Opinion
Case No. 2:03-CV-00906 PGC.
June 7, 2004
ORDER DENYING MOTION TO AMEND AND GRANTING MOTION TO DISMISS
Plaintiffs originally filed this securities class action in state court, but when they amended their complaint to include a federal securities claim, the case was removed to federal court. Shortly thereafter, a number of defendants moved to dismiss the complaint for failure to state a claim. While that motion was pending, the plaintiffs filed a motion to amend the complaint. The resolution of these motions boils down to two issues: (1) whether the original complaint states a claim and (2) whether the plaintiffs' proposed amended complaint states a claim. Since the court concludes that neither complaint states a claim, the plaintiffs will not be allowed to amend, and the complaint is dismissed.
I. The original complaint fails to state a claim for which relief can be granted.
Without even reaching the heightened pleading requirement of the Private Securities Litigation Reform Act (PSLRA), the court notes that the removed complaint failed even to meet the notice pleading standards contained in Rule 12(b)(6). In paragraph three the plaintiffs complain they "were negatively impacted by the acts or omissions of Defendants as alleged below. Then on the next page of the complaint, in paragraph thirteen, the plaintiffs complain the defendants "engaged in manipulative acts, including but not limited to the actions alleged above." The court finds it perplexing that the nine intervening paragraphs do nothing more than introduce the defendants and do not contain a single statement of fact that goes to establish any element of any claim alleged in this complaint. Neither do the following paragraphs raise any actionable allegations. To the contrary, the complaint continues with a series of legal conclusions dressed up as factual allegations, conclusory statements that offer no notice to the defendants of what conduct is being challenged in this action. Accordingly, the motion to dismiss must be granted unless this defect can be cured by the plaintiffs' motion to amend.II. The proposed amended complaint fails to state a claim for which relief can be granted.
The primary challenge to the plaintiffs' motion to amend is that it does not state a claim for which relief can be granted. Although motions to amend should generally be granted, leave to amend need not be granted where the amendment would be futile. A proposed amendment is futile if it would still be subject to a motion to dismiss. Here, the proposed amendment invokes five possible causes of action:
See Bauchman for Bauchman v. West High Sch., 132 F.3d 542, 559 (10th Cir. 1997).
Watson ex rel. Watson v. Beckel, 242 F.3d 1237, 1239-40 (10th Cir. 2001); Bauchman, 132 F.3d at 561.
1. Securities fraud under Section 10(b) of the 1934 Securities and Exchange Act and Rule 10b-5;
2. Unspecified violation of § 9 of the 1934 Securities and Exchange Act;
4. Aiding and Abetting in Securities Fraud; and
5. Conspiracy to commit securities fraud.
Each will be considered in light of the allegations in the complaint to see whether they state a claim.
A. Section 10(b) and Rule 10b-5 Claims — Omission of the Fact that Defendants Would "Knock the Bottom out of the Market"
The predominant fraud theory is that all defendants were part of an alleged conspiracy to "knock the bottom out of the market for the shares" by doing various things that would devalue International Automated Systems, Inc ("IAS") stock. The plaintiffs claim that this fact was a material omission since people who bought the defendants' shares would not have done so had they known defendants would do things to devalue the very stock they were selling. While the court agrees that such an omission could be material, the plaintiffs have not alleged an actionable omission, nor have they adequately pled scienter.
It is well established that to state a claim under these sections, "a plaintiff must allege: `(1) a misleading statement or omission of a material fact; (2) made in connection with the purchase or sale of securities; (3) with intent to defraud or recklessness; (4) reliance; and (5) damages.'" Because the plaintiffs allege a number of misstatements or omissions that they claim support a securities fraud claim, the analysis will proceed by looking at each one in turn.
City of Philadelphia v. Fleming Companies, Inc., 264 F.3d 1245, 1257-58 (10th Cir. 2001) (internal citations omitted).
Regarding what is required to show an actionable omission, the Tenth Circuit has stated, "Liability for failure to disclose only arises when the duty to disclose exists and the withheld information is material." A duty to disclose can arise where an omission makes an affirmative statement misleading or where "the parties are in `a fiduciary or other similar relation of trust and confidence.'"
Connett v. Justus Enterprises of Kansas, Inc., 68 F.3d 382, 385 (10th Cir. 1995).
Jensen v. Kimble, 1 F.3d 1073, 1078 (10th Cir. 1993).
Here the plaintiffs have alleged no fact that would give rise to a duty to disclose their alleged plans. The complaint contains no allegations that the defendants told any half-truths that required them to disclose the omitted information. Likewise, the complaint lacks any allegation that any of the defendants had a fiduciary duty that would have required them to disclose that information.
As to scienter, the Private Securities Litigation Reform Act (PSLRA) imposes a heightened pleading requirement that the plaintiffs have not met. To go forward on this claim, the plaintiffs must "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind," namely "intent to deceive, manipulate, or defraud." The Tenth Circuit has also stated that "[a]llegations of motive and opportunity" may support a finding that the defendants acted with scienter.
Ernst Ernst v. Hochfelder, 425 U.S. 185, 193 n. 12 (1976).
City of Philadelphia, 264 F.3d at 1261-62.
In this case, the main factual predicate for establishing scienter is that the defendants sold their shares knowing they were "going to immediately render [the shares] worthless." The court agrees that evidence of such a conspiracy could possibly be evidence of an intent to defraud. However, inasmuch as these allegations are made to establish scienter, they must be stated with particularity. These allegations lack the necessary specificity. The plaintiffs have not alleged with particularity the acts that comprise their conspiracy claims, so these claims cannot be the basis of scienter. Furthermore, while the plaintiffs' conclusory allegations may be construed as alleging motive and opportunity, these facts likewise have not been pled with particularity and cannot be the basis for establishing scienter.
