Advanced Magnetics, Inc. v. Bayfront Partners, Inc.

• Decision Date: 13 January 1997
• Docket Number: D,No. 368,368
• Citation: 106 F.3d 11
• Parties: Fed. Sec. L. Rep. P 99,378, 36 Fed.R.Serv.3d 1458 ADVANCED MAGNETICS, INC., Plaintiff-Appellant, v. BAYFRONT PARTNERS, INC., William Wood, Jr., and Interbay Group, Defendants-Appellees, Donna Wood, Defendant, Aim Securities, Inc. and Painewebber Incorporated, Third-Party Defendants. ocket 96-7328.
• Court: U.S. Court of Appeals — Second Circuit

Page 11

106 F.3d 11

Fed. Sec. L. Rep. P 99,378, 36 Fed.R.Serv.3d 1458

ADVANCED MAGNETICS, INC., Plaintiff-Appellant, v. BAYFRONT PARTNERS, INC., William Wood, Jr., and Interbay Group, Defendants-Appellees Donna Wood, Defendant Aim Securities, Inc. and Painewebber Incorporated Third-Party Defendants.

No. 368, Docket 96-7328.

United States Court of Appeals Second Circuit.

Jan. 13, 1997.

Martin E. Karlinsky, New York City (Ronald D. Lefton, Michael A. Levy, Allison J. Unger, Adam S. Ziffer, Camhy Karlinsky & Stein, New York City, on the brief), for Plaintiff-Appellant.

Harry L. Garman, Fairfield, New Jersey (Edward I. Sussman, New York City, on the brief), for Defendants-Appellees.

Before KEARSE, WALKER, and JACOBS, Circuit Judges.

KEARSE, Circuit Judge:

Plaintiff Advanced Magnetics, Inc. ("AMI"), appeals from so much of a judgment of the United States District Court for the Southern District of New York, Charles S. Haight, Jr., Judge, entered pursuant to Fed.R.Civ.P. 54(b), as dismissed those parts of its complaint against defendants Bayfront Partners, Inc., Interbay Group ("Interbay"), and William Wood, Jr., which purported to assert (1) claims on behalf of AMI as an assignee of certain of its shareholders, and (2) claims under § 10(a) of the Securities Exchange Act of 1934 ("1934 Act"), 15 U.S.C. § 78j(a) (1994), and Rule 10a-1, 17 C.F.R. § 240.10a-1 (1996), promulgated thereunder. The district court ruled that AMI lacked standing to sue as assignee because the alleged assignment agreements were not sufficient for that purpose. Pursuant to Fed.R.Civ.P. 12(b)(6), the court also dismissed all claims asserted under § 10(a) and Rule 10a-1 on the ground that no private right of action exists under those provisions. On appeal, AMI contends that those rulings were erroneous. It also contends that if the assignments were ineffective, the court should have granted leave to amend the complaint to bring in the purported assignors as plaintiffs in their own names. Though we uphold the district court's ruling that the assignments were not sufficient to give AMI standing to pursue the shareholders' claims, we conclude that the court should not have dismissed those claims but should have granted AMI's request to amend the complaint to allow the shareholders to pursue their own claims. Accordingly, we vacate so much of the judgment as dismissed those claims and remand for further proceedings. As to the district court's dismissal of the claims under § 10(a) and Rule 10a-1, we conclude that the Rule 54(b) certification was improvidently granted, and we therefore dismiss for lack of appellate jurisdiction so much of AMI's appeal as challenges that ruling.

I. BACKGROUND

The events giving rise to this litigation, as alleged in the complaint, were as follows.

A. The Events

AMI's shares are listed and traded on the American Stock Exchange ("AMEX"). In late 1991, AMI filed a registration statement with the Securities and Exchange Commission ("SEC") in order to effectuate a secondary public offering of its stock, in which it and five of its shareholders, Jerome Goldstein, Marlene Kaplan Goldstein, Leslie Goldstein, Lee Josephson, and ML Technology Ventures, L.P. (collectively the "selling shareholders"), were to offer for sale a total of 1,750,000 shares. Approximately 60 percent of these shares belonged to AMI; the remainder belonged to the selling shareholders. The offering was to take place on February 5, 1992. According to AMI's agreement with its underwriter, the per-share price in the offering was to be $1 below the final bid price of AMI stock at the close of trading on February 4, 1992.

On February 4, minutes before the close of trading, Wood caused Interbay to place an order to sell 7,000 shares of AMI stock at a price that was $.375 per share lower than the then-last reported trade; the sale was to be effected at the close of trading. Because AMI's stock was thinly traded, that sale of 7,000 shares (the "Interbay sale") accounted for 63% of the trading in AMI's stock on that day and caused the closing price of AMI's stock to decline by $.50 a share. Because the offering price of AMI stock in the public offering was linked to the February 4 closing price, the offering price was $.50 per share below what it would have been had there been no Interbay sale.

