In re Champion Enterprises, Inc. Securities Lit.
| Decision Date | 13 June 2001 |
| Docket Number | No. 99-74231.,No. 99-75162.,No. 99-76206.,99-74231.,99-75162.,99-76206. |
| Citation | 145 F.Supp.2d 871 |
| Parties | In re CHAMPION ENTERPRISES, INC., SECURITIES LITIGATION Joel Miller, Gary Kissiah, Simche Margulies, individually and on behalf of all others similarly situated, Plaintiffs, v. Champion Enterprises, Inc., a Michigan corporation; and Walter Young, Defendants. |
| Court | U.S. District Court — Eastern District of Michigan |
E. Powell Miller, Mantesa, Miller and Mantesa, Troy, MI, Richard Acocelli, Weiss & Yourman, New York City, Stephen Wasinger, Wasinger, Kickham and Kohls, Royal Oak, MI, Aaron Brody, Julie Brody, Paul T. Curley, Stull, Stull & Brody, New York City, Lionel Z. Glancy, Peter A. Binkow, Law Offices of Lionel Z. Glancy, Los Angeles, CA, Leo W. Desmond, Palm Beach, CA, Brian P. Murray, Rabin & Peckel, New York City, for Plaintiffs.
Andrew J. McGuinness, Dykema Gossett, Ann Arbor, Timothy Nelson, Donna McDevitt, Skadden, Arps, Slate, Meagher & Flom, Chicago, IL, for Defendants.
Plaintiffs sued Champion Enterprises and its Chief Executive Officer for securities fraud under sections 10(b) and 20(a) of the Securities and Exchange Act of 1934 and Rule 10b-5 promulgated by the Securities Exchange Commission (SEC). Having previously held that plaintiffs' first amended complaint was insufficient under the pleading requirements of the Private Securities Litigation Reform Act ("Reform Act" or "the Act"), (see Opinion, Apr. 9, 2001) I now consider plaintiffs' motion for leave to amend. For the reasons that follow, I deny their motion for leave to amend and dismiss the case with prejudice.
Plaintiffs' proposed pleading, the "Second amended supplemental complaint" is actually their fourth complaint in this action. Plaintiffs filed their initial complaints between August 26 and September 1, 1999.1 The parties then stipulated to the filing of a consolidated amended complaint. Plaintiffs filed a first amendment on May 15, 2000. Defendants moved to dismiss the amended complaint on June 30, 2000. Plaintiffs filed their first motion for leave to amend (and their third proposed complaint) on December 1, 2000. On March 27, 2001 plaintiffs filed yet another proposed complaint.2 I heard arguments on the motion for leave to amend on May 16, 2001.
The essential question raised by plaintiffs' motion is not whether amendment should be allowed under Rule 15 of the Federal Rules of Civil Procedure, but rather, whether the Reform Act restricts Rule 15 in Securities Fraud cases.3 I believe it must. This narrow but essential question is a matter of first impression not only in this circuit but throughout the federal court system.
If the Reform Act is read to mean that when a complaint is filed under the Reform Act, a judge must scrutinize the complaint and advise the pleader where the complaint is deficient, and then give the pleader an opportunity to amend the complaint, and when that is done, the judge must again, perhaps like a law school professor, advise the pleader that he or she has not passed the test, and if not, give the pleader another opportunity to meet the heightened pleading requirements, and even after that, still another opportunity, if the pleader requests it, then the Reform Act is meaningless. If this is the interpretation of the Act, then Rule 15 always trumps the plain requirements of the Act, and what Congress did when it passed this act over a presidential veto, means nothing.
During oral argument plaintiffs relied on two cases to support the proposition that leave to amend should be liberally granted in securities fraud cases, Berger v. Ludwick, 2000 WL 1262646 (N.D.Cal.2000), and Chu v. Sabratek, 100 F.Supp.2d 815 (N.D.Ill.2000). Neither of these cases addresses this question. These are merely cases in which a court rules on whether or not to dismiss a third amended complaint. It would require a mind reader to fathom what, if anything, the judges in these cases contemplated in regard to this issue. Plaintiffs' contention that these cases must support the assertion that the Reform Act has no effect on Rule 15 is far more than a stretch; it is a pure flight of fancy.
