Tecku v. YieldStreet Inc.

Background

Michael Tecku, David Finkelstein, and Lawrence Tjok brought a proposed class action against YieldStreet, Inc., YieldStreet Management, LLC, YS ALTNOTES I, LLC, YS ALTNOTES II, LLC, and Michael Weisz. The complaint asserted fraudulent inducement, aiding and abetting fraud, federal securities-law claims, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, and negligent misrepresentation.

The claims arose from purchases of borrower payment dependent notes, or BPDNs. The notes were debt obligations tied to the performance of loans made through YieldStreet investment funds. Plaintiffs alleged that YieldStreet’s private placement memoranda and series note supplements misleadingly described its use of asset-class experts, lending safeguards, credit-committee procedures, and history of principal losses. The court had previously denied the defendants’ motion to dismiss, and the parties had conducted discovery.

Tjok moved under Federal Rule of Civil Procedure 23 to certify a class and appoint him as class representative. Magistrate Judge Stewart D. Aaron recommended granting the motion in part and denying it in part. He recommended certification for Counts I, II, III, IV, and VII as to purchasers connected with Vessel Deconstruction Fund I, Vessel Deconstruction Fund III, and Louisiana Oil & Gas Fund. He recommended no certification for Vessel Deconstruction Fund IV and Vessel Deconstruction Fund VI because of standing concerns, and no certification for the fiduciary-duty claims because individual issues would predominate.

Objections and Rule 23 Analysis

The defendants objected to certifying any class. Judge Marrero reviewed some objections for clear error and others anew. The court agreed with the recommendation that the negligent-misrepresentation claims could be handled on a classwide basis. Under the law discussed in the opinion, the written offering documents could establish a duty to speak with care for all proposed class members through common proof.

The court also held that reliance for the common-law claims could be shown with generalized evidence. The alleged misrepresentations and omissions appeared in a small group of written documents that were distributed to investors. The subscription agreements stated that investors had read and relied on those documents and disclaimed reliance on oral statements. The court concluded that investors’ receipt of the documents and purchase of the related BPDNs could provide common evidence of reliance, and that individual reasons for investing did not defeat predominance because the alleged statements only needed to be one substantial factor in the purchases.

For the federal securities claims, the court rejected use of the Affiliated Ute presumption, which can presume reliance in cases primarily involving omissions. The court found that this case primarily concerned affirmative misrepresentations, not omissions, because the alleged omissions were essentially the reverse of statements about YieldStreet’s investment processes. The court held, however, that the claims still qualified for class treatment because reliance could be shown through common evidence and common issues predominated over individual ones.

Disposition

The court overruled the defendants’ objections and accepted and adopted the Report and Recommendation except as stated in the opinion. It denied the defendants’ motion to strike a declaration submitted with Tjok’s reply. It granted in part and denied in part Tjok’s motion for class certification and appointment as class representative.

The court certified a class under Rule 23 for Counts I, II, III, IV, and VII. The class consists of persons who purchased a BPDN issued by YS ALTNOTES I in connection with Vessel Deconstruction I, Vessel Deconstruction Fund III, or Louisiana Oil & Gas Fund. The class excludes the defendants, entities in which they have a controlling interest, their agents and employees, and the assigned judge’s staff and immediate family. The order did not certify the fiduciary-duty claims or claims involving Vessel Deconstruction Fund IV and Vessel Deconstruction Fund VI.