Summary
holding that an omission claim could not be maintained where plaintiff did not point to previous statements that were misleading without further disclosures
Summary of this case from Malhotra v. Equitable Life Assur. Society of U.S.Opinion
Civil Action No. 01-CV-1277 (ILG)
July 24, 2001
Memorandum Order
The Complaint in this purported securities class action alleges a breach of fiduciary duty and fraud in connection with defendant's commitment of stock as security for his own personal margin trading. Defendant now moves both to dismiss the Complaint and for sanctions against plaintiff. Plaintiff has cross-moved seeking leave to amend the Complaint and an order remanding the case to state court. For the following reasons, defendant's motion to dismiss the Complaint is granted as is his motion for sanctions. Plaintiff's cross-motion for leave to the amend the Complaint is denied since the proposed amendment would not survive dismissal.
BACKGROUND
The Complaint in this action alleges that defendant Bany Hertz owned approximately 45 million shares or 71% of the common stock of Track Data Corporation ("Track Data"). Defendant founded Track Data in 1996 and has served as its chairman and CEO since then. Track Data is a publicly held corporation that is organized and incorporated in Delaware. It is a financial services company engaged in developing and marketing Internet-based online trading and market data systems. Track Data maintains offices in Manhattan and Brooklyn. Plaintiff Edward Burekovitch is a public shareholder who owned common stock of Track Data. He brought this purported class action lawsuit on behalf of the shareholders of Track Data to recover damages arising from defendant's alleged breach of fiduciary duty and failure to disclose that defendant had pledged 40% of his Track Data stock as security for his personal margin trading in other securities.
Plaintiff contends that the United States stock markets began to experience a downward decline in March 2000 and, during the week of April 10, 2000, dropped substantially, culminating in a collapse on Friday, April 14, 2000. (Compl. at ¶ 15-16) During this time, plaintiff contends that Track Data stock also declined, reaching a 52-week low of $3 per share on April 14, 2000. (Id. at 20-21) The following Monday, April 17, 2000, plaintiff avers that the stock markets rebounded sharply — with the Dow Jones Index gaining 2.69% and the NASDAQ index gaining 6.56% — but that, unlike the overall market, Track Data stock never rebounded, a failure he attributes to defendant's conduct. On April 17, 2000, Track Data stock traded as low as $2 per share before closing at $3 per share. (Id. at 24) After the close of trading that day, Track Data announced that defendant owed his stock brokers approximately $45 million as a result of losses in his personal trading activity during the previous week. In a press release, Track Data disclosed for the first time that defendant had pledged 25 million shares, or approximately 40% of Track Data's outstanding shares, to secure trades in his personal accounts, including trades made on margin. The press release stated, in relevant part:
Four brokerage firms claim an aggregate loss of $45 million from Mr. Hertz in respect of these losses. These claims are secured by approximately 25,000 shares out of approximately 45,000,000 shares of Track Data beneficially owned by Mr. Hertz. Track Data is not liable for these claims.
(Compl. at ¶ 26) The press release further stated that defendant incurred the loss while trading the stock of companies other than Track Data. The press release did not state, however, that Hertz lacked the resources needed to meet the margin obligations he had incurred with his brokers and that, therefore, millions of Hertz's shares would be unloaded into the market. (Id. at 27) Hertz's brokers began selling his shares immediately and, on Tuesday, April 18, 2000, approximately seven million shares of Track Data stock changed hands, closing at approximately $2 per share, or $1 less than the previous day's closing price. The stock markets, meanwhile continued to rise — with the Dow Jones Index rising another 1.8% and the NASDAQ index rising 7.2%. (Id. at ¶ 28-29) On Wednesday, April 19, 2000, trading of Track Data stock intensified and Hertz's brokers sold millions more of the pledged shares. That day, Track Data stock reached a low of $1 7/8 on record volume of approximately 42 million shares and closed at $2.4687, about 40 cents more per share than the previous day. (Id. at ¶ 30) The following day, April 20, 2000, approximately 4 million shares of Track Data stock were sold and the stock closed down about 25 cents per share. (Id. at ¶ 31) The Complaint alleges that only after this "selling frenzy" had taken place did Track Data made the following disclosure:
Track Data Corporation (NASDAQ NMS: TRAC), a leading provider of online trading and market data services, announced today that claims by four brokerage firms against Barry Hertz, Chairman and CEO of Track Data, have been reduced to approximately $10 million. Certain of these firms sold approximately 17 million of approximately 25 million shares of Track Data common stock which Mr. Hertz pledged to the four firms.
