Deluca v. GPB Automotive Portfolio, LP ( 2020 )

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK a Pe SS Ses Ale aia Risch Sem ee Se BARBARA DELUCA and DREW R. NAYLOR, on behalf of themselves and other similarly situated limited partners, Plaintiff, -against- 19-cv-10498 (LAK) GPB AUTOMOTIVE PORTFOLIO, LP, et al., Defendants. EASES LSS SS Se a ee SS See eR MEMORANDUM OPINION Appearances: Ira N. Glauber Catherine Pratsinakis Jessica L. Titler-Lingle DILWORTH PAXSON LLP Daniel Lawrence Berger Michael J. Barry Kimberly Evans Laina Herbert GRANT & EISENHOFFER P.A. Attorneys for Plaintiffs Tab Keith Rosenfeld Steven Michael Kaplan Nicole E. Meyer ROSENFELD & KAPLAN, LLP Attorneys for Defendants GPB Automotive Portfolio, LP, GPB Holdings I, LP, and GPB Capital Holdings, LLC Jeffrey Schreiber Richard Joseph Jancasz MEISTER SEELIG & FEIN LLP Attorneys for Defendants Jeffry Schneider and Ascendant Capital, LEC Jessica Erin Levine Alexander Asher Truitt WINGET, SPADAFORA & SCHWARTZBERG, LLP Attorneys for Defendant Axiom Capital Management, Inc. Michael Howard Smith ROSENBERG FELDMAN SMITH, LLP Attorneys for Defendants Mark Martino and Ascendant Alternative Strategies, LLC William F. McGovern Leif Thorsten Simonson KOBRE & KIM LLP Attorneys for Defendant David Gentile LEwIs A. KAPLAN, District Judge. This putative class action relates to two private equity funds that invested in auto dealerships. Plaintiffs, who purport to represent a class of limited partners invested in the funds, claim that the funds and affiliates actually were parts of a Ponzi scheme by which defendants fraudulently “siphoned off’ investments “under the guise” of management and sales fees. Defendants include the funds, the general partner of the funds, the broker-dealers that sold and marketed the funds, and certain co-founders and officers. The complaint alleges six causes of action for common law fraud, aiding and abetting fraud, breach of contract, and unjust enrichment. Defendants move to dismiss under the doctrine of forum non conveniens and for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6). They move also to stay the case due to pending state litigation. For the following reasons, defendants’ motions to stay and to dismiss under forum non conveniens are denied. Their motions to dismiss for failure to state a claim are granted in part and denied in part. ! Compl. 441, 109. Background The following facts are taken from the complaint, documents incorporated by reference in the complaint,’ and matters of which judicial notice appropriately may be taken.* All facts are assumed to be true and all reasonable inferences are drawn in favor of the plaintiffs.’ The Parties The plaintiffs are Barbara DeLuca and Drew R. Naylor, who are accredited investors with limited partnership interests in GPB Automotive Portfolio, LP (“Automotive”) and GPB Holdings II, LP (“Holdings II”) (together, the “GPB Investments”).° Deluca purchased two limited partnership units in Automotive for $100,000 in June 2015.° Naylor’s one unit in Holdings II was This includes the Private Placement Memorandums (“PPMs”), limited partnership agreements, and subscription agreements relating to the funds. See, e.g., Lakonia Mgmt. Ltd. v. Meriwether, 106 F. Supp. 2d 540 (S.D.N.Y. 2000) (looking to offering memorandum, subscription agreement, and partnership agreement on motion to dismiss). See Chambers v. Time Warner, Inc., 282 F.3d 147,152-53 (2d Cir. 2002). See In re Elevator Antitrust Litig., 502 F.3d 47, 50 (2d Cir. 2007) (per curiam). Compl. at 1, 7 17, 18. Limited partners in the GPB Investments invested by purchasing “limited partnership units” sold privately as unregistered securities under Securities and Exchange Commission (“SEC”) Regulation D. Jd. § 41-42. In connection with their purchases, plaintiffs certified that they were “sophisticated investor[s] with ... knowledge and experience in financial and investment matters” who are “accredited” within the meaning of Rule 501(a) of the Securities Act of 1933. Truitt Decl., Exhibit 2 [DI 62-5] at 9§ 10-11 [hereinafter Automotive Subscription Agreement]; Truitt Decl., Exhibit 3 [DI 62-6] at ff 10-11 [hereinafter Holdings I] Subscription Agreement]. Compl. 417. purchased for $50,000 in March 2018.’ Plaintiffs bring this purported class action on behalf of themselves and “all persons or entities” who acquired limited partnership interests in the GPB Investments.* As of May 2018, the GPB Investments had over 14,000 limited partners.” The defendants are 10 entities and individuals, which plaintiffs have categorized into two groups: 1. The “Fund Defendants.” The Fund Defendants are the GPB Investments, namely, Automotive and Holdings I]; their general partner, GPB Capital Holdings LLC (“GPB Capital”); and GPB Capital’s co-founders: David Gentile, Jeffrey Lash, and Jeffry Schneider."° 2. The “Selling Defendants.” The Selling Defendants are the broker-dealer and marketing entities that plaintiffs claim sold and marketed the GPB Investments: Ascendant Alternative Strategies, LLC (“Ascendant Alternative”), Ascendant Capital, LLC (“Ascendant Capital”), and Axiom Capital Management, Inc. (“Axiom”), as well as Mark Martino, Ascendant Alternative’s CEO.'' Id. 4 18. Naylor's wife purchased his limited partnership unit. Naylor is the assignee of his wife's interest. Jd. & Id. at 1. □□□ □□□ 10 Id. 9§ 2, 19-23. The Complaint misspells Jeffry Schneider’s first name as “Jeffrey.” See Jeffry Schneider and Ascendant Capital’s Mot. to Dismiss [DI] 61] at 1 [hereinafter Schneider Defs.” Mot. to Dismiss]; Axiom Mot. to Dismiss [DI 62-1] at 5. 11 Compl. ff 28-31. I. The GPB Investments In 2012, David Gentile and Jeffrey Lash had the idea of starting an investment fund that would invest in auto dealerships.'? Gentile was to be the general partner of the fund, and Lash was to be the manager of its “automotive segment." Gentile and Lash agreed that Jeffry Schneider, Gentile’s friend, would raise capital for the fund.'* Schneider was the chief executive officer (“CEO”) of Ascendant Capital, an entity that marketed private offerings to broker-dealers and registered investment advisers.> Beginning in 2013, the idea came to life as two private funds structured as limited partnerships: Automotive and Holdings II.'° Automotive and Holdings II, the “GPB Investments,” had the stated purpose of acquiring “retail car dealerships” to “generat[e] operating revenue” for the benefit of their limited partners.'7 Lash owned 15 percent of Automotive and was its director,'® while Schneider was to be manager of some of the auto dealerships Automotive claimed to acquire.” 