KASTEL et al v. NUVEEN INVESTMENTS INC. et al
Filing
119
MEMORANDUM OPINION AND RECOMMENDATION OF UNITED STATES MAGISTRATE JUDGE signed by MAG/JUDGE JOI ELIZABETH PEAKE on 08/25/2015; that Defendants' Motions to Dismiss [Doc. # 78 , # 80 ] be granted. (Garland, Leah)
IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF NORTH CAROLINA
HOWARD L. KASTEL, JOAN H. KASTEL,
Plaintiffs,
v.
NUVEEN INVESTMENTS INC., et al.,
Defendants.
)
)
)
)
)
)
)
)
)
1:09CV646
MEMORANDUM OPINION AND RECOMMENDATION OF
UNITED STATES MAGISTRATE JUDGE
This securities fraud action comes before the Court on the Motion to Dismiss of
Defendants Nuveen Investments Inc. (“Nuveen”) and Robert P. Bremner (“Bremner”) [Doc.
#80], as well as the Motion to Dismiss of Defendant Mesirow Financial Inc. (“Mesirow”) and
Lawrence M. Cohen (“Cohen”) [Doc. #78]. All of Plaintiffs’ claims in this case arise out of
Plaintiffs’ purchase of 88 shares of Nuveen North Carolina Auction Preferred Securities
between August 23, 2007 and February 15, 2008, through Plaintiffs’ investment adviser,
Defendant Cohen, and his employer, Defendant Mesirow Financial. (Sec. Am. Compl. [Doc.
#74] at 5.) Plaintiffs bring both state law claims and claims alleging violation of the federal
Securities Exchange Act. After the filing of the action, as reflected in supplemental briefing
ordered by the Court, all of Plaintiffs’ shares were redeemed, rendering many of Plaintiffs’ claims
and much of the relief sought moot. To the extent any claims remain, for the reasons set out
below, the Court recommends that Defendants’ motions to dismiss be granted.
I.
FACTS, CLAIMS, AND PROCEDURAL HISTORY
A.
Facts Alleged in Plaintiffs’ Second Amended Complaint
Plaintiffs in this action are Howard L. Kastel, Trustee of the Howard L. Kastel Trust
Dated November 13, 1985, and his wife, Joan H. Kastel. They filed a Complaint and Amended
Complaint in this action, and subsequently filed a Second Amended Complaint (hereafter
referred to as the “Complaint”) [Doc. #74], which is now the operative pleading in this case.
Defendants Deutsche Bank AG, Merrill Lynch & Co., and CitiGroup Global Markets are not
named in Plaintiffs’ Second Amended Complaint and are therefore no longer defendants in this
action.
With respect to the remaining Defendants, Defendant Nuveen is described in Plaintiffs’
Complaint as a Delaware corporation with its principal place of business in Chicago, Illinois.
Nuveen is the “Sponsor and Investment Adviser” to all of the Nuveen Auction Rate Preferred
Shares (“ARPS”) Funds in which the Plaintiffs invested, including those known as the Nuveen
North Carolina Funds. (Compl. ¶ 7.) Defendant Bremner is described as the Chairman of the
Board of the Nuveen North Carolina Funds. (Id. ¶ 8.) He is alleged to have oversight
responsibility of the Funds’ investment adviser. Defendant Mesirow is a Delaware corporation
with its principal offices in Chicago, Illinois, and conducts business as an investment adviser,
broker dealer, and consultant in North Carolina. (Id. ¶ 9.) Defendant Cohen is a Senior
Managing Director at Mesirow and was the Plaintiffs’ investment adviser. (Id. ¶ 10.) Plaintiffs
allege that Cohen was their investment adviser for more than 20 years.
2
Plaintiffs allege that the Nuveen North Carolina Auction Preferred Securities at issue in
this case were marketed by Nuveen through Mesirow. These ARPS were “perpetual preferred
stock with no maturity date and no right of redemption that paid interest at rates purportedly
set at periodic auctions.” (Id. ¶ 13.) These auctions, sometimes called “Dutch auctions,” were
held every 7 days. The ARPS were not publicly traded, and the only method of tendering the
shares was at these auctions. (Id. ¶ 14.) Under this auction system, broker dealers submitted
customer bids and if the bids were insufficient the auction would fail.
Plaintiffs allege that in June 2004, the United States Securities and Exchange Commission
(“SEC”) announced that it was investigating whether ARS auctions were improperly handled.
In 2006, the SEC announced that it had fined 15 large broker dealers and stated that investors
might not have been aware of the liquidity risks of these types of shares. (Id. ¶ 15.) These
announcements were published in the Wall Street Journal. Plaintiffs state that large broker
dealers such as Merrill Lynch regularly submitted support bids in Nuveen’s ARPS auctions so
that the auctions would not fail. (Id.) In response to the SEC actions, some broker dealers such
as Citigroup disclosed in September 2006 the risks of the auction market and its role in the
process. Merrill Lynch disclosed its role and procedures to investors in October 2006. These
announcements and disclosures addressed auction rate securities and the risks of the auction
market generally, but the Nuveen ARPS “were not specifically referenced in the [SEC] Order
or the [broker dealer] disclosure statements.” (Id.) Plaintiffs allege that the Nuveen North
Carolina prospectuses and promotional materials were misleading and that both Nuveen and
Mesirow should have known this by the end of 2006. (Id.) Plaintiffs state that Nuveen acted
3
as co-broker with Mesirow on transactions made by Mesirow and shared the fees with Mesirow
for those transactions. (Id. ¶ 20.)
Plaintiffs allege they first purchased Nuveen ARPS in January 1998. Defendant Cohen
allegedly described the shares as “7 day munies” or “weeklies” and stated that the shares were
“safe short term preferred,” with the rate of interest determined at weekly auctions, without
disclosing that the auctions were orchestrated by Nuveen and “were not a real public auction . . .
but a managed process.” (Compl. ¶ 23.) Plaintiffs sold these shares in January 2001.
On January 9, 2002, Mesirow purchased Nuveen ARPS for the Howard L. Kastel Trust.
These shares were sold on July 31, 2002. (Id. ¶ 24.) In June and August 2003, additional shares
were purchased for the Trust, after conversations between Kastel and Cohen in which Cohen
described the shares as “short term munis.” In March 2004, Mesirow purchased more Nuveen
shares for the Trust, and shares were sold on June 4, 2004 and November 19, 2004. As of
December 31, 2004, the Trust account had a total of 58 shares of Nuveen ARPS for a total of
$1,450,000.00. (Id.)
On March 15, 2005, August 3, 2006, and later in 2006, Mesirow purchased more Nuveen
shares for the Trust account and for an account of Joan Kastel. As of December 31, 2006, the
Trust account had shares of Nuveen ARPS totaling $1,850,000.00. (Id.) Plaintiffs allege that
they did not maintain a diary of these transactions and that Cohen “did not always tell Kastel
about these transactions and Kastel would learn of them after he received a confirmation from
Mesirow.” (Id.) According to Plaintiffs, Cohen did not disclose any risks.
