Summary
In Hollywood Casino, the alleged "group" consisted of former officers of the issuer-corporation and outside investors who sought to take control of the corporation.
Summary of this case from Greenfield v. Criterion Capital Mgmt., LLCOpinion
Case No. 3:02-CV-0325-M
July 18, 2002
MEMORANDUM OPINION AND ORDER
Before the Court are Harold Simmons, Contran Corp., and Valhi Corp.'s Motion to Dismiss Plaintiff's First Amended Complaint, filed on April 23, 2002, and Jack E. and William D. Pratt's Motion to Dismiss Plaintiff's First Amended Complaint, filed April 30, 2002.
FACTUAL SUMMARY
On August 10, 2001, the Board of Directors ("Board") of Hollywood Casino Corporation ("Hollywood") chose not to re-elect Jack Pratt ("Jack") to his previously held position as Chairman of the Board and Chief Executive Officer ("CEO") of Hollywood. On that date, the Board also chose not to re-elect Jack's brother, William Pratt ("Bill"), as Hollywood's General Counsel. These decisions allegedly precipitated the events giving rise to the claims asserted in Hollywood's First Amended Complaint ("Complaint").
Jack and Bill will be referred to as "the Pratts" when speaking of them collectively.
Harold Simmons ("Simmons") is a long-time friend of Jack and is alleged to be a well-known corporate "raider." He is Chairman and CEO of Defendant Contran, a holding company structured to acquire and hold companies Simmons takes over. Contran owns 90% of Defendant Valhi Corp.
Harold Simmons, Contran, and Valhi will be referred to collectively as "the Simmons Defendants."
There are approximately 25 million shares of Hollywood Class A Common Stock ("Hollywood stock") outstanding. Of these, Jack individually owns approximately 4,110,500 shares, and controls roughly the same amount through various family trusts and partnerships, giving him direct control over approximately 30% of Hollywood stock. Bill owns approximately 1,350,000 shares, or 5.4%. The Simmons Defendants allegedly purchased between four and five percent of Hollywood stock between August 10, 2001, and February 15, 2002. The Complaint alleges the Simmons Defendants might have liquidated some or all of their stock subsequent to February 15, 2002.
Hollywood contends that the Simmons Defendants and the Pratts have formed a group to profit from manipulating Hollywood's share price and/or to take control of Hollywood and re-install Jack and Bill to their former management roles, all in violation of federal securities laws.
STANDARD OF REVIEW
Federal Rule of Civil Procedure 12(b)(6) provides for dismissal of a civil action at the pleading stage when a plaintiff "fail[s] to state a claim upon which relief may be granted." A claim shall 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." "The court must decide whether the facts alleged, if true, would entitle Plaintiff to a legal remedy. Unless the answer is unequivocally `no,' the motion must be denied." However, "conclusory allegations or legal conclusions masquerading as factual conclusions will not suffice to prevent a motion to dismiss."
Conley v. Gibson, 355 U.S. 41, 45-46 (1957).
Vines v. City of Dallas, 851 F. Supp. 254, 259 (N.D. Tex. 1994) (citing Conley v. Gibson, 355 U.S. 41 (1957)).
Jefferson v. Lead Industries Ass'n, Inc., 106 F.3d 1245, 1250 (5th Cir. 1997).
Furthermore, to the extent that Hollywood alleges the Defendants acted with fraudulent intent, Federal Rule of Civil Procedure 9(b) applies, providing that "[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge and other conditions of mind of a person may be averred generally." When Rule 9(b) is invoked to challenge the sufficiency of pleadings claiming fraudulent or misleading statements, the Fifth Circuit requires the pleadings to allege "the particulars of time, place, and contents of the false representations, as well as the identity of the person making the misrepresentation and what he obtained thereby." The Fifth Circuit also requires the plaintiff to plead scienter adequately, by "setting forth specific facts to support an inference of securities fraud." This requirement may be met by either "(1) show[ing] a defendant's motive to commit securities fraud, or (2) identify[ing] circumstances that indicate conscious behavior on the part of the defendant."
