07-3658 | Omnilex

Gesamter Gesetzestext

UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT

August Term, 2008

(Argued: January 16, 2009
Decided: July 14, 2009)

Docket No. 07-3658-CV

SOUTH CHERRY STREET, LLC,

Plaintiff-Appellant,

\- V. -

HENNESSEE GROUP LLC, ELIZABETH LEE HENNESSEE,
CHARLES A. GRADANTE,

Defendants-Appellees.

Before: JACOBS, Chief Judge, KEARSE and HALL, Circuit Judges.

Appeal from so much of a judgment of the United States
District Court for the Southern District of New York, Colleen
McMahon, Judge, as dismissed, pursuant to Fed. R. Civ. P.
12 (b) (6), contract and securities fraud claims against investment
advisors for failure to disclose that hedge fund recommended by
defendants was part of a Ponzi scheme. See In re Bayou Hedge Fund
Litigation, 534 F.Supp.2d 405 (2007) .

Affirmed.

TED PORETZ, New York, New York (Theo J. Robins,
Derek Care, Bingham Mccutchen, New York,
New York, on the brief), for Plaintiff-
Appellant.

BENNETT FALK, Miramar, Florida (Matthew Wolper,
Bressler, Amery & Ross, Miramar, Florida,
on the brief) , for Defendants-Appellees.

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KEARSE, Circuit Judge:

Plaintiff South Cherry Street, LLC ("South Cherry"),
appeals from so much of a judgment of the United States District
Court for the Southern District of New York, Colleen McMahon,
Judge, as dismissed its claims against defendants Hennessee Group
LLC ( "Hennessee Group"), et al., for breach of contract and for
violation of § 10 (b) of the Securities Exchange Act of 1934 ( "1934
Act"), 15 U.S.C. § 78j (b), and Rule 10b-5 promulgated thereunder
by the Securities and Exchange Commission ( "SEC"), in connection
with Hennessee Group's failure to learn and disclose that a hedge
fund in which South Cherry invested, on Hennessee Group's
recommendation, was part of a Ponzi scheme. The district court
dismissed South Cherry's breach-of-contract claim pursuant to Fed.
R. Civ. P. 12 (b) (6) on the ground that it is barred by the New
York Statute of Frauds, see N.Y. Gen. Oblig. Law § 5-701 (a) (1)
(Mckinney 2001) ; the court dismissed the securities fraud claim on
the ground that the Amended Complaint (or "Complaint") failed to
plead scienter in the manner required by the Private Securities
Litigation Reform Act of 1995 ( "PSLRA"), 15 U.S.C. § 78u-4. South
Cherry challenges these rulings on appeal. For the reasons that

follow, we affirm.

# I. BACKGROUND

The present action concerns an investment made by South
Cherry in Bayou Accredited Fund, L.L.C. ( "Bayou Accredited"), on

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the recommendation of Hennessee Group. The following description
is based on the nonconclusory factual allegations in South
Cherry's Complaint, which we accept as true for purposes of
reviewing the dismissal pursuant to Fed. R. Civ. P. 12 (b) (6) ,
along with the Hennessee Hedge Fund Advisory Group Investor
Presentation ( "Hennessee Investor Presentation" or "Presentation")

containing the representations described in the Complaint (see
Declaration of Fred Groothuis dated April 25, 2007, Exhibit A) .

A. Hennessee Group's Pre-Investment Presentation to South Cherry

Hennessee Group (or "HG") is an advisor with respect to
investments in hedge funds, i.e., private pools of capital
collected from qualified investors. Defendants Elizabeth Lee
Hennessee and Charles A. Gradante are HG's managing principals.
HG describes itself as the "Industry Leader: the most recognized
hedge fund consulting firm in the industry, " whose principals have
testified before Congress on hedge fund issues. In 2001, South
Cherry was inexperienced in investing in hedge funds. (See
Complaint | 22.) At the request of one of South Cherry's
creditors, HG made a presentation to South Cherry and its
principal, Fred Groothuis, as to the HG process for evaluating
hedge funds.

The Hennessee Investor Presentation that was sent to South
Cherry stated that " [h]edge funds provide superior returns
relative to risk"; it emphasized HG's unique experience and
expertise in evaluating hedge funds, stating that HG had "150

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direct relationships with hedge funds, " had " [p]ersonal and
professional relationships with all key managers in the industry, "
and "review [ed] 550 [hedge funds] per month"; and it extolled,
inter alia, what HG called its "proprietary data base and
analytics, " its five-phase "unique due diligence process, " and its
" [c] redibility" with "investors and industry professionals."
According to the Presentation, HG considered only "Hedge Funds
With 3 Years Audited Track Record"; its due diligence process with
respect to such funds included the following five levels of
scrutiny prior to its recommendation of such a fund for
investment: (1) collection of information about the fund's
manager; (2) assessment of the fund's "Experience, " "Credibility, "
and "Transparency"; (3) interviews of hedge fund " [p]ersonnel from
the top down" at the fund's offices to give HG a sense of "overall
professionalism, attitude and depth of organization"; (4) study of
the fund's " [i]ndividual positions, " with an emphasis on its long,
short, cash, and derivative positions, as well as any " [o]ff
balance sheet transactions"; and (5) review of "audited financial
statements," checks of the fund's key personnel's references,
confirmation of the fund's prime banking relationship, and
measures to "Verify Auditor." The Presentation also stated that
after a decision to invest in a given hedge fund, " [m]onitoring
the investment, once it is made, is equally important, " and that
Hennessee Group provided " [o]ngoing and continuous quantitative
and qualitative analysis" and conducted "On-Going Due Diligence. "

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After receiving the Presentation from Hennessee Group,
South Cherry and HG entered into an oral arrangement whereby

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Hennessee Group contracted with South Cherry that it
would recommend to South Cherry suitable hedge fund
investments which had passed every stage of Hennessee
Group's detailed and rigorous five step due diligence
process. In addition, Hennessee Group promised South
Cherry that it would continue to perform on-going due
diligence on investments South Cherry would make in
reliance on Hennessee Group recommendations. In
exchange, South Cherry agreed to pay Hennessee Group
an annual commission of 1% of each hedge fund
investment South Cherry made as a result of a
Hennessee Group recommendation.

(Complaint | 45.)

## B. South Cherry's Investment in Bayou Accredited

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One of the hedge funds recommended to South Cherry by
Hennessee Group was Bayou Accredited, whose principals included
Samuel Israel III and Daniel Marino (see Complaint [ 9) .
Hennessee Group presented to South Cherry a " 'Biography'" of
Israel representing that from 1992 to 1996, Israel had been " 'head
one of the hedge fund
22 trader for Omega Advisors, '

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industry's largest and most successful funds, " and had " 'manag [ed]
assets exceeding $4 billion for Leon Cooperman, '" who was "widely
described as a 'legendary' trader." (Id. [ 29.) Hennessee Group
represented that "at Omega, Israel was responsible for all equity
and financial futures execution, and shared responsibility for
hedging the portfolio using futures and options." (Id. (internal
quotation marks omitted) .)

