Fezzani v. Bear, Stearns & Co.

Background

Plaintiffs were customers of A.R. Baron, a broker-dealer that allegedly operated a large securities-fraud scheme from 1992 through 1996. The alleged scheme involved Baron’s “house stocks,” securities traded in over-the-counter markets. Plaintiffs alleged that Baron brokers represented that the securities were being bought and sold at prices established by a real, active, and liquid market, when the prices were allegedly artificial.

The remaining Defendants were two groups: Isaac R. Dweck, individually and as custodian for Nathan Dweck, Barbara Dweck, Morris I. Dweck, Ralph I. Dweck, and Jack Dweck, referred to as the Dwecks; and Aaron Wolfson, the Estate of Abraham Wolfson, and Morris Wolfson, referred to as the Wolfsons. Plaintiffs’ sole remaining claim alleged that these Defendants aided and abetted fraud under New York law.

Applicable law and scope of the claim

To prove aiding and abetting fraud under New York law, Plaintiffs had to show an underlying fraud, Defendants’ actual knowledge of that fraud, and substantial assistance that advanced the fraud. The Court explained that actual knowledge cannot be replaced by evidence that Defendants should have recognized warning signs or could have discovered the fraud through reasonable investigation.

The Court ruled that the underlying fraud was limited by the Second Circuit’s prior decisions in the case. Plaintiffs therefore had to proceed on the theory that Baron brokers misrepresented to Plaintiffs that the securities were priced by a genuine market. The Court rejected Plaintiffs’ broader theory that the relevant fraud was simply that Baron was an illegitimate brokerage firm or that Baron generally engaged in improper conduct.

Motion to strike

The Dwecks moved to strike statements in a declaration by Roman Okin, a former Baron employee, concerning favored investors, alleged agreements with the Wolfsons and Isaac Dweck, and the use of accounts to park Baron house stocks. The Court denied that part of the motion. It held that a reasonable factfinder could believe Okin had personal knowledge because he had been Baron’s head salesman, handled transactions involving the Wolfsons and Dweck, and described personal dealings with them. The Court stated that concerns about the details and credibility of his testimony affected its weight, rather than its admissibility at the summary-judgment stage.

Substantial assistance

Plaintiffs argued that Defendants substantially assisted the fraud by financing Baron, introducing investors, helping Baron obtain Bear Stearns as its clearing broker, and allowing transactions that helped Baron satisfy capital requirements and remain in business. The Court acknowledged that Defendants raised substantial arguments about whether parking and general financing were sufficiently connected to the specific fraud alleged against Plaintiffs.

Nevertheless, the Court held that the Second Circuit’s earlier decisions had already determined that Plaintiffs’ allegations were legally sufficient at the pleading stage to allege substantial assistance through parking and financing. Plaintiffs supplied evidence supporting those allegations, including Okin’s statements about favored investors, guaranteed profits, prearranged trades, capital contributions, and parking of house stocks. The Dwecks and Wolfsons disputed those statements, but the Court held that their conflicting accounts created a genuine dispute of material fact that ordinarily would be resolved by a factfinder at trial.

Actual knowledge

The Court nevertheless granted summary judgment because Plaintiffs lacked sufficient evidence of actual knowledge. Evidence that Defendants invested in Baron, profited from house stocks, participated in parking or wash-sale transactions, brought in customers, or helped Baron generally did not show that they knew Baron brokers were making the specific pricing-related misrepresentations to Plaintiffs.

The Court considered evidence concerning a meeting at which the Wolfsons were allegedly told that non-insider customers would not receive the same opportunities to buy cheaply or sell at inflated prices. The Court held that this information did not establish that the Wolfsons knew Baron brokers were falsely telling customers that prices were set by a legitimate market. Similarly, allegations that Isaac Dweck invested in Baron despite lawsuits, investigations, and negative press suggested knowledge of possible wrongdoing at Baron generally, not actual knowledge of the specific fraud alleged here.

The Court also held that evidence of parking, wash sales, profits, and Defendants’ involvement with Baron did not permit the necessary inference. Plaintiffs had not shown a specific causal connection between an individual Plaintiff’s purchase or sale and a corresponding parking or coordinated transaction. At most, the evidence suggested that Defendants may have known they were benefiting from a scheme that was improper in some respect. It did not show that they knew how Baron allegedly deceived Plaintiffs about the prices of the house stocks.

Disposition

The Court granted the Dwecks’ and Wolfsons’ motions for summary judgment on Plaintiffs’ remaining aiding-and-abetting-fraud claim. The Court stated that Plaintiffs had failed to create a genuine dispute of material fact about actual knowledge, so the claim could not proceed. The Court directed the Clerk to enter judgment for Defendants and close the case.

The Court also denied as moot Plaintiffs’ motions to substitute Reyad Fezzani for Mohamed Fezzani and Shlomo Wolfson for Abraham Wolfson. To the extent not otherwise addressed, the Court denied as moot the remaining motions to strike.