Memorandum of Law in Opposition to Defendants Motions to Dismiss the Third Amended Complaint

i

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK -----------------------------------------------------------------X

SHAFFER SMITH, 2424, LLC,

SUPER SAYIN’ PUBLISHING, LLC, No. 14 CV 5918 (SHS)

COMPOUND TOURING, INC., and

COMPOUND VENTURES, LLC,

Plaintiffs,

v.

KEVIN FOSTER, VERNON BROWN,

FOSTER & FIRM, INC., and

V. BROWN & COMPANY, INC.

Defendants. -----------------------------------------------------------------X

MEMORANDUM OF LAW IN OPPOSITION TO

DEFENDANTS VERNON BROWN, V. BROWN & COMPANY, INC.,

KEVIN FOSTER AND FOSTER & FIRM, INC.’S

RESPECTIVE MOTIONS TO DISMISS THE THIRD AMENDED COMPLAINT

Richard A. Roth

Jordan M. Kam

THE ROTH LAW FIRM, PLLC

295 Madison Avenue, 22nd Floor

New York, New York 10017

Phone: (212) 542-8882

Fax: (212) 542-8883

Attorneys for Plaintiffs

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TABLE OF CONTENTS

TABLE OF AUTHORITIES..........................................................................................................iv

PRELIMINARY STATEMENT ....................................................................................................1

FACTS ALLEGED IN THE THIRD AMENDED COMPLAINT………………..……………...2

ARGUMENT……………………………………………………………………………………...6

I. LEGAL STANDARD……………………………………………………………………..6

II. THE TAC STATES A CLAIM FOR SECURITIES

AND COMMON LAW FRAUD……………………………………………………….....6

A. Plaintiff Has Pled Securities Fraud With Requisite Particularity………………………....7

1. July 2011 Misrepresentations and Omissions……………………………………..8

2. October 2012 Misrepresentations and Omissions………………………………..10

B. The TAC Alleges the Purchase of a “Security” …………………………………………11

C. The TAC Adequately Pleads Scienter …………………………………………………..12

D. The TAC Adequately Pleads “Loss Causation” …………………………………..…….14

E. The Unauthorized $1,500,000 Transfer of Funds to Imperial

Is Subject To Actionable Securities Fraud….……………………………………………15

F. Brown Can Be Held Liable As An Aider And Abettor Of Fosters Fraud……………….15

III. THE TAC ADEQUATELY PLEADS COMMON LAW

CLAIMS AGAINST THE BROWN

DEFENDANTS………………………………………………………………………….17

A. Plaintiffs Have Sufficiently Pled A Cause Of Action For Breach Of

Fiduciary Duty Against The Brown Defendants………………………………………...17

1. The Brown Defendants Have Been Put on Sufficient Notice

of Plaintiffs’ Claims……………………………………………………………..17

2. Plaintiffs Have Pled Sufficient Factual Allegations For Each Element

Of A Breach Of Fiduciary Duty Claim Against the Brown Defendants………...18

B. Plaintiffs Have Sufficiently Pled A Cause Of Action For Negligence

Against The Brown Defendants………………………………………………….………20

iii

1. The Brown Defendants Owed Plaintiffs a Duty Of Care And The

Brown Defendants Breached That Duty………………………………..………..21

2. The Brown Defendants Are Liable For Foster’s Negligence Under

The Doctrine Of Respondeat Superior..................................................................22

C. Plaintiffs Have Sufficiently Pled A Cause Of Action For Breach Of

Contract Against The Brown Defendants………………………………………………..22

D. Plaintiffs Have Sufficiently Pled A Cause Of

Action For Conversion By The Brown Defendants……………………………………..23

E. Plaintiffs Have Sufficiently Pled A Cause Of Action For

Unjust Enrichment Against The Brown Defendants…………………………………….25

CONCLUSION………………………………………………………………………………….26

iv

TABLE OF AUTHORITIES

Abercrombie v. Andrew Coll., 438 F. Supp. 2d 243 (S.D.N.Y. 2006)…………………………...19

Acito v. IMCERA Group, Inc., 47 F.3d 47 (2d Cir.1995)…………………………………………8

Altaro v. Wal-Mart Stores, Inc., 210 F.3d 111 (2d Cir. 2000)…………………………………...22

Arista Records, LLC v. Doe 3, 604 F.3d 110 (2d Cir. 2010)……………………………………..8

Ashcroft v. Iqbal, 556 U.S. 662 (2009)………………………………………………………..8, 19

Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007)……………………………………….19, 24

Boykin v. KeyCorp, 521 F.3d 202 (2d Cir. 2008)…………………………………………………8

Cash Flow Fin., LLC v. Meyer, No. 09 CV 5002, 2012 WL 3637490 (E.D.N.Y. 2012)………..27

Chambers v. Time Warner, Inc., 282 F.3d 147 (2d Cir. 2002)………………………………..7, 18

Childers v. New York & Presbyterian Hosp., 36 F. Supp. 3d 292 (S.D.N.Y. 2014)…………….19

Citadel Mgmt., Inc. v. Telesis Trust, Inc., 123 F.Supp.2d 133 (S.D.N.Y. 2000)………………...26

City of Newburgh v. Sarna, 690 F. Supp. 2d 136 (S.D.N.Y. 2010)……………………………...17

County of Suffolk v. Long Island Power Authority, 100 A.D.3d 944, 948 (2d Dept. 2012)………8

Dumont v. Litton Loan Servicing, LP,

No. 12-CV-2677-ER-LMS, 2014 WL 815244 (S.D.N.Y. March 3, 2014)……………………...24

Eternity Global Master Fund Ltd. v. Morgan Guar. Trust Co. of New York,

375 F.3d 168 (2d. Cir. 2004)……………………………………………………………………..7

Feinberg v. Katz, No. 99 Civ. 45 (CSH), 2002 WL 1751135 (S.D.N.Y. July 26, 2002)………26

Field v. Trump, 850 F.2d 938 (2d Cir.1988)……………………………………………………..7

G.D. Searle & Co. v. Medicore Commc’ns, Inc., 843 F.Supp. 895 (S.D.N.Y. 1994)…………...25

Geisler v. Petrocelli, 616 F.2d 636 (2d. Cir. 1980)………………………………………………7

Glidepath Holding B.V. v. Spherion Corp., 590 F.Supp.2d 435 (S.D.N.Y.2007)……………….15

Goldin Associates, L.L.C. v. Donaldson, Lufkin & Jenrette Sec. Corp.,

No. 00 CIV. 8688 (WHP), 2003 U.S. Dist. LEXIS 16798 (S.D.N.Y. Sept. 25, 2003)………….13

v

Golden Pac. Bancorp v. F.D.I.C., 273 F.3d 509 (2d Cir. 2001)……………………………..27-28

Great Lakes Chemical Corporation v. Monsanto Company,

96 F. Supp. 2d 376 (D. Del. 2000)……………………………………………………………….11

Gregory v. Daly, 243 F.3d 687 (2d. Cir. 2001)…………………………………………………..7

Griffin Bros., Inc. v. Yatto, 415 N.Y.S.2d 114 (N.Y. App. Div. 1976)……………………….....24

Harsco Corp. v. Segui, 91 f.3d 337 (2d Cir. 1996)………………………………………………24

In re Bernard L. Madoff Inv. Sec. LLC, 458 B.R. 87 (Bankr. S.D.N.Y. 2011)………………….26

In re Carter–Wallace, Inc. Sec. Litig., 150 F.3d 153 (2d Cir.1998)……………………………...8

In re J.P. Jeanneret Assocs., 769 F. Supp. 2d 340 (S.D.N.Y. 2011)…………………………….11

In re JMK Constr. Grp., Ltd., 502 B.R. 396 (Bankr. S.D.N.Y. 2013)…………………………..26

In re Prudential Sec. Inc. Ltd. Partnerships Litig.,

930 F.Supp. 68 (S.D.N.Y. 1996)………………………………………………………………...12

In re Scholastic Corp. Sec. Litig., 252 F.3d 63 (2d. Cir. 2001)………………………………….13

Int'l Motor Sports Group. Inc. v. Gordon, No. 98 Civ. 5611 (MBM),

1999 U.S. Dist. LEXIS 12610, 1999 WL 619633 (S.D.N.Y. Aug. 19, 1999)…………………...13

Janby v. Canadian Solar, Inc., No. 10 Civ0 4430

(RWS), 2012 WL 1080306 (S.D.N.Y. Mar. 30, 2012)……………………………………………8

Johnson v. Nextel Commc'ns, Inc., 660 F.3d 131 (2d Cir. 2011)………………………………...19

Lerner v. Fleet Bank, N.A., 459 F.3d 273 (2d Cir. 2006)………………………………………..13

Liaros v. Vaillant, No. 93 CIV. 2170 (CSH), 1996 WL 88559 (S.D.N.Y. March 1, 1996)…….28

Marini v. Adamo, 812 F. Supp. 2d 243 (E.D.N.Y. 2011)………………………………………..11

Matos v. Michele DePalma Enterprises, Inc., 554 N.Y.S.2d 367 (N.Y. App. Div. 1990)….......23