4
With respect to the shares at issue in this action, Plaintiffs allege that on August 17, 2007,
Cohen contacted Howard Kastel by telephone at his residence in Chapel Hill, North Carolina,
and suggested that Plaintiffs invest in Nuveen’s North Carolina funds since Plaintiffs were now
residents of North Carolina and could take advantage of a double tax exemption. (Compl. ¶ 25.)
Following this conversation, many sales of the Trust’s non-North Carolina Nuveen shares
occurred and many Nuveen North Carolina ARPS shares were purchased. (Id.) The same types
of transactions occurred for the account of Joan H. Kastel. (Id.) Plaintiffs claim that during the
August 17, 2007 phone call, Defendant Cohen did not describe the auction procedures for the
ARPS and failed to disclose auction information that, if disclosed, Plaintiffs contend would have
caused them to refuse to allow the Nuveen North Carolina funds to be purchased for their
accounts. (Id. ¶ 26.)
Plaintiffs allege that Mesirow and Nuveen “had knowledge and information that certain
ARS auctions had failed prior to August 23, 2007 and that the risk of auction failure had
increased and continued to increase in late 2007 and January 2008.” (Compl. ¶ 28.) They
further allege that “[b]y January 2008, Nuveen had specific knowledge of auction failures
involving the Nuveen Funds and the pending failure of more Nuveen Fund auctions that would
result from Lehman Brothers’ decision to discontinue propping up the Nuveen ARPS auctions
as of, on or about, February 13, 2008.” (Id.) Plaintiffs allege that Lehman Brothers withdrew
their support of the auction process along with other broker dealers causing the ARPS market
to collapse on or about February 11, 2008. (Id.) This effectively froze the ARPS held by
5
Plaintiffs.1 They could not liquidate their investment and were “locked into the phony
‘maximum interest rates’ that were a fraction of what long-term preferred shares of equal quality
paid as interest.” (Id. ¶ 32.)
Plaintiffs allege that they remained unaware of the risks in the auction process until after
February 15, 2008. (Compl. ¶ 30.) They further allege that they gave notice of their election to
rescind the sales of their Nuveen North Carolina ARPS on February 22, 2008. (Id. ¶ 22.)
Plaintiffs allege that Cohen knew that Plaintiffs were risk averse and that the Nuveen
North Carolina Funds were not a suitable investment for them. (Id. ¶ 34.) Plaintiffs further
contend that “[o]n at least four dates in December [2007] and January [2008], Howard Kastel
talked to Cohen and received repeated reassurance as to the safety of the ARPS because of their
so-called 300% preference on liquidation.” (Compl. ¶ 35.) Plaintiffs say that it was not until
February 15, 2008 that they received a Nuveen prospectus (for a fund in which they were not
invested) from Cohen. (Id. ¶ 37.) Plaintiffs also contend that the auctions did not fail because
of the credit crisis of 2008, and that the crisis was “coincidental” because the broker dealers were
no longer willing to risk their capital to prop up the ARPS auctions. (Id. ¶ 48.)
Plaintiffs state that in July 2008 the Kastel Trust began receiving confirmations that its
ARPS were being redeemed. These redemptions initially amounted to only 3% of their
investments. (Compl. ¶ 50.) According to Plaintiffs, a Nuveen letter dated July 17, 2009, stated
1
Plaintiffs state in their Complaint that on February 15, 2008, Cohen sent an email to Nuveen stating that Cohen
was shocked, further stating that Nuveen had not uttered a word about the crisis, noting that he (Cohen) was
both an adviser and shareholder in the ARPS, and accusing Nuveen of a conflict of interest. (Comp. ¶ 54.)
Plaintiffs set out the e-mail in the Complaint, but contend that to the extent this implies that Cohen owned
ARPS, it is hearsay.
6
that Nuveen could not give a timetable as to when and if Plaintiffs’ remaining ARPS would be
redeemed. (Id.) However, after Plaintiffs filed suit, they allege that more redemptions occurred,
and at the time of the filing of the Second Amended Complaint, shares valued at a total of
$500,000 had not yet been redeemed. (Id. ¶ 51.) The Court subsequently allowed supplemental
briefing, and by the time of the supplemental briefing, the remaining $500,000 in shares had
been redeemed.
Plaintiffs allege that these events caused them severe emotional distress. (Compl. ¶ 55.)
They also allege that they were forced to sell other securities at a loss, to turn down a loan to
their son’s small business that was suffering from the credit crisis, and cancel vacations and other
expenditures.
B.
Claims
Plaintiffs raise the following claims: Count I–Declaratory Judgment against Mesirow;
Count II–Breach of Fiduciary Duty, Constructive Fraud, Aiding and Abetting Breach of
Fiduciary Duty and Constructive Fraud against Mesirow and Nuveen; Count III–Violations of
Section 10(b) of the Exchange Act and Rule 10(b)(5) against all Defendants; Count IV–Violation
of Section 20(A) of the Exchange Act against Bremner; Count V–Fraud against all Defendants;
Count VI–Negligent Misrepresentation against Mesirow and Nuveen; Count VII–Rescission and
Related Relief under the Illinois Act against Mesirow and Nuveen; Count VIII–Rescission and
Related Relief under the North Carolina Securities Act against Mesirow and Nuveen; and, Count
IX–Intentional Infliction of Emotional Distress against Mesirow and Nuveen.
Based upon these claims, Plaintiffs seek declaratory and injunctive relief and damages.
7
C.
Motions to Dismiss
Defendants move to dismiss all claims against them pursuant to Federal Rule of Civil
Procedure 12(b)(6). Their particular contentions with regard to each claim will be discussed
below.
II.
DISCUSSION
A.
Standard
A plaintiff fails to state a claim on which relief may be granted under Federal Rule of
Civil Procedure 12(b)(6) when the complaint does not “contain sufficient factual matter,
accepted as true, to ‘state a claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, 556
U.S. 662, 678 (2009) (quoting Bell Atlantic 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.” Iqbal, 556 U.S.
at 678.
In addition, to the extent that Defendants contend that Plaintiffs have failed to describe
alleged fraudulent acts with the particularity required by Federal Rule of Civil Procedure 9(b),
that contention is treated as an argument under Rule 12(b)(6). Harrison v. Westinghouse
Savannah River Co., 176 F.3d 776, 783 n.5 (4th Cir. 1999) (“[L]ack of compliance with Rule
9(b)’s pleading requirements is treated as a failure to state a claim under Rule 12(b)(6).”) Federal
Rule of Civil Procedure 9(b) requires that a plaintiff “must state with particularity the
circumstances constituting fraud.” United States ex rel. Nathan v. Takeda Pharm. N. Am., Inc.,
707 F.3d 451, 455 (4th Cir. 2013) (“In addition to meeting the plausibility standard of [Ashcroft
8
v. Iqbal, 556 U.S. 662 (2009)], fraud claims . . . must be pleaded with particularity pursuant to
Rule 9(b) of the Federal Rules of Civil Procedure.”); Harrison, 176 F.3d at 783-84. To state with
“particularity” the circumstances constituting fraud, a “plaintiff must, at a minimum, describe
‘the time, place, and contents of the false representations, as well as the identity of the person
making the misrepresentation and what he obtained thereby.’” United States ex rel. Wilson v.
