Gold v. Ford Motor Company et al
MEMORANDUM OPINION re 21 motion to dismiss. Signed by Judge Leonard P. Stark on 4/2/12. (ntl)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE
BRADD GOLD, Individually and on Behalf :
of All Others Similarly Situated,
Civil Action No. 10-587-LPS
FORD MOTOR COMPANY and FORD
MOTOR COMPANY CAPITAL TRUST II, :
Norman M. Monhait and P. Bradford deLeeuw, ROSENTHAL, MONHAIT & GODDESS, P.A.,
Attorneys for Plaintiff.
Stuart J. Baskin, Jerome S. Fortinsky, and Christopher R. Fenton, SHEARMAN & STERLING
LLP, New York, NY.
Jon E. Abramczyk and John P. DiTomo, MORRIS, NICHOLS, ARSHT & TUNNELL LLP,
Attorneys for Defendants.
Currently pending before the Court is Defendants' Motion to Dismiss the Amended
Complaint for Failure to State a Claim. (D.I. 21) The Court held a hearing on September 22,
2011. (D.I. 30) (hereinafter "Tr.") For the reasons set forth below, the Court will grant
Defendants' motion to dismiss.
The Parties and the Securities
In 2002, Defendant Ford Motor Company ("Ford") raised capital through the creation of
the Ford Motor Company Capital Trust II ("Trust"). (D.I. 19 ~~ 8, 10) The Trust sold 90 million
6.5% Cumulative Convertible Trust Preferred Securities ("Trust Preferred Securities") for $50
each to the investing public, and invested the proceeds of that offering in Ford's 6.50% Junior
Subordinated Convertible Debentures (the "Debentures"). (/d.) The Debentures are long-term
unsecured debt of Ford; as the holder ofthe Debentures, the Trust is entitled to receive quarterly
interest payments at a rate of 6.50% per year until January 15, 2032, when the Debentures
The Trust Preferred Securities trade on the New York Stock Exchange ("NYSE") and
entitle holders to receive quarterly cash distributions at an annual rate of 6.50% of the $50
liquidation amount per security ("Distributions"). (Itl
10) Under the terms of the Debentures,
Ford holds the right to defer interest payments for up to 20 consecutive quarters; at the end of
any deferral period, Ford and the Trust are required to pay all interest and Distributions then
accrued and unpaid, respectively. (Itl
Plaintiff Bradd Gold ("Gold") was an owner of approximately 21,800 Trust Preferred
Securities. (!d. ~ 6) Gold filed the present litigation in his capacity as an individual shareholder,
and also on behalf of a purported class. 1
The Events Leading to the Present Litigation
Ford Defers Interest Payments and Distributions
The Trust regularly paid quarterly Distributions on the Trust Preferred Securities through
12) In early 2009, however, Ford announced that, beginning with the
interest payment due on April15, 2009, it would exercise its authority to defer interest payments
on the Debentures, which in tum would defer Distributions to holders of the Trust Preferred
Ford Resumes Interest Payments and Distributions
On the morning of June 30,2010, at approximately 8:59a.m., Ford announced that it
would pay the interest that had accrued on the Debentures since April15, 2009, and resume
quarterly interest payments beginning on July 15,2010.
14) Ford also announced that the
Trust, in tum, would pay previously deferred Distributions on the Trust Preferred Securities, and
would resume quarterly Distribution payments beginning on July 15,2010. (!d.) According to
Ford's announcement, the Trust would make its Distribution payments "on July 15, 2010, to the
holders of record of the Trust Preferred Securities on June 30, 2010." (!d.)
The NYSE Announces the Ex-Distribution
Date for the Trust Preferred Securities
At around 11 :49 a.m. on June 30, 2010, the NYSE posted an electronic notice to the
effect that (a) the exact amount ofthe July 15,2010 Distribution per Trust Preferred Security and
0n September 10, 2010, Gold filed an unopposed motion for appointment as Lead Plaintiff and
for approval ofhis selection of Lead Counsel, which the Court subsequently granted on October
4, 2010. (D.I. 8; D.l. 16) No class has been certified at this point.