(Id. at ¶ 32)
Prior to April 17,2000, plaintiff claims that he and other stock holders were unaware that defendant had used his Track Data stock as security in his own margin trading and that, as a result of defendant's actions, their stock was exposed to danger of which they had no knowledge. Had investors known that the shares owned by defendant were subject to immediate liquidation, they "would not have purchased shares or would have paid less for their shares as a result of the added risk to which they were exposed." (Id. at ¶ 34) Plaintiff and others, it is alleged, were injured when defendant's brokers were forced to liquidate more than 17 million shares of defendant's Track Data stock to satisfy margin calls on his personal trading. Plaintiff contends that as a consequence of defendant's actions, Track Data shares have continued to decline and, as of the date of the Complaint, February 8, 2001, Waded at less than $1 per share, as compared to a 52-week high of approximately $12 per share. As damages, plaintiff seeks recission or to recover the difference between the price he and purported class members paid for their Track Data shares and the price they would have paid had defendant's margin activity been fully disclosed.
It is unclear whether the shareholders referred to in the Complaint include shareholders who owned Track Data stock prior to defendant's commitment of his shares as security in his margin trading or shareholders who purchased stock after defendant's commitment of those shares or both.
Plaintiff originally filed this action in New York Supreme Court, County of Kings on February 8, 2001 alleging two causes of action: breach of fiduciary duty (first cause of action) and common law fraud (second cause of action). Plaintiff's cause of action for breach of fiduciary duty simply repeats and realleges the factual allegations set forth in the Complaint (Compl. ¶ 1-35) and adds the following paragraph:
By failing to disclose that he had offered at least 40% of Track Data's outstanding common stock as security for his personal margin trading of other securities, defendant Hertz breached his fiduciary duty of loyalty, care, and disclosure to Track Data's public shareholders.
(Compl. at ¶ 37) The second cause of action for fraud also repeats and realleges the preceding paragraphs and adds that: "Defendant made material misrepresentations of fact and omissions of material fact regarding his margin trading for the purpose of inducing plaintiff and other members of the class to purchase Track Data stock." (Id. at ¶ 39) The Complaint further alleges that plaintiff and the purported class members were ignorant of these material misrepresentations and omissions (id. at 40); that in reliance on defendant's fidelity, integrity and superior knowledge, they were induced to purchase Track Data stock (id. at ¶ 41); that they would not have purchased Track Data stock or would have paid less for such stock had they known the true facts (Id. at ¶ 42); and, finally, that defendant's actions resulted in damages to plaintiff and the purported class members. (Id. at ¶ 43).
On March 2, 2001, defendant filed a Notice of Removal pursuant to 28 U.S.C. § 1446 in which he stated that the action is governed by the Private Securities Litigation Reform Act of 1995 ("PSLRA"), Pub.L. No. 104-67, in that it is a class action brought on behalf of more than 50 persons concerning fraud in the purchase of securities traded on the National Market System of the NASDAQ Stock Market. Defendant contends that it then promptly called plaintiff's counsel's attention to the fact that the Complaint should be withdrawn voluntarily because it was barred by the Securities Litigation Uniform Standards Act of 1998 ("Uniform Standards Act "). Defendant contends that the Uniform Standards Act was enacted to ensure that state law class actions alleging misrepresentations or omissions are not used to get around the prohibitions of PSLRA. According to defendant, when plaintiff's counsel refused to withdraw the Complaint, defendant was forced to draft this motion, which was served on plaintiff on March 9, 2001. In this motion, defendant seeks dismissal of the Complaint because the state law claims advanced are barred by the Uniform Standards Act; the Complaint fails to state claims for breach of fiduciary duty under Delaware law and common law fraud under New York law, respectively; and because the fraud claim is not pleaded with the specificity required under Rule 9, Fed.R.Civ.P.
In a letter from plaintiff to this court dated April 4, 2001, plaintiff's counsel notified the court that he had been served with defendant's motion to dismiss but wished to amend his Complaint so that it only pleads a common law claim for breach of fiduciary duty and re-file the case in state court. Plaintiff claimed that while he had a right to file a Notice of Dismissal under Rule 41. Fed.R.Civ.P., the dismissal required this court's approval because it was a proposed class action. Plaintiff further informed the court that: "In all candor, the original complaint suffers from inartful drafting, a problem we believe we can cure through amendment." (Letter from Daniel Osborn to court dated April 4, 2001) This court subsequently held a telephone conference call with the parties and instructed them to bring the motion served by defendant before the court. Plaintiff eventually responded to the motion with his opposition, in which he contends that he would prefer to amend his Complaint so as to assert only state law claims based on breach of fiduciary duty, which likely would result in remand of this action, but, in any event, that the Complaint, as drafted, can withstand the motion to dismiss if construed under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) and Securities and Exchange Commission Rule lob-5, 17 C.F.R. § 240.lob-5.