FED. R. CIV. P. 9(b); See Union of Needletrades, Indus. Textile Employees v. May Dep't. Stores Co., 26 F. Supp.2d 577, 583-84 (S.D.N.Y. 1997), aff'd, 171 F.3d 754 (2d Cir. 1999) (dismissing a Rule 14a-9 claim under a heightened pleading standard); Mates v. N. Am. Vaccine, Inc., 53 F. Supp.2d 814, 823-24 (D. Md. 1999) (applying Rule 9(b)'s heightened pleading requirements to a Section 13(D) claim); Sogevalor v. Penn Cent. Corp., 771 F. Supp. 890, 893-94 (S.D. Ohio 1991) (applying Rule 9(b)'s scienter requirement to a Rule 14e claim).
Shushany v. Allwaste, Inc., 992 F.2d 517, 521 (5th Cir. 1993). This standard is commonly referred to as the "who-what-when-where-why" standard.
Lovelace v. Software Spectrum, Inc., 78 F.3d 1015, 1018-19 (5th Cir. 1996).
Id.
Claims I-VI are subject to the heightened pleading requirements of the Private Securities Litigation Reform Act (the "PSLRA"):
(A) made an untrue statement of a material fact; or
(B) omitted to state a material fact necessary in order to make the statements made, in light of the circumstances in which they were made, not misleading;. . . .,
15 U.S.C. § 78u-4 (b)(1)(A)-(B) (1997). The heightened pleading requirement of § 78u-4 is functionally equivalent to Rule 9(b), but is slightly different in form. In relevant part, it states:
(b)(1)(B) [T]he complaint shall specify each statement alleged to have been misleading, the reason why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed.
(b)(2) 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.
The Fifth Circuit views the Rule 9(b) and § 78u-4 standard identically. See ABC Arbitrage Plaintiffs Group v. Tchuruk, No. 01-40645, 2002 WL 975299 at *8 (5th Cir. May 13, 2002) (applying § 78u-4 to a Securities Exchange Act § 10(b) fraud claim).
ANALYSIS
A. Counts I II — The Section 13 ClaimsHollywood alleges that the Simmons Defendants did not file a Schedule 13(D) with the Securities Exchange Commission, as required by 15 U.S.C. § 78m(d)(3). Hollywood also contends that the Schedule 13(D)s Jack and Bill filed with the SEC contain misleading or fraudulent information, in that they do not indicate the existence of a group of which Jack and Bill are members.
Hollywood's ability to survive the Defendants' Motions to Dismiss turns on whether its Complaint sufficiently pleads the existence of a "group." To plead the existence of a group properly, a complaint must allege (1) the existence of an agreement among the group's members, and (2) that the agreement aims to further a common objective.
See Wellman v. Dickinson, 682 F.2d 355, 363 (2d Cir. 1982) (discussing requirement that group members combine efforts to further a common objective); Corenco Corp. v. Schiavone Sons, Inc., 488 F.2d 207, 217 (2d Cir. 1973) (discussing requirement that there be an agreement between the members of the group).
Considering the entirety of the Complaint, Hollywood sufficiently pleads the existence of an agreement between the alleged members of the group. Hollywood contends that Jack and Simmons are old friends, that Simmons is a well-known corporate raider, that the Simmons Defendants have recently taken a large position in Hollywood stock, that Jack has shared confidential information about Hollywood with Simmons, and that Jack has publicly represented to others that he formed a group with the intention of taking control of Hollywood and reinstalling himself as chairman. Also highly suggestive of an agreement is the allegation that Simmons decided to take a significant stock position in Hollywood only after Jack, his old friend, was removed from his position as Chairman/CEO. These allegations suffice to suggest an alliance between the Simmons Defendants and the Pratts which is sufficient under the case law to survive the pending Motions.
