Stein v. Regions Morgan Keegan Select High Income Fund, Inc. (In re Regions Morgan Keegan Sec., Derivative & Erisa Litig.)

• Decision Date: 29 September 2014
• Docket Number: No. 2:09–2009 SMH V,2:09–2009 SMH V
• Citation: 166 F.Supp.3d 948
• Court: U.S. District Court — Western District of Tennessee
• Parties: In re Regions Morgan Keegan Securities, Derivative and Erisa Litigation. This Document Relates to: Andrew M. Stein, et al., Plaintiffs, v. Regions Morgan Keegan Select High Income Fund, Inc., et al., Defendants.

166 F.Supp.3d 948

In re Regions Morgan Keegan Securities, Derivative and Erisa Litigation.This Document Relates to:Andrew M. Stein, et al., Plaintiffs,

v.Regions Morgan Keegan Select High Income Fund, Inc., et al., Defendants.

No. 2:09–2009 SMH V

United States District Court, W.D. Tennessee, Western Division.

Signed September 29, 2014

ORDER

SAMUEL H. MAYS, JR.

, UNITED STATES DISTRICT JUDGE

Before the Court are Individual¹ Defendants' January 31, 2014 Motion to Dismiss Plaintiffs' Amended Complaint (the “Individual Motion”), and Fund² Defendants' January 31, 2014 Motion to Dismiss First Amended Complaint (the “Funds Motion”) (collectively, “Defendants”). (Indiv. Motion, ECF. No. 5; Funds Motion, ECF No. 10.) Plaintiffs Andrew M. Stein (“Stein”), Stein Holdings, Inc. (“Stein Holdings”), and Stein Investments, LLC (“Stein Investments”) (collectively, “Plaintiffs”) responded to both Motions on March 26, 2014. (Indiv. Resp., ECF No. 13; Funds Resp., ECF No. 14.) Individual Defendants replied on April 9, 2014. (Reply, ECF No. 15.) Plaintiffs filed a sur-reply on April 21, 2014. (Sur–Reply, ECF No. 18.)

For the following reasons, Defendants' Motions to Dismiss are GRANTED in part and DENIED in part.

I. Background

Plaintiffs assert claims against Defendants based on Plaintiffs' purchase of publicly traded securities of the Funds. The Funds consist of open-end³ and closed- end⁴ mutual funds that were “operated, managed, directed and/or sold by defendants....” (Am. Compl., ECF No. 4 ¶¶ 1, 10–14.) Plaintiffs allege that Defendants invested heavily in Asset–Backed Securities (“ABS”) and, in particular, subprime mortgage-related ABS, in violation of a “fundamental investment limitation” meant to assure diversification of assets in which the Funds could invest. (Id. ¶¶ 41, 51a.) Plaintiffs assert that Defendants misrepresented the types of assets and the true value of the assets in which the Funds could invest. (Id. ¶ 51e.) Plaintiffs also allege that the Funds falsely classified their portfolio securities as corporate bonds and preferred stocks in SEC filings, overstated the values of their portfolio securities, mischaracterized the Funds as “high yield,” and misrepresented the professional management of the Funds' portfolios. (Id. ¶ 59.)

A. The Stein Arbitration

On September 3, 2008, Plaintiffs filed a Statement of Claim against Morgan Keegan & Company, Inc. (“Morgan Keegan”) with the Financial Industry Regulatory Authority (“FINRA”) (the “Stein Arbitration”). (Stat. Claim, ECF No. 6–1.) Plaintiffs' claims included: (1) violations of § 10(b) and Rule 10b–5 of the Securities Exchange Act of 1934, 15 U.S.C. § 78a

