Stoopler v. Direxion Shares ETF Trust et al
Filing
85
OPINION & ORDER: The Clerk of the Court is directed to terminate defendants' Motion to Dismiss (Dkt. No. 62) and Barton Booth's Motion to Intervene (Dkt. No. 70). (Signed by Judge Katherine B. Forrest on 1/27/2012) (rdz)
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UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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09 Civ. 8011 (KBF)
IN RE DIREXION SHARES ETF TRUST
OPINION & ORDER
-----------------------------
------X
KATHERINE B. FORREST, District Judge:
Lead Plaintiff Evan Stoopler ("Stoopler") and named
plaintiffs David Remmells, Jason Haas, Joel Behnken, Howard
Schwack, and James Kilmmon (the "named plaintiffs") bring this
putative class action against defendants Direxion Shares ETF
Trust ("Direxion"), Rafferty Asset Management, LLC ("Rafferty"),
and various Direxion and Rafferty officers and directors,
alleging violations of sections 11 and 15 of the Securities Act
of 1933 (the "Securities Act") .
In their Second Amended Consolidated Complaint ("SAC"),
filed April 8, 2011, plaintiffs, purchasers of shares in the
Financial Bear 3X ETF ("FAZ") and Energy Bear 3X ETF ("ERY"),
purport to bring claims on behalf of purchasers in FAZ and ERY
as well as purchasers in the Large Cap Bear 3X ETF ("BGZ") and
Small Cap Bear 3X ETF ("TZA").
See, e.g., SAC "
13, 85.
Defendants have moved to dismiss the SAC--or, at a minimum,
certain claims therein- on various grounds, including that
plaintiffs (i) do not have standing to bring claims for funds in
which they did not purchase shares; (ii) fail to plead
adequately compliance with the statute of limitations; and
I
(iii) fail to plead adequately actionable misstatements and
omissions.
On November 9, 2011, Barton Booth (“Proposed Intervenor” or
“Booth”), a purchaser of shares in BGZ and TZA, moved to
intervene in this action.
Booth seeks intervention pursuant to
Federal Rule of Civil Procedure 24(a)(2) as a matter of right,
and permissive intervention under Rule 24(b)(1)(B).
If this
Court were to grant Booth’s motion, his presence would cure the
asserted standing deficiencies with respect to BGZ and TZA.
Defendants’ motion to dismiss was fully submitted on
September 28, 2011.
Booth’s motion to intervene was fully
submitted on December 19, 2011.
The Court held oral argument on
both motions on January 6, 2012.
At oral argument, the Court
requested (and subsequently received) a supplemental letter from
Booth’s counsel regarding the date on which Booth learned of the
instant litigation.
For the reasons set forth below, defendants’ motion to
dismiss is GRANTED IN PART and DENIED IN PART; Proposed
Intervenor’s motion is DENIED.
FACTS
For purposes of ruling on the motion to dismiss, the Court
accepts as true all well-pleaded allegations in the SAC and
draws all reasonable inferences in plaintiffs’ favor.
See Levy
v. Southbrook Int’l Invs., Ltd., 263 F.3d 10, 14 (2d Cir. 2001).
2
The Court also considers the documents publicly filed with the
Securities and Exchange Commission (“SEC”) as well as documents
referenced in the SAC and/or incorporated by reference therein.
ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d
Cir. 2007); Rothman v. Gregor, 220 F.3d 81, 88 (2d Cir. 2000).
Direxion is an open-ended, investment company registered
with the SEC under the Investment Company Act of 1940. 1
¶¶ 74, 93.
funds.
SAC
Rafferty is the investment advisor to Direxion’s
Id. ¶ 80.
The Direxion and Rafferty officers and
directors named in the SAC allegedly signed the Registration
Statement.
Id. ¶¶ 75-79.
Pursuant to a September 17, 2008 registration statement
(the “Registration Statement”) and a Prospectus filed with the
SEC on October 3, 2008 (the “Prospectus”), Direxion offered to
the public shares in certain triple-leveraged exchanged traded
funds (“ETFs”), including FAZ, ERY, BGZ and TZA (the “Funds”).
Id. ¶¶ 10, 23, 74.
The Registration Statement also comprised a
statement of additional information (“SAI”).
Id. ¶ 106.
The
SAI, incorporated by reference into the Prospectus, is legally
part thereof.
Id.; see also White v. Melton, 757 F. Supp. 267,
269 (S.D.N.Y. 1991) (citing 48 Fed. Reg. 37928, 37930 (Aug. 22,
1
Companies registered under the Investment Company Act must comply with the
Securities Act’s registration requirements to sell securities to the public.
15 U.S.C. § 77j; see also SAC ¶ 94.
3
1983)).
For that reason, the Court discusses the Prospectus and
its supplements without specific reference to the SAI.
As described on the website for Russell Investments (i.e.,
the parent company of the index to which the Funds are
benchmarked, see SAC ¶ 12), “Exchange-traded funds are
index-based products that allow investors to buy or sell shares
of entire portfolios of stock in a single security.”
Russell
Investments,
http://www.russell.com/indexes/investing/exchange_traded_funds.a
sp (last visited Jan. 9, 2012); see also SAC ¶ 87; Declaration
of Nicholas G. Terris in Supp. of Defs. Mot. to Dismiss (“Terris
Decl.”) (Dkt. No. 63) Ex. C at 1.
ETFs differ from traditional
mutual funds in certain ways, see SAC ¶ 87, but, like
traditional mutual funds (and other open-ended funds), ETFs
price their shares based upon their net asset value (“NAV”),
Terris Decl. Ex. C at 39.
See also Terris Decl. Ex. G
(Exchange-Traded Funds, Securities Act Release No. 33-8901,
Investment Company Act Release No. 28193, 73 Fed. Reg. 14618,
14624); McGraw-Hill Cos., Inc. v. Vanguard Index Trust, 139 F.
Supp. 2d 544, 546 (S.D.N.Y. 2001) (“shares of an open-ended fund
are continuously issued and redeemed at prices determined by the
fund’s net asset value”).
The Funds, part of Direxion’s “Bear Funds,” are relatively
complicated ETFs that generally seek to achieve a daily return
4
of a multiple of the inverse performance of the index it tracks.
Id. ¶¶ 1, 92.
The Funds seek a daily investment return of three
times (i.e., 300%) the inverse of the daily performance of the
Russell 1000 Financial Services Index.
Id. ¶ 12.
The Funds were sold pursuant to the Registration Statement
and Prospectus, as supplemented on November 3, 2008 (the
“November 3 Supplement”), and again on December 9, 2008 (the
“December 9 Supplement” and collectively with the November 3
Supplement, the “Supplements”).
SAC ¶¶ 103, 152.
As agreed by
the parties and Proposed Intervenor at oral argument, the Funds
were first “bona fide offered to the public” on November 8,
2008, when Direxion filed with the SEC the November 3
Supplement.
See 15 U.S.C. § 77m; 17 C.F.R. § 230.430B(f)(2);
see also SAC ¶¶ 23, 38, 208.
However, the Funds were also “bona
fide offered to the public” pursuant to the December 9
Supplement.
See 15 U.S.C. § 77m; 17 C.F.R. § 230.430B(f)(2); 17
C.F.R. § 229.512(a)(2) (“each such post-effective amendment
shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide offering thereof”).
5
The Supplements 2 both contained the following language (in
bold) on their cover pages (and elsewhere):
The Funds are exchange-traded funds that seek daily
leveraged investment results.
The Funds are intended
to be used as short-term trading vehicles.
The
pursuit of leveraged investment goals means that the
Funds are riskier than alternatives which do not use
leverage.
Further, the pursuit of daily leveraged
investment goals means that the return of a Fund for a
period longer than a single day will be the product of
the series of daily leveraged returns for each day
during the relevant period.