Medina v. Bauer, No. 02 Civ. 8837 (DC), 2004 WL 136636 (S.D.N.Y. Jan. 27, 2004)………...18

Nakahata v. New York-Presbyterian Healthcare Sys., Inc.,

723 F.3d 192 (2d Cir. 2013)……………………………………………………………………...13

Novaks v. Kasaks, 216 F.3d 300, 315 (2d cor. 2000)……………………………………………12

vi

Ochre LLC v. Rockwall Architecture Planning & Design,

No. 12 Civ. 2837 (KBF), 2012 WL 6082387 (S.D.N.Y. Dec. 3, 2012)………………………...18

Palsgraf v. Long Island R.R. Co., 248 N.Y. 339 (N.Y. 1928)…………………………………...23

Press v. Chemical Inv. Serv. Corp., 166 F.3d 529 (2d Cir.1999)………………………………....7

Ritchie v. Northern Leasing Systems, Inc., 414 F.Supp. 3d 229 (S.D.N.Y. 2014)………………18

San Leandro Emergency Med. Group Profit Sharing Plan v. Philip Morris Cos.,

75 F.3d 801 (2d Cir.1996)…………………………………………………………………………8

Scheuer v. Rhodes, 416 U.S. 232 (1974)…………………………………………………….........7

Schwartzco Enters. LLC v. TMH Mgmt., LLC,

2014 U.S. Dist. LEXIS 160856 (E.D.N.Y. Nov. 17, 2014)……………………………………...13

Seanto Exps. v. United Arab Agencies, 137 F.Supp.2d 445 (S.D.N.Y.2001)……………………16

SEC v. W. J. Howey Co., 328 U.S. 293 (1946)…………………………………………………..11

Suez Equity Investors, L.P. v. Toronto–Dominion Bank, 250 F.3d 87 (2d Cir.2001)…………...15

Sweet v. Sheahan, 235 F.3d 80 (2d, Cir. 2000)………………………………………………….7

The Limited, Inc. v. McCrory Corp., 564 N.Y.S.2d 751 (N.Y. App. Div. 1991)………………22

Tomka v. Seiler Corp., 66 F.3d 1295 (2d Cir. 1995)……………………………………………23

United States v. Chestman, 947 F.2d 551 (2d Cir. 1991)……………………………………20-21

United States v. Leonard, 529 F.3d 83 (2d Cir. 2008)…………………………………………..11

Villager Pond, Inc. v. Town of Darien, 56 F.3d 375 (2d. Cir. 1995)………………………........7

William Wrigley Jr. Co. v. Waters, 890 F.2d 594 (2d Cir. 1989)………………………………..22

Wynder v. McMahon, 360 F.3d 73 (2d Cir. 2004)………………………………………………18

1

Plaintiffs Shaffer Smith (“Smith”), 2424, LLC, LLC, Super Sayin’ Publishing, LLC, Compound

Touring, Inc. and Compound Ventures, LLC (collectively “Plaintiffs”), by their attorneys The Roth Law

Firm, PLLC, respectfully submit this Memorandum of Law in opposition to Defendants Vernon Brown

(“Brown”), V. Brown & Company, Inc.’s (“Brown Company”) (collectively the “Brown Defendants”)

and Kevin Foster (“Foster”) and Foster & Firm, Inc. (“Foster Firm”) (collectively the “Foster

Defendants”) respective motions to dismiss the Third Amended Complaint (the “TAC”).1

PRELIMINARY STATEMENT

Plaintiffs hired Defendants to manage their finances. In return, Defendants stole Plaintiffs’ money

and induced Plaintiffs to invest in a company (owned by Defendants) based on false and misleading

representations and omissions in violation of Federal securities laws. That company, of which Foster was

the President and Chief Financial Officer, has since filed for bankruptcy protection and two of its officers

have been convicted of wire fraud and money laundering. In consideration for their supposed “services,”

Defendants have rewarded themselves by taking over $3.5 million in “fees” from Plaintiffs. That

Defendants now ask this Court to summarily rule that Plaintiffs have no cause of action against them is

absurd.

The Brown Defendants’ and Foster Defendants’ motions to dismiss are text-book examples of a

straw-man argument. Both set of defendants mischaracterize facts stated in the TAC, analyze factual

allegations out of context while omitting others, and then argue why those self-serving facts fail to state a

claim. In fact, rather than accepting all factual allegations contained in the TAC as true (and drawing all

reasonable inference in Plaintiffs’ favor) – as required by black-letter law – Defendants’ motions are

based on a fantastical version of what is actually alleged.

1 Defendants’ motion papers are filed via ECF as Docs. 53-54 (the Foster Defendants’ motion) and Docs. 55-56 (the Brown

Defendants’ motion).

2

Despite the Defendants’ self-serving arguments to the contrary, the TAC in its most basic form,

alleges that Vernon Brown and his company (V. Brown & Company, Inc.), knowingly and intentionally

assisted his employee and nephew (Kevin Foster) to defraud and otherwise harm their own clients out of

millions of dollars by: (i) neglecting to perform the duties entrusted to them including failing to timely file

Plaintiffs’ tax returns and failing to make sure that Plaintiffs’ creditors were satisfied (TAC, ¶¶ 14, 21-25,

28); (ii) forging promissory notes and related security agreements in Smith’s name without his knowledge

or consent (Id., ¶¶ 56-59); (iii) fraudulently inducing two investments of $2,500,000 and $1,000,000 from

Smith in a company (Imperial Integrated Health Research & Development LLC (“Imperial”)) of which

the Brown Defendants and Foster were undisclosed owners (Id., ¶¶ 34-50); and (iv) making other

unauthorized bank transfers (including a $300,000 transfer to an individual with whom Smith has no

relationship) without Plaintiffs’ knowledge or consent for the Defendants’ benefit. Id., ¶¶ 29-33.

Because of the highest degree of trust that Plaintiffs placed in Defendants (including granting

Defendants with power of attorney), much of the documents and information relevant to Plaintiffs’ claims

are in Defendants exclusive possession, custody or control. As a result, Plaintiffs have been forced to

allege certain facts upon information and belief. By now moving to dismiss based on facts pled on

information and belief, Defendants are attempting to ensure that those very documents and information

are never obtained in the discovery. This Court should not permit Defendants to once again abuse their

position of trust. For the reasons stated herein, Plaintiffs respectfully request that Defendants’ respective

motions to dismiss be denied and that discovery be permitted to proceed forthwith.

FACTS ALLEGED IN THE THIRD AMENDED COMPLAINT

Rather than restate all of the facts herein, Plaintiffs respectfully refer the Court to the TAC for a

complete version of the facts. For the Court’s convenience, however, a summary of the facts are provided

as follows:

Defendant V. Brown & Company holds itself out as “a trusted, independent

accounting and business advisory firm to established, emerging professionals in the

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sports, entertainment, and fashion industries” that knows “how to keep our clients

clear of financial risk.” TAC ¶¶ 16-19. In 2005, Plaintiff Shaffer Smith, a recording

artist, retained V. Brown & Company to do just that -- manage his personal and

business finances(which included Plaintiffs 2424, LLC, Super Sayin’ Publishing,

LLC, Compound Touring, Inc., and Compound Ventures, LLC.) TAC ¶¶ 1, 3-6, 14,

23.

As business manager, V. Brown & Company was responsible for, among other

things, determining Plaintiffs’ earning projections, overseeing their current

investments and advising them on prospective investments, devising strategies for

managing funds responsibly, maintaining Smith’s budget to ensure he was financially

situated as to maintain his accustomed lifestyle, and protecting Plaintiffs from

financial ruin by mitigating financial risk. Id., at ¶ 26. In consideration for its

services, V. Brown & Company received five percent (5%) of Plaintiffs’ gross

revenues. Id., at ¶ 24. The TAC alleges that V. Brown & Company has taken

purported fees from Plaintiffs in excess of $3,600,000. Id., at ¶ 60.

Foster was employed by V. Brown & Company and was directly supervised by

Defendant Vernon Brown, who is also Foster’s uncle and the owner of V. Brown &

Company Id., at ¶ 21-22. In order for Foster and Brown to gain control over

Plaintiffs’ finances in their role as business manager, they instructed Smith to provide

them with power of attorney, which Smith did. Id., at ¶ 25. Within their collective

role as Smith’s business manager, Foster and Brown controlled Plaintiffs’ Citibank

accounts from the beginning of 2005 until Summer 2013. Id., at ¶ 27.

In breach of their duties as business manager, Foster and Brown failed to satisfy the

most rudimentary accounting tasks such as failing to timely file tax returns or pay

invoices incurred by Plaintiffs’ – this alone led Plaintiffs to incur substantial penalties

and interest. Id., at ¶ 28. While such negligence was damaging, it paled in comparison

to the other serious misconduct alleged.

