Cohen v. Stevanovich .
| Decision Date | 01 July 2010 |
| Docket Number | No. 09 Civ. 4003.,09 Civ. 4003. |
| Citation | 722 F.Supp.2d 416 |
| Parties | Scot J. COHEN, et al., Plaintiff, v. Steve STEVANOVICH, et al., Defendants. |
| Court | U.S. District Court — Southern District of New York |
722 F.Supp.2d 416
Scot J. COHEN, et al., Plaintiff,
v.
Steve STEVANOVICH, et al., Defendants.
No. 09 Civ. 4003.
United States District Court,S.D. New York.
July 1, 2010.
COPYRIGHT MATERIAL OMITTED.
COPYRIGHT MATERIAL OMITTED.
Weitzman Law Offices, L.L.C., by: Raphael Weitzman, Esq., New York, NY, for Plaintiffs.
Sullivan and Cromwell, LLP, by: Richard C. Pepperman, Esq., Richard H. Klapper, Esq., Tracy R. High, Esq., New York, NY, Davis Polk & Wardwell, LLP, by: Robert F. Wise, Jr., Esq., William J. Fenrich, Esq., New York, NY, Proskauer Rose LLP, by: Brian L. Friedman, Esq., Stephen L. Ratner, Esq., New York, NY, O'Melveny & Myers LLP, by: Andrew J. Frackman, Esq., Benjamin D. Petrosky, Esq., Brendan J. Dowd, Esq., New York, NY, Wilmer, Cutler, Hale & Dorr, LLP, by: Eraser L. Hunter, Jr., Esq., New York, NY, Cadwalader, Wickersham & Taft LLP, by: Gregory Arthur Markel, Esq., Martin L. Seidel, Esq., Peter Joseph Isajiw, Esq., New York, NY, Kirkland and Ellis LLP, by: Andrew Brian Clubok, Esq., Jeffrey Landis, Esq., Beth Ann Williams, Esq., Daniel J. Gomez, Esq., Maria Ginzburg, Esq., Washington, DC, for Defendants.
Scot J. Cohen, The Merav Abbe Irrevocable Trust, Abbe Berman Foundation, Coleman Abbe, Cleveland Overseas Ltd., Philip W. Mirabelli, Vertical Ventures, LLC, Martin D. Goldman, Ari S. Goldman, Dan Burko, Abco Quality Engines & Transmissions, Inc, and Ellis International, LP (collectively the “Plaintiffs”) have sued Morgan Stanley & Co. Incorporated, The Goldman Sachs Group, Inc., J.P. Morgan Clearing Corp., JP Morgan Chase & Co., Banc of America Securities LLC, Credit Suisse USA, Inc., Deutsche Bank Securities Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, and UBS Securities, LLC (collectively, the “Financial Institution Defendants”), among others, violations of (i) the Securities and Exchange Act, 1934 (the “Exchange
Act”)-Sections 9,10, 18, and 20, (ii) 17 C.F.R. § 240.10b-5; (iii) conspiracy, and (iv) common law fraud. The Financial Institution Defendants have moved, pursuant to Federal Rule of Civil Procedure 12(b)(6), to dismiss the Amended Complaint (the “AC”) for failure to state a claim upon which relief can be granted. 1 Pursuant to the authorities and conclusions set forth below, the motion is granted and the AC is dismissed as to the Financial Institution Defendants. Plaintiffs are granted leave to replead.
I. PRIOR PROCEEDINGS
Plaintiffs' complaint was filed April 22, 2010 and was amended on December 31, 2009, properly joining UBS Securities, LLC, as a party in place of UBS Financial Services, Inc.
The instant motion was marked fully submitted on January 25, 2010.
II. ALLEGATIONS OF THE AMENDED COMPLAINT
The AC generally asserts that “Defendants engaged in a massive, illegal stock manipulation scheme.” AC ¶ 2. First, Plaintiffs contend that “Defendants ... have executed ... short sales of SulphCo stock without first borrowing the stock or ensuring that the stock can be borrowed to settle the short sale”-so-called “naked short sales.” Id. Plaintiffs further contend that “Defendants have intentionally failed to borrow SulphCo stock to settle the short positions.” Id. Second, Plaintiffs claim that “Defendants orchestrated a wide-scale predatory campaign of knowingly distributing false, and covertly biased, written reports about SulphCo.” Id. ¶ 3. They state that Geoffrey Tirman (“Tirman”) (who is not alleged to be affiliated with any Financial Institution Defendant) “approached William Alpert, a reporter at Barron's Magazine, and bribed him to write an article containing false and covertly biased written reports about SulphCo.” Id. Plaintiffs assert that the Financial Institution Defendants somehow “worked together with” Tirman and Steve Stevanovich (“Stevanovich”) (another unaffiliated individual) “without disclosing the unscrupulous collaboration.” Id.
1. The Alleged Manipulation of SulphCo Stock
Plaintiffs contend that Defendants engaged “in a series of transactions” that manipulated the price of SulphCo's stock beginning in 2004. AC ¶ 2. According to the AC, “from October 26, 2005[sic] and September 29, 2006, large quantities of SulphCo shares were the subject of naked short selling.” Id. ¶ 46. Plaintiffs argue that the Financial Institution Defendants “were motivated to intentionally fail to deliver stocks allowing them to earn more money through the charging of fees, commissions and/or interest through phantom securities transactions.” Id. ¶ 48. And Plaintiffs assert, “[u]pon information and belief,” that “Defendants also profited from naked short selling of SulphCo securities for their own benefit.” Id.
