Gold v. Ford Motor Company et al
MEMORANDUM OPINION re 33 motion to amend judgment and for leave to file second amended complaint. Signed by Judge Leonard P. Stark on 4/9/13. (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
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.
April 9, 2013
STARK, U.S. District Judge:
Currently pending before the Court is Plaintiffs Motion to Amend Judgment and For
Leave to File [Proposed] Second Amended Complaint. (D.I. 33) For the reasons set forth below,
the Court will deny Plaintiffs motion.
On July 8, 2010, Lead Plaintiff Bradd Gold ("Gold" or "Plaintiff') filed suit against
Defendants Ford Motor Company and Ford Motor Company Capital Trust II (collectively,
"Ford" or "Defendants"). (D.I. 1) In his Amended Complaint (D.I. 19), Plaintiff asserted four
counts against Defendants alleging 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 10b-17''), 17 C.F.R. § 240.10b-17; and Section
20(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78t(a). On January 14, 2011,
Defendants moved to dismiss the Amended Complaint on five separate grounds. 1 (D.I. 21) The
Court heard oral argument on the Motion to Dismiss on September 22, 2011. (D.I. 30) On April
2, 2012, the Court granted Defendants' Motion to Dismiss. (D.I. 31; D.I. 32)
The Court granted Defendants' Motion to Dismiss because the Amended Complaint
Defendants made the following arguments in support of dismissal: "(i) the plaintiff failed
to plead a claim based on Rule 1Ob-17 because no private right of action is available under that
rule and because the defendants provided the requisite notice; (ii) the plaintiff failed to identify a
single misstatement made by the defendants or allege the facts necessary to support even the
most basic elements of a claim for market manipulation; (iii) the plaintiff failed to allege that the
defendants acted with fraudulent intent (scienter); among other things, the plaintiff did not allege
that any delay was intentional or even that the defendants obtained any conceivable benefit by
providing notice when they did; (iv) the plaintiff did not attempt to plead that he relied on the
defendants' purportedly manipulative or deceptive conduct; ... and (v) the plaintiff affirmatively
pleaded that his purported loss was caused by the decision as to when the 'ex-date' would be- a
decision not made by the defendants, but by the NYSE." (D.I. 36 at 2-3)
failed to state a claim for a Section 1O(b) violation on which relief could be granted.
Specifically, the Court concluded that the Amended Complaint failed to allege at least one
necessary element of a Section 1O(b) claim: loss causation. In its opinion, the Court also noted
that the law is unclear as to whether Rule 1Ob-1 7 confers a private right of action.
On April27, 2012, Plaintiff filed the pending Motion to Amend. (D.I. 33) The Court
will deny Plaintiffs motion for the following reasons: (1) there is no private right of action under
Rule 10b-17; (2) Plaintiff fails to adequately plead loss causation; and (3) Plaintiff fails to
adequately plead scienter.
Pursuant to Federal Rule of Civil Procedure 15(a), a party may amend its pleading more
than 21 days after serving it, or more than 21 days after service of a responsive pleading or a
motion under Rule 12(b), (e), or (f), "only with the opposing party's written consent or the
court's leave." Rule 15 further provides that "[t]he court should freely give leave when justice so
requires." See Dole v. Arco Chern. Co., 921 F.2d 484, 486-87) (3d Cir. 1990) (adopting liberal
approach to amendments).
Granting leave to amend is within the Court's discretion. See Foman v. Davis, 371 U.S.
178, 182 (1962). In evaluating a request for leave, the Court may consider whether there is
"undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure
deficiencies by amendments previously allowed, undue prejudice to the opposing party by virtue
ofthe allowance ofthe amendment, futility of amendment, etc." !d.; see also Oran v. Stafford,
226 F.3d 275,291 (3d Cir. 2000). Futility of amendment occurs when the amended complaint
does not state a claim upon which relief can be granted. See In re Burlington Coat Factory Sec.
Litig., 114 F.3d 1410, 1434 (3d Cir. 1997). Ifthe proposed amendment "is frivolous or advances
a claim or defense that is legally insufficient on its face, the court may deny leave to amend."
Harrison Beverage Co. v. Dribeck Imps., Inc., 133 F.R.D. 463, 468 (D.N.J. 1990) (internal
quotation marks omitted).
Rule lOb-17 Does Not Provide a Private Right of Action
No court has yet to recognize a private right of action under Rule 1Ob-17. On the other
hand, neither has any court expressly rejected the existence of such a private right of action.