Beginning in or about July 2011, Foster – with Brown’s knowledge and consent –

began making fraudulent and unauthorized transfers to and from Smith’s various

bank accounts. Id., at ¶ 34. For example, in December 2012, $300,000 was transferred

from 2424, LLC’s bank account to an “Edward R. Grauer Esq. attorney trust account”

despite the fact that none of the Plaintiffs authorized the payment nor had any

relationship with Grauer. Id., at ¶¶ 29-31. Grauer, as it turns out, is General Counsel

for Cash Money Records, another client of V. Brown & Company. Id., at ¶¶ 20, 29.

The TAC alleges that Foster and Brown misappropriated this $300,000 to benefit

Cash Money Records (their other client), in breach of their fiduciary duties to Smith.

Id., at ¶¶ 29, 74.

Additionally, according to Compound Venture, LLC’s ledger reports maintained by

Defendants, $70,000 was supposedly transferred from one of their accounts to the

three owners (including Smith). Id., at ¶ 30.2 While $70,000 was in fact transferred,

none of Compound Venture, LLC’s owners (or any of the Plaintiffs) actually received

2 Due to a typographical error in the Third Amended Complaint, there are two paragraphs 30 and 31.

4

any such monies. Id. The whereabouts of those monies are within the Defendants’

exclusive knowledge, but the Plaintiffs believe they were transferred for the benefit of

Foster, Brown, and V. Brown & Company. Id., at ¶¶ 31, 33.

Additional serious issues arise from Foster and Brown’s undisclosed association with

Imperial Integrative Health Research & Development and OXYwater. That is, besides

Foster’s role within V. Brown & Company, he also acted as Imperial’s President and

Chief Financial Officer, owning 66% of the shares in the company. Id., at ¶ 44. V.

Brown & Company (of which Brown is the sole principal) also was an owner of

Imperial. Id., at ¶ 45. In June and July of 2011, both by telephone and in person,

Foster induced Smith to invest in Imperial. Id., at ¶ 34. During those conversations,

Foster misrepresented that Imperial “was in the process of ‘going public’”, that it’s

product, OXYwater, was a healthier alternative to Vitamin Water, that OXYwater

was on the verge of taking over Vitamin Water’s market share, and had deals in place

with several school districts to replace sugar-based drinks. Id., at ¶¶ 34, 39-41. Foster

advised Smith that the time to invest was “now” and, importantly, that prior investors

in Imperial had already received returns on their investment. Id., at ¶¶ 34, 42-43. In

addition, Foster represented that all investment proceeds would go directly towards

taking over Vitamin Water’s market share. Id. ¶ 34. While Foster was

misrepresenting how the investment proceeds would be used and the purported

success of OXYwater and its current investors (who had not actually received any

returns on their investment), Foster intentionally failed to inform Smith of the fact

that Foster and V. Brown & Company had direct financial interests in Imperial and,

most importantly, that his representations of fact were simply not true. Id., at ¶¶ 44-

45.

In fact, unbeknownst to Smith, investment proceeds went to Defendants and/or

Imperial’s other officer’s, who have already been found guilty of criminal acts related

to misuse of investor proceeds. Id. ¶¶ 54. Additionally, Smith was never provided

with any financial documents or risk disclosure statements relating to the investment.

Id., at ¶ 36. In reliance on Foster’s misrepresentations, Smith agreed to invest

$1,000,000 in Imperial. Id., at ¶ 35.

Regardless of Smith’s wishes, Foster – while employed and supervised by Brown –

instead transferred $2,500,000 to Imperial from a 2424, LLC bank account. Id., at ¶

37. Because Smith never received any share or stock certificates showing ownership

in Imperial, Plaintiffs have no knowledge whether the full $2,500,000 was invested

into Imperial or whether the differential $1,500,000 was inappropriately converted.

Id., at ¶ 38. That information is in the exclusive knowledge of Defendants. Id.

In October 2012, Foster, in an attempt to induce Smith to invest more money,

contacted Smith and misrepresented that Imperial had secured a deal to be a

NASCAR car sponsor and had executed an exclusivity contract to be the official

drink of the National Basketball Association’s Cleveland Cavaliers. Id., at ¶¶ 46, 48-

49.3 Based on these misrepresentations (and since Foster failed to correct his prior

3 Rather than accepting the factual allegations contained in the TAC as true, the Brown Defendants attempt to disprove the

falsity of some of Foster’s representations by instructing the Court to visit a website for the truth of the matter of asserted

therein. See, Brown Defendants’ Memorandum of Law in Support of Motion, pg. 9, fn. 4. Notwithstanding the fact that such

5

false representations), Smith agreed to invest another $1,000,000. Id., at ¶ 46. In

breach of his fiduciary duties as business manager, however, Foster intentionally

failed to inform Smith that Imperial was hemorrhaging money at an alarming pace

and was on the verge of filing for protection under Chapter 11 of the United States

Bankruptcy Code -- nor did Smith correct his prior misrepresentations to Smith. Id.,

at ¶ 47.

Imperial thereafter filed for protection under Chapter 11 and listed V. Brown &

Company, Kevin Foster, Foster & Firm, 2424, LLC, and Super Sayin’ Publishing,

LLC as Equity Security Holders. Id., at ¶¶ 50-51. Thus, despite not being in

possession of physical stock certificates, pursuant to Imperial’s Bankruptcy Court

filings, Plaintiffs were equity investors in Imperial.

The TAC alleges that Imperial was a sham business and existed solely as a vehicle to

defraud investors (including Smith), whose investment became worthless following

the news of the Chapter 11 filing and criminal indictments of two of Imperial’s

officers. Id., at ¶¶ 52, 54. Further, the TAC alleges that both Foster and Brown knew

that Imperial was a sham business entity and (by skimming monies out of Plaintiffs’

bank accounts) substantially benefited from Plaintiffs’ willingness to invest. Id., at ¶¶

53, 55. Through the fraudulent investment scheme, the TAC alleges that Plaintiffs

have been injured in an amount of at least $3,500,000, the exact amount that was

invested in Imperial (as opposed to converted), however, is in Defendants’ exclusive

knowledge. Id., at ¶ 74.

The TAC alleges that, in an effort to cover their tracks, Foster forged Smith’s name

on a series of promissory notes and related documents in order to replace the

mishandled monies. That is, beginning February 21, 2013 – two months after the

wrongful $300,000 Grauer transfer – Foster, without Plaintiff’s consent or

knowledge, forged Smith’s name on a $400,000 promissory note between Compound

Touring and Citibank with Smith, 2424, LLC, and Super Sayin’ Publishing, LLC

listed as guarantors. Id., at ¶¶ 56-57. Foster also forged Smith’s name on a promissory

note with Citibank in the amount of $1,000,000, supposedly on behalf of Super

Sayin’ Publishing, LLC and secured by 2424, LLC. Id., at ¶ 58. The TAC alleges that

this note was secured to replace the $1,500,000 that V. Brown & Company caused to

be transferred out of 2424, LLC’s account in the July 8, 2011 Imperial investment.

Id., at ¶ 59. Because Foster executed these documents without Smith’s knowledge or

consent and as a result of a purported default thereunder, both notes have now

resulted in Plaintiffs being named as defendants in a related litigation against

Citibank. Id., at ¶¶ 56, 58.

evidence is not in admissible form (one of the websites contains no information whatsoever and the other is a factually

ambiguous and hearsay news article); even if it was, such evidence is not appropriately considered on a motion to dismiss.

6

ARGUMENT

I. LEGAL STANDARD

In determining a motion under F.R.C.P. 12(b)(6), the Court must construe the Amended

Complaint liberally, “accepting all factual allegations in the complaint as true, and drawing all reasonable

inferences in the plaintiff’s favor.” Chambers v. Time Warner, Inc., 282 F.3d 147, 152 (2d Cir. 2002)

(citing Gregory v. Daly, 243 F.3d 687, 691 (2d. Cir. 2001)).

“The issue is not whether a plaintiff will ultimately prevail but whether the claimant is entitled to

offer evidence to support the claims….” Villager Pond, Inc. v. Town of Darien, 56 F.3d 375, 378 (2d. Cir.

1995) (quoting Scheuer v. Rhodes, 416 U.S. 232, 236 (1974) (emphasis added)). Thus, “the office of a

motion to dismiss is merely to assess the legal feasibility of the complaint, not to assay the weight of the

evidence which might be offered in support thereof.” Eternity Global Master Fund Ltd. v. Morgan Guar.

Trust Co. of New York, 375 F.3d 168 (2d. Cir. 2004) (quoting Geisler v. Petrocelli, 616 F.2d 636, 639 (2d.

Cir. 1980). Dismissal is appropriate only when “it appears beyond doubt that the plaintiff can prove no

set of facts which would entitle him or her to relief.” Sweet v. Sheahan, 235 F.3d 80, 83 (2d. Cir. 2000)

(emphasis added).

II. THE TAC STATES A CLAIM FOR SECURITIES

AND COMMON LAW FRAUD

Section 10(b) of the Exchange Act bars conduct “involving manipulation or deception,

manipulation being practices ... that are intended to mislead investors by artificially affecting market

activity, and deception being misrepresentation, or nondisclosure intended to deceive.” Field v. Trump,

850 F.2d 938, 946–47 (2d Cir.1988) (internal quotation marks and citation omitted); see Press v.

Chemical Inv. Serv. Corp., 166 F.3d 529, 538 (2d Cir.1999). To state a claim under § 10(b) and the

corresponding Rule 10b–5, a plaintiff must plead that the defendant, in connection with the purchase or

sale of securities, made a materially false statement or omitted a material fact, with scienter, and that the

plaintiff's reliance on the defendant's action caused injury to the plaintiff. See In re Carter–Wallace, Inc.

