ATSI Commns v. Shaar Fund; ATSI Commns v. Wolfson, No. 05-5132 (2d Cir. 2007)
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05-5132-cv, 05-2593-cv ATSI Commc ns v. Shaar Fund; ATSI Commc ns v. Wolfson 1 UNITED STATES COURT OF APPEALS 2 FOR THE SECOND CIRCUIT 3 4 5 August Term 2006 (Argued: November 29, 2006 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 Decided: July 11, 2007) Docket No. 05-5132-cv -------------------------------------------------------x ATSI COMMUNICATIONS, INC., a Delaware Corporation, Plaintiff-Appellant, - v. THE SHAAR FUND, LTD., SHAAR ADVISORY SERVICES, N.V., RGC INTERNATIONAL INVESTORS, LDC, ROSE GLEN CAPITAL MANAGEMENT, L.P., CORPORATE CAPITAL MANAGEMENT, INTERCARIBBEAN SERVICES LTD., CITCO FUND SVCS., LUC HOLLMAN, SAM LEVINSON, HUGO VAN NEUTEGEM, DECLAN QUILLIGAN, WAYNE BLOCH, GARY KAMINSKY, STEVE KATZNELSON, TRIMARK SECURITIES, INC., LEVINSON CAPITAL MANAGEMENT, and W.J. LANGEVELD, Defendants-Appellees, MARSHALL CAPITAL SERVICES, LLC., JESUP & LAMONT STRUCTURED FINANCE GROUP, MG SECURITY GROUP, INC., CROWN CAPITAL CORPORATION, JOHN DOES 1-50, KENNETH E. GARDINER, NATHAN LIHON, and SEI INVESTMENT CO., Defendants. -------------------------------------------------------x Docket No. 05-2593-cv -------------------------------------------------------x ATSI COMMUNICATIONS, INC., a Nevada Corporation, -1- 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Plaintiff-Appellant, - v. URI WOLFSON, Defendant-Appellee, SAM LEVINSON, Defendant. -------------------------------------------------------x B e f o r e : JACOBS, Chief Judge, WALKER and RAGGI, Circuit Judges. 17 Appeals from judgments of the United States District Court 18 for the Southern District of New York (Lewis A. Kaplan, Judge), 19 dismissing plaintiff ATSI Communications, Inc. s complaints 20 alleging, inter alia, securities fraud in violation of § 10(b) of 21 the Securities Exchange Act of 1934 and Rule 10b-5 promulgated 22 thereunder. 23 Supp. 2d 712 (S.D.N.Y. 2005). 24 ATSI Commc ns, Inc. v. Shaar Fund, Ltd., 357 F. AFFIRMED. 25 26 27 28 29 THOMAS I. SHERIDAN III (Andrea Bierstein, Melissa C. Welch, on the brief), Hanly Conroy Bierstein & Sheridan LLP, New York, New York, for ATSI Communications, Inc. 30 31 32 33 34 35 36 JONATHAN M. SPERLING (Amanda J. Gourdine, on the brief), Covington & Burling, New York, New York, for The Shaar Fund, Ltd., Shaar Advisory Services, N.V., Levinson Capital Management, Sam Levinson, and Uri Wolfson. -2- 1 2 3 4 5 6 7 8 J. KEVIN MCCARTHY (Joanne L. Monteavaro, on the brief), Wilmer Cutler Pickering Hale and Door LLP, New York, New York, for Rose Glen Capital Management, L.P., RGC International Investors, LDC, Wayne Bloch, Gary Kaminsky, and Steven Katznelson. 9 10 11 12 13 14 15 16 DAVID G. CABRALES (W. Scott Hastings, Jeffrey A. Logan, on the brief), Locke Liddell & Sapp LLP, Dallas, Texas; Cahill Gordon & Reindel LLP (Thorn Rosenthal, Janet A. Beer, on the brief), New York, New York, for Trimark Securities, Inc. 17 18 19 20 21 22 23 24 MICHAEL J. DELL (Elaine Golin, on the brief), Kramer Levin Naftalis & Frankel LLP, New York, New York, for Citco Fund Services (Curaçao) N.V., InterCaribbean Services, Ltd., Hugo van Neutegem, Wim Langeveld, Luc Hollman, and Declan Quilligan. 25 26 27 28 Berkman, Henoch, Peterson & Peddy, P.C. (Ronald M. Terenzi, on the brief), Garden City, New York, for Corporate Capital Management. 29 30 31 JOHN M. WALKER, JR., Circuit Judge: These appeals arise from judgments of the United States 32 District Court for the Southern District of New York (Lewis A. 33 Kaplan, Judge), dismissing plaintiff ATSI Communications, Inc. s 34 ( ATSI ) complaints under Fed. R. Civ. P. 12(b)(6) in two 35 separate actions arising from the same events. 36 Inc. v. Shaar Fund, Ltd., 357 F. Supp. 2d 712 (S.D.N.Y. 2005). 37 ATSI alleges that the defendants made misrepresentations in -3- ATSI Commc ns, 1 connection with securities transactions and engaged in market 2 manipulation in violation of § 10(b) of the Securities Exchange 3 Act of 1934 ( Exchange Act ), 15 U.S.C. § 78j(b), and Rule 10b-5 4 promulgated thereunder, 17 C.F.R. § 240.10b-5, or were liable as 5 control persons under § 20(a) of the Exchange Act, 15 U.S.C. § 6 78t(a). 7 to sell to them its convertible preferred stock. 8 then aggressively short sold ATSI s common stock and converted 9 the preferred stock to cover their short positions. ATSI claims that the defendants fraudulently induced it The defendants The alleged 10 consequence was a death spiral in the price of ATSI s stock and 11 enormous profit for the defendants. 12 We affirm the judgments of the district court. 13 BACKGROUND 14 The following facts are taken from ATSI s complaints and 15 supporting documents, which we must assume to be true in 16 reviewing a Fed. R. Civ. P. 12(b)(6) dismissal. 17 Gregor, 220 F.3d 81, 88 (2d Cir. 2000). See Rothman v. 18 A. ATSI and Its Efforts to Raise Money 19 ATSI was founded in December 1993 and hoped to become a 20 leading provider of retail communications services in Mexico in 21 the wake of the deregulation and privatization in Latin America s 22 telecommunications markets. 23 ATSI needed an infusion of capital to expand its U.S. customer 24 base and further develop its telephone network in Mexico. It never turned a profit. -4- By 1999, 1 To raise money, ATSI issued four series of cumulative 2 convertible preferred stock ( Preferred Stock ): Series B, C, D, 3 and E. 4 Agreement, a Certificate of Designation, and a Registration 5 Rights Agreement. 6 conversion feature that worked as follows. 7 Market Price was calculated as the average of the lowest five 8 closing bid prices during the ten-day period preceding the 9 conversion date. Each transaction included a Securities Purchase Each series included a risk-mitigating Upon conversion, a The Conversion Price was calculated as the 10 lesser of (1) the closing bid price on a trading day fixed by the 11 Certificate of Designation and (2) the Market Price discounted by 12 17% to 22% depending upon the series. 13 number of shares of common stock equal to (1) the number of 14 shares of Preferred Stock to be converted (2) multiplied by the 15 Preferred Stock s stated value of $1,000 per share (3) divided by 16 the Conversion Price. 17 common shares into which the Preferred Stock could convert, 18 securities such as these are called floorless convertibles. 19 The obvious inference from ATSI s sale of these securities is 20 that these unfavorable terms were necessary to attract investors 21 because ATSI was continuously losing money. 22 acknowledged that in light of its financial condition, it might 23 not be able to raise money on any acceptable terms. 24 Telesource International, Inc., Annual Report (Form 10-K), at 16 25 (July 31, 2000). ATSI would then issue a Because there is no limit on the number of -5- In fact, ATSI American 1. 1 Sales to the Levinson Defendants 2 On a road show in Dallas, Texas in March 1999, defendant 3 Corporate Capital Management ( CCM ) introduced ATSI executives 4 to defendant Sam Levinson, the managing director of Levinson 5 Capital and the Shaar Fund. 6 ( Shaar Advisory ) served as executive officer and general 7 partner of the Shaar Fund. 8 Shaar Fund. 9 Fund, and Shaar Advisory constitute the Levinson Defendants. 10 Shaar Advisory Services, N.V. Defendant Uri Wolfson controls the Collectively, Levinson, Levinson Capital, the Shaar During a May 1999 telephone conversation, CCM told ATSI that 11 the Shaar Fund had invested in several strong, successful 12 companies and that the Levinson Defendants were interested in 13 ATSI s long-term growth. 