Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_05-cv-04518/USCOURTS-cand-3_05-cv-04518-51/pdf.json

Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 28:1331 Fed. Question: Securities Violation

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United States District Court

For the Northern District of California

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IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

RONALD SIEMERS and FORREST

MCKENNA, individually and on behalf of all

others similarly situated,

Plaintiffs,

 v.

WELLS FARGO & CO.,WELLS FARGO

FUNDS MANAGEMENT, LLC, WELLS

CAPITAL MANAGEMENT, INC., H.D.

VEST INVESTMENT SERVICES, WELLS

FARGO INVESTMENTS, LLC, STEPHENS,

INC., and WELLS FARGO FUNDS TRUST,

Defendants. /

No. C 05-04518 WHA

ORDER GRANTING

DEFENDANTS’ MOTION 

FOR JUDGMENT ON 

THE PLEADINGS

INTRODUCTION

In this securities-fraud action, defendants move for judgment on the pleadings as to

certain counts of the complaint, pursuant to Federal Rule of Civil Procedure 12(c). Defendants

contend that the undisputed facts establish that plaintiffs’ claims arising under Section 12(a)(2)

of the Securities Act of 1933 must fail as a matter of law. This order finds that plaintiffs’

Section 12(a)(2) claims are barred by the statute of limitations or fail because plaintiffs have

suffered no rescissory loss. Plaintiffs’ claim under Section 15 of the 1933 Act must also fail. 

For the below-stated reasons, defendants’ motion for judgment on the pleadings is GRANTED.

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 Whether these were actual purchases or only reinvestments is not clear from this record.

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STATEMENT

This action alleges that defendants, various Wells Fargo-affiliated companies in the

mutual-fund trade, engaged in a hidden system of “revenue sharing” wherein fund sponsors

made incentive payments to brokerage firms in exchange for increased visibility. The most

incendiary allegation is that the payments came not from the sponsors’ own money but from the

investors’ money — siphoned out of the common fund in the guise of sham fees. Two

putative-class representatives are named as plaintiffs, Ronald Siemers and Forrest McKenna. 

The full procedural history of this action is set forth in an order dated March 9, 2007. See

Siemers v. Wells Fargo & Co., No. C 05-04518 WHA, 2007 WL 760750, at *1 (N.D. Cal. Mar.

9, 2007). 

Counts I and II of the third amended complaint assert claims against defendants Wells

Fargo Investments, Wells Fargo Funds Trust, Wells Fargo Funds Distributor, and Stephens

Incorporated, under Section 12(a)(2) of the Securities Act of 1933, 15 U.S.C. 77l(a)(2). 

Count III asserts a claim against Wells Fargo & Co. under Section 15 of the 1933 Act, 15

U.S.C. 77o. The instant motion is directed at Counts I, II, and III. 

Defendants’ motion focuses on specific purchases and sales of Wells Fargo mutual

funds by plaintiffs McKenna and Siemers. The operative complaint alleges the following

purchases of Wells Fargo funds by McKenna and Siemers (Compl. Exhs. A, B):1

McKenna:

• The purchase of 191.84 shares of Wells Fargo Advantage

Large Company Growth Fund on May 3, 2001.

• The purchase of 252.15 shares of Wells Fargo Advantage

Small Cap Growth Fund on May 3, 2001. 

Siemers:

• Purchases of Wells Fargo Diversified Equity Fund at

various prices between July 14, 2000, and December 24,

2003.

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• Three purchases of Wells Fargo Advantage Small Cap

Growth Fund consisting of 620.018 shares on February 20,

2004 (at $11.08), 217.028 shares on February 20, 2004 (at

$11.29), and 13.384 shares on December 15, 2004 (at

$11.59).

• One purchase of Wells Fargo TR Montgomery Emerging

Markets Focus Fund, consisting of 451.264 shares on

February 23, 2004 (at $22.16).