Kellogg Brown & Root, Inc., 525 F.3d 370, 379 (4th Cir. 2008) (quoting Harrison, 176 F.3d at
784).2
B.
Count I–Declaratory Judgment against Mesirow
In Count I, Plaintiffs allege that a “justiciable controversy exists between the Kastels and
Mesirow concerning whether said Defendants have an obligation to repurchase the Kastel’s
ARPS.” Plaintiffs seek a declaration that “Mesirow has an obligation to repurchase the ARPS
purchased for the Kastels.”
However, Plaintiffs concede in their supplemental brief [Doc. #118 at 4] that Mesirow
repurchased their shares and that “Plaintiffs ultimately received their original principal [sic] and
a ‘pittance’ of interest.” (Id.) Defendants Nuveen and Bremner state in their supplemental brief
[Doc. #115 at 4] that “[a]ll of Plaintiffs’ Auction Rate Preferred Shares (“ARPS”) have been
redeemed, and, therefore, Plaintiffs have suffered no damages.” Defendants Mesirow and
Cohen have adopted and incorporated that supplemental brief into their own brief [Doc. #116
2
In addition to Rule 9(b), the Private Securities Litigation Reform Act of 1995 (“PSLRA”) requires heightened
pleading in securities fraud cases. 15 U.S.C. § 78u-4(b). Cozzarelli v. Inspire Pharm., Inc., 549 F.3d 618, 623 (4th
Cir. 2008); Plymouth Cnty. Retirement Ass’n v. Primo Water Corp., 966 F. Supp. 2d 525, 538-39 (M.D.N.C.
2013). The Court will address the PSLRA specifically in the consideration of Plaintiffs’ securities law claims.
9
¶ 3]. Therefore, it appears that all parties agree that all of Plaintiffs’ ARPS shares have now been
repurchased.
Because Plaintiffs ask only for a declaration that Defendants have an obligation to
repurchase their ARPS, and they have all now been repurchased, the Court recommends that
this claim for relief be dismissed as moot.
C.
Count II–Breach of fiduciary duty, constructive fraud, aiding and abetting breach
of fiduciary duty and constructive fraud against Mesirow and Nuveen
Plaintiffs allege that Defendant Mesirow breached its fiduciary duty to Plaintiffs and
engaged in constructive fraud by “investing in the ARPS that did not comply with the Kastel’s
[sic] stated investment goals and objectives.” (Compl. ¶ 67.) Plaintiffs further allege that
Mesirow Financial and Nuveen Investments breached their fiduciary duty and engaged in
constructive fraud by “intentionally misleading the Kastels into believing that the ARPS were
safe and liquid.” (Id.) Plaintiffs allege that Mesirow and Nuveen were “co-brokers” in respect
to their shares and are both liable. (Compl. ¶ 66.)
Under North Carolina law,3 to state a claim for breach of fiduciary duty, a plaintiff must
allege that a fiduciary relationship existed and that the fiduciary did not act in good faith and
with due regard to plaintiff’s interests. Toomer v. Branch Banking & Tr. Co., 614 S.E.2d 328,
337 (N.C. Ct. App. 2005). A fiduciary relationship arises when one has placed special
confidence in another who in equity and good conscience is bound to act in good faith and with
due regard to the interests of the one reposing confidence. Branch Banking & Tr. Co. v.
3
Plaintiffs state that their claims arise under North Carolina statutory and common law and that the only claim
not arising under North Carolina law is the allegation of a violation of the Illinois Securities Laws in Count VII.
(Compl. ¶ 11.) Therefore, the Court will address the Count II claims only under North Carolina law.
10
Thompson, 418 S.E.2d 694, 699 (N.C. Ct. App. 1992). “[A] cause of action for constructive
fraud must allege (1) a relationship of trust and confidence, (2) that the defendant took
advantage of that position of trust in order to benefit himself, and (3) that plaintiff was, as a
result, injured.” White v. Consolidated Planning, Inc., 603 S.E.2d 147, 156 (N.C. Ct. App.
2004).
With regard to Defendant Nuveen, Plaintiffs fail to allege any contact or communication
between Nuveen and themselves. There is no allegation that Nuveen even knew that Plaintiffs
had purchased shares of North Carolina Nuveen ARP shares or that Nuveen knew of Plaintiffs’
investment goals and objectives. Plaintiffs rely upon their allegation that Defendants Nuveen
and Mesirow were “co-brokers” with regard to the Nuveen North Carolina ARPS shares.
Plaintiffs fail to allege facts in their Complaint showing such a “co-broker” status, however.
Further, there are no facts alleged which might give rise to the required “special confidence”
between Nuveen and Plaintiffs as a result of co-broker status. Therefore, Plaintiffs have failed
to adequately allege a claim for breach of fiduciary duty or for constructive fraud against
Defendant Nuveen.
To the extent that Plaintiffs allege a claim for aiding and abetting a breach of fiduciary
duty, the North Carolina Court of Appeals previously recognized the possibility of such an
action, requiring the plaintiff to show: (1) the existence of a breach of fiduciary duty by the
primary party; (2) knowledge of the breach by the aider and abettor; and (3) substantial assistance
by the aider and abettor in the achievement of the primary violation or breach. See Blow v.
Shaughnessy, 364 S.E.2d 444, 447 (N.C. Ct. App. 1988). However, the North Carolina Court
11
of Appeals has since recognized that the rationale of that decision has been abrogated, and Blow
is no longer valid precedent. See Bottom v. Bailey, 767 S.E.2d 883 (N.C. Ct. App. 2014); see
also In re Bostic Constr., Inc., 435 B.R. 46, 66 n.5 (Bankr. M.D.N.C. 2010); Laws v. Priority Tr.
Serv. of N.C., L.L.C., 610 F. Supp. 2d 528, 532 (W.D.N.C. 2009). Thus, it does not appear that
a claim for aiding and abetting a breach of fiduciary duty exists under North Carolina law.
Moreover, even if such a claim did exist, Plaintiffs in the present case fail to sufficiently allege
facts showing that Defendant Nuveen had knowledge that Defendant Mesirow breached a
fiduciary duty to Plaintiffs. Therefore, all claims in Count II against Defendant Nuveen should
be dismissed.
With respect to Defendant Mesirow Financial,4 Defendant Mesirow argues that no
fiduciary relationship existed between it and Plaintiffs because a “traditional, nondiscretionary
brokerage account does not give rise to a fiduciary relationship between broker and customer.”
(Mesirow Br. [Doc. #79] at 18.) In support of this contention, Defendant notes that:
[T]here are two general types [of investment accounts]: non-discretionary and
discretionary. A non-discretionary account requires the broker to obtain
authorization before it makes any investment decisions. See Merrill Lynch Pierce
Fenner & Smith, Inc. v. Cheng, 901 F.2d 1124, 1128 (D.C.Cir.1990); Hill v.
