IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN ... · port of motion to dismiss - page i...

PORT OF MOTION TO DISMISS - Page i

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IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF TEXAS

DALLAS DIVISION

SAMUEL TROICE, MARTHA DIAZ, PAULA GILLY-FLORES, PUNGA PUNGA FINANCIAL, LTD., MANUEL CANABAL, DANIEL GOMEZ FERREIRO, and PROMOTORA VILLA MARINO, C.A. individually and on behalf of a class of all others similarly situated , Plaintiffs, vs. WILLIS OF COLORADO, INC., WILLIS GROUP HOLDINGS LTD., AMY S. BARANOUCKY, ROBERT S. WINTER, and BOWEN, MICLETTE & BRITT, INC., Defendants.

CIVIL ACTION NO. 3:09-cv-01274-N (ECF) Judge David C. Godbey

In re: Stanford Entities Securities Litigation, MDL 2099

Related Actions: Case No. 3:09-cv-2042-N (Ranni) Case No. 3:10-cv-1862-N (Casanova) Case No. 3:10-cv-0799-N (Rupert) Case No. 5:11-cv-290 (Rishmague)

______________________________________________________________________________

BRIEF IN SUPPORT OF BMB’S MOTION TO DISMISS PLAINTIFFS’ THIRD AMENDED CLASS

ACTION COMPLAINT AND MOTION TO STAY ______________________________________________________________________________

Case 3:09-cv-01274-N Document 128 Filed 05/02/11 of 46 PageID 2261

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TABLE OF CONTENTS

I. INTRODUCTION .............................................................................................................. 1

II. SUMMARY OF MOTION................................................................................................. 2

III. FACTUAL BACKGROUND............................................................................................. 3

IV. PLAINTIFFS’ CLASS ACTION CLAIMS ARE PREEMPTED BY SLUSA.................. 5

V. PLAINTIFFS’ CLAIMS UNDER THE TEXAS SECURITIES ACT AND THE TEXAS INSURANCE CODE MUST BE DISMISSED BECAUSE THESE STATUTES DO NOT APPLY EXTRATERRITORIALLY......................................................................... 9

A. The Texas Securities Act Does Not Apply Extraterritorially ................................... 10

B. The Texas Insurance Code Does Not Apply Extraterritorially................................. 13

VI. PLAINTIFFS FAIL TO STATE A CLAIM FOR ALLEGED VIOLATIONS OF THE TEXAS SECURITIES ACT............................................................................................. 14

A. Plaintiffs fail to state a claim under TSA § 33A(2) because BMB was not a “seller” of the CDs ................................................................................................................. 14

B. Plaintiffs have failed to identify any actionable material misrepresentations or omissions by BMB.................................................................................................... 16

(1) The lone alleged misrepresentation was truthful ......................................... 16

(2) None of the alleged omissions are actionable.............................................. 18

C. Plaintiffs’ claims against BMB under TSA § 33A(2) are time-barred ..................... 20

D. Plaintiffs’ claims against BMB for “aiding” Stanford’s violations of the TSA are likewise time-barred.................................................................................................. 20

E. Conspiracy to violate the TSA is not a legally-recognized claim............................. 22

VII. PLAINTIFFS’ CLAIMS FOR AIDING STANFORD’S TSA VIOLATIONS, FRAUD, NEGLIGENT MISREPRESENTATION, NEGLIGENCE, GROSS NEGLIGENCE, AND CIVIL CONSPIRACY SHOULD BE DISMISSED PURSUANT TO RULES 8(A) AND 9(b) .......................................................................................................................... 24

A. Plaintiffs have not pled their fraud-based allegations with particularity .................. 25

B. Plaintiffs fail to adequately plead scienter under Rule 9(b), requiring dismissal of Plaintiffs’ claims for aiding Texas Securities Act violations, civil conspiracy, and common law fraud .................................................................................................... 26

C. Plaintiffs’ negligent misrepresentation, negligence, and gross negligence claims also should be dismissed because they rely upon the exact same deficient averments as Plaintiffs’ fraud claims.............................................................................................. 29

VIII. PLAINTIFFS FAIL TO STATE A CLAIM FOR COMMON LAW FRAUD AND NEGLIGENT MISREPRESENTATION......................................................................... 30

IX. PLAINTIFFS FAIL TO STATE A CLAIM FOR NEGLIGENT RETENTION/SUPERVISION......................................................................................... 30


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X. PLAINTIFFS LACK STANDING TO ASSERT CLAIMS UNDER THE TEXAS INSURANCE CODE........................................................................................................ 31

XI. PLAINTIFF GILLY-FLORES CANNOT STATE A CLAIM AGAINST BMB............ 32

XII. PLAINTIFFS’ VICARIOUS THEORIES OF LIABILITY ALSO MUST BE DISMISSED ..................................................................................................................... 33

XIII. MOTION TO STAY......................................................................................................... 34

XIV. CONCLUSION................................................................................................................. 35

XV. REQUEST FOR ORAL ARGUMENT ............................................................................ 35


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TABLE OF AUTHORITIES

Cases

Adickes v. Andreoli, 600 S.W.2d 939 (Tex.Civ.App. 1980) .............................................................................. 30

Allstate Ins. Co. v. Watson, 876 S.W.2d 145 (Tex. 1994)............................................................................................. 32

American Realty Trust, Inc. v. Travelers Cas. & Sur. Co. of Am., 362 F.Supp.2d 744 (N.D. Tex. 2005) ......................................................................... 29, 30

Ashcroft v. Iqbal, --- U.S. ---, 129 S.Ct. 1937 (2009).................................................................................... 24

Barron v. Igolnikov, 2010 WL 882890, at *5 (S.D.N.Y. Mar. 10, 2010) ............................................................ 6

Beebe v. Compaq Computer Corp., 940 S.W.2d 304 (Tex.App.─Houston [14th Dist.] 1997, no writ) ................................................................................................ 11

Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007).................................................................................................... 24, 25

Biliouris, 559 F.Supp.2d at 737 ............................................................................................ 29, 30, 33

Bond v. Otis Elevator Co., 388 S.W.2d 681 (Tex. 1965)............................................................................................. 33

Brown v. Cole, 291 S.W. 2d 704 (Tex. 1956)............................................................................................ 15

Brown v. de la Cruz, 156 S.W.3d 560 (Tex. 2004)............................................................................................. 23

Carroll v. Timmers Chevrolet, Inc., 592 S.W.2d 922 (Tex. 1979)............................................................................................. 33

Central Bank of Denver. v. First Interstate Bank, 511 U.S. 164 (1994).................................................................................................... 23, 24

Citizens Ins. Co. of Am. v. Daccach, 217 S.W.3d 430 (Tex. 2007)............................................................................................. 11

Citizens Nat’l Bank v. Allen Rae Invs., 142 S.W.3d 459 (Tex. App. Fort Worth 2004, no pet.) .................................................... 30


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Coca-Cola Co. v. Harmar Bottling Co., 218 S.W.3d 671 (Tex. 2006)............................................................................. 9, 10, 12, 13

Cordova v. Lehman Bros., Inc., 413 F. Supp.2d 1309 (S.D. Fla. 2006) ................................................................................ 7

Crawford v. Guideone Mutual Insurance Co., 420 F.Supp.2d 584 (N.D. Tex. 2006) ............................................................................... 32

Dinsmore v. Squadron, Ellenoff, Plesent, Sheinfeld & Sorkin, 135 F.3d 837 (2d Cir. 1998).............................................................................................. 23

Dorsey v. Portfolio Equities, Inc., 540 F.3d 333 (5th Cir. 2008) ............................................................................................ 26

Elliott Assoc. v. Porsche Automobile Holding SE, slip op., No. 10-CV-0532 (S.D.N.Y. Dec. 30, 2010)....................................................... 12

Equal Employment Opportunity Comm’n v. Arabian Am. Oil. Co., 499 U.S. 244 (1991).......................................................................................................... 10

Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976).......................................................................................................... 26

Frank v. Bear Stearns & Co., 11 S.W.3d 380 (Tex. App. – Houston [14th Dist.] 2000, no pet.).................................... 15

Frank v. L.L. Bean, Inc., 352 F.Supp.2d 8 (D.Me. 2005) ......................................................................................... 34

Grippo v. Perazzo, 357 F.3d 1218 (11th Cir. 2004) .......................................................................................... 6

Huddleston v. Herman & MacLean, 640 F.2d 534 (5th Cir. 1981), aff’d in part and reversed in part on other grounds, 459 U.S. 375 (1983)........................................................................................... 15

In re Alstom S.A. Sec. Litig., 2010 WL 3718863 (S.D.N.Y. Sept. 14, 2010).................................................................. 12

In re Banco Santander Securities-Optimal Litigation, 732 F.Supp.2d 1305 (S.D. Fla. 2010) ............................................................................... 13

In re Enron Corp. Sec., 535 F.3d 325 (5th Cir. 2008) .............................................................................................. 5

In re Enron Corp. Sec., Derivate & ERISA Litigation, 258 F.Supp.2d 579 (S.D. Tex. 2003) .......................................................................... 16, 20


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In re Perry, 404 B.R. 196 (Bankr. S.D. Tex. 2009) ............................................................................. 18

In re Westcap Enterp., 230 F.3d 717 (5th Cir. 2000) ............................................................................................ 17

Indiana Elec. Workers' Pension Trust Fund IBEW v. Shaw Group, Inc., 537 F.3d 527 (5th Cir. 2008) ............................................................................................ 26

Kaiser Aluminum & Chem. Sales, Inc. v. Avondale Shipyards, Inc., 677 F 2d 1045 (5th Cir. 1982) ...........................................................................................20

Kapps v. Torch Offshore, Inc., 379 F.3d 207 (5th Cir. 2004) .......................................................................................18, 19

Lone Star Ladies Inv. Club v. Schlotzsky’s Inc., 238 F.3d 363 (5th Cir. 2001) ............................................................................................ 15

Lovelace v. Software Spectrum Inc., 78 F.3d 1015 (5th Cir. 1996) ............................................................................................ 28

Mancorp, Inc. v. Culpepper, 802 S.W.2d 226 (Tex. 1990)............................................................................................ 33

Marmon v. Mustang Aviation, Inc., 430 S.W.2d 182 (Tex. 1968)......................................................................................... 9, 10

McCamish, Martin Brown & Loeffler v. F.E. Appling Interests, 991 S.W.2d 787 (Tex. 1999)............................................................................................. 30

Medler v. Morris, 27 F.3d 1097 (5th Cir. 1994) ...................................................................................... 25, 28

Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71 (2006).............................................................................................................. 5

Miller v. Nationwide Life Ins. Co., 391 F.3d 698 (5th Cir. 2004) .............................................................................................. 8

Morris v. JTM Materials, Inc., 78 S.W.3d 28 (Tex.App. ─ Fort Worth 2002, no pet.) ..................................................... 31

Morrison v. National Australia Bank Ltd., 130 S.Ct. 2869 (2010)........................................................................................... 11, 12, 13

