RodríGuez-Ortiz v. Margo Caribe, Inc.

• Decision Date: 18 June 2007
• Docket Number: No. 06-1765.,06-1765.
• Court: U.S. Court of Appeals — First Circuit
• Parties: José Fernando RODRÍGUEZ-ORTIZ, Plaintiff, Appellant, v. MARGO CARIBE, INC.; Michael J. Spector, Defendants, Appellees.

490 F.3d 92

José Fernando RODRÍGUEZ-ORTIZ, Plaintiff, Appellant, v. MARGO CARIBE, INC.; Michael J. Spector, Defendants, Appellees.

No. 06-1765.

United States Court of Appeals, First Circuit.

Heard March 5, 2007.

Decided June 18, 2007.

Celina Romany Siaca, with whom Celina Romany Law Offices, was on brief, for appellant.

Heidi L. Rodríguez, with whom Pietrantoni Mendez & Alvarez LLP, was on brief, for appellees.

Before TORRUELLA, Circuit Judge, SELYA, Senior Circuit Judge, and LYNCH, Circuit Judge.

LYNCH, Circuit Judge.

José Fernando Rodríguez-Ortiz filed a federal securities fraud claim against his former employer Margo Caribe, Inc. and its chief executive officer, Michael J. Spector (collectively, "Margo") over Margo's refusal to allow Rodríguez to exercise certain stock options after he resigned from the company. The district court dismissed the claim for failure to meet the pleading standards of the Private Securities Litigation Reform Act of 1995 (PSLRA), 15 U.S.C. § 78u-4(b), and Rodríguez now challenges that dismissal. As to Rodríguez's primary theory of fraud, under the PSLRA, Rodríguez has not pleaded "facts giving rise to a strong inference" of scienter. Id. § 78u-4(b)(2). Rodríguez adverts to a second theory as well, but even assuming such a theory were available, he has not sufficiently specified the "statement alleged to have been misleading" under that theory. Id. § 78u-4(b)(1). We thus affirm the dismissal of Rodríguez's federal securities fraud claim.

I.

Because we are reviewing a motion to dismiss, we recite the facts as alleged in Rodríguez's complaint in the light most favorable to him. See In re Cabletron Sys., Inc., 311 F.3d 11, 22 (1st Cir.2002).

Rodríguez worked for Margo Caribe as its president and chief operating officer, beginning no later than 2001. On or about February 9, 2001, Rodríguez was offered a compensation package from the company that was to include stock options under the 1998 Margo Stock Option Plan. Subsequently, Rodríguez and the company signed a Stock Option Agreement, dated March 2, 2001. The Stock Option Agreement, at section 5(b), provided that if Rodríguez terminated his employment "voluntarily (with or without the consent of [Margo Caribe])," the options would become fully vested and could be exercised for a period of time after the separation.

On September 3, 2003, at Spector's request, Rodríguez and Spector began to discuss the possibility of Rodríguez's resignation. The parties began to negotiate a separation agreement, but on September 12, after the parties' attorneys had worked out the details of an agreement, Margo withdrew from the negotiations and informed Rodríguez that no agreement would be forthcoming. That same day, Rodríguez tendered his resignation. Rodríguez asserts that throughout the negotiations, he

at all times notified Margo of his intention to exercise his rights under the Stock Option Agreement in the event of his resignation and was led to believe by Margo that his resignation would, and could, not be treated as [a] dismissal for any purposes, including without limitation, for purposes of the Stock Option Agreement.

On October 20, 2003, Rodríguez filed suit against Margo Caribe in federal court in Puerto Rico, initially asserting a COBRA claim and a state law claim for bad faith withdrawal from the separation agreement negotiations. These claims are not at issue on appeal.

On October 31, 2003, Rodríguez informed the company of his intention to exercise his options under the Stock Option Agreement. On November 14, the company replied that Rodríguez's resignation would be treated as a dismissal under the Agreement, that as a result the company had the right to terminate his options, and that the company intended to exercise its right of termination. That same day, the company also issued a press release stating that Rodríguez had been dismissed from the company on August 29, 2003.

On November 24, 2003, Rodríguez amended his complaint to add Spector as a defendant and to add a federal securities fraud claim under sections 10(b) and 20(a) of the Securities and Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78t(a), and Rule 10b-5 promulgated by the Securities and Exchange Commission thereunder, 17 C.F.R. § 240.10b-5. Rodríguez also added a state law claim for breach of the Stock Option Agreement. On March 31, 2004, Rodríguez further amended his complaint and added a state law claim for securities fraud. The alleged fraud was that the company "never intended to honor the terms and conditions of the Stock Option Agreement" and that the company and Spector had made misleading "representations regarding the effect of [Rodríguez's] resignation" under the Agreement.

