Sagez et al v. Global Agricultural Investments, LLC et al
Filing
145
ORDER granting in part and denying in part 126 Motion to Dismiss 119 Amended Complaint filed by Defendants Tyler Bruch and Bruchside Inc, granting in part and denying in part 131 Motion to Dismiss 119 Amended Complaint filed by Defendants Artah Holdings LLC and Art A Hall (See Order Text). Signed by Senior Judge Donald E OBrien on 4/14/2015. (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.
____________________
I.
INTRODUCTION AND BACKGROUND
This matter is currently before the Court on Defendant
Tyler
Bruch
and
Defendant
Bruchside,
Inc.’s
[hereinafter
collectively as Bruch] second Motion to Dismiss, Docket No.
126; Defendant Artah Holdings, LLC, and Defendant Art A.
Hall’s [hereinafter Collectively as Artah] second Motion to
Dismiss, Docket No. 131.
The Defendants’ Motions raise various issues arguing that
the Court should dismiss the Plaintiffs’ Amended Complaint,
Docket
No.
119.
The
Court
has
considered
the
parties’
arguments and now enters the following.1
1
The Defendants requested an oral argument on the
pending motions. However, the Court notes that this case has
II.
BACKGROUND/PROCEDURAL HISTORY/STATEMENT OF FACTS
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
fraud
The Plaintiffs believe the
regarding
the
investments.
Specifically, they allege the Brazil farming operation was
been progressing for nearly 4 years and is still at the Motion
to Dismiss stage. When the Court set argument on the previous
Motions to Dismiss, it took nearly six months to agree on a
location and date that worked for all parties and the Court.
(Counsel for the various parties are from different areas of
the country and at least one of the parties is primarily
located internationally.) When the Court did hold hearings on
the prior Motions to Dismiss, they took the better part of two
days. As is so often repeated, “justice delayed is justice
denied.” Sec. & Exch. Comm'n v. First Am. Bank & Trust Co.,
481 F.2d 673, 676 n. 3 (8th Cir. 1973). More importantly, the
primary issue(s) in the present Motions to Dismiss are the
same as in the prior Motions to Dismiss. To wit, the parties
largely rely on the same facts and the same law as their prior
Motions, and simply apply it to the second Amended Complaint.
Accordingly, oral argument is not necessary and would cause
unnecessary dely in this case. See Local Rule 7(c), giving
the Court discretion on whether or not to hold oral argument
on motions.
2
essentially a Ponzi scheme perpetuated by the Defendants.
Based
on
that
belief,
the
Plaintiffs
filed
the
present
lawsuit.
The
Plaintiff
group
is
comprised
of
thirty-six
individuals and businesses that invested in Defendant Bruch’s
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.2
After numerous extensions, the Defendant Bruch filed
its original Motion to Dismiss, Docket No. 57, September 4,
2012.
Docket
Defendant Artah filed its original Motion to Dismiss,
No.
58,
the
same
day.
Resistance on December 3, 2012.
2
The
Plaintiffs
Docket No. 80.
filed
a
On January
On March 20, 2012, the Plaintiffs voluntarily dismissed
Defendant Alan Kluis. Docket No. 38. On December 7, 2012,
the Plaintiffs voluntarily dismissed Defendant Popular
Securities, Inc. Docket No. 85.
Based on statements made by
the Plaintiffs during the hearing of April 18, 2013, the Court
dismissed Defendant Elia Tasca. Docket No. 111. On March 11,
2015, the Clerk of Court entered a default judgment against
Defendants BOL, L.L.C., and Global Agricultural Investments,
L.L.C.
See Docket No. 140.
Neither of the later two
Defendants
had
Answered
the
Complaint
or
otherwise
participated in the case.
3
15, 2013, the Plaintiffs filed their first Amended Complaint,
Docket No. 96, which superseded their original Complaint.
Shortly thereafter, Defendant Bruch filed a Motion for an inperson oral argument on the pending Motions.3
The Court set
a hearing date on the motion for oral argument for January 22,
2013.
On
January
25,
2013,
Defendant
Artah
filed
a
Supplemental Motion to Dismiss, Docket No. 104, based on the
Plaintiffs’ Amended Complaint.4
The Court held an in-court
hearing on the initial batch of Motions to Dismiss on April
18, 2013.5
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.