As a consequence,
especially in periods of market volatility, the path
of the benchmark during the period may be at least as
important to the Funds return for the period as the
cumulative return of the benchmark for the relevant
period. The Funds are not suitable for all investors.
The Funds should be utilized only by sophisticated
investors who (a) understand the risks associated with
the use of leverage, (b) understand the consequences
of seeking daily leveraged investment results and (c)
who intend to actively monitor and manage their
investments.
A critical issue in this action is whether the above
language, repeated in various ways throughout the Supplements,
adequately disclosed the nature and magnitude of the risks to
which investors were exposed.
Plaintiffs allege that although
the Supplements disclosed some risk, they did not disclose that
holding shares in the Funds for longer than a single day could
result in significant loss.
E.g., SAC ¶ 3.
Defendants contend
that the repeated use of the word “daily,” along with the other
2
Although there are slight differences between the November 3 and December 9
Supplements, defendants concede that the two “contained generally similar
relevant disclosures.” Defs. Mem. of Law In Supp. of Mot. to Dismiss (Dkt.
No. 65) (“Defs. Mem.”) at 7. On that representation, the Court addresses the
Supplements collectively, unless otherwise noted.
6
disclosures on expenses, and references to the Funds as
“short-term trading vehicles,” provided adequate disclosure
about the proper holding time for the Funds’ shares.
Defs. Mem.
of Law In Supp. of Mot. to Dismiss (Dkt. No. 65) (“Defs. Mem.”)
at 7-12.
The Supplements indeed contained numerous references to the
Funds as “daily” investment vehicles, but also contained
references to holding for periods of longer than one day, and
examples of and discussions about holding for periods of one to
three years.
E.g., Terris Decl. Ex. C at 11, 29.
The
Supplements also discussed the returns the Funds would provide
to investors “before fees and expenses.”
3, 4, 7, 11.
See, e.g., id. at 1,
The Supplements additionally disclosed risks
associated with specific expenses--in particular, those
associated with “rebalancing” (that is, seeking to adjust the
portfolio to correspond with investment objectives, often--or
even always--on a daily basis).
See Pls. Mem. of Law In Opp’n
to Defs. Mot. to Dismiss (Dkt. No. 67) (“Pls. Opp’n”) at n.4.
As
for those risks, the Supplements explained (with graphical
illustration) that “[d]aily rebalancing will impair a Fund’s
performance if the benchmark experiences volatility.”
Terris
Decl. Ex. C at 8.
On April 10, 2009, Direxion issued a further supplement to
the Prospectus (the “April 10 Supplement”) which, plaintiffs
7
allege, disclosed clearly and for the first time, the “truth”:
that the Funds were “not appropriate for investors who intend to
hold positions” for longer than a single trading day.
see also id. ¶¶ 55, 233.
SAC ¶ 227;
This new supplement contained the
following warning on its cover page:
The Funds offered in this Prospectus are exchangetraded funds but they are very different from most
exchange-traded funds. First, all of the Funds pursue
leveraged investment goals, which means that the Funds
are riskier than alternatives that do not use leverage
because the Funds magnify the performance of the
benchmark on an investment. Second, each of the Bear
Funds pursues investment goals which are inverse to
the performance of its benchmark, a result opposite of
most exchange-traded funds.
Third, each Fund offered
in this Prospectus seeks daily leveraged investment
results.
The return of each Fund for periods longer
than a single day, especially in periods of market
volatility, may be completely uncorrelated to the
return of the Fund’s benchmark for such longer period.
The Funds are intended to be used as short-term
trading
vehicles
for
investors
managing
their
portfolios on a daily basis.
The Funds are not
intended to be used by, and are not appropriate for,
investors who intend to hold positions. The Funds
should be utilized only by sophisticated investors who
(a) understand the risks associated with the use of
leverage, (b) understand the consequences of seeking
daily leveraged investment results, (c) understand the
risk of shorting; and (d) intend to actively monitor
and manage their investments on a daily basis.
Investors who do not understand the Funds or do not
intend to manage the funds on a daily basis should not
buy the Funds.
Direxion Shares ETF Trust, Prospectus (Form 497) (April 1, 2009
as Supplemented on April 10, 2009) (“April 10 Supp.”) at 1.
That cautionary language, and/or parts thereof, is reiterated
8
throughout the April 10 Supplement.
The April 10 Supplement’s
cautionary language provides additional detail and discussion of
the magnitude of risks associated with investing in the Funds
not contained, but able to be known, in the Supplements.
The April 10 Supplement also clarified the disclosures
regarding the risks associated with rebalancing expenses,
stating, “At higher rates of volatility, there is a chance of
near complete loss of Fund value even if the benchmark is flat.”
April 10 Supp. at 8 (emphasis added).
The April 10 Supplement
provided two tables--one showing the Funds’ impaired performance
as compared to benchmark volatility, and one showing the “range
of volatility for each of the indexes to which one of the funds
is benchmarked . . . .”
Id. at 8-10.
In the section on
volatility and rebalancing, the April 10 Supplement reiterated
(in bold, underlined language) that the tables were “intended to
simply underscore the fact that the Funds are designed as shortterm trading vehicles for investors managing their portfolios on
a daily basis. They are not intended to be used by, and are not
appropriate for, investors who intend to hold positions in an
attempt to generate returns through time.”
Id. at 9.
According to plaintiffs, the disclosures in the April 10
Supplement that revealed to investors that Direxion ETF shares
should not be held for more than one day differ materially from
the disclosures in the Supplements which, despite references to
9
“daily,” acknowledged the propriety of holding for longer
periods.
See SAC ¶¶ 6, 141-51.
Although the SAC alleges that
the Supplements did not disclose certain specific risks, see,
e.g., id. ¶¶ 3, 21, 113(e)-(k), 243, 285, 308, 309, 311-12,
315-22, 324-30, 334-39; see also id. ¶¶ 207-15, at bottom,
plaintiffs allege that the Supplements contained material
misstatements and omissions because the Supplements failed to
disclose adequately that the Funds would, because of, inter
alia, compounding, be prevented from achieving their return
objectives if held for longer than a single day, see id. ¶¶ 3,
22, 24-25, 36, 53.
PROCEDURAL HISTORY
On September 18, 2009, Stoopler commenced a putative class
action against Direxion and certain of its officers and
directors, based upon alleged losses stemming from purchases of
shares in FAZ (the “Stoopler action”).
¶ 1.
See Compl. (Dkt. No. 1)
That same day, Stoopler published notice pursuant to the
Private Securities Litigation Reform Act (“PSLRA”), informing
the public (and ergo, putative class members) of claims brought
on behalf of purchasers in FAZ.
Dkt. No. 17-3.
That notice
referenced the Registration Statement pursuant to which all
Funds were offered.
Id.
Shortly thereafter, two FAZ purchasers
filed putative class actions on behalf of FAZ acquirers.
See
Pfeiffer v. Direxion Trust et al., 09 Civ. 08375, Dkt. No. 1
10
(filed Oct. 2, 2009); Longman v. Direxion Trust et al., 09 Civ.
0849, Dkt. No. 1 (filed Oct. 5, 2009) (collectively with the
Stoopler action, the “FAZ actions”).
On January 13, 2010, two individual putative class actions
were filed on behalf of investors in ERY, a Fund not included in
the FAZ actions (the “ERY actions”).
See Dkt. No. 44 at 2.
Plaintiff in the first-filed ERY action, Howard Schwack,
published notice pursuant to the PSLRA on January 13, 2010,
informing putative class members of claims brought on behalf of
purchasers in ERY.
Dkt. No. 7-2.
Schwack v. Direxion ETF Trust, 10 Civ. 271,
That notice referenced the Registration Statement
and Prospectus to which the Funds were offered.
Id.