Newman v. Family Mgmt. Corp., 2010 WL 4118083, at *10 (S.D.N.Y. Oct. 20, 2010) ......................................................... 6


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Parra v. Markel Int’l Ins. Co. Ltd., 300 Fed.App. 317 (5th Cir. 2008)..................................................................................... 32

Paull v. Capital Resource Mangement, 987 S.W.2d 214 (Tex. App.─Austin 1999, writ denied) .................................................. 18

Pegasus Fund, Inc. v. Laraneta, 617 F.2d 1335 (9th Cir. 1980) .......................................................................................... 27

Pinter v. Dahl, 486 U.S. 622 (1988).......................................................................................................... 15

Psarianos v. Standard Marine Ltd., 12 F.3d 461 (5th Cir. 1994) .............................................................................................. 32

Regents of University of California v. Credit Suisse First Boston (USA), Inc., 482 F.3d 372 (5th Cir. 2007) ................................................................................ 23, 24, 33

Romano v. Kazacos, 609 F.3d 512 (2nd Cir. 2010).............................................................................................. 5

Rosenzweig v. Azurix Corp., 332 F.3d 854 (5th Cir. 2003) .............................................................................................15

SEC v. Zandford, 535 U.S. 813, 825 (2002).....................................................................................................6

Sheppard v. Texas Department of Transportation, 158 F.R.D. 592 (E.D. Tex. 1994)...................................................................................... 17

Shoemaker v. Estate of Whistler, 513 S.W.2d 10 (Tex. 1974)............................................................................................... 33

Sioux, Ltd., Sec. Litig. v. Coopers & Lybrand, 914 F.2d 61 (5th Cir. 1990) .............................................................................................. 30

SSP Partners v. Gladstrong Investments (USA) Corp,. 275 S.W.3d 444 (Tex. 2009)............................................................................................. 33

Sterling Trust Co. v. Adderley, 168 S.W.3d 835 (Tex. 2005)............................................................................................. 27

Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148 (2008).......................................................................................................... 23

Superintendent of Ins. of N.Y. v. Bankers Life & Casualty Co., 404 U.S. 6 (1971)................................................................................................................ 6


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Texas Cap. Sec., Inc. v. Sandefer, 58 S.W.3d 760 (Tex.App. – Houston [1st Dist.] 2001, pet. denied]................................ 18

Texas Medical Ass’n v. Aetna Life Ins. Co., 80 F.3d 153 (5th Cir. 1996) .............................................................................................. 32

Torres v. Valencia, 2006 WL 3779815, *5, (W.D.Tex. Sept. 27, 2006).......................................................... 33

Transp. Ins. Co. v. Faircloth, 898 S.W.2d 269 (Tex. 1995)............................................................................................. 17

Trenholm v. Ratcliff, 646 S.W.2d 927 (Tex. 1983)............................................................................................. 30

Tuchman v. DSC Commc’ns Corp., 14 F.3d 1061 (5th Cir. 1994) ................................................................................ 25, 27, 28

Turner v. Upton County, 915 F.2d 133 (5th Cir. 1990) ............................................................................................ 33

Venture Associates v. Zenith Data Systems, 987 F.2d 429 (7th Cir. 1993) ............................................................................................ 17

Walker v. State Farm Lloyd’s, 2004 WL 1462200 (N.D. Tex. June 28, 2004) ................................................................. 32

Warfield v. Fidelity and Deposit Co., 904 F.2d 322 (5th Cir. 1990) ...................................................................................... 31, 32

Williams v. WMX Techs., Inc., 112 F.3d 175 (5th Cir. 1997) ............................................................................................ 25

Statutes

15 U.S.C. §§ 77p(b); 78bb(f)(1) .................................................................................................... 5

15 U.S.C. §§ 77(p)(f)(2)(A)(i)(I); 15 U.S.C. §§ 78 bb(f)(5)(B)(i)(I) ..............................................5

15 U.S.C. §§ 77p(f)(3), 15 U.S.C. 78bb(f)(5)E)..............................................................................6

26 C.F.R. § 1.1092(d)-1 .................................................................................................................. 8

26 U.S.C. § 731............................................................................................................................... 8

7 TEX. ADMIN. CODE § 139.7 (b) ...................................................................................................11

TEX. REV. CIV. STAT. ANN. ART. 581-4(C) & (D).........................................................................10

TEX. REV. CIV. STAT. ANN. ART. 581-4(E)....................................................................................10


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TEX. REV. CIV. STAT. ANN. ART. 581-7 (Vernon 2008) ................................................................21

TEX. REV. CIV. STAT. ANN. ART. 581-12 (Vernon 2008) ........................................................10, 21

TEX. REV. CIV. STAT. ANN. ART. 581-33 (Vernon 2008) ........................................................14, 15

TEX. REV. CIV. STAT. ANN. ART. 581-33A(1) (Vernon 2008).................................... 15, 20, 21, 22

TEX. REV. CIV. STAT. ANN. art. 581-33A(2) (Vernon 2008) ................................ 14, 15, 16, 20, 22

TEX. REV. CIV. STAT. ANN. ART. 581-33F (Vernon 2008) ..........................................15, 22, 23, 24

TEX. REV. CIV. STAT. ANN. ART. 581-33F(2) (Vernon 2008) ...................................................... 27

Tex. Rev. Civ. Stat. Ann. Art. 581-33H (Vernon 2008)................................................................22

TEX. REV. CIV. STAT. ANN. Art. 581-33H(2) (Vernon 2008) ....................................................... 22

TEXAS INS. CODE, § 541.......................................................................................................... 13, 31


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I. INTRODUCTION

This is a Stanford-related class action filed by a group of Mexican and Venezuelan

nationals. As is often the case in the aftermath of a major scandal, Plaintiffs’ lawyers are now

looking for scapegoats ─ deep-pocketed third parties who can be accused of complicity in the

alleged misconduct. Stanford investors have sued banks, law firms, clearing brokers, and

insurance companies, indiscriminately accusing all of them of facilitating the fraud. As a rule,

these cases are long on accusations and short on facts. This case is no different.

Bowen Miclette & Britt, Inc. (“BMB”) is a Houston-based insurance brokerage firm that

procured insurance coverage for the Stanford International Bank between 1996 and 2004. In this

case, therefore, Plaintiffs are doing more than just casting a wide net in the search for third-party

targets. They also are reaching back in time.

Plaintiffs’ claims against BMB are based upon a handful of single-page letters written 7-

16 years ago. These letters addressed insurance coverage that Stanford International Bank had

obtained through BMB. Plaintiffs claim that these letters were misleading, and they further

claim that they relied on the letters in purchasing or renewing CD investments.

This is absurd. The letters on BMB letterhead do not discuss the Plaintiffs’ CD

investments, they confirm that BMB procured insurance coverage for Stanford. BMB had no

involvement in or awareness of Stanford’s alleged fraud, and Plaintiffs have alleged no facts to

the contrary.

Plaintiffs have taken innocuous letters and manufactured claims against BMB, an

innocent party. But shining through the complaint is a simple truth ─ Plaintiffs’ reach has

exceeded their grasp. The facts do not suggest any wrongdoing by BMB, and Plaintiffs have

failed to state a claim for relief as a matter of law.



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II. SUMMARY OF MOTION

For all of the reasons summarized below, Plaintiffs’ claims should be dismissed pursuant

to Fed. R. Civ. P. 8(a), 9(b) and 12(b)(6):

Plaintiffs’ putative class-action claims are preempted by the Securities Litigation Uniform Standards Act (“SLUSA”).

Plaintiffs’ claims under the Texas Securities Act and the Texas Insurance Code are barred because these Texas statutes do not apply extraterritorially to CD purchases made in Mexico and Venezuela.

Plaintiffs fail to state a claim under the Texas Securities Act because: (1) BMB was not a “seller” of securities under the TSA; (2) BMB made no material misrepresentations or omission to the Plaintiffs; (3) Plaintiffs’ TSA claims against BMB are time-barred.

The TSA precludes Plaintiffs’ purported cause of action for conspiracy to violate the TSA.

Plaintiffs’ causes of action for aiding Stanford’s TSA violations, fraud, negligent misrepresentation, negligence, gross negligence, and civil conspiracy should be dismissed pursuant to Rules 8(a) and 9(b) for failure to state a claim.

Plaintiffs’ claims for common law fraud and negligent misrepresentation should be dismissed because BMB made no material misrepresentations or omissions.

Plaintiffs’ claims for negligent retention and supervision should be dismissed because Plaintiffs do not plead that Winter was unfit to be a BMB employee or presented an unreasonable risk of harm to others.

Plaintiffs lack standing to assert claims against BMB under the Texas Insurance Code.

Plaintiff Gilly-Flores cannot state a claim against BMB because her claims have no factual connection to BMB.

Plaintiffs’ vicarious theories of liability fail to state a claim.

Alternatively, the case should be stayed under the terms of the Court’s receivership order

and March 8, 2010 stay order because Plaintiffs have asserted claims against Robert Winter, a

former director of SIB.



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III. FACTUAL BACKGROUND

Plaintiffs are foreign nationals who made foreign purchases of foreign CD investments.

This is a putative class action brought by Mexican and Venezuelan citizens who purportedly

invested in certificates of deposit (“CDs”) offered by Stanford International Bank (“SIB”). Six

of the seven named Plaintiffs claim that they were shown letters on BMB and/or Willis

letterhead reciting SIB’s insurance policies in connection with their purchase and/or renewal of

SIB CDs. Although the Third Amended Complaint (TAC”) focuses on the alleged distribution

of letters on BMB and/or Willis letterhead in Mexico and Venezuela, the putative class would

include any person anywhere who invested in SIB CDs, regardless of whether they were ever

shown letters on BMB and/or Willis letterhead.1 TAC ¶ 161.

Plaintiffs’ lengthy complaint largely focuses on the background of Stanford and the

alleged Ponzi scheme secretly carried out by a few Stanford executives. Id. ¶¶ 21-49; 106-138.

Plaintiffs do not allege any facts showing that BMB knew of Stanford’s fraud. Instead, Plaintiffs

generally allege that based on BMB’s limited role as an insurance broker, it should have been

able to detect the fraud. Id. ¶¶ 54, 56, 57. This is absurd.

According to Plaintiffs, BMB allegedly participated in Stanford’s fraud through a handful

of single-page insurance coverage letters written between 1996 and 2004. TAC Ex. 4. The

gravamen of Plaintiffs’ case is the claim that BMB (and later, Willis) included material

misrepresentations and omissions in the letters, and that these “fraudulent” letters attested to

SIB’s “safety and soundness.” See TAC ¶¶ 75-77, 91.

1 Plaintiffs alternatively seek to certify a class or classes of Latin American investors, Mexican investors, and/or Venezuelan investors who purchased CDs from or maintained accounts with Stanford as of February 2009, but again, without regard to whether the class members saw or relied upon letters on BMB and/or Willis letterhead. TAC ¶ 163-165. In the alternative to all of the above classes, Plaintiffs finally seek to certify a class of investors who were sent or shown the insurance letters. Id. ¶ 166.



