Blank v. Tripoint Global Equities, LLC

Citation: 338 F. Supp. 3d 194Docket: 17-cv-00876 (ALC)

Court: District Court, S.D. Illinois; August 31, 2018; Federal District Court

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Plaintiffs Adam Blank, Acker Family 2012 Gift Trust, and Acker Family 2013 Gift Trust (collectively "Plaintiffs") have initiated legal action against Defendants TriPoint Global Equities, LLC, TriPoint Global, TriPoint Capital Advisors, LLC, TriPoint Capital (collectively "TriPoint Entities"), Mark H. Elenowitz, and Michael Boswell (collectively "Defendants"). The suit alleges violations of Section 10(b) of the Securities Exchange Act of 1934, Sections 9(a)(4) and 9(f) of the Exchange Act, as well as claims for negligent and fraudulent misrepresentation, unjust enrichment, constructive trust, promissory estoppel, breach of fiduciary duty, and violations of New York General Business Law. Defendants have moved to dismiss the Complaint under Fed. R. Civ. P. 12(b)(6), with the court granting this motion in part and denying it in part.

The factual background, drawn from Plaintiffs' First Amended Complaint and related declarations, presumes the truth of the allegations for this motion. Blank is a trustee of the Adam 2012 GRAT and the Acker Family 2012 and 2013 Gift Trusts. TriPoint Global is a registered broker-dealer with the SEC, whereas TriPoint Capital is not registered and operates illegally in New York. Both entities share the same office and contact information, suggesting a close operational relationship. Elenowitz and Boswell are key executives within the TriPoint Entities, with roles that include CEO and COO, respectively.

Plaintiffs allege that the Defendants were involved in a Ponzi scheme, raising around $81 million from approximately 125 investors under the guise of ticket resale investments, while failing to conduct due diligence and not disclosing commission earnings from those investments. During a meeting on January 11, 2016, Blank communicated his aversion to high-risk investments and the importance of due diligence to Elenowitz, who allegedly made several misleading statements about the safety and security of the proposed ticket resale investments.

Elenowitz assured Blank that the investment was secure due to the "intrinsic value" of the tickets, which he claimed could always be sold at face value, and noted that the investment scheme operators had solid insurance for event cancellations, ensuring full coverage for investors. However, Elenowitz failed to disclose that TriPoint Global was a licensed broker-dealer acting as a promoter for the Ponzi scheme operators and earning commissions for recommending ticket resale investments. Instead, he suggested that the Defendants would waive commissions to foster a long-term investment relationship. He claimed that TriPoint conducted thorough due diligence on the ticket resale business, personally reviewing financial statements and corporate governance practices, and asserted familiarity with the business owners. Elenowitz also mentioned that TriPoint clients had consistently received promised returns. Throughout 2016, he reiterated that TriPoint would ensure all investments were vetted and investigated, claiming a collaborative approach among experienced professionals for ongoing oversight and evaluation of investments. Despite these assurances, Plaintiffs contend that the due diligence was either not conducted or insufficient, leading to no reasonable basis for the investment recommendations. Blank invested $300,000 in March 2016, influenced by Elenowitz's claims regarding exclusive access to highly sought-after ticket funds, which he was encouraged to invest in alongside a "Main Fund."

From March to December 2016, Blank communicated regularly with Elenowitz, who assured him that the ticket business was performing well and that there were no concerns regarding Plaintiffs' investments. Based on these assurances, Plaintiffs invested an additional $1,200,000 around August 10, 2016, claiming they relied on Defendants' misrepresentations and omissions. Plaintiffs allege these misrepresentations, combined with Defendants' failure to properly investigate the "Ponzi Operators," led to the misappropriation of millions, including a $1,500,000 investment.

Plaintiffs initiated legal action on February 6, 2017, and filed an amended complaint on March 21, 2017. Defendants moved to dismiss the complaint on October 6, 2017, and Plaintiffs opposed this motion on November 6, 2017. The Court has considered the motion fully submitted.

