United States District Court for the District of Columbia
August 9, 2004.
IN RE INTERBANK FUNDING CORP. SECURITIES LITIGATION.
The opinion of the court was delivered by: JOHN BATES, District Judge
This is an as-yet uncertified class action in which plaintiffs
Monica Belizan and Dr. William Prather ("Belizan" and "Prather,"
or "plaintiffs") assert a variety of securities law claims
relating to their investments in Interbank Funding Corporation
("IBF"). Between 1997 and 2002, IBF and its subsidiaries issued
debt securities in several investment funds totaling $195
million. Plaintiffs claim that the funds amounted to a Ponzi
scheme: proceeds from later fund offerings were allegedly used to
make interest payments to earlier investors.
The case comes before the Court on motions to dismiss by
defendants CIBC World Markets Corp. ("CIBC"), a brokerage firm
that sold some IBF securities, and Radin, Glass & Co., LLP
("Radin"), IBF's auditor. Plaintiffs contend that CIBC and Radin
violated Section 10(b) of the Securities Exchange Act of 1934
(the "Exchange Act"), 15 U.S.C. § 78j(b) ("Section 10(b)"), and
Exchange Act Rule 10b-5, 17 C.F.R. § 240.10b-5, by willingly
participating in the promulgation of misleading disclosures
regarding the funds. Additionally, plaintiffs contend that
Radin's conduct violated Section 11 of the Securities Act of 1933
(the "Securities Act"), 15 U.S.C. § 77k ("Section 11"). A
purported subclass of the plaintiffs asserts that CIBC violated
sections 12(a)(1) and (2) of the Securities Act,
15 U.S.C. § 771(a)(1) & (2) ("Section 12(a)(1)" and "Section 12(a)(2)"). The Court concludes that none of these
claims can proceed in the face of the demanding pleading
standards applicable in securities cases, and accordingly grants
the motions to dismiss.
IBF was organized in 1996 by Simon A. Hershon*fn1 as a
distressed loan outfit. See Consol. Am. Compl. ("Compl.") ¶ 20.
Its business plan was ostensibly to pool capital into funds that
would invest in under-performing loans and, after restructuring
or otherwise rehabilitating the loans, sell them at a profit. The
funds also invested in IBF-affiliated hotel development and
industry consolidation ventures. In all, IBF organized seven
funds between 1996 and 1999 (referred to herein as "Fund I,"
etc.).*fn2 Funds I through IV and Fund VII offered notes
under various private placement memoranda. Compl. ¶ 15.*fn3
Each of these funds issued five-year notes bearing interest at
rates between 8 and 12 percent annually, plus an additional
variable interest payment tied to the respective fund's gross
profits. Id. Both IBF and CIBC allegedly made private placement memoranda available to interested investors.
Compl. ¶ 28. On September 20, 2000, and March 26, 2001, Prather
allegedly purchased IBF securities through CIBC after being
solicited by a CIBC broker. CIBC Mot. to Dismiss, App. 1. Belizan
claims to have purchased IBF securities sometime between July 26,
1999, and June 7, 2002, the purported Class Period. See Compl.
¶¶ 1, 6.
During that time, allege plaintiffs, IBF routinely repaid
investors by shuffling money between its various funds. Compl. ¶
35. To do this, it transferred loan assets between funds at par
value, "meaning that the acquiring fund paid the selling fund all
principal, interest and fees outstanding, without regard to the
value and performance status of the underling loans." Id. As an
example, plaintiffs allege that sometime "in 2000" IBF caused
Fund VII to acquire about forty percent of Fund I's portfolio for
cash to allow Fund I to pay its noteholders. Compl. ¶ 37.
Generally accepted accounting principles ("GAAP") obliged IBF to
disclose such material related-party transactions. Nonetheless,
"other than generic disclosures saying that, from time to time,
the IBF Funds acquire loans from one another," this and other
inter-fund transfers were not properly reported in IBF's private
placement memoranda.*fn4 See Compl. ¶ 38. CIBC allegedly informed potential and actual purchasers of IBF
securities, including Prather, that it had conducted extensive
due diligence investigations into IBF's business practices.
