Thompson v. Relationserve Media Inc, 07-13225

CourtUnited States Courts of Appeals. United States Court of Appeals (11th Circuit)
Citation610 F.3d 628
Docket Number07-13477.,No. 07-13225,07-13225
PartiesRichard F. THOMPSON, Plaintiff,L. Alan Jacoby, Plaintiff-Appellant Cross-Appellee,v.RELATIONSERVE MEDIA, INC., a.k.a. Sendtec, Inc., Defendant-Appellee,Danielle Karp, Defendant-Appellee Cross-Appellant,Mandee Heller Adler, Warren “Pete” Musser, Scott Young, et al., Defendants-Appellees.Richard F. Thompson, Plaintiff,L. Alan Jacoby, Plaintiff-Appellant Cross-Appellee,v.RelationServe Media, Inc., a.k.a. Sendtec, Inc., Defendant-Appellee,Danielle Karp, Defendant-Appellee Cross-Appellant.
Decision Date30 June 2010


Garbriel Hawkins, Cohen & Malad, LLP, Indianapolis, IN, Keith A. Goldbaum, Friedman, Rosenwasser & Goldbaum, P.A., Boca Raton, FL, for Plaintiff-Appellants.

Jason Nelson Zakia, Charles C. Kline, Nicole H. Sulsky, White & Case, LLP, Miami, FL, Jennifer J. Kramer, Boca Raton, FL, Diea D. Kroulik, McClosky, D'Anna & Dieterle, LLP, Boca Raton, FL, for Defendants-Appellees.

Appeals from the United States District Court for the Southern District of Florida.

Before TJOFLAT and BLACK, Circuit Judges, and EVANS,* District Judge.

BLACK, Circuit Judge:

This case comes to us as an appeal from the dismissal of appellant L. Alan Jacoby's putative class action lawsuit. In his Second Amended Complaint, Jacoby alleged RelationServe Media, Inc.1 and eleven of its directors and employees2 violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by failing to disclose, before the company went public, that $2,000,000 in stock had been privately offered for sale by unregistered brokers in ten different states. In the district court, Jacoby joined co-plaintiff Richard Thompson, who had previously initiated this action. Thompson represented a subclass seeking recovery premised on state law claims in the Second Amended Complaint. After twice allowing the plaintiffs to amend their complaint, the district court dismissed with prejudice Jacoby's § 10(b) and § 20(a) claims pursuant to Fed.R.Civ.P. 12(b)(6). The district court found the allegations of the Second Amended Complaint failed to satisfy the heightened pleading requirements of the Private Securities Litigation Reform Act (PSLRA)3 and Rule 9(b) of the Federal Rules of Civil Procedure. The court then dismissed Thompson's state law claims without prejudice after concluding it no longer had supplemental jurisdiction over those claims. In separate orders, on three different occasions, the district court denied defendant Danielle Karp's motions for attorneys' fees and Rule 11 sanctions.

Jacoby appeals the dismissal of his federal securities-law putative class action. Additionally, Karp cross-appeals the denial of her request for Rule 11 sanctions and attorneys' fees.4 Because we conclude the Second Amended Complaint fails to satisfy the standard for pleading scienter, we affirm the district court's dismissal of Jacoby's § 10(b) and § 20(a) claims. With regard to sanctions, we remand to the district court to make findings in accordance with the PSLRA.


On May 24, 2005, RelationServe entered into an Independent Consulting Agreement with Summit Financial Partners, LLC (Summit). Under the agreement, Summit sold shares of RelationServe through a private offering to investors in exchange for 1,050,000 shares of stock and a 7% seller's fee.

On June 14, 2005, RelationServe filed a Form 10-QSB quarterly statement, its first Securities and Exchange Commission (SEC) filing, indicating Chubasco Resources Corporation (Chubasco) had completed a reverse acquisition of RelationServe. RelationServe Media Inc. Quarterly Report-Small Business (Form 10-QSB), at 5 (June 14, 2005).6 On June 16, 2005, RelationServe filed a Form 8-K and disclosed, for the first time, the Independent Consulting Agreement7 with Summit. RelationServe Media Inc., Current Report (Form 8-K), at 29 (June 16, 2005).8 On June 28, 2005, twelve days after RelationServe disclosed its relationship with Summit, Richard F. Thompson, an Indiana resident, purchased 50,000 shares at $2.00 per share. Tony Altavilla, a Summit employee, had advised Thompson about the private offering and helped facilitate Thompson's purchase of the shares. On June 30, 2005, RelationServe became a publicly-traded company and reported to the SEC it had received $2,000,000 in subscriptions through a private offering.9 That same day, RelationServe listed its non-restricted shares on the Over the Counter Bulletin Board. On July 22, July 26, and August 12, 2005, L. Alan Jacoby purchased a total of 10,000 shares of RelationServe on the open market.