Bache Halsey Stuart Shields Inc., 790 F.2d 817, 820 n. 3 (10th Cir.1986). A
discretionary account, by contrast, allows an investment broker to make account
transactions without the client's prior approval. See Cheng, 901 F.2d at 1128; Hill,
790 F.2d at 820 n. 3.
In return for this grant of discretion, a broker operating a discretionary account
typically owes greater duties to his client than a broker who must receive
authorization for each transaction. See, e.g., Indep. Order of Foresters v. Donald,
Lufkin & Jenrette, Inc., 157 F.3d 933, 940-41 (2d Cir.1998) (noting that typically
4
Plaintiffs do not assert Count II directly against Defendant Cohen, but Plaintiffs’ claim against Defendant
Mesirow is based on factual allegations involving Defendant Cohen in his capacity as a Senior Managing Director
at Mesirow.
12
a broker operating a discretionary account has a general fiduciary duty to his
client whereas a broker operating a non-discretionary account has narrower
obligations); Hill, 790 F.2d at 824 (same); see also Leib v. Merrill Lynch, Pierce,
Fenner & Smith, Inc., 461 F.Supp. 951, 953 (E.D.Mich.1978) (describing a broker
operating a discretionary account as “the fiduciary of his customer in a broad
sense”). Most notably, the broker managing a discretionary account has to make
investment decisions that are faithful to the needs and objectives of his client.
Trumball Inv. Ltd. I v. Wachovia Bank, N.A., 436 F.3d 443, 445-46 (4th Cir. 2006). As noted
by Defendants, the allegations in the Complaint reflect that Cohen spoke to Plaintiffs prior to
the purchases of the Nuveen ARPS, and proposed certain investments from time to time. Thus,
the allegations appear to reflect a non-discretionary, traditional relationship in which Plaintiffs
retained decision-making authority. In response to these contentions, Plaintiffs rely on their
allegations of a fiduciary relationship in fact, based on their allegations of a relationship of trust
and confidence with Defendant Cohen as their financial adviser on whom they relied for advice
and direction. See also Ellison v. Alexander, 700 S.E.2d 102, 108 (N.C. Ct. App. 2010) (“[I]n
North Carolina . . . there are two types of fiduciary relationships: (1) those that arise from legal
relations such as attorney and client, broker and client . . . partners, principal and agent, trustee
and cestui que trust, and (2) those that exist as a fact, in which there is confidence reposed on
one side, and the resulting superiority and influence on the other.” (internal quotation
omitted)(emphasis added)). However, Plaintiffs do not allege facts showing a lack of
sophistication or lack of ability to make decisions on their part, and it is not clear that a fiduciary
relationship would arise based on the facts as alleged. Compare White v. Consolidated Planning,
Inc., 603 S.E.2d 147 (finding that the Plaintiffs had stated a claim for breach of fiduciary duty
against a financial planning services company where the plaintiffs “had no prior investment
13
experience and had never before worked with a financial adviser,” the adviser was the plaintiffs’
son who siphoned all the funds to support a gambling addiction, and the complaint alleged that
“‘[b]ecause of [the plaintiffs’] lack of expertise in financial affairs,’ they relied upon [the adviser
and the financial services company] to properly manage their funds.”).
Moreover,
Plaintiffs have failed to allege facts that would establish bad faith by Cohen, and with respect to
Plaintiffs’ related claim of constructive fraud, Plaintiffs have failed to allege that Cohen took
advantage of a position of trust in order to benefit himself. See White, 603 S.E.2d at 156 (“A
plaintiff must allege that the benefit sought was more than a continued relationship with the
plaintiff or payment of a fee to a defendant for work it actually performed. In arguing that his
complaint is sufficient on this issue, plaintiff points only to his allegations that [the defendant]
benefited through the payment of commissions. This Court held in Sterner, however, that an
allegation of the payment of commissions for transactions actually performed is not sufficient
to survive a motion to dismiss a claim for constructive fraud. (citing Sterner, 583 S.E.2d at 674)).
Thus, an incentive to continue the relationship or earn commissions or fees for work performed
is not sufficient to establish that the defendant took advantage of the relationship of trust and
confidence to benefit himself in order to state a claim for constructive fraud. In this case,
Plaintiffs have not alleged sufficient additional facts to support a claim that Defendants Mesirow
or Cohen took advantage of a position of trust in bad faith or in order to benefit themselves.
Finally, the Court notes that Plaintiffs’ shares have been redeemed, and Plaintiffs have
elected to rescind the purchases of the Nuveen ARPS in exchange for the return of their
principal. Because they have elected and received this remedy, it appears inconsistent to also
14
allow them to pursue state law tort claims for damages. See, e.g., United Laboratories, Inc. v.
Kuykendall, 437 S.E.2d 374 (1993); see also In re UBS Auction Rate Sec. Litig., 2009 WL
860812 at *3 (S.D.N.Y. Mar. 30, 2009); Aimis Art Corp. v. Northern Trust Secs., Inc., 641 F.
Supp. 2d 314 (S.D.N.Y. 2009).
Therefore, all claims in Count II should be dismissed.
D.
Count III–Violations of Section 10(b) of the Securities Exchange Act and SEC
Rule 10(b)(5) against all Defendants
Plaintiffs next assert a claim under Section 10(b) of the Securities Exchange Act and SEC
Rule 10(b)(5) against all Defendants. To establish this claim, Plaintiffs must show that
Defendants: (1) made a false statement or omission of material fact; (2) with scienter; (3) upon
which Plaintiffs relied; (4) and which proximately caused Plaintiffs’ economic loss. Cozzarelli
v. Inspire Pharm., Inc., 549 F.3d 618, 623 (4th Cir. 2008).5 In considering whether Plaintiffs
have properly alleged such a claim, the Court notes that the Private Securities Litigation Reform
5
Plaintiffs may also be attempting to assert a violation of Section 10(b) based on alleged market manipulation.
However, such a claim would still require a sufficient allegation of scienter, which Plaintiffs have failed to allege
here as further discussed infra. The Court also notes that multiple other cases have raised claims against brokerdealers and other entities involved in the Nuveen auction rate securities, including class actions and a multidistrict litigation in the Southern District of New York. All of those claims have been dismissed, primarily for
failing to establish market manipulation in light of the disclosures publicly available, and in light of the failure to
adequately plead scienter. In re Merrill Lynch Auction Rate Securities Litigation, 704 F. Supp. 2d 378 (S.D.N.Y.
