Before the Court are Individual
For the following reasons, Defendants’ Motions to Dismiss are GRANTED in part and DENIED in part.
I. Background
Plaintiffs assert claims against Defendants based on Plaintiffs’ purchase of publicly traded securities of the Funds. The Funds consist of open-end
A. The Stein Arbitration
On September 3, 2008, Plaintiffs filed a Statement of Claim against Morgan Kee-gan & Company, Inc. (“Morgan Keegan”) with the Financial Industry Regulatory Authority (“FINRA”) (the “Stein Arbitration”). (Stat. Claim, ECF No. 6-1.) Plaintiffs’ claims included: (1) violations of § 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, 15 U.S.C. § 78a (the “’34 Act”); (2) violations of §§ 11, 12(a)(2), and 15 of the Securities Act of 1933, 15 U.S.C. § 77a (the “ ’33 Act”); (3) violations of § 34(b) and 47(b) of the Investment Company Act of 1940, 15 U.S.C. §§ 80a-33(b), 80a-46(b)(Z) (the “ICA”); (4) violations of the Tennessee Securities Act, T.C.A. §§ 48-2-1, et seq. (the “TSA”); (5) violations of the National Association of Securities Dealers (“NASD”) Conduct Rules; (6) unsuitability; (7) breach of fiduciary duty; (8) negligence; (9) failure to supervise; (10) breach of contract; (11) fraud; (12) vicarious liability; and (13) civil conspiracy. (Id. at 10-18.) Plaintiffs requested compensatory damages of $10,000,000.00, punitive damages, interest, attorney’s fees, expenses and costs, and disgorgement. (Id. at 19.)
The FINRA Panel (the “Panel”) held hearings from February 8, 2010, to February 13, 2010. (FINRA Award at 9, ECF No. 6-4.) On February 19, 2010, the Panel found Morgan Keegan liable on Plaintiffs’ unsuitability, negligence, and failure to supervise claims. (Id. at 8.) The Panel denied Plaintiffs’ other claims. (Id.) The Panel awarded Plaintiffs $2,500,000.00 in damages, plus interest. (Id.) On March 17, 2010, Morgan Keegan paid $2,500,000.00 to Plaintiffs. (Wire Confirm., ECF No. 6-5.) Plaintiffs never sought to vacate the FINRA Award. (In-div. Memo at 6, ECF No. 6.)
B. The Stein Case
On August 29, 2008, Plaintiffs filed a complaint in the Circuit Court of Shelby County, Tennessee, against Pricewater-houseCoopers LLP (“PwC”), and 32 individual defendants, including Allen B. Morgan, Jr., James C. Kelsoe, Jr., Charles D. Maxwell, and Michele Wood (the “Stein Case”). (Stem Compl., ECF No. 6-3.) The claims in the Stein Case included: (1) violations of §§ 11, 12(a), and 15 of the ’33 Act; (2) violations of §§ 34(b) and 47(b) of the ICA; (3) violations of the TSA; (4) civil conspiracy; and (5) professional negligence against PwC. (Id. ¶¶ 108-39.) Plaintiffs sought rescission, compensatory and punitive damages, pre- and post-judgment interest, and attorney’s fees, costs, and expenses. (Id. at 31.)
On September 26, 2008, the Stein Case was removed to this Court. (Not. Rem., No. 2:08-cv-02 623-SHM-tmp, ECF No.
C. The Rice Case
On February 25, 2009, Grantland Rice, II and 18 other plaintiffs filed a complaint in the Circuit Court of Jefferson County, Alabama, against Regions Bank, MAM, James C. Kelsoe (“Kelsoe”), and 50 fictitious parties (the “Rice Case”). (ECF No. 6-6.) On July 21, 2009, the complaint was amended to add Regions as a defendant. (ECF No. 6-7.) On January 5, 2010, Plaintiffs were added as plaintiffs in the Rice Case. (ECF No. 6-8.) On March 18, 2010, a second amended complaint was filed (the “Rice Complaint”). (Rice Compl., ECF No. 6-9.) The claims in the Rice Case included: (1) misrepresentations, suppression, and fraudulent concealment; (2) breach of the TSA; (3) breach of the Georgia Securities Act, O.G.C.A. §§ 10-5-50, et seq.; (4) breach of the Alabama Securities Act, Ala. Code §§ 8-6-17, 8-6-19; (5) breach of the Florida Securities and Investment Protection Act, Florida Statutes §§ 517.011, et seq.; (6) breach of the Illinois Securities Act, 85 ILCS5/1, et seq.] (7) negligent supervision by MAM; and (8) conspiracy. (Id. at 23- 33.) The Rice plaintiffs sought actual and punitive damages, interest, attorney’s fees, and costs. (Id.)
