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DANIEL BOONE AREA SCHOOL DISTRICT v. LEHMAN BROTHERS

February 5, 2002

DANIEL BOONE AREA SCHOOL DISTRICT, INDIVIDUALLY AND ON BEHALF OF OTHERS SIMILARLY SITUATED, PLAINTIFFS
V.
LEHMAN BROTHERS, INC. AND LISA VIONI, DEFENDANTS.



The opinion of the court was delivered by: D. Brooks Smith, Chief United States District Judge.

OPINION AND ORDER

I.

The fraudulent scheme to which Daniel Boone Area School District ("Daniel Boone") and other school districts*fn1 fell victim was revealed for the first time on September 26, 1997, when the Securities and Exchange Commission began a civil enforcement action against John Gardner Black ("Black") and two companies he controlled, Devon Capital Management, Inc. ("Devon") and Financial Management Sciences, Inc. ("FMS").*fn2 Black operated as an independent investment advisor for many school districts in the Commonwealth of Pennsylvania. Black, through Devon, entered into Investment Advisory Agreements with Daniel Boone pursuant to which he would deposit school district funds in Mid-State Bank and then use those funds to invest on behalf of Daniel Boone. Dkt. 24 ¶¶ 44-49.

Facing stiff competition from other municipal investment advisors, Black devised the Collateralized Investment Agreement ("CIA") in late 1993 and early 1994, hoping to increase his rate of return. Id. ¶ 55. CIAs were agreements entered into by Devon, purportedly on behalf of Daniel Boone, and FMS, pursuant to which FMS agreed to pay Daniel Boone principal and interest over a fixed term. Id. ¶ 56. FMS held all of the funds entrusted to it pursuant to the CIAs in a pooled account in Mid-State Bank, and its payment obligations were collateralized by other securities on deposit in FMS's Pooled Account. Id. Although the CIAs explicitly provided that FMS would hold as collateral only those securities authorized for public investment under Pennsylvania law, FMS actually invested Daniel Boone's funds in speculative derivative securities, which were not authorized investments. Id. ¶¶ 60-62. Black's investments in derivative securities pursuant to the CIAs ultimately suffered substantial losses. See, e.g., id. ¶ 67. As trading losses mounted, Black began a Ponzi scheme to keep his operations going, attracting new school district clients whose initial investments were used to pay prior investors.*fn3 Id. ¶ 75. By the end of September 1997, Black's losses totaled approximately $70 million.*fn4
On the basis of Lehman's knowledge of Black's investment scheme and Lehman's role in selling derivative securities, Daniel Boone commenced this action against Lehman. Daniel Boone asserts six counts against Lehman. Some of these counts allege that Lehman is primarily liable for its own tortious conduct. Other counts are more inchoate, alleging that Lehman is liable for aiding and abetting, acting in concert with, and conspiring with Black. Because I conclude that, for five of its counts, there are no facts that would entitle Daniel Boone to relief against Lehman, I will grant the motions to dismiss with respect to those claims. However, because Daniel Boone asserts a viable civil conspiracy claim against Lehman, I will deny the motions to dismiss with respect to that single count.

II.

When considering a motion to dismiss for failure to state a claim under Fed.R.Civ.P. 12(b)(6), I must accept as true all facts alleged in the complaint and view them in the light most favorable to the plaintiff. Independent Enterprises, Inc. v. Pittsburgh Water & Sewer Auth., 103 F.3d 1165, 1168 (3d Cir. 1997); Markowitz v. Northeast Land Co., 906 F.2d 100, 103 (3d Cir. 1990); D.P. Enterprises, Inc. v. Bucks County Community College, 725 F.2d 943, 944 (3d Cir. 1984). In order to prevail on a Rule 12(b)(6) motion, the movant must establish that no relief could be granted under any set of facts that the plaintiff could prove. Conley v. Gibson, 355 U.S. 41, 45-46 (1957); Trump Hotels & Casino Resorts v. Mirage Resorts, Inc., 140 F.3d 478, 483 (3d Cir. 1998); Ransom v. Marrazzo, 848 F.2d 398, 401 (3d Cir. 1988). In deciding a motion to dismiss, courts generally may consider only the allegations contained in the complaint, exhibits attached thereto, and matters of public record. Pension Benefit Guar. Corp. v. White Consol. Indus. Inc., 998 F.2d 1192, 1196 (3d Cir. 1993). Finally, I must presume at the pleading stage that general factual allegations "embrace those specific facts necessary to support the claim." Lujan v. Nat'l Wildlife Fed., 497 U.S. 871, 889 (1990); National Org. for Women, Inc. v. Scheidler, 510 U.S. 249, 256 (1994).

III.

