S.E.C. v. Tambone
| Citation | 473 F.Supp.2d 162 |
| Decision Date | 28 December 2006 |
| Docket Number | Civil Action No. 06-10885-NMG. |
| Parties | SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. James TAMBONE and Robert Hussey, Defendants. |
| Court | U.S. District Court — District of Massachusetts |
Celia Moore, David H. London, Luke T. Cadigan, U.S. Securities & Exchange Commission, Boston, MA, for Plaintiff.
David G. Thomas, John A. Sten, Greenberg Traurig, LLP, Frank A. Libby, Jr., John J. Commisso, Kelly, Libby & Hoopes, PC, Boston, MA, Christopher M. Joralemon, Warren L. Feldman, Clifford Chance U.S. LLP, New York City, for Defendants.
The Securities and Exchange Commission ("SEC") brings this enforcement action against the defendants for securities fraud. The complaint is substantially similar to a previous complaint brought by the SEC against the same defendants, which was dismissed by this Court without prejudice. The defendants have filed motions to dismiss the complaint in the instant case on the grounds that it does not cure the deficiencies that the Court found with respect to the original complaint.
The SEC filed the original complaint against defendants James Tambone ("Tambone") and Robert Hussey ("Hussey") on February 9, 2005 ("the original complaint")(05-cv-10247-NMG). The original complaint involved securities fraud relating to a practice known as "market, timing" and alleged that the defendants: 1) committed fraud in violation of the Securities Exchange Act of 1934 ("the Exchange Act") and Rule 10b-5 thereunder, 2) committed fraud in violation of Section 17(a) of the Securities Act of 1933, 3) aided and abetted fraud in violation of Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 ("the Advisers Act") and 4) aided and abetted in violation of Section 15(c) of the Exchange Act.
In the original complaint, the SEC alleged that the defendants were senior executives of Columbia Funds Distributor, Inc. ("Columbia Distributor"), a broker-dealer registered with the SEC. Columbia Distributor served as the principal underwriter and distributor of over 140 mutual funds in the Columbia mutual fund complex ("the Columbia Funds"). In that capacity, Columbia Distributor disseminated prospectuses for the Columbia Funds. Tambone, Columbia Distributor's Co-President, and Hussey, its Senior Vice President and Managing Director for National Accounts, had responsibility for selling the Columbia Funds to clients and potential clients.
The original complaint alleged that from as early as 1998 and continuing through September 2003, the defendants entered into, approved and knowingly permitted arrangements allowing certain preferred customers to engage in short-term or excessive trading in at least 16 different Columbia Funds. Despite their participation in and knowledge Of those arrangements and their awareness of other short-term or excessive trading by the preferred customers, thee defendants allegedly offered Columbia, Funds to other investors using prospectuses that represented that such trading was prohibited or indicated a hostility towards such practices. The SEC contends further that the defendants, made material omissions insofar as they never disclosed those arrangements to investors to whom they sold the Columbia Funds.
The defendants filed motions to dismiss and, on January 27, 2006, the Court allowed those motions and dismissed the original complaint for failure to plead fraud with particularity as required by Fed.R.Civ.P. 9(b) and for failure to state a claim upon which relief can be based. See SEC v. Tambone, 417 F.Supp2d 127 (D.Mass.2006). The original complaint was dismissed "without prejudice" and an order of dismissal was entered on the same day.
Subsequently, on March 13, 2006, the SEC moved for leave to amend the original complaint. Before that motion was resolved, however, the SEC changed gears and moved for relief from judgment pursuant to Fed.R.Civ.P. 60(b) in recognition of the fact that a motion for leave to amend cannot be entertained after a case has been dismissed. The Court denied the motion for relief from judgment and denied the motion for leave to file an amended complaint as moot on May 5, 2006.
Undeterred, the SEC filed a new complaint 14 days later on May 19, 2006 ("the new complaint"), thereby commencing the instant action. The new complaint alleges almost identical violations of securities laws by the same defendants, Tambone and Hussey. Both defendants have filed motions to dismiss on the grounds that the new complaint is just as deficient as the original complaint and should be dismissed for the same reasons.