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In 1996, Israel and Marino formed Bayou Fund, LLC ( "Bayou
Fund") ; in or about January 2003, Israel and Marino replaced Bayou

Fund with several Bayou Family Funds, including Bayou Accredited.

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(See id. | 23.)

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In recommending an investment in Bayou [Accredited]
to South Cherry, Hennessee Group represented in
writing to Groothuis and South Cherry, among other
things, that the predecessor [, ] Bayou Fund [, ] . . .
had a greater than 19% annualized return since
inception, that it was profitable in 78% of the
months since its inception, and that it had
accomplished all of this at relatively low risk
relative to the broader marketplace.

(Id. | 26.) Further,

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[a]s part of its investment recommendation to
Groothuis and South Cherry, Hennessee Group also
provided South Cherry with six years of written
monthly performance figures for Bayou Fund. Net of
all fees, Hennessee Group represented to South Cherry
that Bayou Fund's annual performance between 1997 and
2002 ranged from a 7.05% gain in 2001 to a 21.04%
gain in 1999 to a high water gain of 32.52% in 1997.

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In reliance on Hennessee Group's representations and
recommendations, "and in specific reliance on [South Cherry's]
understanding that Bayou [Accredited] had passed all stages of
Hennessee Group's due diligence process, " South Cherry invested in
Bayou Accredited. (Complaint | 32.) The Complaint states that
South Cherry invested a total of "$2.9 million" [sic - $2.0
million?] in Bayou Accredited from "March 3, 2003 through June 1,
2003, " that it "withdrew $1.75 million" in the spring of 2004, and
that it "invested another $900, 000" "on or about October 5, 2004
. . . for a total net investment of $1.15 million." (Id.) From
the spring of 2003 until the spring of 2005, Hennessee Group sent
South Cherry monthly reports as to the status of its investment in
Bayou Accredited, the last of which "reported to South Cherry that

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its $1.15 million had appreciated to approximately $1.5 million. "
(Id. | 33.)

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The Complaint alleged that in fact, however, as revealed
in a September 2005 SEC report and an SEC action against the Bayou
funds' principals, Bayou Accredited was part of a Ponzi scheme.
(See, e.g., Complaint (1 33-35.) According to the SEC, Israel and
Marino had begun to divert moneys from all members of the Bayou
Family Funds in 2003, and they had essentially stopped trading in
those accounts and transferred all of those funds' assets to other
accounts in April 2004. (See Complaint 11 34, 35; see also id.
1 31 (quoting the SEC as asserting that "shortly after its
inception in 1996, [Bayou] began to sustain large losses from
trading and ... Israel and Marino, and ... a former Bayou
principal, began lying to investors regarding the Fund's
performance and the value of investors' accounts. Defendants
Israel and Marino also began to misappropriate and dissipate
millions of dollars of investor monies from the Fund and,
beginning in 2003, the four successor Funds." (internal quotation
marks omitted) (alterations in Complaint) ) .) All of the Bayou
Family Fund principals were eventually convicted, upon their pleas
of guilty, of securities fraud. (See id. | 37.)

In July 2005, Israel had written to Bayou Family Fund
investors to say that the funds would be liquidated and that each
investor would receive distributions in August; no distributions
were ever made. South Cherry lost its entire remaining $1.15
million investment in Bayou Accredited. (See Complaint | 36.)

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The SEC reported that "Bayou Fund in fact lost millions of
dollars in every single year it traded." (Complaint | 28.) Thus,
" [t]he figures Hennessee Group provided to South Cherry were all
false, showing profits where there were instead large losses. "
(Id.) In fact, the Complaint alleged, all of the above
representations by Hennessee Group as to Israel's background and
the performance of Bayou Fund were false. (See, e.g., id. 11 23,
26, 28-30.) "Israel was never 'head trader' for Omega Advisors,
and never held any position remotely comparable"; rather, the
" ' legendary'" Leon Cooperman "has since described Israel as a
mere 'order taker. '" (Id. 11 29, 30.) And Bayou Fund, having
"consistently lost money trading in securities and options,
created trading profits out of whole cloth in order to mask that
fact." (Id. [ 26) . Further, " [i]n order to hide th[e] fact" of
those losses, Israel and Marino in or around 1998 fired Bayou
Fund's independent auditor, Hertz Herson & Co. ("HHCO"), and
replaced it with a firm called Richmond, Fairfield & Associates
("Richmond Fairfield") (id. [ 23), a firm that the Complaint
alleged "was not a genuine auditor" (id. | 27), "was not
independent" because its principal was Marino (id. ), and "never
did any auditing" (id. ) . Despite the fact that HHCO had "stopped
auditing Bayou Fund in 1998, and never audited any of the Bayou
Family Funds once they were established in 2003, Hennessee Group
represented to South Cherry that Bayou [Accredited], and the Bayou

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Family Funds, were audited by HHCO." (Id. | 23.)

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The Complaint alleged that Hennessee Group could not have
performed any real due diligence in 2003, for if it had, it would
have discovered, inter alia, that Israel, prior to forming Bayou
Fund, had been a mere clerk, that HHCO had not been the auditor
for any of the Bayou-related funds since 1998, and that the new
auditor was not independent because it was owned by Marino, a
Bayou Fund principal. (See, e.g., Complaint 11 24, 28, 30.)
Thus, "Hennessee Group had no reasonable basis to credit" the
Bayou Fund financial figures "and was accordingly -- at best --
grossly negligent or reckless in passing them on to investors like
South Cherry." (Complaint | 28.)

## C. The Decision of the District Court

Following the disclosures as to the Ponzi-scheme nature of
the Bayou funds, South Cherry commenced the present action,
asserting, to the extent pertinent to this appeal, a breach-of-
contract claim against Hennessee Group for failure to perform the
promised due diligence, and claims of securities fraud under
§ 10 (b) and Rule 10b-5 against Hennessee Group -- and under § 20 of
the 1934 Act against Elizabeth Lee Hennessee and Gradante as
control persons of HG, see 15 U.S.C. § 78t -- for misrepresenting
the financial status and performance of the Bayou funds.
Hennessee Group moved to dismiss the breach-of-contract claim
pursuant to Fed. R. Civ. P. 12 (b) (6) on the ground that it was
barred by the New York Statute of Frauds; all of the defendants
moved to dismiss the securities fraud claims pursuant to Rule

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12 (b) (6) on the ground, inter alia, that the Complaint failed to
plead scienter in accordance with the requirements of the PSLRA.