12 Id. 37. 13 Id. 14 Td. is Id. 9} 25, 30, 37; Axiom Mot. to Dismiss at 5. 16 Compl. {] 19-21, 38, 40. Automotive was formed in 2013. Holdings II was formed in 2015. Id. 44} 39, 40. 17 Id. 42. 18 Id. 920. 19 Id. 9 54. To manage the GPB Investments, Gentile, Lash, and Schneider formed GPB Capital, the GPB Investments’ general partner.”’ As general partner, GPB Capital had exclusive authority over fund management and operation.”’ Gentile was its sole owner and CEO.” Lash was an officer and the “Co-Director of Automotive Retail.””’ Schneider was “Strategic Advisor.” Limited partnership units in the GPB Investments were marketed to investors via a series of private placement memoranda (“PPMs”).*” The PPMs stated that limited partners should expect to receive distributions from cash generated by the auto dealerships acquired by the GPB Investments.”° The annual target return rate for the distributions — which were to begin three months after the limited partner’s subscription — was at least eight percent of the limited partners’ capital contributions.”’ From 2013 to 2017, GPB Capital sold limited partnership units to investors “primarily” through Axiom, a broker-dealer and the underwriter of the GPB Investments’ unit 20 Id. "| 2, 38. GPB Capital is also the general partner of “at least eight other private partnerships” not at issue in this lawsuit. Jd. § 2. 21 Id. 99 39, 40. 22 Id. □□ 23-25. 23 Id. 24 Id. 25 Id. at 1, 9 72. 26 Truitt Decl., Exhibit 4 [DI 62-7] at 12 [hereinafter Automotive PPM]; Truitt Decl., Exhibit 5 [DI 62-8] at 11 [hereinafter Holdings IT PPM]; Compl. § 116. 27 Automotive PPM at 12; Holdings IT PPM at 11; Compl. 4 116. offerings.” In 2017, Ascendant Alternative, a broker-dealer and an affiliate of GPB Capital, also began selling limited partnership units.” Ascendant Alternative’s CEO was Mark Martino, who co-founded the firm with Schneider.** Ascendant Alternative passed 100 percent of the payments it received for the GPB Investments to Ascendant Capital, an affiliate of Ascendant Alternative and a “branch office” of Axiom that provided “marketing” services to GPB Capital.’ As mentioned, Ascendant Capital’s CEO was Schneider.” The GPB Investments paid fees to GPB Capital and the broker-dealers that sold the limited partnership units. GPB Capital was paid an annual management fee of about two percent of capital contributions.*? The broker-dealers were paid sales fees “as high as 11 percent” of capital 28 Compl. §§ 28, 47, 49. Axiom has denied that it was the underwriter for the GPB Investments’ offerings. Axiom Mot. to Dismiss at 5-6. 29 Id. ¥§ 29, 50. Anentity called DJ Partners, LLC., which is owned by Gentile and Schneider, owns 66.67 percent of Ascendant Alternative. /d. | 29. The remaining 33.33 percent of Ascendant Alternative is owned by an entity called MR Ranger LLC, which is owned solely by Mark Martino. Jd. 29. 30 Id. □□ 25, 29. Prior to co-founding Ascendant Alternative, Schneider and Martino worked together at Axiom. □□□ 31 Id. $4 29, 30. 3. Id. 925. 33 Id. § 108. The “managerial assistance fee” paid to GPB Capital is provided for under paragraph 3.13 of the limited partnership agreements (“LPAs”). Bergenfeld Decl., Exhibit E [DI 60-6] § 3.13 [hereinafter Automotive LPA]; Bergenfeld Decl., Exhibit F [DI 60-7] 4 3.13 [hereinafter Holdings I] LPA]. contributions.* And GPB Capital’s “principals” purportedly were paid management fees of unknown amounts directly from dealerships.” From 2015 to 2017, the GPB Investments paid over $20 million in management fees to GPB Capital and $5 million in acquisition fees to “[d]efendants.”** Plaintiffs allege also that “the total amount of expenses reported by” the GPB Investments from 2015 to 2017 (over $103 million) “appeared to filter down to Defendants or their affiliates’ though the complaint does not explain what is covered by the broad term “expenses.”*’ By 2018, the GPB Investments had paid over $100 million in sales fees to the broker-dealers that sold the limited partnership units.* As the years passed, the GPB Investments’ offerings to investors “increased substantially.”*’ By 2017, they had surpassed the SEC’s thresholds for private issuers and were 34 Compl. § 48. For the sale of Class A limited partnership units, the broker-dealers received fees as high as 11 percent. For Class B units, the broker-dealers received a servicing fee of 0.4 percent of capital contributions upon an investor’s subscription, which was payable annually so long as the investor held the interest. Jd. 35 Id. § 108. 36 Id. #9 109-10. 37 Id. 4111. 38 Id. 951. 39 Id. § 45. In 2013, Automotive’s initial offering was $50 million. Jd. 4 45. By 2018, Automotive reported an “indefinite offering.” Jd. Likewise, Holdings II, which had an initial offering of $350 million in 2015, increased its offering to $750 million in 2018. Td. q 46. required to be registered with the SEC.” In the following year, the funds raised by the GPB Investments from inception reached about $1.27 billion.*' A. The Automobile Manufacturer Approval Process and the “Convertible Loan Scheme” The GPB Investments purported to buy auto dealerships, which typically are operated as franchises granted by automobile manufacturers.” In consequence, buyers of dealerships must apply to manufacturers for, and receive, manufacturer approval. This manufacturer approval process is “rigorous” and “subject to strict requirements and due diligence.””* As automobile manufacturers are wary of trusting their brand names to “unknown investors,” they typically approve only those with “sufficient experience and working capital to operate the dealership." Among other things, a dealership buyer must have a “specified dealer principal” and a general manager with requisite expertise in the auto industry to be approved.” 40 Id. 4 128. 4] Id. 1. 42 Id. 99 59, 61. 43 Id. 44 Id. 458. 45 Id. § 60. 46 Id. §§ 60-61. 10 According to plaintiffs, the manufacturer approval process — which typically takes “six months or longer” — “presented a timing problem” for defendants because the limited partners were promised distributions starting three months after purchasing their units.*” To resolve that problem, GPB Capital purportedly engaged in what plaintiffs refer to as the “Convertible Loan Scheme.”