2008) (noting that the prospectuses for the securities at issue, including for the Nuveen Premium Income
Municipal Fund, “revealed the broker-dealer’s ability to intervene in auctions”), aff’d, Wilson v. Merill Lynch &
Co., Inc., 671 F.3d 120, 131 (2d Cir. 2011) (“[T]here can be no dispute that the general phenomenon of ARS
dealers placing bids to prevent failed auctions ( i.e., ‘support bidding’) was publicly disclosed by . . . July 2007.”);
In re Merrill Lynch Auction Rate Securities Litigation, 851 F. Supp. 2d 512 (S.D.N.Y. 2012), aff’d, Louisiana
Pacific Corp. v. Merrill Lynch & Co., Inc., 571 F. App’x 8 (2d Cir. 2014); Ashland Inc. v. Morgan Stanley & Co.,
Inc., 700 F. Supp. 2d 453 (S.D.N.Y. 2010), aff’d, 652 F.3d 333 (2d Cir. 2011); In re JP Morgan Auction Rate
Securities Marketing Litigation, 867 F. Supp. 2d 407 (S.D.N.Y. 2012); In re JP Morgan Auction Rate Securities
Marketing Litigation, No. 10 CIV. 4552, 2014 WL 4953554 (S.D.N.Y. Sept. 30, 2014); In re Citigroup Auction
Rate Securities Litigation, 700 F. Supp. 2d 294 (S.D.N.Y. 2009); In re UBS Auction Rate Securities Litigation,
2010 WL 2541166 (S.D.N.Y 2010); Finn v. Barney, 471 F. App’x 30 (2d Cir. Mar. 27, 2012).
15
Act of 1995 (“PSLRA”) requires heightened pleading in securities fraud cases. 15 U.S.C. § 78u4(b). Cozzarelli, 549 F.3d at 623; Plymouth Cnty. Retirement Ass’n v. Primo Water Corp., 966
F. Supp. 2d 525, 538-39 (M.D.N.C. 2013).
To meet this standard with respect to alleged false statements or omissions, Plaintiffs
must specify each statement alleged to have been misleading, explain why it is misleading, and
if an allegation regarding the statement or omission is made on information and belief, Plaintiffs
must state with particularity all of the facts forming the basis for such belief. Id. Moreover, the
requirement of pleading fraud with particularity of Federal Rule of Civil Procedure 9(b) applies
to allegations under the Exchange Act where those allegations sound in fraud. Cozzarelli, 549
F.3d at 629. The circumstances that must be pled with particularity under Rule 9(b) are the time,
place, and contents of the false representations, as well as the identity of the person making the
misrepresentation and what he obtained thereby. Harrison, 176 F.3d at 784.
In addition, “the complaint shall, with respect to each act or omission alleged to violate
this chapter, state with particularity facts giving rise to a strong inference that the defendant
acted with the required state of mind.” 15 U.S.C. § 78u-4(b)(2)(A). Plaintiffs must state facts
which cause a reasonable person to deem the inference of scienter cogent and at least as
compelling as any opposing inference one could draw from the facts alleged. Plymouth Cnty.,
966 F. Supp. 2d at 539. As a general matter, several courts have examined claims of Rule
10(b)(5) violations based upon occurrences in the auction rate securities market during the same
period at issue in the present action. As discussed below, scienter has been a particularly difficult
element for plaintiffs to allege in sufficiently specific fashion to avoid Rule 12(b)(6) dismissals.
16
See, e.g., Vining v. Oppenheimer Holdings, Inc., No. 08Civ4435 (LAP), 2010 WL 3825722
(S.D.N.Y. Sept. 29, 2010).
1.
False statement or omission of material fact
Defendants Mesirow and Cohen argue that Plaintiffs have not pleaded with the required
degree of particularity the false statement or omission of material fact. They argue that Plaintiffs’
only allegations of misrepresentation specific to Cohen or Mesirow are limited to alleged
conversations in which Cohen purportedly described ARS as “short term,” liquid investments.
(Defs.’ Br. [Doc. #79] at 8 (referring to Compl. ¶¶ 23-25, 35).) But, according to Defendants,
these allegations are not sufficiently specific as to time, place, and content. Plaintiffs argue that
paragraphs 23, 24, and 25 of their Complaint set out the specifics of the conversations with Mr.
Cohen that led to their purchase of Nuveen ARPS. (Pls.’ Br. [Doc. #91] at 3.)
Paragraph 23 of Plaintiffs’ Complaint pertains to Nuveen shares purchased “for the
account of Howard Kastel in January 1998.” (Compl. [Doc. #74] ¶ 23.) In this paragraph,
Plaintiffs acknowledge that “[t]hese shares were sold in January 2001.” (Id.) As stated above,
Plaintiffs allege earlier in their Complaint that all claims at issue arise out of shares they
purchased between August 23, 2007 and February 15, 2008. (Id. ¶ 5.) Plaintiffs fail to explain
how the purchase of shares in 1998, no matter what was said in connection with those
purchases, shows fraud with respect to shares purchased almost ten years later. Moreover, a
comparison of the types of shares purchased reveals they are not the same. The shares
purchased in 1998 were “Nuveen Mun Advantage Pfd F” and “Nuveen Mun Opportunity Pfd
M” [Compl. ¶ 23], while the shares purchased in 2007 were all a type of Nuveen North Carolina
17
shares [Id. ¶ 25]. Therefore, paragraph 23 does not show any particular circumstances of fraud
with respect to the shares at issue in this action.
Paragraph 24 of Plaintiffs’ Complaint details the purchase of “Nuveen Real Estate
Taxable SR W” shares on January 9, 2002. (Compl. ¶ 24.) These shares were sold later in 2002.
(Id.) Plaintiffs also describe in this paragraph more purchases of shares in 2003, 2004, 2005, and
2006. Again, these shares were sold, and none of these purchases were for Nuveen North
Carolina Fund shares that Plaintiffs purchased in 2007 and that are at issue in this action.
Therefore, this paragraph does not help Plaintiffs establish the required element of
misrepresentation.
The final paragraph relied upon by Plaintiffs is paragraph 25. In this paragraph, Plaintiffs
allege that on August 17, 2007, Mr. Cohen contacted Plaintiff Howard Kastel by phone and
suggested that Plaintiffs purchase Nuveen North Carolina Funds for tax advantages in light of
Plaintiffs’ relocation to North Carolina. Plaintiffs then list the 2007 purchases (and sales) of
shares that occurred shortly after this conversation. Plaintiffs allege that Mr. Cohen “did not
identify the Nuveen North Carolina tax exempt funds that he was going to buy other than the
fact that the interest earned by the funds also would not be subject to North Carolina’s income
tax and that now we were North Carolina residents we should be in North Carolina Funds.”
(Compl. ¶ 25.) Plaintiffs do not allege that the representation regarding tax exempt status was
false, therefore no false representation is apparent from the allegations of paragraph 25. Thus,
as to Defendants Cohen and Mesirow, it does not appear that Plaintiffs have sufficiently
specified each statement alleged to have been misleading and explained why it is misleading.
18
With respect to Defendant Nuveen, as discussed above, Plaintiffs have not alleged that
Defendant Nuveen made any statements or representations directly to Plaintiffs.6 Moreover,
to the extent Plaintiffs rely on general statements regarding Nuveen’s marketing materials or
other disclosures, Plaintiffs have alleged that they did not receive or review any such materials
prior to the collapse of the ARPS market.7 Likewise as to Defendant Bremner, Plaintiffs have
not specifically alleged misrepresentations or omissions by Defendant Bremner. Thus, Plaintiffs
have failed to adequately plead the first element of their claim, a false statement or omission of
a material fact, under Section 10(b) of the Securities Act and SEC Rule 10(b)(5).