Compl. ¶ 96; see also Compl. ¶ 90 ("Prior to signing the
selling agreement [with IBF], CIBC Oppenheimer conducted due
diligence for approximately two-years [sic]. This due diligence
including [sic] a review of financial statements; meetings with
IBF Securities management including all of the top executives and
senior management in the District of Columbia and New York; and
reviews of loan files."). Plaintiffs' claim is that, if CIBC did
in fact perform a thorough due diligence investigation, it "must
have obtained knowledge" of IBF's inter-fund transfers and
noticed their omission from the Offering Materials. Compl. ¶ 97.
CIBC was allegedly motivated to withhold what it knew from its
clients because it was to receive nine percent of the gross sale
price of each unit of IBF securities it sold, plus a pro-rata
share of IBF's gross annual profits. Compl. ¶ 32. Thus, say
plaintiffs, CIBC became a willing participant in the promulgation
of misleading disclosures. CIBC supplied its clients with IBF
materials and management presentations that it must have known
were false or misleading as to the Funds' cash flow, ability to
pay interest, and loan losses.
Meanwhile, Radin allegedly overlooked IBF's malfeasances and
rendered unqualified audit reports during the relevant period.
See Compl. ¶¶ 61-63. According to former IBF insiders
interviewed by plaintiffs, Radin personnel spent up to four weeks
annually at IBF's Washington, D.C. offices performing audits and
reviews for the opinions published in IBF's financial statements
and offering materials. Compl. ¶ 66. Plaintiffs charge Radin with
knowing, or recklessly failing to know, that IBF's failure to
disclose its purchases of bad loans were materially misleading.
See Compl. ¶ 71. According to plaintiffs, Radin's reports,
which did not expose IBF's inter-fund transfers, were included in at least eleven SEC
filings between 1999 and 2002. Compl. ¶ 64. The impact of these
omissions was allegedly material because the omissions obscured
significant fund losses. Radin was paid audit fees ranging from
$10,000 to $15,000 per fund and ultimately $50,000 to $100,000
per year in aggregate fees. Compl. ¶ 67.
Aside from their allegations about IBF's inter-fund transfers,
plaintiffs charge in general that IBF's offering memoranda
contained materially false and misleading maturity statistics.
These gave the misimpression that the loans in at least one of
IBF's portfolios turned over more frequently than they actually
did. See Compl. ¶¶ 81-83. A stock of short-term loans would
suggest a more stable investment than the stagnant pool of poor
performers that the IBF funds allegedly contained. The Complaint
also asserts that IBF failed to disclose the methodology it used
to estimate the value of the collateral for its loans. As an
example, plaintiffs cite a Fund VII report dated September 30,
2001, that supplied a 146-percent collateral coverage statistic
for the Fund. Plaintiffs allege that Radin knew or was reckless
in not knowing that the failure to disclose the lack of
methodology was materially misleading given the apparent
precision of that statistic. Compl. ¶ 87.
Throughout 2001, the SEC conducted an inquiry into allegations
that IBF operated as a Ponzi scheme. The inquiry led to a private
order of investigation and, on December 17, 2001, the SEC
requested that all new offering proceeds from IBF Funds be
deposited in an escrow account. Compl. ¶ 25. Incoming monies were
thus not available for new investments or to service the debt
from prior offerings. Sometime in January 2002, an IBF executive
allegedly informed CIBC that IBF was the subject of an SEC
investigation. Compl. ¶ 31. Radin also purportedly became aware
of the SEC investigation some time in January 2002. Compl. ¶ 72
IBF ceased offering securities on January 31, 2002, and filed for bankruptcy that
June. On July 23, 2002, the SEC filed a complaint against IBF,
Funds VI and VII, and Hershon in the United States District Court
for the Southern District of New York. See SEC v. IBF
Collateralized Finance Corp., 2002 U.S. LEXIS (S.D.N.Y. Dec. 6,
2002) (order under granting partial summary judgment in favor of
the SEC and appointing a trustee pursuant to the Investment
Company Act, 15 U.S.C. § 80a-41(d)); In re InterBank Funding
Corp., 310 B.R. 238 (Bankr. S.D.N.Y. 2004).