** While manufacturer approval was pending, GPB Capital allegedly paid an amount equal to the purchase price of the dealership to the seller as a forgivable loan with a very low interest rate.*” Upon manufacturer approval of the sale, GPB Capital had the right to “convert” this loan into equity in the dealership, at which point the loan would be released.*” Through this means, the GPB Investments obtained control of dealerships and their cash flows before receiving manufacturer approval.’ Additionally, the GPB Investments’ “management teams” were paid management fees and other royalties for operating the dealerships.” For instance, in September 2013, GPB Capital gave Lash a $2 million loan to enable Automotive to purchase 50 percent of a Buick/GMC dealership.** In July 2014, GPB Capital loaned AT Id. § 61, 63. 48 Id. 4 65. 49 Id. 50 Id. 51 Id. 52 Id. 53 Id. 4 66. 11 an additional $2 million to Lash to purchase the remaining 50 percent.” These loans, equal in amount to the purchase price of the dealership, were listed as receivables on Automotive’s financial statements.”° In another case, plaintiffs allege, on information and belief, GPB Capital gave dealership owner Patrick Dibre a convertible loan totaling $42 million to purchase six Nissan and Volkswagen dealerships between 2013 and 2015.°° Subsequently, according to plaintiffs, GPB Capital “withdrew amounts in excess of the cash flow generated by the dealerships and paid it as a special distribution based on the alleged performance of the dealerships, which was represented to investors as being higher than its [sic] actual performance.’ GPB Capital ultimately “was unable to complete the transaction . . . because it lacked the funds to do so.”** Plaintiffs allege, also on information and belief, that the auto dealerships the GPB Investments claimed to acquire “typically did not generate the necessary cash flow to make the promised distributions to investors.”*’ On “several occasions in 2016,” GPB Capital transferred funds from GPB Holdings I, which is not a defendant in this action, to Automotive.® Additionally, 34 Id. 55 Id. 56 Id. 4 68. 57 Id. § 69. 58 Id. 59 Id. 470. 60 Id. 12 GPB Capital “falsified financial reports to make the dealerships look more profitable than they were.”*! B. The PPMs The GPB Investments distributed PPMs to each of their prospective investors.” The PPMs described the funds, the terms of their offerings, and their risks. 1. GPB Capital’s Investment Strategy and Goals The PPMs detailed GPB Capital’s goal of using the GPB Investments to “purchase and transform” auto dealerships into “stable, long-term investments.” According to the PPMs, GPB Capital’s investment strategy “was to acquire income-producing, middle-market private companies with high barriers to entry [and] high sustainable current cash flow” that were “recession resilient” and had “proven management teams.”™ 2. The Automobile Manufacturer Approval Process and GPB’s Expertise in the Auto Industry The PPMs disclosed that automobile manufacturer requirements posed a risk with respect to the GPB Investments’ ability to acquire and operate dealerships and to achieve financial = — SSS Id. 62 Id. 9 41, 72. 63 Id. 473. 64 Id. 974. 13 success. At the same time, the PPMs stated that GPB Capital would overcome this “high barrier to entry” by “seeking to partner with automotive industry specialists within their network of long-standing relationships, giving GPB a distinct advantage.” The PPMs stated also that GPB Capital and its management had significant experience in the auto industry.*’ 3. Distributions The PPMs stated that distributions were “expect[ed]” and “intend[ed]” to be made to limited partners from “cash, if any” beginning about three months after their subscription.” In March 2015, Automotive's PPM disclosed small special distributions of gross capital made in December 2013, June 2014, December 2014, and April 2015.” In December 2016, Holdings II's PPM disclosed that Holdings II “reserve[ed] the right to return Capital Contributions to [limited $$ Automotive PPM 17 (“High capital requirements and the franchisee approval process are significant barriers to entry in the automotive retail industry. All franchisees need to possess a certain level of industry experience in order to garner the manufacturers’ approval to own and operate new stores.”); id. at 36-37 (“Dealerships are significantly dependent on relationships with . .. manufacturers, which exercise a great degree of influence over their operations through the franchise agreements . . .. We cannot guarantee all of the franchise agreements that our Dealerships will be party to will be renewed .... Our future results of operations may be materially and adversely affected to the extent that franchise rights that our Dealerships enjoy become compromised. Ifa franchise agreement were terminated or not renewed, we would be materially affected.”); see also Holdings Il PPM at 17, 37-38. 66 Id. § 76. 67 Id. 4 62. 68 Automotive PPM at 12; Holdings II PPM at 11. 69 Automotive PPM at 12. The special distributions disclosed were all under three percent of gross capital. Id. 14 partners] as part of our distributions, though we do not presently have plans to do so.””” In 2016, GPB Capital used over $14 million in new investor capital to pay distributions to Automotive investors and over $8 million in new investor capital to pay distributions to Holdings Il investors.”’ In 2017, GPB Capital used over $27 million in new investor capital to pay distributions to Automotive investors and over $11 million in new investor capital to pay distributions to Holdings II investors.” In July 2018, the Automotive PPM was revised to state that “[p]eriodic distributions are currently and may in the future be paid out of available working capital, which include investor contributions.” 4. Equity Fund Model The PPMs stated that the “equity fund model” for acquiring auto dealerships, i.e., the model used by the GPB Investments, provided a competitive advantage for various reasons, including because it could: i: Aggregate and consolidate dealerships for reasons of cost-control, efficiency, and scaling; 2. Implement standard accounting practices across the dealership portfolio: 3: Consolidate back-office operations; 4. Conduct portfolio-wide board meetings of dealership managers for purposes of strategic coordination; 5. Improve the parts and services operations of each dealership with a focus on bringing margins “up to GPB standards; and Se Holdings II PPM at 12. The special distributions disclosed were all under three percent of gross capital. fd. 71 Compl. §§ 119, 120. 