On July 31, 2014, the
Court entered an Order denying in part and granting in part
the Defendants’ Motions to Dismiss.
See Docket No. 114.
Pursuant to that Order, the Plaintiffs were directed to file
a second Amended Complaint.
Id.
The Plaintiffs filed their
3
The Court was out of the area at the time and routinely
scheduled civil motion hearings via telephone.
4
On April 26, 2013, Defendant Artah filed a Motion for
a More Definite Statement of Count III of the Amended
Complaint. Docket No. 110. Magistrate Judge Strand denied
that Motion, without prejudice, pending resolution of the
Motion to Dismiss. Docket No. 113.
5
The Plaintiffs voluntarily dismissed Count I, part
12-A-I of their first Amended Complaint during the hearing.
4
second Amended Complaint on September 30, 2014.
25,
2014,
Defendant
Bruch
Dismiss, Docket No. 126.
filed
their
second
On November
Motion
to
On December 15, 2014, Defendant
Artah filed their second Motion to Dismiss.
Docket No. 131.
On January 9, 2015, the Plaintiffs filed a Resistance. Docket
No. 132. Defendants filed a joint reply on February 13, 2015.
See Docket Nos. 137 and 138.
The
Court
previously
set
out
the
alleged
factual
background in its Order on the original Motions to Dismiss.
See Docket No. 114, pp. 4-9. The factual allegations have not
changed, and the Court need not repeat them again here.
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
relief.”
Federal Rule of Civil Procedure 12(b) lays the groundwork
for defendants to file pre-answer motions to dismiss.
that rule:
[e]very defense to a claim for relief in
any pleading must be asserted in the
responsive pleading if one is required.
But a party may assert the following
defenses
by
motion:
(1)
lack
of
subject-matter jurisdiction; (2) lack of
5
Under
personal jurisdiction; (3) improper venue;
(4) insufficient process; (5) insufficient
service of process; (6) failure to state a
claim upon which relief can be granted; and
(7) failure to join a party under Rule 19.
A motion asserting any of these defenses
must be made before pleading if a
responsive pleading is allowed.
If a
pleading sets out a claim for relief that
does not require a responsive pleading, an
opposing party may assert at trial any
defense to that claim.
No defense or
objection is waived by joining it with one
or more other defenses or objections in a
responsive pleading or in a motion.
Fed. R. Civ. P. 12(b).
In order for the Court to dismiss a claim under Federal
Rule of Civil Procedure 12(b)(1), the opposing party must
successfully challenge the claim “on its face or the factual
truthfulness of its averments.”
590, 593 (8th Cir. 1993).
Titus v. Sullivan, 4 F.3d
Facial challenges are limited to
analyzing the face of the complaint.
Biscanin v. Merrill
Lynch & Co., Inc., 407 F.3d 905, 907 (8th Cir. 2005).
However,
many,
if
not
brought under Rule 12(b)(6).
most,
motions
to
dismiss
are
In order to meet that standard
and 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.”
Ashcroft v. Iqbal,
556 U.S. 662, 663 (2009) (internal quotations and citation
6
omitted).
the
This requirement of facial plausibility means that
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., Inc., 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
Zoltek Corp. v. Structural Polymer Group, 592
allegation.
F.3d
893,
896
omitted).
requires
n.
4
(8th
Cir.
2010)
(internal
citation
This inquiry is “a context-specific task that
the
reviewing
court
to
draw
on
its
judicial
Iqbal, 556 U.S. at 664.
experience and common sense.”
“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
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
7
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
by
the
pleadings
and
exhibits
attached to the complaint. 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).
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)
8
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 its previous Order, Docket No. 114, the Court held
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.
Some
Plaintiffs
contributed
hundreds of thousands of dollars.
Other
Plaintiffs paid much less. Some Plaintiffs
bought shares in each of the securities.
Some bought into only a few of the
securities.
Some
heard
about
the
securities from family members.
Some
received written solicitations.
Some
attended presentations where the Defendants
orally offered the securities. Thus, it is
9
not plausible that each Count affects each
Plaintiff the same way. Accordingly, the
Plaintiffs are directed to file a Second
Amended Complaint within 45 days of the
date of this Order. 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.
Docket No. 114, pp. 28-29.
Pursuant to that Order, the
Plaintiffs filed the second Amended Complaint, Docket No. 119.
In its second Motion to Dismiss, Defendant Bruch makes three
primary arguments.