Defendant has submitted a reply in which he argues that, even with the abandonment of a fraud claim, the Complaint must be dismissed because the Uniform Standards Act still would bar plaintiff's fiduciary duty claim since it rests entirely on omissions or misstatements in connection with plaintiff's purchase of securities. In addition, defendant argues that dismissal of the Complaint would be appropriate even if plaintiff limited the Complaint to a state law fiduciary duty claim because Delaware law does not require a majority shareholder to disclose that he is pledging his shares as security in margin trades. Defendant also has requested that the court impose sanctions against plaintiff for two reasons: first, because plaintiff refused to withdraw his Complaint even after defendant informed him that he could not survive a motion to dismiss and second because plaintiff failed to identify or address the applicable statutes and case law in his opposition. Defendant also asks the court to reject plaintiff's attempt to amend the Complaint to allege only a common law breach of fiduciary duty claim on the grounds that such an amendment would be futile since plaintiff has not and cannot allege facts which would not be barred by the Uniform Standards Act.
DISCUSSION
I. Motion to dismiss
When deciding a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6), the court must take all allegations in the complaint as true and draw all reasonable inferences in favor of the plaintiffOrtiz v. Cornetta, 867 F.2d 146, 149 (2d Cir. 1989). The court's consideration on a motion to dismiss is limited to the factual allegations in the complaint; documents incorporated by reference into the complaint; matters of which judicial notice may be taken; and documents either in plaintiff's possession or of which plaintiff had knowledge and relied on in bringing suit. Brass v. American Film Technologies, Inc., 987 F.2d 142, 150 (2d Cir. 1993). A complaint should not be dismissed "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief" Conley v. Gibson, 355 U.S. 41, 45-46 (1957); see also Easton v. Sundram, 947 F.2d 1011, 1014-15 (2d Cir. 1991), cert. denied, 493 U.S. 816 (1992).
A. Claims barred by Uniform Standards Act.
The Uniform Standards Act prohibits private securities class actions based on state law, with certain exceptions that defendant alleges are not applicable here. The Uniform Standards Act was enacted with the intention that state private securities class actions alleging misrepresentations and omissions would not be used to frustrate the object of the PSLRA. See Pub.L. 105-353 § 2(5). Section 16 of the Securities Act of 1933, 15 U.S.C. § 77p(b), as amended by the Uniform Standards Act, provides in relevant part:
No covered class action based upon the statutory or common law of any State or subdivision thereof may be maintained in any State or Federal Court by any private party alleging- (1) an untrue statement or omission of a material fact in connection with the purchase or sale of a covered security; or (2) that the defendant used or employed any manipulative or deceptive device or contrivance in connection with the purchase or sale of a covered security.
This same prohibition is contained in Section 28 of the Securities Exchange Act of 1934, 15 U.S.C. § 78bb(f)(1).
The Uniform Standards Act applies to private securities class actions if they are "covered class actions" concerning "covered securities." See 15 U.S.C. § 77p(b), 78bb(f)(1). Defendant maintains that the Track Data securities at issue in this case are "covered securities" because they are traded on NASDAQ and that the action is a "covered class action" because it is a single lawsuit in which damages are sought on behalf of more than 50 prospective class members, and questions of law or fact common to those persons or members of the prospective class, without reference to issues of individualized reliance on an alleged misstatement or omission, predominate over any questions affecting only individual members.
Here, Count II, the fraud claim, is clearly barred by the Uniform Standards Act because it alleges, in language that is almost identical to that barred by the Uniform Standards Act, that: "Defendant made material misrepresentations of fact and omissions of material fact regarding his margin trading for the purpose of inducing plaintiff and other members of the class to purchase Track Data stock." (Compl. at ¶ 39) Plaintiff does not dispute the applicability of the Uniform Standards Act to his fraud claim. In fact, plaintiff explicitly recognizes the Uniform Standards Act and "its effect of removing state court securities class actions to federal court and abolishing state law causes of action in securities fraud cases." (PI.'s Mem. in Opp'n, 3) Given plaintiff's wish to drop his fraud claim and proceed only on a breach of fiduciary duty claim, the court need not elaborate upon why the fraud claim would be barred by the Uniform Standards Act.
As for Count I, the breach of fiduciary duty claim which plaintiff now wishes to make the sole gravamen of his action, that claim too is barred by the Uniform Standards Act. Count I, besides incorporating the Complaint's factual allegations, consists of one paragraph which reads:
By failing to disclose that he had offered at least 40% of Track Data's outstanding common stock as security for his personal margin trading of other securities, defendant Hertz breached his fiduciary duty of loyalty, care, and disclosure to Track Data's public shareholders.
(Compl. at ¶ 37) As with the fraud claim, the breach of fiduciary duty claim rests on alleged misrepresentations or omissions concerning defendant's margin trading which plaintiff contends caused him and others to buy Track Data stock at inflated prices. Section 77p(b)(1) forbids a state law claim alleging an "omission of material fact in connection with the purchase . . . of a covered security."
