Opinion
CV 02-08068 FMC (JWJx)
August 8, 2003
ORDER GRANTING MOTIONS TO DISMISS AND TO STRIKE CLASS ALLEGATIONS
This matter is before the Court on Defendants' Motions to Dismiss and to Strike Class Allegations (docket #45, 50). The Court deems this matter appropriate for decision without oral argument. See Fed.R.Civ.P. 78; Local Rule 7-15. Accordingly, the hearing set for August 11, 2003, is removed from the Court's calendar. For the reasons set forth below, the Court hereby grants both Motions.
I. Background
Plaintiff filed a class action lawsuit in Los Angeles Superior Court on September 23, 2002, asserting three claims based on the Securities and Exchange Act of 1933 ("the 1933 Act") against Defendant Homestore, Inc. ("Homestore") and others. The case was subsequently removed to this Court.
A. Plaintiff's Allegations
Plaintiff alleges that certain business transactions between Homestore and nonparty America Online ("AOL") constitute a type of "kick back" scheme that artificially inflated Homestore's revenues. Plaintiff alleges that these practices do not comply with generally accepted accounting principles("GAAP").
Specifically, Plaintiff alleges the following: Homestore and AOL made an agreement to artificially inflate revenue. For each advertiser who agreed to buy space on the Homestore/AOL website, AOL would kick back approximately half of the revenue to Homestore. Homestore made an agreement to make a payment to third parties who agreed to advertise in exchange for their willingness to consent to the arrangement. In exchange, Homestore agreed to purchase from the third party worthless software licenses equal to the amount of the cost of the advertisement. In so doing, Homestore "bought" its own revenue for about 50 cents on the dollar. Plaintiff alleges that Defendants misrepresented the true nature of its arrangement with AOL in its January 26, 2000, Registration Statement that it filed with the Securities and Exchange Commission ("SEC").
Plaintiff alleges another misstatement regarding "impressions." Impressions are created when the consumers on the Homestore website click on an individual partners' advertisement. Homestore would earn revenue for every one million impressions on a partner's advertisement. Homestore's computer system manipulated the number of impressions received by a partner to make it look as if they received more than they actually did, allowing Homestore to recognize more advertising revenue than it would have otherwise.
B. Plaintiff's Class Definition
Plaintiff purports to assert claims on behalf of the following class: "[A]ll persons who purchased the equity securities of Homestore pursuant to the January 2000 offering." Compl. ¶ 33. This offering is referred to as the Second Public Offering ("SPO").
C. Defendants
Plaintiff asserts claims against Homestore (formerly known as Homestore.com Inc.); directors and signatories to the January 2000 Registration Statement (Stuart H. Wolff, John M. Giesecke, Richard R. Janssen, Nigel DT. Andrews, Michael C. Brooks, John Doerr, Joe R Hanauer, William E. Kelvie, Kenneth K. Klein) (collectively, "the Individual Defendants"); and the Underwriter Defendants (Morgan Stanley Dean Witter, Merrill Lynch Co., Donaldson Lufkin Jenrette, Fleetboston Financial Corp., J.P. Morgan Chase Co., and Soundview Technology Corp.).
D. Plaintiff's Claims
Plaintiff asserts three claims based on these allegations. First, Plaintiff asserts a claim based on § 11 of the Securities and Exchange Act of 1933 ("the 1933 Act") against all Defendants. Plaintiff bases his § 11 claim "solely on claims of strict liability and/or negligence" and expressly disclaims any claim based on fraud or intentional or reckless misconduct. Compl ¶ 40. Plaintiff alleges that Homestore is strictly liable to Plaintiff for the misstatements and omissions in the Registration Statement. Plaintiff alleges that the Underwriter Defendants sold the securities within the meaning of § ll(a)(5) and are therefore responsible for the contents of the Registration Statement.
Section 11 of the 1933 Act is 15 U.S.C. § 77k, which authorizes a civil cause of action Based on material misrepresentation in registration statements.
Second, Plaintiff asserts a claim based on § 12(a)(2) of the 1933 Act against all Defendants. As with his § 11 claim. Plaintiff bases his § 12(a)(2) claim "solely on claims of strict liability and/or negligence" and expressly disclaims any claim based on fraud or intentional or reckless misconduct. Compl. ¶ 51
Section 12 of the 1933 Act is 15 U.S.C. § 77/, which authorizes a civil cause of action based on material misrepresentations in connection with the sale or offering for sale of securities.