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But the letters say nothing about the SIB CDs purchased by Plaintiffs, nor do they attest

to SIB’s “safety and soundness.” See TAC, Ex 4. To the contrary, the coverage letters

accurately describe various insurance policies that BMB placed for SIB. Id. Taking the contents

of the letters in order, Plaintiffs do not allege any of the following are false representations:

(1) the length of the relationship between Winter and SIB or that Winter believed SIB to be

“first-class business people;” (2) that BMB had placed coverage for SIB; (3) that the coverages

were at the time currently in effect; (4) the list of policies in the letters; (5) the expiration dates

for the policies; or (6) that BMB had found its dealings with SIB to have been conducted in a

professional and satisfactory manner.

The only alleged misrepresentation that Plaintiffs point to is a statement that SIB

underwent a stringent Risk Management review conducted by an outside audit firm in order to

qualify for the listed coverages. TAC at ¶ 91-92. But Plaintiffs admit that a risk management

review was indeed conducted by an outside audit firm. Id. ¶ 92. Indeed, Plaintiffs acknowledge

that Stogniew & Associates prepared a risk management report in 2003. That report, a copy of

which is included in the Appendix to BMB’s motion,2 concluded that Stanford had established

“reasonable internal controls and risk management systems . . . to minimize the exposure to

claims covered by the insurance policies.” App. at 10 (emphasis in original).

In short, Plaintiffs have manufactured a multi-billion dollar claim against BMB on the

following evidence: Many years ago, BMB sent coverage letters to Stanford that accurately

verified its purchase of certain insurance policies. These flimsy allegations do not state a claim

for relief. Plaintiffs’ dispute is with Stanford, not BMB.

2 Documents referenced in the plaintiff’s complaint and “central to [its] claim” may be attached to a defendant’s motion to dismiss. See Collins v. Morgan Stanley Dean Witter, 224 F.3d 496, 498-99 (5th Cir. 2000).



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IV. PLAINTIFFS’ CLASS ACTION CLAIMS ARE PREEMPTED BY SLUSA

The Securities Litigation Uniform Standards Act of 1997 (“SLUSA”) preempts state-law

class actions involving the purchase or sale of securities. SLUSA requires that such actions be

brought exclusively under the federal securities laws. Accordingly, Plaintiffs’ state-law class

action claims must be dismissed as a matter of law.

SLUSA prohibits class action claims that are based on state law and allege fraud in

connection with the purchase or sale of covered securities. See 15 U.S.C. §§ 77p(b); 78bb(f)(1).

SLUSA was enacted to prevent plaintiffs from using state-law claims to evade the requirements

and frustrate the purposes of the Private Securities Litigation Reform Act. Merrill Lynch,

Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 82 (2006); In re Enron Corp. Sec., 535 F.3d

325, 337 (5th Cir. 2008) (SLUSA was enacted to “stem this shift from Federal to State court” in

securities class actions). Furthermore, SLUSA requires courts to look beyond the face of the

complaint in assessing whether state-law claims are preempted. Romano v. Kazacos, 609 F.3d

512, 519 (2nd Cir. 2010) (court should look beyond face of complaint in determining whether

SLUSA preempts state-law claims).

SLUSA preempts a state-law class action if four conditions are satisfied: (1) the action is

a “covered class action;” (2) the claims are based on state law; (3) the action involves one or

more “covered securities”; and (4) the claims allege a misrepresentation in connection with the

purchase or sale of the security.3 Id.; Enron, 535 F.3d at 338-39. It is undisputed that the first

two conditions have been satisfied. First, a covered class action under SLUSA requires a lawsuit

seeking damages on behalf of more than 50 people. 15 U.S.C. §§ 77(p)(f)(2)(A)(i)(I); 78

bb(f)(5)(B)(i)(I). Plaintiffs have asked the Court to certify a class that includes “thousands of

3 Plaintiffs have pled that the CDs sold by SIB were securities under Texas law. BMB does not concede that the CDs meet the definition of a security under Texas and/or federal law.



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investors.” TAC ¶¶ 160-166. Second, all of Plaintiffs’ claims are based on state law. Id.

¶¶ 168-199.

Plaintiffs’ allegations also meet the remaining two requirements. Even assuming that

SIB CDs were not themselves covered securities,4 SLUSA’s “in connection” language ─

interpreted like the language from section 10(b) of the Securities Exchange Act on which it was

based – nevertheless bars the Plaintiffs’ claims. SLUSA’s broad preemption provisions do not

hinge on whether the Plaintiffs themselves purchased covered securities. Rather, SLUSA merely

requires that “the fraud alleged ‘coincide with’ a securities transaction ─ whether by the plaintiff

or someone else.” Dabit, 547 U.S. at 85. In fact, it is not necessary that an actual covered

security ever be purchased; all that is necessary is a promise to purchase such securities.5 Id.;

SEC v. Zandford, 535 U.S. 813, 825 (2002); Grippo v. Perazzo, 357 F.3d 1218, 1223 (11th Cir.

2004); see also Newman v. Family Mgmt. Corp., 2010 WL 4118083, at *10 (S.D.N.Y. Oct. 20,

2010) (“[t]hat the trades never took place does not preclude finding a connection” with covered

securities under SLUSA); Barron v. Igolnikov, 2010 WL 882890, at *5 (S.D.N.Y. Mar. 10,

2010) (in Madoff “feeder fund” action, court noted that “Madoff told investors that he would

purchase and sell securities in the S & P 100 Index . . . but never consummated any trades,” and

held that SLUSA preempted state-law claims because “it is enough that this fraudulent scheme

was in connection with the trading in the nationally listed securities in which Madoff claimed to

4 A “covered security” under SLUSA includes any security that trades on a regulated national securities exchange or on the NASDAQ market. See 15 U.S.C. §§ 77p(f)(3), 78bb(f)(5)(E).

5 Plaintiffs’ claims also would meet SLUSA’s “in connection with” requirement if they sold covered securities in order to purchase SIB CDs. Superintendent of Ins. of N.Y. v. Bankers Life & Casualty Co., 404 U.S. 6, 9-12 (1971) (“in connection” requirement satisfied where victim was induced to sell bonds and the proceeds of the sale were misappropriated); Zanford, 535 U.S. at 822 (investors were duped into selling securities on the promise that the proceeds would be conservatively invested, but were instead misappropriated). The individual Plaintiffs have pled that they did not sell covered securities in order to make their SIB investments (TAC ¶ 139, 142, 150, 152, 154, 157), but it is probable that many putative class members may have liquidated investments in covered securities in order to purchase SIB CDs.



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be engaged. It is not essential that Madoff actually performed any trades or acquired any

securities.”).

A recent Florida case is directly on point. In Cordova v. Lehman Bros., Inc., 413 F.

Supp.2d 1309 (S.D. Fla. 2006), the plaintiffs invested money in retirement trusts run by a

company called PFA. Id. at 1311. The marketing for these retirement trusts heavily promoted

safety and security of investing through PFA, based on the fact that well-known financial

institutions such as Merrill Lynch, Raymond James, Lehman Brothers and HSBC acted as

trustees for the retirement trust plans. Id. When it was discovered that PFA had improperly

pooled investor funds and siphoned off 90% of investor assets for non-investor funds, investors

sued Lehman Brothers and the other financial institutions for state law common law fraud and

breach of fiduciary claims. Id.

The Cordova court rejected the investors’ contention that since the retirement plans were

not covered securities, their breach of fiduciary duty and fraud claims were not in connection

with the purchase of covered securities. Id. at 1316-20. While the plans themselves were not

covered securities, one component of the plan was that some of the investor funds were supposed

to be invested in the investor’s choice of mutual funds. Id at 1316-17. This promise was

sufficient to make the investments in the retirement plans connected to covered securities, even

though the money was never actually segregated into individual accounts as promised. Id. at

1317. The court found that despite plaintiffs’ efforts to plead around SLUSA, logic dictated that

since the essence of the claims was that the defendants’ participation in the scheme provided a

false assurance that investors’ funds would be safe, plaintiffs’ claims were in connection with the

promises to purchase securities and were, therefore, preempted. Id. at 1319.

The labels that Plaintiffs have assigned to their causes of action are irrelevant to the issue

of whether their claims allege a misrepresentation in connection with the purchase or sale of



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securities. Miller v. Nationwide Life Ins. Co., 391 F.3d 698 (5th Cir. 2004) (“the issue of

preemption thus hinges on the content of the allegations ─ not on the label affixed to the cause of

action”). Looking past these labels, it is clearly apparent that Plaintiffs’ allegations satisfy

SLUSA’s requirement that the alleged scheme involved covered securities. Plaintiffs allege that

Stanford promised to invest assets in “first grade investment bonds (AAA, AA+, AA) and shares

of stock (of great reputation, liquidity and credibility) and in negotiable instruments in the

financial markets and easily made liquid should it be necessary.” TAC, Ex. 2 at 2. Plaintiffs

also allege that they were misled by Stanford employees and marketing materials that falsely

promised that SIB’s assets were invested in a “well balanced global portfolio of marketable

financial instruments, namely US and international securities and fiduciary placements.” TAC

¶¶ 121, 138; see also SEC Sec. Amend. Compl. ¶ 35 (cited by Plaintiffs at TAC ¶¶ 123, 128,

130, 135). For such investments to be “marketable,” they must by definition include securities

traded on national markets and exchanges that fall within SLUSA’s definition of covered

securities. See. e.g. 26 U.S.C. § 731; 26 C.F.R. § 1.1092(d)-1 (defining marketable securities as

those that are actively traded, such as on a national exchange or interdealer quotation system, or

similar market).

Plaintiffs allegedly relied on Stanford’s marketing materials – and its alleged

misrepresentations regarding covered securities ─ in making their decision to purchase the

Stanford CDs. TAC ¶¶ 139, 142, 145, 152, 154. As a result, Plaintiffs’ state-law class action

claims are preempted by SLUSA and must be dismissed.



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V. PLAINTIFFS’ CLAIMS UNDER THE TEXAS SECURITIES ACT AND THE TEXAS INSURANCE CODE MUST BE DISMISSED BECAUSE

THESE STATUTES DO NOT APPLY EXTRATERRITORIALLY

Plaintiffs fail to state a claim for violations of the Texas Securities Act (“TSA”) and the

Texas Insurance Code because these Texas statutes cannot be applied extraterritorially to reach

sales of foreign investments to foreign citizens.

All of the Plaintiffs are foreign individuals or entities: Mexican or Venezuelan citizens; a

Venezuelan company; and a Panamanian company with its principal place of business in Mexico

City. TAC ¶¶ 2-9. Plaintiffs purchased the CDs from SIB, an Antiguan bank. See Id. ¶¶ 26,

136-57. Plaintiffs do not allege that they made any purchases in Texas, or anywhere else in the

United States. To the contrary, they specifically allege that they purchased their investments in

Mexico and Venezuela:

Plaintiff Troice “invested in SIB CDs through Stanford Mexico,” (id. ¶ 139);

Plaintiff Diaz “and her husband invested . . . via Stanford Mexico,” (id. ¶ 142);

Plaintiff Flores purchased SIB CDs after a meeting “at the Hotel Villa Florida en Pueblo [in Mexico],” (id. ¶¶ 145-46);

Plaintiff Punga Punga Financial, Ltd. purchased SIB CDs in Mexico “because Punga’s business was located right next to Stanford Mexico’s offices in Mexico City,” (id. ¶¶ 147-51); and

Plaintiffs Canabal, Ferreiro and Promotora “all invested in the SIB CDs through Stanford Venezuela.” (Id. ¶ 152).

