Sagez et al v. Global Agricultural Investments, LLC et al
Filing
114
ORDER granting in part and denying in part 57 Motion to Dismiss for Failure to State a Claim, 58 Motion to Dismiss, 104 Supplemental Motion to Dismiss (See Order Text). Plaintiffs will file a Second Amended Complaint within 45 days of this Order. Signed by Senior Judge Donald E OBrien on 7/31/2014. (des)
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF IOWA
CENTRAL DIVISION
DENNIS SAGEZ et al.,
Plaintiffs,
No. 11-CV-3059-DEO
vs.
ORDER ON MOTION TO DISMISS
GLOBAL AGRICULTURAL
INVESTMENTS, LLC; TYLER
BRUCH; BRUCHSIDE, INC.; ART
A. HALL; ARTAH HOLDINGS,
LLC; and, BOL, LLC,
Defendants.
____________________
TABLE OF CONTENTS
I.
II.
III.
IV.
V.
INTRODUCTION AND BACKGROUND . . . . . . . . . . . . .
BACKGROUND . . . . . . . .
A. Factual Background . .
B. Procedural Background
C. The Amended Complaint
MOTION TO DISMISS STANDARD
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ISSUES . . . . . . . . . . . . . . . . . . . . . . . 21
ANALYSIS . . . . . . . . . . . . . . . . . .
A. ‘Shotgun’ Claims and Permissive Joinder
B. Amended Complaint Count I . . . . . . .
1. Statute of Limitations
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2. §12(a)2 Standing
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3. Hall is Not a Seller
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4. Count I Conclusion
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C. Count II . . . . . . . . . . . . . . . .
1. Statute of Limitations
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41
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D.
E.
F.
G.
H.
I.
J.
K.
L.
VI.
I.
2. Pleading Standards
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3. Hindsight and Bespeaks
Count III . . . . . . . .
Count IV . . . . . . . . .
Count V . . . . . . . . .
Count VI . . . . . . . . .
Count VII . . . . . . . .
Count IX . . . . . . . . .
Count X and Count XI . . .
Count XII . . . . . . . .
Other Issues . . . . . . .
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Caution
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53
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CONCLUSION . . . . . . . . . . . . . . . . . . . . . 85
INTRODUCTION AND BACKGROUND
This matter is currently before the Court on Defendant
Tyler
Bruch
and
Defendant
Bruchside,
Inc.’s
[hereinafter
collectively as Bruch] Motion to Dismiss, Docket No. 57;
Defendant Artah Holdings, LLC, and Defendant Art A. Hall’s
[hereinafter Collectively as Artah] Motion to Dismiss, Docket
No. 58; and Artah’s Supplemental Motion to Dismiss, Docket No.
104.
The Defendants’ Motions raise various issues arguing that
the Court should dismiss the Plaintiffs’ Complaint.
parties appeared for a hearing on April 29, 2013.
The
After
listening to the parties’ arguments, the Court took the matter
under consideration and now enters the following.
2
II.
BACKGROUND
The
above-captioned
case
arises
in
the
context
of
securities fraud. In short, the Plaintiffs, a group of uppermidwest farmers/investors, gave money to the Defendants.
Defendants
purported
to
be
engaged
in
The
lucrative
farming/agricultural operations in the South American country
of Brazil and solicited the Plaintiffs’ money as investments
in those Brazilian farms.
However, the Brazil operations
failed to make money and the Plaintiffs did not see any
returns on their investments.
Defendants
committed
The Plaintiffs now believe the
fraud
regarding
the
investments.
Specifically, they allege the Brazil farming operation was
essentially a Ponzi scheme perpetuated by the Defendants.
Based on that belief, the Plaintiffs filed the present law
suit.
As indicated by both the length of the Amended Complaint,
the length of the parties’ pleadings regarding the pending
Motions, and the time it took the Court to consider these
matters, there is no doubt that this is a complex case.
At
this early stage of the litigation, no factual findings are
appropriate. However, the Court believes that a background of
the situation is necessary for an understanding of the legal
3
arguments considered herein.
Accordingly, the Court sets out
the relevant history of the parties’ dispute.
A.
Factual Background
In the early 2000's, Defendants Tyler Bruch and Art Hall
began
establishing
investment
opportunities
for
managed
farming and agriculture in Western Bahia, Brazil (one of
Brazil’s 26 states, located in the northeastern part of South
America on the Atlantic Coast). The purpose of their business
was to entice domestic farmers/investors to invest money in
large scale agricultural operations in Brazil.
As set out in
the Plaintiffs’ brief:
[b]eginning in early to mid-2000, as
evidenced
by
Bruchside
Fund
I,
LP
PowerPoint, Bruch and Hall told Bruchside
Fund I investors about Bruch’s extensive
knowledge of Brazilian farming operations
noting that “Tyler has been actively
involved in agriculture for many years,
having grown up in a farming family in Iowa
and co-managing crop production and labor
for Bruchside Farms, Inc.[,] in Iowa for
four years prior to moving to Brazil, and
he had three years of farming experience in
Brazil.” See Exhibit 1; Complaint ¶ 73.
Bruch and Hall also told investors that
Bruch “lives near the farm in Brazil, and
runs the day-to-day operations.”
See
Exhibit 1. Bruch and Hall further informed
investors that Bruch “has a degree in
Agriculture
Studies
from
Iowa
State
University with an emphasis in economics,
and he has also studied International
Agriculture in Canada, Italy, Panama, and
4
Brazil.” See Exhibit 1. Bruch and Hall
told Bruchside Fund I investors that Bruch
“is a frequent presenter on Brazilian
agriculture to universities and continuing
educations groups all over the Mid-West.”
See Exhibit 1.
Docket No. 78, Att. 1, p. 5.
Based on those assertions, the
Plaintiffs began investing money in Bruchside Fund I in the
spring of 2006. (Bruchside Fund I is the first Brazil farming
investment fund sponsored by the Defendants relevant to the
present case.)
The Plaintiffs maintain that the Defendants’
investment schemes were fatally flawed, alleging that:
Bruchside Fund I investors were lured to
invest based on the Bruchside Fund I
PowerPoint
representations
regarding
expected
returns,
existing
money
commitments, existing U.S. and Brazilian
accounting
staff,
existing
U.S.
and
Brazilian legal staff expertise, and tax
benefits/structures.
See Exhibit 1.
Little did investors know, the Funds
projections were inherently flawed. Bruch
and Hall did not have any accounting staff,
and Bruch and Hall had not properly vetted
the tax benefits/structure represented
during their presentation – all of which
occurred without a filed registration
statement.
Docket No. 78, Att. 1, p. 6.
Bruchside Fund I stopped taking new investors in 2006.
In February 2007, the Defendants created Bruchside Fund II.
On June 26, 2007, Defendants held an
investor meeting at the Wild Rose Casino in
5
Emmetsburg, Iowa[,] during which Defendants
sought additional investors for Bruchside
Fund II by providing, among other things,
updates regarding crop production and
yields for the 2006/2007 crop year - these
2007 crop production and yields served as
the
basis
for
Hall's
February
2007
representations regarding a 36% return.
See Bruchside Fund II PowerPoint attached
hereto and marked as Exhibit 7. During the
meeting,
Bruch
and
Hall
also
made
representations
regarding
in
house
accounting and tax benefits/structures.
Bruch and Hall's presentation also included
spreadsheets that continued to present
inherently flawed projections.
Docket No. 78, Att. 1, p. 9.
In August 2007, Defendants Bruch
and Hall allegedly closed Bruchside Fund II after enticing
most Bruchside Fund I investors to reinvest.1
The next month,
they advised investors in Bruchside Fund I that they would
begin
receiving
financial
returns
on
their
original
investments.
The
payment
made
to
investors
in
September
of
2007
represents what the Plaintiffs contend is a Ponzi Scheme.
As
set out in the Plaintiffs’ brief:
[t]rue to Defendants[’] February 2007
representations and Defendants[’] August
19, 2007 letter, on September 19, 2007,
Defendants paid Bruchside Fund I investors
1
The Plaintiffs assert that although the Bruchside Funds
were “closed” on a certain date, the Defendants continued to
pursue and accept new investors for those funds. See. Docket
No. 78, Att. p. 12.
6
what they represented to be a 40% “ROI.”
See Complaint ¶¶ 113, 524.
Defendants
represented that the source of these
returns was from farming operations, but
the Defendants failed to disclose the true
source of the returns.
See Complaint ¶
526.
Upon
information
and
belief,
Defendants used investor funds from new
Bruchside Fund II investments to pay
returns to Bruchside Fund I investors.
Docket No. 78, Att. 1, p. 10.
Following
the
initial
payment
on
Bruchside
Fund
I,
Defendants created two other investment opportunities, Global
Ag Biodiesel and the Gin Fund.
Then, in 2008, the Defendants
began offering an investment opportunity in Bruchside Fund
III.
The Plaintiffs allege that the Defendants continued to
use Ponzi type payouts to entice further investments.
On October 3, 2008, while Defendants were
still attempting to entice additional
Bruchside Fund III investors, Defendants
represented that Bruchside Fund I investors
would receive a “22.43% cash return, net of
fees” which would be paid out in two
segments.
See October 3, 2008 letter
attached hereto and marked as Exhibit 15.
On October 3, 2008, Defendants paid
Bruchside Fund I investors what they
represented to be 25% of their alleged
22.43% return. See Exhibit 15; Complaint
¶ 113. Defendants represented that the
remaining funds would be paid by the end of
the year. See Exhibit 15. Defendants did
not stop there. In order to ensnare the
maximum number of Bruchside Fund III
investors, on October 3, 2008, Defendants
represented
that
Bruchside
Fund
II
7
investors would receive a “18.43% cash
return, net of fees” which would be paid
out in two segments. See October 3, 2008
letter attached hereto and marked as
Exhibit 16. True to form, on October 3,
2008, Defendants paid Bruchside Fund I
investors what they represented to be 25%
of their alleged 22.43% return.
See
Exhibit 16; Complaint ¶ 124.
Defendants
represented that the remaining funds would
be paid by the end of the year.
See
Exhibit 16.
Docket
No.
Plaintiffs
78,
Att.
invested
1,
p.
in
13-14.
Again,
Defendants’
many
new
of
the
opportunity.
Similarly, many of the Plaintiffs invested in the ‘BOL Fund’
created by the Defendants as a means to garner ‘credit’ for
the ongoing farming operations.
The Plaintiffs generally
allege that, other than the early payments from Bruchside Fund
I and II, they never received any return on any of their
investments with the Defendants.
state
nature
that
the
Defendants’
of
the
investments,
Moreover, the Plaintiffs
representations
and
the
regarding
underlying
the
farming
business, were fraudulent.
The Plaintiffs claim that the
Defendants
set
never
actually
up
a
profitable
farming
operation in Brazil, nor did they do the business/legal due
diligence
necessary
Additionally,
the
to
run
Plaintiffs
this
allege
type
that
of
the
investment.
Defendants
falsely stated that the Brazil operation was profitable, while
8
financial documentation shows that the businesses were losing
money.
In sum, the Plaintiffs allege that the Defendants were
not running a business, they were running a scam.
B.
The
Procedural Background
Plaintiff
group
is
comprised
of
thirty-six
individuals and businesses that invested in Defendant Bruch
and Defendant Hall’s various ventures.
The Plaintiffs filed
their initial Complaint, Docket No. 1, on November 8, 2011.
In
the
initial
Defendants:
Complaint,
Global
the
Agricultural
Plaintiffs
named
nine
Investments,
LLC;
Tyler
Bruch, Bruchside, Inc.; Art A. Hall; Artah Holdings, LLC;
Popular Securities, Inc.; BOL, LLC; Alan Kluis and Elia Tasca.
The Defendants filed a series of Motions to reset the
deadlines to respond to the Complaint. See for example Docket
Nos. 24, 48 and 56.
On March 20, 2012, the Plaintiffs
voluntarily dismissed Defendant Alan Kluis.
Docket No. 38.
On September 4, 2012, Defendant Bruch filed a Motion to
Dismiss, Docket No. 57.
On that same date, Defendant Artah
also filed a Motion to Dismiss.
Docket No. 58.
On September
11, 2012, Defendant Popular Securities, Inc., filed a Motion
to Dismiss.
Docket No. 65.
The Plaintiffs then filed a
9
series of motions for extensions of time to file a resistance
to the various Motions to Dismiss. See for example Docket No.
74.
On December 3, 2012, the Plaintiffs filed a joint
Resistance to the pending Motions to Dismiss.
Docket No. 80.
On December 7, 2012, the Plaintiffs voluntarily dismissed
Defendant
Popular
Securities,
Inc.
Docket
No.
85.
Accordingly, Popular Securities, Inc.’s Motion to Dismiss,
Docket No. 65, was denied as moot.
Defendant Artah filed a Reply Brief.
On January 9, 2013,
Docket No. 86.
On
January 10, 2013, Defendant Bruch also filed a Reply Brief.
Docket No. 90.
Surreply Brief.
On January 15, 2013, the Plaintiffs filed a
Docket No. 94.
On that same date, the
Plaintiffs filed an Amended Complaint,
superceded their original Complaint.
Docket No. 96, which
On January 18, 2013,
Defendant Bruch filed a Joint Response to the Plaintiffs’
Amended Complaint which stated:
[t]he Amended Complaint does not impact any
allegation
related
to
Mr.
Bruch
or
Bruchside,
Inc.
Since
the
Amended
Complaint does not alter Plaintiffs'
allegations asserted against Defendants,
Plaintiffs and Defendants request that the
Court allow and direct that the Motion
Papers shall be applied against the Amended
10
Complaint
such
that
Plaintiffs
and
Defendants do not have to refile their
respective Motion Papers.
Docket No. 97, p. 2.
Shortly thereafter, Defendant Bruch filed a Motion for an
in-person
oral
argument
on
the
pending
Motions.2
The
Plaintiffs contested Bruch’s request to conduct the hearing
live in the courthouse. Docket No. 100. The Court ultimately
ruled that an in-person hearing was appropriate and set a
hearing date for April, 2013.
On January 25, 2013, Defendant
Artah filed a Supplemental Motion to Dismiss, Docket No. 104,
based on the Plaintiffs’ Amended Complaint.
On April 26,
2013, Defendant Artah filed a Motion for a More Definite
Statement of Count III of the Amended Complaint.
110.
Docket No.
Magistrate Judge Strand denied that Motion, without
prejudice,
pending
resolution
of
the
Motion
to
Dismiss.
