IN RE MORGAN KEEGAN OPEN-END MUTUAL FUND LITIGATION, No. 2:2007cv02784 - Document 272 (W.D. Tenn. 2010)
Court Description: ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS' MOTIONS TO DISMISS 222 226 227 228 229 233 . Signed by Judge Samuel H. Mays, Jr., on September 30, 2010. (Mays, Samuel)
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IN RE MORGAN KEEGAN OPEN-END MUTUAL FUND LITIGATION Doc. 272 IN THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF TENNESSEE WESTERN DIVISION IN RE: REGIONS MORGAN KEEGAN SECURITIES, DERIVATIVE, AND ERISA LITIGATION ) ) ) ) ) ) ) ) ) ) IN RE: REGIONS MORGAN KEEGAN OPEN-END MUTUAL FUND LITIGATION Case No. 07-2784 MDL 2009 ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS’ MOTIONS TO DISMISS Before the Court are Defendants’ February 11 and 12, 2010 Motions to Dismiss Complaint (“CAC”). the Consolidated Amended Class (See ECF. Nos. 222, 226-29, 233.) Action The Lead Plaintiffs filed a Consolidated Response in Opposition on April 13, 2010. (See ECF No. 238.) Defendants filed their Replies on May 28, 2010, and June 4, 2010. 253.) (See ECF. Nos. 246-47, 249-51, Plaintiffs filed a Consolidated Sur-Reply on July 6, 2010. (See ECF No. 265.) For the following reasons, Defendants’ Motions are GRANTED IN PART AND DENIED IN PART. I. BACKGROUND Plaintiffs’ CAC exceeds four hundred pages, comprising 766 paragraphs and six appendices. The following is a necessarily Dockets.Justia.com brief summary of the named Kathryn S. parties in this action and the Plaintiffs’ claims. Plaintiffs Cashdollar Estate, Dajalis Ltd., Jeanette H. Landers, H. Austin Landers, and Frank D. Tutor are the Lead Plaintiffs for the Open-End Fund Litigation. 35.) (CAC ¶ The Lead Plaintiffs allege that they represent a purported class of individuals who purchased one or more classes of shares in the Regions Morgan Keegan Select Short Term Bond Fund (“Short Term Fund”), the Regions Morgan Keegan Select Intermediate Bond Fund (“Intermediate Fund”), and/or the Regions Morgan Keegan Select High Income Fund (“High Income Fund” and collectively the “Funds”) from December 6, 2004 through December 6, 2007 (the “class period”). (Id. ¶ 2(a)(1).) Plaintiffs also assert that they represent those “[w]ho refrained from redeeming the Funds’ shares during the period from March 1, 2007 through April 30, 2008.” (Id. ¶ 2(a)(2).) Plaintiff John R. S. Robilio seeks to represent a Fiduciary Subclass that includes persons who are members of the primary class and 1) are beneficiaries of trusts or other custodial accounts for which certain Defendants acted as fiduciaries and made investments on the beneficiaries’ behalf or 2) who acquired a beneficial ownership of shares in the Funds because of certain Defendants’ decisions custodian of these Plaintiffs’ accounts. made (Id. as trustee or ¶¶ 33, 107.) During the class period, the named Plaintiffs invested more than 2 $4.5 million in the Funds and “refrained from redeeming” more than $7 million in investments in the Funds. (Id. ¶ 34.) Defendant Morgan Keegan Select Fund, Inc. (“MK Select”) is a Maryland Corporation organized as a open-end management investment company under the Investment Company Act of 1940, 15 U.S.C. §§ 80a-1 et seq. three portfolios; Intermediate and (CAC ¶ 36.) namely, High the Income three Funds MK Select consisted of Funds. opened The (Id.) for investment on March 22, 1999, and the Short Term Fund opened on November 4, (Id. ¶ 37.) 2001. The High Income Fund closed to new investors in December 2002; however, existing shareholders of the High Income Fund could additional shares. increase (Id.) their investments by purchasing Because of the “catastrophic decline” in the Funds’ assets during 2007-2008, MK Select and the Funds were liquidated on June 15, 2009. (Id. ¶ 39.) MK Select filed an application with the Securities and Exchange Commission to deregister as an investment company on July 28, 2009. (Id.) Defendant Morgan Asset Management (“MAM”) is a registered investment Memphis, advisor with Tennessee. its MAM principal is a place wholly-owned Defendant MK Holding, Inc. (“MK Holding”). managed the purchases or Funds’ sales portfolio of investment objectives. of securities of securities, consistent business in subsidiary of (Id. ¶ 40.) MAM including making with Funds’ the The Advisory Agreement between (Id.) 3 MAM and the Funds required MAM to provide the Funds with office space and the executive personnel necessary to operate the Funds; however, Defendant Morgan Keegan & Co., Inc. (“Morgan Keegan”) actually provided those services. (Id.) The Agreement also required MAM to provide the Funds’ officers and Board of Directors (Id.) with various reports and statistical information. MAM and/or Morgan Keegan compensated those officers and directors who also were employees of MAM or Morgan Keegan. ¶ 41.) (Id. MAM received an annual management fee for its services based on the average daily net assets of the Funds. The more money invested in the Funds, the higher the fee MAM received. (Id.) Defendant with its principal (Id. ¶ 45.) Funds’ Morgan Keegan place is of a business chief based services. service in broker/dealer Memphis, Tennessee. Morgan Keegan provided an employee to serve as the compliance officer accounting services to the Funds. fee full on the (Id.) Funds’ average and provided portfolio It also received an annual daily net assets for those Morgan Keegan is a wholly-owned subsidiary of Defendant Regions Financial Corporation (“Regions”), a Delaware corporation with its principal place of business in Birmingham, Alabama. (Id. ¶ 48.) Regions is also the ultimate parent company of MK Holding and MAM. of the Funds through two (Id.) Regions marketed shares subsidiaries, 4 Morgan Keegan and Defendant Regions Bank. (Id. ¶¶ 49, 53.) Regions Bank maintains Defendant Regions Morgan Keegan Trust FSB (“Regions Morgan Keegan Trust”), a federally chartered savings bank formerly known as Morgan Keegan Trust Company, as its trust department. (Id. ¶ 54.) Regions Morgan Keegan Trust served as a