Stein v. Regions Morgan Keegan Select High Income Fund, Inc.
166 F. Supp. 3d 948
W.D. Tenn.2014Background
- Plaintiffs (Andrew Stein, Stein Holdings, Stein Investments) allege that Regions/Morgan Keegan funds and officers misrepresented fund investments, valuations, and diversification, concentrating in ABS/subprime securities in violation of prospectus limits and inflating fund values.
- Plaintiffs filed multiple prior proceedings: a FINRA arbitration against Morgan Keegan (Stein Arbitration) that resulted in a $2.5M award for unsuitability/negligence (plaintiffs did not vacate); participation in the Rice state action (later dismissed for lack of standing as derivative); and were members of or affected by pending class actions (Willis and Open-End Fund Litigation).
- This action (filed Oct 25, 2013; Am. Compl. Jan 9, 2014) asserts claims under the ’33 Act (§§11, 12(a)(2), 15) and the ’34 Act (§10(b), §20(a), Rule 10b-5) and a state vicarious liability claim under Tennessee law.
- Defendants moved to dismiss on multiple grounds: statute of limitations/repose (timeliness), res judicata/privity based on prior proceedings, derivative-versus-direct nature of claims, failure to meet PSLRA/Rule 9(b) pleading requirements, and misnaming/nonservice of certain fund portfolios (RSH, RSI).
- The Court (Mays, J.) granted some narrow procedural dismissals (RSH and RSI as nonparties; dismissal of claims against certain nondefendant officers), rejected timeliness and res judicata defenses, and denied dismissal of most federal securities claims (with limited exceptions described below).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Are RSH and RSI properly named/served defendants? | Plaintiffs treated them as funds/series offered by RMS but did not serve them as defendants. | RSH and RSI are not named defendants and were not served, so claims against them should be dismissed. | Dismissed: RSH and RSI are nonparties and claims against them are dismissed. |
| Are plaintiffs’ securities claims time-barred (statutes of limitation/repose) or tolled by class actions/other filings? | Tolling under American Pipe applies based on pending class actions (Willis/Open-End); FINRA arbitration and Rice participation did not terminate tolling. | Tolling does not apply to statutes of repose; filing independent actions or arbitration can defeat American Pipe tolling (Wyser-Pratte/Telxon). | Denied dismissal on timeliness: Court applies American Pipe to repose and finds tolling applied; FINRA filing and Rice dismissal did not end tolling here. |
| Are plaintiffs’ claims derivative (thus barred) rather than direct? | Claims rest on materially false or misleading prospectus/registration statements and omissions, so they are direct securities claims, not merely derivative mismanagement claims. | Allegations describe corporate mismanagement and losses to the funds, which are derivative in nature. | Denied: Allegations of false statements/omissions in registration/prospectuses state direct federal securities claims (not barred as derivative) at the pleading stage. |
| Are plaintiffs’ §10(b)/Rule 10b-5 and §11/12 claims pleaded with required particularity and scienter under PSLRA/Rule 9(b)? | Plaintiffs identify specific misstatements/omissions, allege investments and time frame, and plead facts supporting corporate scienter (e.g., valuation problems, auditor findings, concentration violations). | Plaintiffs fail to identify specific statements tied to each fund, fail PSLRA scienter particularity, and cannot attribute scienter to corporate defendants without naming individual wrongdoers as defendants. | Mixed: Court finds plaintiffs met §11 and §12 pleading thresholds (Rule 9(b) where applicable) and satisfied PSLRA particularity as to the Funds (corporate scienter sufficiently pleaded via agent Kelsoe and fund-level facts). Claims against certain nondefendant officers are dismissed; §12(a)(2) claim against closed-end RHY dismissed for lack of direct-purchase standing, but §12(a)(2) claim against open-end RMS remains. |
Key Cases Cited
- American Pipe & Constr. Co. v. Utah, 414 U.S. 538 (class-action filing tolls limitations for putative class members)
- Wyser-Pratte Mgmt. Co. v. Telxon Corp., 413 F.3d 553 (6th Cir.) (filing independent action while class certification pending can preclude American Pipe tolling)
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (corporate scienter analysis; strong-inference standard)
- Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (loss causation pleading requirement)
- In re WorldCom Securities Litigation, 496 F.3d 245 (2d Cir.) (tolling applies even if plaintiff filed independent action)
- Police & Fire Retirement Sys. v. IndyMac MBS, Inc., 721 F.3d 95 (2d Cir.) (statutes of repose and American Pipe — cited but not followed)
- Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128 (presumption of reliance for primarily omission-based securities claims)