Summary
addressing relevance of NASD Notice 99-35 with regard to plaintiff's claims under the Securities Exchange Act of 1934, §§ 10(b) and 10b-5
Summary of this case from Johnson v. Aegon USA, Inc.Opinion
Civil Action No. CV203-131.
July 12, 2004
ORDER
Plaintiffs, David J. Nelson and Samuel Cooper, filed the above-captioned case against Defendants, Pacific Life Insurance Company and Pacific Life Distributors, Inc. (collectively, "Pacific Life"), pursuant to the Securities and Exchange Act of 1934 (the "Exchange Act"), codified in pertinent part at 15 U.S.C. §§ 78aa, 78j(b), 78t, and 78cc(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder.
The case is before the Court on Pacific Life's motion to dismiss for failure to state a claim upon which relief can be granted. Defendants' motion will be GRANTED on Plaintiffs' controlling person theory of liability under § 20(a) of the Exchange Act, DENIED on Plaintiffs' material omission theory under § 10(b) of the Exchange Act, and DENIED on Plaintiffs' claim under § 29(b) of the Exchange Act.
BACKGROUND
Nelson and Cooper purchased variable annuity contracts from Pacific Life in April and May of 1999, respectively.
A variable annuity is an insurance contract that is subject to regulation under state insurance and [federal] securities laws. Although variable annuities offer investment features similar in many respects to mutual funds, a typical variable annuity offers three basic features not commonly found in mutual funds: (1) tax-deferred treatment of earnings; (2) a death benefit; and (3) annuity payout options that can provide guaranteed income for life.
NASD Notice to Members 99-35 at 229.
Plaintiffs seek to bring the action on behalf of all persons who purchased an individual variable annuity contract from Pacific Life, between August 19, 1998 and April 30, 2002, to fund a contributory retirement plan or arrangement qualified for favorable tax treatment under 26 U.S.C. §§ 401, 403, 408, 408A, or 457.
Nelson and Cooper purchased their annuity contracts from Pacific Life through Carol Hanlon, a registered representative of an independent NASD-registered broker-dealer, Salomon Smith Barney. Plaintiffs purchased the annuities for their Individual Retirement Accounts ("IRA"), using rollover funds from the pension plan operated by their former employer, Georgia Pacific Corporation. Plaintiffs received prospectuses with their annuities.
Plaintiffs brought this action alleging securities fraud under the theory that Pacific Life failed to disclose that the tax deferral treatment of the variable annuities was superfluous because this was a feature already enjoyed with the IRA. Nelson and Cooper claimed that this unnecessary tax deferral rendered the annuities inappropriate investments for their IRAs. Plaintiffs assert that Pacific Life and Hanlon had a principal-agent relationship, rendering Pacific Life liable for Hanlon's alleged omission of a material fact under § 10(b) of the Exchange Act. As an alternative or additional ground for recovery, Nelson and Cooper allege that liability is imposed against Pacific Life under § 20 (a) of the Exchange Act, which provides for "controlling person" liability.
Pacific Life filed a motion to dismiss Plaintiffs' amended complaint on March 12, 2004. The parties requested oral argument on the motion, and argued their case to the Court on June 16, 2004.
The Court will proceed to examine Defendants' motion in light of these facts.
RULE 12(b)(6) MOTION TO DISMISS STANDARD
Rule 12 (b) (6) of the Federal Rules of Civil Procedure permits the defendant to move to dismiss a complaint on the ground that the plaintiff has failed to state a claim upon which relief can be granted. A motion under Rule 12 (b) (6) attacks the legal sufficiency of the complaint. In essence, the movant says, "Even if everything you allege is true, the law affords you no relief." Consequently, in determining the merits of a 12 (b) (6) motion, a court must assume that all of the factual allegations of the complaint are true, e.g., United States v. Gaubert, 111 S. Ct. 1267, 1276 (1991), and construe the allegations in the light most favorable to the plaintiff, e.g., Sofarelli v. Pinellas County, 931 F.2d 718, 721 (11th Cir. 1991). "A court may dismiss a complaint only if it is clear that no relief could be granted under any set of facts consistent with the allegations." Hishon v. King Spalding, 467 U.S. 69, 73 (1984) (citation omitted).
