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. Genovese and the investment-firm defendants did not appear in the case. The motions addressed in this opinion were filed by Scibetta, Richter, Lee Anav Chung White Kim Ruger & Richter LLP, and Bender & Rosenthal LLP.

According to the amended complaint, Genovese made false claims about his education, professional history, family wealth, investment fund, and the fund’s performance. The trusts alleged that Scibetta helped prepare documents containing false information, including a claim that Willow Creek was a member of the Securities Investor Protection Corporation. The trusts each initially invested $1 million in November 2015 and each added another $1 million in January 2016, for a total investment of $4 million. They alleged that Genovese did not invest the money as represented and ultimately failed to return $3 million.

The trusts also alleged that Scibetta made false statements during meetings in February and May 2016 and that Richter falsely told them in July 2016 that securities-regulation requirements prevented them from withdrawing their money for a year. 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.

Motion-to-Dismiss Standard

The court applied Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint adequately states a legally sufficient claim. At this stage, the court accepts well-pleaded factual allegations as true, draws reasonable inferences for the plaintiffs, and does not decide whether the plaintiffs will ultimately prove their claims. Securities-fraud allegations also had to satisfy heightened requirements requiring the plaintiffs to identify the alleged misstatements, their speakers, when and where they were made, why they were false, and facts supporting an inference of fraudulent intent.

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

Securities Fraud and Common-Law Fraud

The court dismissed the securities-fraud claim and the New York common-law fraud claims.

For the documents Scibetta allegedly helped prepare, the court held that the complaint did not allege that Scibetta disseminated or approved the statements. Under the Supreme Court’s decision in Janus Capital Group, a person generally must have ultimate authority over a statement to be liable as its maker under Rule 10b-5. The court also concluded that the trusts could not avoid that rule by characterizing Scibetta’s alleged document preparation as participation in a fraudulent scheme because the complaint did not allege that he disseminated the statements or that the trusts relied on his conduct in a way that could support primary liability.

The court found that the trusts adequately alleged that Scibetta intended to defraud them during the February and May 2016 meetings, including through allegations that he expected to receive part of a finder’s fee if the trusts kept their money in Willow Creek. But the court held that the complaint did not adequately allege loss causation—the connection between the defendant’s conduct and the plaintiffs’ financial loss. The meetings occurred after the trusts had already invested, and the complaint alleged that the money was already gone by then. Thus, the alleged statements could have delayed discovery of the fraud but did not increase the trusts’ losses.

The claims concerning Richter’s statements failed for the same causation reason. The court also held that the trusts had not adequately alleged that Richter had the required fraudulent state of mind. The court therefore dismissed the First Count, alleging violations of Section 10(b) and Rule 10b-5, and the Second Count, alleging common-law fraud.

Negligent Misrepresentation

The court dismissed the Fifth Count against all moving defendants. Under New York law, negligent misrepresentation requires a special or trust-based relationship creating a duty to provide accurate information, an incorrect statement, and reasonable reliance. The court held that the trusts had not shown that either attorney owed them that duty. The attorneys’ statements in promoting Willow Creek were not comparable to a formal opinion letter issued for a third party’s reliance. The court also held that Richter’s alleged statements about withdrawal restrictions and board membership could not have caused damages because, according to the complaint, there was no money in Willow Creek to redeem.

Negligence

The court dismissed the Sixth Count against all moving defendants. A negligence claim requires a duty, a breach, and injury caused by the breach. For professional negligence by an attorney without a direct attorney-client relationship, New York law requires allegations of fraud, collusion, malicious conduct, or other special circumstances. The court held that the trusts had not adequately alleged such conduct by Scibetta or Richter and, independently, had not alleged damages resulting from the attorneys’ alleged negligence.

Civil Conspiracy

The court dismissed the Fourth Count against all moving defendants. A civil-conspiracy claim requires an underlying tort plus an agreement, an act advancing the agreement, intentional participation, and resulting injury. The court found that the trusts had alleged an agreement only conclusorily and had not pleaded facts showing that Genovese agreed with any moving defendant to defraud the trusts. The alleged finder’s-fee arrangement involving Scibetta was described as an agreement with a third party, not with Genovese. The allegations against Richter also did not plausibly show that she knew about the fraud.

Aiding and Abetting Fraud

The court dismissed the Third Count against all moving defendants. Under New York law, aiding and abetting fraud requires an underlying fraud, actual knowledge of that fraud, and substantial assistance that helps advance it and proximately causes the injury.

The court held that the trusts had not adequately alleged Scibetta’s actual knowledge. The allegations that he knew certain financial information was false were conclusory and did not explain how he knew the information was part of a fraud. The court further held that the complaint did not show that any assistance by Scibetta proximately caused the trusts’ losses, because the alleged loss had occurred before the relevant meetings.

The court found the allegations against Richter even weaker. The trusts did not adequately allege that she knew about Genovese’s fraud or knew that her statements were false. The court also held that her alleged assistance could not have proximately caused the trusts’ injuries for the same reasons applicable to Scibetta.

Disposition

The court granted the defendants’ motions. It dismissed all counts as to Scibetta, Richter, Bender & Rosenthal LLP, and Lee Anav Chung White Kim Ruger & Richter LLP. The trusts were granted leave to file a Second Amended Complaint by March 4, 2020. Any answer or objection was due by April 1, 2020. The court directed the Clerk to terminate the motions.