Lehman's primary argument is that Daniel Boone lacks standing to assert its claims against Lehman. Lehman asserts that Daniel Boone lacks an injury-in-fact, as required for standing under Article III. See Lujan v. Defenders of Wildlife, 504 U.S. 555, 560 (1992); The Pitt News v. Fisher, 215 F.3d 354, 360 (3d Cir. 2000). However, Daniel Boone's substantial losses in this case are surely a constitutionally adequate injury-in-fact. Lehman's real complaint against Daniel Boone's standing is that those losses are not causally connected to the conduct of Lehman. See Defenders of Wildlife, 504 U.S. at 560 ("the injury has to be fairly . . . trace[able] to the challenged action of the defendant, and not . . . th[e] result [of] the independent action of some third party not before the court." (internal quotation marks omitted)); The Pitt News, 215 F.3d at 360-61. In arguing that Daniel Boone lacks standing because of the traceability requirement, however, Lehman is on shaky ground. As Wright and Miller explain in their discussion of the causation requirement for standing, "causation may be misused as an excuse to avoid decision." 13 CHARLES ALAN WRIGHT, ET AL, FEDERAL PRACTICE AND PROCEDURE: JURISDICTION 2D § 3531.5 (1984). Lehman's standing argument is not a fortiori from any case it cites, and because I do not wish to enter unnecessarily into the "sea of uncertainty" surrounding this issue, id., I will defer any discussion of Lehman's standing argument-the success of which would require dismissal of all of Daniel Boone's claims-until after reaching a decision regarding the alleged defects in each of Daniel Boone's separate counts. See infra Part IV.A.
I turn, then, to Lehman's arguments that each of Daniel Boone's six counts is defective on its merits and must be dismissed. In its amended complaint, Daniel Boone asserts the following six counts against Lehman: (1) tortious conduct in concert with others pursuant to RESTATEMENT (SECOND) OF TORTS § 876(a); (2) aiding and abetting a breach of fiduciary duty in violation of RESTATEMENT (SECOND) OF TORTS § 876(b); (3) civil conspiracy; (4) aiding and abetting a violation of the Pennsylvania Securities Act under § 503 of that Act; (5) common law fraud; and (6) negligence and negligence per se. See generally dkt. no. 30. Because the counts alleging the primary liability of Lehman are logically prior to the "inchoate torts" Daniel Boone also asserts, I begin my analysis with Daniel Boone's negligence and fraud claims. After addressing those counts, I then consider Daniel Boone's aiding and abetting, civil conspiracy, and acting in concert claims.

A.

In Count VI of its amended complaint, dkt. no. 30, Daniel Boone asserts negligence and negligence per se claims against Lehman. Daniel Boone cites Pennsylvania statutes and administrative regulations to establish that Lehman had a duty of care with respect to Daniel Boone. See id., ¶¶ 141-49. Daniel Boone also argues in its brief that the foreseeability of its injury created a duty of care on the part of Lehman. See dkt. no. 38, at 11. In addition, Daniel Boone invokes the doctrine of negligence per se in claiming that Lehman is liable for breaching its duties under the relevant statutes. See dkt. no. 30, ¶ 150. I take up each of these claims separately.

1.

Daniel Boone partly bases all its claims, including its claims of negligence and negligence per se, on provisions of the Pennsylvania Public School Code, 24 PA. CONS. STAT. ANN § 4-440.1 (West 2001), and the Debt Act, 53 PA. CONS. STAT. ANN. § 8224(b) (West 2001). The School Code specifies the types of investments that are authorized for investment of school district funds, and there is no dispute that the derivative securities Black purchased were unauthorized. See 24 PA. CONS. STAT. ANN. § 4-440.1(c) (listing authorized investments). Similarly, the Debt Act provides that a local government unit may invest in any securities in which the Commonwealth of Pennsylvania might itself invest, and again, there is no dispute that the derivative securities Black purchased were not securities in which the Commonwealth might invest. See 53 PA. CONS. STAT. ANN. § 8224(b). Lehman argues, however, that despite the fact that Black's investments in derivatives were not lawful under these statutory provisions, the statutes in question do not impose a duty on Lehman.
On the face of the statutes, it is clear that Lehman's claim is correct. The School Act refers specifically to the "board of school directors in any school district." 24 PA. CONS. STAT. ANN. § 4-440.1(b) (West 2001). Similarly, the Debt Act applies to "local government units." 52 PA. CONS. STAT. ANN. § 8001(b) (West 2001). None of these statutes creates a duty incumbent upon Lehman, and because "a statute that creates no duty cannot be the basis of liability," Travelers Ins. Co. v. SCM Corp., 600 F. Supp. 493, 499 (D.D.C. 1984), Lehman cannot be liable in negligence solely on the basis of these statutes.
At the same time, however, if another statute imposed any duty on Lehman to avoid selling securities that were unauthorized under the School Code and the Debt Act, then it might be possible for Daniel Boone to state a claim under that other statute. To this end, Daniel Boone also argues that Lehman breached the duties imposed by 70 PA. CONS. STAT. ANN. § 401 (West 2001) and 64 PA. CODE § 403.010(b) (West 2001). According to the former statute, "It is unlawful for any person, in connection with the offer, sale or purchase of any security of this State, directly or indirectly . . . to engage in any act, practice or course of business which operates or would operate as a fraud or deceit upon any person." 70 PA. CONS. STAT. ANN. § 401(c). A related administrative code regulation requires that
Each broker-dealer or agent who recommends to a customer the purchase, sale or exchange of any security shall have reasonable grounds to believe that the recommendation is not unsuitable for such customer on the basis of information furnished by such customer after reasonable inquiry concerning the customer's investment objectives, financial situation and needs, and any other information known by or made available to such broker-dealer or agent.
64 PA. CODE § 403.010. According to Daniel Boone, Lehman "knowingly caused violations of Section 401 . . . by trading in derivatives using school district funds." Dkt. no. 24 ¶ 144. Similarly, Daniel Boone argues that Lehman violated § 403.010 because they knew that derivatives were not authorized investments for Pennsylvania school districts and therefore were unsuitable investments. See id. at ¶ 148. Daniel Boone's ...

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