Third, Plaintiff asserts a claim based on § 15 of the 1933 Act against the individual Defendants. As with his other claims, Plaintiff bases his § 15 claim "solely on claims of strict liability and/or negligence" and expressly disclaims any claim based on fraud or intentional or reckless misconduct. Compl, ¶ 56. Plaintiff alleges that each of the individual Defendants was a controlling person of Homestore within the meaning of § 15 during the relevant time period.
Section 15 of the 1933 Act is 15 U.S.C. § 77o, which imposes control person liability for violations of § 11 and § 12 ( 15 U.S.C. § 77k, 77l):
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 77/ 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. § 77o.
II Standard for Dismissal Pursuant to Fed.R.Civ.P. 12(b)(6)
The present Motion to Dismiss requires the Court to determine whether the Complaint states any claim upon which relief may be granted. See Fed R. Civ. P. 12(b)(6). The Court will not dismiss the claims for relief unless Plaintiff cannot prove any set of facts in support of the claims that would entitle him to relief. See Steckman v. Han Brewing, Inc., 143 F.3d 1293, 1295 (9th Cir. 1998). In limiting its inquiry to the content of the Complaint, the Court must take the allegations of material fact as true and construe them in the light most favorable to the plaintiff. See Western Reserve Oil Gas Co. v. New, 765 F.2d 1428, 1430 (9th Cir. 1985). Additionally, the Court "is not required to accept legal conclusions cast in the form of factual allegations if those conclusions cannot be reasonably drawn from the facts alleged." Clegg v. Cult Awareness Network, 18 F.3d 752, 755 (9th Cir. 1994).
III. Plaintiff Has Not Met the Procedural Requirements for Filing the Present Litigation as a Class Action
Defendants correctly point out that Plaintiff has failed to meet the procedural requirements of the Private Securities Litigation Reform Act ("PSLRA") prior to filing the present action as a class action.
The PSLRA is applicable to claims brought under the 1933 Act, such as the claims in the present action. The 1933 Act is found in Subchapter I, Chapter 2A, of the United States Code, Title 15. See 15 U.S.C. § 77a. ("This subchapter[, 15 U.S.C § 77a- 15 U.S.C. § 77z-2] maybe cited as the "Securities Act of 1933"). The PSLRA amended the 1933 Act by adding 15 U.S.C. § 77z-1, which delineates a number of procedural requirements for the filing of private securities litigation class actions.
Plaintiffs are required to file a certification with the complaint. 15 U.S.C. § 77z-1(a)(2). It must be signed by the plaintiff and must state the following: that the plaintiff has reviewed the complaint and authorized its filing; that the plaintiff did not purchase the security that is the subject of the complaint at the direction of plaintiff s counsel or in order to participate in any private action; that the plaintiff is willing to serve as a representative party on behalf of a class, including providing testimony at deposition and trial, if necessary. Id. There are a number of other certification requirements as Well, involving transactions in the security at issue, other securities class action cases in which the plaintiff has been involved in the previous three years, and a statement that the plaintiff will not accept payment for serving as a representative party (beyond his pro rata share of any recovery). Id. There are also a number of notice requirements, including a requirement that the plaintiff publish notice of pendency of the action within 20 days of the filing of the complaint. Id. Other class members may move to be appointed as lead plaintiff in the action, and the Court must appoint the "most capable" lead plaintiff. Id. The PSLRA places restrictions on "professional plaintiff's" by prohibiting, absent leave of court, any plaintiff from serving as lead plaintiff in more than five securities class actions in any three-year period. Id.
Plaintiff has not complied with these requirements, and therefore may not maintain this action as a class action. Accordingly, the Court hereby strikes the class action allegations, ¶¶ 33-39 of the Complaint.
Federal Rule of Civil Procedure 12(0 permits the Court to strike from any pleading `any insufficient defense or any redundant, immaterial, impertinent or scandalous matter."
Plaintiff argues that the present action is not subject to the PSLRA, because it was improperly removed. Plaintiff argues that it should be remanded to state court. The Court disagrees. For the reasons set forth in the Court's January 6, 2003, Order, this case was properly removed pursuant to the Securities Litigation Uniform Standards Act of 1998 ("SLUSA").
Plaintiff has filed a Writ of Mandamus with the Ninth Circuit regarding this issue.