14 ATSI, inter alia, that the Levinson Defendants sought a long-term 15 investment in ATSI and would not engage in any activity to 16 depress its stock. 17 were false and misleading because CCM and Levinson knew otherwise 18 and the Levinson Defendants were actually market manipulators 19 that profited at the expense of the companies in which they 20 invested. 21 22 23 24 During a June meeting, Levinson told ATSI claims that all of these representations Over the next six months, ATSI entered into the following securities transactions with the Shaar Fund. Transaction Date # of Preferred Shares Purchased # of Warrants Purchased -6- Total Purchase Price 1 July 2, 1999 2,000 Series B 50,000 $2,000,000 2 Sept. 24, 1999 500 Series C 20,000 $500,000 3 Feb. 22, 2000 3,000 Series D 150,000 $3,000,000 4 5 6 The Securities Purchase Agreement for each transaction included written representations that: 1. The Shaar Fund was an accredited investor within the 7 meaning of Rule 501 of Regulation D under the 8 Securities Act of 1933; and 9 2. Neither [the Shaar Fund] nor its affiliates nor any 10 person acting on its or their behalf has the intention 11 of entering, or will enter into, prior to the closing, 12 any put option, short position, or other similar 13 instrument or position with respect to the Common Stock 14 [of ATSI] and neither [the Shaar Fund] nor any of its 15 affiliates nor any person acting on its or their behalf 16 will use at any time shares of Common Stock acquired 17 pursuant to this Agreement to settle any put option, 18 short position or other similar instrument or position 19 that may have been entered into prior to the execution 20 of this Agreement. 21 ATSI claims that these representations were false because 22 (1) the Shaar Fund s net worth was not high enough to meet the 23 requirements for being an accredited investor and (2) the Shaar 24 Fund intended to engage, and did engage, in short selling and -7- 1 manipulation of ATSI s stock before, during, and after entering 2 into these agreements. 3 4 5 6 7 8 9 10 11 12 13 The Registration Rights Agreement in each transaction contained a merger clause stating that: There are no restrictions, promises, warranties, or undertakings, other than those set forth or referred to herein. This Agreement, the Securities Purchase Agreement, the Escrow Instructions, the Preferred Shares and the Warrants supersede all prior agreements and undertakings among the parties hereto with respect to the subject matter hereof. The Registration Rights Agreements contemplated that the 14 Shaar Fund would soon sell its converted common stock into the 15 public markets. 16 register the common stock to be issued upon conversion of the 17 Preferred Stock within 90 days of closing and to take all 18 reasonable steps to help the Shaar Fund sell the common stock. 19 They also imposed, at most, a 90-day holding period before the 20 Shaar Fund could convert its Preferred Stock. 21 restriction upon the Shaar Fund s ability to sell the common 22 stock was if ATSI notified it of a material misstatement in the 23 stock s prospectus. 24 25 2. They required ATSI to use its best efforts to The only Sales to Rose Glen In September 1999, ATSI decided to issue $15 million in its 26 equity to fund an acquisition. Defendant Crown Capital 27 Corporation ( Crown Capital ), acting as placement agent, 28 recommended defendants RGC International Investors, LDC, and Rose 29 Glen Capital Management, L.P. Defendants Wayne Bloch, Gary -8- 1 Kaminsky, and Steve Katznelson were employees of Rose Glen 2 Capital Management. 3 defendants as Rose Glen. 4 We refer collectively to all of these During negotiations, Rose Glen allegedly made false verbal 5 representations similar to those made by the Levinson Defendants. 6 On September 27, 2000, Rose Glen submitted a draft term 7 sheet to ATSI offering a $10 million investment. ATSI claims 8 that it then fell victim to a bait-and-switch when, on October 9 16, 2000, Rose Glen submitted closing documents providing for 10 only a $2.5 million investment in Series E Preferred Stock, with 11 a promise of further investment of up to $10 million if certain 12 conditions were met. 13 terms because it was required to pay $2 million to vendors in 14 Mexico the next day. 15 Preferred Stock in March and July of 2001. 16 ATSI says it was forced to accept these ATSI sold Rose Glen additional Series E The Purchase Agreement pursuant to which these securities 17 were sold included two representations by Rose Glen that ATSI 18 claims to be false on the same basis as the Levinson 19 representations: 20 1. Rose Glen was an accredited investor; and 21 2. Rose Glen was purchasing the Preferred Stock and common 22 stock issuable upon conversion: 23 24 25 26 27 for its own account and not with a present view towards the public sale or distribution thereof except pursuant to sales registered or exempted from registration under the 1933 Act; provided, however that by making the representation herein, -9- 1 2 3 4 5 6 7 8 the Buyer does not agree to hold any of the Securities for any minimum or other specific term and reserves the right to dispose of the Securities at any time in accordance with or pursuant to a registration statement or exemption under the 1933 Act. The Registration Rights Agreements also contained a merger clause 9 similar to the one in the Shaar Fund transaction documents. 10 B. The Death Spiral Financing Manipulation Scheme 11 In addition to these misrepresentations, ATSI claims that 12 all of the defendants manipulated the market in ATSI s common 13 stock by bringing about a death spiral in the price of ATSI s 14 common stock. 15 shareholder would short sell the victim s common stock to drive 16 down its price.1 17 into common stock and uses that common stock to cover his short 18 position. 19 increase his profits by allowing him to cover with discounted 20 common shares not obtained on the open market, to rely on the 21 convertible securities as a hedge against the risk of loss, and 22 to dilute existing common shares, resulting in a further decline 1 The scheme, as alleged, worked as follows. The He then converts his convertible securities The convertible securities allow a manipulator to An investor sells short when he sells a security that he does not own by borrowing the security, typically from a broker. See Levitin v. PaineWebber, Inc., 159 F.3d 698, 700 (2d Cir. 1998). At a later date, he covers his short position by purchasing the security and returning it to the lender. Id. A short seller speculates that the price of the security will drop. Id. If the price drops, the investor profits by covering for less than the short sale price. Id. If, on the other hand, the price increases, the investor takes a loss. A short seller s potential losses are limitless because there is no ceiling on how high the stock price may rise. -10- 1 in stock price. 2 example, it disclosed in the registration statement on its Form 3 S-3 that it expected the Shaar Fund to convert shortly after the 4 registration became effective and that future issuances of 5 Preferred Stock would put downward pressure on and dilute its 6 common stock. 7 ATSI was aware of the risk of dilution; for ATSI accuses the Levinson Defendants, Wolfson, and Rose Glen 8 of deliberately causing a death spiral in its common stock. 