See Nathenson v. Zonagen, Inc., 267 F.3d 400, 424-25 (5th Cir. 2001) (looking at all circumstances rather than individual allegations to support a strong inference of scienter in a complaint alleging fraud).
Compl. ¶¶ 14, 26-31, 33; See SEC v. Savoy Indus., Inc., 587 F.2d 1149, 1164 (D.C. Cir. 1978) (finding persuasive that two parties to an alleged group "had known [each other] for a number of years"); GAF Corp. v. Milstein, 453 F.2d 709, 713-16 (2d Cir. 1971) (allegations that family members had sought management positions, disparaged then-current management, aimed to depress stock price, engaged in litigation against the company, and purchased stock on the open market, were sufficient to satisfy pleading requirements with respect to the existence of a group agreement and common objective requirements for pleading a group); Hallwood Realty Partners, L.P. v. Gotham Partners, L.P., 95 F. Supp.2d 169, 176 (S.D.N.Y. 2000) (factual allegations of a "group" were sufficient where the long-standing personal friendship between the parties was pled), aff'd, 286 F.3d 613 (2d Cir. 2002).
See Savoy Indus., 587 F.2d at 1164; GAF Corp., 453 F.2d at 713-716; Hallwood Realty, 95 F. Supp. at 176.
B. Count VI — The Section 16 Claim
Under Section 16(b) of the Securities Exchange Act, beneficial owners of greater than ten percent of a class of securities are subject to disgorgement of profits made on certain trades in the stock. The Simmons Defendants contend that Count VI fails to state a claim against them. They so contend because they did not own more than 10% of Hollywood stock, and claim Hollywood failed to properly plead the existence of a group. However, this argument fails for the same reasons the argument fails in regard to Count I.
15 U.S.C. § 78p(a)-(b) (1997). This provision provides, in relevant part:
[A]ny profit realized by [a beneficial owner] from any purchase and sale, or any sale and purchase, of any equity security . . . involving any such equity security within any period of less than six months . . . shall inure to and be recoverable by the issuer. . . .
See Gwozdzinsky v. Zell/Chilmark Fund, L.P., 156 F.3d 305, 308-09 n. 3 (2d Cir. 1998) (discussing § 16(b)'s requirements that there be "(1) a purchase and (2) a sale of securities (3) by an officer or director of the issuer or by a shareholder who owns more than ten percent of any one class of the issuer's securities (4) within a six-month period.").
See Rosenberg v. XM Ventures, 129 F. Supp.2d 681, 685-89 (D. Del. 2001), aff'd, 274 F.3d 137 (3d Cir. 2001) (dismissing a Section 16(b) claim under Rule 12(b)(6) on the basis that the complaint failed to properly plead the existence of a group when the defendant was not individually an owner of greater than ten percent of the stock in question).
See supra Section A.
The Simmons Defendants further argue that, because Section 16 requires a qualifying transaction to be completed in a six-month period, Hollywood should be required to plead the specific dates of the qualifying transactions. This argument is not supported by case law. Recovery under Section 16 is not based on omissions or fraudulent statements and is not subject to the heightened pleading requirements of Rule 9(b) or the PSLRA. Instead, it is a strict liability provision, and is subject only to the notice pleading requirements of 12(b)(6). The precise dates of the Simmons Defendants' transactions in Hollywood stock is a subject for discovery, not a requirement for proper pleading.
See Rosenberg, 129 F. Supp.2d at 684-85.
In their Motion, Jack and Bill point out that the Complaint does not allege transactions by either of them and reason that this deficiency precludes recovery against them under Section 16. However, Paragraph 102 of the Complaint asserts Hollywood's claim to recover profits made on any transactions in Hollywood stock by any of the Defendants occurring within a six-month period. That paragraph gives both Jack and Bill sufficient notice of what Hollywood intends to prove and is sufficient to survive a 12(b)(6) motion.