2.
Scienter
Even if Plaintiffs had adequately alleged a false statement or material omission, they
must also adequately allege that such false statement or omission was made with the necessary
mental state. The scienter element requires a showing of more than negligence; the plaintiff
must show either “intentional misconduct” or such “severe recklessness” that the danger of
misleading investors was “either known to the defendant or so obvious that the defendant must
have been aware of it.” Cozzarelli, 549 F.3d at 623 (quoting Ottmann v. Hanger Orthopedic
Grp., Inc., 353 F.3d 338, 343-44 (4th Cir. 2003)). And, under the PSLRA, Plaintiffs must “state
6
In supplemental briefing, Nuveen notes that under Janus Capital Group, Inc. v. First Derivative Traders, 131
S. Ct. 2296 (2011), it should not be held responsible for statements made by other entities.
7
Plaintiffs also attempt to rely on a settlement agreement between Nuveen Investments, LLC and the Financial
Industry Regulatory Authority (FINRA). However, to the extent that the agreement makes reference to Nuveen
brochures or materials, the Court considers only those matters specifically alleged in the Complaint. Moreover,
as noted above, Plaintiffs allege that they did not see any of the brochures or materials, and therefore could not
have relied on those representations.
19
with particularity facts giving rise to a strong inference that the defendant acted with the required
state of mind.” 15 U.S.C. § 78u-4(b)(2)(A).
Defendants argue that Plaintiffs have not adequately alleged facts giving rise to a strong
inference of scienter. Plaintiffs’ claims arise out of sales and hold orders occurring from August
23, 2007, until February 15, 2008, when the ARPS market froze. (Compl. ¶ 5.) Plaintiffs allege
that Mesirow “first purchased Nuveen Auction Rate Preferred shares . . . for the account of
Howard Kastel in January 1998.” (Id. ¶ 23.) These shares were sold in January 2001. (Id.)
Plaintiffs further allege that Mesirow purchased more Nuveen shares on January 9, 2002, which
were sold on July 31, 2002. (Id. ¶ 24.) Plaintiffs next allege that on June 26, 2003, and on
August 19, 2003, Mesirow purchased more Nuveen shares for Plaintiffs’ accounts. (Id.) More
Nuveen shares were purchased by Mesirow in March 2004. (Id.) Plaintiffs sold 3 Nuveen
shares on June 4, 2004. (Id.) They sold more Nuveen shares on November 19, 2004. (Id.) On
March 15, 2005, and August 3, 2006, Mesirow purchased more Nuveen shares for Plaintiffs.
(Id.) In August and September 2007, Plaintiffs allege that on several dates Mesirow sold Nuveen
shares and purchased shares in Nuveen North Carolina Funds. (Id. ¶ 25.) From January 1998
through September 7, 2007, Plaintiffs do not allege that they experienced any problems selling
Nuveen shares.
Against this nearly 10-year history of uneventful purchasing and selling of Nuveen shares,
Plaintiffs must state with particularity facts giving rise to a strong inference that Defendants
acted with scienter, that the danger of misleading Plaintiffs about Nuveen shares and their
liquidity and risk was either known to the Defendants or so obvious that Defendants must have
20
been aware of it. Plaintiffs allege that in 2004 the SEC announced a formal investigation of
ARPS in general and in 2006 filed complaints against some broker dealers, but not any of the
named Defendants. (Id. ¶ 26.) Plaintiffs further allege that as of August 21, 2007, ARPS
auctions had failed, but Plaintiffs do not allege that any Nuveen auctions had failed. (Id.) And,
Plaintiff Howard Kastel alleges that his conversation with Defendant Cohen regarding
purchasing the North Carolina Nuveen shares occurred on August 17, 2007. (Id. ¶ 25.)
Plaintiffs have failed to allege facts showing a strong inference of scienter at the time any alleged
representations or omissions were made.
In addition, to the extent Plaintiffs rely on Defendants’ motive to earn commissions or
fees, and similar financial motives, the Court of Appeals for the Fourth Circuit has considered
similar contentions and found them insufficient:
All of these allegations relate to possible financial motives to misrepresent
Hanger's financial situation, such as maintaining positive relationships with
creditors, avoiding additional interest payments, and promoting future
acquisitions. However, courts have repeatedly rejected these types of generalized
motives-which are shared by all companies-as insufficient to plead scienter under
the PSLRA. See, e.g., Fleming Cos., 264 F.3d at 1269; see also Mesko v.
Gakstatter ( In re Cabletron Sys., Inc.), 311 F.3d 11, 39 (1st Cir.2002)
(“‘[C]atch-all allegations' which merely assert motive and opportunity, without
something more, fail to satisfy the PSLRA.”). As we explained in Phillips, “[i]n
order to demonstrate motive, a plaintiff must show concrete benefits that could
be realized by one or more of the false statements and wrongful non-disclosures
alleged. Merely alleging facts that lead to a strained and tenuous inference of
motive is insufficient to satisfy the pleading requirement.” Phillips, 190 F.3d at
621 (citation & internal quotation marks omitted).
Ottmann, 353 F.3d at 352. Plaintiffs fail to meet this high standard in this case. See also In re
Merrill Lynch Auction Rate Securities Litigation, 704 F. Supp. 2d 378 (S.D.N.Y. 2008), aff’d,
Wilson v. Merill Lynch & Co., Inc., 671 F.3d 120, 131 (2d Cir. 2011); In re Merrill Lynch
21
Auction Rate Securities Litigation, 851 F. Supp. 2d 512 (S.D.N.Y. 2012), aff’d, Louisiana Pacific
Corp. v. Merrill Lynch & Co., Inc., 571 F. App’x 8 (2d Cir. 2014); Ashland Inc. v. Morgan
Stanley & Co., Inc., 700 F. Supp. 2d 453 (S.D.N.Y. 2010), aff’d, 652 F.3d 333 (2d Cir. 2011);
In re JP Morgan Auction Rate Securities Marketing Litigation, 867 F. Supp. 2d 407 (S.D.N.Y.
2012); In re JP Morgan Auction Rate Securities Marketing Litigation, No. 10 CIV. 4552, 2014
WL 4953554 (S.D.N.Y. Sept. 30, 2014); In re Citigroup Auction Rate Securities Litigation, 700
F. Supp. 2d 294 (S.D.N.Y. 2009); In re UBS Auction Rate Securities Litigation, 2010 WL
2541166 (S.D.N.Y 2010); Finn v. Barney, 471 F. App’x 30 (2d Cir. Mar. 27, 2012).
3.
Damages
Finally, the Court notes that Plaintiffs have now rescinded the transaction and received
the par value for their investment in Nuveen ARPS. Other courts considering securities law
claims involving auction rate securities have concluded that where plaintiffs have redeemed their
shares and received a full refund of the purchase price, they cannot receive any further recovery
from the transaction. See In re UBS Auction Rate Sec. Litig., 2009 WL 860812 at *3 (S.D.N.Y.