In an opinion reported sub nom. In re Bayou Hedge Fund
Litigation (South Cherry Street LLC v. Hennessee Group LLC), 534
F. Supp.2d 405 (2007), the district court granted the motions to
dismiss. The court found that the oral agreement between South
Cherry and Hennessee Group was a contract of "indefinite
duration, " as " [n]o termination provision, express or implied" was
alleged. 534 F. Supp.2d at 419. The court noted that although it
could be said that performance of the contract would be completed

when South Cherry sold its HG-recommended hedge fund holdings,
such completion could occur only at the option of South Cherry;
because Hennessee Group could not perform its obligations within
one year unless South Cherry exercised that option, the court
concluded that the agreement was unenforceable under N.Y. Gen.
Oblig. Law § 5-701 (a) (1). See 534 F.Supp.2d at 420.

The district court ruled that South Cherry's securities
fraud claim, i.e., "that [HG] acted recklessly when it failed to
uncover the Bayou fraud after it promised to conduct due
diligence on Bayou Accredited, " id. at 414, should be dismissed
for lack of any indication of scienter. It concluded that HG's
alleged failure to perform due diligence did not establish
recklessness in the sense that § 10 (b) and Rule 10b-5 require,
because that failure did not establish either that HG knew Bayou
Accredited was part of a Ponzi scheme or that HG intended to
deceive South Cherry. See 534 F. Supp. 2d at 417.

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# II. DISCUSSION

On appeal, South Cherry contends that the district court
erred in dismissing both its contract claim and its securities
fraud claim. We review dismissals pursuant to Rule 12 (b) (6)
de novo, see, e.q., Burch v. Pioneer Credit Recovery, Inc., 551
F.3d 122, 124 (2d Cir. 2008), assuming all "well-pleaded factual
allegations" to be true, and "determin [ing] whether they plausibly
give rise to an entitlement to relief, " Ashcroft v. Iqbal, 129 S.
Ct. 1937, 1950 (2009) ("Iqbal") ; see Fed. R. Civ. P. 8 (a) (2)
(complaint must contain "a short and plain statement" showing that
the plaintiff "is entitled to relief"). We also review de novo a
dismissal for failure to state a claim in accordance with the
heightened pleading standards imposed by the PSLRA, discussed in
Part II.B. below. See generally Faulkner v. Beer, 463 F.3d 130,
133-34 (2d Cir. 2006) ; Novak v. Kasaks, 216 F.3d 300, 305 (2d Cir.
2000) ("Novak") . Applying these standards to South Cherry's
claims, we see no error in the rulings of the district court.

## A. The Contract Claim

New York's Statute of Frauds provides, in pertinent part,
as follows:

Every agreement, promise or undertaking is void,
unless it or some note or memorandum thereof be in
writing, and subscribed by the party to be charged
therewith, or by his lawful agent, if such agreement,
promise or undertaking:

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1\. By its terms is not to be performed
within one year from the making thereof

N. Y. Gen. Oblig. Law § 5-701 (a) (1). This provision requires
answers to one or both of the following questions: (1) whether
the agreement is reflected in a writing signed by the party
against which enforcement is sought, and (2) if it is not, whether
the agreement is one described by the statute.

There is no dispute here that the answer to the first
question is negative. Although South Cherry's Complaint alleged
that "Hennessee Group
promised South Cherry in writing that
it would perform both extensive pre-recommendation and
post -recommendation ongoing due diligence" (Complaint 1 7
(emphasis added) ), the writing to which South Cherry refers was a
unilateral presentation by HG, rather than a contract. South
Cherry does not contend that it alleged there was any writing
signed by Hennessee Group containing the terms of the agreement
that South Cherry sought to enforce; it merely argues that the
district court erred in ruling that the Statute of Frauds was
applicable to "the oral contract pleaded in the . . . Complaint"
(South Cherry brief on appeal at 7 (emphasis added) ; see also id.
at 15 ( "South Cherry alleged an oral agreement whereby HG would
provide South Cherry with hedge fund recommendations and due
diligence, in exchange for which South Cherry would pay a 1% fee
for each year it held a recommended investment." (emphasis
added) ) ) .

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The disputed question is whether the alleged oral
agreement is within the scope of § 5-701 (a) (1). Historically,
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courts generally held that this provision of the Statute of Frauds
was "limited
to those contracts only which by their very
terms have absolutely no possibility in fact and law of full
performance within one year, " D & N Boening, Inc. v. Kirsch
Beverages, Inc., 63 N.Y.2d 449, 454, 483 N.Y.S.2d 164, 165 (1984)
("Boening") (citing 2 Corbin, Contracts § 444 (1950) ; 3 Williston,
Contracts § 495 (3d ed. 1960) ), making the key question " 'whether
the contract, according to the reasonable interpretation of its
terms, required that it should not be performed within the year, '"
Boening, 63 N. Y.2d at 454, 483 N. Y. S.2d at 165 (quoting Warner v.
Texas & Pacific Ry., 164 U.S. 418, 434 (1896) ). The New York
Court of Appeals had ruled that " 'if the obligation of the
contract is not, by its very terms, or necessary construction, to
endure for a longer period than one year, it is a valid agreement,
although it may be capable of an indefinite continuance, '"
Boening, 63 N.Y.2d at 454-55, 483 N.Y. S.2d at 166 (quoting
Trustees of First Baptist Church v. Brooklyn Fire Insurance Co.,
19 N.Y. 305, 307 (1859) ) .

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The principle that this aspect of the Statute of Frauds
encompasses only those contracts that "by their very terms have
absolutely no possibility in fact and law of full performance
within one year, " Boening, 63 N.Y.2d at 454, 483 N. Y.S.2d at 165,
has not, however, been applied literally. In Shirley Polykoff
Advertising, Inc. v. Houbigant, Inc., 43 N.Y.2d 921, 403 N.Y.S.2d
732 (1978), for example, the plaintiff alleged an oral agreement
pursuant to which it had designed an advertisement for the

defendant, for which the defendant agreed to pay the plaintiff
$5,000 for "every year" that the defendant used the
advertisement. If the defendant had paid the plaintiff $5,000 and
used the advertisement only within one year of the making of the
agreement, performance by both sides would, literally, have been
completed within one year. But under the agreement, the defendant
had the right to use the design in perpetuity. Thus, although the
defendant was not obligated to use the advertisement in any given
year, its non-use in any given year did not extinguish its

obligation to pay if it used the advertisement in any subsequent
year. Accordingly, the possibility existed that the agreement
would not be performed within one year; the duration of the
defendant's right and obligation was thus unlimited; and the court
held that enforcement of the agreement was barred by the Statute
of Frauds. See 43 N. Y.2d at 921-22, 403 N. Y. S.2d at 733; see also
Martocci v. Greater New York Brewery, 301 N.Y. 57, 63, 92 N.E.2d
887, 889 (1950) (finding an oral agreement to be within the
statute, even though the defendant's liability depended on the
placing of orders by a third party, which could have ceased within
one year) .