Stoopler’s and Schwack’s notices (the “Notices”) both set
forth the date by which to move for lead plaintiff status.
Thereafter, several putative lead plaintiffs filed motions
seeking appointment as lead plaintiff and consolidation of the
FAZ and ERY actions.
Dkt. Nos. 7, 9, 12, 14.
On April 1, 2010,
defendants also sought consolidation of the three FAZ and two
ERY actions.
Dkt. Nos. 36, 37.
Just prior to defendants’ filing that motion, in “mid-March
2010,” Booth “first became aware of the pendency of litigation
regarding Direxion ETFs.”
Dkt. No. 84 at 1.
At that time, he
sought legal advice from his current counsel, a law firm that
11
regularly represents plaintiffs in securities class actions.
See id.
On August 12, 2010, the Court consolidated the FAZ and ERY
actions and appointed lead plaintiff and lead counsel for
purchasers in FAZ and ERY, respectively.
Dkt. No. 44. 3
On November 23, 2010, the First Amended Class Action
Complaint (“Amended Complaint”) was filed, asserting claims
under the Securities Act for alleged losses stemming from
purchases in FAZ and ERY, and, for the first time, alleged
losses stemming from BGZ and TZA.
Am. Compl. (Dkt. No. 46) ¶ 1.
On January 25, 2011, defendants submitted a pre-motion
letter, setting forth grounds for dismissal of the Amended
Complaint.
See Dkt. No. 53.
Defendants argued, inter alia,
that (i) plaintiffs failed to plead adequately compliance with
the Securities Act’s one-year statute of limitations; (ii) the
Court’s August 12, 2011 consolidation order authorized
plaintiffs to litigate only on behalf of purchasers in FAZ and
ERY; and (iii) plaintiffs did not have standing to assert claims
for funds in which they did not purchase shares.
3-5.
Dkt. No. 53 at
In response, plaintiffs informed the Court that they
intended to file a second amended pleading.
3
Dkt. No. 55.
The Court filed its original Memorandum Opinion & Order consolidating the
FAZ and ERY actions on August 12, 2010, see Dkt. No. 43, but entered a
corrected version on August 16, 2010, see Dkt. No. 44. The Court cites to
the latter in this Opinion.
12
On April 8, 2011, plaintiffs filed the SAC.
In that
pleading, they conceded that they “individually invested in FAZ
and ERY Funds,” SAC ¶ 67, but continued to assert claims
stemming from purchases in all four Funds--i.e., FAZ, ERY, BGZ,
and TZA, id. ¶ 2.
They did not amend their statute of
limitations allegation from that in the Amended Complaint,
however.
Compare SAC ¶ 352 with Am. Compl. ¶ 227.
On June 10, 2011, defendants filed a motion to dismiss the
See Dkt. No. 62.
SAC.
Plaintiffs filed their opposition on
August 15, 2011, and defendants filed a reply on September 28,
2011.
See Dkt. Nos. 65, 69.
On November 9, 2011, Booth filed a motion to intervene
arguing, inter alia, that his claims are identical to those in
the SAC and that his proposed intervention satisfies the
requirements of Rules 24(a) and 24(b).
Dkt. No. 70.
Defendants
opposed that motion on December 9, 2011, and the motion was
fully submitted as of December 19, 2011.
See Dkt. Nos. 77, 78.
The Court held oral argument on both the motion to dismiss
and the motion to intervene on January 6, 2012.
DISCUSSION
I.
DEFENDANTS’ MOTION TO DISMISS
A.
STANDARD
To survive a Rule 12(b)(6) motion to dismiss, “the
plaintiff must provide the grounds upon which [its] claim rests
13
through factual allegations sufficient ‘to raise a right to
relief above the speculative level.’”
ATSI Commc’ns, Inc., 493
F.3d at 98 (quoting Bell Alt. Corp. v. Twombly, 550 U.S. 544,
555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)).
In other words,
the complaint must allege “enough facts to state a claim to
relief that is plausible on its face.”
Starr v. Sony BMG Music
Entm’t, 592 F.3d 314, 321 (quoting Twombly, 550 U.S. at 570).
See also Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 1949
(2009) (same).
“A claim has facial plausibility when the
plaintiff pleads factual content that allows the court to draw
the reasonable inference that the defendant is liable for the
misconduct alleged.”
Iqbal, 129 S.Ct. at 1949.
In applying
that standard, the court accepts as true all well-plead factual
allegations, but does not credit “mere conclusory statements” or
“threadbare recitals of the elements of a cause of action.”
Id.
If the court can infer no more than “the mere possibility of
misconduct” from the factual averments, dismissal is
appropriate.
Starr, 592 F.3d at 321 (quoting Iqbal, 129 S.Ct.
at 1950). 4
4
Defendants argue that the SAC “sounds in fraud” triggering Rule 9(b)’s
heightened pleading standard. Defs. Mem. at 7. The SAC principally tracks
the language of the Securities Act, but does make three references to
“purposeful” conduct. See SAC ¶¶ 138, 216, 36. Defendants rely on those
references to support their “sounds in fraud” argument. See Defs. Mem. at 7
n.6. Three errant references do not amount to allegations of a “unified
fraudulent scheme.” Rombach v. Chang, 355 F.3d 164, 172 (2d Cir. 2004).
Indeed, three references in a 356-paragraph complaint in no way indicate that
the “gravamen of the [SAC]” is “plainly fraud.” See id.
14
B.
STANDING TO BRING CLAIMS ON BEHALF OF PURCHASERS IN
BGZ AND TZA
Defendants move to dismiss for lack of standing the claims
that arise out of the Funds in which plaintiffs did not purchase
shares--i.e., BGZ and TZA.
Defs. Mem. at 24-25.
In ruling on a
motion to dismiss for lack of standing, the court “must accept
as true all material allegations of the complaint, and must
construe the complaint in favor of the complaining party.”
Warth v. Seldin, 422 U.S. 490, 501, 95 S.Ct. 2197, 45 L.Ed.2d
343 (1975).
Standing is “the threshold question in every federal case.”
Id. at 498.
Article III of the Constitution limits the
jurisdiction of federal courts to the resolution of actual
“cases” and “controversies,” U.S. CONST. art. III, § 2--i.e., a
justiciable action in which the plaintiff has standing, Warth,
422 U.S. at 498.
The law of Article III standing is clear:
a
plaintiff must assert an injury traceable to the conduct of
which the plaintiff complains.
Allen v. Wright, 468 U.S. 737,
750, 751, 104 S.Ct. 3315, 82 L.Ed.2d 556 (1984).
Plaintiffs argue that the standing inquiry is not one
related to Article III, but rather to Rule 23 and thus, should
be addressed at the class certification stage.
30.
Pls. Opp’n at
A rule of procedure, like Rule 23, cannot, however, create
standing where standing simply does not exist.
15
See 28 U.S.C.
§ 2072(b) (procedural rules “shall not abridge, enlarge, or
modify any substantive right”); see also Fed. R. Civ. P. 82
(Federal Rules “do not extend or limit the jurisdiction of the
district courts . . .”).
It is also well settled that the standing requirement
cannot be dispensed with by styling the complaint as a class
action.
Lewis v. Casey, 518 U.S. 343, 357, 116 S.Ct. 2174, 135
L.Ed.2d 606 (1996) (“That a suit may be a class action . . .
adds nothing to the question of standing . . .”).
Each named
plaintiff in a class action “must allege and show that [he]
personally [has] been injured, not that the injury has been
suffered by other, unidentified members of the class to which
they belong and purport to represent.”
Id.; W.R. Huff Asset
Mgmt. Co., LLC v. Deloitte & Touche LLP, 549 F.3d 100, 106 n.5
(2d Cir. 2008) (same) (quoting Warth, 422 U.S. at 502).
Thus, a
court must address the “threshold question” of Article III
standing before it ever reaches the question of class
certification.