The Circuit Court of Jefferson County denied the Rice defendants’ motion to dismiss, and the defendants petitioned the Supreme Court of Alabama to vacate the order denying their motion and to enter an order granting the motion. (Rice at 25, ECF No. 13-1.) On September- 30, 2010, the Supreme Court of Alabama held that
because the claims asserted by the shareholders are properly viewed as derivative claims, and because the shareholders did not comply with the requirements of Rule 23.1 for asserting such claims, the shareholders lack standing, and the defendants’ motion to dismiss should have been granted.
(Id.) The Supreme Court of Alabama directed the trial court to vacate its previous order denying defendants’ motion to dismiss and to enter an order granting the motion. (Id.) On January 17, 2011, the Circuit Court of Jefferson County dismissed the Rice Case with prejudice, with costs taxed as paid. (Dismissal Order, ECF No. 6-10.)
D. The Instant Action
Plaintiffs filed this suit on October 25, 2013. (See ECF No. 1.) Plaintiffs amended their Complaint on January 9, 2014. (Am. Compl., ECF No. 4.) The Amended Complaint alleges six causes of action. (Id. ¶¶ 151-207.) Plaintiffs allege that Defendants violated §§ 11, 12(a)(2), and 15 of the ’33 Act, and §§ 10(b) and 20(a), and Rule 10b-5 of the ’34 Act (collectively, the “Federal Law Claims”). (Id. ¶¶ 151-202.) Plaintiffs allege that MAM is vicariously liable for Kelsoe’s violations of § 12 of the ’33 Act and § 10(b) and Rule 10b-5 of the ’34 Act (the “State Law Claim”). (Id. ¶¶ 203-207.) Plaintiffs seek declaratory judgment, restitution, compensatory damages, prejudgment interest, and rescission rights. (Id. at 73.)
II. Jurisdiction and Choice of Law
Plaintiffs bring their Federal Law Claims under the federal securities laws. The Court has federal question jurisdiction under 28 U.S.C. § 1331. The Court has supplemental jurisdiction over the Plaintiffs’ State Law Claim under 28 U.S.C. § 1367.
Plaintiffs’ vicarious liability claim is based in tort law. Defendants argue that
III. Standard of Review
In addressing a motion to dismiss for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6), the Court must construe the complaint in the light most favorable to the plaintiff and accept all well-pled factual allegations as true. League of United Latin Am. Citizens v. Bredesen,
Nonetheless, a complaint must contain sufficient facts “to ‘state a claim to relief that is plausible on its face’ ” to survive a motion to dismiss. Ashcroft v. Iqbal,
Where a plaintiff makes allegations of fraud, including securities fraud, it must meet the heightened pleading requirements of Federal Rule of Civil Procedure 9(b). Frank v. Dana Corp.,
IV. Analysis
Defendants argue that Plaintiffs’ Amended Complaint should be dismissed because: (1) Plaintiffs’ claims are time barred; (2) their claims are barred by res judicata; (3) their claims are derivative. (Indiv. Motion at 1, Funds’ Motion at 1-
A. Non-Parties
Fund Defendants argue that, because Plaintiffs did not name RSH and RSI as Defendants in the Amended Complaint, the Court should dismiss Plaintiffs’ claims against those entities. (Funds Memo, at 1-2, ECF No. 11-1.)