"[W]here the plaintiff refers to certain documents in the complaint and those documents are central to the plaintiff's claim, then the court may consider the documents part of the pleadings for purposes of Rule 12(b)(6) dismissal[.]" Brooks v. Blue Cross Blue Shield of Fla., Inc., 116 F.3d 1364, 1369 (11th Cir. 1997).
DISCUSSION
In support of its motion, Pacific Life argues (1) that it disclosed all material facts in its prospectus, (2) that the complaint is not particular enough and that the facts alleged in the complaint fail to give rise to a strong inference of scienter, making the complaint infirm under Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act of 1995 ("PSLRA"), and (3) that the statute of limitations ran because the suit was brought more than two years after Plaintiffs were put on "inquiry notice" of the violation. The Court will examine each argument in turn.
Pub.L. No. 104-67, 109 Stat. 737 (1995) (codified as amended in scattered sections of 15 U.S.C.)
To state a claim for securities fraud under Rule 10b-5, a plaintiff must show: (1) a misstatement or omission (2) of a material fact (3) made with scienter (4) on which plaintiff relied (5) that proximately caused plaintiff's injury. Bryant v. Avado Brands, Inc., 187 F.3d 1271, 1281 (11th Cir. 1999). The Court is mindful that "[s]ilence, absent a duty to disclose, is not misleading under Rule 10b-5." Basic Inc. v. Levinson, 485 U.S. 224, 238 n. 17 (1988). As a preliminary matter, then, the Court will examine whether a duty exists for an issuer of securities to warn a prospective investor about the suitability of the investment in the context of the case presented.
I. PACIFIC LIFE'S DUTY TO DISCLOSE
In granting the parties' requests for oral argument, the Court directed the parties to consider the impact of Chiarella v. United States, 445 U.S. 222, 230 (1980), on Defendants' motion to dismiss, insofar as liability under § 10(b) of the Exchange Act, codified at 15 U.S.C. § 78j(b), for silence in connection with the sale of securities, "is premised upon a duty to disclose arising from a relationship of trust and confidence between the parties to a transaction." Id.
In response to this directive, Plaintiffs, Nelson and Cooper, unlike the plaintiffs in Chiarella, were able to identify a relationship between Plaintiffs and Pacific Life "that could give rise to a duty." 445 U.S. at 232. Plaintiffs pointed to their allegations in the complaint that Pacific Life has a principal-agent relationship with the individual NASD registered representatives that sell the company's variable annuities, making Defendants primarily liable for the alleged omission of a material fact.
The National Association of Securities Dealers ("NASD") regulates its members through Conduct Rules. One such rule, NASD Conduct Rule 2310, concerns members' recommendations to their customers regarding the purchase of securities. This Conduct Rule requires NASD members to conduct a suitability inquiry when making a recommendation to investors to purchase securities. Members must have reasonable grounds for believing the investment is appropriate, given the investor's other security holdings and financial situation. "Implicit in all member and registered representative relationships with customers and others is the fundamental responsibility for fair dealing." NASD Conduct Rule 2310, IM-2310-2, available at http://www.nasdr.com/.
NASD members are subject to discipline for the violation of the NASD Conduct Rules. NASD also provides notices to its members, which provide guidance and reminders for its members regarding the Conduct Rules and Members' obligations thereunder. NASD Notice to Members 99-35 is entitled: "The NASD Reminds Members Of Their Responsibilities Regarding The Sales Of Variable Annuities[.]" This Notice provided suggested guidelines to NASD Members on this topic, providing in part:
When a registered representative recommends the purchase of a variable annuity for any tax-qualified retirement account (e.g., 401(k) plan, IRA), the registered representative should disclose to the customer that the tax deferred accrual feature is provided by the tax-qualified retirement plan and that the tax deferred accrual feature of the variable annuity is unnecessary. The registered representative should recommend a variable annuity only when its other benefits, such as lifetime income payments, family protection through the death benefit, and guaranteed fees, support the recommendation.
NASD Notice to Members 99-35 at 231 (¶ 11).