(the “ '34 Act”); (2) violations of §§ 11, 12(a)(2), and 15 of the Securities Act of 1933, 15 U.S.C. § 77a (the “ '33 Act”); (3) violations of § 34(b) and 47(b) of the Investment Company Act of 1940, 15 U.S.C. §§ 80a–33(b), 80a–46(b)(l) (the “ICA”); (4) violations of the Tennessee Securities Act, T.C.A. §§ 48–2–1, et seq. (the “TSA”); (5) violations of the National Association of Securities Dealers (“NASD”) Conduct Rules; (6) unsuitability; (7) breach of fiduciary duty; (8) negligence; (9) failure to supervise; (10) breach of contract; (11) fraud; (12) vicarious liability; and (13) civil conspiracy. (Id. at 10–18.) Plaintiffs requested compensatory damages of $10,000,000.00, punitive damages, interest, attorney's fees, expenses and costs, and disgorgement. (Id. at 19.)

The FINRA Panel (the “Panel”) held hearings from February 8, 2010, to February 13, 2010. (FINRA Award at 9, ECF No. 6–4.) On February 19, 2010, the Panel found Morgan Keegan liable on Plaintiffs' unsuitability, negligence, and failure to supervise claims. (Id. at 8.) The Panel denied Plaintiffs' other claims. (Id. ) The Panel awarded Plaintiffs $2,500,000.00 in damages, plus interest. (Id. ) On March 17, 2010, Morgan Keegan paid $2,500,000.00 to Plaintiffs. (Wire Confirm., ECF No. 6–5.) Plaintiffs never sought to vacate the FINRA Award. (Indiv. Memo at 6, ECF No. 6.)

B. The Stein Case

On August 29, 2008, Plaintiffs filed a complaint in the Circuit Court of Shelby County, Tennessee, against PricewaterhouseCoopers LLP (“PwC”), and 32 individual defendants, including Allen B. Morgan, Jr., James C. Kelsoe, Jr., Charles D. Maxwell, and Michele Wood (the “Stein Case”). (Stein Compl., ECF No. 6–3.) The claims in the Stein Case included: (1) violations of §§ 11, 12(a), and 15 of the '33 Act; (2) violations of §§ 34(b) and 47(b) of the ICA; (3) violations of the TSA; (4) civil conspiracy; and (5) professional negligence against PwC. (Id. ¶¶ 108–39.) Plaintiffs sought rescission, compensatory and punitive damages, pre- and post-judgment interest, and attorney's fees, costs, and expenses. (Id. at 31.)

On September 26, 2008, the Stein Case was removed to this Court. (Not. Rem., No. 2:08–cv–02 623–SHM–tmp, ECF No. 1.) On December 24, 2008, Plaintiffs voluntarily dismissed their claims. (Not. Vol. Dismissal, No. 2:08–cv–02623–SHM–tmp, ECF No. 14.) On December 31, 2008, the Court dismissed the Stein Case without prejudice. (Dismissal Order, No. 2:08–cv–02623–SHM–tmp, ECF No. 15.)

C. The Rice Case

On February 25, 2009, Grantland Rice, II and 18 other plaintiffs filed a complaint in the Circuit Court of Jefferson County, Alabama, against Regions Bank, MAM, James C. Kelsoe (“Kelsoe”), and 50 fictitious parties (the “Rice Case”). (ECF No. 6–6.) On July 21, 2009, the complaint was amended to add Regions as a defendant. (ECF No. 6–7.) On January 5, 2010, Plaintiffs were added as plaintiffs in the Rice Case. (ECF No. 6–8.) On March 18, 2010, a second amended complaint was filed (the “Rice Complaint”). (Rice Compl., ECF No. 6–9.) The claims in the Rice Case included: (1) misrepresentations, suppression, and fraudulent concealment; (2) breach of the TSA; (3) breach of the Georgia Securities Act, O.G.C.A. §§ 10–5–50, et seq. ; (4) breach of the Alabama Securities Act, Ala. Code §§ 8–6–17

, 8–6–19 ; (5) breach of the Florida Securities and Investment Protection Act, Florida Statutes §§ 517.011, et seq. ; (6) breach of the Illinois Securities Act, 85 ILCS5/1, et seq. ; (7) negligent supervision by MAM; and (8) conspiracy. (Id. at 23– 33.) The Rice plaintiffs sought actual and punitive damages, interest, attorney's fees, and costs. (Id. )

