Opinion
CV-02-645-ST
October 28, 2002
FINDINGS AND RECOMMENDATION
INTRODUCTION
On May 17, 2002, plaintiffs, Vincent L. Webb ("Webb"), C.D. Micro, Inc., and C.D. Micro, LLC, filed this action against defendants, Chris Fain ("Fain"), Gordon Dillard ("Dillard"), and Doug Devine. Plaintiffs allege several instances of fraud and misrepresentation in violation of the Securities Exchange Act of 1934 ("Exchange Act") and 17 Oregon state law claims. On July 1, 2002, defendants filed Motions to Dismiss (dockets #3, #4, #5), which this court denied as moot in light of an order granting plaintiffs' Motion to Amend in Response to Defendants' Motions to Dismiss (docket #10). After the filing of the First Amended Complaint, defendants filed Motions to Dismiss First Amended Complaint (dockets #11, #12, #14). Plaintiffs responded with a Motion to File a Second Amended Complaint (docket #16).
Pursuant to 15 U.S.C. § 78j: "It shall be unlawful for any person . . . (b) To use or employ, in connection with the purchase or sale of any security . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe as necessary or appropriate in the public interest or for the protection of investors."
On October 3, 2002, this court denied plaintiffs' Motion to File a Second Amended Complaint, but granted leave to plaintiffs to refile a Motion to File a Second Amended Complaint or respond to defendants' Motions to Dismiss Plaintiffs' First Amended Complaint by October 18, 2002 (docket #20). Plaintiffs chose to respond to defendants' Motions. For the reasons set forth below, defendants' Motions to Dismiss should be granted in part.
ANALYSIS I. Legal Standard
A motion to dismiss under FRCP 12(b)(6) will be granted only if "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46 (1957) (footnote omitted); Allwaste, Inc. v. Hecht, 65 F.3d 1523, 1527 (9th Cir 1995) (citation omitted). "The issue is not whether a plaintiff will ultimately prevail but whether the [plaintiff] is entitled to offer evidence to support the claims." Davis v. Monroe County Bd. of Edu., 526 U.S. 629, 654 (1999), quoting Scheuer v. Rhodes, 416 U.S. 232, 236 (1974). Thus, the review is limited to the First Amended Complaint, and "[a]ll allegations of material fact are taken as true and viewed in the light most favorable to the nonmoving party." Buckey v. County of Los Angeles, 968 F.2d 791, 794 (9th Cir), cert denied, 506 U.S. 999 (1992) (citation omitted).
II. Merits
Defendants seek dismissal of the Third Cause of Action for failure to state a claim and dismissal of the remaining causes of action due to lack of pendant jurisdiction. Plaintiffs' Third Cause of Action alleges that:
During the period of time beginning on or about September 1999 and ending on or about August 3, 2000, defendants Fain and Dillard carried out a plan, scheme and course of conduct which was intended to, and in fact did deceive Webb, and the principals of C.D. Micro, LLC, and caused Webb and the principals of C.D. Micro, LLC to enter into a buy/sell agreement to purchase 66 and 2/3 of all outstanding stock in [CD Micro, Inc.], including unexercised options, and preferred stock as if it had been converted to common stock.
Plaintiffs' First Amended Complaint, ¶ 45.
While the allegations are somewhat unclear, the Third Cause of Action appears to be a claim by all plaintiffs for violations of Rule 10b-5 of the Exchange Act which:
forbids the use, in connection with the purchase or sale of security: (1) any device, scheme, or artifice to defraud; (2) any untrue statement of a material fact; (3) the omission of a material fact necessary in order to make the statements made . . . not misleading; or (4) any other act, practice or course of business that operates . . . as a fraud or deceit.
The Wharf (Holdings) Ltd. v. United Int'l Holdings, Inc., 532 U.S. 588, 593 (2001), quoting 17 C.F.R. § 240.10b-5 (2000) (internal quotations omitted).
