Sheldon v. Vermonty ( 2000 )

UNITED STATES COURT OF APPEALS
FOR THE TENTH CIRCUIT
DAVE SHELDON,
Plaintiff-Appellant,
v. Nos. 99-3202 & 99-3389
JAY VERMONTY; CARMEN
VERMONTY; POWER PHONE, INC.,
including all Directors and Officers;
NOAH STEINBERG; GERSHON
TANNENBAUM; ENRIQUE R.
CARRION, Dr.; TMC AGROWORLD,
INC., including all Directors and
Officers; MONTE CRISTI GROUP,
including all Directors and Officers;
MANHATTAN TRANSFER
REGISTRAR COMPANY, including
all Directors and Officers; HECTOR
CRUZ; JACK SAVAGE, individually
and as Director and Officer and all
Directors and Officers individually,
aka J. Wesley Savage; PRINCETON
RESEARCH,
Defendants-Appellees,
and
CHARLES SCHWAB & CO., INC.;
OLDE DISCOUNT CORPORATION;
PRINCIPAL FINANCIAL,
Defendants.
ORDER
Filed December 4, 2000
Before TACHA , EBEL , and LUCERO , Circuit Judges.
This matter is before the court on appellees’ petition for rehearing of this
court’s order and judgment filed October 30, 2000. The members of the hearing
panel have considered appellees’ arguments regarding the merits of this court’s
disposition of this appeal, and conclude that the original disposition was correct.
Therefore, the petition for rehearing is denied on the merits.
The hearing panel, however, issues a revised order and judgment which
modifies certain language of the filed order and judgment. The primary change
is that the quotation from Appellant’s Appendix at 96 has been changed to a
quotation from Appellant’s Appendix at 47. See slip op. at 8. A copy of the
corrected order and judgment is attached.
Entered for the Court,
Patrick Fisher, Clerk of Court
By:
Keith Nelson
Deputy Court
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F I L E D
United States Court of Appeals
Tenth Circuit
UNITED STATES COURT OF APPEALS
OCT 30 2000
FOR THE TENTH CIRCUIT
PATRICK FISHER
Clerk
DAVE SHELDON,
Plaintiff-Appellant,
v. Nos. 99-3202 & 99-3389
(D.C. No. 98-CV-2277-JWL)
JAY VERMONTY; CARMEN (D. Kan.)
VERMONTY; POWER PHONE, INC.,
including all Directors and Officers;
NOAH STEINBERG; GERSHON
TANNENBAUM; ENRIQUE R.
CARRION, Dr.; TMC AGROWORLD,
INC., including all Directors and
Officers; MONTE CRISTI GROUP,
including all Directors and Officers;
MANHATTAN TRANSFER
REGISTRAR COMPANY, including
all Directors and Officers; HECTOR
CRUZ; JACK SAVAGE, individually
and as Director and Officer and all
Directors and Officers individually,
aka J. Wesley Savage; PRINCETON
RESEARCH,
Defendants-Appellees,
and
CHARLES SCHWAB & CO., INC.;
OLDE DISCOUNT CORPORATION;
PRINCIPAL FINANCIAL,
Defendants.
ORDER AND JUDGMENT *
Before TACHA , EBEL , and LUCERO , Circuit Judges.
After examining the briefs and appellate record, this panel has determined
unanimously to grant the parties’ requests for a decision on the briefs without oral
argument. See Fed. R. App. P. 34(f); 10th Cir. R. 34.1(G). The cases are
therefore ordered submitted without oral argument.
No. 99-3202
Plaintiff-appellant Dave Sheldon filed this action asserting that various
defendants violated provisions of the Securities Act of 1933, the Securities
Exchange Act of 1934, and the Kansas Securities Act in the course of selling
shares of Power Phone, Inc., both before and after its failed merger with TMC
Agroworld, Inc. Sheldon also alleged liability under common-law theories of
fraud, breach of fiduciary duty, civil conspiracy, unjust enrichment, and negligent
misrepresentation. For several reasons, the district court ruled that Sheldon’s
complaint failed to state an adequate federal-question or diversity claim upon
*
This order and judgment is not binding precedent, except under the
doctrines of law of the case, res judicata, and collateral estoppel. The court
generally disfavors the citation of orders and judgments; nevertheless, an order
and judgment may be cited under the terms and conditions of 10th Cir. R. 36.3.
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which relief could be granted. Accordingly, it granted the motion to dismiss filed
by defendants Jay Vermonty, Carmen Vermonty, Gershon Tannenbaum, and
Hector Cruz. Later, the court denied Sheldon’s request for reconsideration and
motion to amend his complaint pursuant to Fed. R. Civ. P. 15(a). It then directed
entry of judgment in accordance with Fed. R. Civ. P. 54(b). Sheldon now appeals
pursuant to 28 U.S.C. § 1291. We affirm in part, and reverse and remand in part.
