In re Worldcom, Inc. Securities Litigation

• Citation: 456 F.Supp.2d 508
• Decision Date: 13 October 2006
• Docket Number: No. 04 Civ. 8308(DLC).,No. 02 Civ. 3288(DLC).,02 Civ. 3288(DLC).,04 Civ. 8308(DLC).
• Parties: In Re WORLDCOM, INC. SCURITIES LITIGATION, This document relates to: William K. Holmes, Holmes Capital, LLC, Brew Dog, LLC, Bimini Star, LLC, and EBH Investments Co., LLC, Plaintiffs, v. Jack Grubman, and Citigroup Global Market Inc. f/k/a Smith Barney & Co., Inc., Defendants.
• Court: U.S. District Court — Southern District of New York

456 F.Supp.2d 508

In Re WORLDCOM, INC. SCURITIES LITIGATION,

This document relates to:

William K. Holmes, Holmes Capital, LLC, Brew Dog, LLC, Bimini Star, LLC, and EBH Investments Co., LLC, Plaintiffs, v. Jack Grubman, and Citigroup Global Market Inc. f/k/a Smith Barney & Co., Inc., Defendants.

No. 02 Civ. 3288(DLC).

No. 04 Civ. 8308(DLC).

United States District Court, S.D. New York.

October 13, 2006.

COPYRIGHT MATERIAL OMITTED

David L. McGee, Peter J. Mougey, Jack W. Lurton, III, Beggs & Lane, LLP, Pensacola, FL, Joseph J. Burton, Jr., Burton & Armstrong, LLP, Atlanta, GA, for Plaintiffs William K. Holmes, Holmes Capital, LLC, Brew Dog, LLC, Bimini Star, LLC, and EBH Investments Co., LLC.

Martin London, Richard Rosen, Brad S. Karp, Walter Rieman, Joyce S. Huang, Paul Weiss Rifkind Wharton and Garrison LLP, and Peter Vigeland, Wilmer Cutler Pickering Hale and Dorr LLP, New York, NY, for Defendants Jack Grubman and Citigroup Global Markets Inc., f/k/a Smith Barney & Co., Inc.

OPINION AND ORDER

COTE, District Judge.

This Opinion addresses a motion to dismiss the third amended complaint filed in an Individual Action brought within the context of the WorldCom Securities Litigation,¹ a motion to enlarge permission to amend, and a motion to remand the case to the bankruptcy court in Georgia. For the following reasons, the motion to dismiss is granted, the motion to enlarge is denied in part, and the motion to remand is denied.

Background

William K. Holmes and entities which he controls ("Holmes") filed this action in June 2003 in the United States Bankruptcy Court for the Middle District of Georgia. The case was transferred to this Court and consolidated for pre-trial purposes with the Securities Litigation.² On March 24, 2006, the motion to dismiss the second amended complaint in the Holmes action was granted. In re WorldCom, Inc. Sec. Litig., No. 02 Civ. 3288(DLC), 2006 WL 751382 (S.D.N.Y. Mar.24, 2006)("March 2006 Opinion"). That pleading attempted to state "holder" claims. Specifically, Holmes sought recovery under Georgia law based on his assertion that his broker convinced him not to sell 2.1 million shares of WorldCom stock that he owned by referring to the defendants' June 25, 1999 research report concerning WorldCom.

Holmes did not request an opportunity to amend, but the Court sua sponte gave the plaintiff a limited opportunity to amend since the complaint referred as well to a purchase of an unidentified number of WorldCom shares after June 25, 1999. Among other things, Holmes was required in any amended pleading to identify with specificity purchases of WorldCom stock after June 25, 1999, the provision of the Georgia statute on which he was relying to assert his statutory claim, and the provision of any contract which he asserted the defendants had breached.

Holmes' third amended complaint lists purchases of WorldCom securities after April 9, 1998. As for purchases after June 25, 1999, Holmes identifies purchases of stock on ten separate days up to July 20, 2000, and purchases of call options up to September 2000. All of his investments in WorldCom securities were involuntarily sold by September 2000 to pay margin calls.

In this most recent pleading, Holmes asserts that the defendants Jack B. Grubman and Citigroup Global Market Inc. f/k/a Smith Barney & Co., Inc. ("Citigroup Defendants") made negligent and fraudulent misrepresentations that induced him to purchase WorldCom securities. Grubman was the telecommunications analyst at Smith Barney, where Holmes had a brokerage account. Holmes asserts that the defendants operated under a conflict of interest from April 1998, providing underwriting services to WorldCom at the same time as they were recommending to investors that they purchase WorldCom securities. Holmes asserts further that the defendants made recommendations to investors to buy WorldCom stock when they knew that an honest assessment of WorldCom would yield a conservative target price for WorldCom stock, but that that honest assessment would also result in the defendants' loss of investment banking fees.

According to Holmes, from June 25, 1999 onwards, the defendants were blindly bullish towards WorldCom, as its stock fell in price from $92 per share to roughly $25 per share in October 2000. In early 2000, Grubman changed his valuation method to permit him to continue to support the target price for WorldCom stock in the face of WorldCom's shrinking revenue stream. Grubman abandoned a discounted free cash flow valuation methodology, a methodology which is affected by consideration of a company's capital expenditures.

