Gibson v. Vanisi

Full title: VAL GIBSON, Plaintiff, v. SEILENI VANISI et al., Defendants

Court: United States District Court, D. Utah, Central Division

Date published: Jan 24, 2005

Case No. 2:03-CV-328 PGC (D. Utah Jan. 24, 2005)

Opinion

Case No. 2:03-CV-328 PGC.

January 24, 2005

MEMORANDUM ORDER

PAUL CASSELL, District Judge

Plaintiff filed suit against Seileni Vanisi, Claudia Vanisi, T. Morris Ostler, Beehive Builders, Everland Financial,¹ and East Star Petroleum, Inc., alleging violations of the federal securities laws, and raising numerous claims under state law. (Am. Compl., Dkt no. 36.) The case is presently before the court on Defendants' Motion to Dismiss (Dkt. no. 47) and Plaintiff's Motions for Summary Judgement or Default Judgement (Dkt. nos. 49 50).

1 Defendant Everland Financial was not properly served with process. (See return of service lodged in file.)

I. STANDARD OF REVIEW

Defendants Seileni Vanisi, Claudia Vanisi, T. Morris Ostler, Beehive Builders, and East Star Petroleum, Inc. filed a motion to dismiss under Rule 12(b)(6) of the Federal Rules of Civil Procedure for failure to state a claim upon which relief can be granted. (Dkt. no. 47.) The basis for Defendants' motion is that the amended complaint does not satisfy the heightened pleading requirements of Fed.R.Civ.P. 9(b), or the pleading requirements for securities fraud under the Private Securities Litigation Reform Act of 1995, Pub.L. No. 104-67, 109 Stat. 737.

Since Defendants filed their motion to dismiss after they had already filed an answer, their motion is more properly characterized as a motion for judgment on the pleadings under Rule 12(c). EEOC v. W.H. Braum, Inc., 347 F.3d 1192, 1195 (10^th Cir. 2003); Steele v. Federal Bureau of Prisons, 355 F.3d 1204, 1212 n. 4 (10^th Cir. 2003) (stating that if the defendant "submits a motion to dismiss after filing an answer, the motion should be treated as a motion for judgment on the pleadings"); Lowe v. Town of Fairland, 143 F.3d 1378, 1381 n. 5 (10th Cir. 1998).

The court reviews a motion for judgment on the pleadings using the same standard applicable to a Rule 12(b)(6) motion. Aspenwood Inv. Co. v. Martinez, 355 F.3d 1256, 1259 (10^th Cir. 2004); McHenry v. Utah Valley Hosp., 927 F.2d 1125, 1126 (10^th Cir. 1991). Under this standard, the court accepts all well-pleaded facts, as distinguished from conclusory allegations, as true. Adams v. Kinder-Morgan, Inc., 340 F.3d 1083, 1088 (10^th Cir. 2003); Ruiz v. McDonnell, 299 F.3d 1173, 1181 (10^th Cir. 2002). In evaluating the motion, the court must evaluate "the totality of the pleadings" to determine whether the plaintiff has stated an actionable claim of securities fraud. Adams, 340 F.3d at 1092; see City of Philadelphia v. Fleming Cos., 264 F.3d 1245, 1261-62 (10^th Cir. 2001). Because Plaintiff is proceeding pro se, the court construes his complaint liberally and holds it to a less stringent standard than required of formal pleadings drafted by lawyers. Hughes v. Rowe, 449 U.S. 5, 9 (1980) (per curiam); Haines v. Kerner, 404 U.S. 519, 520 (1972) (per curiam).

II. SECTION 10(b) RULE 10b-5 CLAIMS

Plaintiff alleges violations of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5. Section 10(b) and Rule 10b-5, promulgated thereunder, prohibit fraudulent acts in connection with the purchase or sale of securities. Adams, 340 F.3d at 1094-95.

Section 10(b) makes it unlawful to "use or employ, in connection with the purchase or sale of any security . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe as necessary or appropriate in the public interest or for the protection of investors." 15 U.S.C. § 78j(b); Adams, 340 F.3d at 1095. Rule 10b-5 identifies certain acts that are prohibited by the statute. Adams, 340 F.3d at 1095. In particular, Rule 10b-5 makes it unlawful to "make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading." 17 C.F.R. § 240.10b-5; Adams, 340 F.3d at 1095.

