Opinion
NO. 3:03-0159
January 8, 2004
MEMORANDUM
Pending before the Court are Defendants' Motion to Dismiss Plaintiffs' Amended Complaint and Compel Arbitration of Plaintiffs' Individual Claims (Docket No. 53) and Defendants' Motion to Dismiss the Additional Allegations in Plaintiffs' Second Amended Complaint (Docket No. 73). The Court heard oral argument on the pending Motions on December 19, 2003.
For the reasons stated herein, Defendants' Motions to Dismiss (Docket Nos. 53 and 73) are GRANTED, and this action is DISMISSED.
FACTS
Plaintiffs have asserted purported class action claims under the federal securities laws against the Defendants, which are related companies that engage in the sale of securities, directly and/or indirectly. Plaintiffs have alleged violations by Defendants of Sections 11, 12 and 10(b) of the Securities Acts of 1933 and 1934 and Securities and Exchange Commission ("SEC") Rule 10b-5(a). Plaintiffs contend that Defendants failed to disclose certain information required by law concerning its investments. Plaintiffs also have asserted state law claims for violations of state securities laws, common law fraud, and negligence. Plaintiffs allege that Defendants' prospectus contains information which, although technically true, is materially misleading because of certain information which is omitted. Plaintiffs contend that Defendants have failed to disclose certain information about the relative merits of their share options and have included misleading and incomplete information concerning the fees associated with each.
More specifically, Plaintiffs argue that investment in Defendants' Class B shares is never the best choice for any rational investment strategy and that Defendants had a duty, under the law, to disclose that information and did not do so. Plaintiffs also contend that Defendants failed to disclose certain allocations and incentives with regard to fees for the Class B shares. Defendants have moved to dismiss Plaintiffs' Second Amended Complaint, arguing that Defendants had no duty to disclose information about Class B shares beyond that which was disclosed in the prospectus. Defendants also contend that Plaintiffs have not stated a claim for common law fraud; that many of Plaintiffs' claims are barred by the applicable statutes of limitations; that Plaintiffs have no standing to assert many of their claims; and that Plaintiffs' individual claims must be arbitrated, not litigated.
MOTIONS TO DISMISS
In considering a motion to dismiss for failure to state a claim on which relief can be granted, the court must accept as true all factual allegations in the complaint Broyde v. Gotham Tower. Inc., 13 F.3d 994, 996 (6th Cir. 1994). The motion should be granted only if it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief. Id. A motion to dismiss for failure to state a claim upon which relief can be granted must be viewed in the light most favorable to the party opposing the motion. State of Ohio ex rel. Fisher v. Louis Trauth Dairy. Inc., 856 F. Supp. 1229, 1232 (S.D. Ohio 1994). The purpose of a motion to dismiss for failure to state a claim is to allow the defendant to test whether, as a matter of law, the plaintiff is entitled to legal relief even if everything alleged in the complaint is true. Maver v. Mylod, 988 F.2d 635, 638 (6th Cir. 1993). In other words, in deciding a motion to dismiss, the function of the district court is to test the legal sufficiency of the complaintCity of Toledo v. Beazer Materials and Services, Inc., 833 F. Supp. 646, 650 (N.D. Ohio 1993).
In ruling on a Rule 12(b)(6) motion to dismiss, if a district court considers evidence outside the pleadings, it must normally convert the motion into a Rule 56 motion for summary judgment, and it must give the nonmoving party an opportunity to respond. Fed.R.Civ.P. 12(b). The Court may consider, however, in addition to the pleadings, any document that is explicitly relied upon in the complaint In re Viropharma. Inc. Securities Litigation, 2003 WL1824914 at * 1 (E.D. Pa. April 7, 2003). The Court may consider, for example, documents incorporated by reference in the complaint or matters of judicial notice, without converting the motion to dismiss into a motion for summary judgmentUnited States v. Ritchie, 342 F.3d 903, 908 (9th Cir. 2003).
