Neubronner v. Milken

• Citation: 6 F.3d 666
• Decision Date: 04 October 1993
• Docket Number: No. 91-56314,91-56314
• Parties: , Fed. Sec. L. Rep. P 97,770, 27 Fed.R.Serv.3d 296 D. NEUBRONNER, Plaintiff-Appellant, v. Michael R. MILKEN, Defendant-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

Page 666

6 F.3d 666

62 USLW 2226, Fed. Sec. L. Rep. P 97,770,

27 Fed.R.Serv.3d 296

D. NEUBRONNER, Plaintiff-Appellant, v. Michael R. MILKEN, Defendant-Appellee.

No. 91-56314.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Feb. 2, 1993.

Decided Oct. 4, 1993.

Robert H. Bretz, Robert H. Bretz, P.D., Marina del Rey, CA, for plaintiff-appellant.

Steven B. Rosenfeld, Paul, Weiss, Rifkind, Wharton & Garrison, New York City, for defendant-appellee.

Appeal from the United States District Court for the Central District of California.

Before: WALLACE, Chief Circuit Judge, SNEED and HALL, Circuit Judges.

CYNTHIA HOLCOMB HALL, Circuit Judge:

Dieter Neubronner appeals the district court's dismissal with prejudice of his fifth amended complaint against Michael Milken purporting to state a cause of action for securities law fraud under section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78j(b), and Securities and Exchange Commission Rule 10b-5, 17 C.F.R. Sec. 240.10b-5. Neubronner alleged that Milken engaged in "insider" trading and made material misrepresentations in connection with the stock of Gibralter Financial Corporation and its wholly owned subsidiary Gibralter Savings. Neubronner lost approximately $7.5 million as a result of his investments in Gibralter securities. We have jurisdiction over Neubronner's timely appeal pursuant to 28 U.S.C. Sec. 1291.

I. BACKGROUND

Between April 1, 1987, and November 14, 1988, Dieter Neubronner purchased a total of 1,235,900 shares of Gibralter Financial Corporation's ("GFC" or "Gibralter") common stock, which he then sold between November 29, 1988, and February 8, 1989, for a loss of approximately $7.5 million. The value of the company's stock had declined dramatically after GFC announced on October 30, 1987, approximately $230 million in losses attributable to its real estate loans and investment portfolio. ¹

In March of 1989, Neubronner initiated this action, at first naming as defendant Drexel Burnham Lambert, the firm which had provided investment banking and broker/dealer services for Gibralter, and later adding Michael Milken, head of Drexel's west coast office. Beginning with Neubronner's third amended complaint, Milken has been the only defendant in this action, as all litigation against Drexel has been stayed due to its bankruptcy filing.

Before filing his present complaint, Neubronner failed five times to survive motions to dismiss. Each time, the district court advised Neubronner of the deficiencies in his complaints and directed him to plead his claims with greater specificity. For example, in its order dismissing the second amended complaint, the district court stated that Neubronner "still fails to allege with any specificity when and how defendants learned about the alleged 'inside information,' what the inside information was, when defendants traded on it, who traded on it, what Mr. Milken's role was in the scheme--and, for some of the allegations ..., when such information was publicly released." The court instructed Neubronner to plead specific facts to support any allegations made on information and belief. This fatal flaw remained uncorrected, and the district court repeated the admonition quoted above in its ultimate order dismissing the fifth amended complaint.

In its order dismissing the third amended complaint, the court gave Neubronner "leave to file one more amended complaint," and warned that if the next complaint was insufficient, the "action may be dismissed with prejudice." In dismissing the fourth amended complaint, the district court gave Neubronner "leave for a final time to file an amended complaint which is limited to a claim of inside trading on the seven established dates of contemporaneous trading or which pleads additional instances with specificity." ² Finally, in dismissing the fifth amended complaint, the district court found once again that Neubronner failed to satisfy the contemporaneous trading requirement and failed to plead insider trading with sufficient particularity under Federal Rule of Civil Procedure 9(b). The court observed that the complaint "still alleges that insider trading took place over a three year period ... despite this Court's instructions to plead 'particular days' of contemporaneous trading." The court further noted that Neubronner again failed "to plead the defendant's role in the alleged insider trading with sufficient particularity under Rule 9(b)." In addition, the court dismissed Neubronner's claims concerning alleged misrepresentations--stated for the first time in the fifth amended complaint--as time-barred and for failure to satisfy Rule 9(b).

