Opinion
Case No. 2:02-cv-483-FtM-29SPC
April 28, 2003
ORDER
This matter comes before the Court on Defendants' Motion to Dismiss Plaintiff's Complaint (Doc. #18) filed on January 6, 2003. Plaintiff filed a Memorandum In Opposition (Doc. #24) to the motion on February 12, 2003, and defendants filed a Reply (Doc. #28) on March 11, 2003.
I.
In deciding a motion to dismiss, the Court must accept all factual allegations in a complaint as true and take them in the light most favorable to plaintiff. Christopher v. Harbury, 536 U.S. 403, 406 (2002). A complaint should not be dismissed unless it appears beyond doubt that plaintiff can prove no set of facts that would entitle him to relief. Conley v. Gibson, 355 U.S. 41, 45-46 (1957) (footnote omitted);Marsh v. Butler County, Alabama, 268 F.3d 1014, 1022 (11th Cir. 2001) (en bane). To satisfy the pleading requirements of Fed.R.Civ.P. 8, a complaint must simply give the defendants fair notice of what the plaintiff's claim is and the grounds upon which it rests. Swierkiewicz v. Sorema N.A., 534 U.S. 506, 512 (2002). However, dismissal is warranted under Fed.R.Civ.P. 12(b)(6) if, assuming the truth of the factual allegations of plaintiff's complaint, there is a dispositive legal issue which precludes relief.Neitzke v. Williams, 490 U.S. 319, 326 (1989); Brown v. Crawford County. Ga., 960 F.2d 1002, 1009-10 (11th Cir. 1992). Additionally, the Court need not accept unsupported conclusions of law or of mixed law and fact in a complaint. Marsh, 268 F.3d at 1036 n. 16.
Because a motion to dismiss is limited to the four corners of a complaint, the Court declines to consider the Declaration of David S. Mandel (Doc. #19).
II.
The putative class action Complaint (Doc. #1) sets forth one count brought under Section 215 of the Investment Advisors Act of 1940 (IAA), 15 U.S.C. § 80b-15. Plaintiff alleges that Merrill Lynch, Pierce, Fenner Smith, Inc. (Merrill Lynch) organized, promoted and distributed shares of the Merrill Lynch Internet Strategies Fund, Inc. (Internet Strategies Fund), an open-end investment company formed to invest primarily in the common stock of Internet and Internet related companies. The Fund Asset Management, L.P. (FAM) is alleged to be a limited partnership and registered investment advisor which is a wholly owned subsidiary of Merrill Lynch. Pursuant to contracts with Merrill Lynch, FAM was the manager and investment advisor of the Internet Strategies Fund and made all investment decisions. The Internet Strategies Fund was offered exclusively to Merrill Lynch customers and was launched on March 22, 2000.On March 22, 2000, plaintiff purchased 1,000 shares of the Internet Strategies Fund at $10 per share on the recommendation of his Merrill Lynch broker. Plaintiff alleges that by then the bull market for stocks in general and Internet and technology stocks in particular had been underway for some time, and that many experts believed the market had peaked and that Internet stocks were vulnerable to a sharp decline in value. Plaintiff alleges that the Internet Strategies Fund immediately began to decline in value, losing 70% of its value by the end of its first year (March, 2001). On October 15, 2001, the Internet Strategies Fund merged with the Merrill Lynch Global Technology Fund (Global Technology Fund), with the Internet Strategies Fund shareholders receiving shares of the Global Technology Fund. By the time of merger, plaintiff's Internet Strategies Fund investment had lost 82% of its value.
Plaintiff alleges that Merrill Lynch falsely represented itself as an expert in providing investment advice and managing assets. Plaintiff asserts that Merrill Lynch and FAM never implemented downside protection or capital preservation strategies to protect plaintiff, and that their conduct "constituted a practice or course of business that operated as a fraud or deceit as defined in the IAA." (Doc. #1, ¶ 16). Plaintiff alleges that the conduct of Merrill Lynch and FAM violated § 206(2) of the IAA (Doc. #1, ¶ 30), and that under § 215 of the IAA investment advisor contracts between the Internet Strategies Fund and FAM (and sub-advisors) are void. Plaintiff seeks rescission of these contracts and restitution of all consideration given by the Internet Strategies Fund. (Doc. #1, ¶ 31).
III.
Section 206 of the IAA prohibits an investment adviser from engaging in conduct that operates as a "fraud or deceit upon any client." 15 U.S.C. § 80b-6. There is, however, no general private right of action under Section 206 of the IAA. Transamerica Mortgage Advisors, Inc. v Lewis, 444 U.S. 11, 19-26 (1979). Section 215 of the IAA provides that contracts made or performed in violation of the IAA shall be void. 15 U.S.C. § 80b-15. This creates a right to specific and limited relief in federal court. Transamerica Mortgage Advisors, Inc., 444 U.S. at 18. Plaintiff's claim is only under § 215, and seeks rescission of the contracts between Merrill Lynch and FAM for the management of the Internet Strategies Fund and restitution of all consideration given under such contracts.