A. Applicable Legal Standard
A motion to dismiss pursuant to FED.R.CIV.P. 12(b)(6) will not
be granted unless "it appears beyond doubt that the plaintiff can
prove no set of facts in support of his claim which would entitle
him to relief." Conley v. Gibson, 355 U.S. 41, 45-46 (1957);
see also Haynesworth v. Miller, 820 F.2d 1245, 1254 (D.C.
Cir. 1987). Generally speaking, all that the Federal Rules of
Civil Procedure require of a complaint is that it contain "`a
short and plain statement of the claim' that will give the
defendant fair notice of what the plaintiff's claim is and the
grounds upon which it rests." Conley, 355 U.S. at 47. However,
where fraud is alleged, the circumstances constituting fraud must
be stated with particularity. FED. R. CIV. P. 9(b).
The Private Litigation Reform Act of 1995, 15 U.S.C. § 78u-4
("PSLRA"), imposes additional pleading requirements on plaintiffs
is securities cases. First, the statute requires that,
in any private action arising under this chapter in
which the plaintiff may recover money damages only on
proof that the defendant acted with a particular
state of mind, the complaint shall, with respect to
each act or omission alleged to violate this chapter,
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); see also In re Digital Island Sec.
Litig., 357 F.3d 322
, 328 (3d Cir. 2004) ("In requiring a `strong inference of scienter, the PSLRA
alters the normal operation of inferences under FED.R.CIV.P.
12(b)(6)."). Second, the PSLRA requires that where a plaintiff
alleges that a defendant made an untrue statement of material
fact or omitted to state a material fact necessary to make the
statements, in light of their circumstances, not misleading:
the complaint shall specify each statement alleged to
have been misleading, the reason or reasons why the
statement is misleading, and, if an allegation
regarding the statement or omission is made on
information and belief, the complaint shall state
with particularity all facts on which that belief is
15 U.S.C. § 78u-4(b)(1).
B. Claims under Section 10 of the Securities Act
Plaintiffs contend that CIBC and Radin violated Section 10(b)
of the Exchange Act and Rule 10b-5 promulgated thereunder by
participating in the dissemination of materially false and
misleading information regarding the IBF Funds. Section 10(b)
makes it unlawful
to use or employ, in connection with the purchase or
sale of any security . . ., any manipulative or
deceptive device or contrivance in contravention of
such rules and regulations as the [Securities
Exchange] Commission may prescribe as necessary or
appropriate in the public interest or for the
protection of investors.
15 U.S.C. § 78j(b). Rule 10b-5 specifies the following actions
among the kinds of behavior proscribed by Section 10(b):
[t]o make any untrue statement of a material fact or
to omit to state a material fact necessary in order
to make the statement made, in light of the
circumstances under which they were made, not
17 C.F.R. § 240.10b-5. To make out a cause of action under
Section 10(b) and Rule 10b-5, a plaintiff must allege that each
defendant (1) made a material misstatement or omission of a
material fact, (2) with "scienter," (3) in connection with the
purchase or sale of a security, (4) upon which the plaintiff reasonably relied, and (5) that
plaintiff's reliance was the proximate cause of its injury. See
Kowal v. MCI Communications Corp., 16 F.3d 1271, 1276 (D.C.
