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dismissing Section 25401 claim where plaintiffs "have not alleged that any CSFB Defendant sold Netcentives shares to Plaintiffs, and the privity element is therefore lacking"
Summary of this case from Hatteras Enters., Inc. v. Forsythe Cosmetic Grp., Ltd.Opinion
No. C03-2061 TEH.
March 21, 2005
ORDER GRANTING IN PART AND DENYING IN PART THE CSFB DEFENDANTS' MOTION TO DISMISS
This matter came before the Court on February 7, 2005, on a motion to dismiss filed by Defendants Credit Suisse First Boston ("CSFB"), George Boutros, and Storm Duncan ("the CSFB Defendants" or "Defendants"). After carefully considering the parties' written and oral arguments, relevant case law, and the allegations in Plaintiffs' third amended complaint, the Court now GRANTS IN PART and DENIES IN PART the motion to dismiss for the reasons discussed below.
BACKGROUND
The Court previously summarized the allegations in Plaintiffs' third amended complaint ("TAC") as follows:
Defendant CSFB underwrote the initial public offering ("IPO") of Netcentives, Inc. ("Netcentives") on October 13, 1999. Defendant Frank Quattrone supervised the group at CSFB that handled the IPO. Shortly after the IPO, Plaintiffs and Netcentives began discussing a possible merger between Netcentives and Plaintiffs' company, UVN Holdings, Inc. ("UVN"). Netcentives brought two CSFB employees, Defendants George F. Boutros and Storm Duncan, into the merger discussions in early November 1999. Duncan and Boutros gave Plaintiffs the IPO prospectus, represented that the prospectus was accurate, and further represented that Plaintiffs could rely on the prospectus. Plaintiffs claim that these representations were false and that, in reality, the prospectus failed to reveal Defendants' manipulative practices that artificially inflated the price of Netcentives stock. Plaintiffs also allege that Defendants misrepresented two of the plaintiffs' future roles at the merged company.
Plaintiffs further allege that Defendant Duncan, on behalf of all Defendants, advised Plaintiffs that they "need not retain their own financial adviser or separate investment banker because CSFB was the `underwriter and market maker' for Netcentives shares, and that CSFB owed duties to the marketplace, including duties to Plaintiffs, to disclose all material information." TAC ¶ 89. Plaintiffs' allegations continue, "Duncan insisted that all CSFB personnel were `straight shooters.' These representations, along with the business advice provided by Duncan and Boutros to Plaintiffs during the Merger, induced Plaintiffs to impose trust and confidence in CSFB and each Individual Defendant and to consider the Merger a joint venture in which they did not need separate advisers." In addition, Plaintiffs contend that Defendants CSFB, Boutros, and Duncan "provided close personal interaction and specific financial and business advice" to Plaintiffs during the merger discussions. Id. ¶ 123. "CSFB and the Individual Defendants all stated that Plaintiffs should trust them and join them because Netcentives would take care of them. The Individual Defendants repeated they had superior inside knowledge of Netcentives business affairs and completed business transactions that, if known to Plaintiffs, would overwhelmingly convince them to consummate the Merger." Id. ¶ 122.
On March 3, 2000, UVN merged into Netcentives. "Based on the representations of the Individual Defendants, Plaintiffs did not undertake to negotiate at any arms-length bargaining, but trusted and had confidence in the Individual Defendants' representations that the Merger constituted a joint venture in which Plaintiffs would participate." Id. ¶ 272. As part of the deal, which was worth approximately $27 million, Plaintiffs received shares in Netcentives that were subject to a one-year restriction on resale and declined in value after the merger. Ultimately, Netcentives was liquidated in bankruptcy, and Netcentives shareholders like Plaintiffs recovered nothing.
Plaintiffs now claim that Defendants — CSFB, three current or former CSFB employees, and two former Netcentives executives — are responsible for Plaintiffs' losses because Defendants breached fiduciary duties, engaged in fraud, were negligent, and violated several other provisions of California law. Plaintiffs did not sue Netcentives, which is now bankrupt and no longer exists as a business entity.
Feb. 1, 2005 Order Granting in Part Denying in Part the CSFB Defs.' Mot. to Strike at 1-3.
LEGAL STANDARD
Dismissal is appropriate under Federal Rule of Civil Procedure 12(b)(6) when a plaintiff's allegations fail "to state a claim upon which relief can be granted." Fed.R.Civ.P. 12(b)(6). A court should not grant dismissal "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). Moreover, dismissal should be with leave to amend unless it is clear that amendment could not possibly cure the complaint's deficiencies. Steckman v. Hart Brewing, Inc., 143 F.3d 1293, 1296 (9th Cir. 1998).
