In re Interbank Funding Corp. Securities Litig.

• Decision Date: 06 November 2009
• Docket Number: Civil Action No. 02-1490 (JDB).
• Parties: In re INTERBANK FUNDING CORP. SECURITIES LITIGATION.
• Court: U.S. District Court — District of Columbia

668 F.Supp.2d 44

In re INTERBANK FUNDING CORP. SECURITIES LITIGATION.

Civil Action No. 02-1490 (JDB).

United States District Court, District of Columbia.

November 6, 2009.

COPYRIGHT MATERIAL OMITTED

Daniel S. Sommers, Cohen Milstein Sellers & Toll, PLLC, Donald J. Enright, Michael G. McLellan, Tracy Diana Rezvani, Finkelstein Thompson LLP, Washington, DC, Arthur J. Salzberg, Marvin Syzmkowicz, Arthur J. Salzberg & Associates, P.C., Bethesda, MD, for Plaintiffs.

Michael L. Martinez, Crowell & Moring LLP, Washington, DC, for Defendants.

MEMORANDUM OPINION

JOHN D. BATES, District Judge.

This securities fraud action is once again before the Court following a second remand from the United States Court of Appeals for the District of Columbia Circuit. The D.C. Circuit vacated the Court's most recent order dismissing plaintiffs' complaint with prejudice, and instructed the Court to reevaluate whether plaintiffs could amend their complaint to meet the heightened pleading requirements applicable to securities fraud claims. Plaintiffs have now moved for leave to file an amended complaint. After carefully reviewing the proposed amended complaint, the Court concludes that plaintiffs have failed to cure all the deficiencies identified in their previous pleadings. The proposed amended complaint does not adequately plead "transaction causation" (i.e., reliance), which is a required elements of a securities fraud action. Accordingly, the Court will deny plaintiffs' motion to amend their complaint.

BACKGROUND

The parties need little reminder of this litigation's tortuous history, which arises out of alleged malfeasance in connection with securities offered by the Interbank Funding Corporation ("Interbank").¹ In 2004, the Court dismissed with prejudice plaintiffs' uncertified class-action claims. See In re Interbank Funding Corp. Secs. Litig., 329 F.Supp.2d. 84. The D.C. Circuit vacated, concluding that the Court's dismissal with prejudice was inadequately explained, and directing the Court "to enter a new order either dismissing without prejudice or explaining its dismissal with prejudice." Belizan, 434 F.3d at 584.

On remand, the Court again dismissed plaintiffs' claims with prejudice, explaining that "[d]ismissal without prejudice would only have resulted in a futile effort by plaintiffs to re-litigate the same issues determined against them by this Court." In re Interbank Funding Corp. Secs. Litig., 432 F.Supp.2d 51, 57 (D.D.C.2006). The D.C. Circuit affirmed the dismissal of some of plaintiffs' causes of action, but remanded the claims brought pursuant to Section 10(b) of the Securities Exchange Act of 1934. The Court of Appeals instructed this Court to reevaluate those allegations in light of a newly-decided Supreme Court case. Belizan v. Hershon, 495 F.3d 686, 692 (D.C.Cir.2007) (citing Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007)).²

Plaintiffs have again moved for leave to amend their complaint against Radin Glass & Co, LLP ("Radin"), Interbank's auditing firm and the sole remaining defendant. For the reasons detailed below, the Court denies plaintiffs' motion.

STANDARD OF REVIEW

Federal Rule of Civil Procedure 15(a)(2) instructs courts to "freely give" leave to amend a complaint "when justice so requires." "If the underlying facts or circumstances relied upon by a plaintiff may be a proper subject of relief, he ought to be afforded an opportunity to test his claim on the merits." Foman v. Davis, 371 U.S. 178, 182, 83 S.Ct. 227, 9 L.Ed.2d 222 (1962). A court may, however, "deny a motion to amend on grounds of futility where the proposed pleading would not survive a motion to dismiss." Nat'l Wrestling Coaches Ass'n v. Dep't of Educ., 366 F.3d 930, 945 (D.C.Cir.2004); see also Firestone v. Firestone, 76 F.3d 1205, 1208 (D.C.Cir.1996) ("It is an abuse of discretion to deny leave to amend unless there is sufficient reason, such as `undue delay, bad faith or dilatory motive ... repeated failure to cure deficiencies by [previous] amendments ... [or] futility of amendment.'" (quoting Foman, 371 U.S. at 182, 83 S.Ct. 227)).

In reviewing whether a proposed pleading can survive a motion to dismiss, "the allegations of the complaint should be construed favorably to the pleader." Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 40 L.Ed.2d 90 (1974); see Leatherman v. Tarrant County Narcotics and Coordination Unit, 507 U.S. 163, 164, 113 S.Ct. 1160, 122 L.Ed.2d 517 (1993). Therefore, plaintiffs' factual allegations must be presumed true, and they must be given every favorable inference that may be drawn from the allegations of fact. Scheuer, 416 U.S. at 236, 94 S.Ct. 1683; Sparrow v. United Air Lines, Inc., 216 F.3d 1111, 1113 (D.C.Cir.2000). But the Court need not accept as true "a legal conclusion couched as a factual allegation," nor inferences that are unsupported by the facts set out in the complaint. Trudeau v. Fed. Trade Comm'n, 456 F.3d 178, 193 (D.C.Cir.2006) (quoting Papasan v. Allain, 478 U.S. 265, 286, 106 S.Ct. 2932, 92 L.Ed.2d 209 (1986)).