Docket No. 113.
As indicated above, the Court held a live hearing on this
matter on April 18, 2013.
Based on statements made by the
Plaintiffs during the hearing, the Court dismissed Defendant
2
The Court was out of the area at the time and routinely
schedules civil motion hearings by telephone.
11
Elia Tasca.3
Docket No. 111.
The Plaintiffs also voluntarily
dismissed Count I, part 12-A-I.
Id.
The parties did not
finish their arguments during the hearing on April 18, 2013,
and a subsequent telephone hearing was held on April 29, 2013.
After listening to the parties’ arguments, the Court took the
matter under consideration.
C.
The Amended Complaint
As stated above, the Plaintiffs are a large group of
investors who gave money to the Defendants.
The Amended
Complaint sets out the history of the Defendants’ Brazilian
ventures. The Complaint describes Bruchside Fund I, Bruchside
Fund II, and Bruchside Fund III as limited partnerships
registered
in
Texas;
the
Complaint
describes
Global
Ag
Biodiesel Fund as a limited liability company registered in
Texas; and BOL, LLC, as an Iowa corporation.
The Amended
Complaint also lists the amount each Plaintiff invested in
each venture.4
3
Based on the statements made by the parties during the
hearing, it seems that Defendants Global Agricultural
Investments, LLC, and BOL, LLC, are defunct business entities.
Those two Defendants are not represented by counsel, nor are
they actively participating in this case.
Thus, for the
purposes of the present Motions, the active remaining
Defendant (groups) are Bruch and Artah.
4
The Court need not repeat those allegations here.
Suffice to say that in total, the Plaintiffs invested several
12
Finally, the Amended Complaint, Docket No. 96, sets out
the Plaintiffs’ specific claims.
In Count I, the Plaintiffs contend that Bruchside Fund I,
Bruchside Fund II, Bruchside Fund III, Global Ag Biodiesel
Fund and BOL, LLC, are securities as defined by 15 U.S.C. §
77b(a)(1).
and
sold
The Plaintiffs claim that the Defendants offered
the
securities
to
the
Plaintiffs
and
that
the
Defendants made untrue statements of fact or omitted material
facts in connection with the securities that it sold to the
Plaintiffs.
Additionally, the Defendants used the mail or
other facilities of interstate commerce in connection with the
securities.
Defendants
damages.
enter
The Plaintiffs contend that those actions by the
were
the
proximate
cause
of
the
Plaintiffs’
Accordingly, the Plaintiffs pray that the Court
judgment,
jointly
and
severally,
against
these
Defendants, awarding the Plaintiffs compensatory damages,
including, but not limited to:
loss of initial investment;
loss of return of past, present, and future investments; costs
and attorney fees; and any and other such relief the court may
deem equitable.
million dollars with Defendants Artah and Bruch.
13
In Count II, the Plaintiffs allege that Bruchside Fund I,
Bruchside Fund II, Bruchside Fund III, Global Ag Biodiesel
Fund and BOL, LLC, are securities as defined by 15 U.S.C. §
78c(a)(10), and that the Defendants offered and sold those
securities to the Plaintiffs.
The Plaintiffs allege that the
Defendants used the mail and interstate commerce in connection
with the securities and that the Defendants employed devices,
schemes and artifices to defraud; made untrue statements of
material fact and omitted material facts; and engaged in acts,
practices and courses of business which operated as a fraud
and deceit upon the Plaintiffs.
Moreover, the Plaintiffs
allege that the Defendants sold the securities knowingly or
with reckless disregard for the truth and that the Defendants
intended to deceive the Plaintiffs.
The Plaintiffs allege
that the Defendants’ conduct resulted in the Plaintiffs’
damages.
Consequently, the Plaintiffs claim that they are
entitled to compensatory damages, including, but not limited
to:
loss of initial investment; loss of return of past,
present, and future investments; costs and attorney fees; and
any and other such relief the court may deem equitable.
In Count III, the Plaintiffs allege that Defendant Art
Hall committed professional negligence.
14
Plaintiffs allege
that Defendant Hall was negligent in one or more of the
following practices:
misrepresentations
of
failure to determine the validity of
expense
and
profit
projections
for
farming operations in Brazil; failure to keep the investments
of the investors in GAI funds segregated in separate bank
accounts and separate farming operations; failure to fill out
all of the required Reg D forms and/or to ascertain whether
the GAI offerings complied with Reg D in order to be exempt
from registration; failure to determine the source of funds
paid to investor Plaintiffs as returns from profitable farming
operations in Brazil; and failure to provide quarterly and
annual
audited
financial
statements
to
investors.
The
Plaintiffs allege that his negligence continued throughout all
of the GAI offerings.
The Plaintiffs argue that they are
entitled to both normal damages, and, because Defendant Hall’s
conduct was willful and wanton, punitive damages.
In Count IV, the Plaintiffs allege that all of the
Defendants had a fiduciary duty to each of the Plaintiffs and
that the Defendants breached those duties.
Specifically, the
Plaintiffs allege that the Defendants breached the duty by
providing Plaintiffs with false or misleading information
regarding GAI Funds.
The Plaintiffs argue that they are
15
entitled to both normal damages, and, because the Defendants’
conduct was willful and wanton, punitive damages.
In Count V, the Plaintiffs allege that the Defendants
committed
the
tort
of
conversion.
Specifically,
the
Plaintiffs allege that Defendants obtained money and equity
from the Plaintiffs and used said monies in a manner which was
not intended or represented to the Plaintiffs, and that the
Defendants exercised control over the Plaintiffs’ money in a
manner that was inconsistent with, and in derogation of the
uses for which, the Plaintiffs agreed that their money should
be used. The Plaintiffs argue that the Defendants’ conversion
caused the Plaintiffs’ actual financial loss, and it was done
with willful and wanton disregard for the Plaintiffs’ rights.
Accordingly, the Plaintiffs request both normal and punitive
damages.
In Count VI, the Plaintiffs allege that the Defendants
provided negligent misrepresentations about the financial
schemes.
Specifically,
the
Plaintiffs
claim
that
the
Defendants supplied (or refrained from supplying) information
to the Plaintiffs for the Defendants’ own benefit.
The
Plaintiffs claim that they acted in reliance on the truth of
the information about the schemes supplied by Defendants, and
16
Plaintiffs were justified in relying on the information.
Plaintiffs
also
claim
that
the
Defendants’
The
negligently
supplied information was a proximate cause of Plaintiffs’
damages.
Accordingly, the Plaintiffs request both normal and
punitive damages.
In Count VII, the Plaintiffs claim that the Defendants
committed fraudulent misrepresentation.
Specifically, the
Plaintiffs allege that the Defendants intentionally conspired
to make misrepresentations and conspired to omit material
information
Plaintiffs
omitted
about
allege
the
that
information
various
the
funds.
Additionally,
Defendants
regarding
their
the
misrepresented
and
financial
condition,
status, business, endeavors, contracts, and customers.
The
Plaintiffs allege that they invested because of the fraudulent
information.
Accordingly, they argue that the Defendants are
liable for the damages.
In Count VIII, the Plaintiffs make an allegation specific
to Popular Securities.
Because that Defendant has been
dismissed, that issue is moot.
In Count IX, the Plaintiffs allege that the Defendants
sold
false
or
fraudulent
securities
by
using
misleading
communications in violation of I.C.A. §502.501 and §502.501A.
17
The Plaintiffs argue that they were damaged by the Defendants’
fraud under those code sections.
In Count X, the Plaintiffs allege that the Defendants
acted in concert in an effort to defraud the Plaintiffs.
Accordingly, the Plaintiffs argue that the Defendants should
be held jointly liable.
In Count XI, the Plaintiffs allege that Defendants Global
Ag Investments, LLC; Bruchside, Inc.; Tyler Bruch; BOL, LLC;
and Alan Kluis and Elia Tasca were involved in a conspiracy to
provide false information.
However, Defendants Kluis and
Tasca have been dismissed from this case.
Additionally, as
discussed above, Global Ag and BOL, LLC, are out of business
and not participating in this case. Accordingly, the scope of
this claim has been significantly limited.
In Count XII entitled, “Recission,” the Plaintiffs claim
that the Defendants made false representations and that the
Plaintiffs
relied
on
those
false
representations
to
the
Plaintiffs’ detriment.
III.
MOTION TO DISMISS STANDARD
The notice pleading standard of Federal Rule of Civil
Procedure 8(a)(2) requires a plaintiff to give “a short and
plain statement showing that the pleader is entitled to
18
relief.”
motion
In order to meet this standard and to survive a
to
dismiss,
“a
complaint
must
contain
sufficient
factual matter, accepted as true, to state a claim to relief
that is plausible on its face.”
Ashcroft v. Iqbal, 556 U.S.
662, 663 (2009) (internal quotations and citation omitted).
This requirement of facial plausibility means that the factual
content of the plaintiff’s allegations must “allow[ ] the
court to draw the reasonable inference that the defendant is
liable for the misconduct alleged.”
Cole v. Homier Distrib.
Co., 599 F.3d 856, 861 (8th Cir. 2010).
Furthermore, courts
must assess the plausibility of a given claim with reference
to the plaintiff's allegations as a whole, not in terms of the
plausibility of each individual allegation.
Zoltek Corp. v.
Structural Polymer Group, 592 F.3d 893, 896 n. 4 (8th Cir.
2010)
(internal
citation
omitted).
This
inquiry
is
“a
context-specific task that requires the reviewing court to
draw on its judicial experience and common sense.” Iqbal, 556
U.S. at 664.
“While a complaint attacked by a Rule 12(b)(6) motion to
dismiss
does
plaintiff's
‘entitlement
not
need
obligation
to
detailed
to
relief’
provide
requires
19
factual
the
more
allegations,
‘grounds’
than
a
of
his
labels
and
conclusions, and a formulaic recitation of the elements of a
cause of action will not do.” Bell Atlantic Corp. v. Twombly,
550 U.S. 544, 555 (2007) (internal alterations and citations
omitted).
Nevertheless, although the “plausibility standard
requires a plaintiff to show at the pleading stage that
success on the merits is more than a sheer possibility,” it is
not a “probability requirement.”
Braden v. Wal–Mart Stores,
Inc., 588 F.3d 585, 594 (8th Cir. 2009).
As such, “a
well-pleaded complaint may proceed even if it strikes a savvy
judge that actual proof of the facts alleged is improbable,
and that a recovery is very remote and unlikely,”
Id.
In assessing “plausibility,” as required by the Supreme
Court in Iqbal, the Eighth Circuit Court of Appeals has
explained that courts should consider only the materials that
are
necessarily
embraced
attached to the complaint.
by
the
pleadings
and
exhibits
See Mattes v. ABC Plastics, Inc.,
323 F.3d 695, 697 n. 4 (8th Cir. 2003), stating that “in
considering a motion to dismiss, the district court may
sometimes consider materials outside the pleadings, such as
materials that are necessarily embraced by the pleadings and
exhibits attached to the complaint.
Porous Media Corp. v.
Pall Corp., 186 F.3d 1077, 1079 (8th Cir. 1999).
20
The Court
may also consider “materials that are part of the public
record or do not contradict the complaint.” Miller v. Redwood
Toxicology Lab., Inc., 688 F.3d 928, 931 (8th Cir. 2012).
“A
more complete list of the matters outside of the pleadings
that a court may consider, without converting a Rule 12(b)(6)
motion to dismiss into a Rule 56 motion for summary judgment,
pursuant to Rule 12(d), includes matters incorporated by
reference or integral to the claim, items subject to judicial
notice, matters of public record, orders, items appearing in
the record of the case, and exhibits attached to the complaint
whose authenticity is unquestioned.”
Van Stelton v. Van
Stelton, 11-CV-4045-MWB, 2013 WL 3776813 (N.D. Iowa 2013)
(internal citations omitted).
IV.
ISSUES
In their Motion(s) to Dismiss, the Defendants raise
numerous issues.
In his Motion to Dismiss, Docket No. 57, Defendant Bruch
argues:
1)
the
Plaintiffs’
Complaint
is
structurally
deficient under Federal Rule of Civil Procedure 8 because it
fails to specifically articulate how each claim pertains to
each Defendant;
2) Count II in the Plaintiffs’ Amended
Complaint, regarding Section 10(b) of the Securities Exchange
21
Act
of
1934,
is
barred
by
the
applicable
statute
of
limitations; 3) Count II, regarding Section 10(b) of the
Securities Exchange Act of 1934, should be dismissed because
the Plaintiffs have failed to comply with the heightened
pleading standard contained in Federal Rule of Civil Procedure
9(b); 4) the Plaintiffs have failed to state a claim under
Section 10(b) of the Securities Exchange Act of 1934 because
their claims are based on “hindsight” and the Defendants’
assertions are protect by the “bespeaks caution doctrine;” 5)
Plaintiffs’
Count
I,
regarding
Section
12(a)(1)
of
the
Securities Exchange Act of 1933, is barred by the applicable
statute of limitations; 6) Plaintiffs have failed to state a
claim in Count I under Section 12(a)(1) of the Securities
Exchange Act of 1933 because the Defendants were not required
to register the alleged securities; 7) Plaintiffs have failed
to state a claim in Count I under Section 12(a)(1) of the
Securities Exchange Act of 1933 because they do not have
standing; 8) Plaintiffs’ Counts VI and VII fail as a matter of
law because they are not specifically plead as required by
Federal Rule of Civil Procedure 9(b); 9) Plaintiffs’ Count IX,
regarding I.C.A. Sections 502.501 and 502.501A fails as a
matter of law because it is not specifically plead as required
22
by
Federal
Rule
of
Civil
Procedure
9(b);
10)
because
Plaintiffs’ fraud claims fail as set out above, so to do
Counts X and XI, related to concert of actions and conspiracy;
11) Plaintiffs’ Count IV, related to fiduciary duty, has not
been specifically plead as required by Federal Rule of Civil
Procedure 9(b); 12) Plaintiffs’ Count V fails as a matter of
law because the Plaintiffs have failed to state a claim for
conversion; and 13) Plaintiffs’ claim of rescission, Count
XII, has not been sufficiently plead.
Defendant Bruch also resists Plaintiffs’ attempts to
further amend their Complaint.
Finally, if the Plaintiffs’
case is allowed to proceed, Defendant Bruch requests that the
case be severed between each Plaintiff.
