Wilamowsky v. Take Two Interactive Software, Inc. et al
Filing
37
OPINION AND ORDER re: 26 MOTION to Dismiss Plaintiff's Complaint filed by Ryan Brant, 24 MOTION to Dismiss / Notice of Motion to Dismiss filed by Take Two Interactive Software, Inc., 29 MOTION to Dismiss filed by Todd Emmel, Robert Flug, Oliver Grace. For the foregoing reasons, Defendants' motions to dismiss are GRANTED and the Complaint is dismissed with prejudice. The Clerk of the Court is respectfully directed to terminate the motions located at document numbers 24, 26, and 29 and close this case. (Signed by Judge Richard J. Sullivan on 9/30/2011) (lmb) Modified on 9/30/2011 (lmb).
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
No. 10 Civ. 7471 (RJS)
USDSSDNY
DOCUMENT
ELECTRONICALLY FILED
ELI WILAMOWSKY,
DOC#: ______~~___
DATE FILED: 91301zoll
Plaintiff,
VERSUS
TAKE-Two INTERACTIVE SOFTWARE, INC., RYAN BRANT, TODD EMMEL, ROBERT FLUG,
AND OLIVER GRACE,
Defendants.
OPINION AND ORDER
September 30,2011
RICHARD J. SULLIVAN, District Judge:
On October IS, 2010, the Court approved
the settlement of a securities fraud class
action
against
Take-Two
Interactive
("Take-Two" or the
Software, Inc.
"Company"), its subsidiary, and several
individual defendants arising from TakeTwo's inclusion of sexually explicit content
in a video game and the backdating of stock
options granted to its directors and senior
management. Plaintiff Eli Wilamowsky is a
short seller of Take-Two stock who opted
out of that settlement and brought this
individual action because the plan of
allocation excluded short sellers like him
from recovery. (Compl. ~ 1.) Now before
the Court are Defendants' motions to dismiss
pursuant to Federal Rules of Civil Procedure
9(b) and 12(b)(6) and the Private Securities
Litigation Reform Act of 1995 ("PSLRA"),
15 U.S.C. § 7Su-4(b). For the reasons that
follow, the motions are granted.
1.
BACKGROUND!
A.
Parties
Plaintiff Eli Wilamowsky short sold
924,500 shares of Take-Two stock between
May 25, 2004 and April 21, 2005. (Compl.
~~ 132, 160-161; id., Ex. E (Chart of
Plaintiff s sales and purchases).) As a short
seller, Plaintiff essentially bet that Take-Two
stock was overvalued and slated to decrease
in price, leading him to borrow and sell
Take-Two stock under an obligation to later
purchase (or "cover") and deliver the stock
I The following facts are drawn from the Complaint
and exhibits attached thereto. The Court presumes the
parties' familiarity with the facts of this case, which
are fully discussed in Judge Kram's comprehensive
opinion, In re Take-Two Interactive Sec. Litig., 55 I F.
Supp. 2d 247 (S.D.N.Y. 2008), and the Court's
preliminary approval of class settlement, No. 06 Civ.
803 (RJS) (S.D.N.Y. June 29, 2010) (Doc. No. 161).
Accordingly, the Court recites only those facts
pertinent to the resolution of this motion.
value of the grants. (Id. ¶¶ 59-60.) The
Company thus effectively granted options
with an exercise price below the market price
of the underlying shares on the date of grant,
referred to as “in-the-money” grants. (Id. ¶
99.)
Significantly, Take-Two failed to
account for these in-the-money grants as
compensation
expenses
pursuant
to
Accounting Principles Board Opinion No. 25
(“APB 25”), and violated Generally
Accepted Accounting Principles (“GAAP”).
(Id. ¶¶ 97-100.)
As a result, Take-Two
understated compensation expenses and
overstated net income in its press releases
and SEC filings. (Id. ¶¶ 131, 139.) The
scheme resulted in an overstatement of TakeTwo’s earnings by 20% in fiscal year 2002,
11% in fiscal year 2003, and 5-6% in fiscal
years 2004 and 2005. (Id. ¶ 89.)
back to its owner. (Id. ¶ 3) Plaintiff alleges
that before and after he made short sales, a
series of Defendants’ misrepresentations
about the Company’s stock options plans
“continually, and increasingly, inflated TakeTwo’s stock price.” (Id. ¶ 5.) Because these
misstatements allegedly caused Plaintiff to
cover his short positions at artificially higher
prices than those at which he sold, Plaintiff
allegedly suffered financial harm. (Id.)
Defendant Take-Two is a public
company organized under the laws of
Delaware that develops and distributes
popular video games, hardware, and
accessories. (Id. ¶¶ 27, 30.) The Company’s
corporate headquarters are located in New
York and its stock is traded on the NASDAQ
National Market. (Id.) The Complaint also
names four Individual Defendants: TakeTwo’s founder and former CEO Ryan Brant
(“Brant”), and former directors Todd Emmel,
Robert Flug, and Oliver Grace (the
“Directors”), who were all beneficiaries of
Take-Two’s alleged options backdating
scheme. (Id. ¶¶ 31-35.)
B.
According to the Complaint, the “truth
about Take-Two’s option backdating was
finally revealed on July 10, 2006,” when
Take-Two announced that the SEC was
investigating its option grants and that it had
initiated its own internal investigation. (Id.
¶ 140.) On this news, Take-Two’s stock
dropped approximately 7.5% from the prior
day’s closing price of $10.10 per share to
$9.34 per share. (Id.)
Subsequently, in
December 2006 and January 2007, TakeTwo completed an internal investigation that
revealed (1) a pattern and practice of
backdating options (particularly by Brant),
and (2) failure to comply with the terms of
its stock option plans, as well as failures to
maintain adequate control and compliance
procedures and accurate documentation of
option grants. (Id. ¶¶ 72-74.) On February
14, 2007, Brant pled guilty to a felony
charge of falsifying business records in New
York State Supreme Court, New York
County, and entered into a civil settlement
with the SEC. (Id. ¶ 17.) On February 23,
2007, Take-Two announced that options
granted to several directors, including
The Options Backdating Scheme
Although the settled shareholder
securities class action involved claims
related to both Take-Two’s options
backdating scheme and the inclusion of
sexually explicit content in one of TakeTwo’s Grand Theft Auto video games, this
individual case focuses solely on the options
backdating scheme.
Specifically, the
Complaint alleges that between 1997 and
2005, Take-Two operated two stock option
plans to compensate its directors and
officers,
including
the
Individual
Defendants. (Id. ¶¶ 51-53, 59.) According
to the Complaint, Take-Two routinely
manipulated the dates of its stock option
grants to make them fall on days with the
lowest stock prices, thereby inflating the
2
Plaintiff seeks to recover the difference
between these average prices (id. ¶ 164),
alleging that Take-Two’s “consistent
misstatements continually, and increasingly,
inflated Take-Two’s stock price during the
Individual Action Period” (id. ¶ 5).
Emmel, Flug, and Grace, were “improperly
dated” and that each of the directors had
entered into an agreement to repay the
compensation that they had unlawfully
obtained. (Id. ¶ 18.)
C.
Plaintiff’s “Individual Action Period”
The first two of these misstatements, a
March 4, 2004 press release announcing
Take-Two’s financial results for the first
fiscal quarter of 2004, and a March 16, 2004
SEC Form 10-Q filing, occurred prior to
Plaintiff’s first sales of Take-Two stock.
The press release reported that the
Company’s quarterly net income was $31.8
million. (Id. ¶ 109.) The 10-Q stated in
relevant part:
Plaintiff’s self-styled “Individual Action
Period” extends from March 4, 2004 through
July 16, 2006 (id. ¶ 3), beginning with the
first of nine alleged Take-Two misstatements
(id. ¶ 109) and ending six days after the truth
was revealed to the market on July 10, 2006
(id. ¶ 140).2 However, Plaintiff’s trading
was confined to a much smaller 11-month
period between May 25, 2004 and April 21,
2005. (Id. ¶¶ 160-161; id., Ex. E.)