The requirement that a Section 10(b) plaintiff allege scienter
or "intent to deceive, manipulate or defraud" is well
settled. See Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193
(1976); Kowal, 16 F.3d at 1276; Novak v. Kasaks,
216 F.3d 300, 306 (2d Cir. 2004); In re Silicon Graphics, Inc. Sec.
Litig., 183 F.3d 970, 975 (9th Cir. 1999). As in Novak,
however, this case "pertains not to the scienter requirement
itself, but rather to the pleading requirement for scienter in
the securities fraud context." 216 F.3d at 306. The courts of
appeals have diverged over the precise contours of the scienter
pleading requirement following enactment of the PSLRA. The Third
Circuit has held that the PSLRA effectively adopts the Second
Circuit's pre-PSLRA requirement that plaintiffs allege facts
giving rise to "a strong inference of fraudulent intent." Actio
v. Imcera Group, Inc., 47 F.3d 47, 52 (2d Cir. 1995); see In
re Advanta Corp. Sec. Litig., 180 F.3d 525 (3d Cir. 1999). Under
that standard, a plaintiff could meet his or her burden at the
pleading stage by "(a) alleging facts to show that defendants had
both motive and opportunity to commit fraud or (b) by alleging
facts that constitute strong circumstantial evidence of conscious
misbehavior or recklessness." Shields v. Citytrust Bancorp,
Inc., 25 F.3d 1124, 1128 (2d Cir. 1994). Other courts have held
that the statute strengthens the old Second Circuit standard by
rejecting the simple pleading of motive and opportunity. See
Bryant v. Avado Brands, Inc, 187 F.3d 1271, 1283 (11th Cir.
1999); In re Silicon Graphics, 183 F.3d at 975; In re
Comshare, Inc. Sec. Litig., 183 F.3d 542, 550-51 (6th Cir.
1999). The Second Circuit itself purported in Novak to adopt "a middle ground," concluding "that the PSLRA
effectively raised the nationwide pleading standard to that
previously existing in this circuit," but that "Congress's
failure to include language about motive and opportunity suggests
that we need not be wedded to these concepts in articulating the
prevailing standard." 216 F.3d at 310. The D.C. Circuit has not
spoken to the issue.*fn5
Plaintiffs have failed to plead scienter under any of the
prevailing standards, and thus this Court need not elect among
them to resolve this case. The gist of plaintiffs' scienter
allegation is that CIBC and Radin, although having access to
materials revealing the problems, let IBF's misstatements and
omissions slide because they expected to reap sizeable fees from
IBF. See Compl. ¶¶ 32, 65, 66. That profit motive, coupled with
the alleged GAAP violations that occurred at IBF which CIBC and
Radin "must have" noticed is admittedly the basis of
plaintiffs' scienter allegation. Tr. of Add'l Mot. Hr'g of Jul.
30, 2004 ("2d Tr.") at 40. Of course, were plaintiffs' theory
correct, all GAAP violations of a certain magnitude would give
rise to a cause of action under Section 10(b) and Rule 10b-5
against an issuer's brokers and accountants. But that is not the
law. See Fisher v. Offerman & Co., Inc., 1996 WL 563141, at
*7 (S.D.N.Y. Oct. 2, 1996) ("[A]n underwriter's alleged motive to
earn its underwriting fees is not alone sufficient to sustain a
strong inference of fraudulent intent. If it were, every . . .
investment advisor whose compensation or commission depended upon the completion of [a challenged transaction] would
have a motive to commit fraud."). Rather, courts have rejected
motive-and-opportunity allegations of scienter anchored merely in
a defendant's profit motive, requiring instead at least some
demonstrable claim of deceptive intent. See In re Digital
Island, 357 F.3d at 331-32; In re Baan Co. Sec. Litig.,
103 F. Supp.2d 1, 20 (D.D.C. 2000) (the fact that defendants "wanted to
maintain their positions within" the company and maintain the
company's competitive position did not suffice to show motive and
opportunity); Vogel v. Sands Bros. & Co, Ltd., 126 F. Supp.2d 730,
739 (S.D.N.Y. 2001) (a broker-dealer's "desire to realize
greater transaction fees" and close relationship with its client
were inadequate to show scienter); Chill v. Gen'l Elec. Co.,
101 F.3d 263, 269 (2d Cir. 1996) ("motive would entail concrete
benefits that could be realized by one or more of the false
statements and wrongful nondisclosures alleged. The motive to
maintain the appearance of corporate profitability, or of the
success of an investment, will naturally involve benefit to a
corporation, but does not entail concrete benefits.") (internal
quotations omitted). Plaintiffs have made no such claim here.