First, Defendant Bruch argues that the
Plaintiffs’
new
Amended
Complaint
still
contains
shotgun
pleadings.
Second, Defendant Bruch argues that Plaintiffs
fail to state a valid section 12(a)(2) claim in Count I.
Finally, Defendant Bruch argues that Plaintiffs’ Count II
fails to state a Section 10(b)/Rule 10b-5 claim.
Defendant Artah largely adopts the arguments of Defendant
Bruch, with a few clarifications set out in their brief.
Docket No. 131, Att. 1.
The Court will consider these matters below.
V.
ANALYSIS
A.
‘Shotgun’ Claims and Permissive Joinder
Defendants argue that the Plaintiffs continue to engage
‘shotgun pleading.’
The typical shotgun complaint contains
10
several
counts,
each
one
incorporating
by
reference
the
allegations of its predecessors, leading to a situation where
most
of
the
irrelevant
counts
factual
(i.e.,
all
allegations
but
the
first)
and
legal
contain
conclusions.
Strategic Income Fund, L.L.C. v. Spear, Leeds & Kellogg Corp.,
305 F.3d 1293, 1295 (11th Cir. 2002).
prohibited
because
it
obscures
Shotgun pleading is
plaintiffs’
material
allegations and severely hinders defendants ability to form a
reasonable response.
See Magluta v. Samples, 256 F.3d 1282,
1284 (11th Cir. 2001) (finding that “[s]hotgun pleading”
results in counts that are “replete with factual allegations
that could not possibly be material to that specific count,
and that any allegations that are material are buried beneath
innumerable
pages
of
rambling
irrelevancies”);
see
also
Johnson Enters. of Jacksonville, Inc. v. FPL Group, Inc., 162
F.3d 1290, 1332 (11th Cir. 1998) (“[t]hese general allegations
operated as camouflage, obscuring the material allegations of
[plaintiff’s] claims and necessarily implying that all the
allegations
were
material
to
each
claim.”).
‘Shotgun
pleading’ is especially problematic when pleading numerous
causes of actions with substantially different elements.
See
Young v. Wells Fargo & Co., 671 F. Supp. 2d 1006, 1016 (S.D.
11
Iowa 2009).
defendant
Such pernicious complaints “shift[] onto the
and
the
court
the
burden
of
identifying
the
plaintiff’s genuine claims and determining which of those
claims might have legal support.”
Gurman v. Metro Hous. &
Redevelopment Auth., 842 F. Supp. 2d 1151, 1153 (D. Minn.
2011).
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
Complaint,
counter
Docket
distinguishable.
that
No.
119,
in
their
all
second
claims
are
The
easily
See Iowa Health Sys. v. Trinity Health
Corp., 177 F. Supp. 2d 897, 906 (N.D. Iowa 2001).
agrees.
Amended
Plaintiffs
have
complied
with
The Court
the
Court’s
previous Order and filed a second Amended Complaint that
sufficiently distinguishes their claims.
Accordingly, the
Defendant’s
improper
Motion
to
Dismiss
based
on
shotgun
pleading will be denied.
B.
Second Amended Complaint Count I
Plaintiffs’ first claim arises under the Securities Act
of 1933.
See 15 U.S.C. § 77a.
As set out in the Plaintiffs’
previous brief,
Section 12(a) creates a private cause of
action against “[a]ny person who... offers
12
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. 18.6
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.
Alpern v. UtiliCorp United,
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.
6
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 the
previous Motion to Dismiss, 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 first
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).
13
1.
The
New Plaintiffs.
first
Plaintiffs
issue
added
the
the
in
Court
second
will
address
Amended
is
the
Complaint.
new
The
Defendants argue that:
[t]he Hemesath Plaintiffs’ Claims Are
Barred By The Three Year Statute of Repose.
This claim should also be dismissed on
statute of repose grounds as to the
Hemesath plaintiff group. 15 U.S.C. § 77m
provides that “[i]n no event shall [an]
action be brought to enforce a liability
created… under section 77/(a)(2) of this
title more than three years after the
sale.”
Thus, a claim under Section
12(a)(2) expires three years after the
sale,
regardless
of
when
the
buyer
discovers
the
purportedly
false
or
misleading statement.