72 Id. 7a Id. 4 147. 15 6. Implement a strong internet sales operation.” In support of these representations, GPB Capital pointed investors to news reports that George Soros and Warren Buffett were “embarking on similar ventures” and using equity funds to acquire auto dealerships.” The complaint alleges that Nissan declined to approve the sale of “several of Dibre’s dealerships” to GPB Capital, which it characterized as “an unknown equity fund.””° a: Financial Statements Finally, the PPMs stated that the GPB Investments’ financial statements “ha[d] been prepared in accordance with accounting principles generally accepted in the United States of America (‘GAAP’) consistent with the presentation and disclosure requirements of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 946, ‘Financial Services — Investment Companies.”””’ Ls GPB Capital's Chief Financial Officer and Automotive 's Auditor Resign In 2018, GPB Capital’s chief financial officer (“CFO”), Macrina Kgil, resigned, allegedly “due to concerns about fraud related to the funds [GPB Capital] managed, including the SS §§— 475. 75 Id. 979. 76 Id. § 77 (quotations omitted). tt Id. § 125. 16 GPB Investments.” In April 2018, GPB Capital reduced the rate of its distributions to limited partners from eight percent to four percent per annum.” In July 2018, the auditor of Automotive’s 2016 financial statements, Crowe LLP (“Crowe”), resigned.*” Crowe cited concerns that Automotive’s 2016 financial statements were “likely materially misstated.”*’ Additionally, plaintiffs allege that Crowe advised GPB Capital in a letter that Automotive’s “internal controls” were not sufficient to develop reliable financial statements due to “significant related party activity.”” In August 2018, GPB Capital informed the limited partners and the broker-dealers that sold securities in the GPB Investments that its financial statements for 2015 and 2016 needed to be restated.® It stated also that the GPB Investments had “certain material weaknesses in internal controls over financial reporting,” including controls over related party transactions and == = SS Id. 9 122. 79 Id. 4 148. 80 Id. §§ 127, 130. Holdings II “has been and continues to be audited by RSM US LLP (f/k/a McGladrey LLP). /d. 4 126. 81 Id. § 130. 82 Id. § 129. 83 Id. § 132. 17 disclosures." That same month, GPB Capital suspended Automotive’s investor offering and redemptions.*° In December 2018, the GPB Investments transitioned to a quarterly distribution They did not make investor distributions for the first quarter of 2019."’ As of June 2019, Automotive had stopped paying distributions, and the value of the limited partnership units for Automotive and Holdings II had dropped by 39 percent and 25.4 percent, respectively. In September 2019, GPB Capital informed the limited partners that, due to ongoing investigations by the Securities and Exchange Commission (“SEC”) and the Federal Bureau of Investigation (“FBI”), the release of the 2015 and 2016 financial restatements and the 2017 and 2018 fmancial statements for the GPB Investments had been delayed.” As of the filing of the complaint, the limited partners had received neither the 2015 and 2016 financial restatements nor the 2017 and 2018 financial statements.” Id. 85 Id. 4 140. 86 Id. § 149. 87 Id. § 151. 88 Id. 4152. 89 Id. ff 138-39. 90 Id. 4 139. 18 IV. Related Lawsuits and Government Investigations Since 2017, GPB Capital and the entities it controls have been the subjects of a variety of lawsuits and government investigations, which the complaint quotes and references extensively.”! A. Dibre and Rosenberg Lawsuits The first lawsuit extensively discussed in the complaint relates to dealership owner Dibre. In July 2017, GPB Capital sued Dibre for breach of contract.” It alleged generally that Dibre used improper and manipulative tactics to inflate the historic earnings of dealerships that he sold to GPB Capital.” Dibre filed counterclaims alleging that GPB Capital was operating a Ponzi scheme and defrauding limited partners invested in funds managed by GPB Capital.” He alleged, inter alia, that GPB Capital “manipulat[ed] the financial statements of the dealerships” to make them look more profitable, “overfunded itself. . . by drawing out more than the net cash flows .. . in order to entice new investors, and . . . used that overfunded cash to distribute to investors as a “special distribution.” Dibre alleged also that “on several occasions” in 2016, “GPB Capital transferred eee See id. 80-107; 140-46, 153-55. 92 Id. 180. 93 Id. 981. 94 Id. 95 Id. 4 82. 19 funds from GPB Holdings I to Automotive and vice versa in order to bolster returns if one fund was lagging behind.””° The second lawsuit began in July 2019, when dealership owner David Rosenberg sued entities controlled by GPB Capital.°” Rosenberg claimed that the entities controlled by GPB Capital breached their contract to pay Rosenberg $5.9 million in connection with an agreement to purchase a controlling interest in Rosenberg’s dealership group.” According to Rosenberg, this breach occurred after he “made efforts to address fraudulent and wrongful conduct” by GPB Capital.’ Rosenberg’s claims relate to alleged financial misconduct he observed, including the fabrication of revenue and self-dealing transactions, with respect to GPB Capital, Gentile, and Lash."™ B. Government Investigations The complaint lists also a number of apparently unresolved government investigations regarding GPB Capital, entities controlled by GPB Capital, and the broker-dealers with which GPB Capital worked. Starting in the summer of 2018, GPB Capital received subpoenas and other requests for information from the U.S. Attorney's Office for the Eastern District of New York, the SEC, the New York City Business Integrity Commission (“BIC”), and the New Jersey — Id. 85. oF, Id. 9 91-92. 98 Id. $9 92-93. 99 Id. 100 Id. 495. 20 Bureau of Securities.'"' Some of the requests related to a waste management fund that GPB Capital managed as well as “issues raised by . . . Patrick Dibre” in his counterclaims.’ In September 2018, Massachusetts announced that it had opened an investigation into “broker-dealer firms” that sold limited partnership units in the GPB Investments.” Likewise, the SEC and the Financial Industry Regulatory Authority (“FINRA”) “reportedly” made inquiries of broker-dealer firms that sold securities “in partnerships controlled by” GPB Capital.'