Kohlberg v. Birdsey

Background

Plaintiffs Marjorie Kohlberg, David Eijadi, Thomas McDougall, Peter Ottavio, Melissa Lassor, Mary Lou Jurkowski, Jason Steinbock, and Betsy Sears sued Tom Birdsey, David Watkins, Ira Starr, Norman Scherr, Eric Von Stroh, Greatbanc Trust Company, Long Point Capital, Inc., other Long Point Capital affiliates, EYP Holdings, Inc., and EYP Group Holdings. Plaintiffs alleged securities fraud and common-law torts arising from negotiations and transactions involving EYP’s 2016 employee stock ownership plan, or ESOP.

According to the opinion, the transactions involved the purchase of stock from existing holders, loans used to fund the ESOP, payments to Long Point Capital and Birdsey, notes issued to EYP employees, and notes issued in connection with EYP’s acquisition of Stanley Beaman & Sears. Plaintiffs alleged that defendants used inflated revenue, profit, and valuation information, including information about a proposed SUNY Polytechnic Institute project, and failed to disclose facts affecting EYP’s value. They also alleged that EYP’s post-ESOP performance caused the firm and the notes to lose value.

Securities-Fraud Claims

The court treated the securities-fraud claim as arising under Section 10(b) of the Securities Exchange Act and Rule 10b-5 because the Third Amended Complaint did not identify the statute expressly, although the court noted that Count One appeared to list the requirements of that claim.

A Rule 12(b)(6) motion asks whether the complaint alleges enough facts to state a legally plausible claim. Securities-fraud claims also must satisfy heightened pleading requirements under Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act. Those requirements generally demand specific identification of the allegedly misleading statements or omissions, the speakers, when and where they occurred, why they were misleading, and facts supporting a strong inference that defendants acted with the required intent.

The court held that plaintiffs did not meet those requirements. It found that the complaint relied on general grievances, legal conclusions, broad references to statements and omissions, and allegations attributed collectively to groups of defendants. The court also found that the complaint did not identify group-published documents that could support group pleading. Allegations attributed specifically to Birdsey, including allegations concerning the SUNY project, the ESOP valuation, a payment for his tax liability, and communications with Kohlberg, were also insufficiently specific to support an inference of securities fraud.

State-Law Claims and Disposition

After dismissing the federal securities-fraud claims, the court considered whether to exercise supplemental jurisdiction, meaning authority to hear related state-law claims in the same case. Because no other basis for federal jurisdiction remained, the court declined to exercise supplemental jurisdiction over the state-law claims and dismissed those claims without prejudice.

The court’s conclusion states that the defendants’ motions to dismiss are granted. It directed the Clerk to terminate the identified docket entry and close the case. The opinion expressly describes the state-law claims as dismissed without prejudice but does not specify a prejudice designation for the securities-fraud dismissal.