In Boening itself, the plaintiff alleged an oral agreement
in which the defendant, a prime distributor of "Yoo-Hoo" chocolate
drink (a) agreed to grant the plaintiff's predecessors the
exclusive right to distribute Yoo-Hoo in a particular area of New
York if they ceased distribution of a competitor's chocolate
drink, and (b) agreed that the predecessors' exclusive

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subdistributorship "would continue 'for as long as they
satisfactorily distributed the product, exerted their best efforts
and acted in good faith. '" 63 N. Y.2d at 452, 483 N. Y. S.2d at 164.
The Boening Court concluded that these terms, reasonably
construed, necessarily meant that "the oral agreement between the
parties called for performance of an indefinite duration and could

only be terminated within one year by its breach during that
period. As such, the agreement fell within the Statute of Frauds
and was void." Id. at 457, 483 N. Y. S.2d at 167 (emphases added) .

If, however, an oral agreement expressly provides that it
may permissibly be terminated within one year by either party,
such a termination is considered performance, rather than a
breach; and such an agreement is not within the Statute of Frauds.
See, e.g., Blake v. Voight, 134 N.Y. 69, 72, 31 N.E. 256, 256-57
(1892) . South Cherry, arguing that the district court erred in
finding the Statute of Frauds applicable here on the ground that
only South Cherry could end the contract within one year without a
breach, relies on Boening for the proposition that an oral
agreement is not within the Statute of Frauds "' [w] here one or
both parties have [] an explicit option to terminate their
agreement within one year. '" (South Cherry brief on appeal at 14
(quoting Boening, 63 N.Y.2d at 456, 483 N. Y. S.2d at 167 (emphasis
and alteration in brief) ) .) Boening did so state; but as the

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court in Huebener v. Kenyon & Eckhardt, Inc., 142 A.D.2d 185, 534
N.Y. S. 2d 952 (1st Dep't 1988) ("Huebener") , observed,
" [s]ignificantly, in distinction to other rules set forth in

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[Boening's] review of the existing authorities, this sentence [in
Boening] is not followed by any citation of authority, " Huebener,
142 A.D.2d at 191, 534 N. Y.S.2d at 956; and we note that the only
cases that Boening cited subsequently in which only one party had
an option to terminate and the oral agreement was held to be
outside the Statute of Frauds were cases in which that option
belonged to the defendant, see Boening, 63 N.Y.2d at 456-57, 483
N. Y. S.2d at 167 (citing Coinmach Industries Corp. v. Domnitch, 37
N. Y. 2d 889, 378 N. Y.S.2d 370 (1975) , and North Shore Bottling Co.
v. C. Schmidt & Sons, Inc., 22 N. Y.2d 171, 292 N. Y.S.2d 86
(1968) ) .

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In North Shore Bottling, the New York Court of Appeals
held that an oral agreement giving the defendant an express
option to terminate was not within the Statute of Frauds; but it
noted that an agreement would be within the Statute if instead the
"option to terminate was solely in [the] plaintiff, the party
seeking to enforce the agreement, and not in the party to be
charged." 22 N.Y.2d at 177 n.3, 292 N. Y. S.2d at 90 n.3 (emphasis
in original) (citing, inter alia, Belfert v. Peoples Planning
Corp. of America, 11 N.Y.2d 755, 226 N.Y.S.2d 693 (1962) ). Thus,
the New York courts have held that the principle announced in
Blake v. Voight, i.e., that an oral contract is not made
unenforceable by the Statute of Frauds if by its express terms, it
is terminable by either party within one year, is not applicable
where only the plaintiff has that option. See, e.g., Americana
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Petroleum Corp. v. Northville Industries Corp., 200 A.D.2d 646,

647, 606 N.Y.S.2d 906, 907 (2d Dep't 1994) ; Huebener, 142 A.D.2d
at 189-91, 534 N.Y.S.2d at 955-56; Sawyer v. Sickinger, 47 A.D.2d
291, 295, 366 N.Y.S.2d 435, 438 (1st Dep't 1975) ). The rationale
is that

where the right to cancel or terminate is limited
unilaterally to plaintiff [, ] . . . [the] defendant's
liability endures indefinitely, subject only to the
uncontrolled voluntary act of the party who seeks to
hold defendant. Under such circumstances it is
illusory, from the point of view of defendant, to
consider the contract terminable or performable
within one year. And it is to the party to be
charged, alone, namely the defendant, that the
statute is designed to provide protection from fraud
and perjury.

Belfert v. Peoples Planning Corp. of America, 22 Misc.2d 753, 756,
199 N. Y. S.2d 839, 842 (Sup. Ct. N.Y. Co. 1959) (internal quotation
marks omitted), aff'd, 11 A.D.2d 760, 760, 202 N.Y.S.2d 101, 101
(1st Dep't 1960) (a "contract [is] one not performable within a
year" where " [t]he oral options [are] exercisable by the
[plaintiff-]appellant alone"), aff'd without opinion, 11 N. Y.2d
755, 226 N.Y.S.2d 693 (1962). Accordingly, our Court has
recognized that under New York law, an oral agreement that is not
by its terms to be fully performed within one year falls within
the Statute of Frauds if the option to terminate rests with the
plaintiff alone. See Zaitsev v. Salomon Bros., 60 F.3d 1001, 1003
(2d Cir. 1995) ("if performance within one year depends upon an
act solely within the control of the party seeking to enforce the
oral agreement, the Statute of Frauds remains applicable") .

Thus, South Cherry's contention that the district court
erred as a matter of law in ruling that the Statute of Frauds is

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applicable where only the plaintiff has the option, without a
breach, to end the contract within one year, is without merit.

South Cherry also seeks to take the alleged oral agreement
between itself and Hennessee Group outside the Statute of Frauds
by contending (a) that HG had an option to terminate (see South
Cherry brief on appeal at 17), (b) that HG's obligations under the
agreement could have ended within one year as a result of the
collapse of a hedge fund in which South Cherry invested (see id. ),
and (c) that its arrangement with HG consisted not of a single
contract of indefinite duration, but rather of a series of
contracts, each of which was capable of being performed in a year
(see id. at 17-19) . These contentions too are meritless.