The Circuit Court of Jefferson County denied the Rice defendants' motion to dismiss, and the defendants petitioned the Supreme Court of Alabama to vacate the order denying their motion and to enter an order granting the motion. (Rice at 25, ECF No. 13–1.) On September 30, 2010, the Supreme Court of Alabama held that

because the claims asserted by the shareholders are properly viewed as derivative claims, and because the shareholders did not comply with the requirements of Rule 23.1 for asserting such claims, the shareholders lack standing, and the defendants' motion to dismiss should have been granted.

(Id. ) The Supreme Court of Alabama directed the trial court to vacate its previous order denying defendants' motion to dismiss and to enter an order granting the motion. (Id. ) On January 17, 2011, the Circuit Court of Jefferson County dismissed the Rice Case with prejudice, with costs taxed as paid. (Dismissal Order, ECF No. 6–10.)

D. The Instant Action

Plaintiffs filed this suit on October 25, 2013. (See ECF No. 1.) Plaintiffs amended their Complaint on January 9, 2014. (Am. Compl., ECF No. 4.) The Amended Complaint alleges six causes of action. (Id. ¶¶ 151–207.) Plaintiffs allege that Defendants violated §§ 11, 12(a)(2), and 15 of the '33 Act, and §§ 10(b) and 20(a), and Rule 10b–5 of the '34 Act (collectively, the “Federal Law Claims”). (Id. ¶¶ 151–202.) Plaintiffs allege that MAM is vicariously liable for Kelsoe's violations of § 12 of the '33 Act and § 10(b) and Rule 10b–5 of the '34 Act (the “State Law Claim”). (Id. ¶¶ 203–207.) Plaintiffs seek declaratory judgment, restitution, compensatory damages, prejudgment interest, and rescission rights. (Id. at 73.)

II. Jurisdiction and Choice of Law

Plaintiffs bring their Federal Law Claims under the federal securities laws. The Court has federal question jurisdiction under 28 U.S.C. § 1331

. The Court has supplemental jurisdiction over the Plaintiffs' State Law Claim under 28 U.S.C. § 1367.

Plaintiffs' vicarious liability claim is based in tort law. Defendants argue that Tennessee law applies to that claim. (Indiv. Memo at 16.) Plaintiffs do not contest Defendants' argument. Where, as here, there is no dispute that a certain state's substantive law applies, the Court will not conduct a “choice of law” analysis sua sponte. See GBJ Corp. v. Eastern Ohio Paving Co. , 139 F.3d 1080, 1085 (6th Cir.1998)

. Tennessee law applies to Plaintiffs' vicarious liability claim.

III. Standard of Review

In addressing a motion to dismiss for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6)

, the Court must construe the complaint in the light most favorable to the plaintiff and accept all well-pled factual allegations as true. League of United Latin Am. Citizens v. Bredesen, 500 F.3d 523, 527 (6th Cir.2007). A plaintiff can support a claim “by showing any set of facts consistent with the allegations in the complaint.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 563, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). This standard requires more than bare assertions of legal conclusions. Bovee v. Coopers & Lybrand C.P.A., 272 F.3d 356, 361 (6th Cir.2001). “[A] formulaic recitation of the elements of a cause of action will not do.” Twombly, 550 U.S. at 555, 127 S.Ct. 1955. Any claim for relief must contain “a short and plain statement of the claim showing that the pleader is entitled to relief.” Erickson v. Pardus, 551 U.S. 89, 93, 127 S.Ct. 2197, 167 L.Ed.2d 1081 (2007) (per curiam ). “Specific facts are not necessary; the statement need only ‘give the defendant fair notice of what the ... claim is and the grounds upon which it rests.’ ” Id. (citing Twombly, 550 U.S. at 555, 127 S.Ct. 1955.)

Nonetheless, a complaint...