See Pub. Emps.’ Ret. Sys. Of Miss. v. Merrill
Lynch & Co. Inc., 714 F. Supp. 2d 475, 480-81 (S.D.N.Y. 2010);
In re Salomon Smith Barney Mut. Fund Fees Litig., 441 F. Supp.
2d 579, 607 (S.D.N.Y. 2006).
Here, plaintiffs do not dispute that they only purchased
shares in FAZ and ERY.
See SAC ¶ 67; see also Hr’g Tr. (Dkt.
No. 82) 58:4-58:6 (Jan. 6, 2012).
16
Those purchases, then, are
the only sources of any injury giving rise to the claims
asserted in the SAC.
Plaintiffs have not been personally
injured with respect to any losses related to BGZ and TZA
because they never owned shares in those Funds.
Thus, they do
not have any injury traceable to purchases in those particular
Funds and “have no standing to assert claims in relation to
funds in which [they] did not personally invest.”
Pub. Emps.’
Ret. Sys. Of Miss., 714 F. Supp. 2d at 481. 5
Accordingly, plaintiffs may proceed only with claims
related to Funds in which they purchased shares (i.e., FAZ and
ERY), and may not pursue claims relating to Funds in which they
did not (i.e., BGZ and TZA).
C.
STATUTE OF LIMITATIONS
Ensuring an action is timely brought is an additional
hurdle.
Cf. In re Morgan Stanley Mortg. Pass-Through
5
See also In re Wachovia Equity Secs. Litig., 753 F. Supp. 2d 326, 368-69
(S.D.N.Y. 2011); New Jersey Carpenters Health Fund v. Novastar Mortg., Inc.,
No. 08–5310, 2011 WL 1338195, at *6 (S.D.N.Y. Mar. 31, 2011); In re IndyMac
Mortgage–Backed Secs. Litig., 718 F. Supp. 2d 495, 501 (S.D.N.Y. 2010); New
Jersey Carpenters Vacation Fund v. Royal Bank of Scotland Grp., PLC, 720 F.
Supp. 2d 254, 265 (S.D.N.Y. 2010); In re Lehman Bros. Secs. & ERISA Litig.,
684 F. Supp. 2d 485, 491 (S.D.N.Y. 2010); New Jersey Carpenters Health Fund
v. Residential Capital, LLC, No. 08–8781, 2010 WL 1257528 (S.D.N.Y. Mar. 31,
2010); New Jersey Carpenters Health Fund v. DLJ Mortg. Capital, Inc., No.
08-5653, 2010 WL 1473288 (S.D.N.Y. Mar. 29, 2010).
The Court recognizes that at least one judge in this District has found
standing as to offerings in which the plaintiffs have not acquired
securities. See In re Citigroup Inc. Bond Litig., 723 F. Supp. 2d 568
(S.D.N.Y. 2010). This Court finds, however, that Article III of the
Constitution and the weight of recent caselaw in this District, see, e.g.,
Pub. Emps.’ Ret. Sys. Of Miss., 714 F. Supp. 2d at 481, and this note, supra,
counsel in favor of the result at which this Court arrives.
17
Certificates Litig., No. 09 Civ. 2137, 2010 WL 3239430, at *6
(S.D.N.Y. Aug. 17, 2010) (addressing the timeliness of the
plaintiffs’ claims before addressing the sufficiency of the
complaint’s allegations).
It is axiomatic that a complaint must
contain sufficient factual allegations to enable a court to
determine if an action is properly before it.
See, Iqbal, 129
S.Ct. at 1949.
Claims brought under the Securities Act must be “brought
within one year after the discovery of the untrue statement or
the omission, or after such discovery should have been made by
the exercise of reasonable diligence.”
15 U.S.C. § 77m.
In
other words, the statute of limitations begins to run on
Securities Act claims when the plaintiff has actual or
constructive (“inquiry”) notice.
F.3d 346, 350 (2d Cir. 1993).
Dodds v. Cigna Secs., Inc., 12
Whether a plaintiff was on
inquiry notice may be determined as a matter of law.
Staehr v.
Hartford Fin. Servs. Grp., Inc., 547 F.3d 406, 427 (2d Cir.
2008).
In Merck & Co. v. Reynolds, --- U.S. ---, 130 S.Ct. 1784
(2010), 6 the Supreme Court addressed the issue of inquiry notice,
holding that “the discovery of facts that put a plaintiff on
6
Merck addressed “inquiry notice” as it applied to the statute of limitations
for Section 10(b) of the Exchange Act claims. While the Exchange Act and
Securities Act limitations statutes differ slightly, they do not in any
material way. See In re Wachovia Equity Secs. Litig., 753 F. Supp. 2d 326,
371 n.39 (S.D.N.Y. 2011).
18
inquiry notice does not automatically begin the running of the
limitations period.”
Id. at 1789.
The limitations period
begins to run only “when a reasonable investor conducting such a
timely investigation would have uncovered the facts constituting
a violation.”
Pontiac Gen. Emps.’ Ret. Sys. v. MBIA, Inc., 637
F.3d 169, 174 (2d Cir. 2011).
Although resolution of “whether a plaintiff had sufficient
facts to place it on inquiry notice is often inappropriate for
resolution on a motion to dismiss under Rule 12(b)(6),” LC
Capital Partners, LP v. Frontier Ins. Grp., Inc., 318 F.3d 148,
156 (2d Cir. 2003) (quotation omitted) (emphasis added), a
plaintiff must still meet the basic pleading burden with respect
to the statute of limitations.
For Securities Act claims, a
plaintiff must allege the time and circumstances of his
discovery of the material misstatement or omission upon which
his claim is based.
In re Chaus Secs. Litig., 801 F. Supp.
1257, 1265 (S.D.N.Y. 1992).
Here, there are no such
allegations.
The SAC simply states that “[l]ess than one year has
elapsed from the time that Plaintiffs and other members of the
Class discovered the facts upon which the Complaint is based.”
SAC ¶ 352.
That allegation is insufficient to state plausibly
the time and circumstance of each plaintiff’s own discovery of
the subject misstatements and omissions.
19
See Iqbal, 129 S.Ct.
at 1949 (“mere conclusory statements[] do not suffice”); In re
Morgan Stanley Mortg. Pass-Through Certificates Litig., 2010 WL
3239430, at *7 (dismissing a complaint with allegations similar
to SAC ¶ 352 regarding compliance with Section 13 for failure to
plead “time and circumstance”).
Without “time and circumstance”
allegations, there is no way to determine whether--and which
of--plaintiffs’ claims are properly before the Court.
That is
particularly important in the context of a purported multi-fund
action where claims for each fund can significantly increase
defendants’ exposure:
there must be at least one plaintiff who
has timely claims for each Fund at issue.
The face of the SAC itself demonstrates the timeliness of
one plaintiff’s claims.
That facial plausibility is based not
on conclusory allegations but on simple math.
Lead Plaintiff
Stoopler filed his individual action on September 18, 2009.
Dkt. No. 1.
See
The Funds were first “bona fide offered” to the
public on November 8, 2008, when Direxion filed with the SEC the
November 3 Supplement.
Direxion Shares ETF Trust, Prospectus
(Form 497) (Oct. 1, 2008 as Supplemented on November 3, 2008);
see 15 U.S.C. § 77m; 17 C.F.R. § 230.430B(f)(2).
Those two
facts conclusively establish that Stoopler’s claims were timely
brought.
See 15 U.S.C. § 77m.
In other words, the subject
misrepresentations were not publicly disclosed prior to November
20
8, 2008--i.e., less than one year prior to the date on which
Stoopler filed his action.
Plaintiffs Remmells, Haas, and Behnken, as purchasers in
FAZ, SAC ¶¶ 69-71, were “asserted members” of the putative class
in the Stoopler action and thus, benefit from American Pipe
tolling.