During this period, Holmes was in almost daily contact with his financial advisor Charles M. Parker, who provided him with the defendants' research reports. Both Parker and Holmes relied on those research reports in their discussions of WorldCom, and Holmes relied on them in making his decision to purchase World-Corn securities. Holmes lists fourteen recommendations by the defendants to investors to buy WorldCom stock between June 25, 1999 and October 2000.

The third amended complaint pleads six causes of action. The first is asserted against both defendants; the remaining are asserted solely against Smith Barney. The first cause of action is for fraudulent misrepresentation and omissions of WorldCom's true financial condition and the defendants' conflict of interest. The second pleads a breach of fiduciary duty. The third and fourth assert negligent misrepresentation for misleading information and omissions, and negligence in making disclosures. The fifth cause of action asserts a violation of Title 10, Chapter 5, Section 12 of the Official Code of Georgia. The final claim is for breach of contract.³

Meanwhile, on February 1, 2006, Holmes requested that his action be remanded to the Georgia bankruptcy court. That motion was fully submitted on March 2, just weeks before his second, amended pleading was dismissed in its entirety. That motion would have been denied on the merits, but in any event was rendered moot by the dismissal and has not been renewed.

Discussion

A complaint must contain "a short and plain statement of the claim showing that the pleader is entitled to relief." Rule 8(a)(2), Fed.R.Civ.P. The purpose of this requirement is to give fair notice of a claim and the grounds upon which it rests so that the opposing party may identify the nature of the case, respond to the complaint, and prepare for trial. Swierkiewicz v. Sorema, N.A., 534 U.S. 506, 512, 122 S.Ct. 992, 152 L.Ed.2d 1 (2002). Rule 8 is fashioned in the interest of fair and reasonable notice, not technicality, and therefore is "not meant to impose a great burden upon a plaintiff." Dura Pharms. Inc. v. Broudo, 544 U.S. 336, 347, 125 S.Ct. 1627, 161 L.Ed.2d 577 (2005). "The complaint thus need not set out in detail the facts upon which the claim is based." Twombly v. Bell Atlantic Corp., 425 F.3d 99, 107 (2d Cir.2005) (citation omitted). If it is clear, however, that "no relief could be granted under any sets of facts that could be proved consistent with the allegations," the claim should be dismissed. Swierkiewicz, 534 U.S. at 514, 122 S.Ct. 992. In construing the complaint, the court must "accept all factual allegations in the complaint as true and draw inferences from those allegations in the light most favorable to the plaintiff." Jaghory v. New York State Dep't of Educ., 131 F.3d 326, 329 (2d Cir.1997).

"The Rules do establish more demanding pleading requirements for certain kinds of claims." Twombly, 425 F.3d at 107. These claims, including fraud, must "be stated with particularity." Rule 9(b), Fed.R.Civ.P. To comply with the requirements of Rule 9(b), an allegation of fraud must specify: "(1) those statements the plaintiff thinks were fraudulent, (2) the speaker, (3) where and when they were made, and (4) why plaintiff believes the statements to be fraudulent." Koehler v. Bank of Bermuda (New York) Ltd., 209 F.3d 130, 136 (2d Cir.2000).

1. Pre-June 25, 1999 Purchases

The defendants move to dismiss all claims to the extent that they are based on purchases before June 25, 1999. Holmes had never referred to any claims based on such purchases in his prior pleadings and motion practice, and as a result, leave to amend was confined to claims based on purchases of WorldCom stock after June 25, 1999. Indeed, in his prior pleadings Holmes' claims hinged on his asserted reliance on a June 25, 1999 telephone conversation. Based on that call, Holmes alleged that he decided to not sell the 2.1 million shares of WorldCom stock that he owned, deciding to hold that stock and acquire an unidentified amount of additional shares after June 25. Based on that cryptic reference to purchases made in reliance on the defendants' representations, Holmes was granted a limited leave to amend his complaint for a fourth time.⁴

Relying on the standard for amendment that applies under Rule 15, Fed.R.Civ.P., Holmes moved on June 9 to enlarge the ruling in the March 2006 Opinion to permit him to plead claims based on purchases of WorldCom stock and options prior to June 25, 1999. This motion is an untimely motion for reconsideration of the March 2006 Opinion, and may be denied on that ground alone. S.D.N.Y. R. 6.3. See also, Lichtenberg v. Besicorp Group Inc., 204 F.3d 397, 402 (2d Cir.2000) (finding motion for reconsideration of injunction under S.D.N.Y. Local Rule 6.3 untimely when filed after more than ten days of entry of injunction).

In addition, the standard for amendment that applies to Holmes' Third Amended Complaint is good cause, since the amendment is governed by a scheduling order. See Rule 16, Fed.R.Civ.P.; Grochowski v. Phoenix Const., 318 F.3d 80, 86 (2d Cir. 2003); Parker v. Colum. Pictures Indus., 204 F.3d 326, 340 (2d Cir.2000); In Re Wireless Serv. Antitrust Litig., No. 02 Civ. 2637(DLC), 2004 WL 2244502, at *5 (S.D.N.Y. Oct.6, 2004). Holmes has not shown good cause to add claims based on...