The Geoffrey A. Orley Revocable Trust U/A/D 1/26/2000 v. Genovese

Background

The plaintiffs were The Geoffrey A. Orley Revocable Trust U/A/D 1/26/2000 and The Randall C. Orley Revocable Trust U/A/D 03/16/1994. They alleged that Nicholas Genovese, Willow Creek Advisors, LLC, Willow Creek Investments, LP, attorneys Salvatore Scibetta and Aimee L. Richter, and their law firms participated in a fraudulent investment scheme. The trusts alleged that Genovese made false claims about his background and Willow Creek’s size, performance, investors, and operations. They also alleged that documents provided before the investments contained false information, including a statement that Willow Creek belonged to the Securities Investor Protection Corporation.

The trusts alleged that they invested $1 million each in November 2015 and increased their investments to $2 million each in January 2016. They later sought to redeem some or all of their investments. According to the complaint, statements by Scibetta and Richter caused the trusts to delay or withdraw redemption requests. The trusts ultimately received $1 million from Randall Orley’s trust but did not receive the remaining $3 million.

The trusts asserted claims under Section 10(b) of the Securities Exchange Act and Securities and Exchange Commission Rule 10b-5, New York common-law fraud, negligent misrepresentation, negligence, civil conspiracy, and aiding and abetting fraud. Scibetta, Richter, Lee Anav Chung White Kim Ruger & Richter LLP, and Bender & Rosenthal LLP moved to dismiss. Genovese and the Willow Creek entities did not appear in the case.

Rulings on the Motion to Dismiss

The court applied the rule that a complaint must plead enough facts to make a claim plausible, accepting the complaint’s factual allegations as true for purposes of the motion. Because the securities-fraud claims involved alleged fraud, the trusts also had to plead the circumstances of the fraud with particularity and provide facts supporting the required wrongful state of mind.

The court dismissed the securities-fraud and common-law-fraud counts. As to Scibetta’s alleged role in preparing the brochure and privacy document, the court held that the complaint did not allege that he had ultimate authority over, approved, or disseminated the statements. Merely helping prepare a statement did not make him the person who made it under Rule 10b-5. The court also concluded that the trusts’ allegations about Scibetta’s later statements did not show that those statements caused additional losses, because the complaint alleged that the money had already disappeared by then. Richter’s alleged statements likewise occurred after the investments, and the complaint did not adequately allege her required wrongful state of mind.

The negligent-misrepresentation claim was dismissed because the trusts did not adequately allege that either lawyer owed them the special duty or trust-based relationship required under New York law. The court stated that the lawyers’ statements while promoting Willow Creek did not have the formality or purpose of an opinion letter. The negligence claim was dismissed because the trusts did not adequately allege a duty, qualifying special circumstances, or damages caused by the alleged conduct.

The civil-conspiracy claim was dismissed because the trusts alleged an agreement only conclusorily and did not plead facts showing that the defendants agreed with Genovese to commit the fraud. The aiding-and-abetting claim was dismissed because the trusts did not adequately allege that Scibetta or Richter had actual knowledge of Genovese’s fraud, that they provided the required substantial assistance, or that their conduct proximately caused the trusts’ losses. The court found that Scibetta’s alleged conduct presented a stronger but still insufficient basis for inferring knowledge, while the complaint did not adequately allege Richter’s knowledge at all.

Other Ruling

The defendants asked the court to consider four emails between Genovese and Scibetta. The court denied that request because the emails were not incorporated into the complaint, and the complaint did not indicate that the trusts knew about them.

Disposition

Judge Ramos granted the defendants’ motions. All counts were dismissed as to Scibetta, Richter, Bender, and Lee Anav. The trusts were granted leave to file a second amended complaint by March 4, 2020. The opinion did not state that the dismissal was with or without prejudice.