South Cherry's contention that Hennessee Group had the
right to terminate the alleged agreement within one year at will,
"merely by recommending that the investor sell an investment"
(South Cherry brief on appeal at 17), borders on the frivolous.
Recommendations are not commands. Although South Cherry states
that it would have been unreasonable for it not to follow such a
recommendation (see South Cherry reply brief on appeal at 4), the
fact remains that the right to decide whether to sell belonged to
South Cherry and South Cherry alone. And the Complaint alleged
that "Hennessee Group promised South Cherry that it would continue
to perform on-going due diligence" on HG-recommended funds
invested in by South Cherry. (Complaint | 45.) Thus, according
to the Complaint's description of the agreement, HG could not
fully perform its obligations merely by recommending the sale of a

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previously recommended fund; if South Cherry chose to continue to
invest in that fund, HG could end the agreement only by breaching
it.

Nor is there merit in South Cherry's contention that the
Statute of Frauds did not apply because "a hedge fund could go
out of business within a year, an event which would necessarily
terminate the agreement between South Cherry and HG" (South Cherry
brief on appeal at 17). The Complaint contains no allegation that
the parties agreed that the contract would end upon dissolution of
a hedge fund. Nor can such a provision reasonably be inferred,
given, inter alia, that South Cherry, on HG's recommendations,
invested in more than one such fund (see, e.g., Complaint 11 8,
25, 30). The alleged agreement provides no basis for either an
inference that if any one of the HG-recommended funds in which
South Cherry invested failed, Hennessee Group would be relieved of
its obligation to perform ongoing due diligence on the other
HG-recommended funds in which South Cherry invested, or an
inference that if any one such fund failed, South Cherry would be
required to sell all of its other HG-recommended funds.

Finally, we reject South Cherry's contention that "[i]t
has long been the law in New York that an agreement of the type
alleged in the Amended Complaint is 'a series of . . . independent
contracts, ' each of which could be performed within one year."
(South Cherry brief on appeal at 17 (citing Nat Nal Service
Stations, Inc. v. Wolf, 304 N.Y. 332, 337, 107 N.E.2d 473, 474
(1952) ("Nat Nal") (emphasis ours) ) .) Nat Nal involved an

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arrangement between a plaintiff gas station owner and defendant
gasoline distributors; the arrangement was that if the plaintiff
would order its gasoline through the defendants and if the
defendants accepted those orders, the defendants would give the
plaintiff a discounted price. The court noted (a) that the
plaintiff was not obligated to place any order with the
defendants, and (b) that if the plaintiff did place an order, the
defendants were not obligated to accept it. Thus, the agreement
"was clearly one at will and for no definite or specific time and
thus by its terms did not of necessity extend beyond one year from
the time of its making." 304 N.Y. at 336, 107 N.E.2d at 475. The
court concluded that " [w]e are confronted with an alleged contract
by the terms of which neither party was bound to do anything at
any time, and consequently there is nothing in its terms to bring
it within the Statute of Frauds." Id. at 337, 107 N. E.2d at 475.
The arrangement in Nat Nal bears no resemblance to the contract
alleged here, in which (a) Hennessee Group agreed to perform due
diligence before recommending a hedge fund to South Cherry, (b)
South Cherry, upon investing in any HG-recommended fund, became
obligated to pay HG annually 1% of the amount invested in that
fund for so long as South Cherry held that investment, and (c)
Hennessee Group agreed to perform continuing due diligence with
respect to any such fund as long as it was held by South Cherry.

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In sum, we conclude that because the possibility of
performance of the alleged oral agreement within one year depended
solely on the will and actions of South Cherry, the party seeking

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to enforce the agreement, the district court correctly ruled that
South Cherry's contract claim was barred by the Statute of Frauds.

B. The Securities Fraud Claims

1\. The Element of Scienter

To state a claim on which relief can be granted under
§ 10 (b) and Rule 10b-5, a plaintiff must plead, inter alia, that
in connection with the purchase or sale of securities, the
defendant made a false representation as to a material fact, or
omitted material information, and acted with scienter. See, e.g.,
Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 318,
321 (2007) ; Chill v. General Electric Co., 101 F.3d 263, 265 (2d
Cir. 1996) ( "Chill") ; In re Time Warner Inc. Securities
Litigation, 9 F.3d 259, 264 (2d Cir. 1993), cert. denied, 511 U.S.
1017 (1994) . The Supreme Court has defined scienter as "'a mental
state embracing intent to deceive, manipulate, or defraud. '"
Tellabs, 551 U.S. at 319 (quoting Ernst & Ernst v. Hochfelder, 425
U.S. 185, 194 n.12 (1976) ).

Prior to the enactment of the PSLRA, this Court had held
that in order to plead an intent to deceive, the complaint must
allege facts giving rise to "a strong inference of fraudulent
intent, " Acito v. IMCERA Group, Inc., 47 F. 3d 47, 52 (2d Cir.
1995) ; see, e.g., Shields v. Citytrust Bancorp, Inc., 25 F.3d
1124, 1128 (2d Cir. 1994) ; In re Time Warner Inc. Securities
Litigation, 9 F.3d at 268, and that such an inference could be
drawn from allegations of facts showing that the defendant had

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both motive and opportunity to commit fraud, see, e.g., Acito v.
IMCERA Group, Inc., 47 F.3d at 52; Shields v. Citytrust Bancorp,
Inc., 25 F.3d at 1128. Motive, we observed, could be shown by
pointing to "the concrete benefits that could be realized" from
one or more of the allegedly misleading statements or
nondisclosures; opportunity could be shown by alleging "the
means" used and the "likely prospect of achieving concrete
benefits by the means alleged." Id. at 1130. This test is
"generally met when corporate insiders [a]re alleged to have
misrepresented to the public material facts about the
corporation's performance or prospects in order to keep the stock
price artificially high while they sold their own shares at a
profit." Novak, 216 F.3d at 308. But in attempting to show that
a defendant had fraudulent intent, it is not sufficient to allege
goals that are "possessed by virtually all corporate insiders, "
such as the desire to maintain a high credit rating for the
corporation or otherwise sustain the appearance of corporate
profitability or the success of an investment, or the desire to
maintain a high stock price in order to increase executive
compensation. Id. ; see, e.g., San Leandro Emergency Medical Group
Profit Sharing Plan v. Philip Morris Cos., 75 F.3d 801, 814 (2d
Cir. 1996) ; Chill, 101 F.3d at 268; Acito v. IMCERA Group, Inc.,
47 F.3d at 54.

