*A complaint alleging fraud must state who made the fraudulent representations and when they were made. **Omitting the “when” prevents defendant from raising a valid statute of limitations defense. ***Making a representation that the defendant erroneously thought was true, but which later information showed was false, is not false. ****A claim that a defendant fraudulently represented that it conducted robust due diligence meets the particularity standard.
Gavaldon vs. StanChart Securities International, Inc., No. 16cv590 (S.D. Cal., 2/20/19).
Plaintiffs sued Standard Chartered Bank International (Americas) Ltd. (SCBI) and StanChart Securities International, Inc., both subsidiaries of Standard Chartered Bank, for fraud, negligence, and breach of fiduciary duty because of securities losses. The losses occurred when SCBI maintained plaintiffs’ accounts. Plaintiffs’ account was subsequently transferred to StanChart. Defendants moved to dismiss the complaint because of the statute of limitations and for failure to plead fraud with particularity. The Court did not reach the issue of the statute of limitations, because it dismissed the complaint for failure to plead fraud with particularity. Plaintiffs’ first amended complaint met the same fate and plaintiffs now move for leave to file a second amended complaint (SAC).
The Court permits the negligence and breach of fiduciary claims to proceed, but not the majority of the fraud claims, and it explains why in detail. In cases of averments of fraud, the details must be specific enough to give defendants notice of the particular conduct, so that they can defend against the charge. For example, many of plaintiffs’ allegations say that one of the defendants (or, occasionally, someone working for defendants) gave bad investment advice, with no allegation of when it happened or how the misleading statement was made. With enough details, the defendant might be able to question its employees or search its records and find documents or information, which would allow it to defend against such an allegation.
In the case of investment advice, some of the possible defenses are that the advice was never given, that the advice was given by someone not acting for defendant, that the advice was materially different than alleged, or that the advice was given at a time or in a context that made it non-fraudulent or non-actionable. Without adequate factual allegations to give support to the claims, defendants have no meaningful opportunity to raise a defense. Further, because the statute of limitations is a particular concern here and because the course of events spanned many years, it is especially important to allege when particular events happened. Omitting the “when” of various events would unfairly prevent defendants from raising what might well be a valid statute of limitations defense.
Another reason allegations of timing are so important concerns scienter. The complaint concerns statements made at various times, and the information defendants had changed over time. The SAC includes many allegations about internal communications or reports, in an effort to show what defendants knew. But the timing is critical here, because fraud must be based on representations known to be false at the time. Making a representation that the defendant erroneously thought was true, but which later information showed was false, is not false. Yet another reason concerns reliance. Some statements were made after plaintiffs had already taken action, making it impossible for these representations to have influenced their earlier decisions.
The only fraud claim the Court will permit to proceed involves Fairfield Sentry, a feeder fund in the Madoff scandal. Plaintiffs alleged that a salesperson for SCBI told them that the recommendation was the product of SCBI’s “robust due diligence.” A representation that SCBI had conducted robust due diligence and that, as a result, it was confident that the fund was safe and secure, could support a finding of fraud. Hence, the motion to file the SAC is granted only as to this claim, plus the negligence and breach of fiduciary duty claims, because the latter two claims are not subject to Rule 9’s pleading requirements. In addition, the case is allowed to proceed only against SCBI, because plaintiffs provided no evidence that SCBI and StanChart were acting as agents for each other.
(SOLA Ref. No. 2019-11-06)
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