrine — which establishes a rebuttable presumption of reliance where the alleged fraud consists primarily of omissions rather than
misstatements — in recommending certification of the Proposed Class’s common law claims. See Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 153 (1972). (See also R&R at 24-26; Objns. at 7-8.) As noted above, the Court reviews the R&R de novo with respect to this objection. The Court notes at the outset that, contrary to Defendants’ characterization (Objns. at 7), the R&R is not fairly read to recommend application of the Affiliated Ute presumption to Plaintiffs’ common law claims. Rather, Magistrate Judge Aaron recommended that the class be certified with respect to all claims (except the fiduciary duty claims) because those claims could be proven largely
with generalized evidence, thus establishing predominance of common issues over potential individual issues. (See R&R at 24-26.) Affiliated Ute provided further support only for class certification of the claims brought under the federal securities laws. (See R&R at 25.) Magistrate Judge Aaron’s findings are supported without application of Affiliated Ute. To meet their burdens on the element of reliance, members of the Proposed Class need only show that the alleged misrepresentations or omissions “were a ‘substantial factor’ in each investor’s decision” to purchase BPDNs. Abu Dhabi Com. Bank v. Morgan Stanley & Co., Inc., 269 F.R.D. 252, 261 (S.D.N.Y. 2010) (quoting Curiale v.
Peat, Marwick, Mitchell & Co., 630 N.Y.S.2d 996, 1002 (1st Dep’t 1995)); see Ge Dandong v. Pinnacle Performance, Ltd., No. 10 Civ. 8086, 2013 WL 5658790, at *11 (S.D.N.Y. Oct. 17, 2013) (“Plaintiff must demonstrate that the misrepresentation or omission was a substantial factor in inducing him or her to act the way that he or she did.” (cleaned up)). At this stage, Tjok’s burden is to show that reliance can be established by generalized proof, and that common issues predominate over individual issues. See Rule 23(b)(3). The Court finds that the necessary showing of reliance for the Proposed Class can be made through generalized proof. The law is clear that common law fraud claims are not beyond
the reach of Rule 23, even though they require proof of each class member’s reliance. “Fraud claims based on uniform misrepresentations made to all members of the class” are “appropriate subjects for class certification because the standardized misrepresentations may be established by generalized proof.” Moore v. PaineWebber, Inc., 306 F.3d 1247, 1253 (2d Cir. 2002). Especially “in the context of a financial transaction — which does not usually implicate the same type or degree of personal idiosyncratic choice as does a consumer purchase — payment alone may constitute circumstantial proof of reliance upon a financial representation.” Ge Dandong, 2013 WL 5658790, at *9; see also
In re U.S. Foodservice Inc. Pricing Litig., 729 F.3d 108, 119-120 (2d Cir. 2013); Anwar v. Fairfield Greenwich Ltd., 306 F.R.D. 117, 144 (S.D.N.Y. 2013). For reasons stated in Moore, 306 F.3d at 1253, U.S. Foodservice, 729 F.3d at 120, and Ge Dandong, 2013 WL 5658790, at *9, the Proposed Class’s common law claims here are appropriate subjects for class certification. The actionable misstatements at the heart of the Proposed Class members’ claims are all found in a handful of written offering documents: the PPMs (see, e.g., Centner Ex. 1; Centner Ex. 2) and the SNSs (see, e.g., Centner Ex. 9; Centner Ex. 10). The subscription agreements defining the relationship between
YieldStreet and its investors further warrants that the investors read and relied upon the PPMs and the SNSs and expressly disclaims reliance on verbal representations that YieldStreet’s employees may have made. (See Centner Ex. 6; Centner Ex. 7; Centner Ex. 8; see also Opp. at 12 n.9.) This is not the type of case where misstatements and omissions were made in personal, unscripted conversations likely to vary from investor to investor; the misrepresentations and omissions were written, and they were uniform, meriting class treatment. See Moore, 306 F.3d at 1255 (looking to sales scripts as probative of uniformity of statements to investors); Abu Dhabi, 269 F.R.D. at 263 (denying class
certification where communications to investors “varied”). Proposed Class members’ reasonable reliance can therefore be shown through common evidence, simply by the fact that they received the PPMs and SNSs and purchased the related BPDNs. Having concluded that reliance is susceptible to generalized proof in this case, the Court next must determine whether common issues in the reliance analysis predominate over the individual ones. See Rule 23(b)(3). The Court finds they do. Defendants insist in their Opposition and their Objections that reliance is, necessarily, a “hopelessly individualized” inquiry. (Opp. at 12; see Objns. at 7-8.)