In its earlier opinion, the Court observed that the text of Rule 1Ob-17 does not appear to
reflect an intent to confer individual rights upon a class of beneficiaries or to any class of
persons. (D.I. 31 at 7-8) Plaintiffunpersuasively cites to three cases in support ofthe assertion
that Rule 1Ob-17 provides plaintiffs with a private cause of action. (D .I. 24 at 7) Plaintiff
acknowledges, however, that none of these cases clearly recognized a private cause of action.
See Lowry v. Bait. & Ohio R.R. Co., 707 F.2d 721, 721-23 (3d Cir. 1983) (affirming dismissal of
federal claims); Lutgert v. Vanderbilt Bank, 508 F.2d 1035, 1038-39 (5th Cir. 1975) (suggesting
in dicta it is "conceivable" that seller might have claim for failure to comply with Rule 1Ob-7);
Pittsburgh Terminal Corp. v. Bait. & Ohio R.R. Co., 680 F.2d 933, 941-42 (3d Cir. 1983) (noting
Rule 1Ob-17 is source of duty to speak but holding only that cause of action arose under Rule
10b-5); see also D.I. 24 at 7 (Plaintiff describing these cases as containing "implication" that
cause of action exists under Rule 1Ob-17).
Subsequent to Lowry, Lutgert, and Pittsburgh, the Supreme Court clarified the scope of
private actions under Section 1O(b) and has warned against expanding such actions. See
Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, 552 U.S. 148, 162-63 (2008). To find a
private right of action under Rule 1Ob-17, the Court must "determine whether Congress intended
to create a federal right." See Gonzaga Univ. v. Doe, 536 U.S. 273,283 (2002) (emphasis in
original). There is no private right of action ifthe language ofRule 10b-17 "grants no private
rights to any identifiable class." Touche Ross & Co. v. Redington, 442 U.S. 560, 576 (1979).
Alternatively, there may be a right if the statutory text is "phrased in terms of the persons
benefited." Gonzaga, 536 U.S. at 284 (internal quotation marks omitted). Even when a statute
uses right-creating language, the plaintiff must show that the statute is intended to create a
private right and remedy. See id.
The Section 1O(b) private cause of action does not arise from an express statutory grant;
rather, it is "a judicial construct that Congress did not enact in the text of the relevant statutes."
Stoneridge, 552 U.S. at 164. In part because the Section 10(b) private cause of action is a
"judicial creation," the Supreme Court has "caution[ed] against its expansion," id. at 165,
explaining that "the breadth of the right once recognized should not ... grow beyond the scope
congressionally intended." Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083, 1085 (1991).
The Court concludes that there is no "intentionally and 'unambiguously conferred'"
private right of action under Rule 1Ob-17. See Three Rivers Ctr. for Indep. Living, Inc. v. Hous.
Auth. ofthe City ofPittsburgh, 382 F.3d 412,419-20 (3d Cir. 2009) (quoting Gonzaga, 536 U.S.
at 283). The text of Rule 1Ob-17 is not phrased in terms of any benefited class or person; nor
does it appear to reflect any intent to confer individual rights. Instead, Rule 1Ob-17 requires
notice be provided to the National Association of Securities Dealers, Inc., not to investors. See
17 C.F.R. § 240.10b-17 (2010). Whether investors like Plaintiff may benefit from Rule 10b-17
notice is a different question than whether a statute is intended to benefit investors. Rule I Ob-I 7
does not use rights-creating language. Thus, the text falls short of creating a private right or
remedy. Accordingly, and consistent with the Supreme Court's caution against expanding the
existing Section I O(b) private cause of action, the Court concludes that there is no private right of
action under Rule I Ob-I 7.
Plaintiff's Proposed Amendments Are Futile
An amendment to a complaint is futile if it does "not cure the deficiency in the original
complaint or if the amended complaint cannot withstand a renewed motion to dismiss."
Jablonski v. Pan Am. World Airways, Inc., 863 F.2d 289, 292 (3d Cir. I988). Given the Court's
determination above with respect to the lack of a private right of action under Rule I Ob-I7,
Plaintiffs proposed amended claims could not survive a renewed motion to dismiss and the
proposed amendments are futile.
