Halperin v. Ebanker Usa.Com, Inc.

• Decision Date: 09 July 2002
• Docket Number: No. 01-7440.,01-7440.
• Citation: 295 F.3d 352
• Parties: Michael HALPERIN, M.D., Donald Kern, D.D.S. and all other plaintiffs similarly situated, Plaintiffs-Appellants, v. EBANKER USA.COM, INC., Evision USA.Com, Inc., American Fronteer Financial Corporation, Fai Chan, Tong Wan Chan, Robert Trapp, Kwok Jen Fong, David Chen, Gary Cook, Jeffrey Busch, and Robert Jeffers, Jr., Defendants-Appellees.
• Court: U.S. Court of Appeals — Second Circuit

295 F.3d 352

Michael HALPERIN, M.D., Donald Kern, D.D.S. and all other plaintiffs similarly situated, Plaintiffs-Appellants, v. EBANKER USA.COM, INC., Evision USA.Com, Inc., American Fronteer Financial Corporation, Fai Chan, Tong Wan Chan, Robert Trapp, Kwok Jen Fong, David Chen, Gary Cook, Jeffrey Busch, and Robert Jeffers, Jr., Defendants-Appellees.

No. 01-7440.

United States Court of Appeals, Second Circuit.

Argued December 10, 2001.

Decided July 9, 2002.

COPYRIGHT MATERIAL OMITTED

Lawrence A. Steckman, New York, N.Y. (Debra J. Guzov, Darren L. Ofsink, Guzov & Rella, L.L.C., New York, NY, of counsel), for Plaintiffs-Appellants.

Bruce H. Schneider, New York, N.Y. (Charles G. Moerdler, Heidi Balk, Stroock & Stroock & Lavan, LLP, New York, NY, of counsel), for Defendants-Appellees.

Before OAKES, CARDAMONE, and POOLER, Circuit Judges.

CARDAMONE, Circuit Judge.

This appeal involves investors who by purchasing securities took a risk for the purpose of securing an economic advantage but, failing to exercise prudence, instead suffered a loss. Plaintiffs claim defendants, sellers of the securities, defrauded them; when in fact what plaintiffs had done was to make a bad investment. Plaintiffs Michael Halperin, M.D., and Donald Kern, D.D.S., appeal from a judgment of the United States District Court for the Southern District of New York (Martin, J.), entered March 26, 2001 granting defendants' motion to dismiss their complaint for failure to state a claim upon which relief could be granted.

Although the district court dismissed the 12-count securities fraud complaint in its entirety, plaintiffs appeal the dismissal of only eight of their claims. In a separate summary order filed today, we affirm the dismissal of seven of these eight counts. We write to address an issue in the remaining eighth count that warrants more detailed analysis: whether plaintiffs stated a claim that defendants fraudulently misrepresented the future registration of certain securities with the Securities and Exchange Commission (SEC).

BACKGROUND

This is a class action suit against three corporations and several individuals who served as officers and/or directors of those corporations. Plaintiffs, representing four subclasses of purchasers of stock from defendants, filed their 12-count complaint alleging fraud and other wrongful conduct under both state and federal law.

The relationship between the three defendant companies is as follows: eVision USA.COM, Inc. (eVision) is a public holding company; American Fronteer Financial Corporation (American Fronteer), a wholly-owned subsidiary of eVision, is a private corporation engaged in stock brokerage activities; and eBanker USA.COM, Inc. (eBanker), is a private corporation run by American Fronteer under a management agreement. Since April 1999 eVision has owned enough preferred stock in eBanker to cast 73 percent of the votes in the election of eBanker's directors, giving eVision effective control over eBanker.

Plaintiffs' claim of fraudulent misrepresentation stems from the issuance by defendants of two offering memoranda for the sale of eBanker securities. On May 26, 1998 Fronteer Development (now eBanker) issued a Confidential Private Offering Memorandum (1998 Offering Memorandum) advertising the sale of debentures, common stock, and warrants exercisable for the purchase of common stock in the future. The 1998 Offering Memorandum acknowledged on the first page and elsewhere that the offered units had not been registered with the SEC under the Securities Act of 1933 or with any state securities commission under state securities laws. Without such registration, the memo noted, transfer of the shares were subject to restrictions. Thus, the memo stated that "[t]here is no public or other market for the units ... [and so] investors must expect to retain ownership of the units and bear the economic risks of their investment for an indefinite period." Similar warnings appeared throughout the memo.

However, with respect to eBanker's future plans, the 1998 Offering Memorandum also stated that

[t]he Company intends to endeavor to file registration statements with the SEC to register the Convertible Debentures [and Common Stock] for resale under the 1933 Act and under the Securities Exchange Act of 1934 ... as soon as practicable, but in no event sooner than 12 months following the Final Closing Date, and may submit an application to list the Convertible Debentures [and Common Stock] on a national securities exchange. However, there can be no assurance that the Company will file a registration statement with the SEC or that the SEC will declare the registration statement effective or that any listing on a national securities exchange will occur at any time.