NASD Notices "are not law and noncompliance therewith cannot itself constitute a violation of the federal securities laws."Donovan v. Am. Skandia Life Assurance Corp., 2003 WL 21757260 at *1 (S.D.N.Y. 2003). However, the NASD Notices are relevant to the extent that they show how NASD interprets its own Conduct Rules. Moreover, although a violation of a NASD Conduct Rule does not automatically imply liability under § 10(b) and Rule 10b-5, a violation of the Conduct Rules is relevant for purposes of proving securities fraud claims. See, e.g., GMS Group, LLC v. Benderson, 326 F.3d 75, 82 (2d Cir. 2003); Hoxworth v. Blinder, Robinson Co., 903 F.2d 186, 200 (3d Cir. 1990).
The Court is convinced that if Plaintiffs' allegations of a principal-agent relationship prove true, Defendants would be liable for any wrongdoing on the part of Hanlon or Salomon Smith Barney. See Paul F. Newton Co. v. Tex. Commerce Bank, 630 F.2d 1111, 1118-19 (5th Cir. 1980) (common law agency principles not preempted by federal securities law). Plaintiffs have pled facts that could establish a duty to disclose under the Exchange Act.
In Bonner v. City of Prichard, 661 F.2d 1206, 1209 (11th Cir. 1981) (en banc), the Eleventh Circuit adopted as binding precedent all Fifth Circuit decisions handed down prior to the close of business on September 30, 1981.
II. DISCLOSURE OF ALL MATERIAL FACTS
Section 10(b) of the Exchange Act makes it unlawful for any person:
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(b) (1997).
Rule 10b-5, in turn, makes it unlawful for a person, in the context of a sale of securities, to "omit to state a material fact necessary to make the statements made, in light of the circumstances . . ., not misleading[.]" 17 C.F.R. § 240.10b-5(b) (2003).
"[T]o fulfill the materiality requirement `there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the `total mix' of information available.'"Basic Inc., 485 U.S. at 231-32 (citing TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976)).
In support of its argument that it disclosed all material facts, Pacific Life points to the prospectuses it issued to Nelson and Cooper. According to Pacific Life, it is not liable for any alleged omission, because nothing else it could have said in the prospectuses would have altered the "total mix" of information available to its investors. Pacific Life notes that the prospectuses stated that both the variable annuities and tax qualified retirement plans are tax deferrable, and advised investors to consult a tax adviser.
The Court will take judicial notice of Pacific Life's 1998 and 1999 prospectuses, both of which are public records that are required to be, and actually are, on file with the Securities and Exchange Commission ("SEC"). The Court may properly consider these documents on a motion to dismiss. Bryant, 187 F.3d at 1275-81 (11th Cir. 1999); Fed.R.Evid. 201.
However, the determination of "materiality" is a mixed question of law and fact. The Supreme Court has recognized that the assessment can be a delicate chore, involving the significance of inferences to a "reasonable" person. Generally, it is deemed a question best left to the trier of fact. TSC Industries, Inc., 426 U.S. at 450. In this case, the question must be reserved for the trier of fact because of the structure and nature of the disclosure within each particular prospectus. To elaborate, the Court will explain the arguable deficiency in the 1998 prospectus, which was in effect at the time Nelson purchased his variable annuity, and was the prospectus he received. The 1999 prospectus, which Cooper received, is similar in all material respects.
At the first opportunity in the prospectus, Pacific Life explains the nature of the investment contract. It explains to the investor that the annuity contract is "designed to be a long-term financial planning device, permitting you to invest on a tax-deferred basis[.]" 1998 Pacific Life Prospectus 7. After this section summarizing the nature of the investment, Pacific Life proceeds to detail the fee table, and some financial highlights of its various accounts. Next, Pacific Life describes why an investor might want to purchase a contract. Here, on page 12, it explains again the tax-deferred nature of the investment. Investment options are then described, followed by instructions on how to purchase a contract. The prospectus then describes how payments are allocated, and explains how charges, fees, and deductions are made on the account. Next, several pages discuss retirement benefits and payouts.
