Griffin v. Gk Intelligent Systems, Inc.
| Decision Date | 26 October 1999 |
| Docket Number | No. Civ.A. H-98-3847.,Civ.A. H-98-3847. |
| Citation | 87 F.Supp.2d 684 |
| Parties | Shelley GRIFFIN, et al., Plaintiffs, v. GK INTELLIGENT SYSTEMS, INC., et al., Defendants. |
| Court | U.S. District Court — Southern District of Texas |
William B. Federman, Day Edwards Federman Propester and Christensen, Oklahoma City, OK, Roger B. Greenberg, Greenberg Peden Siegmyer & Oshman, Houston, TX, Richard A. Speirs, Zwerling Schachter et al., New York City, for Kaylynn Holloway, Charles S. Farrell, Jr., plaintiffs.
Ann Ryan Robertson, Winstead Sechrest & Minick, Houston, TX, Jeffrey Lloyd Joyce, Winstead Sechrest & Minick, Houston, TX, Carl Wimberley, Winstead Sechrest & Minick, Houston, TX, Paul R. Bessette, Brobeck Phleger & Harrison, Austin, TX, for GK Intelligent Systems Inc., Gary F. Kimmons, Rodney L. ("Rod") Norville, defendants.
This securities fraud case is before the Court on the Motion to Dismiss ("Motion") filed by Defendants GK Intelligent Systems, Inc. ("GK"), Gary F. Kimmons, and Rodney L. Norville [Doc. # 55]. The Court has carefully reviewed the full record in this case, including the Second Amended Complaint [Doc. # 18], Defendants' Memorandum of Law ("Memorandum") in support of their Motion [Doc. # 56], Plaintiffs' Opposition ("Response") [Doc. # 62], and Defendants' Reply ("Reply") [Doc. # 67]. Based on this review and the application of binding and persuasive legal authority, the Court concludes that Plaintiffs have satisfied their pleading burden in connection with the federal securities fraud claims, but have failed to do so in connection with the state law claims. Defendants' Motion is denied in part and granted in part, for the reasons discussed herein.
GK is a Delaware corporation with its principal place of business in Houston, Texas. GK is a relatively new computer software company which is now publicly traded on the American Stock Exchange. Plaintiffs are each purchasers of GK stock.
GK issued a press release on February 10, 1998, announcing that it had entered into a three-year agreement with Capella Computers, Ltd. ("Capella") from which GK expected to realize at least $12 million in revenue. Plaintiffs allege that GK knew at the time it released the February 10, 1998 press statement that it did not have an agreement with Capella.
In April 1998, GK announced that Joseph R. Canion, co-founder and former Chief Executive Officer of Compaq Computers, had been named Chairman of the Board of GK. Plaintiffs allege that GK failed to disclose the full extent of Canion's compensation and the limited extent of Canion's time commitment to GK.
Four months later, on August 13, 1998, GK announced that Canion had resigned because of a philosophical difference between Defendant Kimmons and Canion. Plaintiffs allege that Defendants knew this statement was materially false and that the true reason Canion had resigned was his loss of confidence in Kimmons's judgment and ability to manage GK.
Plaintiffs allege that these materially false statements, which Plaintiffs claim Defendants knew were false at the time they were made, caused GK's stock to become artificially inflated. Plaintiffs purchased stock at the inflated prices and, according to Plaintiffs, lost money when the truth was later revealed and the stock price fell.
Plaintiffs filed their original complaint in state court, and Defendants removed the case to this Court on November 11, 1998. Plaintiffs filed an Amended Complaint [Doc. # 17] on March 16, 1999, and filed their Second Amended Complaint on March 31, 1999. Plaintiffs allege violations of Sections 10(b) and 20(a) of the Securities and Exchange Act, 15 U.S.C. §§ 78j(b), 78t(a) and Securities and Exchange Commission Rule 10(b)-5. Plaintiffs also assert state law causes of action for common law fraud, conspiracy, and negligence and negligent misrepresentation.
Defendants moved to dismiss each of the claims in Plaintiff's Second Amended Complaint. The parties submitted thorough briefs in support of their respective positions, and the motion is ripe for decision.
Rule 12(b)(6) allows for dismissal of a complaint if the plaintiff fails "to state a claim upon which relief may be granted." A motion to dismiss is "viewed with disfavor and is rarely granted." Leleux v. United States, 178 F.3d 750, 754 (5th Cir. 1999). Dismissal is appropriate only when "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957); Holmes v. Texas A & M Univ., 145 F.3d 681, 683 (5th Cir.1998) (citations omitted).