ANALYSIS

Plaintiffs' only claim against Radin is that the firm, through its statements about Interbank's securities, violated Section 10(b) of the Securities Exchange Act of 1934. That section prohibits the "use or employ, in connection with the purchase or sale of any security ..., [of] any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe as necessary or appropriate in the public interest or for the protection of investors." 15 U.S.C. § 78j(b).

To properly plead a cause of action under Section 10(b), a plaintiff must allege that the defendant (1) made a material misstatement or omission of a material fact, (2) with scienter, (3) in connection with the purchase or sale of a security, (4) upon which the plaintiff reasonably relied, and that (5) plaintiff's reliance was the cause of his injury. See Media Gen., Inc. v. Tomlin, 532 F.3d 854, 858 (D.C.Cir. 2008). Plaintiffs in securities fraud cases must "state with particularity ... the facts constituting the alleged violation." Tellabs, 551 U.S. at 313, 127 S.Ct. 2499.

Radin argues that plaintiffs' proposed amended complaint fails to state a claim for relief under Section 10(b), and that amendment would therefore be futile. Specifically, Radin contends that the proposed amended complaint fails to plead facts that establish that Radin made material misstatements or omissions of fact, that plaintiffs relied on any such statements or omissions,³ or that any such reliance caused plaintiffs' injury.⁴

The Court agrees that plaintiffs' proposed amended complaint does not adequately plead transaction causation, the reliance element of a securities fraud claim. Accordingly, the Court denies as futile plaintiffs' motion for leave to amend their complaint. Although plaintiffs have properly pled the remaining elements of securities fraud, the Court need not reach those issues.

Transaction causation "refers to the causal link between the defendant's misconduct and the plaintiff's decision to buy or sell securities." Emergent Capital Inv. Mgmt. LLC v. Stonepath Group, Inc., 343 F.3d 189, 196 (2d Cir.2003); see also Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148, 158, 128 S.Ct. 761, 769, 169 L.Ed.2d 627 (2008). "The obvious reason for this requirement is that a plaintiff in a rule 10b-5 action should not be allowed to recover damages when the defendant's wrongful action had no relationship to the plaintiff's loss." Sharp v. Coopers & Lybrand, 649 F.2d 175, 186 (3d Cir.1981). To establish this element of securities fraud, a plaintiff must allege "that but for the claimed misrepresentations or omissions, the plaintiff would not have entered into the detrimental securities transaction." Lentell v. Merrill Lynch & Co., 396 F.3d 161, 172 (2d Cir. 2005) (internal quotation marks omitted).

Plaintiffs do not seriously argue that they directly relied on Radin's alleged misrepresentations or omissions.⁵ Instead, they urge the Court to presume transaction causation based on two alternative theories: Affiliated Ute and "fraud created the market."

A. Affiliated Ute

Plaintiffs first argue that they are eligible for a presumption of reliance under Affiliated Ute Citizens v. United States, 406 U.S. 128, 153-54, 92 S.Ct. 1456, 31 L.Ed.2d 741 (1972). Where a securities fraud case "involv[es] primarily a failure to disclose, positive proof of reliance is not a prerequisite to recovery." Affiliated Ute, 406 U.S. at 153, 92 S.Ct. 1456. Rather, "reliance on the omitted information may be presumed where such information is material." Black v. Finantra Capital, Inc., 418 F.3d 203, 209 (2d Cir.2005). This so-called Affiliated Ute presumption reflects the idea that where the defendant's fraud consists largely of omissions, "[r]equiring a plaintiff to show a speculative state of facts, i.e., how he would have behaved if omitted material information had been disclosed, places an unrealistic evidentiary burden on the 10(b) plaintiff." Joseph v. Wiles, 223 F.3d 1155, 1162 (10th Cir.2000).

Affiliated Ute's presumption of reliance "is limited to cases that `can be characterized as ... primarily alleg[ing] omissions.'" Desai v. Deutsche Bank Sec. Ltd., 573 F.3d 931, 940 (9th Cir.2009) (quoting Binder v. Gillespie, 184 F.3d 1059, 1064 (9th Cir.1999)); see also Joseph, 223 F.3d at 1162 ("Affiliated Ute's holding is limited to omissions as opposed to affirmative misrepresentations."). It "does not require the burden of persuasion to shift in cases where the plaintiffs allege either that the defendant has made false statements or has distorted the truth by making true but misleading incomplete statements." Abell v. Potomac Ins. Co., 858 F.2d 1104, 1119 (5th Cir.1988), vacated on other grounds sub nom. Fryar v. Abell, 492 U.S. 914, 109 S.Ct. 3236, 106 L.Ed.2d 584 (1989).

Plaintiffs concede that their proposed...