HULL v. GLOBAL DIGITAL SOLUTIONS, INC. et al
Filing
48
OPINION filed. Signed by Judge Freda L. Wolfson on 9/14/2018. (mmh)
*NOT FOR PUBLICATION*
UNITED STATES DISTRICT COURT
DISTRICT OF NEW JERSEY
___________________________________
:
JEFF HULL, on behalf of himself
:
and all those similarly-situated,
:
Civil Action No. 16-5153 (FLW)
:
Plaintiff,
:
OPINION
:
v.
:
:
GLOBAL DIGITAL SOLUTIONS, INC., :
et al.,
:
:
Defendants.
:
:
___________________________________ :
WOLFSON, United States District Judge:
Lead Plaintiff Michael Perry (“Plaintiff”) brings this putative securities class action, on
behalf of himself and all other similarly situated individuals, against Global Digital Solutions,
Inc. (“GDS” or “Company”), a company involved in specialty-vehicle manufacturing, as well as
GDS’s former Chief Executive Officer Richard J. Sullivan (“R. Sullivan”), former Chief
Financial Officer David Loppert (“Loppert”), former director and Executive Vice President
William J. Delgado (“Delgado”), and former directors Arthur F. Noterman (“Noterman”) and
Stephanie C. Sullivan (“S. Sullivan”) (collectively “Individual Defendants”) (GDS and
Individual Defendants together referred to as “Defendants”), alleging violations under, inter alia,
various provisions of the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq., and the rules
promulgated thereunder. Plaintiff accuses Defendants of making false representations and
omissions to artificially raise GDS’s stock price in an effort to finance specific acquisitions and
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raise cash using the inflated stock. The Court previously dismissed Plaintiff’s Complaint without
prejudice on December 19, 2017, holding that Plaintiff had failed to adequately allege reliance,
an element of his securities claim. See Hull v. Glob. Digital Sols., Inc., No. 16-5153, 2017 WL
6493148, at *17 (D.N.J. Dec. 19, 2017). In accordance with that opinion, Plaintiff filed a Second
Amended Complaint (“SAC”) on January 18, 2018. ECF No. 38.
In the instant matter, Defendants GDS, Delgado, and Loppert move for dismissal on the
basis that the additional allegations in the SAC still do not satisfy Plaintiff’s burden of pleading
reliance. ECF Nos. 38, 41. In addition, Loppert separately moves for dismissal for lack of
personal jurisdiction or venue. ECF. No. 41. For the reasons that follow, Defendants’ motions
are DENIED.
I.
FACTUAL BACKGROUND AND PROCEDURAL HISTORY
The facts of the case are fully laid out in the Court’s previous opinion. See Hull, 2017
WL 6493148, at *2-4. For the sake of clarity, the Court states here the facts relevant to the
current motions.
GDS is a company that, through its subsidiary, builds mobile command/communications
and specialty vehicles for emergency and law enforcement operations. SAC at ¶¶ 91-93. During
all relevant periods, GDS’s stock traded on an over-the-counter exchange, OTCQB, under the
ticker symbol “GDSI.” Id. at ¶ 15. The putative class period is October 8, 2013 through August
11, 2016 (“Class Period”). Id. at ¶ 1. From August 12, 2013 through April 10, 2015, Loppert was
GDS’s Chief Financial Officer (“CFO”), id. at ¶ 17; Delgado was responsible for GDS’s
business development and served in various roles, such as President, CEO, CFO, Chairman, and
Executive Vice President, id. at ¶ 18; and R. Sullivan was GDS’s CEO from the start of the Class
Period through May 13, 2016. Id. at ¶ 16. Plaintiff alleges that these individual defendants
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participated in the day-to-day management and operations of GDS at the highest level, were
privy to confidential information, and were directly or indirectly involved in drafting, producing,
reviewing, approving, and/or disseminating false and misleading statements to deceive investors.
Id. at ¶¶ 18, 23, 116.
More specifically, Plaintiff alleges that during the class period, unbeknownst to investors,
GDS’s stock was “worthless.” Id. at ¶ 2. Plaintiff accuses Defendants of disseminating false and
misleading statements and participating in several schemes designed to artificially inflate the
price of GDS’s common stock. Id. In the SAC, Plaintiff sets forth various alleged “schemes”
perpetuated by Defendants:
1.
By way of press releases, Defendants misrepresented a failed merger with
Airtronic USA, Inc. (“Airtronic”) for $95 million, id. at ¶ 3;
2.
Defendants issued a misleading press release announcing that GDS “expects to
announce several agreements regarding potential acquisitions,” when in reality,
Defendants knew GDS had neither the cash nor credible financing to acquire any
company, id. at ¶ 4; and
3.
Defendants falsely issued press releases in March 2014, announcing an
unsolicited bid to acquire, inter alia, Remington Outdoor Company, Inc.
(“Remington”) for over $1 billion in cash and stock, when, in fact, GDS had very
little cash on hand, and no credible financing options, id. at ¶ 5.
Plaintiff further avers that Defendants used the artificially inflated stock to finance
acquisitions. Id. at ¶ 90. Additional details for each of these schemes are described in Hull, 2017
WL 6493148 at *2-4.
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On August 11, 2016, the SEC filed a civil complaint charging Defendants GDS, R.
Sullivan, and Loppert with multiple counts of securities fraud, including claims related to the $95
million Airtronic contract, GDS’s allegedly knowingly false revenue forecast for the first quarter
of 2014, the documents announcing GDS's Remington offers, and the allegations concerning
additional acquisitions. Id. at ¶ 104. Upon this news, GDS shares dropped 52% on August 12,
2016. Id. at ¶ 107.
Plaintiff alleges that only with the filing of the SEC complaint did the public learn of an
SEC investigation into GDS and its officers. Id. at. ¶ 105. According to Plaintiff, the SEC
Complaint revealed, for the first time, the full extent of Defendants' alleged schemes to
artificially inflate the price of its stock, despite lacking any working businesses or revenue, in
order to use the inflated stock to finance acquisitions. Id. at. ¶¶ 105–106.
