Opinion
3:01-CV-0942-P.
April 23, 2002
ORDER
Before the Court are:
1. Plaintiffs Reply to Court's Order of September 19, 2001, filed October 22, 2001;
2. The Gotham Defendants' Motion to Dismiss the Amended Complaint for Failure to State a Claim, Lack of Subject Matter Jurisdiction, Improper Venue, and Lack of Personal Jurisdiction, filed November 6, 2001; and
3. The Gotham Defendants' Alternative Motion for a Stay, filed November 13, 2001.
In this "Reply," Plaintiffs seek relief from the September 19, 2001 Order by requesting that the Court reconsider its opinion.
After considering the parties' arguments and briefing, and the applicable law, the Court DENIES Plaintiffs' request to reconsider its earlier Order, GRANTS Defendants' Motion to Dismiss, and DENIES AS MOOT Defendants' Alternative Motion for a Stay.
I. Background
Plaintiffs brought this Complaint alleging violation of section 10(b) of the Securities Act of 1934, as well as state claims, on May 18, 2001. This Court, through Judge Joe Kendall, granted motions to dismiss as well as granting Plaintiffs leave to amend their Complaint by order of September 18, 2001. For the purposes of the motions now before the Court, Plaintiffs filed an Amended Complaint that was substantively identical, as well as their "Reply to Court's Order of September 19, 2001" on October 22, 2001.
Plaintiffs allege that there was an agreement between Morgan Stanley Dean Witter ("MSDW") and Defendants to sell stock at an artificially low price and profit once the price of the stock had recovered. The stock at issue was that of Transcontinental Realty Investors, Inc. ("Transcontinental") and American Realty Trust ("American Realty"). Plaintiffs Basic Capital Management, Inc. ("BCM") and GEP Children's Trust ("GEP Trust") owned significant stock in Transcontinental and American Realty. BCM, Transcontinental, and American Realty share certain common officers.
The Plaintiffs and the realty companies used MSDW for various brokerage services. Plaintiffs allege that MSDW had substantial business relationships with Defendants. Plaintiffs' Complaint is based upon the purchase of Transcontinental and American Realty stock by Defendants during a period when, Plaintiffs allege, the price of such stock was artificially low because of negative media attention. Plaintiffs owned stock in Transcontinental and American Realty through margin accounts from brokerage firms, including MSDW. A newspaper article alleged securities fraud by several defendants, including one closely associated with Transcontinental and American Realty, and their stock prices dropped substantially. Plaintiffs attempted to negotiate with MSDW to reduce their debt on the margin loans, however, their proposals were rejected. Plaintiffs allege that MSDW knew the true value of the Transcontinental and American Realty stock, but nonetheless refused to negotiate with Plaintiffs.
Plaintiffs allege that MSDW and Defendants entered into a conspiracy to purchase the Transcontinental and American Realty stock controlled by MSDW at the artificially low price. MSDW thereafter sold the shares held by Plaintiffs to Defendants. Not only did Defendants gain the profit from the gain in the price of the stock, but plaintiffs argue that MSDW received larger than average commissions on the sale. Plaintiffs allege that this sale is the basis for Defendants' liability.
II. Motion to Reconsider
Judge Kendall dismissed the count alleging violation of securities laws because Plaintiffs had failed to state a claim upon which relief could be granted. Specifically, the Court held that there was no fraud or deceptive behavior alleged. The Court also looked to Loper v. Advest, Inc., a case with similar facts, where a district court found no section 10(b) fraud alleged where a defendant broker liquidated the plaintiffs position on a margin call, after having told the plaintiff that no liquidation would occur until a later date. Loper v. Advest, Inc., 617 F. Supp. 652, 653 (W.D. Pa. 1985).
Plaintiffs argue in their "Reply" as well as in responding to Defendants' current motion to dismiss that the Court erred by relying on cases which interpret Rule 10b-5(b) because their claim relied upon subparts (a) and (c) of the Rule. Their argument is that Defendants engaged in behavior which violated the parts of the Rule which prohibit "(a) [employing] any device scheme or artifice to defraud . . . [or] . . . (c) [engaging] in any act, practice or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security." Plaintiffs conclude that there is no requirement of an actual misrepresentation or material omission.
However, even if no misrepresentation or omission is required, Plaintiffs have still failed to allege any behavior by Defendants which would show their fraudulent or deceitful behavior. The court in Loper held that wrongful liquidation did not trigger section 10(b) liability. Here, Plaintiffs have not alleged any behavior that meets Rule 10b-5's requirement of some "element of deception." Santa Fe Indust., Inc. v. Green, 430 U.S. 462, 475 (1977). As Judge Kendall noted in his prior order, "there is simply no allegation of any deceptive behavior by the Gotham Defendants toward Plaintiffs." Any claim of deception is based upon Plaintiffs' allegations of conspiracy, which also does not trigger section 10(b) liability. Central Bank of Denver N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 191 (1994).
The Court, therefore, declines Plaintiffs' request to reconsider its earlier order. Because Plaintiffs' amended claim is identical to the original claim, the Court GRANTS Defendants' Motion to Dismiss and Count Six is DISMISSED WITH PREJUDICE. Because this case is at such at early stage in the proceedings, the Court DISMISSES WITHOUT PREJUDICE Counts One through Five so that Plaintiffs may re-file their claims in state court. 28 U.S.C. § 1367 (c)(3); see also Carnegie-Mellon Univ. v. Cohill, 484 U.S. 343, 350, n. 7; Lewis v. Law-Yone, 813 F. Supp. 1247, 1258 (N.D. Tex. 1993) (McBryde, J.).
Conclusion
For the foregoing reasons, Plaintiffs request for reconsideration is DENIED, Defendants' Motion to Dismiss is GRANTED, Defendants' Alternative Motion to Stay is DENIED AS MOOT, Count Six is DISMISSED WITH PREJUDICE, and Counts One through Five are DISMISSED WITHOUT PREJUDICE.
It is so ordered.