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August 14, 2012
BRICKLAYERS AND ALLIED CRAFTWORKERS LOCAL 2, ALBANY, NEW YORK PENSION FUND BY ITS ADMINISTRATOR, STEPHEN J. O'SICK; BRICKLAYERS AND ALLIED CRAFTWORKERS LOCAL 2, ALBANY, NEW YORK HEALTH BENEFIT FUND BY ITS ADMINISTRATOR, STEPHEN J. O'SICK; BRICKLAYERS AND ALLIED CRAFTWORKERS LOCAL 2, ALBANY, NEW YORK EDUCATION & TRAINING FUND BY ITS TRUSTEES, ROBERT MANTELLO, PASQUALE TIRINO, LUKE RENNA, MICHAEL SUPRENANT, NICHOLAS TIRINO, DALE STEHLIN, THOMAS MURRAY, VIC MION, KEVIN AUGUSTINI, J. D. GILBERT, THOMAS MARINELLO AND TODD HELFRICH; BRICKLAYERS AND TROWEL TRADES INTERNATIONAL PENSION FUND BY DAVID STUPAR, EXECUTIVE DIRECTOR; AND BRICKLAYERS AND ALLIED CRAFTWORKERS LOCAL 2, ALBANY NEW YORK, AFL-CIO BY ROBERT MANTELLO, PRESIDENT, PLAINTIFFS,v.DIBERNARDO TILE AND MARBLE CO., INC.; AND GEORGE DIBERNARDO, JR. INDIVIDUALLY AND AS AN OFFICER OF DIBERNARDO TILE AND MARBLE CO., INC. DEFENDANTS.
Plaintiffs brought this suit pursuant to the Employee Retirement Income Security Act ("ERISA"), as amended, 29 U.S.C. §§ 1001 et seq. Dkt. No. 1 ("Complaint"). On December 4, 2008, a Stipulation and Order of conditional discontinuance was entered in, stating that the parties had reached a settlement agreement. Dkt. No. 28 ("Stipulation and Order"). Presently before the Court is Plaintiffs' Motion requesting that the Court: (1) reopen the case; (2) enforce a judgment against Defendant; and (3) award attorney's fees to Plaintiffs. Dkt. No. 29 ("Motion"). Defendant filed a Response to the Motion, and Plaintiffs subsequently filed a Reply to the Response. Dkt. Nos. 31 ("Response"), 32 ("Reply"). For the following reasons, the Court concludes that it lacks subject matter jurisdiction to grant Plaintiffs' requests and denies Plaintiffs' Motion without prejudice.
On January 11, 2008, Plaintiffs filed the instant action, alleging, inter alia, that Defendant had failed to remit fringe benefit contributions to a pension plan under ERISA. See generally Compl.; see also Dkt. No. 22 ("Amended Complaint"). The parties eventually reached a settlement agreement, and on December 4, 2008, the Court entered a Stipulation and Order of conditional discontinuance. Stipulation The Stipulation and Order did not contain the terms of the parties' agreement and contained no language incorporating any such terms. Id. Instead, the Stipulation and Order stated that "the action is settled and is conditionally discontinued without prejudice, reserving Plaintiffs' rights to reopen the action and proceed with the entry of judgment." Id. The Stipulation and Order makes mention of an agreement reached on November 10, 2008 ("the November 2008 Agreement"), but no such agreement was presented to the Court. See generally Dkt.
Almost three years later, on September 7, 2011, Plaintiffs filed the instant Motion, alleging that Defendant had failed to comply with the terms of the parties' agreement and that as a result Plaintiffs were entitled to, inter alia, liquidated damages and attorney's fees. See generally Mot.
Along with their Motion and other supporting documentation, Plaintiffs filed as "Exhibit A" what appears to be a copy of the November 2008 Agreement, signed by Defendant on November 10, 2008 and by Plaintiff Stephen J. O'Sick ("O'Sick") on April 15, 2009. Dkt. No. 29-3 ("Agreement"). The Agreement appears to lay out the terms of settlement, including provisions for the entry of a judgment and the payment of liquidated damages and attorney's fees in the event of Defendant's non-compliance or non-performance. See generally id. The Agreement also contains a provision stating that Defendant waives all defenses to the filing of the Agreement. Id. at 7.
Defendant filed a Response to the Motion, primarily relying on New York state contract law and arguing that the liquidated damages that Plaintiffs had requested amounted to an impermissible penalty. Response at 1-2. In their Reply, Plaintiffs quote language from the Agreement and argue that Defendant is obligated to pay liquidated damages and comply with the terms of the Agreement. See generally Reply.
"The district courts of the United States . . . are 'courts of limited jurisdiction. They possess only that power authorized by Constitution and statute.'" Exxon Mobil Corp. v. Allapattah Servs., Inc., 545 U.S. 546, 552 (2005) (quoting Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 377 (1994)). For a matter to properly be before a federal court, that court must have both subject matter and personal jurisdiction. Even if the parties themselves have not raised the issue, jurisdiction is a threshold issue which that a court must address and may raise sua sponte. See, e.g., Gonzalez v. Thaler, 132 S. Ct. 641, 648 (2012); Henderson ex rel. Henderson v. Shinseki, 131 S. Ct. 1197, 1202 (2011) ("[F]ederal courts have an independent obligation to ensure that they do not exceed the scope of their jurisdiction, and therefore they must raise and decide jurisdictional questions that the parties either overlook or elect not to press"); Transatlantic Marine Claims Agency, Inc. v. Ace Shipping Corp., 109 F.3d 105, 107 (2d Cir. 1997). If a federal court lacks subject matter jurisdiction, it must dismiss the action. See FED. R. CIV. P. 12(h)(3); Arbaugh v. Y & H Corp., 546 U.S. 500, 514 (2006); Durant, Nichols, Houston, Hodgson & Cortese-Costa, P.C. v. Dupont, 565 F.3d 56, 62-63 (2d Cir. 2009).
A. Jurisdiction
In this case, no party has questioned the Court's jurisdiction. See Mot., Resp., Reply. However, mindful of its "independent obligation to ensure that [it does] not exceed the scope of [its] jurisdiction," the Court addresses the issue of its subject matter jurisdiction sua sponte. Henderson, 131 S.Ct. at 1202. Therefore, the Court must apply Kokkonen to determine if the Court has authority to enforce the settlement agreement, or if such enforcement is properly the province of another court or the subject of another action.
An action seeking to enforce a settlement agreement "is more than just a continuation or renewal of [a] dismissed suit, and hence requires its own basis for jurisdiction." Kokkonen, 511 U.S. at 378. It is "well-settled" that a district court may "exercise ancillary jurisdiction to enforce a settlement agreement only if the dismissal order expressly retained jurisdiction over that particular agreement, or incorporated it into the order." State Street House, Inc. v. New York State Urban Development Corp., 75 F. App'x 807, 810 (2d Cir. 2003) (citing Herrick Co., Inc. v. SCS Communications, Inc., 251 F.3d 315, 327 (2d Cir. 2002) and Scelsa v. City University of New York, 76 F.3d 37, 41 (2d Cir. 1996) (underlying action based on federal claim jurisdiction)); see also Kokkonen, 511 U.S. at 378. A "judge's mere awareness and approval of the terms of the settlement agreement do not suffice to make them part of his order." Kokkonen, 511 U.S. at 381; see also Scelsa, 76 F.3d at 41 ("The mere reference in the order to the Agreement does not incorporate the Agreement into the order") (citing Miener v. Missouri Dep't of Mental Health, 62 F.3d 1126, 1128 (8th Cir. 1995)). Further, in Kokkonen, the Supreme Court emphasized the distinction between a new action to enforce a settlement agreement and "merely reopening . . . the dismissed suit," recognizing that enforcement of a settlement agreement posed more jurisdictional concerns and required an independent basis for jurisdiction. Kokkonen, 511 U.S. at 381.
Even if a dismissal order does not explicitly state that a court retains jurisdiction over a claim and does not explicitly incorporate the terms of the settlement agreement into the order, a federal court may still decide a motion to reopen a case and enforce a settlement agreement if an independent basis for jurisdiction exists. Id. at 382; see also Burke v. Lash Work Environments, Inc., 408 F. App'x 438, 439-41 (2d Cir. 2011);*fn1 Murphy v. First Reliance Standard Life Ins. Co., No. 00-CV-6647, 2008 WL 1787672 at *2 (E.D.N.Y. Apr. 17, 2008).