Even if their respective discoveries of the alleged
misstatements and omissions are out of time (which the Court
cannot assess from the face of the SAC), the statute of
limitations was tolled as to their claims.
See American Pipe,
414 U.S. 538, 554, 94 S.Ct. 756, 38 L.Ed.2d 713 (1974).
Neither
math nor American Pipe tolling saves plaintiffs Schwack’s or
Kilmmon’s ERY claims, however.
Accordingly, only Stoopler,
Remmells, Haas, and Benhken’s FAZ claims may proceed at this
time.
It is notable that plaintiffs were on notice of possible
problems with their statute of limitations allegations as of
January 25, 2011--i.e., the date of defendants’ pre-motion
letter regarding dismissal of the Amended Complaint.
No. 53 at 3-4.
Nevertheless, plaintiffs took no action to cure
those deficiencies in the SAC.
Compl. ¶ 227.
See Dkt.
Compare SAC ¶ 352 with Am.
That failure raises concerns about plaintiffs’
ability to cure these conclusory allegations.
Regardless, the
Court will provide a brief period of time for amendment of the
statute of limitations allegations.
21
See In re Morgan Stanley
Mortg. Pass-Through Certificates Litig., 2010 WL 3239430, at *7,
10.
A further amended complaint must allege--with the requisite
specificity--compliance with the statute of limitations as to
each plaintiff (regardless of math or tolling).
See In re
Morgan Stanley Mortg. Pass-Through Certificates Litig., --- F.
Supp. 2d ---, 2011 WL 4089580, at *11 (S.D.N.Y. Sept. 15, 2011).
D.
ACTIONABLE MISSTATEMENTS OR OMISSIONS
Having addressed the threshold questions of standing and
timeliness and finding that some claims remain, the Court now
turns to whether the SAC states a plausible claim for violations
of Section 11 of the Securities Act.
Section 11 imposes “virtually absolute liability” where a
registration statement (or any part thereof) for a public
offering contains “an untrue statement of a material fact or
omitted to state a material fact required to be stated therein
or necessary to make the statements therein not misleading.”
15
U.S.C. § 77k; In re Morgan Stanley Info. Fund Sec. Litig., 592
F.3d 347, 359 (2d Cir. 2010)(quotation omitted).
Such claims
“do not require allegations of scienter, reliance, or loss
causation.”
Fait v. Regions Fin. Corp., 655 F.3d 105, 109 (2d
Cir. 2011).
Defendants contend that the relevant offering documents
here did not contain misrepresentations or omissions because
Direxion “made extensive and unusually clear disclosures
22
regarding the very issues that are the subject matter of the
[SAC]”--namely, that “the Bear Funds tracked their benchmarks
only on a daily basis rather than over longer investment
horizons.”
Defs. Mem. at 8.
Plaintiffs argue that “[r]ather
than disclosing that the risk of loss increased if investors
held Bear Fund shares for a day or longer, Defendants said
exactly the opposite,”--i.e., they made “extensive references to
investor’s holding periods of one year, three years, or even
longer . . . .”
Pls. Opp’n at 4, 5.
Plaintiffs argue that the
expense disclosures likewise were inadequate because they failed
to disclose the magnitude to which expenses could impair the
Funds’ ability to achieve their investment objectives.
Opp’n at 13-14; see also SAC ¶¶ 24-29.
Pls.
The critical question
for this Court is not a mere calculation of the number of times
the word “daily” or “expense” was used, but rather whether the
disclosures sufficiently revealed the magnitude of the risk.
See Credit Suisse First Boston Corp. v. ARM Fin. Grp., Inc., No.
99 Civ. 12046, 2001 WL 300733, at *8 (S.D.N.Y. Mar. 28, 2001).
Here, although the Supplements contained a number of
references to the “daily” nature of the Funds, they also
contained contra-indicators, signifying that holding for longer
than a single day was appropriate.
For example, defendants
point to the cautionary language on the Supplements’ covers to
support their argument that the Funds were “short term
23
investment vehicles” that sought “daily returns.”
But that same
warning states, “Further, pursuit of daily leveraged investment
goals means that the return of a Fund for a period longer than a
single day will be the product of the series of daily leveraged
returns for each day during the relevant period.”
Ex. C at 1 (second emphasis added).
Terris Decl.
Those two statements taken
together certainly do not indicate that holding for longer than
a single day is inappropriate and/or may impair an investor’s
ability to profit from their investment in the Funds.
That is
not the only contra-indicator of the appropriate holding period
for the Funds’ shares.
For example, in addition, the
Supplements referenced an annual distribution of dividends
(which would have to be only as of a record date), which
strongly signaled to investors that holding for a period of
longer than one day was appropriate.
Id. at 43.
Thus, the
Court finds that the “daily” or “short term” disclosures were
“undercut to some extent by [Direxion’s] statements” in the same
Supplements that holding for longer than one day was
appropriate.
See Friedus v. ING Groep N.V., 736 F. Supp. 2d
816, 841 (S.D.N.Y. 2010).
In comparing the disclosures on “rebalancing expenses” in
the April 10 Supplement to those in the Supplements, there is
import in the clear differences.
The Court is not suggesting
that disclosures made in the April 10 Supplement necessarily
24
should have been made in the earlier Supplements.
Barber, 576 F.2d 465, 470 (2d Cir. 1978).
See Denny v.
Rather, the April 10
disclosures illuminate the magnitude of the risks associated
with holding shares in the Funds for longer than a single
day--risks that Direxion should have or could have known at the
time they issued the Supplements.
See New Jersey Carpenters
Health Fund v. Residential Capital, LLC, 08 Civ. 8781, 2010 WL
1257528, at *6 (S.D.N.Y. Mar. 31, 2010) (“The truth of a
statement made in the prospectus is adjudged by the facts as
they existed when the registration statement became
effective.”).
The disclosures in the April 10 Supplement regarding the
relationship between volatility of the benchmark to rebalancing
expenses stated in no uncertain terms that in times of “higher
ranges of volatility,” there was a possibility of “near complete
loss of Fund value.”
April 10 Supp. at 8 (emphasis added).
such language is included in the Supplements.
No
Although the
Supplements contain statements regarding the correlation between
volatility and the Funds’ returns, the disclosures in the April
10 Supplement reveal that the Supplements did not disclose “hard
facts critical to appreciating the magnitude of the risks
described,” Credit Suisse First Boston Corp., 2001 WL 300733, at
*8; see also New Jersey Carpenters Health Fund v. DLJ Mortg.
Capital, Inc., No. 08 Civ. 5653, 2010 WL 1473288, at *6
25
(S.D.N.Y. Mar. 29, 2010)--i.e., that holding for longer than one
day carried the risk of complete loss of value of the Funds.
Defendants’ argument that they disclosed “enough” in the
Supplements relating to that risk, Defs. Mem. at 11-12, is
belied by the statements in the April 10 Supplements.
Accordingly, the Court finds that the SAC plausibly states
that the Supplements contained misstatements and omissions. 7
E.
DEFENDANTS’ REMAINING ARGUMENTS
The Court does not find persuasive defendants’ remaining
arguments for dismissal of the SAC.
First, defendants argue that under In re State Street Bank
& Trust Co. Fixed Income Funds Investment Litig., 774 F. Supp.
2d 584 (S.D.N.Y. 2011) (Holwell, J.), “there can be no loss
causation in this case” because the Funds’ NAVs declined due to
declines in the value of the Funds’ underlying investments.
Defs. Mem. at 21.
But Judge Holwell’s decision in State Street
was based, in part, on the fact that “[b]ecause there is no
secondary market for a mutual fund’s shares, statements by a
fund’s issuer have no ability to ‘inflate’ the price of the
fund’s shares.”
Id. at 595.
