ORDER GRANTING IN PART AND DENYING IN PART MOTIONS TO DISMISS
Re: ECF Nos. 121, 123, 126, 130, 155
Before the Court are five motions to dismiss filed by Nader Tavakoli, ECF No. 121; by Avenue Capital Management II, L.P., Michael Elkins, and Randal Klein, ECF No. 123; by Ilbok Lee, Magnachip
For the reasons stated below, the motions to dismiss in regards to Avenue Capital Management II, L.P. are granted in part and denied in part. The parties have also filed five requests for judicial notice, ECF Nos. 125, 128, 132, 140, 157, which the Court will grant.
I. BACKGROUND
Plaintiffs in this case bring claims under both the Securities Exchange Act of 1934 (the “Exchange Act”) and the Securities Act of 1933 (“the Securities Act”), related to allegations that Magnaehip made materially false and misleading statements in its financial statements and other information related to securities offerings. Magna-chip announced in 2013 that it needed to restate many of its financial reports for the prior few years due to accounting errors, and later restated its financial results for the reporting periods during those years, in some instances reporting a loss rather than a profit. The claims were first brought in two separate cases that were later consolidated by this Court. See ECF No. 112.
A. Factual Background
For the purpose of this order, the following allegations in the Third Amended Complaint (“TAC”), ECF No. 114, are taken to be true.
Magnaehip, a Delaware corporation with its principle place of business in Seoul, Korea, designs and manufactures “analog and mixed-signal semiconductor products” for a number of high volume consumer applications including smartphones, tablets, and PCs. TAC, ECF No. 114, at ¶¶ 23, 38. Magnaehip began operations in 2004, but struggled and filed for Chapter 11 bankruptcy protection in 2009. Id. at ¶¶ 39-40. Following Magnachip’s reorganization, Avenue Capital, a “global investment marketing firm” that “specializes in investing in high yield debt, debt of insolvent or financially distressed companies, and equity of companies undergoing financial or operational turnarounds or reorganizations,” was the majority owner of Magnaehip by virtue of owning 70.3% of Magnachip’s shares. Id. at ¶¶ 33, 40. Avenue Capital was entitled to have three des-ignees serving as members of the seven-member board of directors, and, in exercising its power, appointed four out of the seven, three of which were Avenue employees and two of which served on the “Audit Committee” for the company. Id. at ¶ 41.
Magnaehip eventually executed an IPO on March 10, 2011, at $14 per share. Id. at ¶41. Despite the “highly cyclical” nature of the semiconductor industry, Plaintiffs allege that Magnachip’s reported results “curiously ‘managed’ to consistently beat analysts’ consensus estimates,” which caused its stock price to “skyrocket” to $23.57 per share and “enabled Avenue Capital to sell over $310 million of its Magnaehip shares.” Id. at ¶ 42.
MagnaChip also conducted a follow-on public stock offering on February 6, 2013 (the “2/13 Offering”). Id. at ¶ 1. On or about April 13, 2012, Magnaehip filed Form S-3 Registration forms with the SEC using a “shelf’ registration that would allow it to sell securities in continu
Magnachip consistently reported positive results for each quarter from the beginning of 2011 through the third quarter of 2013. Id. at ¶¶ 44-90. On January 27, 2014, however, it “abruptly postponed its year-end and fourth quarter 2013 earnings release.” Id. at ¶ 92.
On March 11, 2014, Magnachip announced that its Audit Committee had determined that “Magnachip needed to restate its financial results for 2011 through 2013 due to improper revenue recognition for products sold through its distributors.” Id. at ¶ 94. It stated that this decision was “based on an ongoing review by ‘outside professional advisors,’ ” which had “identified ‘material weaknesses’ in Mag-nachip’s accounting procedures such that ‘internal controls over financial reporting and disclosure controls and procedures were not effective.’ ” Id. It also announced that Defendant Margaret Sakai had been “relieved” of her position as “principal accounting officer.” Id. Finally, “[w]hile stating that prior financial statements ‘should not be relied upon’, MagnaChip otherwise reassured investors that the accounting problem was one of simply timing of revenue recognition, rather than the absence of legitimate sales; and would be limited to distributor related transactions.” Id. Defendant Sang Park resigned in May 20, 2014 from his position as CEO of the company. Id. at ¶ 97.
On August 12, 2014, Magnachip announced that its financial statements would be “further delayed due to expansion of the investigation beyond ‘sales’ to distributors to include issues of revenue recognition involving all customers; cost of goods sold; and inventory reserves.” Id. at ¶ 98. On November 12, 2014, Magnachip issued “preliminary findings” regarding the restatement identifying several “specific illegal accounting practices in violation of Generally Accepted Accounting Principles (‘GAAP’)”. Id. at ¶ 99.