Based on the above allegations, on August 24, 2016, Plaintiff brought this putative class
action against Defendants, asserting two causes of action under the Securities Exchange Act: 1)
violation of Section 10(b) against all Defendants; and 2) violation of Section 20(a) against the
Individual Defendants. On December 19, 2017, this Court granted Defendants’ Motions to
Dismiss on certain grounds but granted Plaintiff leave to amend his Amended Complaint. Hull,
2017 WL 6493148 at *23. With respect to the Section 10(b) claim, the Court found that while
Plaintiff adequately alleged material misrepresentations, scienter, economic loss, and loss
causation, Plaintiff failed to allege that GDS’s stock traded in an efficient market, which is
required for pleading reliance under a fraud-on-the-market theory. Id. at *16-17, 22. The Court
also dismissed without prejudice, the Section 20(a) claim, which is derivative of the Section
10(b) claim.
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On January 18, 2018, Plaintiff filed the SAC, which is the current operative complaint.
ECF No. 38. In the SAC, Plaintiff made additional factual allegations supporting his fraud-onthe-market presumption of reliance.1 SAC at ¶ 127. In particular, Plaintiff alleged the following:
1. GDS’s stock was listed on the over-the-counter stock market, which is an efficient
and automated market, id. at ¶ 127(a);
2. GDS’s stock had an average weekly trading volume of nearly 3.4 million shares, or
10.65% of outstanding shares during the Class Period, id. at ¶ 127(b);
3. GDS regularly disseminated press releases to national newswire services, id. at ¶
127(c);
4. There were at least 195 news articles about GDS published during the Class Period,
id. at ¶ 127(d);
5. There were 25 market makers for GDS stock during the class period, id. at ¶ 127(e);2
6. From January 22, 2014 to January 24, 2014, and on March 12, 2014, GDS was
eligible for S-3 registration with a tradeable float in excess of $75 million, id. at ¶
127(f);
7. GDS stock reacted quickly to unexpected GDS-related news, id. at ¶ 127(g); and
I previously rejected Plaintiff’s argument that it should be afforded the presumption of reliance
established by the Supreme Court in Affiliated Ute Citizens of the State of Utah v. United States,
406 U.S. 128, 92 S.Ct. 1456, 31 L.Ed.2d 741 (1972).
2
These alleged market makers are: Cantor Fitzgerald & Co., Aegis Capital Corp., Archipelago
Trading Services, Inc., Ascendiant Capital Markets, LLC, Automated Trading Desk Fin. Svcs.,
LLC, Biltmore International Corp., BMA Securities, Buckman, Buckman & Reid, Inc.,
Canaccord Genuity Inc, Capital Path Securities, LLC, Citadel Securities, Finance 500, Inc., G1
Execution Services, LLC, Guggenheim Securities, LLC, Intl. FCStone Fin., Inc., Maxim Group
LLC, Puma Capital, LLC, R. F. Lafferty & Co., Inc., Stockcross Fin. Svcs., Inc., T.R. Winston &
Company, LLC, Vandham Securities Corp., Vfinance Investments, Inc, VIRTU Americas LLC,
Wilson-Davis & Co., Inc., and World Trade Financial Corporation.
1
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8. False and misleading statements directly impacted the price of GDS stock. Id. at ¶
127(h). Plaintiff alleges 17 specific instances of “price impact,” including how the
stock rose and fell in response to allegedly false or misleading statements in
connection with the the Airtronic, Remington, and revenue forecast allegations, as
well as the filing of the SEC complaint. Id. at ¶¶ 127(h), 131-133.
In the instant matter, Defendants seek dismissal of Plaintiff’s SAC for failure to state a
claim on the basis that Plaintiff did not adequately plead that GDS traded in an efficient market.
ECF No. 39. In addition, Loppert separately moves for dismissal of the SAC for lack of personal
jurisdiction and improper venue. ECF No. 41. Plaintiff opposes the motion, arguing that the
additional allegations in the SAC support a finding of reliance, and that Loppert waived personal
jurisdiction and venue objections. ECF No. 44.
II.
STANDARD OF REVIEW
Under Fed. R. Civ. P. 12(b)(6), a complaint may be dismissed for “[f]ailure to state a
claim upon which relief can be granted.” Fed. R. Civ. P. 12(b)(6). When reviewing a motion to
dismiss on the pleadings, courts “accept all factual allegations as true, construe the complaint in
the light most favorable to the plaintiff, and determine whether, under any reasonable reading of
the complaint, the plaintiff may be entitled to relief.” Phillips v. Cnty. of Allegheny, 515 F.3d
224, 233 (3d Cir. 2008) (quotations omitted). Under this standard, the factual allegations set forth
in a complaint “must be enough to raise a right to relief above the speculative level.” Bell
Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007). Indeed, “the tenet that a court must accept
as true all of the allegations contained in a complaint is inapplicable to legal conclusions.”
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). “[A] complaint must do more than allege the
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plaintiff's entitlement to relief. A complaint has to ‘show’ such an entitlement with its facts.”
Fowler v. UPMC Shadyside, 578 F.3d 203, 211 (3d Cir. 2009).
However, Rule 12(b)(6) only requires a “short and plain statement of the claim showing
that the pleader is entitled to relief” in order to “give the defendant fair notice of what the . . .
claim is and the grounds upon which it rests.” Twombly, 550 U.S. at 555. The complaint must
include “enough factual matter (taken as true) to suggest the required element. This does not
impose a probability requirement at the pleading stage, but instead simply calls for enough facts
to raise a reasonable expectation that discovery will reveal evidence of the necessary element.”