Specifically, beginning in May 2004 and
mostly ending in January 2005,3 Plaintiff
sold Take-Two stock “short” at prices
averaging $23.38 per share.4 (Id. ¶ 160.)
Plaintiff subsequently covered his short
positions by purchasing 924,500 shares in
March and April of 2005 at an average price
of $28.74 per share. (Id. ¶¶ 132, 161.)
In the opinion of management, the
financial statements reflect all
adjustments (consisting only of
normal recurring accruals) necessary
for a fair presentation of the
Company’s financial position, results
of operations and cash flows. . . . The
Company accounts for its employee
stock option plans in accordance
with Accounting Principles Board
Opinion No. 25, “Accounting for
Stock Issued to Employees” (“APB
25”).
2
For the reader’s ease, the Court annexes to this
opinion a chart prepared by Defendants reflecting the
relevant misstatements, Plaintiff’s stock transactions,
and stock price changes during the “Individual Action
Period.” See First Decl. of John V. Ponyicsanyi,
dated January 14, 2011, Doc. No. 28 (“Ponyicsanyi
Decl.”), Ex. 2. Plaintiff does not dispute the accuracy
of the chart, which is based on the Complaint and
judicially-noticeable facts. See Collier v. Aksys Ltd.,
No. 04 Civ. 1232 (MRK), 2005 WL 1949868 (D.
Conn. Aug. 15, 2005) (attaching a price chart).
(Id. ¶ 112-13.)
The remaining seven misstatements
similarly involve pairs of (1) press releases
reporting financial results in advance of SEC
filings and (2) the SEC filings themselves,
reiterating the results and restating the
accuracy of Take-Two’s financial statements
and its compliance with APB 25. (See id.
¶¶ 115-38 (June 8, 2004 Press Release, June
14, 2004 10-Q, September 9, 2004 Press
Release, September 14, 2004 10-Q,
December 22, 2004 10-K, March 3, 2005
3
Although the vast majority of Plaintiff’s short sales
were completed by January 24, 2005, he sporadically
continued to short the stock while engaging in
covering purchases in March and April 2005. For
instance, Plaintiff shorted 5,000 shares on March 23,
2005 and 7,000 shares on April 12, 2005.
4
On April 15, 2005, Take-Two undertook a 3:2 stock
split. (See Compl., Ex. A.) Unless otherwise noted,
the Court refers to the adjusted close price for all
stock prices, as do the parties. (See id., Ex. D.)
3
Press Release and March 10, 2005 10-Q).)5
Five of these alleged misstatements occurred
during Plaintiff’s selling period between
May 25, 2004 and January 24, 2005, when
Plaintiff was betting that the market
overvalued Take-Two stock. This selling
period was followed by a holding period
between January 25, 2005 and March 2,
2005, during which Plaintiff did not sell or
purchase any Take-Two stock and TakeTwo did not issue any alleged
misstatements. (Id., Ex. E.) The price of
Take-Two
shares,
however,
rose
approximately 13% during the holding
period. (Id., Ex. D.) Plaintiff began to
cover his earlier sales on March 3, 2005, and
concluded his covering purchases by April
21, 2005.
In the early part of this
purchasing period, Take-Two issued its two
final alleged misstatements: a March 3, 2005
Press Release announcing its first quarter
financial results, and a March 10, 2005 SEC
10-Q filing detailing those results.
D.
2008, Judge Kram denied in part and granted
in part a motion to dismiss the SAC and
granted lead plaintiffs leave to amend. Lead
plaintiffs filed the Consolidated Third
Amended Class Action Complaint on
September 15, 2008.
Following Judge
Kram’s death, the case was reassigned to my
docket.
Subsequently, the parties entered into a
$20,115,000 cash settlement, and on June 29,
2010, the Court preliminarily approved a
class for settlement purposes. The Plan of
Allocation specifically excluded short sellers
like Plaintiff from receiving any of the
settlement fund. (See Compl., Ex. B (“Proof
of Claim”) at 2 (“Any person or entity that
sold Take-Two common stock ‘short’ shall
have no Recognized Loss with respect to any
purchase during the Class Period or SEC
Claims Period to cover such short sale.”).)
Although Plaintiff did not object to the
settlement, he became the sole person to
exclude himself from the class, which
numbered upwards of 170,000 people. (See
Aff. of Stacey B. Fishbein dated Oct. 5,
2010, 06 Civ. 803, Doc. No. 174 ¶¶ 5-6.)
The Court approved the final settlement,
plan of allocation, and application for
attorney’s fees on October 18, 2010.
Procedural History
As noted above, prior to opting out of the
class settlement, Plaintiff was a putative
member of a consolidated class action
captioned In re Take-Two Interactive
Securities Litigation, No. 06 Civ. 803
(S.D.N.Y). The first of the cases comprising
that consolidated action was filed on
February 2, 2006 and assigned to the
Honorable Shirley Wohl Kram, United
States District Judge. On April 16, 2006,
lead plaintiffs filed the Consolidated Second
Amended Class Action Complaint (“SAC”).
By Memorandum and Order dated April 16,
On September 29, 2010, Plaintiff filed a
four-count Complaint in this individual
action. Count One alleges that Defendants
violated Section 10(b) of the Exchange Act,
15 U.S.C. § 78j(b), and Rule 10b-5, 17
C.F.R. § 240.10b-5, promulgated thereunder;
Count Two alleges that Defendant Brant
violated Section 20(a) of the Exchange Act;
and Counts Three and Four allege common
law claims of breach of fiduciary duty and
unjust enrichment against all Defendants in
connection with their issuance and receipt of
improper stock grants. On December 14,
2010, the Court held a pre-motion
conference
relating
to
Defendants’
5
As described infra, one exception to Plaintiff’s
pairing of actionable press releases and SEC filings is
a December 16, 2004 press release issued in advance
of the December 22, 2004 10-K, which Plaintiff does
not cite as a misstatement.
As Plaintiff
acknowledges, Take-Two’s stock price declined after
that misstatement. (Pl.’s Opp’n 15.)
4
contemplated motion to dismiss the
Complaint. Subsequently, on January 14,
2011, Defendants filed three separate
motions to dismiss. The motions were fully
briefed as of February 28, 2011.6
II.
LEGAL STANDARDS
A.
conclusions’ or ‘a formulaic recitation of the
elements of a cause of action will not do.’”
Id. (quoting Twombly, 550 U.S. at 555). If
Plaintiff “ha[s] not nudged [his] claims
across the line from conceivable to plausible,
[his] complaint must be dismissed.”
Twombly, 550 U.S. at 570.
Motion to Dismiss
B.
In reviewing a motion to dismiss
pursuant to Rule 12(b)(6) of the Federal
Rules of Civil Procedure, the Court must
accept as true all factual allegations in the
complaint and draw all reasonable inferences
in favor of the plaintiff. ATSI Commc’ns
Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d
Cir. 2007). To survive a Rule 12(b)(6)
motion to dismiss, a complaint must allege
“enough facts to state a claim to relief that is
plausible on its face.” Bell Atl. Corp. v.
Twombly, 550 U.S. 544, 570 (2007). “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.” Ashcroft v. Iqbal, 129
S. Ct. 1937, 1949 (2009). By contrast, a
pleading that only “offers ‘labels and
Securities Fraud
A securities fraud complaint must also
comply with the heightened pleading
standards imposed by Rule 9(b) and the
PSLRA. Rule 9(b) requires the complaint to
“state with particularity the circumstances
constituting fraud.” Fed. R. Civ. P. 9(b). To
meet this standard, the complaint must “(1)
specify the statements that the plaintiff
contends were fraudulent, (2) identify the
speaker, (3) state where and when the
statements were made, and (4) explain why
the statements were fraudulent.”