After discussing withdrawals from the account, and Pacific Life's Separate Account A, the prospectus delves into federal tax consequences. It is in this section that Pacific Life discloses that IRAs are tax deferrable. Its rather cryptic acknowledgment of that fact comes a few pages into this section. Pacific Life states: "recent federal tax legislation has expanded the type of IRAs available to individuals for tax deferred retirement savings: In addition to `traditional' IRAs established under Code Section 408, there are Roth IRAs . . .
Depending on the circumstances of the individual, contributions may be made on a deductible or non-deductible basis." 1998 Pacific Life Prospectus 35.
Whether these statements, occurring some twenty-eight and twenty-four pages after Pacific Life disclosed that the variable annuities were tax deferrable, are sufficient to put the investor on notice that the tax-deferred treatment of the variable annuity is superfluous is a question that cannot be resolved as a matter of law. A trier of fact may reasonably find that a prominent warning, to the effect that when investing in an IRA, "no additional tax advantage results from the purchase of the variable annuity," appearing in close proximity to the statements either on page seven or twelve may have altered the "total mix of information" available, thus influencing the "reasonable investor." Basic Inc., 485 U.S. at 231-32.
For the reasons explained above, Pacific Life's reliance onDonovan is misplaced. Donovan was cited by Defendants because the court in that case accepted the defendant's materiality argument. The court noted that the prospectuses "clearly state that both variable annuities and tax qualified retirement plans are tax deferrable." Donovan, 2003 WL 21757260, at *2. Perhaps because the disclosure in the prospectus was abundantly clear, or perhaps because the opinion was not published, little detail is offered to support this conclusion. The Court does not have the ability to compare American Skandia's prospectuses to Pacific Life's prospectuses to make this determination. If American Skandia's disclosure was much clearer than Pacific Life's disclosure, then Donovan is distinguishable. If Pacific Life's disclosure closely approximates American Skandia's disclosure, the Court has explained why such a disclosure is inadequate to resolve the question as a matter of law.
The Court also notes that the plaintiffs in Donovan, in contrast to Nelson and Cooper, did not pursue an agency theory of liability.
Likewise, the Court views Pacific Life's recommendation in the prospectus to consult a tax adviser as inadequate to resolve the case as a matter of law. See Pacific Life 1998 Pacific Life Prospectus 35. Whether this recommendation was sufficient to render the alleged omission immaterial is a question of fact that the Court cannot resolve at this stage of the proceedings.
The Court fails to see how either Pacific Life's disclosure of the fees associated with the contract, or Pacific Life's policy allowing its customers to get their money back if they have a change of heart within ten days of receiving their contracts, has any bearing on whether Defendants omitted "a material fact necessary to make the statements made, in light of the circumstances . . ., not misleading[.]" 17 C.F.R. § 240.10b-5(b) (2003).
III. PLEADING REQUIREMENTS OF RULE 9 (b) AND THE PSLRA
A. Particularity Requirement
Rule 9(b) of the Federal Rules of Civil Procedure states in part: "In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." Defendants argue that Plaintiffs fail to meet this requirement.
The Court finds that the amended complaint satisfies the particularity requirement of Rule 9(b) because it "sets forth what statements or omissions were made in what documents or oral representation; the time and place of the statements or omissions; who made the statements; the content of the statement and the manner in which they misled the plaintiffs; and what the defendant `obtained as a consequence of the fraud.'" Druskin v. Answerthink, Inc., 299 F. Supp. 2d 1307, 1321 (S.D. Fla. 2004) (quoting Brooks v. Blue Cross Blue Shield of Fla., Inc., 116 F.3d 1364, 1369 (11th Cir. 1997).
The Court has discussed Plaintiffs' allegations at some length above. To summarize, Plaintiffs have specifically pinpointed the omission that it considers to be fraudulent in the instant case: Pacific Life sold them variable annuities without warning them that it was unnecessarily duplicative, in light of their IRAs. Carol Hanlon, the registered representative, did not explain that the tax deferral treatment was unnecessary and, at the time, she was alleged to be acting as Pacific Life's agent, which would make the company, as the principal, liable for her omission. The Court has discussed why the prospectuses did not sufficiently clarify the alleged omission. The relevant times and places of these omissions are described adequately in the amended complaint. Additionally, Plaintiffs described in the amended complaint what Defendants obtained as a result of the fraud: higher fees and sales commissions than might be obtained from the sale of mutual funds or some other investment. The particularity requirement of Rule 9 is satisfied.