fiduciary on behalf of its customers. Under an April 1, 2003 agreement, MAM provided investment advisory services to Regions Bank and Regions Morgan Keegan Trust (collectively “RMK Trust”). (Id.) Defendants Allen B. Morgan, Jr.; J. Kenneth Alderman; Jack R. Blair; Albert C. Johnson; James Stillman R. McFadden; W. Randall Pittman; Mary S. Stone; and Archie W. Willis, III, were directors of the Funds. (Id. ¶¶ 59-67.) Morgan also served as a director and vice-chairman of Regions, a director of MAM, and chairman and CEO of Morgan Keegan. (Id. ¶ 59.) Alderman served as CEO of MAM and has served as an executive vice president of Regions, president of RMK Trust, and vice chairman and CEO of MAM. (Id. ¶ 60.) Johnson, McFadden, Pittman, and Stone served as members of MK Select’s audit committee. (Id. ¶ 69.) Defendants Carter E. Anthony, Brian B. Sullivan, Joseph C. Weller, J. Thompson Weller,1 G. Douglas Edwards, Charles D. Maxwell, David M. George, and Michele F. Wood served as officers of the Funds. 1 (Id. ¶¶ 75-82.) Anthony served as the Funds’ J. Thompson Weller is the son of Joseph C. Weller. 5 (CAC ¶ 78.) president from 2003 until August 2006. (Id. ¶ 75.) He also was president and chief investment officer of MAM from 2002-2006. (Id.) Sullivan succeeded Anthony as the Funds’ president. ¶ 76.) (Id. (Id. Joseph C. and J. Thompson Weller served as treasurer. ¶¶ Keegan. 77-78.) Both also held executive roles at Morgan Edwards, a twenty-five year veteran of Morgan (Id.) Keegan, served as the investment bank’s CEO from 2003 until his resignation in April 2008. Before becoming CEO, Edwards had served as Morgan Keegan’s president from 2001-2003. (Id. ¶ 79.) Maxwell was the Funds’ secretary and, from 2006, served as the executive managing director, chief financial officer, treasurer, and secretary of Morgan Keegan. was the Morgan Funds’ chief Keegan’s compliance senior vice (Id. ¶ 80.) officer president. David M. George until (Id. 2006 ¶ and 81.) Wood (Id. ¶ 82.) succeeded George as chief compliance officer. was She also served as MAM’s chief compliance officer, and her salary was paid solely by Morgan Keegan. Defendant analyst, manager. James served as C. Kelsoe, MAM’s and (Id.) Jr., the a chartered Funds’ senior financial portfolio Kelsoe also was employed by Morgan Keegan and was registered with the Financial Industry Regulatory Authority as a representative of Morgan Keegan. H. Tannehill, also a chartered (Id. ¶ 83.) financial Defendant David analyst, Kelsoe as a portfolio manager for the Funds and MAM. 6 assisted (Id. ¶ 84.) Kelsoe and Tannehill were eligible to receive annual cash bonuses that could equal fifty percent of their base salaries. (Id. ¶ 86.) benchmark The performance of the Funds relative to their index bonuses. determined (Id.) discretionary and The part of Kelsoe’s remainder depended on factors of and their like Tannehill’s bonuses their was ability to bring in new clients, their service to existing clients, and their support of Morgan Keegan’s policies and procedures. (Id.) Defendant Thomas R. Gamble was a vice president of the Funds from 2003 and an executive of Regions from 1981. 85.) (Id. ¶ Plaintiffs have also sued twenty “John Doe” Defendants who were “supervised, or . . . otherwise employed by Morgan Keegan and [MAM].” (Id. ¶ 87.) Those John Doe Defendants allegedly aided Morgan Keegan in performing due diligence in its sale of the Funds’ shares. (Id.) The CAC employs the term “RMK Defendants” to refer to MAM, Morgan Keegan, MK Holding, Regions, Regions Bank, and John Does 1-20. (Id. ¶ 88.) “Morgan Keegan” and “MAM” include “as relevant, their respective officers and employees named as Defendants, including John Doe One through Twenty.” RMK (Id.) Defendants, The term “Defendants” includes the Funds, the and Defendant PricewaterhouseCoopers (“PwC”). (Id.) PwC, a limited liability partnership, is a national public accounting and auditing firm that 7 audited the Funds’ annual financial statements. (Id. ¶ 94.) It also issued reports on the Funds’ internal controls and certified certain information in the Funds’ information. prospectuses and statements of additional (Id. ¶ 94.) According to Plaintiffs’ CAC, Kelsoe became enamored with investing in collateralized debt obligations (“CDOs”). 361, 367.) (Id. ¶¶ He allegedly caused the Funds to invest heavily in CDOs; although, most other mutual funds invested minimally in CDOs. would (Id. ¶ 369) never invest The Funds’ prospectuses stated that they more than 15% of their total assets in illiquid investments – investments where the market is small because of the small number of potential purchasers. 162.) (Id. ¶ Nonetheless, Kelsoe allegedly violated that restriction in managing all three Funds. (Id. ¶ 164.) For example, the Short Term Fund, meant to have the most conservative investment strategy of the three Funds, invested 31.5% of its total assets in illiquid CDOs – more than twice the maximum amount allowed. (Id.) The Funds also had a “fundamental investment restriction” that prevented them from having more than 25% of their total assets in “the securities of companies whose principal business activities are in the same industry.” (Id. ¶ 273.) Because that restriction was fundamental, only an affirmative vote of the Funds’ shareholders could waive it. (Id. ¶ 274.) The RMK Defendants allegedly ignored the restriction and caused the High 8 Income Fund to invest 52.32% of its assets in mortgage-backed securities. (Id. ¶ 276(a).) The Intermediate Fund held 54.71% of its assets in mortgage-backed securities, and the supposedly conservative Short similar investments. Term Fund held 54.11% of its assets in (Id. ¶ 276(b)-(c).) Although the markets as a whole experienced a significant decline because of the credit crisis, Plaintiffs assert that the Funds’ losses were not a result of normal market factors. Instead, they allege that the Funds declined because of their investment in securities. numerous (Id. ¶ low-priority 295.) These tranches2 of low-quality, asset-backed high risk investments had the effect of exposing “the Funds and their investors to the credit risk equivalent of an investment in the underlying portfolio of assets leveraged between 10 to 50-to-1. (Id. ¶ 296(b).) This violated the Funds’ fundamental restriction that “they would not use leverage for investment purposes” but only for emergency purposes to maintain liquidity. (Id. ¶ 293.) 