WTW Investment Co., Ltd. v. Jefferies, LLC
Posted on Categories Court Decisions, Securities Customers

By Jack D. Ballard

Motion to dismiss for failure to state a claim granted where third amended complaint failed to allege facts showing that securities broker owed a duty of care to investors who allegedly relied on statements in a private placement memoranda prepared by the broker.

WTW Investment Co., Ltd. vs. Jefferies, LLC, No. 3:17-CV-00332-X (N.D. Tex., 1/24/20).

Plaintiffs were investors in Palmaz Scientific, Inc. (“PSI”) who alleged they relied on misrepresentations in PSI’s private placement memoranda and, as a result, invested and lost $3 million in the company. Jefferies was Palmaz’s placement agent and prepared the private placement memoranda as PSI prepared to sell its stock. Plaintiffs claimed the document contained misrepresentations and asserted claims for negligence, negligent supervision and gross negligence based on those statements. Jefferies moved to dismiss the plaintiffs’ third amended complaint for failure to state a claim on which relief could be granted, pursuant to Rule 12(b)(6).

Under New York law, plaintiffs alleging negligence must allege facts showing that the defendant owed them a duty of care. The plaintiffs asserted two theories to support the imposition of a duty of care, but both were rejected by the court. The investors first contended that Jefferies owed them a duty of care because it was PSI’s agent for purposes of the offering, and that, as an agent, it committed affirmative acts of negligence. However, the doctrine of affirmative negligence does not create any duties that do not exist otherwise. Plaintiff alleged no facts to support the imposition of a duty.

The investors also claimed Jefferies assumed control over PSI’s offering as if it were the principal of the transaction. However, Jefferies never engaged in any business relationship with the plaintiffs. Under New York law, brokers do not owe a general duty of care or disclosure to the public, but only to those they do business with. Because the plaintiffs were not customers of Jefferies or of an associated person of Jefferies’, there was no factual basis to impose a duty of care on it. A duty of care is a necessary element of any negligence claim and the investors thus failed to state a claim for which relief may be granted. The motion to dismiss plaintiffs’ claims with prejudice was granted.

(J. Ballard)

(SOLA Ref. No. 2020-05-07)

NOTICE: The court decision synopsis published above represents an abbreviated description of the actual decision and is re-printed here for its educational value. The author's effort is to report concisely the substance of the decision or a selected portion of the decision; commentary or analysis is generally reserved for the italicized section at the bottom of the summary. Subscribers to SAC's Online Litigation Alert (SOLA), from which this synopsis is excerpted, have immediate access to the full decision, in addition to the synopsis. 

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