In deciding whether a case should be dismissed, a court may generally only consider the complaint and any attached exhibits that have been incorporated therein. Lee v. City of Los Angeles, 250 F.3d 668, 688 (9th Cir. 2001). However, the court may consider a document external to the complaint if the complaint "necessarily relies" on the document and no party contests the document's authenticity. Parrino v. FHP, Inc., 146 F.3d 699, 706 (9th Cir. 1998). The court may also consider facts for which judicial notice is appropriate. Barron v. Reich, 13 F.3d 1370, 1377 (9th Cir. 1994). Thus, while the court must generally accept as true the factual allegations of the complaint and construe those allegations in the light most favorable to the plaintiff, the court need not "accept as true allegations that contradict matters properly subject to judicial notice or by exhibit." Sprewell v. Golden State Warriors, 266 F.3d 979, 988 (9th Cir. 2001), amended by 275 F.3d 1187 (9th Cir. 2001). "Nor is the court required to accept as true allegations that are merely conclusory, unwarranted deductions of fact, or unreasonable inferences." Id.
DISCUSSION
I. Breach of Fiduciary Duty
Defendants first move to dismiss Plaintiffs' fiduciary duty claims on grounds that Defendants did not, as a matter of law, have a fiduciary relationship with Plaintiffs. "The mere fact that in the course of their business relationships the parties reposed trust and confidence in each other does not impose any corresponding fiduciary duty in the absence of an act creating or establishing a fiduciary relationship known to law." City Solutions, Inc. v. Clear Channel Communications, Inc., 201 F. Supp. 2d 1048, 1050 (N.D. Cal. 2002) (citing Worldvision Enterprises, Inc. v. Am. Broad. Cos., 142 Cal. App. 3d 589, 595 (1983)). To become a fiduciary, a person "must either knowingly undertake to act on behalf and for the benefit of another, or must enter into a relationship which imposes that undertaking as a matter of law." Comm. on Children's Television, Inc. v. Gen. Foods Corp., 35 Cal. 3d 197, 221 (1983). That is, a fiduciary "assumes duties beyond those of mere fairness and honesty in marketing its product — he must undertake to act on behalf of the beneficiary, giving priority to the best interest of the beneficiary." Id. at 222. A fiduciary relationship generally does not arise in a buyer-seller relationship, "even though sellers routinely make representations concerning their product, often on the basis of a claimed expert knowledge about its utility and value." Id. However, "[d]oubtless in an exceptional case a court might be able to find that a close and trusting relationship between buyer and seller, in which the buyer relied on the seller and the seller recognized that reliance, justified imposing fiduciary duties." Id. at 222 n. 22.
In this case, Defendants were retained as financial advisors by Netcentives, the company on the other side of the negotiating table from Plaintiffs. The allegations in the TAC also demonstrate that Plaintiffs negotiated aggressively during the merger, thus suggesting that the negotiations were arms-length. Furthermore, the merger agreement itself expressly states that the parties agreed that they were represented by counsel during the negotiation, preparation, and execution of the agreement. At first glance, it therefore appears that the fiduciary duty claims are unfounded, and Defendants correctly point out that Plaintiffs have not identified a single case where a financial advisor in an arms-length negotiation was found to owe fiduciary duties to the opposing party.
However, because the Court must accept all allegations as true and construe those allegations in a light most favorable to Plaintiffs at this stage of the proceedings, the Court cannot say with certainty that Defendants did not owe any fiduciary duties to Plaintiffs as a matter of law. Plaintiffs specifically allege that Defendant Duncan, on behalf of all Defendants, told Plaintiffs that they "need not retain their own financial adviser or separate investment banker because CSFB was the `underwriter and `market maker' for Netcentives shares, and that CSFB owed duties to the marketplace, including duties to Plaintiffs, to disclose all material information." TAC ¶ 89. Plaintiffs further allege that "Duncan insisted that all CSFB personnel were `straight shooters.' These representations, along with the business advice provided by Duncan and Boutros to Plaintiffs during the Merger, induced Plaintiffs to impose trust and confidence in CSFB and each Individual Defendant and to consider the Merger a joint venture in which they did not need separate advisers." Id. Thus, Defendants allegedly went beyond saying they had confidential or superior information about Netcentives. When viewed in a light most favorable to Plaintiffs, the allegations suggest that Defendants induced Plaintiffs' trust and convinced Plaintiffs that Defendants would be acting in Plaintiffs' best interest. This is sufficient to state claims for breach of fiduciary duty, and the Court therefore DENIES Defendants' motion as to these claims.
II. Aiding and Abetting Breach of Fiduciary Duty
Defendants move to dismiss the aiding and abetting breach of fiduciary claims by arguing that they cannot be liable for aiding and abetting unless they owed a fiduciary duty. As discussed above, the Court cannot say at this stage of the proceedings that Defendants did not owe Plaintiffs a fiduciary duty. Thus, the Court also DENIES Defendants' motion to dismiss the aiding and abetting breach of fiduciary claims.
