P. Stolz Family Partnership L.P. v. Daum

• Decision Date: 12 January 2004
• Docket Number: Docket No. 02-7680.
• Citation: 355 F.3d 92
• Parties: P. STOLZ FAMILY PARTNERSHIP L.P., on behalf of itself and others similarly situated, Plaintiff-Counter-Defendant-Appellant, v. Steven B. DAUM, Paula B. Daum, Philip Spies, and Smart World Technologies, LLC, Defendant-Counter-Claimant-Appellee.
• Court: U.S. Court of Appeals — Second Circuit

355 F.3d 92

P. STOLZ FAMILY PARTNERSHIP L.P., on behalf of itself and others similarly situated, Plaintiff-Counter-Defendant-Appellant, v. Steven B. DAUM, Paula B. Daum, Philip Spies, and Smart World Technologies, LLC, Defendant-Counter-Claimant-Appellee.

Docket No. 02-7680.

United States Court of Appeals, Second Circuit.

Argued: March 4, 2003.

Decided: January 12, 2004.

Appeal from the United States District Court for the Southern District of New York, Rakoff, J.

COPYRIGHT MATERIAL OMITTED

Paul D. Wexler, Bragar Wexler Eagel & Morgenstern, LLP, New York, NY, for Plaintiff-Counter-Defendant-Appellant.

Barry S. Pollack, Donnelly Controy & Gelhaar, LLP, Boston, MA, for Defendant-Appellee.

Giovanni Prezioso, General Counsel, Jacob H. Stillman, Solicitor, Allan A. Capute, Special Counsel to the Solicitor, for Amicus Curiae S.E.C., Washington, D.C.

Before: CALABRESI, SACK, and CUDAHY,^* Circuit Judges.

Judge CALABRESI concurs in a separate opinion.

CUDAHY, Circuit Judge.

Smart World Technologies (Smart World) was one of many technology companies that did not survive the bursting of the technology bubble during 2000. Its business was free Internet access. At some point during its existence, Smart World began offering and selling "membership interests" in the company through a written prospectus. The P. Stolz Family Partnership (Stolz) purchased 31,250 of these membership units for a total of $250,000 with a Subscription Agreement signed on February 17, 2000. The sale was effective with the issuance of a certificate of membership to Stolz on April 28, 2000. Thereafter, Smart World's business collapsed, and it filed for bankruptcy in June of 2000.¹

Stolz filed its original complaint against Smart World and three of its officers (collectively, also, Smart World) in this putative class action in February 2001 and its Amended Complaint on June 5, 2001. Stolz alleged that the offer and sale of the membership interests violated the Securities Act of 1933, 15 U.S.C. § 77a et seq. (Securities Act or Act). The Amended Complaint contained two counts. Count I alleged a violation of § 12(a)(1) of the Securities Act, 15 U.S.C. § 77l(a)(1), claiming that Smart World and three of its officers made a public offering of unregistered securities in violation of § 5 of the Securities Act, 15 U.S.C. § 77e. Count II of the Amended Complaint alleged that the defendants made material misrepresentations in connection with a prospectus for the public offering of securities in violation of § 12(a)(2) of the Securities Act, 15 U.S.C. § 77l(a)(2).

On a motion to dismiss by Smart World, the district court dismissed Count II in its entirety and dismissed Count I as to Philip Spies, the Smart World CFO. Stolz I, 166 F.Supp.2d at 875. Count II was dismissed under the "bespeaks caution" doctrine. The court found that the prospectus of Smart World contained sufficient cautionary language concerning possible risks that an investor could not be misled by the alleged misrepresentations. As to Count I, the court dismissed the claim against Spies because Spies was not a "control person" under § 15 of the Securities Act, 15 U.S.C. § 77o.

Stolz subsequently amended its complaint again, filing the Second Amended Complaint on November 19, 2001. The Second Amended Complaint only included Count I, and did not replead Count II. In the Second Amended Complaint, Smart World amended the allegations of the factual background. While it had previously alleged that "[b]eginning in or about November, 1999, Smart World engaged in a `public offering,'" now the Second Amended Complaint alleged in paragraph 16 that "[b]eginning in or about July, 1997 and continuously through the bankruptcy filing... Smart World engaged in a `public offering.'" On a new motion by Smart World, the district court dismissed Stolz's Second Amended Complaint in its entirety. P. Stolz Family Partnership, LP v. Daum, 204 F.Supp.2d 693 (S.D.N.Y.2002) (Stolz II). Claims under § 12(a)(1) of the Securities Act face a statute of repose that states that "[i]n no event shall any such action be brought to enforce a liability created under section 77k or 77l(a)(1) of this title more than three years after the security was bona fide offered to the public...." 15 U.S.C. § 77m. The original complaint was filed on February 20, 2001. The district court found that this filing was more than three years after the membership interests were "bona fide offered to the public," and thus the claim was barred.