2 “Tranche” is the French world for “slice.” In the field of investments, tranche refers to a security that its sellers split into smaller pieces to be sold to investors. Where the security is an asset-backed security, like those at issue here, each tranche has different rules for paying its investors. The “top” tranche contains the safest securities, and its investors receive principal and income payments first. The lowest tranche contains the riskiest securities. Its investors receive payment only if all investors in the higher tranches are paid first. Thus, if borrowers default on the assets backing the securities, those who have invested in the lowest tranches bear any losses first. Consulting Servs. Group, LLC v. Morgan Keegan & Co., Nos. 10-02045, MDL 2009, 2010 U.S. Dist. LEXIS 66917, at *4 n.2 (W.D. Tenn. July 2, 2010). 9 When the market began to question the underlying value of mortgage-backed CDOs in 2007, the Funds found themselves holding assets quickly declining in value that they could not readily sell because of the limited market for such investments. 5.) (Id. ¶ From December 31, 2006, to December 31, 2007, the per-share value of the assets held by the High Income Fund, Intermediate Fund, and Short Term Fund dropped respectively by 72%, 70%, and 23%. The collective value of the assets held by all (Id.) three Funds fell from $2.2 billion to $372.5 million. (See Compl., Plaintiffs filed suit on December 6, 2007. ECF No. 1.) This Court consolidated five (Id.) then-separately pending suits and appointed Lead Plaintiffs and Lead Counsel by Order dated September 23, 2008. (Atkinson v. Morgan Asset Mgmt., No. 07-2784, ECF No. 154, Order Granting in Part and Denying in Part Motions for Partial Consolidation, Appointment of Lead Plaintiff, Tenn.)). 2009. federal and Approval of Counsel, at 38-40 (W.D. The Lead Plaintiffs filed the CAC on November 30, The CAC alleges seven causes of action, all based on law. Plaintiffs allege Defendants violated §11, §12(a)(2), and § 15 of the Securities Act of 1933; §§ 11, 22, 30, 34(b), and 47(b) of the Investment Company Act of 1940; and § 10(b), § 20, and Rule 10b-5 of the Securities Exchange Act of 1934. (CAC rescissory ¶¶ 684-766.) damages for Plaintiffs their losses, 10 seek compensatory prejudgment or interest, costs, and reasonable attorneys’ fees. (Id. at 366.) Defendants filed the present Motions to test the adequacy of Plaintiffs’ Complaint. II. JURISDICTION AND STANDARD OF REVIEW Plaintiffs securities bring laws. all This their Court claims thus jurisdiction over Plaintiffs’ suit. under has the federal federal question 28 U.S.C. § 1331. In addressing a motion to dismiss for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6), the Court must construe the complaint in the light most favorable to the plaintiff and accept all well-pled factual allegations as true. League of United Latin Am. Citizens v. Bredesen, 500 F.3d 523, 527 (6th Cir. 2007). A plaintiff can support a claim “by showing any set of facts consistent with the allegations in the complaint.” (2007). Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 563 This standard requires more than bare assertions of legal conclusions. Bovee v. Coopers & Lybrand C.P.A., 272 F.3d 356, 361 (6th Cir. 2001). “[A] formulaic recitation of the elements of a cause of action will not do.” at 555. Twombly, 550 U.S. Any claim for relief must contain “a short and plain statement of the claim showing that the pleader is entitled to relief.” curiam). Erickson v. Pardus, 551 U.S. 89, 93 (2007) (per “Specific facts are not necessary; the statement need only ‘give the defendant fair notice of what the . . . claim is 11 and the grounds upon which it rests.’” Id. (citing Twombly, 550 U.S. at 555.) Nonetheless, a complaint must contain sufficient facts “to ‘state a claim to relief that is plausible on its face’” to survive a motion to dismiss. Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009) (quoting Twombly, 550 U.S. at 570). plausibility standard is not akin to a “This ‘probability requirement,’ but it asks for more than a sheer possibility that Id. (citing Twombly, 550 a defendant has acted unlawfully.” U.S. at 556). of action, “Threadbare recitals of the elements of a cause supported by mere conclusory statements, do not suffice.” Id. at 1949 (citation omitted). A plaintiff with no facts “armed conclusions” and with nothing “unlock the doors of discovery.” more than cannot Id. at 1950. Plaintiffs’ CAC accuses “[e]ach of the RMK Defendants” of being “a participant conduct.” fraud, (CAC ¶ 103.) including heightened Cir. 2008). . a fraudulent scheme and course of Where a plaintiff makes allegations of securities pleading fraud, requirements he of or she Federal must Rule meet of the Civil Frank v. Dana Corp., 547 F.3d 564, 569-70 (6th Procedure 9(b). mistake in Rule 9(b) requires that a party “alleging fraud or . . state with particularity constituting fraud or mistake.” the circumstances Fed. R. Civ. P. 9(b). This heightened pleading standard mandates that plaintiffs alleging 12 fraud 1) specify which statements were fraudulent, 2) indentify the defendant(s) describe “when who and spoke where the the fraudulent statements were “explain why the statements were fraudulent.” statements, made” and 3) 4) Frank, 547 F.3d at 570 (citation and internal quotation marks omitted). “At a minimum, [p]laintiffs must allege the time, place and contents of the misrepresentations upon which they relied” to satisfy Rule 9. Id. (citing Bender v. Southland Corp, 749 F.2d 1205, 1216 (6th Cir. 1984)). III. ANALYSIS A. `34 Act Claims Plaintiffs’ CAC alleges three claims under the Securities and Exchange