Opinion
NOT TO BE PUBLISHED
APPEAL from a judgment of the Superior Court of Los Angeles County No. BC339808, Rex Heeseman, Judge.
Thomas J. O’Keefe and Everett L. Skillman for Plaintiffs and Appellants.
Gibson, Dunn & Crutcher, Wesley G. Howell, Jr., Marjorie Ehrich Lewis and Jennifer L. Conn for Defendants and Respondents.
JOHNSON, J.
Plaintiffs John McMahon, individually, and John McMahon and Mary McMahon as Trustees of the McMahon Family Trust appeal from the judgment in their action arising out of large losses they sustained trading in defendant Marsh & McLennan, Inc.’s (MMC) stock. Plaintiffs contend that MMC engaged in an illegal “bid-rigging” practice based upon its use of contingent commissions, and as a result of New York Attorney General Elliot Spitzer’s October 2004 investigation of MMC, the price of its stock dropped sharply. Plaintiffs asserted claims against MMC for fraud, breach of fiduciary duty, negligent misrepresentation, and violations of California Corporations Code sections 25400 and 25500. The trial court sustained MMC’s demurrers without leave to amend to plaintiffs first three claims, and granted summary judgment on plaintiffs’ remaining Corporations Code claim. We affirm.
FACTUAL BACKGROUND AND PROCEDURAL HISTORY
A. Background Facts
MMC is a professional services firm providing risk and insurance services, consulting services, and investment managing services. It is the world’s largest provider, through its subsidiaries, of insurance brokerage and consulting services. Marsh, Inc. (Marsh), MMC’s wholly-owned subsidiary, provides insurance brokering and management services. Marsh accounted for roughly 60 percent of MMC’s revenue for the year 2003. MMC is publicly traded on the NYSE; Marsh is not.
Plaintiffs alleged that defendants (primarily Marsh) used contingent commissions as a means of fraudulently increasing their revenues and inflating the price of MMC stock. Contingent commissions are calculated based upon a variety of factors, including profitability of the business placed with defendants, the aggregate dollar value of business placed, and the renewal rate of policies. MMC and Marsh maximized contingent commissions with a system of steering clients to preferred insurers with the solicitation of fraudulent bids. Plaintiffs alleged defendants failed to disclose this practice to the public and its shareholders. The contingent commission practice was profitable and accounted for over half of MMC’s net reported income for 2003.
Contingent commissions are also referred to as placement services agreements (PSA’s) or market services agreements (MSA’s).
Plaintiffs alleged that Marsh first began to centralize its contingent commission practice in 2000, and that it made affirmative misrepresentations to clients and investors at least four years prior to 2004 through its public filings and other public financial information. These public disclosures painted a rosy picture of MMC’s and Marsh’s financial health, depicting increasing revenues, an improving insurance market, a strong corporate culture that was immune to the avarice of Wall Street, and a global presence. At a shareholders’ conference call in July 2004 the defendants stated they had not changed anything in their operations or in the nature of their disclosures to the public or their clients in light of Spitzer’s April 2004 subpoenas.
However, in October 2004, Eliot Spitzer, then Attorney General of New York, convened a press conference and announced the indictment of MMC and Marsh based upon allegations of bid rigging to maximize Marsh’s contingent commissions. MMC’s stock price plummeted from a close of $46.13 on October 13, 2004 to a price of $29.20 over the next several days. The next day, MMC suspended the use of contingent commissions, and over the next two years, its dividend was cut in half. On October 18, 2004, MMC reported for the first time that $845 million of its $1.5 billion 2003 net income was attributable to the contingent commissions.
Plaintiffs have requested that we take judicial notice of MMC’s closing stock price on the New York Stock Exchange on July 28, 2004 ($45.07), August 16, 2004 ($43.18), and October 4, 2004 ($46.86). We take judicial notice of these facts. (Evid. Code, § 452, subd. (h) [court may take judicial notice of facts not subject to reasonable dispute that are subject to immediate and accurate determination by reference to sources of reasonably indisputable accuracy].)
In 1997, John McMahon had acquired 198, 000 shares of MMC’s stock as a result of a merger between MMC and Johnson & Higgins, a firm where John McMahon had been a managing shareholder. McMahon created a trust and a foundation to hold the shares. By 2004, as a result of stock dividends and splits, plaintiffs owned about 418, 000 shares of MMC stock.
McMahon did not want to sell the family’s MMC stock because he wanted to avoid paying taxes on the resulting capital gain, and he also wanted to continue to receive dividends on the stock. In 2000, plaintiffs retained Thomas Purdy, an investment advisor to assist them in meeting their investment goals. Therefore, in order to maximize the profits from the family’s MMC stockholdings without selling the stock, McMahon engaged in the practice of selling put options of MMC stock. McMahon also sometimes sold MMC shares short. For many years, from 2000 to 2004, McMahon enjoyed profits based upon this practice of selling put options.
A put is an option contract which gives the holder the option of selling the stock at a future date for a specified price. (Black’s Law Dict. (6th ed. 1990) at p. 1237.) Pursuant to Purdy’s practice, McMahon would sell the put option and keep the proceeds from the sale; generally for a period of up to 90 days following the sale of the option, he would have the obligation to buy the stock from the holder of the option at the “strike price.” If the stock price remained stable, the option would not be exercised, and McMahon would be able to keep the money received from the sale of the puts when the option expired, usually within 30 days; however, if the stock price fell, McMahon would be forced to purchase the shares from the holder of the puts at the strike price, which would be higher than the market price.
A stock is sold “short” where the investor borrows the shares from another investor, sells them and keeps the proceeds. Optimally, at a future date, the investor buys back the shares at a cheaper price, returns them to the investor they were borrowed from, and profits from the difference between the original sale price and the cheaper repurchase price. (Black’s Law Dict. (6th ed. 1990) at p. 1379.)
