Miller v. Asensio

Decision Date16 June 2000
Docket NumberNo. C/A 2:99-1861-18.,C/A 2:99-1861-18.
CourtU.S. District Court — District of South Carolina
PartiesJoe H. MILLER and Robert W. Pearce, Jr., Plaintiffs, v. Manuel P. ASENSIO, Asensio & Company, Inc., Asensio Capital Management, Inc. and John Does 1-20 Defendants.

David C. Franceski, Philadelphia, PA, Joseph C. Wilson IV, Charleston, SC, Allan Poe Sloan, III, Charleston, SC, for plaintiff.

William Jefferson Leath, Jr., Charleston, SC, Timothy William Bouch, Charleston, SC, for defendant.

ORDER

NORTON, District Judge.

This matter comes before the court on Defendants' Motion to Dismiss. For the reasons set forth below, this court denies Defendants' motion.

I. FACTUAL BACKGROUND1
A. The Players

Plaintiffs Joe Miller and Robert Pearce allege that they were shareholders and owners of common stock of Chromatics Color Sciences International, Inc. (CCSI). Defendant Manuel Asensio is a stock research analyst in New York City. Defendant Asensio and Company is a New York-based investment bank and securities brokerage firm engaged in the business of trading securities for its own account and in producing and disseminating to the investing public analytical research reports regarding publicly traded companies. Defendant Asensio Capital Management, Inc. is a New York-based company engaged in the business of managing investments for individuals, mutual funds, hedge funds, investment companies, and other institutional investors. Defendants John Does 1-20 are yet unknown investment companies, investment managers, investment advisors, broker-dealers, registered representatives, associated persons of broker-dealers, and investors that Plaintiffs allege illegally traded in the publicly available common stock of CCSI.2

B. The Game

This action arises out of the alleged unlawful manipulation and illegal short selling by Defendants of the common stock of CCSI, traded on the NASDAQ small cap market. On June 9, 1998, Plaintiffs allege that Defendants published and disseminated through means of interstate commerce, including the Internet, a false and fraudulent "research report," together with a "strong sell recommendation," which contained numerous material misrepresentations and omissions of fact regarding CCSI, a development-stage company engaged in the business of developing a medical product. According to Plaintiffs, these misrepresentations were designed to convey to the investing public that CCSI's products were ineffective, worthless, lacking any market or commercialization potential and without any ability to generate significant revenues for CCSI, thereby suggesting that CCSI's then-current market price was grossly inflated and the company grossly overvalued. Because of the allegedly material misrepresentations, the price of CCSI stock fell precipitously.

During this time period, Defendants allegedly engaged in illegal short selling of CCSI's common stock in a successful effort to drive down the price of the stock to the profit of the short sellers and to the detriment of Plaintiffs. According to Plaintiffs, Defendants' short selling included selling on the "down tick," in violation of NASD Rules and SEC Rule 10a-1, and selling short "naked"3 at a time when the short sellers neither owned, nor had any reason to believe that they could borrow, sufficient shares to make delivery on the short sales, in violation of applicable industry rules and regulations. Plaintiffs allege that because of the sharp decline in the price of CCSI stock, they were forced to sell their CCSI and other holdings at substantial losses.

Plaintiffs allege three causes of action against Defendants. First, Plaintiffs allege that Defendants violated § 10(b) of the Securities and Exchange Act of 1934 ("SEA of 1934") and Rule 10b-5, promulgated pursuant to the statute. Specifically, they allege that the material misstatements, the manipulation of stock prices, and the short selling were designed to defraud the market for CCSI common stock to the benefit of Defendants and to the detriment of the owners of CCSI common stock. Second, Plaintiffs allege that Defendants' actions constitute common-law fraud. Finally, Plaintiffs allege that Defendants were negligent in failing to conduct any appropriate investigation or due diligence before publishing the research report.

II. PROCEDURAL HISTORY

On June 10, 1999, Plaintiffs filed a Complaint against Defendants in this court. On August 31, 1999, Defendants filed a Motion to Dismiss Based on Lack of Personal Jurisdiction and Failure to State a Claim Upon Which Relief May Be Granted. At the hearing on October 22, 1999, this court requested that the parties file supplemental briefs, which were subsequently filed with the court. The motion is now ripe for decision.

III. LAW/ANALYSIS
A. Personal Jurisdiction

Defendants ask the court to dismiss this action, pursuant to Rule 12(b)(2) of the Federal Rules of Civil Procedure, because this court lacks personal jurisdiction. Plaintiffs argue that this court has personal jurisdiction over Defendants for the federal claim based upon the nationwide service of process provisions of the SEA of 1934 and pendent personal jurisdiction over Defendants for the state-law claims.4 However, before the court considers whether the SEA of 1934 confers nationwide personal jurisdiction, it must first turn to the burden of proof in a jurisdictional analysis.