7

Sec. Litig., 150 F.3d 153, 155–56 (2d Cir.1998); San Leandro Emergency Med. Group Profit Sharing

Plan v. Philip Morris Cos., 75 F.3d 801, 808 (2d Cir.1996); Acito v. IMCERA Group, Inc., 47 F.3d 47, 52

(2d Cir.1995). In addition, misrepresentations about “use of proceeds” constitute actionable fraud in New

York. County of Suffolk v. Long Island Power Authority, 100 A.D.3d 944, 948 (2d Dept. 2012).

A. Plaintiff Has Pled Securities Fraud With Requisite Particularity

Under Rule 9(b) and the PSLRA, “Plaintiffs must plead specific facts explaining why each alleged

misstatement was false at the time it was made.” Janby v. Canadian Solar, Inc., No. 10 Civ. 4430 (RWS),

2012 WL 1080306, at *4 (S.D.N.Y. Mar. 30, 2012). However, “[pleading] on information and belief is

a desirable and essential expedient when matters that are necessary to complete the statement of a

claim are not within the knowledge of the plaintiff….” Boykin v. KeyCorp, 521 F.3d 202, 215 (2d Cir.

2008) (emphasis added) (quoting 5 Charles Alan Wright & Arthur R. Miller, Federal Practice and

Procedure § 1224 (3d. ed. 2004)); Aquino v. Trupin, 833 F.Supp. 336, 342 (S.D.N.Y. 1993) (“[P]leadings

upon information and belief are acceptable as to matters peculiarly within the opposing party's knowledge

and control….”) (citing Luce v. Edelsstein, 802 F.2d 49, 55 (2d Cir. 1986); Vigilant Ins. Co. v. C. & F.

Brokerage Servs., 751 F.Supp. 436, 438 (S.D.N.Y. 1990) (“It is permissible to plead upon information

and belief when the facts necessary to state a cause of action are wholly within the control of the party

who is alleged to have committed the wrongdoing); Segal v. Gordon, 467 F.2d 602, 608 (2d Cir. 1972)

(“the [general rule disfavoring claims based on ‘information and belief’] is relaxed as to matters

peculiarly within the adverse parties’ knowledge….).

Additionally, pleadings based upon information and belief may be asserted “where the belief is

based on factual information that makes the inference of culpability plausible.” Arista Records, LLC v.

Doe 3, 604 F.3d 110, 120 (2d Cir. 2010); see also Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (“A claim

has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable

inference that the defendant is liable for the misconduct alleged.”).

8

As detailed herein and in the TAC, the nature of the parties’ relationship was that Smith (a

recording artist who is constantly traveling around the World to various performances and events) hired

Defendants specifically to manage all aspects of his finances, as advertised by Defendants they were

capable of handling. And because of the highest level of trust assumed by Defendants’ in the performance

of their services, Smith even provided Defendants with power of attorney to handle Plaintiffs’ financial

affairs. Thus at all relevant times, Defendants -- and not Plaintiffs -- controlled all of Plaintiffs’ financial

affairs, including all documents associated therewith. Such documents included, but were not limited to,

all documents relevant to Plaintiffs’ investment in Imperial and all documents related to Imperial’s other

investors, finances, sales, contracts and subsequent bankruptcy and criminal investigations.

1. July 2011 Misrepresentations and Omissions

The TAC alleges that in order to induce the July 2011 investment, Foster misrepresented: (i) that

Imperial’s product, OXYwater, was a healthier alternative to Vitamin water; (ii) that OXYwater was on

the verge of taking over Vitamin Water’s market share and “was in the process of ‘going public’; (iii) that

Imperial had secured multiple contracts with several school districts to make OXYwater a replacement for

sugar-based drinks; (iv) that prior investors had already received returns on their investments; and (v) that

Smith’s investment would directly be used for the purpose of helping OXYwater overtake Vitamin

Water’s market share. TAC, ¶¶ 34, 39-43. All of these claims are sufficiently made on the basis of

“information and belief” because any relevant documents and information (e.g. Imperial’s contracts

regarding OXYwater, nutritional studies, market data, communications with attorneys, accountants and

investment banks with respect to its efforts in, at the time, “going public,” etc.) are peculiarly within the

Defendants’ possession and control.

Additionally, Plaintiffs are able to validly make these pleadings on information and belief because

the Court could plausibly infer culpability based on the facts as known. The TAC specifically alleges that

after Foster’s 2011 misrepresentations, Imperial applied for protection under Chapter 11 of the United

9

States Bankruptcy Code (Id., at ¶¶ 34, 51) and two of Imperial’s officers were indicted and subsequently

convicted of crimes involving the misuse of investor monies. Id., ¶¶ 52, 54. As the President and Chief

Financial Officer of Imperial, the Court can infer that Foster had actual knowledge of Imperial’s perilous

financial situation and, significantly, that large amounts of investor monies were not in any way being

used for the benefit of the Company. These circumstances only add to the fact that Brown and Foster were

also equity owners of Imperial (with Foster owning over sixty-six percent of the Company). Id., at ¶¶ 43-

45.

The TAC also alleges that Defendants fraudulently omitted that: (i) Foster was Imperial’s

President and Chief Financial Officer, (ii) Foster owned at least 66% of Imperial’s stock, and (iii) Brown

(as sole principal of V. Brown & Company) was also an equity owner of Imperial. Id., at ¶¶ 44-45. For the

same reasons stated herein, these allegations constitute material omissions of fact.

While the Brown Defendants and Foster Defendants argue that two of Foster’s misrepresentations

(wherein he stated Imperial was on the verge of taking over Vitamin Water’s market share and “going

public”) are too general to cause a reasonable investor to rely on them and are in any event a non-

actionable statement of optimism, that argument is without merit. Foster did not merely state that he

hoped to one day go public, he stated that Imperial was currently “in the process of ‘going public.’” That

representation is not merely an expression of optimism; it is a process based on fact. Indeed, the

“process” of “going public” involves, among other things, engaging securities counsel and accountants,

reviewing financials to ensure compliance with Generally Accepted Accounting Principles (“GAAP”),

hiring an investment bank and submitting a prospectus to the United States Securities and Exchange

Commission (the “SEC”). Considering that Imperial’s principals were engaged in wire fraud and money

laundering, a reasonable inference can be drawn that Imperial had not taken any legitimate steps to “go

public” – which would have obviously exposed the criminal conduct even sooner. Even if such

statements were expressions of optimism, however, while Courts have found statements containing

simple economic projections, expressions of optimism, or other puffery to be insufficient to constitute

10

fraud, defendants, “may be liable for misrepresentations of existing facts.” Novak v. Kasaks, 216 F.3d

300, 315 (2d Cir. 2000) (statements that inventory situation was “ ‘in good shape’ ” or “ ‘under control’ ”

while defendants “allegedly knew the contrary was true,” are actionable statements of securities fraud as

more than mere statements of opinion or puffery); In re Oxford Health Plans, Inc. Sec. Litig., 187 F.R.D.

133, 141 (S.D.N.Y.1999) (beliefs based on factual assertions made by the defendants when “[t]here is also

evidence that the defendants were aware of undisclosed facts that seriously undermined the accuracy of

their alleged opinions or beliefs” may be actionable under § 10(b)); In re Prudential Sec. Inc. Ltd.

Partnerships Litig., 930 F.Supp. 68, 74-75 (S.D.N.Y. 1996); see also, Virginia Bankshares, Inc. v.

Sandberg, 501 U.S. 1083, 1093, 111 S.Ct. 2749, 115 L.Ed.2d 929 (1991) ( “conclusory terms in a

commercial context [may be] reasonably understood to rest on a factual basis that justifies them as

accurate, the absence of which renders them misleading.”).

In Novak, the Second Circuit held that a defendant’s representation that the company was “in good

shape” or “under control” -- while knowing the contrary to be true at the time the representations to be

made -- created an actionable claim for the plaintiffs who relied on such representations. Novak, 216 F.3d

at 315. The false and misleading statements of fact herein should lead to the same result.

From the facts and circumstances alleged, the Court can plausibly infer that Defendants knew that

the above representations and omissions were intended to fraudulently induce Plaintiffs’ July 2011

investment in Imperial.