Here, however, the parties agree
that shares in the Funds were sold on the secondary market.
Defs. Mem. at 5 (citing SAC ¶ 87).
7
That fact may be critical to
As plaintiffs have pleaded adequately a primary violation under Section 11,
the secondary liability claim under Section 15 may proceed at this time. Cf.
Rombach, 355 F.3d at 178.
26
the question of the movement of the Funds’ NAV.
Due to the
fact-intensive nature of that issue here, the question of
“negative loss causation,” 15 U.S.C. § 77k(e), is inappropriate
for resolution on this motion to dismiss.
Second, resolution of what (if any) of plaintiffs’ losses
are attributable to the alleged misrepresentations, see Defs.
Mem. at 22-23, requires wading into the facts to an extent that
likewise is inappropriate on a motion to dismiss.
For example,
at oral argument, plaintiffs’ counsel argued that Stoopler lost
nearly $10 million on his investment in FAZ whereas defendants’
counsel argued that Stoopler “actually benefitted from the
supposed misrepresentations and had no damages whatsoever.”
Hr’g Tr. 27:18-27:20, 28:13-28:16 (Jan. 6, 2012).
As stated
above, the Court will not engage in resolution of such factual
issues.
Third, defendants’ argument with respect to plaintiffs’
untimely filing of the certifications required by the PSLRA is
equally unavailing.
Defs. Mem. at 20-21.
Although the Court
does not condone such untimeliness, plaintiffs’ counsel
represented at oral argument that their clients all read the SAC
prior to its filing, as required by the PSLRA.
47:8-47:22 (Jan. 6, 2012).
Hr’g Tr.
Those representations resolve the
certification issues raised in defendants’ motion and defendants
have not suffered prejudice from the tardiness of the cure.
27
Accordingly, defendants’ motion to dismiss is denied on the
above three grounds.
II.
BOOTH’S MOTION TO INTERVENE
Booth seeks to intervene as a lead plaintiff for purchasers
of BGZ and TZA.
Such intervention would cure plaintiffs’
standing deficiencies with respect to BGZ and TZA.
Booth seeks
both intervention as a matter of right under Rule 24(a) and
permissive intervention under Rule 24(b).
A.
STANDARD
In order to intervene as a matter of right, an intervenor
must demonstrate that:
(1) the application is timely; (2) he
claims “an interest relating to the property or transaction
which is the subject matter of the action;” (3) he is situated
such that “disposition of the action may, as a practical matter,
impair or impede [his] ability to protect [his] interests;” and
(4) his interest is “not adequately protected by an existing
party.”
MasterCard Int’l Inc. v. Visa Int’l Serv. Ass’n, Inc.,
471 F.3d 377, 389 (2d Cir. 2006); accord St. John’s Univ., New
York v. Bolton, No. 11-0099-cv, 2011 WL 6157352, at *2 (2d Cir.
Dec. 13, 2011) (summary order); Fed. R. Civ. P. 24(a).
Failure
to demonstrate one of the above requires denial of the
intervention motion.
MasterCard Int’l Inc., 471 F.3d at 389;
28
Washington Elec. Coop., Inc. v. Mass. Mun. Wholesale Elec. Co.,
922 F.2d 92, 96 (2d Cir. 1990).
Courts typically consider the same four factors whether a
motion for intervention is “of right” under Fed. R. Civ. P.
24(a), or “permissive” under Fed. R. Civ. P. 24(b).
See, e.g.,
R Best Produce, Inc. v. Shulman-Rabin Marketing Corp., 467 F.3d
238, 240 (2d Cir. 2006); see also Hnot v. Willis Group Holdings,
Ltd., 234 Fed. App’x 13, 14 (2d Cir. 2007) (same).
“A district
court has broad discretion under Rule 24(b) to determine whether
to permit intervention on the basis that the intervenor’s claim
or defense and the main action have a question of law or fact in
common.’”
St. John’s Univ., New York, 2011 WL 6157352, at *3
(quoting Fed. R. Civ. P. 24(b)(2)).
The timeliness of an intervention motion is a matter left
to the district court’s discretion.
In re Bank of New York
Deriv. Litig., 320 F.2d 291, 300 (2d Cir. 2003).
In determining
timeliness, the Court considers “(a) the length of time the
applicant knew or should have known of its interest before
making the motion; (b) prejudice to the existing parties
resulting from the applicant’s delay; (c) prejudice to the
applicant if the motion is denied; and (d) the presence of
unusual circumstances militating for or against a finding of
timeliness.”
B.
MasterCard Int’l Inc., 471 F.3d at 390.
TIMELINESS
29
The Court’s decision regarding Proposed Intervenor’s motion
turns on the untimeliness of his application.
On September 18, 2009, two things started the clock for the
statute of limitations.
First, Stoopler filed his putative
class action on behalf of purchasers in FAZ, asserting
Securities Act claims based upon misstatements and omissions in
the Registration Statement, Prospectus and Supplements (the
“offering documents”).
See generally Compl. (Dkt. No. 1).
The
offering documents contained information and disclosures
relating to all four Bear Funds.
Second, that same day,
Stoopler published notice as required by the PLSRA, apprising
members of the putative class of the pendency of the action and
the nature of his claims.
The notice specifically set forth the
general misstatements or omissions as well as the specific risks
that the offering documents purportedly failed to disclose.
Dkt. No. 17-3 at 2.
See
The notice defined the putative class as
“any and all investors who purchased or otherwise acquired
shares of Direxion Daily Financial Bear 3X Shares (the ‘FAZ
Fund’).”
Id.
As discussed above, in Merck, the Supreme Court held that
the statute of limitations begins to run--i.e., there is
“inquiry notice”--when “a reasonably diligent plaintiff would
have discovered the facts constituting the violation . . . .”
Merck, 130 S.Ct. at 1798; see also In re Wachovia Secs. Litig.,
30
753 F. Supp. 2d 326, 371 & n.39 (S.D.N.Y. 2011) (applying Merck
to Securities Act claims).
Applying Merck, the Second Circuit
explained that “a fact is not deemed ‘discovered’ until a
reasonably diligent plaintiff would have sufficient information
about that fact to adequately plead it in a complaint.”
Pontiac
Gen. Emps.’ Ret. Sys., 637 F.3d at 175.
The filing of a complaint (and PSLRA notice) relating to
one of four “Bear Funds” whose shares were issued pursuant to
the very same offering documents certainly “would suggest to an
investor of ordinary intelligence of the probability that []he
has been defrauded.”
Staehr, 547 F.3d at 411.
At that time, a
reasonable investor in one of the Bear Funds offered pursuant to
the very same offering documents had information “to adequately
plead [the facts] in a complaint.”
Sys., 637 F.3d at 175.
Pontiac Gen. Emps.’ Ret.
Thus, the one-year statute of
limitations began to run upon the September 18, 2009 filing of
the Stoopler action and the publication of the attendant PSLRA
notice for Booth’s claims relating to BGZ and TZA.
See
Plumbers’ & Pipefitters Local No. 562 Supplemental Plan & Trust
v. J.P. Morgan Acceptance Corp. I, No. 08 CV 1713, 2011 WL
6182090, at *2 (E.D.N.Y. Dec. 13, 2011) (“The class action was
filed on March 26, 2008, and plaintiff’s counsel issued a press
release describing these cases on January 21, 2009.
This placed
the Intervenors on inquiry notice prior to one year before
31
filing these respective motions.” (citations omitted)); cf.
Menowitz v. Brown, 991 F.2d 36, 42 (2d Cir. 1993) (affirming the
district court’s finding that the plaintiffs were on inquiry
notice upon the public disclosure of lawsuits in SEC filings
where the “disclosures specifically concerned the very
misrepresentations alleged in the complaints”); In re White
Electronic Design Corp. Sec. Litig., 416 F. Supp. 2d 754, 775
(D. Ariz. 2006) (quotations omitted) (“The main purpose of the
notice requirement is to provide information describing the
legal and factual basis of the claims so that an investor can
make an informed determination whether intervention is
appropriate to protect his interests.”).