Nor do the so-called "Delaware carve-out" exceptions to the Uniform Standards Act save plaintiff's breach of fiduciary duty claim. Sections 77p(d)(1) and 78bb(f)(3) of the Uniform Standards Act preserve certain class actions based on state law under the following circumstances:
Preservation of certain actions— (A) Actions under State law of State of incorporation (i) Actions preserved Notwithstanding paragraph (I) or (2), a covered class action described in clause (ii) of this subparagraph that is based upon the statutory or common law of the State in which the issuer is incorporated . . . may be maintained in a State or Federal court by a private party. (ii) Permissible actions A covered class action is described in this clause if it involves— (I) the purchase or sale of securities by the issuer or an affiliate of the issuer exclusively from or to holders of equity securities of the issuer; or (II) any recommendation, position or other communication with respect to the sale of securities of an issuer that— (an) is made by or on behalf of the issuer or an affiliate of the issuer to holders of equity securities of the issuer; and (bb) concerns decisions of such equity holders with respect to voting their securities, acting in response to a tender or exchange offer, or exercising dissenters' or appraisal rights.15 U.S.C. § 78bb(f) (emphasis added).
Here, it is clear that none of the circumstances described in subparts (I) or (II) apply. As for subpart (I), defendant correctly notes that this is not a case in which Track Data stock was purchased or sold "exclusively from or to" Track Data shareholders, but rather a case in which the stock was sold in the open market. Nor, under subpart (II), is this a case in which management is alleged to have made a communication to shareholders concerning a vote, a tender or exchange, or the exercise of dissenters' or appraisal rights. As such, Count I as alleged in the Original Complaint does not fall within any of the exceptions to the Uniform Standards Act and must be dismissed.
Plaintiff proposes to cure the defects in the Original Complaint by amending and refiling in state court with only a breach of fiduciary duty claim. Plaintiff's allegations in both the Original and the proposed Amended Complaint with respect to breach of fiduciary duty are the same in that both allege that defendant breached his duty by omitting to disclose that he pledged his shares as security for his personal margin trading. In the proposed Amended Complaint, plaintiff additionally has alleged that Hertz failed to disclose that he lacked the resources needed to meet his margin obligations to his brokers. (Am. Compl. at ¶ 38) Because the Uniform Standards Act prohibits state law class actions alleging material misrepresentations or omissions in the sale or purchase of a covered security, the additional allegation concerning defendant's resources at the time he was engaged in margin trading is immaterial. Thus, the conclusion that the Uniform Standards Act bars the claim of breach of fiduciary duty is inescapable.
B. Claims barred by Delaware law
Even if the Uniform Standards Act did not bar plaintiff's breach of fiduciary claim, defendant correctly notes that this claim fails to state a cause of action under Delaware law, since that state does not recognize a "fraud on the market" theory. A "fraud on the market" theory, in general terms, recognizes that "in an open and developed securities market, the price of a company's stock is determined by available material information regarding the company and its business . . . Misleading statements will therefore defraud purchasers of stock even if the purchasers do not directly rely on the misstatements." Basic, Inc v. Levinson, 485 U.S. 224, 241 42 (1988). Here, plaintiff contends that defendant's failure to disclose certain information to the public caused them to purchase Track Data stock at inflated prices. Delaware courts, however, have refused to recognize such a theory because they do not wish to replicate federal securities laws, which generally govern claims by shareholders against directors for breach of the fiduciary duty of disclosure. See Malone v. Brincat, 722 A.2d 5 (Del. 1998) (rejecting claims that directors had misled shareholders about company's net worth and noting that state common law cause of action for "fraud on the market" has not been recognized).
New York law provides that a cause of action for breach of fiduciary duty by a Delaware corporation must be decided according to Delaware law. Green v. Santa Fe Indus., Inc., 70 N.Y.2d 244, 256 (1987).
Plaintiff's resort to Delaware law suffers from a second flaw as well in that the Complaint fails to allege any source for the duty of disclosure in these circumstances. Delaware law does not require a controlling shareholder to disclose the fact that he has used his stock as security in his personal margin trading. Under Malone, a director is only required to disclose material information about a corporation when he is seeking shareholder action. "In the absence of a request for stockholder action, the Delaware General Corporation Law does not require directors to provide shareholders with information concerning the finances or affairs of the corporation." Malone, 722 A.D.2d at 11 (citing David A. Drexler et al., Delaware Corporation Law I 5.07A (Matthew Bender 1998)); see also Raskin v. Birmingham Steel Corp., Civ. No. 11365, 1990 Del. Ch. LEXIS 194, at **15-16 (Del. CH. Dec. 4, 1990) ("[S]ince the company did not seek the vote of the shareholder, offer them an exchange, or otherwise seek any action from them, the only possible breach of candor claim would necessarily rest upon the existence of a duty to inform the market accurately of material developments. No Delaware case establishes such a duty to my knowledge and, in my opinion, no such duty exists. If the board does not seek shareholder action . . . it has, in my opinion, no distinctive state law duty to disclose material developments with respect to the company's business. There are good business reasons to permit the company to treat material information confidentially."). Because plaintiff here has not alleged either in the Original or the proposed Complaints that any shareholder action was sought, the Complaint must be dismissed and leave to amend denied.