To state a claim of securities fraud under Rule 10b-5, the complaint must contain allegations which address the following five elements:

(1) the defendant made an untrue or misleading statement of material fact, or failed to state a material fact necessary to make statements not misleading; (2) the statement complained of was made in connection with the purchase or sale of securities; (3) the defendant acted with scienter, that is with intent to defraud or recklessness; (4) the plaintiff relied on the misleading statements; and (5) the plaintiff suffered damages as a result of his reliance.

Adams, 340 F.3d at 1095; Grossman v. Novell, Inc., 120 F.3d 1112, 1118 (10^th Cir. 1997).

A. Rule 9(b) Requirements

Prior to the passage of the Private Securities Litigation Reform Act of 1995 (PSLRA), Rule 9(b) of the Federal Rules of Civil Procedure set the standard for the required level of particularity when pleading the elements of a securities fraud claim. Adams, 340 F.3d at 1095; City of Philadelphia, 264 F.3d at 1258. "Rule 9(b) dictates that `in averments of fraud . . ., the circumstances constituting fraud . . . shall be stated with particularity.'" Adams, 340 F.3d at 1095 (quoting Fed.R.Civ.P. 9(b));City of Philadelphia, 264 F.3d at 1258.

Courts have strictly enforced Rule 9(b) in securities fraud cases, requiring detailed statements of the specific conduct that allegedly violated the law. Farlow v. Peat, Marwick, Mitchell Co., 956 F.2d 982, 986 (10th Cir. 1992). For example, in Sears v. Likens, 912 F.2d 889 (7^th Cir. 1990), the court dismissed a complaint for failure to state "in any detail what misrepresentations were made by the defendant, to whom these misrepresentations were made, when these misrepresentations were made, or how these misrepresentations furthered the alleged fraudulent scheme." Id. at 893; quoted with approval in Farlow, 956 F.2d at 986. Similarly, the Tenth Circuit requires a complaint alleging fraud to "set forth the time, place and contents of the false representation, the identity of the party making the false statements and the consequences thereof." Koch v. Koch Indus., Inc., 203 F.3d 1202, 1236 (10^th Cir. 2000) (quoting Lawrence Nat'l Bank v. Edmonds (In re Edmonds), 924 F.2d 176, 180 (10th Cir. 1991)).

In the instant case, the amended complaint fails to set forth the specific allegations required by the Tenth Circuit. In fact, as Defendants point out, it contains few, if any, specific factual allegations concerning the alleged fraud. Although Defendants concede Plaintiff has provided a laundry list of specific facts, they are not placed in any context in relation to the alleged fraud.

The amended complaint does not alert Defendants to a sufficiently precise time frame to satisfy Rule 9(b). Further, it does not specify the place where the misrepresentations were made. Similarly, it fails to specify which of the defendants made the allegedly fraudulent misrepresentations. This is a particularly important requirement in a case involving a number of defendants. Koch, 203 F.3d at 1237. Likewise, it fails to explain how the allegedly false misrepresentations furthered the allegedly fraudulent scheme. Most importantly, the amended complaint contains no specific allegations that the defendants made any statements or omissions that were false or that they acted with the intent to defraud. Accordingly, the amended complaint fails to satisfy the particularity requirements of Rule 9(b).

B. Pleading Requirements Under the PSLRA

With passage of the PSLRA, Congress heightened the pleading standard for securities fraud claims. In so doing, Congress did not add to the five elements stated above; but instead, strengthened the requirements for pleading two of the elements. Adams, 340 F.3d at 1095; see 15 U.S.C. § 78u-4(b)(1), (2).

First, the PSLRA increased the burden of pleading the first element of a securities fraud claim: "the allegation that the defendant made a false or misleading statement, or failed to state a material fact necessary to make statements made not misleading." Adams, 340 F.3d at 1095. The PSLRA requires that in making this allegation, "the complaint shall specify each statement alleged to have been misleading, the reason or reasons 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."Id. (quoting 15 U.S.C. § 78u-4(b)(1)); City of Philadelphia, 264 F.3d at 1258.