To survive a motion to dismiss under Rule 12(b)(6), a complaint must present sufficient facts for a plausible claim of relief. A claim achieves facial plausibility when it allows the court to reasonably infer the defendant's liability. The Court's role is not to weigh evidence but to determine if the complaint is legally sufficient, assuming all well-pleaded facts as true and drawing reasonable inferences in favor of the Plaintiffs.

For securities fraud, heightened pleading standards apply under Fed. R. Civ. P. 9(b) and the PSLRA. Plaintiffs must specify the fraudulent statements, identify the speaker, detail when and where the statements were made, and explain their fraudulent nature. Conclusory allegations are insufficient. Under the PSLRA, plaintiffs must also state why the statements were misleading and provide facts suggesting the defendant acted with the required intent. However, detailed evidentiary matters are not necessary to state a claim.

For a Section 10(b) claim, a plaintiff must demonstrate: (1) a material misrepresentation or omission by the defendant, (2) scienter, (3) connection to the purchase or sale of securities, (4) reliance on the misrepresentation or omission, (5) economic loss, and (6) loss causation.

Material misrepresentations or omissions under Rule 10b-5 prohibit making untrue statements of material facts or omitting necessary information that would render existing statements misleading to a reasonable investor. The standard for materiality is a mixed question of law and fact, meaning that a complaint cannot be dismissed for lack of materiality unless the alleged misstatements are obviously unimportant. In cases involving multiple defendants, each must be specifically linked to the alleged misstatements; merely preparing or publishing a statement on behalf of another does not constitute "making" it. Each defendant must be clearly informed of their individual involvement in the alleged fraud.

In this case, Plaintiffs assert that Defendants made misleading statements during a January 11, 2016 meeting and subsequent discussions throughout 2016 regarding the investigation into the ticket business, its financial condition, their status as "Trusted Advisors," TriPoint Global's role as a broker-dealer, and commissions received for soliciting ticket sale investments. Plaintiffs argue these statements were false because Defendants did not conduct the promised investigations, which would have revealed significant "red flags." Defendants counter that Plaintiffs have not specifically identified any material misstatements and that their claims are vague regarding which defendant made which statements. 

Regarding the January 11, 2016 meeting, Plaintiffs allege that only Elenowitz made specific false statements. They attempt to hold Boswell, TriPoint Global, and TriPoint Capital accountable through the group pleading doctrine, which typically attributes statements in group-published documents to corporate insiders. However, it is uncertain whether this doctrine applies following the Janus decision, and it is not applicable to oral statements, only to collectively-authored written communications.

Elenowitz is not liable for oral statements made to Blank at a meeting on January 11, 2016, but TriPoint Global and TriPoint Capital can be held liable for his misrepresentations as he acted within his authority as CEO of both companies. Plaintiffs have sufficiently identified the statements made, including claims about due diligence on a ticket resale business, which were materially misleading. Specifically, Elenowitz allegedly misrepresented the extent of investigations, either by falsely claiming due diligence or by misrepresenting the security of the investment, which would mislead a reasonable investor. Conversely, statements describing the investment as a "no-brainer" or "can't lose" are considered non-actionable puffery, as they are too vague to mislead a reasonable investor. Similarly, assertions of TriPoint's status as a "Trusted Advisor" are also deemed puffery and not actionable due to their generality. Plaintiffs must demonstrate that statements were false or misleading at the time they were made, which they failed to do regarding the "Trusted Advisor" claims since they did not allege that Elenowitz or TriPoint were not trusted advisors. However, Elenowitz's failure to disclose that TriPoint Global was a licensed broker-dealer receiving commissions for soliciting investors, coupled with his false statements about not receiving commissions, is actionable due to its materiality concerning pecuniary motivations. The plaintiffs also allege that similar misrepresentations were made by Elenowitz during subsequent conversations from January to December 2016, for which liability extends to TriPoint Global and TriPoint Capital, while Boswell remains non-liable.