"[I]n cases involving settlement agreements whose enforcement requires interpretation or application of ERISA law, courts have ruled statelaw [sic] claims preempted and have found federal jurisdiction." Murphy, 2008 WL 1787672 at *2 (quoting Miele v. Pension Plan of N.Y. State Teamsters Conference Pension & Ret. Fund, 72 F. Supp. 2d 88, 95 (E.D.N.Y. 1999)); see also Burke, 408 F. App'x at 439-41. However, even in ERISA cases, courts have found federal jurisdiction lacking where enforcing a settlement agreement requires applying principles of contract law as opposed to interpreting statutory provisions. See, e.g., Peacock v. Thomas, 516 U.S. 349, 358 (1996) (finding no subject matter jurisdiction because "the alleged wrongdoing in this case took place after the ERISA judgment was entered"); Brown v. City of New York, No. CV 2009-1809, 2012 WL 628496, at *2-3 (E.D.N.Y. Jan. 30, 2012); LaBarbera v. Dasgowd, Inc., No. CV-03-1762, 2007 WL 1531895, at *2 (E.D.N.Y. May 22, 2007) (finding no subject matter jurisdiction to enforce an ERISA settlement and noting that "[a]ctions to enforce settlement agreements are, in essence, contract actions which are governed by state law"); cf. Scelsa, 76 F.3d at 41 (finding jurisdiction lacking to enforce a settlement agreement when the underlying action involved a federal claim); Bryant v. Emigrant Mortg. Co., Inc., No. 10-CV-0102, 2011 WL 3876978, at *6 (E.D.N.Y. Aug.31, 2011) (stating that disputes over federal settlements, even those that resolve federal claims, are "quintessentially . . . of contractual interpretation and performance and wholly governed by state law"); Stone v. Credit Solutions Corp., No. 09-CV-281A, 2011 WL 2747572, at *2 (W.D.N.Y. June 21, 2011) (finding jurisdiction lacking to enforce a settlement agreement when the underlying action involved a federal claim).
Here, it is clear that the Stipulation and Order did not incorporate the terms of the Agreement. No such language ever appeared in the Stipulation and Order. "In fact, [the Agreement] was never submitted to the Court. Accordingly, under Kokkonen, the Court lacks ancillary jurisdiction to hear the settlement dispute."*fn2 Murphy, 2008 WL 1787672 at *2 (citing Buckhannon Bd. and Care Home Inc. v. West Va. Dep't of Health and Human Resources, 532 U.S. 598, 604 n. 7 (2001)). Similarly, the Stipulation and Order does not explicitly reserve the Court's jurisdiction to enforce the Agreement. See Scelsa, 76 F.3d at 41 ("most importantly, the Dismissal Order neither expressly retains jurisdiction over the Agreement nor incorporates its terms. The mere reference in the order to the Agreement does not incorporate the Agreement into the order") (citation omitted).*fn3
While the Stipulation and Order does state that "the action is settled and is conditionally discontinued without prejudice, reserving Plaintiffs' rights to reopen the action and proceed with the entry of judgment," Stipulation, the Court considers such a statement to be geared towards preserving Plaintiffs' rights and preventing Plaintiffs from being left without legal recourse, rather than guaranteeing that the Court will reopen the case for the sole purpose of enforcing a judgment.*fn4
That is, the Court concludes that a plain reading of the Stipulation and Order does not demonstrate an intent to preserve the Court's jurisdiction over all issues that might arise in relation to the enforcement of the Agreement -- a document that the Court had neither inspected, approved, nor incorporated.*fn5 See LaBarbera, 2007 WL 1531895, at *2 ("Once a lawsuit is settled and dismissed, the district court does not generally have ancillary jurisdiction to enforce the parties' settlement agreement. A district court can, however, retain jurisdiction over a settlement agreement if the order of dismissal shows an intent to retain jurisdiction or incorporates the settlement agreement.") (quoting McKay v. U.S., No. 06-1194, 2006 WL 3291757, *1 (10th Cir. Nov. 14, 2006) (alterations in original). Rather, the Stipulation and Order appears designed to insure that Plaintiffs' would not be precluded from pursuing appropriate remedies in the event of Defendant's failure to abide by the terms of the Agreement. Cf. Murphy, 2008 WL 1787672, at *3 ("the Court finds that it may not exercise ancillary jurisdiction over the instant dispute pursuant to Kokkonen. Plaintiff may have recourse under Rule 60(b)(6), or he may file a separate action"); Rolex Watch, U.S.A., Inc. v. Bulova Watch Co., Inc., 820 F. Supp. 60, 63 (E.D.N.Y. 1993). Therefore, the Court cannot conclude that the Stipulation and Order provides a basis for the Court to exercise ancillary jurisdiction to enforce the settlement.
Even though the Court did not incorporate the terms of the Agreement into its Stipulation and Order and did not manifest a clear intent to exercise jurisdiction over future enforcement of the Agreement, the Court might still appropriately exercise jurisdiction over Plaintiffs' Motion if a federal question persists. Burke, 408 F. App'x at 439-41. The Court finds no such federal foothold here. While the Court is mindful of the federal courts' exclusive jurisdiction over ERISA matters and also of the clear ubiquity of federal issues in Plaintiffs' initial Complaint, the Court concludes that the Motion and the request that the Court enforce the Agreement require a state law contract analysis and do not implicate the niceties of ERISA. See, e.g., Peacock, 516 U.S. at 358 ("the alleged wrongdoing in this case took place after the ERISA judgment was entered . . . . Other than the existence of the ERISA judgment itself, this suit has little connection to the ERISA case"); Brown, 2012 WL 628496, at *3 ("such an action is simply 'a claim for breach of contract, part of the consideration for which was dismissal of an earlier federal suit,' the effect of which is that 'enforcement of the settlement agreement is for state courts unless there is some independent basis for federal jurisdiction.'") (quoting Kokkenen, 511 U.S. at 381-82); see also Scelsa, 76 F.3d at 41 (finding no subject matter jurisdiction despite the fact that the settlement agreement was entered into to resolve a claim under federal statute).
Here, enforcement of the Agreement appears to hinge on a determination
of: (1) whether Defendant failed to abide by the terms of the
Agreement; and (2) whether the terms of the Agreement that relate to
liquidated damages comport with principles of contract law. The Court
is unconvinced that either of these avenues of analysis require any
degree of engagement with ERISA or other federal law.*fn6
Absent any need to interpret provisions of ERISA or apply
federal law, the resolution of this matter falls outside of the
province of the federal courts and would appropriately be resolved as
a contract dispute in state court.*fn7 Therefore, the
Court denies Plaintiffs' Motion requesting the Court to reopen the
case, enforce judgment against Defendant, and award attorney's
B. Leave to Re-File
In concluding, the Court emphasizes that it has addressed the jurisdictional question sua sponte and absent any briefing from the parties. That the Court finds denial of Plaintiffs' Motion the only proper course of action in no way leaves Plaintiffs without recourse if -- as alleged -- Defendant has failed to abide by the terms of the parties' Agreement and if Plaintiffs wish to persist in pursuing this judgment. Nevertheless, cognizant of the fact that the Stipulation and Order discontinued the case without prejudice, and in an effort to avoid unnecessary and costly duplicate litigation and to ensure that the parties are heard fully, the Court denies Plaintiffs' Motion without prejudice. If Plaintiffs wish to re-file, they must do so within thirty days. Plaintiffs are advised that if they do so, they must provide full briefing on the jurisdictional question and the enforceability of the Agreement's liquidated damages provisions.*fn9
Accordingly, it is hereby:
ORDERED, that Plaintiffs' Motion (Dkt. No. 29) requesting that the Court reopen the case, enforce a judgment against Defendant, and award attorney's fees is DENIED without prejudice. If Plaintiffs wish to re-file a motion seeking the same relief, they must do so within thirty (30) days. Plaintiffs are advised that if they do so, they must provide full briefing on the jurisdictional question and the enforceability of the Agreement's liquidated damages provisions; and it is further
ORDERED, that the Clerk serve a copy of this Order on all parties.
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April 25, 2007
The named plaintiffs in this case purchased shares or like interests in certain mutual funds ("the Shelf-Space Funds").*fn1 Plaintiffs bring this putative class action*fn2 against (a) AIG Financial Advisors, Inc.,*fn3 Advantage Capital Corp., FSC Securities Corp., and Royal Alliance, Inc. (collectively, "the AIG Brokers"); and (b) AIG, Inc. ("AIG"), the corporate parent of the AIG Brokers. The AIG Brokers are registered broker-dealer entities. They employ financial advisors who, among other services, distribute mutual fund shares to would-be investors.