Before the complaint was filed, Siemers sold all the shares he owned in both the

Diversified Equity Fund and the Emerging Markets Focus Fund. He sold his shares in the

Emerging Markets Fund on October 31, 2005, for $25.78 per share. He sold his shares in the

Diversified Equity Fund in two separate sales. On February 24, 2004, he sold 43.256 shares for

$40.02 per share, and on April 7, 2004, he sold 2.538 shares for $41.21 per share. He still owns

his shares in the Advantage Small Cap Growth Fund.

Defendants Wells Fargo Investments, Wells Fargo Fund Distributor, Wells Fargo Funds

Trust, and Stephens move for judgment as to Counts I and II. Defendant Wells Fargo &

Company moves for judgment as to Count III of the complaint. Plaintiffs concede that neither

Siemers nor McKenna may plead a Section 12(a)(2) claim based on any purchase made before

November 2, 2005. Thus only some of Siemers’ purchases — and none of McKenna’s — are at

issue in this motion.

ANALYSIS

1. LEGAL STANDARD.

“After the pleadings are closed but within such time as not to delay the trial, any party

may move for judgment on the pleadings.” Fed. R. Civ. P. 12(c). A motion for judgment on the

pleadings is evaluated according to virtually the same legal standard as a motion to dismiss

pursuant to Rule 12(b)(6), in that the pleadings are construed in the light most favorable to the

non-moving party. See Brennan v. Concord EFS, Inc., 369 F. Supp. 2d 1127, 1130–31 (N.D.

Cal. 2005). “Judgment on the pleadings is proper when the moving party clearly establishes on

the face of the pleadings that no material issue of fact remains to be resolved and that it is

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entitled to judgment as a matter of law.” See Hal Roach Studios, Inc. v. Richard Feiner and

Co., 896 F.2d 1542, 1550 (9th Cir. 1990). 

Although materials outside of the pleadings should not be considered, a court may

consider all materials properly submitted as part of the complaint, such as exhibits. See Hal

Roach Studios, 896 F.2d at 1555 n.19. Otherwise, if “matters outside the pleadings are

presented to and not excluded by the Court,” the motion must be treated as a

summary-judgment motion instead. Fed. R. Civ. P. 12(c). 

The Court takes judicial notice of the Yahoo Finance quotes for the per share price of

the Wells Fargo Advantage Small Cap Growth Fund, filed concurrently with the instant motion. 

See Ravens v. Iftikar, 174 F.R.D. 651, 661 (N.D. Cal. 1997). While generally consideration of

these judicially noticed facts would not convert the instant motion into a motion for summary

judgment, there are other facts that require consideration of this motion as one for summary

judgment. See In re Century 21-RE/MAX Real Estate Advertising Claims Litig., 882 F. Supp.

915, 921 (C.D. Cal. 1994). Specifically, this order also takes into account defendants’

calculation of Siemers’ profit from the sale of his shares. Although these calculations are not

disputed by plaintiffs in their opposition, the Court declines to take judicial notice of these facts

and will construe the instant motion, to that extent, as one for summary judgment.

Under Rule 56, summary judgment is proper where the evidence shows that “there is no

genuine issue as to any material fact and that the moving party is entitled to judgment as a

matter of law.” It is not the task of the district court to scour the record in search of a genuine

issue of triable fact. The nonmoving party has the burden of identifying with reasonable

particularity the evidence that precludes summary judgment. Keenan v. Allen, 91 F.3d 1275,

1279 (9th Cir. 1996). A genuine dispute as to a material fact exists if there is sufficient

evidence for a reasonable finder of fact to return a verdict for the nonmoving party. On

summary judgment, the “evidence of the non-movant is to be believed, and all justifiable

inferences are to be drawn in his favor.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248,

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255 (1986). Absent such a factual showing, “the moving party is entitled to a judgment as a

matter of law.” Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986).