In September and October 2004, plaintiffs purchased 180, 000 shares of MMC stock to close out short positions, and purchased over 2, 800 put options. Following Spitzer’s October 14, 2004 announcement, their losses due to the decline in MMC’s stock price exceeded $13 million. Furthermore, plaintiffs’ entire core MMC stock position was eliminated when a margin call forced the sale of their stock.
B. Procedural History
1. Defendants’ Demurrers
Plaintiffs have filed a total of six complaints in this action.
On September 13, 2005, plaintiffs filed a complaint for damages. On July 6, 2006, pursuant to stipulation, plaintiffs filed a second amended complaint, alleging claims for fraud, negligent misrepresentation, unfair business practices under Business and Professions Code section 17200, et seq., conspiracy, and breach of fiduciary duty. The trial court sustained defendants’ demurrer without leave to amend to the Business and Professions Code section 17200 claim and the breach of fiduciary duty claim, and granted leave to amend with respect to the other claims. The court found plaintiffs did not have a claim for breach of fiduciary duty because an individual cause of action existed only where there was individual harm to a particular shareholder, as opposed to harm inflicted on all shareholders, citing Nelson v. Anderson (1999) 72 Cal.App.4th 111, 124.
The original complaint named as defendants, in addition to MMC and Marsh, Marsh & McLennan Global Brokering, Inc., Marsh & McLennan Group Associates, Inc., and Marsh & McLennan USA, Inc. The trial court did not enter judgment with respect to those additional defendants, and plaintiffs are not pursuing this appeal against them. In addition, the complaint named corporate defendants Seabury & Smith, Inc. and Guy Carpenter and Company, Inc., which are subsidiaries of MMC, and several other individuals. After the series of demurrers, by the time of the filing of the Fifth Amended Complaint, the only individual defendant who remained was Robert Erburu, a member of MMC’s board of directors. Erburu was not named as a defendant in the Sixth Amended Complaint.
Plaintiffs do not seek review of the dismissal of their unfair business practices claim pursuant to Business and Professions Code section 17200, et seq.
On January 8, 2007, plaintiffs filed a Fifth Amended Complaint asserting claims for fraud, negligent misrepresentation, conspiracy, and violation of Corporations Code sections 25400 and 25500. On May 11, 2007, the trial court sustained defendants’ demurer without leave to amend to plaintiffs’ fraud and negligent misrepresentation claims, and granted leave to amend on plaintiffs’ conspiracy and Corporations Code claims. The court found plaintiffs could not state a claim for fraud or negligent misrepresentation under Small v. Fritz Companies, Inc. (2003) 30 Cal.4th 167 (Small), because they were unable to plead the necessary allegations that they would have taken action based upon the alleged misrepresentations.
Plaintiffs filed a third amended complaint alleging claims of fraud, negligent misrepresentation and conspiracy, to which the court sustained demurrers with leave to amend and without leave to amend to the individual defendants except for the conspiracy claim. Defendants demurred to plaintiffs’ fourth amended complaint, and as part of an agreement not to oppose the demurer, plaintiffs filed the Fifth Amended Complaint.
All statutory references herein are to the Corporations Code, unless otherwise noted.
On June 4, 2007, plaintiffs filed a Sixth Amended Complaint alleging claims for violations of section 25400, subdivision (d) and section 25500, and conspiracy. Defendants demurred and moved to strike punitive damages allegations. The court overruled defendants’ demurrer to the sections 25400 and 25500 claims with respect to MMC and Marsh, and sustained the demurrer without leave to amend on plaintiffs’ conspiracy claim because plaintiffs had not alleged the names of any co-conspirators. The court granted defendants’ motion to strike punitive damages.
The court sustained the demurrer without leave to amend with respect to corporate defendants Seabury and Smith, Inc. and Guy Carpenter and Company, Inc.
2. Defendants’ Motion for Summary Judgment on the Section 25400 and 25500 Claim
MMC and Marsh, Inc. answered the Sixth Amended Complaint and moved for summary judgment on the section 25400 and 25500 claims. The trial court granted the motion, finding primarily that sections 25400 and 25500 did not apply to the securities at issue, and plaintiffs could not demonstrate damages because the covering of the short sales occurred before Spitzer’s announcement and therefore the transactions were unaffected.
DISCUSSION
I. OVERVIEW OF SECURITIES FRAUD LAWS
Under the common law, the buyer, seller or holder of a security may assert a claim for fraud or negligent misrepresentation against the corporation or a party with whom they have engaged in a stock transaction. “‘The elements of fraud, which give rise to the tort action for deceit, are (a) misrepresentation (false representation, concealment, or nondisclosure); (b) knowledge of falsity (or “scienter”); (c) intent to defraud, i.e., to induce reliance; (d) justifiable reliance; and (e) resulting damage.’” (Lazar v. Superior Court (1996) 12 Cal.4th 631, 638 (Lazar).) In contrast, a claim for negligent misrepresentation does not require knowledge of falsity; rather, the plaintiff must show “(1) the misrepresentation of a past or existing material fact, (2) without reasonable grounds for believing it to be true, (3) with intent to induce another’s reliance on the fact misrepresented, (4) justifiable reliance, and (5) resulting damages.” (Apollo Capital Fund LLC v. Roth Capital Partners, LLC (2007) 158 Cal.App.4th 226, 243.) Essential to both types of common law claims is a showing of reliance. (Mirkin v. Wasserman (1993) 5 Cal.4th 1082, 1092.) For an investor who holds stock, the plaintiff must establish reliance through a forbearance theory by specifically pleading those shares of stock that would have been sold and when the stock would have sold. (Small, supra, 30 Cal.4th 167, 184.)
In contrast, federal “fraud on the market” cases under Rule 10b-5 presume reliance and defendants are held liable for material misrepresentations that have affected the price of a security traded in an open and developed market such that the security has deviated from its “efficient price, ” which is the price at which the security would have traded absent the misrepresentation. (In re Seagate Technology II Securities Litigation (N.D. Cal. 1992) 802 F.Supp. 271, 275–277 (Seagate); see also Basic, Inc. v. Levinson (1988) 485 U.S. 224, 241–242.) “Investors transacting in such markets rely generally on the supposition that the market price is validly set and that no unsuspected manipulation has artificially inflated the price.” (Seagate, supra, 802 F.Supp. at p. 274.)