Booth asserts that he “became aware of the pendency of
litigation regarding Direxion ETFs in mid-March 2010,” which was
the first time he consulted with his current counsel.
84 at 1.
Dkt. No.
With inquiry notice charged as of September 18, 2009,
at the time Booth consulted counsel, six months remained within
the one-year limitations period.
Cf. 15 U.S.C. § 77m.
Booth
(and his counsel) had sufficient time to bring claims related to
the two Funds (issued pursuant to the very same offering
documents challenged in the Stoopler action) in which he
invested.
He did not do so.
In his reply, Booth argues that the filing of the Stoopler
action did not trigger notice of his interest in the case
32
because the PSLRA notice for the initial complaint “was brought
only on behalf of the FAZ Fund acquirers.”
Reply Mem. Of Law in
Supp. Of Mot. For Intervention (Dkt. No. 78) (“Reply Mem.”) at
2.
That is precisely the point.
It was clear on the face of
Stoopler’s complaint and the attendant PSLRA notice that the
putative class action did not include Booth and thus, did not
protect his interests.
Further, as of mid-March 2010, the first pleading which
asserted claims on behalf of BGZ and TZA purchasers (correctly
or not) had not yet been filed.
filed Nov. 23, 2011).
See Dkt. No. 46 (Am. Compl.
Thus, the question of whether Booth’s
interests were “adequately represented” as of March 2010 was not
uncertain.
Cf. MasterCard Int’l Inc., 471 F.3d at 390 (the
proposed intervenor was deemed to have known of his interest at
the outset of the litigation where the “complaint and other
filings” were “publicly available for anyone to access”).
the opposite.
Just
But Booth did not take any action until November
9, 2011--more than three years after the Stoopler action and
PSLRA notice (i.e., more than two years after the statute of
limitations had run), and more than a year and a half after
Booth knew of potential Securities Act claims against Direxion
related to the offering documents.
Publication of Stoopler’s notice gave Booth sufficient
information of the claims included in this action so that he (or
33
any other purchasers in BGZ or TZA) could “make an informed
determination whether intervention [was] appropriate to protect
his interests” as of September 18, 2009.
In re White Electronic
Design Corp. Sec. Litig., 416 F. Supp. 2d at 775.
His claims
are out of time under the one-year statute of limitations,
unless they are tolled, as discussed below.
C.
Id. 8
NEITHER RELATION BACK NOR TOLLING CAN SALVAGE PROPOSED
INTERVENOR’S CLAIMS
Proposed Intervenor argues that his claims are not time
barred because (i) they relate back not only to the Amended
Complaint and SAC, but also the initial FAZ and ERY complaints;
and (ii) his claims were tolled under American Pipe.
at 7-8, 9.
Reply Mem.
None of relation back, American Pipe tolling, or
even equitable tolling salvage the timeliness of Booth’s claims.
As an initial matter, Booth cannot relate back to the
Amended Complaint.
The Amended Complaint was the first pleading
8
Booth argues that requiring him to publish notice for appointment as a
BGZ/TZA lead plaintiff “would complicate discovery and risk conflicting
determinations,” but that he would do so if ordered by the Court. Reply Mem.
at 7. The Court is not aware of any precedent--and Proposed Intervenor has
not cited any--that authorizes intervention on newly-brought class claims
without any PSLRA notice with respect to those claims.
Allowing intervention by Booth not only would encourage uncertainty in just
what claims would (or could) be included in a class action at what time, but
also would conflict with the underlying purpose of the PSLRA--i.e., “to
restrict abuses in securities class action litigation.” Cf. Seippel v.
Sidley, Austin, Brown & Wood LLP, No. 03 Civ. 6942, 2005 WL 388561, at *2
(S.D.N.Y. Feb. 17, 2005) (quoting In re Advanta Corp. Secs. Litig., 180 F.3d
525, 530-31 (3d Cir. 1999)). The policy encouraged by allowing claims to
proceed for which there had been no notice would create uncertainty for
defendants, absent class members, and even those plaintiffs who are appointed
lead plaintiffs. That uncertainty does not--and would not--promote the
“efficiency and economy of litigation.” See Am. Pipe, 414 U.S. at 553.
34
which asserted claims on behalf of BGZ and TZA purchasers.
In
the Amended Complaint, then-plaintiff Michael Salach was alleged
to have purchased shares in BGZ.
Am. Compl. ¶ 57.
No plaintiff
in that pleading was alleged to have purchased in TZA.
As
discussed below, the Court only may exercise jurisdiction where
there is a plaintiff with standing.
See Pressroom Unions-
Printers League Income Security Fund v. Continental Assurance
Co., 700 F.2d 889, 893 (2d Cir. 1983).
Thus, Salach is the only
plaintiff that could have conferred standing on BGZ claims.
On
January 27, 2011, however, plaintiffs informed the Court that
the Amended Complaint would “not be the operative complaint” and
See Dkt.
that they intended to file a second amended pleading.
No. 55 at 1.
In the Amended Complaint, then-plaintiff Michael
Salach was alleged to have purchased shares in BGZ.
¶ 57.
Am. Compl.
Because Salach is no longer named in the SAC, his claims
were voluntarily dismissed when the SAC superceded the Amended
Complaint.
The “law treats a voluntarily dismissed [claim] as
if had never been filed.”
See In re IndyMac Mortgage-Backed
Secs. Litig. 718 F. Supp. 2d 495, 504 (S.D.N.Y. 2010).
Accordingly, “a voluntarily dismissed [claim] does not toll the
statute of limitations,” id., nor can claims “relate back to a
[claim] that no longer exists,” In re Adelphia Commc’ns Corp.
Sec. & Deriv. Litig., Nos. 03 MD 1529, 03-CV-5750, 2005 WL
1882281, at *1 (S.D.N.Y. Aug. 9, 2005).
35
The only complaint that
could possibly save Booth’s claims is the SAC.
As discussed
below, it does not.
The “threshold issue” of constitutional standing dooms
Proposed Intervenor’s arguments on relation back and tolling.
“The longstanding and clear rule is that if jurisdiction is
lacking at the commencement of a suit, it cannot be aided by the
intervention of a plaintiff with a sufficient claim.”
Pressroom, 700 F.2d at 893; see also Walters v. Edgar, 163 F.3d
430, 432 (7th Cir. 1998) (Posner, J.) (“The chief exception [to
the principle that jurisdiction once acquired is not defeated by
a change of circumstances] is the existence of a case or
controversy in the Article III sense . . .”).
Here, in essence,
Proposed Intervenor seeks to “substitute a new action [i.e., one
for claims relating to BGZ and TZA] over which there is
jurisdiction for one where it did not exist [i.e., one in which
there are no plaintiffs with standing].”
893 (emphasis added).
Pressroom, 700 F.2d at
Thus, where no jurisdiction existed as to
claims related to BGZ and TZA, Proposed Intervenor’s motion
“does not relate back to the original suit and would be a new
action.”
Id. at n.9.
The same rationale applies to the question of tolling under
American Pipe.
In Walters, the Seventh Circuit held that the
filing of a putative class action complaint by a plaintiff who
did not have standing as to certain claims does not toll the
36
statute of limitations for those who later seek to intervene as
plaintiffs.
Walters, 163 F.3d at 432.
That decision is
predicated upon the rule that under Article III, where a
plaintiff does not have standing to bring a claim, there is no
case or controversy over which a federal court may exercise
Id. at 432-33.
jurisdiction.
Relation back and tolling, on the facts of Proposed
Intervenor’s motion, also would not accord with American Pipe’s
rationales.