Act of 1934 (the “`34 Act”). Count V alleges that the Funds, MAM, Morgan Keegan, Regions Bank, and PwC violated § 10 of the `34 Act and Rule 10b-5 promulgated thereunder. (CAC ¶ 742, 750); see also 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5. Count VI of the CAC alleges violations of the same provisions against Regions Bank, Morgan Keegan, and MAM on behalf of the Fiduciary Subclass. (Id. ¶ 752.) Count VII alleges that the officer and director Defendants, Regions, and MK Holding were “control persons” under § 20 of the `34 Act. 78t(a). See § 15 U.S.C. § Plaintiffs’ control person claim may only stand if Plaintiffs successfully plead a primary violation of § 10(b). See 15 U.S.C. § 78t(a); PR Diamonds, Inc. v. Chandler, 364 F.3d 13 671, 696 (6th Cir. 2004). Section 10(b) prohibits, “in connection with the purchase or sale of any security,” the use of “any 78j(b). manipulative device or contrivance.” 15 U.S.C. § Rule 10b-5, promulgated by the Securities and Exchange Commission, implements that prohibition. See 17 C.F.R. § 240.10b-5; Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 318 (2007). 1. The PSLRA’s heightened pleading standard When a plaintiff alleges a violation of § 10(b) and Rule 10b-5, the Private Securities Litigation Reform Act (“PSLRA”) mandates a heightened required by Rule 9(b). pleading standard greater than that Compare 15 U.S.C. § 78u-4(b)(2), with Fed. R. Civ. P. 9(b); Konkol v. Diebold, Inc., 590 F.3d 390, 396 (6th Cir. requirements” 2009) of marks omitted)). with (noting the PSLRA “the more (citation and exacting pleading internal quotation The PSLRA requires a plaintiff 1) “to state particularity” the facts constituting the alleged violation, including “specifying each statement alleged to have been misleading,” 15 U.S.C. § 78u-4(b)(1), and 2) “state with particularity the facts giving rise to a strong inference that the defendant acted with the particular state of mind.” 78 u-4(b)(2). That “particular state of mind” is Id. § known as scienter and requires a plaintiff to show that a defendant’s intention was “to deceive, manipulate or defraud.” 14 Tellabs, 551 U.S. at 313 (quoting Ernst & Ernst v. Hochfelder, 425 U.S. 185, 194 (1976)). An inference of scienter is “strong” within the meaning of the PSLRA if it is “more than merely plausible or reasonable – it must be cogent and at least as compelling as any opposing inference of nonfraudulent intent.” Id. at 314. Allegations of negligence do not support a finding of scienter. Konkol, 590 F.3d at 396. In the Sixth Circuit, a plaintiff at least must state allegations sufficient to find that a defendant acted with recklessness. Mansbach v. Prescott, Ball, & Turben, 598 F.2d 1017, 1023 (6th Cir. 1979); see also Konkol, 590 F.3d at 396. The unreasonable Sixth conduct Circuit which standards of ordinary care.” is defines an recklessness extreme as departure “highly from Mansbach, 598 F.2d at 1025. the The danger “must be so obvious that any reasonable man would have known of it.” Id. 2. Plaintiffs have failed to plead scienter Plaintiffs argue that they have adequately pled scienter as to the named Defendants in Counts V-VI of the CAC. (Plaintiffs’ Consolidated Opposition to Defendants’ Motions to Dismiss, ECF No. 238, at 93-99.) (“Pls’ Resp.”) An examination of the CAC and the relevant case law, however, demonstrates that they have not met the PSLRA’s enhanced burden. 15 a. It is unclear who is a Defendant Plaintiffs’ CAC names as Defendants in their § 10(b) claims the Funds, MAM, Morgan Keegan, Regions Bank, and PwC. (CAC ¶¶ 74, 750, 752.) Paragraph 88 of the CAC advises that the terms MAM Keegan and Morgan relevant, their “shall respective each be officers deemed and to include, employees as Defendants, including John Doe One through Twenty.” as named Thus, at first glance, one would conclude that Plaintiffs are stating claims against the officers and directors of Morgan Keegan and MAM by the use of those terms in Counts V and VI. However, examining the other counts of the CAC, one finds that Plaintiffs appear to state explicitly when they are suing, or not suing, “Defendant Officers and Directors” in the relevant count. (Cf. CAC ¶ 684 (explicitly excluding the directors and officers for claims under the `33 Act); ¶ 758 (suing the officers and directors for control person liability under § 20 of the `34 Act).) points The to Motion this to Dismiss ambiguity of and the Individual states that Defendants3 the Individual Defendants are unsure whether Plaintiffs have sued them under § 10(b). (Memorandum Defendants’ Motion Plaintiffs’ own to of Law in Dismiss, Response fails 3 Support ECF to No. of the 226-1, answer the Individual at 1 n.1.) Individual Allen B. Morgan, Jr.; J. Kenneth Alderman; Carter E Anthony; Brian B. Sullivan; Joseph C. Weller; John T. Weller; G. Douglas Edwards; Charles D. Maxwell; David M. George; Michelle F. Wood; James C. Kelsoe, Jr.; David H. Tannehill; and Thomas R. Gamble. 16 Defendants’ query. Plaintiffs state instead that they have “allege[d] the role of each Defendant that was instrumental to the Funds’ includes mismanagement” officers Defendants. and without directors clarifying such as whether the that Individual (Pls’ Resp. at 93.) When it is possible to ask legitimately, after reading a four-hundred-page Complaint, who is being sued for what on a particular count, Plaintiffs have not met the PSLRA’s pleading standards. See 15 U.S.C. § 78u-4(b)(1)-(2) (requiring that a plaintiff “state with particularity” all facts surrounding the alleged misrepresentations or omissions and why a finding of scienter is appropriate). It is not for the Court or for Defendants to ask who is “relevant” (CAC ¶ 88) to a particular count. It is Plaintiffs’ duty to state clearly against whom See Frank, 547 F.3d at 570. they seek damages. arguably do not meet requiring plausibility. a “short and plain even Rule 8’s more Counts V and VI forgiving standard See Fed. R. Civ. P. 8(a)(2) (requiring statement of the claim showing pleader is entitled to relief” (emphasis added)). that the Therefore, they cannot meet the “more exacting” standards of Rule 9(b) and the PSLRA. Konkol, 590 F.3d at 396 (internal quotation marks and citation omitted). On this basis alone, DISMISSAL of the `34 Act counts is appropriate. 