Not what you're
looking for? Try an advanced search.
Buy This Entire Record For
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
LEHMAN BROTHERS, INC. AND LISA VIONI, DEFENDANTS.
The opinion of the court was delivered by: D. Brooks Smith, Chief United States District Judge.
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.
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
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));
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
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.
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.
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
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 ...
Buy This Entire Record For