While the Court's denial of the motion as to these claims is based on the denial of the motion to dismiss the breach of fiduciary duty claims, the Court also notes that at least one court has found that a non-fiduciary can be liable for aiding and abetting under California law. Neilson v. Union Bank of Cal., 290 F. Supp. 2d 1101, 1137 (C.D. Cal. 2003); but see County of Orange v. McGraw-Hill Cos., 203 B.R. 983, 997-99 (Bankr. C.D. Cal. 1996), aff'd in part and rev'd in part on other grounds, 245 B.R. 138 (C.D. Cal. 1997) (reaching the opposite conclusion).
III. Negligence
Defendants next move to dismiss Plaintiffs' negligence claims. Defendants correctly assert that it would make no sense to impose a duty of negligence on professional advisors in the general case: "To impose the duty asserted by plaintiffs here would place every financial advisor in a hopeless conflict of interest — the advisor could never fulfill its duty to negotiate the best deal possible for its own client without at least the fear of violating a countervailing duty to ensure that the terms of the deal were also advantageous to its client's counterparty/adversary." Mot. at 10. See also Quelimane Co. v. Stewart Title Guar. Co., 19 Cal. 4th 26, 59 ("In the business arena it would be unprecedented to impose a duty on one actor to operate a business that would ensure the financial success of transactions between third parties. With rare exceptions, a business entity has no duty to prevent financial loss to others with whom it deals directly.").
However, this case — or at least the factual allegations of the case construed in a light most favorable to Plaintiffs — was not a run-of-the-mill business transaction. Typically, a financial advisor to one party would not owe a fiduciary duty to the other party. Here, however, the Court has found that Plaintiffs may be able to prevail on their breach of fiduciary duty claims, and it therefore cannot dismiss Plaintiffs' negligence claims. As Defendants conceded at oral argument, a fiduciary relationship is a "special relationship" that can give rise to a duty under negligence law.
In a footnote in their opposition brief, Defendants alternatively argue that Plaintiffs' negligence claims must be dismissed because they are duplicative of the negligent misrepresentation claims. Defendants cite Bily v. Arthur Young Co., 3 Cal. 4th 370 (1992), to support their argument, but they read that case too broadly. In Bily, the California Supreme Court held that "intended [third-party] beneficiaries of an audit report are entitled to recovery on a theory of negligent misrepresentation," but that they may not recover under a general negligence theory. Id. at 413. The court continued, "[n]onclients of the auditor are connected with the audit only through receipt of and express reliance on the audit report," and that, therefore, without "justifiable reliance on the representations in the report . . . there is no recovery regardless of the manner in which the audit itself was conducted." Id. In this case, by contrast, Plaintiffs allege a special relationship with Defendants, thereby moving them beyond the scope of the decision in Bily. Accordingly, the Court DENIES Defendants' motion to dismiss Plaintiffs' negligence claims.
IV. Fraud and Negligent Misrepresentation
Defendants move to dismiss Plaintiffs' fraud and negligent misrepresentation claims on a number of grounds. First, they argue that these claims must be dismissed because Plaintiffs failed to plead reasonable reliance. See Gonsalves v. Hodgson, 38 Cal. 2d 91, 100-01 (1951) (absence of justifiable reliance will preclude recovery on a fraud claim). The issue "is whether the person who claims reliance was justified in believing the representation in the light of his own knowledge and experience." Kolodge v. Boyd, 88 Cal. App. 4th 349, 373 (2001) (citations omitted). This is ordinarily a question of fact. Id. However, dismissal would be appropriate if Plaintiffs could prove no set of facts that would entitle them to relief. Conley, 355 U.S. at 45-46; see also Guido v. Koopman, 1 Cal. App. 4th 837, 843-44 (1991) (summary judgment case holding that, as a matter of law, a practicing attorney could not reasonably "rely on the advice of an equestrian instructor as to the validity of a written release of liability that she executed without reading").
In their papers, Defendants categorized as "fraud-based claims" Plaintiffs' claims for breach of fiduciary duty, aiding and abetting breach of fiduciary duty, fraud, negligent misrepresentation, and Corporations Code claims. At oral argument, Defendants clarified that reasonable reliance applies only to Plaintiffs' negligent misrepresentation and fraud claims, including Plaintiffs' claim under California Civil Code § 1709, which is a statutory claim for "fraudulent deceit."