The Interbay sale was a "short sale," i.e., a sale of stock that defendants did not own on February 4. Defendants "covered" their short sale on February 5 by purchasing 5,000 AMI shares in the public offering; they purchased the remaining 2,000 shares on February 5 on the open market.

AMI commenced the present action in September 1992, partially in its own right and partially as assignee of the selling shareholders, alleging that the Interbay short sale violated § 10(b) of the 1934 Act, 15 U.S.C. § 78j(b) (1994), and SEC Rules 10b-5 and 10b-21, 17 C.F.R. §§ 240.10b-5, 240.10b-21 (1996) (denominated the "FIRST CAUSE OF ACTION"), as well as § 10(a) and Rule 10a-1 (denominated the "SECOND CAUSE OF ACTION"). Both causes of action alleged that AMI had suffered a loss of at least $875,000, representing the 1,750,000 shares sold by AMI and the selling shareholders in the public offering, multiplied by the $.50 per share by which the offering price was alleged to have been lowered as a result of defendants' conduct.

B. The Assignments and the Rulings of the District Court

In asserting its right to pursue claims belonging to the selling shareholders, AMI relied principally on written agreements by which it maintained that the shareholders had assigned their claims to AMI. Its agreements with the individual selling shareholders stated, in pertinent part, that

the assignors do hereby assign to AMI the power to commence and prosecute to final consummation or compromise any suits, actions or proceedings at law or in equity in any court of competent jurisdiction which arise from the above-[described] claims.

AMI's agreement with ML Technology Ventures, L.P. ("MLTV"), contained an identical provision, but the MLTV agreement was made subject to a separate letter agreement ("AMI-MLTV letter agreement") stating, inter alia, that, subject to MLTV's right to terminate the arrangement at any time, AMI would pursue the lawsuit "on behalf of" MLTV without naming MLTV as a plaintiff, and that MLTV would pay its pro rata share of the litigation costs and receive its pro rata share of the recovery.

In December 1993, following a period of discovery, AMI moved to amend the complaint to make the selling shareholders the named plaintiffs on their own claims. AMI stated that its motion was prompted by defendants' pretrial discovery focus on the validity of the assignments to AMI. In a Memorandum Opinion and Order dated July 6, 1994, 1994 WL 324018 ("1994 Opinion"), the district court denied AMI's motion on two grounds. First, it ruled that the amendment would be "futile" because AMI did not concede that the assignments either were not made or were not valid. 1994 Opinion at 3. Second, the court ruled that the selling shareholders' claims would be barred by the statute of limitations on the ground that the amendment did not "relate back" to the date of the original complaint, id., because the assertion by AMI of the selling shareholders' claims in the original complaint was "tactical," rather than due to a "mistake" within the meaning of Fed.R.Civ.P. 15(c), 1994 Opinion at 8.

Following the denial of AMI's motion to amend the complaint, defendants moved to dismiss, inter alia, the claims asserted by AMI as assignee on the ground that the purported assignments were ineffective to transfer ownership of the claims to AMI and hence AMI lacked standing to assert those claims. They also moved to dismiss the claims asserted by AMI, in any capacity, under § 10(a) and Rule 10a-1 on the ground that there is no private right of action for violation of those provisions. In opposition to the motion to dismiss the allegedly assigned claims, AMI presented, inter alia, deposition testimony by the individual selling shareholders to the effect that they had intended to make irrevocable assignments of their interests in the proceeds of their claims although they neither received nor expected to receive any value in return.

In a Memorandum Opinion and Order dated January 10, 1996 ("1996 Opinion"), the district court granted defendants' motion. With respect to the assignment issue, the court noted the "generally accepted principle that in order to be effective, an assignment to transfer a chose in action must manifest an intent to divest the assignor of all control and right to his claim, thereby empowering the assignee to control the cause of action and to receive its fruits." 1996 Opinion at 6 (emphasis in original). After reviewing the evidence presented by each side, the court concluded that there was no evidence that AMI had been given ownership of, or the right to retain any recovery with respect to, the claims of the selling shareholders. The court found that the AMI-MLTV letter agreement showed conclusively that the parties intended MLTV to retain the right to its pro rata share of the litigation proceeds. Id. at 7-8. The court noted that the other assignment agreements were "entirely silent about what happens to any litigation proceeds," id. at 8, and hence insufficient in themselves to convey ownership of any recovery to AMI, and the court found the deposition testimony that the individual selling shareholders had intended to cede their claims (worth a total of $62,500, according to the complaint) without receiving or expecting value in return was "unworthy of belief," id. at 9. The court concluded that AMI therefore could not show that the assignments in question were effective to transfer ownership to AMI, and hence AMI had no right to sue on the selling shareholders' claims. Id.

The district court denied AMI's renewed request for leave to amend the complaint to add the selling...