Margo filed a motion to dismiss, arguing, inter alia, that the federal securities claim should be dismissed for failure to satisfy the heightened pleading standards of the PSLRA and Federal Rule of Civil Procedure 9(b).¹

The motion to dismiss was referred to a magistrate judge, who recommended that it be denied in its entirety. On the securities fraud claim, the magistrate judge found that Rodríguez had satisfied the heightened pleading standards "by providing the time, place, date and content of the alleged misrepresentation," namely the "promise" in the Stock Option Agreement itself "that in the event of [Rodríguez's] resignation the full Option would vest."

On August 29, 2005, the district court issued an opinion and order in which it declined to adopt the magistrate judge's recommendation on this point and determined instead that Rodríguez had not satisfied the pleading standards of the PSLRA. The court found that Rodríguez had "failed to specify a materially misleading statement or omission, in connection with the sale" of securities, and that while he had alleged "misrepresentations right and left," he had not "specifie[d] their time, place and content." Moreover, the court noted that "given the juxtaposition of the alleged fraud with the dismissal and not the original sale of the option," the complaint seemed to impermissibly allege "fraud in hindsight." As a result, the district court granted the motion to dismiss the federal securities claim. The court declined to exercise supplemental jurisdiction over the state law claims.²

II.

Our review of the district court's granting of the motion to dismiss is de novo, and we may affirm on any ground apparent in the record. See Ezra Charitable Trust v. Tyco Int'l, Ltd., 466 F.3d 1, 5-6 (1st Cir. 2006).

At the outset, we note that even under the liberal pleading standard of Federal Rule of Civil Procedure 8, the Supreme Court has recently held that to survive a motion to dismiss, a complaint must allege "a plausible entitlement to relief." Bell Atl. Corp. v. Twombly, ___ U.S. ____, 127 S.Ct. 1955, 1967, 167 L.Ed.2d 929 (2007). In so doing, the Court disavowed the oft-quoted language of Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957), that "a complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." See Twombly, 127 S.Ct. at 1969. The Court found that the "no set of facts" language, if taken literally, would impermissibly allow for the pleading of "a wholly conclusory statement of [a] claim," and that "after puzzling the profession for 50 years, this famous observation has earned its retirement." Id. at 1968, 1969.

To make out a claim under section 10(b) and Rule 10b-5, Rodríguez needed to allege that

(1) [Margo] made a materially false or misleading statement or failed to state a fact necessary to make a statement not misleading; (2) in connection with the purchase or sale of a security; (3) with the intent to deceive, manipulate, or defraud; and that (4) [Rodríguez] was injured by his reasonable reliance on [Margo's] misrepresentations.

Wortley v. Camplin, 333 F.3d 284, 294 (1st Cir.2003); see also Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 341-42, 125 S.Ct. 1627, 161 L.Ed.2d 577 (2005). The first and third elements are critical here.

The PSLRA imposes two heightened pleading requirements on federal securities fraud claims, beyond the requirements of Rule 8. First, to support allegations of misleading statements or omissions, the complaint must "specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed." 15 U.S.C. § 78u-4(b)(1). This standard is "congruent and consistent with the pre-existing standards of this circuit" under Rule 9(b), Greebel, 194 F.3d at 193, under which we required the "specification of the time, place, and content of an alleged false representation," id. (quoting McGinty v. Beranger Volkswagen, Inc., 633 F.2d 226, 228 (1st Cir.1980)) (internal quotation marks omitted).

Second, allegations of scienter must be made by stating "with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2). The "required state of mind" for liability under section 10(b) and Rule 10b-5 is "intent to deceive, manipulate, or defraud," Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976), or recklessness that goes beyond "ordinary negligence and is closer to a lesser form of intent," Greebel, 194 F.3d at 199.

On a motion to dismiss in a securities fraud case, this "strong inference" standard has several consequences. A court continues to take all factual allegations as true and to draw all reasonable inferences in favor of the plaintiff. See Aldridge v. A.T. Cross Corp., 284 F.3d 72, 78-79 (1st Cir.2002). However, as to scienter, not any inference will do: the ultimate inference of scienter must be a strong one. See Cabl...