In this case, Plaintiffs allege that they are highly experienced businessmen. For example, the complaint alleges that the "management team," including Plaintiffs Scognamillo and Galasso, "was experienced and successful in developing and expanding the business of UVN." TAC ¶ 59. Prior to joining UVN, Plaintiff Galasso was the CEO of the consumer credit card division of Bank of America. Id. Plaintiff Scognamillo has more than twenty years of marketing experience and, together with Plaintiff Shein, developed and organized UVN. Id. ¶¶ 57-58. Plaintiff Cresto was laterally hired as a partner by Seyfarth Shaw in the "financial services, mergers and acquisitions" department. Defs.' Request for Judicial Notice Ex. 1. Elsewhere, the complaint alleges that Plaintiffs questioned the terms of the agreement, e.g., TAC ¶ 92, and actually threatened to walk away from the deal shortly before the closing after the equity portion of the merger agreement was reduced from $27 million to $22 million, id. ¶¶ 116-17. In addition, the merger agreement explicitly states that the parties "agree that they have been represented by counsel during the negotiation, preparation, and execution of the Agreement." Hibbard Decl. Ex. E § 7.8.
Under these circumstances, any reliance by Plaintiffs would, at first glance, appear to be unreasonable. However, the Court cannot say that it would be unreasonable as a matter of law for a party to rely on statements made by someone owing fiduciary duties to that party. Thus, if Plaintiffs are able to demonstrate that Defendants owed them fiduciary duties — a question that the Court cannot resolve on a motion to dismiss — then Plaintiffs may also be able to demonstrate that their reliance on Defendants' statements was justifiable. As a result, it would be improper for the Court to dismiss Plaintiffs' fraud and negligent misrepresentation claims on grounds that Plaintiffs could not establish that any reliance was reasonable.
Defendants also move to dismiss the fraud claims on grounds that Plaintiffs have not adequately pleaded proximate causation. Defendants claim that Plaintiffs fail to allege any relationship between Defendants' alleged misrepresentations and Plaintiffs' alleged damages. Defendants further attempt to attribute Plaintiffs' losses to the economic downturn that caused technology stock prices to drop in 2000. However, Plaintiffs contend that Defendants' allegedly fraudulent statements caused Netcentives share prices to be artificially inflated, and that these artificially inflated prices led Plaintiffs to believe that the merger was justified. Plaintiffs further allege that they would not have entered into the merger were it not for the alleged fraud. Thus, had the alleged fraud not occurred, Plaintiffs would have avoided the losses that form the basis for this suit because they would not have owned Netcentives shares. Accordingly, the Court cannot say, at this stage of the proceedings, that Plaintiffs have failed to allege a cause-and-effect relationship between the alleged misrepresentations and Plaintiffs' alleged damages, and the case law relied on by Defendants requires no more.
V. Pleading with Particularity
Defendants also move to dismiss Plaintiffs' fraud-based claims for failure to comply with Federal Rule of Civil Procedure 9(b). Several of Plaintiffs claims are based on fraud, and heightened pleading under Rule 9(b) therefore applies to these claims. Neilson v. Union Bank of Cal., 290 F. Supp. 2d 1101, 1141 (C.D. Cal. 2003) (Rule 9(b) applies to fraud and negligent misrepresentation claims); MTC Elec. Tech. Co. v. Leung, 876 F. Supp. 1143, 1147 (C.D. Cal. 1995) (same for securities fraud claims under the California Corporations Code); Fed. Sav. Loan Ins. Corp. v. Musacchio, 695 F. Supp. 1053, 1058 (N.D. Cal. 1988) (same for breach of fiduciary duty claims where conduct underlying alleged breach of fiduciary duty is also alleged to constitute fraud). Under Rule 9(b), fraud allegations must be "specific enough to give defendants notice of the particular misconduct which is alleged to constitute the fraud charged so that they can defend against the charge and not just deny that they have done anything wrong." Semegen v. Weidner, 780 F.2d 727, 731 (9th Cir. 1985). "[M]ere conclusory allegations of fraud are insufficient." Moore v. Kayport Package Express, Inc., 885 F.2d 531, 540 (9th Cir. 1989).
Instead, Rule 9(b) "requires that a plaintiff plead with sufficient particularity attribution of the alleged misrepresentations or omissions to each defendant; the plaintiff is obligated to `distinguish among those they sue and enlighten each defendant as to his or her part in the alleged fraud.'" In re Silicon Graphics, Inc. Sec. Litig., 970 F. Supp. 746, 752 (N.D. Cal. 1997). Defendants argue that Plaintiffs have failed to comply with this requirement of Rule 9(b) and that the fraud claims must be dismissed because of Plaintiffs' group-pleading defects. As examples, Defendants cite to a few paragraphs in the TAC that do refer to the actions of "Defendants" or "CSFB and the Individual Defendants." However, these paragraphs appear to be summary paragraphs, and Defendants ignore the countless other paragraphs in the complaint that specifically identify who allegedly met with whom when, and who allegedly made certain fraudulent statements. The Court therefore does not find good cause to dismiss the fraud claims under Rule 9(b) because of supposed group-pleading defects.
The Court next turns to the three categories of fraudulent statements alleged by Plaintiffs: statements regarding the Netcentives IPO and prospectus; statements regarding the business and prospects of Netcentives and future value of Plaintiffs' shares; and statements regarding joint management. The Court addresses each category of statements in turn below.