They argue that they can successfully rebut common evidence of reasonable reliance through individualized evidence of each investor’s investment philosophy, risk tolerance, reaction to Defendants’ statements, one-on-one communications with YieldStreet, and independent diligence efforts. (See Opp. at 11-20 (collecting evidentiary citations).) By and large, the evidence cited by Defendants is beside the point. Defendants’ evidence does not show that Proposed Class members did not, in fact, rely on the PPMs or SNSs or
somehow acted unreasonably in doing so. That Proposed Class members may have had additional, individual reasons to invest in BPDNs does not disprove that the Proposed Class members did rely on the misrepresentations in the PPMs and SNSs. See Ge Dandong, 2013 WL 5658790, at *11 (“At most, the conversations Defendants point to demonstrate that some putative class members had more than one reason for purchasing the Notes; they do not, however, contradict the notion that Proposed Class members relied on Defendants' alleged misrepresentations and omissions as well.”).8 After all, the Proposed Class need only show that Defendants’ misrepresentations and omissions were just one “substantial
factor” in inducing the Proposed Class members’ BPDN purchases. Ge Dandong, 2013 WL 5658790, at *11; see also
8 See also Seekamp v. It’s Huge, Inc., Case 09 Civ. 0018, 2012 WL 860364, at *10 (N.D.N.Y. Mar. 13, 2012) (finding predominance of common issues even though “each proposed class member may have opted to purchase the [product] for different reasons”); Spencer v. Hartford Fin. Servs. Grp., Inc., 256 F.R.D. 284, 303 (D. Conn. 2009) (same, where “each plaintiff may have accepted his or her [allegedly fraudulent] settlement for somewhat different reasons”). Curiale, 630 N.Y.S.2d at 996. They can do so through generalized proof. Indeed, the Court can conclude that investors relied on the misrepresentations and omissions simply because of the nature of the misrepresentations and omissions themselves,
which were “so fundamental to the value” of the BPDNs that many investors might find it inconceivable that they may have been untrue. Ge Dandong, 2013 WL 5658790, at *9; see also U.S. Foodservice, 729 F.3d at 120-21. Defendants put forth no evidence to suggest that investors knew (or should have known) that YieldStreet made unacceptably risky loans contrary to their own expert consultants’ advice. Similarly, Defendants set forth no evidence to suggest that investors knew (or should have known) that the YieldStreet credit committee would make lending decisions for reasons other than the committee’s expert-backed assessment of risk and likely return to investors. In these circumstances, the fact that
Proposed Class members went through with their investments is indicative that those Proposed Class Members believed the representations in the PPMs and SNSs to be true. U.S. Foodservice, 729 F.3d at 120. Even the cases cited by Defendants underscore the propriety of class certification under these circumstances. See In re Initial Pub. Offerings Secs. Litig. [hereinafter “IPO”], 471 F.3d 24 (2d Cir. 2006); N.J. Carpenters Health Fund v. Residential Cap., LLC, 272 F.R.D. 160 (S.D.N.Y. 2011); Abu Dhabi, 269 F.R.D. at 261. In IPO, N.J. Carpenters, and Abu Dhabi, individual issues of reliance predominated over common issues; however, in each case, the plaintiffs knew (or
should have known) the falsity of the alleged misrepresentations underlying their fraud allegations, unlike the instant case. See 471 F.3d at 42-43; 272 F.R.D. at 169; 269 F.R.D. at 263. In IPO, the defendants’ scheme was public knowledge, and any person could have discovered the nature of the scheme simply through diligent research. See 471 F.3d at 43. Whether reliance was reasonable therefore depended on the diligence of each plaintiff’s research efforts. See id. In N.J. Carpenters and Abu Dhabi, the plaintiffs included sophisticated institutional investors with the right to conduct thorough diligence on the investments at issue. See 272 F.R.D. at 169; 269 F.R.D. at 263. In those cases, the
courts held that the factual details of the plaintiffs’ individual due diligence processes, as relevant to reasonable reliance, would predominate over common issues. See 272 F.R.D. at 169; 269 F.R.D. at 263. No such circumstances are present here. Unlike IPO, there is no suggestion that the nature of YieldStreet’s lending practices were publicly known when Proposed Class members made their investments. See 471 F.3d at 43. And unlike the plaintiffs in N.J. Carpenters and Abu Dhabi, Plaintiffs were not institutional investors but rather individual investors buying securities in a retail market. See 272 F.R.D. at 169; 269 F.R.D. at 263. Plaintiffs had no window into
