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Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 

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United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued March 8, 2007 Decided July 27, 2007

No. 06-7104

MONICA BELIZAN,

AND ALL OTHERS SIMILARLY SITUATED AND

WILLIAM PRATHER, DR., AS TRUSTEE FOR THE AVON

MEDICAL GROUP PC EMPLOYEES PROFIT SHARING PLAN &

TRUST, AND AS TRUSTEE FOR THE JUDITH ANN PRATHER

REVOCABLE TRUST,

APPELLANTS

v.

SIMON HERSHON, ET AL.,

APPELLEES

Appeal from the United States District Court

for the District of Columbia

(No. 02cv01490)

Donald J. Enright argued the cause for appellants. With

him on the briefs were Burton H. Finkelstein, Tracy D. Rezvani,

and Benjamin J. Weir.

Michael L. Martinez argued the cause and filed the brief for

appellee Radin Glass & Co, LLP. 

Alexander Maltas, David M. Brodsky, Jeff G. Hammel, and

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Donna G. Patel were on the brief for appellee CIBC World

Markets Corporation. DeMaurice F. Smith entered an

appearance.

Before: GINSBURG, Chief Judge, and GARLAND and

BROWN, Circuit Judges.

Opinion for the court filed by Chief Judge GINSBURG.

GINSBURG, Chief Judge: An uncertified class of plaintiffs

appeals an order of the district court dismissing with prejudice

their claims against Radin Glass & Co. and CIBC World

Markets Corp. under §§ 11 and 12(a)(2) of the Securities Act of

1933 and under § 10(b) of the Securities Exchange Act of 1934.

On the plaintiffs’ previous appeal we remanded the case for the

district court “to enter a new order either dismissing without

prejudice or explaining its dismissal with prejudice in a manner

consistent with [our] opinion.” Belizan v. Hershon, 434 F.3d

579, 584 (D.C. Cir. 2006) (Belizan II). On remand, the district

court once again dismissed all the plaintiffs’ claims with

prejudice. In re Interbank Funding Corp. Sec. Litig., 432

F. Supp. 2d 51, 57 (D.D.C. 2006) (Belizan III).

We hold the district court did not abuse its discretion by

dismissing the plaintiffs’ § 11 claim with prejudice because their

two unsuccessful attempts to replead the claim adequately

demonstrated, as the district court found, that they could not

plead additional facts consistent with, but sufficient to cure the

deficiency in, their original pleadings. The district court did not,

however, adequately explain why the plaintiffs’ attempt in their

Pre-Appeal Draft Complaint, submitted with a motion to

reconsider the first dismissal of their complaint, was inadequate

to demonstrate they could cure the deficiencies in pleading their

§§ 10(b) and 12(a)(2) claims. Accordingly, we vacate the order

in part and again remand the question of prejudice for

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clarification with respect to those two claims.

I. Background

The plaintiffs allege they purchased debt securities from

InterBank Funding Corp. (IBF) and its subsidiaries between

1997 and 2002, including the class period of July 26, 1999 to

June 7, 2002. IBF, at least a majority of which was owned by

Simon Hershon, had formed several investment funds with the

purpose of purchasing and restructuring or rehabilitating

underperforming loans. The plaintiffs claim IBF’s funds were

actually part of a “Ponzi scheme,” wherein proceeds from

successive securities offerings were used to make interest

payments to those who had invested in prior offerings. CIBC

World Markets Corp. sold securities to the plaintiffs and Radin

Glass & Co. served as IBF’s independent auditor for IBF’s Fund

VII, now called Collateralized Finance Corporation.

The plaintiffs’ suits against Hershon, Radin, CIBC, and

others were consolidated, after which they filed a Consolidated

Amended Complaint and settled their claims against Hershon.

In the Consolidated Amended Complaint, the plaintiffs alleged

Radin and CIBC had disseminated materially false and

misleading information about IBF’s funds and engaged in a

scheme to defraud investors, in violation of § 10(b) of the ‘34

Act, 15 U.S.C. § 78j(b), and of Rule 10b-5 promulgated

thereunder, 17 C.F.R. § 240.10b-5. In addition, they claimed

Radin, by attesting that IBF’s financial statements complied

with Generally Accepted Accounting Principles (GAAP) when,

in fact, the statements were materially false or misleading, had

violated § 11 of the ‘33 Act, 15 U.S.C. § 77k. Finally, they

alleged CIBC had violated the prospectus delivery requirements

of § 12(a)(1) and (2) of the ‘33 Act, 15 U.S.C. § 77l(a)(1)-(2),

when it sold IBF’s securities to investors.

