WPP Luxembourg Gamma Three Sarl v. Spot Runner, Inc.
655 F.3d 1039
| 9th Cir. | 2011Background
- WPP Luxembourg Gamma Three Sarl invested in Spot Runner in 2006 and obtained board-observer rights and ROFR/Co-Sale protections.
- Founders Grouf and Waxman controlled Spot Runner; Battery and Index provided major investor funding in 2006.
- WPP alleges the Founders sold shares in 2006–2008 without disclosing under the ROFR/Co-Sale and related agreements.
- Spot Runner, underwriters, and investors engaged in subsequent primary and secondary offerings in 2007 while allegedly concealing Founder sales.
- WPP asserted securities fraud claims under Section 10(b) and Rule 10b-5, including omissions, insider trading, and scheme liability, against multiple Defendants; district court dismissed some claims under Rule 12(b)(6) with leave to amend, which WPP declined, leading to this appeal and cross-appeal.
- The Ninth Circuit reverses in part, affirming in part the district court’s dismissal and remanding for further proceedings.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Duty to disclose in Rule 10b-5(b) omissions | Grouf/Waxman owed disclosure under ROFR/Co-Sale. | Waivers and contract terms limit duty. | Duty exists; contract ambiguity requires further fact-finding. |
| Scienter for 10b-5(b) omissions against founders | Strong inference of intent from repeated non-disclosures. | Alternative explanations negate strong inference. | Sufficient facts to plead strong inference of scienter. |
| Scienter for Huie omission claim | Huie knew or acted with deliberate recklessness in email exchange. | Ambiguity and confusion plausible; not cogent scienter. | Amended complaint fails to plead strong inference of scienter; dismissal affirmed. |
| Spot Runner insider trading/omissions | Spot Runner knowingly aided fraud by not disclosing Founder sales. | Separating corporate liability from founders’ actions; no cogent scienter. | Pleadings do not show cogent scienter; claims against Spot Runner affirmed as to scienter. |
| Rule 10b-5(a)/(c) fraudulent scheme liability | Scheme liability arises from combined omissions to investors. | Cannot premiss scheme liability on duplicative omissions; must show broader scheme. | Rule 10b-5(a)/(c) claim dismissed as duplicative of omission theory. |
Key Cases Cited
- Ashcroft v. Iqbal, 556 U.S. 662 (U.S. 2009) (pleading plausibility standard for claims)
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (U.S. 2007) (strong inference of scienter must be cogent and at least as compelling as nonfraudulent inference)
- Twombly v. Bell Atlantic Corp., 550 U.S. 544 (U.S. 2007) (pleading must give plausible claim to relief)
- Dura Pharm., Inc. v. Broudo, 544 U.S. 336 (U.S. 2005) (loss causation requirement in §10(b) claims)
- In re Read-Rite Corp., 335 F.3d 843 (9th Cir. 2003) (pleading standards for securities actions)
- South Ferry LP, No. 2 v. Killinger, 542 F.3d 776 (9th Cir. 2008) (holistic scienter analysis under PSLRA)
- Livid Holdings, Ltd. v. Salomon Smith Barney, Inc., 416 F.3d 940 (9th Cir. 2005) (loss causation standard in private securities actions)
- Procter & Gamble v. Read-Rite Corp., 335 F.3d 843 (9th Cir. 2003) ((example))