Defendants’ credit committee operations until discovery in this action, forestalling a meaningful opportunity to perform independent diligence on whether Defendants’ representations about YieldStreet’s own operations were true.9 Defendants’ evidence does not show that ordinary individual diligence efforts could have revealed the allegedly untruthful nature of Defendants’ representations in the PPMs and SNSs. Accordingly, the common issues with respect to reasonable reliance, as related to the Proposed Class’s
9 Defendants, apparently making the argument that Plaintiffs should have investigated YieldStreet’s operations before investing, emphasize that “every [YieldStreet] investor is a sophisticated, high-net-worth accredited investor” because YieldStreet offered securities only to accredited investors under SEC Regulation D. (Opp. at 13 & n.10) Even if Regulation D in some circumstances exempts securities issuers from registering with the SEC offerings made to accredited investors, see 17 C.F.R. § 230.506(c), it does not necessarily follow that those investors the same capabilities as the institutional investors had in N.J. Carpenters or Abu Dhabi to conduct meaningful due diligence. See 272 F.R.D. at 169; 269 F.R.D. at 263. Nor does it follow that all accredited investors under Regulation D are experienced investors or high-net-worth individuals by today’s standards. Indeed, some have observed that the definition of “accredited investor” today includes many inexperienced investors because “the wealth criteria for individual investors have not been adjusted since 1982.” Jennifer Johnson, Private Placements: A Regulatory Black Hole, 35 Del. J. of Corp. Law 151, 191 & n.242 (2010); see also Donald C. Langevoort, The SEC, Retail Investors, and the Institutionalization of the Securities Markets, 95 Va. L. Rev. 1025, 1058 (2009) (similar). The Proposed Class does not forfeit its ability to recover for fraud simply because they were all accredited investors. common-law claims, predominate over any individual issues. The Court is persuaded by a preponderance of the evidence that Defendants’ misrepresentations and omissions were at least one substantial factor causing Plaintiffs’ investments, and that this notion can be shown by generalized proof. C. OBJECTION III: FEDERAL SECURITIES CLAIMS
Defendants’ final objection to the R&R contends that it was error to apply the Affiliated Ute presumption of reliance to the claims brought under the federal securities laws (Counts III and IV) – which, like the common law claims, require a showing of the Proposed Class’s reasonable reliance on YieldStreet’s alleged misrepresentations or omissions. (See Objns. at 8-10.) More specifically, Defendants argue that the Affiliated Ute presumption applies only to claims involving omissions, not misrepresentations, and that Affiliated Ute is therefore not applicable to this action, in which the allegations focus largely on purported
misrepresentations. Defendants also argue that, even if the Court finds that Affiliated Ute applies in the first instance, Defendants have rebutted the presumption with a sufficient evidentiary showing. As indicated above, the Court reviews the R&R in this respect de novo. As briefly noted above, the Affiliated Ute presumption “allows the element of reliance to be presumed in cases involving primarily omissions, rather than affirmative misstatements.” Waggoner v. Barclays PLC, 875 F.3d 79, 93 (2d Cir. 2017); see also Affiliated Ute, 406 U.S. at 153. “The Affiliated Ute presumption does not apply to earlier misrepresentations made more misleading by subsequent
omissions, or to what has been described as ‘half–truths,’ nor does it apply to misstatements whose only omission is the truth that the statement misrepresents.” Waggoner, 875 F.3d at 96; see also Baliga v. Link Motion, Inc., No. 18 Civ. 11642, 2022 WL 16707361, at *11 (S.D.N.Y. Nov. 4, 2022). Cases involving primarily omissions receive special treatment under Affiliated Ute because it can be functionally impossible for a plaintiff to prove reasonable reliance on a defendant’s silence; the same, however, is not true where a defendant made affirmative misrepresentations to the plaintiff. See Affiliated Ute, 406 U.S. at 153; Waggoner, 875 F.3d at 93, 96.
