Reding v. Goldman Sachs & Co.

Decision Date27 June 2005
Docket NumberNo. 4:04CV1118SNL.,4:04CV1118SNL.
Citation382 F.Supp.2d 1112
CourtU.S. District Court — Eastern District of Missouri
PartiesJames REDING and Mary Katherine Reding, Plaintiffs, v. GOLDMAN SACHS & CO., Defendant.

Steven W. Koslovsky, Steven Koslovsky, LLC, St. Louis, MO, for Plaintiffs.

Hardy C. Menees, Menees and Whitney, St. Louis, MO, Michael J. Dell, Karen Steinberg Kennedy, Kramer, Levin, Naftalis & Frankel, LLP, New York, NY, for Defendant.


LIMBAUGH, Senior District Judge.

This matter is before the Court on the defendant's motion to dismiss plaintiffs' Amended Complaint (# 20), filed November 23, 2004. Responsive pleadings have all now been filed and the matter is ripe for disposition.

Plaintiff James Reding, a registered investment advisor working in the financial services industry, and his wife, Mary Katherine Reding, have brought this action against defendant alleging that based upon "fraudulent research analysis reports" published by the defendant and disseminated through "various means", plaintiff bought various stocks from other brokers and sustained losses. Plaintiffs now assert state-law claims for fraud (Count I); negligent misrepresentation (Count II); and violation of the Missouri Securities Act, Chapter 4291 (Count III); as well as a federal claim for violations of Section 10-b of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder (Count IV).

Defendant seeks to dismiss this amended complaint for failure to state a claim under Rule 12(b)(6) Fed.R.Civ.P., in connection with the "heighten pleading requirements" of the Private Securities Litigation Reform Act of 1995 (PSLRA), 15 U.S.C. § 78u-4, and for failure to state a claim for fraud with particularity as required under Rule 9(b) Fed.R.Civ.P. It avers, among other things, that plaintiffs have continued to fail to 1) allege any type of client relationship between the plaintiffs and defendant or that the plaintiff purchased the subject stocks through defendant during the relevant time-period; 2) allege or identify any misrepresentation in any identified analyst report upon which plaintiffs relied in making their stock purchases; 3) allege any facts to support any allegation that defendant acted with intent to defraud the plaintiffs; 4) allege any facts showing that plaintiffs were among a limited group of persons for whom defendant supplied investment information for use in any particular stock transactions (as required under Missouri law for a claim of negligent misrepresentation); and 5) allege any facts showing that any conduct by defendant proximately caused plaintiffs any damages in connection with the stock transactions listed on Exhibit A to the plaintiffs' amended complaint.

Before addressing the alleged pleading defects, the Court believes it necessary to briefly address an issue central to this dispute: the "SEC Complaint". As the primary factual basis for their amended complaint, the plaintiffs adopt and incorporate the complaint that the Securities Exchange Commission (SEC) filed against defendant in April 2003. The SEC Complaint charged defendant with violating certain rules and regulations of the New York Stock Exchange and the NASD, Inc. because defendant's research analysts were allegedly providing information and recommendations that were sometimes influenced by defendant's investment banking relationships.2 The SEC Complaint resulted in two (2) consent orders: a consent order entered in the United States District Court for the Southern District of New York3 (SEC Consent Order) and a consent order entered into with the State of Missouri4 (Missouri Consent Order). The SEC Complaint does not charge the defendant with fraud or statutory violations, only with SEC rules violations regarding conflict of interest and undue banking investment influence in connection with defendant's research reports. The consent orders admit no past or present wrong by the defendant but simply enjoin the defendant from engaging in any acts which would result in conflicts of interest and/or undue banking investment influence in connection with its research reports.

The plaintiffs have incorporated the SEC Complaint as the "factual basis" for their allegations of fraud, negligent misrepresentation, violation of state securities law, and violation of federal securities law. Essentially, they are asking the Court to accept this document for the "truth of the matters asserted therein" in consideration of the instant motion. This the Court cannot do. Judicial notice of the SEC filings (as well as the Missouri Consent Order) is proper if neither party is offering the filings for the truth of the matters asserted therein. See, Kushner v. Beverly Enterprises, Inc., 317 F.3d 820, 831-32 (8th Cir.2003); Jakobe v. Rawlings Sporting Goods, 943 F.Supp. 1143, 1149 (E.D.Mo.1996); see also, In re Novastar Financial Securities Litigation, 2005 WL 1279033, *1 (W.D.Mo. May 12, 2005)5. Thus, the Court will consider the content of the SEC Complaint (and if necessary, the consent orders) for the purpose of determining what statements are contained therein, but not for the truth of the matter asserted with regard to these statements.