Defendants argue that Webb and C.D. Micro, Inc., have no standing to sue for a violation of Rule 10b-5. A securities fraud claim for violating Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5 requires that the plaintiff allege: "(1) a misstatement or omission (2) of material fact (3) made with scienter (4) on which [plaintiffs] relied (5) which proximately caused their injury." DSAM Global Value Fund v. Altris Software, Inc., 288 F.3d 385, 388 (9th Cir 2002), citing McCormick v. Fund Am. Cos., 26 F.3d 869, 875 (9th Cir 1994). It is well-settled that only the "actual purchasers and sellers of securities" have standing to bring a private right of action for damages. Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 730-31 (1975).
Plaintiffs do not directly address whether Webb and C.D. Micro, Inc. lack standing, but instead refer to the new Rule 10b-5 claims alleged in their proposed Second Amended Complaint. Because there is no pending Motion to file a Second Amended Complaint, this response is unhelpful and fails to cure this court's concerns expressed in its October 3, 2002 Opinion and Order.
Plaintiffs argue that United States v. Naftalin, 441 U.S. 768, 772 (1979) ("Naftalin"), supports their current and proposed Rule 10b-5 claims because Congress intended the term "sale" to be defined broadly and the term is expansive enough to encompass the entire selling process, since the purpose of the Securities Act is to "achieve a high standard of business ethics in every facet of the securities industry." Id at 775, quoting SEC v. Capital Gains Bureau, 375 U.S. 180, 186-87 (1963) (internal quotations omitted). However, plaintiffs' reliance on Naftalin is misguided. Naftalin involved a "short selling scheme," where the plaintiff sold selected stocks that he did not own which, "in his judgment, had peaked in price and were entering into a period of market decline." Nattalin, 441 U.S. at 770. Since Naftalin involved a criminal charge against a purported seller of securities, the Supreme Court did not address the definition of a purchaser or seller, instead noting that "[a]n offer and sale clearly occurred here." Id at 772. Additionally, the Court clarified that "[t]his case involves a criminal prosecution. The decision in Blue Chip Stamps . . . which limited to purchasers or sellers of the class of plaintiffs who have private implied causes of action under . . . Rule 10b-5, is therefore inapplicable." Id at 774 n6 (citation omitted) (emphasis added).
As explained in defendants' Motions, the only party having standing to sue based upon the allegations of alleged fraud in connection with the purchase or sale of securities is C.D. Micro, LLC. Accordingly, defendants' Motions to Dismiss the Third Cause of Action as to Webb and C.D. Micro, Inc., are granted. However, C.D. Micro, LLC, does have standing to bring this claim. Contrary to defendants' argument, C.D. Micro, LLC, is a named party in the First Amended Complaint. Thus, defendants' Motions to Dismiss the Third Cause of Action should be denied as to C.D. Micro, LLC.
Because this court has jurisdiction over the Third Cause of Action pursuant to 28 U.S.C. § 1331 1337, it also has supplemental jurisdiction over the state law claims pursuant to 28 U.S.C. § 1367. Thus, defendants' Motions to Dismiss the remaining causes of action should be denied. Plaintiffs are cautioned that any attempt to file a motion to amend which adds any new claim or party must be supported by persuasive authority. Failure to do so will result in the imposition of sanctions.
ORDER
Defendants' Motions to Dismiss Plaintiffs' First Amended Complaint (dockets #11, #12, #14) should be GRANTED with respect to the Third Cause of Action as alleged by Webb and C.D. Micro, Inc., and otherwise DENIED. In addition, the Pretrial Order deadline is reset to April 28, 2003.
SCHEDULING ORDER
Objections to the Findings and Recommendation, if any, are due November 18, 2002. If no objections are filed, then the Findings and Recommendation will be referred to a district court judge and go under advisement on that date.
If objections are filed, the response is due no later than December 6, 2002. When the response is due or filed, whichever date is earlier, the Findings and Recommendation will be referred to a district court judge and go under advisement.