Second, the PSLRA increased the standard for pleading the scienter element of securities fraud claims. Adams, 340 F.3d at 1095-96. Under Rule 9(b), malice, intent, knowledge, and other conditions of the mind could be averred generally. The PSLRA supersedes this portion of Rule 9(b), and imposes a more stringent requirement for pleading scienter:

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.

Adams, 340 F.3d at 1096 (quoting 15 U.S.C. § 78u-4(b)(2); accord City of Philadelphia, 264 F.3d at 1258.

1. Pleading the Circumstances of Fraud with Particularity Under the PSLRA

First, the court applies the requirements of § 78u-4(b)(1), which requires that the complaint "specify each statement alleged to have been misleading [and] the reason or reasons why the statement is misleading."Adams, 340 F.3d at 1096 (quoting § 78u-4(b)(1)). The amended complaint in this case fails to specify each statement that Plaintiff alleges to be misleading, or to provide the reasons why the statement is misleading. As discussed, the amended complaint in this case contains a plethora of facts. However, Plaintiff has not set out any statements that are alleged to be misleading. Further, even facts that could be interpreted to relate to misleading statements are not attributed to any particular defendant. Plaintiff simply uses the term "Defendants" in describing what was said or done without specifying the Defendant to whom he is referring. This is not sufficient to satisfy the requirements of the PSLRA.

2. Pleading Scienter Under the PSLRA

Under section 78u-4(b)(2), the complaint must "state with particularity facts giving rise to a strong inference that the defendant acted with . . . [scienter]." Adams, 340 F.3d at 1105 (quoting § 78u-4(b)(2). "In a securities fraud case, the appropriate level of scienter is `a mental state embracing intent to deceive, manipulate, or defraud,' or recklessness." Adams, 340 F.3d at 1105 (quoting City of Philadelphia, 264 F.3d at 1259). When reviewing a plaintiff's allegations of scienter, the court should examine the allegations in their entirety, and determine whether the allegations, taken as a whole, give rise to a strong inference of scienter. Adams, 340 F.3d at 1105; City of Philadelphia, 264 F.3d at 1263. The Tenth Circuit has interpreted a "`strong inference' of scienter to be a conclusion logically based upon particular facts that would convince a reasonable person that the defendant knew a statement was false or misleading." Adams, 340 F.3d at 1105.

Although the amended complaint is replete with factual information, Plaintiff has failed to plead that any of the defendants acted with scienter. Further, the amended complaint does not provide sufficient particularized facts to give rise to a strong inference of scienter on the part of any particular defendant. As discussed, Plaintiff generally refers to the defendants as a group.

In Adams, the Tenth Circuit held that the complaint failed to provide sufficient particularized facts to give rise to a strong inference that a particular defendant knew that the company's financial statements were false. The plaintiff alleged that "senior management" attended meetings to plan improper booking of transactions and mask operational problems. However, there was no specific allegation that the defendant attended the meetings. The Tenth Circuit stated that the conclusory allegations concerning the involvement of "senior management" did not amount to a particularized claim that the defendant knew of the false statements. Instead, the allegations were nothing more than "generalized imputations of knowledge" and were not sufficient to establish scienter. Adams, 340 F.3d at 1107 (quoting City of Philadelphia, 264 F.3d at 1264). Because the amended complaint fails to plead fraud with particularity, and also fails to adequately plead scienter, Plaintiff's claims for primary violations of section 10(b) of the 1934 Act, and Rule 10b-5 are dismissed.

III. SECTION 20(a) CLAIM

Plaintiff has attempted to state a claim under section 20(a) of the 1934 Act which provides as follows:

Every person who, directly or indirectly, controls any person liable under any provision of this chapter or of any rule or regulation thereunder shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable, unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action.

15 U.S.C. § 78t(a).

"[T]o state a prima facie case of control person liability, the plaintiff must establish (1) a primary violation of the securities laws and (2) `control' over the primary violator by the alleged controlling person." City of Philadelphia, 264 F.3d at 1270; accord Adams, 340 F.3d at 1107. Because the court concludes that Plaintiff failed to adequately plead primary claims that any of the defendants violated section 10(b) and Rule 10b-5, Plaintiff's section 20(a) claim is dismissed.