As for defendant's third argument that the state law fraud claim must be dismissed because it fails to comply with the heightened pleading requirements of Rule 9(b), that argument need not be addressed as plaintiff has agreed to drop that claim. The Complaint's adherence to heightened pleading requirements will be addressed separately in the discussion below, which is devoted to plaintiff's claim that the Complaint can survive this motion to dismiss if construed under Section 10b-5.
Although plaintiff has moved to amend the Complaint so that it will contain only one state law claim for breach of fiduciary duty, his Opposition suffers from the glaring and fatal omission that it fails to address the argument, persuasively made by defendant, that this claim fails to state an action under Delaware law. Thus, it can only be assumed that plaintiff is conceding that, if — as this court has just determined — the Uniform Standards Act in fact bars his claim of breach of fiduciary duty because it is grounded upon a misrepresentation or omission, then his claim must fail. The only possible recourse left for plaintiff — and one which he gladly assumes — is asking court to construe the complaint as containing a claim under Section 1 Ob-5 of the Securities Exchange Act.
C. Construing the Complaint under Section lob-5
Plaintiff argues that, in the event the court denies his request to file the proposed amended Complaint in state court, the original Complaint, though inartfully drafted, might yet survive this motion to dismiss if it is construed under Section 10b-5 of the Securities Exchange Act. That argument is equally unavailing. Plaintiff concedes that the original cause of action was for common law fraud but alleges that the Complaint also states a cause of action under Section l0bS because he pleads: "1) a misstatement or omission in connection with the purchase or sale of securities; 2) materiality; 3) scienter; 4) reliance; 5) injury; and 6) a causal link between the injury and the misstatement or omission." In re Gaming Lottery Sec. Litig, 58 F. Supp.2d 62, 70 (S.D.N.Y. 1999) (citing In re Symbol Techs. Class Action Litig., 950 F. Supp. 1237, 1242 (E.D.N.Y. 1997)). The omissions claimed are defendant's failure to disclose the assignment of 40% of Track Data's stock as security for his margin trading and his failure to reveal that, as a result of this stock commitment, defendant's brokers were forced to sell 17 million shares. The materiality alleged is that investors might have refrained from or altered their purchasing decisions had they known of the margin trading. Scienter, plaintiff claims, is alleged by virtue of the fact that defendant had "an economic self-interest in the purported fraud" and "knew facts tending to show that statements from the Company should have been issued to inform shareholders of the added risk Hertz's margin trading was causing them . . . Specifically, Hertz was aware that he did not have the resources to meet his margin obligations to his brokers." (Pl.'s Opp'n at 5, citing Compl. ¶ 4, 5, 27) The injuries, it is claimed, are the extra costs incurred by class members who purchased their Track Data at a higher price than they would have had they had known of defendant's activities and also the continued decline the stock has experienced as a result of defendant's conduct. Finally, the causal link is supplied by plaintiff's contention that defendant's omissions guided shareholders' investment decisions insofar as shareholders relied on defendant's "fidelity, integrity and superior knowledge, by virtue of his position in the company, when deciding to purchase Track Data stock." (Pl.'s Opp'n at 6)
Defendant's motion forcefully argues that the Complaint cannot be construed as stating a cause of action under Section l0b-5 for two principal reasons: First, the Complaint fails to allege a duty to disclose his personal trading practices. Second, the Complaint fails to comply with the heightened requirements of the PSLRA for pleading scienter.
As for defendant's first contention that the Complaint fails to provide a source for the duty to disclose, the court cannot disagree. "A "duty to speak' must exist before the disclosure of material facts is required under Rule l0b-5." Glazer v. Formica Corp., 964 F.2d 149, 157 (2d Cir. 1992) (quoting Starkman v. Marathon Oil Co., 772 F.2d 231, 238 (6th Cir. 1985), cert. denied, 475 U.S. 1015 (1986)). While a controlling shareholder's decision to commit large quantities of his stock as security in margin trading undoubtedly has the potential to affect the price of that stock, plaintiff has not and cannot allege an affirmative duty imposed by common law to keep the public appraised of such a decision. Such a duty, if it exists at all, must arise under the federal securities laws. Even then, such a duty arises only under certain circumstances. "As a general matter in federal securities law, there is no affirmative duty to disclose unless (1) a Commission statute or rule requires disclosure, (2) an "insider' (or the issuer itself) is trading, or (3) a previous disclosure is or becomes inaccurate, incomplete, or misleading." Louis Loss Joel Seligman, Fundamentals of Securities Regulation at p. 888 (4th ed. 2001). Plaintiff certainly has not alleged a statute or rule that would fall under the first possible source of a duty to disclose. Nor can such a duty exist under the federal securities laws simply because the information may be material and because a stockholder might like to know it. See In re Time Warner Inc. Securities Litigation, 9 F.3d 259, 267 (2d Cir. 1993) ("[A] corporation is not required to disclose a fact merely because a reasonable investor would very much like to know that fact. Rather, an omission is actionable under the securities laws only when the corporation is subject to a duty to disclose the omitted facts."); see also Roeder v. Alpha Indus., Inc., (finding no duty to disclose existed in case alleging that company failed to disclose prior to indictment for bribery that it had paid bribes to obtain contracts, where despite egregious nature of behavior the duty to disclose "does not arise from the mere possession of nonpublic market information.") (cited with approval in Glazer, 964 F.2d at 157 ("We agree that the mere fact . . . that information may be considered material does not, of itself, mean that the companies have a duty to disclose.")).