The AC does not identify any supposedly manipulative naked short sales by any Financial Institution Defendant-or anyone else. Instead, Plaintiffs allege that Defendants'
unidentified naked short sales resulted in similarly unidentified “fails to deliver,” which supposedly created “phantom shares” of SulphCo stock and caused the number of shares of SulphCo that are beneficially owned to exceed the number issued by the company. Id. ¶¶ 46, 47, 49. 2
2. The Alleged Scheme to Bribe the Barron's Reporter
The AC asserts that “Defendants orchestrated a wide-scale predatory campaign of knowingly distributing false, and covertly biased, written reports about SulphCo.” AC ¶ 3. Plaintiffs state that “Defendants posted negative information about SulphCo” in “Barron's Magazine and Barron's Online.” Id. ¶ 42. The AC does not quote or describe this “negative information,” explain how it was false or misleading, or identify the Defendant that supposedly posted it. Plaintiffs simply assert that these reports contained “plenty of innuendos.” Id.
The only specifics alleged in the AC relate to a January 23, 2006 article that appeared in Barron's. See William Alpert, A Crank Case, Barron's Magazine, Jan. 23, 2006, at 42. Plaintiffs contend that “Defendant TIRMAN approached William Alpert, a reporter at Barron's Magazine and bribed him to write an article containing false and covertly biased written reports about SulphCo.” AC ¶ 3. Plaintiffs assert that “[t]he article failed to disclose that the Defendants controlled its content, and that the article was not independent and objective analysis of their target.” Id. ¶ 45. According to the AC, “[t]he article does not discuss the technology of SulphCo, but engages in plenty of innuendos about [SulphCo's founder] and his educational background.” Id. ¶ 3. Plaintiffs allege that the price of SulphCo stock “drastically dropped” following the publication of the Barron's article. Id.
The AC pleads no facts regarding Tirman's purported bribe or the Financial Institution Defendants' supposed connection with it or the Barron's article. The AC is silent concerning the amount of the alleged bribe, when it was supposedly made, or who was present at the time. Nor does the AC allege that any Financial Institution Defendant ever spoke to Alpert regarding SulphCo, much less offered him an inducement to publish an unflattering article. Similarly, Plaintiffs allege no facts to support their conclusory assertion that the Financial Institution Defendants somehow “controlled the timing of the release and dissemination” of reports in Barron's. Id. ¶ 44.
III. THE LEGAL STANDARD
“When considering a motion to dismiss, the complaint is liberally construed, accepting all factual allegations in the complaint as true, and drawing all reasonable inferences in the plaintiff's favor.”
In re Tommy Hilfiger Sec. Litig., No. 04-CV-7678, 2007 WL 5581705, at *2, 2007 U.S. Dist. LEXIS 55088, at *5 (S.D.N.Y. July 20, 2007) (internal quotation marks and citations omitted). A complaint must allege “enough factual matter (taken as true)” to suggest that a violation occurred, and “a well-pleaded complaint may proceed even if it strikes a savvy judge that actual proof of those facts is improbable ...” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 556, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) (emphasis added; citation omitted). The pleading need only contain “[f]actual allegations ... [sufficient] to raise a right to relief above the speculative level.” Twombly, 550 U.S. at 556, 127 S.Ct. 1955. “When there are well-pleaded factual allegations, a court should assume their veracity and then determine whether they plausibly give rise to an entitlement to relief.” Ashcroft v. Iqbal, --- U.S. ----, 129 S.Ct. 1937, 1940-41, 173 L.Ed.2d 868 (2009).
“The plausibility standard is not akin to a ‘probability requirement,’ but it asks for more than a sheer possibility that a defendant has acted unlawfully.” Ashcroft, 129 S.Ct. at 1949. For elements of claims subject to Rule 8(a), Twombly requires more than pleading the “bare elements of [the] cause of action,” but far less than the particularity of pleading required under Fed.R.Civ.P. 9(b). See id. at 1954.
Under Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. 240.10b-5(b), a plaintiff must plead six elements in order to demonstrate securities fraud: (1) a material misrepresentation or omission; (2) scienter; (3) a connection between the misrepresentation or omission and purchase or sale of a security; (4) reliance; (5) economic loss; and (6) loss causation. Heller v. Goldin Restructuring Fund, L.P., 590 F.Supp.2d 603, 613 (S.D.N.Y.2008) (citations omitted). The heightened pleading standard under the Private Securities Litigation Reform Act of 1995 (“PSLRA”) and Tellabs v. Makor Issues & Rights, Ltd., 551 U.S. 308, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007) applies only to the element of scienter; all other elements of a § 10(b) claim are governed by traditional pleading standards under Fed.R.Civ.P. 8(a) or 9(b). See In re PXRE Group, Ltd. Sec. Litig., 600 F.Supp.2d 510, 528-29 (S.D.N.Y.2009). Rule 9(b) merely requires that the complaint “(1) specify the statements...
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