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Media Alerts - Cohen v. Cohen - Second Circuit
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April 3, 2013
  Cohen v. Cohen - Second Circuit
Headings: Second Circuit Reinstates Ex-Wife's Fraud and Breach of Fiduciary Duty Claims Against Steven A. Cohen, Donald Cohen and S.A.C. Trading Corporation

Area of Law: RICO; Fraud

Issue(s) Presented: Whether claims against former S.A.C. Trading Corporation President Steven Cohen and others brought by Cohen's ex-wife for fraud, breach of fiduciary duty and unjust enrichment were timely and stated claims upon which relief may be granted.

Brief Summary: Patricia Cohen, ex-wife of Steven Cohen, the former President of S.A.C. Trading Corporation, alleges in this action that prior to and during the negotiations over their 1989 marital separation agreement, and in 1991 court filings in her action to set aside that agreement's financial provisions, her ex-husband and others failed to disclose a $5.5 million payment that Steven Cohen had received from a real estate development project investment made during their marriage. Patricia Cohen asserts that she uncovered this fraud in 2006 and, as a result, filed this action alleging Steven Cohen's conduct constituted RICO-based and common law fraud and a violation of fiduciary duties and resulted in Steven Cohen's unjustly enrichment. The United States District Court for the Southern District of New York dismissed Patricia Cohen's complaint in full as untimely, and for failing to state a claim.

The Second Circuit reversed the District Court's dismissal of the fraud and breach of fiduciary duty claims finding the complaint sufficiently alleged plausible and timely claims, but affirmed dismissal of the unjust enrichment claim as untimely. The Second Circuit reasoned that the fraud and fiduciary duty breach claims were not, on their face, untimely, because Patricia Cohen did not have sufficient notice of the alleged fraud in 1991 to trigger a duty to undertake further investigation at that time and there was no evidence that a reasonable investigation in 1991 would have uncovered the fraud. Additionally, the court held that several statements by Steven Cohen and his lawyer, asserting that the real estate investment was worthless and had been written-off, created a plausible inference of fraud sufficient to state a claim upon which relief may be granted.

To read the full opinion, please visit:
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Extended Summary:
Patricia and Steven Cohen were married in 1979. In January 1986, Steven created S.A.C. Trading Corporation ("SAC"). Steven Cohen served as President, his brother Donald as Treasurer, and Brett Lurie as Secretary. Donald Cohen also served as Patricia's personal accountant and financial advisor, and Lurie as her attorney. In early 1986 Steven, through SAC, invested $9 million in a co-op conversion project. Later that year, Steven and Donald allegedly told Patricia the entire investment had been lost, when in fact $5.5 million had been returned to Steven Cohen in settlement of a claim he had brought against Brett Lurie. The investment remained on SAC's books, but Steven and Donald maintained that it was worthless and would be written off once the properties entered bankruptcy or foreclosure.

Steven and Patricia Cohen separated in 1988 and eventually divorced. In a 1989 separation agreement, Steven made "no representation as to the value of the interest in a second and third mortgage on various properties involved in cooperative conversions in Queens, New York in which the investment was listed on his statement of financial condition dated as of July 1, 1988 at a value of $8,745,169." However, during negotiations leading to a separation agreement, Steven's lawyer allegedly told Patricia that the real estate investment money was "lost." During a 1991 action brought by Patricia to increase maintenance, child support, and other relief from the 1989 separation agreement, Steven stated in an affidavit that he was writing-off the real estate deal as "totally worthless."

In 2006, after reading an article about the fraud conviction of an individual who worked at Steven's former employer, Patricia decided to investigate the representations Steven made during the 1989 and 1991 separation proceedings. As a result, Patricia claims she discovered the lawsuit brought by Steven against Brett Laurie, where she found reference to the $5.5 million payment. Thereafter, Patricia filed suit in the United States District Court for the Southern District of New York alleging defendants conspired to hide the payment in violation of RICO, committed common law fraud, and breached fiduciary duties, and that Steven was unjustly enriched. On March 30, 2011, the district court granted a motion to dismiss all Patricia's claims, ruling that the complaint did not adequately allege fraud and that the claims were time-barred.

The Second Circuit reversed the district court's decision to dismiss Patricia's claims, except for the dismissal of the unjust enrichment claim, which was affirmed. The Second Circuit held that the district court's reasons for finding the following three statements by Cohen and his attorney were insufficient to state a claim for relief were legally insufficient: (1) the statement of Steven and his attorney during the negotiations surrounding the 1989 Separation Agreement that investment was "lost" but continued to be carried on the books because it could not be written off until there was a bankruptcy or foreclosure; (2) Steven's statement in the 1989 Separation Agreement that he had provided wife with his net worth statement; and (3) Steven's statement in his 1991 affidavit that he was writing off the Lurie Investment as worthless. Rather, according to the Second Circuit, these allegations created a plausible inference that Steven Cohen concealed the $5.5 million settlement payment and that he continued to conceal that money in his financial statement that was incorporated into the separation agreement.

Emphasizing that both the four year statute of limitations for civil RICO claims and the six year statute of limitations for fraud and breach of fiduciary duty under New York law begin to run only once a plaintiff has actual or inquiry notice of the injury, the Second Circuit also disagreed with the district court's dismissal of the fraud and fiduciary duty claims as untimely. The district court found that Patricia had inquiry notice in 1991 when she sought increased support payments, suspected Steven of income concealment, had suspicions regarding the real estate investment, and found he was owed some income that he had not revealed. Disagreeing with the district court, however, the Second Circuit found no basis to conclude that Patricia's suspicions necessarily triggered a duty to investigate the possible fraud earlier than she did nor any basis for concluding that the investigation Patricia made in 1991 was not reasonable, despite her failure to uncover the $5.5 million payment. Finally, the Second Circuit found no evidence indicating that a reasonable investigation would have uncovered the $5.5 million payment, since the information available to Patricia in 1991 did not suggest in any way that Steven had sued Lurie, much less that he received a concealed payment in settlement of the suit. The court upheld the dismissal of the unjust enrichment claims, however, on the grounds that the statue of limitations for those claims begins at the moment an injury occurs. Accordingly, the Second Circuit reinstated and remanded to the district court Patricia's fraud-based and breach of fiduciary duty claims, while affirming dismissal of her unjust enrichment claim as untimely.

To read the full opinion, please visit:
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Panel: Circuit Judges Leval, Sack and Hall.

Argument Date: 02/22/2013

Date of Issued Opinion: 04/03/2013

Docket Number: No. 11-1390

Decided: Affirmed in Part, Vacated and Remanded in Part

Case Alert Author: Matthew Auten

Counsel: Howard W. Foster, Foster PC, Chicago, IL, for Appellant. Martin Klotz (John R. Oller, Jeffrey B. Korn, on the brief), Willkie Farr & Gallagher LLP, New York, NY, for Appellees

Author: Circuit Judge Leval

Case Alert Circuit Supervisor: Professor Elyse Diamond Moskowitz

Edited: 04/03/2013 at 08:33 PM by Elyse Diamond

    Posted By: Elyse Diamond @ 04/03/2013 04:14 PM     2nd Circuit  

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