See Arneil v. Ramsey, 550 F.2d 774, 782 (2d Cir.
1977), overruled on other grounds, In re WorldCom Secs. Litig.,
496 F.3d 245 (2d Cir. 2007).
Under American Pipe, “the
commencement of a class action suspends the applicable statute
of limitations as to all asserted members of the class who would
have been parties had the suit been permitted to continue as a
class action.”
414 U.S. at 554.
That the rule is “in no way
inconsistent with the functional operation of a statute of
limitations,” id. at 554-55--i.e., protection from the assertion
of untimely claims--because it only tolls the limitations period
for claims of “asserted” class members.
Id.; see also Arneil,
550 F.2d at 782-83.
Proposed Intervenor was never an “asserted member” of the
putative class.
First, at the time Booth learned of this
action, the action was, as discussed above, clearly limited to
FAZ and ERY purchasers.
He could not have thought otherwise
37
where there was no pleading which asserted those claims.
Second, under the SAC, where no plaintiff has standing to bring
claims related to BGZ and TZA, BGZ and TZA purchasers cannot be
“asserted members” of the putative class.
at 782-83; Walters, 163 F.3d at 432.
See Arneil, 550 F.2d
To suspend the statute of
limitations under relation back or American Pipe would
improperly cloak claims with jurisdiction where jurisdiction
never existed before.
See Pressroom, 700 F.2d at 893. 9
And although American Pipe is sensible for the proposition
for which it stands, the circumstances before this Court on
Proposed Intervenor’s motion are not of the type contemplated by
the Supreme Court in American Pipe.
In American Pipe, the
putative class representatives had constitutional standing to
preserve the claims they asserted.
Inserting claims in this
action (over which the Court never had jurisdiction in the first
instance) well after the expiration of the statute of
limitations, where no notice of those claims was ever given,
would ignore American Pipe’s requirement that defendants be
apprised “of the essential information necessary to determine
9
The Court recognizes the split among district courts on the issue of whether
American Pipe tolling applies to claims where the putative class plaintiff
did not have standing to assert those claims. See In re IndyMac, 793 F.
Supp. 2d at 646 & nn. 39-40 (noting that courts that have addressed this
issue “are divided” and citing cases on both sides). The circumstances of
this action--i.e., that the Notices did not include claims relating to BGZ
and TZA and that Proposed Intervenor concedes that he was aware of this
action eight months prior to the filing of the pleading in this action to
assert claims related to BGZ and TZA--have not been addressed in any of the
cases on either side of the split.
38
both the subject matter and size of the prospective litigation”
“[w]ithin the period set by the statute of limitations.”
Pipe, 414 U.S. at 555.
Am.
The Supreme Court could not have
intended the rule of tolling to allow intervenors to insert
jurisdiction over entirely new claims particularly where, as
here, Proposed Intervenor was aware of information sufficient to
put him on notice that his interests were not protected nearly
three years before he filed the instant motion.
This is not a case where Proposed Intervenor could have
believed that the yet-to-be “asserted” class would protect his
interests because, as of mid-March 2010, there was no indication
that the class members were anything but FAZ and ERY purchasers.
Rather, a reasonable purchaser in BGZ and TZA would have relied
upon (i) the class allegations in the initial complaints;
(ii) the definitions in the Notices regarding classes on behalf
of ERY and FAZ purchasers, only; and (iii) the Court’s
appointment of lead plaintiffs for FAZ and ERY acquirers only,
and acted to protect his BGZ and TZA interests.
Cf. In re
Morgan Stanley Mortgage Pass-Through Certificates Litig., 2011
WL 4089580, at *18.
The Court’s finding on the circumstances
before it do not contravene American Pipe’s
policy of
“efficiency and economy of litigation,” 414 U.S. at 553, but
rather promote American Pipe’s policy of ensuring that the
“subject matter and size of the litigation,” id. at 555, be
39
fixed according to the requirements of Article III of the
Constitution and the purpose of the PSLRA.
Although not argued by Proposed Intervenor or defendants,
the Court has undertaken an independent examination of whether
Booth’s claims are salvaged by equitable tolling.
Booth cannot show either:
They are not.
(i) that he acted with diligence
throughout the period he seeks to toll; or (ii) that
extraordinary circumstances prevented him from filing his
petition on time.
See A.C.Q. v. United States, 656 F.3d 135,
144 (2d Cir. 2011) (citing Pace v. DiGuglielmo, 544 U.S. 408,
418, 125 S.Ct. 1807, 161 L.Ed.2d 669 (2005)).
First, Booth knew of this action as of mid-March 2010.
The
Notices relating to this action demonstrated that the
(consolidated) action would not protect his interests related to
BGZ and TZA.
But Booth did nothing to protect his claims until
November 9, 2011, when he moved to intervene.
It is not that
Booth did not take any steps to determine whether his interests
were protected, but rather that he affirmatively acted--i.e.,
contacted his current counsel--and still did not take steps to
protect his interests for over eighteen months.
pattern does not depict diligence.
That fact
See A.C.Q., 656 F.3d at 144.
Second, no extraordinary circumstances prevented Booth’s
counsel from determining the nature of Booth’s interest--and
whether that interest was protected--in the “Direxion ETFs”
40
litigation.
Dkt. No. 84 at 1.
Counsel for Proposed Intervenor
needed only to look at the basic requirements of the PSLRA and
the Notices to know that BGZ and TZA were not included in this
action as of mid-March 2010.
Counsel for Booth did not act
diligently--and there are no extraordinary circumstances that
excuse that indolence.
See id. at 145.
Proposed Intervenor brought his claims outside of the
applicable statute of limitations, and nothing salvages those
claims.
Given that Booth’s application is untimely, and that the
Court lacks jurisdiction over his claims (i.e., there is both
“prejudice to the existing parties” and “the presence of unusual
circumstances militating . . . against a finding of
timeliness”), the Court need not assess the remaining factors to
determine whether Booth may intervene as of right or
permissively.
He has failed to satisfy one of the four
requisite conditions for intervention.
Accordingly, Booth’s
motion to intervene is denied.
CONCLUSION
For the aforementioned reasons, defendants’ motion to
dismiss is GRANTED IN PART and DENIED IN PART.
The claims relating to BGZ and TZA are dismissed based upon
plaintiffs’ lack of Article III standing to pursue such claims.
The claims of Lead Plaintiff Stoopler and named plaintiffs David
41
Remmells, Jason Haas, and Joel Behnken may proceed, but only as
to Funds in which they purchased shares (i.e., FAZ).
The claims
of Howard Schwack and James Kilmmon are dismissed for failure to
plead compliance with the applicable statute of limitations.
Barton Booth’s motion to intervene in this action to bring
claims on behalf of purchasers in the BGZ and TZA Funds is
DENIED.
At this time, this action is limited to a purported class
of purchasers in Direxion’s FAZ Fund.
It is hereby ORDERED that no later than February 10, 2012,
plaintiffs may file an amended complaint to cure the pleading
deficiencies regarding the statute of limitations.
If
plaintiffs submit a Third Amended Complaint with additional
allegations regarding each plaintiff’s compliance with the
one-year statute of limitations, and if defendants wish to move
to dismiss the claims on statute of limitations grounds,
defendants may submit a ten-page brief by February 24, 2012, and
plaintiffs may submit ten-page brief in response thereto by
March 2, 2012.
No reply will be necessary.
The Court will not lift the PSLRA stay of discovery until
the statute of limitations question has been resolved as to all
plaintiffs.
42
The Clerk of the Court is directed to terminate defendants'
Motion to Dismiss (Dkt. No. 62) and Barton Booth's Motion to
Intervene (Dkt. No. 70).
SO ORDERED:
Dated:
New York, New York
January ~1'; 2012
KATHERINE B. FORREST
United States District Judge
43
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