B. Scienter Requirement
The PSLRA requires that plaintiffs "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b) (2) (1997). To meet the scienter requirement in this circuit, Plaintiff must plead facts that, at the very least, indicate severe recklessness by Defendant. Bryant, 187 F.3d at 1283. Evidence of motive and opportunity are insufficient, standing alone, to establish severe recklessness. Id. at 1285-86. However, in some circumstances, evidence of motive and opportunity may contribute to an inference of severe recklessness. Id. at 1286.
Severe recklessness is limited to those highly unreasonable omissions or misrepresentations that involve not merely simple or even inexcusable negligence, but an extreme departure from the standards of ordinary care, and that presents a danger of misleading buyers or sellers which is either known to the defendant or is so obvious that the defendant must have been aware of it.McDonald v. Alan Bush Brokerage Co., 863 F.2d 809, 814 (11th Cir. 1989) (citations omitted).
In the amended complaint, Plaintiffs allege that Pacific Life trained registered representatives to avoid disclosure of the tax deferral redundancy when selling the variable annuities to clients investing in an IRA. If questioned, agents were supposed to try to sell the variable annuities based on the death benefits associated with the product if investors questioned the tax deferral duplication. ¶ 48. The complaint describes how Pacific Life trained its agents to recommend variable annuities to all qualified plan investors, regardless of the investor's insurance needs, and without disclosure of the redundancy of the investment's tax treatment. ¶¶ 37, 46-49. These allegations gives rise to a strong inference that Pacific Life acted either intentionally or with severe recklessness. The inference is that Pacific Life attempted evading legitimate questions from its agents and customers when asked about the wisdom of using variable annuities. Instead of addressing these concerns, Plaintiffs allege that Pacific Life avoided and, when pressed, attempted to obscure the advisability of the investment, taking advantage of the "myriad features of variable insurance products" which "make the suitability analysis required under NASD rules particularly complex." NASD Notice to Members 99-35 at 230.
Plaintiffs' allegations that the larger profits available with variable annuity contracts motivated Pacific Life to favor variable annuity sales are only one part of Plaintiff's scienter allegations. As noted, evidence of motive may contribute to an inference of severe recklessness. Bryant, 187 F.3d at 1286. Taken together, Plaintiffs' allegations are sufficient to give rise to a strong inference of scienter.
In fact, Pacific Life's argument regarding "materiality" belies its claimed lack of scienter. This is not a case where Pacific Life pleads ignorance of the alleged wrongdoing. Rather, it argues that the tax deferred treatment of both the variable annuity and the IRA was so obvious that any warning would have been superfluous.
Pacific Life's reliance on Druskin is misplaced. In that case, the alleged securities fraud concerned uncollectible receivables, but the former employees quoted in the complaint did not actually claim that any company officials knew the receivables were uncollectible. Druskin, 299 F. Supp.2d at 1332-33. In contrast, the former employees in the instant case claim to have witnessed the sales practice training and other alleged wrongdoing. Defendants' arguments regarding the lack of "specificity" in the complaint are without merit. Certainly, more discovery may need to be done to flesh out Plaintiffs' allegations. However, Plaintiffs are not required to plead the identity of their sources relied upon for all of their factual allegations. Novak v. Kasaks, 216 F.3d 300, 312-14 (2d Cir. 2000) ("the applicable provision of the law as ultimately enacted requires plaintiffs to plead only facts and makes no mention of the sources of these facts." Id. at 313. See 15 U.S.C. § 78u-4 (b) (1) (1997)); In re PSS World Med., Inc. Sec. Litig., 250 F. Supp. 2d 1335, 1343-44 (M.D. Fla. 2002).