C. Count III — The Tender Offer Claim
In Count Three of its Complaint, Hollywood alleges Jack, Bill, and the Simmons Defendants violated the Securities Exchange Act § 14 and Rule 14e-3. Rule 14e-3 is a broad anti-fraud provision aimed at preventing illicit profit from trading on inside information about upcoming tender offers. There are two ways to violate Rule 14e-3, either as a tippee under Rule 14e-3(a), or as a tipper under Rule 14e-3 (d).
Securities Exchange Act of 1934, § 14(e), 15 U.S.C. § 78n(e); 17 C.F.R. § 240.14e-3 (2002). Rule 14e-3 provides in relevant part:
(a) If any person has taken a substantial step or steps to commence, or has commenced, a tender offer ("the offering person"), it shall constitute a fraudulent, deceptive or manipulative act or practice within the meaning of section 14(e) of the Act for any other person who is in possession of material information relating to such tender offer which information he knows or has reason to know has been acquired directly or indirectly from:
(a)(1) The offering person. . . .
(d)(1) As a means reasonably designed to prevent fraudulent, deceptive or manipulative acts or practices within the meaning of section 14(e) of the Act, it shall be unlawful for any person described in paragraph (d)(2) of this section to communicate material, nonpublic information relating to a tender offer to any other person under circumstances in which it is reasonably foreseeable that such communication is likely to result in a violation of this section except that this paragraph shall not apply to a communication made in good faith,
(d)(2) The persons referred to in paragraph (d)(1) of this section are:
(d)(2)(i) The offering person or its officers, directors, partners, employees or advisors;
(d)(2)(iii) Anyone acting on behalf of the persons in paragraph (d)(2)(i) of this section or the issuer or persons in paragraph (d)(2)(ii) of this section; and
(d)(2)(iv) Any person in possession of material information relating to a tender offer which information he knows or has reason to know is nonpublic and which he knows or has reason to know has been acquired directly or indirectly from any of the above.
See Schreiber v. Burlington Northern, Inc., 472 U.S. 1, 10-12 (1985) (stating Rule 14(e) was "modeled on the antifraud provisions of § 10(b)" and "[Rule 14-e] supplements the more precise disclosure provisions found elsewhere in the Williams Act, while requiring disclosure more explicitly addressed to the tender offer context than that required by § 10(b).").
United States v. Chestman, 947 F.2d 551, 557 (2d Cir. 1991) (en banc), cert. denied, 503 U.S. 1004 (1992), cited with approval in United States v. O'Hagan, 521 U.S. 642, 669 (1997) (discussing tippee liability under 14e-3(a)); SEC v. Falbo, 14 F. Supp.2d 508, 525 (S.D.N.Y. 1998) (discussing tipper liability under 14e-3(d)).
Specifically, Hollywood alleges that:
Because the defendants have commenced a "creeping" tender offer, they have violated Rule 14e-3 by, inter alia, knowingly purchasing shares of Hollywood stock based upon material information obtained from Jack Pratt and Bill Pratt, directors and former officers of Hollywood. Defendants knew or had reason to know that the information was non-public and material.
Compl. ¶ 82. The Fourth Circuit provides the best definition of a "creeping tender offer," defining it as:
[A]n acquisition strategy where, by achieving a substantial position in a company by open market purchases, a purchaser can achieve a blocking position which enables it to purchase the remaining shares by tender or exchange offer at a cost substantially less than that which would be required if a formal tender offer were made in the first instance. In short it is an acquisition device which avoids or minimizes the control premium which a would be acquirer is usually required to pay in a conventional tender offer.
See Telvest, Inc. v. Bradshaw, 697 F.2d 576 n. 1 (4th Cir. 1982).
