Johnson v. Aljian

• Decision Date: 20 June 2007
• Docket Number: No. 04-56997.,04-56997.
• Citation: 490 F.3d 778
• Parties: Donald JOHNSON, individually and on behalf of all others similarly situated, Plaintiff-Appellee, v. James D. ALJIAN; Kirk Kerkorian; Tracinda Corporation, Defendants-Appellants.
• Court: U.S. Court of Appeals — Ninth Circuit

490 F.3d 778

Donald JOHNSON, individually and on behalf of all others similarly situated, Plaintiff-Appellee, v. James D. ALJIAN; Kirk Kerkorian; Tracinda Corporation, Defendants-Appellants.

No. 04-56997.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted January 8, 2007.

Filed June 20, 2007.

Eric Landau, McDermott Will & Emery LLP, Irvine, CA, argued the cause for defendants-appellants James D. Aljian, Kirk Kerkorian, and Tracinda Corporation; Shawn M. Harpen, McDermott Will & Emery LLP, Irvine, CA, and Terry Christensen and Eric P. Early, Christensen, Miller, Fink, Jacobs, Glasser, Weil & Shapiro, LLP, Los Angeles, CA, were on the brief.

Christopher L. Nelson, Schiffrin & Barroway, LLP, Radnor, PA, argued the cause for plaintiff-appellee Donald Johnson; Katharine M. Ryan, Schiffrin & Barroway, LLP, Radnor, PA, and Christopher Kim and Lisa J. Yang, Lim, Ruger & Kim, LLP, Los Angeles, CA, were on the brief.

Appeal from the United States District Court for the Central District of California; Florence-Marie Cooper, District Judge, Presiding. D.C. No. CV-03-05986-FMC.

Before: DIARMUID F. O'SCANNLAIN, ANDREW J. KLEINFELD, and MILAN D. SMITH, JR., Circuit Judges.

O'SCANNLAIN, Circuit Judge.

We must decide a case of first impression involving insider trading liability under the federal securities laws.

I

On August 21, 2003, Donald Johnson,¹ on behalf of himself and all other persons who purchased the common stock of DaimlerChrysler AG ("DaimlerChrysler") on nine different dates between March 19, 1999, and June 11, 1999, brought this as-yet-uncertified securities fraud class action against James D. Aljian, Kirk Kerkorian, and Tracinda Corporation.² Kerkorian is an executive and sole shareholder of Tracinda.³ Aljian is an executive of Tracinda and a member of the DaimlerChrysler Shareholder Committee.

The amended complaint⁴ alleges (1) illegal insider trading against all defendants in violation of Section 10(b)⁵ of the Exchange Act of 1934 ("Exchange Act"), and Rules 10b-5⁶ and 10b5-1⁷ promulgated thereunder; (2) control person liability against Aljian and Kerkorian based on Section 20(a)⁸ of the Exchange Act; and (3) contemporaneous trading liability against all defendants based on Section 20A of the Exchange Act.⁹

The amended complaint alleges that Aljian attended a DaimlerChrysler Shareholder Committee Meeting, where he was given a board report entitled "DaimlerChrysler Operative Planning 1999-2001" and marked "strictly confidential." The report projected a "significant" decline in free cash flows. The amended complaint further claims that Aljian placed the report in Tracinda's central files, which were readily accessible to Kerkorian. The amended complaint does not allege that Aljian informed Kerkorian of the projected decline in free cash flows, but alleges that he knew that Kerkorkian had unrestricted access to the report.

The amended complaint also alleges that, with the benefit of such insider information, Tracinda sold approximately 7.6 million shares of DaimlerChrysler stock between March 19, 1999, and June 11, 1999. Finally, the amended complaint alleges that when DaimlerChrysler announced a decline in cash flows in July 1999, the price of its shares dropped.

The defendants filed a motion to dismiss, arguing that (1) the claims for violation of Sections 10(b) and 20(a) were time-barred; (2) the amended complaint lacked the particularity required by Fed.R.Civ.P. 9(b) and the Private Securities Litigation Reform Act of 1995, 15 U.S.C. § 78u-4; (3) the amended complaint failed to establish the elements of insider trading, including scienter, materiality, loss causation, undisclosed "inside" information; and (4) the claim under Section 20A could not survive dismissal of the Section 10(b) claim, which served as the sole predicate violation. The district court granted the motion to dismiss with prejudice the Sections 10(b) and 20(a) claims as barred by the applicable statute of limitations, but denied the motion to dismiss the Section 20A claim. Johnson v. Aljian, 394 F.Supp.2d 1184, 1203 (C.D.Cal.2004).

The district court certified the issue involving the Section 20A claim for interlocutory appeal pursuant to 28 U.S.C. § 1292(b), and we granted the defendants' petition for permission to appeal.

