FIH, LLC v. Found. Capital Partners LLC

176 F.Supp.3d 52

FIH, LLC, Plaintiff,

v.Foundation Capital Partners LLC, f/k/a Foundation Managing Member LLC; Dean Barr; Joseph Meehan; and Joseph Elmlinger, Defendants.

Civil No. 3:15cv785 (JBA)

United States District Court, D. Connecticut.

Signed March 30, 2016

Brian P. Flaherty, Cozen & O'Connor, Philadelphia, PA, Michael Anthony Savino, Cozen O'Connor, Tamar S. Wise, Cozen & O'Connor, New York, NY, James I. Glasser, Kevin M. Smith, Wiggin & Dana, New Haven, CT, for Plaintiff.

Peter M. Nolin, Carmody Torrance Sandak & Hennessey, LLP, New Haven, CT, Jane Catherine Christie, Jonathan P. Whitcomb, Thomas P. O'Dea, Jr., Diserio Martin O'Connor & Castiglioni, LLP, Andrew M. Zeitlin, Shipman & Goodwin, Stamford, CT, Andrea Christine Sisca, Stephen George Walko, Ivey, Barnum & O'Mara LLC, Greenwich, CT, David G. Trachtenberg, Trachtenberg Rodes & Friedberg LLP, New York, NY, for Defendants.

RULING ON DEFENDANTS' MOTIONS TO DISMISS

Janet Bond Arterton, United States District Judge.

This is an action brought by Plaintiff FIH, LLC against Defendants Foundation Capital Partners, LLC ("Foundation"), Dean Barr, Joseph Meehan, Thomas Ward, and Joseph Elmlinger, alleging: violations of § 10(b) of the Security Exchange Act, 15 U.S.C. § 78j(b) (Count I); violations of the Connecticut Uniform Securities Act ("CUSA"), Conn. Gen. Stat. §§ 36b–29(a), (c) (Count II); intentional misrepresentation (Count III); fraudulent inducement (Count IV); negligent misrepresentation (Count V); and unjust enrichment (Count VI), all arising out of FIH's investment in Foundation on the basis of representations by the individual defendants that FIH now claims to have been false or misleading. Defendants Barr [Doc. # 46], Ward [Doc. # 47], Meehan [Doc. # 51], and Elmlinger [Doc. # 49] each move to dismiss. Oral argument was held on February 9, 2016. For the following reasons, Defendants' motions are granted in part and denied in part.

Table of Contents

I. Facts Alleged... 60

A. Defendants' Alleged Representations...61

1. Barr's Skills, Experience and Contacts...61

2. Barr and Meehan's Relationship...62

3. The Pipeline and Expectations regarding Performance...62

4. Barr's Personal Spending...63

B. FIH's Investment...64

C. Project Activity Logs...64

D. Project Soothsayer and Emails...64

E. Evidence of Misrepresentations...65

1. Barr's Skills, Experience and Contacts...65

2. Barr and Meehan's Relationship...66

3. The Pipeline and Expectations regarding Performance...664. Barr's Personal Spending...67

F. Request for Rescission...68

II. Discussion...68

A. Securities and Exchange Act § 10(b) (Count I)...69

1. Liability for Misrepresentations...70

a. Due Diligence Materials, Portfolio Model, General Partner Forecast...70

b. Other Statements...72

2. Materially False/Misleading...73

a. Barr's Skills, Experience and Contacts...73

b. The Pipeline and Expectations Regarding Performance...76

i. Misrepresentations...78

ii. Omissions...80

iii. Materiality of Misrepresentations and Omissions...82

c. Barr and Meehan's Relationship...85

d. Barr's Personal Spending...86

i. Salary Draw...87

ii. Emerald Investment...87

iii. In the Control Room...87

3. Reasonable Reliance...89

4. Scienter...89

a. Pipeline Continues to Expand & Pipeline has Become Increasingly Active... 91

b. Project Apex...91

c. Nothing FIH Needed to Know...91

d. No Threat to Barr and Meehan's Ability to Work Together...92

5. Loss Causation...92

B. State Law Claims...94

1. CUSA, Conn. Gen. Stat. §§ 36b–29(a) and (c) (Count II)...94

2. Intentional and Negligent Misrepresentation and Fraudulent Inducement (Counts III, IV & V)...94

3. Unjust Enrichment (Count VI)...95

III. Conclusion...96

I. Facts Alleged¹

Plaintiff alleges the following facts in its Amended Complaint [Doc. # 43]. Foundation was founded in 2009 by Defendants Dean Barr and Joseph Meehan as a start-up company. (Am. Compl. ¶ 29.) The company's "business plan was to make three to four yearly minority investments of up to 25% in the management companies of large, well-established hedge funds." (Id. ¶ 28.) Foundation "asserted to potential investors that it expected to raise $4,000,000,000 to pursue this type of investment and that it was to yield substantial returns." (Id. )

Dean Barr served as the managing partner and managing principal of Foundation (id. ¶ 20); Joseph Meehan was a partner, managing principal and the Chief Operating Officer (id. ¶ 21); Thomas Ward was a partner, principal, manager, and Head of Distribution (id. ¶ 22); and Joseph Elmlinger was a partner, principal, and Head of Risk Structuring (id. ¶ 23).