Plaintiffs allege that "AIG participated in a self-serving kickback scheme referred to as selling 'Shelf-Space,' whereby AIG used the AIG Brokers to direct AIG clients into the Shelf-Space Funds in exchange for illegal kickback payments through revenue sharing and other improper incentives that AIG received from the Shelf-Space Funds." Consolidated Amended Class Action Complaint ("Compl.") ¶ 2. Ultimately, plaintiffs seek to represent a class of "all persons or entities who purchased shares or like interests in any of the Shelf-Space Funds between April 8, 2001 and June 8, 2005, inclusive, and who were damaged thereby." Id. ¶ 82.*fn4
Plaintiffs advance six claims for relief under the federal securities fraud laws. Count I is brought against the AIG Brokers pursuant to Section 12(a)(2) of the Securities Act of 1933 ("the 1933 Act"), 15 U.S.C. § 77l(a)(2).*fn5 Count II is brought against AIG pursuant to Section 15 of the 1933 Act, 15 U.S.C. § 77o, alleging "control person" liability for the AIG Brokers' alleged violations of Section 12(a)(2). Count III is brought against all defendants pursuant to Section 10(b) of the Securities Exchange Act of 1934 ("the 1934 Act"), 15 U.S.C. § 78j(b), and Rule 10b-5(b) promulgated thereunder, 17 C.F.R. § 240.10b-5(b). Count IV is brought against all defendants pursuant to Section 10(b) and Rules 10b-5(a) and 10b-5(c), 17 C.F.R. §§ 240.10b-5(a), (c). Count V is brought against the AIG Brokers pursuant to Section 10(b) and Rule 10b-10, 17 C.F.R. § 240.10b-10. Finally, Count VI is brought against AIG pursuant to Section 20(a) of the 1934 Act, 15 U.S.C. § 78t(a), as a "control person" for the AIG Brokers' alleged liability under Counts III-V.
Defendants move to dismiss the complaint*fn6 pursuant to Fed. R. Civ. P. 12(b)(1) and Fed. R. Civ. P. 12(h)(3) for lack of subject matter jurisdiction, pursuant to Fed. R. Civ. P. 12(b)(6) for failure to state a claim upon which relief can be granted, and pursuant to Fed. R. Civ. P. 9(b) and the Private Securities Litigation Reform Act of 1995, 15 U.S.C. § 78u-4 et seq., ("PSLRA") for failure to adequately plead fraud. For the reasons stated below, the complaint is dismissed without prejudice to the filing of a second amended complaint on or before May 24, 2007. Specifically, the Rule 12(b)(1) and Rule 12(h)(3) motion is granted; the Rule 12(b)(6) motion is granted in part and denied in part; and the Rule 9(b) and PSLRA motion is granted.
Plaintiffs allege that "[d]efendants cultivated a clandestine, incentive-driven culture among AIG's brokerage arm to sell Shelf-Space Funds, regardless of the comparative value of the funds." Compl.¶ 41. Specifically, they contend that the AIG Brokers "implemented and managed" a system called the "Elite Partners" program, id. ¶ 36, in which participant funds would pay the AIG Brokers to "steer[]" their clients into investing in the funds, id. ¶¶ 23-26. According to the complaint, "Elite Partners" was something of a misnomer, because defendants refused to sell interests in any funds that did not participate in the payment system. Id. ¶ 43.
The alleged "steering" consisted, in part, of representations by the AIG Brokers that the Shelf-Space Funds "would perform better" than other funds. Id. ¶ 37. The AIG Brokers' financial advisors led their clients to believe that these representations were "based on objective analysis." Id. In addition, according to a "Letter of Acceptance, Waiver and Consent," written by the National Association of Securities Dealers ("NASD") and quoted at length in the complaint, the Elite Partners program offered participant funds "increased visibility on the firms' websites . . . ; increased access to the sales force . . . ; the inclusion of materials relating to the Elite Partner funds in . . . internal marketing publications and newsletters; ticket charge waivers; and participation in joint marketing programs between [participant broker-dealers] and Elite Partner fund complexes." Id. ¶ 36 (citing NASD Letter of Acceptance, Waiver and Consent (No. CE2050011) ("NASD Letter")).
The AIG Brokers' financial gain -- which plaintiffs repeatedly refer to as "kickbacks" -- took several forms. First, there was "revenue sharing," i.e., cash payments from the Shelf-Space Funds to the broker-dealers. Id. ¶ 32. Plaintiffs allege revenue-sharing payments of "up to a 0.25% (i.e., 25 basis points) charge on the sales of shares," and "[q]uarterly fees, of up to 0.11% (i.e., 11 basis points) per year, of the amount of assets under management." Id. ¶ 38 (citing NASD Letter).
Second, there was "directed brokerage," i.e., "allotting trades -- and the lucrative commissions that are a result of the trades -- in [fund] securities . . . to a particular brokerage . . . in exchange for that brokerage pushing the sale of those mutual funds onto investors." Id. ¶ 33. Plaintiffs allege that "[f]rom January 2001 through December 2003, twelve of the Shelf-Space Funds paid the AIG Brokers more than $41 million in kickback payments by directing brokerage commissions for portfolio transactions to the AIG Brokers." Id. ¶ 63 (citing NASD Letter).
Third, there were "other payments." Id. ¶ 35. For example, in addition to ordinary fees charged in connection with offering Shelf-Space Funds for sale, AIG Brokers were allegedly reimbursed "for expenses incurred . . . during 'top producer' meetings and educational and training seminars," and were partially reimbursed for "certain administrative costs such as record keeping." Id. ¶ 39. Defendants also "did not have to pay the usual 'ticket charge' of up to $12 per transaction when selling Shelf-Space Funds, raising the commission they received with each [such] sale." Id. ¶ 40.
The complaint also alleges "sponsorship" by participant funds "for company events, office parties, training and educational materials and conferences." Id. ¶ 42. Shelf-Space Fund representatives "were given greater access to branch offices and were invited to corporate training and marketing events." Id. The result: "increased opportunities" for Shelf-Space Fund representatives "to promote the sale of their mutual funds." Id.
In general, plaintiffs claim, "[t]he AIG Brokers gave the impression of providing the benefits of objective investment advice to investors." Id. ¶ 48. The complaint quotes an AIG Broker's website as stating that it "offer[s] unbiased financial information based solely on your financial agenda and no one else's." Id. (quoting Advantage Capital Corporation Overview, http://www.advcap.net/overview/default.asp (last visited Apr. 17, 2007)). The complaint cites to another website for the same statement. See id. (citing FSC Securities Corp. Overview, http://www.fscorp.net/overview/default.asp (last visited Apr. 17, 2007)). In addition, plaintiffs allege, the AIG Brokers used Shelf-Space Fund prospectuses and Statements of Additional Information ("SAIs") to disclose mutual fund information, but did not disclose the Shelf-Space payment system in those documents. Id. ¶¶ 66, 68. As an example, plaintiffs quote extensively from the April 1, 2003 prospectus for the Massachusetts Financial Services Investors Growth Stock Fund,*fn7 which they claim is "identical in substance to all the other Shelf-Space Fund prospectuses issued during the Class Period." Id. ¶ 69. Plaintiffs also cite to four prospectuses from other funds. See id.
In reality, plaintiffs allege, the AIG Brokers' recommendations were "neither objective nor performance-based." Id. ¶ 42. The AIG Brokers "actively concealed" from plaintiffs the "conflicts of interest" generated by the Shelf-Space system of payments "with respect to the . . . investment advice given to their clients and the management of their client accounts." Id. ¶ 65. Plaintiffs claim that, as a result, the investment in Shelf-Space Funds resulted in below-average returns. See id. ¶¶ 54-58. Defendants' sale of Shelf-Space Funds also operated "to the detriment of investors" because of the "undisclosed kickbacks" of the Shelf-Space program. Id. ¶ 49. "Defendants took advantage of investors' reliance on their financial expertise and steered those investors into [investments] that incurred higher costs . . . ." Id. These costs, in their various forms, "were deducted from investors' principal" in the Shelf-Space Funds. Id. ¶ 60.
A. Standing
Defendants move pursuant to Fed. R. Civ. P. 12(b)(1) and Fed. R. Civ. P. 12(h)(3) to dismiss the complaint as to mutual funds of which the named plaintiffs did not own shares during the class period. Plaintiffs wish to represent investors in one or more mutual fund families set forth in an exhibit to the complaint. See Compl. Ex. A. That exhibit lists 19 families of funds. According to the next exhibit, however, the named plaintiffs owned shares in only 16 funds. See id. Ex B (listing details of named plaintiffs' transactions by fund). Defendants argue that I lack subject matter jurisdiction over causes of action relating to funds in which plaintiffs had no stake.
To invoke this Court's subject matter jurisdiction, plaintiffs must present a justiciable "Case[]" or "Controvers[y]." U.S. Const. art. III, § 2, cl. 1. See Raines v. Byrd, 521 U.S. 811, 818 (1997); Warth v. Seldin, 422 U.S. 490, 498 (1975). Plaintiffs present no such case or controversy if they lack standing to sue, i.e., if they allege no (a) injury-in-fact that is (b) fairly traceable to the defendants' allegedly unlawful conduct, and (c) likely to be redressed by a favorable decision. Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-61 (1992); Alliance for Envtl. Renewal, Inc. v. Pyramid Crossgates Co., 436 F.3d 82, 85 (2d Cir. 2006). That plaintiffs would represent a class of similarly situated claimants does not exempt them from the requirement that "[a]t the pleading stage" they must set forth some "general factual allegations of injury resulting from the defendant's conduct." Lewis v. Casey, 518 U.S. 343, 358 (1996) (citing Lujan, 504 U.S. at 561). In this securities fraud case, the named plaintiffs can allege no injury from the purchase or sale of funds they never invested in. See 15 U.S.C. § 77l(a) (limiting recovery under Section 12(a)(2) to purchasers or sellers of securities); Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 749 (1975) (holding that recovery under Section 10(b) and Rule 10b-5 is limited to purchasers or sellers of securities). They therefore have no standing to ask me to remedy injuries related to those funds.