Magnachip issued its restatement of its financial results on February 12, 2015. Id. at ¶ 102. The restatement showed that Magnachip had overstated its earnings throughout 2011 to 2013 — in the fiscal year 2011, for example, a reported net income of $21.8 million was restated to a loss of $11.3. Id. The following day, Magnachip’s stock price was cut in half, from its previous price of $15.02 per share to $7.52 per share. Id. at ¶ 105. Over the next few days, Magnachip’s share price continued to decline. Id. at ¶ 106.
B. Procedural Background
On March 12, 2014, the day after Mag-nachip first announced it would be issuing restatements of its financial reports, plaintiff Richard Hayes filed a class action complaint against Magnachip and multiple Magnachip officers. See Complaint, ECF No. 1. The complaint alleged claims under the Exchange Act. Id. On July 3, 2014, the Court appointed Keith Thomas (hereinafter, “Lead Plaintiff’) as Lead Plaintiff of the case. ECF No. 32.
On April 21, 2015, in a separate case, the Oklahoma Police Pension & Retirement System (“OPPRS”) filed a class action complaint against Magnachip, Avenue Capital, various officers at both companies, and several institutions serving as underwriters for Magnachip’s transactions. See ECF No. 1, Case No. 3:15-cv-01797-JST. In addition to asserting the same claims as Lead Plaintiff, OPPRS also asserted claims for Securities Act violations. Id. On April 27, 2015, Magnachip moved to relate
The Plaintiffs filed their most recent complaint, the Third Amended Complaint, on June 26, 2015. ECF No. 114. The complaint brings claims under both the Exchange Act and the Securities Act. The defendants named in the complaint are Magnachip; three of Magnachip’s current and former officers (Sang Park, Margaret Sakai, and Tae Young Hwang); two members of the Board of Directors and the Audit Committee who were also Avenue Capital employees (Randall Klein and Michael Elkins); three additional members of the Board of Directors and the Audit Committee (R. Douglass Norby, Ilbok Lee, and Nader Tavakoli); Avenue Capital; and the Underwriters to Magnachip’s offerings (Barclays Capital Inc., Deutsche Bank Securities Inc., Citigroup Global Markets Inc., UBS Securities LLC, and Needham & Company, LLC). Id.
Four sets of defendants filed motions to dismiss on July 27, 2015: Mr. Tavakoli (“Tavakoli”), ECF No. 121; Avenue Capital and Mr. Klein and Mr. Elkins, (“Avenue Defendants”), ECF No. 128, Magnachip and Mr. Norby and Mr. Lee (“Magnachip Defendants”), ECF No. 126; and by Bar-clays Capital Inc., Citigroup Global Markets Inc., Deutsche Bank Securities Inc., Needham & Company, LLC, and UBS Securities LLC (“Underwriter Defendants”), ECF No. 130. A fifth motion to dismiss was filed on November 9, 2015
The five motions to dismiss were heard together and submitted on December 1, 2015. ECF No. 169. On December 11, 2015, the Plaintiffs filed a Notice of Settlement, informing the Court that a settlement had been reached that will result in the release of all claims asserted against Magnachip, Mr. Park, Mr. Hwang, Ms. Sakai, Mr. Norby, Mr. Lee, Mr. Tavakoli, Mr. Klein, Mr. Elkins, and the Underwriter Defendants. ECF No. 174. The settlement did not release any claims against Avenue Capital. Id. At a telephonic case management conference held on January 22, 2016, the parties informed the Court that they will file a motion for preliminary settlement by February 5, 2016 but that no agreement with Avenue Capital had at that time been reached. ECF No. 182. Plaintiffs subsequently filed a motion for preliminary approval of the settlement. ECF No. 185. Accordingly, the motions to dismiss in regards to all Defendants other than Avenue Capital are denied as moot
II. LEGAL STANDARD
The Court has federal question jurisdiction over the claims in this case pursuant to 28 U.S.C. § 1381.
On a motion to dismiss, courts accept the material facts alleged in the complaint, together with reasonable inferences to be drawn from those facts, as true. Navarro v. Block,
While a plaintiff generally need only plead “enough facts to state a claim to relief that is plausible on its face” to survive a motion to dismiss, Bell Atlantic Corp. v. Twombly,
The Ninth Circuit has held that under the PSLRA, securities fraud plaintiffs must plead all the elements of a securities fraud action with particularity. Oregon Pub. Employees Ret. Fund,
III. DISCUSSION
Plaintiffs assert seven causes of action against the various Defendants under the Exchange Act and the Securities Act.