Reply Mem. (Re: Smith, Bodell, Johnson) in Supp. of Mot. to Amend (#32-1) 5.
Accordingly, the defendants' failure to declare their alleged intentions to devalue IAS stock cannot be the basis for a § 10(b) and Rule 10b-5 action.
B. Section 9
In addition to the fraud claims described above, the plaintiffs apparently are seeking recovery under Section 9 of the 1934 Act. The complaint does not specify what provision of Section 9 was violated, although one of the plaintiffs' reply briefs addresses the following elements necessary to establish a claim under subsection (e):
(1) a series of transactions in a security creating actual or apparent trading in that security or raising or depressing the price of that security, (2) carried out with scienter (3) for the purpose of inducing the security's sale or purchase by others, (4) was relied on by the plaintiff, (5) and affected the plaintiff's purchase or selling price.
15 U.S.C. § 78i.
See Am. Proposed Class Action Compl. 9, ¶ 46.
Reply Mem. (Re: Smith, Bodell, Johnson) in Supp. of Mot. to Amend (#32-1) 7-8.
Ray v. Lehman Bros. Kuhn Loeb, Inc., 624 F. Supp. 16, 19 (N.D. Ga. 1984).
The court agrees with the defendants that, except for conclusory statements that the defendants were part of a conspiracy to "artificially deflate the price of IAS common stock," the plaintiffs have not alleged facts to support this claim. This allegation is not enough to state a Section 9 claim, so this claim must also be dismissed.
Am. Proposed Class Action Comp. 10, ¶ 49.
C. Computer Fraud
The plaintiffs next allege that Johnson "committed computer fraud, in violation of 18 U.S.C. § 1030(a)(5)(b)(i) by reprogramming the till system [of U-Check grocery store] to falsify income in the grocery store." Although this section is a criminal statute, "any person who suffers damage or loss by reason of a violation of this section may maintain a civil action against the violator." This law prohibits accessing and damaging a "protected computer" without authorization. A computer is protected if it is either (a) used by a financial institution or (b) used in interstate commerce.
Am. Proposed Class Action Compl. 7, ¶ 37.
18 U.S.C. § 1030(g); see also EF Cultural Travel BV v. Explorica, Inc., 274 F.3d 577 (1st Cir. 2001).
The dispositive issue here is whether the till system of the U-Check grocery store was a protected computer under the terms of this statute. The plaintiffs argue in their reply brief that these computers were protected since they "communicate with banks and are engaged in commerce which affects the flow of goods and services across state lines." While such allegations could conceivably support a finding that the computer was used in interstate commerce, the court notes that the complaint nowhere actually makes such allegations. The only description of the computer system and the store was that U-Check "served as a showcase for IAS' patented front-end system technology." Nowhere does the complaint allege that the computer system communicated with banks or was in any way engaged in interstate commerce. Since the complaint as presently pled would not survive a motion to dismiss, the motion to amend is denied.
Reply Mem. (Re: Smith, Bodell, Johnson) in Supp. of Mot. to Amend (#32-1), 8.
Am. Proposed Class Action Compl. 5, ¶ 26.
D. Aiding and Abetting
In addition to the underlying fraud claims, the plaintiffs also assert claims under an aiding and abetting theory:
Defendants Blakelock and Jackman were controlling persons and persons who instructed, aided, and abetted defendants Bodell, Smith, Donnell, and Jolley in committing the acts and violations alleged [in the complaint] and therefore, pursuant to the provisions of 15 U.S.C. § 78t are jointly and severally liable with defendant Bodell, Donnel, and Jolley, and to the same extent as defendant Bodell for the acts and violations alleged above."
Am. Proposed Class Action Compl. 8, ¶ 42.
The court need not address the merits of this claim since it has already held that the plaintiffs have not stated a claim for the underlying violation. Blakelock and Jackman cannot be liable under an aiding and abetting theory if the plaintiffs cannot even establish an underlying violation.
E. Conspiracy
The plaintiffs' final claim seems to be a vague allegation that the defendants conspired to commit securities fraud. The plaintiffs do not clarify whether they are alleging a state or federal conspiracy claim. Nevertheless, the court holds that this claim is deficient.
Under Utah law, to establish a civil conspiracy, a plaintiff must allege "(1) a combination of two or more persons, (2) an object to be accomplished, (3) a meeting of the minds on the object or course of action, (4) one or more unlawful, overt acts, and (5) damages as a proximate result thereof." Even under the Federal Rules' liberal notice pleading standards, the plaintiffs fail to make out a claim for conspiracy. Other than bare, conclusory allegations that the defendants conspired to commit securities fraud, the plaintiffs allege no facts to establish a meeting of the minds.
Alta Industries v. Hurst, 846 P.2d 1282, 1290 n. 17 (Utah 1993).
Because the plaintiffs have not alleged sufficient facts to survive a motion to dismiss on any of the claims alleged, amendment would be futile, and the motion to amend is denied.
III. Conclusion
Accordingly, the various motions to dismiss (#2-1, #5-1, #8-1, #29-1, #29-2, #29-3) are GRANTED, and the motion to amend (#17-1) is DENIED. These dismissals are without prejudice. The clerk is directed to close this case.
SO ORDERED.