2. October 2012 Misrepresentations and Omissions

The TAC also alleges that in order to induce Plaintiffs’ $1,000,000 investment in October 2012,

Foster, while employed by Brown & Company and supervised by Brown: (i) misrepresented that

Plaintiffs’ Imperial investment was doing “great”; (ii) misrepresented a NASCAR car sponsorship deal;

(iii) misrepresented an exclusivity deal with the NBA’s Cleveland Cavaliers; (iv) and omitted material

information regarding Imperial’s perilous financial situation (including the fact that, as CFO, Foster must

have known that investor monies were wrongfully being taken out of the Company’s accounts to

11

personally benefit other of the Company’s officers). Id., at ¶¶ 46-47, 51. In addition, Defendants failed to

correct any of the prior misrepresentations that led to the July 2011 investment. The fact that allegations

are made on “information and belief” does not require dismissal because much of the information

necessary to prove Plaintiffs’ claims is currently in Defendants’ exclusive possession, custody or

control.). Boykin v. KeyCorp, 521 F.3d 202, 215 (2d Cir. 2008) (remanding a prior decision for

improperly dismissing a complaint that based pleadings on “information and belief” when the opposing

party was in exclusive possession of the relevant facts); Aquino v. Trupin, 833 F.Supp. 336, 342

(S.D.N.Y. 1993) (finding that while pleadings based on “information and belief” were adequate to create

a claim because the opposing party was in peculiar possession of the facts, Plaintiff could not establish

scienter); Vigilant Ins. Co. v. C. & F. Brokerage Servs., 751 F.Supp. 436, 438 (S.D.N.Y. 1990) (finding

that “information and belief” was a proper vehicle to state a claim when Defendants held exclusive

possession and the there is an inclusion of known facts on which the belief is founded).

From the facts and circumstances alleged, the Court can plausibly infer that Defendants knew that

the above representations and omissions were intended to fraudulently induce Plaintiffs’ October 2012

investment in Imperial.

B. The TAC Alleges The Purchase Of A “Security”

Highlighting the Foster Defendants’ unreasonably narrow interpretation of the pleading

requirements, is the argument that the TAC does not allege that any of the Plaintiffs purchased a security.

That argument is erroneous.

Federal securities laws define "security" to include an investment contract. See 15 U.S.C. §

77b(a)(1), see also 15 U.S.C.S. § 78c(a)(10). The Supreme Court has defined an "investment contract" to

mean "a contract, transaction or scheme whereby a person invests his money in a common enterprise and

is led to expect profits solely from the efforts of the promoter or a third party. . . ." Marini v. Adamo, 812

F. Supp. 2d 243, 255 (E.D.N.Y. 2011), citing SEC v. W. J. Howey Co., 328 U.S. 293, 298-99 (1946). The

12

requirements for establishing an investment contract are: (1) an investment of money, (2) in a common

enterprise, (3) with profits to come solely from the efforts of others. Great Lakes Chemical Corporation v.

Monsanto Company, 96 F. Supp. 2d 376, 384 (D. Del. 2000) (citing W. J. Howey Co., 328 U.S. at 301).

In determining whether a particular transaction constitutes a security, courts should look beyond

the formal terms of the arrangement and assess whether the reasonable expectation was one of significant

investor control, or third-party control over the investor's funds. In re J.P. Jeanneret Assocs., 769 F. Supp.

2d 340, 360-361 (S.D.N.Y. 2011), citing United States v. Leonard, 529 F.3d 83, 85 (2d Cir. 2008). It is

immaterial whether the shares in the enterprise are evidenced by formal certificates or by nominal

interests in the physical assets employed in the enterprise. In re J.P. Jeanneret Assocs., 769 F. Supp. 2d

340, 359 (S.D.N.Y. 2011).

The passive “investment” of monies by Smith into Imperial (a common enterprise), as described in

the TAC, is clearly a “security” under the Securities Exchange Act, 15 U.S.C. § 78c(a)(10).

C. The TAC Adequately Pleads Scienter

A claim under section 10(b) and Rule 10b-5 sounds in fraud and therefore must meet the pleading

requirements of Rule 9(b) (see, In re Scholastic Corp. Sec. Litig., 252 F.3d 63, 69-70 (2d. Cir. 2001),

which provides that, a plaintiff asserting fraud must "state with particularity the circumstances

constituting fraud or mistake. Malice, intent, knowledge, and other condition of mind of a person may be

averred generally.” Fed. R. Civ. P. 9(b). A plaintiff “must allege facts that give rise to a strong inference

of fraudulent intent.” Schwartzco Enters. LLC v. TMH Mgmt., LLC, 2014 U.S. Dist. LEXIS 160856, 18

(E.D.N.Y. Nov. 17, 2014), citing Nakahata v. New York-Presbyterian Healthcare Sys., Inc., 723 F.3d

192, 198 (2d Cir. 2013). The inference "may be established either (a) by alleging facts to show that

defendants had both motive and opportunity to commit fraud, or (b) by alleging facts that constitute

strong circumstantial evidence of conscious misbehavior or recklessness." Schwartzco Enters. LLC, at 18-

19, citing Lerner v. Fleet Bank, N.A., 459 F.3d 273, 290-91 (2d Cir. 2006).

13

“[I]n analyzing the sufficiency of a pleading under Rule 9(b), a district court must balance the rule

with both Fed, R. Civ. P. 8(a), which requires only a 'short and plain statement' of the claims for relief,

and Fed. R. Civ. P. 8(f), which provides that 'all pleadings shall be so construed as to do substantial

justice.’" Schwartzco Enters. LLC, at 20, citing Int'l Motor Sports Group. Inc. v. Gordon, No. 98 Civ.

5611 (MBM), 1999 U.S. Dist. LEXIS 12610, 1999 WL 619633, at *3 (S.D.N.Y. Aug. 19, 1999). Rule

9(b) does not displace Rule 8(a); rather, the Court must "balance the requirements of Rule 9(b) and their

overall purposes with the requirements of notice pleading under Rule 8(a)." Schwartzco Enters. LLC, at

19-20, citing Goldin Associates, L.L.C. v. Donaldson, Lufkin & Jenrette Sec. Corp., No. 00 CIV. 8688

(WHP), 2003 U.S. Dist. LEXIS 16798, 2003 WL 22218643, at *6 (S.D.N.Y. Sept. 25, 2003).

First, the TAC alleges that Defendants had both ample motive and opportunity to meet the

scienter requirement. According to the TAC, in order to induce their client, Smith, to invest in Imperial (a

company in which both Foster and Brown had a financial interest and of which Foster was a corporate

officer), Brown and Foster devised and carried out a scheme whereby Foster made numerous material

misrepresentations and omissions. See, e.g., TAC, ¶¶ 34-35, 39-45. The investment secured from Smith

on reliance of Foster’s misrepresentations and omissions went to enrich Imperial which Defendants had a

substantial personal interest in, but also enriched Foster and Brown directly, since Foster would skim

additional monies out of Plaintiffs’ accounts when taking monies out for investment. Id., ¶ 38.

Second, the TAC alleges that Defendants misrepresented facts that constitute strong circumstantial

evidence of conscious misbehavior or recklessness. In his role as Business Manager and President and

CFO of Imperial, Foster recommended Smith invest $1,000,000 in Imperial, misrepresenting all aspects

of the Company and the investment, including that investors had already seen a return on their investment

and that Imperial was “in the process of” going public. Id., at ¶¶ 23-24, 34-36, 39-45. Less than a year

later, Foster made further misrepresentations regarding the status of Smith’s investment and omitting the

perilous financial situation looming over Imperial (that would directly lead to their Chapter 11 filing a

mere six (6) months later). Id., at ¶¶ 46-51. According to these facts, it is clear that Foster Defendants and

14

Brown Defendants either consciously misbehaved and knew Foster was making fraudulent assertions or

were recklessly performing their job as Smith’s Business Manager, Imperial owner (Foster), and Foster’s

supervisor (Brown) by failing to properly research and investigate the basic financial status of his own

company before making representations to investors such as Smith. These allegations and circumstances

satisfy the scienter element of a claim for fraud.

D. The TAC Adequately Pleads “Loss Causation”

Defendants’ “loss causation” argument is another straw-man argument. That is, Defendants start

by arguing that omissions with respect to their equity interest in Imperial, when the truth came to light,

did not cause any damages (see, Brown Defendants’ Memorandum of Law, pgs. 16-17), but somehow

Defendants then arrive at the conclusion that none of the many misrepresentations and omissions alleged

in the TAC allege loss causation. Id. That argument is without any merit whatsoever. To establish loss

causation, “a plaintiff must allege ... that the subject of the fraudulent statement or omission was the cause

of the actual loss suffered,” Suez Equity Investors, L.P. v. Toronto–Dominion Bank, 250 F.3d 87, 95 (2d

Cir.2001). “A plaintiff has [shown] loss causation with regard to the concealment or misstatement of a

material fact if it [demonstrates] that its loss was foreseeable to the party alleged to have concealed or

misrepresented the material fact and that its loss was caused by the materialization of the concealed (or

misrepresented) fact.” Glidepath Holding B.V. v. Spherion Corp., 590 F.Supp.2d 435, 457 (S.D.N.Y.

2007).

While it is true that Defendants’ undisclosed equity interest in Imperial, in and of itself, did not

cause Plaintiffs’ damages, the fact that the solicitor of the investment happens to be the President, Chief

Financial Officer and majority equity-holder of the company, is certainly a factor that would alter the mix

of available information to a reasonable investor. Putting that aside, however, the TAC does not merely

allege that one omission. To the contrary, the TAC alleges that Defendants made material

misrepresentations and omissions with respect to the associated risk and likelihood of a return on the

15

investment and Imperial’s financial situation (see, e.g. TAC, ¶¶ 24, 34-35), which was particularly

egregious, since Foster, as CFO, must have known that investor funds were being misused. Id., ¶¶ 52, 55.