9 The Shaar Fund began converting its Preferred Stock shortly after 10 it was contractually permitted to do so. 11 quarters of fiscal year 2000, it had converted all of its Series 12 B shares into approximately 2.6 million common shares. 13 ATSI s April 14, 2000 Form S-3 states that the Shaar Fund sold 14 the common stock, the complaints do not allege any such sales. 15 Between December 12, 2000 and January 23, 2002, the Shaar Fund 16 converted its Series D shares into 8,331,454 shares of ATSI 17 common stock. 18 Glen converted its Preferred Stock into over nineteen million 19 shares of common stock. 20 During the first two Although Between March 8, 2001 and August 14, 2002, Rose ATSI does not allege any specific acts of short selling by 21 the Levinson Defendants, but it includes circumstantial 22 allegations. 23 database reveal that of the 38 companies that reported the 24 Levinson Defendants as investors, 30 experienced stock price It alleges that searches in the SEC s Edgar -11- 1 declines indicative of a death spiral financing scheme. 2 allegations against Rose Glen are of like kind. 3 Its ATSI also relies on the magnitude and timing of changes in 4 its stock price and trading volume. At the time of the Series B 5 transaction in July 1999, its stock traded at $1.50 per share. 6 Two months later, it traded at $1.08 per share. 7 2000, the Series D Preferred Stock purchase was preceded by a 8 significant increase in the daily trading volume of ATSI s shares 9 and a dramatic rise in ATSI s share price to $9 per share In February 10 (perhaps not coincidentally as ATSI listed its stock on the 11 American Stock Exchange ( AMEX ) during that period). 12 saw massive stock sales and large price declines in ATSI s stock. 13 For example, between April 13, 2000 and April 18, 2000 during 14 which time ATSI filed a registration statement for the common 15 stock into which the Series C and D Preferred Stock would convert 16 the price fell from $6.50 per share to $3.62 per share on heavy 17 volume. 18 resulted from sales by the Levinson Defendants, despite 19 Levinson s claim that the Shaar Fund was not selling. 20 April 2000 ATSI claims that these price movements could only have ATSI s stock price climbed up to $6 per share by early-June 21 2000. On September 8, 2000, ATSI s registration of common stock 22 for the Series C and D Preferred Stock became effective and, by 23 November 28, 2000, its price had fallen to $0.75 per share, and 24 plummeted to $0.09 per share on August 16, 2002. -12- 1 In addition to these price fluctuations, ATSI relies more 2 specifically on price movements and trading volume around the 3 time that the Shaar Fund and Rose Glen converted their Series D 4 and E Preferred Stock, which worked to their benefit. 5 further points to instances where its stock price reacted 6 negatively to positive news. 7 day period between December 31, 2002 and January 14, 2003 in 8 which Depository Trust Company records show that over eight 9 million shares were traded in excess of settlement, which it 10 ATSI ATSI also points to a 10-trading- claims could only result from sham trading. 11 C. Other Defendants 12 ATSI alleges that any manipulation had to involve defendant 13 Trimark Securities, Inc. ( Trimark ), which served as the 14 principal market maker in ATSI s stock. 15 ATSI also alleges that several defendants, hereinafter 16 referred to as the Citco Defendants, caused the Shaar Fund to 17 engage in the charged misconduct. 18 (Curaçao) N.V. is the parent of defendant InterCaribbean 19 Services, Ltd., the Shaar Fund s sole director. 20 is a director of InterCaribbean. 21 Neutegem, and Luc Hollman served as Managing Directors of Shaar 22 Advisory. 23 D. Defendant Citco Fund Services Declan Quilligan W.J. Langeveld, Hugo Van ATSI s Demise -13- 1 Telecom stocks were generally hard-hit during the period in 2 which ATSI alleges manipulation. Between February 22, 2000 (the 3 date on which ATSI issued the Series D Preferred Stock) and 4 October 31, 2002 (the date on which ATSI filed its first suit), 5 the AMEX North American Telecom Index (of which ATSI s stock was 6 not a component) dropped by 73%. 7 its stock traded at $0.02 per share. 8 has rendered it unable to raise capital to maintain or expand its 9 business. When ATSI filed its complaint, Its financial impairment 10 E. 11 ATSI claims that the Levinson Defendants, Wolfson, 12 Langeveld, Rose Glen, CCM, and Crown Capital are liable for 13 misrepresentations under § 10(b) and Rule 10b-5; that these same 14 defendants and Trimark are also liable for market manipulation in 15 violation of Rule 10b-5; and that the Citco Defendants and others 16 not relevant to this appeal are liable as control persons under § 17 20(a). 18 ATSI s Claims and Procedural History ATSI also asserts various state law claims. ATSI filed its complaint in the first suit in October 2002 19 against all defendants except Wolfson ( ATSI I ). In March 2004, 20 the district court dismissed ATSI s first amended complaint 21 against the Levinson Defendants and Rose Glen for failing to 22 satisfy the pleading requirements of Fed. R. Civ. P. 9(b) and the 23 Private Securities Litigation Reform Act ( PSLRA ), 15 U.S.C. § 24 78u-4(b). 25 service and lack of personal jurisdiction. -14- It dismissed as to the other defendants for improper Second and third 1 amended complaints followed and, in July 2004, ATSI filed a 2 largely identical complaint against Levinson and Wolfson in a 3 separate suit ( ATSI II ). 4 dismissed the third amended complaint in ATSI I under Fed. R. 5 Civ. P. 12(b)(6) with prejudice for again failing to satisfy Rule 6 9(b) and the PSLRA s pleading requirements. 7 357 F. Supp. 2d at 720. 8 based solely on ATSI s federal claims, the district court did not 9 separately consider the state law causes of action. In February 2005, the district court See ATSI Commc ns, Because subject matter jurisdiction was The district 10 court entered judgment under Fed. R. Civ. P. 54(b), and the 11 parties in ATSI II stipulated to dismissal based on the district 12 court s order in ATSI I. 13 ATSI s timely appeals followed. DISCUSSION 14 15 I. Legal Standards 16 We review a district court s dismissal of a complaint 17 pursuant to Fed. R. Civ. P. 12(b)(6) de novo, accepting all 18 factual allegations in the complaint and drawing all reasonable 19 inferences in the plaintiff s favor. 20 Co., 228 F.3d 154, 161 (2d Cir. 2000). 21 consider any written instrument attached to the complaint, 22 statements or documents incorporated into the complaint by 23 reference, legally required public disclosure documents filed 24 with the SEC, and documents possessed by or known to the -15- Ganino v. Citizens Utils. In addition, we may 1 plaintiff and upon which it relied in bringing the suit. 2 Rothman, 220 F.3d at 88. 3 must provide the grounds upon which his claim rests through 4 factual allegations sufficient to raise a right to relief above 5 the speculative level. 2 6 1955, 1965 (2007). 7 may be supported by showing any set of facts consistent with the 8 allegations in the complaint. 9 To survive dismissal, the plaintiff Bell Atl. Corp. v. Twombly, 127 S. Ct. Once a claim has been adequately stated, it Id. at 1969. Securities fraud claims are subject to heightened pleading 10 requirements that the plaintiff must meet to survive a motion to 11 dismiss. 12 satisfy Rule 9(b), Ganino, 228 F.3d at 168, which requires that 13 the circumstances constituting fraud . . . shall be stated with 14 particularity, Fed. R. Civ. P. 9(b). 