See, e.g., John
Hancock Life Ins. Co. (U.S.A.) v. JP Morgan
Chase & Co., 938 F. Supp. 2d 440, 445
(S.D.N.Y. 2013) (“An examination of the
plain meaning and structure of [15 U.S.C.
§ 77m] supports the conclusion that the
statute of repose is not subject to
equitable tolling.”).
The Hemesaths
allegedly
made
their
only
GAI
Fund
investment in December 2008. SAC ¶ 228.
Because the Hemesaths did not file suit
until September 30, 2014, their Section 12
claim is time-barred.
Docket No. 126, Att. 2, p. 17.
Plaintiffs respond that the new claim relates back to the
original complaint.
See Plubell v. Merck & Co., Inc., 434
F.3d 1070, 1072 (8th Cir. 2006), stating, “[t]o determine
whether an amendment adding a new plaintiff relates back to
14
the
original
complaint,
federal
courts
generally
either
interpret Rule 15(c)(3) or apply a judicial-created test.”
Under the Rule 15(c)(3) approach, an amendment relates back if
the defendant knew or should have known that it would be
called
on
to
defend
against
the
claim
asserted
by
the
newly-added plaintiff, unless the defendant would be unfairly
prejudiced in maintaining a defense against the newly added
plaintiff.
See Plubell, 434 F.3d at 1072.
Defendants reply
that:
[f]or a newly-added plaintiff’s claims to
relate back to the filing of a previous
complaint, the claims must satisfy the
three requirements of Rule 15(c) of the
Federal Rules of Civil Procedure: (1) the
amended complaint must arise out of the
conduct, transaction, or occurrence set
forth in the original complaint; (2) the
new
plaintiff’s
interest
must
be
sufficiently related to the original
plaintiff’s interest that the defendants
receive fair notice of the new plaintiff’s
claims; and (3) the defendant must not be
unduly prejudiced by the addition of the
new plaintiff.
Self v. Equilon Enters.,
L.L.C.,
No.
4:00-CV-1903TA,
2005
WL
3763533, *5 (E.D. Mo. Mar. 30 2005).
Docket No. 137, p. 12.
The Court is persuaded the parties’ arguments miss the
point.
The Court gave the Plaintiff leave to file the second
Amended Complaint to correct issues related to ‘shotgun’
15
pleading, as discussed above.
The Plaintiffs did not apply
for leave to add additional plaintiffs to the case, nor did
they receive permission to add additional Plaintiffs to this
case.
At the time the Plaintiffs filed their second Amended
Complaint,
Docket
No.
119,
this
case
had
already
been
proceeding for nearly three years. The rules state plaintiffs
may amend their complaint once as a matter of course.
The
Plaintiffs filed their ‘matter of course’ Amended Complaint,
Docket No. 96, on January 15, 2013.
The rules go on to say
that ‘[i]n all other cases, a party may amend its pleading
only with the opposing party’s written consent or the court’s
leave.” Fed. R. Civ. P. 15(a)(2). Because the Plaintiffs did
not have the Court’s leave or the Defendant’s permission to
add the Hemesaths to the above captioned case, they could not
be
added
under
the
rules.
Accordingly,
the
Hemesath
plaintiffs will be dismissed from the case.7
2.
12(a)(2) Public Offering
To plead a section 12(a)(2) claim, a plaintiff must
“allege that a defendant offered or sold a security to the
plaintiff by means of a prospectus or oral communication that
7
The Court notes that in any subsequent motion to amend
or to join, new plaintiffs will have to meet the tough
procedural requirements set out above.
16
was false or misleading with respect to material facts.”
Armstrong v. Am. Pallet Leasing Inc., 678 F. Supp. 2d 827, 866
(N.D. Iowa 2009); 15 U.S.C. 77l(a)(2).
This Court previously held that the relevant Supreme
Court precedent, Gustafson v. Alloyd Co., Inc., 513 U.S. 561,
584
(1995),
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
securities.
of
securities,
not
to
private
sales
of
The Court summarized the arguments and stated:
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.
Accordingly,
this
portion
of
these
defendants’ respective motions to dismiss
17
are denied.” Armstrong, 678 F. Supp. 2d at
867.
Similarly, the present Plaintiffs
have alleged “Defendants offered and sold
GAI Funds 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.
Docket No. 114, p. 40-41.
The Court noted that:
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.
Id.