ATSI
Commc’ns, 493 F.3d at 99 (citation omitted).
“Allegations that are conclusory or
unsupported by factual assertions are
insufficient.” Id.
The PSLRA, in turn, sets forth additional
pleading requirements. To this end, “[t]he
statute insists that securities fraud complaints
‘specify’ each misleading statement; that
they set forth the facts ‘on which [a] belief’
that a statement is misleading was ‘formed’;
and that they ‘state with particularity facts
giving rise to a strong inference that the
defendant acted with the required state of
mind.’” Dura Pharms., Inc. v. Broudo, 544
U.S. 336, 345 (2005) (quoting 15 U.S.C. §
78u-4(b)).
6
In resolving the instant motions, the Court has
considered the Complaint, any written instrument
attached to the Complaint or documents incorporated
therein by reference, legally required public
disclosure documents filed with the Securities and
Exchange Commission (“SEC”), and documents upon
which Plaintiff relied in bringing the suit. See ATSI
Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98
(2d Cir. 2007). The Court has also considered TakeTwo’s Memorandum of Law in Support of the Motion
to Dismiss (“Take-Two’s Mem.”); Brant’s
Memorandum of Law in Support of the Motion to
Dismiss
(“Brant’s
Mem.”);
the
Directors’
Memorandum of Law in Support of the Motion to
Dismiss (“Directors’ Mem.”); Plaintiff’s Omnibus
Memorandum of Law in Opposition (“Pl.’s Opp’n”);
Take-Two’s Reply; Brant’s Reply; and the Directors’
Reply, as well as the various declarations and exhibits
filed alongside these documents.
III. DISCUSSION
A.
Section 10(b) Claim
To state a claim for securities fraud under
Section 10(b) and Rule 10b-5, a plaintiff
5
must adequately plead: “(1) a material
misrepresentation or omission by the
defendant; (2) scienter; (3) a connection
between the misrepresentation or omission
and the purchase or sale of a security; (4)
reliance upon the misrepresentation or
omission; (5) economic loss; and (6) loss
causation.” Stoneridge Inv. Partners, LLC v.
Scientific-Atlanta, 552 U.S. 148, 157 (2008)
(citing Dura, 544 U.S. at 341-42).
By contrast, loss causation is the
proximate causal link between the
defendant’s alleged misconduct and the
plaintiff’s economic harm.
See ATSI
Commc’ns, Inc. 493 F.3d at 106; Dura, 544
U.S. at 346. This requirement is codified in
the PSLRA, which imposes on a plaintiff in
a private securities action “the burden of
proving that the act or omission of the
defendant alleged to violate this chapter
caused the loss for which the plaintiff seeks
to recover damages.” 15 U.S.C. § 78u4(b)(4). Loss causation requires “both that
the loss be foreseeable and that the loss be
caused by the materialization of the
concealed risk.” Lentell, 396 F.3d at 173
(emphasis in original). “[T]o establish loss
causation in a securities case, a plaintiff must
allege . . . that the subject of the fraudulent
statement or omission was the cause of the
actual loss suffered, i.e., that the
misstatement or omission concealed
something from the market that, when
disclosed, negatively affected the value of
the security.” Id. (emphasis in original
(internal citation omitted)). The Second
Circuit has articulated several possible
methods of pleading loss causation in
securities cases, including the “corrective
disclosure” theory and the “materialization
of risk” theory. See In re Omnicom Grp.,
Inc. Sec. Litig., 597 F.3d 501, 511 (2d Cir.
2010) (“Establishing either theory as
applicable would suffice to show loss
causation.”). The first and more common
way to plead loss causation requires an
allegation that “the market reacted negatively
to a ‘corrective disclosure,’ which revealed
an alleged misstatement’s falsity or disclosed
that allegedly material information had been
omitted.” In re AOL Time Warner, Inc. Sec.
Litig., 503 F. Supp. 2d 666, 677 (S.D.N.Y.
2007) (citing Lentell, 396 F.3d at 175).
Under this method, a plaintiff must tie his
loss to the dissipation of an inflated (or
deflated) price upon a disclosing event that
Defendants
separately
move
for
dismissal of the Section 10(b) claim on the
grounds that the Complaint fails to
sufficiently plead (1) a material misstatement
or omission attributable to Emmel, (2) a
strong inference of scienter among the
Directors, and (3) loss causation. Because
the Court agrees that the Complaint fails to
sufficiently plead loss causation, it does not
assess the remaining grounds for dismissal.
1.
Loss Causation Standard
A securities fraud plaintiff is required to
“prove both transaction causation (also
known as reliance) and loss causation.”
ATSI Commc’ns, 493 F.3d at 106 (citing
Lentell v. Merrill Lynch & Co., 396 F.3d
161, 172 (2d Cir. 2005)). “Transaction
causation only requires allegations that ‘but
for the claimed misrepresentations or
omissions, the plaintiff would not have
entered into the detrimental securities
transaction.’” Id. In this case, Plaintiff
alleges reliance based on the fraud-on-the
market presumption for securities sold on an
efficient market (Compl. ¶¶ 167-68), and
Defendants do not dispute that such a
presumption applies to short sellers. See
generally Basic v. Levinson, 485 U.S. 224,
248 (1988) (“An investor who buys or sells
stock at the price set by the market does so in
reliance on the integrity of that price.”).
Accordingly, transaction causation is not in
dispute here.
6
thereby.” Id. at 340 (alterations in original).
A unanimous Supreme Court cited several
reasons why such “inflated purchase price”
allegations were insufficient to plead loss
causation. First, the Court observed that in
the ordinary securities case, a plaintiff
suffers no loss at the moment of purchase
because “inflated purchase payment is offset
by ownership of a share that at that instant
possesses equivalent value.” Id. at 342.
Second, the Court recognized that “the
logical link between the inflated share
purchase price and any later economic loss is
not invariably strong,” because any future
decline in share price “may reflect, not the
earlier misrepresentation, but changed
economic circumstances, changed investor
expectations, new industry-specific or firmspecific facts, conditions, or other events,
which taken separately or together account
for some or all of that lower price.” Id. at
342-43. With “[o]ther things being equal,”
the Court stated, “the longer the time
between the purchase and sale . . . the more
likely that other factors caused the loss.” Id.
at 343. In light of the broad “tangle of
factors affecting price,” the Court held that
an allegation of an inflated purchase price
alone at most “touches upon” a later
economic loss, and does not cause a loss, as
15 U.S.C. § 78u-4(b)(4) requires. Id. To
find otherwise, the Court concluded, would
be to vitiate the objective of Section 10(b),
which is intended “not to provide investors
with broad insurance against market losses,
but to protect them against those economic
losses that misrepresentations actually
cause.” Id. at 345.
reveals the false information to the market.
See In re Initial Pub. Offering Sec. Litig.,
544 F. Supp. 2d 277, 289 (S.D.N.Y. 2008).
Alternatively, in the absence of a
corrective disclosure, loss causation may be
alleged “by showing ‘that the loss was
foreseeable and caused by the materialization
of the risk concealed by the fraudulent
statement.’” Omnicom Grp., 597 F.3d at
513 (quoting ATSI Commc’ns, 493 F.3d at
107); see also In re Flag Telecom Holdings,
Ltd. Sec. Litig., 574 F.3d 29, 40 (2d Cir.
2009) (“[I]n order to prove loss causation,
any plaintiff who sold their stock prior to the
[corrective] disclosure must prove that the
loss they suffered was both foreseeable and
caused by the ‘materialization of the
concealed risk.’”).
Thus, “[w]here the
alleged misstatement conceals a condition or
event which then occurs and causes the
plaintiff’s loss, a plaintiff may plead that it is
the materialization of the undisclosed
condition or event that causes the loss.”