15 serves to provide a defendant with fair notice of a plaintiff s 16 claim, safeguard his reputation from improvident charges of 17 wrongdoing, and protect him against strike suits. 18 Chang, 355 F.3d 164, 171 (2d Cir. 2004). 19 complaint based on misstatements must (1) specify the statements 20 that the plaintiff contends were fraudulent, (2) identify the 2 First, a complaint alleging securities fraud must This pleading constraint Rombach v. A securities fraud We have declined to read Twombly s flexible plausibility standard as relating only to antitrust cases. See Iqbal v. Hasty, - F.3d -, 2007 WL 1717803, at *11 (2d Cir. June 14, 2007). Some of [Twombly s] language relating generally to Rule 8 pleading standards seems to be so integral to the rationale of the Court s parallel conduct holding as to constitute a necessary part of that holding. Id. -16- 1 speaker, (3) state where and when the statements were made, and 2 (4) explain why the statements were fraudulent. 3 216 F.3d 300, 306 (2d Cir. 2000). 4 conclusory or unsupported by factual assertions are insufficient. 5 See Luce v. Edelstein, 802 F.2d 49, 54 (2d Cir. 1986). 6 Novak v. Kasaks, Allegations that are Second, private securities fraud actions must also meet the 7 PSLRA s pleading requirements or face dismissal. See 15 U.S.C. § 8 78u-4(b)(3)(A). 9 damages requiring proof of a particular state of mind, the In pleading scienter in an action for money 10 complaint shall, with respect to each act or omission alleged to 11 violate this chapter, state with particularity facts giving rise 12 to a strong inference that the defendant acted with the required 13 state of mind. 3 14 this requirement by alleging facts (1) showing that the 15 defendants had both motive and opportunity to commit the fraud or 16 (2) constituting strong circumstantial evidence of conscious 17 misbehavior or recklessness. 18 Moreover, in determining whether the pleaded facts give rise to 19 a strong inference of scienter, the court must take into 20 account plausible opposing inferences. 21 Issues & Rights, Ltd., S. Ct. , 2007 WL 1773208, at *10 (June 3 Id. § 78u-4(b)(2). The plaintiff may satisfy Ganino, 228 F.3d at 168-69. Tellabs, Inc. v. Makor In a Rule 10b-5 action, scienter requires a showing of intent to deceive, manipulate, or defraud, Ernst & Ernst v. Hochfelder, 425 U.S. 185, 194 n.12 (1976), or reckless conduct, In re CarterWallace, Inc. Sec. Litig., 220 F.3d 36, 39 (2d Cir. 2000); SEC v. U.S. Envtl., Inc., 155 F.3d 107, 111 (2d Cir. 1998) (stating in dicta that reckless behavior is sufficient to plead scienter). -17- 1 21, 2007). 2 reasonable person [must] deem [it] cogent and at least as 3 compelling as any opposing inference one could draw from the 4 facts alleged. 5 For an inference of scienter to be strong, a Id. (emphasis added). If the plaintiff alleges a false statement or omission, the 6 PSLRA also requires that the complaint shall specify each 7 statement alleged to have been misleading, the reason or reasons 8 why the statement is misleading, and, if an allegation regarding 9 the statement or omission is made on information and belief, the 10 complaint shall state with particularity all facts on which that 11 belief is formed. 12 13 14 II. 15 U.S.C. § 78u-4(b)(1). ATSI s Market Manipulation Claims A. Market Manipulation and Short Selling Section 10(b), in proscribing the use of a manipulative or 15 deceptive device or contrivance, id. § 78j(b), prohibits not 16 only material misstatements but also manipulative acts. 17 Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 18 511 U.S. 164, 177 (1994). 19 20 21 22 23 24 25 26 27 28 29 30 31 Cent. Under the statute: Manipulation is virtually a term of art when used in connection with securities markets. The term refers generally to practices, such as wash sales, matched orders, or rigged prices, that are intended to mislead investors by artificially affecting market activity. Section 10(b) s general prohibition of practices deemed by the SEC to be manipulative in this technical sense of artificially affecting market activity in order to mislead investors is fully consistent with the fundamental purpose of the [Exchange] Act to substitute a philosophy of full disclosure for the philosophy of caveat emptor . . . . -18- 1 Sante Fe Indus. v. Green, 430 U.S. 462, 476-77 (1977) (alteration 2 in original) (citations omitted). 3 intentional or willful conduct designed to deceive or defraud 4 investors by controlling or artificially affecting the price of 5 securities. 6 question then becomes what activity artificially affects a 7 security s price in a deceptive manner. 8 9 Thus, manipulation connotes Ernst & Ernst, 425 U.S. at 199. The critical Although not explicitly described as such, case law in this circuit and elsewhere has required a showing that an alleged 10 manipulator engaged in market activity aimed at deceiving 11 investors as to how other market participants have valued a 12 security. 13 misled to believe that prices at which they purchase and sell 14 securities are determined by the natural interplay of supply and 15 demand, not rigged by manipulators. 16 F.3d 37, 45 (2d Cir. 1999); see also Mobil Corp. v. Marathon Oil 17 Co., 669 F.2d 366, 374 (6th Cir. 1981) (stating that the Supreme 18 Court has indicated that manipulation under § 10(b) refers to 19 means unrelated to the natural forces of supply and demand ); 20 cf. Pagel, Inc. v. SEC, 803 F.2d 942, 946 (8th Cir. 1986) 21 (agreeing with the SEC that [w]hen individuals occupying a 22 dominant market position engage in a scheme to distort the price 23 of a security for their own benefit, they violate the securities 24 laws by perpetrating a fraud on all public investors ); Crane Co. 25 v. Westinghouse Air Brake Co., 419 F.2d 787, 796 (2d Cir. 1969) The deception arises from the fact that investors are -19- Gurary v. Winehouse, 190 1 (holding that nondisclosure of large open market purchases 2 combined with large secret sales to deter stockholders from 3 participating in a competing tender offer violated Rule 10b-5 by 4 distort[ing] the market picture and deceiv[ing] the [issuer s] 5 stockholders ). 6 In identifying activity that is outside the natural 7 interplay of supply and demand, courts generally ask whether a 8 transaction sends a false pricing signal to the market. 9 example, the Seventh Circuit recognizes that one of the For 10 fundamental goals of the federal securities laws is to prevent 11 practices that impair the function of stock markets in enabling 12 people to buy and sell securities at prices that reflect 13 undistorted (though not necessarily accurate) estimates of the 14 underlying economic value of the securities traded, and thus 15 looks to the charged activity s effect on capital market 16 efficiency.4 17 F.3d 857, 861 (7th Cir. 1995). 18 disruptions to the efficient pricing of a security is consistent 19 with our view that in preventing market rigging, § 10(b) seeks a 20 market where competing judgments of buyers and sellers as to the 21 fair price of the security brings about a situation where the 4 See Sullivan & Long, Inc. v. Scattered Corp., 47 The Seventh Circuit s focus on The efficient capital market hypothesis, as adopted by the Supreme Court, posits that the market price of shares traded on well-developed markets reflects all publicly available information. See Basic Inc. v. Levinson, 485 U.S. 224, 246 & n.24 (1988). -20- 1 market price reflects as nearly as possible a just price. SEC 2 v. First Jersey Sec., Inc., 101 F.3d 1450, 1466 (2d Cir. 1996) 3 (quoting H.R. Rep. No. 73-1383, at 11 (1934)). 