When the materialization of the misrepresented and omitted facts were revealed, Imperial filed for

bankruptcy protection (Id., ¶¶ 47, 51) and two of its officers were convicted of wire fraud and money

laundering (Id., ¶¶ 53-54). The TAC adequately pleads loss causation.

E. The Unauthorized $1,500,000 Transfer of Funds

is Subject To Actionable Securities Fraud

Defendants argue that the unauthorized July 2011 $1,500,000 transfer to Imperial (above Smith’s

fraudulently induced investment of $1,000,000) is not a proper subject to actionable securities fraud. This

argument is incorrect.

To state a claim for conversion in New York, a plaintiff must allege that “(1) the party charged

has acted without authorization, and (2) exercised dominion or a right of ownership over property

belonging to another [,] (3) the rightful owner makes a demand for the property, and (4) the demand for

the return is refused.” Seanto Exps. v. United Arab Agencies, 137 F.Supp.2d 445, 451 (S.D.N.Y.2001).

Here, the $1,500,000 transfer may not fit the legal definition of conversion if Plaintiffs received shares in

Imperial in exchange for those monies, thereby making the transaction an investment.

However, since it is exclusively within Defendants’ knowledge whether Plaintiffs actually

received equity in Imperial in exchange for the $1,500,000, whether the transfer was an act of conversion

or securities fraud is not currently known to Plaintiffs. Under these circumstances, Plaintiffs should be

permitted to take discovery as to whether the funds were converted or invested in Plaintiffs’ name.

G. Brown Can be Held Liable as an Aider and Abettor of Foster’s Fraud

The general requirements for establishing aiding and abetting liability for fraud are: (1) a securities

law violation by a primary wrongdoer; (2) knowledge of the violation by the person sought to be charged;

and (3) proof that the person sought to be charged substantially assisted in the primary wrongdoing. Janus

Capital grp., Inc. v. First Derivative Traders, 131 S.Ct. 2296, 2308 (2011). However, in the Second

16

Circuit, if the alleged aider and abettor owes a fiduciary duty to the plaintiff, recklessness is enough.

S.E.C. v. Apuzzo, 689 F.3d 204, 216 (2d Cir. 2012); see also, Janus Capital Group, 131 S.Ct. at 168-169.

Inaction on the part of the alleged aider and abettor ordinarily should not be treated as substantial

assistance, except when it was designed intentionally to aid the primary fraud or it was in conscious and

reckless violation of a duty to act. Armstrong v. McAlpin, 699 F.2d 79, 91 (2d Cir. 1983); Apuzzo, 689

F.3d at 216.

Here, Plaintiffs’ common law claim for aiding and abetting against Vernon Brown is adequately

stated. The TAC alleges that Foster was Brown’s employee and nephew, and that Brown directly

supervised Foster. TAC, ¶¶ 14-15, 21-22. As a result, Brown owed a fiduciary duty to Plaintiffs in

ensuring that Plaintiffs’ finances were handled appropriately. The TAC alleges that Brown had actual

knowledge of Foster’s misconduct (see, e.g., Id. ¶¶ 53, 70), but even if he did not, the Court could

plausibly infer from the allegations that Brown acted recklessly in fulfilling his obligations as Plaintiffs’

fiduciary. This is particularly the case in light of the fact that Brown’s company took over $3.6 million in

fees from Plaintiffs (Id., ¶ 60) and had additional motive to willfully ignore Foster’s conduct in light of

the fact that $300,000 of Plaintiffs’ monies were apparently given to Cash Money Records (a long-time

client of Brown) (Id., ¶¶ 19-20, 29-31) and Brown’s company also was an equity owner of the very

company (Imperial) of which Foster induced Plaintiffs to invest.5 Id., ¶¶ 44-45.

Under these facts and circumstances, the TAC adequately states a claim against Brown for aiding

and abetting Foster’s fraudulent conduct.

5 One particular issue ripe for discovery would be the circumstances that led Brown & Co. to become an equity shareholder in

Imperial, including any conversations that took place between Brown and Foster in connection therewith.

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III. THE TAC HAS SUFFICENTLY PLED COMMON LAW CLAIMS AGAINST THE

BROWN DEFENDANTS

A. Plaintiffs Have Sufficiently Pled A Cause of Action for Breach of Fiduciary

Duty Against The Brown Defendants

1. The Brown Defendants Have Been Put on

Sufficient Notice of Plaintiffs’ Claims

The Brown Defendants argue that the TAC fails to allege a cause of action for breach of fiduciary

duty because the TAC “lumps” the Defendants together. See, Brown MOL, pg. 19. This argument most

frequently arises and achieves success under the heightened pleading standards Federal Rule of Civil

Procedure 9(b).6 While the Brown Defendants cite two cases where this doctrine is applied to the

standards under Rule 8, those cases are distinguished from the case at hand.7

In Ochre LLC v. Rockwall Architecture Planning & Design, the plaintiffs brought a copyright

infringement suit against four unrelated entities and made no distinction between the defendants when

making key allegations.8 Here, Defendants are closely related, Vernon Brown is the owner and sole

principal of Brown Company and Foster, who is Brown’s nephew, was his employee. TAC ¶¶ 14-15, 21-

22. Similarly, in Medina v. Bauer plaintiffs brought a RICO claim with only one specific allegation

pertaining to three separate defendants.9

The proper standard for pleading in these cases is the one set forth in Ritchie v. Northern Leasing

Systems, Inc., where the court distinguished both Ochre and Medina, noting that Rule 8 is satisfied so

long as defendants are given fair notice of plaintiffs’ claims.10

Unlike the pleadings in Ochre and Medina,

and in line with the pleadings in Ritchie, there are multiple specific allegations in the TAC against the

Brown Defendants which support a cause for breach of fiduciary duty.11

The touchstone for determining

sufficiency of pleadings under Rule 8 is that defendants are given fair notice that enables “the adverse

6 See, City of Newburgh v. Sarna, 690 F. Supp. 2d 136, 159 (S.D.N.Y. 2010).

7 Brown MOL, pg. 20.

8 No. 12 Civ. 2837 (KBF), 2012 WL 6082387 (S.D.N.Y. Dec. 3, 2012).

9 No. 02 Civ. 8837 (DC), 2004 WL 136636 (S.D.N.Y. Jan. 27, 2004).

10 414 F.Supp. 3d 229, 235-37 (S.D.N.Y. 2014).

11 See, e.g., TAC ¶ 24 (“Smith and his entities retained Brown Company . . . .”); ¶ 25 (“Smith provided Brown and Foster with

powers of attorney . . . .”); ¶28 (“…Brown and Brown Company cause a $300,000 transfer of monies”).

18

party to answer and prepare for trial, allow the application of res judicata, and identify the nature of the

case . . . . Wynder v. McMahon, 360 F.3d 73, 79 (2d Cir. 2004) (internal quotations omitted).

Additionally, Plaintiffs are entitled to every reasonable inference that can be made in determining whether

a plausible claim has been pled. Chambers, 282 F.3d at 152. For the reasons discussed herein, the TAC

pleads sufficient factual allegations to “nudge [Plaintiffs’ claims] across the line from conceivable to

plausible.” Ashcroft v. Iqbal, 556 U.S. 662, 683 (2009) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S.

544, 570 (2007)). Notwithstanding the fact that many of the facts are within Defendants’ exclusive

knowledge (such as why $300,000 was transferred to an attorney for another of Defendants’ clients), the

TAC outs Defendants on sufficient notice of the claims and thus the discovery that will be sought relating

thereto.

2. Plaintiffs Have Pled Sufficient Factual Allegations

For Each Element Of A Breach of Fiduciary Duty

Claim Against the Brown Defendants

There are sufficient factual allegations in the TAC to maintain a claim for breach of fiduciary duty

against the Brown Defendants. The elements of a claim for breach of fiduciary duty in New York are: “(i)

the existence of a fiduciary duty; (ii) a knowing breach of that duty; and (iii) damages resulting

therefrom.” Johnson v. Nextel Commc'ns, Inc., 660 F.3d 131, 138 (2d Cir. 2011). Generally, a claim

alleging the existence of a fiduciary duty is fact specific and not appropriate for dismissal at the pleading

stage. Abercrombie v. Andrew Coll., 438 F. Supp. 2d 243, 274 (S.D.N.Y. 2006). The existence of a

fiduciary duty arises out of one party’s placing of great confidence and trust in another party. Childers v.

New York & Presbyterian Hosp., 36 F. Supp. 3d 292, 307 (S.D.N.Y. 2014). “[T]he hallmark of a

fiduciary relationship is one party’s handling of money or property for a second party’s best interest.” Id.