™ In February 2019, FBI and BIC agents executed a search warrant at “GPB offices.” In October 2019, GPB Capital’s managing director and chief compliance officer, Michael S. Cohen, was indicted by the Eastern District of New York.'°° Cohen, who had worked as a securities compliance examiner and industry specialist in the SEC’s Enforcement Division before joining GPB Capital, was charged with disclosing inside information about SEC’s investigation of GPB Capital to GPB Capital’s senior management in order to “land a job.”"” ee Id. 99] 143-44. 102 Id. 103 Id.4 141, 104 Id. | 142. 105 Id. 143. 106 Id. 99 153-54. 107 Id. 99 153, 155. V. Current Securities Litigation In November 2019, plaintiffs brought this action on behalf of all limited partners in the GPB Investments under the Class Action Fairness Act of 2005.'°° The complaint consists of six claims for relief under state law, including: ° Two fraud claims (Count I and Count II) against all defendants, which solely relate to alleged misstatements and omissions in the PPMs used to market the limited partnership units; ° One aiding and abetting fraud claim (Count V) against the Selling Defendants, which also relates to misstatements and omissions in the PPMs; ° Two breach of contract claims (Count III and Count IV) against GPB Capital, which relate to the limited partnership agreements (“LP As”) that governed the GPB Investments’ relationship with its partners; ° One claim for unjust enrichment (Count VI) against all defendants. All of the defendants except Lash’ move to dismiss under the doctrine of forum non conveniens and for failure to state a claim under Rule 12(b)(6). Likewise, all of the defendants except Lash moved to stay the action due to pending state litigation. Plaintiffs’ action is one of at least six putative class actions filed in the summer and fall of 2019 regarding the GPB Investments.''® The others include one brought in the Supreme Court of New York County by Adam Younker on behalf of all limited partners of the GPB —— 28 U.S.C. § 1332(d)(2)(B). 109 Despite accepting service, see DI 26, Lash neither has filed a motion to dismiss nor has had counsel appear on his behalf in this matter. As the Court finds that the other defendants’ claims equally apply to Lash, it considers their claims with respect to Lash sua sponte. See Thomas v. Scully, 943 F.2d 259, 260 (2d Cir. 1991) ({T]he district court has the power to dismiss a complaint sua sponte for failure to state a claim on which relief can be □□ granted”). Automotive, Holdings II, and GPB Capital’s Mot. to Dismiss [DI 60-9] at 2 & n.4 [hereinafter GPB Defs.’ Mot. to Dismiss]. 22 Investments and other funds, which has been consolidated with a related action under the caption Inre GPB Capital Holdings, LLC., Litigation [hereinafter Younker].''' Younker, in which there are currently motions to dismiss pending, brings claims for, inter alia, negligence, breach of fiduciary duty, fraud, aiding and abetting fraud, and unjust enrichment.'’* The defendants in Younker include all of the defendants in this action except Martino, as well as other entities and individuals that are not defendants here.''? Discussion Motion for a Stay Defendants request a stay of this action until the New York Supreme Court determines pending motions to dismiss in Younker.'"* As a stay of this action due to parallel state litigation is not warranted under Colorado River Water Conservation Dist. v. United States,''° and defendants have not established that the balance of factors supports adiscretionary stay, defendants’ request is denied. ap Index No.: 157679/2019 (Sup. Ct., N.Y. County). 112 Verified Consol. Compl., Inre GPB Capital Holdings, LLC, Litig. , Index No.: 157679/2019 (NYSCEF Doc. No. 82) [hereinafter Consol. Younker Compl.]. 13 fd. il4 Index No.: 157679/2019. WS 424 U.S. 800 (1976). 23 A. Colorado River Stay Federal courts have a “virtually unflagging obligation . . . to exercise the jurisdiction given them.”!!® Nevertheless, the Supreme Court held in Colorado River that certain “exceptional” circumstances require a federal court to abstain from exercising its jurisdiction — that is, when paralle] state court litigation exists that could result in a “comprehensive disposition” of the litigation and it would conserve judicial resources.''’ Though defendants have not requested explicitly that the Court abstain under Colorado River — they have requested generally that the Court use its discretion to stay this action in light of the state action’'® — the Second Circuit has held that “{t]here is no difference between a stay and a dismissal for purposes of the Colorado River doctrine.”''? Accordingly, the Court applies Colorado River. Under Colorado River and its progeny, courts consider six factors in determining whether to stay an action in favor of a parallel state proceeding: “(1) whether the controversy involves a res over which one of the courts has assumed jurisdiction; (2) whether the federal forum is less inconvenient than the other for the parties; (3) whether staying or dismissing the federal action will avoid piecemeal litigation; (4) the order in which the actions were filed, and whether proceedings have advanced more in one forum than in the other; (5) whether federal ge Colorado River, 424 U.S. at 817. Id. at 813, 817-18. 158 See, e.g., GPB Defs.' Mot. to Dismiss at 14-15. Plaintiffs, on the other hand, do argue that Colorado River applies. See Pls.” Omnibus Brief in Opp. to Defs.? Mot. to Dismiss [DI 77] at 54 [hereinafter Pls.” Omnibus Opp.]. 119 Burnett v. Physician's Online, Inc., 99 F.3d 72, 76-77 (2d Cir. 1996) (citations omitted). 24 law provides the rule of decision; and (6) whether the state procedures are adequate to protect the plaintiff's federal rights.”'”° No one of these factors necessarily is determinative. Rather, “a carefully considered judgment taking into account both the obligation to exercise jurisdiction and the combination of factors counselling against that exercise is required.”’*! The facial neutrality of a factor “is a basis for retaining jurisdiction, not for yielding it.”!” Before delving into the six-factor Colorado River analysis, a court must make the threshold determination “that the concurrent proceedings are ‘parallel.’”!?* “Federal and state proceedings are parallel if substantially the same parties are contemporaneously litigating substantially the same issue in both forums.”'”