4 market, trading engineered to stimulate demand can mislead 5 investors into believing that the market has discovered some 6 positive news and seeks to exploit it, see In re Initial Pub. 7 Offering Sec. Litig., 383 F. Supp. 2d 566, 579 (S.D.N.Y. 2005), 8 aff d Tenney v. Credit Suisse First Boston Corp., No. 05-3450-cv, 9 2006 WL 1423785 (2d Cir. May 19, 2006); the duped investors then In an efficient 10 transact accordingly. To prevent this deleterious effect on the 11 capital markets, the Third Circuit distinguishes manipulative 12 from legal conduct by asking whether the manipulator inject[ed] 13 inaccurate information into the marketplace or creat[ed] a false 14 impression of supply and demand for the security . . . for the 15 purpose of artificially depressing or inflating the price of the 16 security. 17 207 (3d Cir. 2001); see also Jones v. Intelli-Check, Inc., 274 F. 18 Supp. 2d 615, 627-28 (D.N.J. 2003). GFL Advantage Fund, Ltd. v. Colkitt, 272 F.3d 189, 19 Market manipulation is forbidden regardless of whether there 20 is a fiduciary relationship between the transaction participants. 21 See United States v. Russo, 74 F.3d 1383, 1391-92 (2d Cir. 1996); 22 United States v. Regan, 937 F.2d 823, 829 (2d Cir. 1991). 23 market manipulation claim, however, cannot be based solely upon 24 misrepresentations or omissions. 25 396 F.3d 161, 177 (2d Cir. 2005). A Lentell v. Merrill Lynch & Co., -21- There must be some market 1 activity, such as wash sales, matched orders, or rigged prices. 2 See Sante Fe, 430 U.S. at 476. 3 Furthermore, short selling even in high volumes is not, 4 by itself, manipulative. 5 providing market liquidity, short selling enhances pricing 6 efficiency by helping to move the prices of overvalued securities 7 toward their intrinsic values. 8 47 F.3d at 861-62 (discussing the defendants short sales as 9 arbitrage that eliminates disparities between price and value); 10 In re Scattered Corp. Sec. Litig., 844 F. Supp. 416, 420 (N.D. 11 Ill. 1994); John D. Finnerty, Short Selling, Death Spiral 12 Convertibles, and the Profitability of Stock Manipulation 2-3 13 (Mar. 2005), available at http://www.sec.gov/rules/petitions/4- 14 500/jdfinnerty050505.pdf; Ralph S. Janvey, Short Selling, 20 Sec. 15 Reg. L.J. 270, 272 (1992). 16 is no different than taking a long position. 17 a manipulative act, short selling must be willfully combined with 18 something more to create a false impression of how market 19 participants value a security. 20 convertible security is not, by itself or when coupled with short 21 selling, inherently manipulative. 22 distressed companies with access to much-needed capital and, so 23 long as their terms are fully disclosed, can provide a 24 transparent hedge against a short sale. 25 B. GFL, 272 F.3d at 209. Aside from See id. at 208; Sullivan & Long, In essence, taking a short position To be actionable as Similarly, purchasing a floorless Such securities provide Pleading Market Manipulation -22- 1 Market manipulation requires a plaintiff to allege (1) 2 manipulative acts; (2) damage (3) caused by reliance on an 3 assumption of an efficient market free of manipulation; (4) 4 scienter; (5) in connection with the purchase or sale of 5 securities; (6) furthered by the defendant s use of the mails or 6 any facility of a national securities exchange. 7 Conseco, Inc., 43 F. Supp. 2d 438, 448 (S.D.N.Y. 1999); Cowen & 8 Co. v. Merriam, 745 F. Supp. 925, 929 (S.D.N.Y. 1990). 9 See Schnell v. Because a claim for market manipulation is a claim for 10 fraud, it must be pled with particularity under Rule 9(b). See 11 Internet Law Library, Inc. v. Southridge Capital Mgmt., 223 F. 12 Supp. 2d 474, 486 (S.D.N.Y. 2002); U.S. Envtl., 82 F. Supp. 2d at 13 239; see also Rooney Pace, Inc. v. Reid, 605 F. Supp. 158, 162-63 14 (S.D.N.Y. 1985) (applying Rule 9(b) to a market manipulation 15 claim). 16 solely within the defendant s knowledge; therefore, at the early 17 stages of litigation, the plaintiff need not plead manipulation 18 to the same degree of specificity as a plain misrepresentation 19 claim. 20 Envtl., 82 F. Supp. 2d at 240; cf. Romach, 355 F.3d at 175 n.10 21 (relaxing the standard where information was likely to be in the 22 exclusive control of the defendants and analysts). A claim of manipulation, however, can involve facts See Internet Law Library, 223 F. Supp. 2d at 486; U.S. 23 Accordingly, a manipulation complaint must plead with 24 particularity the nature, purpose, and effect of the fraudulent 25 conduct and the roles of the defendants. -23- See In re Blech Sec. 1 Litig., 928 F. Supp. 1279, 1291 (S.D.N.Y. 1996) (adopting this 2 test as set forth in the unpublished decision Baxter v. A.R. 3 Baron & Co., No. 94 Civ. 3913, 1995 WL 600720 (S.D.N.Y. Oct. 12, 4 1995)); see also Compudyne Corp. v. Shane, 453 F. Supp. 2d 807, 5 821 (S.D.N.Y. 2006); U.S. Commodity Futures Trading Comm n v. 6 Bradley, 408 F. Supp. 2d 1214, 1222 (N.D. Okla. 2005) (market 7 manipulation under the Commodity Exchange Act); Fezzani v. Bear, 8 Stearns & Co., 384 F. Supp. 2d 618, 642 (S.D.N.Y. 2004); In re 9 Royal Ahold N.V. Sec. & ERISA Litig., 351 F. Supp. 2d 334, 372 10 (D. Md. 2004); Log On Am., Inc. v. Promethean Asset Mgmt., 223 F. 11 Supp. 2d 435, 445 (S.D.N.Y. 2001); U.S. Envtl., 82 F. Supp. 2d at 12 240; In re Blech Sec. Litig., 961 F. Supp. 569, 580 (S.D.N.Y. 13 1997). 14 (articulating requirements for a less stringent pleading standard 15 in the Third Circuit). 16 defendants or resting upon speculation are insufficient. 17 test will be satisfied if the complaint sets forth, to the extent 18 possible, what manipulative acts were performed, which 19 defendants performed them, when the manipulative acts were 20 performed, and what effect the scheme had on the market for the 21 securities at issue. 22 also Miller v. Lazard Ltd., 473 F. Supp. 2d 571, 587 (S.D.N.Y. 23 2007); In re Sterling Foster & Co. Sec. Litig., 222 F. Supp. 2d 24 216, 270 (E.D.N.Y. 2002); Blech, 961 F. Supp. at 580. 25 standard meets the goals of Rule 9(b) while also considering -24- But see Intelli-Check, 274 F. Supp. 2d at 629 General allegations not tied to the This Baxter, 1995 WL 600720, at *6; see This 1 which specific facts a plaintiff alleging manipulation can 2 realistically plead at this stage of the litigation. 3 Because a claim for market manipulation requires a showing 4 of scienter, the PSLRA s heightened standards for pleading 5 scienter also apply. 6 particularly facts giving rise to a strong inference that the 7 defendant intended to deceive investors by artificially affecting 8 the market price of securities. 9 Section II.A, supra. Therefore, the complaint must plead with See 15 U.S.C. § 78u-4(b)(2); This pleading requirement is particularly 10 important in manipulation claims because in some cases scienter 11 is the only factor that distinguishes legitimate trading from 12 improper manipulation. 13 C. 14 15 Manipulation by the Levinson Defendants, Wolfson, and Rose Glen ATSI s allegations that the Levinson Defendants, Wolfson, 16 and Rose Glen manipulated the market are based on (1) high-volume 17 selling of ATSI s stock with coinciding drops in the stock price, 18 (2) trading patterns around conversion time, (3) the stock s 19 negative reaction to positive news, and (4) the volume of trades 20 in excess of settlement during a 10-day period in 2003. 