In re Interbank Funding Corp. Sec. Litig.

• Decision Date: 28 December 2010
• Docket Number: No. 09-7167,09-7167
• Citation: 393 U.S.App.D.C. 415,629 F.3d 213
• Parties: In re INTERBANK FUNDING CORP. SECURITIES LITIGATION, Monica Belizan, and All Others Similarly Situated, et al., Appellants v. Radin Glass & Co, LLP, Appellee.
• Court: U.S. Court of Appeals — District of Columbia Circuit

629 F.3d 213

393 U.S.App.D.C. 415

In re INTERBANK FUNDING CORP. SECURITIES LITIGATION,

Monica Belizan, and All Others Similarly Situated, et al., Appellants

v.Radin Glass & Co, LLP, Appellee.

No. 09-7167.

United States Court of Appeals,District of Columbia Circuit.

Argued Sept. 24, 2010.

Decided Dec. 28, 2010.

Appeal from the United States District Court for the District of Columbia (No. 1:02-cv-01490).

Michael G. McLellan argued the cause for appellants. With him on the briefs were Burton H. Finkelstein, Donald J. Enright, and Tracy D. Rezvani.

Michael L. Martinez argued the cause and filed the brief for appellee.

Before: KAVANAUGH, Circuit Judge, EDWARDS and SILBERMAN, Senior Circuit Judges.

Opinion for the Court filed by Senior Circuit Judge EDWARDS.

EDWARDS, Senior Circuit Judge:

In 2002, plaintiff-appellant Monica Belizan, on behalf of herself and a class of similarly situated persons, filed a complaint against, inter alia, defendant-appellee Radin Glass & Co., LLP ("Radin"). Belizan alleged that she purchased securities of InterBank Funding Corporation ("Interbank"), and, in doing so, relied on materially false misrepresentations andomissions by Radin, Interbank's auditor, made in violation of section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Securities and Exchange Commission ("SEC") Rule 10b-5, 17 C.F.R. § 240.10b-5. After Belizan consolidated her action with a related action in 2003, the District Court granted a motion to dismiss filed by Radin and then-defendant CIBC World Markets Corp. ("CIBC"). In re Interbank Funding Corp. Sec. Litig., 329 F.Supp.2d 84 (D.D.C.2004). This court vacated the District Court's order of dismissal, because the District Court failed to adequately explain why it dismissed the appellants' complaint with prejudice. Belizan v. Hershon ("Belizan I"), 434 F.3d 579 (D.C.Cir.2006). On remand, the District Court again dismissed the appellants' suit, because there was no indication that appellants would be able to cure the deficiencies in their pleadings. In re Interbank Funding Corp. Sec. Litig., 432 F.Supp.2d 51, 55 (D.D.C.2006). On appeal, this court again vacated in part and remanded the section 10(b) and Rule 10b-5 claims for the District Court to re-evaluate the appellants' allegations of scienter. Belizan v. Hershon ("Belizan II"), 495 F.3d 686, 691-92 (D.C.Cir.2007).

Before the District Court for the third time, appellants moved for leave to amend their complaint against Radin pursuant to Fed.R.Civ.P. 15(a). The District Court denied the motion and again dismissed appellants' suit with prejudice. In re Interbank Funding Corp. Sec. Litig., 668 F.Supp.2d 44 (D.D.C.2009). The District Court held that the appellants' proposed amendment was futile because the draft complaint failed to adequately plead the reliance element of a securities fraud claim— i.e., "the causal link between the defendant's misconduct and the plaintiff[s'] decision to buy ... securities," Emergent Capital Inv. Mgmt., LLC. v. Stonepath Grp., Inc., 343 F.3d 189, 197 (2d Cir.2003). Appellants argue that the District Court erred in its decision not to apply the " Affiliated Ute presumption" of reliance. See Affiliated Ute Citizens v. United States, 406 U.S. 128, 153, 92 S.Ct. 1456, 31 L.Ed.2d 741 (1972). Had the District Court found the presumption applicable, appellants' amended complaint would have properly pled all elements of a cause of action under SEC Rule 10b-5.

We agree with the District Court that the Affiliated Ute presumption is inapplicable here. In Affiliated Ute, the Supreme Court applied a presumption of reliance in a situation "involving primarily a failure to disclose." 406 U.S. at 153, 92 S.Ct. 1456. Appellants contend that because their action primarily relies on Radin's alleged omissions, they should benefit from a presumption of reliance. We disagree. The complaint is focused on appellants' claim that Interbank's financial statements, which Radin attested were accurate and in accord with Generally Accepted Accounting Principles ("GAAP"), did not reveal Interbank's alleged "Ponzi scheme." Thus, the gravamen of the appellants' complaint is that, by certifying Interbank's materially false financial statements, Radin affirmatively misrepresented Interbank's financial situation. Because, as appellants concede, the Affiliated Ute presumption of reliance does not apply to affirmative misrepresentations, appellants' proposed amendment to their complaint would be futile. We therefore affirm the District Court's order denying appellants' motion for leave to amend.