As for the second possible source of a duty to disclose — insider status — while defendant can in one sense be characterized as an "insider', there is no suggestion in the Complaint that the forced stock sales resulted from defendant leaming inside information from Track Data. Stated otherwise, the information upon which defendant made his decision to commit Track Data stock in his margin trades was not supplied by Track Data and therefore not covered by the federal securities laws' disclosure requirement.
Finally, plaintiff cannot establish the third possible source of a duty to disclose — a previous disclosure that is or becomes inaccurate, incomplete, or misleading. Nothing in the April 17, 2000 press release is claimed to be false and there is no allegation, other than a conclusory one, that defendant knew anything on April 17 that contradicted the company's press release. As defendant correctly argues, if he did not know that the brokers would have to sell his stock or at what price, he could not have had a duty to disclose this information. (Def's Mem. in Further Support of Mot., 8) See e.g., San Leandro Emergency Med. Plan v. Philip Morris, Inc., 75 F.3d 801, 812 (2d Cir. 1996) (dismissing complaint alleging that defendants misled plaintiff's by not disclosing certain adverse sales figures where "plaintiff's allege no facts supporting their assertion that defendants had knowledge of the 8.3 percent decline before April, and it is not clear that the decline rate even reached a level of 8.3 percent until the month of April. Nor do plaintiff's offer anything but conclusory allegations to support their contention that defendants knew long before the April 2 announcement that Marlboro was in trouble and that an change in strategy would be necessary.")
Besides failing to identify a source for the duty to disclose information concerning his private trading, plaintiff also fails to plead scienter with the requisite particularity. In the PLSRA, Congress "heightened the pleading requirement for pleading scienter[,]" Press v. Chemical Inv. Servs. Corp., 166 F.3d 529, 537-38 (2d Cir. 1999), and stated:
(2) Required state of mind In any private action arising under this chapter in which the plaintiff may recover money damages only on proof that the defendant acted with a particular state of mind, the complaint shall, with respect to each act or omission alleged to violate this chapter, state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.15 U.S.C. § 78u-4 (b). See H.R. Conf Rep. No. 104-369, at 31 (1995) (noting "significant evidence of abuse in private securities lawsuits," including "the routine filing of lawsuits against issuers of securities and others whenever there is a significant change in an issuer's stock price, without regard to any underlying culpability of the issuer," and "the abuse of the discovery process to impose costs so burdensome that it is often economical for the victimized party to settle"), reprinted in 1995 U.S.C.C.A.N. 730, 730. Scienter is properly alleged by a showing of "intent to deceive, manipulate, or defraud, or knowing misconduct."Press, 166 F.3d at 53 7-38 (internal quotations omitted). "[A] plaintiff must either (a) allege facts to show that defendants had both motive and opportunity to commit fraud, or (b) allege facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness." Id. (internal quotations omitted).
Here, plaintiff has shown neither motive nor opportunity to commit fraud. "Motive would entail concrete benefits that could be realized by one or more of the false statements and wrongful nondisclosures alleged. Opportunity would entail the means and likely prospect of achieving concrete benefits by the means alleged." Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1130 (2d Cir. 1994). Here, plainitff's allegations that defendant had the "requisite scienter" and "economic self-interest in the purported fraud" are conclusory allegations, not statements of fact establishing an evidentiary basis for motive or opportunity. Nor is plaintiff's claim of scienter supported by any evidence of conscious misbehavior. The Complaint does not allege that defendant knew at some earlier point that his shares would be sold off in bulk at prices even lower than his brokers' break even price. Plaintiff's in Shields alleged that defendants had publicly announced their expectation that the company would have record eamings but two months later had to admit it would have a loss. The court found that plaintiff's had failed to meet the pleading requirement for scienter:
[Plaintiffs'] frequent conclusory allegations — that defendant's `knew but concealed some things, or `knew or were reckless in not knowing' other things — do not satisfy the requirements of Rule 9 (b). We have held in the context of securities fraud claims that such allegations are `so broad and conclusory as to be meaningless.Id. at 1129. Here, lacking "circumstantial evidence that would indicate conscious fraudulent behavior or recklessness[,]" id., plaintiff's allegations can only be described as conclusory as well. Simply because defendants' brokers ultimately sold off his stock in bulk at low prices, that alone does not establish that he knew that they would have to. "We have rejected the legitimacy of "alleging fraud by hindsight.'" Id.