In its caption, the Amended Complaint formally names RMS, RMH, RSF, RMA, RHY, Regions, RFC Holding, and MAM as Defendants. (Am. Compl. at 1.) In describing the parties, Plaintiffs identify RMS as a defendant, and RSH and RSI as portfolios offered by Defendant RMS. (Id. ¶ 10) (“[Defendant RMS] was an open-end, management investment company registered under the Investment Company Act (‘ICA’) and offered three portfolios or ‘series’ of common stock, each with its own investment objective: [RSS], [RSI], and [RSH].”). Counts I, II, and IV assert claims against RSH and RSI. (Id. ¶¶ 152, 167, 189.) Plaintiffs have not shown service on RSH or RSI.
Although Plaintiffs bring Counts I, II, and IV against RSH and RSI, the Amended Complaint identifies them only as funds offered by Defendant RMS, not as defendants. (Am.ComplV 10.) Fund Defendants’ Motion to Dismiss RSH and RSI as non-parties is GRANTED.
B. Timeliness
Defendants argue that Plaintiffs’ claims are untimely because: (1) American Pipe & Constr. Co. v. Utah,
The Amended Complaint alleges three claims under the ’33 Act. Count I alleges that the Funds and the Director Non-Defendants
Plaintiffs must successfully state a primary violation of the ’33 Act or § 10(b) of the ’34 Act to maintain their control person claims. See 15 U.S.C. 77(o)(a); 15 U.S.C. § 78t(a); J & R Mktg. v. Gen. Motors Corp.,
Defendants argue that Plaintiffs’ ’33 Act claims are barred by the applicable three-year statute of repose at 15 U.S.C. § 77m. (Indiv. Memo, at 15.) Defendants argue that Plaintiffs’ ’34 Act claims are barred by the applicable five-year statute of repose at 28 U.S.C. § 1658(b). (Id. at 15-16.) Defendants argue that Plaintiffs’ ’33 Act claims are barred by the applicable one-year statute of limitation at 15 U.S.C. § 77m. (Id. at 17.) Defendants argue that Plaintiffs’ ’34 Act claims are barred by the applicable two-year statute of limitation at 28 U.S.C. § 1658(b)(1). (Id. at 17-18.)
Plaintiffs rely on the filing of Willis et al. v. Morgan Keegan & Company, Inc. et al., No. 2: 07-cv-02830-SHM, and In re Morgan Keegan Open-End Mutual Fund Litigation (the “Open-End Fund Litigation”), No. 2:07-cv-02784-SHM, to toll the applicable statutes of limitation and repose in this case. (Indiv. Resp. at 16.) Willis, filed on December 21, 2007, was a securities class action on behalf of all persons who purchased or acquired shares of RMH, RSF, RMA, or RHY. On August 5, 2013, the Court approved settlement in Willis and certified the class action. (Willis Order at 5-7, No. 07-cv-2830, ECF No. 345.)
1. American Pipe Tolled the Applicable Statutes of Repose
Defendants argue that American Pipe, in which the Supreme Court held that “the commencement of the original class suit tolls the running of the statute for all purported members of the class who make timely motions to intervene after the court has found the suit inappropriate for class action status,” does not apply to the applicable statutes of repose for Plaintiffs’ Federal Law Claims. (Reply at 3.) The Court held in Willis that American Pipe applies to statutes of repose. (Willis Order at 23-24, No. 07-cv-2830). “Tolling the limitations period while class certification is pending does not compromise the purposes of statutes of limitation and repose.” Joseph v. Wiles,
The Second Circuit’s IndyMac decision is not binding on the Court. On March 10, 2014, the Supreme Court granted the petition for writ of certiorari in IndyMac. Id., cert. granted, — U.S. —,
2. The Stein Arbitration
Defendants argue that American Pipe does not toll the applicable statutes of limitation for Plaintiffs’ Federal Law Claims. (Reply at 1.) Defendants rely primarily on Wyser-Pratte Mgmt. Co. v. Telxon Corp.,
In Telxon, a putative class member filed an independent lawsuit. Id. The Sixth Circuit relied on the policy stated in In re WorldCom, Inc. Sec. Litig.,
The Second Circuit has overruled the district court’s decision in WorldCom, opining that, “We agree with Appellants that their time to file should have been tolled upon the filing of a class action purporting to assert their claims, regardless of their having also filed individual actions asserting the same claims.” In re WorldCom Sec. Litig.,
The Court’s Order Approving Proposed Settlement in Willis certified that class action. (Willis Order at 5-7, No. 07-cv-2830, ECF No. 345.) The Court excluded a person from the class if he had “filed a proceeding with FINRA against one or more of Released Defendant Parties concerning the purchase of shares in one or more of the Closed-End Funds during the Class Period and such proceeding was not dismissed to allow the Person to specifically participate as a Class Member.” (Willis Order at 6, No. 07-cv-2830, ECF No. 345.) The Court opined that a person was excluded from the class if he had
filed a state court action that has not been removed to federal court, against one or more of the Defendants concerning the purchase of shares in one or more of the Closed-End Funds during the Class Period and whose claims in that action have been dismissed with prejudice, released, or fully adjudicated absent a specific agreement with suchDefendant(s) to allow the person to participate as a Class Member.