Texas statutes are presumed not to apply extraterritorially unless the language of the

statute clearly states an extraterritorial intent. Marmon v. Mustang Aviation, Inc., 430 S.W.2d

182, 187 (Tex. 1968) (the laws of Texas are presumed to stop at the Texas border, unless the

legislature includes in the relevant statute a clear intention for extraterritoriality). “We start with

the principle that a statute will not be given extraterritorial effect by implication but only when

such intent is clear.” Coca-Cola Co. v. Harmar Bottling Co., 218 S.W.3d 671, 682 (Tex. 2006)



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(citing Equal Employment Opportunity Comm’n v. Arabian Am. Oil. Co., 499 U.S. 244, 248

(1991)).

As the Texas Supreme Court explained in Coca-Cola:

Unless the intention to have a statute operate beyond the limits of the state or country is clearly expressed or indicated by its language, purpose, subject matter, or history, no legislation is presumed to be intended to operate outside the territorial jurisdiction of the state or country enacting it. To the contrary the presumption is that the statute is intended to have no extraterritorial effect, but to apply only within the territorial jurisdiction of the state or country enacting it, and it is generally so construed. An extraterritorial effect is not to be given statutes by implication.

Coca-Cola, 218 S.W.3d at 683 n.33 (quoting Marmon, 430 S.W.2d at 187).

A. The Texas Securities Act Does Not Apply Extraterritorially

The TSA provisions at issue in this case expressly limit their application to Texas-based

transactions. For example, section 12 of the TSA (see TAC ¶ 177) is expressly limited to sales

of securities in Texas:

Except as provided in Section 5 of this Act, no person, firm, corporation or dealer shall, directly or through agents, offer for sale, sell or make a sale of any securities in this state without first being registered as in this Act provided. No agent shall, on behalf of any dealer, sell, order for sale, or make sale of any securities within the state unless registered as an agent for that particular registered dealer under the provisions of the Act.

TSA, art. 581-12 (emphasis added). Similarly, the TSA’s definitions for “agent” and “dealer,”

are expressly limited to persons “within this state,” see TSA, art. 581-4 (C) & (D) , and the

definitions of “sale,” “offer for sale,” and “sell” include similar territorial limitations:

The term ‘sell’ means any act by which a sale is made, and the term ‘sale’ or ‘offer for sale’ shall include a subscription, an option for sale, a solicitation of sale, a solicitation of an offer to buy, an attempt to sell, or an offer to sell, directly or by an agent, by a circular, letter, or advertisement or otherwise, including the deposit in a United States Post Office or mail box or in any manner in the United States mails within this State of a letter, circular or other advertising matter. . .

TSA, art. 581-4 (E) (emphasis added).



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Moreover, the Texas Supreme Court has recognized that the TSA “governs a transaction

and claims arising from it if wrongful acts in the transaction occurred ‘in this state.’” Citizens

Ins. Co. of Am. v. Daccach, 217 S.W.3d 430, 445 (Tex. 2007) (emphasis added). Similarly, the

Texas Securities Board’s regulations under the TSA require a transactional nexus with Texas,

not merely some conduct within the State that facilitates a transaction:

An issuer or selling agent who makes an offer or sale from Texas, by any means, including of the mail or telephone, is a dealer and must comply with the dealer registration requirements of the Securities Act. An offer is not deemed to be made from Texas merely because offering material is prepared in Texas, if such material is still in the possession of the issuer or its selling agent when it leaves the state. A sale is not deemed to be made in Texas merely because a purchaser sends his purchase money to Texas, or because clerical functions connected with the closing of a sale are performed in Texas.

7 TEX. ADMIN. CODE § 139.7 (b) (emphasis added).

The conclusion that the TSA does not apply to conduct abroad is further supported by the

U.S. Supreme Court’s recent decision in Morrison v. National Australia Bank Ltd., in which the

Court held that foreign investors in foreign companies who purchased their securities on a

foreign exchange could not bring an action under the federal securities laws in U.S. courts. 130

S.Ct. 2869, 2875-76 (2010). Interpretations of federal securities laws provide persuasive

authority for interpreting similar provisions in the Texas Securities Act. See Beebe v. Compaq

Computer Corp., 940 S.W.2d 304, 306-07 (Tex.App.─Houston [14th Dist.] 1997, no writ)

(“While cases dealing with the federal securities laws are not dispositive concerning our

interpretation of the Texas Securities Act, they may provide persuasive guidance.”).

In Morrison, Australian plaintiffs bought shares in National Australia Bank (NAB).

Although the securities at issue were all purchased on foreign exchanges, the plaintiffs sued in

the United States based on allegations that NAB’s Florida-based subsidiary orchestrated the

alleged fraud. See 130 S. Ct at 2875-76. In rejecting the plaintiffs’ claims, the Supreme Court



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emphasized the “longstanding principle of American law that legislation of Congress, unless a

contrary intent appears, is meant to apply only within the territorial jurisdiction of the United

States.” Id. at 2873. Because the Australian plaintiffs in Morrison purchased their securities on

foreign exchanges, they failed to state a claim within the territorial reach of the U.S. securities

laws.

Since Plaintiffs purchased Antiguan CDs in Mexico and Venezuela, their claims are

beyond the reach of federal or state securities laws in the United States. Furthermore, it does not

matter that Plaintiffs point to conduct that occurred in Texas (e.g., that Houston was the “nerve

center” for the alleged Stanford fraud (TAC ¶ 29)). “[T]he presumption against extraterritorial

application would be a craven watchdog indeed if it retreated to its kennel whenever some

domestic activity is involved in the case.” Id. at 2884. The critical factor is not the place of the

alleged misconduct, but the place of the transaction, since “purchase-and-sale transactions are

the objects of the statute’s solicitude.” Id. at 2884 (emphasis added); see Elliott Assoc. v.

Porsche Automobile Holding SE, slip op., No. 10-CV-0532 at 9 (S.D.N.Y. Dec. 30, 2010)

(“[T]he Morrison court changed the presumption long-held . . . that the locus of deceptive

conduct is relevant to the applicability of section 10(b).”); In re Alstom S.A. Sec. Litig., 2010 WL

3718863, at *3 (S.D.N.Y. Sept. 14, 2010) (applying Morrison to dismiss claim against French

issuer, despite alleged fraudulent conduct in the United States).

The dismissal of the claims based on sales outside Texas also avoids the risk of

interfering with foreign law and the policy choices embodied in foreign statutes. See Morrison,

130 S. Ct. at 2885-86 (interpreting §10(b) to avoid interfering with foreign securities laws: “The

probability of incompatibility with the applicable laws of other countries is so obvious that if

Congress intended such foreign application ‘it would have addressed the subject of conflicts with

foreign laws and procedures.’”); see also Coca-Cola Co., 218 S.W.3d at 680-81 (“It is an



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especially sensitive matter for a jurisdiction to extend its laws governing economic competition

beyond its borders. Such laws necessarily reflect fundamental policy choices that the people of

one jurisdiction should not impose on the people of another.”).

Finally, the courts of the United States are simply not an appropriate venue for claims

such as those asserted here ─ claims by Latin American investors in an Antiguan Bank, with

sales taking place in Mexico and Venezuela. Many of the relevant documents and witnesses will

be located outside of the United States, perhaps beyond the subpoena power of this Court.

Numerous issues relating to jurisdiction and conflicts of law may arise. As the Southern District

of Florida recently noted, it makes little sense to “to try to force a square peg (claims by foreign

parties, governed by foreign law and concerning foreign securities) into a round hole (an

American court).” In re Banco Santander Securities-Optimal Litigation, 732 F.Supp.2d 1305,

1314 (S.D. Fla. 2010). Accordingly, Plaintiffs’ TSA claims must be dismissed.

B. The Texas Insurance Code Does Not Apply Extraterritorially

The presumption against extraterritoriality articulated in Coca-Cola and Morrison is a

general principle of statutory construction that also bars Plaintiffs’ claims under the Texas

Insurance Code. See Coca-Cola, 218 S.W.3d at 683 n.33 (“Unless the intention to have a statute

operate beyond the limits of the state or country is clearly expressed or indicated by its language,

purpose, subject matter, or history, no legislation is presumed to be intended to operate outside

the territorial jurisdiction of the state or country enacting it.”). The Texas Insurance Code does

not attempt to regulate extraterritorial matters, and therefore the Court should dismiss Plaintiffs’

claims under this statute.

The plain language of Chapter 541 of the Texas Insurance Code makes clear that the

legislature intended to limit its application to transactions that occurred within the state of Texas,

by including the limiting language of “in this state” in eight different provisions. See TEXAS INS.



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CODE §§ 541.001, 541.003, 541.005, 541.006, 541.059, 541.082, 541.101, 541.102, 541.201.

Most notably, the “Purpose” of Chapter 541 and the section therein prohibiting deceptive acts

expressly limit claims to acts and practices occurring within the State of Texas. See Id. § 541.003

(“The purpose of this chapter is to regulate trade practices in the business of insurance by: (1)

defining or providing for the determination of trade practices in this state that are unfair methods

of competition or unfair or deceptive acts or practices . . .”) (emphasis added); Id. § 541.003 (“A

person may not engage in this state in a trade practice that is defined in this chapter as or

determined under this chapter to be an unfair method of competition or an unfair or deceptive act

or practice in the business of insurance.”). Accordingly, Plaintiffs’ Texas Insurance Code claims

must be dismissed.

VI. PLAINTIFFS FAIL TO STATE A CLAIM FOR ALLEGED VIOLATIONS OF THE TEXAS SECURITIES ACT

Plaintiffs assert various causes of action under the Texas Securities Act, all of which fail

to state a claim. Plaintiffs’ TSA claims must be dismissed because: (1) BMB is not a “seller”

under § 33A(2) of the TSA; (2) Plaintiffs fail to identify any material misrepresentations or

omission to support their § 33A(2) claim; (3) Plaintiffs’ TSA claims against BMB are time-

barred; (4) the TSA precludes Plaintiffs’ conspiracy claims.

A. Plaintiffs fail to state a claim under TSA § 33A(2) because BMB was not a “seller” of the CDs

Section 33A(2) prohibits a seller from making material misrepresentations or omissions

to a buyer in the sale of a security. TEX. REV. CIV. STAT. ANN. ART. 581-33 (Vernon 2008) . As

a matter of law, BMB cannot be liable under § 33A(2) because it is not a “seller” under the TSA.