Nor does plaintiff rest on anything other than conclusory allegations with respect to motive and opportunity. The Complaint contains no allegation as to how defendant would have benefitted from a forced sale by his brokers or large amounts of his stock at distressed prices. If anything, such a sale would have diminished his overall shares and status as a controlling shareholder. In the case of Novak v. Kasaks, 216 F.3d 300, 304 (2d Cir. 2000), the one case cited by plaintiff in support of his scienter argument, the Complaint contained specific allegations of meetings in which defendants had rejected pleas by personnel to abandon their practice of "boxing and holding" outdated inventory in a warehouse without being marked down in furtherance of a scheme to overstate earnings. In addition, plaintiff's could cite examples of financial statements that materially misstated inventory values because they did not account for the company's box and hold policy. Because the Complaint here fails to allege that defendant "benefitted in some concrete and personal way from the purported fraud[,]" id. at 307-308, it falls starkly short of those kinds of factual allegations, it fails to describe facts which would show a motive and opportunity to commit fraud.
In view of plaintiff's failure both to identify a source for the duty to disclose and to plead scienter with the requisite particularity, the Complaint cannot be construed as stating as claim under Section l0b-5 and must be dismissed.
II. Motion for Rule 11 sanctions
Defendant also has asked the court to impose Rule 11 sanctions against plaintiff for his utter failure to deal with relevant authorities that have been brought to his attention, and that are adverse to his position." (Def's Mem. in Further Support of Mot., 12) Section 78u-4(c) of the PLSRA requires a court to review upon dismissal whether Rule 11 sanctions are appropriate.
The relevant provision reads:
(c) Sanctions for abusive litigation (1) Mandatory review by court In any private action arising under this chapter, upon final adjudication of the action, the court shall include in the record specific findings regarding compliance by each party and each attorney representing each party with each requirement of Rule 11(b) of the Federal Rules of Civil Procedure as to any complaint, responsive pleading, or dispositive motion. (2) Mandatory sanctions If the court makes a finding under paragraph (1) that a party or attorney violated any requirement of Rule 11(b) of the Federal Rules of Civil Procedure as to any complaint, responsive pleading or dispositive motion, the court shall impose sanctions on such party or attorney in accordance with Rule 11 of the Federal Rules of Civil Procedure. Prior to making a finding that any party or attorney has violated Rule 11 of the Federal Rules of Civil Procedure, the court shall give such party or attorney notice and an opportunity to respond.15 U.S.C. § 78u-4 (c)(1)-(2). The PLSRA was intended to "give "teeth' to Rule 11, "recognizing
Section 78u-4(c)(3)(A)-(C) also provides:
(3) Presumption in favor of attorneys' fees and costs. (A) In general. Subject to subparagraphs (B) and (C), for purposes of paragraph (2), the court shall adopt a presumption that the appropriate sanction- (i) for failure of any responsive pleading or dispositive motion to comply with any requirement of Rule 11(b) of the Federal Rules of Civil Procedure is an award to the opposing party of the reasonable attorneys' fees and other expenses incurred as a direct result of the violation; and (ii) for substantial failure of any complaint to comply with any requirement of Rule 11(b) of the Federal Rules of Civil Procedure is an award to the opposing party of the reasonable attorneys' fees and other expenses incurred in the action. (B) Rebuttal evidence. The presumption described in subparagraph (A) may be rebutted only upon proof by the party or attorney against whom sanctions are to be imposed that- (i) the award of attorneys' fees and other expenses will impose an unreasonable burden on that party or attorney and would be unjust, and the failure to make such an award would not impose a greater burden on the party in whose favor sanctions are to be imposed; or (ii) the violation of Rule 11(b) of the Federal Rules of Civil Procedure was de minimis (C) Sanctions. If the party or attorney against whom sanctions are to be imposed meets its burden under subparagraph (B), the court shall award the sanctions that the court deems appropriate pursuant to Rule II of the Federal Rules of Civil Procedure.
. . . the need to reduce significantly the filing of meritless securities lawsuits without hindering the ability of victims of fraud to pursue legitimate claims, and [because] . . . [e]xisting Rule 11 has not deterred abusive securities litigation.'" Gurary v. Winehouse, 235 F.3d 792, 797 (2d Cir. 2000) (ellipses and brackets in original). The PLSRA "mandates the imposition of sanctions if the court determines that Rule 11 has been violated." Id. (emphasis in original).