Defendants’ motion for judgment on the pleadings is limited to plaintiffs’ claims

alleging violations of Sections 12(a)(2) and 15 of the 1933 Act, the first three counts of the

complaint. Defendants first allege that certain transactions made before November 5, 2002, by

Siemers and McKenna are barred by the three-year statute of limitations, this action having

been initated on November 4, 2005. As stated above, plaintiffs concede that “neither Plaintiff

intended to plead any [Section] 12(a)(2) claims in the Third Amended Complaint with regard to

purchases made more than three years before the filing of the Complaint” (Opp. 1). None of

McKenna’s purchases was within the three-year period, so he cannot plead a claim under the

1933 Act with respect to his purchases of the Wells Fargo funds. Plaintiffs also concede that

Siemers cannot plead a claim under the 1933 Act with respect to his purchases of Wells Fargo

funds before November 2002. All parties agree, however, that at least some of Siemers’

purchases of the Wells Fargo Small Cap Growth Fund, Wells Fargo Diversified Equity Fund,

and Wells Fargo TR Montgomery Emerging Markets Focus Fund occurred after November

2002 and are not time-barred.

2. SECTION 12(A)(2) CLAIMS.

Defendants’ principal argument is that as to the Wells Fargo funds Siemers purchased in

the three years preceding the filing of the complaint, he cannot sustain a Section 12(a)(2) claim

because he did not incur a loss. This argument has merit. This order recounts Siemers’ relevant

transactions during the class period.

Wells Fargo Diversified Equity Fund: Siemers made ten purchases at various times and

prices between November 15, 2002, and December 24, 2003. These purchases were all at

prices between $31.37 and $38.98. He sold all his shares in February and April 2004 at prices

ranging from $40.02 to $41.21 per share. Matching his purchases against the lowest sale price,

his profit was 19%.

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Wells Fargo TR Montgomery Emerging Markets Focus Fund: Siemers made one

purchase, on February 23, 2004. He bought these shares at $22.16. He sold the shares at

$25.78 on November 2, 2005. He thus made a profit of 16%.

Wells Fargo Advantage Small Cap Growth Fund: Siemers made two purchases on

February 20, 2004, and one on December 15, 2004. He paid $9,755.12 for 850.43 shares, at

prices of $11.08, $11.29, and $11.59 per share. To date, he has not sold his shares in this fund. 

On the day the action was filed, the per-share value was $12.57. The share price was valued

more recently on April 5, 2007, at $13.87. 

A. Siemers Has No Section 12(a)(2) Losses.

The parties agree that the remedies available under Section 12(a)(2) are limited. A

plaintiff may “recover the consideration paid for such security with interest thereon, less the

amount of any income received thereon, upon the tender of such security, or for damages if he

no longer owns the security.” 15 U.S.C. 77l(a)(2). The Supreme Court has explained that this

provision “prescribes the remedy of rescission except where the plaintiff no longer owns the

security.” Randall v. Loftsgaarden, 478 U.S. 647, 655 (1986). And “[e]ven in the latter

situation, we may assume that a rescissory measure of damages will be employed; the plaintiff

is entitled to a return of the consideration paid, reduced by the amount realized when he sold the

security and by any ‘income received’ on the security.” Id. at 655–56. Thus, the successful

plaintiff under Section 12(a)(2) may recover his or her “purchase price, or . . . damages not

exceeding such price.” Id. at 656 (quoting H.R. Rep. No. 85, 73d Cong., 1st Sess. 9 (1933)).

According to defendants, because Siemers profited on the fund purchases at issue, he

would not be entitled to any Section 12(a)(2) damages. The Ninth Circuit’s holding in In re

Broderbund /Learning Co. Securities Litigation, 294 F.3d 1201, 1202–03 (9th Cir. 2002),

provides guidance. In that decision, the plaintiff had acquired stock in The Learning Company

at a price of $17.6875 per share. The plaintiff disposed of his stock at a price of $33.45 per

TLC share in a stock-for-stock deal when TLC was acquired by Mattel. The plaintiff alleged

that certain misstatements by TLC had inflated the value of TLC stock when he purchased it. 

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He asserted claims under Sections 11 and 12(a)(2) of the 1933 Act. The Ninth Circuit affirmed

dismissal under Rule 12(b)(6), holding that the plaintiff had no damages as a matter of law: 

“[W]hen he disposed of [the security], he did so for an amount greater than the purchase

price. . . . In the TLC transactions, he ‘has suffered no damages recoverable under § 12(2)’ of

the Act.” Id. at 1205 (quoting PPM AM., Inc. v. Marriott Corp., 853 F. Supp. 860, 876 (D. Md.