Under California law, the plaintiff may not rely on a “fraud on the market” theory analogous to Rule 10b-5 where the plaintiff bought based upon the integrity of the market. (Mirkin v. Wasserman, supra, 5 Cal.4th at p. 1089–1094.) “[T]he body of law that has developed under Rule 10b-5 is not sufficiently analogous to the law of fraud to justify its importation into the latter.” (Id. at p. 1093.)
However, sections 25400 and 25500, which are part of the Corporate Securities Law of 1968 (§ 25000, et seq.) (Act), contain prohibitions on fraudulent and manipulative practices in the purchase and sale of securities, and operate to eliminate some of the elements of common law fraud. (California Amplifier, supra, 94 Cal.App.4th at p. 108–109; Boam v. Trident Financial Corporation (1992) 6 Cal.App.4th 738, 743–744.) Any person who has purchased or sold a security whose price was affected by an act proscribed by Section 25400 may recover damages. (§ 25500; California Amplifier, supra, 94 Cal.App.4th at p. 109.)
The Act contains three sections creating fraudulent and prohibited practices in the purchase and sale of securities-sections 25400, 25041, and 25402. Section 25400 prohibits false and misleading statements designed to manipulate the securities market. Sections 25401 and 25402 prohibit other types of misrepresentations and insider trading, respectively. Each of the three types of fraudulent practices may be enforced through a corresponding section that establishes a private action for damages, namely, sections 25500 through 25502. Section 25500 provides the private remedy for violations of section 25400. (California Amplifier, Inc. v. RLI Ins. Co. (2002)94 Cal.App.4th 102, 108–109.) In In re Federal National Mortg. Assn. Securities (D.D.C. 2007) 503 F.Supp.2d 25, 31, the court held that section 25400 was preempted by Securities Litigation Uniform Standards Act of 1998.
Under the Act, in contrast to state common law claims, plaintiff need not show reliance on the defendant’s deception or manipulation. (Diamond Multimedia Systems, Inc. v. Superior Court (1999) 19 Cal.4th 1036, 1046, fns. 10 & 11.) Liability for violations of section 25400 is imposed on any person who willfully participated in the transaction. Section 25500 provides a private right of action for violations of section 25400, and “extends liability to all persons affected by market manipulation without requiring reliance or privity.” (California Amplifier, supra, 94 Cal.App.4th at p. 109; Diamond Multimedia Systems, Inc. v. Superior Court, supra, 19 Cal.4th at p. 1056 [defendant who violates section 25400 is liable to “any other person” whose trade is affected by defendant’s unlawful conduct].) Both Rule 10b-5 and sections 25400 and 25500 require the purchase and sale of securities. “Holders, ” or those persons who hold stock based upon reliance upon misrepresentations have no redress under federal Rule 10b-5 or under sections 25400 or 25500 because those provisions are limited to buyers and sellers of securities. (See Small, supra, 30 Cal.4th at p. 184.)
. Section 25500 provides, “Any person who willfully participates in any act or transaction in violation of Section 25400 shall be liable to any other person who purchases or sells any security at a price which was affected by such act or transaction for the damages sustained by the latter as a result of such act or transaction. Such damages shall be the difference between the price at which such other person purchased or sold securities and the market value which such securities would have had at the time of his purchase or sale in the absence of such act or transaction, plus interest at the legal rate.”
II. PLAINTIFFS’ FIFTH AMENDED COMPLAINT: FRAUD AND NEGLIGENT MISREPRESENTATION
Plaintiffs contend that defendants did not dispute at summary judgment whether they made material misrepresentations or omissions, and therefore only the elements of intent to defraud and reliance are at issue on appeal. With respect to those issues, they contend that they sold puts in reliance on the belief that the price of MMC stock would remain stable; after the July 2004 press conference they used short sales to hedge their position; and they alleged intent to defraud. They further argue that MMC should be liable for the torts of Marsh, Inc. through a theory of alter ego liability.
Defendants contend that plaintiffs cannot show reliance as “holders” of MMC stock, nor can they show reliance for their claims based upon short selling or put options because their claims are not pleaded with sufficient particularity.
A. Standard of Review
We apply a de novo standard of review in an appeal following the sustaining of a demurrer without leave to amend. (Holiday Matinee, Inc. v. Rambus, Inc. (2004) 118 Cal.App.4th 1413, 1420.) “We assume the truth of the allegations in the complaint, but do not assume the truth of contentions, deductions, or conclusions of law.” (California Logistics, Inc. v. State of California (2008) 161 Cal.App.4th 242, 247.) It is an abuse of discretion for the court to sustain a demurrer without leave to amend if the plaintiff has shown there is a reasonable possibility a defect can be cured by amendment. (Ibid.) We liberally construe the pleading with a view to substantial justice between the parties. (Code Civ. Proc., § 452; Kotlar v. Hartford Fire Ins. Co. (2000) 83 Cal.App.4th 1116, 1120.)
B. Allegations of Fifth Amended Complaint
The Fifth Amended Complaint, which contained plaintiffs’ fraud and negligent misrepresentation claims, alleged that MMC and Marsh engaged in a practice of conspiring with various preferred insurance companies to manipulate the market for commercial insurance, thereby artificially inflating insurance premiums and obtaining hundreds of millions of dollars in kickbacks. Plaintiffs alleged that they relied upon the public reports and other corporate filings that failed to disclose the nature of the contingent commission agreements or bid rigging practices actively pursued by Marsh and its overstated revenues based upon these practices. Plaintiffs alleged they relied on MMC’s trustworthiness and good reputation in deciding whether to hold MMC stock and short positions and to lift or cover option contracts.
