Livid Holdings Ltd. v. Salomon Smith Barney

• Decision Date: 06 April 2005
• Docket Number: No. 03-35374.,03-35374.
• Citation: Livid Holdings Ltd. v. Salomon Smith Barney, 403 F.3d 1050 (9th Cir. 2005)
• Parties: LIVID HOLDINGS LTD., Plaintiff-Appellant, v. SALOMON SMITH BARNEY, INC.; Salomon Smith Barney Holdings Inc.; BNY Clearing Services LLC, Successor in interest to Schroders & Co, Inc.; Andrew Van Der Vord; Robert Chamine; Michael Dura; Robert Hamecs; William Hurst; Leon Kalvaria; Ilan Kaufthal; John O'Donogue; Herc Segalas; Jed Sherwindt; James Stone; Frederick Taylor; Samuel Weinhoff, Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

403 F.3d 1050

LIVID HOLDINGS LTD., Plaintiff-Appellant, v.SALOMON SMITH BARNEY, INC.; Salomon Smith Barney Holdings Inc.; BNY Clearing Services LLC, Successor in interest to Schroders & Co, Inc.; Andrew Van Der Vord; Robert Chamine; Michael Dura; Robert Hamecs; William Hurst; Leon Kalvaria; Ilan Kaufthal; John O'Donogue; Herc Segalas; Jed Sherwindt; James Stone; Frederick Taylor; Samuel Weinhoff, Defendants-Appellees.

No. 03-35374.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted October 5, 2004.

Filed April 6, 2005.

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Marc M. Seltzer(argued), Susman Godfrey, LLP, Los Angeles, CA, and Paula K. Jacobi(on the briefs), Sugar, Friedberg & Felsenthal, LLP, Chicago, IL, for the plaintiff-appellant.

William F. Alderman, Orrick, Herrington & Sutcliffe, LLP, San Francisco, CA, for the defendants-appellees.

Appeal from the United States District Court for the Western District of Washington;John C. Coughenour, Chief Judge, Presiding. D.C.No. CV-02-01607-JCC.

Before D.W. NELSON, REINHARDT, and THOMAS, Circuit Judges.

D.W. NELSON, Circuit Judge.

Livid Holdings, Ltd.("Livid") appeals the district court's dismissal with prejudice of its complaint against the corporate successors to Schroders & Co., Inc.(collectively referred to as "Schroders" or "Defendants") under Federal Rule of Civil Procedure 12(b)(6).Livid's complaint alleges that Defendants violated: (1)§ 10(b) of the Securities Exchange Act of 1934("1934 Act"), 15 U.S.C. § 78j(b), andRule 10b-5,17 C.F.R. § 240.10b-5, promulgated thereunder; (2) the Washington Securities Act("WSA"), Wash. Rev.Code § 21.20.010; and (3) Washington tort law.We hold that the district court erred in dismissing Livid's complaint.

FACTS AND PROCEEDINGS BELOW

Livid's claims arise out of its December 1999 purchase of $10 million worth of shares in Purely Cotton, Inc.("PCI") stock.In January 1999, Schroders helped PCI arrange a private placement of $25 million worth of its stock.For this purpose, Schroders created a Confidential Offering Memorandum ("the Memorandum"), which outlined PCI's operations, business plan, and financial position.After the distribution of the Memorandum to potential investors, Livid alleges that UAE Investments, Ltd.("UAE"), a Gibralter-based company, agreed to purchase over 98% of the offering.The individual Defendants, who were directors and/or officers of Schroders, agreed to purchase the remaining stock.Livid alleges that there was never a contractual document requiring UAE to pay more than $2 million of the $25 million purchase price.

In September 1999, PCI asked Schroders for additional copies of the Memorandum in order to solicit additional investors.Livid alleges that before providing PCI with these extra copies, DefendantVan der Vord, the managing director at Schroders in charge of the offering, and his team amended the Memorandum by attaching the following notice:

This Memorandum was written in January 1999 and represents the original Offering Memorandum distributed to potential investors in the Company's $25 million private equity fund raising.Subsequent to the writing and distribution of this document the Company may have undergone various changes including but not limited to management changes, ownership changes and business strategy changes.This document has not been updated or amended to reflect any events that have occurred since January 1999.As such, it does not reflect the fact that the above-mentioned $25 million private equity fund raising has been completed.

(emphasis added).