1994)). This order finds that pursuant to Broderbund, where, as here, the undisputed facts show

that plaintiff has profited from the transactions at issue, such allegations cannot constitute a

Section 12(a)(2) claim for damages. See Randall, 478 U.S. at 655–56 (“[T]he plaintiff is

entitled to a return of the consideration paid, reduced by the amount realized when he sold the

security and by any ‘income received’ on the security.”). The same is true for securities

currently held that could be sold at their present value for a profit.

Plaintiffs maintain, however, that Siemers did suffer a rescissory loss for the mutual

funds he sold. They contend that defendants neglected to include interest information, which is,

in plaintiffs’ view, necessary to calculate Section 12(a)(2) damages. Plaintiffs suggest that the

interest rate can only be set after resolving fact issues and that it is inappropriate to do so in a

motion for judgment on the pleadings. According to plaintiffs, Siemers can demonstrate

Section 12(a)(2) losses using an “appropriate” interest rate. 

Plaintiffs are wrong that interest is necessary in a Section 12(a)(2) damages calculation. 

In Section 12(a)(2) cases, “an award of prejudgment interest rests in the sound discretion of the

trial court.” Commercial Union Assurance Co. v. Milken, 17 F.3d 608, 615 (2d Cir. 1994). 

Factors to be considered include: “(I) the need to fully compensate the wronged party for actual

damages suffered, (ii) considerations of the fairness and the relative equities of the award,

(iii) the remedial purpose of the statute involved, and/or (iv) such other general principles that

the court deems relevant.” Wickham Contracting Co., Inc. v. Local Union No. 3, Intern. Bhd.,

955 F.2d 831, 833–34 (2d Cir. 1992); see also Milken, 17 F.3d at 615. 

Based on the undisputed facts, consideration of the factors here weighs in favor of

denying an award of interest as a matter of law. Perhaps most importantly, the undisputed facts

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demonstrate that interest is not needed to fully compensate Siemers for any alleged Section

12(a)(2) loss suffered. Over almost two years, Siemers made a 19% profit from his sale of

Wells Fargo Diversified Equity Fund shares. Over one and a half years, he made a 16% profit

from his sale of Wells Fargo TR Montgomery Emerging Markets Focus Fund. As other courts

have recognized, “if a plaintiff sells the securities at issue for an amount greater than the

plaintiff’s purchase price, then the plaintiff has suffered no damages recoverable under § 12(2).” 

PPM AM., Inc., 853 F. Supp. at 876, cited with approval in Broderbund, 294 F.3d at 1205. 

Furthermore, although he has not sold his shares in the Wells Fargo Advantage Small

Cap Growth Fund, he could have made a 10% profit if he had sold the fund on the day the

action commenced, or a 21% profit if he sold recently, on April 5, 2007. Because plaintiff still

holds these shares, the proper remedy would be rescission; he would have to tender back his

interest and receive his purchase price. See Randall, 478 U.S. at 655–56. But he would not be

entitled to any award because rescission would result in him receiving less than the actual value

of the shares. See Merzin v. Provident Fin. Group, Inc., 311 F. Supp. 2d 674, 684 (S.D. Ohio

2004) (“Because in this case rescission would clearly result in a loss for Plaintiffs, such claim

should be and is dismissed.”).

For all of the relevant investments, Siemers’ gain is at least as great as conventional

interest over the periods in question, or so close thereto as to be fair without a disproportionate

waste of resources in trying to put a finer point on it. This order holds that prejudgment interest

is adequately compensated for in the profits already earned on the investments. Accordingly,

Counts I and II must fail. In this regard, the Second Circuit has aptly held: “We realize that

Congress specifically provided in § 12(2) for an award of interest. But we do not read § 12(2)

as insisting upon any set rate of interest. . . . The net result of these computations is that

appellants have not suffered compensable damages under § 12(2). Allowing them to maintain a

cause of action under such circumstances would constitute a waste of judicial resources and a

thwarting of Congress’ aim in enacting § 12(2).” Milken, 17 F.3d at 616. The lack of a

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 Plaintiffs expressly “do not waive their right to assert that the interest should be set in other ways,”

such as by reference to a fixed rate or a treasury-bill rate (Opp. 7). They suggest the theory discussed above as

a possible way to calculate interest and to demonstrate that Siemers has incurred a loss.