Plaintiffs allege that Defendants qualify as sellers under the Texas Securities Act

“because they acted as the soliciting agents of Stanford Financial and SIB in the chain of the

selling process by communicating misleading information about SIB to the general public around



DAL:799748.1

the globe with the goal of selling SIB CDs, and but for Defendants’ participation, Stanford

Financial could not have sold the SIB CDs to Plaintiffs.” TAC ¶ 168 (emphasis added). But this

is inconsistent with the statutory standard defining a “seller” under the TSA.

Section 33A(2) of the TSA is a “privity provision, allowing a buyer to recover from his

offeror or seller.” TEX. CIV. ST. ANN. ART. 581-33, cmt. to §581-33A(1) . In other words, only

“sellers” may be liable under §33A(2). Before the 1977 amendment to the TSA, Texas courts

had broadly defined the term “seller” in the TSA as including any person who served as a link in

the chain of the selling process. Brown v. Cole, 291 S.W. 2d 704, 708 (Tex. 1956). The 1977

amendment to the TSA, however, narrowed the definition of a “seller.” The drafters noted:

“Brown v. Cole should have no application to the new law, since §33F [containing the control

person and aider and abettor liability provisions] provides quite specifically who, besides a

person who buys or sells, is liable, and the criteria for such liability.” TEX. REV. CIV. ST. ANN.

ART. 581-33F cmt.; see also Frank v. Bear Stearns & Co., 11 S.W.3d 380 (Tex. App. – Houston

[14th Dist.] 2000, no pet.).

Under the current version of the TSA, a “seller” is defined as a person that passes title of

the securities to the buyer or successfully solicits the purchase, motivated at least in part by a

desire to serve his own financial interests or those of the securities owner. Pinter v. Dahl, 486

U.S. 622, 647 (1988).6 Solicitation requires that the alleged seller had active participation and

direct contact with the buyer. Rosenzweig v. Azurix Corp., 332 F.3d 854, 871 (5th Cir. 2003); In

6 The definition of the term “seller” under the TSA is interpreted in accordance with the definition of the same term under §12 of the 1933 Securities Act, upon which the TSA’s civil liability provisions are based. Huddleston v. Herman & MacLean, 640 F.2d 534, 551 (5th Cir. 1981), aff’d in part and reversed in part on other grounds, 459 U.S. 375 (1983). In Pinter v. Dahl, the Supreme Court held that the term “seller” under §12(1) of the 1933 Act included only those who passed title and brokers or agents of vendors who actively solicit the purchase of securities in order to serve their own financial interests or the interests of the securities owners. 486 U.S. 622, 647 (1983). The Fifth Circuit applies the Pinter definition of “seller” to §12(2) of the 1933 Act, which is most similar to §33A(2) of the TSA. Lone Star Ladies Inv. Club v. Schlotzsky’s Inc., 238 F.3d 363, 370 (5th Cir. 2001).



DAL:799748.1

re Enron Corp. Sec., Derivate & ERISA Litigation, 258 F.Supp.2d 579, 604, 606 (S.D. Tex.

2003). BMB does not meet this test and therefore cannot be liable under §33A(2) of the TSA.

B. Plaintiffs have failed to identify any actionable material misrepresentations or omissions by BMB

Plaintiffs have failed to identify a single actionable misrepresentation or omission by

BMB. While Plaintiffs make various claims of misrepresentations made by Stanford personnel,

the entirety of the alleged misrepresentation and omissions by BMB are contained in the single-

page coverage letters attached to the Third Amended Complaint. These letters contain no

material misrepresentations or omissions, and therefore do not support a claim under the TSA.7

(1) The lone alleged misrepresentation was truthful

The sole affirmative statement that Plaintiffs identify as an alleged misrepresentation is

the statement that in order to qualify for the listed coverages, SIB underwent a stringent Risk

Management review conducted by an outside audit firm. TAC ¶ 91. But Plaintiffs admit,

however, that a Risk Management review was conducted by an outside audit firm. Id. In 2003,

Stogniew & Associates prepared a risk management report, which is included in the appendix to

BMB’s motion. The report “included an evaluation of Stanford’s risk management systems in

terms of existence, adequacy, and compliance.” App. at 2. Stogniew & Associates conducted

in-depth interviews of 34 senior officers and managers concerning Stanford’s business activities,

operating procedures, and internal controls. Id. at 10. It also reviewed Stanford’s written

policies and procedures, as well as numerous reports prepared by regulators, examiners, auditors,

and attorneys. Id.

The Report contained the following conclusion:

7 The lack of a material misrepresentation or omission is also fatal to Plaintiffs’ negligent misrepresentation, common law fraud and Insurance Code claims.



DAL:799748.1

The primary objective of the engagement was to provide underwriters with additional information concerning the risk management systems and internal controls implemented by the Stanford Companies to minimize exposures covered by the Lloyds’ policies. . . . Based on the results of the Risk Survey and the information provided during the engagement, reasonable internal controls and risk management systems have been established to minimize the exposure to claims covered by the insurance policies. Further, I did not identify any material weaknesses in policies, procedures, internal controls and risk management systems that would warrant a recommendation to management to correct any such weaknesses.

App. at 10 (emphasis original).

In short, Plaintiffs’ misrepresentation claims are contradicted by the very documents that

Plaintiffs rely upon to support their allegations. See TAC ¶ 91; see also Sheppard v. Texas

Department of Transportation, 158 F.R.D. 592, 595 (E.D. Tex. 1994) (“[A] court may also

consider the exhibits attached to the complaint in determining whether a claim upon which relief

may be granted exists. And where an exhibit contradicts an assertion made in the complaint and

eliminates any possible claim for relief, dismissal is appropriate.”); Venture Associates v. Zenith

Data Systems, 987 F.2d 429, 431 (7th Cir. 1993) (“[d]ocuments that a defendant attaches to a

motion to dismiss are considered part of the pleadings if they are referred to in the plaintiff's

complaint and are central to her claim”).

Plaintiffs also argue that the Risk Management review was not “stringent.” Id. But

under Texas law, a misrepresentation is actionable only if it concerns a material fact. In re

Westcap Enterp., 230 F.3d 717, 726 (5th Cir. 2000) ; Transp. Ins. Co. v. Faircloth, 898 S.W.2d

269, 276 (Tex. 1995). Stogniew & Associates clearly conducted a risk management review.

Whether that review was “stringent” is a matter of opinion, not a statement of material fact. In re

Westcap Enterp., 230 F.3d at 726 (“An actionable representation is one concerning a material

fact; a pure expression of opinion will not support an action for fraud”); Paull v. Capital

Resource Management, 987 S.W.2d 214, 218 (Tex. App.─Austin 1999, writ denied) (statements



DAL:799748.1

that investment “would fit [plaintiff’s] needs” and was “low risk” were statements of opinion,

not actionable misrepresentations); or Texas Cap. Sec., Inc. v. Sandefer, 58 S.W.3d 760, 776

(Tex.App. – Houston [1st Dist.] 2001, pet. denied) (statements of opinion, including opinion as

to value, are not actionable under the TSA).

(2) None of the alleged omissions are actionable

Plaintiffs contend that BMB omitted to state: (1) that the Risk Management review was

conducted by a one-man Florida firm and resulted “in a flimsy ‘whitewash’ report full of

disclaimers;” (2) that Winter was a member of the SIB Board of Directors; and (3) the amounts

of coverage under the referenced insurance policies. TAC ¶¶ 92, 94, 95. None of these are

material omissions.

Plaintiffs incorrectly claim that by sending the coverage letters BMB “assumed a duty to

disclose all of the information they knew about Stanford Financial and SIB.” TAC ¶ 171

(emphasis in original). This is simply not true. BMB was required only to disclose information

that rendered the information already disclosed not materially misleading. Kapps v. Torch

Offshore, Inc., 379 F.3d 207, 214-17 (5th Cir. 2004) ; In re Perry, 404 B.R. 196, 212 (Bankr.

S.D. Tex. 2009) (“to recover under article 581-33(a)(2), a plaintiff must prove that a security was

sold by means of (1) an untrue statement of material fact, or (2) an omission to state a material

fact that is necessary to make the statement made not misleading”). None of the alleged

omissions render the information disclosed misleading.

First, with regard to the alleged omissions relating to the Risk Management review, BMB

was not required to disclose the size of the Florida firm or the length of the report it issued.

Neither the size of the firm nor the length of the report is relevant to whether a review was

conducted, which is all the letters state. In fact, the Stogniew Report was exactly what BMB said

it was ─ a review of risk management systems for the underwriter to use in determining whether



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Stanford qualified for particular insurance coverage. See App. 10 (“The primary objective of the

engagement was to provide underwriters with additional information concerning the risk

management systems and internal controls implemented by the Stanford Companies to minimize

the exposures covered by the Lloyds’ policies”). If Plaintiffs made the assumption that the risk

management review was conducted to assure the security of their investments, this does not

make their logical leap reasonable.

Second, in complaining that Winter did not identify himself as a member of the SIB

Board of Directors, Plaintiffs claim that the letters created the false impression that the letters

“constituted . . . an independent endorsement of Stanford.” TAC ¶ 94. But although Winter

states he has found SIB to be “first class business people,” the focus of the letters is to state facts

surrounding SIB’s insurance policies. Importantly, the letters make no reference to the SIB CDs,

the safety of the CDs or deposits at SIB, and certainly no opinions on the CDs are given.

Winter’s position on the SIB Board has no relevance to SIB’s insurance coverage, and the

omission of this information did not render any of the statements made by BMB misleading.

Contrary to Plaintiffs’ claims, the insurance letters did not create an obligation for BMB to

disclose all knowledge that it possessed regarding SIB or Winter’s board position. Kapps, 379

F.3d at 214-17.

Third, in the largest leap of logic, Plaintiffs claim that the omission of the amount of

coverage created the impression that the insurance policies provided unlimited coverage for all

investments in SIB. TAC ¶¶ 95-97. There is nothing in the letters that could lead a reasonable

person to believe BMB was addressing insurance relating to SIB CDs ─ there is no reference

whatsoever to the CDs or any insurance coverage for the CDs. Further, it would be illogical for

anyone to assume that the policies were limitless because the amount of coverage was not stated.

In short, the letters were limited in scope and truthful. BMB made no material



DAL:799748.1

misrepresentations or omissions. Plaintiffs may claim that the letters made implicit between-the-

lines assurances about the “safety and soundness” of Stanford and the SIB CDs, but that does not

make it so.

C. Plaintiffs’ claims against BMB under TSA § 33A(2) are time-barred

A claim under § 33A(2) requires proof that a seller “offers or sells a security . . . by

means of” a material misrepresentation or omission. TEX. CIV. ST. ANN. art. 581-33A(2)

(Vernon 2008). A claim under § 33A(2) must be filed within three years after discovery of the

untruth or omission, and no later than five years after the sale. Id. at art. 581-33H(2). The TSA,

therefore, imposes a five-year statute of repose upon § 33A(2) claims regardless of when the

Plaintiffs allegedly discovered the alleged fraud. See In re Enron Corp. Sec, Derv. & ERISA

Litig., 465 F.Supp.2d 687, 719 (S.D.Tex. 2006).