II. STANDARD OF REVIEW

We review de novo a district court's dismissal of a complaint. Sun Savings and Loan Ass'n v. Dierdorff, 825 F.2d 187, 191 (9th Cir.1987). "A complaint should not be dismissed for failure to state a cause of action 'unless it appears beyond doubt that plaintiff can prove no set of facts in support of his claim which would entitle him to relief.' " Id. (citation omitted). We construe all allegations in the complaint favorably to the plaintiff. Id.

III. DISCUSSION

A. Contemporaneous Trading Requirement

Neubronner contends that the district court improperly required him to plead with specificity all instances in which he and Milken traded contemporaneously in Gibralter securities. ³ In his fifth amended complaint, Neubronner refers by way of example to seven specific days on which he and Drexel traded contemporaneously, but he does not limit his claim of insider trading to those seven days. Rather, he alleges generally that he traded contemporaneously with Milken and Drexel throughout the "time period covered by this complaint." Neubronner defines that time period as the three-year span between January 1, 1986, and December 31, 1988.

Milken argues that contemporaneous trading is one of the primary "circumstances constituting fraud" when a plaintiff asserts an insider trading claim, and therefore must be pleaded with particularity under Federal Rule of Civil Procedure 9(b). ⁴ He suggests that this is a sensible rule because otherwise any investor who lost money could sue any insider who ever traded in the same security in the hope that discovery would reveal matching trade dates.

This court has not previously established a contemporaneous trading requirement for implied private causes of action under section 10(b) and Rule 10b-5. ⁵ However, the district courts in this circuit have followed the Second Circuit's interpretation of the requirement. In Wilson v. Comtech Telecommunications Corp., 648 F.2d 88 (2d Cir.1981), the Second Circuit held that any duty of disclosure on the part of insiders trading in the open market "is owed only to those investors trading contemporaneously with the insider; noncontemporaneous traders do not require the protection of the 'disclose or abstain' rule because they do not suffer the disadvantage of trading with someone who has superior access to information." Id. at 94-95. In reaching this conclusion, the court commented that to "extend the period of liability well beyond the time of the insider's trading simply because disclosure was never made could make the insider liable to all the world." Id. at 94. In Wilson, the court held that trades approximately one month apart were not contemporaneous, and that because the plaintiff did not trade contemporaneously with the insiders he had no standing to sue them. Id. at 95. See alsoShapiro v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 495 F.2d 228, 237 (2d Cir.1974) (trades within a four day period were contemporaneous).

In following Wilson, one district court has noted that the duration of a "contemporaneous" period is not fixed, "although the courts have interpreted the 'contemporaneous trading' requirement quite strictly" and have found the requirement not met if the plaintiff's trades occurred more than a few days apart from the defendant's. Alfus v. Pyramid Technology Corp., 745 F.Supp. 1511, 1522 (N.D.Cal.1990). The district court in Alfus found that the plaintiff failed to satisfy the contemporaneous trading requirement, and therefore lacked standing to bring a private insider trading claim, where she alleged a four and one-half month period of insider trading. Id. at 1523. See alsoIn re Genentech, Inc. Securities Litigation, 1989 WL 201577, * 6 (N.D.Cal.1989) (following Second Circuit, held plaintiff did not satisfy contemporaneous trading requirement where complaint alleged only that plaintiffs purchased Genentech stock on unidentified days between March 1987 and September 1988); In re Verifone Securities Litigation, 784 F.Supp. 1471, 1489 (N.D.Cal.1992) (trades 14 days and more apart not contemporaneous). Cf.In re Worlds of Wonder Securities Litigation, 1990 WL 260675, * 5 (N.D.Cal.1990) (court cited Second Circuit's Wilson rule but declined to address contemporaneous trading issue noting that "the status of the law is unclear on the issue").

We now adopt the Second Circuit's approach in Wilson and hold that the scope of liability for insider trading claims under section 10(b) and Rule 10b-5 is confined to persons who traded contemporaneously with the insider. We further hold that contemporaneous trading is necessarily a "circumstance constituting fraud" because an insider can not be liable to a private party under section 10(b) and Rule 10b-5 without having traded contemporaneously; thus, contemporaneous trading must be pleaded with particularity under Rule 9(b).

As the Wilson court explained, the contemporaneous trading rule ensures that only private parties who have traded with someone who had an unfair advantage will be able to maintain insider trading claims. Neubronner does not propose an alternative rule, but instead suggests he should be permitted to allege generally that contemporaneous trading occurred, and then amend his complaint following discovery of any particular instances of...