This Court has also long held that the scienter element
can be satisfied by a strong showing of reckless disregard for the
truth. See, e.g., Lanza v. Drexel & Co., 479 F.2d 1277, 1301 (2d

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Cir. 1973) (en banc) ; Rolf v. Blyth, Eastman Dillon & Co., 570
F.2d 38, 47 (2d Cir.) ("Rolf"), cert. denied, 439 U.S. 1039
(1978) ; SEC v. McNulty, 137 F.3d 732, 741 (2d Cir.), cert. denied,
525 U.S. 931 (1998) ; Novak, 216 F.3d at 306, 308; ATSI
Communications, Inc. v. Shaar Fund Ltd., 493 F.3d 87, 99 n.3 (2d
Cir. 2007). See also Tellabs, 551 U.S. at 319 n.3 ("Every Court
of Appeals that has considered the issue has held that a plaintiff
may meet the scienter requirement" for civil liability under
§ 10 (b) and Rule 10b-5 "by showing that the defendant acted
[either] intentionally or recklessly"; the Supreme Court itself
has not yet decided "whether [a showing of] reckless behavior is
sufficient . ") .

By reckless disregard for the truth, we mean "conscious
recklessness -- i.e., a state of mind approximating actual intent,
and not merely a heightened form of negligence, " Novak, 216 F.3d
at 312 (internal quotation marks omitted) (emphases ours). In
elaborating as to what may constitute recklessness in the context
of a private securities fraud action, we have referred to conduct
that "'at the least
is highly unreasonable and which
represents an extreme departure from the standards of ordinary
care to the extent that the danger was either known to the
defendant or so obvious that the defendant must have been aware of
it, '" In re Carter-Wallace, Inc. Securities Litigation, 220 F.3d
36, 39 (2d Cir. 2000) (quoting Rolf, 570 F.2d at 47 (emphasis
ours) ) ; or to evidence that the "defendants failed to review or
check information that they had a duty to monitor, or ignored

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obvious signs of fraud, " and hence "should have known that they
were misrepresenting material facts, " Novak, 216 F.3d at 308
(emphases added) . "An egregious refusal to see the obvious, or to
investigate the doubtful, may in some cases give rise to an
inference of . . . recklessness." Chill, 101 F.3d at 269
(internal quotation marks omitted) (emphases added) ; see, e.g.,
SEC v. McNulty, 137 F.3d at 741 (defendant corporate officer who
prepared and proceeded to file documents with the SEC containing
statements whose veracity he himself had questioned, had had an
obvious duty to verify the suspicious information) .

In passing the PSLRA, Congress adopted a substantive
"'standard modeled upon the pleading standard of the Second
Circuit, '" Novak, 216 F.3d at 311 (quoting legislative history) ,
insofar as we had applied a "strong inference" test (see Part
II. B. 2. below), although it did not adopt our motive-and-
opportunity gloss for the pleading of intent or our alternative
standard of recklessness, see Novak, 216 F.3d at 311. Thus, we
reasoned that, under the PSLRA, litigants and courts need not "and
should not employ or rely on magic words such as 'motive and
opportunity'" with respect to intent; but that, in accordance with
our prior cases, a strong inference of the requisite state of mind

may arise where the complaint sufficiently alleges
that the defendants: (1) benefitted in a concrete
and personal way from the purported fraud
; (2)
(3)

engaged in deliberately illegal behavior

knew facts or had access to information suggesting
that their public statements were not accurate
. . . ; or (4) failed to check information they had a
duty to monitor

Id .; see also id. at 307-09.

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In Novak, we also noted that "there are limits to the
scope of liability for failure adequately to monitor the allegedly
fraudulent behavior of others." Id. at 309. In Chill, for
example, we held that the allegation that a parent company had
failed to interpret its subsidiary's "unprecedented and
dramatically increasing profitability" in a particular form of
trading as a sign of problems, and thus had failed to investigate
further, did not adequately plead recklessness amounting to
scienter. See 101 F.3d at 269-70. In Decker v. Massey-Ferguson,
Ltd., 681 F.2d 111, 120-21 (2d Cir. 1982) , we held that the
allegation of a non-fiduciary accountant's failure to identify
problems in a company's internal controls and accounting practices
was not sufficient. For "recklessness on the part of a non-
fiduciary accountant [to] satisfy Ernst & Ernst's requirement of
scienter," it must "approximate an actual intent to aid in the
fraud being perpetrated by the audited company." Id.

### 2. PSLRA Pleading Requirements

As a general matter, " [t]o survive a motion to dismiss, a
complaint must contain sufficient factual matter, accepted as
true, to 'state a claim to relief that is plausible on its face. '"
Iqbal, 129 S. Ct. at 1949 (quoting Bell Atlantic Corp. v. Twombly,
550 U.S. 544, 570 (2007) ("Twombly") (emphasis ours) ); see also
Iqbal, 129 S. Ct. at 1953 ("the [Twombly] pleading standard
[applies to] all civil actions" (internal quotation marks
omitted) ). "Determining whether a complaint states a plausible

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claim for relief will
be a context-specific task that
requires the reviewing court to draw on its judicial experience
and common sense." Iqbal, 129 S. Ct. at 1950. Generally " [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." Id.
at 1949; see Twombly, 550 U.S. at 556.

In a private securities fraud action, however, " [u] nder
the PSLRA's heightened pleading instructions," enacted in 1995
" [a]s a check against abusive litigation by private parties,"
Tellabs, 551 U.S. at 313, 321, the plaintiff must do more. See,
e. g., Teamsters Local 445 Freight Division Pension Fund v. Dynex
Capital Inc., 531 F.3d 190, 194 (2d Cir. 2008) ("Teamsters
14 .
Local 445"). Section 21D (b) (2) of the PSLRA, codified at
15 U.S.C. § 78u-4 (b) (2), provides that

[i]n any private action arising under this chapter in
which the plaintiff may recover money damages only on
proof that the defendant acted with a particular
state of mind, the complaint shall, with respect to
each act or omission alleged to violate this chapter,
state with particularity facts giving rise to a
strong inference that the defendant acted with the
required state of mind.

15 U.S.C. § 78u-4 (b) (2) (emphases added) . To meet the "strong
inference" standard, it is not sufficient to set out "facts from

which, if true, a reasonable person could infer that the defendant
acted with the required intent, " for that gauge "does not capture
the stricter demand Congress sought to convey in § 21D (b) (2) ."
Tellabs, 551 U.S. at 314 (internal quotation marks omitted)
(emphasis ours) . Rather, "[t]o qualify as 'strong' within the

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intendment of § 21D (b) (2) ,
an inference of scienter must be
more than merely plausible or reasonable -- it must be cogent and at

least as compelling as any opposing inference of nonfraudulent
intent." Tellabs, 551 U.S. at 314 (emphases added) . Thus,

to determine whether a complaint's scienter
allegations can survive threshold inspection for
sufficiency, a court governed by § 21D (b) (2) must
engage in a comparative evaluation; it must consider,
not only inferences urged by the plaintiff, . . . but
also competing inferences rationally drawn from the
facts alleged. An inference of fraudulent intent may
be plausible, yet less cogent than other, nonculpable
explanations for the defendant's conduct.