The alleged misrepresentation and omissions by BMB are contained in the coverage

letters attached to the complaint. Plaintiffs have identified six such letters on BMB letterhead,

the latest of which is dated April 6, 2004. TAC at Ex. 4. Plaintiffs do not plead that BMB made

any misrepresentations or omissions after April 6, 2004, and they do not plead that any Plaintiffs

invested in SIB CDs after July 2, 2004 based upon the April 2004 letter. See Id. ¶¶ 44-53, 83-

104. Plaintiffs’ claims under § 33A(2) are therefore time-barred. See Kaiser Aluminum &

Chem. Sales, Inc. v. Avondale Shipyards, Inc., 677 F.2d 1045, 1050 (5th Cir. 1982).

D. Plaintiffs’ claims against BMB for “aiding” Stanford’s violations of the TSA are likewise time-barred

The TSA provides for a private right of action against a person who “with intent to

deceive or defraud or with reckless disregard for the truth or the law materially aids” a primary

violation. TEX. REV. CIV. ST. ANN. Art. 581-33F(2) (Vernon 2008) . In section B of Plaintiffs’

“Class Causes of Action,” Plaintiffs assert three bases for their claims for aiding liability under



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the TSA ─ for allegedly aiding (1) sales of unregistered securities (B.1); (2) sales of securities by

unregistered dealers (B.2); and (3) sales by untruths or omissions (B.3). TAC ¶¶ 173-183.

The first two bases for Plaintiffs’ aiding liability claim are based on § 33A(1) of the TSA,

which prohibits offers or sales of securities in violation of, inter alia, § 7 of TSA (requiring

securities sold in Texas to be registered with the state securities board unless exempted) and § 12

(requiring dealers who sell securities in Texas to be registered with the state securities board).

TEX. CIV. ST. ANN. ART. 581-33A(1), 581-7A, 581-12A (Vernon 2008). These aiding claims

against BMB (for allegedly aiding (1) sales of unregistered securities (B.1); and (2) sales of

securities by unregistered dealers (B.2)) are time-barred because this case was filed more than

three years after the last sale possibly made using any letter from BMB identified in the Third

Amended Complaint.

The Complaint makes clear that BMB was not SIB’s insurance broker for the financial

lines of coverage after August 15, 2004, and placed no SIB insurance policies effective after that

date. Plaintiffs plead that BMB provided Stanford with letters every year from 1996 to 2004.

TAC ¶ 78. Plaintiffs do not allege BMB provided any letters after 2004, pleading instead that

the letters in 2005 to 2008 were provided by Defendant Willis. Id.

Furthermore, it is clear that whatever insurance that BMB placed for SIB expired on

August 15, 2004.8 No investor, therefore, could credibly claim that BMB represented anything

about SIB’s insurance coverage after August 15, 2004, and Plaintiffs have not made any such

allegation. In other words, BMB’s letters were of no effect after August 15, 2004. It follows,

then, that the last date on which BMB could have allegedly “aided” SIB was August 15, 2004.

8 Plaintiffs attach a letter dated April 6, 2004, which states that the three policies described in the letter expired on August 15, 2004. TAC Ex. 4. Plaintiffs have alleged that these policies were issued annually. TAC ¶ 91.



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Section 33H of the TSA, which sets for the statute of limitations for claims under § 33,

provides in relevant part that “No person may sue under § 33A(1) or 33F so far as it relates to

§ 33A(1) more than three years after the sale.” TEX. REV. CIV. ST. ANN. ART. 581-33H (Vernon

2008). The three-year statute of limitations for aiding a violation of § 33A(1) is not subject to a

discovery rule or statute of repose. Therefore, Plaintiffs were required to file their claims for

aiding a violation of § 33A(1) ─ the first two bases for their aiding claims against BMB ─ within

three years of the sale in which BMB allegedly aided. Because Plaintiffs’ claims for aiding

alleged violations of § 33A(1) were not filed before August 15, 2007, the claims are also time-

barred and should be dismissed with prejudice.

For the same reasons that Plaintiffs’ § 33A(2) claim is time-barred, the third basis for

Plaintiffs’ aiding claim is likewise time-barred. Section 33H(2) governs the statue of limitations

for aiding claims of misrepresentations and omissions in the sale of a security (§ 33A(2)) and

provides that such claims must be filed within three years after discovery of the untruth or

omission, but no later than five years after the sale. TEX. CIV. ST. ANN. Art. 581-33H(2). Just

like their § 33A(2) claim, Plaintiffs do not plead that any Plaintiffs made any investments after

July 2, 2004, in reliance on BMB’s April 2004 letter. Therefore, Plaintiffs’ claims for aiding the

alleged sale of securities by untruths or omissions are time-barred and should be dismissed.

E. Conspiracy to violate the TSA is not a legally-recognized claim

Plaintiffs’ civil conspiracy claim is based on an alleged conspiracy to engage in various

wrongful conduct, including fraud and violations of the TSA. TAC ¶ 186. Plaintiffs also plead

co-conspirator liability against BMB for Stanford’s primary violations of the TSA. Id. ¶ 184.

The TSA, however, precludes these claims.9

9 Plaintiffs also plead, as part of their class claims, that BMB is liable for “Participation in a Fraudulent Scheme.” This is not a cause of action, but merely a theory of vicarious liability. For the same reasons that the TSA precludes



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Comments to the 1977 revision to the TSA state: “§ 33F provides quite specifically who,

besides a person who buys or sells, is liable, and the criteria for such liability.” TEX. CIV. ST.

ANN. ART. 581-33F cmt. The comments also state that “§ 33F is not intended to supersede the

common law liability of a principal for an agent’s acts within the scope of authority.” Id.

When a statute provides for certain types of secondary liability under a statutory scheme,

but not others, courts should not extend liability beyond the scope of the text to allow recovery

for other forms of secondary liability. Central Bank of Denver v. First Interstate Bank, 511 U.S.

164, 177 (1994) (refusing to find an implied private cause of action for aiding and abetting

liability under Rule 10b-5); Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 552

U.S. 148 (2008) (Congress’s grant of authority to the SEC to prosecute aiders and abettors of

Rule 10b-5 violations, but not providing a private cause of action, precluded a finding that there

was a private right of action for “scheme liability” for 10b-5 violations). The Texas Supreme

Court has stated that when a private cause of action is alleged to derive from a statutory

provision, the duty of courts is to ascertain the drafter’s intent and causes of action should only

be implied when there is a clear legislative intent to do so. Brown v. de la Cruz, 156 S.W.3d

560, 563 and 567 (Tex. 2004) (holding that there was no private cause of action under a statute

that subjected a vendor to penalty for failing to transfer title after final payment under executory

contracts).

Aiding and conspiracy are similar, but distinct, forms of secondary liability. See, e.g.

Regents of University of California v. Credit Suisse First Boston (USA), Inc., 482 F.3d 372, 392

(5th Cir. 2007); see also Dinsmore v. Squadron, Ellenoff, Plesent, Sheinfeld & Sorkin, 135 F.3d

837, 842 (2d Cir. 1998). As the Fifth Circuit has noted, clarity as to secondary liability is

a conspiracy theory, it likewise precludes “Participation in a Fraudulent Scheme” as an attempt for secondary liability for violations of the TSA.



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particularly important in securities-related cases: “In Central Bank, the Court emphasized that

securities fraud liability is an area of the law that demands certainty and predictability.

Secondary liability brings neither; instead it gives rise to confusion about the extent of secondary

actors’ obligations and invites vague and conflicting standards of proof in diverse courts.”

Regents of University of California, 482 F.3d at 386.

The Texas Legislature explicitly provided for only two types of secondary liability for

violations of the TSA. The Legislature also expressly stated in the comments to the 1977

amending that the addition of § 33F was “not intended to supersede the common law liability of

a principal for an agent’s acts within the scope of authority.” TEX. CIV. ST. ANN. ART. 581-33F

cmt. Conspiracy was not included among either the statutory forms of secondary liability

created by the TSA or the principal-agent secondary liability that the drafters expressly intended

to leave intact. Allowing a plaintiff to recover for conspiracy to commit violations of the TSA

would be contrary to the intent of the statute’s drafters, as expressed through their intentional

creation and preservation of certain limited forms of secondary liability. Therefore, Plaintiffs’

claims for civil conspiracy to commit violations of the TSA and claim for co-conspirator liability

should be dismissed.

VII. PLAINTIFFS’ CLAIMS FOR AIDING STANFORD’S TSA VIOLATIONS, FRAUD, NEGLIGENT MISREPRESENTATION,

NEGLIGENCE, GROSS NEGLIGENCE, AND CIVIL CONSPIRACY SHOULD BE DISMISSED PURSUANT TO RULES 8(A) AND 9(b)

Plaintiffs have failed to allege facts, rather than conclusory allegations, to make many of

their claims plausible under Rule 8(a), much less to meet the required heightened standards of

Rule 9(b). For a cause of action to survive a motion to dismiss, the complaint must contain

enough facts that the claim is “plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544,

570 (2007) at 570. Neither “labels and conclusions” nor a “formulaic recitation of the elements

of a cause of action will do.” Ashcroft v. Iqbal, ---U.S.---, 129 S.Ct. 1937, 1949 (2009). Further,



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as set forth below, a number of Plaintiffs’ claims are subject to the heightened pleading

requirements of Rule 9(b), requiring Plaintiffs to plead the circumstances of fraud allegations

with particularity. Fed. R. Civ. P. 9(b). The Third Amended Complaint, however, does not

allege sufficient facts to “nudge [Plaintiffs’] claims across the line from conceivable to

plausible,” and therefore does not satisfy the requirements of Rule 8(a), much less the heightened

standard of Rule 9(b). Twombly, 550 U.S. at 570.

A. Plaintiffs have not pled their fraud-based allegations with particularity

To plead fraud with particularity, as required by Rule 9(b), Plaintiffs must allege the

“time, place and contents of the false representations, as well as the identity of the person making

the misrepresentation and what [that person] obtained thereby.” Williams v. WMX Techs., Inc.,

112 F.3d 175, 177 (5th Cir. 1997) (quoting Tuchman v. DSC Commc’ns Corp., 14 F.3d 1061,

1068 (5th Cir. 1994)). Put another way, Plaintiffs’ burden to plead fraud with sufficient

particularity is akin to “the essentials of the first paragraph of any newspaper story, namely the

who, what, when, where and how.” Medler v. Morris, 27 F.3d 1097, 1100 (5th Cir. 1994).

Plaintiffs, despite the length of their complaint, have not met this burden.

Plaintiffs have extensively detailed the alleged fraud perpetrated by Stanford. TAC

¶¶ 21-49; 106-135. But they have no support for their claim that BMB had knowledge of or

participated in Stanford’s alleged scheme. Plaintiffs have failed to identify any specific relevant

information that BMB supposedly possessed, how it obtained this information, who was

involved, etc. Instead, Plaintiffs merely allege that because of its middle-man role in procuring

insurance coverage for various Stanford entities, BMB should have detected a fraud that

deceived sophisticated investors and government regulators from several countries. Indeed, the

SEC has publicly stated that Stanford’s alleged scheme was closely guarded and limited to Allen

Stanford’s closest inner circle. See SEC Sec. Amend. Compl. ¶ 55.