In particular, plaintiffs alleged that they told their financial advisor, Purdy, on May 27, 2004, that they should watch carefully how MMC accounted for the acquisition of several competitors, and how they would deal with “Spitzer payoffs, ” namely, fines, penalties and restitution that might be required to be paid to the State of New York if irregularities were found in the mergers if Eliot Spitzer investigated MMC’s proposed acquisitions. During the months that followed, plaintiffs considered whether to sell their underlying long position in MMC stock and to liquidate their option positions based in part on these concerns. Further plaintiffs were aware that MMC’s stock might drop with the planned announcement of a sizeable reduction in its workforce and a write-down of its fourth quarter earnings. On September 9, 2004, plaintiffs received an unsolicited email from an MMC employee advising them to sell their MMC stock. They forwarded this information to their investment advisor in consideration of selling their entire long portfolio.
Specifically, plaintiffs alleged that (1) during the period September 27, 2004 through October 4, 2004, they purchased 180, 000 shares of MMC stock to cover and close out preexisting short positions; (2) on October 14, 2004, they purchased an additional 7, 770 shares of MMC stock as a long position; and (3) from October 5, 2004 through October 14, 2004, they wrote and sold 2, 823 MMC put contracts. Plaintiffs alleged in detail the substance of each share purchase.
Plaintiffs alleged that based upon their review of MMC’s public filings and other corporate documents (financial statements and publicly available financial information), they concluded that MMC was a solid investment. Further, based upon defendants’ statements concerning their revenues and profits, “not only did plaintiffs abort their decision to sell their entire long position in MMC, but further decided to purchase 180, 000 shares long, that would in effect close out their entire short position in MMC; purchase an additional 7, 700 shares of MMC stock to hold long; and, sell an additional 2, 823 ‘puts’ (equal to 282, 300 shares) to generate additional income and to hedge against minor downward fluctuations in the share value of MMC stock.”
C. Court’s Ruling on Defendants’ Demurrer
The court noted that plaintiffs’ “essential difficulty... in pleading a ‘holder’s action’ pursuant to Small[, supra, 30 Cal.4th 167], is the ability to allege specific actions with relation to the securities position at issue which were then altered by actual reliance on the subject misrepresentation, as opposed to ex post facto plans, which any stockholder can allege in hindsight.” The court found that under Small, specific reliance must be pleaded with reference to “‘actions, as distinguished from unspoken and unrecorded thoughts and decisions, that would indicate that the plaintiff actually relied on the misrepresentations.’” (Id. at p. 184.) The trial court interpreted Small to require pleading of actual action taken, rather than allegations of hypothetical sales.
The trial court found plaintiffs’ Fifth Amended Complaint did not adequately allege a holder’s action for fraud. “Plaintiffs have pled that they had concerns, that they were considering selling, and that the information which gave rise to those concerns was forwarded to an advisor in consideration of selling their long shares. Nowhere is there a recorded thought, action, decision or statement alleged regarding precisely how many shares would be sold, and when they would have been sold. The plaintiffs’ allegations are essentially that they were worried, they were thinking about selling, then they decided not to-based on reliance on the misrepresentations. This is insufficient to meet the pleading requirements of Small, which clearly requires more than an averment to an unrealized and unrecorded investment strategy responsive to misgivings about a particular stock. The allegations [of the Fifth Amended Complaint] are projections as to what might have been done, and do not aid Plaintiffs in pleading reliance.” The court found that the plaintiffs’ specific allegations of shares sold did not allege more than an internalized personal determination that was unshared with the outside world and unmemorialized in action. “No arrangements were made, no sell orders were given or prepared contingent on certain events.... To the extent there was a decision, it is apparently exactly the sort of unspoken and unrecorded thought or decision which the Supreme Court in Small says is inadequate to plead a holder’s action for fraud.” The court found plaintiffs did not state a claim for negligent misrepresentation because the allegations were all based upon omissions, rather than affirmative statements.
D. Analysis
1. Holder’s Claim
In Small, supra, 30 Cal.4th 167, the Supreme Court noted that persons who hold common stock in reliance on misrepresentations were dependent upon state common law causes of action because sections 25400 and 25500 and Rule 10b-5 required the actual sale or purchase of a security. (Id. at p. 180.) Further, Small noted that because common law claims of fraud and negligent representation required a showing of reliance, forbearance-the decision not to exercise a right or power-was insufficient to satisfy the element of reliance. (Id. at p. 174.)
Small was primarily concerned that holders would file unmeritorious suits to coerce settlements, but did not want to deny relief to holders entirely. (Small, supra, 30 Cal.4th at pp. 180–184.) Recognizing the problem that proof of reliance would often depend upon oral testimony that the stockholder read the financial statement, decided not to sell the stock and spoke to his broker or another person of this decision, but there would be no written record of these actions, Small nonetheless found this was not a reason to deny liability completely. (Id. at p. 182.) “Ideally, what is needed is some device to separate meritorious and nonmeritorious cases, if possible in advance of trial.... California’s requirement for specific pleading in fraud cases serves that purpose....” Therefore, Small concluded that in a “holder’s action a plaintiff must allege specific reliance on the defendants’ representations: for example, that if the plaintiff had read a truthful account of the corporation’s financial status the plaintiff would have sold the stock, how many shares plaintiff would have sold, and when the sale would have taken place. The plaintiff must allege actions, as distinguished from unspoken and unrecorded thoughts and decisions, that would indicate that the plaintiff actually relied on the misrepresentations.” (Id. at p. 184.) Otherwise, plaintiffs who could not plead with specificity sufficient to show a bona fide claim of reliance “do not stand out from the mass of stockholders who rely on the market.” (Id. at pp. 184–185.) Small’spleading requirements apply to both claims for fraud and for negligent misrepresentation. (Id. at p. 184.)