By so pleading, Hollywood seemingly forecloses one possibility for recovery on a Rule 14e-3 claim because liability as a tipper under Rule 14e-3(d) or as a tippee under Rule 14e-3(a) requires "a person" to give information to "another person." Assuming the undifferentiated word "defendants" means all defendants (both the Pratts and the Simmons Defendants), and if these defendants — working as a group — "have commenced a `creeping' tender offer," then information transferred between the Pratts and the Simmons Defendants would not be transferred to "another." Under Hollywood's group theory, the Simmons Defendants and the Pratts together would be the "offering person" for purposes of Rule 14e-3 (a) and, thus, would be immune from the operation of 14e-3(d) and 14e-3 (a) by 14e-3(d)(1)(i). Hence, assuming Hollywood proves its contention that the Pratts and the Simmons Defendants are working as a group to take over Hollywood, liability under Rule 14e-3 as a viable legal theory on which relief could be granted would be seemingly foreclosed.
Even putting aside the seeming inconsistency between simultaneously pleading group liability and a Rule 14e-3 violation among members of the purported group, Hollywood has not pleaded with particularity that the Pratts planned a tender offer and then divulged that intention to the Simmons Defendants, who traded on that information. Such a theory requires the existence of a tender offer, or at least a planned tender offer and the offeror would have to be one or both of the Pratts, or a person or entity controlled by them. It would also assume that Simmons would disregard his long-standing friendship with Jack Pratt to profit by bidding up Hollywood stock prior to Pratt's tender offer, thereby substantially increasing the price Pratt would pay to obtain control of Hollywood.
To decide whether a tender offer was made, this Court must consider the SEC's eight-factor analysis:
(1) whether there is an active and widespread solicitation of public shareholders for shares of an issuer; (2) whether the solicitation is made for a substantial percentage of the issuer's stock; (3) whether the offer to purchase is made at a premium over the prevailing market price; (4) whether the terms of the offer are firm rather than negotiated; (5) whether the offer is contingent on the tender of a fixed number of shares, and perhaps, subject to the ceiling of a fixed maximum number to be purchased; (6) whether the offer is open for only a limited period of time; (7) whether the offerees are subject to pressure to sell their stock; and (8) whether public announcements of a purchasing program concerning the target company precede or accompany a rapid accumulation of large amounts of target company securities.
Pin v. Texaco, 793 F.2d 1448, 1454-55 (5th Cir. 1986) (citations omitted)).
Other than the filing of the amended Schedule 13(D), the Complaint fails to allege any activities on the part of Jack or Bill which could be construed as preparing for or initiating a tender offer, creeping or otherwise. A Schedule 13(D) filing does not constitute a tender offer.
Ludlow Corp. v. Tyco Labs, Inc., 529 F. Supp. 62, 68-69 (D. Mass. 1981); See also Trans World Corp. v. Odyssey Partners, 561 F. Supp. 1315, 1320-21 (S.D.N.Y. 1983) (rejecting argument that citing intentions in a Schedule 13(D) was sufficient to allege the existence of a proxy solicitation).
The Complaint is further deficient in that it does not allege "active or widespread advance publicity or public solicitation, which is one of the earmarks of a conventional tender offer." Rather, it alleges that Jack "informed several of his friends that he had formed a group and that they had been purchasing shares in order to take over Hollywood." Such an assertion would do nothing more than support the group theory. It does not demonstrate that the Pratts were making a tender offer, nor that the Simmons Defendants were trading on advance knowledge of such an offer. Moreover, the Complaint does not allege any pressure by the Pratts on any shareholder to sell Hollywood stock. In fact, the Complaint does not even state that Jack or Bill made an offer to purchase stock. Hollywood has simply failed to adequately plead a claim for relief under the SEC rules governing tender offers because it failed to plead the existence of a tender offer. The Motion to Dismiss the 14e-3 allegations is, therefore, granted; however, Plaintiff may replead within twenty days of the date of this Order in an effort to correct the claims.
Hanson Trust, 774 F.2d at 58, cited in Pin v. Texaco, 793 F.2d 1448, 1454 (5th Cir. 1986).
Compl. ¶ 31.