The Federal Rules of Civil Procedure provide that a copy of any written instrument which is an exhibit to a pleading is a part thereof for all purposes. Fed.R.Civ.P. 10(c). A "written instrument" within the meaning of Rule 10(c) is a document evidencing legal rights or duties or giving formal expression to a legal act or agreement, such as a deed, will, bond, lease, insurance policy or security agreement DeMarco. v. DepoTech Corp., 149 F. Supp.2d 1212, 1219 (S.D. Cal. 2001). The documents that satisfy this definition consist largely of documentary evidence, specifically, contracts, notes, and other writings on which a party's action or defense is based. Id.
Attached to Plaintiffs' Second Amended Complaint are an analysis and graphs created by Plaintiffs' expert witness, Professor Edward O'Neal of Wake Forest University's Graduate School of Management The Court cannot consider Professor O'Neal's analysis or graphs. These documents do not form the basis of the Second Amended Complaint; they are opinions, merely "pieces of evidentiary matter that do not exist independently of the complaint." See DeMarco at 1220.
In the case of In re Empyrean Biosciences. Inc. Securities Litigation, ___ F.R.D.___, 2003 WL 23000944 (N.D. Ohio July 2, 2003), the court excluded an attorney's declaration and its exhibits, which were attached to the complaint, stating: "In sum, it appears plaintiffs have attempted to provide evidentiary support for the allegations in the complaint by attaching a declaration from their attorney." Id. at * 2. Noting a split of authority and the fact that the Sixth Circuit has not specifically addressed the issue of whether all affidavits attached to a complaint must be considered part of the pleading, the court found that the specific declaration offered by the plaintiffs in that case did not satisfy the definition of "written instrument" in Rule 10(c).
The Empyrean court cited Rose v. Bartle, 871 F.2d 331 (3d Cir. 1989), in which that court held that the plaintiffs' affidavit attached to the complaint could not be considered part of the pleading, and Murphy v. Cadillac Rubber Plastics, Inc., 946 F. Supp. 1108 (W.D.N.Y. 1996), in which the court, citing to the definition from Black's Law Dictionary, found that affidavits were not "written instruments" for purposes of Rule 10(c).
In DeMarco, the court found that considering an expert affidavit on a motion to dismiss would force a district court to confront a myriad of complex evidentiary issues not generally capable of resolution at the pleading stage. DeMarco at 1221. For example, the court would have to fulfill its role of "gatekeeper" with respect to the expert testimony, requiring the court to ensure that the testimony is reliable and that it would assist the trier of fact Id.
In this case, there is not an affidavit or declaration at issue; the information attached to the Second Amended Complaint is an expert witness' analysis and graphs. For all the above reasons, the Court will not consider the expert witness' information attached to the Second Amended Complaint The Court will consider, on Defendants' Motions to Dismiss, only the pleadings and the specific prospectus at issue herein. Even if the excluded information was considered, it would not change the result because, for the reasons described herein, Defendants had no legal duty to make the disclosures asserted by Plaintiffs.
FEDERAL LAW CLAIMS
Federal securities laws provide that any person who offers or sells a security by the use of any means or communication in interstate commerce or by use of the mails, by means of a prospectus or oral communication, which includes an untrue statement of a material fact or fails to state a material fact necessary in order to make the statements, in light of the circumstances under which they are made, not misleading, shall be liable to the person purchasing such security from him. 15 U.S.C. § 771(a)(2) (Supp. 2003). Any person acquiring such a security shall be able to sue those who prepared, signed, certified or underwrote such a statement, and those persons who are directors or partners of the issuer.Id.; 15 U.S.C. § 77k(a).
In addition, federal law provides that it is unlawful for any person, directly or indirectly, by use of any means to "use or employ, in connection with the purchase or sale of any security registered on a national securities exchange . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors." 15 U.S.C. § 78j (Supp. 2003). The law also specifically makes "controlling persons" jointly and severally liable for violations of the securities law. 15 U.S.C. § 77o.