Plaintiffs warn that my consideration of their standing at the pleading stage is premature. They argue that I should delay my decision until I decide whether plaintiffs have satisfied the class-certification requirements of Fed. R. Civ. P. 23, because the question "whether Plaintiffs may represent persons who bought shares in the other Shelf-Space Funds is . . . intertwined with issues pertinent to class certification." Plaintiffs' Corrected Memorandum of Law in Opposition to Defendants' Motions To Dismiss the Consolidated Amended Class Action Complaint ("Pl. Br.") 28.
As support, plaintiffs invoke Ortiz v. Fibreboard Corp., 527 U.S. 815 (1999). In Ortiz, the Supreme Court considered the validity of a class certification for a global settlement of asbestos-related tort claims. The Court held that the class certification issues before it were "logically antecedent to Article III standing concerns," following Amchem Products, Inc. v. Windsor, 521 U.S. 591 (1997). Ortiz, 527 U.S. at 831 (internal quotation marks omitted). Amchem, like Ortiz, reviewed a class action that attempted to settle a large fraction of "the elephantine mass of asbestos cases," the number, length, complexity, redundancy, and expense of which "defie[d] customary judicial administration and call[ed] for national legislation." Id. at 821. Indeed, the "class actions" in Amchem and Ortiz were not really actions at all -- they were applications for a court to approve a pre-negotiated global settlement of actual and potential claims. See id. at 824-26 (relating how two settlement agreements binding actual and potential claimants, the defendant, and defendant's insurers were negotiated and finalized before the filing of the class action); Amchem, 521 U.S. at 601 (the class action, in which the complaint, motion for certification, answer, and settlement agreement were all filed simultaneously, "was not intended to be litigated"). In those cases, the Supreme Court did not conduct a threshold analysis of the standing of so-called "exposure only" claimants, perhaps because its ultimate rejection of the class certification made that analysis unnecessary -- there could be no further litigation (or settlement) without court approval of the class. See In re Eaton Vance Corp. Sec. Litig., 220 F.R.D. 162, 166 (D. Mass. 2004) (in Amchem and Ortiz, "without class certification there would be no settlement; and without a global settlement, the case would not have proceeded as constituted"). It is in that way that the class certification question, being "dispositive" in the unique circumstance of a global settlement, was "logically antecedent to the existence of any Article III issues." Amchem, 521 U.S. at 612.
Class certification is not similarly dispositive in this case. No pre-negotiated settlement agreement has been filed indicating that the purpose of filing this case was to formalize a global agreement. Defendants do not challenge the named plaintiffs' standing with respect to funds in which they have owned shares, see Memorandum of Law in Support of Defendants' Motion to Dismiss the Consolidated Amended Class Action Complaint ("Def. Br.") 43, so the case can move forward on the plaintiffs' claims, whether or not similarly situated plaintiffs are brought into the action pursuant to Rule 23. See In re AllianceBernstein Mut. Fund Excessive Fee Litig., No. 04 Civ. 4885(SWK), 2005 WL 2677753, at *9 (S.D.N.Y. Oct. 19, 2005), vacated in part on other grounds, 2006 WL 74439 (S.D.N.Y. Jan. 11, 2006) ("[B]ecause Plaintiffs clearly have standing to sue on behalf of the . . . Funds in which they own shares, addressing class certification would not be outcome determinative."). Moreover, unlike the "exposure only" plaintiffs in Amchem and Ortiz, the question whether the named plaintiffs here have standing to litigate claims about funds of which they did not own shares would have to be answered whether or not the plaintiffs filed their claim as part of a class. See Rivera v. Wyeth-Ayerst Labs., 283 F.3d 315, 319 n.6 (5th Cir. 2002) ("In the instant case, in contrast to Ortiz and Amchem, the standing question would exist whether Rivera filed her claim alone or as part of a class; class certification did not create the jurisdictional issue.").
Courts in this circuit and elsewhere have rejected similar attempts to delay consideration of Article III standing until the class certification stage, concluding that Ortiz and Amchem are limited to the unique circumstances of global mass-tort settlements. See In re Salomon Smith Barney Mut. Fund Fees Litig., 441 F. Supp. 2d 579, 607 (S.D.N.Y. 2006) ("[T]he Article III standing determination should precede that of class certification. With regard to the sixty-eight funds of which Plaintiffs own no shares, Plaintiffs do not have standing to assert any claims because Plaintiffs cannot satisfy the standing requirements."); In re Merrill Lynch Investment Management Funds Sec. Litig., 434 F. Supp. 2d 233, 236 (S.D.N.Y. 2006) (denying plaintiffs' attempt to "assert claims on behalf of shareholders of all of the Shelf Space Funds" for want of standing); AllianceBernstein, 2005 WL 2677753, at *9 ("As a straighforward securities case, many of the concerns triggering the exception mentioned by the Supreme Court in Ortiz are noticeably absent here."); see also Rivera, 283 F.3d at 319 n.6; Pederson v. La. State Univ., 213 F.3d 858, 866 n.5 (5th Cir. 2000) (treating Article III standing as a threshold issue "[b]ecause the class certification issue presented here is not outcome determinative"); Eaton Vance, 220 F.R.D. at 166; Clark v. McDonald's Corp., 213 F.R.D. 198, 204 (D.N.J. 2003) ("[T]he Ortiz exception treating class certification as the antecedent consideration does not apply if the standing issue would exist regardless of whether the named plaintiff filed his claim alone or as part of a class.").*fn8
Plaintiffs' appeal to cases applying the juridical link doctrine does not alter my decision to consider plaintiffs' standing prior to class certification. The juridical link doctrine relates to whether, once class certification is at issue, named plaintiffs ought to be allowed to represent other claimants injured by other, related defendants. See Eaton Vance, 220 F.R.D. at 164-65; see also La Mar v. H & B Novelty & Loan Co., 489 F.2d 461, 466 (9th Cir. 1973). The doctrine provides an exception to the general rule that "a plaintiff who has been subject to injurious conduct of one kind [does not] possess by virtue of that injury the necessary stake in litigating conduct of another kind, although similar, to which he has not been subject." Blum v. Yaretsky, 457 U.S. 991, 999 (1982). But we are not yet at the point where I need to decide the validity of plaintiffs' proposed class. And nothing in the juridical link doctrine requires me to depart from the Supreme Court's longstanding instruction to decide Article III standing as a threshold issue.*fn9 See City of Los Angeles v. Lyons, 461 U.S. 95, 101 (1983); Warth, 422 U.S. at 498.
I therefore dismiss the complaint insofar as it relates to funds other than the ones in which plaintiffs allege they actually invested.
B. Legal Sufficiency Challenges
Defendants move under Fed. R. Civ. P. 12(b)(6) to dismiss the complaint for failure to state a claim upon which relief can be granted. Plaintiffs' core fraud claims -- Counts I and III -- are brought against the AIG Brokers pursuant to Section 12(a)(2) of the 1933 Act and Section 10(b) of the 1934 Act (and Rule 10b-5(b)) for alleged misrepresentations and omissions.
In pressing for dismissal with prejudice, defendants argue that (a) the statements and omissions, as alleged, are immaterial as a matter of law, and, in the alternative, (b) the alleged misconduct cannot have caused plaintiffs any cognizable economic loss. Defendants also argue,among other things, that (c) plaintiffs' claims are at least partially time-barred, and (d) plaintiffs seek certain remedies that are unavailable.*fn10
1. The Motion To Dismiss Standard of Review
A motion to dismiss pursuant to Rule 12(b)(6) tests the legal, not the factual, sufficiency of the complaint. Scheuer v. Rhodes, 416 U.S. 232, 236 (1974) ("When a federal court reviews the sufficiency of a complaint, before the reception of any evidence either by affidavit or admissions, its task is necessarily a limited one. The issue is not whether a plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support the claims."); Sims v. Artuz, 230 F.3d 14, 20 (2d Cir. 2000) ("At the Rule 12(b)(6) stage, '[t]he issue is not whether a plaintiff is likely to prevail ultimately, but whether the claimant is entitled to offer evidence to support the claims.'" (quoting Chance v. Armstrong, 143 F.3d 698, 701 (2d Cir. 1998)) (prior citations omitted)). Accordingly, I must accept the factual allegations in the complaint as true, and draw all reasonable inferences in plaintiffs' favor. See Sheppard v. Beerman, 18 F.3d 147, 150 (2d Cir. 1994), cert. denied, 513 U.S. 816 (1994). Moreover, I may not grant the defendants' Rule 12(b)(6) motion unless it appears beyond doubt that plaintiffs can prove no set of factsthat entitle them to relief. See Conley v. Gibson, 355 U.S. 41, 45-46 (1957); Gregory v. Daly, 243 F.3d 687, 691 (2d Cir. 2001).