A. Statements re: IPO and Prospectus
Plaintiffs' first category of alleged fraud concerns the Netcentives IPO and prospectus. Plaintiffs allege that certain statements in the prospectus were false because they failed to disclose alleged CSFB practices ("spinning," "tie-ins," and "laddering" arrangements) that allegedly increased CSFB commissions and artificially increased the market price of Netcentives shares. Plaintiffs essentially admit that they do not have any specific information as to the use of any of these practices during the Netcentives IPO. Instead, they argue that their allegations are reasonably based on the fact that an SEC investigation "indicated that CSFB engaged in market manipulations in the normal course of its business underwriting IPOs at the same time as the [Netcentives] IPO and merger." Opp'n at 13.
Defendants argue that Plaintiffs' allegations are wholly deficient because they do not allege any factual detail about any allegedly fraudulent activity regarding the Netcentives prospectus in particular. For support, Defendants rely heavily on a Central District of California case, Nachom v. Morgan Stanley Co., that was decided in 2002. Nachom, Case No. CV 02-00299 AHM (RCx) (C.D. Cal. Oct. 9, 2002) (Ex. D to Hibbard Decl.). However, the Nachom court specifically stated that its order was "not intended for publication." Id. at 7. Defendants argue that the case may still be cited because it was not marked "not for citation," but this argument is specious. Even were this Court to consider Nachom, however, that case is factually distinguishable. Unlike Plaintiffs here, the plaintiff in Nachom did not allege that he fell under the exception to Rule 9(b) that allows pleading on information and belief where the information is in the defendant's exclusive control, nor did the plaintiff allege any facts on which such a belief might have been based. Id. at 4 n. 2. Thus, Defendants' reliance on Nachom is misplaced.
While fraud claims may generally not be asserted "on information and belief," an exception exists where relevant information lies in the exclusive possession of the defendants. Neubronner v. Milken, 6 F.3d 666, 672 (9th Cir. 1993). In such cases, the plaintiff must still state the factual basis for the belief, id., but Defendants have made no argument that Plaintiffs' allegations fail to state the factual basis for their belief that Defendants engaged in fraudulent behavior regarding Netcentives. Instead, Defendants relegate to a footnote their argument that allegations regarding other companies cannot support allegations regarding Netcentives. They cite only a single case in support: In re Merrill Lynch Co., Inc. Research Reports Sec. Litig., 273 F. Supp. 2d 351, 368 n. 30 (S.D.N.Y. 2003). While Defendants accurately represent that the Merrill Lynch case held that plaintiffs failed to show any connection between the defendants' alleged general market influence and any specific impact on the specific securities at issue, the case here is again distinct. In the Merrill Lynch case, the plaintiffs attempted to rely on allegations regarding an analyst's general influence on the market without showing that that analyst had any influence over the specific stock in question — and during a class period that began to run after the analyst stopped covering the company in question. Here, by contrast, Plaintiffs have alleged several instances where CSFB allegedly engaged in fraudulent behavior during IPOs at the same time that CSFB handled the Netcentives IPO. These allegations are sufficient to support Plaintiffs' belief for alleging fraud with respect to the Netcentives IPO.
That said, Defendants also argue that Plaintiffs "fail to plead any facts whatsoever to suggest that Boutros and Duncan had any responsibility for or involvement with the Prospectus or any of the alleged misrepresentations therein, or that they ever knew of such alleged practices." Mot. at 15. Plaintiffs did not address this argument in their opposition papers. In response to the Court's questioning at oral argument, Plaintiffs cited to several paragraphs in the complaint setting forth how the prospectus was allegedly fraudulent, but nowhere do these paragraphs specifically mention Boutros or Duncan. Plaintiffs therefore failed to rebut Defendants' argument that the TAC's allegations are insufficient to state a claim against Boutros and Duncan under Rule 9(b) with respect to statements about the IPO and prospectus. Nonetheless, one of the paragraphs cited by Defendants defeats their own argument. In paragraph 224 of the TAC, Plaintiffs specifically allege that Boutros and Duncan "knew of the practices described in this Complaint." The "practices" are elsewhere defined with sufficient particularity to pass muster under Rule 9(b), and the Court therefore rejects Defendants' argument.
At oral argument, Plaintiffs asserted that their response to this argument appeared in their opposition brief at page 13, starting at line 11. However, the cited paragraph discusses only whether the prospectus was fraudulent and never once mentions Boutros or Duncan.