To state a claim under these sections, a plaintiff must allege that the defendants had a legal obligation to disclose the allegedly omitted information. In re Merrill Lynch Co., Inc. Research Reports Securities Litigation, 272 F. Supp.2d 243, 248 (S.D.N.Y. 2003). The parties dispute whether Defendants adequately complied with the law, SEC-promulgated forms, and regulations concerning disclosure. Although Plaintiffs do not claim that the prospectus contains false information, they argue that the prospectus is incomplete and misleading. Plaintiffs argue that Defendants violated the law by failing to disclose that, because of the fee structure, Class B shares are never the best investment for any rational investor and by failing to specifically disclose how certain fees are paid in association with the purchase of Class B stock.
The Court finds that Defendants' failure to include the specific information asserted by the Plaintiffs does not make the prospectus false or misleading. Assuming, but not deciding, that Plaintiffs' allegation is true (that Class B shares are never the best investment for anybody at any time under any rational investment strategy), the Court finds that Defendants had no duty to make such an affirmative and conclusory statement.
The prospectus at issue discloses information which would permit any investor to determine the "best" investment for him or her, under the circumstances. It is up to each investor to take the facts provided, evaluate options, make calculations, and decide on the best investment strategy for his or her particular circumstances, taking into account the myriad changes which occur daily, both in the market and in the individual's own financial situation. See Wallerstain v. Primerica Corp., 701 F. Supp. 393, 398 (ED. N.Y. 1988) ("Full factual disclosures need not be embellished with speculative financial predictions.")
So long as Defendants provide truthful information, then investors, with or without financial advisors, have the duty to decide was is "best" for them. See Vides v. Amelio, 265 F. Supp.2d 273, 280 (S.D. N.Y. 2003) ("corporations are not required to address their stockholders as if they were children in kindergarten."); In re Digital Island Securities Litigation, 223 F. Supp.2d 546, 552 (D. Del. 2002) ("A defendant is not required to disclose a fact merely because a reasonable investor would like to know that fact."). Plaintiffs have failed to show that Defendants had a duty to provide more information concerning Class B stock in this case.
As for the disclosure of fees, the prospectus at issue discloses the total amounts paid to Defendants for the various options. It is not "hidden" from potential investors that Defendants make money and how much they make for each option. The Court finds that Defendants had no duty to provide more specific information in the prospectus concerning specific allocations or incentives given to brokers. See Castillo v. Dean Witter Discover Co., 1998 WL 342050 at * 9 (S.D.N.Y. June 25, 1998). Plaintiffs have failed to show that Defendants had a duty to disclose more specific information about fees in this case.
For these reasons, Plaintiffs have not met the standard for stating claims for relief which may be granted under the federal securities laws asserted. There being no duty, Plaintiffs' claims under Sections 11 and 12 and Rule 10b-5 must fail. Merrill Lynch, 272 F. Supp.2d at 248; Castillo, 1998 WL342050at* 8.
The Court need not address Defendants' other arguments. Defendants' Motion to Dismiss Plaintiffs' federal claims is GRANTED, and those claims are DISMISSED.
STATE LAW CLAMS
Having dismissed Plaintiffs' federal claims, the Court declines to exercise supplemental jurisdiction over Plaintiffs' state law claims. Plaintiffs' state law claims are dismissed without prejudice, pursuant to 28 U.S.C. § 1367(c)(3).
IT IS SO ORDERED.
ORDER
Pending before the Court are Defendants' Motion to Dismiss Plaintiffs' Amended Complaint and Compel Arbitration of Plaintiffs' Individual Claims (Docket No. 53) and Defendants' Motion to Dismiss the Additional Allegations in Plaintiffs' Second Amended Complaint (Docket No. 73). The Court heard oral argument on the pending Motions on December 19, 2003.For the reasons stated in the accompanying Memorandum, Defendants' Motions to Dismiss (Docket Nos. 53 and 73) are GRANTED, and this action is DISMISSED.
IT IS SO ORDERED.