1. Burden of Proof

The Fourth Circuit has ruled that "[w]hen a court's personal jurisdiction is properly challenged by a Rule 12(b)(2) motion, the jurisdictional question thus raised is one for the judge, with the burden on the plaintiff ultimately to prove the existence of a ground for jurisdiction by a preponderance of the evidence." Combs v.

Bakker, 886 F.2d 673, 676 (4th Cir.1989). However, when

the court addresses the question on the basis only of motion papers, supporting legal memoranda and the relevant allegations of a complaint, the burden on the plaintiff is simply to make a prima facie showing of a sufficient jurisdictional basis in order to survive the jurisdictional challenge. In considering a challenge on such a record, the court must construe all relevant pleading allegations in the light most favorable to the plaintiff, assume credibility, and draw the most favorable inferences for the existence of jurisdiction.

Id.

2. Applicability of the Personal Jurisdiction Provisions of the SEA of 1934

Plaintiffs have filed a cause of action alleging that Defendants violated § 10(b) of the SEA of 1934 and Rule 10b-5, promulgated pursuant to that Act. Defendants claim that Plaintiffs have failed to properly allege such a claim, which, if true, would preclude Plaintiffs from being able to use the provisions of the Act to assert personal jurisdiction over Defendants. "`When a federal claim is not wholly immaterial or insubstantial, a plaintiff is entitled to take advantage of the federal statute's nationwide service of process provision.'" Sadighi v. Daghighfekr, 36 F.Supp.2d 267, 271 (D.S.C.1999) (quoting Republic of Panama v. BCCI Holdings (Luxembourg) S.A., 119 F.3d 935, 942 (11th Cir.1997)). Defendants "must meet the `high burden' of demonstrating that Plaintiffs' [§ 10(b) and Rule 10b-5] claim is not colorable, that is, [the claim] is "`so insubstantial, implausible, ... or otherwise devoid of merit' as to deprive [Plaintiffs] of the right to utilize ... the nationwide service of process provision.'" Id. (quoting Republic of Panama, 119 F.3d at 941); see also United Liberty Life Ins. Co. v. Ryan, 985 F.2d 1320, 1330 (6th Cir.1993) (noting that a plaintiff can only take advantage of the nationwide service of process provisions of the SEA of 1934 if he has adequately stated a claim under the Act).

Defendants failed to satisfy their "high burden" of demonstrating that Plaintiffs' § 10(b) and Rule 10b-5 claims are not colorable. Under Fourth Circuit case law,

to establish liability under § 10(b) of the Securities Exchange Act and under Rule 10b-5, a plaintiff must prove that, in connection with the purchase or sale of a security, `(1) the defendant made a false statement or omission of material fact (2) with scienter (3) upon which the plaintiff justifiably relied5 (4) that proximately caused the plaintiff's damages.'

Longman v. Food Lion, Inc., 197 F.3d 675, 682 (4th Cir.1999) (quoting Cooke v. Manufactured Homes, Inc., 998 F.2d 1256, 1261 (4th Cir.1993)). Defendants argue that Plaintiffs' § 10(b) and Rule 10b-5 allegations do not present a colorable claim under the SEA of 1934 because the alleged misstatements did not occur "in connection with the purchase or sale of a security." In determining the breadth of this language, the "relevant definitional sections of the 1934 Act are for the most part unhelpful; they only declare generally that the terms `purchase' and `sale' shall include contracts to purchase or sell." SEC Comm'n v. National Securities, Inc., 393 U.S. 453, 466, 89 S.Ct. 564, 21 L.Ed.2d 668 (1969). Although the Supreme Court has declared that "[s]ection 10(b) must be read flexibly, not technically and restrictively," Superintendent of Ins v. Bankers Life & Cas. Co., 404 U.S. 6, 12, 92 S.Ct. 165, 30 L.Ed.2d 128 (1971), the Fourth Circuit has rejected a "de minimis touch" test that would "make any securities transaction actionable under Rule 10b-5 so long as there was some deceptive practice remotely `touching' the transaction." Head v. Head, 759 F.2d 1172, 1175 (4th Cir.1985). Instead, a close reading of the scant Fourth Circuit case law on this issue convinces this court that the Fourth Circuit would require that the causal connection between the alleged fraud and the purchase or sale of securities is only satisfied when the alleged misrepresentations "pertain[] to the securities themselves," id., in that the misrepresentations relate to "the value of the stock" or the pertinent company's "financial condition" and thus the value of its...

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