Livid's claims against Defendants arise out of the last sentence of this notice.This sentence, Livid contends, implies that the proceeds of the initial $25 million sale had been received by PCI, but that the Memorandum had not yet been updated to reflect this additional capital.At the time this notice was written, however, UAE and the Defendants had actually paid less than $2 million to PCI.Livid alleges that additional payments on UAE's balance were conditional on UAE's approval of a PCI business plan and a new chief executive officer — meaning that UAE was not actually bound to pay for the PCI stock.Livid further alleges that all of the named Defendants bought stock through this initial offering on the same terms as UAE, and therefore knew that the sale was incomplete when the notice was attached to the Memorandum for the express purpose of attracting additional investors.Defendants do not contest that they had such knowledge.In addition, Livid alleges that Defendants had a motive to deceive potential investors because PCI had not yet paid Schroders for the services it provided in connection with the first fund-raising campaign.In essence, Livid contends that Defendants had a motive to try to bring additional capital into PCI — to increase the likelihood that it would be paid for past services rendered.

The district court dismissed each of Livid's claims with prejudice.With respect to the federal claim, the district court found that Livid failed to plead adequately that the notice statement was a material misrepresentation, upon which it reasonably relied in purchasing PCI stock.In addition, the district court found that Livid's complaint did not satisfy the heightened pleading standards for scienter under the 1995 Private Securities Litigation Reform Act ("PSLRA").The district court dismissed Livid's state securities claim because it found the alleged misrepresentation immaterial, and that Defendants were not sellers of securities within the meaning of the WSA.Because the district court found that Livid's reliance on the representations in the notice was unreasonable, the court also dismissed the state tort claims.Finally, the district court refused to grant Livid leave to amend its complaint, concluding that any such attempt would be futile.

DISCUSSION

I.Standard of Review

We review dismissals for failure to state a claim pursuant to Federal Rule 12(b)(6) de novo.Decker v. Advantage Fund, Ltd.,362 F.3d 593, 595-96(9th Cir.2004).In conducting such a review, we generally limit consideration to the complaint and construe all allegations of material fact in the light most favorable to the nonmoving party.Warren v. Fox Family Worldwide, Inc.,328 F.3d 1136, 1141 n. 5(9th Cir.2003);No. 84 Employer-Teamster Joint Council Pension Trust Fund v. Am. W. Holding Corp.,320 F.3d 920, 931(9th Cir.), cert. denied,540 U.S. 966, 124 S.Ct. 433, 157 L.Ed.2d 311(2003).A Federal Rule 12(b)(6) dismissal is inappropriate unless it appears beyond doubt that the plaintiff can prove no set of facts in support of the claim entitling plaintiff to relief.No. 84 Employer-Teamster Joint Council,320 F.3d at 931.The district court's dismissal of a complaint without leave to amend is reviewed de novo and is improper unless it is clear that the complaint could not be saved by any amendment.Thinket Ink Infor. Res., Inc. v. Sun Microsystems, Inc.,368 F.3d 1053, 1061(9th Cir.2004).

II.Federal Securities Law Claim

Section 10(b) of the 1934 Act makes it unlawful "for any person, directly or indirectly, ... [t]o use or employ, in connection with the purchase or sale of any security ... any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe."15 U.S.C. §§ 78j,78j(b).Rule 10b-5, promulgated under § 10(b), in turn provides: "It shall be unlawful for any person ... [t]o make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading."17 C.F.R. § 240.10b-5.The elements of a Rule 10b-5 claim are: (1) a misrepresentation or omission of a material fact; (2) scienter; (3) causation; (4) reliance; and (5) damages.In re Daou Sys., Inc. Sec. Litig.,397 F.3d 704, 710(9th Cir.2005).

Claims brought under Rule 10b-5 must meet the particularity requirement of Federal Rule of Civil Procedure 9(b), which requires that "[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity."Fed.R.Civ.P. 9(b).The PSLRA raised the pleading standards for Rule 10b-5 claims by requiring that plaintiffs plead scienter by "stat[ing] with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind."15 U.S.C. § 78u-4(b)(2).

A.Material Misrepresentations or Omissions

For the purposes of a 10b-5 claim, a misrepresentation or omission is material if there is a substantial likelihood that a reasonable investor would have acted differently if the misrepresentation had not been made or the truth had been disclosed.Basic Inc. v. Levinson,485 U.S. 224, 231-32, 108 S.Ct. 978, 99 L.Ed.2d 194(1988).We conclude that Livid has sufficiently pled materiality by raising a substantial likelihood that a reasonable investor would not have purchased $10 million worth of PCI stock after learning that the company had $25 million less in cash than the investor was led to believe.If this misrepresentation had not been made, Livid would likely have believed that PCI's financial status was closer to the negative net worth of $743,646 reported in the Memorandum, rather than $24.2 million predicted to result from the stock offering.¹This misrepresentation radically altered the picture of PCI's overall economic health and viability presented to Livid by the Memorandum.Thus, Livid successfully pled the materiality of Defendants' misrepresentation regarding PCI's capital.

The district court, however, found that the notice Defendants attached to the Memorandum contained cautionary language rendering "any statement made in the [n]otice legally immaterial."In making this finding, the district court relied on the "bespeaks caution" doctrine, which "provides a mechanism by which a court can...