II

The defendants argue on appeal that the district court erred by not dismissing the Section 20A claim. The defendants contend that Section 20A requires an actionable¹⁰ predicate violation of the Exchange Act. Although the Section 20A claim was timely filed under its own period of limitations, the Section 10(b) claim—the sole predicate violation of the Exchange Act in this case—was not independently actionable because the claim has been dismissed as time-barred under its separate period of limitations. Therefore, the defendants urge, the district court should have also dismissed the Section 20A claim.

A

Our analysis must begin with the statutory language. United States v. TRW Rifle 7.62×51mm Caliber, 447 F.3d 686, 689 (9th Cir.2006). When interpreting Section 20A, we must give words their ordinary or plain meaning. Id. "[W]e follow the common practice of consulting dictionary definitions to clarify their ordinary meaning[ ] and look to how the terms were defined at the time [the statute] was adopted." Id. (internal quotation marks omitted) (alterations in original). We also recognize the "cardinal rule of statutory construction that significance and effect shall, if possible, be accorded to every word." Wash. Market Co. v. Hoffman, 101 U.S. 112, 115, 25 L.Ed. 782 (1879). But interpreting a statute "is a holistic endeavor." United Sav. Ass'n of Tex. v. Timbers of Inwood Forest Assocs., Ltd., 484 U.S. 365, 371, 108 S.Ct. 626, 98 L.Ed.2d 740 (1988). We therefore look not only to the "language itself, [but also to] the specific context in which that language is used, and the broader context of the statute as a whole." Robinson v. Shell Oil Co., 519 U.S. 337, 341, 117 S.Ct. 843, 136 L.Ed.2d 808 (1997).

B

Section 20A provides a cause of action against "[a]ny person who violates any provision of this chapter or the rules or regulations thereunder by purchasing or selling a security while in possession of material, nonpublic information." Exchange Act § 20A(a).¹¹ Section 20A also includes an express statute of limitations,¹² which provides that "[n]o action may be brought under this section more than 5 years after the date of the last transaction that is the subject of the violation." Exchange Act § 20A(b)(4).

The term "violates" in Section 20A is crucial. Claims under Section 20A are derivative and therefore require an independent violation of the Exchange Act. See Lipton v. Pathogenesis Corp., 284 F.3d 1027, 1035 n. 15 (9th Cir.2002); see also In re Advanta Corp. Sec. Litig., 180 F.3d 525, 541 (3d Cir.1999); Jackson Nat'l Life Ins. Co. v. Merrill Lynch & Co., 32 F.3d 697, 703 (2d Cir.1994); In re VeriFone Sec. Litig., 11 F.3d 865, 872 (9th Cir.1993). The defendants claim that "the statute is clear: a viable predicate violation is required." But the defendants seek to introduce an additional requirement into the text. Nowhere do we find in the statute such modifying or restricting terms as "viable," "actionable," or "timely."

Webster's Third New International Dictionary, the edition in print when Congress enacted Section 20A in 1988, defines the verb "violates" to mean breaking or disregarding the law. Webster's Third New Int'l Dictionary 2554 (3d ed.1986); see also Black's Law Dictionary 1408 (5th ed.1979) (defining "violation" to mean "[i]njury; infringement; breach of right, duty, or law"). When, for example, someone asks if a person "violated" the speeding law, she is ordinarily understood as inquiring whether that person disregarded the posted speed limit, not whether a timely action commenced or a successful prosecution resulted. We believe that the term "violates" ordinarily is understood to mean that a person has satisfied the essential elements¹³ of the proscribed act regardless of whether an action is commenced within the applicable statute of limitations or whether a traffic citation was issued. Indeed, we have employed this common understanding of the term with respect to an action under Section 10(b), the predicate violation in this case. For example, in Ambassador Hotel Co., Ltd. v. Wei-Chuan Investment, 189 F.3d 1017 (9th Cir.1999), we explained:

[T]o prove violation of either Section 10(b) or Rule 10b-5, the private plaintiff must demonstrate that the alleged fraud occurred "in connection with the purchase or sale of a security". Once this foundational requirement has been met, the plaintiff must prove five elements: 1. misrepresentation (or omission, where there exists some duty to disclose); 2. materiality; 3. scienter (intent to defraud or deceive); 4. reliance; and 5. causation. The plaintiff must prove both actual cause ("transaction causation") and proximate cause ("loss causation").

Id. at 1025 (citations omitted) (emphasis added).¹⁴ Accordingly, we are persuaded that the plain meaning of the term "violates" does not require that the predicate claim be filed within its own period of limitations.

That the predicate violation need not itself be actionable is further supported by the statutory language of other provisions of the Exchange Act. In particular, the statute of limitations applicable to Section 10(b), the predicate violation in this case, measures the period of limitations in relation to the "violation." A Section 10(b) claim "must be commenced within one year after the discovery of the facts constituting the violation and within three years after such violation." Lampf, 501 U.S. at 364, 111 S.Ct. 2773 (emphasis added), superseded in part by statute, 28 U.S.C. § 1658(b) ("[A] private right of action that involves a claim of fraud, deceit, manipulation, or contrivance in contravention of a regulatory requirement concerning the securities laws . . . may...