Initial Pub. Offering Sec. Litig., 544 F. Supp.
2d at 289 (internal citation and quotation
marks omitted); see, e.g., In re Parmalat Sec.
Litig., 375 F. Supp. 2d 278, 2005 WL
1527674 (S.D.N.Y. 2005) (loss causation
sufficiently pled where a series of fraudulent
transactions caused the company’s liquidity
problems and ensuing loss).
In Dura Pharmaceuticals, the Supreme
Court held that in ordinary fraud-on-themarket cases, an “inflated purchase price [of
a security] will not itself constitute or
proximately cause the relevant economic
loss.” Dura, 544 U.S. at 342. The plaintiffs
in Dura did not allege that they held their
stock through a corrective disclosure that
resulted in a price decline, but instead merely
alleged that “[i]n reliance on the integrity of
the market, [the plaintiffs] . . . paid
artificially inflated prices for Dura
securities” and “suffered ‘damage[s]’
The Dura Court did not decide whether
loss causation in securities fraud cases must
be pled with the specificity required by Rule
9(b) or the heightened pleading standards of
the PSLRA, “assum[ing], at least for
argument’s sake, that neither the Rules nor
the securities statutes impose any special
7
covering purchases following a corrective
disclosure, although the nature of the
misstatement, the corrective disclosure, and
the corresponding movement of stock prices
would all be inverted from the standard longinvestor model. See Collier v. Aksys Ltd.,
No. 04 Civ. 1232 (MRK), 2005 WL 1949868
(D. Conn. Aug. 15, 2005), aff’d 179 F.
App’x 770 (2d Cir. 2006). Thus, the
actionable misstatement in the short-selling
context would conceal positive rather than
negative information about the company –
such as the pendency of a favorable merger –
and would depress rather than inflate stock
prices. An investor short selling stock at
these artificially low prices would plainly
suffer an economic loss when the truth was
revealed to the market, boosting the prices at
which he was forced to cover. See id. at *11
(“[I]n order to adequately plead loss
causation, [plaintiff] would have to plead
with specificity that: (a) Defendants’
misstatements and omissions in their SEC
filings . . . kept the price of . . . stock
artificially low (not high) at the time they
were short selling the stock; (b) the price of
. . . stock rose (not fell) after materialization
of the concealed risk; and (c) [plaintiff]
suffered financial losses that were causally
linked to the revelation of the previously
undisclosed information when he had to
cover at the higher (not lower) prices.”). By
contrast, where, as alleged here, a company
concealed negative information about its
economic condition, a short seller who sold
at artificially inflated prices and covered
after the corrective disclosure would actually
profit from the fraud.
further requirement in respect to the pleading
of proximate causation or economic loss.”
Id. at 346. Therefore, the Court’s conclusion
that “inflated purchase price” allegations
were insufficient to plead loss causation
applied the then-operative “no set of facts”
articulation of Rule 8’s notice pleading
standards. Id. (citing Conley v. Gibson, 355
U.S. 41 (1957)); see Conley, 355 U.S. at 4546 (“[A] complaint should not be dismissed
for failure to state a claim unless it appears
beyond doubt that the plaintiff can prove no
set of facts in support of his claim which
would entitle him to relief.”). Of course,
subsequent to Dura, the Supreme Court has
clarified that even Rule 8 pleadings must
meet a “facial plausibility” standard, which
applies to the loss causation allegations
here.7 Iqbal, 129 S. Ct. at 1949. Thus,
Plaintiff must plead sufficient factual content
to allow a reasonable inference to be drawn
connecting Take-Two’s misconduct to his
loss.
2.
Application to Plaintiff’s Claims
Consistent with Dura, there is no
question that a short seller can allege an
actionable economic loss by making
7
The question of whether Rule 9(b) applies to loss
causation has not yet been definitively addressed by
the Second Circuit, but the vast majority of courts in
this district have required that loss causation only
meet the notice requirements of Rule 8. See King
Cnty., Wash. v. IKB Deutsche Industriebank AG, 708
F. Supp. 2d 334, 339 (S.D.N.Y. 2010) (“[P]laintiffs
need only meet the lesser Rule 8(a) standard when
pleading loss causation.”), In re Tower Auto. Sec.
Litig., 483 F. Supp. 2d 327, 348 (S.D.N.Y. 2007)
(“[N]early all courts addressing the [loss causation]
issue since [Dura] have also applied Rule 8, rather
than the heightened pleading standard of Rule 9.”);
but see Cohen v. Stevanovich, 722 F. Supp. 2d 416,
432 n.9 (S.D.N.Y. 2010) (“Requiring that loss
causation be pled under Rule 9(b) is consistent with
the language of the rule itself, which requires that all
circumstances of fraud, except for intent, be pled with
particularity.”).
Of the few securities fraud cases directly
addressing loss causation in the context of
short selling, Collier v. Aksys is instructive.
In Collier, Judge Kravitz dismissed claims
made on behalf of a class of short sellers for
failing to sufficiently plead loss causation.
2005 WL 1949868, at *16. The complaint
8
revealed to the market. See Lentell,
396 F.3d at 175 n. 4 (“[Defendant’s]
concealed opinions regarding 24/7
Media and Interliant stock could not
have caused a decrease in the value
of those companies before the
concealment was made public.”). . . .
In essence, any losses associated
with these pre-disclosure cover
purchases are the equivalent to a bare
allegation of purchase-time value
disparity, which cannot by itself
demonstrate loss causation.
alleged that several hedge fund defendants
deliberately concealed their dramatically
rising ownership of Aksys in order to
artificially deflate the stock price. Id. at *34. As defendants increased their ownership
interest from 8% to 77% over the course of
nearly 18 months, they failed to file the
requisite disclosure forms under Section 13
of the Securities Exchange Act, and – in the
forms they did file – allegedly
misrepresented
their
true
intentions
regarding control of Aksys. Id. at *6-7. The
representative plaintiff was allegedly harmed
by the scheme by paying higher purchase
prices than his sale prices when he covered
(1) before the curative revelation and (2)
seven months afterwards.
Id. at *13.
Scrutinizing the pleadings, Judge Kravitz
observed that the allegations of deliberate
artificial deflation were belied by the fact
that the price “rose dramatically throughout
most of the class period.” Id. at *11 (citation
omitted). “This dramatic rise in Aksys’
stock price,” the court stated, “can hardly be
considered a clear sign that the stock was
being kept artificially low.” Id. Indeed, the
actual stock movement in Collier resembled
that of a standard misrepresentation case:
the
stock
increased
during
the
misrepresentation period, and plummeted
50% after a corrective disclosure. See id. at
*12. Recognizing that “at least in theory,”
the short seller could have alleged that the
stock was rising less than it would have but
for the misstatements, Judge Kravitz
nevertheless concluded that the plaintiff’s
pre-revelation covering purchases failed to
establish loss causation as a matter of law:
Id. at *13 (internal citation omitted). The
court also found that losses from covering
purchases that occurred seven months after a
corrective disclosure, when the price
eventually rebounded, were “simply too
remote in time to be causally linked” to prior
misrepresentations. Id. at *13. Finding the
opinion “well-reasoned,” the Second Circuit
summarily affirmed it for the reasons stated
in the opinion. Collier, 179 F. App’x. at
771.
As
Plaintiff
acknowledges,
his
transactions in Take-Two stock ended
fourteen months prior to the relevant
curative disclosure, and thus do not implicate
the straightforward application of Dura’s
principles to an inverted corrective
disclosure model. As a result, Plaintiff
strains to distinguish his pre-disclosure
transactions from those found to be
insufficient in Collier, pointing out that the
investor in that case “sold short and covered,
back and forth, continually throughout the
class period, presumably receiving in sales
proceeds the same artificial inflation he
received when buying.” (Pl.’s Opp’n 11-12.)