I. Background

"[A] district court has discretion to 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). Consequently "our review in this instance is, forpractical purposes, identical to review of a Rule 12(b)(6) dismissal based on the allegations in the amended complaint." Platten v. HG Bermuda Exempted Ltd., 437 F.3d 118, 132 (1st Cir.2006). On review of a motion to dismiss, we "treat the complaint's factual allegations as true ... and must grant [appellants] the benefit of all inferences that can be derived from the facts alleged." Holy Land Found. for Relief & Dev. v. Ashcroft, 333 F.3d 156, 165 (D.C.Cir.2003) (ellipsis in original) (citation and quotation omitted). Therefore, the facts recited below are drawn from appellants' proposed amended complaint.

Interbank was formed in 1996 with the purpose of buying distressed loans and restructuring or rehabilitating those loans for a profit. Proposed Second Consolidated Am. Class Action Compl. for Violation of the Fed. Securities Laws ¶ 26 ("Second Amended Complaint"), No. 1:02-cv-01490 (D.D.C. Oct. 20, 2008), reprinted in Appendix ("App.") 62. Between 1996 and 1999, Interbank formed a succession of wholly-owned funds that offered private placement notes to investors. Id. ¶ 19, App. 60. These were five-year notes that bore interest between eight and twelve percent annually, plus a share of the fund's gross profits. Id. Shortly after the first fund commenced operations, Interbank established a "related party transaction policy," under which Interbank itself purchased a loan from a fund if there was a question about whether the loan would be collected before the fund's scheduled liquidation. Id. ¶ 42, App. 65-66. With respect to these transactions, Interbank paid the fund the full amount outstanding on an acquired loan even if the loan was uncollectable. Id. ¶ 43, App. 66. As a result, the fact that a loan had gone bad was not disclosed to prospective investors to the Interbank fund that sold the loan, id. ¶ 44, App. 66, and Interbank was able to tap fresh offering proceeds to pay off earlier noteholders, id. ¶ 46, App. 66-67.

Although Radin publicly attested to the accuracy of Interbank's balance sheets and private placement memoranda on many occasions—typically averring that these documents were "in conformity with generally accepted accounting principles," id. ¶¶ 52-71, App. 68-77—Radin did not comply with GAAP or Generally Accepted Auditing Standards ("GAAS") in its audits. For example, Radin endorsed financial statements that did not disclose Interbank's related-party transfers, id. ¶ 82, App. 80; Radin reviewed financial documents that did not disclose specific amounts of one of the funds' loan losses, id. ¶ 91-94, App. 82; and the audited financial statements did not state that some of the Interbank funds were co-obligors with Interbank on a line of credit, id. ¶ 115, App. 86. Appellants' complaint also alleges that "superimposed over each of these misrepresentations is a single constant omission: the class members were not informed they were investing in a Ponzi scheme." Id. ¶ 76, App. 79.

Belizan first filed a complaint against Radin and numerous other defendants in July 2002, alleging violations of section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 ("Section 10 claims"). Compl. for Violation of the Fed. Securities Laws, No. 1:02-cv-01490 (D.D.C. July 26, 2002). Belizan's complaint was consolidated with a related action, and, in September 2003, the named plaintiffs filed an amended complaint against, inter alia, Radin and broker-dealer CIBC. In addition to the Section 10 claims, this complaint alleged violations of section 11 of the Securities Act of 1933 ("Section 11 claims"), 15 U.S.C. § 77k, against Radin for filing a series of materially false and misleading registration statements. Consolidated Am. Class Action Compl. for Violation of the Fed. Securities Laws, No. 1:02-cv-01490 (D.D.C. Sept. 29, 2003).

The District Court granted Radin and CIBC's motion to dismiss all of the appellants' claims with prejudice. In re Interbank Funding Corp. Sec. Litig., 329 F.Supp.2d 84 (D.D.C.2004). In particular, the District Court disposed of appellants' Section 10 claims on the grounds that they failed to adequately plead scienter or causation, and did not plead with the particularity required by Fed.R.Civ.P. 9(b) and the Private Securities Litigation Reform Act. Id. at 94. The court also dismissed the Section 11 claims. Id. at 94-95. This court vacated the District Court's order of dismissal and remanded because the District Court "fail[ed] adequately to explain ... why it dismissed Belizan's complaint with prejudice." Belizan I, 434 F.3d at 584 (emphasis added).

On remand, the District Court again dismissed all claims against Radin and CIBC—explaining that it was dismissing the claims with prejudice because "there was no indication that plaintiffs were capable of making additional allegations, consistent with their prior pleadings, that would cure the deficiencies in the claims against CIBC and Radin." In re Interbank Funding Corp. Sec. Litig., 432 F.Supp.2d 51, 55 (D.D.C.2006). Back before this court on appeal, we vacated the District Court's order in part. We affirmed the District Court's dismissal of t...