21 with the district court that these allegations are inadequate 22 under Rule 9(b). 23 allegations that the defendants did anything to manipulate the 24 market; it relies, at best, on speculative inferences. 25 ATSI has failed to adequately plead scienter. -25- We agree In sum, ATSI has offered no specific Moreover, 1 ATSI s complaint alleges high-volume selling between April 2 13, 2000 and April 18, 2000, resulting in a 44% decline in stock 3 price. 4 defendants because ATSI s major shareholders said that they were 5 not selling stock, leaving only the defendants with large enough 6 blocks of shares to trade at the observed volumes. 7 allegations fail to state even roughly how many shares the 8 defendants sold, when they sold them, and why those sales caused 9 the precipitous drop in stock price. ATSI narrows the list of potential culprits to these These And the complaint is devoid 10 of facts supporting ATSI s belief that these defendants had 11 sufficient shares to engage in the high-volume trading alleged. 12 Even though the complaint alleges trading volumes of up to 1.5 13 million shares per day, ATSI reported in its April 14, 2000 Form 14 S-3 that the Shaar Fund held only 492,308 shares of its common 15 stock. 16 many shares Wolfson and Rose Glen held. 17 Shaar Fund s 3,000 shares of Series D Preferred Stock were 18 eventually converted into 8.3 million common shares sufficient 19 to support the observed trading volumes. 20 not help ATSI, however, because the complaint states that the 21 Shaar Fund did not begin converting those preferred shares until 22 December 12, 2000, many months after the high-volume selling. 23 The complaint and relevant documents do not reveal how ATSI argues that the This allegation does The complaint then alleges that there was a drop in ATSI s 24 stock price in the days leading up to the defendants conversion 25 of the Preferred Stock. It alleges that in the absence of -26- 1 manipulation, (1) the Reference Price for conversion should 2 approximate the average price during the 30 days prior to the 3 look-back period and (2) that trading volumes during the look- 4 back periods should have been equal to the average for the 5 previous quarter. 6 ATSI s position is ludicrous. 7 at 719. 8 in the stock markets. 9 Dep t of Treasury, 912 F.2d 897, 902 (7th Cir. 1990) ( [T]he We agree with the district court s view that ATSI Commc ns, 357 F. Supp. 2d One does not observe constant prices or trading volumes Cf. Cent. Nat l Bank of Mattoon v. U.S. 10 value of a company is rarely constant over an entire year . . . 11 . ). 12 The complaint next alleges that manipulation may be inferred 13 from the stock s negative reaction to positive news. 14 district court was mistaken in dismissing this circumstance on 15 the grounds that the announcement concerns events with no 16 apparent connection to the defendants or this case. 17 Commc ns, 357 F. Supp. 2d at 719. 18 is that an issuer s stock price, in the absence of manipulation, 19 should increase when good news is announced.5 5 The ATSI The premise of ATSI s theory Under such a The strength of this broad proposition is questionable. Cf. United States v. Bilzerian, 926 F.2d 1285, 1298 (2d Cir. 1991) ( [W]hether a public company s stock price moves up or down or stays the same after the filing of a Schedule 13D does not establish the materiality of the statements made, though stock movement is a factor the jury may consider relevant. ). For example, the stock price may not move if the market already knew about the good news, or if the market believes the news is overblown or false, or if adverse developments in the company or industry are anticipated or rumored. -27- 1 theory, the subject of the news and the defendants do not need to 2 be connected. 3 Nevertheless, this allegation cannot save the complaint 4 because ATSI pleads no particular connection between the negative 5 reaction of the stock price and anything the defendants did. 6 Adopting ATSI s reasoning would subject large holders of 7 convertible preferred stock to the risk of suit under § 10(b) 8 whenever the stock price does not react to news as the issuer 9 expects. See Rombach, 355 F.3d at 171 (stating that Rule 9(b) 10 serves, inter alia, to safeguard a defendant s reputation from 11 improvident charges of wrongdoing and protect him against strike 12 suits). 13 Finally, the complaint rests on an inference of manipulation 14 based upon Depository Trust Company records showing that 15 8,256,493 shares were traded in excess of settlements during the 16 10-day period before the AMEX suspended trading of ATSI s stock. 17 Trading volume increased over this period, yet the percentage of 18 trading volume that settled decreased. 19 plausible explanation is that the trades did not result in any 20 change in beneficial ownership, indicating wash trades, matched 21 trades, phantom shares, and other manipulative trading. 22 ATSI claims that the only The inference ATSI asks us to draw is too speculative even 23 on a motion to dismiss. See Segal v. Gordon, 467 F.2d 602, 606, 24 608 (2d Cir. 1972) (holding that distorted inferences and 25 speculations could not meet Rule 9(b) s requirements). -28- Nowhere 1 does ATSI particularly allege what the defendants did - beyond 2 simply mentioning common types of manipulative activity - or 3 state how this activity affected the market in ATSI s stock. 4 This data could easily be the result of internal settlements 5 within broker-dealers that do not involve the Depository Trust 6 Company. 7 share price during this period started at $0.08 per share and 8 ended at $0.08 per share. 9 Manipulation is also unlikely given that ATSI s closing For similar reasons, none of these allegations, nor anything 10 else in the complaint, meets the PSLRA s requirements for 11 pleading scienter. 12 inference of scienter is not raised by alleging that a legitimate 13 investment vehicle, such as the convertible preferred stock at 14 issue here, creates an opportunity for profit through 15 manipulation. 16 circumstances are present for any investor in floorless 17 convertibles. 18 n.5 (2d Cir. 1996) (holding that a generalized motive that an 19 issuer wishes to appear profitable, which could be imputed to any 20 public for-profit enterprise, was insufficiently concrete to 21 infer scienter); In re Alstom SA Sec. Litig., 454 F. Supp. 2d 22 187, 197 (S.D.N.Y. 2006) (stating a similar proposition for 23 corporate insiders). 24 nonculpable explanation[] for the defendants actions that is 25 more likely than any inference that the defendants intended to See 15 U.S.C. § 78u-4(b)(2). See Ganino, 228 F.3d at 168-69. A strong These Cf. Chill v. Gen. Elec. Co., 101 F.3d 263, 267 & Accordingly, there is a plausible -29- 1 manipulate the market, see Tellabs, 2007 WL 1773208, at *10: ATSI 2 and the defendants simply entered into mutually beneficial 3 financing transactions. 4 pled that the defendants engaged in any short sales or other 5 potentially manipulative activity, there is no circumstantial 6 evidence of manipulative intent. 7 Accordingly, more specific allegations are required. D. 8 9 Further, because ATSI has not adequately See Ganino, 228 F.3d at 168-69. Manipulation Claims Against Trimark The complaint is plainly insufficient in alleging that 10 Trimark engaged in market manipulation.6 11 Trimark was the principal market maker in ATSI s stock, that 12 Trimark knew or should have known of the manipulation, and that 13 ATSI believes that Trimark was a cooperating broker-dealer. 