Plaintiffs' claims regarding statements made during a January 11th meeting lack specificity, failing to meet the requirements of Rule 9(b) and the PSLRA, rendering those statements non-actionable. They also seek to hold Defendants liable for statements on the TriPoint Capital, TriPoint Global, and BANQ websites. TriPoint Capital and TriPoint Global can be held accountable for their own website statements. However, Boswell and Elenowitz cannot be held liable under the group pleading doctrine, as there are no specific allegations indicating their involvement in the creation or maintenance of the website content. The assertion that Individual Defendants are liable based on any connection to TriPoint Entities is overly broad. The statements on the websites, such as claims of providing "Trusted Advice" and having specialized practices, are deemed mere puffery, and Plaintiffs have not demonstrated their falsity.

Regarding scienter, the required intent in 10b-5 claims necessitates that Plaintiffs provide specific facts evidencing the defendants' intent to deceive or manipulate. This can include showing that defendants benefitted personally from the alleged fraud or acted recklessly. The court emphasizes that general motives common to corporate officers are insufficient. A strong inference of scienter must arise from a collective evaluation of the alleged facts. Here, the Plaintiffs adequately allege that Elenowitz had a motive tied to commissions earned from investments, as well as the opportunity to commit fraud due to his corporate role.

Elenowitz's failure to disclose commissions and misleading statements about TriPoint's practices demonstrate his scienter, suggesting both motive and opportunity for wrongdoing. Even if these factors were insufficient alone, allegations indicate conscious misbehavior or recklessness, as Elenowitz did not perform due diligence on the fraudulent ticket resale business but falsely claimed to have done so. His repeated assurances to Plaintiffs about having their best interests in mind and ensuring thorough vetting of investments represent a significant deviation from expected care standards.

Conversely, no specific allegations of scienter are made against Boswell, as Plaintiffs do not provide claims beyond his corporate roles, which courts typically disregard. 

For corporate defendants TriPoint Global and TriPoint Capital, Elenowitz's scienter can be imputed to the corporations due to his official capacity as CEO. 

Regarding reliance in securities fraud claims, Plaintiffs must demonstrate that they would not have made the investment but for the misleading statements and that their reliance was reasonable. Factors affecting this reasonableness include the plaintiffs' sophistication, prior relationships with the defendants, access to information, and whether the fraud was concealed. Plaintiffs argue they relied on the Defendants’ assurances of acting in their best interests and conducting thorough investigations, asserting that this reliance was reasonable due to a relationship of trust and the Defendants’ claimed expertise.

Reliance is presumed due to the Defendants' failure to disclose material facts, specifically their inadequate due diligence and receipt of commissions for promoting investments. The Defendants counter that the Plaintiffs cannot claim reliance without a material misstatement, argue that Plaintiffs, as sophisticated investors, acted unreasonably, and assert that only conversations with one individual (Blank) limit the claims of other Plaintiffs. In response, the Court finds that the Plaintiffs have sufficiently alleged actionable material misstatements. The lack of disclosure from Elenowitz leads to a presumption of reasonable reliance, despite the sophisticated nature of the Plaintiffs. The Court also recognizes that indirect reliance can be established when information is conveyed through an intermediary (Blank) who represented himself as the trustee of the Gift Trust. The Defendants' acceptance of funds from all Plaintiffs bolsters claims of reasonable reliance. Furthermore, a general disclaimer in an Executive Summary does not negate specific statements made by Elenowitz. Thus, the motions to dismiss the 10-b count against Elenowitz, TriPoint Capital, and TriPoint Global are denied, except for non-actionable puffery. Conversely, Boswell's motion to dismiss is granted due to insufficient specific allegations against him.

