Aronson v. Advanced Cell Tech., Inc., CIVIL ACTION NO. 11-11492-NMG

CourtUnited States District Courts. 1st Circuit. United States District Courts. 1st Circuit. District of Massachusetts
Writing for the CourtJudith Gail Dein
PartiesGARY D. ARONSON, Plaintiff, v. ADVANCED CELL TECHNOLOGY, INC., et al., Defendants. and JOHN S. GORTON, AS TRUSTEE OF THE JOHN S. GORTON SEPARATE PROPERTY TRUST, DATED 3/3/1993, Plaintiff, v. ADVANCED CELL TECHNOLOGY, INC., et al., Defendants.
Docket NumberNO. 11-11515-NMG,CIVIL ACTION NO. 11-11492-NMG
Decision Date16 July 2012

GARY D. ARONSON, Plaintiff,
v.
ADVANCED CELL TECHNOLOGY, INC., et al., Defendants.

and
JOHN S. GORTON, AS TRUSTEE OF THE JOHN S. GORTON SEPARATE PROPERTY TRUST, DATED 3/3/1993, Plaintiff,
v.
ADVANCED CELL TECHNOLOGY, INC., et al., Defendants.

CIVIL ACTION NO. 11-11492-NMG
NO. 11-11515-NMG

UNITED STATES DISTRICT COURT DISTRICT OF MASSACHUSETTS

July 16, 2012


REPORT AND RECOMMENDATION
ON DEFENDANTS' MOTIONS TO DISMISS

DEIN, U.S.M.J.

I. INTRODUCTION

These consolidated actions arise out of Warrants to Purchase Securities (the "Warrant Agreements"), which the defendant, Advanced Cell Technology, Inc. ("ACT"), issued to the plaintiffs, Gary D. Aronson ("Aronson") and John S. Gorton, as Trustee of

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the John S. Gorton Separate Property Trust, Dated 3/3/1993 ("Gorton"). Under the Warrant Agreements, the plaintiffs were entitled to purchase shares of ACT stock at a set price, and also were entitled to certain adjustments in the share price and number of shares they would receive in the event ACT issued, or agreed to issue, lower priced shares to a third party during the time period known as the Pricing Period. In both of these actions, the plaintiffs claim that ACT, with the assistance of its former Chairman and Chief Executive Officer, William MacKay Caldwell ("Caldwell"), violated the company's obligations under the Warrant Agreements by concealing the occurrence of two transactions in which ACT agreed to sell stock to third parties during the Pricing Period at prices which allegedly should have triggered adjustments to the plaintiffs' shares. They further allege that as a result of ACT's and Caldwell's misleading statements and omissions regarding the two transactions, Aronson and Gorton purchased ACT stock at inflated prices and received fewer shares than they should have received under the terms of their Warrant Agreements.

By their First Amended Complaints, the plaintiffs have asserted claims against ACT for securities fraud pursuant to section 10(b) of the Securities and Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, as well as for breach of contract. Additionally, the plaintiffs have asserted securities claims against the defendant, Wilmington Trust, N.A. ("Wilmington Trust"), as Special Administrator of the Estate of William MacKay Caldwell. By those claims, the plaintiffs

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are seeking to hold Wilmington Trust liable, pursuant to section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a), based on Caldwell's former status as an alleged control person of ACT.

The matter is presently before the court on the defendants' motions to dismiss (Docket Nos. 13, 19, 37 and 38)1 the plaintiffs' First Amended Complaints. By their motions, the defendants contend that dismissal is warranted because the plaintiffs have failed to state a plausible claim for relief under Fed. R. Civ. P. 12(b)(6), and because the claims asserted against them under the Exchange Act are untimely and fail to comply with the heightened pleading standards required under Fed. R. Civ. P. 9(b) and the Private Securities Litigations Reform Act, 15 U.S.C. § 78u-4(b). As detailed herein, this court finds that Aronson and Gorton have failed to state a claim for violations of the federal securities laws, and recommends that Counts I and II of the plaintiffs' First Amended Complaints be dismissed with prejudice. This court also concludes that the plaintiffs' allegations are sufficient at this stage in the litigation to state a claim against ACT for breach of contract relating to ACT's issuance of a warrant to William Woodward. Therefore, and for all the reasons described below, this court recommends to

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the District Judge to whom this case is assigned that Wilmington Trust's motions to dismiss (Docket Nos. 13, 37) be ALLOWED and that ACT's motions to dismiss be ALLOWED IN PART and DENIED IN PART, in accordance with this decision.