United States v. Chestman, 947 F.2d 551, 555-56, 563 (2d Cir. 1991) (holding stockbroker liable under Rule 14e-3(a) for trading on a tip from a client who was a relative of an insider in a corporation for which a tender offer was upcoming).
See Wellman v. Dickinson, 475 F. Supp. 783, 820-21, 826 (S.D.N.Y. 1979) (finding a tender offer for purposes of Rule 14e-3 on the basis of significant pressure on shareholders to sell securities to offeror, among other reasons), aff'd, 682 F.2d 355 (2d Cir. 1982).
D. Counts IV and V — The Proxy Solicitation Claims
In Counts IV and V of its Complaint, Hollywood alleges the Pratts and the Simmons Defendants are violating Securities Exchange Act Section 14(a) and SEC Rules 14a-3, 14a-6, and 14a-9.
15 U.S.C. § 78n(a) (1997). A claim under Section 14(a) requires proof of three elements: "(1) defendants misrepresented or omitted a material fact in a proxy statement, (2) defendants acted at least negligently in distributing the proxy statement, and (3) the false or misleading proxy statement was an essential link in causing the corporate actions." In re Browning-Ferris Indus., Inc. S'holder Derivative Litig., 830 F. Supp. 361, 365 (S.D. Tex. 1993) (citations omitted).
In relevant part, Rule 14a-3 provides:
No solicitation subject to this regulation shall be made unless each person solicited is concurrently furnished or has previously been furnished with a publicly-filed preliminary or definitive written proxy statement containing the information specified in Schedule 14A (§ 240.14a-101) or with a preliminary or definitive written proxy statement included in a registration statement filed under the Securities Act of 1933 . . . . 17 C.F.R. § 240.14a-3 (2002).
In relevant part, Rule 14a-6 provides:
(a) Five preliminary copies of the proxy statement and form of proxy statement shall be filed with the Commission at least 10 calendar days prior to the date definitive copies of such material are first sent or given to security holders . . . . 17 C.F.R. § 240.14a-6 (2002).
In relevant part, Rule 14a-9 provides:
(a) No solicitation subject to this regulation shall be made by means of any proxy statement . . . containing any statement which . . . is false or misleading with respect to any material fact, or which omits to state any material fact necessary in order to make the statements therein not false or misleading or necessary to correct any statement in any earlier communication with respect to the solicitation of a proxy . . . . 17 C.F.R. § 240.14a-9 (2002).
Each of these Rules depends on the existence of a proxy solicitation or, at a minimum, the existence of a communication which could be construed as a proxy solicitation. Courts construe the term "solicitation" broadly. Communication with shareholders need not be direct; the SEC rules also contemplate indirect communications aimed toward ultimately requesting a proxy.
See 17 C.F.R. § 240.14a-1 (2002) (defining a "proxy" and a "solicitation" as:
14a-1(f) Proxy. The term `proxy' includes every proxy, consent or authorization within the meaning of section 14(a) of the [Securities Exchange Act]. The consent or authorization may take the form of failure to object or to dissent.
14a-1(l)(1) The terms `solicit' and `solicitation' include:
14a-1(l)(1)(i) Any request for a proxy whether or not accompanied by or included in a form of proxy; or
14a-1(l)(1)(ii) Any request to execute or not to execute, or to revoke, a proxy; or
14a-1(l)(iii) The furnishing of a form of proxy or other communication to security holders under circumstances reasonably calculated to result in the procurement, withholding or revocation of a proxy.)
Kaufman v. Cooper Co.'s, Inc., 719 F. Supp. 174, 184 (S.D.N.Y. 1989).
See 17 C.F.R. § 240.14a-6 (g)(2) (2002); Long Island Lighting Co. v. Barbash, 779 F.2d 793, 796 (2d Cir. 1985); SEC v. Okin, 132 F.2d 784, 786 (2d Cir. 1943).