* This action and Younker are indeed parallel. The plaintiffs in both actions purportedly include all investors who purchased limited partnership units in the GPB Investments. □□□ DQ — Niagara Mohawk Power Corp. v. Hudson River-Black River Regulating Dist., 673 F.3d 84, 100-01 (2d Cir. 2012) (quoting Woodford v. Cmty. Action Agency of Greene Cty., Inc., 239 F.3d 517, 522 (2d Cir. 2001)). 12t Colorado River, 424 U.S. at 818-819. 122 Woodford, 239 F.3d at 522. 123 Dittmer v. Cty of Suffolk, 146 F.3d 113, 118 (2d Cir. 1998). 124 lacovacci v. Brevet Holdings, LLC, No. 18-cv-8048 (JFK), 2019 WL 2085989, at *4 (S.D.N.Y. May 13, 2019) (quotations omitted), reconsideration denied, No. 18-cv-8048, 2019 WL 2992165 (S.D.N.Y. July 9, 2019). 125 Consol. Younker Compl. at 1-2; Compl. at 1. 25 Likewise, the defendants in both actions include all of the defendants in this action except Martino.’ Moreover, claims common to both actions are based on substantially the same issues. Namely, both actions bring, inter alia, fraud claims based on alleged misrepresentations or omissions regarding: ° Whether the GPB Investments’ distributions would be made from cash rather than capital funds;'”’ . Whether the GPB Investments used convertible loans to cover up the fact that they had not acquired dealerships; Whether the GPB Investments’ financial statements were accurate when provided to the limited partners:'”” . Whether the GPB Investments were a Ponzi scheme.'*° As this action and Younker feature substantially the same parties litigating substantially the same issues, the actions are parallel. Though the actions are parallel, the balance of the six Colorado River factors do not favor a stay of this action. First, no property exists over which the state court has exercised exclusive jurisdiction. Second, no party would be inconvenienced by having to litigate in federal Se Id. 127 Consol. Younker Compl. at § 422; Compl. at § 165. 128 Consol. Younker Compl. at | 422; Compl. at 4 166. 129 Consol. Younker Compl. at § 425; Compl. at { 165. 130 Consol. Younker Compl. at § 422; Compl. at J 165. 26 court: this courthouse and New York Supreme Court are next door to each other.'*’ Thus, the first two factors do not support a stay. Third, there is no significant need to avoid piecemeal litigation. As the state court has not resolved the pending motions to dismiss, Younker is still in its early stages. Accordingly, though certain issues are common between the two actions, a final judgment by the state court pertaining to those issues is not likely to come for some time. And evenif the state court does arrive at a final judgment applicable to issues or claims in this case before this Court does, “this Court would give [that judgment] the appropriate preclusive effect.”'? At best, the third factor is neutral with respect to a stay.'* Fourth, as mentioned, there is no need to defer to Younker because it is still in its early stages. Though Younker was filed before this action, the Supreme Court has made clear that the fourth factor “does not turn exclusively on the sequence in which the cases were filed, “but rather in terms of how much progress has been made in the two actions.’”'*4 As both this action and Younker have progressed in an equal manner — indeed, this action now is farther ahead given this opinion — the fourth factor does not support a stay. ee See lacovacci, 2019 WL 2085989, at *6. 132 Frydman v. Verschleiser, 172 F. Supp. 3d 653, 665 (S.D.N.Y. 2016); see also Abe v. New York Univ., No. 14-cv-9323 (RJS), 2016 WL 1275661, at *7 (S.D.N.Y. Mar. 30, 2016) (“The mere existence of parallel federal and state suits does not, without more, warrant abstention, particularly where ‘the nature of the parallel actions is such that principles of res judicata and collateral estoppel should be effective to prevent inconsistent outcomes.’”) (quoting CVR Energy, Inc. v. Wachtell, Lipton, Rosen & Katz, No 14-cv-6566 (RJS), 2014 WL 7399040, at *4 (S.D.N.Y. Dec. 29, 2014)). 133 See id. 134 Vill. of Westfield v. Welch's, 170 F.3d 116, 122 (2d Cir. 1999) (quoting Moses H. Cone Men'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 21 (1983)). 27 Fifth, though plaintiffs have brought exclusively state claims, those claims “are not particularly novel or complex.” And, importantly, federal jurisdiction exists over this putative class action under the Class Action Fairness Act of 2005, which is “a statute Congress enacted to facilitate adjudication of certain class actions in federal court.”'** The fifth factor is, at best, neutral. Sixth, there is “no serious question” that the New York Supreme Court can “adequately protect [plaintiffs’ | procedural and substantive rights and provide a fair forum that will promptly resolve the parties’ claims.”'*’ Nevertheless, “the ability of the state court to adequately protect [plaintiffs’] interests only makes this factor neutral.”'** The Court counts three “neutral” factors and three factors that do not support a stay. As neutrality is a basis for retaining jurisdiction, the Court concludes that “exceptional circumstances” do not warrant a stay under Colorado River. B. Discretionary Stay Nor is a discretionary stay warranted. ee Frydman v. Verschleiser, 172 F. Supp. 3d 653, 666 (S.D.N.Y. 2016). 136 Dart Cherokee Basin Operating Co., LLC v. Owens, 574 U.S, 81, 82 (2014). 137 Dalzell Memt. Co. v. Bardonia Plaza, LLC, 923 F. Supp. 2d 590, 602 (S.D.N.Y. 2013). 138 Id.; see also Dunkin' Donuts Franchised Rests. LLC v. Rijay, Inc., No. 06-cv-8237 WCC, 2007 WL 1459289, at *6 (S.D.N.Y. May 16, 2007) (“[T]he sixth factor — whether the state court proceeding will adequately protect the rights of the party seeking to invoke federal jurisdiction — is consequential only when the answer is negative and thus weighs in favor of federal jurisdiction.”). 28 Courts have inherent power over their dockets and thus have discretion to stay proceedings when they consider it appropriate,’ Considerations pertinent to the exercise of that discretion include “economy of time and effort for [the court], for counsel, and for litigants” and whether the applicant has made “out a clear case of hardship or inequity in being required to go forward.”!