The claims brought are as follows: (I) violation of section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b) against defendants Magnachip, Park, Sakai, Hwang, Klein, El-kins, Norby, Lee, and Tavakoli; (II) violation of section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a), against defendants Park, Sakai, Hwang, Klein, Elkins, Norby, Lee, and Tavakoli; (III) violation of section 20(a) against Avenue Capital; (IV) violation of section 20A of the Exchange Act, 15 U.S.C. § 78t-l, against Avenue Capital; (V) violation of section 11 of the Securities Act, 15 U.S.C. § 77k, against defendants Magnachip, Park, Sakai, Elkins, Klein, Lee, Norby, Tavakoli, and the Underwriter Defendants; (VI) violation of section 12(a)(2), 15 U.S.C. § 771(a)(2), against de
The only counts brought against Avenue Capital, and which therefore must be resolved following the Notice of Settlement, are counts III, IV, VI, and VII: violation of sections 20(a) and 20A of the Exchange Act, and violations of sections 12(a)(2) and section 15 of the Securities Act.
A. Judicial Notice
Before addressing Plaintiffs’ claims, the Court considers the four requests for judicial notice filed by Defendants, ECF Nos. 125, 128, 132, 157 and a fourth request filed by Plaintiffs, ECF No. 140. While the scope of review on a motion to dismiss is generally limited to the contents of the complaint, under Federal Rule of Evidence 201(b), courts may take judicial notice of facts that are “not subject to reasonable dispute.” Courts have previously taken judicial notice of documents on which complaints necessarily rely, Lee v. City of Los Angeles,
Defendants request judicial notice of numerous reports, press releases, and other filings with the SEC, many of which were referenced by Plaintiffs in their complaint. See ECF Nos. 125, 128, 132, 157. Plaintiffs do not object to the Court taking judicial notice of these documents generally, but they request judicial notice is taken only of the facts of their existence, not of any allegations made within. Lead Plaintiffs’ Opposition, ECF No. 137 at 23. Defendants’ requests are accordingly granted.
Plaintiffs request judicial notice of three documents, two of which are public reports by financial analysts and one of which was filed by Magnachip with the SEC. ECF No. 140 at 3. Defendants do not object to this request. The request is granted.
B. Exchange Act Claims
Though Plaintiffs do not bring section 10(b) claims against Avenue Capital, the viability of their section 20(a) claims against Avenue Capital depends on the existence of a primary violation of securities law, which in this case is alleged in connection with Plaintiffs’ 10(b) claims against the other defendants. Avenue Capital asserts that Plaintiffs’ 20(a) claims fail in part because they have not plausibly plead a primary violation. Avenue Defendants’ Motion, ECF No. 123 at 21. Therefore, the Court begins by examining the 10(b) claims before turning to the 20(a) claims and lastly to the 20A claims.
1. 10(b) Claims
Section 10(b) of the Exchange Act of 1934, 15 U.S.C. § 78j(b), makes it unlawful “for any person ... [t]o use or employ, in connection with the purchase or sale of any security ... any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe^]” Rule 10b-5, which is promulgated by the SEC under the authority of section 10(b), in turn makes it unlawful for any person “(a) To employ any device, scheme, or artifice to defraud, (b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in light of the circumstances
Defendants assert that Plaintiffs have not viably alleged a Rule 10b-5 violation based on three issues: (1) scienter, (2) loss causation, and (3) .whether defendants “made” the material misrepresentations. For the reasons detailed below, the Court concludes that Plaintiffs have successfully pleaded a primary violation under Rule 10b-5.
a. Scienter
The Avenue Defendants, Magna-chip Defendants, Tavakoli, and Sakai all argue that Plaintiffs have failed to allege they acted with the requisite scienter. The scienter required for a PSLRA claim is “a mental state embracing intent to deceive, manipulate, or defraud.” Tellabs, Inc. v. Makor Issues & Rights, Ltd.,
The “strong inference” of scien-ter required by the PSLRA “need not be irrefutable, ie., of the ‘smoking-gun’ genre, or even the most plausible of competing inferences.” Tellabs, Inc.,
The Magnachip Defendants, Sakai, and Tavakoli all argue that Plaintiffs have failed to allege any specific facts that they knew, or were reckless in failing to know material information regarding the alleged false statements. See Magnachip Defendants’ Motion, ECF No. 126 at 14; Sakai’s
i. Magnitude and Nature of Violation
Plaintiffs offer several arguments in response. First, Plaintiffs assert that scien-ter can be inferred from the “magnitude, obviousness, and reasonableness” of the violation. Lead Plaintiffs’ Opposition, ECF No. 137 at 26 (quoting In re Medicis Pharm. Corp. Sec. Litig., No. CV-08-1821-PHX-GMS,
These were not minor accounting errors. To the contrary, they dramatically affected Magnachip’s financial results, and in ways that strongly suggest a typical corporate executive should have noticed them. “Accounting errors that prove to have a significant impact on core business operations-i.e. cash, revenue, profits, liquidity, or viability of a product, sometimes give rise to a compelling inference of scienter.” In re Medicis,