17 b. Plaintiffs fail under group pleading Alternatively, assuming that Plaintiffs have pled with the requisite particularity against whom they bring their claims, Plaintiffs have failed to demonstrate that “an inference of scienter . . . [is] at least as compelling as any opposing inference of nonfraudulent intent.” Tellabs, 551 U.S. at 314. Plaintiffs invoke the “group pleading” doctrine, also called the “group published doctrine,” which provides that, “[i]n cases of corporate fraud where the false or misleading information is conveyed in prospectuses, registration statements, annual reports, press releases, or other ‘group published information,’ it is reasonable to presume actions of the officers.”4 that these are the collective City of Monroe Emps. Ret. Sys. v. Bridgestone Corp., 399 F.3d 651, 689 (6th Cir. 2005). Following the passage of the PSLRA, the Fifth Circuit and many district courts have found that the group pleading doctrine no longer applies. See Southland Sec. Corp. v. INSpire Solutions, Inc., 365 F.3d 353, 364 (5th Cir. 2004) (collecting cases). circuits that have continued to apply the doctrine Those have generally done so without analysis of the potential effects of the PSLRA’s passage. (collecting cases). See Bridgestone, 399 F.3d at 690 n.33 The Sixth Circuit has not taken a position 4 Here, Plaintiffs arguably seek to expand the group pleading doctrine to include not only the officers but also the directors, related corporate entities, and the Funds’ auditor. (Pls’ Resp. at 95-96.) Cf. Bridgestone, 399 F.3d at 689. 18 on the continuing viability of the group pleading doctrine. See id. at 690 (noting that the court “need not decide here the current viability of the group published doctrine”). For the purposes of this analysis, the Court will assume the doctrine applies. The Sixth Circuit has identified “usually relevant to scienter.” nine factors that are Helwig v. Vencor, Inc., 251 F.3d 540, 552 (6th Cir. 2001) (en banc), abrogated in part by Tellabs, 551 U.S. at 324 (expressly abrogating the Sixth Circuit’s prior, higher standard requiring that the inference that a defendant acted with scienter be the “most plausible of competing inferences”); see also PR Diamonds, 364 F.3d at 682-83 (noting that the Helwig factors remain “probative of scienter”). Those nine factors are: (1) insider trading at a suspicious time or in an unusual amount; (2) divergence between internal reports and external statements on the same subject; (3) closeness in time of an allegedly fraudulent statement or omission and the later disclosure of inconsistent information; (4) evidence of bribery by a top company official; (5) existence of an ancillary lawsuit charging fraud by a company and the company's quick settlement of that suit; (6) disregard of the most current factual information before making statements; (7) disclosure of accounting information in such a way that its negative implications could only be understood by someone with a high degree of sophistication; (8) the personal interest of certain directors in not informing disinterested directors of an impending sale of stock; and (9) the selfinterested motivation of defendants in the form of saving their salaries or jobs. 19 Helwig, 251 F.3d at 552 (citation omitted). are not an exhaustive list. Court must view the The Helwig factors PR Diamonds, 364 F.3d at 682. Plaintiffs’ CAC as a whole, take The into account documents incorporated into the CAC by reference, and engage in a comparative inquiry about how likely it is that scienter, as opposed to non-fraudulent activity, arises from the underlying facts. Plaintiffs this case. Tellabs, 551 U.S. at 323. point to four factors (Pls’ Resp. at 98.) suggesting scienter in First, they note those portions of their CAC that allege the proximity between the allegedly fraudulent investments statements and the about later the liquidity disclosure of of those the Funds’ investments’ illiquidity. (CAC ¶¶ 182-83, 187, 195-98, 220(h), 220(l), 221- 22, 470-72.) Temporal proximity alone, however, cannot support a finding of scienter. (6th Cir. 2004). See Fidel v. Farley, 392 F.3d 220, 232 The facts alleged in this case illustrate why. The credit crisis that caused the collapse of the market for asset backed securities, like those in which the Funds invested, occurred over a relatively short time. (Cf. CAC ¶ 154 (graph depicting the sharp and sudden drop of the share price of the Intermediate Fund in mid-to-late 2007).) It is at least equally possible that the temporal proximity occurred because of the closeness of the sudden market crash to the July 30, 2007 end 20 date of the Funds’ fiscal years. Nonetheless, proximity must weigh in the scienter analysis. The second factor Plaintiffs cite is the disclosure of accounting information in such a way that only a person of a high degree of sophistication could understand it. 189, 195-98, 209, 220, 220(l), 469-72.) (CAC ¶¶ 183, Plaintiffs undercut their theory by admitting that they “do not allege that the dollar value for any security was incorrect at any time during the Class Period.” Plaintiffs (Pls’ Resp. at 22 (emphasis added).) admit that a perfect disclosure of Thus, the facts surrounding the Funds’ investments would not have revealed that any dollar value assigned to a Fund security was incorrect. Although the cited paragraphs of the CAC reference specific omitted or misleading disclosures about the Funds’ liquidity, when one views Plaintiffs’ inability to allege that any security’s dollar value was overstated in conjunction with the proximity of the Funds’ revelation of illiquidity to the collapse of the credit markets, it becomes increasingly likely that market forces, rather than recklessness, caused the collapse. Plaintiffs’ third factor is that