“” “[A|ssessment of whether an applicant would suffer hardship in being required to go forward necessarily involves consideration of the likelihood that some useful purpose would be served by delay.”"" No useful purpose would be served by a stay here. As mentioned, the state action has not progressed past its preliminary stages, so there is no real need to delay this action due to a risk of inconsistent legal or factual rulings. Furthermore, aside from vague concerns about litigation costs, defendants have not established a clear case of hardship or inequity in being required to go forward. As plaintiffs have recognized, “[p|arallel state and federal litigation is quite common.” I. Forum Non Conveniens In connection with their purchases of the limited partnership units. plaintiffs signed Subscription Agreements that contained the following clause: “Venue for any litigation arising out of, under, or in connection with this Agreement will lie in the state courts having jurisdiction over == —— See Compl. 9 25, 28. Merely alleging that an entity was the underwriter of the securities offerings at issue is not sufficient under heightened pleading requirements for fraud claims. See Sharette v. Credit Suisse Int'l, 127 F. Supp. 3d 60, 91-93 (S.D.N.Y. 2015); In re Puda Cool Securities, Inc., Litig., 30 F. Supp. 3d 261, 267 (S.D.N.Y. 2014); In re Fannie Mae 2008 Sec. Litig., 891 F. Supp. 2d 458, 485 (S.D.N.Y. 2012), aff'd, 525 Fed. Appx. 16 (2d Cir. 2013). 183 See Wexner v. First Manhattan Co., 902 F.2d 169, 172 (2d Cir. 1990) (finding Luce and DiVittorio “must not be mistaken for license to base claims of fraud on speculation and conclusory allegations.”). 40 general partner.'** Accordingly, with respect to these defendants, Counts I and II satisfy Rule 9(b)’s particularity requirement. With respect to the Selling Defendants and Schneider, however, Counts I and II are not pleaded sufficiently under Rule 9(b) and are dismissed. 3. Fraud Claims Against the GPB Investments, GPB Capital, Gentile, and Lash The bulk of plaintiffs’ alleged misrepresentations and omissions also fail to support a claim for relief with regard to the remaining defendants: the GPB Investments, GPB Capital, Gentile, and Lash. A careful analysis of the complaint reveals that plaintiffs’ overarching claim that the sale of units in the GPB Investments was a Ponzi scheme is no more than an allusion propped up by conclusory allegations and claims improperly taken from other lawsuits. a. Allegations from the Dibre and Rosenberg Actions As a threshold matter, plaintiffs cannot rely on allegations from other lawsuits to plead legally sufficient fraud claims. A fraud complaint that “merely recites others’ allegations” is generally insufficient under Rule 9(b) where it does not allege also non-conclusory facts to support its claim for relief.'® This is because “secondhand allegations” quoted in a complaint are “in the nature of allegations ‘upon information and belief,’ which cannot ordinarily form the basis ofa fraud SE Luce, 8@ F.2d at 52, 55 (finding there is no need to plead specific facts linking insiders such as officers and directors to particular misstatements in an offering memorandum); Neubauer v. Eva-Health USA, Inc., 158 F.R.D 281,283 (S.D.N.Y. 1994) (same); Cf DiVittorio, 822 F.2d at 1249 (“None of the individual . .. defendants . . . is tied to the Offering Memorandum in any specific way, or even alleged to have been an officer or director of any non-individual ... defendant when the Offering Memorandum was issued or the specified class of plaintiffs bought their limited partnership interests .”) 185 Loreley Fin. Jersey) No. 3 Ltd., 797 F.3d at 180. 4] claim ‘except as to matters peculiarly within the opposing party's knowledge.’”'® “Even as to the latter, a fraud plaintiff must generally state the facts upon which her belief is founded.”!®’ Almost thirty paragraphs of the complaint are attributed directly to the Dibre and Rosenberg actions.'** These paragraphs largely parrot allegations that GPB Capital, Gentile, Lash, and Schneider engaged in fraudulent acts with respect to Dibre’s and Rosenberg’s dealerships. □□ If plaintiffs had made these allegations on their own knowledge, they may have led to a “strong inference” that defendants intentionally made the misrepresentations and omissions alleged in this action. But they have not done so. Indeed, the complaint alleges no non-conclusory facts that support the truth of these secondhand allegations. Allowing plaintiffs to rely on them is therefore impermissible under Rule 9(b).'”° er Id. (quoting Luce, 802 F.2d at 54 n.1). 187 Loreley Fin. (Jersey) No. 3 Ltd., 797 F.3d at 180. 188 See Compl. 80-107. Outside of those paragraphs, other conclusory statements in the complaint appear to have been pulled also from those actions. E.g., 69, 70. 189 E.g., id. (repeating Dibre’s allegation that “GPB Capital . . . overfunded itself from the dealerships by drawing out more than the net cash flows... and then used that overfunded cash to distribute . . . a ‘special distribution’” to entice investors); id. ¢ 83 (repeating Dibre’s allegation that “Defendants Gentile and Schneider recorded the purchase price of dealerships they purchases at several million dollars more than the actual purchase price”); id. § 96-97 (repeating Rosenberg’s allegation that he saw “two contracts titled ‘Performance Guarantee,’” with Lash, which were a sham to boost profits); id. 999 (repeating Rosenberg’s allegation that he “witnessed documents evidencing improper ‘round tripping’ by GPB Capital in an effort to inflate revenues”). 190 It is worth noting also that the complaint’s recitation of inconclusive government investigations into matters related to the GPB Investments — some of which are not related to the funds at issue in this lawsuit — similarly does not suffice under Rule 9(b) to support a strong inference of fraud. See, e.g., City of Rockton Retirement Sys. v. Avon Products, Inc., 1 1-cv-4665 (PGG), 2014 WL 4832321, at *24 (Apr. 24, 2015) (“[T]he existence of an investigation alone is not sufficient to give rise to a requisite cogent and compelling inference of scienter.”); Lipow v. Net] UEPS Techs., Inc., 131 F. Supp. 3d 144, 167 42 Putting aside the secondhand allegations from the Dibre and Rosenberg actions, most of plaintiffs’ alleged misrepresentations and omissions do not support an independent claim for fraud. The Court addresses each of the alleged misrepresentations and omissions in turn. b. The “Convertible Loan Scheme” First, plaintiffs allege that the Fund Defendants misled them by failing to disclose “that... the Fund Defendants would employ the Convertible Loan Scheme to end-run manufacturer approval requirements.”'”' But the Automotive PPM from March 2015 described what plaintiffs characterize as the “Convertible Loan Scheme” as it was employed with respect to the loans given to Lash and Dibre in 2013 and 2014. Indeed, it did so in the same language that appears in the complaint. With regard to Lash, Automotive’s PPM disclosed that Automotive used convertible loans to purchase a Buick/GMC dealership from Lash in 2013 and 2014.'” The transactions were described as two “convertible loans” totaling around $2 million each, which “enhance[d] [Automotive’s] ability to obtain ownership . . . faster than [it] would otherwise be able.”