Seidl v. Am. Century Companies Inc

• Decision Date: 07 May 2010
• Docket Number: No. 08 Civ. 8857(DLC).,08 Civ. 8857(DLC).
• Citation: 713 F.Supp.2d 249
• Parties: Laura SEIDL, individually, derivatively and on behalf of all others similarly situated, Plaintiff,v.AMERICAN CENTURY COMPANIES, INC., American Century Investment Management, Inc., James E. Stowers, Jr., James E. Stowers, III, Jonathan S. Thomas, Thomas A. Brown, Andrea C. Hall, Donald H. Pratt, Gale E. Sayers, M. Jeannine Strandjord, Timothy S. Webster, William M. Lyons, Mark Mallon, Wade Slome, Bruce Wimberly, and Jerry Sullivan, Defendants,andAmerican Century Mutual Funds, Inc., doing business as American Century Ultra Fund, Nominal Defendant.
• Court: U.S. District Court — Southern District of New York

713 F.Supp.2d 249

Laura SEIDL, individually, derivatively and on behalf of all others similarly situated, Plaintiff,v.AMERICAN CENTURY COMPANIES, INC., American Century Investment Management, Inc., James E. Stowers, Jr., James E. Stowers, III, Jonathan S. Thomas, Thomas A. Brown, Andrea C. Hall, Donald H. Pratt, Gale E. Sayers, M. Jeannine Strandjord, Timothy S. Webster, William M. Lyons, Mark Mallon, Wade Slome, Bruce Wimberly, and Jerry Sullivan, Defendants,andAmerican Century Mutual Funds, Inc., doing business as American Century Ultra Fund, Nominal Defendant.

No. 08 Civ. 8857(DLC).

United States District Court,

S.D. New York.

May 7, 2010.

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Gregory P. Erthal, SimmonsCooper, LLC, East Alton, IL, Thomas I. Sheridan, III, Andrea Bierstein, Hanly Conroy Bierstein Sheridan Fisher & Hayes, LLP, New York, NY, for plaintiff.

Gordon C. Atkinson, Cooley Godward Kronish LLP, New York, NY, for defendants American Century Companies, Inc., American Century Investment Management, Inc., James E. Stowers, Jr., James E. Stowers, III, Jonathan S. Thomas, William M. Lyons, Mark Mallon, Wade Slome, Bruce Wimberly, and Jerry Sullivan.

David P. Langlois, Sutherland Asbil & Brennan, LLP, New York, NY, Marguerite C. Bateman, Steuart H. Thomsen, Sutherland Asbill & Brennan LLP, Washington, DC, for defendants Thomas A. Brown, Andrea C. Hall, Donald H. Pratt, Gale E. Sayers, M. Jeannine Strandjord, and Timothy S. Webster, and nominal defendant American Century Mutual Funds, Inc., doing business as American Century Ultra Fund.

OPINION & ORDER

DENISE COTE, District Judge:

This lawsuit concerns a mutual fund's liability to its shareholders for investments in an online gambling company. The investments declined in value after the United States government stepped up law enforcement efforts against illegal online gambling enterprises. Plaintiff, a shareholder in the mutual fund, brings this derivative and putative class action lawsuit alleging violations of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. §§ 1961-1968 (“RICO”), as well as state common law claims for breach of fiduciary duty, negligence, and waste. On December 18, 2009, the defendants filed motions to dismiss pursuant to Fed.R.Civ.P. 12(b)(6). For the following reasons, the motions are granted.

BACKGROUND

The following facts are taken from the second amended complaint (“SAC”). Plaintiff Laura Seidl (“plaintiff”) is a shareholder in nominal defendant American Century Mutual Funds, Inc. (“ACMF”), a Maryland corporation, through its American Century Ultra Fund (the “Ultra Fund”). Plaintiff purchased her shares in the Ultra Fund sometime prior to 2005, and still owns her shares. ACMF is registered under the Investment Company Act of 1940 as an open-end management investment company. ACMF is a “series” mutual fund that offers eighteen different series, or classes of stock, to investors. Each series of stock represents a different group of shareholders with an interest in a separate portfolio of securities, commonly referred to as a “fund.” The Ultra Fund is one of the eighteen funds managed by ACMF; it is not a separate legal entity from ACMF.

ACMF is controlled by an investment management company, defendant American Century Companies, Inc. (“ACC”), through its subsidiary, defendant American Century Investment Management, Inc. (“ACIM”). ACC selects and appoints the executives and the entire board of directors of ACMF. ACIM serves as the investment adviser to ACMF and is responsible for management of the Ultra Fund. ACMF has a single board of directors which oversees all eighteen of its funds, including the Ultra Fund. At all times relevant to this action, ACMF's board of directors had nine members, of which six were independent directors (the “Independent Directors”), all of whom are named as individual defendants in this action.¹ In addition to ACC, ACIM, ACMF, and the members of ACMF's board, plaintiff also names as defendants other officers of ACMF ² and the co-portfolio managers of the Ultra Fund ³, who plaintiff alleges were also responsible for the investment decision at issue here.