Of course, Plaintiff himself actually engaged
in 12,000 shares’ worth of short sales in
March and April 2005 while he was covering
his larger previous sales, thus obscuring any
difference between Plaintiff and the Collier
According to Lentell, any losses
associated with those pre-revelation
cover purchases could not be
causally linked to the misstatements
and omissions, because the truth
relating to Defendants’ ownership of
Aksys stock had not yet been
9
plaintiff. But even leaving aside that fact,
Plaintiff fails to demonstrate why his more
distinct sequence of sales and purchases is
not likewise “equivalent to a bare allegation
of purchase-time value disparity,” Collier,
2005 WL 1949868, at *13, that typically
dooms claims by in-and-out purchasers. See
Flag Telecom Holdings, 574 F.3d at 40-41
(concluding that in-and-out traders who
transacted prior to a corrective disclosure
must be excluded from the certified class
because they could not even “conceivably”
allege loss causation as a matter of law and
should not have been included in the
certified class).
Rather, Plaintiff broadly asserts that
“plaintiffs can plead loss causation in a
variety of ways,” citing Operating Local 649
Annuity Trust Fund v. Smith Barney Fund
Management., LLC, 595 F.3d 86 (2d Cir.
2010).
(Pl.’s Opp’n 1-2.)
However,
Operating Local involved a materialization
of risk scenario dissimilar to this pure
misstatement action.
There, defendants
concealed that they were siphoning excessive
fees from certain funds, plausibly causing
plaintiffs to invest in the funds and suffer
directly ascertainable losses when the fees
were deducted.
595 F.3d at 96.
Accordingly, the “losses were real ones
because the deductions used to fund the
transfer agent ‘fees’ diminished for
[plaintiffs] . . . (and other shareholders)
money under management and, as a result,
negatively and predictably impacted
returns.” Id. As noted above, Plaintiff’s
allegations of economic loss here are
premised solely on the mere issuance of
material misstatements and omissions, and
not on the materialized impact of the actual
options backdating scheme on Take-Two
stock.
Nor has Plaintiff alleged that he was
harmed by the “materialization of the risk
concealed by the fraudulent statement.”
Omnicom Grp., 597 F.3d at 513. In this
case, the “risk concealed” is that Defendants
allegedly “backdat[ed] and re-pric[ed]
employee stock options to provide illegal,
windfall profits to senior executives and
members of Take-Two’s board of directors.”
(Compl. ¶ 13). Plaintiff has not attempted to
allege that the scheme itself – rather than any
attendant misstatements – caused his
economic loss. (Cf. Compl. ¶ 164 (“The
difference in price between Plaintiff’s sales
and purchases – Plaintiff’s purchases were
made at greater artificial inflation than
Plaintiff’s sales – was caused by Defendants’
misstatements.” (emphasis added)).) Nor
does Plaintiff argue that this fraud-on-themarket case is premised on market
manipulation.
See Collier, 2005 WL
1949868, at *12. (“Because this case is
founded on material misstatements or
omissions and not on manipulation . . . mere
allegations of purchase-time value disparity
between the price paid for a security and its
true investment quality are insufficient,
without more, to establish loss causation.”).
Plaintiff contends that this measure of
harm is enough, arguing that as a short seller,
he was damaged at the time of his covering
purchases rather than after the truth was
revealed to the market as in a “gardenvariety Section 10(b) situation.”
(Pl.’s
Opp’n 1, 13.) Although this is true as a
purely descriptive matter – Plaintiff
obviously experienced losses on the days he
covered his earlier short sales – he cannot
plausibly articulate why those losses are
attributable to Defendants’ misstatements
and omissions, which would not be revealed
to the market for more than a year. Put
another way, Plaintiff fails to plausibly
“disaggregate those losses caused by
‘changed economic circumstances, changed
investor expectations, new industry-specific
10
v. Deloitte & Touche LLP, 476 F.3d 147, 158
(2d Cir. 2007)). To begin, Plaintiff alleges
that the options backdating scheme began in
1997 (Compl. ¶ 157), causing a substantial
overstatement of Take-Two’s earnings in the
years prior to his transactions. (See id. ¶ 89
(alleging that Take-Two’s earnings were
overstated by 20% in fiscal year 2002, 11%
in fiscal year 2003, and 5-6% in fiscal years
2004 and 2005).) Indeed, Plaintiff alleges
that “Take-Two’s improper accounting for
options rendered the financial results set forth
in all SEC annual and quarterly reports, and
the press releases reporting such results,
materially false and misleading.” (Id. ¶ 102
(emphasis added).) Take-Two’s share prices
were thus already substantially inflated
before Plaintiff began to short sell in May
2004, and unbeknownst to him, vindicated
his view that the stock was overvalued. As a
matter of logic, Plaintiff cannot show harm
with respect to the two March 2004
misstatements that preceded his short selling.
By covering prior to a corrective disclosure,
Plaintiff at most paid back the same inflation
he received in his sale prices. If, on the other
hand, Plaintiff had covered after a corrective
disclosure, he would have profited from
Take-Two’s fraud and the post-disclosure
price drop.
or firm-specific facts, conditions, or other
events,’ from disclosures of the truth behind
the alleged misstatements.”
Telecom
Holdings, 574 F.3d at 36 (quoting Dura, 544
U.S. at 342-43). These legitimate market
circumstances and intervening events can
just as readily animate stock movements for
a short seller’s inverted sequence of sales
and purchases as they do for a traditional
purchaser. This is particularly so here,
where the in-and-out stock transactions
began after the stock price was already
inflated, spanned an extended time period
punctuated by constant legitimate market
stimuli and repeated misstatements, and
terminated more than a year prior to the
corrective disclosure. Cf. In re Sec. Capital
Assurance, Ltd. Sec. Litig., No. 07 Civ.
11086 (DAB), 2010 WL 1372688, at *30
(S.D.N.Y. Mar. 31, 2010) (loss causation
inadequately alleged where the allegations
“incorporate[d] intervening events and
actors, and at times present[ed] (rather
inexplicably) wide event windows that
welcome[d] into their narrative noise and
information from other events that ma[de] it
difficult to isolate the impact of Defendants
alleged misrepresentations, and their
revelation to the market.”). Because under
these circumstances, the “relationship
between the plaintiff’s investment loss and
the information misstated” is highly
“attenuated,” the fraud claim may not lie.
Lentell, 396 F.3d at 174 (internal citations
and quotations omitted).
Plaintiff implausibly presses a “continual
inflation” theory with respect to the
remaining misstatements, alleging that each
statement further inflated Take-Two stock
prices and caused his loss. Plaintiff’s theory
suffers from several flaws. First, every SEC
filing cited in the Complaint contained the
same language about Take-Two’s accounting
for executive compensation, making it highly
unlikely that the attendant price increases
were caused by the repetition of that
information. As for the misrepresentations
that did vary – namely Take-Two’s reported
net income and compensation costs –
Plaintiff fails to disaggregate their impact on
A closer inspection of Plaintiff’s
“Individual Action Period” illustrates his
failure to link his losses to Take-Two’s
material misrepresentations and omissions.