Here, under a holder’s theory, plaintiffs have pleaded that they refrained from selling their core holding of 418, 000 shares of MMC stock, but they have not pleaded any specific action beyond unrecorded thoughts or decisions with respect to that core holding. They allege that they “forwarded this information [relating to Spitzer’s investigation] onto their investment advisor in consideration of selling their entire long position in MMC stock.” This fails to allege the required specificity of when shares would have been sold and how many. As the trial court pointed out, at most plaintiffs have alleged that they had concerns about MMC’s stock, considered selling, and advised their investment advisor about their concerns. Without more to their holder’s allegations, plaintiffs do not stand out from the “mass of stockholders who rely on the market.” (Small, supra, at pp. 184–185.)
2. Claims Based Upon Shares Traded
Plaintiffs have also alleged specific transactions allegedly relating to shares purchased or sold that fall into three categories, and which are therefore not “holder’s” claims.
Every element of the cause of action for fraud must be alleged in full, factually and specifically. We will not invoke the policy of liberal construction of pleading to sustain a pleading defective in any material respect. (Wilhelm v. Pray, Price, Williams & Russell (1986) 186 Cal.App.3d 1324, 1331.) The plaintiffs must plead facts that show how, when, where, to whom, and by what means the representations were made. (Lazar, supra, 12 Cal.4th at p. 645.)
With respect to pleading requirements for securities fraud under state law, Murphy v. BDO Seidman (2003) 113 Cal.App.4th 687 (Murphy) is instructive. There, the investor plaintiffs alleged fraud based on two accounting firms’ falsely rosy reports of a firm’s assets; the plaintiffs relied on the report in investing in the company and approving a merger. The trial court sustained the defendant’s demurrer on the grounds the complaint failed to allege fraud with sufficient particularity. (Id. at p. 689-690.) However, plaintiffs had pleaded that contributing to the company’s inflated value were the representations that one report valued its assets at $121,274,018, when in fact they were worth only $6,951,667; its broadcast license was worth $79,048,589, when in fact it was worth less than $1 million if GAAP principles were applied; the report falsely represented it had $6,643,427 in annuities when no such annuities existed. (Id. at pp. 692–693.) Murphy found these allegations sufficient to put defendants on notice of the purported falsehoods they would need to defend. (Id. at p. 693.)
Generally Accepted Accounting Principles.
Plaintiffs’ specific transactions were based upon plaintiffs’ belief that MMC stock was stable and would not fluctuate in price, and MMC’s rosy predictions of its financial health made during the period 2000 through 2004 that ignored the scope of the contingent commission practice and the underlying bid rigging, and the potential effect of Spitzer’s ongoing investigation. Plaintiffs’ claims based upon these transactions are not “holder’s” claims, but actual purchases and sales made in reliance on defendant’s misrepresentations of the state of its business and its revenues.
At the demurrer stage, we are not concerned with purported stipulations regarding the materiality of defendants’ representations made in connection with the summary judgment motion on plaintiffs’ section 25400 and 25500 claim.
In contrast to Murphy, supra, 113 Cal.App.4th 687, in spite of the fact plaintiffs have alleged very specific stock transactions, the underlying fraudulent basis of the claims are not pleaded with sufficient particularity, and thus amount to no more than a Rule 10b-5 “fraud on the market” theory disguised as state common law claims. Mirkin holds that such a theory is not permitted under California law. (Mirkin, supra, 5 Cal.4th at p. 1093.) Here, plaintiffs have pleaded no more than that they relied on the general health of MMC as a corporation and statements in its corporate documents during the period 2000 through 2004. These facts amount to no more than a reliance on the state of MMC’s stock price as reflecting all material information. (Seagate, supra, 802 F.Supp. at p. 274.)
In any event, plaintiffs cannot state claims against Marsh, which did not publicly issue stock. We reject plaintiffs’ contentions that Marsh should be held liable on a theory that it was the alter ego of MMC and we should therefore pierce its corporate veil. Alter ego is a method by which the corporate form will be disregarded where (1) there is such a unity of interest and ownership between the corporation and its equitable owner such that the separate personalities of the corporation and the equitable owner in reality do not exist; and (2) there is an inequitable result in treating the acts of the corporation as those of the corporation alone. (Sonora Diamond Corp. v. Superior Court (2000) 83 Cal.App.4th 523, 538.) Factors to consider in applying the doctrine include commingling of funds and other assets of the two entities; ostensible liability of one entity for the debt of another; identical ownership of the two entities; use of the same offices and employees; inadequate capitalization; disregard of corporate formalities; and identical directors and officers. (Id. at pp. 538–539.) Plaintiffs’ Fifth Amended Complaint does not contain any allegations that Marsh is the alter ego of MMC such that MMC should be held liable for the torts of Marsh, its subsidiary corporation.
III. PLAINTIFFS’ SECOND AMENDED COMPLAINT: BREACH OF FIDUCIARY DUTY
Plaintiffs’ Second Amended complaint alleged a claim for breach of fiduciary duty based upon defendants’ status as agents and brokers for their clients and as agents for the shareholders of the Marsh entities, which created a duty to the shareholders of MMC. The trial court sustained the demurrer to this claim without leave to amend on the basis that plaintiffs did not have standing to assert a claim for fiduciary duty, had alleged no fiduciary duty, and under Nelson v. Anderson (1999) 72 Cal.App.4th 111, 124, an individual claim exists only where there has been individual harm, as opposed to harm inflicted upon all shareholders.
On appeal, plaintiffs base their breach of fiduciary arguments on the duty of corporate officers and directors to the corporation, and the overall loss in value of MMC’s stock due to the conduct of corporate management. Plaintiffs’ arguments are without merit.