Plaintiff is granted leave to amend the Complaint to comply with all relevant procedural requirements, if he is able.
IV. Plaintiff's Securities
Plaintiff alleges that he "purchased shares of Homestore stock pursuant to and traceable to the Registration Statement and has suffered damages as a result thereof" Compl. ¶ 6.
A. § 11
To maintain a § 11 claim, Plaintiff must allege that his stock was issued under the offending Registration Statement; he need not allege that he was the original purchaser Hertzberg v. Dignity Partners, Inc., 191 F.3d 1076, 1080-82 (9th Cir. 1999). Plaintiff's conclusory allegations, however, are not sufficient to state a § 11 claim. See Lilley v. Charren, 936 F. Supp. 708, 715-16 (N.D. Cal. 1996) (dismissing § 11 claims for failure to allege specific dates and facts necessary to establish that stock purchased was issued pursuant to IPO). Accordingly, Plaintiff's first cause of action is dismissed without prejudice.
B. § 12
To maintain a § 12 claim, Plaintiff must allege that he was the original purchaser in the public offering. See Henzberg, 191 F.3d at 1081 ("Section 12 . . . permits suit against a seller of a security by prospectus only by `the person purchasing such security from him,' thus specifying that a plaintiff must have purchased the security directly from the issuer of the prospectus.") Plaintiff has not alleged that he was the initial purchaser in the SPO, and therefore Plaintiff has not stated a § 12 claim. Accordingly, Plaintiff's second cause of action is dismissed without prejudice.
V. Pleading Particularity Requirements
Plaintiff argues that his claims are not subject to any particularity requirements for two reasons. First, Plaintiff notes that claims under the 1933 Act, in contrast to claims under the 1934 Act, are not subject to statutory requirements regarding pleading with particularity. Compare 15 U.S.C. § 77z-1 (1933 Act) with 15 U.S.C. § 78u-4(b) (1934 Act), Second, Plaintiff argues that his claims are not subject to the heightened pleading standards of Fed.R.Civ.P. 9(b) because he has expressly disclaimed any allegations of fraud or intentional or reckless conduct.
Plaintiff correctly notes, and Defendants do not disagree, that neither § 11 nor § 12 of the 1933 Act has a scienter requirement.
Plaintiff is correct that the 1933 Act has no statutory requirements regarding pleading with particularity. See Falkowski v. Imation Corp., 309 F.3d 1123, 1133 (9th Cir. 2002), However, the Ninth Circuit has held that where a plaintiff's § 11 and § 12 claims sound in fraud, they are subject to the Rule 9(b) particularity requirements. Id.
Of course, Plaintiff has expressly disclaimed all claims based on fraud or intentional or reckless conduct. However, the Ninth Circuit has held that a Court should not take such a disclaimer at face value; rather, the Court must inquire into the substance of a plaintiff's allegations to determine if they sound in fraud. In re Stac Electronics Securities Litigation, 89 F.3d 1399, 1404-05, n. 2 (9th Cir. 1996). Where those claims sound in fraud, the Court must apply the Rule 9(b) particularity requirements, notwithstanding a plaintiff's express disclaimer. Id. at 1405 n. 2.
The Court agrees with Defendants' observation that the claims asserted by Plaintiff sound in fraud. Plaintiff's claims, therefore, are subject to the particularity requirements of Rule 9(b).
In In re: Glenfed, Inc., Securities Litigation, 42 F.3d 1541, 1547-49 (9th Cir. 1994), the Ninth Circuit discussed at length the requirements of satisfying the Rule 9(b) particularity requirements in a securities action. The Ninth Circuit first rejected the argument that Rule 9(b) requires merely that a plaintiff plead the "facts necessary to identify the transaction." Id. at 1547. To accept this argument would place the Rule 9(b) particularity requirements on the same level as the Rule 8(a) notice pleading requirement, a result clearly not intended. Instead, the Ninth Circuit held that "Rule 9(b) clearly imposed an additional obligation on plaintiff's: the statement of the claim must also aver with particularity the circumstances constituting the fraud." Id. This requires that, in order for a complaint to allege fraud with the requisite particularity, "a plaintiff must set forth more than the neutral facts necessary to identify the transaction." Id. at 1548. "The plaintiff must set forth what is false or misleading about a statement., and why it is false." Id. "In other words, the plaintiff must set forth an explanation as to why the statement or omission complained of was false or misleading." Id.
