Robert N. Clemens Trust v. Morgan Stanley Dw, Inc.

• Decision Date: 02 May 2007
• Docket Number: No. 06-5525.,06-5525.
• Citation: 485 F.3d 840
• Parties: The ROBERT N. CLEMENS TRUST, et al., Plaintiffs-Appellants, v. MORGAN STANLEY DW, INC., Defendant-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

485 F.3d 840

The ROBERT N. CLEMENS TRUST, et al., Plaintiffs-Appellants, v. MORGAN STANLEY DW, INC., Defendant-Appellee.

No. 06-5525.

United States Court of Appeals, Sixth Circuit.

Argued: January 30, 2007.

Decided and Filed: May 2, 2007.

ARGUED: H. Naill Falls, Falls & Veach, Nashville, Tennessee, for Appellants. Richard A. Rosen, Paul, Weiss, Rifkind, Wharton & Garrison, New York, New York, for Appellee. ON BRIEF: H. Naill Falls, Falls & Veach, Nashville, Tennessee, for Appellants. Richard A. Rosen, Paul, Weiss, Rifkind, Wharton & Garrison, New York, New York, for Appellee.

Before: NORRIS, COLE, and CLAY, Circuit Judges.

OPINION

R. GUY COLE, JR., Circuit Judge.

The Robert N. Clemens Trust, Automobile Consumer Service Corporation, John D. Brandon, Jr., Pat F. Wakefield, and Marty D. Jackson (collectively the "Plaintiffs") brought this class-action suit against Morgan Stanley DW, Inc. ("Morgan Stanley"). Plaintiffs allege that Morgan Stanley's brokers recommended to Plaintiffs the purchase of unsuitable securities in violation of Section 10(b) of the Securities and Exchange Act of 1934, codified at 15 U.S.C. § 78j, and Rule 10b-5, codified at 17 C.F.R. § 240.10b-5. The Plaintiffs also brought state-law claims against Morgan Stanley under Tenn.Code Ann. § 48-2-121(a), which parallels the language in Rule 10b-5, and Ala.Code § 8-6-19. The district court granted Morgan Stanley's motion, under Rule 12(b)(6), to dismiss Plaintiffs' complaint. For the following reasons, we AFFIRM the district court's dismissal of Plaintiffs' suit.

I. BACKGROUND

Plaintiffs brought this class-action suit on behalf of individuals and entities who, at the recommendation of a Morgan Stanley broker, purchased $50,000 or more of Class B shares in one or more of Morgan Stanley's mutual funds.¹ For purposes of reviewing the district court's grant of Morgan Stanley's motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), we accept as true the Plaintiffs' allegations. Therefore, the following facts are taken from the complaint:

Morgan Stanley, and its affiliates, market[] more than sixty mutual equity and bond mutual funds to investors throughout the United States. Compl. ¶ 15. The Morgan Stanley Funds, which invest in stocks, bonds, and other classes of assets and offer a wide range of investment strategies, are marketed to the public as a "family of mutual funds." Id. ¶ 19. The great majority of Morgan Stanley Fund shares are marketed and sold to investors who have brokerage accounts with Morgan Stanley. Id. ¶ 24.

Morgan Stanley Funds are offered in different share classes, designated as A, B, C and other share classes. Id. ¶ 25. The share classes for a given fund represent claims on the same underlying portfolio of investments, but differ in their expense structures. Id. Expenses for the share classes are differentiated with respect to the amount and timing of one-time charges, referred to as "loads," and annual fees for asset management, marketing, sales ("distribution"), and other services. Id. ¶ 26.

For Class A shares in equity funds, Morgan Stanley typically charges what is referred to as a "front-end load" in the amount of 5.25% for investments of less than $25,000, which is paid at the time of the initial investment. Id. ¶ 27. In addition, Class A shares are charged an annual distribution fee of 0.25% as well as other fees and expenses. Id. The front-end load is reduced incrementally for investments of $25,000 or more. Id. For example, the front-end load for an investment of $25,000 to $49,999 is reduced to 4.75% of the investment. Id. The front-end load is further reduced at investment levels of $50,000, $100,000, $250,000, and $500[,000]. Id. The front-end load for Class A shares is eliminated altogether for investments of $1 million and over. Id.

The reduced sales charge is applicable to purchases of Class A shares in a single transaction. Id. ¶ 28. The reduced sales charge is also available (1) for combined purchases of Class A shares in different Morgan Stanley Funds, (2) under rights of accumulation, (3) when the investor enters into a Letter of Intent, and (4) under a number of other different scenarios relating to retirement planning. Id. ¶ 29.

Morgan Stanley offers Class B shares with no initial sales charge, but the Class B shares are subject to a contingent deferred sales charge (CDSC), also known as back-end load, ranging from 5% in the first year the shares are held to 1% in the sixth year. Id. ¶ 30. There is no CDSC for Class B shares held more than six years. Id. Morgan Stanley states that it normally charges Class B shareholders of equity funds an annual distribution fee of 1%, which is .75% more than Class A shares, as well as the same other fees and expenses charged to Class A funds. Id. ¶ 31.