A court may not dismiss a complaint for failure to state a claim under Fed.R.Civ.P 12(b)(6) "unless it appears, beyond doubt, that the [p]laintiff can prove no set of facts in support of his claim which would entitle him to relief." Judge v. City of Lowell, 160 F.3d 67, 72 (1st Cir.1998)(quoting Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957)). In considering the merits of a motion to dismiss, the court may look only to the facts alleged in the pleadings, documents attached as exhibits or incorporated by reference in the complaint and matters of which judicial notice can be taken. Nollet v. Justices of the Trial Court of Mass., 83 F.Supp.2d 204, 208 (D.Mass.2000) aff'd, 248 F.3d 1127 (1st Cir.2000). Furthermore, the court must accept all factual allegations in the complaint as true and draw all reasonable inferences in the plaintiffs favor. Langadinos v. American Airlines, Inc., 199 F.3d 68, 69 (1st Cir.2000). If the facts in the complaint are sufficient to state a cause of action, a motion to dismiss the complaint must be denied. See Nollet, 83 F.Supp.2d at 208.
The new complaint contains 110 paragraphs that are nearly identical to those of the original complaint, 12 additional paragraphs not contained in the original complaint and one new count of aiding and abetting. The new allegations are summarized as follows:
that Hussey helped lead a "working group" that proposed processes and procedures designed to detect and deter market timing in the Columbia Funds and, "on information and belief', that he and Tambone reviewed and provided input into the market timing language that was incorporated into certain of the prospectuses (paras. 10, 34, 97);
that the defendants reviewed draft prospectus language concerning market timing and that in April and May, 2001, both Tambone and Hussey exchanged emails with in-house counsel regarding the proposed changes to the prospectus language (paras. 36-37);
that, as underwriter of Columbia Funds, Columbia Distributor had a duty to make reasonable and diligent investigation of the statements contained in the prospectuses for the Columbia Funds to ensure that such statements were true and that there were no omissions of material fact that needed to be stated in order to make the statements not misleading, and that Tambone and Hussey, as "securities professionals" and executives of Columbia Distributor, owed a similar "special duty" to those to whom they sold funds (para. 11);
that Tambone signed "hundreds" of "Selling Agreements" warranting that "each Prospectus and all sales literature we issue will not by statement or omission be misleading", although no dates of execution or parties to the Selling Agreements are provided in the new complaint (paras. 40-43); and
that the facts regarding the purported fraud were concealed from the SEC until September, 2003, when Columbia Advisors was asked about market-timing activity by SEC staff (paras. 100-101).
In all other material respects, the new complaint is identical to the original complaint. The new allegations relate primarily to the issue of attributing material misstatements in prospectuses to one or both of the defendants.
In its memorandum and order dismissing the SEC's original complaint the Court made it clear that, in order to plead fraud with the requisite particularity pursuant to Fed.R.Civ.P. 9(b), the plaintiff must set forth the following allegations in the complaint: 1) the allegedly fraudulent statements, 2) the identity of the speaker, 3) where and when the statements were made and 4) how the statements were fraudulent. See SEC v. Druffner, 353 F.Supp2d 141, 148 (D.Mass.2005). That standard will be applied to the new allegations against the defendants.
The Court was also clear, in dismissing the original complaint, that to prove fraudulent conduct the plaintiff must allege that the defendants: 1) made an untrue statement of material fact, 2) omitted a fact that rendered a prior statement misleading or 3) committed a manipulative or deceptive act as part of a scheme to defraud. See Gross v. Summa Four, Inc., 93 F.3d 987, 992 (1st Cir.1996)(superseded by statute on other grounds). In order to be liable for a primary violation of Section 10(b) of the Exchange Act and Section 17(a)of the Securities Act, a defendant must have personally made either an allegedly untrue statement or a material omission. Wright v. Ernst & Young LLP, 152 F.3d 169, 175 (2d Cir.1998).
In its previous memorandum and order, the Court found that the original complaint failed to attribute a material misstatement or omission of fact to either defendant with sufficient particularity. The original complaint did not allege that either defendant played any role in preparing, drafting or signing the allegedly misleading prospectuses.
The new complaint contains two paragraphs that do allege involvement with drafting a prospectus by both Tambone and Hussey. In paragraphs 36 and 37 of the new complaint the defendants are alleged to have exchanged e-mails with in-house counsel for Columbia Advisors regarding draft language on market timing for the fall 2001 prospectus. Those allegations are particularized in that they allege specific activity on...
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Sec. And Exch. v. Tambone
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