In its Motion to Dismiss, Docket No. 58, Defendant Artah
argues that:
1) Plaintiffs’ Count I should be dismissed
because it is beyond the applicable statute of limitations; 2)
Plaintiffs’ Count I should be dismissed because it has failed
to state a claim against Defendant Hall or Defendant Artah
because they were not sellers as defined by the law; 3)
Plaintiffs’ Count II should be dismissed for the reasons
stated in Defendant Bruch’s Motion to Dismiss, Docket No. 57;5
5
In their original Complaint, Docket No. 1, Plaintiffs
did not include Defendant Artah in Count II. Accordingly,
23
4) Plaintiffs’ Count III related to professional negligence
fails because the Plaintiffs have failed to allege that they
were
the
intended
beneficiaries
of
Defendant
Hall’s
professional services; 5) Plaintiffs’ Count IV, related to
fiduciary
duty,
fails
as
a
matter
of
law
because
the
Plaintiffs have failed to allege that Defendants Hall and
Artah were in the profession of supplying information or that
the Plaintiffs were the intended recipient of Defendant Hall’s
services; 6) Plaintiffs’ Count V, related to conversion, fails
as a matter of law because the Plaintiffs have failed to
allege that Defendants Hall or Defendant Artah ever had
dominion or control over Plaintiffs’ money; 7) Plaintiffs’
Count VI, regarding negligent misrepresentation, fails as a
matter of law because the Plaintiffs have failed to allege
Count II was not addressed in Defendant Artah’s original
Motion to Dismiss, Docket No. 58.
However, as discussed
above, the Plaintiffs filed an Amended Complaint, Docket No.
96. In their Amended Complaint, Plaintiffs included Defendant
Artah in Count II. On January 25, 2013, Defendant Artah filed
a Supplemental Motion to Dismiss, Docket No. 104. In that
Supplemental Motion to Dismiss, Defendant Artah adopted
Defendant Bruch’s arguments related to Count II. Similarly,
Defendant Artah’s Original Motion to Dismiss did not address
Plaintiffs’ Counts VII and XII because Defendant Artah was not
included in those Counts until the Plaintiff filed their
Amended Complaint. Consequently, in the Supplemental Motion,
Defendant Artah incorporated Defendant Bruch’s Motion to
Dismiss arguments related to those two Counts. See Docket
No. 104.
24
that Defendants Hall or Artah were in the profession of
supplying information or that Plaintiffs relied on information
provided by Defendants Hall or Artah; 8) Plaintiffs’ Count
VII, related to fraudulent misrepresentation, fails for the
reasons set out in Defendant Bruch’s Motion to Dismiss, Docket
No. 57, Att. 1, p. 35-36; 9) Plaintiffs’ Count IX, related to
I.C.A. §§ 502.501 and 502.201A, fails as a matter of law
because the Plaintiffs have failed to allege that Defendants
Hall or Artah were ‘sellers’ or that the Plaintiffs relied on
representations
made
by
Defendants
Artah
or
Hall;
10)
Plaintiffs’ Count X fails to state a claim for concert of
action; 11) Plaintiffs’ Count XI fails to state a claim for
conspiracy as set out in Defendant Bruch’s Motion to Dismiss;
12)
Plaintiffs’
Count
XII
fails
to
state
a
claim
for
rescission because Plaintiffs fail to claim that Defendants
Artah or Hall supplied the Plaintiffs any information; 13) the
Plaintiffs have failed to plead facts that would support an
award of punitive damages.
Defendant
Artah
also
makes
the
argument
that
the
Plaintiffs’ case(s) should be severed and the Plaintiffs
should proceed, if at all, individually.
Finally, Defendant
Artah argues that if the Court decides to allow Plaintiffs’
25
case to proceed, the Plaintiffs should be required to file a
second amended complaint setting out their causes of action
with more specificity.
The Court will consider these matters below.
V.
ANALYSIS
A.
‘Shotgun’ Claims and Permissive Joinder
Both Defendant Bruch and Defendant Artah urge the Court
to find that the Plaintiffs’ Amended Complaint is too vague.
Specifically,
in
his
Motion
to
Dismiss,
Defendant
argues:
Plaintiffs base their nine causes of action
against Mr. Bruch and Bruchside on a
shotgun pleading.
Courts in the 8th
Circuit have "repeatedly criticized the
filing of ‘kitchen-sink’ or ‘shotgun’
complaint—complaints in which plaintiff
brings every conceivable claim against
every conceivable defendant."
A shotgun
pleading "contains several counts, each one
incorporating by reference the allegations
of its predecessors, leading to a situation
where most of the counts ... contain
irrelevant factual allegations and legal
conclusions." Such "pernicious" complaints
"shift[] onto the defendant and the court
the burden of identifying the plaintiff's
genuine claims and determining which of
those claims might have legal support."
Shotgun
pleadings
violate
Rule
8's
requirement to set forth "a short and plain
statement of the claim showing that the
pleader is entitled to relief." Plaintiffs
aver no facts and fail to separate which
allegations
they
attribute
to
which
26
Bruch
Defendants, even though they named multiple
Defendants to each count.
Although each
cause of action requires different legal
elements of proof, all are allegedly
predicated on the same 536 paragraphs. The
Complaint does not satisfy Rule 8's
pleading requirements.
Docket No. 57, Att. 1, p. 20-21.
Similarly, Defendant Artah
argues:
[i]f any of Plaintiffs' claim survives the
motion to dismiss, Defendants, Artah
Holdings and Hall, request that the Court
require Plaintiffs to re-plead their
Complaint more specifically. Federal Rule
of Civil Procedure 12(e) allows a party to
"move for a more definite statement of a
pleading to which a responsive pleading is
allowed but which is so vague or ambiguous
that the party cannot reasonably prepare a
response."
Fed. R. Civ. P. 12(e).
The
Court "in its discretion, in response to a
motion for more definite statement under
Federal Rule of Civil Procedure 12(e), may
require such detail as may be appropriate
in the particular case, and may dismiss the
complaint if his order is violated."
Nelson v. Long Lines Ltd, C02-4083-MWB,
2003 WL 21356081 (N.D. Iowa 2003) (citing
McHenry v. Renne, 84 F.3d 1172, 1179 (9th
Cir. 1996)).
Docket No. 58, Att 1, p. 25.
In each specific section of their Resistance, Docket No.
80, the Plaintiffs argue that their Amended Complaint is
sufficiently
specific
to
survive
a
Motion
to
Dismiss.
However, during the hearing on the Motions to Dismiss, the
27
attorneys for the Plaintiffs stated that if the Court found
more specificity is necessary, they would file a Second
Amended Complaint setting out the relationship between each
Plaintiff (or Plaintiff Group) and the 12 Counts set out in
the Amended Complaint.
The Court is persuaded that the Amended Complaint does
contain “shotgun” pleadings, like those previously criticized
by the 8th Circuit.
The Amended Complaint sets out the
Plaintiffs, then sets out the Counts, and implies that each
Plaintiff pleads each Count in equal measure.
The background
contained in the Amended Complaint makes such a blanket
allegation unlikely. It is clear from the face of the Amended
Complaint that each Plaintiff (or Plaintiff Group) is not
equally invested in the securities at issue.
contributed
hundreds
of
thousands
Plaintiffs paid much less.
each of the securities.
securities.
members.
of
Some Plaintiffs
dollars.
Some Plaintiffs bought shares in
Some bought into only a few of the
Some heard about the securities from family
Some received written solicitations.
presentations
Other
where
the
Defendants
orally
Some attended
offered
the
securities. Thus, it is not plausible that each Count affects
each Plaintiff the same way.
Accordingly, the Plaintiffs are
28
directed to file a Second Amended Complaint within 45 days of
the date of this Order.6
In that Second Amended Complaint the
Plaintiffs shall set out those Counts that survive the present
Motions to Dismiss, and then state which Defendant(s) and
which Plaintiff(s) the individual Counts apply to.7
8
Turning to the issue of severance, the Plaintiffs resist
Defendant Artah’s argument that the cases should be severed,
saying
that
Plaintiffs
judicial
to
proceed
economy
as
a
is
served
group.
by
allowing
the
Specifically,
the
Plaintiffs argue that:
[t]here are two specific requirements for
permissive joinder of plaintiffs under
Federal Rule of Civil Procedure 20(a): (1)
a right to relief must be asserted by each
plaintiff relating to or arising out of the
same transaction or occurrence, or series
of transactions or occurrences; and (2)
some question of law or fact common to all
the parties must arise in the action. See
6
The Magistrate Judge will conducting a scheduling
conference to discuss the discovery schedule beyond the filing
of the Second Amended Complaint and any necessary responsive
pleadings.
7
Filing the Second Amended Complaint will also give the
Plaintiffs an opportunity to remove Defendants that have
already been dismissed from this case, and those Counts that
apply to previously dismissed Defendants.
8
See Federal Rule of Civil Procedure 15(a), giving the
Court authority to allow pre-trial amendments as justice
requires.
29
Directv v. Loussaert, 218 F.R.D. 639, 642
(S.D. Iowa 2003) (citations omitted). “The
purpose of the Rule is to entertain ‘the
broadest
possible
scope
of
action
consistent with fairness to the parties;
joinder of claims, parties and remedies is
strongly encouraged.’” Directv, 218 F.R.D.
at 641-42 (citation omitted) (emphasis
added). Here, Bruch and Hall contend that
the thirty-six Plaintiffs to the current
action, who all invested in GAI Funds, all
of which were managed by GAI, all of which
were created to raise capital for the same
purpose
(Bruch’s
Brazilian
farming
operation), all of whom invested in
multiple GAI Funds, all of whom invested or
reinvested after learning that Bruchside
Fund I paid a 40% ROI, all of whom plead
the same causes of action against Bruch and
Hall, respectively, arising out of GAI’s
management of investor funds should not be
permitted to be joined in the current
action because the several Plaintiffs[’]
claims do not arise out of the same
transaction, occurrence, or same basic set
of facts. Not only have Plaintiffs alleged
with particularity which statements Bruch
and Hall made, Plaintiffs have plead with
particularity
which
Bruch
and
Hall
statements they relied upon when making
their investment decisions. Overwhelming,
Plaintiffs[] relied upon, among other
things,
Defendants[’]
PowerPoint
presentations
which
contained
several
critical
omissions
and
Defendants[’]
representations regarding Bruchside Fund I
and Fund II’s ROI.
These allegations
certainly satisfy Federal Rule of Civil
Procedure 20(a).
Moreover, judicial
economy is served by joining the thirty-six
Plaintiffs in one action.
Requiring
separate
lawsuits
for
the
various
Plaintiffs
not
only
wastes
judicial
resources, but it would create additional
30
and unnecessary cost and expense for the
Plaintiffs.
Docket No. 80, p. 45-46.
As stated by Judge Gritzner in the case cited by the
Plaintiffs, there are two specific requirements under Federal
Rule of Civil Procedure Rule 20.
A right to relief must be
asserted by, or against, each plaintiff or defendant relating
to or arising out of the same transaction or occurrence, or
series of transactions or occurrences.
Additionally, some
question of law or fact common to all the parties must arise
in the action.
“The determination of whether the situation
constitutes the same transaction or occurrence for purposes of
Rule 20, is determined on a case by case basis.”
F.R.D. at 642.
Directv, 218
In this case, the right to relief arises out
of the same group of transactions, the alleged sale of the
Brazilian farming securities by the Defendants.
clearly common factual and legal questions.
There are
Accordingly,
joinder is appropriate, at least throughout the early stages
of this case.
However, once (if) this case proceeds past
summary judgment, the Court will consider a renewed Motion to
Sever, or a motion to bifurcate the trial, or any other
similar motion the parties deem appropriate.
31
B.
Amended Complaint Count I
Plaintiffs’ first claim arises under Securities Act of
1933.
See 15 U.S.C. § 77a.
As set out in the Plaintiffs’
brief,
Section 12(a) creates a private cause of
action against “[a]ny person who... offers
or sells a security” when a registration
statement or oral communication “includes
an untrue statement of material fact or
omits to state a material fact necessary in
order to make the statements, in light of
the circumstances under which they were
made, not misleading...”
15 U.S.C. §
77l(a)(2) (2012).
Docket No. 80, p. 18.9
To plead a claim under Section
12(a)(2), a plaintiff need only allege that a defendant
offered or sold a security to the plaintiff by means of a
prospectus or oral communication that was false or misleading
with respect to material facts.
9
Alpern v. UtiliCorp United,
In Count I of Plaintiffs’ Amended Complaint, they
include claims under both 15 U.S.C. § 77l(a)(1) and 15 U.S.C.
§ 77l(a)(2). The Defendants moved to dismiss both claims.
The Plaintiffs’ brief does not offer a defense of their claim
under 15 U.S.C. § 77l(a)(1).
During the hearing on this
matter, the Plaintiffs conceded that they were abandoning
their claim under 15 U.S.C. § 77l(a)(1). Accordingly, the
Court dismissed that portion of the Amended Complaint during
the hearing on this matter. See Docket No. 111. However, the
Plaintiffs continue to pursue their claim under 15 U.S.C. §
77l(a)(2).
32
Inc., 84 F.3d 1525, 1541 (8th Cir. 1996); see 15 U.S.C. §
77l(a)(2).
The Defendants argue that the Plaintiffs’ claim under the
Securities Act of 1933 should fail for several reasons.
1.
Statute of Limitations
First, the Defendants argue that the claim is barred by
the statute of limitations.
“The applicable statute of
limitations for § 12(a)(2) claims is governed by § 13 of the
1933 Act, 15 U.S.C. § 77m.”
Armstrong v. Am. Pallet Leasing
Inc., 678 F. Supp. 2d 827, 867 (N.D. Iowa 2009).
Section 13
provides that:
No action shall be maintained to enforce
any liability created under section 77k or
77l(a)(2) of this title unless brought
within one year after the discovery of the
untrue statement or the omission, or after
such discovery should have been made by the
exercise of reasonable diligence, or, if
the action is to enforce a liability
created under section 77l(a)(1) of this
title, unless brought within one year after
the violation upon which it is based. In
no event shall any such action be brought
to enforce a liability created under
section 77k or 77l(a)(1) of this title more
than three years after the security was
bona fide offered to the public, or under
section 77l(a)(2) of this title more than
three years after the sale.
15 U.S.C. § 77m.
Thus, § 13 contains both a one-year and
three-year limitations period, requiring claims to be brought
33
“within one year after the violation” and no more than “three
years after the security was bona fide offered to the public.”
15 U.S.C. § 77m.
The three-year period is a statute of
repose, not of limitations.