In order to determine which share class is best for a particular investment strategy or investment amount, one must examine the fees and expenses associated with each share class during the period of time the investor may hold the investment. Id. ¶ 33. As [Morgan Stanley] knows, such an analysis is beyond the ability of the vast majority of mutual fund investors. Id.

With a $50,000 investment in Class A, investors pay a smaller front-end load than with smaller investments. Id. ¶ 34. With respect to almost any possible holding period, an investor is better off investing $50,000 or more in Class A shares rather than Class B shares. Id. Because of the greater reduction in the Class A front-end load for investors [who invest between $100,000 and $249,000], a Class A investment is even more clearly superior to a Class B investment. Id. ¶ 35.

Defendant recommends and sells Class B shares to individuals and entities investing $50,000 or more in Morgan Stanley funds, even though defendant knows that Class B investors will pay more fees and earn less profit than if they had chosen Class A shares. Id. ¶ 37. A stockbroker who recommends an investment to a client has a legal obligation to recommend only suitable investments. Id. ¶ 38. [Morgan Stanley] and its agents have consistently violated this duty in recommending the purchase of Morgan Stanley mutual funds in amounts of $50,000 or more. Id. In addition, by recommending that [Plaintiffs] purchase Class B shares in such amounts, [Morgan Stanley] and its agents impliedly represented to [Plaintiffs] that such an investment was suitable for them. Id. This representation was false. Id.

(JA 9-28.) Morgan Stanley's bond funds perform in the same manner as the equity funds discussed above. Plaintiffs invested in both equity and bond funds.

On March 8, 2006, the district court granted Morgan Stanley's motion to dismiss Plaintiffs' federal-law claims because Plaintiffs failed to state a cause of action under the heightened pleading requirement for Section 10(b) and Rule 10b-5. Robert N. Clemens Trust v. Morgan Stanley DW, Inc., No. 04-2384, slip op. (W.D.Tenn. Mar. 8, 2006). In granting Morgan Stanley's motion to dismiss, the district court reached the following conclusions (1) Plaintiffs failed to state specific factual allegations that Morgan Stanley "or its agents knew or were reckless in not knowing that Class B was inferior to Class A shares"; (2) Plaintiffs failed to state sufficient facts to "allow the Court to draw an inference that [Morgan Stanley] knew that Class B was inferior to Class A" shares and thus the "most likely inference is that Morgan Stanley sought to offer diverse funds to its clients"; and (3) Plaintiffs failed to state specific facts to establish that Morgan Stanley's brokers "knew that Class B was unsuitable for investors." Clemens Trust, slip op. at 6-7. The district court also declined to exercise supplemental jurisdiction over Plaintiffs' state-law claims. Plaintiffs timely appealed.

II. DISCUSSION

We review de novo the district court's grant of Morgan Stanley's Rule 12(b)(6) motion to dismiss. McCarthy v. Middle Tenn. Elec. Membership Corp., 466 F.3d 399, 405 (6th Cir.2006). "In reviewing a Rule 12(b)(6) motion to dismiss, [we] treat all well-pleaded allegations in the complaint as true, and dismissal is proper only if it appears beyond doubt that the plaintiff can prove no set of facts in support of the claims that would entitle him or her to relief." Downie v. City of Middleburg Heights, 301 F.3d 688, 693 (6th Cir. 2002) (quoting Pfennig v. Household Credit Servs., Inc., 286 F.3d 340, 343 (6th Cir. 2002) (internal quotation marks omitted)). We must also "construe the complaint in the light most favorable to the plaintiffs." Inge v. Rock Fin. Corp., 281 F.3d 613, 619 (6th Cir.2002). Further, we are not confined to the grounds relied on by the district court in affirming the court's dismissal; rather, we may affirm the district court's dismissal of Plaintiffs' claims on any grounds, even those not relied on by the district court. In re Comshare, Inc. Sec. Litig., 183 F.3d 542, 548-49 (6th Cir. 1999) (explaining that "a federal court of appeals is not restricted to ruling on the district court's reasoning, and may affirm a district court's grant of a motion to dismiss on a basis not mentioned in the district court's opinion").

As an initial matter, we address whether we have jurisdiction to hear this appeal in light of the district court's order which clearly states that Plaintiffs' claims are dismissed without prejudice. See Clemens Trust, slip op. at 10. However, after the district court issued its order, the court also issued a final judgment dismissing all of Plaintiffs' claims.

A federal court must satisfy itself that it has subject-matter jurisdiction over a case. United States v. Yeager, 303 F.3d 661, 664 (6th Cir.2002) ("A court of appeals independently evaluates its appellate jurisdiction over cases."). Under 28 U.S.C. § 1291, we have jurisdiction over "final decisions of the district courts of the United States." We have explained that "[f]or a dismissal without prejudice to be inherently final, it must, as a...