As Defendants point out, Plaintiffs’ own case law suggests that allegations regarding the nature and magnitude of the alleged accounting violations will rarely be enough by themselves to show scienter. See, e.g., In re Diamond Foods, Inc. Sec. Litig., No. C 11-05386,
Second, Plaintiffs argue that Magnachip admitted its own management was responsible for the errors that led to the allegedly false statements. Lead Plaintiffs’ Opposition, ECF No. 137 at 25. They point to Magnachip’s statement on March 11, 2014 that the decision to issue restatements was prompted by ongoing review into “practices and procedures by management,” and conclusions by outside auditors that management was “not maintaining an effective control environment” and there was “circumvention of numerous internal controls under the management team then in place.” TAC, ECF No. 114 at ¶¶ 94, 103. They argue that “[ajdmissions of management’s actual participation in the improper
Defendants argue that these admissions are not helpful unless they establish that defendants “ ‘knew specific facts at the time that rendered their accounting determinations fraudulent.’ ” See Magna-chip Defendants’ Reply, ECF No. 148 at 14 (quoting Rudolph v. UTStarcom,
iii. Further Inferences
Third, Plaintiffs argue that several other facts provide additional inferences of scienter. Lead Plaintiffs’ Opposition, ECF No. 137 at 30-33. They note that Magnachip’s dismissal of defendants Sakai and Park (though both of them resigned) contributes to an inference of scienter. Lead Plaintiffs Opposition, ECF NO. 137 at 30. Courts have held that such resignations may be relevant; however, “[wjhere a resignation occurs slightly before or after a defendant corporation issues a restatement, a plaintiff must plead facts refuting the reasonable assumption that the resignation occurred as a result of restatement’s issuance itself in order for a resignation to be strongly indicative of scien-ter.” Zucco Partners, LLC v. Digimarc Corp.,
Plaintiffs also point to the SEC’s ongoing investigation of Magnachip, which some courts have acknowledged as “one more piece of the scienter puzzle,” In re UTstarcom, Inc. Sec. Litig.,
These allegations by themselves are not sufficient to plead scienter. See Zueco Partners,
Plaintiffs also allege, in relation to individual defendants Lee, Norby, Elkins, Klein, and Tavakoli, that their membership in Magnachip’s Audit Committee leads to a further inference of scienter. Lead Plaintiffs Opposition, ECF No. 137 at 35. They assert that the audit committee’s obligation — indeed, its reason for existence— is to review the company’s financial statements and its accounting procedures, and
Defendants argue that mere membership in an audit committee is insufficient to meet the heightened pleading standard of Rule 9(b) and the PSLRA, and contrasts this case with others involving more specific allegations. Avenue Defendants’ Motion, ECF No. 123 at 18; see also, e.g., Novak v. Kasaks,
iv. Core Operations Inference
Lastly, Plaintiffs argue that, given these other inferences, scienter can be assumed based on the inference that executive officers have knowledge of the “core operations” of their company. Lead Plaintiffs’ Opposition, ECF No. 137 at 34. Generally, a plaintiff cannot “rely[ ] exclusively on the core operations inference to plead scienter under the PSLRA.” S. Ferry LP, No. 2 v. Killinger,
v. Stock Sales
Defendants argue that because many of the individual defendants did not sell any stock while the alleged fraud was ongoing, the Court should draw the inference that they therefore lacked scienter of that fraud. See Sakai Motion, ECF No. 155 at 25; Tavakoli Reply, ECF No. 145 at 15. They argue that if the individual defendants in fact knew about the overstatements of revenue, they would not have kept their stock and incurred the same losses as all investors when the price declined after Magnachip’s restatements. See In re Hansen Natural Corp. Sec. Litig.,
The Court does not agree. “Scien-ter can be established even if the officers who made the misleading statements did not sell stock during the class period.” No. 84 Employer-Teamster Joint Council Pension Trust Fund v. Am. W. Holding Corp.,
In sum, Plaintiffs have alleged that the violations committed by Magna-chip had such a significant effect on its revenue and was of such a fundamental nature that it can be inferred that most reasonable, non-reckless executives would have become aware of them. They alleged that Magnachip admitted, albeit somewhat vaguely, that management may be at fault for these violations. They alleged that two high-level officers were dismissed at the same time the violations were announced, that other officers signed documents attesting to the accuracy of the false statements, and that defendants had strong motives to commit them. Finally, they alleged that many of the individual defendants served on a committee whose responsibility was to police for such violations. While each of these allegations alone might be insufficient to plead a “cogent and compelling” claim of scienter, taken as a whole the Court concludes they meet the standard under the PSLRA.