Defendants' argument that even more detail be required, before there is any discovery, here amounts to requiring plaintiffs to plead evidence. The fraud allegations advanced in this complaint, with their consistent details provided from at least a half dozen different sources . . . reinforce each other and suggest reliability of the information reported.In re: Cabletron Sys., Inc., 311 F.3d 11, 33 (1st Cir. 2002).
Plaintiffs' allegations give rise to a strong inference of scienter.
IV. STATUTE OF LIMITATIONS
Claims under § 10(b) of the Exchange Act must be brought within two years after the discovery of the facts constituting a violation. 28 U.S.C. § 1658(b) (2004). "Discovery occurs when a potential plaintiff has inquiry or actual notice of a violation."Theoharous v. Fong, 256 F.3d 1219, 1228 (11th Cir. 2001) (citations omitted).
An objective standard is applied to determine if an individual is on inquiry notice of a particular claim. "Inquiry notice is `the term used for knowledge of facts that would lead a reasonable person to begin investigating the possibility that his legal rights had been infringed.'" Id. (citation omitted).See generally, Lawrence Kaplan, What Constitutes "Inquiry Notice" Sufficient to Commence Running of Statute of Limitations in Securities Fraud Action-Post-Lampf Cases, 148 ALR Fed 629 (1998) (collecting cases). "A reasonable investor is deemed to have knowledge of well publicized and widely available information in the public domain." Meadows v. Pac. Inland Sec. Corp., 36 F. Supp. 2d 1240, 1246 (S.D. Cal. 1999) (citation omitted).
As an initial matter, Pacific Life claimed that Nelson and Cooper were on inquiry notice at the time they received and read their prospectuses, in 1999. Investors are charged with the duty of reading the prospectus and will not be heard to complain if there is an adequate disclosure therein. Franze v. Equitable Assurance, 296 F.3d 1250, 1254-55 (11th Cir. 2002). The Court's previous finding on materiality in Section II, above, precludes the statute of limitations from having run as a matter of law insofar as Defendants' argument is based on the prospectus.
In Section II, the Court found that there was a question of fact on this matter due to the structure and nature of the disclosure within each particular prospectus. As noted above, Pacific Life's "rather cryptic" acknowledgment that IRAs are tax deferrable comes over twenty pages after Pacific Life disclosed that the variable annuities were tax deferrable. The Court viewed the question, whether these acknowledgments were sufficient to render the statements made in the prospectus not misleading under Rule 10b-5, as one properly left to the trier of fact. If the prospectuses omitted a material fact, then Nelson and Cooper can hardly be placed on inquiry notice by having received these misleading and inadequate prospectuses.
However, in their reply brief, Defendants argued that "storm warnings," or the publication of suspicious facts, also shields Pacific Life from liability. Defendant's reliance on United Klans of Am. v. McGovern, 621 F.2d 152, 153 (5th Cir. 1980), for support on this point is unavailing, as that case is readily distinguishable from the case sub judice.
In United Klans, the court determined that the Klan was on inquiry notice of their possible right to institute a civil suit based on alleged constitutional violations. Id. at 153-55. The court so held because more than one year before the lawsuit was filed, Attorney General William Saxbe held a press conference describing the Federal Bureau of Investigation's counterintelligence program ("COINTELPRO") to the American public. Saxbe explained that COINTELPRO was designed to investigate white hate groups such as the Klan. Id. Also over a year before suit was instituted, the U.S. Senate published a report on COINTELPRO. This report discussed the tactics used to uncover the Klan's alleged misdeeds. Id. at 154-55. The court held that the statute of limitations had run because the Klan was placed on notice by the press conference and the release of the Senate report. Id. at 155.
The applicable limitations period for the cause of action was one year.
The court took care to note that this press conference was reported in two newspapers with circulation in the district and division in which suit was filed. Id. at 154.
The evidence of storm warnings is much weaker in the case sub judice. Almost without exception, Pacific Life relies on comments made to industry-specific groups or publications, or press coverage to which no reasonable person would expect Nelson or Cooper to have had access before the two-year period prior to the institution of this proceeding. For example, Defendants cite to an issue of the "National Underwriter-Life/Health" publication, a NASD Notice to Members, a quote in an unidentified newspaper, and a speech made to the National Association for Variable Annuities Regulatory Affairs Conference by an SEC Director. There are no assertions by Pacific Life that the fraud of which Nelson and Cooper complained was reported on or disclosed in any local media outlets in the Southern District of Georgia, Brunswick Division, as was the case in United Klans.