See In re Omnicom Grp., Inc. Sec. Litig., 541
F. Supp. 2d 546, 553 (S.D.N.Y. 2008)
(“While plaintiffs need not quantify the
fraud-related loss, they must ‘ascribe some
rough proportion of the whole loss to [the
alleged] misstatements.’” (quoting Lattanzio
11
court need not feel constrained to accept as
truth conflicting pleadings that make no
sense, or that would render a claim
incoherent . . . .”).
his loss from prior misstatements and
legitimate news affecting Take-Two stock
prices. Significantly, Plaintiff’s continual
inflation theory is contradicted by the fact
that Take-Two’s share price actually
declined, rather than increased, following
other Take-Two statements containing
similar misrepresentations. See First Decl.
of John V. Ponyicsanyi, dated January 14,
2011, Doc. No. 28 (“Ponyicsanyi Decl.”),
Ex. 14 (collecting statements); Ex. 3
(reporting stock price movements). For
instance, as Plaintiff acknowledges, the stock
fell after a December 16, 2004 press release
(omitted from the Complaint) that
announced the same financial results as the
December 22, 2004 10-K (included in the
Complaint). (Pl.’s Opp’n 15.)8 The obvious
inference derived from these varied stock
reactions is that the upward price movement
following Plaintiff’s nine cherry-picked
statements was caused by the broad “tangle”
of non-culpable positive information rather
than Take-Two’s false affirmations relating
to its executive compensation. Cf. In re
Livent, Inc. Noteholders Sec. Litig., 151 F.
Supp. 2d 371, 405 (S.D.N.Y. 2001) (“[A]
Moreover, Take-Two did not issue any
inflationary misstatements between the last
day of Plaintiff’s primary selling period,
January 24, 2005, and the beginning of his
covering purchases on March 3, 2005. Yet
between those dates, the stock price rose
13.23% from $22.30 to $25.25.9 Plaintiff
entirely fails to acknowledge the effect of
this legitimate price increase on his losses.
See Erica P. John Fund, Inc. v. Halliburton
Co., 131 S. Ct. 2179, 2186 (2011) (“If one of
[the legitimate intervening] . . . factors were
responsible for the loss or part of it, a
plaintiff would not be able to prove loss
causation to that extent.”). Finally, even if
the misstatements themselves were construed
as the “materialization of the concealed risk”
for a short seller, the overwhelming majority
of Plaintiff’s purchases took place more than
a month after the issuance of the last
misstatement, a near eternity in the market
that makes his loss particularly attenuated.
Cf. Dura, 544 U.S. at 342-43 (“If the
purchaser sells later after the truth makes its
way into the marketplace, an initially
inflated purchase price might mean a later
loss. But that is far from inevitably so. . . .
Other things being equal, the longer the time
between purchase and sale, the more likely
that . . . other factors caused the loss.”).
8
Plaintiff discounts this and other statements
identified by Defendants as “simply irrelevant,”
stating that the “Court has to weigh the Complaint –
not what Take-Two believes Plaintiff could have
alleged.” (Pl.’s Opp’n 16.) But “although these
documents are not mentioned on the face of the
complaint,” it is well established that “on a Rule
12(b)(6) motion to dismiss a court may consider
matters of which judicial notice may be taken,
including ‘the fact that press coverage . . . or
regulatory filings contained certain information,
without regard to the truth of their contents.’” Garber
v. Legg Mason, Inc., 347 F. App’x 665, 669 (2d Cir.
2009) (quoting Staehr v. Hartford Fin. Servs. Grp.,
Inc., 547 F.3d 406, 425 (2d Cir. 2008) (emphasis in
original)). The Court may also take judicial notice of
publicized stock prices. See Ganino v. Citizens Utils.
Co., 228 F.3d 154, 166 n.8 (2d Cir. 2000). In any
event, while these statements illustrate the
implausibility of Plaintiff’s loss causation theory, the
Court’s conclusion does not depend on them.
Plaintiff contends that any effort to
disaggregate his losses from the tangle of
9
Having sold Take-Two at an average price of $23.38
(Compl. ¶ 160), Plaintiff thus could have earned an
immediate profit by covering at $22.30 at the
beginning of the holding period. That Plaintiff chose
to wait as the price spiked due to indisputably
legitimate market forces during the holding period
undermines any plausible causal link between the
alleged misconduct and his harm.
12
artificially inflated stock prices are incurred
at the time of cover. (This differs from the
typical fraud-on-the-market scenario where
purchasers buy at a fraudulently inflated
price and then the stock subsequently drops
once the truth is revealed to the market.)”
2005 WL 1366025, at *7.
The court
accepted the inference drawn from the
complaint that “the false financial statements
artificially inflated L & H stock, which, in
turn, forced Plaintiffs to make cover
transactions and incur significant losses.” Id.
(emphasis added). The court then concluded
that “[f]act-intensive issues related to
causation and whether a given misstatement
‘substantially contributed’ to Plaintiffs’
losses, are not properly resolved at this
juncture.” Id. (quoting Newton v. Merrill
Lynch, Pierce, Fenner & Smith, Inc., 259
F.3d 154, 177, 181 n.24 (3d Cir. 2001)). Of
course, unlike the short sellers in Rocker,
Plaintiff began his short sales well after the
prices were already inflated, and makes no
allegations of a subsequent scheme by TakeTwo to manipulate prices in order to force
short sellers like him to prematurely cover.
Nor is it clear whether Rocker’s hesitation to
analyze loss causation pleadings was
informed by more liberal pre-Twombly
pleading standards or its application of the
Third Circuit’s pre-Dura “substantial
contribution” test, which has not been
adopted in this Circuit. In any event, Rocker
is not binding on the Court, and the Court
finds it inapplicable here in the postTwombly world of the Second Circuit.
factors influencing price is “premature” on a
motion to dismiss because it involves an
“inherently factual” inquiry. (Pl.’s Opp’n
13-14.) Such a rationale, however, would
call for courts to sidestep analysis of
essentially any loss causation pleadings until
summary judgment – a result at odds with
Dura and the Court’s obligation to analyze
whether a pleading contains sufficient
“factual content . . . to draw the reasonable
inference that the defendant is liable for the
misconduct alleged.” Iqbal, 129 S. Ct. at
1937 (emphasis added).
Finally, Plaintiff points to out-of-circuit
case authorities that do not warrant a
different conclusion in this matter. (See Pl.’s
Opp’n 8-10 (citing Rocker Mgmt. L.L.C. v.
Lernout & Hauspie Speech Prods. N.V., No.
Civ. A. 00-5965 (JCL), 2005 WL 1366025,
at *1 (D.N.J. June 8, 2005) and Levie v.
Sears Roebuck & Co., 496 F. Supp. 2d 944,
948 (N.D. Ill. 2007).) The plaintiffs in
Rocker were hedge funds who shorted the
defendant company’s stock and publicly
voiced their opinion that it was overvalued.
Rocker Mgmt. L.L.C., No. Civ. A. 00-5965,
Am. Compl. ¶ 6, Doc. No. 101 (D.N.J. Apr.
8,
2002).
Subsequently,
company
management allegedly engaged in a
fraudulent conspiracy to “squeeze the shorts”
out of the market by raising the price of the
stock well beyond the acceptable level of
risk for short sellers. Id. In that vein, the
defendants allegedly issued false financial
statements that caused the stock price to
double or triple from the prices at which
plaintiffs sold short, forcing them to cover
prior to a corrective disclosure. Id. In a
brief discussion issued approximately six
weeks after Dura, the court stated that it was
“satisfied that the allegations relating to
transaction causation in this short-selling
context are sufficient to withstand a motion
to dismiss based on loss causation. In the
short-selling context, losses caused by
Plaintiff’s other authority, Levie v. Sears,
involved allegations that Sears and Kmart
fraudulently concealed their pending merger,
artificially deflating Sears’ stock price. 496
F. Supp. 2d at 948-49. In determining the
scope of a class to be certified, the court
included pre-disclosure regular sellers, but
excluded short sellers who covered prior to a
disclosure and thus “benefitted from the
13
that under Rule 23, “a certified class can go
down in flames on the merits”).
artificially low price at the time of the
covering purchase.” Id. at 949. In including
regular in-and-out investors in the certified
class, the court reasoned that:
Ultimately, as in Collier, Plaintiff
appears to have voluntarily chosen to cover
his previous short sales near the peak of
Take-Two stock prices “based on his own
guess that the stock would continue to
precipitously rise.”