(Id.)
Plaintiffs filed their FINRA arbitration related to securities purchased in the closed-end Funds during the class period. (FINRA Award at 1.) The Stein Arbitration was not dismissed to allow Plaintiffs to participate as class members. American Pipe tolled the applicable statutes of limitation for Plaintiffs’ Federal Law Claims.
Defendants argue that, if American Pipe applies, tolling ceased to apply when Plaintiffs filed their Statement of Claim with FINRA. (Reply at 2.) FINRA Rule 12204(b) prohibits arbitrating claims that are “based upon the same facts and law, and involve the same defendants as ... a putative class action.... ” A claimant may arbitrate such a claim if he gives notice that he “will not participate in the class action or in any recovery that may result from the class action.” FINRA R. 12204(b)(2).
Defendants’ argument that American Pipe tolling ceased to apply when Plaintiffs filed their Statement of Claim with FINRA is not well taken. The Statement of Claim does not contain a statement that Plaintiffs will opt out of any pending class action against Morgan Keegan. Defendants do not assert that Plaintiffs sent a letter to FINRA opting out of any such action. Defendants do not assert that the FINRA Director referred any dispute “as to whether [Plaintiffs’] claim is part of a class action” to a FINRA panel under FINRA Rule 12204(c). Defendants do not assert that any party asked the Court to decide whether Plaintiffs’ claims were part of the pending class actions until August 5, 2013. Defendants do not assert that Plaintiffs opted out of the pending class actions before the Court. American Pipe tolled the applicable statutes of limitation for Plaintiffs’ Federal Law Claims.
3. The Rice Case
Defendants’ reliance on Telxon is similarly ill taken when applied to the Rice Case. Plaintiffs were added to the Rice Case on January 5, 2010. (Rice Am. Compl., ECF No. 6-8 at 1.) The Rice Case related to securities in the Funds purchased during the class period. The Rice Case was dismissed with prejudice on April 17, 2011. (Rice Decision, ECF No. 13-1.) Plaintiffs were not excluded from the Willis class until August 5, 2013. American Pipe tolled the applicable statutes of limitation for Plaintiffs’ Federal Law Claims.
C. Derivative v. Direct Action
Defendants argue that Plaintiffs may raise their claims only in a derivative action because the Amended Complaint focuses on the Defendants’ alleged mismanagement of the Funds. (Indiv. Memo at 18-19.) Defendants cite the Alabama Supreme Court in Ex parte Regions Financial Corp.,
Under general principles of corporate law, “if a shareholder’s investment is frittered away by corporate mismanagement, only the corporation can recover.” See, e.g., Lubin v. Skow,
Ex parte Regions Financial Corp. is distinguishable because it was a separate suit with a separate complaint. That complaint is only briefly excerpted in the Alabama Supreme Court’s opinion. Ex parte Regions,
D. Res Judicata
Defendants argue that Plaintiffs’ claims are barred by res judicata. (Indiv. Memo at 9.) “Under res judicata, a final judgment on the merits bars further claims by parties or their privies based on the same cause of action.” Montana v. United States,
1. The Stein Arbitration
Defendants argue that Plaintiffs’ claims are barred by res judicata because they litigated the same claims in their FINRA arbitration. (Indiv. Memo at 9.)