Pacific Life's reliance on a June 2000 SEC advisory to consumers is more to the point, but ultimately unpersuasive because a plaintiff's constructive knowledge of a public record "is not as a matter of law tantamount to actual or constructive knowledge of their claim." In re Beef Indus. Antitrust Litig., MDL Docket No. 248, 600 F.2d 1148, 1171 (5th Cir. 1979). Judge Posner has aptly characterized the relevant inquiry:
Is mere suspicion discovery? Or, at the other extreme, must the investor have learned (or be in a position where he should have learned) all the facts he needs in order to file suit? . . . [T]he plaintiff gets [the] period of the statute of limitations after he learned the facts that he must know to know that he has a claim.Morton's Mkt., Inc. v. Gustafson's Dairy, Inc., 198 F.3d 823, 836 (11th Cir. 1999) (quoting Law v. Medco Research, Inc., 113 F.3d 781, 785 (7th Cir. 1997)).
"Information in the public records or published by the news media may be so massive that investors will not be heard to say that they remained ignorant[,]" but the information available to the public was not so "massive" as to put Plaintiffs on notice in the instant case. Rochelle v. Marine Midland Grace Trust Co. of N.Y., 535 F.2d 523, 532 (9th Cir. 1976). See also Great Rivers Coop. of Southeastern Iowa v. Farmland Indus., Inc., 120 F.3d 893, 897 (8th Cir. 1997) (refusing to impute automatically public information to a plaintiff in securities fraud context); In re Apple Computer Sec. Litig., 886 F.2d 1109, 1114 (9th Cir. 1989).
In summary, while Plaintiffs need not have had notice of the entire fraudulent scheme to be on inquiry notice, they must have had evidence of the general plan employed. Theoharous, 256 F.3d at 1228. In the end analysis, the Court must reject Pacific Life's invitation to find that the 2000 SEC advisory to consumers put Nelson and Cooper of inquiry notice of their claims. If the Court were to accept Defendants' reasoning in the case sub judice, it would simply be requiring the premature filing of lawsuits, which would invite complaints with particularity and scienter deficiencies, making them infirm under Rule 9(b) and the PSLRA. The Court declines to endorse this Catch-22. See Law, 113 F.3d at 786.
Whether Nelson and Cooper were on inquiry notice is a question of fact that cannot be resolved as a matter of law. Defendants' motion to dismiss the § 10(b) claim set forth in Count I of the complaint will be denied.
V. CONTROLLING PERSON LIABILITY
To establish control person liability, Plaintiff must show (1) that Defendant exercised control over the operation of the primary violator's business in general, and (2) that Defendant possessed the power to control to specific transaction in question for controlling person liability to attach under § 20(a), 15 U.S.C. § 78t(a) (1997). Brown v. Enstar Group, Inc., 84 F.3d 393, 396 (11th Cir. 1996).
As Defendants noted at oral argument, there are no allegations in the instant case that Pacific Life exercised general control over the primary violator's business, either Carol Hanlon or Salomon Smith Barney. For this reason, Plaintiff's § 20(a) claim under the Exchange Act must fail as a matter of law. The Court will grant Pacific Life's motion as to Count II.
VI. SECTION 29(b) CLAIM
Section 29(b) of the Exchange Act makes contracts made in violation of the Act voidable. 15 U.S.C. § 78cc(b) (1997). Because this remedy is not clearly precluded under the Court's analysis of the case in the previous sections, Count III will not be dismissed as a matter of law. CONCLUSION
Having considered carefully the positions of the parties, Defendants' motion to dismiss is hereby GRANTED as to Count II (claim made under § 20(a) of the Exchange Act), DENIED as to Count I (claim made under § 10(b) of the Exchange Act, and Rule 10b-5, promulgated thereunder), and DENIED as to Count III (claim made under § 29(b) of the Exchange Act). See Doc. No. 17.