Rushing v. Bank

752 F.Supp.2d 1254

Karen E. RUSHING, as Clerk of the Circuit Court and County Comptroller of Sarasota County, Florida, Plaintiff,

v.WELLS FARGO BANK, N.A., as successor-in-interest to Wachovia Bank, N.A., Defendant.

Case No. 8:10–cv–1572–T–24–AEP.

United States District Court, M.D. Florida,Tampa Division.

Nov. 8, 2010.

Walter Andrew Clayton, Jr., Johnson, Browning & Clayton, Frederick Joseph Elbrecht, Sarasota, FL, for Plaintiff.Jack B. Cobetto, Mary J. Hackett, Reed Smith, LLP, Pittsburgh, PA, Kevin P. McCoy, Samuel J. Salario, Jr., Carlton Fields, PA, Tampa, FL, for Defendant.

ORDER

SUSAN C. BUCKLEW, District Judge.

This cause comes before the Court on Defendant Wells Fargo Bank, N.A.'s Motion to Dismiss Counts I, II, III, and V of the Complaint. (Doc. No. 12). Plaintiff opposes this Motion. (Doc. No. 14). After careful consideration of the allegations of the Complaint (Doc. No. 2), the Court concludes that the motion should be granted as to Counts I and V, and denied as to Counts II and III.

I. Background

Karen E. Rushing, as Clerk of the Circuit Court and County Comptroller (the “Clerk”) of Sarasota County, Florida (the “County”), brings this action for violations of the Florida Securities Investor Protection Act (“FSIPA”) (Count I), negligence (Count II), breach of fiduciary duty (Count III), breach of contract (Count IV), and unjust enrichment (Count V) in connection with losses resulting from investments purchased by Wachovia for the County. The County sues Wells Fargo Bank, N.A., as successor-in-interest to Wachovia Bank, N.A. (“Wachovia”).

The County alleges the following in its Complaint: Wachovia serves as the County's agent for purposes of lending the County's securities to third-party borrowers. The cash collateral received from any borrower is then reinvested by Wachovia for the County. The relationship between Wachovia and the County is governed by the Securities Lending Agency Agreement (the “Agreement”) (Doc. No. 2, Ex. C) and an addendum to the Agreement—the Securities Lending Investment Guidelines (the “Wachovia Guidelines”) (Doc. No. 2, Ex. D).

To engage in securities lending, the County was required to amend its investment policy guidelines (the “Revised County Guidelines”). (Doc. No. 2, Ex. A). Wachovia assisted the County in drafting portions of those amendments needed to allow securities lending, reviewed the Revised County Guidelines, and encouraged the Clerk to obtain approval of the Revised County Guidelines from the Sarasota County Board of County Commissioners. (Doc. No. 2, ¶ 16). In contrast to the Agreement and the Wachovia Guidelines, Wachovia was not a party to the Revised County Guidelines.

Under Paragraph 6.1 of the Agreement, Wachovia had the authority to act as the County's agent and to invest the cash collateral received from borrowers in accordance with the Wachovia Guidelines. (Doc. No. 2, Ex. C). In return for Wachovia's management of the securities lending program, Wachovia was compensated, in part, by receiving 40% of the revenues generated by the investments of cash collateral.

Both the Wachovia Guidelines and the Revised County Guidelines mandate conservative investments of the cash collateral; however, Wachovia deviated from that mandate with respect to three investments known as Altius III Funding, Ltd. (the “Altius Bonds”), the Option One Mortgage Notes OONIM 07–3 (the “OONIM Notes”), and the Lehman Bros. Notes (the “Lehman Notes”). (Doc. No. 2, ¶ 28). Wachovia purchased the investments pursuant to the power granted to it under the Agreement, and as such, Wachovia did not discuss these investments with the County before purchasing them. (Doc. No. 2, ¶ 30).

A. The Altius Bonds

On September 8, 2006, Wachovia arranged for the County's purchase of $20 million face value of the Altius Bonds. (Doc. No. 2, ¶ 29). However, this investment did not conform to the conservative investment policies set forth in the Wachovia Guidelines and Revised County Guidelines. First, the Altius Bonds exceeded the maturity guidelines of the Wachovia Guidelines and the Revised County Guidelines. Second, the Altius Bonds were prohibited securities because they violated the prohibition on derivative securities in the Wachovia Guidelines. Third, the Altius Bonds failed to conform to the secondary market requirements of the Revised County Guidelines and violated the County's risk-averse investment policies because they were high-risk investments. Finally, although not explicitly required in the Revised County Guidelines or the Wachovia Guidelines, the Altius Bonds were not issued by an American company. (Doc. No. 2, ¶ 34).

