Securities And Exchange Commission v. Daifotis et al, No. 3:2011cv00137 - Document 74 (N.D. Cal. 2011)
Court Description: ORDER GRANTING DEFENDANTS' MOTIONS FOR RECONSIDERATION AND MODIFYING IN PART ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS' MOTIONS TO DISMISS AND STRIKE by Judge Alsup granting 66 Motion for Reconsideration ; granting 67 Motion for Reconsideration (whalc2, COURT STAFF) (Filed on 8/1/2011)
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Securities And Exchange Commission v. Daifotis et al Doc. 74 1 2 3 4 5 6 IN THE UNITED STATES DISTRICT COURT 7 FOR THE NORTHERN DISTRICT OF CALIFORNIA 8 9 11 For the Northern District of California United States District Court 10 SECURITIES AND EXCHANGE COMMISSION, Plaintiff, 12 13 14 15 No. C 11-00137 WHA v. KIMON DAIFOTIS and RANDALL MERK, Defendants. / ORDER GRANTING DEFENDANTS’ MOTIONS FOR RECONSIDERATION AND MODIFYING IN PART ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS’ MOTIONS TO DISMISS AND STRIKE 16 17 INTRODUCTION 18 Defendants Kimon Daifotis and Randall Merk move for reconsideration of the order 19 granting in part and denying in part their motions to dismiss and strike portions of the complaint 20 against them in light of the subsequent Supreme Court decision, Janus Capital Group, Inc. v. 21 First Derivative Traders, 131 S.Ct. 2296 (2011). For the following reasons, defendants’ motions 22 for reconsideration are GRANTED, and the order granting in part and denying in part defendants’ 23 motions to dismiss and strike is MODIFIED IN PART. 24 STATEMENT 25 On June 6, 2011, an order granted in part and denied in part defendants’ motions to 26 dismiss and strike the complaint against them in this enforcement action that alleges securities 27 law violations in defendants’ management of the Schwab YieldPlus Fund. The background and a 28 review of the complaint can be found in that order. On June 13, 2011, the Supreme Court issued its decision in Janus Capital Group, Inc. v. First Derivative Traders. That decision will be Dockets.Justia.com 1 reviewed below. Defendants moved for leave to file motions for reconsideration and leave was 2 granted. Defendants’ motions for reconsideration were heard on July 28. 3 ANALYSIS 4 A. JANUS CAPITAL GROUP, INC. V. FIRST DERIVATIVE TRADERS 5 Janus considered whether a mutual fund investment adviser could be held liable in a 6 private action under Securities and Exchange Commission Rule 10b-5 for false statements 7 included in its client mutual funds’ prospectuses. Justice Thomas writing for the Court concluded 8 that the mutual fund investment adviser could not be held liable because it did not “make” the 9 statements in the prospectuses. The procedural posture of Janus was whether the complaint there 11 For the Northern District of California United States District Court 10 stated a claim on which relief could be granted. In interpreting Rule 10b-5’s prohibition making it “unlawful for any person, directly or 12 indirectly, . . . [t]o make any untrue statement of a material fact” in connection with the purchase 13 or sale of securities, Janus began with the following: “One ‘makes’ a statement by stating it.” 14 After considering dictionary definitions and uses of the word “make,” Janus held that the phrase 15 at issue in Rule 10b-5 (“[t]o make any . . . statement”) is the “approximate equivalent” of “to 16 state.” Thus: 17 18 19 20 21 22 23 24 For purposes of Rule 10b-5, the maker of a statement is the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it. Without control, a person or entity can merely suggest what to say, not “make” a statement in its own right. One who prepares or publishes a statement on behalf of another is not its maker. And in the ordinary case, attribution within a statement or implicit from surrounding circumstances is strong evidence that a statement was made by — and only by — the party to whom it is attributed. This rule might best be exemplified by the relationship between a speechwriter and a speaker. Even when a speechwriter drafts a speech, the content is entirely within the control of the person who delivers it. And it is the speaker who takes credit — or blame — for what is ultimately said. 131 S.Ct. at 2302. Janus then went on to state that this rule follows from Central Bank of Denver, N.A. v. 25 First Interstate Bank of Denver, N.A., 511 U.S. 164 (1994), which held that a private right of 26 action does not lie against aiders and abettors of alleged Rule 10b-5 violations. “If persons or 27 