Mar. 30, 2009); Aimis Art Corp. v. Northern Trust Secs., Inc., 641 F. Supp. 2d 314 (S.D.N.Y.
2009). In Aimis, the Plaintiff had received the par value of its August 2007 investment in
auction rate securities, and the Amended Complaint alleged damages from “the reduced interest
earned on the auction rate securities, which would have been higher had the securities not been
sold under false pretenses.” Aimis, 641 F. Supp. 2d at 319. “Aimis in particular also allegedly
suffered damages from the ‘lack of use of [its] auction rate funds,’ as well as its inability to
‘purchase art at auction during the period of time February–December 2008 that its auction rate
22
securities were illiquid.’” (Id.) However, the Court concluded that “Aimis’s claims under § 10(b)
and Rule 10b–5 must fail because Aimis has already received compensation for losses suffered
as a result of the alleged misstatements or omissions. As the court explained in UBS, a plaintiff
in a § 10(b) and Rule 10b–5 action must ‘choose between rescinding a transaction and being paid
restitution on the one hand and holding the defrauder to the bargain and recovering
out-of-pocket losses resulting from the fraudulent transaction on the other hand.’ ‘Rescission
and restitution are alternatives to money damages; a plaintiff cannot both rescind a transaction
and ask for the benefit of the bargain rescinded.’ Aimis received the par value of its investment
in the auction rate securities funds in December 2008, effectively rescinding the transaction.
Aimis therefore cannot receive any further recovery from the transaction.” Id. (internal citations
omitted).
For this additional reason, the claims of Plaintiffs’ Count III should be dismissed as to
all Defendants.
E.
Count IV–Violation of Section 20(A) of the Exchange Act against Bremner
In Count IV Plaintiffs allege that Robert Bremner is liable under Section 20(a) of the
Exchange Act (15 U.S.C. § 78t(a)) as a “controlling person” of “the Nuveen North Carolina
Funds.” (Compl. ¶ 83.) He is alleged to be chairman of “the Board of the Nuveen North
Carolina Funds.” (Id. ¶ 8.) Plaintiffs further allege that he “has oversight responsibility over the
management of the Fund’s Investment Adviser and is a controlling person in respect to North
Carolina Funds.” (Id.) Plaintiffs contend that Nuveen Investments Inc. is “the Sponsor and
Investment Adviser to all of the self-styled Nuveen Closed End ARPS Funds . . . including the
23
Nuveen North Carolina Funds.” (Id. ¶ 7.) In the Motion to Dismiss, Defendant Bremner
argues that because there was no Rule 10(b)(5) violations by Nuveen, he cannot be held liable
under section 20(a) as a controlling person.
In this regard, Plaintiffs attempt to hold Defendant Bremner liable through the Nuveen
North Carolina Funds. (Compl. ¶ 83.) However, the Funds are not named defendants in this
action. Therefore, Plaintiffs have not established the liability of the Funds, the alleged entity
being controlled by Defendant Bremner. And absent this being established, Defendant Bremner
may not be liable as a controlling person. See Teachers’ Ret. Sys. of La. v. Hunter, 477 F.3d 162,
188 (4th Cir. 2007) (claim under section 20(a) of the Exchange Act (15 U.S.C. § 78t(a)) “requires
a predicate allegation of a violation of law;” failure to show a violation of Rule 10b-5 by the
person allegedly being controlled mandates dismissal of a section 20(a) claim).
Additionally, as seen from the above discussion, even if Plaintiffs were contending that
Defendant Bremner was a controlling person of Nuveen Investments, Inc., Plaintiffs have not
shown Rule 10b-5 liability of that entity.
Therefore, all claims raised in Count IV should be dismissed.
F.
Count V–Fraud by all Defendants
Plaintiffs argue that all of the Defendants made material misrepresentations or omissions
to them about the Nuveen North Carolina Funds in connection with their decision not to sell
the Nuveen North Carolina ARPS prior to the time that the auction market collapsed in
February 2008. The false information allegedly provided by Mesirow and Nuveen concerned
the liquidity of the ARPS and that the liquidity did not meet their investment goals.
24
The elements for a fraud claim under North Carolina law are: (1) material
misrepresentation of a past or existing fact; (2) the representation must be definite and specific;
(3) made with knowledge of its falsity or in culpable ignorance of its truth; (4) that the
misrepresentation was made with intention that it should be acted upon; (5) that the recipient
of the misrepresentation reasonably relied upon it and acted upon it; and (6) that the
misrepresentation resulted in damage to the injured party. Forbes v. Par Ten Grp., Inc., 394
S.E.2d 643, 647 (N.C. Ct. App. 1990). Elements three and four “comprise ‘scienter,’ both of
which are required to show fraud.” Id. The defendant must have known the representation to
be false when making it, or have made the representation recklessly without any knowledge of
its truth and as a positive assertion. Id. The determination of truth or falsity must be made at
the time of the representation.
As discussed above, the only specific representations relied upon by Plaintiffs were made
by Defendant Cohen on August 17, 2007. Plaintiffs fail to explain how Defendant Cohen at that
time, or any other time he made representations regarding Nuveen North Carolina Funds, knew
or was reckless with regard to the truth of statements concerning the liquidity of the Nuveen
North Carolina ARPS when up to that point there had been no auctions that failed of those
securities, and Plaintiffs had been able to sell all Nuveen shares that they offered for sale.
Plaintiffs also fail to make such a showing with regard to any other Defendant.
In addition, as to Defendant Nuveen and Defendant Bremner, as discussed above,
Plaintiffs have failed to allege any representations by these Defendants that Plaintiffs relied
25
upon. Moreover, as to all of the Defendants, Plaintiffs have failed to sufficiently allege
fraudulent intent or intent to deceive.
Therefore, Plaintiffs fail to state a claim of actionable fraud and all claims raised in Count
V should be dismissed.
G.
Count VI–Negligent Misrepresentation by Mesirow and Nuveen
Plaintiffs allege that Mesirow and Nuveen had an affirmative duty to provide them with
all the material information regarding risk associated with the Nuveen North Carolina ARPS
investments, Nuveen’s role in sponsoring the ARPS auction process, and risk associated with
the potential collapse of the ARPS auction process. Plaintiffs further allege that Mesirow and
Nuveen did not exercise due care in obtaining or communicating information to them.
According to Plaintiffs, Mesirow and Nuveen negligently made material representations as stated
above and knew or should have known that their representations were false. Plaintiffs allege
that they relied upon the representations and suffered damages and loss.
