Silverman v. 3D Total Solutions, Inc.

Background

Carl Silverman sued 3D Total Solutions, Inc.; 3D Total Solutions Limited; Glenn Lafaye; Michael Shaw; Richard Epstein; James Endee; David Hostelley; and Jason Perkes. New Skyline Partners, LLC was named as a nominal defendant. Silverman brought claims individually and derivatively on behalf of New Skyline Partners, LLC. He alleged that the defendants fraudulently induced him to contribute and loan money to the fund, which then used his money to finance two companies specializing in three-dimensional printing.

Silverman invested $200,000 in August 2012 and another $40,000 in December 2012. He alleged that Lafaye created or controlled the 3D companies but did not disclose that connection, and that the fund was used to finance those companies. The opinion states that 3D Total Solutions, Inc. ultimately failed. Silverman asserted claims under federal securities laws and claims under common law, including common-law fraud, negligent misrepresentation, breach of fiduciary duty, gross negligence and mismanagement, aiding and abetting breaches of fiduciary duty, and derivative claims.

All individual defendants except Richard Epstein moved to dismiss the amended complaint. The court referred those motions to Magistrate Judge Gabriel W. Gorenstein, who recommended granting them. Silverman objected to the recommendation and to the denial of permission to amend his complaint.

Court’s Review of the Objections

The court reviewed specific objections de novo, meaning it independently considered the challenged portions of the recommendation. It reviewed general or conclusory objections for clear error, meaning whether the record showed an obvious mistake. The court found no clear error in the challenged or unchallenged portions of the recommendation.

Federal Securities Claims

The court upheld the conclusion that Silverman failed to state a claim under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. Those provisions generally prohibit deceptive conduct connected with the purchase or sale of securities. Securities-fraud allegations also must satisfy Rule 9(b) and the Private Securities Litigation Reform Act, which require the complaint to identify the alleged misleading statements and plead the circumstances of fraud with particularity.

The court considered five alleged statements or omissions involving Lafaye. First, the Operating Agreement’s statement that Lafaye would act in good faith and in the investing members’ best interests was too general to be an actionable securities misrepresentation. Second and third, statements describing the fund’s investment objectives and strategies were not false or misleading and were too broad and general to provide an investor with a concrete, reliable promise. The court also agreed that the Offering Memorandum gave Lafaye authority to make investments across a substantially unrestricted range of instruments and strategies.

Fourth, Silverman alleged that Lafaye led him to believe that 3D Total Solutions, Inc. had been discovered as an investment opportunity rather than being controlled or owned by Lafaye. The court held that the complaint did not identify the actual statements that created this impression or explain when and where they were made. It therefore did not satisfy the required particularity standard.

Fifth, Silverman relied on a June 20, 2013 email in which Lafaye allegedly said that the fund was “up around 17-20% so far.” The court held that this statement could not have induced Silverman to purchase the fund shares because it was made after his last investment in December 2012. The court rejected Silverman’s argument that the statement was actionable because it may have influenced him to remain invested.

Because the court found no primary violation of Section 10(b) or Rule 10b-5, it also upheld dismissal of Silverman’s Section 20(a) control-person claim.

Common-Law and Fiduciary-Duty Claims

The court upheld dismissal of the common-law fraud claim because the allegations had the same deficiencies as the securities-fraud allegations, including failure to plead a specific false representation with the required detail. It also overruled Silverman’s objection concerning negligent misrepresentation because that claim relied on the same allegations, which had not been pleaded with sufficient particularity.

The court further held that the complaint did not allege misconduct sufficient to support a breach-of-fiduciary-duty claim under New York law. The court reasoned that the Operating Agreement and Offering Memorandum gave Lafaye broad investment discretion and warned that he might engage in activities conflicting with the fund’s interests. The complaint did not show that investing in the 3D companies was anything more than a failed investment or that the investment itself constituted misconduct. Because the related claims depended on the fiduciary-duty theory, the court also overruled objections concerning gross negligence and mismanagement, aiding and abetting breaches of fiduciary duty, and the derivative claims.

Leave to Amend and Disposition

The court upheld the denial of leave to amend. Silverman had previously been given an opportunity to amend after the defendants identified defects in the original complaint, and the court agreed that another amendment was not warranted under those circumstances.

Judge Analisa Torres overruled Silverman’s objections, adopted Magistrate Judge Gorenstein’s Report and Recommendation in its entirety, and granted the defendants’ motions to dismiss. The court also noted that Silverman’s motion to strike certain documents was denied as moot. The opinion does not specify whether the dismissal was with or without prejudice.