P. Stolz Family Partnership L.P.
v. Daum, 355 F.3d 92, 99–107 (2d Cir. 2004); Pacific Mut. Life
Ins. Co. v. First RepublicBank Corp., 997 F.2d 39, 52 (5th
Cir. 1993).
The Defendants argue that, under the former
limit, the Plaintiffs’ claim is time barred, stating:
every purchase claimed by the Plaintiffs
occurred outside of the one year statute of
limitations...
Plaintiffs filed their
Complaint on November 8, 2011, almost two
years after the last of these purchases.
As such, the 12(a)(1) claim is time-barred.
So too with their Section 12(a)(2) claim
because, as set forth in Section IV.B.1,
supra, Plaintiffs had, at the very least,
inquiry notice of the alleged facts
underlying this claim by July 2009.
Docket No.57 , Att.1 , p. 32-33.
The Plaintiffs respond by
arguing:
[h]ere, Plaintiffs’ Complaint was filed on
November 8, 2011. Plaintiffs have alleged
that they only became aware of fact[s] that
would alert them to Defendants’ violations
on or about December 20, 2010[,] after
Plaintiffs’ counsel had retained a private
forensic investigative firm to investigate
Defendants.
See Complaint ¶ 532-534.
Defendants Bruch and Hall contend, however,
that thirty-six separate Plaintiffs knew or
should have known about any wrongdoing by
Defendants that could have given rise to
34
their 12(a)(2) claim before December 20,
2010.
This is clearly a dispute of
material fact which cannot be resolved
through Defendants’ motions to dismiss.
Docket No. 80, p. 24.
In the Armstrong case, cited above, the Honorable Mark W.
Bennett considered a similar argument and concluded that, “the
court
concludes
that
the
issue
of
whether
plaintiffs
§
12(a)(2) claims are barred by § 13's statute of limitations,
is a factual one which cannot be resolved on defendants'
Armstrong, 678 F. Supp. 2d at 867.
motions to dismiss.”
Likewise,
in
this
case,
the
Plaintiffs
have
made
the
allegation that they uncovered Defendants’ alleged wrong doing
on December 20, 2010.
November 8, 2011.
The original Complaint was filed on
Docket No. 1.
November 8, 2011, is within
one year of December 20, 2010, and the statute of limitations.
The Plaintiffs’ alleged discovery date may be accurate, or it
may not, but the accuracy of that claim is a factual question
that cannot be answered at the Motion to Dismiss stage.
Accordingly, the Defendants’ Motion that Plaintiffs’ §12(a)2
claim be dismissed on statute of limitations grounds is
denied.
35
2.
§12(a)2 Standing
Next, Defendant Bruch argues that the Plaintiffs lack
standing to bring a §12(a)2 claim.
As stated above, in order
to plead an adequate claim under section 12(a)(2), a plaintiff
need only allege that a defendant offered or sold a security
to
the
plaintiff
by
means
of
a
prospectus
or
oral
communication that was false or misleading with respect to
material facts.
Defendant Bruch does not dispute that the
Plaintiffs have alleged that he sold a security.
Bruch
argues
that
the
Plaintiffs
securities in a public offering.
did
not
purchase
the
Specifically, he states:
Section
12(a)(2)
prohibits
sales
of
securities
made
through
a
false
or
misleading
“prospectus
or
oral
communication.”
In Gustafson v. Alloyd
Co., Inc., [513 U.S. 561 (1995)], the
Supreme Court held that the use of the term
“prospectus” meant that the statute applied
only to material misstatements or omissions
in connection with an initial public
offering of securities, not to private
sales of securities. Similarly, the phrase
“oral communication” is “restricted to oral
communications
that
relate
to
a
prospectus.”
Standing under section
12(a)(2) is limited to those individuals
who purchase securities in a public
offering.
Plaintiffs do not and cannot
allege that the investments at issue here
were part of a public offering. Rather,
they were sold through private placements.
36
Rather,
Plaintiffs’ cause of action under Section
12(a)(2) must be dismissed as a matter of
law.
Docket No.57, Att. 1, p. 34-35.
The Plaintiffs reply to this
argument by stating:
[t]he Supreme Court has defined prospectus
to mean “documents related to public
offerings by an issuer or its controlling
shareholders.”
Gustafson v. Alloyd Co.,
513 U.S. 561, 566 (1995). As noted above,
Bruch and Hall prepared and presented
PowerPoint slide shows for Bruchside Fund
I, Bruchside Fund II, and Bruchside Fund
III investors in an effort to entice
investors to buy securities.
These
PowerPoint presentations are documents
related to each public offering. Further,
Bruch and Hall were the promoters for
Bruchside Funds I, II, and III, and the
Global Ag Biodiesel Fund. Bruch and Hall
also mailed several letters to investors,
and Bruch constantly blogged to investors,
in an effort to secure investors for the
Global Ag Biodiesel Fund, the Gin Fund, the
BOL Fund I. These letters and blogs are
documents related to each public offering.
Plaintiffs have also alleged that Bruch and
Hall made oral representations regarding
Bruchside Fund I, Fund II, and Fund III
during their oral PowerPoint presentations.
Further, Plaintiffs have alleged that Bruch
made very specific representations about
returns during the February 2007 investor
tours to Brazil. Therefore, there is no
question that Plaintiffs have alleged that
Defendants sold securities by means of a
prospectus or oral communication.
Docket No. 80, p. 21-22.
The Plaintiffs go on to discuss the
alleged omissions in the security offers. The Plaintiffs then
37
discuss Bruch’s claim that securities were private and did not
need to be registered.
The Plaintiffs state:
Defendant Bruch contends that GAI Funds
were not required to be registered because
these Funds were exempted by Rule 506 as
GAI Funds were only available to accredited
investors.
This argument is contrary to
the Bruchside Fund I Form D filed with the
SEC which indicates that Defendants sold
$300,000
worth
of
securities
to
non-accredited investors. See Exhibit 21.
It is well settled that Defendants bear the
burden of demonstrating that their offering
complied with Rule 506.
See Parker v.
Broom, 820 F.2d 966, 968 (8th Cir. 1987)
(noting that defendant have the burden of
proving an exemption from registration
requirements).
Defendant Bruch’s paltry
three paragraphs hardly establish that
Defendants have met all of the strict
requirements of Rule 506. Defendants have
not, and cannot through a motion to
dismiss, presented any evidence that each
GAI Fund investor was an accredited
investor. Accordingly, Defendants have not
met their burden of establishing a Rule 506
exemption
from
the
registration
requirements.
Docket No. 80, p. 23.
Defendant Bruch filed a reply brief and stated:
Plaintiffs misread the law and argue in a
section addressing Section 12(a)(2) that
the Section 12(a)(2) claim, presumably,
should survive because Mr. Bruch has not
shown that the registration requirements do
not apply to these securities.
This
contention
is
irrelevant
to
Section
12(a)(2)
because
the
registration
requirements implicate Section 12(a)(1),
38
not Section 12(a)(2).
And Plaintiffs’
analysis is misplaced in any event.
Plaintiffs
base
this
argument
on
a
contention that does not appear in the
Complaint:
$300,000 worth of securities
were sold to non-accredited investors in
Fund I. A security offering may be exempt
from registration when it includes only
accredited
investors
and
up
to
35
non-accredited investors. According to the
exhibit cited by Plaintiffs, GAI sold
partnership interests in Fund I to only
three
non-accredited
investors,
and
Plaintiffs make no argument whatsoever with
respect to the registration requirements
for the other five investment vehicles...
Section
12(a)(2)
applies
only
to
misstatements in or omissions regarding a
prospectus pertaining to an initial public
offering
of
securities
and
to
oral
communications
relating
to
such
prospectuses. Plaintiffs acknowledge this
authority, but do not explain how offerings
made to a limited group of investors
through private placement memoranda qualify
as public offerings, nor could they.
Numerous courts have found that private
placement memoranda like those at issue
“are not ‘prospectuses’ for the purposes of
a claim under § 12(2).”
Plaintiffs’
Section 12(a)(2) claim fails because the
securities at issue do not implicate the
statute.
Docket No. 90, p. 7-8.
As the Court understands it, Defendant Bruch makes a
rather simple argument:
publicly
sold.
The
the securities at issue were never
relevant
Supreme
Court
precedent,
Gustafson v. Alloyd Co., Inc., 513 U.S. 561, 584 (1995),
39
clearly states that the use of the term "prospectus" meant
that the statute applied only to material misstatements or
omissions in connection with an initial public offering of
securities, not to private sales of securities.
Accordingly,
Bruch argues, the Plaintiffs’ Section 12(a)(2) claim fails as
matter of law.
However, neither party specifically sets the
exact definition of a public offering. The implication in the
Plaintiffs’ argument is that because the Defendants used
public forums, such as power point presentations at casinos to
solicit buyers, they “publically” offered the securities.
In
any case, the Court is persuaded that the parties’ arguments
miss the mark when it comes to the Motion to Dismiss standards
discussed above.
As stated by Judge Bennett in the Armstrong
case, cited above, “[b]ecause § 12 claims are only subject to
the notice pleading requirements of Federal Rule of Civil
Procedure 8, see In re Nations Mart Corp. Sec. Litig., 130
F.3d 309, 319, the court concludes that plaintiffs have
alleged facts that these defendants all either sold or offered
... stock to plaintiffs.
defendants'
respective
Accordingly, this portion of these
motions
to
Armstrong, 678 F. Supp. 2d at 867.
dismiss
are
denied.”
Similarly, the present
Plaintiffs have alleged “Defendants offered and sold GAI Funds
40
securities
to
the
Plaintiffs.
Defendants
made
untrue
statements of fact or omitted material facts in connection
with the securities that it sold to the Plaintiffs.”
Amended
Complaint, Docket No. 96, p. 65.
Defendant
Bruch
makes
a
powerful
argument
that
the
Plaintiffs’ claim necessarily fails because the securities
were not publically offered and, accordingly, the Plaintiffs
are not entitled to Section 12(a)(2) relief. However, for the
Court to rule on that argument, the Court would have to
determine if a public offer was made, and that is a factual
finding.
As is well known, in order to survive a motion to
dismiss, "a complaint must contain sufficient factual matter,
accepted as true, to state a claim to relief that is plausible
on its face."
Accepted as true, the Plaintiffs have plead a
Section 12(a)(2) claim which alleges that an offer was made.
At this early stage, the Court cannot weigh the facts as urged
by Defendant Bruch.
Accordingly, Defendant Bruch’s Motion to
Dismiss Plaintiffs’ Section 12(a)(2) claim is denied.
3.
Hall is Not a Seller
Finally, Defendant Artah argues that Mr. Hall was not a
“seller” as contemplated by the statute and, thus, cannot be
41
held liable for the alleged wrong doing.
Specifically, Artah
argues that:
[i]n order to adequately plead a claim
under § 12 of the 1933 Act, a plaintiff
must allege that the defendant offered or
sold a security to the plaintiff by means
of a prospectus or oral communication that
was false or misleading with respect to
material facts... Neither Hall nor Artah
Holdings were "sellers." A "seller" "must
have engaged in actual solicitation." De
Wit v. Firstar Corp., 879 F. Supp. 947, 984
(N.D. Iowa 1995) (citing Smith v. American
Nat'l Bank & Trust Co., 982 F.2d 936, 941
(6th Cir. 1992)). To qualify as a "seller"
for purposes of § 12, [“]a person must have
either passed title or offered to do so.”
Id. (citing Cyrak v. Lemon, 919 F.2d 320,
324-25 (5th Cir. 1990)).
Neither passed
title nor offered to do so.
Indeed,
neither was the owner of title to the funds
at issue. Further, as to Hall, personally,
[]providers of professional services, such
as accountants and lawyers, do not usually
qualify as "sellers", because "[t]he buyer
does
not,
in
any
meaningful
sense,
'purchase the security from' such a
person." Id. (quoting Ryder Int'l Corp.
v. First Am. Natl Bank, 943 F.2d 1521, 1528
(11th Cir. 1991).
Hall, a provider of
professional services, cannot qualify as a
"seller" for § 12 purposes. GAI sold the
securities to the Plaintiffs, according to
Plaintiffs' Complaint, not Hall.
See
Complaint at 30.
Hall merely acted
pursuant to his duties as general counsel
to GAI, and providers of these types of
services do not qualify as sellers.
Docket No. 58, Att. 1, p. 9-10.
The Plaintiffs allege both in
their Resistance and in the Amended Complaint that Defendant
42
Hall and his business Artah was a seller of the securities.
See, for example, Docket No. 80, p. 19-20.
Plaintiffs’
general allegation is that Defendants Bruch and Hall worked
together
to
promote
and
sell
the
securities
at
Specifically, Plaintiffs state:
Plaintiffs have alleged that Bruch and Hall
offered
and/or
sold
the
following
unregistered securities to the Plaintiffs:
Bruchside Fund I, Bruchside Fund II,
Bruchside Fund III, the Global Ag Biodiesel
Fund, Gin Fund. See generally Complaint.
Plaintiff[s] have alleged and attached
documents embraced by the Complaint that
Bruch and Hall drafted and presented to the
Bruchside Fund I, Fund II, and Fund III
slideshows.
See Exhibits 1, 7, and 13.
Defendants have attached several letters to
Plaintiffs from Bruch and Hall informing
Plaintiffs of the availability of Bruchside
Fund II and Bruchside Fund III for
investments. Plaintiffs have alleged that
Hall was integral in drafting all Bruchside
Fund I, Fund II, Fund III, Global Ag
Biodiesel subscription agreements, private
placement
memoranda,
and
limited
partnership agreements.
See Complaint ¶
76. Finally, even though Hall may not be
listed as a promoter for the Gin Fund, Hall
was integral in offering and selling
Bruchside
Fund
III
securities
which
included an[] interest in the BOL Fund.
Hall’s January 8, 2009[,] Form D filing for
Bruchside Fund I’s indicates that Bruch and
Hall are promoters. See Form D filings for
Bruchside Fund I, Bruchside Fund II,
Bruchside Fund III, Global Ag Biodiesel,
and BOL, LLC[,] attached hereto and marked
as
Exhibit
21.
Despite
Bruch’s
representations to the contrary, Bruchside
43
issue.
Fund I’s Form D filing indicates that Bruch
and Hall sold $300,000 worth of Bruchside
Fund
I
securities
to
non-accredited
investors.
See Exhibit 21.
Similarly,
Hall’s October 26, 2009[,] Form D filings
for Bruchside Fund II and Fund III,
respectively, indicate that Bruch and Hall,
among others, are promoters. See Exhibit
21.