the `34 Act Defendants’ disregarded the most current factual information before making the misleading statements. (Pls’ Resp. at 98.) Particularly relevant here are Plaintiffs’ allegations that Regions, Morgan 21 Keegan, and PwC had actual knowledge that the Funds’ liquidity disclosures were deficient because they issued, underwrote, or audited some of the same securities in which the Funds invested and had reason to know they were illiquid. (Id. ¶ 205.) Such an allegation is damaging and likely would lead to a finding of scienter, because it would mean these Defendants concluded that the investments were illiquid when they analyzed them for independent investors, but stated they were liquid when they purchased or audited them for the Funds. Once again, however, the Plaintiffs severely undermine their own allegation. The CAC states that the Funds invested in two securities that Morgan Keegan underwrote; PwC audited securities twenty the Funds purchased as investments; and the CAC is silent about how many securities Regions issued. (Id.) For Funds that held $2.2 billion twenty securities in assets, two or represent a de minimus amount. (See ¶ 5.) are likely to It is impossible to determine how large a share of the Funds’ investments these securities represented because Plaintiffs fail to indentify the securities by name and do not allege how large a share of the Funds’ assets they represented. Basing knowledge on two or twenty securities among differing investments made over a threeyear period does not support a finding of scienter. A court cannot that infer fraudulent intent 22 from the mere fact a particular defendant had access to information. PR Diamonds, 364 F.3d at 688. This barrier is especially applicable to PwC. “To allege that an independent auditor acted with scienter, the complaint must allege specific facts showing that the deficiencies in the audit were so severe that they strongly suggest that the auditor must have been aware of the corporation’s fraud.” (citations omitted). have been aware of Id. at 694 Plaintiffs cannot allege that PwC must the fraud when Plaintiffs security’s dollar value was incorrect. admit that no (Pls’ Resp. at 22.) Although Plaintiffs plead violations of several provisions of the Generally Accepted Accounting Principles (“GAAP”), (see CAC ¶¶ 531-71), failure to follow GAAP does not by itself state a securities fraud claim. Konkol, 590 F.3d at 400. The Sixth Circuit has described the type of accounting violations that lead to a finding of scienter as “obvious.” F.3d at 685. PR Diamonds, 364 That a perfect audit would not have led PwC to find a misvalued security in the Funds’ portfolios leads the Court to conclude that any errors were not clear violations of “simple accounting rules.” See id. The final factor Plaintiffs assert is that the Defendants had a self-interested motivation. (Pls’ Resp. at 98.) Plaintiffs point to the fees received by MAM, Morgan Keegan, Regions, and Regions Bank for managing and administering the 23 Funds and marketing the Funds’ shares (CAC ¶¶ 41, 45); the substantial bonuses Kelsoe and Tannehill could earn (id. ¶¶ 8384, 86); and Regions’ and Morgan Keegan’s strategy of crossbranding each other’s services. (Id. ¶¶ 651, 654.) When analyzing the self-interest factor, a court must differentiate between “motives common to corporation and executives generally” and “motives to commit fraud.” Every corporation successful. Id. and PR Diamonds, 364 F.3d at 690. business executive wants to appear That Morgan Keegan, MAM, and Regions stood to profit from the success of the Funds does not make a “cogent” case for fraud. See Tellabs, 551 U.S. at 314. Plaintiffs do not allege that Tannehill or Kelsoe ever received a bonus or how much they received, discount these Plaintiffs have not chosen to argue one allegation. They allegations, as well. requiring the Court to (See CAC ¶¶ 83-84, 86.) allege that certain employees of Morgan Keegan read a “published article” revealing that the Funds had purchased many securities from a small Florida dealer who focused on illiquid securities. (CAC ¶ 352.) These unidentified employees became concerned about their investments in the Funds and sold their personal shares. (Id. ¶ 354.) discovered those sales Defendant Edwards, Morgan Keegan’s CEO, and prohibited other selling their personal holdings in the Funds. employees (Id. ¶ 354.) from It is certainly possible to read this allegation to indicate that a 24 corporate leader was concerned that news of his employees’ selling their shares could alert other shareholders to potential losses. (See id.) However, the CAC notes that this revelation about one of the sources of the Funds’ investments came in a published, investor publically could have available gained article. access to the Any same interested information. Edwards may have believed that the Funds were sound investments and that individual employees – the precise number of whom and the size of whose sales the CAC does not reveal – should not undermine this corporate message. (See id. ¶¶ 352-54.) Employing the reading of this allegation most favorable to Plaintiffs, Plaintiffs have not established scienter. Insider trading only raises suspicions “when it is dramatically out of line with maximize prior the information.”5 trading personal practices benefit at from times calculated undisclosed to insider Konkol, 590 F.3d at 399 (citations and internal quotation marks omitted). Plaintiffs do not allege how many employees sold their shares in the Funds, when these sales took place, how many total employees held the Funds’ shares, or whether the individual share sales made a marked difference in the number of shares held by Morgan Keegan employees. 5 Without The information here, of course, was disclosed publically in a published article. (CAC ¶ 352.) 