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According to Plaintiffs, BMB sent its coverage letters between 1996 and 2004. TAC

¶ 80, Ex 4. Yet many of Plaintiffs’ allegations relating to BMB occurred years later. See, e.g.

TAC ¶¶ 56-57 (referencing property coverage that BMB procured for Stanford in the Caribbean);

¶ 81 (email correspondence in 2005). Similarly, Plaintiffs refer to isolated communications that

various BMB employees had with Stanford over the course of several years, but without

specifying how these communications supposedly added up to fraud on the part of any single

individual. Id. ¶¶ 43, 53, 56, 78, 81, 94. See Indiana Elec. Workers' Pension Trust Fund IBEW

v. Shaw Group, Inc., 537 F.3d 527, 533-534 (5th Cir. 2008) (“this court has rejected the group

pleading approach to scienter and instead looks to the state of mind of the individual corporate

official or officials “who make or issue the statement (or order or approve it or its making or

issuance, or who furnish information or language for inclusion therein, or the like) rather than

generally to the collective knowledge of all the corporation's officers and employees acquired in

the course of their employment”). Plaintiffs’ reliance on group pleading and their failure to

plead with specificity are fatal to their fraud-based claims under Rule 9(b).

B. Plaintiffs fail to adequately plead scienter under Rule 9(b), requiring dismissal of Plaintiffs’ claims for aiding Texas Securities Act violations, civil conspiracy, and common law fraud

Plaintiffs must plead scienter, not only for their common law fraud and civil conspiracy

claims, but also for their claims for aiding liability under the Texas Securities Act. Dorsey v.

Portfolio Equities, Inc., 540 F.3d 333, 344 (5th Cir. 2008) (stating that “a claim for aider and

abettor liability [under the Texas Securities Act] does require that a plaintiff plead and prove

scienter”).

The Supreme Court defines scienter as “a mental state embracing intent to deceive,

manipulate, or defraud.” Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976). Conduct

that creates an inference of scienter “is conduct of an extreme sort and should be found



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sparingly.” Pegasus Fund, Inc. v. Laraneta, 617 F.2d 1335, 1341 (9th Cir. 1980). “[P]leading

scienter requires more than a simple allegation that a defendant had fraudulent intent. To plead

scienter adequately, a plaintiff must set forth specific facts that support an inference of fraud.”

Tuchman v. DSC Communications Corp., 14 F.3d 1061, 1068 (5th Cir. 1994).

A claim for “aider” liability under the TSA requires proof that the alleged aider either

intended to deceive plaintiff or acted with reckless disregard of a perceived risk that its conduct

would provide substantial assistance to known illegal conduct by the primary violator. TEX.

REV. CIV. STAT. art. 581-33F(2) (Vernon 2008); Sterling Trust Co. v. Adderley, 168 S.W.3d 835,

842 (Tex. 2005). In order to be held liable for aiding and abetting under § 33F, BMB must have

“rendered assistance in the face of a perceived risk that its assistance would facilitate untruthful

or illegal activity by the primary violator.” Sterling Trust, 168 S.W.3d at 842. In order to

perceive such a risk, the alleged aider must possess a “general awareness that his role was part of

an overall activity that is improper.” Id. Allegations that the defendant “should have known”

about the primary violator’s untruthful or illegal activities are insufficient. Id.

To satisfy the requirement to adequately plead facts that raise an inference of fraudulent

intent, a plaintiff may allege facts sufficient to show a defendant’s motive to commit fraud.

Tuchman, 14 F.3d at 1068. “Where a defendant’s motive is not apparent, a plaintiff may

adequately plead scienter by identifying circumstances that indicate conscious behavior on the

part of the defendant, though the strength of the circumstantial allegations must be

correspondingly greater.” Id.

Here, Plaintiffs do not plead facts sufficient to show BMB’s alleged motive to commit

fraud. Plaintiffs argue that BMB “engaged in severely reckless and misleading conduct designed

with one goal in mind ─ to advance the business goals of their client Stanford Financial.” TAC

¶ 99. This allegation fails as a matter of law. The Fifth Circuit has squarely held that such



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arguments are insufficient evidence of scienter. See, e.g. Medler v. Morris, 27 F.3d 1097, 1103

(5th Cir. 1994) (rejecting claim that accounting firm had motive to overlook client’s accounting

fraud in order to retain client and continue to earn fees from the engagement). As the Fifth

Circuit pointed out, such arguments are illogical: if BMB, like most rational actors, seeks to

maximize its profits, there is little incentive for BMB to destroy its reputation and expose itself

to massive liability by conniving at one client’s fraud in exchange for a few years’ fees. Id.

And, such a finding would essentially “universally eliminate the state of mind requirement” for

fraud. Id.

Because Plaintiffs fail to adequately plead that BMB had a motive to commit fraud, they

must plead facts sufficient to conclude that BMB engaged in “conscious behavior” that

demonstrated it had the requisite fraudulent intent. Tuchman, 14 F.3d at 1068. Plaintiffs utterly

fail to meet this threshold. Plaintiffs have not pled any facts demonstrating that BMB: (1) knew

that Stanford was a Ponzi scheme; (2) knew that Stanford allegedly misrepresented to investors

that their investments were insured; or (3) knew that Stanford was using the coverage letters to

bolster its alleged misrepresentations. And the reason for this is obvious. According to the

SEC’s Complaint, Allen Stanford and his inner circle took extreme precautions to prevent the

spread of information about SIB’s true financial condition.10 The idea that they would have

handed over this information to an insurance broker is preposterous.

Plaintiffs’ claims are merely rote conclusory allegations of knowledge, which are wholly

insufficient to meet the rigors of Rule 9(b). See Lovelace v. Software Spectrum Inc., 78 F.3d

1015, 1019 (5th Cir. 1996) (“Rote conclusory allegations that the defendants ‘knowingly did

10 According to the SEC, the steps that were taken to hide SIB’s financial information included transferring all SIB-related financial information on thumb drives so that it did not appear on servers in the US, keeping files on a portable hard drive, flying paper files to Antigua for burning, and protecting spreadsheets with passwords distributed via text message to avoid detection on email servers. SEC Sec. Amend. Compl. at ¶ 55.



DAL:799748.1

this’ or ‘recklessly did that’ fail to meet the heightened pleading requirements of Rule 9(b)”).

Accordingly, Plaintiffs’ claims for common law fraud, aiding liability under the Texas Securities

Act, and civil conspiracy should be dismissed.11

C. Plaintiffs’ negligent misrepresentation, negligence, and gross negligence claims also should be dismissed because they rely upon the exact same deficient averments as Plaintiffs’ fraud claims

Plaintiffs’ failure to adequately plead fraud under Rule 9(b) also requires dismissal of

their negligent misrepresentation, negligence, and gross negligence causes of action. This Court

has dismissed nonfraud claims when those claims were pled with rote recitation of the elements

and were wholly dependent upon deficient fraud averments. Biliouris, 559 F.Supp.2d at 737

(Godbey, J.). When factual allegations are grouped together such that the Court cannot “devise a

‘simple redaction’ of Plaintiffs’ allegations that would leave behind an intelligible claim” after

deficient fraud claims are dismissed under Rule 9(b), claims dependent on those same allegations

should be dismissed as well. Id. (citation omitted). As the Court stated in American Realty

Trust, “one can make a colorable claim that [Rule 9(b)] operates indirectly to also require

dismissal of nonfraud claims that are based upon the same inadequate averments.” American

Realty Trust, Inc. v. Travelers Cas. & Sur. Co. of Am., 362 F.Supp.2d 744, 749 (N.D. Tex. 2005).

Plaintiffs plead no separate facts to support their negligent misrepresentation, negligence,

and gross negligence claims, but merely recite the elements of those claims. TAC ¶¶ 196-198.

Because the Plaintiffs’ inadequate fraud claim is wholly intertwined with, and cannot be

separated from, Plaintiffs’ claims for negligent misrepresentation, negligence, and gross

negligence, the Court should also dismiss those claims for failure to state a claim upon which

11 To the extent the Court concludes that “Participation in a Fraudulent Scheme” constitutes a cause of action, it should likewise be dismissed for failure to adequately plead fraud and scienter.



DAL:799748.1

relief may be granted. Biliouris, 559 F.Supp.2d at 737; American Realty Trust, Inc., 362

F.Supp.2d at 752.

VIII. PLAINTIFFS FAIL TO STATE A CLAIM FOR COMMON LAW FRAUD AND NEGLIGENT MISREPRESENTATION

Plaintiffs’ claims for common law fraud and negligent misrepresentation should be

dismissed because Plaintiffs fail to plead that BMB made material misrepresentations or

omissions upon which the Plaintiffs reasonably relied. See Trenholm v. Ratcliff, 646 S.W.2d

927, 930 (Tex. 1983) (fraud claim requires proof that the defendant made material

misrepresentations or omissions that the plaintiff detrimentally relied upon); McCamish, Martin

Brown & Loeffler v. F.E. Appling Interests, 991 S.W.2d 787, 791 (Tex. 1999) (claim for

negligent misrepresentation requires proof, inter alia, that the defendant provided false

information to the plaintiff, which the plaintiff relied upon).

The test for materiality for a Texas-based fraud claim is whether the information would

induce a reasonable person to act in a transaction. Sioux, Ltd., Sec. Litig. v. Coopers & Lybrand,

914 F.2d 61, 65 (5th Cir. 1990) (quoting Adickes v. Andreoli, 600 S.W.2d 939, 946

(Tex.Civ.App. 1980) (“The test of materiality to be applied in an action for fraud is whether the

contract would have been signed by the plaintiff without such misrepresentations having been

made.”)); see also Citizens Nat’l Bank v. Allen Rae Invs. 142 S.W.3d 459, 478-9 (Tex. App. Fort

Worth 2004, no pet.). For the same reasons set forth in Section VI(B) above, Plaintiffs have

failed to plead that BMB made a material misrepresentation or omission upon which they

reasonably relied.

IX. PLAINTIFFS FAIL TO STATE A CLAIM FOR NEGLIGENT RETENTION/SUPERVISION

Plaintiffs’ individual claims against BMB for negligent retention and supervision should

be dismissed because Plaintiffs do not plead that Winter was unfit to be an employee of BMB or



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that he presented an unreasonable risk of harm to others. An employer is only liable for

negligent hiring, retention, or supervision if it hires an incompetent or unfit employee who it

knows, or by the exercise of reasonable care should have known, was incompetent or unfit,

thereby creating an unreasonable risk of harm to others. Morris v. JTM Materials, Inc., 78

S.W.3d 28, 49 (Tex.App. ─ Fort Worth 2002, no pet.).