Independent of the SEC Complaint, the plaintiffs, "a registered investment advisor working in the financial services industry" and his wife, allege that research published by the defendant, an investment banking and securities firm with its headquarters in New York, was "made available to Plaintiff" through the plaintiffs' broker/dealer, D.E.Frey & Company. Plaintiffs' Amended Complaint, ¶ 66. Plaintiffs further allege that because plaintiff James Reding "brought Goldman Sachs' mutual funds a significant amount of investor money" by selling defendant's mutual funds to his clients, plaintiff James Reding was named to defendant's "Blue Chip Council" and "provided with" defendant's research reports. Finally, plaintiffs aver that research published by defendant was "disseminated" to plaintiff James Reding "by various means, including mail and via daily updates on Goldman Sachs' research website". Plaintiffs' Amended Complaint, ¶ 66.

Plaintiffs alleged that they relied upon unidentified research reports in deciding to purchase (again not through the defendant) the following securities: Exodus, Webvan, Priceline, Niku, Ask Jeeves, Insweb Doubleclick, Excite@home, Agilent, Juniper Networks, Commerce One, Checkpoint Software, Yahoo, AOL, Amazon, Ebay, Nextel, JDS Uniphase, Network Appliance, "and others". Amended Complaint, ¶ 66.6 Plaintiffs aver that the unidentified research reports upon which they relied to buy securities (either as listed in the Amended Complaint or in Exhibit A) contained "false and misleading information concerning the respective securities and companies referred to therein." and reference the SEC Complaint, the SEC Consent Order, and the Missouri Consent Order. Amended Complaint, ¶ 67. Plaintiffs do not specify what information was "false and misleading".

Finally, plaintiffs allege that the "false and misleading research reports", "had the intended effect of driving up demand and the price of said securities" by "concealing the true value of said securities from Plaintiffs in particular and the investing public in general." Amended Complaint, ¶ 68. Plaintiffs alleged they would "never had purchased the securities at issue, and not suffered the damages" when the market prices of these securities decreased once "Plaintiffs and the investing public learned the truth about these companies and Goldman Sachs' research reports." Amended Complaint, ¶ 68.

In passing on a motion to dismiss, a court must view the facts alleged in the complaint in the light most favorable to the plaintiff. Scheuer v. Rhodes, 416 U.S. 232, 94 S.Ct. 1683, 40 L.Ed.2d 90 (1974); Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957); Toombs v. Bell, 798 F.2d 297, 298 (8th Cir.1986). The court must accept the allegations in the complaint as true and draw reasonable inferences in favor of the nonmoving party, dismissing the complaint only if "it appears beyond a reasonable doubt that plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, supra, 355 U.S. at 45-46, 78 S.Ct. 99; see also, Securities v. Comprehensive Software Systems, Inc., 406 F.3d 1052, 1062 (8th Cir.2005). "Although the pleading standard is liberal, the plaintiff must allege facts — not mere legal conclusions — that, if true, would support the existence of the claimed torts.", at 1062 citing Schaller Tel. Co. v. Golden Sky Sys., 298 F.3d 736, 740 (8th Cir.2002).

Common Law Fraud

Under Missouri law, the elements of an action for fraudulent misrepresentation are: 1) a false, material representation; 2) the speaker's knowledge of its falsity or his ignorance of its truth; 3) the speaker's intent that it should be acted upon by the hearer in the manner reasonably contemplated; 4) the hearer's ignorance of the falsity of the statement; 5) the hearer's reliance on its truth; 6) the hearer's right to rely thereon; and 7) the hearer's consequent and proximately caused injury., at 1064; Clearly Canadian Beverage Corp. v. American Winery, Inc., 257 F.3d 880, 890-91 (8th Cir.2001); Constance, et. al. v. B.B.C. Development Co., 25 S.W.3d 571, 580 (Mo.App.2000); Arnold v. Erkmann, 934 S.W.2d 621, 626 (Mo.App.1996); Trotter's Corp. v. Ringleader Restaurants, Inc., 929 S.W.2d 935, 939 (Mo.App.1996). Failure to establish any one of these elements is fatal to a fraud claim., at 1064; Clearly Canadian, at 891; Constance, at 580; Arnold, at 626. "Fraud may be established by circumstantial evidence; however, it may not be presumed, and a party's case will fail if he can show only facts and circumstances which are equally consistent with honesty and good faith." Clearly Canadian, at 891 quoting Bank of Kirksville v....

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