However, the complaint is impermissibly vague when it alleges that Boutros and Duncan "in some instances, personally engaged in the practices described in this Complaint." TAC ¶ 224. "In some instances" does not qualify as particularized pleading under any reading of Rule 9(b). Similarly, Plaintiffs' allegation in the same paragraph that Boutros and Duncan "encouraged many of the practices described in this Complaint" is unacceptably vague as to "many." It is unclear to the Court whether any of Plaintiffs' claims relies on these allegations, but to the extent that Plaintiffs' claims do rely on these allegations, the claims are dismissed for failure to comply with Rule 9(b). Because it is not clear that the deficiencies could not be cured by amendment, however, dismissal is without prejudice should Plaintiffs desire to state a claim based on Defendants' "personal engagement" in or "encouragement" of the alleged practices.
B. Statements re: Business Prospects of Netcentives
Plaintiffs' second category of alleged fraud concerns the business prospects of Netcentives. Plaintiffs allege: (1) that Boutros and Duncan made misrepresentations regarding the existence and value of commercial agreements between Netcentives and third-party companies, and (2) that Boutros and Duncan also made misrepresentations regarding a possible acquisition of Netcentives by a third party that was allegedly in the pipeline at the time of the merger.
Defendants argue that these allegations must be dismissed because fraud actions must be based on misrepresentations of fact, and statements regarding future events and statements expressing "value" are "merely deemed opinions," not facts. Neu-Visions Sports, Inc. v. Soren/McAdam/Bartells, 86 Cal. App. 4th 303, 309-10 (2000). This is a correct statement of law, and Defendants' alleged statements regarding the value of the company — e.g., that Netcentives's stock was under-valued, or that Netcentives was an "800 Pound Gorilla" and did not have to undertake a secondary public offering because certain transactions had occurred — are therefore not actionable statements of fact. Thus, Plaintiffs' claims based on these statements shall be dismissed without leave to amend. Similarly, the allegations regarding how an allegedly pending merger with a third party would affect Netcentives's business prospects shall also be dismissed without leave to amend as non-actionable statements of opinion.
On the other hand, Defendants' alleged statements about whether the transactions occurred, or that a merger was pending, are actionable statements of fact. Defendants assert that these allegations must be dismissed because Plaintiffs failed to allege with particularity why the statements were false when made or how Boutros or Duncan knew that such statements were false. See, e.g., Yourish v. Cal. Amplifier, 191 F.3d 983, 996 (9th Cir. 1999) (holding that "a complaint's unsupported general claim of the existence of non-public information that is inconsistent with the substance of identified representations is insufficient under Rule 9(b)"). However, Plaintiffs allege that "CSFB and the Individual Defendants knew that the completed transactions which they had disclosed to Plaintiffs had not, in fact, taken place, and that there was no merger with CMGI, Inc. pending." TAC ¶ 130. This satisfies Rule 9(b)'s requirement that plaintiffs plead the circumstances constituting fraud — i.e., "why the statement or omission complained of was false or misleading." In re GlenFed, Inc. Sec. Litig., 42 F.3d 1541, 1548 (9th Cir. 1994). Plaintiffs allege that the statements were false because the transactions did not actually occur or were not pending. Defendants are clearly on notice as to the alleged misrepresentation, and they can rebut Plaintiffs' allegations with specificity. Thus, these claims shall not be dismissed for failing to plead with particularity in accordance with Rule 9(b).
C. Statements re: Joint Management
Plaintiffs' third category of allegedly fraudulent representations concerns statements that Defendants allegedly made to Plaintiffs concerning Plaintiffs' continued involvement with the management of the company. Defendants argue that these statements are not actionable, but the only case they cite for support is distinguishable. The Ninth Circuit has held that statements to an employee that an employer was "look[ing] forward to their `partnership'" and "valued long-term `partnership-type' relationships" are not actionable. Omega Envtl., Inc. v. Gilbarco, Inc., 127 F.3d 1157, 1165-67 (9th Cir. 1997). However, in this case, Defendants allegedly told Plaintiffs that "Scognamillo and Galasso were the key senior managers who would manage the UVN business after the Merger; i.e., they would be responsible for the operating success of UVN and would make the management decisions for all UVN operations." TAC ¶ 82. Thus, the allegations here are more specific statements of fact, as opposed to the mere expression of general future expectations. Moreover, although neither party raised this observation, Omega Environmental was based on Washington, not California, law.
In addition to not raising this issue, Plaintiffs failed to address the Omega Environmental case at all. Nor did Plaintiffs otherwise respond to Defendants' argument that the alleged statements were not actionable under fraud or misrepresentation. Nonetheless, the Court has reviewed the authority cited by Defendants and found it to be distinguishable for the reasons stated.