Plaintiff claims that “each of the [d]efendants knowingly developed, implemented, and continued” or “conspired to develop, implement, and continue” an investment strategy involving the purchase of shares in PartyGaming Plc (“PartyGaming”),⁴ which plaintiff contends was “an illegal gambling business” within the meaning of 18 U.S.C. § 1955.⁵ Plaintiff alleges that beginning in or around June 2005, defendants caused ACMF, through the Ultra Fund, to purchase millions of shares of PartyGaming. ACMF continued to purchase shares of PartyGaming for the Ultra Fund through at least January 2006. The SAC states that as of April 30, 2006, ACMF owned 34,684,000 shares of PartyGaming through the Ultra Fund. Plaintiff alleges that prior to making these investments, each of the defendants knew, or was reckless in not knowing, that PartyGaming was taking bets from gamblers in the United States and that United States law enforcement considered PartyGaming's activities to be illegal gambling.

On June 1, 2006, a U.S. grand jury indicted London-based BetOnSports Plc, an online gambling business similar to PartyGaming, for racketeering, mail fraud, and running an illegal gambling enterprise. When the indictment was unsealed on July 16, 2006, the price of PartyGaming's stock fell “dramatically.” Sometime around late July 2006, ACMF sold all of the shares of PartyGaming held by the Ultra Fund, realizing millions of dollars in losses. ⁶

Over two years later, on October 15, 2008, plaintiff filed a complaint against the defendants, alleging direct class action and derivative claims under RICO and state common law. Specifically, plaintiff alleged that defendants' repeated investments in PartyGaming, an illegal gambling business, constituted an “open-ended, continuous pattern of racketeering activity” that injured her “[a]s a direct, foreseeable, and proximate result.” The complaint also accused defendants of breach of fiduciary duty, negligence, and waste. The defendants answered the complaint on April 6, 2009, and amended their answer on April 22.

At a conference held April 28, the plaintiff and defendants agreed that the application of this Court's decision in McBrearty v. Vanguard Group, Inc., No. 08 Civ. 7650(DLC), 2009 WL 875220 (S.D.N.Y. Apr. 2, 2009) aff'd, 353 Fed.Appx. 640 (2d Cir.2009) ( “McBrearty” ), would result in dismissal of plaintiff's RICO claims due to the failure to adequately plead proximate causation as required by RICO. By Order dated April 28, 2009, plaintiff's RICO claims were dismissed and plaintiff was granted leave to amend the complaint to allege diversity jurisdiction.

Plaintiff filed a first amended complaint on May 8, 2009. Defendants answered on June 25, and on July 2, moved for judgment on the pleadings pursuant to Fed.R.Civ.P. 12(c). On August 28, plaintiff filed her opposition in which she requested leave to amend. On October 20, defendants' motion for judgment on the pleadings was denied without prejudice to renewal and plaintiff was granted leave to amend. Plaintiff filed the SAC on November 20, 2009. The SAC reasserts plaintiff's purported direct class action, derivative, and individual claims under RICO, 18 U.S.C. § 1962(c) & (d), and under state common law. On December 18, defendants filed motions to dismiss the SAC pursuant to Fed.R.Civ.P. 12(b)(6). Plaintiff filed her opposition on January 22, 2010, and the motions became fully submitted on February 19.

DISCUSSION

“Under Federal Rule of Civil Procedure 8(a)(2), a pleading must contain a ‘short and plain statement of the claim showing that the pleader is entitled to relief.’ ” Ashcroft v. Iqbal, 556 U.S. ----, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009). A court considering a motion to dismiss pursuant to Rule 12(b)(6) “must accept as true all allegations in the complaint and draw all reasonable inferences in favor of the non-moving party.” Vietnam Ass'n for Victims of Agent Orange v. Dow Chem. Co., 517 F.3d 104, 115 (2d Cir.2008) (citation omitted). For a plaintiff's claim to survive a motion to dismiss, “a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ ” Iqbal, 129 S.Ct. at 1949 (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) (citation omitted)). Applying this plausibility standard is “a context-specific task that requires the reviewing court to draw on its judicial experience and common sense.” Iqbal, 129 S.Ct. at 1950. “[T]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.” Harris v. Mills, 572 F.3d 66, 72 (2d Cir.2009). A complaint must “give[ ] the defendant fair notice of what the plaintiff's claim is and the grounds upon which it rests.” Holmes v. Grubman, 568 F.3d 329, 335 (2d Cir.2009) (citation omitted).

1. RICO Claims

The April 28, 2009 Order dismissed plaintiff's RICO claims for the reasons stated in McBrearty, 2009 WL 875220, at *2-*4. Since the dismissal of these claims, plaintiff has twice amended her complaint. Plaintiff concedes, however, that there has been no amendment that would alter the conclusion that plaintiff has failed to plead proximate causation under RICO. See id. Because the April 28, 2009 Order is the law of the case, and plaintiff has identified no “cogent” or “compelling” reason to revisit the Order see Ali v. Mukasey, 529 F.3d 478, 490 (2d Cir.2008), the RICO claims are dismissed.

2. Shareholder Standing

Plaintiff asserts two direct class-action claims under state common law for breach of fiduciary duty and negligence. Defendants argue that these claims should be dismissed because they can be brought only as derivative claims on behalf of ACMF. The issue of “shareholder standing,” that is, whether claims should be brought...