Under North Carolina law, the tort of negligent misrepresentation occurs when: (1) a
party justifiably relies, (2) to his detriment; (3) on information prepared without reasonable care;
(4) by one who owed the relying part a duty of care. Simms v. Prudential Life Ins. Co., 537
S.E.2d 237, 240 (N.C. Ct. App. 2000). In this case, Defendant Nuveen notes that Plaintiffs have
failed to allege any misrepresentation by Nuveen on which Plaintiffs relied. Defendant Mesirow
likewise contends that Plaintiffs have failed to allege a negligent misrepresentation by Cohen,
and have failed to show that Plaintiffs justifiably relied on any alleged misrepresentation,
particularly given that the information regarding auction rate securities was equally available in
26
the public record to Plaintiffs. Having considered the parties contention, and in light of the
deficiencies further set out above, the Court concludes that Plaintiffs have not sufficiently stated
a negligent misrepresentation claim. In addition, as also discussed above, all of Plaintiffs’ shares
have been redeemed and Plaintiffs have elected to recover their investments. Therefore,
Plaintiffs’ Count VI should be dismissed.
H.
Plaintiffs’ Count VII–Rescission and Related Relief under the Illinois Securities
Act, 815 ILCS 5/1 against Mesirow and Nuveen
Plaintiffs allege in Count VII that Mesirow and Nuveen violated the Illinois Securities
Act by selling Nuveen North Carolina ARPS which worked a fraud or deceit upon them, by
obtaining money through the sale of Nuveen North Carolina ARPS by means of untrue
statements of material facts and omissions of material facts, employing devices to defraud, and
offering and selling Nuveen North Carolina ARPS not in compliance with the Illinois Securities
Act. Defendants argue that these claims fail because the Illinois Act requires heightened
pleading and facts that raise a strong inference of scienter, which Plaintiffs have failed to
provide.
The claims raised by Plaintiffs correlate to 815 ILCS 5/12(F), (G), and (I). Subsection
(F) prohibits engaging “in any transaction, practice or course of business in connection with the
sale or purchase of securities which works or tends to work a fraud or deceit upon the purchaser
or seller thereof.” 815 ILCS 5/12(F). Subsection (G) makes it a violation to “obtain money or
property through the sale of securities by means of any untrue statement of a material fact or any
omission to state a material fact necessary in order to make the statements made, in the light of
the circumstances under which they were made, not misleading.” (Id. (G).) And, subsection (I)
27
forbids employing “any device, scheme or artifice to defraud in connection with the sale or
purchase of any security, directly or indirectly.” (Id. (I).)
Illinois courts hold that these subsections in the civil context are modeled after the
federal Rule 10b-5, and share similar elements. Platinum Partners Value Arbitrage Fund, Ltd.
P’ship v. Chicago Bd. Options Exch., 976 N.E.2d 415, 423 (Ill. App. Ct. 2012). “[A] private
claim under section 12(F) or (I) requires either a misstatement or an omission of material fact.”
Id. Subsection (G) also requires a misstatement or an omission of material fact. See Tirapelli
v. Advanced Equities, Inc., 813 N.E.2d 1138, 1142 (Ill. Ct. App. 2004). As seen from the
discussion of Count III, Plaintiffs have failed to allege sufficient facts to satisfy this element of
the cause of action. Additionally, scienter is a required element for a claim under subsection (I),
which Plaintiffs fail to sufficiently allege. See Platinum Partners, 976 N.E.2d at 423 (“[S]cienter,
or intent or knowledge of wrongdoing, is required for liability under section 12(I).”) (italics
omitted).
Accordingly, Plaintiffs’ Count VII should be dismissed.
I.
Plaintiffs’ Count VIII–Rescission and Related Relief under North Carolina
Statutes section 78A-56 against Mesirow and Nuveen
Plaintiffs allege that Defendants Mesirow and Nuveen violated the Securities Act of
North Carolina, N.C. Gen. Stat. § 78A-56, by selling Nuveen North Carolina ARPS to them by
means of untrue statements of material facts and omissions of material facts necessary in order
to make the statements made, in light of the circumstances under which they were made, not
misleading. This general allegation tracks the language of the statute, N.C. Gen. Stat. § 78A56(a)(2). By the terms of the statute, Plaintiffs must sufficiently allege an untrue statement of
28
a material fact or a material omission. As seen from the discussion of Count III, Plaintiffs have
failed to allege sufficient facts to satisfy this element of the cause of action.
Therefore, Plaintiffs’ Count VIII should be dismissed.
J.
Plaintiffs’ Count IX–Tort of Intentional Infliction of Emotional Distress against
Mesirow and Nuveen
Plaintiffs allege that Defendants repeatedly suggested that they had a plan to redeem
Plaintiffs’ shares when they knew at the time the statements were made that they were false and
misleading. Plaintiffs point to their allegations of fraud, theft by deception and obtaining monies
by false pretenses. (Compl. ¶ 109.) Plaintiffs have not alleged a claim of theft by deception or
obtaining monies by false pretenses. Therefore, these two claims cannot form the basis for a
claim of emotional distress. Plaintiffs have attempted to allege a fraud claim, however, it is
recommended that all fraud claims be dismissed.
Regarding Plaintiffs’ emotional distress, Plaintiffs allege that their investment in Nuveen
North Carolina shares represented a “significant part” of their net worth and was material to
their retirement plan. (Compl. ¶ 55.) They claim that the alleged fraud has had a “major
economic and psychological effect on the quality of their lives and their health.” (Id.)
To state a claim of intentional infliction of emotional distress in North Carolina, Plaintiffs
must allege that: (1) defendants engaged in extreme and outrageous conduct; (2) intending to
cause and actually causing; (3) severe emotional distress. Jolly v. Academy Collection Serv., Inc.,
400 F. Supp. 2d 851, 866 (M.D.N.C. 2005). The standard for what constitutes extreme and
outrageous conduct is a “stringent” one. Id. It must be conduct that exceeds all bounds usually
tolerated by decent society. Id. Whether the conduct meets this standard is a question of law
29
for the courts. Id. Severe emotional distress means “any emotional or metal disorder, such as,
for example, neurosis, psychosis, chronic depression, phobia, or any other type of severe and
disabling emotional or mental condition which may be generally recognized and diagnosed by
professionals trained to do so.” Waddle v. Sparks, 414 S.E.2d 22, 27 (N.C. 1992). Humiliation
and worry are not enough. Id.
Plaintiffs have failed to allege the type of conduct that meets the extreme and outrageous
level. What Plaintiffs describe is not conduct that exceeds “all bounds usually tolerated by
decent society.” See Jolly, 400 F. Supp. 2d at 866. Moreover, Plaintiffs have not sufficiently
alleged severe emotional distress. They allege in conclusory fashion that they suffered “major
psychological effect” on their lives and “severe emotional distress.” (Compl. ¶ 55) They have not
given any particulars as to the “major psychological effect” upon them resulting from
Defendants’ conduct. There is no allegation that they sought or received a physician’s diagnosis
of such distress. See Castonguay v. Long Term Care Mgmt. Servs., L.L.C., No. 1:11CV682,
2014 WL 1757308 at *13 (M.D.N.C. Apr. 30, 2014). For these reasons, Plaintiffs’ claim for
intentional infliction of emotional distress should be dismissed.
III.
CONCLUSION
IT IS THEREFORE RECOMMENDED that Defendants’ Motions to Dismiss [Doc.
#78, #80] be granted.
This, the 25th day of August, 2015.
/s/ Joi Elizabeth Peake
United States Magistrate Judge
30
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?