Defendants also argue that the claims based on alleged statements of joint management must be dismissed on the independent ground that Plaintiffs make no allegations about how the statements were false or misleading when made. As the Ninth Circuit explained, "often there is no reason to assume that what is true at the moment plaintiff discovers it was also true at the moment of the alleged misrepresentation, and that therefore simply because the alleged misrepresentation conflicts with the current state of facts, the charged statement must have been false." In re GlenFed, 42 F.3d at 1548. The only statement regarding knowledge of the falsity of the statements at the time made is contained in paragraph 148 of the TAC: "The reality was that CSFB, Boutros, Duncan, Shell and Longinotti had never intended that Netcentives would stand behind their pre-closing inducement representations that Plaintiffs would manage and direct UVN's business." While this allegation is conclusory, Plaintiffs do allege that Defendants told Plaintiffs they would have management roles after the merger, and they further allege that those statements were false when made because Defendants never had any intention of giving Plaintiffs such a role. This is sufficient to satisfy Rule 9(b), and the Court therefore DENIES Defendants' motion as to these claims.
VI. Corporations Code Claims
Defendants next move to dismiss Plaintiffs' Corporations Code claims. The parties agree that section 25506 governs all of Plaintiffs' claims under the California Corporations Code. Section 25506 provides that claims must be brought "four years after the act or transaction constituting the violation or the expiration of one year after discovery by the plaintiff of the facts constituting the violation, whichever shall first expire." Cal. Corp. Code § 25506. The Ninth Circuit has held that inquiry notice suffices to start the running of the statute of limitations under this code section. Kramas v. Sec. Gas Oil, Inc., 672 F.2d 766, 770 (9th Cir. 1982). However, this case is distinguishable from Kramas because it involves a fiduciary relationship, or at least the potential for such a relationship under the factual allegations construed in a light most favorable to Plaintiffs. Under California law, where there is a fiduciary relationship, unless the plaintiff has some independent duty to investigate, "the limitations period does not begin to run until plaintiff actually discovers the facts constituting the cause of action, even though the means for obtaining the information are available." Eisenbaum v. W. Energy Resources, 218 Cal. App. 3d 314, 324-25 (1990) (citation omitted). Defendants here have not pointed to any independent duty to investigate, and the Court therefore applies an actual notice standard because, at this stage of the proceedings, the Court cannot say that there was no fiduciary relationship between Plaintiffs and Defendants.
The Court's decision to apply an actual notice standard to resolve this motion is not dispositive of the standard that will ultimately apply at trial. If Defendants ultimately prevail on the fiduciary duty issue, then the Court will need to re-visit the question of whether actual or inquiry notice is required to trigger the statute of limitations on Plaintiffs' Corporations Code claims. At this stage, however, dismissal would only be proper if Plaintiffs could prove no set of facts that would entitle them to relief. Because it remains possible that an actual notice standard may apply, the Court applies that standard in analyzing Plaintiffs' claims in the context of this motion.
As to actual notice, Defendants argue that allegations in Plaintiffs' first amended complaint ("FAC") demonstrate that Plaintiffs had actual knowledge in 2000. Paragraph 125 of the FAC alleges that "[b]y mid-April 2000 [nearly two years before Plaintiffs filed their complaint], it was becoming increasingly clear to Plaintiffs that CSFB and the Individual Defendants had lied during the pre-merger negotiations when they caused Plaintiffs to rely on their promises to create meaningful management roles for Scognamillo and Galasso." Defendants also cite two paragraphs from the TAC in which Plaintiffs allege that they attempted to mitigate damages in April 2000. TAC ¶¶ 141-42. These allegations, however, fail to establish actual notice. First, the allegation from the FAC relates only to statements of Plaintiffs' post-merger management roles, and not to any of the other allegedly fraudulent statements. Thus, even if the allegation supported a finding of actual notice, it would only be actual notice as to certain of Plaintiffs' claims. Second, and more importantly, to say that something "was becoming increasingly clear" to Plaintiffs hardly establishes that Plaintiffs actually knew they were being lied to; instead, it only establishes that Plaintiffs were becoming suspicious. Similarly, to say that Plaintiffs were aware that they were suffering financial loss and wanted to mitigate that loss says nothing about Plaintiffs' awareness of the cause of the loss. Thus, the Court does not find dismissal of the Corporations Code claims based on the statute of limitations to be appropriate.
The parties dispute whether the Court can consider an allegation from the FAC, a superseded complaint, on a motion to dismiss, but the Court need not decide that issue. As discussed below, actual notice would not be established even if the truth of the allegations in the FAC were presumed.
Defendants also move to dismiss all of the Corporations Code claims on grounds that Plaintiffs failed to plead the statutory elements. The Court addresses each claim in turn.
A. Count XI (sections 25400/25500)
Defendants argue that sections 25400 and 25500 only apply to buyers or sellers of securities, and that Plaintiffs have failed to allege that CSFB was a buyer or seller of Netcentives stock. Kamen v. Lindly, 94 Cal. App. 4th 197, 206 (2001) (holding that section 25500, which allows civil liability for a violation of section 25400, "applies only to a defendant who is either a person selling or offering to sell or buying or offering to buy a security"). However, Plaintiffs do allege that the CSFB Defendants sold Netcentives shares, and section 25500 permits recovery by "any other person who purchases or sells any security at a price which was affected by [an act in violation of section 25400]." Cal. Corp. Code § 25500. Consequently, the Court DENIES Defendants' motion as to this claim.