The Court finds that this case is primarily about misrepresentations, not omissions, and Affiliated Ute therefore does not apply. The PPMs and SNSs described processes to protect Plaintiffs’ investments, but Defendants are alleged to have omitted mentioning that they ignored those processes. (See Centner Ex. 1; Centner Ex. 2; Centner Ex. 9; Centner Ex. 10.) The statements alleged to be omitted — that is, that Defendants did not follow the advice of the asset- class expert and that Defendants accepted unreasonable risk despite the presence of a “credit committee” to police that risk — are simply the inverse of Defendants’ misrepresentations on the same topics. See Waggoner, 875 F.3d
at 96. Accordingly, Affiliated Ute does not apply, and the Court need not determine whether Defendants have rebutted the Affiliated Ute presumption with competent evidence. Regardless of the applicability of Affiliated Ute, however, class treatment is still appropriate for the claims brought under the federal securities laws. As the Court has already found with respect to the Proposed Class’s common law claims (see supra § IV(B)), reasonable reliance on Defendants’ misrepresentations in this action can be established through common proof. See Moore, 306 F.3d at 1253; U.S. Foodservice, 729 F.3d at 120. This Court’s analysis with respect those common law fraud claims applies with equal force
to Plaintiffs’ federal securities fraud claims, given that reasonable reliance is an element of all of those claims. Moreover, because the issues of fact relevant to each Proposed Class member’s investment decisions do not disprove the class members’ reliance on the PPMs and SNSs, the Court finds that the common issues of fact in the federal securities law claims predominate over any individual issues. Certification is therefore warranted as to the federal securities law claims. V. ORDER For the reasons stated above, it is hereby ORDERED that the objections (see Dkt. No. 110) filed by
defendants Yieldstreet, Inc., Yieldstreet Management, LLC, YS ALTNOTES I, LLC, YS ALTNOTES II, LLC, and Michael Weisz (collectively, “Defendants”) to the Report and Recommendation (see Dkt. No. 109 (the “R&R”)) issued by Magistrate Judge Stewart D. Aaron in this action, upon the Court’s review and substantially for the reasons stated by Magistrate Judge Aaron, are hereby OVERRULED; and it is further ORDERED that the R&R (see Dkt. No. 109) is hereby ACCEPTED and ADOPTED except as noted herein; and it is further ORDERED that Defendants’ motion to strike (see Dkt. No. 102) is hereby DENIED; and it is further ORDERED that Plaintiff Lawrence Tjok’s (“Tjok”) motion
for class certification and appointment as class representative (see Dkt. No. 87) is hereby GRANTED in part and DENIED in part as specified in the R&R; and it is further ORDERED that pursuant to Federal Rule of Civil Procedure 23, a class is hereby certified with respect to Count I, Count II, Count III, Count IV, and Count VII of the Corrected Amended Class Action Complaint (see Dkt. No. 51) in this action as follows: All persons who purchased a Borrower Payment Dependent Note (BPDN) issued by YS ALTNOTES I in connection with the following offerings: (1) Vessel Deconstruction I; (2) Vessel Deconstruction Fund III; and (3) Louisiana Oil & Gas Fund, excluding Defendants, any entities in which Defendants have a controlling interest, Defendants’ agents and employees, and any judge to whom this action is assigned and any member of such judge’s staff and immediate family. SO ORDERED. Dated: New York, New York March 29, 2024
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