Here, the TAC alleges that Brown Company was retained in 2005 to represent Smith as his

business manager. TAC, ¶ 24. More specifically, the Brown Defendants were responsible for handling

Plaintiffs’ finances and business transactions (Id., at ¶ 26), as well as maintaining control of all of

Plaintiffs bank accounts at Citibank from 2005 through the Summer of 2013. Id., at ¶ 27. Thus, it is clear

19

that Plaintiffs placed their trust and gave control of their financial property to the Brown Defendants in

order for them to care for and use that property in Plaintiffs’ best interest. It cannot be reasonably

disputed that the TAC makes sufficient allegations to plausibly infer that both Brown Defendants owed

Plaintiffs a fiduciary duty.

Additionally, there are sufficient factual allegations to plausibly infer that the Brown Defendants

knowingly breached this duty in a manner that damaged the Plaintiffs. A fiduciary breaches his duty

when he uses the fiduciary relationship or the property entrusted to him for his own use. United States v.

Chestman, 947 F.2d 551, 569 (2d Cir. 1991). The TAC alleges that Foster made unauthorized

transactions from Smith’s accounts as an employee of Brown Company with Brown’s knowledge and

consent to parties Plaintiffs were not indebted to and had no relationship with. TAC, ¶¶ 29, 32. It is also

alleged that Foster was knowingly and intentionally permitted by Brown to induce Smith to invest in

Imperial, of which the Brown Defendants were shareholders, in order to increase the value of Brown’s

holdings in that company. Id., at ¶¶ 43-45, 70. The Court could plausibly infer that these acts by the

Brown Defendants included an appropriation of the funds Plaintiffs entrusted to them for their own use,

and thus, a breach of their fiduciary duty.

The fact that Plaintiffs’ claims for breach of fiduciary duty were contrary to Plaintiff’s interests,

were disloyal and reflected a lack of care, are certainly inferred from the pleadings found in the TAC. For

example, it cannot be reasonably disputed that transferring money to a company that Brown knew was

quickly losing money and on the verge of bankruptcy (Id., at ¶ 51) – to Brown and Foster’s benefit (Id., at

¶¶ 44-45) but to the financial harm of Smith (Id., at ¶¶ 53-54) – is obviously against the interest of Smith.

Another obvious example is Defendants’ transfer of $300,000 of Plaintiffs’ funds to an attorney of

another of Defendants’ clients, Cash Money Records. Id. ¶¶ 20, 29-31. This transfer was in breach of the

duty entrusted to Defendants. Further, the Brown Defendant’s contention that, because Plaintiffs granted

the responsibility for all finances and business transactions to Defendants and that they maintained control

of Smith’s Citibank accounts, they therefore could not plausibly make an unauthorized transaction, is

20

absurd. Brown MOL, pg. 23. It is precisely this granting of responsibility and control that creates the

fiduciary relationship and the corresponding duty to use that responsibility and control solely for the

principal’s benefit. See, United States v. Chestman at 569. Thus, any transfers that were not made solely

for the Plaintiffs’ benefit would be outside of the implicit authorization in granting such responsibility and

control.

If this contention of the Brown Defendants were taken as true, then all the Defendants would have

been authorized to transfer any and all of the assets in any and all of Plaintiffs’ accounts they had control

over in to their personal accounts without breaching their fiduciary duties. Such a contention is not

supported by law or equity. Further, merely because harm may not be inferred from transfers between

Plaintiffs’ accounts does not preclude the plausible and necessary inferences of harm from the plainly

inappropriate transfers alleged in the TAC. For the multiple reasons discussed above, the factual

allegations of the TAC support multiple plausible inferences of the Brown Defendants’ breaches of their

fiduciary duties owed to the Plaintiffs, which resulted in substantial monetary harm to Plaintiffs. The TAC

sufficiently pleads claims for breach of fiduciary duties against the Brown Defendants and their motion to

dismiss this cause of action should be denied.

B. Plaintiffs Have Sufficiently Pled A Cause Of Action

For Negligence Against The Brown Defendants

First, for the same reasons that the Brown Defendants’ previous “lumping” argument fails to

mandate dismissal of Plaintiffs’ breach of fiduciary duty claims under the notice pleading requirements of

Rule 8 (supra pg. 17), it fails to mandate dismissal of Plaintiffs’ claims for negligence against the Brown

Defendants.

There are sufficient factual allegations in the TAC to maintain a claim for negligence against the

Brown Defendants. In New York the elements necessary to maintain a claim for negligence are: (i) the

defendant owed the plaintiff a duty of care; (ii) the defendant breached that duty; and (iii) injury to the

plaintiff as a result of that breach. Altaro v. Wal-Mart Stores, Inc., 210 F.3d 111, 114 (2d Cir. 2000).

21

These elements in relation to the allegations against the Brown Defendants are adequately pled in the

TAC for the reasons discussed below.

1. The Brown Defendants Owed Plaintiffs A Duty Of

Care And The Brown Defendants Breached That Duty

When a party contracts to undertake certain work, that party has a duty to perform that work with

a reasonable level of skill and care. William Wrigley Jr. Co. v. Waters, 890 F.2d 594, 602 (2d Cir. 1989).

Here the TAC alleges that in 2005, Brown Company was retained by Smith “to perform all accounting

and business services for Smith and his companies.” TAC, ¶ 24. Additionally, by this agreement the

Brown Defendants were alleged to have undertaken the responsibility to oversee a variety of Smith’s

financial and business responsibilities. Id., at ¶¶ 25-27. Thus, by entering this agreement and undertaking

these responsibilities, the Brown Defendants owed the plaintiff a duty to perform these responsibilities

with a sufficient level of care. Therefore, the TAC makes sufficient factual allegations to plausibly infer

that the Brown Defendants owed Plaintiffs a duty of care.

Plaintiffs have pled sufficient factual allegations to plausibly infer that the Brown Defendants

breached the duty of care they owed Plaintiffs. In New York, when one undertakes to file taxes or pay

invoices and they fail to do so in a timely manner, this failure may support a finding that the undertaking

party breached a duty of care sufficient to maintain a claim of negligence against the breaching party.12

Here, the TAC alleges that the Brown Defendants failed to timely file tax returns and timely pay invoices.

TAC, ¶ 28. Thus, the TAC alleges a breach of the duty of cared owed to Plaintiffs by the Brown

Defendants.

The TAC sufficiently pleads factual allegations showing that the Brown Defendants’ breach of the

duty of care owed to Plaintiffs caused injury to Plaintiffs. First, the damage alleged by Plaintiffs caused

by this breach is clear. It is the penalties and interest on debt incurred by plaintiffs as a result of the

Brown Defendants’ failure to timely file tax returns and pay invoices. Id, ¶¶ 85-87. A breach of duty is

12

See, The Limited, Inc. v. McCrory Corp., 169 A.D. 2d 605,608, 564 N.Y.S.2d 751, 753 (N.Y. App. Div. 1991) (reinstating

plaintiff’s claim for negligence for defendant’s failure to timely and fully pay tax liability).

22

the legal cause of harm when the harm caused is the reasonably foreseeable result of the breach.13

The

incurrence of late penalties and accumulation of interest on a debt owed is the reasonably foreseeable

result of failing to make tax filings and invoice payments in a timely manner. As a result of the

foregoing, the TAC makes sufficient factual allegations to plausibly support the existence of a claim for

negligence against the Brown Defendants.

2. The Brown Defendants Are Liable for Foster’s

Negligence Under the Doctrine of Respondeat Superior

The Brown Defendants’ argument relating to the theory of negligent supervision completely fails

to address their liability for Foster’s negligence under a theory of respondeat superior. Under this

doctrine an employer is liable for the torts of their employees that occur within the scope of their

employment, when the employer is, or could be, exercising direct or indirect control over the employee’s

activities.14

Foster’s filing of tax returns and paying invoices was in the scope of his employment.15

TAC,

¶¶ 26-28. This coupled with the factual allegation that Brown was Foster’s supervisor during the course

of Foster’s employment with Brown & Co. (Id., at ¶ 22) make the Brown Defendants’ liability under a

theory of respondeat superior plausible. The factual allegations in the TAC provide a sufficient basis to

maintain a negligence action against the Brown Defendants and their motion to dismiss these claims

should be denied.

C. Plaintiffs Have Sufficiently Pled A Cause Of Action For

Breach Of Contract Against The Brown Defendants

The elements of a claim for breach of contract in New York are: (1) the existence of an agreement;

(2) performance by the Plaintiff; (3) breach of contract by the Defendant; and (4) damages.16

Each

specific element of contract formation is not required for a breach of contract claim to survive the

13

Palsgraf v. Long Island R.R. Co., 248 N.Y. 339, 345, 162 N.E. 99, 101 (N.Y. 1928). 14

See, Tomka v. Seiler Corp., 66 F.3d 1295, 1317 (2d Cir. 1995); Matos v. Michele DePalma Enterprises, Inc., 160 AD.2d

1163, 1163-64, 554 N.Y.S.2d 367, 368 (N.Y. App. Div. 1990). 15

In fact, the Brown Defendants’ negligent supervision argument also overlooks their undertaking to supervise these aspects of

Plaintiffs’ finances, thus creating an independent duty to supervise with a reasonable level of skill and care. 16

Dumont v. Litton Loan Servicing, LP, No. 12-CV-2677-ER-LMS, 2014 WL 815244 at *6 (S.D.N.Y. March 3, 2014) (citing

Harsco Corp. v. Segui, 91 f.3d 337, 348 (2d Cir. 1996)).

