Eli Wilamowsky v. Take-two Interactive Software, Inc.
818 F. Supp. 2d 744
S.D.N.Y.2011Background
- Wilamowsky, a Take-Two short seller, opted out of a securities class settlement and sues individually.
- Allegations focus on Take-Two’s option backdating scheme and related misstatements, not the sexual-content issue from the prior settlement.
- Plaintiff purchased and sold Take-Two stock between May 25, 2004 and April 21, 2005, with 924,500 shares shorted and later covered at higher prices.
- Defendants include Take-Two, Brant (founder/CEO), and Directors Emmel, Flug, and Grace, alleged to benefit from the backdating scheme.
- Plaintiff asserts the class settlement excluded short sellers; he challenges the viability of loss causation under Rule 10b-5 and PSLRA standards.
- Court granted Defendants’ motions to dismiss, concluding failures to plead loss causation and other elements warranted dismissal with prejudice.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether loss causation is adequately pled under §10(b) and Rule 10b-5 in a short-selling context | Wilamowsky argues loss causation can be shown by the concealed risk or corrective disclosure | Defendants contend the loss causation theory fails under Dura and Collier, especially given pre-disclosure trades | Plaintiff fails to plead loss causation with plausibility under Dura and related authorities |
| Whether Brant-style control liability under §20(a) is pled adequately | Brant controlled the primary violator and was a culpable participant | No primary §10(b) violation pled, so §20(a) fails | Dismissed for lack of a pleaded primary violation under §10(b) |
| Whether state-law claims are preempted by the Martin Act | Claims arise from securities fraud and should be viable state-law theories | Martin Act preempts private fraud claims and likewise preempts related common-law claims | Dismissed as preempted by the Martin Act |
| Whether the state-law claims are derivative and lack standing | Plaintiff asserts direct injury separate from corporation; standing to sue derivative claims | Claims are derivative; plaintiff lacks standing as non-shareholder | Dismissed for lack of standing and derivative posture |
| Whether the complaint should be dismissed with prejudice | Plaudits could be amended to address deficiencies | Amendment would be futile given fundamental loss causation gaps | Dismissed with prejudice |
Key Cases Cited
- ATSI Communications, Inc. v. Shaar Fund, Ltd., 493 F.3d 87 (2d Cir. 2007) (standard for pleading fraud under PSLRA and Rule 9(b))
- Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (U.S. 2005) (inflated purchase price insufficient for loss causation)
- Basic Inc. v. Levinson, 485 U.S. 224 (U.S. 1988) (fraud-on-the-market reliance for efficient markets)
- In re Omnicom Grp., Inc. Sec. Litig., 597 F.3d 501 (2d Cir. 2010) (loss causation theories include corrective disclosure or materialization of risk)
- Lentell v. Merrill Lynch & Co., 396 F.3d 161 (2d Cir. 2005) (loss causation requirements)
- Collier v. Aksys Ltd., 179 F. App’x 770 (2d Cir. 2006) (short-seller loss causation not established when pre-disclosure and post-revelation prices are not causally linked)
- In re AOL Time Warner, Inc. Sec. Litig., 503 F.Supp.2d 666 (S.D.N.Y. 2007) (illustrative loss causation pleading standards in market fraud cases)
- Castellano v. Young & Rubicam, 257 F.3d 171 (2d Cir. 2001) (Martin Act considerations in private securities claims)
- Levie v. Sears, Roebuck & Co., 496 F.Supp.2d 944 (N.D. Ill. 2007) (class certification and loss causation precedents in merger contexts)