The Defendants’ argument is largely repetitive of the one
made during their first Motion to Dismiss. The Defendants add
to their argument by citing cases where courts have struck
18
12(a)(2) claims at the motion to dismiss stage.
See Docket
No. 131, p. 3, stating:
courts have struck Section 12(a)(2) claims
when the offering documents, themselves,
were private placement memoranda which
expressly noted that they were not marketed
to the public and would not be registered
with the SEC. See ESI Montgomery County,
[Inc.] v. Montenay Intern.Corp., 899 F.
Supp. 1061, 1065 (SDNY 1995). Furthermore,
the cases are legion where 12(a)(2) claims
were dismissed at the Rule 12(b)(6) stage
when the Plaintiffs have failed to plead a
public offering.
See Bruch/Bruchside
Motion to Dismiss Brief at 14 (Doc. 127-1),
(citing Brattain v. Alcitepe, 934 F. Supp.
2d 119, 126 (DDC 2013); Gallman v.
Sovereign Equity Group, Inc., 2012 WL
1820556, *5 (DMD May 15, 2012); ESI
Montgomery County, Inc., 899 F. Supp.
[1061], 1065; Walish v. Leverage Group,
Inc., 1998 WL 314644 (EDPA June 15, 1998);
Vannest v. Sage, Rutty and [Co.], Inc., 960
F. Supp. 651, 655 (WDNY 1997)).
Simply
put, Section 12(a)(2) claims do not apply,
as a matter of law, to the private
offerings for the investments in this case,
as a matter of law.
Regardless, this Court believes the Plaintiffs accurately
set out the Court’s prior decision on this matter:
the Court did not dismiss Plaintiffs’
12(a)(2) claim because “the Court would
have to determine if a public offer was
made, and that is a factual finding[,]”
which is impermissible when evaluating a
motion to dismiss. See Doc. 114, pg. 41.
Docket No. 132, p. 5.
19
The Court cannot deny that other courts have dismissed
cases at the motion to dismiss stage after finding that an
offering was not public. However, this Court is persuaded, as
set out in its prior Order, that the Plaintiffs have alleged
that a public offering was made.
Accordingly, while the
Plaintiffs’ allegation may fail as a matter of fact, the Court
should withhold ruling on the issue until facts are actually
before the Court.
Accordingly, the Defendants’ Motion to
Dismiss Plaintiffs’ 12(a)(2) claims are denied.
The Court
will withhold making a finding on the definition of a public
offering, and whether one was made in this case, until postanswer motions are before the Court.
C.
Second Amended Complaint 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,
20
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, 552 U.S. 148, 128 (2008)
(“Rule 10–b encompasses only conduct already prohibited by §
10(b).”); see also S.E.C. 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).
21
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
22
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
23
elements or preconditions for liability ...”
Stoneridge Inv.
Partners, LLC, 128 S. Ct. at 769.
In their previous motions, the Defendants argued that
Plaintiffs failed to adequately plead Section 10(b) claims
under
the
applicable
heightened
pleading
standard.
The
Plaintiffs responded that their allegations were adequate
under the group pleading doctrine. The Defendants argued that
the group pleading doctrine was no longer good law.
This
Court considered that argument and found that the 8th Circuit
had not yet ruled on the group pleading doctrine, stating:
[i]t 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
that the group pleading doctrine continues
to be good law...
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... the group pleading
doctrine continues to be good law as
applied to the particular claim in this
case. For that reason, the mere fact that
the Plaintiffs have 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.
Docket No. 114, pp. 56-58.
24
This Court also found that the Plaintiffs adequately
plead scienter, stating:
[t]he Court has considered the Plaintiffs’
Amended Complaint, and is persuaded that
the Plaintiffs have adequately plead a
claim under Section 10(b).
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, paragraphs 111-112,
discussing an allegedly 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 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.
Docket No. 114, p. 60-61.
Finally, the Court found that the
bespeaks caution doctrine was a factual question best left for
a later stage of the case.
Id. at 61-62.
25
In
their
new
Motions,
the
Defendants
make
several
arguments that Plaintiffs’ Section 10(b) claims should be
dismissed.
Many of the arguments duplicate the arguments
raised in the earlier motions.
For the reasons set out in the
previous Order, Docket No. 114, p. 61, the arguments are
denied.8
However, the Defendants raise a novel argument that
because some Plaintiffs were informed about the securities by
other Plaintiffs, the Plaintiffs fail to allege that the
Defendants
made
the
untrue
statements.