B. The OONIM Notes

On April 20, 2007, Wachovia purchased $20 million of the OONIM Notes. Wachovia never told the County that OONIM was a trust consisting primarily of a pool of first and second lien adjustable-rate and fixed-rate mortgage loans. (Doc. No. 2, ¶¶ 35–36). The OONIM Notes deviated from the Wachovia Guidelines and the Revised County Guidelines because the maturities exceeded the guidelines. Furthermore, the OONIM notes were high-risk investments because they were mortgage-related instead of mortgage-backed. Finally, the OONIM Notes were prohibited because they were derivative securities. (Doc. No. 2, ¶ 40).

C. The Lehman Notes

On March 20, 2007, Wachovia placed $40 million of the Lehman Notes in the County's securities lending portfolio. At that time, the Lehman Notes were the largest single corporate securities holding in the County's securities lending portfolio. The County alleges this failure to diversify was not prudent; that Wachovia should have informed the County that the risk was exacerbated by a concentrated position in Lehman; and that the risk could have been reduced by further diversification of the County's securities lending portfolio. (Doc. No. 2, ¶¶ 41–42). Based on media reports and the downgrading of Lehman in June 2008, Wachovia clearly knew the Lehman Notes were no longer consistent with the County's conservative investment objectives. Yet, Wachovia never advised the County of this, and this information would have given the County the reason and opportunity to dispose of the Lehman Notes. (Doc. No. 2, ¶ 46).

D. Current Value of the Investments

The County continues to hold the Altius Bonds, OONIM Notes, and Lehman Notes. As of May 26, 2010, the three investments reflected an unrealized loss of $39,787,510.88. The County alleges it did not discover and could not have discovered the basis for its claims until it retained counsel to conduct an investigation with the assistance of an independent investment management expert. (Doc. No. 2, ¶¶ 55–56).

II. Standard of Review for a Motion to Dismiss

In deciding a motion to dismiss, the district court is required to view the complaint in the light most favorable to the plaintiff. See Murphy v. Federal Deposit Ins. Corp., 208 F.3d 959, 962 (11th Cir.2000) (citing Kirby v. Siegelman, 195 F.3d 1285, 1289 (11th Cir.1999)). The Federal Rules of Civil Procedure do not require a claimant to set out in detail the facts upon which he bases his claim. Instead, Rule 8(a)(2) requires a short and plain statement of the claim showing that the pleader is entitled to relief in order to give the defendant fair notice of what the claim is and the grounds upon which it rests. See Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 553, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) (citation omitted). As such, a plaintiff is required to allege “more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.” Id. at 555, 127 S.Ct. 1955 (citation omitted). While the Court must assume that all of the allegations in the complaint are true, dismissal is appropriate if the allegations do not “raise [the plaintiff's] right to relief above the speculative level.” Id. (citation omitted). The standard on a 12(b)(6) motion is not whether the plaintiff will ultimately prevail in his or her theories, but whether the allegations are sufficient to allow the plaintiff to conduct discovery in an attempt to prove the allegations. See Jackam v. Hospital Corp. of Am. Mideast, Ltd., 800 F.2d 1577, 1579 (11th Cir.1986).

III. Motion to Dismiss

Wachovia moves to dismiss Counts I, II, III, and V of the Complaint. Accordingly, the Court will analyze Wachovia's argument regarding each count.

A. FSIPA (Count I)

In Count I, the County alleges that Wachovia violated FSIPA by purchasing the Altius Bonds and OONIM Notes, because those investments did not comply with the Wachovia Guidelines. Additionally, the County contends that Wachovia violated FSIPA because Wachovia failed to advise the County that the Altius Bonds and OONIM Notes did not comply with the Wachovia Guidelines and failed to advise the County of the risks associated with its continued holding of the Lehman Notes. Chapter 517 of the Florida Statutes addresses FSIPA violations. Pursuant to Florida Statute § 517.301:

It is unlawful and a violation of the provisions of this chapter for a person:

(a) In connection with the rendering of any investment advice or in connection with the offer, sale or purchase of any investment or security ... directly or indirectly:

1. To employ any device, scheme, or artifice to defraud;

2. To obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstance under which they were made, not misleading; or

3. To engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon a person.

The remedy for a violation of Section 517.301 is contained in Florida Statutes Section 517.211(2) and states:

Any person purchasing or selling a security in violation of s. 517.301, and every ... agent of or for the purchaser or seller, if the ... agent has personally participated or aided in making the sale or purchase, is jointly and severally liable...