In re Stratosphere Corp. Securities Litigation

• Decision Date: 07 April 1998
• Docket Number: No. CV-S-96-0708-PMP (RLH).,CV-S-96-0708-PMP (RLH).
• Parties: In re STRATOSPHERE CORPORATION SECURITIES LITIGATION. This Document Relates to: All Actions.
• Court: U.S. District Court — District of Nevada

Page 1096

1 F.Supp.2d 1096

In re STRATOSPHERE CORPORATION SECURITIES LITIGATION.

This Document Relates to: All Actions.

No. CV-S-96-0708-PMP (RLH).

United States District Court, D. Nevada.

April 7, 1998.

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Kevin P. Roddy, Milberg Weiss Bershad Hynes & Lerach LLP, Los Angeles, CA, William S. Lerach, Spencer A. Burkholz, San Diego, CA, Jules Brody, Edward P. Dietrich, Stull, Stull & Brody, New York City, co-lead counsel, for plaintiffs.

G. Mark Albright, Albright, Stoddard, Warnick & Albright, Las Vegas, NV, Eleissa C. Lavelle, Lavelle-Stubberud & Associates, Las Vegas, NV, Liaison counsel, for plaintiffs.

Kirk B. Lenhard, Kim Boyer, Jones, Jones, Close & Brown, Las Vegas, NV, Martin C. Washton, Gareth T. Evans, James P. Maniscalco, Gibson, Dunn & Crutcher LLP, Los Angeles, CA, for defendants Grand Casinos, Inc., Lyle A. Berman, Stanley M. Taube, David R. Wirshing, Thomas A. Lettero, Andrew S. Blumen and Thomas G. Bell.

Dennis L. Kennedy, Laurel E. Davis, Lionel Sawyer & Collins, Las Vegas, NV, Martin Glenn, Scott A. Schrader, Alfred P. Levitt, O'Melveny & Myers, New York City, Seth Aronson, David R. Garcia, O'Melveny & Myers, Los Angeles, CA, for defendants BT Securities Corporation and Montgomery Securities.

Michael R. Mushkin, Mark C. Hafer, Mushkin & Hafer, Las Vegas, NV, Randy G. Gerchick, Hughes Hubbard & Reed, Los Angeles, CA, for defendants Bob Stupak and Bob Stupak Enterprises, Inc.

ORDER

PRO, District Judge.

Presently before the Court are several motions relating to Plaintiffs' claim that Defendants violated provisions of the Securities Act of 1933, the Securities Act of 1934, and Nevada State Securities Laws regarding the sale of Stratosphere Corporation ("Stratosphere") securities.

On October 6, 1997, Defendants Grand Casinos, Inc. ("Grand Casinos"), Lyle A. Berman ("Berman"), Stanley M. Taube ("Taube"), David R. Wirshing ("Wirshing"), Thomas A. Lettero ("Lettero"), Andrew S. Blumen ("Blumen"), and Thomas G. Bell ("Bell") (collectively the "Defendants") filed a Motion to Dismiss Plaintiffs' Second Amended Complaint ("SAC") (# 135). On September 30, 1997, Defendant Bob Stupak ("Stupak") and Bob Stupak Enterprises, Inc. ("BSE") filed a Notice of Joinder (# 130) with Grand Casinos' Motion to Dismiss. Plaintiffs filed Oppositions to Stupak's Motion (# 139) on November 4, 1997, and to Grand Casinos' Motion (# 145) on November 13, 1997. Grand Casinos filed a Reply (# 150) on November 25, 1997.

On September 30, 1997, Defendants BT Securities Corporation and Montgomery Securities (collectively "the Underwriters") filed a Motion to Dismiss the SAC (# 129). Plaintiffs filed an Opposition (# 141) on November 4, 1997, and the Underwriters filed a Reply Brief (# 146) on November 14, 1997.¹ Oral Argument on all the above motions was conducted on March 26, 1998.

I. Procedural History

This Court previously dismissed Plaintiffs' First Amended and Consolidated Class Action Complaint with prejudice, for failure to meet Federal Rule of Civil Procedure Rule 9(b)'s requirement of pleading fraud with particularity. In re Stratosphere Corp. Sec. Litig., Fed.Sec.L.Rep. (CCH) ¶ 99,473, 1997 WL 581032 (D.Nev.1997). Subsequently, this Court granted Plaintiffs' Motion to Alter or Amend Judgment and for Leave to Amend, allowing Plaintiffs to file an amended Complaint in light of new evidence obtained through discovery in a related bankruptcy proceeding. (# 118). Bankruptcy Case No. BK-S-97-20554-GWZ.

II. Factual Background²

This is a class action brought on behalf of all persons, other than Defendants, who purchased the common stock and/or call options of Stratosphere during the period from March 3, 1995, through July 22, 1996. Plaintiffs allege that the Defendants made false and misleading statements regarding the sale of Stratosphere securities, in violation of federal and Nevada state securities laws.³

The Stratosphere is a hotel, casino and retail center, including a 1,149 foot Tower ("the Tower"), in Las Vegas, Nevada. The initial public offering ("IPO") of Stratosphere stock occurred on February 23, 1994. Plaintiffs contend that Stratosphere's Prospectuses for two 1995 offerings, Form 10-K, Form 10-Q and various public statements by Stratosphere officials were false and misleading when made. They also allege that when the true circumstances regarding Stratosphere's financial condition were revealed in July of 1996, the price of Stratosphere stock plummeted, resulting in damages to the Plaintiffs. By end of class period, the stock had plunged from a high of $14 per share to just $3 per share. After the class period, it dropped to less than $1 per share prior to Stratosphere's January 27, 1997, Bankruptcy filing.