entities without control over the content of a statement could be considered primary violators who 28 ‘made’ the statement, then aiders and abettors would be almost nonexistent.” In addition, the 2 1 Court noted that it followed from Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 2 552 U.S. 148 (2008), “that the maker of a statement is the entity with authority over the content of 3 the statement and whether and how to communicate it.” 4 The Supreme Court held that under this rule the mutual fund investment adviser did not 5 “make” the statements in its client mutual funds’ prospectuses. A footnote added a potentially 6 important caveat that “as long as a statement is made, it does not matter whether the statement 7 was communicated directly or indirectly to the recipient” — but in any event “attribution” of the 8 statement to the alleged primary violator “is necessary.” Janus concluded by noting explicitly 9 that it is insufficient for the alleged primary violator to have been “significantly involved” in preparing the statement or “assist[ing]” the entity with ultimate control in “crafting” the 11 For the Northern District of California United States District Court 10 statement. 12 Our court of appeals has since noted that Janus “set[] the pleading bar even higher in 13 private securities fraud actions seeking to hold defendants primarily liable for the misstatements 14 of others.” Reese v. BP Exploration (Alaska) Inc., — F.3d —, No. 10-35128, 2011 WL 2557238, 15 at *10 n.8 (9th Cir. June 29, 2011). 16 Both sides agree that this order must reconsider the order granting in part and denying in 17 part defendants’ motions to dismiss and strike, at least in part, pursuant to these new principles, 18 and this order so finds. With the scope of consequent modifications to the order to be considered 19 below, the motions for reconsideration are GRANTED. THE CLAIMS AT ISSUE IN THE RECONSIDERATION MOTIONS 20 B. 21 Defendants’ instant motions for reconsideration target the claims in the complaint for: 22 (1) violations of Section 10(b) of the Exchange Act (15 U.S.C. 78j(b)) and Rule 10b-5 thereunder 23 (17 C.F.R. 240.10b-5); (2) aiding and abetting violations of Section 10(b) of the Exchange Act 24 (15 U.S.C. 78j(b)) and Rule 10b-5 thereunder (17 C.F.R. 240.10b-5); (3) violations of Section 25 17(a) of the Securities Act (15 U.S.C. 77q(a)); and (6) violations of Section 34(b) of the 26 Investment Company Act (15 U.S.C. 80a-33(b)). The other claims in the complaint will not be 27 addressed by this order and the holdings of the order on defendants’ motions to dismiss as to 28 those claims will not be disturbed. 3 1 C. CLAIM ONE: PRIMARY LIABILITY UNDER RULE 10B-5 2 The parties agree that defendants are sufficiently alleged to have been “makers” of certain 3 alleged misstatements identified in the complaint. In other words, no one argues that claim one 4 should be dismissed entirely as to either defendant after Janus. Defendant Merk concedes that the 5 following statements are sufficiently alleged to have been “made” by him to serve as a basis for 6 claim one liability even under Janus: 7 1. Registration statement signed by Merk filed on November 15, 2006 (Compl. ¶¶ 123–24); and 2. Set of questions and answers that listed Merk as the author published on the Schwab website in August 2007 (Compl. ¶ 145). 8 9 Defendant Daifotis concedes that the following statements are sufficiently alleged to have been 11 For the Northern District of California United States District Court 10 “made” by him to serve as a basis for claim one liability even under Janus: 12 • Advertisement quoting Daifotis and containing his picture in September 2005 (Compl. ¶ 74(f)); • Brochure, attributing a statement to Daifotis, sent to investors in Spring 2006 (Compl. ¶ 74(b)); • Statement by Daifotis in a conference call with registered investment advisers in August 2007 (Compl. ¶ 68); • Statement by Daifotis in a conference call with registered investment advisers on August 14, 2007 (Compl. ¶ 141); and • Statement by Daifotis in a conference call with registered investment advisers on August 16, 2007 (Compl. ¶ 142). 13 14 15 16 17 18 19 Claim one thus remains against both defendants, as the above alleged misstatements are 20 sufficiently alleged to have been made by them. 21 The Commission asserts that there are two other alleged misstatements that are 22 sufficiently pled as having been “made” by defendant Daifotis pursuant to Janus. 