14 Wholly absent are particular facts giving rise to a strong 15 inference that Trimark acted with scienter in manipulating the 16 market in ATSI s common stock and any allegations of specific 6 It only alleges that Rose Glen and Trimark also argue that ATSI lacks standing to bring a Rule 10b-5 claim against them because ATSI sold its Preferred Stock and warrants to the defendants in primary market transactions and did not transact in the allegedly manipulated secondary market. Because ATSI s complaints do not meet the pleading requirements, we choose not to reach this statutory standing question. See Coan v. Kaufman, 457 F.3d 250, 256 (2d Cir. 2006) ( Unlike Article III standing, which ordinarily should be determined before reaching the merits, statutory standing may be assumed for the purposes of deciding whether the plaintiff otherwise has a viable cause of action. (citations omitted)); see also Official Comm. Of Unsecured Creditors of Worldcom, Inc. v. SEC, 467 F.3d 73, 80-81 (2d Cir. 2006); cf. Steel Co. v. Citizens for a Better Env t, 523 U.S. 83, 97 n.2 (1998). -30- 1 acts by Trimark to manipulate the market, much less how those 2 actions might have affected the market. 3 III. ATSI s Misrepresentation Claims 4 To state a claim under Rule 10b-5 for misrepresentations, a 5 plaintiff must allege that the defendant (1) made misstatements 6 or omissions of material fact, (2) with scienter, (3) in 7 connection with the purchase or sale of securities, (4) upon 8 which the plaintiff relied, and (5) that the plaintiff s reliance 9 was the proximate cause of its injury. Lentell, 396 F.3d at 172. 10 The district court properly dismissed the misrepresentations 11 claims. 12 13 A. Levinson Defendants and Wolfson Of the misrepresentations that ATSI claims, we can quickly 14 dispose of all except the two alleged in the transaction 15 agreements. 16 the Shaar Fund plainly states that the only promises, 17 restrictions, and warranties to the transaction were those set 18 forth in the transaction documents. 19 sophisticated investor and an integrated agreement between the 20 parties does not include the misrepresentation at issue, the 21 plaintiff cannot establish reasonable reliance on that 22 misrepresentation. 23 Group, Inc., 343 F.3d 189, 196 (2d Cir. 2003); Dresner v. 24 Utility.com, Inc., 371 F. Supp. 2d 476, 491-93 (S.D.N.Y. 2005). 25 By engaging in these private placements of complex securities, -31- The Registration Rights agreement between ATSI and Where the plaintiff is a See Emergent Capital Inv. Mgmt. v. Stonepath 1 ATSI is clearly a sophisticated investor. 2 extent ATSI s causes of action are based on alleged 3 misrepresentations made during negotiations preceding the 4 defendants investment, those claims are barred by the merger 5 clauses. 1. 6 7 Accordingly, to the Promise Not to Short Sell The complaint alleges, on information and belief, a 8 fraudulent misrepresentation by the Shaar Fund in promising, in 9 the Securities Purchase Agreement, not to enter a short position 10 prior to closing or cover a short position entered into prior to 11 execution of the agreement using converted common stock. 12 complaint fails to sufficiently allege that this representation 13 was false when made. 14 connection with a securities transaction might constitute breach 15 of contract, it does not constitute fraud unless, when the 16 promise was made, the defendant secretly intended not to perform 17 or knew that he could not perform. Gurary, 190 F.3d at 44 18 (internal quotation marks omitted). The speculative allegations 19 that the Levinson Defendants and Wolfson engaged in short selling 20 are deficient for the same reasons that they did not establish 21 manipulation. 22 The While the failure to carry out a promise in ATSI asks us to infer that the Levinson Defendants never 23 intended to honor this promise because they had previously 24 engaged in death spiral financing schemes, as evidenced by the 25 declining stock prices of unspecified companies in which they -32- 1 invested. 2 stating with particularity why the statement was fraudulent and 3 the PSLRA s requirement of stating the facts on which a belief is 4 based. 5 experienced a decline in share price or when they experienced the 6 decline (other than that they occurred within 1 year of an 7 unspecified time of investment). 8 particularity what, if anything, the defendants did to cause the 9 decline; it simply offers a generalized allegation that the 10 defendants engaged in death spiral financing combined with a 11 detailed definition of how death spiral financing works. 12 United States ex rel. Walsh v. Eastman Kodak Co., 98 F. Supp. 2d 13 141, 147 (D. Mass. 2000) (holding that fraud was not adequately 14 pled under Rule 9(b) where the plaintiff only alleged a method by 15 which the defendants could produce false invoices without 16 specifying instances of false claims arising from false 17 invoices). 18 and risky, distressed companies to fraud claims based solely on 19 the (unsurprisingly) poor performance of their portfolios. 20 Rombach, 355 F.3d at 171. 21 These allegations fail Rule 9(b) s requirement of The complaint does not specify which companies It also fails to allege with Cf. Holding otherwise would expose investors in start-ups See In response, ATSI argues that it adequately identified the 22 defendants victims by detailing how the companies could be found 23 by searching the SEC s publicly-available Edgar database. 24 also contends that the defendants have personal knowledge of what -33- It 1 investments they made and when the stock prices of those 2 investments declined. 3 ATSI cannot sufficiently plead fraud by simply providing a 4 method for the defendant to discover the underlying details. 5 ATSI had access to the details necessary to make these 6 allegations, it must plead them and not just tell the defendants 7 to go find them. 8 9 If We also reject ATSI s argument that it adequately pled fraud by pointing to the drop in the stock prices of the defendants 10 other investments because that information is relevant under Fed. 11 R. Evid. 404(b) and 406 and supports a reasonable inference of 12 fraud. 13 circumstance that some (or many) risky investments come to 14 nothing. 15 actions by the defendants with respect to those investments and 16 thus fail to establish that the defendants promise was 17 fraudulent. 18 decision in Internet Law Library, 223 F. Supp. 2d 474, is to the 19 contrary, we reject it. No inference of sabotage is available from the Moreover, the allegations fail to point to any specific To the extent the Southern District of New York s 2. 20 21 Investor Profile Representation ATSI also claims that the representation in the Securities 22 Purchase Agreement that the Shaar Fund was an accredited investor 23 was fraudulent. 24 causation with respect to this misrepresentation. 25 required to prove both transaction causation (also known as -34- The complaint does not sufficiently allege loss A plaintiff is 1 reliance) and loss causation. Lentell, 396 F.3d at 172; see also 2 15 U.S.C. § 78u-4(b)(4). 3 allegations that but for the claimed misrepresentations or 4 omissions, the plaintiff would not have entered into the 5 detrimental securities transaction. 6 (quoting Emergent Capital, 343 F.3d at 197). 7 contrast, is the proximate causal link between the alleged 8 misconduct and the plaintiff s economic harm. 9 Inc. v. Broudo, 544 U.S. 336, 346 (2005); Lentell, 396 F.3d at Transaction causation only requires Lentell, 396 F.3d at 172 Loss causation, by See Dura Pharm., 10 172. 