BACKGROUND 1
Sheldon’s securities claims arise from his serial purchases of stock in
Power Phone, Inc. from July 1, 1996 through April 21, 1997. Sheldon alleges that
he invested in reliance on false information disseminated primarily by defendant
Jay Vermonty, Power Phone’s investor relations representative, through press
releases, asset statements, internet messages, and individual contacts with
investors. Sheldon also alleges that several other defendants were involved in the
1
Sheldon filed three complaints: essentially all of the claims in the first
complaint were dismissed, with leave to amend, for failure to comply with the
pleading requirements of Rules 8 and 9(b) of the Federal Rules of Civil
Procedure. The Second Amended Complaint added additional defendants. The
Third Amended Complaint is the subject of this appeal and is referred to in this
order and judgment as “the Complaint.” In making sense of the jumbled factual
allegations in that filing, we have the advantage of the district court’s distillation
of Sheldon’s claims. The district court performed a yeoman’s task in determining
the gist of the case, rather than simply describing the Complaint as
incomprehensible and dismissing it under Rule 8(a). See Carpenter v. Williams ,
86 F.3d 1015, 1016 (10th Cir. 1996).
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misrepresentations. Carrion, Reyes, and Tannenbaum, who were officers of
Power Phone, allegedly corroborated Vermonty’s statements so that they, like
Vermonty, would benefit through stock transactions. Carmen Vermonty, Jay
Vermonty’s wife, was supposedly an investor-relations representative for Power
Phone. Jack Savage allegedly drafted and distributed false Princeton Research
reports in return for payment. Although the Complaint alleges that defendant
Hector Cruz served as the transfer agent for Power Phone shares, it does not
connect him with any statements made on behalf of Power Phone.
The alleged misrepresentations were that: (1) Power Phone was to merge
with TMC Agroworld, Inc., a company with $50-$75 million in documented
assets, no liabilities, and an internationally-known expert in free trade zones,
defendant Carrion, at its head; (2) Power Phone had acquired the Monte Cristi
Lumber Company (with $19-$20 million in assets and $200 million in sales); 2
(3)
the Power Phone/TMC merger was completed, resulting in the addition of $74.3
million in assets; (4) Power Phone owned the Santa Elena meat-packing plant in
Argentina, with assets of $74 million and sales over $100 million, and would be
opening it in a matter of months; (5) Power Phone had a consummated contract to
deliver two million metric tons of urea from Argentina; and (6) generally Power
2
We note that Sheldon’s filings spell “Monte Cristi” in several different
ways. In this Order and Judgment we use the “Monte Cristi” spelling.
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Phone had appreciable revenues, assets, and confirmed contractual arrangements.
The Complaint provides specific time frames for each of the alleged
misstatements.
According to the Complaint, Sheldon eventually learned that none of the
statements circulated about Power Phone was true. Specifically, he alleges that
the company did not own the Santa Elena meat-packing plant, a facility which
“had been closed for years and [] would require millions of dollars to take it over
from Argentina’s government, and, no one had been hired to work there.”
Appellant’s App. at 31. The Complaint further alleges that the “Monte Cristi
Lumber [Company] did not exist.” Id. at 33. In addition, Sheldon asserts that
Power Phone was not properly registered under the federal and Kansas securities
laws and that its sole Securities Exchange Commission filing is “full of false
information.” Id. at 38.
The stock price allegedly declined from $3.50 per share in July 1996 to
$.87 in December 1996, and to $.05 at the time the Complaint was filed. Sheldon
asserts that he suffered an investment loss of $38,722.89.
DISCUSSION
This court reviews de novo a district court’s decision to dismiss a
complaint pursuant to Fed. R. Civ. P. 12(b)(6) for failure to state a claim upon
which relief may be granted or pursuant to Fed. R. Civ. P. 9(b) for failure to plead
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fraud with particularity. See Grossman v. Novell, Inc., 120 F.3d 1112, 1118 &
n.5 (10th Cir. 1997). “We accept as true all well-pleaded facts, as distinguished
from conclusory allegations, and view those facts in the light most favorable to
the nonmoving party.” Maher v. Durango Metals, Inc. , 144 F.3d.1302, 1304
(10th Cir. 1998). The dismissal will be upheld only if “‘it appears beyond doubt
that the plaintiff can prove no set of facts in support of his claim which would
entitle him to relief.’” Id. (quoting Conley v. Gibson , 355 U.S. 41, 45-46 (1957)).