IV. CLAIMS UNDER SECTIONS 12(a)(1) AND 12(a)(2) OF THE 1933 ACT

Plaintiff asserts claims under Sections 12(a)(1) and 12(a)(2) of the Securities Act of 1933. Section 12(a)(1) provides a remedy for the sale of unregistered securities. 15 U.S.C. § 77 l(a)(1); Gustafson v. Alloyd Co., 513 U.S. 561, 572 (1995). Section 12(a)(2) imposes liability on any person who offers or sells a security by use of the mails or interstate facilities by means of a prospectus or oral communication² which includes any untrue statement or omission of material fact. 15 U.S.C. § 77 l(a)(2).

2 "Oral communication" as used in section 12(a)(2) "is restricted to oral communications that relate to a prospectus." Gustafson, 513 U.S. at 567-68.

The Securities Act primarily relates to the initial public offering of securities. See, e.g., Gustafson, 513 U.S. at 571-72; Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 752 (1975) (stating that the 1933 Act is far narrower than the 1934 Act and is "chiefly concerned with disclosure and fraud in connection with offerings of securities-primarily, . . . initial distributions of newly issued stock from corporate issuers"); United States v. Naftalin, 441 U.S. 768, 777-78 (1979) ("[T]he 1933 Act was primarily concerned with the regulation of new offerings.").

In Gustafson, the Supreme Court determined that Section 12 applies only to public offerings. See id. at 581. See also Lewis v. Fresne, 252 F.3d 352, 357-58 (5th Cir. 2001) (holding that section 12 does not apply to private transactions); Joseph v. Wiles, 223 F.3d 1155, 1160-61 (10^th Cir. 2000) (noting that "only purchasers in the initial public offering could bring suit pursuant to section 12(2)"). In the instant case, it is clear from the allegations in Plaintiff's amended complaint that the alleged investments were not part of a public offering, but were in fact private transactions. Accordingly, Plaintiff has failed to state a claim under section 12.

V. STATE LAW CLAIMS

Plaintiff attempts to assert numerous state law claims invoking this court's supplemental jurisdiction under 28 U.S.C. § 1367. Having dismissed all of Plaintiff's federal claims, the court declines to exercise supplemental jurisdiction over his state law claims. See 28 U.S.C. § 1367(c)(3); Doe v. Bagan, 41 F.3d 571, 577 (10th Cir. 1994) (approving dismissal of state law claims for lack of subject matter jurisdiction after summary judgment was granted as to all federal claims); United Mine Workers of Am. v. Gibbs, 383 U.S. 715, 726 (1966) ("Certainly, if the federal claims are dismissed before trial, . . . the state claims should be dismissed as well.").

VI. PLAINTIFF'S MOTIONS

On March 26, 2004, Plaintiff filed two motions for summary judgment or default judgment. One motion seeks judgment against Defendants Seileni Vanisi, T. Morris Ostler, and Claudia Vanisi (Dkt. no. 49); and the second seeks judgment against Defendants Beehive Builders and East Star Petroleum, Inc. (Dkt. no. 50.) Since Defendants' motion for judgment on the pleadings is granted, it follows that Plaintiff's motions for summary judgment and default judgment are denied.

On December 6, 2004, Plaintiff filed two additional motions for summary judgment or default judgment. (Dkt. nos. 55 56.) In response, Defendants filed a motion to strike on the ground that the motions were filed months after the deadline for the filing of dispositive motions had passed. (Dkt. no. 57.) The deadline for filing dispositive motions was March 26, 2004. (See Order, Dkt. no. 43 at 4.) Accordingly, the court strikes Plaintiff's second set of motions for summary judgment or default judgment. (Dkt. nos. 55 56.)

VII. ORDER

Defendants' Motion to Dismiss (Dkt. no. 47) is GRANTED. Plaintiff's Motions for Summary Judgment or for Default Judgment (Dkt. nos. 49 50) are DENIED. The court STRIKES Plaintiff's Motions for Summary Judgment or for Default Judgment (Dkt. nos. 55 56). The case is hereby DISMISSED.