Tellabs, 551 U.S. at 314 (emphases added) .

In sum, " [a] plaintiff alleging fraud in a § 10 (b) action
must plead facts rendering an inference of scienter at least
as likely as any plausible opposing inference." Tellabs, 551 U.S.
at 328 (emphasis in original). And in determining whether this
standard has been met, the court must consider whether "all of the
facts alleged, taken collectively, give rise to a strong inference
of scienter, not whether any individual allegation, scrutinized in
isolation, meets that standard." Id. at 323 (emphasis in
original) .

Applying these principles in Teamsters Local 445, in which
the complaint alleged that false and misleading statements were
made recklessly but did not allege that the defendants had any
compelling motive to mislead their bondholders, we concluded that
there were a number of permissible competing inferences, including
an inference that the statements "were the result of merely
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fed" to them by others. 531 F. 3d at 197 (internal quotation marks
omitted) . Given that this inference was "'at least as
compelling'" as the conscious-recklessness inference advocated by
the plaintiff, we concluded that the PSLRA required dismissal of
the complaint. Id.

### 3. The Present Case

Within the above legal framework, South Cherry's challenge
to the dismissal of its securities fraud claims presents two
overarching questions: (1) whether the Complaint alleged facts
sufficient to create a strong inference of scienter, and (2)
whether an inference of scienter is at least as compelling as any
opposing inference of nonfraudulent and nonreckless intent. To
warrant reversal, both questions need to be answered in the
affirmative. We conclude that both must be answered in the
negative.

The district court viewed South Cherry's Complaint as
asserting that Hennessee Group's conduct was reckless in
recommending Bayou Accredited for investment. South Cherry, in
challenging that decision, reiterates some of the allegations in
the Complaint that led the court to that interpretation. (See,
e. g., South Cherry brief on appeal at 25 ("South Cherry clearly
alleged that HG failed to do basic due diligence, with the result
that its 'representations and opinions were given without basis
and in reckless disregard of their truth or falsity' as to the
suitability of Bayou Accredited as an investment for South

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Cherry." (quoting Rolf, 570 F.2d at 48) ) .) But South Cherry also
argues that

[its] allegation is that HG, perpetrating its own
fraud (and not merely advancing Bayou's), made
intentional misrepresentations of fact to South
Cherry when it represented, among other things, the
performance history, investment strategy, principals'
track record and auditors' identity for Bayou
Accredited and its predecessor fund on the basis of
thorough due diligence HG claimed to have performed,
but did not.

(South Cherry brief on appeal at 20 (emphases added) .)
This
somewhat convoluted sentence is perhaps subject to various
interpretations; but we conclude that whichever way it was
intended, the Complaint lacks sufficient factual allegations to
give rise to a strong inference of either fraudulent intent or
conscious recklessness.

To the extent that the quoted passage was intended to
argue that Hennessee Group made "intentional" misrepresentations
as to the performance and record of the Bayou funds and their
principals, it does not carry the day because we see no such
factual allegations in the Complaint. Despite the Complaint's
conclusory allegation that Hennessee Group "knowingly or
recklessly (a) made untrue statements of material fact and omitted
to state material facts necessary in order to make the statements
made, in light of the circumstances under which they were made,
not misleading, and (b) engaged in acts, practices, and/or a
course of business that operated or would operate as a fraud or
deceit upon South Cherry" (Complaint 1 55 (emphasis added) ),
nowhere in the Complaint is there any allegation that Hennessee

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Group had knowledge that any representation it made as to the
records or circumstances of Bayou Accredited, or its predecessor
Bayou Fund, was untrue. Instead, the Complaint is replete with
allegations that HG "would" have learned the truth as to those
aspects of the Bayou funds if HG had performed the "due diligence"
it promised. (E.g., Complaint || 7, 18, 26, 27, 28, 30.)
Nor, to the extent that South Cherry sought to allege
recklessness, does the Complaint contain an allegation of any fact
relating to Bayou Accredited that (a) was known to Hennessee Group
and (b) created a strong inference that HG had a state of mind
approximating an actual intent either to relay false or misleading
information about Bayou Accredited or to aid in the fraud being
perpetrated by the Bayou Accredited principals. Although the
Complaint alleged that, "[i]n breach of its agreement with South
Cherry," Hennessee Group "failed to take obvious investigative
steps and ignored clear red flags" (id. | 30), it did not allege
that Hennessee Group did not believe that the various Bayou funds'
representations, including their records and financial statements,
were accurate. It did not allege any fact known to Hennessee
Group prior to the summer of 2005, i.e., during the period in
which HG was recommending Bayou Accredited, that either made the
falsity of any of the Bayou funds' representations obvious or that
should have alerted HG that the Bayou funds' representations were
dubious. According to the Complaint, federal and state officials
did not focus on the Bayou funds until the summer of 2005,
following Israel's announcement to investors that the funds would

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be liquidated. (See Complaint 11 36, 37.) There is no factual
allegation in the Complaint that, prior to that announcement in
July 2005, there were obvious signs of fraud, or that the danger
of fraud was so obvious that HG must have been aware of it.
Rather, the Complaint alleged that "[i]f" Hennessee Group had
asked various questions earlier, it would have further questioned
the Bayou Accredited financial records or recognized the need to
ask further questions. (Complaint 11 18, 24; see also id. 11 7,
26, 27, 28, 30, 35.)

The closest the Complaint came to identifying any fact
that supposedly should have put HG on fraud alert was the
allegation that Bayou Accredited's purported auditor was named
"Richmond Fairfield, " because "Richmond [and] Fairfield [are]
names that a diligent investigator might have recognized as names
of counties and not accountants" (id. [ 27). But even leaving
aside the Complaint's flawed premise, inter alia, that no person
would have the same name as a place, the Complaint did not in fact
allege that HG knew the Bayou funds' financials were purportedly
audited by Richmond Fairfield; rather, it alleged that " [i]f" HG
had taken "steps to 'verify' Bayou's auditors, as it promised

South Cherry, " HG "would
have discovered the existence of
Richmond-Fairfield." (Complaint | 24 (emphasis added) . )

To the extent that the above-quoted passage from page 20
of South Cherry's brief was meant to argue that HG intended to
defraud South Cherry as to HG's own performance, i.e., that HG
represented that it had performed due diligence when in fact it