As an alternative to the motive and opportunity test, courts
have also acknowledged that plaintiffs may sometimes meet the
scienter pleading requirement by alleging facts that amount to
strong circumstantial evidence of conscious misbehavior or
recklessness on the part of defendants. Novak, 216 F.3d at
308;*fn6 Chill, 101 F.3d at 269 ("an egregious refusal to
see the obvious, or to investigate the doubtful, may in some
cases give rise to an inference of . . . recklessness."). In this vein, some cases have noted that
"a violation of GAAP, combined with other circumstances
suggesting fraud, may create a strong inference of scienter." In
re Digi Int'l Inc. Sec. Litig., 6 F. Supp.2d 1089, 1099 (D.
Minn. 1998); see also Baan, 103 F. Supp.2d at 21; In re
Miller Indus. Sec. Litig., 12 F. Supp.2d 1323, 1332 (N.D. Ga.
Although plaintiffs' tune sounds better in this key, their
allegations as to what CIBC and Radin "must have known"
illustrate a broader and fatal failing of their Complaint.
Plaintiffs make only very general allegations as to the scope and
content of CIBC's due diligence and Radin's audits. They do not,
for instance, identify specific transactions that CIBC or Radin
elected not to investigate or otherwise overlooked. Nor do they
specifically allege that CIBC and Radin had access to particular
pieces of information that would have revealed IBF's allegedly
fraudulent and GAAP-violating inter-fund transfers.*fn8
Rather, plaintiffs repeatedly assert that CIBC and Radin simply
could not have fulfilled their professional roles without coming
across some evidence of fraud at IBF. It is true that a strong inference of scienter may be established "where the
complaint sufficiently alleges that the defendants . . . failed
to check information they had a duty to monitor." Novak, 216
F.3d at 311. "[I]t is well established," however, "that a
pleading of scienter may not rest on a bare inference that a
defendant `must have had knowledge of the facts.'" In re
Advanta, 180 F.3d at 539 (quoting Greenston v. Cambex Corp.,
975 F.2d 22, 26 (1st Cir. 1992) (Breyer, J.)); Mfrs. Life Ins.
Co. v. Donaldson, Lufkin & Jenrette Sec. Corp., 2000 WL 709006,
at *3-*4 & n. 5 (S.D.N.Y. Jun. 1, 2000) (rejecting allegation of
scienter based on underwriter's alleged access to information
during due diligence). Here, only such an inference supports
plaintiffs' allegation of recklessness.
Setting aside their theory of scienter, plaintiffs' factual
allegations as a whole are plagued with imprecision. Plaintiffs
concede that, except as to their own conduct, the allegations of
the Complaint are made upon information and belief. Compl. at 1.
The PSLRA requires that allegations made on that basis "state
with particularity all facts on which that belief is formed."
15 U.S.C. § 78u-4(b)(1). Yet the Complaint does no such thing. It
does not, for instance, identify specific misstatements and
omissions in particular private placement memoranda for which
CIBC or Radin should be held accountable let alone the facts on
which plaintiffs rely in concluding that such statements or
omissions were fraudulent. More typical of the Complaint's
cumulative and imprecise accusations is the following statement:
"From the inception of Fund I in 1996, interest payments to
noteholders of the IBF Funds have always been funded in
significant part out of fresh offering proceeds because operating
cash flows have never been sufficient to cover these interest
payments." Compl ¶ 43. What allegations like this fail to supply
is the requisite specification of "each statement alleged to have been misleading,
[and] the reasons why the statement is misleading."
15 U.S.C. § 78u-4(b)(1); see also Mayer v. Dell, 1991 WL 21567, *4
(D.D.C. Feb. 13, 1991) (dismissing a pre-PSLRA securities fraud
claim where the complaint "fail[ed] to state with particularity
the nature of each defendant's participation in the alleged
fraud, what statements were made, when they were made, who made
them, how those statements misled plaintiff, or what investments
to which the statements pertained.").
Even in their scattered invocations of discrete alleged
falsehoods or omissions, plaintiffs fail to state with
particularity how CIBC or Radin played a role in misleading them.