Hall’s February 19, 2008[,] Form D
filing for Global Ag Biodiesel indicates
that Bruch and Hall are promoters.
See
Exhibit 21.
Docket No. 80, p. 19-20.
The Plaintiffs’ Resistance, cited above, makes reference
to a number of exhibits that purport to show that Defendant
Artah helped sell the securities.
No. 80, Exhibit 7.)
(See, for example, Docket
However, as stated above, and will be
stated again below, the Court will not weigh the facts in
ruling on a Motion to Dismiss.
Rather, the Court’s only
inquiry is whether the actual allegations are plausible on
their face.
Turning to that issue, the Court finds that it is
possible that Defendant Artah worked with Defendant Bruch to
sell the securities.
owner can be a seller.
Moreover, the law states that a non“The fact that one is not an actual
owner of securities does not necessarily prevent him from
being a statutory seller.
A non-owner cannot be a seller,
however, unless he urges a prospective purchaser to buy.”
Smith v. Am. Nat. Bank & Trust Co., 982 F.2d 936, 941 (6th
44
Cir. 1992).
The Plaintiffs have alleged that Defendant
Artah/Hall induced the Plaintiffs to purchase the securities.
Accordingly,
the
Plaintiffs
have
alleged
that
Defendant
Artah/Hall is a seller under Section 12(a)(2), and Defendant
Artah’s Motion to Dismiss that claim must be denied.
4.
Count I Conclusion
Because the Plaintiffs have alleged a viable claim on
Section 12(a)(2), Count I, related to Section 12(a)(2), will
be allowed to proceed.
the
Plaintiffs’
claim
previously dismissed.
However, as the Court stated above,
related
to
Section
12(a)(1)
was
When filed, the Plaintiffs’ Second
Amended Complaint should reflect that dismissal.
C.
Count II
Plaintiffs’ Count II arises under the Securities and
Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 of
the SEC, 17 C.F.R. § 240.10b-5.
Under § 10(b), it is unlawful
for any person, “directly or indirectly ... [t]o use or
employ,
security
in
connection
...
any
with
the
manipulative
purchase
or
or
sale
deceptive
of
device
any
or
contrivance in contravention of such rules and regulations as
the [SEC] may prescribe....”
15 U.S.C. § 78j(b).
Section
10(b) is not limited to a purchaser or seller of securities,
45
but rather “reaches any deceptive device used ‘in connection
with the purchase or sale of any security.’”
Id.
The
Securities and Exchange Commission, pursuant to this section,
promulgated Rule 10b–5, which states that “[i]t 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 material fact or to omit to state a
material fact necessary in order to make the statements made,
in light of the circumstances under which they were made, not
misleading, or (c) To engage in any act, practice, or course
of business 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.F.R. § 240.10b–5.
coextensive in scope with § 10(b).
Rule 10b–5 is
See Stoneridge Inv.
Partners, LLC v. Scientific–Atlanta, Inc., 552 U.S. 148, 128
(2008) (“Rule 10–b encompasses only conduct already prohibited
by § 10(b).”); see also SEC v. Zandford, 535 U.S. 813, 816 n.
1,(2002).
The Supreme Court has stressed that § 10(b) should be
“construed not technically and restrictively, but flexibly to
effectuate its remedial purposes.” Affiliated Ute Citizens of
Utah v. United States, 406 U.S. 128, 151 (1972).
46
This
flexibility is necessary to realize the goal of Congress:
“substitut[ing]
philosophy
of
a
philosophy
caveat
emptor
of
full
disclosure
and
thus
to
achieve
for
the
a
high
standard of business ethics in the securities industry.”
Affiliated Ute, 406 U.S. at 151.
Regarding the specific pleading standards, it is true
that
allegations
of
fraud
are
generally
subject
to
the
pleading requirements of Rule 9(b) of the Federal Rules of
Civil Procedure. However, certain aspects of § 10(b) and Rule
10b–5 fall under special pleading standards of the Private
Securities Litigation Reform Act (PSLRA).
Specifically, the
complaint must “specify each statement alleged to have been
misleading,
the
reason
or
reasons
why
the
statement
is
misleading, and, if an allegation regarding the statement or
omission is made on information and belief, the complaint
shall state with particularity all facts on which that belief
is formed.”
15 U.S.C. § 78u–4(b)(1).
In addition, the
complaint must, “with respect to each act or omission alleged
to violate this chapter, 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).
In a §
10(b) private action, a plaintiff must prove: “(1) a material
47
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 Inv. Partners, LLC, 128 S. Ct. at 768
(citing Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336,
341–342 (2005)).
Accordingly, the Eighth Circuit Court of
Appeals has directed that in order to survive a Rule 12(b)(6)
motion to dismiss, a securities plaintiff must point to: “(1)
misrepresentations or omissions of material fact or acts that
operated as a fraud or deceit in violation of the rule; (2)
causation,
often
analyzed
in
terms
of
materiality
and
reliance; (3) scienter on the part of the defendants; and (4)
economic harm caused by the fraudulent activity occurring in
connection
with
the
purchase
and
sale
of
a
security.”
Cornelia I. Crowell GST Trust v. Possis Med., Inc., 519 F.3d
778, 782 (8th Cir. 2008) (quoting In re K-tel Int'l, Inc. Sec.
Litig., 300 F.3d 881, 888 (8th Cir. 2002)).
A § 10(b) private
right of action does not extend to aiders and abettors.
Stoneridge Inv. Partners, LLC, 128 S. Ct. at 769.
Rather,
“[t]he conduct of a secondary actor must satisfy each of the
48
elements or preconditions for liability ...”
Stoneridge Inv.
Partners, LLC, 128 S. Ct. at 769.
The Defendants make several arguments that Plaintiffs’
Section 10(b) claims should be dismissed.10
1.
Statute of Limitations
First, the Defendants argue that Plaintiffs’ Section
10(b)
claims
limitations.
are
barred
by
the
applicable
statute
of
The relevant statute states:
(a) Except as otherwise provided by law, a
civil action arising under an Act of
Congress enacted after the date of the
enactment of this section may not be
commenced later than 4 years after the
cause
of
action
accrues.
(b)
Notwithstanding subsection (a), a private
right of action that involves a claim of
fraud, deceit, manipulation, or contrivance
in
contravention
of
a
regulatory
requirement concerning the securities laws,
as defined in section 3(a)(47) of the
Securities Exchange Act of 1934 (15 U.S.C.
78c(a)(47)), may be brought not later than
the earlier of-- (1) 2 years after the
discovery of the facts constituting the
violation; or (2) 5 years after such
violation.
28 U.S.C. § 1658.
A plaintiff has inquiry notice when he or
she becomes “aware of facts that would lead a reasonable
10
As discussed in Footnote 5, above, Defendant Artah has
adopted Defendant Bruch’s arguments in relation to Count II.
See Docket No. 104.
49
person
to
investigate
and
consequently
acquire
knowledge of the alleged fraudulent conduct.”
Advisors, LLC, 2005 WL 1773908 (E.D. Mo. 2005).
actual
McKuin v. RF
“There are
three determinations a court must make in ascertaining whether
the inquiry notice standard has been satisfied: (1) the facts
of which the victim was aware; (2) whether a reasonable person
with knowledge of those facts would have investigated the
situation further; and (3) upon investigation, whether the
reasonable person would have acquired actual notice of the
defendant's misrepresentations.”
635, 639 (8th Cir. 2001).
Ritchey v. Horner, 244 F.3d
Inquiry notice exists when there
are ‘storm warnings’ that would alert a reasonable person of
the possibility of misleading information, relayed either by
an act or by omission.
Id.
The Defendants argue:
Plaintiffs had, at the very least, inquiry
notice of the facts underlying their fraud
claims over two years before they filed
this
action
on
November
8,
2011.
Plaintiffs themselves identify PWC’s July
2009 audit of GAI funds as critical to
their knowledge of an alleged fraud:
“[o]nly
after
the
Price
Waterhouse
information became available, could anyone
other than the Defendants learn the true
source of the Returns paid to Bruchside
Fund I investors.”
At that time, “it
became
clear
that
Defendants
had
misrepresented the source of the 40%
50
returns as profits from the farming
operations in Brazil.” Plaintiffs repeat
this allegation with respect to Fund II by
stating that, “[b]ased on the Price
Waterhouse review, it became clear that
Defendants had misrepresented the source of
the alleged 25% profit from farming
operations.”
The statute of limitations
began running no later than July 2009, more
than two years before Plaintiffs filed
suit.
Docket No. 57, Att. 1, p. 23-24.
The Plaintiffs acknowledge
that the Price Waterhouse audit was a water shed moment in the
case.
(And it seems an agreed fact that the Price Waterhouse
audit occurred more than two years before the filing of the
initial Complaint, Docket No. 1.)
However, the Plaintiffs
cite the case of SEC v. Seaboard Corp., 677 F.2d 1301, 1310
(9th
Cir.
1982),
to
argue
that
because
the
Defendants
continued to mislead them regarding the alleged fraud during
and after the audit, the date the Plaintiffs were put on
notice about the fraud becomes an issue of fact that should
not
be
decided
at
this
preliminary
stage
of
the
Specifically, the Plaintiffs state:
[o]n June 12, 2009, just prior to
disclosing the PWC limited review to
investors, GAI published its Management
Discussion and Analysis Report.
See
Management Discussion and Analysis Report
attached hereto and marked as Exhibit 20.
On several instances in that report, which
Bruch represents contains the relevant
51
case.
information from the PWC limited review,
GAI represents that "[t]he financial
results [contained in the report] have no
cash effect on our Company." See Exhibit
20.
As of the date this Management
Discussion and Analysis Report, investors
had not received a single spreadsheet,
balance sheet, financial statement, or
audit reflecting losses; let alone cash
losses for any of the GAI Fund. Investors
were only aware of the ROIs. In addition,
Plaintiffs had received several K-1s that
also indicated profits. It is telling that
in the face of these facts, and despite the
voluminous and repeated showering of
positive information coupled with GAI's
representation
that
"[t]he
financial
results have no cash effect on our
Company," Bruch contend[s] that the July
2009 PWC limited review should have caused
Plaintiffs to immediately initiate a
lawsuit against the Defendants. Plaintiffs
maintain that they only became aware of
facts
that
would
alert
them
to
Defendants[’] wrongdoing on or about
December 20, 2010[,] after Plaintiffs'
counsel had retained a private forensic
investigative
firm
to
investigate
Defendants.
See Complaint ¶ 532-534.
Based on the foregoing and in light of
Seaboard Corp., Bruch cannot prevail on a
motion to dismiss in reliance on the
statute of limitations due to Plaintiffs[’]
numerous allegations of fraud.
Docket No. 80, p. 29-30.
Based on the forgoing, the Court is persuaded there is a
factual dispute regarding when inquiry notice began.
Because
the Court cannot decide the factual dispute at this early
stage
of
the
case,
the
Defendants’
52
Motions
to
Dismiss
Plaintiffs’ Section 10(b) claims on statute of limitations
grounds are denied.
2.
Pleading Standards
Next, the Defendants argue that Section 10(b) claims are
subject to higher pleading standards and Plaintiffs Amended
Complaint
fail
to
meet
those
higher
standards.
“While
allegations of fraud are generally subject to the pleading
requirements of Rule 9(b) of the Federal Rules of Civil
Procedure, certain aspects of § 10(b) and Rule 10b-5 fall
under special pleading standards of the PSLRA.
Specifically,
the complaint must ‘specify each statement alleged to have
been misleading, the reason or reasons why the statement is
misleading, and, if an allegation regarding the statement or
omission is made on information and belief, the complaint
shall state with particularity all facts on which that belief
is formed.’
15 U.S.C. § 78u-4(b)(1).
In addition, the
complaint must, ‘with respect to each act or omission alleged
to violate this chapter, state with particularity facts giving
rise to a strong inference that the defendant acted with the
required
state
of
mind.’
15
Armstrong, 678 F. Supp. 2d at 856.
U.S.C.
§
78u-4(b)(2).”
The Defendants argue that
Plaintiffs’ second count falls far short of that standard in
53
two ways; the allegations are not specific enough, and they do
not give rise an inference of scienter.
Regarding the first,
the Defendants argue:
Plaintiffs do not approach the pleading
requirements of Rule 9(b) and PSLRA. They
make no real effort to support the Section
10(b) claim with the necessary specific
allegations.
Plaintiffs attribute the
overwhelming
majority
of
the
misrepresentations to “Defendants,” rather
than specifying who made them, as they
must. For example, although the “Plaintiff
Investors—Representations,
Reliance,
Investments and Loss” section contains 334
individual paragraphs that purportedly set
forth the fraud against each investor
group, all but two of the alleged
representations
and
omissions
are
attributed to “Defendants.” Similarly, the
Complaint contains only a scattering of the
dates
and
locations
of
the
alleged
misrepresentation, and little if any
explanation as to how the representations
and alleged omissions duped Plaintiffs into
investing.
Docket No. 57, Att. 1, p. 27
In this case, there is no doubt that Plaintiffs’ claims
related to Section 10(b) are meagerly plead. In its entirety,
Plaintiffs’ Count II takes up less than two pages of the
Amended
Complaint.
See
Docket
No.96,
p.
65-66.
The
Plaintiffs seem to acknowledge that the allegations of Section
10(b) fraud in the Amended Complaint are not specifically
plead as to particular Defendants.
54
However, the Plaintiffs
argue that they are entitled to level broad allegations at
“Defendants”
as
a
group,
rather
than
at
the
Defendants, under the group pleading doctrine.
individual
Plaintiffs
argue:
Plaintiffs are entitled to rely upon the
“group pleading” doctrine.
The group
pleading doctrine is an exception to the
requirement that the fraudulent acts of
each defendant be identified separately in
the complaint. Remmes v. Int'l Flavors &
Fragrances, Inc., 389 F. Supp. 2d 1080,
1089 (N.D. Iowa 2005).
Under the group
pleading doctrine, Plaintiffs are exempted
from
the
strictures
of
Rule
9(b).
Specifically, Plaintiffs are exempted from
specifying
the
particular
role
of
defendants in the alleged fraud.
Id.
Group pleading allows plaintiffs to “rely
on a presumption that statements in
prospectuses,
registration
statements,
annual reports, press releases, or other
group-published
information,
are
the
collective work of those individuals with
direct involvement in the everyday business
of the company.” Id. (citations omitted);
Accord In re BankAmerica Corp. Secs.