Defendants rely on the Tennessee definition of privity. (Indiv. Memo, at 11-13.) Because Defendants assert that claims litigated in a FINRA arbitration bar Plaintiffs’ claims, federal law applies. See, e.g., Farber v. Goldman Sachs Grp.,
Defendants argue that the privity standard is met under federal law. (Reply at 7.) They argue that the relevant inquiry is “whether the interests of the party against whom claim preclusion is asserted were represented in prior litigation.” (Id. at 7 (citing Chase Manhattan Bank, N.A. v. Celotex Corp.,
Defendants have not shown there is privity between Morgan Keegan, the defendant in the Stein Arbitration, and any of the Defendants in this case. Defendants argue that, because the subject matter of the Stein Arbitration and this case is the same, a “shared identity of interests exists” between Morgan Keegan and Defendants. (Indiv. Memo at 12-13.)
A common nucleus of operative fact is only one factor in the privity analysis. A “shared identity of interests” takes into account the working relationship between the parties “in which the interests of the nonparty are presented and protected by the party in the litigation.” Vanmeerbeeck v. M & T Bank,
Defendants argue there is privity given the affiliation among the Defendants and Morgan Keegan. (Reply at 8-9.) They cite cases where a parent company and a wholly-owned subsidiary were in privity for purposes of res judicata. (Id.) Plaintiffs argue that the relationship between Defendants and Morgan Keegan, taken alone, is not enough to demonstrate privity. (Indiv. Resp. at 12.)
“A corporation is constituted ... of all its stockholders; but it has a legal existence separate from them, rights and obligations separate from them.” Dorchen/Martin Assocs., Inc. v. Brook of Boyne City, Inc.,
“Corporate affiliations may be relevant in determining whether two parties are in privity for purposes of issue or claim preclusion under this analysis where there is identity of control.” Id. (internal quotation marks and citation omitted).
Relationships between a parent corporation and its subsidiaries should generally be regulated by the same rules as apply to other shareholders. The parent[-]subsidiary relationship does not itself establish privity. Preclusion is particularly appropriate if the parentcontrolled the litigation against a subsidiary, or brought or defended an action for the benefit of the subsidiary. If different subsidiaries are involved in successive litigation, however, extra care may be required in assaying the control relationships involved, particularly if there are independent interests,
/¿(citing Wright & Miller § 4460).
Taking Plaintiffs’ allegations as true, there is no allegation that Defendants controlled Morgan Keegan in the Stein Arbitration or that Morgan Keegan adequately represented Defendants’ interests there. The parent-subsidiary relationship between Morgan Keegan and Regions is not sufficient by itself to establish privity. Defendants have not shown that privity exists. The Court need not discuss the other three elements of res judicata. Plaintiffs’ claims are not barred by res judicata based on the Stein Arbitration.
2. The Rice Case
Defendants assert the same arguments as to the res judicata effect of the Rice Case. Defendants argue that, because the district court dismissed the Rice Case with prejudice, there is a final judgment on the merits. (Indiv. Memo, at 10-11.) Plaintiffs argue that Rice did not reach a decision on the merits. (Indiv. Resp. at 2.) The Alabama Supreme Court in Rice decided that the Rice plaintiffs lacked standing to pursue their claims. (Rice at 25, ECF No. 13-1.)
The Rice Case is not a decision on the merits. The Alabama Supreme Court in Rice held that,
because the claims asserted by the shareholders are properly viewed as derivative claims, and because the shareholders did not comply with the requirements of Rule 23.1 for asserting such claims, the shareholders lack standing, and the defendants’ motion to dismiss should have been granted.
(Id.) The Aabama Supreme Court then directed the trial court to vacate its previous order denying defendants’ motion to dismiss, and to enter an order granting the motion. (Id.)
The Supreme Court has opined that a judgment is a final decision on the merits if there are “no qualifying words” in a decree. Johnson v. Williams, — U.S. —,
That presumption of finality ... disappears whenever the record shows that the court did not pass upon the merits but dismissed the bill because of want of jurisdiction, for want of parties, because the suit was brought prematurely, because the plaintiff had a right to file a subsequent bill on the same subject-matter, or on any other ground not going to the merits.
/¿(internal citation omitted).