III. Legal Standards

A. Motion to Dismiss

In considering a Motion to Dismiss, the factual allegations of a complaint must be presumed to be true, and this Court must draw all reasonable inferences in favor of the plaintiff. Usher v. City of Los Angeles, 828 F.2d 556, 561 (9th Cir.1987). The issue is not whether the plaintiffs will ultimately prevail, but whether they are entitled to offer evidence in support of their claims. Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 40 L.Ed.2d 90 (1974). The Court does not, however, necessarily assume the truth of legal conclusions merely because they are cast in the form of factual allegations in the complaint. Western Mining Council v. Watt, 643 F.2d 618, 624 (9th Cir.1981), cert. denied, 454 U.S. 1031, 102 S.Ct. 567, 70 L.Ed.2d 474 (1981). It is not the Court's role to weigh evidence which could possibly be presented at trial, the Court must merely determine if the Complaint itself if legally sufficient. In re Health Management, Inc. Sec. Litig., 970 F.Supp. 192, 199 (E.D.N.Y.1997).

In ruling on a Motion to Dismiss, a court generally "`may not consider any material beyond the pleadings.'" Cooper v. Pickett, 137 F.3d 616, 622 (9th Cir.1998) (quoting Branch v. Tunnell, 14 F.3d 449, 453 (9th Cir.1994)). However, if the complaint specifically refers to a document and its authenticity is not questioned, a court may consider the full texts of documents which the complaint partially quotes. See Id. at 622.

B. Rule 9(b)

Federal Rule of Civil Procedure 9(b) states that in all averments of fraud or mistake, the circumstances constituting the fraud or mistake shall be stated with particularity. Fed. R.Civ.P. 9(b). Rule 9(b) applies to actions brought under the federal securities laws. In re GlenFed, Inc. Sec. Litig., 42 F.3d 1541, 1545 (9th Cir.1994).

Under Rule 9(b), a plaintiff must set forth an "explanation as to why the statement or omission complained of was false or misleading." In re GlenFed, 42 F.3d at 1548. The most direct method of proving false or misleading statements is to cite inconsistent contemporaneous statements or internal information available to defendants. Id. at 1549. A plaintiff may also use later statements by defendants, such as "I knew it was false all along." Id. at 1549 n. 9. Additionally, circumstantial evidence will satisfy Rule 9(b) if it explains how and why the statements were misleading when made. Fecht v. Price Co., 70 F.3d 1078, 1083 (9th Cir.1995).

1. Application to Section 11 and 12(2) Claims

This Court rejects Plaintiffs' argument that Rule 9(b) does not apply to their §§ 11 and 12(2) Securities Act claims. The Ninth Circuit stated in In re Stac Elec. Sec. Litig., 89 F.3d 1399 (9th Cir.1996), cert. denied, ___ U.S. ___, 117 S.Ct. 1105, 137 L.Ed.2d 308 (1997), that "the particularity requirements of Rule 9(b) apply to claims brought under Section 11 when, as here, they are grounded in fraud." Id. at 1404. In In re Stac, the court applied Rule 9(b) even though the complaint specifically disclaimed any reliance on fraud for the section 11 claim. Id. at n. 2. The court stated "These nominal efforts are unconvincing where the gravamen of the complaint is plainly fraud and no effort is made to show any other basis for the claims levied at the Prospectus." Id.

Section 11 does allow recovery for negligent, non-fraudulent conduct. In the SAC, plaintiffs have alleged that the Defendants in some instances failed to use due diligence, or "should have known" statements were inaccurate. However, the overwhelming majority of allegations in the SAC concern the fraudulent concealment or misrepresentation of material information, claiming that the Defendants knew of Stratosphere's true financial condition, yet purposefully issued optimistic and false statements. Plaintiffs cannot avoid the more stringent requirements of Rule 9(b) by merely inserting boilerplate language into their Complaint stating that claims are based in negligence, not fraud. Therefore, as the Complaint is grounded in fraud, Rule 9(b) applies to the entirety of the SAC.

C. The Private Securities Reform Act of 1995

The Private Securities Reform Act of 1995 ("PSLRA") amended the Exchange Act and the Securities Act, and applies to private plaintiff class actions. The PSLRA involves both substantive and procedural law changes, including pleading requirements,⁴ automatic discovery stays and "safe harbors" for forward looking statements. This Court will first examine the PSLRA provisions relevant to the present action, then determine if the SAC meets the requirements of Rule 9(b) and the PSLRA.

1. Retroactivity of the PSLRA

Plaintiffs initially argue that the PSLRA does not apply to their claims, as a few of the events giving rise to those claims occurred before the enactment of the PSLRA on December 22, 1995.⁵ Plaintiffs argue that under the test set forth in Landgraf v. USI Film Prods., 511 U.S. 244, 114 S.Ct. 1483, 128 L.Ed.2d 229 (1994), the PSLRA does not apply to conduct occurring before December 22, 1995. In Landgraf, the Supreme Court set forth a two part test. A court must first determine if Congress has expressly...