In September 2013, FIH, an investment company, was introduced to Foundation. (Id. ¶ 37.) "The initial call between the representatives of FIH and Foundation took place in October 2013." (Id. ) Over the next five months, "Foundation, through the individual defendants, engaged in extensive communications with representatives of FIH to persuade them to make a substantial investment in Foundation. (Id. ¶ 38.) Among these communications were: (1) Preliminary Due Diligence Materials "drafted and/or approved by the individual defendants," prepared as of September 2013 and February 2014 (id. ¶ 40); (2) phone calls, emails and meetings; (3) a Portfolio Model (id. ¶ 77); and (4) a General Partner Forecast (id. ¶ 78; see Forecast, Ex. D to Barr Mot. to Dismiss). In these communications, Defendants made a number of representations to Plaintiff that Plaintiff now alleges were false or misleading. These representations are outlined below.

A. Defendants' Alleged Representations

1. Barr's Skills, Experience and Contacts

Many of the representations alleged to have been made by Defendants to FIH concerned Barr's experience, skills, and contacts in the investment industry. These statements include the following:

• "The principals ... have deep experience launching and managing investment businesses. Collectively, the team has over 100 years of experience in the alternative investment industry, having built/managed a number of successful asset management businesses, managed nearly $1 trillion in assets, and participated in dozens of growth capital investments. The principals believe that these experiences in successfully building alternative investment firms will enable [Foundation] to enjoy a strong start and long term success." (Due Diligence Sept. 2013 at 6; Due Diligence Feb. 2014 at 6).

• "[Foundation's] team maintains extensive relationships with leading managers, prime brokers and operations/administrative servicing professionals that will assist the firm with deal sourcing and execution." (Due Diligence Sept. 2013 at 26; Due Diligence Feb. 2014 at 26.)

• "The Investment Manager plans to source deals directly through personal relationships and direct contact with targeted leading managers in the alternative investment industry. The firm's partners maintain close working relationships with prime brokerage firms, investment banks, key funds-of-funds, and strategic limited partners who represent some of the world's largest investors in hedge funds .... The firm will use the extensive experience and relationships Mr. Barr cultivated at Citi Alternative Investments .... [Foundation] will use his background and experience in its discussions surrounding investment opportunities [with] Large Hedge Fund Managers." (Due Diligence Sept. 2013 at 26; Due Diligence Feb. 2014 at 26.)

The Due Diligence Materials additionally asserted that "[a] third party diligence group was retained to conduct professional and personal background checks on the managing principals of the General Partner," and its findings "validated the work history and achievements of Mr. Barr and Mr. Meehan." (Due Diligence Sept. 2013 at 14; Due Diligence Feb. 2014 at 14.) Furthermore, the Materials stated, the third party found "no negative legal or personal judgments involving these principals." (Due Diligence Sept. 2013 at 14; Due Diligence Feb. 2014 at 14.) Barr similarly asserted on December 4, 2013,² during a meeting at which all of the individual defendants were present, that there was nothing "FIH needed to know about [his] background or personality" and no other matters concerning him that FIH should know about before proceeding with an investment. (Am. Compl. ¶ 91.)

2. Barr and Meehan's Relationship

Several of Defendants' alleged representations to FIH concerned Barr's relationship with Meehan. The Due Diligence Materials for example, stated that "Mr. Barr and Mr. Meehan have known each other for 16 years, meeting through family relationships in 1997," and "[b]oth have worked closely together since the concept for Foundation Capital Partners was created in 2007." (Due Diligence Sept. 2013 at 13; Due Diligence Feb. 2014 at 13.) The Materials additionally asserted that the partners did "not believe they ha[d] any potential conflicts of interest with [Foundation]." (Due Diligence Sept. 2013 at 14; Due Diligence Feb. 2014 at 14.) In the lead-up to Barr's divorce from Meehan's wife's sister, Barr and Meehan each represented to FIH, in separate phone calls on December 5, 2013, that "their relationship as brothers in law" posed no "threat to their ability to work together." (Am. Compl. ¶¶ 83–84.)

3. The Pipeline and Expectations regarding Performance

FIH also alleges that Defendants made a number of representations to it concerning investments in Foundation's pipeline and Defendants' expectations about Foundation's performance. These include the following statements:

• As of September 2013:

• The Due Diligence Materials indicated that fifteen projects were in Foundation's pipeline, "including those with which the firm is in active discussions" (Projects Delta, Lake, California, and Corvette, and Funds Nos. 5–15). (Due Diligence Sept. 2013 at 27.)

• December 2, 2013:

• Barr circulated to FIH a document "drafted and/or approved by the individual defendants," entitled "[Foundation] Portfolio Model," which showed that "Foundation would close on four hedge fund GP minority interest transactions by June 30, 2014." (Am. Compl. ¶ 77.)

• The Portfolio

...