The Aabama Supreme Court’s decision in Rice was based on the Rice plaintiffs’ lack of standing. That is a dismissal “for want of parties.” The Rice decision was not a final decision on the merits. The Court need not discuss the other three elements of res judicata. Plaintiffs’ claims are not barred by res judicata.
E. Claims Pleading
1. The Heightened ’34 Act Pleading Standard
When a plaintiff alleges a violation of § 10(b) and Rule 10b-5, the PSLRA mandates a heightened pleading standard, a standard higher than that required by Rule 9(b). Compare 15 U.S.C. § 78u-4(b)(2), with Fed. R. Civ. P. 9(b); Konkol v. Diebold, Inc.,
The PSLRA requires a plaintiff 1) “to state with particularity” the facts
a. Particularity as to Each Fund
Fund Defendants argue that Plaintiffs do not plead facts sufficient to determine the Funds in which Plaintiffs invested and when they did so. (Funds Memo, at 8, ECF No. 10-1.) Plaintiffs argue that, because they allege the Funds were essentially identical, they do not need to address the conduct of each Fund. (Fund Resp. at 24, ECF No. 14.)
At the motion to dismiss stage, the Court takes all of Plaintiffs’ allegations as true. Plaintiffs allege that the conduct of the Fund Defendants was almost identical. (Am. Compl. ¶¶ 17, 40, 51(g).) Plaintiffs allege that they invested in all of the Funds between 2004 and 2008. (Id. ¶ 9.) Plaintiffs’ allegations are sufficient under the PSLRA.
b. Pleading Scienter
Fund Defendants argue that Plaintiffs do not allege facts sufficient to support an inference of scienter as to the Funds. (Fund Memo, at 9.) Fund Defendants argue that Plaintiffs have failed to make specific allegations of scienter as to each of the Funds. (Id.)
Plaintiffs assert that the Funds and Kelsoe, Anthony, Sullivan, and Weller intentionally and recklessly made untrue statements of material fact and/or omitted material facts about investment strategy, the level of investment risk, and types of portfolio holdings. (Am.ComplJt 189-90). Plaintiffs assert that those misstatements and omissions artificially inflated and maintained the prices of the Funds’ securities. (Id.)
Kelsoe, Anthony, Sullivan, and Weller are “Officer Non-Defendants.” (Am. ComplV 189.) “Although not naming these individuals as defendants herein, plaintiffs claim that they violated the securities laws.” (Id. ¶ 37.) Because they are not defendants, there can be no recovery against Kelsoe, Anthony, Sullivan, and Weller. Cf. p. 12.
To plead scienter as to the Funds, Plaintiffs may plead facts that “create a strong inference that someone whose intent could be imputed to the corporation acted with the requisite scienter. In most cases, the most straightforward way to raise such an inference for a corporate defendant will be to plead it for an individual defendant.” Teamsters Local 445 Freight Div. Pension Fund v. Dynex Cap
Plaintiffs also assert an inference of scienter as to the Funds based on alleged misstatements about valuation procedures and the overconcentration of portfolio assets. (Am. Compl. ¶¶ 41, 47, 49, 52-57.) It is possible
to raise the required inference [of scien-ter] with regard to a corporate defendant without doing so with regard to a specific individual defendant. As the Seventh Circuit recently observed in the wake of the Supreme Court’s remand in Tellabs, ‘[I]t is possible to draw a strong inference of corporate scienter without being able to name the individuals who concocted and disseminated the fraud.’
Teamsters
An examination of the Amended Complaint and the relevant case law demonstrates that Plaintiffs have met the PSLRA’s enhanced burden as to the Funds.
c. Reliance
Fund Defendants argue that Plaintiffs are not entitled to a presumption of reliance under Affiliated Ute Citizens of Utah v. U.S.,
Plaintiffs are entitled to a presumption of reliance under Affiliated Ute. Plaintiffs allege that the primary problem with the disclosures made in the Funds’ prospectuses and registration statements was their omission of material information. (Am.Compm 42-44, 49, 50-57, 120-122.)