As a preliminary matter, we note that the Complaint is bereft of
legally-significant allegations as to defendant Cruz. Without any further
discussion, we affirm the district court’s dismissal of all claims against Mr. Cruz.
The remainder of our analysis applies to defendants Jay Vermonty, Carmen
Vermonty, and Tannenbaum.
Claims under the Securities Act of 1933
Count one of the Complaint asserts violations of § 12 of the Securities Act
of 1933 (the Securities Act), codified at 15 U.S.C. § 77l(a)(1) and (a)(2). The
Securities Act primarily regulates one corporate event: the initial distribution of
securities. See Gustafson v. Alloyd Co. , 513 U.S. 561, 570-72 (1995). The Act
requires issuing companies to make a number of company and transaction-specific
disclosures and to deliver this information to potential investors. See id. In this
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case, Sheldon alleges that the event requiring compliance with the Securities Act
was the merger between Power Phone and TMC Agroworld.
Section 12(2) provides, in pertinent part, that any person who offers or sells
a security by use of the mails or interstate facilities by means of a prospectus or
oral communication which includes any untrue statement or omission of a
material fact is liable for damages to the immediate purchaser of the security. 3
The Supreme Court has “indicated in dicta that only purchasers in the initial
public offering could bring suit pursuant to section 12(2).” Joseph v. Wiles ,
223 F.3d 1155, 1160-61 (10th Cir. 2000) (citing Gustafson , 513 U.S. at 571-72)).
The district court dismissed Sheldon’s § 12(2) claim for failure to plead sufficient
facts to support an inference that the Power Phone/TMC merger was required to
be registered pursuant to § 5 of the Act, 15 U.S.C. § 77e, or that the sale of stock
subsequent to the merger amounted to an initial public offering. In his
Complaint, Sheldon alleged that the defendants “failed to make a proper ‘33 Act
3
As this court has stated,
Section 12 claims are commonly referred to as either § 12(1) or
§ 12(2) claims. In 1995, however, Congress added another subsection
to § 12. See Private Securities Litigation Reform Act of 1995,
Pub. L. No. 104-67, § 105, 109 Stat. 737, 757 (codified at 15 U.S.C.
§ 77l ). Therefore, § 12(1) and § 12(2) claims are now technically
§ 12(a)(1) and §12(a)(2) claims.
Maher v. Durango Metals, Inc. , 144 F.3d 1302, 1303 n. 1 (10th Cir. 1998).
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registration for the initial public offering of the ‘merger’ between TMC and the
‘Shell’ of [Power Phone] as required for this specific situation (Merger; Shell)
when no legitimate exemption applied. . . .” Appellant’s App. at 47.
These allegations bear some similarity to the factual circumstances of SEC
v. Datronics Engineers, Inc. , 490 F.2d 250 (4th Cir. 1973), in which the
defendant, a public corporation, acquired a number of privately-held, target
companies in merger transactions. A subsidiary of the defendant would merge
with the target company, with the target company disappearing and the subsidiary
surviving the merger. Both the shareholder-principals of the disappearing target
and Datronics received stock in the surviving subsidiary. After the merger,
Datronics distributed some of its shares to its shareholders as a dividend. In this
way, formerly privately-held companies became publicly owned without going
through a registered public offering. See id. at 253-54. The court was concerned
that, contrary to the purposes of the Securities Act, a public trading market would
develop in the securities of these newly-public companies for which no public
information was yet available. See id. The court therefore held that Datronics’
activities violated the Securities Act. See id. at 254.
We make no determination as to whether the Datronics rationale is
applicable here or whether the merger actually resulted in an initial public
offering of stock. We note, however, that a “court should be especially reluctant
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to dismiss on the basis of the pleadings when the asserted theory of liability is
novel or extreme, since it is important that new legal theories be explored and
assayed in the light of actual facts rather than a pleader’s suppositions.” 5A
Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 1357,
at 341-43 (2d ed. 1990). We conclude that plaintiff’s § 12(a)(2) allegations
concerning the merger between Power Phone (a public company alleged to be
a shell having little or no assets) and TMC Agroworld are sufficient to survive
defendants’ motion to dismiss. Accordingly, the district court’s dismissal of the
claim was premature.
Sheldon also makes a claim under § 12(1) of the Securities Act, 15 U.S.C.
§ 77l(a)(1), which provides a right of action for the immediate purchaser to
rescind the sale and demand a return of the purchase price against an individual
who offered or sold unregistered securities required to be registered. The
purchaser must bring the action “within one year after the violation upon which it
is based” and, in no event, “more than three years after the security was bona fide
offered to the public.” 15 U.S.C. § 77m.