23 First, the Commission points to alleged misstatements in a November 2007 “Manager’s 24 Discussion” issued to the public. The complaint states that the “Manager’s Discussion” 25 document was “reviewed by Daifotis” and “was issued to the public under his title ‘Manager’” 26 (Compl. ¶ 159). The Commission argues that the “manager” referenced in the document was 27 Daifotis, and defense counsel argue that “manager” could refer to a variety of people or entities. 28 This order, however, must focus on what the complaint says; again, it says this document “was 4 1 issued to the public under his title ‘Manager’” (emphasis added). The complaint’s allegations 2 impress upon the reader that Daifotis was the manager being referred to as the speaker in the 3 document, and in addition that he reviewed the document before it was issued, which would only 4 be consistent if he was the “manager” being referred to as the speaker. If the facts show 5 something different, it will undoubtedly be the subject of a motion for summary judgment, but 6 that is not our issue now. As alleged, the complaint states a claim for violation of Rule 10b-5 7 based on alleged misstatements in the November 2007 “Manager’s Discussion” against defendant 8 Daifotis. Thus, one additional alleged misstatement — in addition to the above five — is 9 sufficiently pled under the Janus standard against defendant Daifotis. Second, the Commission points to alleged misstatements in an advertisement described in 11 For the Northern District of California United States District Court 10 paragraph 74(g) of the complaint, which states that the advertisement “included a picture of 12 Daifotis” (emphasis omitted). As alleged, this is insufficient to state a claim under Janus — 13 Daifotis is not sufficiently alleged to have been the “maker” of the statements in the 14 advertisement solely based on an allegation that the advertisement included a picture of him. This 15 order expresses no opinion about whether further allegations could be made about the 16 advertisement to sufficiently attribute it to Daifotis for pleading purposes. 17 Other than these two contested allegations and the alleged misstatements that defendants 18 concede are sufficient to state a claim (reviewed above), all other alleged misstatements in the 19 complaint are not sufficiently pled as having been “made” by defendants to serve as a basis for 20 claim one liability under Janus. The Commission does not contest this. In other words, the 21 Commission does not oppose that Janus renders all other alleged misstatements in the complaint 22 ineligible to serve as a basis for claim one liability against either defendant. 23 Moreover, it is unnecessary to parse further whether various individual alleged 24 misstatements could meet the Janus standard if pled differently, because, as stated clearly in the 25 order on defendants’ motions to dismiss, discovery is proceeding as to all alleged false 26 statements. For this reason it is inappropriate to strike any allegations just because they do not 27 sufficiently serve as a basis for primary liability on their own, as defendant Daifotis requests. A 28 motion to strike should only be granted if “the matter to be stricken clearly could have no possible 5 1 bearing on the subject of the litigation.” Castaneda v. Burger King Corp., 597 F. Supp. 2d 1035, 2 1046 (N.D. Cal. 2009). That is not the case here. As some of the statements are properly pled 3 under Janus, reasonable discovery is allowed into other statements related to the same alleged 4 fraud. Then, at summary judgment time, we can sort which raise issues of fact under the Janus 5 standard. 6 For the foregoing reasons, there are six alleged misstatements as to defendant Daifotis and 7 two alleged misstatements as to defendant Merk that meet the pleading standard to state a claim 8 under Rule 10b-5 pursuant to Janus, and claim one will proceed as to the current complaint only 9 on those alleged misstatements. D. 11 For the Northern District of California United States District Court 10 CLAIM TWO: AIDING AND ABETTING RULE 10B-5 VIOLATIONS Defendants next argue that the complaint must be dismissed as to claim two for aiding and 12 abetting Rule 10b-5 violations under Janus. As stated in the order on defendants’ motions to 13 dismiss, the aiding and abetting claims brought here have three elements: (1) a primary violation 14 of the relevant securities law; (2) actual knowledge by the alleged aider and abettor of the primary 15 violation and of his or her role in furthering it; and (3) substantial assistance in commission of the 16 primary violation, see Ponce v. S.E.C., 345 F.3d 722, 737 (9th Cir. 2003), and each prong must be 17 pled with the particularity required by FRCP 9(b), see, e.g., S.E.C. v. Berry, 580 F. Supp. 2d 911, 18 924 (N.D. Cal. 2008). Defendants argue that, as to the primary violation prong, the complaint 19 does not meet the Janus standard in alleging primary violations by others. As an initial matter, defendants were not granted leave to file a motion for reconsideration 20 21 as to any of the claims except the “primary liability” claims (Dkt. No. 61). Defendants were not 22 granted leave to move for reconsideration of the order on their motions to dismiss as to claim two. 23 Nevertheless, even if leave had been granted, modification of the order under Janus is 24 inappropriate. The order on defendants’ motions to dismiss stated, as to whether primary violations were 25 26 adequately stated as a basis for the aiding and abetting claims against defendants (Dkt. No. 58 at 27 11): 28 As to the first prong — the primary violation — the complaint sets forth many alleged misrepresentations, and it is undisputed that the complaint contains direct 6 1 2 3 4 statements by Daifotis and Merk that serve as a basis for the direct liability claims against them, as set forth above. The same alleged misrepresentations by Merk can serve as a primary violation underlying aiding and abetting by Daifotis, and vice versa. Alternatively, as the Commission points out, the directly attributed statements are just some of the pled misstatements that can otherwise be attributed to the Schwab entities, which alleged misstatements may serve as the primary violations for aiding and abetting liability. 5 Defendants present no reason to modify this holding under Janus. First, the complaint still 6 contains direct statements by Daifotis and Merk that serve as a basis for the direct liability claims 7 against them, and the alleged primary violations by one can still underlie the aiding and abetting 8 claim against the other. 9 Second, defendants argue that the complaint pleads various alleged misstatements made by the Schwab entities but does not sufficiently identify which of the Schwab entities “made” 11 For the Northern District of California United States District Court 10 each specific misstatement in Janus terms. In other words, the allegations do not attribute the 12 entity maker exclusive of other entities as to each misstatement. This is not surprising given that 13 the complaint was filed before Janus was decided. For the reasons stated, claim two remains 14 against defendants. If the Commission chooses to move for leave to file an amended complaint, 15 perhaps it will more clearly attribute each misstatement to a specific Schwab entity pursuant to 16 Janus. In any event, and as stated, discovery is proceeding as to all alleged false statements. 17 E. 18 Defendant Daifotis argues that Janus should also make it harder to plead a claim of CLAIM THREE: JANUS DOES NOT APPLY TO SECTION 17(A) 19 violation of Section 17(a). Counsel point out that both Section 17(a) and Section 10(b) “forbid 20 making a material misstatement or omission in connection with the offer or sale of a security by 21 means of interstate commerce.” S.E.C. v. Dain Rauscher, Inc., 254 F.3d 852, 855–56 (9th Cir. 22 2001) (emphasis added). Nevertheless, this order holds that Janus does not apply to claims 23 brought under Section 17(a). 24 Janus was very specifically a decision about claimed violations of Rule 10b-5. 25 Importantly, the word “make,” which was the very thing the Supreme Court was interpreting in 26 Janus, is absent from the operative language of Section 17(a). Rather, Section 17(a) makes it 27 unlawful (1) “to employ any device, scheme, or artifice to defraud,” (2) “to obtain money or 28 7 1 property by means of any untrue statement” or omission of a material fact, or (3) “to engage in” 2 certain types of transactions (emphasis added). 3 Moreover, Janus’s stringent reading of the word “make” followed from the Court’s prior 4 decisions limiting the scope of implied private rights of action under Rule 10b-5, as reviewed 5 above. The same rationale does not apply in the context of Section 17(a) because there is already 6 no implied private right of action for Section 17(a) claims. See In re Wash. Pub. Power Supply 7 Sys. Sec. Litig., 823 F.2d 1349, 1358 (9th Cir. 1987) (holding that there is no implied private right 8 of action under Section 17(a)). 