Phillips, 515 F.3d at 234 (citation and quotations omitted); Covington v. Int’l Ass’n of Approved
Basketball Officials, 710 F.3d 114, 118 (3d Cir. 2013) (“[A] claimant does not have to set out in
detail the facts upon which he bases his claim. The pleading standard is not akin to a probability
requirement; to survive a motion to dismiss, a complaint merely has to state a plausible claim for
relief.” (citation and quotations omitted)).
Under the current pleading regime, when a court considers a dismissal motion, three
sequential steps must be taken: first, “it must take note of the elements the plaintiff must plead to
state a claim.” Connelly v. Lane Constr. Corp., 809 F.3d 780, 787 (3d Cir. 2016) (quotations
omitted). Next, the court “should identify allegations that, because they are no more than
conclusions, are not entitled to the assumption of truth.” Id. (quotations omitted). Lastly, “when
there are well-pleaded factual allegations, the court should assume their veracity and then
determine whether they plausibly give rise to an entitlement to relief.” Id. (quotations and
brackets omitted).
“Independent of the standard applicable to Rule 12(b)(6) motions,” Fed. R. Civ. P. 9(b)
“imposes a heightened pleading requirement of factual particularity with respect to allegations of
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fraud.” In re Rockefeller Ctr. Props. Secs. Litig., 311 F.3d 198, 216 (3d Cir. 2002); see also Fed.
R. Civ. P. 9(b) (“In 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.”). To satisfy this heightened pleading standard, a
plaintiff must state the circumstances of his alleged cause of action with “sufficient particularity
to place the defendant on notice of the 'precise misconduct with which [it is] charged.’”
Frederico v. Home Depot, 507 F.3d 188, 200 (3d Cir. 2007) (quoting Lum v. Bank of America,
361 F.3d 217, 223-24 (3d Cir. 2004)). Specifically, the plaintiff must plead or allege the “date,
time and place of the alleged fraud or otherwise inject precision or some measure of
substantiation into a fraud allegation.” Frederico, 507 F.3d at 200 (citing Lum, 361 F.3d at 224).
Indeed, the Third Circuit has advised that, at a minimum, Rule 9(b) requires a plaintiff to allege
the “essential factual background that would accompany ‘the first paragraph of any newspaper
story’—that is, the ‘who, what, when, where and how’ of the events at issue.” In re Suprema
Specialties, Inc. Sec. Litig., 438 F.3d 256, 276-77 (3d Cir. 2006) (quoting In re Rockefeller, 311
F.3d at 216).
In addition to Rule 9(b)’s heightened pleading requirements, Congress enacted the
Private Securities Litigation Reform Act (“PSLRA”), 15 U.S.C § 78u et seq., to require an even
higher pleading standard for plaintiffs bringing private securities fraud actions. In re Suprema,
438 F.3d at 276. This heightened pleading standard is targeted at preventing abusive securities
litigation. See Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 313 (2007) (“Private
securities fraud actions . . . if not adequately contained, can be employed abusively to impose
substantial costs on companies and individuals whose conduct conforms to the law.”); Merrill
Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 81 (2006) (identifying “ways in which
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the class-action device was being used to injure the entire U.S. economy” and listing examples
such as “nuisance filings, targeting of deep-pocket defendants, vexatious discovery requests, and
manipulation by class action lawyers of the clients whom they purportedly represent”)
(quotations and citations omitted).
The PSLRA provides two distinct pleading requirements, both of which must be met in
order for a complaint to survive a motion to dismiss. Institutional Investors Group v. Avaya, Inc.,
564 F.3d 242, 252 (3d Cir. 2009). First, under 15 U.S.C. § 78u-4(b)(1), the complaint must
“specify each allegedly misleading statement, why the statement was misleading, and, if an
allegation is made on information and belief, all facts supporting that belief with particularity.”
Winer Family Trust v. Queen, 503 F.3d 319, 326 (3d Cir. 2007) (construing 15 U.S.C. § 78u4(b)(1)). Second, 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).
Both provisions of the PSLRA require facts to be pled with “particularity.” Avaya, 564
F.3d at 253. This particularity language “echoes precisely Fed. R. Civ. P. 9(b).” In re Advanta
Corp. Sec. Litig., 180 F.3d 525, 534 (3d Cir. 1999); see Fed. R. Civ. P. 9(b) (“[A] party must
state with particularity the circumstances constituting fraud or mistake.”). Indeed, although the
PSLRA replaces Rule 9(b) as the pleading standard governing private securities class actions, the
rule's particularity requirement “is comparable to and effectively subsumed by the requirements
of [§ 78u-4(b)(1) of] the PSLRA.” Avaya, 564 F.3d at 253 (citations omitted). This standard
“requires plaintiffs to plead the who, what, when, where and how: the first paragraph of any
newspaper story.” In re Advanta, 180 F.3d at 534 (quotations marks omitted).
III.
DISCUSSION
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a. Section 10(b) of the Securities Exchange Act
Defendants move to dismiss the SAC, arguing that the amended allegations are still
insufficient to meet the fraud-on-the-market presumption of reliance under Section 10(b) of the
Securities Exchange Act and Rule 10b-5. The private right of action under Section 10(b) and
Rule 10b-5 “creates liability for false or misleading statements or omissions of material fact that
affect trading on the secondary market.” In re Burlington Coat Factory Sec. Litig., 114 F.3d
1410, 1417 (3d Cir. 1997). In relevant part, Rule 10b-5 makes it unlawful for an individual “[t]o
make any untrue statement of a material fact or to omit to state a material fact necessary in order
to make the statements made, in the light of the circumstances under which they were made, not
misleading” in connection with the purchase or sale of any security. 17 C.F.R. § 240.10b-5(b).