See, e.g., Compl. ¶¶ 46-47 (stating that Fund VII made a
materially misleading statement as to the source of its interest
income in its May 10, 1999, private placement memorandum and that
"Defendants knew from their experience with Funds I, II and III
that interest payments would certainly be made out of note
proceeds" rather than earned income).*fn9 The Complaint
simply does not state with particularity the basis on which
plaintiffs believe that CIBC and Radin defrauded them. Where, as
here, a securities fraud complaint "requires a laborious
deconstruction and reconstruction of a great web of scattered,
vague, redundant and often irrelevant allegations," the spirit
and letter of the PSLRA support dismissal. Wenger v. Lumisys,
Inc., 2 F. Supp.2d 1231, 1243 (N.D. Cal. 1998); see also
In re Secure Computing Corp. Sec. Litig., 120 F. Supp.2d 810,
816 (N.D. Cal. 2000) ("a complaint that requires such efforts to
understand it does not comply with Rule 9(b) or the PSLRA.").*fn10
Finally, plaintiffs' claims under Section 10(b) and Rule 10b-5
cannot proceed because plaintiffs fail adequately to allege
causation. A plaintiff must plead that "the economic harm it
suffered occurred as a result of the alleged
misrepresentations." Citibank, N.A. v. K-H Corp.,
968 F.2d 1489, 1495 (2d Cir. 1992) (emphasis original); see also
15 U.S.C. § 78u-4(b)(4). "It is settled that causation under the
federal securities laws is two-pronged: a plaintiff must allege
both transaction causation, i.e., that but for the fraudulent
statement or omission, the plaintiff would not have entered into
the transaction; and loss causation, i.e., that the subject of
the fraudulent statement or omission was the cause of the actual
loss suffered." Suez Equity Investors, L.P. v. Toronto-Dominion
Bank, 250 F.3d 87, 95 (2d Cir. 2001). "Like reliance,
transaction causation refers to the causal link between the
defendant's misconduct and the plaintiff's decision to buy or
sell securities. . . . It is established simply by showing that,
but for the claimed misrepresentations or omissions, the
plaintiff would not have entered into the detrimental securities
transaction." In re Enron Corp. Sec. Litig., 310 F. Supp.2d 819,
831 (S.D. Tex. 2004) (quoting Emergent Capital Inv. Mgmt.,
LLC v. Stonepath Group, Inc., 343 F.3d 189, 196-97 (2d Cir.
2003)).*fn11 Loss causation is like the concept of proximate cause in tort law: "in
order for the plaintiff to recover it must prove the damages it
suffered were a foreseeable consequence of the
misrepresentation." Suez Equity, 250 F.3d at 96. "If the
allegations support an inference that a defendant could
reasonably have foreseen that the misrepresentation pertained to
an issue that would cause the eventual damage, loss causation
will be considered adequately pleaded." In re Worldcom, Inc.
Sec. Litig., 294 F. Supp.2d 392, 413 (S.D.N.Y. 2003).
On both prongs of the causation analysis, plaintiffs'
allegations as to CIBC and Radin are insufficiently particular.
First, as to transaction causation, plaintiffs' downfall is again
their failure to allege with particularity the specific
misrepresentations and omissions chargeable to CIBC and Radin.
Where no specific misstatement or omission attributable to CIBC
or Radin has been clearly identified, the Court can hardly
conclude that plaintiffs would not have purchased IBF securities
but for such misstatements or omissions. Second, as to loss
causation, plaintiffs argue that "[i]t was clearly foreseeable by
CIBC that when it sold the notes in the various Funds knowing or
recklessly disregarding IBF's Ponzi scheme, that if the scheme
was discovered, the securities that CIBC sold would be
worthless." Opp'n to CIBC Mot. to Dismiss at 31; see also Compl. ¶ 31. This
statement is deficient as an allegation of loss causation because
it provides no factual basis for the proposition that the price
of some identifiable IBF security was inflated by a particular
statement or omission on the part of CIBC or Radin. See In re
Worldcom, 294 F. Supp.2d at 397. Nor does plaintiffs' repeated
invocation of IBF's bankruptcy supply evidence of loss causation.