Collier, 2005 WL
1949868, at *12 n.8. As it turned out,
Plaintiff’s bet on the direction of Take-Two
stock did not pay off. With hindsight,
Plaintiff may wish that he either covered
immediately at the end of his short-selling
period in January 2005, when the stock fell
below his average sale price, or waited until
after the corrective disclosure, by which
point the price declined enough to put him in
a position to earn millions of dollars.10 But
allowing him to state a claim under these
circumstances would permit a short seller in
any standard misrepresentation case to either
win big in the marketplace by covering after
a corrective disclosure, or win in court by
“transform[ing] a private securities action
into a partial downside insurance policy.”
Dura, 544 U.S. at 347-48. Because the
securities laws do not stand for such a result,
the Court concludes that Plaintiff’s Section
10(b) claim fails to plausibly allege loss
causation.
[A]ny investor who sold (during the
class period) before the fraud was
revealed incurred injuries because
that investor sold at a price that was
artificially lower than the investor
should have received. Regardless of
the price such an investor paid for
the stock, the price would have been
higher at any point after the (secret)
merger negotiations became material
and before the merger plans were
disclosed.
Id. at 948.
Although Plaintiff seeks to analogize his
situation to that of the in-and-out seller class,
the court did not distinguish between (1)
persons who purchased stock at a legitimate
price before a misstatement, and (2) those
who bought stock after a misstatement, and
so benefitted on the front end from an
artificially low price. As such, the Court
finds Levie inapposite with respect to the
circumstances of this case, which includes
no less than seven of nine misstatements
allegedly inflating the prices before and
during Plaintiff’s short selling period.
Moreover, Levie was decided in the context
of class certification, where, as was recently
reaffirmed by the Supreme Court, a plaintiff
need not establish loss causation. See Erica
P. John Fund, Inc., 131 S. Ct. at 2183; cf.
Schleicher v. Wendt, 618 F.3d 679, 684 (7th
Cir. 2010) (noting that short sellers can be
included in a certified class even if “[i]t may
turn out that the shorts do not suffer
compensable losses,” disagreeing with the
Fifth Circuit that proof of loss causation was
essential to class certification, and stating
B.
Section 20(a) Claim
The Complaint also asserts a claim
against Brant pursuant to Section 20(a) of
the Exchange Act. Section 20(a) imposes
liability on individuals who control Section
10 violators. See 15 U.S.C. § 78t(a). To
assert a prima facie case under Section 20(a),
a plaintiff “must show a primary violation by
10
Indeed, had Plaintiff waited to cover until July 10,
2006, when (following a period of substantial decline
in 2005 and 2006) Take-Two’s stock fell to $9.34 per
share, he would have stood to gain a total profit of
approximately $13 million.
14
addressed the preemption of non-fraud
common law claims that fall within the
scope of the Martin Act, . . . the
overwhelming majority of courts to consider
the issue,” including this Court, “have found
that such claims are preempted.” Beacon
Assocs. Litig., 745 F. Supp. 2d 386, 431
(S.D.N.Y. 2010) (dismissing claims for
breach of fiduciary duty, aiding and abetting
breach of fiduciary duty, negligent
misrepresentation, gross negligence, unjust
enrichment, and breach of contract); see also
Wachovia Equity Sec. Litig., 753 F. Supp. 2d
326, 380-81 (S.D.N.Y. 2011) (dismissing
negligent misrepresentation claims as
preempted by the Martin Act); Owens v.
Gaffken & Barriger Fund, LLC, No. 08 Civ.
8414 (PKC), 2009 WL 3073338, at *14
(S.D.N.Y. Sept. 21, 2009) (finding an unjust
enrichment claim to be “merely a recast
securities fraud claim” and therefore
precluded by the Martin Act); Heller, 590 F.
Supp. 2d at 610-12 (holding that common
law breach of fiduciary duty claims were
preempted by the Martin Act when the
claims arose from the securities fraud
violations).
the controlled person and control of the
primary violator by the targeted defendant,
and show that the controlling person was in
some meaningful sense a culpable
participant in the fraud perpetrated by the
controlled person.” SEC v. First Jersey Sec.,
Inc., 101 F.3d 1450, 1472 (2d Cir. 1996)
(internal citations and quotation marks
omitted). Because the Complaint has not
stated a primary violation under Section
10(b) and Rule 10b-5, the Section 20(a)
claim must likewise be dismissed. Rombach
v. Chang, 355 F.3d 164, 177-78 (2d Cir.
2004).
C.
State Law Claims
Counts Three and Four of the Complaint
assert state law claims against all Defendants
for breaches of fiduciary duties and unjust
enrichment. Defendants argue that these
claims (1) are preempted by New York’s
Martin Act, and can only be brought by the
New York Attorney General, and (2)
constitute derivative claims, which Plaintiff
lacks standing to bring. The Court agrees on
both points.
1.
Significantly, the only Second Circuit
case to address the subject similarly
recognized that common law claims
involving securities are preempted by the
Martin Act:
Martin Act Preemption
The Martin Act, N.Y. Gen. Bus. Law
§ 352 et seq, “prohibits various fraudulent
and deceitful practices in the distribution,
exchange, sale, and purchase of securities
but does not require proof of intent to
defraud or scienter.” Kassover v. UBS AG,
619 F. Supp. 2d 28, 36 (S.D.N.Y. 2008).
New York courts have held that the Martin
Act vests in the New York Attorney General
the sole authority for prosecuting state law
securities violations sounding in fraud, and
contains no implied right of action. See
Barron v. Igolnikov, No. 09 Civ. 4471
(TPG), 2010 WL 882890, at *5 (S.D.N.Y.
Mar. 10, 2010). Although “the New York
Court of Appeals has not explicitly
Castellano appeals the district court’s
dismissal of his claim under New
York state law for breach of
fiduciary duty. This claim is barred
by the Martin Act, New York’s blue
sky law, which prohibits various
fraudulent and deceitful practices in
the distribution, exchange, sale and
purchase of securities. The New
York Court of Appeals has held that
there is no implied private right of
action under the Martin Act, and
15
fraud or deception, but do not require
pleading or proof of intent. Barron, 2010
WL 882890, at *5. Indeed, these claims
simply reincorporate the securities fraud
allegations premised on Defendants’ options
backdating scheme. Accordingly, Plaintiff’s
claims are “exactly of the kind routinely
dismissed as preempted” by the Martin Act.
Beacon Assocs. Litig., 745 F. Supp. 2d at
434.
other New York courts have
determined that sustaining a cause of
action for breach of fiduciary duty in
the context of securities fraud would
effectively permit a private action
under the Martin Act, which would
be inconsistent with the AttorneyGeneral’s exclusive enforcement
powers thereunder.
Castellano v. Young & Rubicam, 257 F.3d
171, 190 (2d Cir. 2001) (internal citations
and quotation marks omitted).
2.
Standing
Even if Martin Act preemption did not
apply, because the state law claims are
essentially derivative, Plaintiff lacks
standing to bring them. As Take-Two is a
Delaware corporation, the question of
whether these claims are direct or derivative
is governed by Delaware law. See Halebian
v. Berv, 590 F.3d 195, 204 (2d Cir. 2009)
(“[W]hether the action is properly classified
as derivative or direct is ordinarily
determined by state law.”). Under Delaware
law, whether a claim is direct or derivative
“turn[s] solely on the following questions:
‘(1) who suffered the alleged harm (the
corporation or the suing stockholders,
individually); and (2) who would receive the
benefit of any recovery or other remedy (the
corporation
or
the
stockholders,
individually).’” Newman v. Family Mgmt.
Corp., 748 F. Supp. 2d 299, 314-315
(S.D.N.Y. 2010) (quoting Tooley v.