In deciding defendants' motion, I may consider documents attached to the complaint as exhibits, or statements incorporated by reference. Chambers v. Time Warner, Inc., 282 F.3d 147, 152-53 (2d Cir. 2002). I may also consider publicly available documents -- such as prospectuses and SAIs -- relied upon or referenced in a complaint. Press v. Quick & Reilly, Inc., 218 F.3d 121, 129 (2d Cir. 2000) ("We have consistently recognized that publicly filed information may be considered when evaluating a claim of securities fraud.").
2. Materiality
A legally sufficient securities fraud claim under Section 12(a)(2) or Section 10(b) alleges, among other things, a misrepresentation or omission of a "material" fact. Section 12(a)(2) provides:
Any person who . . . offers or sells a security . . . by means of a prospectus or oral communication, which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading . . . shall be liable . . . to the person purchasing such security from him . . . .
15 U.S.C. § 77l(a) (emphasis added). Similarly, "[t]o state a cause of action under Section 10(b) and Rule 10b-5, a plaintiff must plead [among other things] that the defendant made a false statement or omitted a material fact." Rombach v. Chang, 355 F.3d 164, 169 n.4 (2d Cir. 2004) (emphasis added).*fn11
Defendants argue that the misrepresentations and omissions identified in the complaint are immaterial as a matter of law. Plaintiffs counter that they are material because they concern a "conflict of interest" on the part of the AIG Brokers arising out of the Shelf-Space system of payments. Pl. Br. 6. In substance, plaintiffs claim that because of the AIG Brokers' misleading statements and omissions, plaintiffs never knew that money (revenue sharing, directed brokerage, and other compensation) flowing from their fund assets to the AIG Brokers paid for defendants' "Shelf-Space" services (promoting the fund to potential investors), not services that would accrue to the plaintiffs' benefit. See Compl. ¶ 49.
"[W]hen presented with a Rule 12(b)(6) motion, 'a complaint may not properly be dismissed . . . on the ground that the alleged misstatements or omissions are not material unless they are so obviously unimportant to a reasonable investor that reasonable minds could not differ on the question of their importance.'" Ganino v. Citizens Utils. Co., 228 F.3d 154, 162 (2d Cir. 2000) (quoting Goldman v. Belden, 754 F.2d 1059, 1067 (2d Cir. 1985)). In the case of omissions, "to 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 made available.'" Basic Inc. v. Levinson, 485 U.S. 224, 231-32 (1988) (quoting TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976)); see also SEC v. Mayhew, 121 F.3d 44, 52 (2d Cir. 1997). Measured by this standard, the subject of the misrepresentations and omissions alleged by plaintiffs was not immaterial as a matter of law.
The alleged misrepresentations and omissions concerned the potential bias of the AIG Brokers. Plaintiffs cite two misrepresentations in this regard. The first, which appeared on the website*fn12 of Advantage Capital Corp., stated that that defendant's financial advisors "offer unbiased financial information based solely on your financial agenda and no one else's." Compl. ¶ 29. Plaintiffs also reference a statement by FSC Securities Corp. See id. The topic of the Advantage statement is the lack of bias in the information provided by financial advisors employed by Advantage Capital Corp.
On the omissions side, plaintiffs allege that all the Shelf-Space Funds' "prospectuses and SAIs were deceptive and misleading as they failed to disclose Defendants' practice of steering investors into Shelf-Space Funds." Id. ¶ 68.*fn13 As context, plaintiffs set forth a lengthy disclosure by Massachusetts Financial Services Investors Growth Stock Fund ("the MFS Fund") and a string citation to four other prospectuses.*fn14 Id. ¶¶ 69-70.
With respect to commissions, the MFS Fund prospectus states that (a) brokers or dealers who provide "brokerage and research services" to the fund may receive from the fund "an amount of commission for effecting a securities transaction for the Fund in excess of the amount other brokers or dealers would have charged,"*fn15 and (b) such transaction commissions may be paid "in part for providing such brokerage and research services." Id. ¶ 69. The prospectus also mentions that (a) certain brokerage or underwriting commissions might be paid as "consideration" by the fund to broker-dealers in return for certain research services, (b) some brokers might be "selected" for such commission-research bargains "principally because of their execution capabilities," and (c) some of these brokerage commissions "might exceed those that might otherwise be paid." Id.
In sum, the prospectus (at least, the text plaintiffs quote) states only that commissions would be paid to broker-dealers in return for their brokerage and research. What the prospectus does not mention is that commissions might also be paid out from fund assets in return for broker-dealers promoting the fund to would-be investors. If such a payment system existed, it would create an incentive for broker-dealers to push the fund when advising potential investors. That undisclosed*fn16 interest would conflict with a potential investor's interest in not paying commissions which, unlike the brokerage and research services mentioned in the prospectus, deplete fund assets with no corresponding return to owners of those assets.*fn17 The MFS prospectus thus illustrates that the failure of a prospectus to disclose the payment system alleged by plaintiffs amounts to a failure to disclose a conflict of interest presented by broker-dealers who stand to receive those payments.
From the point of view of a potential investor, such a conflict of interest is materially undesirable. The more conflicted the broker-dealer, the greater the possibility that his advice will not be consistent with the investor's self-interest. One can debate, of course, whether investment information is ever totally objective or free from bias, and, in that vein defendants argue that Advantage's statement that its financial advisors offer "unbiased financial information based solely on your financial agenda and no one else's" is mere "corporate puffery." Def. Br. 19.
But the question presented here is not so metaphysical; it is whether reasonable minds could differ on the importance of information about the conflict of interest alleged by plaintiffs. I conclude that they could: a substantial change in the information presented to a reasonable investor about a conflict of interest on the part of her financial advisor could significantly alter the "total mix" of information relevant to the prospective transaction. Accordingly, insofar as the misrepresentations and omissions by the AIG Brokers in fact concerned such a conflict of interest, they were not immaterial as a matter of law.
This conclusion is supported by the purpose of the securities laws at issue, which counsels for a generous construction of plaintiffs' fraud theory. The "'fundamental purpose [of the those laws is] to substitute a philosophy of full disclosure for the philosophy of caveat emptor and thus to achieve a high standard of business ethics in the securities industry.'" Affiliated Ute Citizens v. United States, 406 U.S. 128, 151 (1972) (quoting SEC v. Capital Gains Research Bureau, 375 U.S. 180, 186 (1963)). Accordingly, "Congress intended securities legislation enacted for the purpose of avoiding frauds to be construed 'not technically and restrictively, but flexibly to effectuate its remedial purposes.'" Id. (quoting 375 U.S. at 195). My conclusion is also supported by the Second Circuit, which has noted in dictain a similar case that "knowledge that [investors'] broker-dealers have a conflict of interest, i.e., that their broker-dealers are paid by the money market funds the broker-dealers selected for 'automatic sweeps' of plaintiffs' uncommitted account balances, is material." Press, 218 F.3d at 130 (holding that omission of that fact was nonetheless not actionable because the court was required to defer to the SEC's opinion that defendants' disclosures were in compliance with Rule 10b-10).
For reasons I discuss in detail below, I leave open the question whether information about the alleged bias of the AIG Brokers (in the form of the payment structure generally alleged by plaintiffs) would "significantly" alter the total mix of information available to a reasonable investor. Certain types of information about the bias of investment advice are insignificant as a matter of law. See, e.g., In re Morgan Stanley & Van Kampen Mut. Fund Sec. Litig., No. 03 Civ. 8208 (RO), 2006 U.S. Dist. LEXIS 20758, at *32-*33 (S.D.N.Y. Apr. 18, 2006) (information about fees of "mere fractions of a percentage point," sales contests "limited in geographical scope and in duration," and prizes "primarily of minimal value" was immaterial as a matter of law); Castillo v. Dean Witter Discover & Co., No. 97 Civ. 1272 (RPP), 1998 WL 342050, at *9 (S.D.N.Y. June 25, 1998) (the mere fact a fund and broker-dealer were owned by the same company was immaterial as a matter of law). Such information need not be disclosed, especially since all disclosure comes at a processing cost, as any layperson who has attempted to read a prospectus can attest. But I cannot address whether or not the payment system alleged by plaintiffs is significant as a matter of law in this case, because, as I discuss below, plaintiffs have not pled that system with adequate particularity.