The Complaint simply does not spell out the logical steps between
IBF's insolvency and the liability of CIBC and Radin for
In sum, plaintiffs' claims against CIBC and Radin under Section
10(b) and Rule 10b-5 fail for at least three independent reasons:
they fail to plead scienter, they are not alleged with the
specificity required by FED. R. CIV. P. 9(b) and the PSLRA, and
they fail to plead causation.
C. Claims under Sections 11 and 12 of the Securities Act
In addition to their allegations of fraud, plaintiffs contend
that Radin violated Section 11, and that CIBC violated Sections
12(a)(1) and 12(a)(2), of the Securities Act. Section 11 imposes
civil liability on issuers of securities or signatories, such as
officers of the issuer and underwriters, of a registration
statement that "contained an untrue statement of a material fact
or omitted to state a material fact . . . necessary to make the
statements therein not misleading." 15 U.S.C. § 77k; see also
Rombach v. Chang, 355 F.3d 164, 169 (2d Cir. 2004). Of the IBF
Funds, only Fund VI is alleged to have filed a registration
statement with the SEC a form SB-2 dated August 23, 2000. See
Compl. ¶ 144. Yet, as Radin points out, the Complaint contains no
allegation that Fund VI made any loans to, or acquired any
non-performing loans from, other IBF entities on Radin's watch.
Radin Mot. Dismiss at 35. Instead, plaintiffs seek to sweep all the allegedly misleading
placement memoranda within Section 11's reach by arguing that the
"Fund VI public offerings were actually part of an integrated
offering involving all of the IBF Funds." Compl. ¶ 146.
The case upon which plaintiffs rely principally in support of
this integration argument, Kennedy v. Tallant, 1976 WL 840
(S.D. Ga. Oct. 22, 1976), see 1st Tr. at 27, is of little aid
to them. The court in that case found that seven public offerings
of stock constituted an integrated offering for purposes of SEC
Rule 147. Id. at *12-*13. Plaintiffs have marshaled no cases
"integrating" public and private offerings for Section 11
purposes. As plaintiffs concede, 1st Tr. at 25, Section 11 was
designed to protect purchasers of publicly-offered securities;
their proposed expansion of liability to purchasers of
privately-placed securities would thus seem inconsistent with the
statute's purpose. See Herman & McLean v. Huddleston,
459 U.S. 375, 381-82 (1983) ("The section was designed to assure
compliance with the disclosure provisions of the [Securities] Act
by imposing a stringent standard of liability on the parties who
play a direct role in a registered offering."). Plaintiffs' novel
integration theory, unsupported by applicable case law or policy,
is not persuasive.
Plaintiffs' claim against CIBC under Section 12(a)(1) fares no
better; it is barred by the applicable statute of
limitations.*fn12 Section 13 of the Securities Act provides
in relevant part:
No action shall be maintained to enforce any
liability created under section 11 or section 12(a)(2) unless brought within one year after the
discovery of the untrue statement or the omission, or
after such discovery should have been made by the
exercise of reasonable diligence, or, if the action
is to enforce a liability created under section
12(a)(1), unless brought within one year after the
violation upon which it is based. In no event shall
any such action be brought to enforce a liability
created under section 11 or section 12(a)(1) more
than three years after the security was bona fide
offered to the public, or under section 12(a)(2) more
than three years after the sale.
15 U.S.C. § 77m. As to claims under Section 12(a)(1), the one-
and three-year limitation periods "are not alternative that is,
plaintiffs must plead and prove facts demonstrating compliance
with both limitations periods." In re Chaus Sec. Litig.,
801 F. Supp. 1257, 1265 (S.D.N.Y. 1992). The one-year period "is
measured from the date at which a violation occurred as to each
share of stock. A violation occurs when there is an offer, sale,
or delivery of unregistered stock" In re Elec. Data Sys. Corp.