Additionally, even if there was a private right of action under Rule I Ob-I7, Plaintiffs
proposed Second Amended Complaint would fail to state a claim for at least the reasons
Plaintiff Fails to Adequately Plead Loss Causation
The essential elements of a Section I O(b) claim are: "(1) a material misrepresentation or
omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or
omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or
omission; (5) economic loss; and (6) loss causation." Stoneridge, 552. U.S. at I 57; see also
McCabe v. Ernst & Young, LLP, 494 F .3d 418, 424 (3d Cir. 2007). In granting the prior motion
to dismiss, the Court held that Plaintiff failed to alleged loss causation. This was based on the
Court's conclusion that "the NYSE's actions constitute an intervening cause that disrupted the
chain of causation necessary for Gold to adequately plead loss causation." (D .I. 31 at 10-11)
Plaintiffs proposed Second Amended Complaint fails to cure this deficiency. Two new
paragraphs of the Second Amended Complaint set forth the customary practice of the NYSE to
set an ex-dividend date two business days prior to the record date. Plaintiff alleges that if Ford
had provided ten days of advance notice, the NYSE would not have departed from its customary
practice. (D.I. 33
23-24) In essence, Plaintiff argues that the Second Amended Complaint
states that the NYSE's actions were a result of Ford's alleged failure to provide ten days notice of
the distribution. Plaintiff had made the same argument previously and the Court rejected it. (D.I.
31 at 10-11) The Court finds nothing in Plaintiffs proposed amendments to justify altering this
conclusion. (See generally D.I. 30 at 51 (Plaintiffs counsel agreeing, "Ifthe NYSE had done
nothing, Mr. Gold would not have been harmed."); D.I. 33-1
24 ("Had Ford provided 10 days
advance notice of the Distribution as SEC Rule 1Ob-1 7 requires, the NYSE would not have
varied from its typical practice and would not have adjusted the ex-distribution date with regard
to the Distribution."))
Plaintiff Fails to Adequately Plead Scienter
The Court further concludes that Plaintiff has failed to adequately plead the necessary
element of scienter, i.e. a wrongful state of mind. In order to satisfy the scienter pleading
requirement, "the complaint shall ... state with particularity facts giving rise to a strong
inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2). A
strong inference of fraudulent intent or recklessness arises when it is "more than merely plausible
or reasonable - it must be cogent and at least as compelling as any opposing inference of
nonfraudulent intent." Tellabs, Inc. v. Makar Issues & Rights, Ltd., 551 U.S. 308, 314 (2007).
Conclusory statements that a defendant must have had knowledge of its violation, and therefore
fraudulent intent, are insufficient to plead scienter. See In re Advanta Corp. Sec. Litig., 180 F.3d
525, 539 (3d Cir. 1999) (stating that allegations of scienter such as motive, intent, intentional,
conscious, or reckless behavior must be plead with particularity, such that "blanket assertions"
Here, Plaintiff attempts to plead scienter in the proposed Second Amended Complaint by
stating that Defendants understood the requirements of 1Ob-1 7, as evidenced by Defendants'
compliance with the rule from 2002 to 2008. (D.I. 33 at 8-9) 2 However, that Defendants had a
consistent record of providing greater than ten days notice does not reasonably lead to a strong
inference that Defendants failure to provide such notice on one occasion was the result of
conscious misbehavior. As the Third Circuit has stated, a "pleading of scienter may not rest on a
bare inference that a defendant must have had knowledge of the facts." In re Advanta, 180 F.3d
at 539 (internal quotations omitted).
Plaintiff's allegation that Defendants acted recklessly is inadequate here as well. As
Plaintiff notes, recklessness involves "an extreme departure from the standards or ordinary care."
(D.I. 24 at 14 (quoting Institutional Investors Grp. v. Avaya, Inc., 564 F.3d 242,267 n.42 (3d Cir.
2009)) The proposed Second Amended Complaint does not allege facts in support of an extreme
departure from the purported standard of ordinary care of providing ten days notice.
Plaintiff incorporates by reference its arguments in opposition to Defendants' Motion to
Dismiss (D.I. 21) that it adequately pleads scienter. (D.I. 22, 24, 26)
Given the Court's preceding conclusions, the Court will not address whether Plaintiffs
Motion to Amend should also be denied due to undue delay.
For the foregoing reasons, the Court will deny Plaintiffs Motion to Amend Judgment and
For Leave to File [Proposed] Second Amended Complaint. (D.I. 33) An appropriate Order