Fund Defendants argue that the Fourth Circuit’s decision in Cox v. Collins,
Fund Defendants concede that Plaintiffs’ claims need only be “primarily premised on alleged fraudulent omissions.” (Funds Memo, at 13.) Plaintiffs’ claims are primarily based on Fund Defendants’ omissions. Plaintiffs are entitled to the presumption of reliance under American Ute.
d. Loss Causation
The PSLRA expressly provides that a plaintiff has “the burden of proving” that a defendant’s fraudulent conduct “caused the loss for which the plaintiff seeks to recover.” 15 U.S.C. § 78u-4(b)(4); see also Dura Pharms., Inc. v. Broudo,
e. Misrepresentation and Omissions
Fund Defendants argue that Plaintiffs have not pled any material misrepresentations or omissions made by the Funds. (Funds Memo, at 15.)
Plaintiffs have alleged that Kelsoe, the Funds’ Senior Portfolio Manager, was responsible for selecting and purchasing the Funds’ portfolio assets and managing their operations. (Am.CompO 18.) Plaintiffs have alleged with particularity the numerous fraudulent statements and omissions that the Funds made through Kelsoe and MAM. (Am.Cornpm 38-48, 50-52, 72-85, 92-119.)
To the extent Plaintiffs claim that Non-Defendants Kelsoe, Weller, Sullivan, and Anthony violated securities laws, those claims are DISMISSED. Fund Defendants’ Motion to Dismiss Count IV against Kelsoe, Weller, Sullivan, and Anthony is MOOT. Fund Defendants’ Motion to Dismiss Count IV against the Funds is DENIED.
2. Section 11 Claims
This Court has held that, although the heightened pleading standards of the PSLRA do not apply to claims under the ’33 Act, when the claims “sound in fraud,” the pleading requirements of Rule 9(b) do apply. In re Regions Morgan Keegan Sec., Derivative, & Erisa Litig.,
Section 11 prohibits making “untrue statements] of material fact” or omitting statements of material fact in a security’s registration statement. 15 U.S.C. § 77k(a). It protects investors who “acquired” securities in reliance on the representations contained in the registration statement. Id. The Amended Complaint identifies with particularity when the supposedly misleading statements were made. (Am.Compl.1ffl 19-33.) It also makes clear which statements are alleged to have been misleading: for example, each of the Funds claimed to abide by restrictions that prohibited it from holding more than 25% of its assets in securities related to the same industry. (Id. ¶ 51d.) Plaintiffs allege that this statement was misleading because, for example, RMH did not, in fact, abide by the restriction. (Id. ¶¶ 52-55.) Fund Defendants’ argument that Plaintiffs do not specify Fund Defendants’ role in any allegedly fraudulent scheme is not well taken.
Loss causation is not an element of a § 11 claim; it is an affirmative defense unsuitable for adjudication on a motion to dismiss. 15 U.S.C. § 771(b); see Indiana State Dist. Council of Laborers v. Omnicare,
3. Section 12 Claims
Section 12(a)(2) creates a cause of action based on “misleading statements, misstatements, or omissions in a ... prospectus.” J & R Mktg.,
Open-end Fund Defendant RMS and closed-end Fund Defendant RHY argue that Plaintiffs do not have standing to sue under § 12(a)(2). (Fund Memo at 18.) They argue that Plaintiffs have not alleged facts that support an inference that they purchased directly from any of RMS’s initial offerings. (Id.) Plaintiffs argue that they are only required to trace their purchases to an earlier sale made pursuant to a false registration statement. (Funds Resp. at 27.) Plaintiffs also argue that, because open-end funds have no secondary market, Plaintiffs could only have purchased directly from the fund. (Id. at 28 n. 15.)
Plaintiffs’ argument as to RHY is not well taken. Plaintiffs rely on Joseph v. Wiles,
Plaintiffs do not have standing to pursue a Section 12(a)(2) claim against RHY. RHY is a closed-end Fund. (Am. Comply 14.) “The mere ability to trace back securities to the offering, without allegations of direct purchase, are insufficient.” In re MF Global Holdings Ltd. Sec. Litig.,
Plaintiffs have standing to pursue a Section 12(a)(2) claim against RMS. Plaintiffs allege that it was an open-end management investment company. (Am. Compl.fl 10.) “Open-end funds redeem their shares on the demand of the shareholder, so there is no secondary market for the shares.” I. Meyer Pincus & Assocs. P.C. v. Oppenheimer & Co., Inc.,
Fund Defendants’ Motion to Dismiss Count II against RHY is GRANTED. Fund Defendants’ Motion to Dismiss Count II against RMS is DENIED.