Specifically,
Defendants argue that:
Rule 10b-5 prohibits “mak[ing] any untrue
statements
of
a
material
fact”
in
connection with the purchase or sale of
securities. 17 C.F.R. § 240.10b-5. The
8
Specifically, the Court relies on its prior ruling
regarding the bespeaks caution doctrine, plaintiffs allegation
of scienter, and failure to plead loss causation. When read
together, the 620 paragraphs of the Plaintiffs’ second Amended
Complaint adequately allege a Section 10(b) claim. Regarding
the bespeaks caution doctrine, the Court acknowledges that
other courts have dismissed claims at the motion to dismiss
stage. See Parns v. Gateway 2000, Inc., 122 F.3d 539, 548
(8th Cir. 1997) (quoting Fecht v. Price Co., 70 F.3d 1078,
1082 (9th Cir. 1995), stating, “[a] dismissal of a securities
fraud complaint under Rule 12(b)(6) should be granted under
the bespeaks caution doctrine … where the ‘documents
containing defendants’ challenged statements include enough
cautionary language or risk disclosure that reasonable minds
could not disagree that the challenged statements were not
misleading.’”
However, if the present Defendants included
‘enough cautionary language’ in their documents is an
inherently factual question that this Court will withhold
making at this early stage of the case.
26
Supreme Court in Janus addressed what it
means to “make” a statement for purposes of
Rule 10b-5.
The Court explained that
“[o]ne ‘makes’ a statement by stating it.”
131 S. Ct. at 2302. Under Rule 10b-5, “the
maker of a statement is the person or
entity with ultimate authority over the
statement, including its content and
whether and how to communicate it. Without
control, a person or entity can merely
suggest what to say, not ‘make’ a statement
in its own right.” Id. The maker of the
statement
must
be
“the
entity
with
authority over the content of the statement
and whether and how to communicate it”
because, lacking “such authority, it is not
‘necessary
or
inevitable’
that
any
falsehood
will
be
contained
in
the
statement.” Id. at 2303 (emphasis added).
In defining the term “maker,” the Court
offered the analogy of the relationship
between a speech[] writer and a speaker:
[“]Even when a speech[] writer drafts a
speech, the content is entirely within the
control of the person who delivers it. And
it is the speaker who takes credit—or
blame—for what is ultimately said.[”] Id.
at 2302. The Court rejected a definition
of “maker” that would “permit private
plaintiffs to sue a person who ‘provides
the false or misleading information that
another
person
then
puts
into
the
statement.’” Id. at 2303... Instead, the
Court drew “a clean line”: “the maker is
the
person
or
entity
with
ultimate
authority over a statement and others are
not.” Id. at 2302 n.6.
Docket No. 126, Att. 2, p. 22.
27
The Plaintiffs concede the Defendants’ statement of law
is correct, noting that:
[t]o
be
sure,
in
order
for
a
misrepresentation to serve as the basis for
a Plaintiff’s Section 10(b)/Rule 10b-5
claim against a Defendant, Janus Capital
Group, Inc., et al. v. First Derivative
Traders requires that Defendant “make” the
statement. See Janus Capital Group, Inc.,
et al. v. First Derivative Traders, 131 S.
Ct. 2296, 2302-03 (2011).
As such, any
misrepresentations relied on by a Plaintiff
that have not been “made,” as defined by
Janus, by a Defendant cannot serve as the
basis for a Section 10(b)/Rule 10b-5 claim,
but that does not preclude those same
misrepresentations from serving as the
basis for that Plaintiff’s state law claims
against Defendants, which this Court can
hear
pursuant
to
its
supplemental
jurisdiction. See 28 U.S.C. § 1367 (2015).
Docket No. 132, p. 11. Plaintiffs also seemingly concede that
the Defendants’ argument has some level of merit stating,
“[t]o the extent that Janus may defeat some [of] Plaintiffs’
Section 10(b)/Rule 10b-5 claims, those Plaintiffs’ state law
claims should remain before this Court pursuant to this
Court’s supplemental jurisdiction.”
In
their
brief,
the
Bruch
Id. at 12.
Defendants
state
that
representations made by Plaintiffs Nick Kill and Eric Tieszen
cannot
be
attributed
to
the
Defendants.