23

pleading stage; all that is required is enough factual allegations to make the claim plausible under the

standards set forth in Twombly and Iqbal. See, Dumont at *7. Attachment of the contract is not required

nor is a verbatim recital of the terms, even under the stricter pleading standards in New York State

Court.17

The TAC alleges that an agreement was entered in 2005 such that the Defendants would provide

accounting and business management services to Plaintiff in exchange for a 5% commission. TAC, ¶¶ 23-

24, 26-27. These services were not provided despite the Plaintiffs’ payment for such services. Id., at ¶¶

60. This breach caused monetary damages to Plaintiffs. Id., at ¶ 81. As a result, the Plaintiffs have

sufficiently pled factual allegations to plausibly infer a claim for breach of contract against the Brown

Defendants.

D. Plaintiffs Have Sufficiently Pled A Cause Of Action

For Conversion By The Brown Defendants

Assuming that the $1,500,000 transferred by Foster in July 2011 was not invested in Imperial on

behalf of any Plaintiff (which facts are in the exclusive knowledge of Defendants), both Defendants admit

that the transferred monies necessary constitutes a conversion. See Brown MOL, pg. 17; Foster MOL, pgs.

21-22. Whether this money creates a cause of action for fraud or conversion is dependent on information

in the exclusive possession of the defendants. However, assuming that the $1,500,000 was taken and

never fraudulently invested, the TAC sufficiently pleads a cause of action for conversion.

1. To Support A Claim For Conversion Of Funds, The

Funds Merely Must be Identifiable, Not Segregated

First, there is no requirement in New York that the funds must be segregated to support a claim for

conversion.18

The segregated account requirement is only necessary to maintain a claim for conversion

17

Griffin Bros., Inc. v. Yatto, 68 A.D.2d 1009, 1010, 415 N.Y.S.2d 114, 115 (N.Y. App. Div. 1976). 18

See, G.D. Searle & Co. v. Medicore Commc’ns, Inc., 843 F.Supp. 895, 912 (S.D.N.Y. 1994) (In New York “money can be

the subject of conversion and a conversion action only when it can be described, identified, or segregated…”) (emphasis

added).

24

against a bank.19

The requirement is merely, that the specific funds that are converted must be

identifiable. Feinberg at 17.

Here, specific amounts are identified in the TAC. See, e.g., TAC, ¶ 29 ($300,000 transferred to

attorney account); ¶ 32 ($70,000 transferred out and concealed with fraudulent entries); ¶ 38 ($1,500,000

transferred out without Plaintiffs’ knowledge). Further, the mere fact that the TAC asks for an amount to

be determined at trial does not preclude a claim for conversion. In In re Bernard L. Madoff Inv. Sec. LLC,

the case cited by Brown Defendants, the plaintiff’s failed to allege specific amounts converted anywhere

in the complaint and instead asserted an amount as at least enough to establish diversity jurisdiction. 458

B.R. 87 (Bankr. S.D.N.Y. 2011). In fact, the court noted the lack of any facts to even infer the specific

amounts. Id. at 133. Here, the pleadings in the TAC allege specific converted funds, and at the very least,

provide a sufficient basis for the Court to infer specific and identifiable funds which can be the proper

subject of a conversion action against the Brown Defendants. Thus, Plaintiffs have sufficiently pled

identifiable funds that were converted by the Brown Defendants.

2. Plaintiffs Have Pled Sufficient Factual Allegations

For Each Element Of A Claim Of Conversion Against

The Brown Defendants And The Foster Defendants

In New York, the elements of a conversion claim are: (1) converted property is a specific

identifiable thing; (2) plaintiff owned the property prior to its conversion; and (3) the defendant exercised

unauthorized dominion over the property to the exclusion of plaintiff’s rights. In re JMK Constr. Grp.,

Ltd., 502 B.R. 396, 413 (Bankr. S.D.N.Y. 2013). For the reasons discussed above, the funds at hand are

specifically identifiable. Additionally, there is no dispute, nor can there be, that the Plaintiffs had

ownership of their funds. All the previously discussed transfers are alleged to be unauthorized and to

parties the Plaintiffs had no relationship with and were not indebted to. See TAC ¶¶ 29, 32, 38. The

Brown Defendants’ argument that they lacked any limitation on their ability to use Plaintiffs’ accounts,

19

See, Citadel Mgmt., Inc. v. Telesis Trust, Inc., 123 F.Supp.2d 133, 151 (S.D.N.Y. 2000); Feinberg v. Katz, No. 99 Civ. 45

(CSH), 2002 WL 1751135 at *16-17 (S.D.N.Y. July 26, 2002).

25

and thus could not have converted any of Plaintiffs’ funds is erroneous. The case Brown Defendants cite,

Cash Flow Fin., LLC v. Meyer, concerns investments made within an account that the plaintiff failed to

allege the defendant was prohibited from making the specific investment that was the subject of plaintiff’s

claim. No. 09 CV 5002 (DRH) (ETB), 2012 WL 3637490 (E.D.N.Y. Aug. 22, 2012). This case, on the

other hand, involves Defendants transferring money out of Plaintiffs’ accounts, not to make a

discretionary investment, but in to their own pocket and in to the pockets of parties the Plaintiffs had no

relation to and no indebtedness to, to the benefit of Defendants and to the detriment of Plaintiff. See, e.g.,

TAC, ¶¶ 29, 32, 38.

It is self-evident, and further mandated by the Brown Defendants’ fiduciary duties to Plaintiffs,

that they were not authorized to deplete the Plaintiffs’ funds for their own personal gain or for the benefit

of their other clients, including Cash Money Records. Thus, such transfers show that the Brown

Defendants exercised unauthorized dominion over the funds to the exclusion of Plaintiffs’ rights.

Therefore, the TAC provides sufficient factual allegations to plausibly maintain an action for conversion

against the Brown Defendants.

E. Plaintiffs Have Sufficiently Pled A Cause Of Action For

Unjust Enrichment Against The Brown Defendants

In New York, the elements for a claim of unjust enrichment are: (1) the other party was enriched;

(2) the enrichment was at the plaintiff’s expense; and (3) equity and good conscience dictate that the

defendant should not be permitted to keep the enrichment at the plaintiff’s expense. Golden Pac. Bancorp

v. F.D.I.C., 273 F.3d 509, 519 (2d Cir. 2001). For the reasons discussed below, the TAC provides

sufficient factual allegations to maintain a claim for unjust enrichment against the Brown Defendants.

First, the TAC sufficiently alleges the Brown Defendants were enriched. The Brown Defendants

argue that the TAC fails to allege how transfers to Imperial enriched them. Brown MOL, pg. 23. In

making this argument, they overlook the allegations that Brown and Brown & Co. were shareholders in

Imperial and that transfers to Imperial were made for the purpose of increasing the value of Brown’s

26

holding in Imperial. TAC, ¶ 45. Additionally, they ignore the compensation they received for services

which either were not rendered or were rendered negligently. Id., at ¶¶ 24-28. It would be against equity

and good conscience for Defendants to retain millions of dollars in fees in light of the allegations of

wrongdoing alleged in the TAC.

Further, allowing the Brown Defendants to the fruits of their misconduct is against equity and

good conscience. When a party is enriched by fraudulently inducing an investment for their own benefit,

allowing them to keep the funds is against equity. Liaros v. Vaillant, No. 93 CIV. 2170 (CSH), 1996 WL

88559 at *15 (S.D.N.Y. March 1, 1996). That is precisely what is alleged regarding the inappropriate

transfers out of Plaintiffs’ accounts. TAC, ¶¶ 29, 32, 38. Unlike what the Brown Defendants contend,

Plaintiffs are not required to allege they received no value from services rendered. All that is required is

that it would be against equity for the defendants to retain their enrichment at plaintiff’s expense. See,

Golden Pac. Bancorp at 519. Equity requires a return, of at least a substantial portion (if not all), of the

funds Defendants received in consideration for performing the services they failed to perform.

Additionally, the fact that it is alleged that Brown & Co. received the 5% commission does not prevent

Vernon Brown from being enriched by such compensation considering his position as the sole principal,

owner, and controller of Brown & Company. TAC, ¶¶ 15, 24. There is no question that Brown has been

unjustly enriched by the millions of dollars in “fees” that Plaintiffs have paid Brown & Company.

CONCLUSION

For the foregoing reasons, Plaintiffs respectfully request that the Court deny Defendants’

respective motions to dismiss the TAC, together with any other relief that this Court deems just and

equitable.

27

Dated: New York, New York

June 5, 2015

THE ROTH LAW FIRM, PLLC

By: /s/ Richard A. Roth

Richard A. Roth

Jordan M. Kam

295 Madison Avenue, 22nd Fl.

New York, New York 10017

Tel: 212-542-8882

Fax: 212-542-8883

Attorneys for Plaintiffs