Fleisig v. ED&F Man Capital Markets, Inc.

Background

Jonathan Fleisig and Condor Alpha Asset Management sued ED&F Man Capital Markets, Inc. and Paragon Global Markets, LLC. Fleisig is a commodities futures trader and Condor’s sole shareholder. Paragon connected Fleisig with ED&F, where Condor opened a futures trading account. Paragon received daily updates about the account and coordinated changes to its trading limits.

The plaintiffs alleged that Paragon was liable for some amount of any account deficit. In 2016, Paragon allegedly pressured Fleisig to obtain a third-party guarantee for up to $1 million of debt to ED&F. The plaintiffs alleged that Paragon also represented that the guarantee would prevent ED&F from limiting or terminating Fleisig’s trading authority. Fleisig obtained the guarantee, but ED&F later changed or terminated his trading authority after additional account losses.

The Third Amended Complaint asserted four claims against Paragon: fraudulent inducement, breach of contract, breach of the implied covenant of good faith and fair dealing, and negligent misrepresentation. The complaint also asserted six claims against ED&F. Paragon moved to dismiss the claims against it under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint states a legally sufficient claim, and Rule 9(b), which requires fraud to be pleaded with particular detail.

Fraudulent Inducement

The court applied New York law. It held that the plaintiffs did not adequately allege a misrepresentation because the complaint did not identify who at Paragon made the statement, when it was made, or precisely what was said. The complaint also described the alleged representation inconsistently, stating in one place that the guarantee would prevent ED&F from limiting or terminating trading authority and elsewhere that it would eliminate account-value issues.

The court also held that the plaintiffs did not adequately allege fraudulent intent. Their allegation that Paragon knew its statement was untrue was conclusory and was not supported by facts showing an intent to defraud. The court noted that Fleisig was able to trade for nearly three years after obtaining the guarantee and that later events preceded ED&F’s termination of his trading authority. The fraudulent-inducement claim was dismissed.

Breach of Contract

The plaintiffs alleged that Paragon breached contractual duties involving supervision and due care and breached duties incorporated from National Futures Association rules and the Commodities Exchange Act. The court held that the complaint did not identify the specific contract provisions Paragon allegedly breached or connect those provisions to Paragon’s conduct, including its request that Fleisig obtain a guarantee.

The court further held that the plaintiffs could not cure those pleading defects by referring to arguments in their briefs. Even assuming the cited National Futures Association principles were incorporated into the parties’ agreement, the general references did not give Paragon fair notice of the basis for the claim. The breach-of-contract claim was dismissed.

Implied Covenant of Good Faith and Fair Dealing

The plaintiffs alleged that Paragon breached the implied duty of good faith and fair dealing by advising Fleisig to obtain a guarantee that did not prevent ED&F from ending his trading authority. The court held that this claim required an identified contractual obligation that Paragon had frustrated or violated.

The plaintiffs did not identify a contractual provision supporting the claim. Their argument that Paragon had a separate duty to act in Fleisig’s best interests did not establish that Paragon deprived them of the benefits of their contract. The claim was dismissed.

Negligent Misrepresentation

The plaintiffs alleged that Paragon had a special relationship with them and a duty to provide accurate information as their introducing broker. They claimed Paragon negligently represented that ED&F would not limit or terminate Fleisig’s trading authority if he obtained a guarantee.

The court held that the representation was not pleaded with sufficient particularity under Rules 12(b)(6) and 9(b). It also held that the alleged statement was a prediction about how ED&F would act in the future. Under the legal standards applied by the court, a prediction about a third party’s future conduct could not support a negligent-misrepresentation claim. The court did not decide Paragon’s separate argument that no special relationship existed because the claim failed on other grounds.

Disposition

Judge Denise Cote granted Paragon’s December 31, 2019 motion. All claims against Paragon were dismissed. The opinion stated that the action continued against ED&F. It did not state whether the dismissal was with or without prejudice.