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cognizable loss under Section 12(a)(2) means that judgment must be entered on the Section

12(a)(2) claims in defendants’ favor.

B. Plaintiffs’ Proposed Interest Calculation Is Flawed.

Even if the Court were to find interest available, plaintiffs’ theory of “interest” to

demonstrate a “loss” lacks merit. Plaintiffs propose a novel way to calculate interest. Plaintiffs

“believe that one appropriate way to set the interest rate would be to see what return Mr.

Siemers would have earned had he invested in non-Wells Fargo mutual funds in the same

market segment” (Opp. 7). Plaintiffs suggest comparing Siemers’ rate of return relative to

industry “benchmark” funds identified by industry analysts at Morningstar and Yahoo. 

According to the calculations offered by plaintiffs, if Siemers had invested in the benchmark

funds rather than the Wells Fargo funds, his return rate would have been higher. Under this

theory, he has incurred a “loss” and is entitled to the “interest” he could have earned through a

hypothetical investment (id. at 7–9).2

 

This proposed theory of “interest” is rejected. Plaintiffs cite no decision actually

applying this approach in a Section 12 case. This theory is not interest at all. It is capital gain

from competing equity investments.

The decision on which plaintiffs rely, Johns Hopkins University v. Hutton, 297 F. Supp.

1165, 1229–30 (D. Md. 1968), is inapposite. Johns Hopkins held that “[i]n order to place [the

plaintiff] in the position it would have been in were it not for the violations by [the defendant]

of the standards of Section 12, an examination is required to determine what Hopkins could

reasonably have been expected to earn by a similar type of investment.” In the circumstances of

that decision, however, the court considered the rate of return the plaintiff had been promised

before making the investment. The district court found that the promised rate was above the

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prime rate and that accordingly, it was appropriate to award the plaintiff what it had expected to

earn according to the defendants’ promise.

Even if Johns Hopkins is correct that a plaintiff’s reasonable expectation can be

considered in calculating interest in Section 12(a)(2), plaintiffs do not argue that Siemers could

reasonably expect to receive a particular rate of return. Generally, “[i]n a rescission action the

proper measure is the amount lost rather than value of the bargain.” Andrews v. Blue, 489 F.2d

367, 376 (10th Cir. 1973). There being no Section 12(a)(2) decision supporting the theory that

a fictitious investment can be used to create a loss for a plaintiff who has profited from the

investment at issue, plaintiffs’ theory fails. 

3. SECTION 15 CLAIM.

Count III, alleging control-person liability under Section 15, only survives this motion if

the underlying claims brought under Section 12(a)(2), Counts I and II, survive. Because the

Section 12(a)(2) claims do not survive, judgment on the Section 15 claim must be entered in

Wells Fargo & Company’s favor. See 15 U.S.C. 77o; Durham v. Kelly, 810 F.2d 1500,

1503–04 (9th Cir. 1987); Payne v. Fidelity Homes of Am., Inc., 437 F. Supp. 656, 658 (D.C. Ky.

1977).

CONCLUSION

For the foregoing reasons, defendants’ motion for judgment on the pleadings as to

Counts I, II, and III, construed as a motion for summary judgment, is GRANTED. The

remaining claims are Count IV, which alleges a violation of Section 10(b) of the Securities

Exchange Act of 1934, 15 U.S.C. 78j(b) and Securities and Exchange Commission Rule 10b-5,

17 C.F.R. 240.10b-5; Count V, which alleges a violation of Section 20(a) of the 1934 Act, 15

U.S.C. 78t; and Count VI, which alleges a violation of Section 36(b) of the Investment

Company Act of 1940, 15 U.S.C. 80a-35(b).

IT IS SO ORDERED.

Dated: May 17, 2007. WILLIAM ALSUP

UNITED STATES DISTRICT JUDGE

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