Rule 11(b), Fed.R.Civ.P., provides:
(b) Representations to Court. By presenting to the court (whether by signing, filing, submitting or later advocating) a pleading written motion, or other paper, an attorney or unrepresented party is certifying that to the best of the person's knowledge, information, and belief, formed after an inquiry reasonable under the circumstances,- (1) it is not being presented for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation; (2) the claims, defenses, and other legal contentions therein are warranted by existing law or by a nonfrivolous argument for the extension, modification, or reversal of existing law or the establishment of new law; (3) the allegations and other factual contentions have evidentiary support or, if specifically so identified, are likely to have evidentiary support after a reasonable opportunity for further investigation or discovery; and (4) the denials of factual contentions are warranted on the evidence or, if specifically so identified, are reasonably based on a lack of information or belief
Having closely examined the Complaint and pleadings in this case and given plaintiff an opportunity during oral argument to argue why sanctions should not be imposed, this court can come to no conclusion other than that plaintiff's decision to bring this action and persist in its litigation even after being informed of its total lack of merit must result is the imposition of sanctions. Plaintiff's Complaint contained a fraud claim which, as even plaintiff has acknowledged, clearly was barred by the Uniform Standards Act. After defendant filed the motion to dismiss, plaintiff recognized the shortcomings of his Complaint and sought a dismissal without prejudice so that he could refile in state court relying solely on a breach of fiduciary duty claim. As defendant informed plaintiff, however, such a claim also is prohibited by the Uniform Standards Act and would be grounds for dismissal even in state court. After plaintiff was directed by this court to respond to the motion to dismiss, plaintiff failed to identify or discuss any authority that might be read to suggest that his breach of fiduciary duty claim is permissible either under the Uniform Standards Act or Delaware law. Plaintiff's counsel contends in his opposition that he meant to assert state law causes of action only, and that defendant's removal of the action to federal court on the basis of the PLSRA therefore was inappropriate. At the same time, however, plaintiff's counsel conceded at oral argument that he never moved to remand this action to state court in the time period contemplated by the Rules and could not reconcile his position that his Complaint contained only a state law cause of action with his failure to seek a remand to state court. Plaintiff's present attempt to file an amended Complaint alleging only a state law cause of action can be seen as nothing other than a late attempt to accomplish now what he failed to accomplish in a timely manner.
Even if plaintiff's request to refile in state court with an amended Complaint could be interpreted as something other than an untimely motion to remand, sanctions would be appropriate in view of the fact that plaintiff had an opportunity but refused to withdraw his Complaint when he was informed by defendant that he had no valid state law claim for breach of fiduciary duty that was not barred by the federal securities laws. During oral argument, plaintiff acknowledged that his claim under Delaware law that defendant was under a duty to disclose his commitment of Track Data stock as security in his own margin trading was a novel one; yet, in his papers, plaintiff fails to state why the law should be modified or extended to cover his claim. Nor does plaintiff make any effort to discuss, let alone rebut, defendant's argument that the Complaint cannot meet the requirements of a Delaware common law claim for breach of fiduciary duty. Because there is neither existing law favoring plaintiff's position that he has a claim under Delaware law for breach of fiduciary duty nor an attempt on plaintiff's part to argue why the law should be changed, plaintiff has violated Rule 11(b)(2), Fed.R.Civ.P. Moreover, because plaintiff fails to provide sufficient details establishing that defendant acted with scienter, despite the PSLRA's clear requirement that scienter be specifically pleaded, and also fails to establish that defendant had a duty to disclose his use of Track Data shares as security, plaintiff also has violated Rule 11(b)(3). Accordingly, the motion for sanctions is granted.
At oral argument, plaintiff largely abandoned the position that his Complaint may be construed as stating a cause of action under Section l0b-5.
III. Cross-motion for leave to amend Complaint and remand to state court
For the reasons already discussed, plaintiff's proposed amendment would accomplish nothing as the fiduciary duty claim in the proposed amended Complaint, like the original Complaint, is prohibited by the Uniform Standards Act. Moreover, plaintiff simply has not alleged facts which would support a claim for breach of fiduciary duty under Delaware law. First, Delaware does not support the "fraud on the market" theory alleged here. Second, Delaware imposes no duty that required defendant to reveal his use of Track Data shares as security on his margin trading. Because the Amended Complaint fails to cure the very defects which require dismissal of the original Complaint, its filing would be fruitless.
So Ordered.
CONCLUSION
For the foregoing reasons, defendant's motion to dismiss the case is granted and his motion for sanctions is granted. Defendant is directed to submit time sheets reflecting reasonable attorney's fees and other expenses incurred in the action. plaintiff's cross-motion in the alternative for leave to amend the Complaint is denied.
motion for sanctions is granted. Defendant is directed to submit time sheets reflecting reasonable attorneys' fees and other expenses incurred in the action. Plaintiff's cross-motion in the alternative for leave to amend the Complaint is denied.