Litig., 78 F. Supp. 2d at 992 (citations
omitted) (noting that the group pleading
doctrine “involves a rebuttable presumption
that individual officers or directors
involved in the day-to-day affairs of the
corporation are collectively responsible
for fraudulent or misleading statements or
omission in group published documents such
as registration statements, prospectuses,
annual
reports,
and
certain
press
releases.”); In re McLeodUSA Inc., Secs.
Litig., No. C02-001-MWB, 2004 U.S. Dist.
LEXIS 8538, at *12 (N.D. Iowa Mar. 31,
2004)
(“[U]nder
the
group-published
55
information doctrine, plaintiffs may impute
false or misleading statements conveyed in
annual reports, quarterly and year-end
financial results, or other group-published
information to corporate officers.”); Wool
v. Tandem Computers Inc., 818 F.2d 1433,
1440 (9th Cir. 1987) (“That exception is
premised on the assumption that ‘in cases
of corporate fraud where the false or
misleading information is conveyed in
prospectuses,
registration
statements,
annual report, press release, or other
‘group-published
information,’
it
is
reasonable to presume that these are the
collective actions of the officers.”).
Indeed,
courts
have
noted
that
a
Plaintiffs[’] reference to “Defendants”
jointly is sufficient with respect to group
publications. See e.g., Martino-Catt, 213
F.R.D. at 315 (“The Court agrees that
references to ‘Defendants’ jointly is
‘sufficiently’ with regard to communication
on the Website and in the Retention Plan
Prospectus.”).
Docket No. 80, p. 26-27.
The law related to the group pleading doctrine cited by
the Plaintiffs above was generally correct at the time those
cases were decided.11
However, in their reply, the Defendants
argue that the group pleading doctrine has been limited by the
Supreme Court in the case Janus Capital Grp., Inc. v. First
Derivative Traders, 131 S. Ct. 2296, 2299 (2011).
11
Docket No.
See also In re Meta Fin. Grp., Inc., 2011 WL 2893625
(N.D. Iowa 2011), finding that the GPD “does adequately tie
the alleged misrepresentations and non-disclosures to the
various defendants.”
56
90, p. 8.
It does not appear that the 8th Circuit has
considered the effect the Janus case had on the group pleading
doctrine. However, other courts have considered the effect of
the
Janus
decision,
and
stated
doctrine continues to be good law.
that
the
group
pleading
As one Court stated:
As for Janus Capital, that case addressed
only whether third parties can be held
liable for statements made by their
clients.
Its logic rested on the
distinction between secondary liability and
primary liability, see Janus Capital, 131
S. Ct. at 2302, and has no bearing on how
corporate officers who work together in the
same entity can be held jointly responsible
on a theory of primary liability. It is
not inconsistent with Janus Capital to
presume that multiple people in a single
corporation have the joint authority to
‘make’
an SEC filing, such that a
misstatement has more than one ‘maker.’
See City of Roseville, 814 F. Supp. 2d at
417 n. 9.
Moreover, as to the PSLRA's
requirement
that
a
plaintiff
plead
securities fraud with specificity as to
each defendant, there is no tension between
requiring a plaintiff to allege specific
facts
for
individual
defendants
and
presuming that multiple corporate officers
may work as a group to produce particular
documents. Pfizer, 584 F. Supp. 2d at 638.
It is for this reason that, in the cases
cited above, most judges in this District
have continued to conclude that group
pleading is alive and well.
City of Pontiac Gen. Employees' Ret. Sys. v. Lockheed Martin
Corp., 875 F. Supp. 2d 359, 374 (S.D.N.Y. 2012).
57
In this
case, the Plaintiffs allege that Defendants Bruch and Hall
worked
together
to
produce
misstatements
and
omissions
regarding the securities. Accordingly, the Court is persuaded
that, under the same rationale employed in the Southern
District of New York case cited above, the group pleading
doctrine continues to be good law as applied to the particular
claim in this case.12
Plaintiffs
have
For that reason, the mere fact that the
alleged
“Defendants”
committed
the
misstatement and/or admissions in the Section 10(b), rather
than listing each Defendant’s misstatements, individually,
will not defeat their claim.
However, the Defendants also argue that, substantively,
the Plaintiffs have failed to give rise to an inference of
scienter.
Defendants argue:
[w]hile Plaintiffs predictably attribute
their alleged losses to a “Ponzi scheme,”
their own allegations and the documents
they rely on suggest a more compelling
explanation—that the losses stemmed from
the very risk factors that GAI disclosed
regarding investments in an untested
enterprise operating abroad. The PWC audit
cited by Plaintiffs suggests that the
devaluation of the dollar increased the
costs of doing business in Brazil and,
12
The Court notes that in a similar case in the Southern
District of Iowa, Judge Gritzner suggests a different
conclusion.
Aviva Life & Annuity Co. v. Davis, 2014 WL
2069640 (S.D. Iowa 2014).
58
coupled with a historic rain event in the
region,
led
to
the
demise
of
the
enterprise.
Far short of pleading an
actionable claim of securities fraud, the
Complaint boils down to and stems from the
investors’ recognition of the very risks
GAI explained having come to pass and of
the “Defendants” inability to foretell the
worst case scenario.
Docket No. 57, Att. 1, p. 27.
Plaintiffs respond that:
GAI’s misrepresentations about the 2007 40%
ROI for Bruchside Fund I investors occurred
during or immediately before other GAI Fund
offers. GAI’s misrepresentations regarding
the 2008 Bruchside Fund I and Bruchside
Fund II returns occurred during GAI’s
Bruchside Fund III offering.
The nature
and timing of these misrepresentations also
give rise to an inference that Plaintiffs
have plead, with sufficient particularity,
the scienter requirement of a 10(b) claim.
In addition, GAI’s failure to provide
timely and accurate K-1s to investors also
gives rise to a strong inference that
Plaintiffs
have
plead
scienter
with
sufficient particularity. The allegations
in [the] Complaint and the facts set forth
above, including the attached document
embraced by the Complaint, give rise to an
inference that Plaintiffs have plead an
obvious
connection
between
the
misrepresentations and/or omissions and the
investors purchasing GAI Funds securities.
The allegations in the Complaint and the
facts set forth above, including the
documents embraced by the Complaint, give
rise to an inference that Plaintiffs relied
on
Defendants’
misrepresentations
and
omission
when
Plaintiffs
determine[d]
whether to continue investing or increase
59
their investments in GAI Funds. Plaintiffs
would not have invested but for GAI
misrepresentations or omissions.
Docket No. 80, p. 28.
The
Court
Complaint,
and
has
is
considered
persuaded
the
that
Plaintiffs’
the
Amended
Plaintiffs
adequately plead a claim under Section 10(b).
have
Although the
substance of the section titled ‘Count II’ of the Amended
Complaint is meager, the background portion of the Amended
Complaint
sets
out
specific
documentation
of
“(1)
misrepresentations or omissions of material fact or acts that
operated as a fraud or deceit in violation of the rule; (2)
causation,
often
analyzed
in
terms
of
materiality
and
reliance; (3) scienter on the part of the defendants; and (4)
economic harm caused by the fraudulent activity occurring in
connection
with
the
purchase
and
sale
of
a
security."
Cornelia I. Crowell GST Trust, 519 F.3d at 782.
See, for
example,
allegedly
paragraphs
111-112,
discussing
an
misleading letter sent by Defendant Bruch; paragraphs 118-121,
discussing a presentation put on by the Defendants regarding
Bruchside Fund II that failed to disclose how GAI would use
the funds; paragraphs 153-159, discussing letters sent by the
Defendants
regarding
payouts
60
that
allegedly
mislead
the
investors regarding the source of the payment money, etc.
Accordingly, the Defendants’ Motion to Dismiss Plaintiffs’
Count II regarding Section 10(b) is denied.
As the Court noted above, the Plaintiffs will be required
to file a Second Amended Complaint.
Although the Court is
persuaded that the Plaintiffs have plead a Section 10(b), the
Plaintiffs shall use the Second Amended Complaint as an
opportunity to clarify the particulars of their Section 10(b)
claim.
3.
Hindsight and Bespeaks Caution
The Defendants also argue that the Plaintiffs’ Section
10(b) claims should fail because “Plaintiffs cannot create
claims based on allegations that “Defendants’” statements or
omissions were false or misleading in hindsight” and “offering
documents thoroughly explained reasonably foreseeable risk
factors associated with the subject investments ... [t]he
occurrence of any one of these foretold risks renders any
alleged
misstatements
or
omissions
immaterial as a matter of law.”
31.
The
Court
is
persuaded
associated
with
them
Docket No. 57, Att. 1, p. 28that
those
arguments
are
inherently factual because they require the Court to judge the
61
accuracy of particular pieces of evidence. Accordingly, those
issues are better raised at the summary judgment stage.
D.
Count III
Plaintiffs’ third count is that Defendant Hall committed
professional negligence.
“‘It is well-established that an
attorney-client relationship may give rise to a duty, the
breach of which may be legal malpractice.
See Ruden v. Jenk,
543 N.W.2d 605, 610 (Iowa 1996). In a legal malpractice case,
the plaintiff generally must demonstrate:
(1) the existence
of an attorney-client relationship giving rise to a duty, (2)
the attorney, either by an act or failure to act, violated or
breached
that
duty,
(3)
the
attorney's
breach
of
duty
proximately caused injury to the client, and (4) the client
sustained actual injury, loss, or damage.’
Trobaugh v.
Sondag, 668 N.W.2d 577, 581 n. 1 (Iowa 2003).’”
Armstrong,
678 F. Supp. 2d 881. “[T]he Iowa Supreme Court has recognized
third-party legal malpractice claims under ‘severely limited
Estate of Leonard v. Swift, 656 N.W.2d 132,
circumstances.’
145 (Iowa 2003) (quoting Brody v. Ruby, 267 N.W.2d 902, 906
(Iowa 1978)).
is
‘a
Such circumstances exist where the third party
direct
services.’”
and
intended
beneficiary
Id.
62
of
the
lawyer's
Defendant Hall argues that the Plaintiffs have failed to
plead the required elements cited above.
correct.
Defendant Hall is
Plaintiffs’ Amended Complaint, Count III, merely
lists alleged deficiencies committed by Defendant Hall, such
as “[f]ailure to determine the validity of misrepresentations
of expense and profit” and “[f]ailure to keep the investments
of the investors in GAI funds segregated in separate bank
accounts and separate farming operations.”
67.
Docket No. 96, p.
The Amended Complaint makes no attempt to tie the
allegations to the standard cited above, nor does it explain
whether
the
beneficiaries.
Plaintiffs
were
direct
or
third
party
In their Resistance, the Plaintiffs allege
“Hall incorrectly maintains that Plaintiffs seek liability
against Hall based on his capacity as an attorney while
working for Popular Securities, Inc.
This is not the case.
Rather, as set forth in Count III of the Complaint, Plaintiffs
allege Hall negligently executed his duties within the scope
of his employment at Popular Securities, Inc.” Docket No. 80,
p. 31.
However, even if that is true, the Plaintiffs still
have failed to give any indication of what legal standard Hall
has allegedly violated.
For that reason, Defendant Hall’s
Motion to Dismiss Count III must be granted.
63
E.
Count IV
In Count IV, the Plaintiffs allege that the Defendants
breached a fiduciary duty.
Under a breach of fiduciary duty
claim a plaintiff must prove:
"(1) the existence of a
fiduciary relationship; and (2) that the [actions taken by the
fiduciary] were not beneficial to his or her interests."
Vos
v. Farm Bureau Life Ins. Co., 667 N.W.2d 36, 52 (Iowa 2003)
(quoting Rothwell v. Chubb Life Ins. Co., 191 F.R.D. 25, 32
(D.N.H. 1998)).
"A fiduciary relationship exists between two
persons when one of them is under a duty to act for or to give
advice for the benefit of another upon matters within the
Kurth v. Van Horn, 380 N.W.2d
scope of the relationship."
693, 695
(Iowa 1986) (citing Restatement (Second) of Torts §
874 cmt. a (1979)).
Courts have held that to the extent a complaint alleges
a breach of fiduciary duty under a fraud theory, the court
shall analyze the count pursuant to the Rule 9(b) standards.
McGraw v. Wachovia Sec., LLC, 2009 WL 2949290 (N.D. Iowa
2009).
alleging
Federal Rule of Civil Procedure 9(b) provides:
fraud
or
mistake,
a
party
must
state
“In
with
particularity the circumstances constituting fraud or mistake.
Malice, intent, knowledge, and other conditions of a person's
64
mind may be alleged generally.”
Fed. R. Civ. P. 9(b).
Rule
9(b) requires a party to plead “‘the who, what, when, where[]
and how: the first paragraph of any newspaper story.’” Great
Plains Trust Co. v. Union Pac. R.R. Co., 492 F.3d 986, 995
(8th
Cir.
2007).
In
its
entirety,
Count
IV
states,
“Plaintiffs hereby replead and reassert Paragraphs 1 through
549 as though fully set forth herein.
At all times material
to this action, a fiduciary relationship existed between the
Plaintiffs and Defendants. Defendants breached that fiduciary
duty
by
providing
Plaintiffs
with
false
or
misleading
information regarding GAI Funds. The breach of fiduciary duty
was a cause of damages to the Plaintiffs.
Defendants was willful and wanton.
The conduct of
As [a] result[,] the
Plaintiffs are entitled to punitive damages.”
p.
68.
That
brief
statement
fails
to
Docket No. 96,
comply
with
the
heightened pleading standards of Fed. R. Civ. P. 9(b) in that
it fails to state the who, what, when, where and how of the
allegation.
Accordingly, Count IV must be dismissed.13
The
Defendants’ Motions to Dismiss Count IV are granted.
13
In their Resistance, the Plaintiffs argue facts that
support a breach of fiduciary relationship, but they fail to
argue or otherwise show how Count IV could possibly comply
with the requisite pleading standard. Docket No. 80, p. 3335.
65
F.
Count V
In their fifth count, the Plaintiffs allege conversion.
In their briefs, the parties set out the legal standards for
conversion
in
both
Iowa
conversion
is
“‘the
and
wrongful
Texas.13
control
Under
or
Iowa
law,
dominion
over
another's property contrary to that person's possessory right
to the property.
The wrongful control must amount to a
serious interference with the other person's right to control
the property.’” Crawley v. Price, 692 N.W.2d 44, 49 (Iowa Ct.