(b) the date on which the Trust Preferred Securities would be "ex-distribution" would both be
subsequently determined. (Id
18) The "ex-distribution date" determines when the right to a
distribution no longer transfers with the sale of a security. If a security is purchased on or after
the ex-distribution date, the seller receives the distribution rather than the buyer. Conversely, if
the security is purchased before the ex-distribution date, the buyer receives the distribution.
(D.I. 22 at 8 n.l; D.l. 24 at 5 n.l)
On the afternoon of June 30, 2010, after Ford's announcement, the NYSE posted an
electronic notice setting the "ex-distribution" date for Ford's forthcoming distributions as July 1,
2010. (D.I. 19 ~ 18) The NYSE also set a "due bill period" for June 28, 29, and 30, requiring
that any trades in the Trust Preferred Securities made during that three-day period would entitle
the purchasers, rather than the sellers, to receive the July 15, 2010 Distribution payments. (Id
Thus, whereas the June 30 "record date" announced by Ford initially determined which
shareholders would receive the July 15, 2010 distribution from the Trust, the July 1 "exdistribution date" and "due bill" announcement by the NYSE ultimately determined whether
certain record holders as of June 30 could retain the forthcoming July 15 distribution or would,
instead, have to provide that distribution to those to whom such record holders had sold their
Gold Sells Trust Preferred Securities Before the Ex-Distribution Date
On June 30, 2010, during the interval between Ford's announcement in the morning and
the NYSE's determination that afternoon of the ex-distribution date, Gold sold 13,800 shares of
the Trust Preferred Securities. (Id
16-18) Because those sales occurred before the July 1,
2010 ex-distribution date, and during the "due bill period" announced by the NYSE, Gold was
not entitled to be paid and retain the July 15, 2010 Distribution payments for the shares he sold.
Gold Files Suit Against Defendants
On July 8, 2010, Gold filed suit against Ford and the Trust, alleging securities fraud in
connection with the July 15,2010 Distributions. On November 15,2010, Gold amended his
Complaint. (D.I. 19) The Amended Complaint asserts four separate counts against Ford and the
Trust, alleging that they committed securities fraud in violation of Section 1O(b) of the Securities
Exchange Act of 1934 ("Section 10(b)"), 15 U.S.C. § 78j(b); SEC Rule 10b-5 ("Rule 10b-5"), 17
C.F.R. § 240.10b-5; SEC Rule 10b-17 ("Rule lOb-17''), 17 C.F.R. § 240.10b-17; and Section
20(a) ofthe Securities Exchange Act of 1934, 15 U.S.C. § 78t(a) ("Section 20(a)"). On January
14, 2011, Defendants moved to dismiss the Amended Complaint.
Rule 12(b)(6) Motion to Dismiss
Evaluating a motion to dismiss under Federal Rule of Civil Procedure 12(b)( 6) requires
the Court to accept as true all material allegations ofthe complaint. See Spruill v. Gillis, 372
F.3d 218, 223 (3d Cir. 2004 ). "The issue is not whether a plaintiff will ultimately prevail but
whether the claimant is entitled to offer evidence to support the claims." In re Burlington Coat
Factory Sec. Litig., 114 F .3d 1410, 1420 (3d Cir. 1997) (internal quotation marks omitted).
Thus, the Court may grant such a motion to dismiss only if, after "accepting all well-pleaded
allegations in the complaint as true, and viewing them in the light most favorable to plaintiff,
plaintiff is not entitled to relief." Maio v. Aetna, Inc., 221 F.3d 472,481-82 (3d Cir. 2000)
(internal quotation marks omitted).
However, "[t]o survive a motion to dismiss, a civil plaintiff must allege facts that 'raise a
right to relief above the speculative level on the assumption that the allegations in the complaint
are true (even if doubtful in fact)."' Victaulic Co. v. Tieman, 499 F.3d 227, 234 (3d Cir. 2007)
(quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 127 S. Ct. 1955, 1965 (2007)). While
heightened fact pleading is not required, "enough facts to state a claim to relief that is plausible
on its face" must be alleged. Twombly, 127 S. Ct. at 1974. At bottom, "[t]he complaint must
state enough facts to raise a reasonable expectation that discovery will reveal evidence of [each]
necessary element" of a plaintiffs claim. Wilkerson v. New Media Technology Charter School
Inc., 522 F.3d 315, 321 (3d Cir. 2008) (internal quotation marks omitted).