On March 3, 2006, Thompson filed a lawsuit in Indiana state court against RelationServe and several of the defendants named in this federal action. Unrelated to this litigation, RelationServe filed a registration statement with the SEC on March 20, 2006. This statement did not mention the Thompson litigation. On May 1, 2006, RelationServe amended the registration statement to provide the public with notice of the lawsuit, and indicated it believed the suit lacked merit. In response to an inquiry from the SEC requesting more details about the lawsuit, RelationServe updated its filings on May 23, 2006. 10

On May 23, 2006, RelationServe stock was valued at $1.35 per share. Three weeks later, on June 15, 2006, the stock was valued at $0.63 per share. Jacoby attributes this decline in value to the public disclosure of Thompson's lawsuit.


On August 28, 2006, Thompson initiated this action by filing a class action in the United States District Court for the Southern District of Florida. RelationServe and the other defendants moved to dismiss the complaint; the district court then denied these motions and ordered that Thompson file an amended complaint. On November 13, 2006, Thompson filed the First Amended Complaint, which added Jacoby as a co-plaintiff. The defendants again moved to dismiss, and on March 6, 2007, the district court dismissed the amended complaint without prejudice.

On March 19, 2007, Thompson and Jacoby filed the Second Amended Complaint, raising claims for two putative classes: one, led by Thompson, which included all purchasers of securities through unregistered broker/dealers of RelationServe, and another, led by Jacoby, which included all purchasers who bought RelationServe stock on the open market prior to May 23, 2006. Defendants then moved to dismiss the Second Amended Complaint for failure to state a claim, and this time the district court granted the motion with prejudice, concluding Jacoby had failed to state a claim for a violation of either § 10(b) or § 20(a) of the Securities Act. The district court also dismissed without prejudice Thompson's state law claims for lack of subject matter jurisdiction.

Once before and twice after the district court dismissed the Second Amended Complaint, defendant Karp moved for Rule 11 sanctions and attorneys' fees, contending the claims against her were frivolous and demonstrated an utter lack of legal or factual investigation. The district court denied the motions in three separate orders. This appeal and cross-appeal ensued.


Our discussion is divided into three parts. First, we address whether the Second Amended Complaint satisfies the standard for pleading scienter. Second, we address whether the Second Amended Complaint states a claim of secondary liability under § 20(a). Third, we address the district court's refusal to impose Rule 11 sanctions and award attorneys' fees.

A. Scienter Pleading Requirements

We review the grant of a motion to dismiss for failure to state a claim under Fed.R.Civ.P. 12(b)(6) de novo. Fin. Sec. Assurance, Inc. v. Stephens, Inc., 500 F.3d 1276, 1282 (11th Cir.2007).

In Count I, Jacoby asserted a violation of § 10(b) of the Securities Act and SEC Rule 10b-5. Section 10(b) of the Securities Act makes it unlawful to “use or employ, in connection with the ... sale of any security ... any manipulative or deceptive device or contrivance.” 15 U.S.C. § 78j(b). Pursuant to § 10(b), the SEC promulgated Rule 10b-5, which makes it unlawful, among other things, “to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading.” 17 C.F.R. § 240.10b-5(b).

To state a claim for a violation of § 10(b), a plaintiff must allege: (1) the existence of a material misrepresentation (or omission), (2) made with scienter (i.e., “a wrongful state of mind”), (3) in connection with the purchase or sale of any security, (4) on which the plaintiff relied, and (5) which was causally connected to (6) the plaintiff's economic loss. Dura Pharm. Inc. v. Broudo, 544 U.S. 336, 341-42, 125 S.Ct. 1627, 1631, 161 L.Ed.2d 577 (2005); see also Bryant v. Avado Brands, Inc., 187 F.3d 1271, 1281 (11th Cir.1999) (elaborating on the scienter requirement).11 Because Rule 10b-5 sounds in fraud, the plaintiff must plead the elements of its violation with particularity. See Mizzaro v. Home Depot, Inc., 544 F.3d 1230, 1237 (11th Cir.2008) (stating Rule 9(b) requires securities fraud complaints “to state with particularity the circumstances constituting fraud”).

When a § 10(b) claim is brought by a private litigant, it is subject to the PSLRA, under which a plaintiff must “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” 15 U.S.C. § 78u-4(b)(2). In this context, a “strong inference” of scienter is one that is “more than merely plausible or reasonable-it must be cogent and at least as compelling as any opposing inference of nonfraudulent intent.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 314, 127 S.Ct. 2499, 2504-05, 168 L.Ed.2d 179 (2007). Three guidelines govern our review: courts must (1) “accept all factual allegations in the complaint as true,” (2)...

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