App. 2004) (quoting Condon Auto Sales & Serv., Inc. v. Crick,
604 N.W.2d 587, 594 (Iowa 1999)); see Ezzone v. Riccardi, 525
N.W.2d 388, 396 (Iowa 1994); Kendall/Hunt Publ'g Co. v. Rowe,
424 N.W.2d 235, 247 (Iowa 1988). In order to establish a claim
of
conversion,
a
plaintiff
must
establish
a
possessory
interest in the property. Kendall/Hunt Publ'g Co., 424 N.W.2d
at 247.
A person may commit conversion “by obtaining the
chattel through fraud or by using a chattel, properly within
one's
control,
in
an
unauthorized
manner.”
State
v.
Hollinrake, 608 N.W.2d 806, 808 (Iowa App. 2000) (citing
13
The limited partnership interests in Bruchside Funds
I - III and the Gin Fund, along with the membership interests
in Biodiesel Fund, are governed by Texas law. Bruchside Fund
I - III LPAs § 15.3; Gin Fund LP Agreement § 11.9; Biodiesel
Fund Company Ag. § 12.9.
66
Restatement
(Second)
of
Torts
§§
221(b),
228
(1964)).
Similarly, in order to state a claim conversion under Texas
law, a plaintiff must plead:
(1) the plaintiff owned, had
legal possession of, or was entitled to possession of the
property; (2) the defendant assumed and exercised dominion
and control over the property in an unlawful and unauthorized
manner, to the exclusion of and inconsistent with plaintiff's
rights; and (3) the defendant refused plaintiff's demand for
return of the property.
Hunt v. Baldwin, 68 S.W.3d 117, 131
(Tex. App 2001).
In the Amended Complaint, Plaintiffs allege that the
Defendants took control of Plaintiffs’ money and/or interfered
with Plaintiffs’ control of their money.
Further, Plaintiffs
allege that Defendants exercised control of the money and
damaged the Plaintiffs through that control.
Taken as a
whole, it is clear that Plaintiffs allege that the Defendants
used
fraud
to
take
control
of
the
Plaintiffs’
money.
Accordingly, the Plaintiffs have properly plead conversion.
The Defendants argue that Plaintiffs cannot in fact prove
conversation, especially under Texas law.
That may be true,
but it is a matter more appropriate for the summary judgment
67
stage.14
Accordingly,
Defendants’
Motions
to
Dismiss
Plaintiffs’ Count V claims are denied.
G.
Count VI
In
Count
VI,
the
Plaintiffs
allege
the
Defendants
committed negligent misrepresentation and nondisclosure.
The
Iowa
all
Supreme
negligence
Court
actions,
has
an
recognized
that,
“[a]s
essential
element
of
with
negligent
misrepresentation is that the defendant must owe a duty of
care to the plaintiff.”
Sain v. Cedar Rapids Cmty. Sch.
Dist., 626 N.W.2d 115, 124 (Iowa 2001); accord Jensen v.
Sattler, 696 N.W.2d 582, 588 (Iowa 2005) (“Absent a special
relationship giving rise to a duty of care, a plaintiff cannot
14
Defendant Artah also alleges that Plaintiffs’ state
law claims, including conversion, should be dismissed because
a judgment would require the Plaintiff to pierce the corporate
veil. Docket No. 86, p. 4-5. However, as pointed out in the
Plaintiffs’ Surreply, Docket No. 94, “[a] corporate officer is
individually liable for fraudulent corporate acts which he or
she participated in or committed. Grefe v. Ross, supra, 231
N.W.2d at 868.
The exemption from personal liability of
corporate directors and officers is subject to the
qualification of good faith, and honesty of intent and
purpose.
Where there is ulterior motive, the immunity is
withdrawn.”
Briggs Transp. Co., Inc. v. Starr Sales Co.,
Inc., 262 N.W.2d 805, 808-09 (Iowa 1978). It is clear that
all of Plaintiffs’ claims, both those that will survive this
Motion to Dismiss, and those that will not, are rooted in
theories of fraud. Because Plaintiffs allege that Hall acted
fraudulently and in bad faith, Hall is not protected by the
corporate veil.
68
establish negligent misrepresentation.”).
Although the Iowa
Supreme Court has recognized that “the Restatement supports a
broader view,” that court has determined that, under Iowa law,
“this duty arises only when the information is provided by
persons in the business or profession of supplying information
to
others.”
following:
profession
Id.
(1)
of
“The
the
elements
defendant
supplying
of
the
claim
was
in
the
information
to
others;
are
business
(2)
the
or
the
defendant intended to supply information to the plaintiff or
knew
that
the
recipient
intended
to
supply
it
to
the
plaintiff; (3) the information was false; (4) the defendant
knew or reasonably should have known that the information was
false; (5) the plaintiff reasonably relied on the information
in the transaction that the defendant intended the information
to influence; (6) and the false information was the proximate
cause of damage to the plaintiff.”
The Conveyor Co. v.
Sunsource Tech. Servs., Inc., 398 F. Supp. 2d 992, 1013 (N.D.
Iowa 2005).
In their Amended Complaint, the Plaintiffs state:
Defendants negligently supplied information
and failed to disclose material information
about the GAI Funds’ financial condition,
status, business endeavors, contracts and
customers.
Defendants had a financial
interest in supplying or not disclosing
69
information about the respective GAI Funds.
Defendants intended to supply or refrain
from supplying information about the GAI
Funds for their own benefit and to the
detriment
of
the
Plaintiffs;
and/or
Defendants knew that the recipients of such
information about the GAI Funds intended to
supply it for the benefit and guidance of
Plaintiffs.
Defendants intended the
information
about
the
GAI
Funds
to
influence Plaintiffs to invest in GAI
Funds; the Plaintiffs acted in reliance on
the truth of the information about GAI
Funds supplied by Defendants and Plaintiffs
were
justified
in
relying
on
the
information about GAI.
The negligently
supplied information or lack thereof was a
proximate cause of Plaintiffs’ damages.
Docket No. 96, p. 69-70.
Both Defendants argue that Plaintiffs have failed to
specifically plead fraud as is required by Federal Rule of
Civil Procedure 9(b). “Under Rule 9(b)'s heightened pleading
standard, allegations of fraud ... [must] be pleaded with
particularity.
In other words, Rule 9(b) requires plaintiffs
to plead the who, what, when, where, and how:
paragraph of any newspaper story.”
the first
Crest Const. II, Inc. v.
Doe, 660 F.3d 346, 353 (8th Cir. 2011) (internal citations
omitted).
The parties’ arguments related to the adequacy of the
pleading duplicate those made in the previous sections related
to the Plaintiffs’ Section 12(a)(2) and Section 10(b) claims,
70
Amended Complaint Counts I-II. For the same reasons discussed
above, the Plaintiffs have adequately plead the elements of
negligent misrepresentation.
Accordingly, the Defendants’
Motion to Dismiss this claim will be denied.
Additionally, Defendant Artah argues that Hall/Artah were
not in the business of supplying information.
However, the
Amended Complaint clearly makes repeated allegations that Hall
was supplying information to the Plaintiffs in a professional
capacity.
Whether those allegations are true is a matter of
fact beyond the scope of the present Order.
The Plaintiffs
have sufficiently alleged Count VI to survive the Motions to
Dismiss.
H.
Count VII
In Count VII, the Plaintiffs allege that the Defendants
committed fraudulent misrepresentations and omissions.
In
order to establish a claim of fraudulent misrepresentation,
plaintiffs
must
prove:
(1)
[the
defendant]
made
a
representation to [the plaintiff]; (2) the representation was
false;
(3)
defendant]
the
knew
representation
the
was
representation
material;
was
false;
(4)
[the
(5)
[the
defendant] intended to deceive [the plaintiff]; (6) [the
plaintiff]
acted
in
reliance
71
on
the
truth
of
the
representation
and
was
justified
in
relying
on
the
representation; (7) the representation was the proximate cause
of [the plaintiff's] damages; and (8) the amount of damage.
Armstrong,
678
F.
Supp.
2d
at
876.
A
fraudulent
representation need not be an affirmative statement.
Fraud
may also arise from a failure to disclose material facts.
Sinnard v. Roach, 414 N.W.2d 100, 105 (Iowa 1987).
The elements of a fraudulent omission are the same as for
fraudulent
establish:
misrepresentation,
requiring
plaintiffs
to
(1) representation; (2) falsity; (3) materiality;
(4) scienter; (5) intent to deceive; (6) reliance; and (7)
Anderson v. Boeke, 491 N.W.2d
resulting injury and damage.
182, 188 (Iowa Ct. App. 1992).
“Moreover, the omission must
‘relate to a material matter known to the party ... which it
is his legal duty to communicate to the other contracting
party whether the duty arises from a relation of trust, from
confidence, from inequality of condition and knowledge, or
other attendant circumstances.’”
Armstrong, 678 F. Supp. 2d
at 876.
In the Amended Complaint, the Plaintiffs allege:
Defendants intentionally conspired to make
misrepresentations
and
conspired
to
intentionally omit material information set
forth
in
the
proceeding
paragraphs.
72
Defendants
misrepresented
and
omitted
information
regarding
GAI’s
financial
condition, status, business, endeavors,
contracts, and customers.
Each such
representation identified above was false.
Each such representation or omission
identified above was material. Defendants
knew the representations were false.
Defendants
intended
to
deceive
the
Plaintiffs and induce the Plaintiffs to
invest money in the GAI Funds. Plaintiffs
were induced and did invest substantial
sums in reliance upon Defendants’ repeated
misrepresentations and Plaintiffs were
justified
in
relying
on
those
misrepresentations.
Docket No. 96, p. 71.
The Defendants’ arguments related to Count VII are the
same as those to Count VI, set out in Section V(G) above.15
For
the
reasons
discussed
above,
Defendants’
Motions
to
Dismiss Count VII are denied.
I.
Count IX
Plaintiffs’ claims in Count IX arise under Iowa Code
§502.501 and §502.501A.
The first of those states, “[i]t is
unlawful for a person, in connection with the offer, sale, or
purchase of a security, directly or indirectly:
1) To employ
a device, scheme, or artifice to defraud; 2) To make an untrue
statement of a material fact or to omit to state a material
15
Defendant Artah adopted Defendant Bruch’s arguments in
relation to Count VII. Docket No. 104, p. 2.
73
fact necessary in order to make the statements made, in light
of
the
circumstances
under
which
they
were
made,
not
misleading; or 3) To engage in an act, practice, or course of
business that operates or would operate as a fraud or deceit
upon another person.”
I.C.A. § 502.501.
The second, I.C.A.
§ 502.501A, states, “[a] broker-dealer or agent shall not
effect a transaction in, or induce or attempt to induce the
purchase or sale of, any security in this state by means of
any
manipulative,
deceptive,
or
other
fraudulent
scheme,
device, or contrivance, fictitious quotation, or in violation
of this chapter. A broker-dealer or agent shall not recommend
to a customer the purchase, sale, or exchange of a security
without reasonable grounds to believe that the transaction or
recommendation
reasonable
is
inquiry
suitable
for
concerning
the
the
customer
customer's
based
upon
investment
objectives, financial situation and needs, and other relevant
information known by the broker-dealer.”
I.C.A. § 502.501A.
In their Amended Complaint, the Plaintiffs argue that:
[i]n violation of IUSA §502.501 and
§502.501A, Defendants sold to the investors
securities
by
means
of
written
communication. Said written communication
included offering written materials which
contain misstatements and omissions of
material fact.
Defendants also made
investment recommendations to the investors
74
that were unsuitable for the investors.
Defendants lacked a reasonable basis to
believe that their recommendations to the
investors were suitable. Such violations
of the Iowa Uniform Securities Act was a
proximate and actual cause of Plaintiff’s
damages.
Docket No. 96. p. 73.
Again, the Defendants argue that Plaintiffs have failed
to specifically plead fraud as is required by the relevant
precedent.
standards
“The elements of fraud under Iowa law and the
for
pleading
fraud
[must
be
done]
with
the
particularity required by Rule 9(b) of the Federal Rules of
Civil Procedure.”
2000 WL 33915815
Seaboard Farms, Inc. v. Pork Data, Inc.,
(N.D. Iowa 2000).
Federal Rules of Civil
Procedure “9(b) clearly imposes obligations additional to
those stated in Fed. R. Civ. P. 8, which establishes notice
pleading. In re GlenFed, Inc., Securities Litigation, 42 F.3d
1541, 1547 (9th Cir. 1994).
The statement of the claim must
also aver with particularity the circumstances constituting
the fraud.”
DeWit v. Firstar Corp., 879 F. Supp. 947, 989
(N.D. Iowa 1995).
This argument also mirrors the argument regarding the
Plaintiffs’ §12(a)(2) and §10(b) claims, discussed in Sections
V(B) and V(C) above.
Specifically, Defendant Bruch argues,
75
“[t]he same flaws identified with respect to the federal
securities and common law misrepresentation causes of action
plague Plaintiffs’ claim under Section 502.501.
Plaintiffs
cannot state a claim under the Iowa Act simply by pointing to
‘said
written
communication.’
They
must
identify
the
communication, who made it, when, where, to whom, and how the
communication allegedly was fraudulent.”
Docket No. 57, Att.
1, p. 37-38.
In Sections V(B) and V(C) (discussing Counts I-II above),
the Court determined that the Plaintiffs’ Section 12(a)(2) and
Section 10(b) claims should survive the Defendants’ Motions to
Dismiss.
For the reasons outlined in Sections V(B) and V(C),
the Court determines that the Plaintiffs have adequately plead
their I.C.A. § 502.501.
Accordingly, the Defendants’ Motion
to Dismiss that claim is denied.
Defendant Bruch also argues that the Plaintiffs’ claim
under I.C.A. § 502.501A should fail because that section only
applies to ‘broker dealer and their agents.’
Defendant Bruch
argues that “[i]n the vernacular, this section applies to
investment advisors.
Plaintiffs cannot allege that they had
such a relationship with any defendant.”
76
Docket No. 57, Att.
1, p. 38.
That is a factual argument best left for summary
judgment.
Similarly, Defendant Artah argues that:
[t]he Court should dismiss Plaintiffs'
claim against Hall and Artah Holdings for
violation of Iowa's securities laws.
As
stated above, Plaintiffs' Complaint fails
to allege with particularity that Hall or
Artah Holdings were "sellers" or supplied
information to Plaintiffs. See supra Part
I.A. Several of the Plaintiffs decided to
invest in the Brazilian farming operation
based on information provided by other
investors and not from Hall or Artah
Holdings. Several Plaintiffs[] invested in
Fund II or Fund III after learning from
other investors that high returns were paid
to Fund I and Fund II. Hall and the other
Defendants never made any representations
to several Plaintiffs about investing.