ERISA Litig., 305 F. Supp.2d 658, 679-80 (E.D. Tex. 2004);
accord Blatt v. Merrill Lynch, Pierce, Fenner & Smith, Inc.,
916 F. Supp. 1343, 1354 (D.N.J. 1996). The three-year period runs
from the time the stock was initially bona-fide offered to the
public. See P. Stolz Family P'ship v. Daum, 355 F.3d 92
(2d Cir. 2004). Here, Prather does not allege that he purchased
IBF securities anytime after March 26, 2001, and his initial
Complaint against CIBC was filed on June 23, 2003, more than two
years later. Additionally, Prather's 12(a)(1) claim may fail the
three-year test given the Complaint's imprecision about which
IBF securities he purchased, it is impossible to tell when the
allegedly offending securities were initially bona-fide offered.
Assuming that the start of the purported Class Period July 26,
1999 is the date upon which a security purchased by Prather was
first offered, time has run on any claim he may have had.
Prather's claim under Section 12(a)(2) cannot succeed for
slightly different reasons. CIBC is correct that the Complaint does not, as it must,
affirmatively plead facts indicating that the action has been
timely brought. Davidson v. Wilson, 973 F.2d 1391, 1402 n. 8
(8th Cir. 1992) (compliance with Section 13 must be pled with
specificity because timeliness is a substantive requirement of a
Section 12(a)(2) cause of action). But the Section 12(a)(2) claim
suffers from a more basic infirmity: Prather has not alleged that
he purchased IBF securities in public offerings, and Section
12(a)(2) does not apply to purchases in aftermarket or private
transactions. Gustafson v. Alloyd Co., Inc., 513 U.S. 561, 569
(1995); Maldonado v. Dominguez, 137 F.3d 1, 8-9 (1st Cir. 1998)
("the Supreme Court has conclusively decided that section
12[(a)](2) applies exclusively to initial public offerings"). He
cannot establish standing to sue on the hypothesized purchases of
members of his uncertified class. Accordingly, the Section
12(a)(2) claim cannot survive.
D. Leave to Amend
Finally, while FED. R. CIV. P. 15(a) provides that "leave [to
amend] shall be freely given when justice so requires," a "bare
request in an opposition to a motion to dismiss without any
indication of the particular grounds on which the amendment is
sought . . . does not constitute a motion within the
contemplation of Rule 15(a)." Confederate Mem'l Ass'n Inc. v.
Hines, 995 F.2d 295, 299 (D.C. Cir. 1993); accord Kowal, 16
F.3d at 1280. Plaintiffs' arguments in the alternative during
hearings on the present motions see 1st Tr. at 25-26; 2d Tr.
at 46 do not amount to formal motions for leave to amend.
Furthermore, the words and legislative goals of the PSLRA would
seem to counsel restraint in granting leave to amend. See In
re Champion Ent., Inc. Sec. Litig., 145 F. Supp.2d 871, 873
(E.D. Mich. 2001) ("The plain language of the [PSLRA] does not
contemplate amending complaints; it does set a high standard of pleading which if not met results in
a mandatory dismissal. The necessary goal of this plain, and
strong language, is that it should be dismissed with prejudice.
To conclude otherwise would be to abrogate the very purpose of
the legislation.") (emphasis original). Accordingly, plaintiffs'
claims as to CIBC and Radin shall be dismissed with prejudice.
Because plaintiffs have failed to meet the stringent pleading
requirements established by the PSLRA and relevant case law,
their claims against CIBC and Radin under Section 10(b) and
Rule 10b-5 must be dismissed. Their claims under Sections 11 and 12
also fail for the reasons explained. A separate order has been
issued on this date. ORDER
Upon consideration of the motions to dismiss filed by
defendants CIBC World Markets Corp. and Radin Glass & Co., and
for the reasons elaborated in the Memorandum Opinion issued on
this 9th day of August, 2004, it is hereby
ORDERED that the motions are GRANTED; and it is further
ORDERED that plaintiffs' claims against CIBC and Radin are
DISMISSED WITH PREJUDICE.