The Court is not obligated to accept as true "bald assertions," Morse v. Lower Merion
School Dist., 132 F.3d 902, 906 (3d Cir. 1997) (internal quotation marks omitted), "unsupported
conclusions and unwarranted inferences," Schuylkill Energy Resources, Inc. v. Pennsylvania
Power & Light Co., 113 F.3d 405, 417 (3d Cir. 1997), or allegations that are "self-evidently
false," Nami v. Fauver, 82 F.3d 63,69 (3d Cir. 1996).
The Securities Exchange Act of 1934 ("Exchange Act")
Section lO(b) and Section 20(a)
Section 10(b) provides, in relevant part, that it is unlawful "[t]o use or employ ... any
manipulative or deceptive device or contrivance in contravention of such rules and regulations as
the [Securities Exchange] Commission may prescribe as necessary or appropriate in the public
interest or for the protection of investors." 15 U.S.C. § 78j(b). Section 20(a) provides, in
relevant part, that "[e ]very person who, directly or indirectly, controls any person liable under
any provision of this chapter or of any rule or regulation thereunder shall also be liable jointly
and severally with and to the same extent as such controlled person." 15 U.S.C. § 78t(a).
SEC Rule lOb-S
Rule 1Ob-5 states:
It shall be unlawful for any person, directly or indirectly, ...
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to
state a material fact necessary in order to make the statements
made, in the light of the circumstances under which they were
made, not misleading, or
(c) To engage in any act, practice, or course ofbusiness which
operates or would operate as a fraud or deceit upon any person, in
connection with the purchase or sale of any security.
17 C.P.R.§ 240.10b-5.
SEC Rule lOb-17
Paragraph (a) of Rule 10b-17 provides, in relevant part, that with respect to a "dividend
or other distribution in cash or in kind," "[i]t shall constitute a 'manipulative or deceptive device
or contrivance' as used in section 1O(b) of the Act for any issuer of a class of securities publicly
traded ... to fail to give notice in accordance with paragraph (b) of this section." 17 C.P.R.
§ 240.10b-17(a). In tum, paragraph (b) provides that "[n]otice shall be deemed to have been
given in accordance with this section only if' it is "[g]iven to the National Association of
Securities Dealers, Inc., no later than 10 days prior to the record date involved." !d. § 240.1 Ob17(b).
Each of Counts I, II, and III ofthe Amended Complaint alleges that Ford and the Trust
"violated Section 10(b) of the Exchange Act" by employing "a manipulative or deceptive device
or contrivance" in contravention of SEC Rule 1Ob-17 in connection with the July 15, 2010
Distribution. (See D.I. 19 ~~ 32, 35, 38) Count IV alleges that "Ford is liable pursuant to
Section 20(a) of the Exchange Act" for the Trust's violations of Section 1O(b) and Rule 10b-17.
43) Thus, every count in the Amended Complaint alleges that Defendants violated Section
1O(b) by failing to comply with Rule 1Ob-17.
The Court concludes that the Amended Complaint fails to state a claim for a Section
1O(b) violation on which relief may be granted. This conclusion necessitates dismissal of the
Amended Complaint in its entirety, for the reasons set forth below.
Whether Rule lOb-17 Provides a Private Right of Action
As a preliminary matter, the parties dispute whether Rule 1Ob-17 provides a private right
of action. Plaintiff correctly notes, and Defendants do not dispute, that a private right of action
exists under Section 1O(b) of the Exchange Act. See Superintendent of Ins. v. Bankers Life &
Cas. Co., 404 U.S. 6, 13 n.9 (1971) ("It is now established that a private right of action is
implied under§ 10(b)."); see also Herman & MacLean v. Huddleston, 459 U.S. 375, 380 (1983)
("[A] private right of action under Section 1O(b) of the 1934 Act ... has been consistently
recognized for more than 35 years. The existence of this implied remedy is simply beyond
peradventure."). The parties' disagreement concerns whether Rule 1Ob-17, an implementing
regulation promulgated by the SEC pursuant to Section 1O(b ), also confers a private right of
action, such that a violation of Rule 1Ob-17 may serve as the basis for a Section 1O(b) action. On
this point, the law is less clear.