!’? The PPM stated that “[t]he terms of [the loans] provide that Mr. Lash is required to pay us 100% of the (S.D.N.Y. 2015) (‘[G]lovernment investigations cannot bolster allegations of scienter that do not exist, and, as currently plead, the government investigations are just that, investigations.”). 191 Compl. ff 166, 174. 192 Automotive PPM at 23-24; see also Compl. { 66. 193 Automotive PPM at 23-24. 43 net cash flow of the [dealership], offset by a performance bonus payable to Mr. Lash.”'™ The PPMs stated also that the initial loan to Lash was recorded as a receivable on Automotive’s books.'”” The same PPM disclosed that, in 2014, Automotive gave Dibre a convertible loan of over $6 million, under which Automotive “has the right to convert the debt into 51% of the equity” in an entity that owned and operated a Nissan dealership.'"° The PPM disclosed that subsequently, “two additional tranches of debt were added to the investment which reserve the right to convert the loan into 90.1% of the equity” in the entity that operated the dealership.'”” The PPM stated that the loan was “coupled with a pledge of all of the seller’s economic and management rights in [the dealership]” and that its “[c]urrent interest” was “90.1% of [the dealership’s] net cash flow, with a minimum of $157,151 monthly.”'* Finally, the PPM stated that the transaction was “structured . . . as debt instead of equity to better enable us to gain control of the [dealership] and obtain operating financing.”'” In light of these clear disclosures to the limited partners, it would defy reason to infer that such a “scheme” was intentionally concealed — either to support a Ponzi scheme or to bring Delaware courts have interpreted such claims as direct because they essentially allege that “[p]laintiffs were injured because they were stripped of ‘their right to withdraw from the [partnership] or to seek rescission of their investment.’”?*° Under Delaware law, “[o]n a claim of breach of contract, the plaintiff must prove a) the existence of a contract; b) the breach of an obligation imposed by that contract; and c) resulting damages to the plaintiff’? Here, plaintiffs have alleged plausibly that GPB Capital breached its obligation under the LPAs to provide them with yearly audited financial statements because it failed to provide the GPB Investments’ audited financials for 2017 and 2018. Moreover, RS SS See MKE Holdings Ltd. v. Schwartz, No. CV 2018-0729-SG, 2019 WL 4 723 816, at *8 n. 150 (Del. Ch. Sept. 26,2019); Sehoy Energy LP v. Haven Real Estate Grp., LLC,No. CV 12387-VCG, 2017 WL 1380619, at *9 (Del. Ch. Apr. 17, 2017). 236 Sehoy Energy LP, 2017 WL 1380619, at *9; Albert v. Alex. Brown Mgmt. Servs., Inc., No. CIV.A. 762-N, 2005 WL 2130607, at *6 (Del. Ch. Aug. 26, 2005). 237 Lorenzetti v. Hodges, 62 A.3d 1224 (Del. 2013). 57 the complaint plausibly alleges “that the plaintiffs were harmed by either not being able to ask for a redemption, or not being able to sue for rescission or a like remedy.””** Accordingly, plaintiffs’ claim for breach regarding the failure to provide financial statements states a claim for relief under Delaware law. E. Unjust Enrichment (Count V1) Finally, plaintiffs’ claim for unjust enrichment is dismissed in its entirety against all defendants. The unjust enrichment claim is premised on vague allegations that “[d]efendants” were unjustly enriched through “unearned compensation and fees.” Asan initial matter, this claim makes no sense as against the GPB Investments, which are alleged to have “hemorrhaged hundreds of millions of dollars” in the allegedly improper fees paid to the other defendants.’ The complaint therefore cannot sustain a claim for unjust enrichment against the GPB Investments. With regard to the rest of the defendants, the Court already has concluded that plaintiffs have not alleged plausibly that the GPB Investments were a Ponzi scheme through which defendants “enriched” themselves via the receipt of unearned fees. Likewise, with regard to the Selling Defendants and Schneider, the Court has concluded that plaintiffs’ fraud claims are insufficiently pleaded. Those conclusions apply with the same force here, and thus require dismissal of this count.?° — See Albert v. Alex. Brown Mgmt. Servs., Inc., No. CIV.A. 762-N, 2005 WL 2130607, at *6. 239 Compl. § 113. 240 See DiMuro v. Clinique Labs., LLC, 572 F. App'x 27, 32 (2d Cir. 2014) (finding Rule 9(b) applies to unjust enrichment claims premised on alleged fraudulent conduct). 58 Moreover, with respect to GPB Capital in particular, the unjust enrichment claim fails for another reason: the “unearned compensation and fees” paid to GPB Capital - ie., its management fees — were paid pursuant to the LPAs. Under New York law, a claim for unjust enrichment is precluded where “a valid and enforceable written contract govern[s] [the] particular subject matter.” Conclusion Defendants’ motions [DI 58, 60, 61, 62, 70] are disposed of as follows: i Insofar as the motions seek dismissal of the complaint for failure to state a claim upon which relief may be granted, the motions are granted in all respects except that they are denied with respect to: a. So much of Counts I and II as are against GPB Capital, the GPB Investments, Gentile, and Lash and assert fraudulent misrepresentation with respect to the source of investor distributions. b. So much of Count III as asserts breach of contract by GPB Capital for failure to provide audited financial statements and reports. De Insofar as the motions seek to stay proceedings and to dismiss on the basis of forum non conveniens, the motions are denied in all respects. SO ORDERED. Dated: December 13, 2020 fe: Lewis A. Kapla United States Distriat Judge oo Clark-Fitzpatrick, Inc. v. Long Island R. Co., 70 N.Y .2d 382, 388 (N.Y. 1987).