To state a claim under Section 10(b) and Rule 10b-5, the plaintiff must allege: “(1) a material
misrepresentation or omission, (2) scienter, (3) a connection with the purchase or sale of a
security, (4) reliance, also referred to as transactional causation, (5) economic loss, and (6) loss
causation.” Gold v. Ford Motor Co., 577 F. App’x 120, 122 (3d Cir. 2014) (citing Dura Pharms.,
Inc. v. Broudo, 544 U.S. 336, 341-42 (2005)).
On the element of reliance, a securities fraud plaintiff must plead facts to indicate a
causal link between the alleged misrepresentation and the plaintiff’s transaction. In re
Intelligroup Sec. Litig., 527 F. Supp. 2d 262, 292 (D.N.J. 2007) (citing Basic Inc. v. Levinson,
485 U.S. 224, 243 (1988)). Since requiring proof of direct reliance “would place an
unnecessarily unrealistic evidentiary burden on [a] plaintiff who has traded on an impersonal
market,” Basic, 485 U.S. at 245, a plaintiff can obtain a presumption of reliance by successfully
invoking the fraud-on-the market theory. “The fraud-on-the-market premise is that the price of a
security traded in an efficient market will reflect all publicly available information about a
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company; accordingly, a buyer of the security may be presumed to have relied on that
information in purchasing the security.” Amgen Inc. v. Connecticut Ret. Plans & Tr. Funds, 568
U.S. 455, 458 (2013).
To invoke the fraud-on-the-market theory, a plaintiff must first establish that the
securities at issue traded in an open and efficient market. In re Burlington, 114 F.3d at 1419
(citing Hayes v. Gross, 982 F.2d 104, 107 (3d Cir. 1992); Peil v. Speiser, 806 F.2d 1154, 1161
(3d Cir. 1986); In re DVI Inc. Sec. Litig., 249 F.R.D. 196, 208 (E.D. Pa. 2008), aff'd sub nom. In
re DVI, Inc. Sec. Litig., 639 F.3d 623 (3d Cir. 2011). “[I]n an open and developed securities
market, the price of a company’s stock is determined by the available material information
regarding the company and its business.” Basic, 485 U.S. at 241 (citation omitted). The Third
Circuit has defined an “efficient” market as one in which “information important to reasonable
investors . . . is immediately incorporated into stock prices.” In re Burlington, 114 F.3d at 1425
(citation omitted). “[I]f a market is shown to be efficient, courts may presume that investors who
traded securities in that market relied on public, material misrepresentations regarding those
securities.” Amgen, 568 U.S. at 462 (citing Basic, 485 U.S. at 245-247). Importantly, at a motion
to dismiss stage, “the question … is not whether plaintiff has proved an efficient market, but
whether he has pleaded one.” Hayes, 982 F.2d at 107.
Courts consider several factors to assess whether a plaintiff has pled market efficiency.
These include (1) percentage of weekly trading volume; (2) coverage of a company’s stock in
securities analyst reports; (3) the reported number of market-makers; (4) the company’s
eligibility to file an S-3 registration statement; and (5) quick responses in stock price caused by
unexpected corporate events or financial releases. Cammer v. Bloom, 711 F. Supp. 1264, 128687 (D.N.J. 1989); see also Hayes, 982 F.2d at 107 n. 1 (summarizing the role of the Cammer
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factors at the pleading stage). These are often referred to as the Cammer factors. Courts have also
considered the (6) bid-ask spread, see Cheney v. Cyberguard Corp., 213 F.R.D. 484, 501 (S.D.
Fla. 2003); (7) number of institutional investors, see Bennett v. Sprint Nextel Corp., 298 F.R.D.
498, 511 (D. Kan. 2014); In re HealthSouth Corp. Sec. Litig., 261 F.R.D. 616, 637 (N.D. Ala.
2009); (8) float, see Krogman v. Sterritt, 202 F.R.D. 467, 478 (N.D. Tex. 2001); and (9)
percentage of shares outstanding that has been sold short, see Petrie v. Electronic Game Card,
Inc., 308 F.R.D. 336, 357 (C.D. Cal. 2015). Courts should not view these factors as a checklist
that a plaintiff must pass in order to plead market efficiency, but rather should use them as an
analytical tool to assist in its analysis. See Unger v. Amedisys Inc., 401 F.3d 316, 325 (5th Cir.
2005). Indeed, Courts are permissive when considering Cammer allegations in pleadings,
viewing the factors as “an acceptable basic framework for evaluating whether a plaintiff's
allegations of efficiency are plausible.” In re Tronox, Inc. Sec. Litig., No. 09-6220, 2010 WL
2835545, at *12 n. 166 (S.D.N.Y. June 28, 2010). Thus, at the motion to dismiss stage, Plaintiff
may use Cammer to allege facts to suggest that the stock at issue traded in an efficient market,
and need not include allegations supporting all, or even most, of the Cammer factors. See Hayes
v. Gross, 982 F.2d 104, 107 n. 1 (3d Cir.1992) (noting that the Cammer court “ruling on a
motion for summary judgment under Fed.R.Civ.P. 56, considered whether plaintiffs' affidavit
showed ‘specific facts' indicating an efficient market” but that “[a]t the time of a motion to
dismiss under Rule 12(b)(6), however, a plaintiff need not show ‘specific facts' as required under
Rule 56(e)”).
Here, Plaintiff contends that the SAC adequately alleges reliance by demonstrating direct
evidence of price impact and market efficiency. Plaintiff alleges that four of the Cammer factors
weigh in favor of finding reliance: percentage of weekly trading volume, reported number of
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market makers, eligibility for S-3 registration, and quick responses in stock price caused by
unexpected corporate events or financial releases. Defendants argue that these allegations are
deficient, and additionally argue that the lack of other Cammer factors warrants dismissal. I
address each of the relevant Cammer factors at issue in turn. Because I must review the
allegations supporting these factors permissively at the pleading stage, I find that Plaintiff has
done just enough to support a fraud-on-the-market presumption of reliance.
i.