First, as Defendants note, the Supreme Court has warned that "the § 1O(b) private right
should not be extended beyond its present boundaries," because "[c ]oncems with the judicial
creation of a private cause of action caution against its expansion." Stoneridge Inv. Partners,
LLC v. Scientific-Atlanta, 552 U.S. 148, 165 (2008).
Second, in terms of statutory interpretation, personal rights must be intentionally and
unambiguously conferred through "rights-creating language" that evidences an intent "to confer
individual rights upon a class of beneficiaries." Gonzaga Univ. v. Doe, 536 U.S. 273, 284-85
(2002). Thus, to create a private right of action, a statute's "text must be phrased in terms of the
persons benefited." Id at 274 (citing Cannon v. Univ. ofChicago, 441 U.S. 677, 692 n.13
(1979)). To the extent such an intent must also be evident from an agency implementing rule,
Rule 1Ob-17 would seem to fail. The text of Rule 1Ob-17 does not appear to reflect an intent to
confer individual rights upon a class of beneficiaries, nor does it appear to be phrased in terms of
any class of persons benefited. To the contrary, as Defendants note, Rule 10b-17 "does not even
[require] that notice be given to investors; rather, it requires that notice be provided to the
National Association of Securities Dealers, Inc." (D.I. 26 at 3 n.4)
Third, both parties agree that, to date, "no court has yet recognized a cause of action
under Rule 10b-17." (D.I. 24 at 7; D.I. 22 at 2) At the same time, Plaintiff correctly notes that
"it is equally true that no court has rejected such a cause of action." (D.I. 24 at 7)2
The Court finds it unnecessary to decide whether Rule 1Ob-17 provides a private right of
action because, even assuming it does, dismissal is warranted for at least the reasons explained
Plaintiff Fails to Allege Loss Causation as Required Under Section lO(b)
There are six necessary elements of a Section 1O(b) action. Briefly summarized, they
are: (1) a material misrepresentation or omission, (2) scienter, i.e., a wrongful state of mind, (3) a
Plaintiffcites Pittsburgh Terminal Corp. v. Baltimore and Ohio R.R. Co., 680 F.2d 933 (1982),
to argue that "a violation of Rule 1Ob-17 [gives] rise to a claim under Section 1O(b) and Rule
10b-5." (D.I. 24 at 7) Plaintiff appears to be relying on a statement from the concurring opinion
for the proposition that the "failure of the defendants to give such notice [under Rule 1Ob-17]
rendered them liable in damages under Rule 10b-5." Id at 946. However, aside from being a
concurrence that is not binding on this Court, Plaintiff also fails to note that the same opinion
states, "we need not decide whether a violation of Rule 1Ob-17 ... itself gives rise to an implied
right of action for damages under § lO(b). " Id at 945 n.4.
connection with the purchase or sale of a security, (4) reliance, (5) economic loss, and (6) loss
causation, i.e., a causal connection between the material misrepresentation or omission and the
loss. See Stoneridge, 552 U.S. at 157; see also McCabe v. Ernst & Young, LLP, 494 F.3d 418,
424 (3d Cir. 2007).
In the Court's view, the Amended Complaint fails to allege the sixth necessary element,
loss causation. 3 With respect to this element, in order to prevail on a Section 10(b) claim, the
plaintiff bears "the burden of proving that the act or omission of the defendant ... caused the
loss for which the plaintiff seeks to recover damages." 15 U.S.C. § 78u-4(b)(4). Thus, "[t]he
loss causation inquiry asks whether the [defendant's] misrepresentation or omission proximately
caused the economic loss" allegedly suffered by the plaintiff. McCabe, 494 F.3d at 426.