Defendants suggest that their nondisclosures cannot form the basis of fraud liability because they met the disclosure obligations of SEC Form N1-A, which "requires the disclosure of the total fees paid by the investor in connection with a securities purchase, as well as total commissions paid by the fund." Morgan Stanley, 2006 U.S. Dist. LEXIS 20758, at *30. See Def. Br. 22-23 ("[D]isclosures as to the subject of Plaintiffs' allegations were governed by specific regulations, and disclosures that complied with that regulatory regime were adequate as a matter of law." (citation omitted)). While the question whether defendants met their Form N1-A disclosure obligations is likely relevant to plaintiffs' Rule 10b-10 claim,*fn18 it does not affect my conclusion about the materiality of defendants' alleged nondisclosure of the Shelf-Space payments to the AIG Brokers because, as defendants acknowledge, Form N1-A "does not require disclosure of how differential compensation is allocated." Def. Br. 22 (citing Morgan Stanley, 2006 U.S. Dist. LEXIS 20758, at *30). "[T]he disclosure requirements of Rule 10b-5 still apply to those categories of information not specifically covered by Rule 10b-10." Press, 218 F.3d at 132 n.12; see also Benzon v. Morgan Stanley Distribs., Inc., 420 F.3d 598, 612 (6th Cir. 2005) ("Current SEC regulations, including Form N1-A, do not impose a disclosure obligation with respect to broker compensation. Therefore, Defendants had no duty to disclose that information unless it was necessary to make another statement contained in the prospectus not misleading." (emphasis added)). So even if defendants are correct that they fully complied with their Form N1-A disclosure obligations, it does not follow that their failure to disclose the AIG Brokers' alleged conflict of interest is necessarily immaterial.
3. Loss Causation
Defendants move for dismissal on the ground that, even if they misrepresented or omitted a material fact, that misconduct could not have caused plaintiffs any cognizable harm. Defendants argue plaintiffs cannot allege loss causation under Section 10(b), as the PSLRA requires them to do. See 15 U.S.C. § 78u-4(b)(4) (providing that actions pursuant to Section 10(b) carry "the burden of proving that the act or omission of the defendant alleged to violate [Section 10(b)] caused the loss for which the plaintiff seeks to recover damages"); see also Lentell v. Merrill Lynch & Co., 396 F.3d 161, 172 (2d Cir. 2005), cert. denied, 126 S.Ct. 421 (2005). Defendants argue the affirmative defense of a lack of loss causation*fn19 under Section 12(a)(2) "appears on the face of the complaint" and thus provides a valid basis for dismissal. Pani v. Empire Blue Cross Blue Shield, 152 F.3d 67, 74 (2d Cir. 1998), cert. denied, 525 U.S. 1103 (1999). I conclude that dismissal is unwarranted, because one version of plaintiffs' loss causation theory withstands the motion.
"Loss causation is the causal link between the alleged misconduct and the economic harm ultimately suffered by the plaintiff." Lentell, 396 F.3d at 172 (internal quotation marks omitted). Proper pleading of that causal link requires alleging "'that the subjectof the fraudulent statement or omission was the cause of the actual loss suffered.'" Id. at 173 (quoting Suez Equity Investors, L.P. v. Toronto-Dominion Bank, 250 F.3d 87, 95 (2d Cir. 2001)) (emphasis omitted).
Three theories of loss causation are discernable from the complaint. First, plaintiffs claim that, absent defendants' misrepresentations and nondisclosures, they would have not bought shares in the Shelf-Space Funds. See Compl. ¶ 79 ("Plaintiffs . . . would not have purchased the Shelf-Space Funds, and paid . . . the related commissions and fees . . . had they known of [the Shelf-Space system of payments]."). Instead, they could have bought shares in other funds with a greater return or spent less money for an equivalent return. Id. ("By investing in the Shelf-Space Funds, Plaintiffs . . . received a return on their investment that was substantially less than the return they would have received had they invested the same dollars in a comparable fund that did not participate in the revenue sharing program. Alternatively, investors could have invested fewer dollars in a non-Shelf-Space Fund to obtain a rate of return equal to or greater than that obtained at a higher price from the comparable Shelf-Space Fund.").
This claim does not allege loss causation. That plaintiffs would not have purchased shares in the Shelf-Space Funds but for defendants' misconduct may show transaction causation. See Salomon Smith Barney, 441 F. Supp. 2d at 589 ("With regard to Plaintiffs' assertion that they would not have purchased the Fund shares had they known of the complained-of practices, this assertion makes out transaction causation -- not loss causation.").*fn20
And plaintiffs' hypothesis that they would have gotten a better deal on a different investment is too speculative to support a pleading of loss causation. As the Supreme Court has recognized in a related context, if it were sufficient to allege a "largely conjectural and speculative recovery" based entirely upon "the plaintiff's subjective hypothesis," there would be a "very real risk" of "recovery of substantial damages on the part of one who offers only his own testimony" as proof to the jury. Blue Chip Stamps, 421 U.S. at 734, 746 (plaintiffs who merely allege they would have purchased a security but for a misrepresentation or omission have no standing to sue under Rule 10b-5); see also Morgan Stanley, 2006 U.S. Dist. LEXIS 20758, at *38-*39.*fn21
Second, plaintiffs claim that defendants' misrepresentations and omissions "distorted" the "market prices" at which plaintiffs bought Shelf-Space Fund shares "such that [the prices] did not reflect the risks and costs of the continuing course of conduct alleged." Compl. ¶ 81. But, as plaintiffs acknowledge, the price of mutual fund shares is set not by the market but by law. See Pl. Br. 23. The price of a share is calculated by reference to the "Net Asset Value" ("NAV") of the fund, i.e., the value of the assets less liabilities. See 17 C.F.R. 270.22c-1; Morgan Stanley, 2006 U.S. Dist. LEXIS 20758, at *35-*36. Plaintiffs nowhere allege that the total amount of liabilities (fees and commissions) at issue were anything but fully disclosed to investors. Accordingly, plaintiffs cannot reasonably allege that the prices were somehow "distorted."*fn22
Third, plaintiffs claim that defendants misled them into buying Shelf-Space Funds "at an artificially inflated value." Compl. ¶ 80. This theory appears to be that defendants misled plaintiffs into thinking certain fees and commissions they paid were "legitimate outlays for services" accruing to the benefit of plaintiffs, whereas in fact the fees went to Shelf-Space promotional services, accruing to the benefit of the defendants. Id.
Defendants argue that the relevant prospectuses and SAIs disclosed the total amount of Shelf-Space Fund fees,*fn23 so any complaint of "loss" is really just a complaint about the allocation of particular fees within that total amount. Courts have held that challenges to the mere allocation of fees that were disclosed in their total amount fail as a matter of law to establish loss causation. In Castillo v. Dean Witter Discover & Co., No. 97 Civ. 1272(RPP), 1998 WL 342050 (S.D.N.Y. June 25, 1998), for example, the district court rejected a Section 10(b) and Rule 10b-5 claim based upon, inter alia, allegedly excessive commissions charged to the plaintiffs' investment principal. "It is the total fees charged," the court held, "that would affect the asset value of a mutual fund and the decision to invest. The prospectus disclosed these amounts." Id. at *5.
Castillo's reasoning does not require the rejection of plantiffs' third loss causation theory as a matter of law. In Castillo, the investors' willingness to purchase shares knowing the total fee amount to be charged to their principal -- i.e., the potential diminution of the funds' NAV -- indicated that even absent the nondisclosures there would still have been an equivalent amount of diminution in NAV. The investors had no quarrel with paying the disclosed total amount of fees for the services they received in return. They just objected to the allocation of a certain fee f to a service s. Here, by contrast, the investors do quarrel with paying the total amount of fees, because defendants did not disclose the "Shelf-Space" services that certain of the fees were paying for. The plaintiffs allege that they assumed wrongly -- because of defendants' nondisclosure and misrepresentation -- that they were paying (out of their principal, see Compl. ¶ 60) only fees for services that accrued to their benefit. See Compl. ¶ 80. In reality, plaintiffs' principal was funding the Shelf-Space system of payments. So plaintiffs challenge not the allocation of a fee f to a service s, but rather the very existence of f. See Siemers v. Wells Fargo & Co., No. C 05-04518 WHA, 2006 WL 2355411, at *12 (N.D. Cal. Aug. 14, 2006) (finding sufficient pleading of loss causation when plaintiff alleged not "a failure to disclose the overall amount of all fees" but "that defendants deceived him into thinking the fees were for worthwhile investment advice or something else of value to shareholders when, in fact, these fees were merely a cover for funneling kickbacks to broker-dealers"). Accordingly, plaintiffs sufficiently allege that the Shelf-Space system of payments caused them an economic loss: absent those payments, plaintiffs' total amount of fees, and thus the resulting diminution of their investment's asset value, would have been smaller. Indeed, plaintiffs claim they never would have paid the Shelf-Space fees had the nature of the fees been disclosed.
I find that a rational jury, if it credited plaintiffs' allegations, could conclude that the subject of defendants' alleged nondisclosure and misrepresentation caused economic harm to the plaintiffs.*fn24 I therefore conclude that dismissal of the complaint with prejudice is unwarranted.