b. Loss Causation
The Magnachip Defendants argue that Plaintiffs have also failed to prove loss causation. Magnachip Defendants’ Motion, ECF No. 126 at 24. Loss causation, “i.e. a causal connection between the material misrepresentation and the loss” experienced by the plaintiff, is a necessary element of pleading a securities fraud claim under' section 10(b) of the Exchange Act. Dura Pharm., Inc. v. Broudo,
“Typically, ‘to satisfy the loss causation requirement, the plaintiff must show that the revelation of that misrepresentation or omission was a substantial factor in causing a decline in the security’s price, thus creating an actual economic loss for the plaintiff.’ ” Nuveen Mun. High Income Opportunity Fund v. City of Alameda,
In asserting that loss causation is not shown here, the Magnachip Defendants argue that Plaintiffs “cite seven purported corrective disclosures that they allege cause Magnachip’s stock price to drop;” but that “five of these purported disclosures” did not “reveal[ ] to the market the pertinent truth that was previously concealed or obscured by the Company’s alleged fraud.” Magnachip Defendants’ Motion,- ECF No. 126 at 24. For example, they assert that Magnachip’s announce
As the Magnachip Defendants correctly note, Magnachip Defendants’ Reply, ECF No. 148 at 18, the Ninth Circuit has not adopted the materialization of the risk theory. Nuveen,
Here, Plaintiffs allege that beginning with Magnachip’s January 27, 2013 postponement of its financial report and through its February 12, 2015 release of its restatement of its financial results, Magnachip’s stock steadily declined, from over $17 a share to less than $6 a share. TAC, ECF No. 114 at ¶¶ 92-106. Plaintiffs further allege that over this period of time, Magnachip received a “credit negative” report, Id. at ¶ 93, outside auditors suggested that Magnachip was “not maintaining an effective control environment,” Id. at ¶ 103, and market- analysis downgraded their ratings of the company, Id. at ¶ 104. Perhaps most significantly, Plaintiffs allege that Magnachip’s stock price was cut in half, from $15.02 per share to $7.52 per share, the day after it revealed the effects of its accounting errors on its financial results. Id. at ¶ 105. These allegations are sufficient to plead a claim that Plaintiffs’ economic loss was caused by Magnachip’s misrepresentations. See In re Daou,
c. “Making” the Alleged Misrepresentations
The final argument raised against Plaintiffs’ 10(b) claims is that they fail to show that any Defendants made the alleged misrepresentations. The Supreme Court has held that only a “maker” of an allegedly false statement can be held liable for that statement under Section 10(b) and Rule 10b-5. Janus Capital Grp. v. First Deriv. Traders,
Defendants argue that Howard should only apply to inside directors, who presumably have a greater knowledge of the day-to-day operations of the company, and not to outside directors, who presumably do not. They contend that “outside directors are differently situated than officers, and signing an SEC filing, in and of itself, is not sufficient to plead a securities fraud claim against an outside director.” Magna-chip Defendants’ Motion, ECF No. 126 at 17 (citing to Wojtunik v. Kealy,
Neither authority nor public policy support the establishment of the distinction for which Defendants argue. For one thing, Howard itself addresses the issue. Citing many of the same cases as Defendant, Howard explains that these cases are better classified as cases in which the defendants arguably lacked scienter rather than in which they did not “make” the relevant statements.
For another, Defendants ignore the fact that most of their cases are concerned with the “group pleading doctrine,” by which “plaintiffs are allowed to plead claims for fraud against officers of the corporation using group pleading presumptions that the fraud was the collective action of the officers.” In re Ross Sys. Sec Litig., No. C-94-0017 DLJ,
2. 20(a) Claims
Section 20(a) of the Exchange Act extends liability for 10(b) violations to those who are “controlling persons” of the alleged violations. See Hollinger v. Titan Capital Corp.,
The Court has already addressed Defendants’ arguments that Plaintiffs have failed to plead a primary violation. It now turns to Defendants’ arguments that Plaintiffs have also failed to plead that Avenue Capital is a “controlling person.”
Plaintiffs assert that Avenue Capital’s control over Magnachip’s statements is established through its role as majority shareholder, and its corresponding power to appoint the majority of Magnachip’s Board of Directors. Lead Plaintiffs’ Opposition, ECF No. 137 at 52. Though Avenue sold enough of its stock to lose its status as majority shareholder shortly after the beginning of the class period, Plaintiffs argue that Avenue nevertheless retained its control since its appointees continued to serve on the Board of Directors and the Audit Committee. Id. They argue that Avenue’s control can be established through the following facts: (a) that it has substantial holdings of the controlled entity; (b) it places its designees on the board, and (c) these designees signed the document(s) containing false statements. Id. at 53. They rely on In re Am. Apparel, Inc. Shareholder Litigation,
Defendants offer two responses to Plaintiffs’ argument. First, they assert that applicable case law establishes that minority shareholders — which Avenue became after selling much of its stock — cannot be considered to have “control” over companies in which they own their minority share. Avenue Defendants’ Reply, ECF No. 146 at 14. Second, they argue that In re Am. Apparel and In re UTStarcom are distinguishable because the complaints in both of those cases involved specific allegations that the minority shareholder had a significant role in company decisions, while the TAC in this case does not. Id. at 15.