25 more, it is impossible to know whether this was an aberration or indicative of deep, growing concerns about the Funds’ liquidity. Assuming the group pleading doctrine has retained its viability after passage of the PSLRA and viewing the pleadings as a whole, Plaintiffs have failed to demonstrate that the inference of scienter is “at least as compelling as any opposing inference of nonfraudulent intent.” Tellabs, 551 U.S. at 314. Plaintiffs’ pleadings undermine their strongest assertions of scienter and some assertions, like those about violation of the GAAP or the alleged self-interested motives of the Defendants, are entitled to little or no weight. are DISMISSED. Because Counts V and VI of the CAC Plaintiffs have failed to plead a primary violation, they may not bring a claim for controlled person liability under § 20(a) of the `34 Act. 78t(a); PR Diamonds, 364 F.3d at 696. See 15 U.S.C. § The Court, therefore, DISMISSES Count VII of the CAC. B. `33 Act Claims Plaintiffs’ CAC also allege causes of action based on the Securities Act of 1933 (the “33 Act”). (CAC ¶¶ 683-724.) Count I alleges violations of § 11 of the `33 Act, 15 U.S.C. § 77k, against the Funds, Bank, and PwC.6 Morgan Keegan, (Id. ¶ 684.) Morgan Management, Regions The Count’s heading makes clear 6 Auditors such as PwC are only liable for those statements registration statement that they certified. 15 U.S.C. § 77k(a)(4). 26 in the that the claim does not lie against the officer and director Defendants. (See id.) Count II, which is against all Defendants except Regions, PwC, and MK Holding, asserts claims under § 12(a)(2) of the `33 Act, 15 U.S.C. § 77l. Count III alleges control person liability under § 15, 15 U.S.C. § 77o, against the officers and directors of the Funds; MAM; MK Holding; Regions; Morgan Keegan; and the officers and directors of MAM, Morgan Keegan, MK Holding, Regions Bank, and Regions. (CAC ¶ 717.) As with control person liability under the `34 Act, Plaintiffs must successfully state a primary violation of the `33 Act, i.e., Counts I or II, to maintain their control person claims. See 15 U.S.C. § 77o(a); J&R Mktg. v. Gen. Motors Corp., 549 F.3d 384, 398 (6th Cir. 2008). The heightened pleading standards of the PSLRA do not apply to claims under the `33 Act; however, where the claims sound in fraud, the standards of Rule 9(b) do apply. Indiana State Dist. Council of Laborers v. Omnicare, Inc., 583 F.3d 935, 948 (6th Cir. 2009); Rubke v. Capitol Bancorp, Ltd., 551 F.3d 1156, 1161 (9th Cir. 2009). the time, place Thus, “[a]t a minimum, Plaintiffs must allege and which they relied.” contents of the misrepresentations upon Frank, 547 F.3d at 570 (citation omitted). 1. Section 11 claims Section 11 prohibits making “untrue statement[s] of material fact” or omitting statements of material fact in a 27 security’s registration statement. 15 U.S.C. § 77k(a). It protects investors who “acquired” the security in reliance on the representations Id. contained in the registration statement. The CAC identifies with particularity when the supposedly misleading statements were made. (CAC ¶ 690.) clear which statements were misleading: It also makes the Funds claimed to abide by restrictions that prohibited them from holding more than 15% of their assets in illiquid securities and more than 25% of their assets in securities related to the same industry. (See, e.g., id. ¶¶ 162, 276.) Plaintiffs allege that these statements were misleading because the Funds did not, in fact, (See, e.g., id. ¶¶ 171, 276(a)- abide by these restrictions. (c).) Other courts faced with similar § 11 claims have allowed such claims to proceed. See, e.g., Rodney v. KPMG Peat Marwick, 143 F.3d 1140, 1145 (8th Cir. 1998) (allowing claims alleging that the funds violated restrictions on borrowing money, purchasing illiquid securities, and investing in derivatives to proceed); White v. Heartland High-Yield Mun. Bond Fund, 237 F. Supp. 2d 982, 984-86 (E.D. Wis. 2002) (permitting claims against PwC based on securities). support their failure to follow limitations on illiquid Indeed, in one of the cases Defendants cite to argument that Plaintiffs’ claims should be dismissed, the district court reversed itself as to the § 11 claims on reconsideration. See Yu v. State St. Corp., 686 F. 28 Supp. 2d claims 369, 378-81 based on (S.D.N.Y. funds’ 2010) (dismissing over-exposure to plaintiffs’ mortgage backed securities), vacated by 2010 U.S. Dist. LEXIS 70931, at *9-15 (allowing claims to proceed following the filing of amended complaint). Defendants argue that Plaintiffs have failed to plead loss causation. (See, e.g., Memorandum in Support of Defendant Morgan Keegan’s Motion to Dismiss, ECF No. 222-1, at 49-55.) (“Morgan Keegan Mem.”) 11 claim; it is an Loss causation is not an element of a § affirmative adjudication in a motion to dismiss. defense unsuitable for 15 U.S.C. § 77l(b); see Indiana State Dist. Council, 583 F.3d at 947. Plaintiffs have therefore stated a claim under Section 11 of the `33 Act, and Defendants’ Motions to Dismiss this claim are DENIED. 2. Sections 12(a)(2) and 15 claims Section 12(a)(2) creates a cause of action based on “misleading statements, misstatements, or omissions in a . . . prospectus.” 77l(a)(2). J&R Mktg., 549 F.3d at 389; see also 15 U.S.C. § Plaintiffs base their allegations in this count on the same misstatements alleged under the § 11 count. e.g., CAC ¶ 222.) (See, For the reasons stated in the § 11 analysis, Plaintiffs have stated a claim under § 12(a)(2) of the `33 Act. Certain Defendants argue sellers” under § 12(a)(2). that they are not “statutory (See, e.g., Morgan Keegan Mem. at 29 46-47.) A seller is one who 1) passes title, or other interest in the security, to the purchaser for value or 2) successfully solicits the purchase based at least in part on a desire to further his own financial interests or those of the securities’ owner. Pinter v. Dahl, 486 U.S. 622, 647 (1988); Smith v. Am. Nat’l Bank & Trust Co., 982 F.2d 936, 941 (6th Cir. 1992). As the test suggests, whether someone “solicits” a purchase is a fact-bound Defendants’ inquiry Motions unsuited to for Dismiss a Rule 12(b)(6) Plaintiffs’ claims motion. under § 12(a)(2) of the `33 Act are DENIED. Because Plaintiffs have stated primary claims under the `33 Act, they may also state a claim under § 15 for control person liability. 