In deciding whether dismissal is warranted, the Court accepts as true the non-conclusory allegations in a plaintiff's complaint. Jones v. Greninger, 188 F.3d 322, 324 (5th Cir.1999); Robertson v. Strassner, 32 F.Supp.2d 443, 445 (S.D.Tex.1998). A motion to dismiss for failure to plead fraud with the particularity required by Rule 9(b) is treated as a motion to dismiss for failure to state a claim under Rule 12(b)(6). United States ex rel. Thompson v. Columbia/HCA Healthcare Corp., 125 F.3d 899, 901 (5th Cir.1997).
Section 10(b) Elements. — To state a claim based on Section 10(b) of the Securities Exchange Act of 1934 (the "Act"), the plaintiff must allege "(1) a false misrepresentations [sic] or omission; (2) of material fact; (3) knowing its falsity and intending that the plaintiff rely on it; (4) that the plaintiff justifiably relied on the misrepresentation or omission; and (5) suffered damage resulting from this reliance." Oppenheimer v. Prudential Securities Inc., 94 F.3d 189, 194 (5th Cir.1996); see also In re Comshare, Inc. Securities Litigation, 183 F.3d 542, 548 (6th Cir. 1999); Williams v. WMX Technologies, Inc., 112 F.3d 175, 177 (5th Cir.), cert. denied, 522 U.S. 966, 118 S.Ct. 412, 139 L.Ed.2d 315 (1997). It is undisputed that Plaintiffs must satisfy the pleading requirements of both Rule 9(b) of the Federal Rules of Civil Procedure and the Private Securities Litigation Reform Act of 1995 ("PSLRA"), 15 U.S.C. § 78u-4.
Rule 9(b) Requirements. — Rule 9(b) of the Federal Rules of Civil Procedure provides a heightened pleading requirement for allegations of fraud. To satisfy the burden imposed by Rule 9(b), the plaintiff must set forth with specificity the statements contended to be fraudulent, identify the speaker, state when and where the statements were made, and explain why the statements were fraudulent. Oppenheimer, 94 F.3d at 195; Tuchman v. DSC Communications Corp., 14 F.3d 1061, 1067 (5th Cir.1994); Robertson, 32 F.Supp.2d at 446.
The PSLRA's Requirements. — The PSLRA imposes additional pleading requirements on plaintiffs in securities fraud actions. Plaintiffs must distinguish among the defendants, attributing each allegedly fraudulent statement to a particular defendant or defendants. Zuckerman v. Foxmeyer Health Corp., 4 F.Supp.2d 618, 622 (N.D.Tex.1998). "This rule, however, is applied in tandem with the presumption that senior executives of a corporate defendant may be held personally liable for misrepresentations contained in a public statement issued for the corporation." Id.
Plaintiffs in securities fraud litigation under the PSLRA must also allege facts which demonstrate scienter. Comshare, 183 F.3d at 548; Zuckerman, 4 F.Supp.2d at 622. Scienter is a "mental state embracing intent to deceive, manipulate or defraud." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n. 12, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976). The PSLRA provides that securities fraud plaintiffs must "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). A "plaintiff may survive a motion to dismiss by pleading facts that give rise to a `strong inference' of recklessness." Comshare, 183 F.3d at 550. Plaintiffs may meet the heightened pleading requirements of Rule 9(b) and the PSLRA, as applied to Section 10(b), by "pleading facts which identify circumstances indicating Defendants' conscious or reckless behavior, so long as the totality of the allegations raises a strong inference of fraudulent intent." Zuckerman, 4 F.Supp.2d at 623; see also Robertson, 32 F.Supp.2d at 447.
Plaintiffs have sufficiently alleged facts supporting their Section 10(b) claim which satisfy the requirements of Rule 9(b) and the PSLRA. Plaintiffs have alleged — by time, place, content and speaker — the statements which they allege were false and misleading. See, e.g., Second Amended Complaint, ¶¶ 31-32, 35, 48, 52, 61, 63. Plaintiffs have explained factually why they believe the statements were false. Id., ¶¶ 33, 36, 44, 51, 53, 58, 61, 63. Plaintiffs have identified which defendant or defendants are charged with which allegedly false statements, or have identified the statement as one disseminated through a corporate document. Id., ¶¶ 34, 48, 52.
On the issue of scienter, the Court concludes that the Second Amended Complaint provides sufficient factual detail to "give rise to a strong inference that the defendant acted with fraudulent intent." Plaintiffs have satisfied their burden by alleging knowledge, conscious action, and recklessness. Id., ¶¶ 14, 53, 63, 77.
Plaintiffs have alleged facts supporting the reliance element of their securities fraud claim by alleging a fraud on the market. Id., ¶ 68-69. Contrary to Defendants' argument, the "fraud-on-the-market" doctrine can properly be applied in securities fraud cases involving securities traded in the over-the-counter market. See Finkel v. Docutel/Olivetti Corp., 817 F.2d 356, 364 (5th Cir.1987), cert. denied, 485 U.S. 959, 108 S.Ct. 1220, 99 L.Ed.2d 421 (1988).
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