In this case, it appears that plaintiffs are contending that since discovery procedures are not available to them, that a court must be lenient in allowing amendments to pleadings. Contending that Rule 15 permits this, they purposely seek to circumvent the Reform Act's strict requirements preventing discovery. But this is precisely the device that Congress intended to be used, i.e., to prevent suits in which a foundation for the suit can not be pleaded.
The stay of discovery and the heightened pleading standards are separate and distinct, yet complementary mechanisms. The stay of discovery operates to prevent plaintiffs with baseless claims from squeezing a nuisance settlement from an innocent defendant. The pleading requirement is more than simply a line the plaintiffs must cross to get to discovery; it is the heart of the Reform Act. This stringent requirement operates to discourage baseless suits altogether. It evinces Congress's acknowledgment of the burden an allegation of securities fraud places on the innocent defendant even without discovery. The Reform Act requires a uniform pleading standard; this standard is meaningless if judges on a case-by-case basis grant leave to amend numerous times.
The Reform Act clearly states, "In any private action arising under this chapter, the court shall, on the motion of any defendant, dismiss the complaint if the [pleading] requirements...are not met." 15 U.S.C. § 78u-4(b)(3)(A). See also, 15 U.S.C. § 78u-4(b)(1) & (2) (). Plaintiffs fundamentally failed to meet these requirements. Now they want still another chance.4
The plain language of the Reform Act does not contemplate amending complaints; it does set a high standard of pleading which if not met results in a mandatory dismissal. The necessary goal of this plain, and strong language, is that it should be dismissed with prejudice. To conclude otherwise would be to abrogate the very purpose of the legislation.
As plaintiffs' counsel admitted, the purpose of the Reform Act is to prevent harassing strike suits filed the moment a company's stock price falls.5 The Reform Act could not achieve this purpose if plaintiffs were allowed to amend and amend until they got it right. This is not only supported by the plain language of the Reform Act cited above, it is supported by the voluminous legislative history. Selected Bill Provisions of the Conference Report to H.R. 1058/S.240, 141 Cong. Rec. S19152 (daily ed. Dec. 22, 1995). Id. (emphasis added).
The legislative history contains assertions of both the supporters and the opponents of the Act that are quite revealing. The supporters hoped that the strict pleading requirements would bar frivolous and harassing lawsuits. "This should help weed out, at an early stage, lawsuits filed against innocent defendants." Statement of Senator Hatch, 141 Cong. Rec. S17966 (daily ed. Dec. 5, 1995). "This bill will hopefully curb this modern-day champerty, stop the vexatiousness and restore integrity to our securities laws by filtering out abusive, frivolous class action lawsuits that harm investors and only benefit the class action attorneys." Statement of Senator Domenici, 141 Cong. Rec. S17967 (daily ed. Dec. 5, 1995). Statement of Rep. Ganske, 141 Cong. Rec. H15220 (daily ed. Dec. 20, 1995).
Likewise, opponents feared that these same requirements would bar the door to meritorious claims from wronged investors. "This is a standard more stringent than the Federal Rules of Civil Procedure." Statement of Senator Sarbanes, 141 Cong. Rec. S19038 (daily ed. Dec. 21, 1995). "The Conference Report establishes almost insurmountable hurdles in the form of pleading requirements as a barrier to federal court." Letter of John Sexton to President Clinton, 141 Cong. Rec. S19038, Ex. 1 (daily ed. Dec. 21 1995). The Reform Act "erect[s] a higher barrier to bringing suit than any now existing — one so high that even the most aggrieved investors with the most painful losses may get tossed out of court before they have a chance to prove their case." Veto message of President Clinton, 141 Cong. Rec. S19035 (daily ed. Dec. 21 1995). These hopes and fears would be unfounded if any improperly pleaded complaint could repeatedly be amended. The pleading requirements would merely be a technical formality which could be cured by amendment.
Leave to amend should be denied because amendment here would be...
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