"Similar to the concept of proximate cause in the tort context, loss causation focuses on whether
the defendant should be held responsible as a matter of public policy for the losses suffered by
the plaintiff." Berckeley Inv. Group, Ltd v. Colkitt, 455 F.3d 195, 222 (3d Cir. 2006).
Here, the Amended Complaint alleges that Defendants violated Section 1O(b) by failing
to comply with the ten-day notice requirement of Rule 10b-17, causing Gold to sell the Trust
Preferred Securities "without the required notice of ... the July 15, 2010 Distribution," resulting
in Gold's failure to receive the July 15,2010 distributions. (D.I. 19 ,-r,-r 32-33, 35-36, 38-39,4344) However, the Court agrees with Defendants that the Amended Complaint "affirmatively
pleads a different cause of the plaintiffs alleged loss;" namely, that it was the "NYSE's
independent decision to set the ex-distribution date on July 1," and the accompanying three-day
Because the failure to plead a single element of a claim is sufficient grounds for dismissal, the
Court does not address whether the Amended Complaint adequately pleads the other remaining
elements of a Section 1O(b) violation; nor does the Court resolve the other issues and arguments
raised in the parties' briefing.
due bill period for June 28, 29, and 30, that actually caused Gold's losses with respect to the July
15,2010 distributions. (D.I. 22 at 19) Specifically, the Amended Complaint alleges that on the
morning of June 30, 2010, Gold sold 13,800 shares of Trust Preferred Securities after Ford's
distribution announcement, but before the NYSE had determined the ex-distribution date and
due bill period for Ford's forthcoming distributions. (D.I. 19 ~~ 16-18) Therefore, the Amended
Complaint demonstrates that Gold's failure to receive the July 15, 2010 distributions directly
resulted from the July 1 ex-distribution date and three-day due bill period, both of which were
determined by the NYSE, and not by Ford or the Trust.
Gold states, in both his Amended Complaint and his opposition brief, that he sold shares
of Trust Preferred Securities following Ford's announcement because "under prevailing
practices, such market transactions do not settle for three days," leading him to believe that he
would remain the "record holder of the sold Trust Preferred Securities at the close of business on
June 30, 2010," thereby entitling him to receive the July 15, 2010 distributions for those shares.
(D.I. 19 ~ 16; D.I. 24 at 5) Thus, Gold's losses were incurred when the NYSE acted contrary to
his expectations that drove his decision to sell his shares. The Amended Complaint does not
plausibly allege any facts suggesting that his losses resulted from Defendants' conduct.
In the Court's view, even taking the allegations in the Amended Complaint as true and
drawing all reasonable inferences in favor of Gold, it was the NYSE's actions in determining the
ex-distribution date and due bill period that caused the losses incurred by Gold in connection
with Ford's July 15, 2010 distributions. 4 Hence, the Court agrees with Defendants that the
NYSE's actions constitute an intervening cause that disrupted the chain of causation necessary
See generally Tr. at 50-51 (Plaintiffs counsel agreeing: "If the NYSE had done nothing, Mr.
Gold would not have been harmed.").
for Gold to adequately plead loss causation as required under Section 1O(b). See McCabe, 494
F.3d at 436; see also Egervary v. Young, 366 F.3d 238, 246 (3d Cir. 2004) ("[A]n intervening act
of a third party, which actively operates to produce harm after the first person's wrongful act has
been committed, is a superseding cause which prevents the first person from being liable.").
Accordingly, because the Amended Complaint pleads facts precluding a finding of loss
causation under Section 10(b) ofthe Exchange Act, the Court will grant Defendants' motion to
dismiss for failure to state a claim. 5
For the foregoing reasons, the Court will grant Defendants' motion to dismiss the
Amended Complaint. An appropriate order follows.
Counts I, II, and III each allege a Section 1O(b) violation, and must be dismissed for failure to
state a claim because loss causation is a necessary element for a Section 1O(b) violation. Count
IV also must be dismissed because it asserts a Section 20(a) claim against Ford based on an
underlying Section 1O(b) violation by the Trust.