15 U.S.C. § 77o(a); J&R Mktg., 549 F.3d at 398. Section places 15 liability “jointly and severally” on any person who “controls any person liable under section 11 or 12.” 15 U.S.C. § 77o(a). control involves determination. a Whether a party exercised the requisite factual analysis best saved for later The Court, therefore, DENIES Defendants’ Motions to Dismiss Plaintiffs’ control person liability claims under the `33 Act.7 7 Likewise, any arguments about the application of the statue of repose to any individual claims should await factual development of the claims. See 15 U.S.C. § 77m (extinguishing all claims “three years after the security was bona fide offered to the public”). 30 3. Holder Claims Plaintiffs seek to represent a class of individuals who “refrained from redeeming the Funds’ shares during the period from March 1, 2007 through April 30, 2008.” The `33 Act limits claims to purchasers. (CAC ¶ 2(a)(2).) 15 U.S.C. § 77k(a) (noting that the party must have “acquired” the security); 15 U.S.C. § 77l(a)(2) (imposing liability if a the party “offers or sells” a security to an investor based on misstatements in a prospectus or oral communication). Because the proposed class definition includes investors who did not purchase the Funds’ shares during the class period of December 6, 2004 - December 6, See Simmons v. 2007, these holder claims must be DISMISSED. Wolfson, 428 F.2d 455, 456 (6th Cir. 1970) (per curiam); Miller v. Lazard, (noting Ltd., that the 473 `33 F. Supp. Act 2d allows 571, 578 (S.D.N.Y. “purchasers of 2007) registered securities” to hold parties liable for misstatements). C. ICA Claims Count IV of the CAC alleges that all Defendants violated §§ 13, 22, 30, 34(b), and 47(b) of the Investment Company Act of 1940 (“ICA”). (CAC ¶ 725.) As Plaintiffs admit, other than § 47(b), the cited ICA provisions do not contemplate private rights of action. (Pls’ Resp. at 136-37.) Plaintiffs assert that one district court has found an implied private right of action under § 13(a). See Northstar Fin. Advisors, Inc. v. 31 Schwab Invs., 609 F. Supp. 2d 938, 944 (N.D. Cal. 2009). The Ninth Circuit recently reversed that conclusion on interlocutory appeal. Northstar Fin. Advisors, Inc. v. Schwab Invs., No. 09- 16347, ___ F.3d ___, 2010 U.S. App. LEXIS 16706, at *2 (9th Cir. Aug. 12, 2010). The Second Circuit has persuasively explained why it is inappropriate to imply private rights of action under the ICA. See Olmsted v. Pruco Life Ins. Co., 283 F.3d 429, 432-436 (2d Cir. 2002). Exchange The ICA expressly provides that the Securities and Commission, rather than private plaintiffs, right to enforce all provisions of the ICA. 80a-41. has the See 15 U.S.C. § Congress provided an express private right of action to enforce § 36(b) of the ICA, demonstrating that Congress knew how to provide a private right of action when it wanted one. U.S.C. § 80a-35(b) (“An action may be brought See 15 under this subsection by the Commission, or by a security holder of such registered investment company.” (emphasis added)). These two factors create a strong presumption that Congress did not intend to create a private right of action under any section of the ICA that does not specify one. Olmsted, 283 F.3d at 433. Plaintiffs have failed to overcome that presumption, and the Court DECLINES to imply any new private rights of action under the ICA. Plaintiffs’ claims under §§ 13, 22, 30, and 34(b) of the ICA are DISMISSED. 32 Courts have determined that § 47(b) of the ICA contemplates a private right of action. Lessler v. Little, 857 F.2d 866, 874 (1st Cir. 1988); Mathers Fund, Inc. v. Colwell Co., 564 F.2d 780, 783 (7th Cir. 1977); Hamilton v. Allen, 396 F. Supp. 2d 545, 558-60 (E.D. Pa. 2005); In re Mut. Funds Inv. Litig., 384 F. Supp. 2d 873, 880-81 (D. Md. 2005). that any contract whose terms or Section 47(b) provides performance would violating any provision of the ICA is unenforceable. § 80a-46(b)(1). involve 15 U.S.C. It gives “any party” to the contract the right to seek rescission. Id. (b)(2). Plaintiffs argue that the underlying contract is the underwriting agreement between the Funds and Morgan Keegan. (Pls’ Resp. at 139.) Plaintiffs are not parties to the underwriting agreement and, therefore, may not assert a direct remedy under § 47(b). 874; Hamilton, 396 F. Supp. 2d at 558. Lessler, 857 F.2d at A plaintiff may bring a § 47(b) claim derivatively on behalf of the Funds, but this suit is a direct action. 558. suit against the defendants, not a derivative Lessler, 857 F.2d at 874; Hamilton, 396 F. Supp. 2d at Plaintiffs’ claim under § 47(b) of the ICA is prohibited and is DISMISSED. IV. CONCLUSION Defendants’ GRANTED because Motions to Plaintiffs Dismiss have failed properly, as required by the PSLRA. 33 the `34 to Act claims plead are scienter Defendants’ Motions to Dismiss the `33 Act claims are DENIED, with the exception of any claims on behalf of those who did not purchase shares of the Funds during the class period. DISMISSED for lack of standing. All such holder claims are Plaintiffs’ claims under the ICA are also DISMISSED. In the last sentence of their response, Plaintiffs seek permission to amend the CAC “to cure any deficiencies” the Court may find. (Pls’ Resp. at 140.) This request is unsupported by any argument or citation to authority. The request is DENIED. See PR Diamonds, 364 F.3d at 699 (noting that “a bare request in an opposition to a motion to dismiss” without any argument does not constitute a motion to amend (citations and internal quotation marks omitted)); cf. Mitan v. Duval (In re Mitan), 573 F.3d 237, 248 n.5 (6th Cir. 2009) (declining to consider a “last-sentence request” because applicants provided no citation of authority or other support). So ordered this 30th day of September, 2010. s/ Samuel H. Mays, Jr. SAMUEL H. MAYS, JR. UNITED STATES DISTRICT JUDGE 34
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