Here, the district court dismissed the § 12(1) claim as time-barred. The
court determined that Sheldon’s last purchase of stock occurred in April of 1997,
but that this action not filed until June 1998, more than one year later. On the
facts of this case, we agree with the district court’s ruling. A § 12(a)(1) claim
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“contemplates a buyer-seller relationship not unlike traditional contractual
privity.” Pinter v. Dahl , 486 U.S. 622, 642 (1988). The allegations of
misrepresentations made within the required one-year time frame, but which did
not result in a sale, are irrelevant here. Accordingly, the § 12(1) claim was
properly dismissed.
Claims under the Securities Exchange Act of 1934
Count V of Sheldon’s Complaint alleges violations of the Securities
Exchange Act of 1934 (the Exchange Act). To state a claim under § 10(b) of the
Exchange Act, codified at 15 U.S.C. § 78j(b), “a plaintiff must establish that, in
connection with the purchase or sale of a security, the defendant, with scienter,
made a false representation of a material fact upon which the plaintiff justifiably
relied to his or her detriment. Wiles , 223 F.3d at 1161 (quotations and citations
omitted).
In this case, the district court dismissed Sheldon’s claim for failure to plead
the fraud element of a § 10(b) claim with particularity, pursuant to Rule 9(b) of
the Federal Rules of Civil Procedure. Specifically, the district court found the
complaint wanting in allegations as to “how or why the alleged misrepresentations
were false,” Appellant’s App. at 259; whether the “allegedly false statements
were known to be false when made,” id. at 260, and “defendants’ intent to
deceive, or ‘scienter.’” id. at 262-63.
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In reviewing a dismissal under Rule 9(b), we confine our analysis to the
text of the complaint. See Koch v. Koch Indus., Inc. , 203 F.3d 1202, 1236
(10th Cir.), cert denied , 68 U.S.L.W. 3023 (U.S. Oct. 10, 2000) (No. 00-28) and
cert. denied , 69 U.S.L.W. 3128 (U.S. Oct. 10, 2000) (No. 00-175). 4
Rule 9(b) provides, “[i]n all averments of fraud or mistake, the
circumstances constituting fraud or mistake shall be stated with
particularity. . . .” More specifically, this court requires a complaint
alleging fraud to set forth the time, place and contents of the false
representation, the identity of the party making the false statements
and the consequences thereof. Rule 9(b)’s purpose is to afford
defendant fair notice of plaintiff’s claims and the factual ground
upon which [they] are based. . . .”
Id. (further quotations and citations omitted). Rule 9(b) further provides that
“malice, intent, knowledge, and other conditions of mind of a person may be
averred generally.”
After a review of the complaint, we conclude that it adequately met
Rule 9(b) requirements. First, as the district court acknowledged, the Complaint
alleged misrepresentations with background information as to date, speaker, and
the medium of communication. See Appellant’s App. at 259. Second, certain of
the alleged misrepresentations involved profitable expectations arising from an
4
Accordingly, we disregard the content of papers that Sheldon filed with the
court subsequent to his filing of the Third Amended Complaint. We note,
however, that the documents denominated Exhibit 1-A through Exhibit 6-D,
which were filed with the initial Complaint and referenced in the Third Amended
Complaint as Exhibits 1- through 6, are appropriately included in the record on
appeal.
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unowned and inoperable meat-packing plant, a nonexistent lumber company, and
fabricated contracts. Accepting Sheldon’s allegations as true, these are patently
false statements of present fact. The district court erred in determining they were
“‘mere conclusory allegations of falsity’” and in characterizing them as “‘fraud by
hindsight.’” Appellant’s App. at 259 (quoting Grossman , 120 F.3d at 1124).
Third, the allegations of scienter were sufficient. In securities fraud cases,
although speculation and conclusory allegations will not suffice, great specificity
is not required if the plaintiff alleges enough facts to support “a strong inference
of fraudulent intent.” Stevelman v. Alias Research Inc. , 174 F.3d 79, 84 (2d Cir.
1999).
At this procedural juncture, the allegations of fraud need no further
explanation. Although Sheldon’s complaint could have been more artfully
crafted, he should be permitted to pursue his § 10(b) claim. The district court’s
dismissal of the claim was inappropriate.
Sheldon also alleges violations of § 12 and § 13 of the Exchange Act.