Corporate directors and officers owe a fiduciary duty to the corporation. (See Berg & Berg Enterprises, LLC. v. Boyle (2009) 178 Cal.App.4th 1020, 1037.) Generally, shareholders may bring a derivative action to recover for breaches of fiduciary duties of officers and directors causing injury to the corporation. (Jones v. H.F. Ahmanson & Co. (1969) 1 Cal.3d 93, 107.) However, under California law a shareholder may not bring a direct action for damages on the theory that the directors and officers engaged in wrongdoing that decreased the value of their stock. Such an action is a derivative action. (Schuster v. Gardner (2005) 127 Cal.App.4th 305, 312.) The rationale is that the wrong is to the corporation, rather than the individual shareholder whose injury is incidental to the injury to the corporation; permitting individual actions would “authorize multitudinous litigation.” (Sutter v. General Petroleum Corp. (1946) 28 Cal.2d 525, 530; see also Nelson v. Anderson, supra, 72 Cal.App.4th at p. 124 [stockholder may file derivative action for stock losses caused by directors’ and officers’ wrongdoing, but an individual stockholder may not maintain an action in his own right against the directors for destruction of or diminution in the value of the stock].)
Nonetheless, plaintiffs rely on dicta in Small, supra, 30 Cal.4th 167 that plaintiffs who cannot allege a holder’s action because they cannot show reliance could bring a derivative action against the corporate officers and directors for harm to the corporation. (Id. at p. 185.) This argument ignores the fact that the instant claim for breach of fiduciary duty is not a derivative action but a prohibited direct action. The trial court did not err in sustaining defendants’ demurrer to this claim.
IV. SUMMARY JUDGMENT ON PLAINTIFFS’ CLAIM UNDER CORPORATIONS CODE SECTIONS 25400 AND 25500
Plaintiffs argue that under StorMedia Inc. v. Superior Court (1999) 20 Cal.4th 449(StorMedia), the put options they sold constituted securities for purposes of sections 25400, subdivision (e) and 25500; they would not have sold the options at market prices if they had known the extent of MMC and Marsh’s fraudulent bid rigging; and they were not required to prove intent to defraud for their section 25400, subdivision (e) cause of action. Defendants argue the following: they did not buy or sell the puts at issue; plaintiffs did not raise a section 25400, subdivision (e) argument in the trial court, but in any event, that section does not apply because they did not receive any consideration for the stock or the puts or make any representation that the price of the stock would rise or fall; and defendants did not cause any damages to plaintiffs because none of the shares at issue were “long” purchases, the transactions were closed out prior to Spitzer’s announcement, and 2, 200 of the puts were written after Spitzer’s announcement.
On appeal, plaintiffs have apparently abandoned their claims based upon section 25400, subdivision (d), and for the first time assert a claim based upon section 25400, subdivision (e). We therefore do not consider section 25400, subdivision (d). (Dimon v. County of Los Angeles (2008) 166 Cal.App.4th 1276, 1279, fn.1.)
A. Standard of Review
“[T]he party moving for summary judgment bears the burden of persuasion that there is no triable issue of material fact and that he is entitled to judgment as a matter of law.” (Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 850.) “Once the [movant] has met that burden, the burden shifts to the [other party] to show that a triable issue of one or more material facts exists as to that cause of action.” (Code of Civ. Proc., § 437c, subd. (p)(1); Aguilar, supra, 25 Cal.4th at p. 850.) A triable issue of material fact exists where “the evidence would allow a reasonable trier of fact to find the underlying fact in favor of the party opposing the motion in accordance with the applicable standard of proof.” (Aguilar, at p. 850.) Where summary judgment has been granted, we review the trial court’s decision de novo, “considering all of the evidence the parties offered in connection with the motion (except that which the trial court properly excluded) and the uncontradicted inferences the evidence reasonably supports.” (Merrill v. Navigar, Inc. (2001) 26 Cal.4th 465, 476.)
B. Factual Background
1. Allegations of the Sixth Amended Complaint
Plaintiffs’ Sixth Amended Complaint alleged violations of Corporations Code section 25400, subdivision (d) based upon the offer for sale or purchase of securities based upon false or misleading statements. As stated in its annual reports, in 2004 MMC repurchased 11.4 million shares for a consideration of $524 million and in 2003 repurchased 26.1 million shares for a consideration of $1.2 billion. Plaintiffs alleged that MMC and Marsh made misstatements with the intent to artificially inflate the price of its stock for the purpose of maximizing the compensation of Marsh’s executives and employees under the various stock and benefit plans. During 2003 and 2004, $1.3 billion and $715 million were invested in the Marsh & McLennan Companies Stock Investment Plan.
Section 25400, subdivision (d) provides it is unlawful for any person, “[i]f such person is a broker-dealer or other person selling or offering for sale or purchasing or offering to purchase the security, to make, for the purpose of inducing the purchase or sale of such security by others, any statement which was, at the time and in the light of the circumstances under which it was made, false or misleading with respect to any material fact, or which omitted to state any material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, and which he knew or had reasonable ground to believe was so false or misleading.”
Based upon defendants’ fraudulent representations about the health of MMC and Marsh, Plaintiffs alleged that they purchased 180, 000 shares of MMC stock from September 17, 2004 through October 4, 2004, to close existing short positions; on October 14, 2004, they purchased an additional 7, 700 shares of MMC stock; and wrote 2, 823 puts in MMC stock. As a result of the decline in MMC’s stock price after Spitzer’s announcement, plaintiffs suffered losses in excess of $12 million.
2. The Parties’ Arguments and Evidence
Defendants’ summary judgment motion argued that (1) plaintiffs could not prove scienter because there was no evidence defendants’ senior executives knew of the facts alleged by Spitzer on October 14, 2004; (2) there were no damages because plaintiffs closed out their short positions prior to October 14, 2004; (3) under the statute, defendants were not the sellers of the put options.
Defendants’ evidence in support established that MMC’s employee benefit plans did not issue put options. Instead, the plans issued stock and call options, which were the right to purchase a share of stock at a specified price. Marsh, Inc. did not issue stock. Defendants contended that McMahon, rather than MMC, was the issuer of the puts at issue in the case. McMahon testified at his deposition to the nature of a put contract: in essence, he sold the right to someone else to force him to purchase the stock at a specified price.