Defendants seek dismissal of the Complaint for three reasons: (1) plaintiff's claim must be brought derivatively on behalf of the Internet Strategies Fund, and cannot be brought by plaintiff directly; (2) the complaint fails to plead fraud with particularity, as required by Fed.R.Civ.P. 9(b); and (3) the § 215 claim is time-barred by the applicable one-year statute of limitations.
As to the sufficiency of the Complaint issue, the Court agrees with defendants that the Complaint sounds in fraud, not negligence, and that it is not pleaded with particularity as required by Rule 9(b). Paragraphs 16 and 29 of the Complaint clearly state that the claim is based on defendants' fraud and deceit. Therefore, the Court need not decide whether it is possible for plaintiff to state a § 215 claim based on negligence. Rule 9(b) requires that a complaint for fraud allege
(1) precisely what statements were made in what documents or oral representations or what omissions were made, and (2) the time and place of each such statement and the person responsible for making (or, in the case of omissions, not making) same, and (3) the content of such statements and the manner in which they misled the plaintiff, and (4) what the defendants obtained as a consequence of the fraud.Ziemba v. Cascade Intern., Inc., 256 F.3d 1194, 1208 (11th Cir. 2001) (quoting Brooks v. Blue Cross and Blue Shield of Florida, Inc., 116 F.3d 1364, 1371 (11th Cir. 1997)). The Complaint in this case fails to allege any such matters, and is therefore due to be dismissed without prejudice.
Defendants argue that plaintiff's claim must be dismissed because it is not brought derivatively on behalf of the Internet Strategies Fund, and plaintiff cannot sue individually or as a representative of a class. The Complaint confirms that plaintiff is suing individually, and not derivatively as a representative of the Internet Strategies Fund. (Doc. #1, ¶ 1). Essentially, defendants argue that plaintiff as a shareholder or former shareholder has no standing to bring a § 215 claim seeking to void contracts of which he was not a party. The Court agrees.
In Transamerica Mortgage Advisors, Inc. v. Lewis the Court stated that while "[i]t is apparent that the two sections [§§ 206 and 215] were intended to benefit the clients of investment advisers, and, in the case of § 215, the parties to advisory contracts as well," "whether Congress intended additionally that these provisions would be enforced through private litigation is a different question." 444 U.S. at 17-18. The Court concluded that § 215 created "a right to specific and limited relief in a federal court." Id. at 18. The Court stated that § 215 voidness could be raised defensively in private litigation to preclude the enforcement of an investment adviser contract, and that a person with the power to void a contract could ordinarily sue to have the contract rescinded and obtain restitution. Id. The Court held that "when Congress declared in § 215 that certain contracts are void, it intended that the customary legal incidents of voidness would follow, including the availability of a suit for rescission or for an injunction against continued operation of the contract, and for restitution." Id. at 19. The Court concluded that the Court of Appeals had been correct in ruling that a shareholder of the Mortgage Trust of America could bring a derivative action on behalf of the Trust seeking to void the investment advisers contract. Id.
Unlike Transamerica, plaintiff in this case is not suing derivatively on behalf of the Internet Strategies Fund or its successor by merger, but is suing only as an individual former shareholder and as a class representative of other such shareholders. The alleged injuries sustained by the plaintiff are not separate and distinct from the injuries sustained by the Internet Strategies Fund or the other shareholders generally. While the Internet Strategies Fund was an intended beneficiary of the investment adviser contracts between Merrill Lynch and FAM, the individual shareholders were not. The Court concludes that the shareholders have no standing to individually sue either defendant in this case to void the contracts. E.g., In re Sunrise Sec. Litig., 916 F.2d 874, 879-82 (3d Cir. 1990), The direct action Complaint is due to be dismissed.
Finally, defendants argue that the one year statute of limitations bars the claim. The Court declines to decide the statute of limitations issue since the Complaint has been found to be deficiently plead and not to state a cause of action by plaintiff individually or as a class representative. Plaintiff will be given twenty days to file an amended complaint, and this issue may be raised as to the amended complaint if appropriate.
Accordingly, it is now
ORDERED:
1. Defendants' Motion to Dismiss Plaintiff's Complaint (Doc. #18) is GRANTED and the Complaint (Doc, #1) is dismissed without prejudice. Plaintiff may file an appropriate amended complaint within twenty (20) days of the date of this Order. If no such amended complaint is filed, the Clerk of the Court shall enter judgment and close the file.
2. Plaintiff's Motion for Leave to File Motion for Class Certification (Doc. #31) is DENIED as moot at this time.