Average weekly trading volume
A high average trading volume supports a finding of market efficiency because it
“implies significant investor interest in the company,” which in turn “implies a likelihood that
many investors are executing trades on the basis of newly available or disseminated corporate
information.” Cammer, 711 F.Supp. at 1286. Although there is no bright line rule for adequate
trading volume, average weekly trading of 2% or more of the outstanding shares justifies a
strong presumption of market efficiency. Id.
Here, Plaintiff alleges an average weekly trading volume of nearly 3.4 million shares, or
10.65% of outstanding shares during the Class Period, which is typically more than sufficient to
survive a motion to dismiss. See In re DVI., 249 F.R.D. at 209 (holding that even a “1% average
weekly trading volume justifies a substantial presumption that a security trades in an efficient
market”); See In re Schering-Plough Corp./ENHANCE Sec. Litig., No. 8-397, 2012 WL
4482032, at *5 (D.N.J. Sept. 25, 2012) (holding that a trading volume of around 4.18 percent for
common stock, and 4.63 percent for preferred stock was “well over the threshold justifying a
‘strong presumption’”); Petrie v. Elec. Game Card, Inc., 308 F.R.D. 336, 349 (C.D. Cal. 2015)
(finding that “the average weekly trading volume of EGC's stock during the Class Period was
3.3%, which, under Cammer, justifies a strong presumption of an efficient market”).
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Instead of challenging the sufficiency of a 10.65% trading volume, Defendants contest
the credibility of the allegation because of purportedly “contradictory facts” in Plaintiff’s
Complaint. In particular, Defendants claim the Complaint’s stated average weekly trading
volume of 3,384,415 shares, or an average daily trading volume of 676,883 shares, is
inconsistent with the allegation that, on December 2, 2013, when GDS failed to complete the
Airtronics merger, the GDS stock had an “immense trading volume of 304,600 shares.” In
Defendants’ view, Plaintiff’s characterization of this one-day trading volume as “immense”
undermines the claim that the average weekly trading volume was more than twice as high.
The Court does not share Defendants’ concern about this purported contradiction at this
junction. As already noted, the average weekly trading volume of 10.65% of outstanding shares
is well above the 2% threshold set out in Cammer. While true that this one-day trading volume is
inconsistent with the overall average weekly volume, that is not an issue for Plaintiff at this
pleading stage. See In re DVI, Inc. Sec. Litig., 639 F.3d 623 (3d Cir. 2011) (accepting “the
inclusion of a highly volatile period” that “may skew the average weekly trading volume” and
affording Plaintiff “a substantial presumption that the market for DVI’s common stock was
efficient”). Importantly, the single-day-trade number by itself does not preclude the possibility
that the alleged weekly trading volume of 10.65% is, nevertheless, accurate. The Court is bound
by the pleadings, and thus, is not persuaded that a single reference to “immense” trading volume
on a single day is sufficient to find a contradiction in the average weekly trading volume for the
class period as alleged in the SAC.
Indeed, because Defendants have failed to demonstrate any real contradictions in the
SAC, I do not find persuasive the cases on which Defendants rely for support on this issue,
which involve instances of clear contradiction. See Kalick v. United States, 35 F. Supp. 3d 639,
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647 (D.N.J. 2014), aff'd, 604 F. App'x 108 (3d Cir. 2015) (finding that separate contradictory
allegations about whether a meeting took place “further obscure[s] the factual basis on which
Plaintiff's due process claims may rest”). Here, the SAC’s reference to allegedly lower trading
volume on a single day as “immense,” although perhaps an odd word choice, is not a
contradiction. As one court stated in a case on which Defendants rely, a court should not
disregard allegations in a Complaint when they “do[ ] not appear to be advancing completely
contradictory theories.” BanxCorp v. Bankrate Inc., No. 07-3398, 2011 WL 6934836, at *21
(D.N.J. Dec. 30, 2011). As Plaintiff does not advance contradictory theories here, GDS’s alleged
trading volume weighs in favor of market efficiency.
ii.
Market makers
“A market-maker is one who helps establish a market for securities by reporting bid-and-
asked quotations … and who stands ready to buy or sell at these publicly quoted prices.” In re
Countrywide, 273 F.R.D. at 613–14. “The more market-makers for a particular security (and,
relatedly, the greater the volume of the security the market-makers are prepared to handle), the
more reasonable it is to infer that the security is liquid, and, therefore, more likely the market for
that security is efficient.” Id. at 614. In Cammer, eleven market makers supported a finding of an
efficient market. 711 F.Supp. at 1283. Courts have held that there need only be “some market
makers” to satisfy this factor. In re Dynex Capital, Inc. Sec. Litig., No. 5-1897, 2011 WL 781215
at *5 (S.D.N.Y. Mar. 7, 2011) (thirteen market makers sufficient); see also In re Winstar
Commc’ns Sec. Litig., 290 F.R.D. 437, 447 (S.D.N.Y. 2013) (six market makers sufficient).
Here, Plaintiff alleges that there were 25 market makers for GDSI stock during the Class
Period. SAC at ¶127. Defendants argue that Plaintiff failed to adequately substantiate its
allegation because Plaintiff did not allege any facts regarding the market makers’ activity related
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to trading GDS stock. In support of this argument, they point to a number of cases that note that
“[t]he number of market makers has limited probative value without information regarding the
volume of shares that each market maker committed to trade, the volume of shares they actually
traded, and the prices at which they did so." See Griffin v. GK Intelligent Sys., 196 F.R.D. 298,
304 (S.D. Tex. 2000); see also Unger, 401 F.3d at 324; O'Neil v. Appel, 165 F.R.D. 479, 502
(W.D. Mich. 1995).