Under Section 9(a)(4) of the Exchange Act, a claim requires a material misstatement or omission made with scienter that induced a sale or purchase, relied upon by the plaintiff, affecting the transaction's price. Defendants argue that the Plaintiffs did not adequately plead material misstatements or scienter and failed to show how these affected investment prices, as they were fixed in a private placement. The Plaintiffs counter that the misrepresentations influenced the purchase price. While the Court agrees that Plaintiffs have met their burden regarding the first and fifth factors, they have not adequately alleged a direct impact on the purchase or selling price, leading to the granting of Defendants' motions to dismiss this count.

To establish a claim for negligent misrepresentation under New York law, a plaintiff must prove five elements: (1) the defendant owed a duty to provide accurate information due to a special relationship; (2) the defendant made a false representation that should have been known to be incorrect; (3) the defendant knew the plaintiff desired the information for a significant purpose; (4) the plaintiff intended to rely on the representation; and (5) the plaintiff reasonably relied on it, resulting in detriment. The duty element restricts claims to situations with actual privity of contract or a relationship approaching privity. To demonstrate near privity, the plaintiff must show (1) the defendant's awareness that representations were for a specific purpose; (2) reliance by known parties for that purpose; and (3) conduct linking the defendants to the parties and showing the defendants' understanding of their reliance.

In this case, plaintiffs allege that defendants Elenowitz, TriPoint Capital, and TriPoint Global made false representations that plaintiffs relied on to their detriment concerning significant investments. The critical issue is whether a special relationship existed between the parties. Defendants argue that no agreement or customer relationship was established, and TriPoint Global's role as a placement agent did not create such a relationship. In contrast, plaintiffs claim a special relationship existed due to the defendants presenting themselves as trusted financial advisors and making continuous representations over several months regarding their advice.

The court finds that plaintiffs sufficiently alleged a special relationship with Elenowitz, who indicated that he and the TriPoint Entities provided reliable advice in the plaintiffs' best interest and even stated they would forgo commissions to build a long-term relationship. Elenowitz's representations were clearly linked to the purpose of investment in the ticket resale business. As a result, the motions to dismiss the negligent misrepresentation claims against Elenowitz, TriPoint Capital, and TriPoint Global are denied. However, Boswell's motion to dismiss this claim is granted because plaintiffs did not allege any false representations made by him.

For a fraudulent misrepresentation claim under New York law, the plaintiff must allege a material fact representation, its falsity, the defendant's knowledge of its falsity at the time of making it, justifiable reliance by the plaintiff, and resulting injury.

The elements required to establish a fraudulent misrepresentation claim align closely with those under section 10(b). A defendant can be liable for making a false statement recklessly, even without knowledge of its falsity, as long as they acted with a pretense of knowledge. Plaintiffs have sufficiently alleged that Elenowitz, TriPoint Global, and TriPoint Capital knowingly made material misrepresentations that Plaintiffs justifiably relied upon, warranting the denial of these Defendants' motions to dismiss the claim. Conversely, Boswell's motion to dismiss this count is granted.

Under New York law, the elements of an unjust enrichment claim include: 1) the defendant's enrichment, 2) the enrichment occurring at the plaintiff’s expense, and 3) the circumstances indicating that the defendant should equitably return the property or money. New York does not require direct dealing or a substantive relationship between the parties, just that their relationship is not overly attenuated. The core question is whether it would be inequitable for the defendant to retain what the plaintiff seeks to recover. 

Defendants argue that Plaintiffs do not establish an unjust enrichment claim since they fail to show that Defendants received improper compensation or were enriched at Plaintiffs' expense, contending that commissions from Ponzi scheme operators do not suffice. Plaintiffs counter that Defendants were unjustly enriched due to their material misrepresentations about the investment scheme, which led to commissions received from Plaintiffs' investments. Plaintiffs claim they plausibly conferred benefits on Defendants indirectly, asserting that it would be inequitable to allow Defendants to retain commissions from funds obtained through alleged fraud. At this stage, these allegations are deemed sufficient.