Y. Conclusion
Fund Defendants’ Motion to Dismiss RSH and RSI as nonparties is GRANTED. Defendants’ Motions to Dismiss Plaintiffs’ claims as untimely are DENIED. Defendants’ Motions to Dismiss Plaintiffs’ claims as barred by res judicata are DENIED. To the extent Plaintiffs claim that Officer Non-Defendants Kelsoe, Weller, Sullivan, and Anthony violated securities laws, those claims are DISMISSED. Fund Defendants’ Motion to Dismiss Count IV against Kelsoe, Weller, Sullivan, and Anthony is MOOT. Fund Defendants’ Motion to Dismiss Plaintiffs’ claims in Count IV is DENIED. Fund Defendants’ Motion to Dismiss Plaintiffs’ claims in Count I is DENIED. Fund Defendants’ Motion to Dismiss Plaintiffs’ claims in Count II against RHY is GRANTED. Fund Defendants’ Motion to Dismiss Plaintiffs’ claims in Count II against RMS is DENIED.
So ordered this 29th day of September, 2014
Notes
. "Individual Defendants” are Regions Financial Corporation ("Regions”), RFC Financial Holding, LLC ("RFC Holding”), and Regions Investment Management, Inc., formerly known as Morgan Asset Management, Inc. ("MAM”).
. "Fund Defendants” or the "Funds” are the Regions Morgan Keegan Select Fund, Inc., ("RMS”) (incorrectly sued as the "Regions Morgan Keegan Select Fund High Income”) (which includes the RMK Select High Income Fund ("RSH”), the RMK Select Short Term Bond Fund ("RSS”), and the RMK Select Intermediate Bond Fund (“RSI”)), RMK High Income Fund, Inc. ("RMH”), RMK Strategic income Fund, Inc. (“RSF”), RMK Advantage Fund, Inc. ("RMA”), and RMK Multi-Sector High Income Fund, Inc. ("RHY”). The names of some of the Funds in this action were changed to Helios Select Fund, Inc., Helios High Income Fund, Inc., RMK Strategic Income Fund, Inc., Helios Advantage Fund, Inc., and Helios Multi-Sector High Income Fund, Inc. after the Funds were acquired by Hyperion Brookfield Asset Management, Inc. on July 29, 2008.
.The open-end Fund is: RMS, which includes RSH, RSS, and RSI. RMS is a Fund Defendant and, as an open-end management investment company, offered three portfolios
. The closed-end Funds are: RMH, RSF, RMA, and RHY.
. The Fund Defendants and the Individual Defendants rely on the same procedural arguments. (See ECF No. 10, 6.) When the Court refers to Defendants' arguments, the Court is relying on the Individual Defendants’ Memorandum unless otherwise stated. (ECF No. 6.)
. “Director Non-Defendants" are Allen B. Morgan, Jr., J. Kenneth Alderman, Jack R. Blair, Albert C. Johnson, William Jeffries Mann, James Stillman R. McFadden, W. Randall Pittman, Archie W. Willis, III, Carter E. Anthony ("Anthony”), Brian B. Sullivan ("Sullivan”), Charles D. Maxwell, Joseph C. Weller, and J. Thompson Weller. (Am. Compl. ¶¶ 37, 152.)
. Plaintiffs allege that the Funds are liable to Plaintiffs. (Am. Compl. ¶ 164.) “Although not naming [Director Non-Defendants] as defendants herein, [PJlaintiffs claim that they violated the securities laws....” (Id. ¶ 37.)
. “Officer Non-Defendants” are James C. Kelsoe, Jr. (“Kelsoe”), Sullivan, Joseph C. Weller ("Weller”), and Anthony. (Am.Compl. ¶ 189.)
. Plaintiffs allege that the Funds are liable to Plaintiffs. (Am. Compl. ¶ 195.) "Although
. The Open-End Fund Litigation is still pending before the Court.