Regarding the latter argument, Plaintiffs plead in the TAC that Magnachip stated in its public filings that “Avenue will continue to have significant influence over
As for Defendants’ argument that minority status precludes possession of “control,” the Court concludes that Defendants’ cited case law is distinguishable because none of it involves a party who began the class period as a majority shareholder only to lose that status shortly thereafter. Rather, Defendants’ cases stand merely for the proposition, which no one here disputes, that a party that has always held only a minority share of the company does not, by virtue of that fact alone, possess “control” over that company. See Avenue Defendants’ Reply, ECF No. 146 at 14 (citing to Silsby v. Icahn,
Defendants’ motions to dismiss Plaintiffs’ 20(a) claims are denied.
3. 20A Claims
Section 20A(a) of the Exchange Act imposes liability on parties who engage in insider trading, for “damages suffered by individuals who trade contemporaneously with the insider.” Johnson v. Aljian,
Here, Plaintiffs have alleged that Lead Plaintiff purchased shares of Magna-chip stock on August 2, 2013, the day after Avenue Capital sold a portion of its stock on August 1, 2013. See TAC, ECF No. 114 at ¶ 236. This is sufficient to allege that Lead Plaintiff traded “contemporaneously” with Avenue. See In re Countrywide Fin. Corp. Sec. Litig,,
A more difficult question is whether Avenue engaged in insider trading. An initial matter, though not discussed by the parties, is whether section 20(A) requires the defendant to “actually use” the inside information as part of their investment decision, or merely requires the defendant to possess such information at the same time it conducts its transactions. Two district courts in this circuit have considered the issue and reached different results. In In re Countrywide Financial Corp. Sec. Litig.,
The court in Johnson v. Aljian,
This Court agrees with the Second Circuit and Johnson v. Aljian that Section 20A requires only that a party know the inside information while making the trade, not that she actually use that information. This conclusion comports with the language of the section, which prohibits “purchasing or selling a security while in possession of material, nonpublic information.” 15 U.S.C. § 78Nl(a) (emphasis added).
Plaintiffs allege that Avenue Capital “through its Audit Committee appointees had access to MagnaChip’s material, nonpublic and highly confidential information concerning the improper business and accounting practices giving rise to the Restatement and the knowledge that Magnachip’s financial reports were materially misstated during the Class Period.” TAC, ECF No. 114 at ¶238. The Court has already concluded, in its analysis of Plaintiffs’ 10(b) claims, that the individual Avenue Defendants Elkins and Klein are alleged to have the requisite scienter regarding Magnachip’s misrepresentations. Plaintiffs argue that because Elkins and Klein were also Avenue employees, their knowledge can be imputed to Avenue itself, Lead Plaintiffs Opposition, ECF No. 137 at 55 n.26, citing to W. R. Grace & Co. v. W. U.S. Indus., Inc.,
Plaintiffs’ cases are not entirely on point, as Defendants note. Avenue Defendants’ Reply, ECF No. 146 at 21. W.R. Grace was a patent infringement case in which the Ninth Circuit held that an employee’s knowledge of a fraudulent affidavit could be imputed to his employer corporation under established agency-principal doctrines.
Accordingly, Defendants’ motions to dismiss Plaintiffs’ Section 20A claims are denied.
C. Securities Act Claims
Though Plaintiffs raise claims under sections 11, 12(a)(2), and 15 of the Securities Act in their TAC, only the latter two claims apply to Avenue Capital. However, as explained below, sections 11 and 12(a)(2) often overlap in their analysis. As the parties do in their briefing, the Court therefore discusses the claims related to these two sections together. It concludes that Plaintiffs’ claims under these sections, and accordingly their claims under section 15, must be dismissed.