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after the summer of 2005 as to the Bayou Family Funds principals'
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fraudulent conduct, it would be plausible to infer that Hennessee
Group had been negligent in failing to discover the truth. It is
far less plausible to infer that an industry leader that prides
itself on having expertise that is called on by Congress, that
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had not done so, the factual allegations in the Complaint do not
give rise to a strong inference that the alleged failure to
conduct due diligence was indicative of an intent to defraud. The
only fact cited -- in South Cherry's brief on appeal -- as to a
possible motive for such an intent is that HG receives a fee when
a client invests in a recommended fund, and South Cherry suggests
that HG wanted to receive its fee without incurring the expense of
performing the promised due diligence (see South Cherry brief on
appeal at 22, 23). This is hardly a cogent or compelling
suggestion. According to the Complaint, Hennessee Group
proclaimed itself the industry leader, boasted that its principals
testify before Congress, repeatedly emphasized the thoroughness of
its hedge fund evaluations, and prided itself on its credibility
with investors and other participants in the hedge fund industry.
(See, e.g., Complaint 11 13, 14.) The Complaint also alleged that
HG represented that it evaluated 550 hedge funds each month (see
id. [ 13), a representation that South Cherry does not claim was
false, and alleged that HG recommended the Bayou Family Funds to a
large number of investors who proceeded to invest tens of millions
of dollars in those funds (see id. | 10). Given the disclosures

advertises its credibility in the industry -- and that evaluates 550
funds -- would deliberately jeopardize its standing and reliability,
and the viability of its business, by recommending to a large
segment of its clientele a fund as to which it had made, according
to South Cherry, little or no inquiry at all.

On appeal, South Cherry suggests that the combination of
Hennessee Group's "wide recommendation of Bayou-related funds" and
"its apparent failure to conduct much or any of the requisite due
diligence or to learn easily discovered facts . . . lends itself
to the inference" that HG was "receiving some undisclosed payment
from the Bayou funds for steering additional investors toward
them." (South Cherry brief on appeal at 23-24 & n. 7.) This
suggestion that Hennessee Group may have deliberately engaged in
illegal behavior, see 15 U.S.C. § 77q (b) (requiring disclosure of
existence and amount of payments made for promotion of
securities) , appears nowhere in the complaint, and South Cherry
essentially concedes that this proffered inference is speculative.
It argues that because such facts would be peculiarly within the
knowledge of the defendants, it had no obligation to include such
an allegation in the Complaint (see South Cherry brief on appeal
at 23 n.7), intimating that it might hope to develop some such
evidence in discovery. To be sure, South Cherry should not
include such an allegation in its pleading without having a
"factual basis or justification, " Fed. R. Civ. P. 11 Advisory
Committee Note (1993). But "before proceeding to discovery, a
complaint must allege facts suggestive of illegal conduct, "

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Twombly, 550 U. S. at 564 n. 8; and a plaintiff whose "complaint is
deficient under Rule 8
is not entitled to discovery, " Iqbal,
129 S. Ct. at 1954. South Cherry's confessed inability to offer
more than speculation that there may have been such unlawful
conduct underscores, rather than cures, the deficiency in the
Complaint.

The prior decisions of this Court on which South Cherry
principally relies -- Novak and Rolf (see South Cherry brief on
appeal, passim) -- do not require a conclusion that the requisite
state of mind has been adequately pleaded here, for they dealt
with duties and actions different from those alleged here. Novak
dealt with shareholder claims against one group of company
officials who allegedly issued fraudulently inflated financial
statements and another group of defendants who owned a dominant
percentage of the company's shares, a significant number of which
they sold during the period in which the financials were inflated.
The relationship between South Cherry and Hennessee Group, a
consultant, does not parallel either of the relationships that
existed in Novak; and indeed, in our Novak opinion, the only
claims at issue were those against the company officials who
issued the financial statements. See 216 F.3d at 305.

Nor does Rolf provide support for South Cherry's claim
that dismissal of its complaint pursuant to Rule 12 (b) (6) was
error, for Rolf is significantly different from this case both
procedurally and substantively. Our opinion in Rolf reviewed a
decision after trial; thus, we were dealing with actual evidence

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and findings of fact, not assessing the adequacy of a pleading or
the plausibility of inferences that could be drawn from factual
allegations. And the pertinent facts, as sufficiently established
at the Rolf trial, were that the defendants, a brokerage house and
two of its account managers, had a fiduciary relationship with the
plaintiff; that one of the individual defendants had engaged in
fraudulent stock manipulations; and that the other individual
defendant had aided and abetted the frauds on the plaintiff.
Thus, the trial court concluded that the individuals and their
firm had breached their fiduciary duty to the plaintiff. See 570
F.2d at 43, 47-48. Here, South Cherry has not sued the
perpetrators of the Bayou funds' frauds, and the Complaint
contains no allegation that Hennessee Group and its principals
aided and abetted those frauds. Further, the present appeal
involves no claim that Hennessee Group or its principals owed
South Cherry a fiduciary duty. The Complaint contained a claim
for breach of such a duty; but the district court dismissed that
claim, and South Cherry has not pursued that claim on appeal.

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In sum, we conclude (a) that the factual allegations in
the Complaint do not give rise to a strong inference of either
fraudulent intent or conscious recklessness, and (b) that the
inferences advocated by South Cherry are not as compelling as an
inference of negligence. Accordingly, on either ground, South
Cherry's efforts to plead a claim under § 10 (b) and Rule 10b-5
were properly found wanting for lack of plausible and cogent
allegations of scienter.

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At bottom, this was a contract case. "The obligation to
conduct the five-step due diligence [wals one imposed by contract
on HG." (South Cherry brief on appeal at 27 (emphasis in
original) ; see, e.g., id. at 21 (the "ongoing Ponzi scheme" would
have been obvious if Hennessee Group had "conduct [ed] any
substantial portion of the due diligence it promised" (emphasis
added; other emphasis omitted) ); id. at 29-30 (HG would have
discovered the Bayou fraud "had it performed even a modicum of the
due diligence for which South Cherry bargained" (emphasis
added) ) .) But the alleged contract was not in writing and hence
was unenforceable under the Statute of Frauds; and we cannot
conclude, given the factual allegations of the Complaint, that
these non-fiduciary defendants' failure to learn the truth
constitutes the scienter needed to state a claim under § 10 (b) and
Rule 10b-5 where the supposed obligation to learn was imposed only
by an agreement that is void.

# CONCLUSION

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We have considered all of South Cherry's arguments on this
appeal and have found them to be without merit. The judgment of
the district court is affirmed.

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August Term, 2008 Argued: January 16, 2009 Decided: July 14, 2009 Docket No.… v. - Hennessee Group LLC, Elizabeth Lee Hennessee, Charles A. Gradante

Gesamter Gesetzestext

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