I.

We review de novo the district court's dismissal under Rule 12(b)(6), accepting as true the material facts alleged in the complaint and drawing all reasonable inferences in plaintiffs' favor. Van Buskirk v. The New York Times Co., 325 F.3d 87, 89 (2d Cir.2003)

A. § 12(a)(2) claim

1. Waiver

As a preliminary issue, we must address Smart World's argument that Stolz has waived its § 12(a)(2) claims by not repleading them in the Second Amended Complaint. But this is not our rule. We will not require a party, in an amended complaint, to replead a dismissed claim in order to preserve the right to appeal the dismissal when the court has not granted leave to amend.² Such a formalistic requirement serves no valid purpose. In this respect, we join most other circuits. See Young v. City of Mt. Ranier, 238 F.3d 567, 572 (4th Cir.2001) (collecting cases); see also 3 Moore's Federal Practice, 3d ed. § 15.17[4] ("In this situation [where a claim has been dismissed without leave to amend] it would be pointless to require the plaintiff to replead the dismissed claim and plaintiff's counsel would be forced to bear the risk of sanctions to preserve the client's right to appeal."). Stolz's § 12(a)(2) claim is properly before us on appeal.

2. Allegations of Historical or Present Fact

A defendant may not be liable under § 12(a)(2) for misrepresentations in a prospectus if the alleged misrepresentations were sufficiently balanced by cautionary language within the same prospectus such that no reasonable investor would be misled about the nature and risk of the offered security. See Halperin v. EBanker Usa.com, Inc., 295 F.3d 352, 357 (2d Cir.2002) ("Certain alleged misrepresentations in a stock offering are immaterial as a matter of law because it cannot be said that any reasonable investor could consider them important in light of adequate cautionary language set out in the same offering."); Luce v. Edelstein, 802 F.2d 49, 56 (2d Cir.1986) ("We are not inclined to impose liability on the basis of statements that clearly `bespeak caution.'"). This is the "bespeaks caution" doctrine under which the district court dismissed Stolz's § 12(a)(2) claim.

Although it does not appear that this circuit has ruled specifically on this issue, other circuits have expressly limited the application of the "bespeaks caution" doctrine to forward-looking, prospective representations, but they have noted that the misrepresentation of present or historical facts cannot be cured by cautionary language.³ See, e.g., EP Medsystems, Inc. v. EchoCath, Inc., 235 F.3d 865, 874 (3d Cir.2000) ("By its terms, the `bespeaks caution' doctrine ... is directed only to forward-looking statements."). District courts within this circuit have recognized this limitation. In re Complete Mgmt. Inc. Sec. Litig., 153 F.Supp.2d 314, 340 (S.D.N.Y.2001) (noting that the "bespeaks caution" doctrine applies "to forward-looking statements only, and not to material omissions or misstatements of historical fact.") (emphasis in original). This is a reasonable limitation on the "bespeaks caution" doctrine and we adopt it here. The cautionary language associated with the "bespeaks caution" doctrine is aimed at warning investors that bad things may come to pass — in dealing with the contingent or unforeseen future. Historical or present fact — knowledge within the grasp of the offeror — is a different matter. Such facts exist and are known; they are not unforeseen or contingent. It would be perverse indeed if an offeror could knowingly misrepresent historical facts but at the same time disclaim those misrepresented facts with cautionary language.

Additionally, the cautionary language must be examined in the context of the representations to determine whether the language warns of the specific contingency that lies at the heart of the alleged misrepresentation. See Hunt v. Alliance N. Am. Gov't Income Trust, Inc., 159 F.3d 723, 729 (2d Cir.1998) ("The cautionary language, however, must relate directly to that by which the plaintiffs claim to have been misled.").

Stolz's allegations centered on oral representations made by Smart World that it had hired an investment bank to do a $30 million financing and to subsequently take Smart World public with an initial public offering (IPO) that would raise $50 to $100 million. In its Amended Complaint, Stolz laid out relevant parts of the factual background for its § 12(a)(2) allegations as follows:

SmartWorld [orally] represented to prospective investors ... that ... it had entered into an agreement with an investment bank to do a financing which would raise $30 million ... and that it had made arrangements with an investment banking firm to file an [IPO]....

Amended Complaint at ¶¶ 18, 33 (App. at 13, 16). The specific allegations of a violation of § 12(a)(2) followed thereafter:

At no time prior to plaintiff's purchase of the [membership interests] did Smart World disclose that the investment bank it had retained had failed to raise any money for the company, that no initial public offering was being planned, that the projections of sales and revenues it was relying upon were totally without foundation, or that the Company was essentially insolvent and was supporting itself through continued sales of membership interests rather than from revenues from ongoing business operations. Thus, Smart World made untrue statements of a material fact and/or omitted to state material facts necessary to make the statements made not...