In order to avoid a sale of McMahon’s core holding of MMC stock on which they wanted to avoid capital gains and collect the dividends, Purdy had McMahon implement a strategy of selling puts on MMC stock. This permitted them to collect the premium (proceeds) on the sale of the put. They would not sell a put unless they simultaneously had a “short” position in the stock. However, they did not want to be short when the stock went “ex-dividend” because they would have to pay the dividend to the actual owner of the borrowed shares of stock.
Ex dividend is a “synonym for ‘without dividend.’” (Black’s Law Dict. (6th ed. 1990) at p. 567.) The buyer of a stock ex dividend does not receive the recently declared dividend, which instead belongs to the seller of the stock.
The puts McMahon purchased generally had a duration of 30 days, and expired around the middle of the month after their issuance. Each month, new puts would be written to replace the expiring puts. Each put contract covered 100 shares of stock. To offset the downside risk of selling puts, McMahon would sell additional shares short to offset some of this downside risk.
In April 2004, Spitzer issued subpoenas to numerous insurance companies and brokers seeking information about the use of contingent commissions. MMC disclosed to the public in its first quarter 2004 form 10-Q it had received a subpoena from Spitzer. Spitzer’s investigation continued for several months until the October 14, 2004 press conference at which he announced Marsh had engaged in bid rigging. Gwendolyn King, a member of MMC’s board of directors, was unaware that MMC or Marsh engaged bid rigging or illegal conduct as described by Spitzer.
From the period commencing August 16, 2004 and continuing into September 2004, plaintiffs sold 180, 000 shares of MMC stock short. Beginning on September 27, 2004, McMahon began to eliminate the short position by purchasing the stock. By October 4, 2004, this short position had been eliminated. In September 2004, McMahon wrote 2, 000 October puts which were set to expire on October 15, 2004. Close to the expiration date of the October puts, in early October McMahon wrote 700 puts set to expire on November 15, 2004. After Spitzer’s October 14, 2004 announcement, McMahon wrote 2, 200 additional puts set to expire on November 20, 2004. This brought the total open position of puts to 2, 900. On October 14, 2007, McMahon exercised 77 of the November puts at the strike price of $45.
Defendants argued the 180, 000 shares purchased “long” in September and October 2004 were in fact purchased to cover short sales, and plaintiffs had a loss of $362,817.78 on those sales. Further, 2, 200 of the approximately 2, 900 put contracts purchased October 14, 2004 were written after Spitzer’s announcement; and the 7, 700 share purchase was for satisfaction of the 77 put contracts sold a week before.
Plaintiffs’ opposition argued that section 25019 defined security to include a “put, call, straddle, option, or privilege on any security, ” and defendants engaged in the purchase and sale of securities pursuant to section 25400 because they did not require that MMC sell the exact securities that McMahon purchased. They contended they suffered losses as a result of defendants’ misrepresentations because if MMC’s share price had not fallen dramatically on October 14, 2004, he would not have been forced to purchase stock at the strike price resulting in an overall loss of over $8 million; further, had they known of MMC’s bid rigging, they would have kept their short position open and not suffered additional losses when they closed that position out.
Plaintiffs’ evidence established that McMahon received 198, 327 shares as his final allotment upon the sale of Johnson & Higgins. The strategy of writing puts was designed to protect against any downward price fluctuation, but not the severe fluctuation that followed Spitzer’s announcement. During a July 2004 conference call with shareholders, MMC’s board of directors indicated that even if they were required to change their use of contingent commissions, this would have little impact on the company in terms of revenue.
McMahon did not directly dispute the fact he that was the writer of the put options, instead claiming that the sale of a put only generated income where the value of MMC stock did not drop below the strike price of the put. He claimed however that he did not know who actually issued the put contract. He did not dispute he sold the 180, 000 shares short and covered the positions by October 4, 2004, before Spitzer’s announcement, and he did not dispute the 7, 700 share purchase was to satisfy put contracts. He claimed that the 2, 900 November puts were written before Purdy was fully aware of the content of Spitzer’s announcement and the extent of MMC’s misconduct. Further, he disputed that Marsh did not sell securities, instead claiming that it was “part of an integrated insurance enterprise that under the name and symbol, MMC, does issue, purchase, and sell securities both directly and through its subsidiary, Putnam.”
3. Supplemental Briefing and the Court’s Ruling
At the November 20, 2008 hearing, the court indicated in its tentative ruling that it was inclined to grant the motion because the puts at issue were not “such security” within the meaning of section 25400, subdivision (d) because “such security “ meant “of this kind, ” rather than “any security.” However, because this argument did not dispose of the short sale transactions and whether plaintiffs suffered any damages as a result of those transactions, the court requested further briefing on that issue, and continued the motion.
In their supplemental brief, relying on StorMedia, supra, 20 Cal.4th at p. 459, fn.11, which cited to section 25019 defining security to include a “call” or a “put” option, plaintiffs contended that “such security” meant any security that the plaintiff bought or sold based upon misleading statements. Further, reading section 24500 as a whole, including subsections (a), (b) and (c), and section 25500, the affected security was “any security” which was purchased or sold by any other person “at a price which was affected by such act or transaction.”
MMC and Marsh argued that plaintiffs completed all of their short sales transactions by the time of Elliott Spitzer’s announcement, and therefore suffered no damages. Further, citing to OCM Principal Opportunities Fund, L.P. v. CIBC World Markets Corp. (2007) 157 Cal.App.4th 835, 881, they contended any argument that plaintiffs would have waited to repurchase the stock to cover their short position until after the announcement failed because they were not entitled to lost profits under the statute, but only out-of-pocket loss.