Many of the Plaintiffs decided to make
their investments solely based on the
representations made by other investors.
Docket No. 58, Att. 1, p. 21-22.
The Plaintiffs have alleged
that the Artah Defendants were sellers.
Whether Artah/Hall
were sellers is a factual question beyond the scope of the
present Motions to Dismiss.
Accordingly, Defendant Artah’s
Motion to Dismiss Plaintiffs’ I.C.A. § 502.501 and I.C.A. §
502.501A claims must be denied.
However, as the Court stated above, the Plaintiffs have
been directed to file a Second Amended Complaint.
In that
document, the Plaintiffs should take care to particularly
77
state how each Defendant and each Plaintiff relate to each
particular claim.
J.
Count X and Count XI
The Plaintiffs’ tenth and eleventh counts have to do with
concert of action and conspiracy.
In Count X, the Plaintiffs
allege that all the Defendants worked in concert to provide
false information to the Plaintiffs.
allege
that
Defendant
Bruch
In Count XI, Plaintiffs
acted
in
conspiracy
with
Defendants Global Ag Investments, LLC; Bruchside, Inc.; Bol,
LLC; Kluis and Tasca.16
Iowa has adopted Section 876 of the Second Restatement of
Torts regarding concerted tortious action claims.
Concerted
tortious action occurs when the defendant (a) commits a
tortious act in concert with another or pursuant to a common
design; (b) knows that the other’s conduct constitutes a
breach
of
duty
and
gives
substantial
assistance
or
encouragement; or (c) gives substantial assistance to the
other person in accomplishing a tortious result and his own
conduct, separately considered, constitutes a breach of duty
to the third person.
Tubbs v. United Central Bank, NA, Des
16
As stated in Section II(B) above, Kluis and Tasca have
been dismissed from this case, and Global Ag Investments and
Bol are defunct and not participating.
78
Moines, 451 N.W.2d 177, 182 (Iowa 1990).
recognizes the action.
Texas similarly
III Forks Real Estate, LP v. Cohen,
228 S.W.3d 810, 816 (Tex. App. 2007).
Regarding the concert of action claim, the Plaintiffs
allege that:
Defendants acted in concert with each other
Defendant [sic] or pursuant to a common
design to provide false or misleading
information about GAI Funds to Plaintiffs.
Each Defendant knew that the other’s
conduct constituted a breach of a duty and
gave
substantial
assistance
or
encouragement to the other in providing
false or misleading information to the
Plaintiffs.
Each
defendant
gave
substantial assistance to the other in
providing false or misleading information
about GAI Funds to the Plaintiffs and each
of the Defendants own conduct, separately
considered, constitutes a breach of duty to
the Plaintiffs. The Defendants’ concert of
action
was
a
proximate
cause
of
Plaintiffs[’] damages.
Docket No. 96, p. 74.
Defendant Bruch argues that Plaintiffs’ concert of action
claim cannot survive because they have not alleged a viable
underlying tort(s).
However, the Court has found that the
Plaintiffs have adequately plead various torts, including
conversion and negligent misrepresentation.
Accordingly,
Defendant Bruch’s Motion to Dismiss Plaintiffs’ concert of
action claim is denied.
79
Defendant Artah argues, “t]he Court should dismiss this
claim against Hall and Artah Holdings. Artah Holdings did not
act in concert to provide false or misleading information to
Plaintiffs.
Artah Holdings was an entity that made up one of
the partners of GAI.
Artah Holdings did not engage in
supplying information to Plaintiffs and did not agree to act
pursuant to a common scheme.”
This is a factual argument.
action.
Docket No. 58, Att. 1, p. 23.
Plaintiffs have plead concert of
The argument that Defendant Artah did not provide
false information to the Plaintiffs will be considered at a
later stage of the case.
But for now, Plaintiffs have
sufficiently plead concert of action to survive a Motion to
Dismiss.
Accordingly, Defendant Artah’s Motion to Dismiss
Plaintiffs’ concert of action claim is denied.
Regarding conspiracy, Plaintiffs argue:
[the non-Artah] Defendants committed the
wrong of providing false or misleading
information to GAI Fund investors in
violation of Federal and State securities
laws.
Each Defendant knowingly and
actively participated in a conspiracy with
each of the other Defendants to provide
false or misleading information to the
Plaintiffs in violation of Federal and
State securities laws.
Docket No. 96, p. 74.
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Defendant Bruch argues that the Plaintiffs have failed to
allege an underlying count that would give rise to a valid
conspiracy claim.
As stated in their brief:
the U.S. Supreme Court has, on two separate
occasions, held that no private right of
action exists under the 1933 and 1934
Securities Exchange Acts for aiding and
abetting or concert of action. In its 1994
decision in Central Bank of Denver, N.A. v.
First Interstate Bank of Denver, N.A., 511
U.S. 164 (1994), the Court, in discussing
both the 1933 and 1934 Acts, explained that
“Congress did not attach private aiding and
abetting liability to any of the express
causes of action of the securities Acts.”
In 2008 Stoneridge Inv.
Id., at 176.
Partners, LLC v. Scientific-Atlanta, 552
U.S. 148, 158 (2008), the Court reaffirmed
that the Ҥ 10(b) implied private right of
action does not extend to aiders and
abettors.”
Courts in this district and
elsewhere have held that Central Bank and
Stoneridge preclude private parties from
asserting
aiding
and
abetting
and
conspiracy causes of action under federal
securities law.
Thus, Plaintiffs cannot
invoke these counts as the basis for either
claim.
Docket No. 57, Att. 1, p. 40-41.
The Plaintiffs offer no law
or citation that would rebut the Defendants’ argument, and the
Court
has
found
none.
Accordingly,
to
the
extent
the
Plaintiffs claim a conspiracy on the basis of the violations
related to Section 12(a)(2) and Section 10(b), the Defendant
81
Bruch’s Motion to Dismiss is granted and those claims are
dismissed.
However,
Defendant
Bruch
admits
that
the
Iowa
Act
includes a private cause of action for secondary liability.
See I.C.A. § 502.509(7). As stated above, the Plaintiffs have
alleged a viable claim under I.C.A. § 502.501 and I.C.A. §
502.501A.
Accordingly, the Plaintiffs’ claim of conspiracy,
grounded in the alleged I.C.A. § 502.501 and I.C.A. § 502.501A
violations, has been adequately plead. Accordingly, Defendant
Bruch’s Motion to Dismiss Plaintiffs’ conspiracy claim related
to the Iowa Uniform Securities Act is denied.
K.
Count XII
Plaintiffs’ final count is for rescission.
Under Iowa
law, the elements of an equitable claim for rescission based
on misrepresentation are: “(1) a representation, (2) falsity,
(3) materiality, (4) an intent to induce the other to act or
refrain from acting, and (5) justifiable reliance.” Gunderson
v. ADM Investor Servs., Inc., 85 F. Supp. 2d 892, 920 (N.D.
Iowa 2000).
In the Amended Complaint, the Plaintiffs state:
Defendants made false representations in
connections with the offer and sale of GAI
Funds.
Defendants’ representations were
material as those statements induced
82
Plaintiff[s] to invest[] in various GAI
Funds.
Defendants intended to induce
Plaintiffs into investing in GAI Funds
based
on
the
aforementioned
false
representations. Plaintiffs were justified
in
relying
on
Defendants[’]
false
representations.
Docket No. 96, p. 75.
Defendant Bruch argues:
[t]he
pleading
requirements
scuttle
Plaintiffs’ request for rescission, which
they
seek
on
the
basis
of
“false
representations” that allegedly “induced
Plaintiff [sic] to invests [sic] in GAI
Funds.”
When
“the
basis
of
the
[plaintiffs’] claim for rescission is
fraud, [it] is subject to the heightened
pleading requirements of Federal Rule of
Civil Procedure 9(b).” Plaintiffs have not
made any creditable allegations of fraud
and their rescission claim cannot survive.
Docket No. 57, Att. 1, p. 44-45.
To support their argument,
Defendant Bruch cites the case of St. Paul Reinsurance Co.,
Ltd. v. Commercial Financial Corp., 144 F. Supp. 2d 1057, 1061
(N.D. Iowa 2001).
In that case, Judge Bennett stated, “the
court notes that the basis of the London Insurers' claim for
rescission is fraud, which is subject to the heightened
pleading requirements of Federal Rule of Civil Procedure
9(b).”
St. Paul Reinsurance Co., Ltd, 144 F. Supp. 2d at
1061.
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Defendant Bruch is correct that Plaintiffs’ bare bones
rescission claim fails to meet the heightened burden of Rule
9(b).
Plaintiffs’ Count XII sets out the mere elements of a
rescission claim.
Again, Rule 9(b) states, “[i]n alleging
fraud or mistake, a party must state with particularity the
circumstances constituting fraud or mistake.
Malice, intent,
knowledge, and other conditions of a person's mind may be
alleged generally.
Fed. R. Civ. P. 9(b).
In spite of that
clear language, the Plaintiffs have failed to include any
particulars in Count XII.
Accordingly, Count XII fails as a
matter of law. The Defendants’ Motions to Dismiss Plaintiffs’
rescission claim are granted.
L.
Other Issues
In Counts V, VI and VII of the Amended Complaint, the
Plaintiffs allege they are entitled to punitive damages.
Throughout their Motions to Dismiss, the Defendants argue that
punitive damages are not appropriate.
It is clear that
Plaintiffs have stated a claim for punitive damages in Counts
V, VI, and VII.
Whether the Plaintiffs are actually entitled
to punitive damages is a question of fact that will either be
decided by a motion for summary judgment, or, more likely, at
the time of trial.
84
The Court’s typical custom is to consider claims related
to punitive damages (and the attendant motions in limine) at
the close of the case.
After jury instructions have been
completed, the Court will ask the Plaintiffs to set out what
facts support a claim that the Defendants’ actions were
willful and wanton.
Based on the facts presented during the
case, the Court will determine whether the issue of punitive
damages should be submitted to the jury.
VI.
CONCLUSION
For the reason set out above, Defendant Bruch’s Motion to
Dismiss, Docket No. 57, is GRANTED in part and DENIED in part
as set out above.
Additionally, Defendant Artah’s Motion to
Dismiss, Docket No. 58, and Supplement Motion to Dismiss,
Docket No. 104, is GRANTED in part and DENIED in part.
Specifically,
Plaintiffs’
12(a)(1) is dismissed.
claim
related
to
Section
See Docket No. 111.
The Defendants’ Motion that Plaintiffs’ §12(a)2 claim be
dismissed on statute of limitations grounds is denied.
Defendant Bruch's Motion to Dismiss Plaintiffs' Section
12(a)(2) claim on standing grounds is denied.
85
Defendant
Artah/Hall’s
Motion
to
Dismiss
Plaintiffs’
Section 12(a)(2) claim, arguing Artah is not a seller, must be
denied.
The Defendants' Motions to Dismiss Plaintiffs' Section
10(b) claims on statute of limitations grounds are denied.
The Defendants' Motion to Dismiss Plaintiffs' Count II
claim regarding Section 10(b) on pleading grounds is denied.
The Defendants' Motions to Dismiss Plaintiffs' Count V
claim regarding conversion are denied.
The
Defendants'
Motions
to
Dismiss
the
Plaintiffs’
negligent misrepresentation claim, Count VI, are denied.
The Defendants' Motions to Dismiss Count VII, related to
fraudulent misrepresentation, are denied.
Defendants’ Motions to Dismiss Plaintiffs’ claims related
to Iowa Code §502.501 and §502.501A, Count IX, are denied.
Defendants’ Motions to Dismiss Plaintiffs’ Count X claims
related to concert of action are denied.
To the extent the Plaintiffs claim a conspiracy on the
basis of the violations related to Section 12(a)(2) and
Section 10(b) in Count XI, Defendant Bruch's Motion to Dismiss
is
granted,
and
those
claims
are
dismissed.
However,
Plaintiffs' claim of conspiracy, grounded in the alleged
86
I.C.A. § 502.501 and I.C.A. § 502.501A violations, has been
adequately plead.
Accordingly, Defendant Bruch's Motion to
Dismiss Plaintiffs' conspiracy claim related to the Iowa
Uniform Securities Act is denied.
However,
the
Plaintiffs
have
failed
to
give
any
indication of what legal standard Hall has allegedly violated
regarding professional negligence. For that reason, Defendant
Hall's Motion to Dismiss Count III must be granted.
Similarly, Plaintiffs have not adequately plead a breach of a
fiduciary duty.
Accordingly, the Defendants' Motions to
Dismiss Count IV are granted.
Finally,
Defendants'
Motion
to
Dismiss
Plaintiffs'
rescission claim, Count XII, is granted.
Plaintiffs will file a Second Amended Complaint within 45
days of this Order. In light of the rulings summarized above,
the Plaintiffs may include the following claims in the Second
Amended Complaint.
Count I, the §12(a)(2) claim, in which Plaintiffs allege
that
the
Defendants
offered
or
sold
a
security
to
the
plaintiffs by means of prospectus or oral communication that
was false or misleading with respect to material facts.
87
Count II, the §10(b) claim, in which the Plaintiffs
allege that the Defendants discretely or indirectly used
manipulative and deceptive devices barred by the rules and
regulations that the SEC has prescribed.
Count V, the conversation claim, in which the Plaintiffs
allege that the Defendants exercised wrongful control and/or
dominion over Plaintiffs’ property contrary to Plaintiffs’
possessory right to said property.
Count VI, the negligent misrepresentation claim, in which
the Plaintiffs allege that the Defendants owed a duty of care
to the Plaintiffs and ignored said duty by committing acts of
negligent misrepresentation and nondisclosure.
Count VII, the fraudulent misrepresentation claim, in
which the Plaintiffs allege that the Defendants made material
false representations to Plaintiffs, that the Defendants knew
the representations were false and intended to deceive the
Plaintiffs, and that the Plaintiffs relied on the false
representations.
Count XI, the claims arising from I.C.A. §502.501 and
502.501A, in which the Plaintiffs allege that the Defendants
employed
a
device,
scheme
and
Plaintiffs.
88
artifice
to
defraud
the
Finally, Counts X and XI related to concert of action and
conspiracy claims as set out above in Section V(J).
IT IS SO ORDERED this 31st day of July, 2014.
__________________________________
Donald E. O’Brien, Senior Judge
United States District Court
Northern District of Iowa
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