4. Statute of Limitations
Defendants move to dismiss as time-barred any 1933 Act claim arising more than three years prior to the April 7, 2006 filing of this action and any 1934 Act claim arising more than five years prior. Section 804 of the Sarbanes-Oxley reform legislation lengthened to five years the limitations period for private causes of action pursuant to Section 10(b).The statute provides:
[A] private right of action that involves a claim of fraud, deceit, manipulation, or contrivance in contravention of a regulatory requirement concerning the securities laws . . . may be brought not later than the earlier of --
(1) 2 years after the discovery of the facts constituting the violation; or
(2) 5 years after such violation. 28 U.S.C. § 1658(b). See In re AOL Time Warner, Inc. Sec. & "ERISA" Litig., 381 F. Supp. 2d 192,208 (S.D.N.Y. 2004) ("There is little doubt that Section 804's expanded statute of limitations applies to § 10(b) claims."). Defendants contend, and plaintiffs do not dispute, that Sarbanes Oxley did not alter the three-year period applicable to 1933 Act claims, however. See In re Alstom SA Sec. Litig., 406 F. Supp. 2d 402, 412-13 (S.D.N.Y. 2005) (Sarbanes-Oxley Section 804 does not apply to Section 12(a)(2) claims). The relevant statute provides: "In no event shall any such action be brought to enforce a liability created . . . under [Section 12(a)(2)] more than three years after the sale." 15 U.S.C. § 77m.
Plaintiffs do not contest this aspect of defendants' motion. Accordingly, any 1934 Act claims arising prior to April 7, 2001 are time-barred, and any 1933 Act claims arising prior to April 7, 2003 are time-barred. For plaintiff Bogage, this means all his claims relating to the October 31, 2000 purchase of Shelf-Space Fund shares are dismissed for failure to state a claim upon which relief can be granted,*fn25 and his 1933 Act claims relating to the October 4, 2001, February 6, 2003, and February 7, 2003 purchases and sales of Shelf-Space Funds are likewise dismissed. For plaintiff Perris, this means all claims relating to the February 15, 2001 purchase of Shelf-Space Funds are dismissed.*fn26
Because I ultimately dismiss this complaint without prejudice to plaintiffs specifying their allegations in greater detail, I decline to address at this point defendants' other timeliness arguments, which concern whether and when plaintiffs were on notice of the misconduct they allege.
5. Remedies
Defendants move to dismiss plaintiffs' Section 12(a)(2) claims insofar as plaintiffs seek rescission. The complaint requests a "declaration" that plaintiffs who still own Shelf-Space Fund shares "may, at the option of each Class Member, rescind his or her purchase of the securities at issue, and upon the tender of the securities at issue, obtain reimbursement of the amounts paid." Compl. ¶ 94. But plaintiffs must plead tender or, at least, an offer of tender to obtain rescission. Morin v. Trupin, 747 F. Supp. 1051, 1063 (S.D.N.Y. 1990). I deny plaintiffs' request that I grant them the "option" to tender; such relief would essentially guarantee plaintiffs a floor price on their investment. Accordingly, that claim for relief is dismissed, without prejudice to an adequate pleading of tender or an offer of tender.
Defendants argue for dismissal insofar as plaintiffs seek damages, because plaintiffs have not alleged sale of their shares at a loss. This is denied. The complaint states that "[i]f any plaintiff . . . no longer owns the securities at issue, he or she is entitled to damages." Compl. ¶ 94. Drawing all inferences in plaintiffs' favor, that allegation sufficiently pleads a loss. Defendants also argue that, as a matter of fact, plaintiffs have suffered no damages because at least some of their shares appreciated in value. I decline to address this argument unless and until plaintiffs amend their complaint with greater specificity.
C. Pleading Sufficiency
Defendants also move pursuant to Rule 9(b), which requires in relevant part that
"[i]n all averments of fraud . . . , the circumstances constituting fraud . . . shall be stated with particularity." Fed. R. Civ. P. 9(b). The Second Circuit has elaborated on this requirement: A complaint pleading fraud must "'(1) specify the statements that plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent.'" Rombach, 355 F.3d at 170 (quoting Mills v. Polar Molecular Corp., 12 F.3d 1170, 1175 (2d Cir. 1993)). To the extent plaintiffs allege fraud, the PSLRA also requires that their pleadings "specify each statement alleged to have been misleading [and] the reason or reasons why the statement is misleading."15 U.S.C. § 78u-4(b)(1).
Plaintiffs' allegations sound in fraud. Though they repeatedly protest that they "expressly exclude and disclaim any allegation that could be construed as alleging fraud or intentional or reckless misconduct," Compl. ¶¶ 86, 96, the complaint deploys language that describes secretive and culpable acts. See, e.g., id. ¶ 41 ("Defendants cultivated a clandestine, incentive-driven culture among AIG's brokerage arm to sell Shelf-Space Funds, regardless of the comparative value of the funds."); id. ¶ 49 (defendants promoted Shelf-Space Funds "for undisclosed kickbacks" and "took advantage of investors' reliance on their financial expertise and steered those investors into unsuitable mutual funds, inappropriate class shares and brokerage programs that incurred higher costs to the investor"). If the AIG Brokers "carefully participated in an institutional revenue sharing scheme wherein [they] received secret payments from the Shelf-Space Funds," id. ¶ 30, they could not have done so negligently.
I decline to construe the complaint as alleging negligence in the alternative, for it is unreasonable to believe the payment arrangements, as alleged, came about by accident. The elaborate yet "secret" payment structure and the "clandestine" culture that promoted it were, if true, by definition non-negligent. Plaintiffs may not escape the particularity requirements of Rule 9(b) and the PLSRA merely by including template language disclaiming fraud. See Alstom SA, 406 F. Supp. 2d at 411 ("[A]s now drafted, Plaintiffs' Complaint, their disclaimers to the contrary notwithstanding, sounds in fraud.") (internal quotation marks and citation omitted); see also Rombach, 355 F.3d at 172 (plaintiffs alleged only fraud due to the "classically" fraud-based "wording and imputations of the Complaint").
Applying those pleading requirements,I conclude that plaintiffs have failed to allege with sufficient particularity the "circumstances" of the fraud in two principal respects.
First, plaintiffs fail to allege facts that link their claims to the defendants. As discussed above, plaintiffs mention explicitly the misrepresentation of only one defendant. See Compl. ¶ 29. They merely cite, without any explication, a statement by another defendant. See id. This falls far short of the particular identification of each speaker and statement required by Rule 9(b) and the PSLRA. To be sure, plaintiffs extensively quote one prospectus in the complaint, id. ¶ 69, but they do not link that statement to a defendant; indeed, as discussed above, no plaintiff has even alleged an injury relating to that fund. And plaintiffs cannot discharge their responsibility to plead statements with particularity by averring that the quoted prospectus is "identical in substance to all the other Shelf-Space Fund prospectuses issued during the Class Period." Id. (emphasis added). Furthermore, to the extent plaintiffs' Section 10(b) claims are based upon misrepresentations, plaintiffs nowhere allege that any particular individual relied upon those misrepresentations. See Press v. Chem. Inv. Servs. Corp., 166 F.3d 529, 539 (2d Cir. 1999) ("Reliance, also referred to as 'transaction causation,' is an essential element of a section 10(b) and Rule 10b-5 claim.").
Second, plaintiffs fail to adequately plead that disclosure of the Shelf-Space payment arrangements would "significantly" alter the total mix of information available to a reasonable investor (i.e., whether it was material).*fn27 For example, plaintiffs recite that the AIG Brokers received payments of up to 25 basis points "on the sales of shares" and up to 11 basis points of quarterly fees per year, calculated by reference to assets under management. Compl. ¶ 38.
Calculating the actual size of these payments is impossible, however, because plaintiffs nowhere mention the amount of assets under management for any fund. Similarly, plaintiffs allege that defendants received "revenue through reimbursement for expenses incurred during certain meetings and seminars," and compensation of certain "administrative costs such as record keeping," id. ¶ 39, but nowhere allege how much these payments were for any broker-dealer. Plaintiffs allege "kickbacks" based on sales of Shelf-Space Funds, citing an example of a $12 transaction-charge forgiveness, id. ¶ 40, but nowhere allege how much those kickbacks added up to. Plaintiffs allege the use of directed brokerage as reimbursement of broker-dealers, id. ¶ 33, but nowhere allege how much directed brokerage they are talking about. Plaintiffs allege that the Shelf-Space Funds "were more expensive with respect to fees," id. ¶ 49, but nowhere allege how the compensation received by AIG Brokers for promoting Shelf-Space Funds was significantly different than they compensation they received for promoting other funds. In fact, plaintiffs nowhere mention the total amount of fees received by any given broker-dealer. Accordingly, without further information, it is impossible to assess whether the money allegedly received by the broker-dealers was significant.