Donaldson, Lufkin & Jenrette, Inc., 845
A.2d 1031, 1033 (Del. 2004). “In order for a
claim to be direct, plaintiff must allege that
‘the duty breached was owed to the
stockholder and that he or she can prevail
without showing an injury to the
corporation.’” Diana Allen Life Ins. Trust v.
BP P.L.C., 333 F. App’x 636, 638, 2d Cir.
2009) (quoting Tooley, 845 A.2d at 1033
(emphasis in original)).
Plaintiff’s only response to this line of
authority arises in a footnote, which observes
that a recent decision in Anwar v. Fairfield
Greenwich Ltd., 728 F. Supp. 2d 354
(S.D.N.Y. 2010), questioned Martin Act
preemption on the basis of statutory
interpretation and legislative history. (See
Pls.’ Opp’n 24-25 n.12.) However, as this
and other courts, have noted in declining to
follow Anwar, “unless and until the New
York Court of Appeals adopts such a rule,
this Court is bound to apply the result in the
only Second Circuit case to address the
subject of Martin Act preemption,
Castellano v. Young & Rubicam.”
Wachovia, 753 F. Supp. 2d at 380-81;
accord In re Kingate Mgmt. Ltd. Litig., No.
09 Civ. 5386 (DAB), 2011 WL 1362106, at
*11 (S.D.N.Y. Mar. 30, 2011).
Plaintiff’s New York residence and his
New York venue allegations, (Compl. ¶ 27;
id. Ex. A), make the Martin Act applicable
here. See Heller v. Goldin Restructuring
Fund, L.P., 590 F. Supp. 2d 603, 610 n.9
(S.D.N.Y.
2008)
(finding
Plaintiff’s
residency in New York and New York venue
allegations “sufficient for the Martin Act to
apply”). Consistent with claims “routinely
dismiss[ed]” as preempted by the Martin
Act, Plaintiff’s breach of fiduciary duty and
unjust enrichment claims plainly sound in
16
to amend."). Accordingly, the Complaint is
dismissed with prejudice.
The alleged hann here concerned the
diversion of Take-Two funds towards the
payment of illicit stock options to Company
insiders, an action for which the Company
suffered harm and would receive the benefit
of any recovery. Indeed, two derivative
actions premised on these claims have
already been brought and resolved in this
District. See In Re Take-Two Interactive
Software, Inc. Derivative Litig., No. 06 Civ.
05279 (LTS),
Doc. Nos.
182-186
(voluntarily dismissing the action with
prejudice); St. Clair Shores Gen. Emps. Ret.
Sys. v. Eibeler, No. 06 Civ. 688 (RJS), 2010
WL 3958803 (S.D.N.Y. Sept. 8, 2010)
(granting motion to dismiss with prejudice).
Plaintiff has not attempted to file his claim
derivatively and has not complied with the
relevant requirements of such an action; nor
does he have standing to do so as a nonshareholder. See Lewis v. Anderson, 477
A.2d 1040, 1049 (DeL 1984) ("A plaintiff
who ceases to be a shareholder, whether by
reason of a merger or for any other reason,
loses standing to continue a derivative
suit."). For this additional reason, Plaintiffs
state law claims are dismissed.
D.
III.
CONCLUSION
For the foregoing reasons, Defendants'
motions to dismiss are GRANTED and the
Complaint is dismissed with prejudice. The
Clerk of the Court is respectfully directed to
tenninate the motions located at document
numbers 24, 26, and 29 and close this case. 11
United States District Judge
Dated: September 30,2011
New York, New York
***
Plaintiff is represented by Sandy A.
Liebhard, Uri S. Ottensoser, and Joseph R.
Seidman of Bernstein Liebhard, LLP, 10
East 40th Street, 22nd Floor, New York, NY
10016.
Dismissal with Prejudice
Defendant Take-Two is represented by
Ada F. Johnson, John B. Missing, and John
V. Ponyicsanyi of Debevoise & Plimpton
LLP (DC), 555 13th Street, N.W.,
Washington, DC 20004, and Colby A. Smith
of Debevoise & Plimpton, LLP (NYC) 919
Third Avenue, 31 st Floor, New York, NY
10022. Defendant Ryan Brant is represented
Perhaps conscious of the fact that the
sufficiency of this Complaint rises and falls
on its ability to plead loss causation through
largely undisputed facts, Plaintiff does not
seek leave to replead in the event this motion
is granted. Even had Plaintiff made such a
request, in light of the fundamental
deficiencies in Plaintiff s loss causation
theory, the Court would deny it as futile. See
Lucente v. Int'l Bus. Machs. Corp., 310 F.3d
243, 258 (2d Cir. 2002) ("An amendment to
a pleading is futile if the proposed claim
could not withstand a motion to dismiss
pursuant to [Rule] 12(b)(6)."); Chill v. Gen.
Elec. Co., 101 F.3d 263, 272 (2d Cir. 1996)
("[F]utility is a 'good reason' to deny leave
11 As required by the PSLRA, the Court also finds that
the parties and counsel in this matter have complied
with Rule 11(b). See 15 U.S.C. § 78u-4(c)(1);
Rombach, 355 F.3d at 178 ("The PSLRA mandates
that, at the end of any private securities action, the
district court must 'include in the record specific
findings regarding compliance by each party and each
attorney representing any party with each requirement
of Rule II(b).'" (citation omitted».
17
by Gary S. Klein and Brian A. Daley of
Sandak Hennessey & Greco, LLP
707 Summer Street, Stamford, CT 06901.
Defendant Todd Emmel is represented by
Andrew C. Hruska and Louisa B. Childs of
King & Spalding LLP, 1185 Avenue of the
Americas New York, NY 10036. Defendant
Robert Flug is represented by Stephen
Ehrenberg of Sullivan and Cromwell, LLP,
125 Broad Street, New York, NY 10004.
Defendant Oliver Grace is represented by
Charles A. Stillman, Michael J. Grudberg,
and Nathaniel I. Kolodny of Stillman,
Friedman & Shechtman, P.C. 425 Park
Avenue New York, NY 10022.
18
1
19
-
V
'I
Sales Period
(5/25/04-1124105)
~~
Period #5
No Plaintiff Activity
(4/22/05-7116/06)
U I
1\1'\".
.
Ii
~----~I~----------------------------------------~
No
Plaintiff
Activity
(3/4/045124/04)
Period #2
Period #4
Purchases
Period
(3/31054/21/05)
Period #3
Holding Period
(no alleged
inflationary
statements)
(1125/05-3/2/05)
Period #1
'"
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3Q 2004 lO-Q Filed With The SEC (911 4/2004)
Press Release Announcing 3Q 2004 Financial Results
(919/2004)
2Q 2004 10-Q Filed With The SEC (611 412004)
~
a
'" '"
~ ~
* Stock price is based on Take-Twa' s daily close price, adj usted for the 3:2 split that occurred on April IS, 200S.
** Individual Action Period was defined by the Plaintiff in his Complaint at 1]3.
Press Release Announcing 2Q 2004 Financial Results
(6/8/2004)
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I Q 2004 10-Q Filed With The SEC (3116/2004)
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Press Release Announcing I Q 2004 Financial Results
(3 /412004)
~
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.... 1
Alleged
Corrective
Disclosure
(7/10/06)
I Q 200S lO-Q Filed With The SEC (311 012005)
Press Release Announcing I Q 200S Financial Results
(3 /3/2005)
2004 Form 10-K F iled With The SEC (12 /22/2004)
a
<0
14+1--------1--------------------------+---4-----~--------------------------------------------~--~
1
29
Filed 01/14/11 Page 2 of 2
Take-Two's Daily Stock Price* And Alleged
Misstatements During Plaintiff's "Individual Action Period**" (3/4/2004 - 7116/2006)
Case 1:10-cv-07471-RJS Document 28-2
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