CPLR R. 3016 Pleading Requirements; Ct. App.

The elements of a cause of action for fraud require a material
misrepresentation of a fact, knowledge of its falsity, an intent to
induce reliance, justifiable reliance by the plaintiff and damages (see Ross v Louise Wise Servs., Inc., 8 NY3d 478, 488 [2007]; Lama Holding Co. v Smith Barney, 88 NY2d 413, 421 [1996]). A claim rooted in fraud must be pleaded with the requisite particularity under CPLR 3016 (b).

We recently explored the pleading requirements of CPLR 3016 (b) in Pludeman v Northern Leasing Sys., Inc. (10 NY3d 486
[2008]). In that case, we noted that the purpose underlying the statute
is to inform a defendant of the complained-of incidents. We cautioned
that the statute "should not be so strictly interpreted as to prevent
an otherwise valid cause of action in situations where it may be
impossible to state in detail the circumstances constituting a fraud" (id.
at 491 [internal quotation marks and citations omitted]). Although
there is certainly no requirement of "unassailable proof" at the
pleading stage, the complaint must "allege the basic facts to establish
the elements of the cause of action" (id. at 492). We therefore
held that CPLR 3016 (b) is satisfied when the facts suffice to permit a
"reasonable inference" of the alleged misconduct. And, "in certain
cases, less than plainly observable facts may be supplemented by the
circumstances surrounding the alleged fraud" (id. at 493).

Here, whether the claim is labeled fraud or aiding and abetting
fraud, we conclude that neither the allegations in the complaint nor
the surrounding circumstances give rise to a reasonable inference that
S & K participated in a scheme to defraud or knew about the falsity
of the two contested statements in the offering memoranda. The amended
complaint conclusorily alleges that at some unspecified point in 2005 S
& K became aware that more than 10% of Wood River's holdings were
invested with Endwave but, nonetheless, S & K continued to issue
offering memoranda falsely representing that Wood River would not
invest more than 10% of its assets in any given security ^[FN7].
In support of this allegation, plaintiffs assert that S & K was
informed in January 2005 that Wood River had purchased 10% of Endwave's
stock. But the fact that S & K may have been aware that Wood River
owned 10% of Endwave's stock is not material to whether Wood River
invested more than 10% of its total assets in Endwave, particularly
where there is no [*5]indication that S
& K was ever informed of Wood River's overall asset levels or the
cost basis of the Endwave shares. Plaintiffs' reliance on a 2002 letter
— predating the existence of Wood River by nearly a year — from a S
& K attorney to Whittier discussing the performance of a separate
fund is similarly unavailing.

Nor do the surrounding circumstances breathe life into
plaintiffs' fraud claim premised on the 10% cap representation. Unlike
the individual corporate officer defendants in Pludeman, each
of whom managed a company implicated in a nationwide fraudulent scheme
covering a span of years, S & K was outside counsel to Wood River,
whose manager — Whittier — was convicted of securities fraud. Notably,
plaintiffs do not dispute S & K's assertion that they secured
Whittier's assistance in drafting the amended complaint. The absence of
any firm factual pleadings relevant to S & K's knowledge that Wood
River breached the 10% restriction or any fraudulent scheme between
Whittier and S & K is even more conspicuous in light of Whittier's
cooperation with plaintiffs.

We likewise find the amended complaint's alternative allegation
of fraud or aiding and abetting fraud — that S & K knew TBS was not
Wood River's auditor yet continued to list TBS in the offering
memoranda — to be similarly conclusory. As the Appellate Division
recognized, the complaint elsewhere alleges that in the summer of 2005
TBS falsely represented that it was the fund's auditor and would
conduct an audit. In short, although we are mindful that a plaintiff
need not produce absolute proof of fraud and that there may be cases in
which particular facts are within a defendant's possession, it is also
true that the strength of the requisite inference of fraud will vary
based on the facts and context of each case. Under the facts of this
case, we believe that the allegations in the complaint, coupled with
the surrounding circumstances, do not give rise to a reasonable
inference that S & K committed fraud or aided and abetted Wood
River's or Whittier's fraudulent activities.