On January 8, 2009, the court issued its judgment in which it ruled for MMC and Marsh, finding that the term “such security” in the context of section 25400 meant the subject transaction must involve the particular security at issue. “[T]he phrase ‘such security’ in Section 2[54]00 points to the security in question, not all conceivable securities; that is, ‘such’ appears to be a specific situational word, rather than a general or all-inclusive word. Other uses of the words ‘such’ in Sections 25400 and 25500 also seem to support that view.” Further, the court found plaintiffs could not show they were damaged because all of their short sales, and the purchases to cover them, were made before Elliot Spitzer’s October 14, 2004 announcement of his lawsuit against the defendants. Any alleged misrepresentations would have affected both the purchase and the sale and no loss could be attributed to any of defendants’ misrepresentations.
C. Discussion
1. Sections 25400 and 25400 Do Not Apply to the 2, 900 Put Contracts
Questions of statutory interpretation are issues of law that we review de novo. (Apartment Assn. of Los Angeles County, Inc. v. City of Los Angeles (2009) 173 Cal.App.4th 13, 21.) Our fundamental task in statutory construction is to ascertain the intent of the lawmakers so as to effectuate the purpose of the law. In order to determine this intent, we begin by examining the language of the statute. (People v. Cruz (1996) 13 Cal.4th 764, 774–775.) “When the [statutory] language is clear and there is no uncertainty as to the legislative intent, we look no further and simply enforce the statute according to its terms.” (DuBois v. Workers’ Comp. Appeals Bd. (1993) 5 Cal.4th 382, 387–388.) In examining the language of the statute, we must consider the statutory scheme of which it is a part. We must enforce statutes according to the usual, ordinary import of the language employed in framing them, and, if possible, we give significance to every word, phrase, sentence and part of a statute. “‘“[T]he various parts of a statutory enactment must be harmonized by considering the particular clause or section in the context of the statutory framework as a whole.”’” (Smith v. Workers’ Comp. Appeals Bd. (2002) 96 Cal.App.4th 117, 123–124.)
Section 25019 defines security to include call and put options. However, that does not automatically attach liability to the put options sold by plaintiffs because they seek damages based not on the value of the put options themselves, but the underlying stock and the fact the “strike” price of the option was artificially changed by defendants’ alleged misrepresentations concerning their contingent commission practice. We do not find that liability under sections 25400 and section 25500 extends to damages based upon options trading in this circumstance.
Section 25400, subdivision (d) provides in relevant part that it is unlawful for the “person selling or offering for sale or purchasing or offering to purchase the security, to make [a material misrepresentation], for the purpose of inducing the purchase or sale of such security by others.” Section 25500 globally applies to anyact or transaction in violation of section 25400 and anysecurity whose price was affected by suchact or transaction. As the trial court correctly found, “such security, ” in this case, are the put options themselves. Defendants did not offer for sale, either directly or through their stock option plan, put options; rather, such options were bought and sold to and from third parties. Therefore, liability does not attach for the purchase or sale of the put options under section 25500. (See Kamen v. Lindly (2001) 94 Cal.App.4th 197, 203–204 [sections 25400 and 25500 applied only to purchasers and sellers of securities].)
Similar reasoning applies under section 25400, subdivision (e). Section 25400, subdivision (e) provides that it is unlawful for any person, “[f]or a consideration, received directly or indirectly from a broker-dealer or other person selling or offering for sale or purchasing or offering to purchase the security, to induce the purchase or sale of any security by the circulation or dissemination of information to the effect that the price of such security will or is likely to rise or fall because of the market operations of any one or more persons conducted for the purpose of raising or depressing the price of such security.” Defendants did not offer for purchase or sale the put options at issue.
2. Section 25400, Subdivision (e) Does Not Apply to the Remaining 180, 000 Share Closeout of the Short Position
Plaintiffs also sought damages based upon actual short sales transactions for 180, 000 shares and for 7, 700 shares (representing the shares purchased as the result of the exercise of the holder of the 77 put contracts plaintiffs had sold). As discussed above, section 25400, subdivision (e) provides that it is unlawful for any person to induce the purchase or sale of any security by the circulation or dissemination of information to the effect that the price of such security will or is likely to rise or fall. Section 25400, subdivision (e) outlaws “tipster sheets.” (Diamond Multimedia Systems, Inc. v. Superior Court, supra, 19 Cal.4th at p. 1048.) There are no allegations made in the complaints at issue here, nor were there any facts presented in support or opposition to the summary judgment motion, supporting a claim under this subsection because plaintiffs have not alleged defendants made any specific representations concerning the share price of MMC.
V. PLAINTIFFS’ SIXTH AMENDED COMPLAINT: CONSPIRACY
Plaintiffs contend the trial court erred in dismissing their conspiracy claim because they alleged the defendants engaged in an illegal bid-rigging scheme designed to inflate revenues from contingent commissions which they fraudulently concealed from the public.
“The elements of an action for civil conspiracy are (1) formation and operation of the conspiracy and (2) damage resulting to the plaintiff (3) from a wrongful act done in furtherance of the common design.” (Rusheen v. Cohen (2006) 37 Cal.4th 1048, 1062.) There are not two separate causes of action for a wrongful act done pursuant to a conspiracy-one for the tortious act itself and a separate one for the conspiracy; hence, there is nothing improper about pleading a single cause of action for conspiracy to commit a recognized tort, which would result in each member of the conspiracy being held responsible as a joint tortfeasor. (See, e.g., Richard B. LeVine, Inc. v. Higashi (2005) 131 Cal.App.4th 566, 574.) Nonetheless, liability for civil conspiracy requires the commission of an underlying tort. (Ibid.)
Here, plaintiffs have failed to establish defendants’ liability for either common law misrepresentation or violations of Corporations Code section 25400. Therefore, their claim for conspiracy fails.
VI. MOTION TO STRIKE PUNITIVE DAMAGES
Plaintiffs contend the trial court erred in granting defendants’ motion to strike their punitive damages allegations because they have alleged fraud. However, because we affirm the trial court’s finding that plaintiffs have failed to state a claim, their punitive damages claim fails.
DISPOSITION
The judgment is affirmed. Respondents are to recover their costs on appeal.
We concur: ROTHSCHILD, Acting P. J.CHANEY, J.