1. 11 and 12(a)(2) claims
“Section 11 creates a private right of action for any purchaser of a security where ‘any part of the registration statement, when such part became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading.’ ” Rieckborn v. Jefferies LLC,
Section 12(a)(2) functions as the “sibling” to Section 11 of the Securities Act, allowing plaintiffs to bring suit against parties who are statutory sellers of securities pursuant to misrepresentations in registration statements. Id. at 925. “To plead a claim under Section 12(a)(2), the plaintiff must allege that (1) the defendant is a statutory seller; (2) the sale was effected by means of a prospectus or oral communication; and (3) the prospectus or oral communication contained a material misstatement or omission.” Maine State Ret. Sys. v. Countrywide Fin. Corp., No. 2:10-CV-0302 MRP,
Defendants raise two arguments that these claims are not sufficiently pleaded
a. Whether Plaintiffs’ Claims are Time-Barred
Defendants first argue that Plaintiffs’ Securities Act claims are time-barred. Claims brought under the Securities Act are barred “unless brought within one year after the discovery of the untrue statement or the omission, or after such discovery should have been made by the exercise of reasonable diligence.” 15 U.S.C. § 77m. The one-year period “begins to run once the plaintiff did discover or a reasonably diligent plaintiff would have discovered the facts constituting the violation— whichever comes first.” Merck & Co. v. Reynolds,
The focus of the dispute is whether Magnaehip’s announcement in March 11, 2014 that it needed to restate its financial results for 2011 through 2013 gave reasonably diligent plaintiffs enough information to discover Magnachip’s alleged misrepresentations. If so, the Securities Act claims, which were first raised by OPPRS in April of 2014, would be time-barred because they were brought thirteen months after the announcement.
Plaintiffs argue that there were not sufficient facts to support their claims until at least August 12, 2014, when Magnachip first announced that the effect of its restatements would be “material.” See OPPRS Opposition, ECF No. 138 at 18.
Defendants argue that the March 11 announcement would still have put a “reasonably diligent” investor on notice that the financial reports should not be relied upon as true; indeed, Plaintiffs themselves allege that Magnachip stated that the prior financial reports “should not be relied upon.” TAC, ECF No. 114 ¶94. Defendants analogize to In re Magnum Hunter Resources Corp. Sec. Litig.,
This case appears to lie somewhere in between the two cited by Plaintiffs and Defendants. The March 11 and August 12 announcements were not merely a series of “repeated disclosures of ongoing weaknesses” as in Magnum Hunter. At the same time, the March 11 announcement did “make plain” that the accounting errors cited by Magnachip would cause changes to Magnachip’s financial results, unlike in Reickborn. Nevertheless, Plaintiffs may be correct that the March 11 announcement, in and of itself, did not sufficiently put them on notice to begin their one-year clock.
However, as Defendants point out, there were several other sources of information that a reasonably diligent investor would likely' uncover. Most significant is the March 12 complaint filed by the Lead Plaintiffs, in which they allege similar claims to those later brought by OPPRS in April of the following year. Underwriter Defendants’ Opposition, ECF No. 130 at 15. Indeed, Lead Plaintiffs alleged in their initial complaint that “defendants made false and/or misleading statements” in relation to the fact that Magnachip “was improperly recognizing revenues” and “as a result of the above, the Company’s financial statements were materially false and misleading at all relevant times.” Complaint, ECF No. 1 at 3. At base, these
Plaintiffs contend that “Defendants ignore significant differences between OPPRS’s initial complaint and the March 12, 2014 complaint, including the pleading of information about the magnitude and impact of the accounting violations.” OPPRS’s Opposition, ECF No. 138 at 26. However, the one-year time period does not reset simply because additional information is revealed that could make for a stronger claim. See Stitching Pensioenfonds ABP v. Countrywide Fin. Corp.
Accordingly, the Court concludes that the combination of the March 11 announcement, the Lead Plaintiffs’ initial complaint filed the next day, and the other coverage surrounding the announcement would have put a reasonably diligent investor on notice of potential Securities Act claims against Defendants.
Plaintiffs argue in the alternative that their claims are not time-barred because they relate back to the original complaint filed on March 12. However, the Ninth Circuit has held that an amended complaint that adds new plaintiffs relates back to the original complaint only if “there is an identity of interests between the original and newly proposed plaintiff.” In re Syntex Corp. Sec. Litig.,
b. Statutory Standing
In the alternative, the Court concludes Plaintiffs also lack statutory standing for their section 11 and 12(a)(2) claims.
The Ninth Circuit has explained that the “level of factual specificity” needed to trace shares back to a particular offering and registration statement “will vary depending on the context.” In re Century Alum. Co. Sec. Litig.,
This can be done in two ways. First, plaintiff can prove that they purchased the shares directly in the offering itself. Id. Second, plaintiffs can prove “that their shares, although purchased in the aftermarket, can be traced back to the secondary offering.” Id. This second method is “often impossible,” because it requires plaintiffs “to trace the chain of title for their shares back to the [pertinent] offering, starting with their own purchases and ending with someone who bought directly in the [pertinent] offering.” Id. at 1106-07. Most trading, however, “is done through brokers who neither know nor care whether they are getting newly registered or old shares.” Id. (citation omitted).