The lack of specifics about statements, speakers, and payment arrangements also makes it impossible to consider defendants' remaining arguments for dismissal. The details of the alleged payment system are too sparse to permit a determination whether its disclosure would be material, much less whether the facts support a "strong inference" of the requisite scienter. 15 U.S.C. § 78u-4(b)(2) (requiring that a pleading "with respect to each . . . omission . . . state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind"); Rombach, 355 F.3d at 171. The lack of particularity poses the same impediment to a determination whether defendants' actions constituted a "scheme" for Rule 10b-5(a) and 10b-5(c) purposes. See In re Marsh & McLennan Cos., Inc. Sec. Litig., No. MDL NO. 1744, 04 Civ. 8144(SWK), 2006 WL 2057194, at *32 (S.D.N.Y. July 20, 2006) (requiring "particularized allegations of the individual defendants' active participation in a scheme" and not merely "allegations that the individual defendants made, or allowed to be made, false or misleading statements"). Finally, without knowing what prospectuses and SAIs are actually at issue, and what specific statements (or omissions) in them are at issue, I cannot determine the sufficiency of plaintiffs' Rule 10b-10 disclosure claims.*fn28
The motion pursuant to Fed. R. Civ. P. 12(b)(1) and Fed. R. Civ. P. 12(h)(3) to dismiss the complaint, insofar as it relates to funds other than the ones in which plaintiffs allege they actually owned shares, is granted. The motion pursuant to Fed. R. Civ. P. 12(b)(6) is granted in part and denied in part. The motion pursuant to Fed. R. Civ. P. 9(b) and the PSLRA is granted. Accordingly, the complaint is dismissed without prejudice to the filing of a second amended complaint on or before May 24, 2007.
So ordered.
John Gleeson, U.S.D.J.
15 U.S.C. § 77l. Civil liabilities arising in connection with prospectuses and communications
(a) In General
Any person who --
(2) offers or sells a security . . . by means of a prospectus or oral communication, which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading (the purchaser not knowing of such untruth or omission), and who shall not sustain the burden of proof that he did not know, and in the exercise of reasonable care could not have known, of such untruth or omission, shall be liable, subject to subsection (b) of this section, to the person purchasing such security from him . . . to recover the consideration paid for such security with interest thereon, less the amount of any income received thereon, upon the tender of such security, or for damages if he no longer owns the security.
(b) Loss Causation
In an action described in subsection (a)(2) of this section, if the person who offered or sold such security proves that any portion or all of the amount recoverable under subsection (a)(2) of this section represents other than the depreciation in value of the subject security resulting from such part of the prospectus or oral communication, with respect to which the liability of that person is asserted, not being true or omitting to state a material fact required to be stated therein or necessary to make the statement not misleading, then such portion or amount, as the case may be, shall not be recoverable.
15 U.S.C. § 77o.
Liability of Controlling Persons
Every person who, by or through stock ownership, agency, or otherwise, or who, pursuant to or in connection with an agreement or understanding with one or more other persons by or through stock ownership, agency, or otherwise, controls any person liable under sections 77k or 77l of this title, shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable, unless the controlling person had no knowledge of or reasonable ground to believe in the existence of the facts by reason of which the liability of the controlled person is alleged to exist.
15 U.S.C. § 78j(b).
Manipulative and Deceptive Devices
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange--
(b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered . . . 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.
17 C.F.R. § 240.10b-5 Employment of manipulative and deceptive devices.
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.
15 U.S.C.A. § 78t. Liability of controlling persons and persons who aid and abet violations
(a) Joint and several liability; good faith defense Every person who, directly or indirectly, controls any person liable under any provision of this chapter or of any rule or regulation thereunder shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable, unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action.
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This and many other videos really get my goat in terms of representing Archaeology on Youtube, either a ludicrous cover up of ancient culture or as evidence for biblical archaeology. I am almost furious that we as a discipline have allowed our online presence to become a haven for what can only be called fringe archaeology. Most archaeologists will scoff at the mention of ancient aliens and other such fantasies but it seems for many on Youtube, these are real and believable theories. In addition, someone attempting to learn more about archaeology in general is swamped by hour long documentaries talking about Sodom & Gomorrah, Confirming the Bible through Archaeology and the Secret History of Archaeology. I want to be clear that I don't want these types of programs removed, nor do I want to silence people's opinions; I just wish that the online landscape of archaeology better reflected the real world of archaeology.
Tristan notes the existence of hundreds of high quality archaeology blogs, but regrets that they are drowned out by well-financed "made-for-market media that dominates search engines and has money assigned for promotion."
The problem is that the conspiracy theories are pretty much all the interested layperson sees when looking for information on television, on YouTube, are on much of the open internet. And virtually no one is immune to mistaking slickly produced propaganda for truth. Take the case of Dorothy Turcotte, who by most accounts is a very nice senior citizen from Canada who has devoted much of her later life to writing a newspaper column for a succession of local newspapers and producing a variety of nonfiction books, mostly on subjects of local interest to her community of Grimsby, near St Catharines and Niagara Falls.
Earlier this month Turcotte wrote a column for the Grimsby Lincoln News that went over Niagara Falls in a barrel, plunging straight into the foaming depths of lunatic fringe history. She got there thanks to Scott Wolter, whose America Unearthed she watches regularly, despite not quite knowing who he is. She calls him "Scott Wolper," perhaps thinking of the twentieth century filmmaker David L. Wolper, who produced many famed historical documentaries. Anyway, Turcotte thinks that what she saw on America Unearthed and then learned from researching its claims is "sure to pique children's interest in learning more." She's like to see it taught in schools.
Turcotte's investigations into fringe history are unfathomably sad, and someone at the Gimsby Lincoln News needed to fact check the article, or suggest to the author that something was amiss. It is frankly, embarrassing, and a sensitive editor might have done something about it.
Turcotte claims that the Vikings discovered Manitoba after finding "Anse l'Meadows," by which she means L'anse-aux-Meadows by way of Ansel Adams. Her evidence for Vikings in Manitoba rests on the community of Gimli, which has no Viking archaeology but does have giant statue of a Viking erected in 1967 in honor of the province's Icelandic residents, commemorating an ethnic heritage festival held in the town since 1932. Icelanders founded the settlement in 1875.
She then adopts all of Gavin Menzies's various claims about Chinese voyages to America uncritically. She claims that Native Americans have "Chinese" DNA and speak languages influenced by Chinese, and that a Chinese junk was excavated from the Sacramento River and carbon dated to 1410. The trouble with that claim, of course, is that the junk doesn't exist, at least so far as anyone other than Gavin Menzies knows. Menzies refused to reveal the ship's location, provide documentation of its recovery, or release the data behind his alleged radiocarbon test. He offers not even a photograph, let alone the documentation needed in California to actually conduct a recovery expedition, as was allegedly done in 2002 and 2003.
Turcotte then asserts, embarrassingly, that Western and Russian scientists discovered a perfect match for Atlantis on an island "in the Atlantic Ocean east of Gibraltar." East of Gibraltar is the Mediterranean Sea. The Atlantic is to the west, and there is no match for Atlantis on either side.
She also believes that science has found information about the "universes" beyond ours, and it isn't clear whether she is referring to the multiverse or confusing galaxies with universes.
Her call to action is depressing on many levels:
Is any of this being taught in our schools, in place of the traditional historical and geographical material? I hope so. Those who doubt its truth can easily find sources to support these claims. While such amazing information must change our entire thinking about the past, it must also be disseminated, rather than being suppressed. Young people today need to have their vision of this planet broadened, and be given the opportunity to learn much, much more than was previously available.
If it weren't for Lance Aux Meadows we'd still hail Columbus Day and the Roman Catholic Church would be giddy. The fact is the same 'serious academics' turn a blind eye to the obvious conclusive evidence behind the "Big Three", the Kensington Rune Stone, the Bat Creek Stone, and the Tucson Lead Artifacts. To accept them throws the last 2000 years of North American history upside down completely.
And just to be clear: Leif Erikson, the founder of Vinland, was a Catholic according to the sagas. So, too, were some of the people who allegedly created the Tucson Lead Artifacts, forged (supposedly) by Christians who accompanied some Jews to Arizona. Needless to say, the Norse who supposedly carved the Kensington Rune Stone were putatively (though not in Wolter's imagination) Catholics who inscribed the stone with "Ave Maria" (AVM). I'm not sure why the Catholic Church would have much interest in the question, except in Wolter's imagination, where there is an elaborate conspiracy to fabricate history to suppress heresy. I'll remind you that McCarthy's textbook was for Catholic schools and endorsed the Viking discovery in 1919!
If you're not a conspiracy theorist, you might be interested in this final item: There is a group trying to save the fields around the Chesterton Windmill, which was likely the model for the Newport Tower in Rhode Island, presuming you accept that the Tower is a colonial era windmill and not the secret clubhouse of itinerant Templars. There is a move afoot to develop the land around the Chesterton Windmill, and this could compromise the historic landscape and the beautiful views of the windmill. I don't know much about the plans or their impact, but I told one of the preservationists that I'd pass on the link.