The Court recognizes that the market maker allegations in the SAC are threadbare. But
while allegations regarding market makers’ activity trading stock would further bolster
Plaintiff’s claims, their absence is not fatal at the pleading stage. Accord Cheney, 213 F.R.D. at
500 (“While the Court recognizes that additional information would aid the Court in its
determination of efficiency for purposes of class certification, it is not essential as the Court is
not making a final determination on efficiency … the existence of multiple market makers in
addition to other factors support efficiency”); see also ScripsAmerica, Inc. v. Ironridge Glob.
LLC, 119 F. Supp. 3d 1213, 1255 (C.D. Cal. 2015) (finding that Plaintiff’s allegation that there
were market makers “weighs in favor of a finding that it has sufficiently pled the existence of an
efficient market” but is not a “particularly probative” factor on its own). Rather, on a summary
judgment motion, Plaintiff would necessarily have to provide additional evidence regarding these
market makers’ trading activities as to GDS’ stock. But we are at the motion to dismiss stage.
Thus, this factor slightly weighs in favor of efficiency.
iii.
S-3 registration
Cammer states that, with regards to demonstrating market efficiency, “it would be helpful
to allege the Company was entitled to file an S-3 Registration Statement in connection with
public offerings.” Cammer, 711 F.Supp. at 1287. The SEC registration Form S-3 is a short form
16
reserved for companies (1) with $75 million in common equity held by non-affiliates of the
registrant and (2) that have filed reports with the SEC for 12 consecutive months. 17 C.F.R. §
239.13. “Corporations permitted to use the S-3 form are thus presumed to be actively traded and
widely followed. Therefore, a company's ability to file an S-3 Registration Statement points to
market efficiency.” Krogman v. Sterritt, 202 F.R.D. 467, 476 (N.D. Tex. 2001) (internal citation
omitted).
Plaintiff alleges that “[d]uring part of the Class Period, specifically on January 22, 2014,
January 23, 2014, January 24, 2014, and March 12, 2014, Global Digital was eligible for S-3
registration, with a tradeable float in excess of $75 million.” SAC at ¶ 127(f). Defendants argue
that an allegation of four days of eligibility out of a 34-month Class Period is insufficient.
Although at the class certification stage, other courts have found that company ineligibility for S3 registration for a majority of the class period tips this factor against market efficiency,
Plaintiff’s allegations are sufficient at the motion to dismiss stage. See, e.g., Cammer, 711
F.Supp. at 1287 (rejecting Form S–3 eligibility as a bright-line test for market efficiency); Petrie
v. Elec. Game Card, Inc., 308 F.R.D. 336, 352 (C.D. Cal. 2015) (finding this factor not fatal to a
finding of market efficiency); Nguyen v. Radient Pharm. Corp., 287 F.R.D. 563, 574 (C.D. Cal.
2012) (same). Similarly, here, Plaintiff’s allegations regarding a few discrete periods of time
when the Company was S-3 eligible are not fatal to Plaintiff’s claim, even if they do not strongly
support a finding of market efficiency.
iv.
Market reaction to announcements
Under Cammer, evidence of a causal relationship between unexpected corporate events
or financial releases and an immediate response in the stock price is an important indicator of
17
market efficiency. 711 F.Supp. at 1287 (noting that this factor is “the essence of an efficient
market and the foundation for the fraud on the market theory.”).
Plaintiff alleges that "[d]uring the Class Period, Global Digital stock quickly reacted to
unexpected Company-specific news with its share price rising and falling in the expected
direction in response to such news, an important and persuasive indication of market efficiency."
SAC at ¶ 127(g). The SAC alleges seventeen separate instances of Company-specific news with
corresponding changes in stock price, id. at ¶ 127(h), including specific direct evidence of price
impact in connection with the Airtronic, Remington, and revenue forecast allegations, as well as
the filing of the SEC complaint. Id. at ¶¶131-133.
Defendants argue that the Court should discount these allegations regarding market
reaction to GDS-specific news, because Plaintiff failed to delineate, with specificity, the public
release of news, the exact timing of the alleged market reaction, or the causal relationship
between the news and the stock value. These arguments, however, are premature at the motion to
dismiss stage. The SAC alleges specific instances of price impact that cannot be easily explained
away: for example, Plaintiff alleges that share prices rose upon the allegedly false or misleading
statements connected to the Airtronic and Remington allegations, and then fell drastically
immediately following public reports questioning the veracity of the statements. These are
sufficient allegations of price impact at the pleading stage. The Court must take these allegations
as true, and the merits of the allegations, including other factors that may have caused the stock
price to rise or fall in each of the seventeen separate instances cited by Plaintiff, are not now
before the Court.
As such, I find that Plaintiff has sufficiently alleged the market-reaction element.
v.
Other factors
18
Finally, Defendants argue that the SAC does not sufficiently plead reliance because it
contains no allegations regarding additional factors that this Court enumerated in its initial
opinion. These are: coverage of the stock by a significant number of securities analysts; the
stock’s bid-ask spread; the number of institutional investors; the percentage of shares held by
insiders, or the float; and the percentage of shares outstanding that has been sold short. Hull,
2017 WL 6493148 at *17.
In that regard, Defendants primarily contend that Plaintiff’s failure to allege GDS’s stock
was covered by a “significant number of securities analysts” during the class period, should be
fatal to Plaintiff’s 10(b) claim. Cammer, 711 F. Supp. at 1286. In Cammer, the issuance of 15
company research reports during the class period supported a finding of market efficiency. Id. at
1283 n. 30. Defendants argue that Plaintiff alleges only that GDS initiated communications and
that news articles on GDS were published, not that securities analysts followed GDS stock or
reported on the stock. However, while Cammer and the subsequent case law call for allegations
of securities analysts’ coverage at class certification, Plaintiff’s failure to specifically allege
coverage by securities analysts, alone, is not fatal at the pleading stage. The same is true for
Plaintiff’s failure to even cursorily address the other factors. See Seidman v. Am. Mobile Sys.,
813 F. Supp. 323, 324 (E.D. Pa. 1993) (finding that plaintiff had adequately pleaded market
efficiency at the motion to dismiss stage despite not pleading particular factors such as securities
analysts’ coverage).