Plaintiffs contend that general allegations that securities purchases are “traceable” to a false registration statement are sufficient to allege statutory standing, citing to In re Petrobras Sec. Litig.,
Plaintiffs do not argue or allege that they purchased their shares directly from defendants. Instead, they allege generally that “Plaintiff Oklahoma Police acquired Magnachip stock pursuant and/or traceable to the Registration Statement for the 2/13 Offering” TAC, ECF No. 114 at II251. They assert this can be shown because they purchased their shares on the day of the 2/13 Offering (February 6, 2013) and for the same offering price ($14.50). OPPRS Opposition, ECF No. 138 at 29. However, these same allegations were rejected by the Ninth Circuit in In re Century,
Accordingly, Plaintiffs have failed to sufficiently allege statutory standing for their Securities Act claims.
In sum, Plaintiffs’ section 11 and 12(a)(2) claims against Avenue Capital are dismissed because they are time-barred, and
2. Section 15 claims
Section 15, much like Section 20(a) for Exchange Act claims, allows plaintiffs to also bring claims against parties who are “control persons” for a primary violation of the Securities Act. See Hollinger v. Titan Capital Corp.,
CONCLUSION
For the foregoing reasons, the Court reaches the following conclusions: (1) in light of the Notice of Settlement, the motions to dismiss in regards to all Defendants except Avenue Capital are denied without prejudice to their re-filing if the settlement agreement is not approved; (2) Defendants’ motions to dismiss are denied as to Plaintiffs’ claims against Avenue Capital under sections 20(a) and 20A of the Exchange Act; and (3) Defendants’ motions to dismiss are granted with prejudice as to Plaintiffs’ claims against Avenue
Capital under sections 12(a)(2) and 15 of the Securities Act.
IT IS SO ORDERED.
Notes
. Ms. Sakai’s brief was filed at a later date because, as the parties informed the Court, she was not served until September 8, 2015. See ECF Nos. 159, 161. The parties also informed the Court that two remaining defendants, Mr. Park and Mr. Hwang, had still not b.een served. Pursuant to the Court's order, Plaintiffs filed a motion for alternative service or for discovery to obtain Mr. Park’s and Mr. Hwang’s addresses. ECF No. 176. In light of the settlement agreement, that motion was vacated as moot. ECF No. 183.
. The Court will refer to the briefs in regards to each of these motions by the stage of briefing (the Motion, Opposition, or Reply) and the party that filed it (for example, the Underwriter Defendants or the Magnachip Defendants), along with the ECF docket number. By stipulation, the plaintiffs jointly filed two briefs in response to the first four motions to dismiss. See ECF No. 136. The first brief was filed by the counsel for plaintiffs in the Hayes/Thomas case, ECF No. 137, while the second brief was filed by the counsel for plaintiffs in the OPPRS case, ECF No. 138. For the sake of clarity, the Court will refer to these as the "Lead Plaintiff Opposition” and the "OPPRS Opposition,” respectively.
. Plaintiffs argue that the heightened fraud pleading standard should not apply to 20(a) claims because unlike section 10(b), fraud is not a necessary element of pleading a claim under section 20(a). Lead Plaintiffs’ Opposition, ECF No. 137 at 49. The Court does not address this argument, as it concludes that Plaintiffs sufficiently allege control even under the higher pleading standard.
. In light of the Notice of Settlement, the Court does not address Defendants' arguments regarding whether the other Defendants are "controlling persons.” See Avenue Defendants’ Motion, ECF 123 at 21; Magna-chip Defendants’ Motion, ECF No. 126 at 26.
. Plaintiffs allege that because neither section 11 nor section 12(a) requires a showing of fraud, only the standard pleading requirements of Rule 8(a) are applicable to claims under those sections. However, such claims for which the alleged violations are “grounded in fraud” must ■ nevertheless meet the heightened 9(b) standard. In re Stac Elec. Sec. Litig.,
. The other Defendants besides Avenue Capital also argued that they were not statutory sellers. Because Avenue Capital did not contest that it was a statutory seller, the Court does not address this issue.
. Though Merck was an Exchange Act case, its reasoning applies equally to the similar timeliness requirements for Securities Act claims. See, e.g,, Booth v. Strategic Realty Trust, Inc., No. 13-CV-04921-JST,
.The Underwriter Defendants also contend that Plaintiffs should not be allowed to argue they lacked sufficient information to bring their claims until August 12, 2014 because the Lead Plaintiffs first filed their complaint on March 12, 2014. Underwriter Reply, ECF No. 144, at 9. The Court will not address this argument except to say it is based on a selective reading of the prior history of the case and the consolidation of OPPRS's claims with those of the Lead Plaintiff.
. Because the claim here is in regards to statutory standing under the Securities Act rather than Article III standing, this claim is properly considered under Fed. R. Civ. Pro. 12(b)(6) rather than Rule 12(b)(1). See In re Century Alum. Co. Sec. Litig.,