9 based on defendants’ request to apply Janus to claim three. CLAIM SIX: JANUS DOES NOT APPLY TO SECTION 34(B) 11 For the Northern District of California United States District Court 10 For these reasons, this order will not modify the order on defendants’ motions to dismiss F. 12 Similarly, defendants argue that Janus should also make it harder to plead a Section 34(b) 13 claim. Section 34(b) does include the word “make,” in stating: “It shall be unlawful for any 14 person to make any untrue statement of a material fact in any registration statement, application, 15 report, account, record, or other document filed or transmitted . . .” 16 Yet, here too, Janus shall not be applied to limit claims made under Section 34(b) because 17 Janus itself was limited to claims of primary violations of Rule 10b-5. Moreover, as stated 18 above, Janus’s stringent reading of the word “make” followed from the Court’s prior decisions 19 limiting the scope of implied private rights of action under Rule 10b-5, and the same rationale 20 does not apply in the context of Section 34(b) because there is already no implied private right of 21 action for Section 34(b) claims. See Bellikoff v. Eaton Vance Corp., 481 F.3d 110, 117 (2d Cir. 22 2007), cited with approval in Northstar Fin. Advisors, Inc. v. Schwab Invs., 615 F.3d 1106 (9th 23 Cir. 2010) (no implied private right of action under Section 34(b)). To hold otherwise may cabin 24 Section 34(b) liability only to entity defendants that bear the statutory obligation to file 25 documents with the Commission. This would change the scope of defendants that may be 26 targeted by Section 34(b) based on a Supreme Court decision that in no way even addressed 27 Section 34(b). This order cannot and need not take such a step. Janus was not a touchstone to 28 8 1 change myriad laws that happen to use the word “make” — it was a decision interpreting primary 2 liability under Rule 10b-5. 3 Therefore, this order will leave claim six untouched by Janus. 4 G. 5 In his reply brief, defendant Daifotis requests for the first time a ruling that portions of the 6 order on defendants’ motions to dismiss concerning certain of defendant Merk’s arguments in his 7 motion to dismiss should also apply to defendant Daifotis (Reply 11). 8 9 DEFENDANT DAIFOTIS’S REQUEST FOR CLARIFICATION Defendant Daifotis is not entitled to such a ruling. The arguments made by defendant Merk included discussion of the allegations made against him specifically. Defendant Daifotis made no such arguments. Instead, he included a footnote that stated generally, “Mr. Daifotis 11 For the Northern District of California United States District Court 10 joins in and incorporates by reference the parallel motion to dismiss . . . by Defendant Randall 12 Merk” (Dkt. No. 38 at 1 n.2). 13 Defendants Daifotis and Merk were entitled to file a joint motion and apply various legal 14 points to the allegations against each of the two defendants in one brief. Alternatively, they were 15 entitled to file separate briefs — as they did — and raise separate arguments in each. In contrast, 16 defendants were not entitled to combine their two 25-page briefs to set forth 50 pages worth of 17 different arguments and then as to the arguments found in the other defendant’s brief simply say 18 “me too.” If a defendant did not actually apply a legal point to the case against him, he cannot 19 cure the problem with a general joinder in a footnote. Therefore, defendant Daifotis is not 20 entitled to the “clarification” he seeks that the portions of the order on defendants’ motions to 21 dismiss concerning arguments made solely by defendant Merk apply to him too. CONCLUSION 22 23 For the reasons stated, defendants’ motions for reconsideration are GRANTED, and the 24 order granting in part and denying in part defendants’ motions to dismiss and strike is MODIFIED 25 IN PART. 26 complaint WITHIN 21 CALENDAR DAYS of the date of this order (Dkt. No. 65). The admonition As stated by prior order, the Commission may move for leave to file an amended 27 28 9 1 remains that discovery should be proceeding in earnest as to all claims and all alleged false 2 statements regardless of whether they state a claim by themselves. 3 IT IS SO ORDERED. 4 5 Dated: August 1, 2011. WILLIAM ALSUP UNITED STATES DISTRICT JUDGE 6 7 8 9 11 For the Northern District of California United States District Court 10 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 10
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