Accordingly,
Defendants argue that “the claims of Adam Hemesath, Keith
28
Hemesath, Peter Ver Mulm, Reed and Mary Tieszen, and Georgia
Kassel, who invested based exclusively on information provided
from a source other than Bruch or any Defendant, must be
dismissed
as
a
matter
of
law.
See
Plaintiff
Charts.
Moreover, many other Plaintiffs received information about the
GAI Funds from sources other than Bruch (or any Defendant),
which cannot serve as the basis for claims against Bruch. See
Id. (Buesings; Finstrom; Guge; Helgets; Kasparbauer Trust;
Kibbies; Lundgren; Schroeder; Craig Tieszen; Reed and Mary
Tieszen; Weber Family Farm).”
Docket No. 137, p. 10-11.
As the Court stated above, the Hemesath Plaintiffs were
improperly added to this case and must be dismissed on other
grounds.
Thus, the Defendants’ argument that the Hemesath
Plaintiffs relied on representations made by other Plaintiffs,
and must be dismissed under the Janus rationale, is moot.
That leaves four other Plaintiffs, Peter Ver Mulm, Reed, Mary
Tieszen, and Georgia Kassel, who, the Defendants alleged,
relied
exclusively
on
(mis)representations
from
other
Plaintiffs.
In paragraph 110 of the Amended Complaint, it states,
“Plaintiffs Eric and Amy Tieszen and Reed and Mary Tieszen
purchased their interests in Global Ag Biodiesel in October
29
2007 after Defendants represented that Bruchside Fund I paid
a 40% return on investment.”
Docket No. 119, p. 18.
At
paragraph 488 of the Plaintiffs’ second Amended Complaint, it
states,
“Reed
and
Mary
learned
about
these
investment
opportunities through their son Eric Tieszen who worked for
Bruch in Brazil.”
However, paragraph 489 then states, “In
January 2006, Reed attended a Bruchside Fund I fundraising
meeting at the Ramkota Inn in Sioux Fall[s], South Dakota.
During
that
meeting,
Bruch
presented
the
‘Global
Ag
Investment, LLC presents Bruchside Fund I, LP’ PowerPoint
presentation and Reed received a handout of the same.” Docket
No. 119, p. 66.
It goes on say that Reed Tieszen traveled to
Brazil for the 2007 tour and then invested in Bruchside Fund
II later in 2007.
The second Amended Complaint goes on to say
that, “[i]n February 2008, Reed and Mary attended a second
investor tour in Brazil...
In April 2008, Reed and Mary
Tieszen invested $200,000 in the Bruchside Fund III based on
the returns Defendants paid Bruchside Fund I investors and
Defendants’ projected returns for Bruchside Fund II.”
Docket
No. 119, p. 68.
Although the second Amended Complaint initially states
that Mary and Reed Tieszen learned about the GAI funds through
30
their son, they also allege receiving information from the
Defendants (on the trips and at the Sioux Falls meeting)
before buying particular securities.
Accordingly, they have
alleged that the Defendants made representations sufficient to
survive the Defendants’ Motions to Dismiss.
However, the same cannot be said for the other two
Plaintiffs singled out in the Defendants’ Motions to Dismiss.
In the second Amended Complaint, it states that Plaintiff
Peter Ver Mulm “relied on his son, Dean Ver Mulm – who also
invested in GAI Funds, for information regarding the Funds.”
Docket No. 119, p. 72.
information.
There is no clarifying or additional
The second Amended Complaint’s only discussion
of Peter Ver Mulm is that he received the GAI information from
his son. Accordingly, Peter Ver Mulm fails to allege a viable
Section 10(b)/Rule 10b-5 claim because he does not allege that
any Defendant ‘made’ a false statement to him.
His Count II
will be dismissed.
Similarly, Ms. Georgia Kassel fails to allege a valid
Section 10(b)/Rule 10b-5 claim.
As set out in the second
Amended Complaint, “[o]n October 12, 2007, [Georgia] Kassel
invested $50,000 in Bruchside Fund II based on information she
received
from
Craig
Kassel
regarding
31
the
returns
that
Defendants paid for Bruchside Fund I.” Docket No. 119, p. 43.
The Complaint goes on to say that Defendant Bruch had dinner
with Georgia Kassel and that he brought her fish.
However,
there is no allegation that Defendant Bruch ‘made’ false
representations
to
Georgia
Kassel
during
those
meetings.