Plaintiffs have not claimed that Boswell made any material misstatements, but they have alleged that he, as a senior executive of TriPoint Global and TriPoint Capital, likely benefited from the inducement of Plaintiffs by these organizations. Consequently, all Defendants’ motions to dismiss the unjust enrichment claim are denied at this early pleading stage. To establish a constructive trust, the movant must demonstrate: 1) a confidential or fiduciary relationship, 2) a promise (express or implied), 3) a transfer made in reliance on that promise, and 4) unjust enrichment. Courts indicate that while these elements serve as guidelines, not all must be met for a constructive trust to be imposed. A constructive trust is an equitable remedy that requires showing the inadequacy of a legal remedy. Plaintiffs did not address Defendants' arguments against establishing a constructive trust, suggesting they may have abandoned this claim. As a constructive trust is a remedy and not a separate cause of action, this claim is dismissed without prejudice. 

For promissory estoppel under New York law, a plaintiff must show: 1) a clear and unambiguous promise, 2) reasonable and foreseeable reliance on that promise, and 3) injury from such reliance. Plaintiffs assert that Defendants promised to act as trusted advisors and identify low-risk investments, leading to injuries from reliance on these promises. Defendants argue that no promise existed since Plaintiffs were not their clients. However, at this pleading stage, the Court finds these representations potentially constitute clear promises, which are factual questions inappropriate for resolution on a motion to dismiss. Thus, motions to dismiss the promissory estoppel claim by Elenowitz, TriPoint Global, and TriPoint Capital are denied, while Boswell’s motion is granted due to lack of alleged promises from him.

Investment advisors owe a fiduciary duty to their clients. The elements for a breach of fiduciary duty claim in New York include a breach of duty by a fiduciary, the defendant's knowing participation in that breach, and damages. New York courts utilize a flexible approach to determine the existence of a fiduciary duty.

A fiduciary relationship is characterized by trust and confidence, existing when one party relies on another's integrity and fidelity. Such relationships arise from both formal and informal contexts where influence is acquired and abused. The determination of whether a fiduciary relationship exists is a factual issue. When a breach of fiduciary duty claim also constitutes fraud, it must meet the heightened pleading requirements of Rule 9(b). In this case, Plaintiffs assert that Defendants, acting as financial advisors, owed them a fiduciary duty due to their assurances of due diligence and serving the Plaintiffs' best interests. The Court supports Plaintiffs' claims regarding Elenowitz, TriPoint Global, and TriPoint Capital, indicating their failure to perform due diligence constitutes a breach of fiduciary duty. However, the claims against Boswell are dismissed due to insufficient allegations of a fiduciary relationship.

Under New York General Business Law § 349, a plaintiff must demonstrate that the defendant's actions were consumer-oriented, materially deceptive, and resulted in injury. The conduct must broadly impact consumers, and private disputes unrelated to public interest are not actionable under this law. Claims related to securities transactions generally do not qualify as consumer transactions. Plaintiffs argue that Defendants' marketing misled the public, but Defendants contend that no public harm from the private placement transaction has been alleged, which supports Defendants' position.

Plaintiffs failed to demonstrate that Defendants' conduct was "sufficiently 'consumer oriented'" to fall under the applicable statute, leading to the granting of all Defendants' motions to dismiss related claims. The Court partially granted and partially denied the motions to dismiss. The Clerk of Court is instructed to terminate motions numbered 42, 44, 46, and 48. Plaintiffs have voluntarily withdrawn their claims for negligence and mutual mistake. Following the completion of briefing on the motion to dismiss, Plaintiffs submitted a letter referencing related case opinions, which the Court considered for relevant issues. The Court also reviewed Plaintiffs' allegations regarding misstatements on the TriPoint Entities' webpage. Defendants did not challenge loss causation, and the Court concluded that all elements of the 10-b claim were adequately pled.