B. Count XII (sections 25401/25501)
However, unlike sections 25400 and 25500, sections 25401 and 25501 require privity between the defendant and plaintiff. Defendants argue that Plaintiffs have not alleged that any CSFB Defendant sold Netcentives shares to Plaintiffs, and the privity element is therefore lacking. Plaintiffs failed to respond to this argument in their opposition papers and conceded at oral argument that there was no direct privity between Plaintiffs and Defendants in this case. The Court therefore GRANTS Defendants' motion as to this claim, and dismissal shall be with prejudice.
C. Counts XIII-XV (sections 25403, 25504.1, 25504.2)
Next, sections 25403, 25504.1, and 25504.2 are for secondary liability — i.e., for aiding and abetting a primary violation of other code sections. Defendants argue that no basis for primary liability has been pleaded, and that therefore these claims must be dismissed. However, Plaintiffs argue that Netcentives, which is not named as a defendant in this case, was a primary violator of section 25401. While this may or may not be proven at trial, Defendants have not met their burden of convincing the Court that the claims should be thrown out on a motion to dismiss. Defendants have not, for example, cited any authority for the proposition that Plaintiffs must pursue the primary violator in order to assert secondary liability claims against the aiding and abetting party. As a result, the Court DENIES Defendants' motion as to these claims.
VII. Acting in Concert and Conspiracy
Finally, Defendants move to dismiss Plaintiffs' acting in concert and civil conspiracy claims on grounds that there was no underlying wrongful action or tortious conduct on which to base such claims. However, as discussed above, the Court cannot say at this stage of the proceedings that Defendants did not commit any tortious acts. Thus, the basis for Defendants' motion to dismiss Plaintiffs' acting in concert and civil conspiracy claims has fallen away, and the Court accordingly DENIES the motion to dismiss these claims.
CONCLUSION
In sum, the Court GRANTS IN PART and DENIES IN PART Defendants' motion to dismiss as discussed above. The motion is GRANTED only as follows:
1. Plaintiffs' fraud-based claims, including Plaintiffs' fraud, negligent misrepresentation, breach of fiduciary duty, and Corporations Code claims, that rely on Plaintiffs' allegations that Boutros and Duncan "encouraged many of the practices described in this Complaint" and "in some instances, personally engaged in the practices described in this Complaint" are dismissed without prejudice. TAC ¶ 224. These allegations fail to satisfy the requirements of Federal Rule of Civil Procedure 9(b).
2. Plaintiffs' fraud-based claims based on alleged misstatements regarding the business prospects and future value of Netcentives, including alleged statements regarding how the value of Netcentives would increase as soon as certain confidential information was made public and how an allegedly pending merger with a third party would affect the company's business prospects, are dismissed with prejudice. These alleged misstatements are non-actionable statements of opinion. The alleged misstatements about whether certain transactions occurred or were pending, however, are actionable statements of fact, and claims based on these alleged statements shall not be dismissed.
3. Plaintiffs' Count XII, for violation of California Corporations Code sections 25401 and 25501, is dismissed with prejudice against Defendants CSFB, Boutros, and Duncan. Plaintiffs concede that these statutes require privity, which Plaintiffs also concede is not present in this case.
In all other respects, the motion is DENIED. While Defendants may or may not ultimately prevail on Plaintiffs' remaining claims, the Court does not find that these claims are subject to dismissal. Viewed in a light most favorable to Plaintiffs, the remaining allegations are sufficient to withstand Defendants' motion.
The Court now turns to scheduling the motions to dismiss that the remaining Defendants have reported they intend to file. Upon reconsideration of the Court's September 21, 2004 Scheduling Order, the Court finds it would be efficient to consider the three remaining motions simultaneously. Accordingly, this case shall proceed as follows:
1. If any of the three remaining sets of Defendants still wish to file a motion to dismiss after considering the Court's rulings on the CSFB Defendants' motions to dismiss and strike, they shall file and serve their motions to dismiss on or before Monday, April 11, 2005. The Court fully expects the parties to take into account the Court's rulings on the CSFB Defendants' motions when they re-draft their motions to dismiss. Repetition of arguments that have already been rejected is unacceptable and may be subject to sanctions.
2. Plaintiffs' opposition papers to the above motions shall be filed and served no later than Monday, May 2, 2005.
3. Defendants' replies shall be filed and served no later than Monday, May 16, 2005.
4. The hearings on these motions shall occur on Monday, June 13, 2005, at 10:00 AM.
5. Following resolution of all motions to dismiss, the Court will set a deadline by which Plaintiffs' shall file their fourth amended complaint, should any amendments be necessary.