Accordingly, Georgia Kassel’s Count II must be dismissed.
The Defendants also argue that the Buesing Plaintiffs,
Plaintiff Finstrom, Plaintiff Guge, the Helget Plaintiffs, the
Kasparbauer Trust, the Kibbie Plaintiffs, Plaintiff Lundgren,
Plaintiff Schroeder, Plaintiff Craig Tieszen, Plaintiffs Reed
and Mary Tieszen, and the Weber Family Farm (allegedly) relied
in part on statements ‘made’ by persons/entities other than
the Defendants.
second
Amended
Clearly, the Defendants are correct.
Complaint
states
that
other
The
Plaintiffs,
including Nick Kill, ‘made’ statements that induced investment
in
the
GAI
funds.
(See,
for
example,
second
Amended
Complaint, paragraph 157, stating that, “[o]n April 7, 2008,
Nick Kill faxed Dean [Buesing] a copy of the PowerPoint
slide[] show that was presented during the March 2008 meeting
of potential investors in Hancock, Minnesota.”)
However,
those Plaintiffs also (allegedly) received information from
one or more of the Defendants.
32
(See for example, second
Amended Complaint, paragraph 160, stating that, “On April 17,
2008, after the March 2008 meeting, Dean [Buesing] made
efforts to contact Bruch regarding investing in Bruchside Fund
III.
On that same day, Dean received an email from Bruch
regarding Fund III investment opportunities.
The purpose of
Dean’s email to Bruch was to verify his understanding of the
Fund III and its payouts.
Dean received Bruch’s response
prior to investing in Bruchside Fund III.)
Plaintiffs,
Plaintiff
Guge,
the
Helget
The Buesing
Plaintiffs,
the
Kasparbauer Trust, the Kibbie Plaintiffs, Plaintiff Lundgren,
Plaintiff Schroeder, Plaintiffs Reed and Mary Tieszen, and the
Weber
Family
information
Farm
from
each
either
allege
that
Defendant
they
Bruch,
received
the
some
Defendants’
presentations, the Defendants’ website, or from Ms. Gunderson
(the Defendants’ secretary).
Accordingly, they have alleged
that a Defendant ‘made’ a false statement; and, their Count II
claims survive the Defendants’ Motions to Dismiss.
However, there are two exceptions among the above listed
Plaintiffs.
First, Plaintiff Craig Tieszen only made the
vague allegation that “Defendants also told” him about funds.
Docket No. 119, p. 62.
sufficient
to
survive
Although vague, his allegation is
the
Motions
33
to
Dismiss.
Second,
Defendant Finstrom alleges that he received information from
fellow Plaintiff Nick Kill.
See Docket No. 119, p. 27.
There
is no allegation, even a vague one, that any Defendant ‘made’
a statement to Plaintiff Finstrom.
Accordingly, his Section
10(b)/Rule 10b-5 claim fails as a matter of law and must be
dismissed.
D.
Other Issues
To the extent the Defendants’ Motions to Dismiss raises
other issues not herein addressed, the Court relies on the
rational stated in its prior Order, Docket No. 114, pp. 84-89,
to deny those Motions.
VI.
CONCLUSION
For the reasons set out above, Defendant Bruch’s Motion
to Dismiss, Docket No. 126, and Defendant Artah’s Motion to
Dismiss, Docket No. 131, are granted in part and denied in
part.
As set out on page number 16, the Defendants’ Motions to
Dismiss are GRANTED in that the Hemesath Plaintiffs were
improperly added to this case and must be DISMISSED;
as set
out on page number 31, Plaintiff Peter Ver Mulm’s Count II
must be DISMISSED for failure to state a claim; as set out on
page number 31, Plaintiff Georgia Kassel’s Count II must be
34
DISMISSED for failure to state a claim; and, finally, as set
out on page number 33, Plaintiff Douglas Finstrom’s Count II
must be DISMISSED for failure to state a claim.9
As set out
on page numbers 12, 20, 30, 33, and 34, the remainder of the
Defendants’ Motions to Dismiss, Docket Nos. 126 and 131, are
DENIED.
IT IS SO ORDERED this 14th day of April, 2015.
__________________________________
Donald E. O’Brien, Senior Judge
United States District Court
Northern District of Iowa
9
The Court will retain jurisdiction over Plaintiffs’
remaining claims.
35
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