More importantly, however, the enumerated factors to be considered in determining
whether the subject stock traded in an efficient market are an analytical tool, not a mere
checklist. Teamsters Local 445 Freight Div. Pension Fund v. Bombardier, Inc., No. 05-1898,
2006 WL 2161887, at *5 (S.D.N.Y. Aug. 1, 2006), aff'd, 546 F.3d 196 (2d Cir. 2008). Cammer
19
does not require “that every factor be established,” McIntire v. China MediaExpress Holdings,
Inc., 38 F. Supp. 3d 415, 432 (S.D.N.Y. 2014), and, indeed, courts have found allegations
supporting as few as two or three of the factors to be sufficient at the pleading stage. See, e.g., In
re China Med. Sec. Litig., No. 11-1061, 2012 WL 5713399, at *5 (C.D. Cal. May 10, 2012)
(three factors); Burritt v. NutraCea, No. 09-406, 2010 WL 668806, at *8–9 (D. Ariz. Feb. 25,
2010) (two factors); see also Seidman, 813 F.Supp. at 325 & n. 1 (finding that the complaint
adequately pled the existence of an efficient market only by alleging that stock price plunged
following sudden disclosures by corporation). “The question on a motion to dismiss is not
whether plaintiff has proved an efficient market, but whether he has pleaded one.” In re
Parmalat Sec. Litig., 376 F. Supp. 2d 472, 510 (S.D.N.Y. 2005) (citing Hayes, 982 F.2d at 107).
The Court tasked Plaintiff with pleading sufficient facts to support a presumption of reliance; he
did so, albeit not resoundingly. Indeed, the SAC includes allegations supporting four factors, but
only those related to average weekly trading volume and market reaction solidly support a
finding of efficiency. Yet not every factor need weigh in Plaintiff’s favor or even be alleged,
when considered the motion to dismiss stage. Accordingly, while not overwhelming, I find that
Plaintiff’s Cammer allegations suffice at this stage to permit Plaintiff to go forward with his
10(b) claim.3
b. Section 20(a) of the Securities Exchange Act
Plaintiff also alleges that Individual Defendants are liable under Section 20(a) of the
Securities Exchange Act. This statute reads, in pertinent part:
§ 78t. Liability of controlling persons and persons who aid and abet violations
(a) Joint and several liability
It should be noted that although I deny Defendants’ motions, Plaintiff’s amended allegations
are just barely sufficient to survive, even accounting for the leniency I must afford Plaintiff at the
pleading stage.
3
20
...
Every person who, directly or indirectly, controls any person liable under any provision
of this chapter or of any rule or regulation thereunder shall also be liable jointly and
severally with and to the same extent as such controlled person to any person to whom
such controlled person is liable ...
15 U.S.C. § 78t(a); see also In re Suprema Specialties, Inc. Sec. Litig., 438 F.3d 256, 285 (3d
Cir. 2006). “[L]iability under Section 20(a) is derivative of an underlying violation of Section
10(b) by the controlled person.” Avaya, 564 F.3d at 252 (citing In re Alpharma Sec. Litig., 372
F.3d 137, 153 (3d. Cir. 2004)). The plaintiff must prove that one person controlled another
person or entity and that the controlled person or entity committed a primary violation of the
securities laws. Suprema, 438 F.3d at 284 (internal citations omitted). “The pleading of facts that
‘support a reasonable inference that [defendants] had the potential to influence and direct the
activities of the primary violator’ will survive a motion to dismiss.” Palladin Partners v. Gaon,
No. 05-3305, 2006 WL 2460650, at *16 (D.N.J. Aug. 22, 2006) (internal citations omitted)
In this case, Plaintiffs have adequately pleaded their Section 20(a) claim against
Individual Defendants. First, Plaintiffs have adequately alleged a primary violation of Section
10(b). Further, the Complaint alleges that Individual Defendants, including Delgado and
Loppert, were high-level officers and executives of GDS during the Class Period who controlled
the Company’s SEC filings and other public disclosures. It is, therefore, “reasonable to find that
[Defendants were] responsible for the information contained in the SEC filings because of the
nature of [their] position[s].” In re Am. Bus. Fin. Servs., Inc. Sec. Litig., 413 F. Supp. 2d 378,
396 (E.D. Pa. 2005). Individual Defendants, thus, fall within the meaning of “controlling
persons” under Section 20(a). See Dudley v. Haub, No. 11-05196, 2013 WL 1845519, at *20
(D.N.J. Apr. 30, 2013) (“[T]he Complaint alleges that Claus, Galgano, Haub, and Brace were
each high-level officers of A & P during the Class Period who controlled the Company's SEC
21
filings and other public disclosures…This is sufficient to place them within the meaning of
“controlling persons” under Section 20(a)”).
Defendants’ motion to dismiss Plaintiff’s Section 20(a) claim is, therefore, denied.
c. Defendant Loppert’s Motion to Dismiss for Lack of Personal Jurisdiction
and Improper Venue
Defendant Loppert moves separately to dismiss for lack of personal jurisdiction and
improper venue. “Because the requirement of personal jurisdiction represents first of all an
individual right, it can, like other such rights, be waived.” Insurance Corp. of Ireland, Ltd., et al.
v. Compagnie des Bauxites de Guinee, 456 U.S. 694, 703 (1982). “[W]here a party seeks
affirmative relief from a court, it normally submits itself to the jurisdiction of the court with
respect to the adjudication of claims arising from the same subject matter.” Bel-Ray Co. v.