On March 3, 1999 the eBanker Board of Directors authorized another private offering. According to the accompanying memorandum (1999 Offering Memorandum), the units for sale each consisted of one share of common stock and one detachable warrant. In its first few pages, the 1999 Offering Memorandum warned in bold lettering that the units had not been registered with the SEC or any state securities commission. This memo contained language virtually identical to the 1998 Offering Memorandum regarding the company's intent to endeavor to register its securities for resale under the federal securities laws, observing that there could be "no assurance that such registrations will occur." Both memos advised potential investors that the units should only be purchased by persons of substantial means who are not dependent upon liquidity in their investment and who could bear its entire loss.

Although both memos stated that there could be "no assurance" that the securities would be registered with the SEC, plaintiffs assert, first, that the cautionary language was mere boilerplate and that eBanker "viewed registration of its shares as impractical without an [initial public offering (IPO)] and that it had no intention of commencing a registration in the absence of an IPO." Hence, plaintiffs contend that defendants' failure to state unequivocally in the 1998 and 1999 Offering Memoranda that registration was contingent on an IPO constituted a material omission and rendered the documents untruthful.

Second, plaintiffs declare that eBanker knew an IPO was unlikely, which in turn made registration unlikely. In support of this allegation, they point to a memo addressed to eBanker's Board of Directors that spells out the following obstacles to an IPO of eBanker stock: 1) overhang on the market for eBanker shares caused by the number of outstanding warrants; 2) the need to register as an investment company under the Investment Company Act of 1940 in order to conduct an IPO, which would be a disincentive to institutional investors; 3) eBanker's investments in foreign securities, which would also be a disincentive to institutional investors; 4) overlap of employees between eBanker and American Fronteer, another disincentive to institutional investors; and 5) difficulty in valuation of eBanker. Plaintiffs maintain that eBanker's failure to mention these "substantial impediments" in the 1998 and 1999 Offering Memoranda constituted fraud.

DISCUSSION

I Standard of Review

We review de novo a district court's dismissal of a complaint under Rule 12(b)(6). Kalnit v. Eichler, 264 F.3d 131, 137 (2d Cir.2001). In doing so, we accept all of plaintiffs' allegations as true and draw all reasonable inferences in their favor, upholding the dismissal only when it plainly appears that no set of facts may be proved by plaintiffs in support of their claims that would entitle them to relief. Id. at 137-38.

II Fraudulent Misrepresentation Under § 10(b) and Rule 10b-5

Plaintiffs bring the claim of fraudulent misrepresentation under § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (2000), and Rule 10b-5, 17 C.F.R. § 240.10b-5 (2000), promulgated thereunder. Rule 10b-5 states, in part, that it is "unlawful for any person... [t]o make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading." 17 C.F.R. § 240.10b-5(b). To state a cause of action under § 10(b) and Rule 10b-5, the complaint must allege that, in offering to buy or sell securities, defendant, acting with scienter, made a false statement or omitted a material fact, so that plaintiff, acting in reliance on defendant's false statement or omission, suffered injury and damages. In re Scholastic Corp. Sec. Litig., 252 F.3d 63, 69 (2d Cir.), cert. denied, sub nom. Scholastic Corp. v. Truncellito, ___ U.S. ___, 122 S.Ct. 678, 151 L.Ed.2d 590 (2001). An omission is material if there is "a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the `total mix' of information made available." Basic Inc. v. Levinson, 485 U.S. 224, 231-32, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988) (quoting TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449, 96 S.Ct. 2126, 48 L.Ed.2d 757 (1976)); accord Castellano v. Young & Rubicam, Inc., 257 F.3d 171, 180 (2d Cir.2001); see also Azrielli v. Cohen Law Offices, 21 F.3d 512, 518 (2d Cir.1994) ("A fact is to be considered material if there is a substantial likelihood that a reasonable person would consider it important in deciding whether to buy or sell shares [of stock].").

Recognizing that the materiality of an omission is a mixed question of law and fact, courts often will not dismiss a securities fraud complaint at the pleading stage of the proceedings, unless reasonable minds could not differ on the importance of the omission. See, e.g., TSC Indus., 426 U.S. at 450, 96 S.Ct. 2126; Ganino v. Citizens Utils. Co., 228 F.3d 154, 162 (2d Cir.2000); Anderson v. Clow (In re Stac Elecs. Sec. Litig.), 89 F.3d 1399, 1405 (9th Cir.1996). Certain alleged...