11 loss was foreseeable and caused by the materialization of the 12 risk concealed by the fraudulent statement. 13 F.3d at 173. 14 To that end, the plaintiff s complaint must plead that the See Lentell, 396 The complaint alleges losses (1) through the tremendous 15 decline in ATSI s share price, impairing its access to capital 16 and its viability as a business; and (2) by ATSI s sale of its 17 own stock at depressed prices. 18 any causal connection between those losses and the 19 misrepresentation that the Shaar Fund was an accredited investor. 20 In what appears to be an attempt to meet Lentell s requirements, 21 ATSI contends that it adequately pled loss causation because the 22 Levinson Defendants made this misrepresentation to induce ATSI to 23 enter into the transaction under the pretense that they were 24 trustworthy, reputable and long-term investor[s], and that when 25 the true risk of their plans materialized through their It fails, however, to establish -35- 1 manipulative acts, ATSI suffered losses. 2 support transaction causation; it fails, however, to show how the 3 fact that the Shaar Fund was not an accredited investor caused 4 any loss. 5 more than a paraphrased allegation of transaction causation - 6 explains why a particular investment was made, but does not speak 7 to the relationship between the fraud and the loss of the 8 investment. (internal quotation marks omitted)). 9 This allegation might See id. at 174 ( Such an allegation - which is nothing ATSI is wrong in claiming that these allegations are 10 sufficient to establish loss causation under our decision in 11 Weiss v. Wittcoff, 966 F.2d 109 (2d Cir. 1992) (per curiam). 12 Weiss, the plaintiff agreed to merge his business with the 13 defendant s on the latter s representation that his other company 14 would supply goods and services. 15 sold his other company a year after the transaction, id. at 110, 16 112, the plaintiff s business suffered subsequent losses from 17 higher costs, id. at 110-11. 18 adequately pled loss causation because the plaintiff s losses 19 were clearly a proximate result of his reliance on defendants 20 promises, since defendants failure to fulfill those promises 21 foreseeably caused [the business s] financial condition to 22 deteriorate. 23 Id. at 110. In When the defendant We held that the complaint Id. at 111. Weiss is easily distinguishable. There, the complaint 24 established a causal connection between (1) the promise to 25 provide for the business s needs and (2) the business s increased -36- 1 costs when the promise turned out to be false. 2 contrast, fails to show that the subject of the fraudulent 3 statement proximately caused any loss. 4 173 ( Thus to establish loss causation, a plaintiff must allege 5 . . . that the subject of the fraudulent statement or omission 6 was the cause of the actual loss suffered . . . . (alteration 7 in original)). 8 9 B. See id. ATSI, by See Lentell, 396 F.3d at Misrepresentations by Rose Glen The misrepresentations attributed to Rose Glen suffer from 10 largely the same defects as those against the Levinson 11 Defendants. 12 contractual, verbal representations because of the merger clause 13 in the Registration Rights Agreement. 14 ATSI cannot claim reliance on Rose Glen s pre- The only representation in the Securities Purchase Agreement 15 that merits discussion is the one in which Rose Glen represented 16 that it was purchasing the Preferred Stock: 17 18 19 20 21 22 23 24 25 26 27 28 for its own account and not with a present view towards the public sale or distribution thereof except pursuant to sales registered or exempted from registration under the 1933 Act; provided, however that by making the representation herein, the Buyer does not agree to hold any of the Securities for any minimum or other specific term and reserves the right to dispose of the Securities at any time in accordance with or pursuant to a registration statement or an exemption under the 1933 Act. In addition to failing to plead falsity under Gurary, ATSI s 29 complaint fails to plead that Rose Glen even broke this promise, 30 much less that it secretly intended to break it. -37- 1 ATSI also alleges that Rose Glen engaged in a bait-and- 2 switch scheme by first promising in its draft term sheet to 3 invest $10 million, then offering only $2.5 million at closing. 4 The district court properly dismissed this claim. 5 time-barred. 6 2002, Pub. L. No. 107-204, 116 Stat. 745 (2002), the statute of 7 limitations required that a Rule 10b-5 claim be brought within 8 one year of discovery of the facts constituting the violation and 9 within three years of the violation. First, it is Prior to the passage of the Sarbanes-Oxley Act of Lampf, Pleva, Lipkind, 10 Prupis & Petigrow v. Gilbertson, 501 U.S. 350, 364 (1991). 11 learned of the alleged falsity of this representation when it 12 signed the closing documents on October 16, 2000, but did not 13 commence its action against Rose Glen until October 31, 2002 14 more than two years later. 15 Frontier Ins. Group, Inc., 318 F.3d 148, 154 (2d Cir. 2003) 16 (stating that the limitations period begins to run, inter alia, 17 after the plaintiff receives actual knowledge of the facts giving 18 rise to the action). 19 reliance because the term sheet expressly stated that Rose Glen s 20 obligation to fund is subject to satisfactory due diligence, in 21 RGC s sole discretion. 22 C. 23 ATSI See LC Capital Partners, LP v. Second, ATSI has not pled falsity or Misrepresentations by CCM ATSI claims that CCM made misrepresentations very similar to 24 those alleged against Rose Glen. Largely for the same reasons as 25 above, the district court properly dismissed those claims. -38- 1 IV. Control Person Liability 2 ATSI alleges control person liability under § 20(a) against 3 the Levinson Defendants, Wolfson, Rose Glen, and the Citco 4 Defendants. 5 liability, a plaintiff must show (1) a primary violation by the 6 controlled person, (2) control of the primary violator by the 7 defendant, and (3) that the defendant was, in some meaningful 8 sense, a culpable participant in the controlled person s fraud. 9 First Jersey, 101 F.3d at 1472. 10 To establish a prima facie case of control person ATSI fails to allege any primary violation; thus, it cannot establish control person liability. 11 V. Leave to Amend 12 ATSI argues that even if the district court properly 13 dismissed its complaints under Fed. R. Civ. P. 12(b)(6), it 14 should have granted leave to amend. 15 denial of leave to amend for abuse of discretion. 16 Rosenstock, 228 F.3d 40, 54 (2d Cir. 2000). 17 submitted three amended complaints; in ATSI II, it submitted a 18 complaint largely identical to ATSI I s third amended complaint. 19 The district court had already dismissed ATSI I s first amended 20 complaint for failure to meet Rule 9(b) and the PSLRA s pleading 21 requirements on many grounds similar to its final dismissal. 22 District courts typically grant plaintiffs at least one 23 opportunity to plead fraud with greater specificity when they 24 dismiss under Rule 9(b). We review a district court s In ATSI I, ATSI See Luce, 802 F.2d at 56. -39- Grace v. ATSI was 1 given that opportunity. The district court did not abuse its 2 discretion in declining to grant further leave to amend. 3 CONCLUSION 4 For the foregoing reasons, the judgments of the district 5 court are AFFIRMED. -40-
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