II. STANDARD OF REVIEW OF RECORD

A. Motion to Dismiss Standard of Review

"In considering a motion to dismiss, a court must take the allegations in the complaint as true and must make all reasonable inferences in favor of the plaintiffs." Watterson v. Page, 987 F.2d 1, 3 (1st Cir. 1993). In doing so, the court may consider documents attached to or expressly incorporated into the Complaint, as well as "documents the authenticity of which are not disputed by the parties," "official public records," "documents central to the plaintiffs' claim," and "documents sufficiently referred to in the complaint" without converting the motion into one for summary judgment. Id.. at 3-4 and cases cited.2 The court may grant dismissal only if the Plaintiffs

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have failed to allege "a plausible entitlement to relief." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 559, 127 S. Ct. 1955, 1967, 167 L. Ed. 2d 929 (2007). Accordingly, "the complaint must include 'factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.'" SEC v. Tambone, 597 F.3d 436, 442 (1st Cir. 2010) (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S. Ct. 1937, 1949, 173 L. Ed. 2d 868 (2009)). "If the factual allegations in the complaint are too meager, vague, or conclusory to remove the possibility of relief from the realm of mere conjecture, the complaint is open to dismissal." Id.

B. PSLRA Heightened Pleading Requirements

In 1995, Congress enacted the Private Securities Litigation Reform Act ("PSLRA"), 15 U.S.C. § 78u-4, which marked an effort to curb abuse in private securities lawsuits. See Greebel v. FTP Software, Inc., 194 F.3d 185, 191 (1st Cir. 1999). The PSLRA established strict pleading standards for such lawsuits, which are consistent with the First Circuit's preexisting standards for pleading securities fraud under Fed. R. Civ. P. 9(b). See id. at 193. The statute requires that a complaint claiming securities fraud based on misstatements or omissions set forth "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). Additionally, where a plaintiff's cause of action requires proof that a defendant

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acted with a particular state of mind, the PSLRA requires the complaint to "state 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) [of the Exchange Act] and Rule 10b-5 is referred to as scienter, which the Supreme Court has defined as 'a mental state embracing intent to deceive, manipulate, or defraud.'" Greebel, 194 F.3d at 194 (quoting Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12, 96 S. Ct. 1375, 1381 n.12, 47 L. Ed. 2d 668 (1976)). Therefore, under the PSLRA, the complaint must "state with particularity facts that give rise to a 'strong inference' of scienter rather than merely a reasonable inference." In re Cabletron Sys., Inc., 311 F.3d 11, 28 (1st Cir. 2002).

Although the pleading requirements in private securities fraud cases are strict, "they do not change the standard of review for a motion to dismiss." Aldridge v. A.T. Cross Corp., 284 F.3d 72, 78 (1st Cir. 2002). Accordingly, the following facts are viewed in the light most favorable to the plaintiffs.

III. STATEMENT OF FACTS

The Parties

Defendant ACT is an early-stage biotechnology company that is incorporated in Delaware and has a principal place of business in Marlborough, Massachusetts. (Compl. ¶ 5).3 Its common stock is registered with the Securities and Exchange Commission

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("SEC"), and its shares are traded under the symbol "ACTC." (Id.). Prior to his death in December 2010, Caldwell served as the Chairman and Chief Executive Officer of ACT. (Id. ¶ 7). Allegedly, Caldwell also claimed to fill the roles of the company's Chief Operating Officer, Chief Administrative Officer and Chief Financial Officer, and he was responsible for issuing ACT stock during all times relevant to the present action. (Id. ¶¶ 6-7). Defendant Wilmington Trust is the Administrator of Caldwell's estate. (Id. ¶ 6).

Plaintiff Aronson is a citizen of Nevada, and an investor in early stage start-up biotechnology companies. (Id. ¶ 4). He has owned shares of ACT common stock for over six years. (Id.). Plaintiff Gorton is a citizen of California. (G. Compl. ¶ 4). Like Aronson, Gorton is a shareholder of ACT. (Id.).

The Warrant Agreements

The Warrant Agreements at the center of this case arose out of a legal dispute that began in 2004, when Aronson and Gorton brought a collection action against ACT's predecessors and two of their officers in the Worcester Superior Court. (See Compl. ¶ 12). Following a year of litigation, during which time ACT's predecessors allegedly violated or sought to avoid the state court's orders, the parties reached a settlement, which was memorialized in a Settlement Agreement dated...

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