These "neutral facts" involve the "time, place, and content of an alleged misrepresentation." Id. at 1547-48.
Moreover, timing is especially important in securities actions. Because a plaintiff must set forth what is false or misleading about a statement, he must also "set forth, as part of the circumstances constituting fraud, an explanation as to why the disputed statement was untrue or misleading when made." Id. at 1548-49 (emphasis in the original).
Plaintiff has pointed to two specific passages that he alleges are misstatements. He also explains how each passage is alleged to be false or misleading. Plaintiff fails, however, to allege with specificity the relevant time period of his allegations. Because timing is especially important in securities actions, Plaintiff's allegations fail to meet the Rule 9(b) particularity requirements.
First, in ¶ 28, Plaintiff quotes language from the Registration Statement regarding Homestore's arrangement with AOL regarding advertising. Plaintiff explains that the true cost of generating this advertising revenue, including the payments to third parties, is not disclosed.
The quoted language may be found in the Registration Statement, attached as Exh. 1 to the Davidson Decl, at 12, 22. Although this document is not explicitly incorporated into the Complaint, the authenticity of it is not questioned, and the Complaint necessarily relies upon it. Accordingly, the Court may consider this document in connection with the present Rule 12(b)(6) Motions. See Parrino v. FHP, Inc., 146 F.3d 699, 706 (9th Cir. 1998).
Second, in ¶ 29, Plaintiff quotes language from the Registration Statement regarding revenues to be generated by "impressions." As noted above, "impressions" are made when the consumers on the Homestore website click on an individual partners' advertisement. Plaintiff also explains that the Registration Statement fails to reveal that the number of impressions was falsely inflated by Homestore's computer system.
The quoted language may be found in the Registration Statement, attached as Exh. 1 to the Davidson Decl., at 41.
As to both alleged misstatements, however. Plaintiff has not alleged the relevant time period. For this reason, he has failed to set forth an explanation as to why the disputed statements were untrue or misleading when they were made, and he has therefore failed to satisfy the Rule 9(b) particularity requirements as to these claims.
Plaintiff's § 11, § 12, and § 15 claims are dismissed without prejudice on this basis as well.
VI The Individual Defendants and Homestore Are Not Alleged to be "Sellers" Within the Meaning of § 12
The individual Defendants and Homestore argue that Plaintiff has not alleged that they are "sellers" within the meaning of § 12. Instead, Plaintiff merely alleges that "[b]y means of the defective Registration Statement, Defendants assisted in [the] sale of shares of the Company's securities to plaintiff and other members of the class." Compl. ¶ 52.
A person is a "seller" if he or she "either passes title of the security to the purchaser, or solicits the sale of the security." In re Stratosphere Corporation Securities Litigation, 1 R Supp.2d 1096, 1120 (D. Nev. 1998) (citing Pinter v. Dahl, 486 U.S. 622, 646-48, 108 S.Ct. 2063 (1988)). Under this standard, Plaintiff's allegations are insufficient. The most Plaintiff alleges is that "[t]he Underwriter Defendants arranged a multi-city Roadshow prior to the Offering during which they, and certain of the Individual Defendants, including Wolff and Giesecke, met with potential investors and money managers and presented highly favorable information about the Company, including forecasts of strong revenue and profit growth for Homestore associated with its agreement with AOL." Compl. ¶ 25. Even if true, these allegations are insufficient to establish that Homestore and the individual Defendants are "sellers" within the meaning of § 12. See In re Activision Securities Litigation, 621 F. Supp. 415, 421 (N.D. Cal. 1985) (finding such "road show" activities insufficient to allege that officers and directors were "sellers").
Plaintiff's second cause of action (as to Homestore and the individual Defendants) is dismissed without prejudice on this basis as well.
VII No § 15 Liability Absent an Underlying § 11 or § 12 Claim
Plaintiff's § 15 claim is a derivative claim; in the absence of § 11 or § 12 liability, there can be no § 15 liability. See 15 U.S.C. § 77o. Accordingly, in light of the dismissal of the § 11 and § 12 claims, the Court dismisses without prejudice the § 15 claim on this basis as well.
VIII Conclusion
The Court hereby strikes ¶¶ 33-39 of the Complaint. The Court hereby dismisses without prejudice all three of Plaintiff s claims. Plaintiff is hereby granted thirty days' leave to amend the Complaint in conformity with this Order.