Plaintiffs’ negligent retention and supervision claims do not include allegations that

Winter was incompetent or unfit or that there was any reason that the employment of Winter

would create an unreasonable risk of harm to any individual, much less identified any facts that

would support such allegations. Therefore, Plaintiffs have failed to state a claim for negligent

retention and supervision.

X. PLAINTIFFS LACK STANDING TO ASSERT CLAIMS UNDER THE TEXAS INSURANCE CODE

Plaintiffs are neither insureds nor beneficiaries under Stanford policies procured by

BMB, and therefore lack standing to pursue claims under the Texas Insurance Code. In Warfield

v. Fidelity and Deposit Co., 904 F.2d 322, 328 (5th Cir. 1990), the Fifth Circuit held that

standing under the predecessor provision to Texas Insurance Code §541.15112 requires “privity

of contract or some sort of reliance by the person bringing a claim on the words or deeds of the

insurer.” In Warfield, the Fifth Circuit noted that standing under the statute required “a direct

and close relationship between the wrongdoer and the claimant.” Id. Applying this standard, the

Fifth Circuit determined that the Warfield plaintiffs, the majority shareholder and directors of a

bank, lacked standing to pursue Texas Insurance Code claims against the issuer of the bank’s

banker’s blanket bond. Id.; see also Parra v. Markel Int’l Ins. Co. Ltd., 300 Fed.App. 317, 319

12 Warfield was addressing article 21.21 §16, which was recodified in 2005 as Texas Insurance Code §541.151 in substantially the same language. The Fifth Circuit continues to apply Warfield to §541.151 cases. See, e.g. Parra v. Markel Intern. Ins. Co. Ltd., 300 Fed.Appx. 317, 319 (5th Cir. Nov 24, 2008).



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(5th Cir. 2008) (employee who did not prove reliance or privity could not sue employer’s

liability carrier); Walker v. State Farm Lloyd’s, 2004 WL 1462200 (N.D. Tex. June 28, 2004)

(same-sex partner who properly pled detrimental reliance on partner’s insurer’s statements that

he was covered under the partner’s policy did have standing under Warfield); Crawford v.

Guideone Mutual Insurance Co., 420 F.Supp.2d 584, 599 (N.D. Tex. 2006) (student who was co-

defendant with university did not have standing to sue university’s insurer); Texas Medical Ass’n

v. Aetna Life Ins. Co., 80 F.3d 153, 160-61 (5th Cir. 1996) (doctors who were removed from

insurer’s preferred providers list were not “persons” under the predecessor to §541.151);

Psarianos v. Standard Marine Ltd., 12 F.3d 461, 465 (5th Cir. 1994) (third-party accident

victims did not have standing to sue insurer because there was no special relationship between

the insurer and the plaintiffs).

In Allstate Ins. Co. v. Watson, 876 S.W.2d 145, 146 (Tex. 1994), the Texas Supreme

Court likewise held that a third party claimant to an automobile liability policy lacked standing

to pursue deceptive practices claims against the insurer under the Insurance Code. In so holding,

the Court stated: “A third-party claimant has no contract with the insurer or the insured, has not

paid any premiums, has no legal relationship to the insurer or special relationship of trust with

the insurer, and in short has no basis on which to expect or demand the benefit of the extra-

contractual obligations imposed on insurers under [the predecessor to Code §541] with regard to

their insureds.” Id. at 149.

Plaintiffs therefore lack standing to pursue a cause of action under the Texas Insurance

Code, and their claims should be dismissed.

XI. PLAINTIFF GILLY-FLORES CANNOT STATE A CLAIM AGAINST BMB

The Third Amended Complaint makes clear that Plaintiff Gilly-Flores did not purchase

any investments from SIB until October 9, 2007, more than three and one-half years after BMB



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ceased functioning as SIB’s insurance broker. TAC ¶ 146. Further, Plaintiff Gilly-Flores does

not even allege that she received or relied upon any letter on BMB letterhead. Id. ¶¶ 144-146.

Therefore, any and all claims by Plaintiffs Gilly-Flores against BMB should be dismissed.

XII. PLAINTIFFS’ VICARIOUS THEORIES OF LIABILITY ALSO MUST BE DISMISSED

To survive a motion to dismiss under Rule 12(b)(6), a plaintiff must assert a legally

sufficient claim for relief. Biliouris, 559 F.Supp.2d at 735. Plaintiffs plead a number of theories

of vicarious liability, none of which are independent causes of action. These vicarious theories

are derivative in nature, and they cannot serve to avoid dismissal if the primary causes of action

are dismissed.

Plaintiffs’ plead the following theories of secondary liability: (a) “Co-Conspirator

Liability” (¶ 184); (b) “Joint Enterprise/Single Business Enterprise”13 (¶¶ 200-201); (c) “Alter

Ego”14 (¶¶ 202-204); (d) “Agency” (¶¶ 205-206); (e) “Respondeat Superior” (¶ 207); and

“Participation in a fraudulent scheme” (¶ 185). Because none of these theories are true causes of

action,15 they must be dismissed with the rest of the Complaint. Torres v. Valencia, 2006 WL

3779815, *5, (W.D.Tex. Sept. 27, 2006) (since defendant failed to state a claim for conspiracy,

vicarious liability theory based on the claim must be dismissed); Frank v. L.L. Bean, Inc., 352

13 Single business enterprise is no longer a viable theory of liability under Texas law for imposing one corporation’s obligations upon another. SSP Partners v. Gladstrong Investments (USA) Corp., 275 S.W.3d 444, 456 (Tex. 2009).

14 Plaintiffs do not discuss BMB when pleading alter ego and, therefore, it does not appear that this theory is directed to BMB.

15 Carroll v. Timmers Chevrolet, Inc., 592 S.W.2d 922, 926 (Tex. 1979) (conspiracy theory of liability); Shoemaker v. Estate of Whistler, 513 S.W.2d 10, 14 (Tex. 1974) (joint enterprise theory of liability); Mancorp, Inc. v. Culpepper, 802 S.W.2d 226, 228 (Tex. 1990) (alter ego is theory of liability); Bond v. Otis Elevator Co., 388 S.W.2d 681, 686 (Tex. 1965) (agency is theory of vicarious liability); Turner v. Upton County, 915 F.2d 133, 138 (5th Cir. 1990) (respondeat superior theory of liability); Regents of University of California v. Credit Suisse First Boston (USA), Inc., 482 F.3d 372, (5th Cir. 2007) (analyzing “Participation in Fraudulent Scheme” as a theory of liability).



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F.Supp.2d 8, 14 (D.Me. 2005) (vicarious liability count must be dismissed since not asserted in

support of a valid cause of action).

XIII. MOTION TO STAY

Plaintiffs have asserted claims against Winter, a BMB employee who also is a former

director of SIB. In the Third Amended Complaint, Plaintiffs have made numerous references to

Winter’s role on the SIB board. TAC ¶¶ 50, 76, 78, 94. Accordingly, this case falls squarely

within the terms of the Court’s receivership and stay orders.

On March 12, 2009, this Court issued an Amended Order Appointing Receiver

(“Receivership Order”) in the SEC Action. On March 8, 2010, the Court re-emphasized that it

has stayed all litigation against former Stanford agents and employees:

The Court’s receivership order enjoins all persons from “[t]he commencement or continuation . . . of any judicial, administrative, or other proceeding against the Receiver, any of the defendants, the Receivership Estate, or any agent, officer, or employee related to the Receivership Estate, arising from the subject matter of this civil action.” Order Appointing Receiver [157] at 7. Some movants express uncertainty as to whether this order bars litigation against former Stanford employees. To the extent the order is unclear, the Court now clarifies that it enjoins litigation against any former Stanford employee “arising from the subject matter of this civil action.”

Unless the Plaintiffs dismiss their claims against Winter, or agree to limit their claims to

actions that he took solely in his capacity as a BMB employee without reference to his conduct

as a former SIB director, this case must be stayed under the terms of the Court’s prior

receivership and stay orders.

If this case is permitted to proceed against Winter, extensive discovery will be required

from the Receivership entities and from individuals named in the SEC and criminal cases,

particularly since Plaintiffs have multiple references to Winter’s role on the SIB board. TAC ¶¶

50, 76, 78, 94. Plaintiffs are relying on knowledge that Winter allegedly obtained as a director of



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SIB to prove elements of their claims against both Winter and BMB. See, e.g., TAC ¶ 78 (“As a

member of the Board of Directors, Winters [sic] knew that the purpose of the letters was to help

market and sell SIB CDs. And his company BMB also knew that.”).

The Court has the power, of course, to lift the stay as to Winter. But the Court should not

do so for the same reason that the stay order was entered in the first place. If Winter’s service as

an SIB board member is an issue in the case, the parties will necessarily seek discovery that both

the Receiver and the Department of Justice have sought to avoid.

In the alternative, BMB requests that the Court exercise its discretion to stay all

discovery, while permitting motion practice to move forward. A discovery stay would protect

the interests of the Receiver and the Department of Justice, while permitting the Court to address

the threshold legal issues raised in the defendants’ motions to dismiss.

Plaintiffs will not be prejudiced by an order staying or abating this action. No discovery

has begun, and Plaintiffs have expended limited resources so far in this action. If Plaintiffs wish

to move the case forward, they have the option of dismissing or limiting their claims against

Winter. But unless they do so, the case ─ or at least discovery ─ should be stayed.

XIV. CONCLUSION

For the reasons stated herein, Plaintiffs’ Third Amended Complaint should be dismissed

for failure to state a claim upon which relief may be granted. Alternatively, BMB requests that

this action be stayed under the terms of the Court’s prior orders staying all claims against

Stanford’s former agents and employees.

XV. REQUEST FOR ORAL ARGUMENT

BMB respectfully requests oral argument on its Motion to Dismiss and Motion to Stay.



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Respectfully submitted,

s/ Bradley W. Foster Bradley W. Foster State Bar No. 07283200 Matthew G. Nielsen State Bar No. 24032792 Andrews Kurth LLP 1717 Main Street, Suite 3700 Dallas, Texas 75201 Telephone: (214) 659-4400 Facsimile: (214) 659-4401 David P. Whittlesey State Bar No. 00791920 Andrews Kurth LLP 111 Congress Avenue, Suite 1700 Austin, Texas 78701 Telephone: (512) 320-9321 Facsimile: (512) 320-9200

Nicholas J. Lanza State Bar No. 11941225 MCCORMICK, MCNEEL, ELDER, WILLIAMS & LANZA, LLP. 5909 West Loop South, Suite 650 Bellaire, Texas 77401 Telephone: (713) 523-0400 Facsimile: (713) 668-6417 ATTORNEYS FOR DEFENDANT BOWEN, MICLETTE & BRITT, INC.



DAL:799748.1

CERTIFICATE OF SERVICE

I hereby certify that on this 2nd day of May, 2011, I electronically filed the foregoing document with the clerk of the court for the U.S. District Court, Northern District of Texas, using the electronic case filing system of the Court. The electronic case files system sent a “Notice of Electronic Filing” to all counsel of records, each of whom have consented in writing to accept this Notice as service of this document by Electronic means.

s/ Bradley W. Foster


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