The only non-conclusory allegations of proxy solicitations in Hollywood's Complaint are that Jack (1) "informed his friends and others of his plan to conduct a proxy fight for control of Hollywood," (2) "requested to inspect various records and documents of Hollywood in order to communicate with stockholders regarding their investment, including to communicate with stockholders concerning the election of directors and a possible proxy solicitation," and (3) "formed a group with a purpose of facilitating a proxy contest."
Compl. ¶ 31.
Id. ¶ 32.
Id. ¶ 36.
None of the statements quoted above signifies an underlying proxy solicitation. Informing friends of an intent to wage a proxy fight (shortly after being ousted from the Board) is not a communication with shareholders requesting a proxy. A party could have an intent to make a proxy solicitation at some point in the future without violating SEC rules because the SEC only requires notice ten days prior to a formal solicitation.
17 C.F.R. § 240.14a-6 (2002).
The Complaint also refers to the "Purpose of Transaction" section in Jack's Amended Schedule 13(D). However, a Schedule 13(D) filing is not a proxy solicitation. A simple reference to the prospect of a proxy fight is not sufficient to invoke the SEC regulations governing the form of proxy solicitations; this intent must be communicated to shareholders either directly or indirectly. For a proxy solicitation to exist, there must be a communication to the shareholders of the intent to solicit their proxies. Hollywood's Complaint fails to allege facts that, if taken as true, would constitute a proxy solicitation. Plaintiff's Section 14(a) and Rule 14a-3, 6, and 9 claims are therefore dismissed, but Plaintiff may amend in twenty days in an attempt to cure such deficiencies.
See Trans World Corp. v. Odyssey Partners, 561 F. Supp. 1315, 1320-21 (S.D.N.Y. 1983).
E. Is Valhi Corporation a proper defendant?
The Motion to Dismiss of the Simmons Defendants argues that Valhi should be dismissed because the Complaint does not plead "what Valhi has done that warrants it being a defendant." Hollywood disagrees, maintaining that the Complaint alleges that "the Simmons Defendants — including Valhi — purchased shares in Hollywood and improperly solicited proxies," and that this allegation is sufficient to keep Valhi present as a defendant in this matter. The Court finds Hollywood's argument unavailing. In a Complaint alleging fraud, the simple grouping of Valhi in with Simmons and Contran in allegations, without expressly setting forth what fraudulent activities Valhi itself allegedly engaged in, fails to meet the heightened pleading standards of Rule 9(b) and the PSLRA. It fails the Fifth Circuit's "who" requirement of an adequate pleading of fraud. Without more, the Court concurs with the Simmons Defendants that Valhi should be dismissed, but as discussed below, it grants Hollywood leave to cure this deficiency within twenty days of the date of this Order.
Simmons Mot. to Dismiss at 4.
Hollywood Br. in Resp. to Simmons Mot. to Dismiss at 5.
See Shushany, 992 F.2d at 522 (citing complaint's simple allegation that "Defendants, or Defendants agents" (out of several) engaged in fraudulent behavior as one factor weighing in favor of granting a motion to dismiss).
E. Counts VII and VIII — The Supplemental State Law Claims
In their Motions to Dismiss, the Defendants suggest the Court should decline to exercise jurisdiction over the state law claims enumerated in Counts VII and VIII of Hollywood's Complaint. As the Court declines to dismiss all of Hollywood's federal question claims, and the Defendants do not make independent arguments for the dismissal of these claims at the pleading stage, the Court will continue to exercise supplemental jurisdiction over the claims stated in Counts VII and VIII, pursuant to 28 U.S.C. § 1367.
CONCLUSION
Harold Simmons, Contran, and Valhi's Motion to Dismiss is GRANTED as to Count III, IV, V and the Motion to Dismiss all claims against Defendant Valhi Corporation, and is DENIED as to all other counts. The Pratts's Motion to Dismiss is GRANTED as to Counts III, IV, and V and is DENIED as to all other counts.
Hollywood shall have twenty days to amend its Complaint in an effort to cure the defects above noted.
SO ORDERED.