Chemrite (Pty) Ltd., 181 F.3d 435, 443 (3d Cir. 1999) (citation omitted). A party who fails to
raise personal jurisdiction as a defense in a Rule 12 motion waives the defense and cannot raise it
in an answer or in a subsequent motion. See Myers v. American Dental Ass'n, 695 F.2d 716, 720
(3d. Cir.1982) (discussing the Fed. R. Civ. P. Rule 12(h) waiver provision). See also Rates
Technology v. Nortel Networks Corp., 399 F.3d 1302, 1307 (Fed. Cir.), cert. denied, 545 U.S.
1141 (2005) (stating that Rule 12(h) “advises a litigant to exercise great diligence in challenging
personal jurisdiction ... [and this defense must be raised] at the time the first significant defensive
move is made—whether by way of a Rule 12 motion or in a responsive pleading”) (citation
omitted). Like the defense of lack of personal jurisdiction, the defense of improper venue is
waived if not raised in the first instance. Fed. R. Civ. P. 12(h); Myers, 695 F.2d at 720 (“If a
party files a pre-answer motion but fails to raise one of the defenses [such as improper venue],
the party waives the omitted defense and cannot subsequently raise it in his answer or
22
otherwise.”). The filing of an amended complaint will not revive the right to present by motion
defenses that were available but were not asserted in timely fashion prior to the amendment of
the pleading. See Bell v. Lockheed Martin Corp., Nos. 08–6292, 10–4297, 2011 WL 1467365, at
*9 (D.N.J. 2011); Chan v. County of Lancaster, No. 10-3424, 2012 WL 4510776, at *13 (E.D.
Pa. 2012).
Here, Loppert filed a 12(b)(6) motion to dismiss Plaintiff’s initial Complaint for failure to
state a claim on May 8, 2017. ECF No. 29. As explained above, the Court granted this motion
and granted Plaintiff leave to amend. At that time, Loppert did not raise a personal jurisdiction or
improper venue defense until he filed the present motion on February 13, 2018. ECF No. 41.
Accordingly, Loppert waived personal jurisdiction and improper venue as defenses when he filed
his initial 12(b)(6) motion to dismiss, which neither raised a jurisdictional argument nor
improper venue.4
Loppert does not contest that he failed to raise personal jurisdiction and venue arguments
in his initial responsive pleading. He instead argues that the cases that Plaintiff cites to support
the waiver argument, Bell and Consol. Rail Corp. v. Grand Trunk W. R. Co., 592 F. Supp. 562
(E. D. Pa. 1984), are distinguishable. For instance, Loppert argues that the defendant in Bell,
4
Loppert argues that upon his 12(b)(2) motion to dismiss for want of personal jurisdiction, the
burden now lies with Plaintiff to establish personal jurisdiction. However, because Loppert
previously moved for dismissal, he has waived personal jurisdiction, eliminating any burden to
establish such jurisdiction. Loppert inappropriately relies on case law in which the defendant
raised a 12(b)(2) motion in the first instance. See Sprout Retail, Inc. v. USConnect LLC, No. 1700135, 2017 WL 1351401, at *6 (D.N.J. Apr. 10, 2017); Miller Yacht Sales, Inc. v. Smith, 384
F.3d 93, 97 (3d Cir. 2004); Metcalfe v. Renaissance Marine, Inc., 566 F.3d 324 (3d Cir. 2009);
Provident Nat’l Bank v. Cal. Fed. Sav. & Loan, Ass’n, 819 F.2d 434 (3d Cir. 1987); Acteon, Inc.
v. Vista Dental Prods, No. 05-3847, 2006 WL 1207999, at *2 (D.N.J. May 3, 2006). These cases
are distinguishable from the present motion, in which Loppert raises a personal jurisdiction
defense 9 months after his first 12(b)(6) motion.
23
unlike here, “voluntarily submitted to the Court’s jurisdiction, appealed one of the Court’s
decisions, had meaningfully participated in the proceedings and filed an answer conceding that
the District Court for the District of New Jersey was the proper forum.” ECF No. 47 at 2-3.
These purported distinctions are not relevant, however. Rather, importantly, Loppert neglected
his opportunity to timely raise personal jurisdiction and venue defenses in his initial motion to
dismiss. This very act voluntarily submitted Loppert to the Court’s jurisdiction and constituted
meaningful participation in the proceedings. As the Court in Consolidated Rail succinctly put it,
“Under Rule 12(h), if a party proceeds to challenge a complaint by motion and fails to raise the
specific defenses of lack of personal jurisdiction, improper venue, insufficiency of process, and
insufficiency of service of process in the motion, these defenses are waived and cannot
subsequently be raised.” 592 F. Supp. at 566–67.
Loppert asks the Court, in the alternative, to exercise its discretion to excuse Loppert
from the requirements of Rule 12 and dismiss the SAC. As Loppert notes, a court may exercise
its discretion to consider defenses that would otherwise be barred if such consideration would
advance the court’s charge “to secure the just, speedy, and inexpensive determination of every
action and proceeding.” Fed. R. Civ. P. 1. The Court declines to exercise this discretion. A denial
of Loppert’s 12(b)(2) motion in accordance with Rule 12 better serves the principles of justice
and efficiency in this case. See Bel-Ray Co., 181 F.3d at 443 (“Because there ‘exists a strong
policy to conserve judicial time and resources,’ we have held that ‘preliminary matters such as
… personal jurisdiction … should be raised and disposed of before the court considers the merits
or quasi-merits of a controversy.”) (citing Wyrough & Loser, Inc. v. Pelmor Labs., Inc., 376 F.2d
543, 547 (3d Cir. 1967)). Accordingly, Loppert’s motions to dismiss for lack of personal
jurisdiction and improper venue are denied.
24
IV.
CONCLUSION
For the foregoing reasons, Defendants’ Motions to Dismiss the Second Amended
Complaint are DENIED.
Dated: September 14, 2018
/s/ Freda L. Wolfson
Hon. Freda L. Wolfson
United States District Judge
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