See 15 U.S.C. § 78l (setting out registration requirements for securities); § 78m
(setting out, among other things, subsequent reporting requirements). The
Complaint does not provide sufficient allegations to demonstrate which of these
provisions, if any, apply to any of the defendants. Furthermore, on appeal,
Sheldon makes no comprehensible argument supporting his theory that he is
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entitled to pursue a private right of action under these provisions. See generally ,
Lora C. Siegler, Availability of Implied Private Action for Violation of § 13 of
Securities Exchange Act of 1934 , 110 A.L.R. Fed. 758 (1992). The district court
properly dismissed this claim, as alleged in count II of the Complaint. 5
Controlling Person Liability Claims
In counts III and IV of the Complaint, Sheldon claims violations of § 15 of
the Securities Act, 15 U.S.C. § 77o, and § 20(a) of the Exchange Act, 15 U.S.C.
§ 78t. Under both these provisions, “a person who controls a party that commits
a violation of the securities laws may be held jointly and severally liable with the
primary violator.” Maher , 144 F.3d at 1304-05. “[T]o state a prima facie case of
control person liability, the plaintiff must establish (1) a primary violation of the
securities laws and (2) ‘control’ over the primary violator by the alleged
controlling person.” Id. at 1305.
The district court summarily dismissed Sheldon’s control person claims for
failure to state a primary violation. As discussed above, we have concluded that
certain of his claims of primary securities violations should have survived
defendants’ motion to dismiss. On remand, the district court should allow the
concomitant control person claims to proceed.
5
To the extent Sheldon seeks to make claims under any other provisions of
the Exchange Act, these claims are inadequately pled and properly dismissed.
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Diversity Claims
Sheldon has asserted numerous diversity claims. The district court
dismissed his claims under the Kansas Securities Act, along with claims of
common law fraud and common law conspiracy with prejudice, essentially for
failure to plead fraud with particularity. The court dismissed state-law claims of
unjust enrichment and negligent misrepresentation without prejudice. For the
same reasons that we determine Sheldon’s federal-law fraud claims were
improperly dismissed, we reverse the district court’s dismissal of these state-law
claims. We agree with the district court, however, that Sheldon failed to allege
any facts from which a fiduciary duty could be discerned. See Denison State
Bank v. Madeira , 640 P.2d 1235, 1241 (Kan. 1982) (stating existence of fiduciary
relationship depends upon whether “there has been a special confidence reposed
in one who, in equity and good conscience, is bound to act in good faith and with
due regard to the interests of the one reposing the confidence”). Dismissal of the
breach of fiduciary duty claim was appropriate.
Denial of Leave to File an Amended Complaint
Finally, Sheldon asserts that the district court erred in dismissing his
complaint without affording him leave to amend. Whether to allow amendment of
a complaint is a matter left to the district court’s discretion. See Trotter v
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Regents of the Univ. of N.M. , 219 F.3d 1179, 1185 (10th Cir. 2000). In light of
the poor quality of Sheldon’s pleadings, the district court did not abuse its
discretion in denying a request to amend. Because we are remanding certain
claims to the district court for further proceedings, however, the issue of
amendment as to these claims is best left to the district court’s discretion
on remand.
CONCLUSION
In sum, we reverse the dismissal of the following claims against defendants
Jay Vermonty, Carmen Vermonty, and Gershon Tannenbaum: § 12(2) Security
Act claims; § 10(b) Exchange Act claims; controlling person liability claims
under the Securities Act and the Exchange Act; Kansas Securities Act claims; and
common-law fraud, conspiracy, and unjust enrichment claims. These claims are
remanded for further proceedings consistent with this order and judgment. The
dismissal of Sheldon’s remaining claims is affirmed, including the dismissal of all
claims against defendant Hector Cruz.
We regret the significant expenditure of judicial resources caused by the
poor quality of Sheldon’s advocacy. Although we have determined that some
of Sheldon’s claims are adequate to survive defendants’ motion to dismiss,
we caution Sheldon that, in the absence of significant improvement in the quality
of his filings, his entire case may be vulnerable to a subsequent legal challenge.
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No. 99-3389
The claims made in this case against defendants Power Phone, Inc., Noah
Steinberg, Dr. Enrique R. Carrion, TMC Agroworld, Inc., The Monte Cristi
Group, Manhattan Transfer Registrar Company, Princeton Research, Inc., and
Jack Savage are identical to those discussed above in Case No. 99-3202. The
district court dismissed all claims against these defendants for the same reasons
and in the same manner as they were dismissed against defendants Jay Vermonty,
Carmen Vermonty, Tannenbaum, and Cruz. See Appellant’s App. at 10.
We affirm in part, and reverse and remand in part, consistent with our
resolution of case No. 99-3202. Issues concerning sufficiency of service and
other arguments unique to individual defendants may be dealt with on remand.
Entered for the Court
David M. Ebel
Circuit Judge
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