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Radin and CIBC each moved, pursuant to Federal Rule of

Civil Procedure 12(b)(6), to dismiss the complaint for failure to

state a claim upon which relief can be granted. After a hearing,

the district court granted the defendants’ motions to dismiss.

See In re Interbank Funding Corp. Sec. Litig., 329 F. Supp. 2d

84, 96 (D.D.C. 2004) (Belizan I). With respect to the alleged

violations of § 10(b), the court held the plaintiffs had failed

adequately to: (1) plead scienter; (2) allege their claims with the

specificity required by Federal Rule of Civil Procedure 9(b) and

the Private Securities Litigation Reform Act of 1995 (PSLRA),

104 Pub. L. No. § 101, 109 Stat. 737, 743, 15 U.S.C. § 78u-4;

and (3) plead causation. 329 F. Supp. 2d at 89-94. The district

court also held they failed properly to plead a violation of § 11;

failed to plead with specificity that their § 12(a)(1) was timely;

and lacked standing to bring the § 12(a)(2) claim. Id. at 94-96.

The district court also held the plaintiffs would not be

allowed to amend their complaint, which it dismissed “with

prejudice.” Id. at 96. The court explained that counsel’s

references at the hearing to the possibility of amending the

complaint did not “amount to formal motions for leave to

amend” and that even if they did, the PSLRA “counsel[s]

restraint in granting leave to amend.” Id. As for the dismissal

being with prejudice, the court cited In re Champion Enterprises

Inc. Securities Litigation, 145 F. Supp. 2d 871, 873 (E.D. Mich.

2001), for the proposition the PSLRA “set[s] a high standard of

pleading which if not met results in a mandatory dismissal ....

with prejudice.” Id.

The plaintiffs filed a motion under Federal Rule of Civil

Procedure 59(e) seeking reconsideration insofar as the court had

not permitted them leave to amend the complaint and dismissed

their claims with prejudice. With their motion, they submitted

the Pre-Appeal Draft Complaint. The district court denied

reconsideration and stated that the plaintiffs’ revised complaint

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“share[d] important failings with [their] earlier effort.”

On the plaintiffs’ first appeal, we held the district court did

not err in determining counsel’s oral reference to the possibility

of amending the Consolidated Amended Complaint was not a

proper motion for leave to amend. Belizan II, 434 F.3d at 582-

83. We vacated the order of dismissal with prejudice, however,

and remanded the case for the district court “to exercise its

discretion under Firestone,” which required the court to

“determine whether the allegation of other facts consistent with

the challenged pleading could not possibly meet the heightened

pleading requirements of the PSLRA.” Id. at 584 (citing

Firestone v. Firestone, 76 F.3d 1205, 1209 (D.C. Cir. 1996)).

On remand, the district court once again dismissed the

plaintiffs’ claims with prejudice, holding they “could not

possibly have alleged other facts consistent with the challenged

complaint sufficient to make out a proper cause of action against

CIBC or Radin.” Belizan III, 432 F. Supp. 2d at 57. The district

court also denied as moot the plaintiffs’ post-remand motion to

amend, to which their Post-Remand Draft Complaint was

attached. Id.

II. Analysis

The parties dispute whether the district court abused its

discretion when it denied their post-remand motion to amend

and looked to the Pre-Appeal Draft Complaint but not the PostRemand Draft Complaint and, if not, then whether the new

allegations in the Pre-Appeal Draft Complaint indicated the

plaintiffs possibly could have cured the deficiencies of their

Consolidated Amended Complaint.

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A. Post-Remand Motion to Amend and Draft Complaint

Invoking the policy of Federal Rule of Civil Procedure

15(a) that leave to amend is liberally to be granted, the plaintiffs

argue that the district court abused its discretion (1) in denying

their post-remand motion for leave to amend their complaint and

(2) in determining whether to dismiss their claims with prejudice

by looking solely to the Pre-Appeal Draft Complaint, rather than

evaluating their Post-Remand Draft Complaint. CIBC and

Radin argue the district court correctly denied the plaintiffs’

post-remand motion to amend and ignored the allegations in the

Post-Remand Draft Complaint because the district court “has no

power or authority to deviate from [this court’s] mandate,”

Indep. Petroleum Ass’n of Am. v. Babbitt, 235 F.3d 588, 596

(D.C. Cir. 2001), which instructed the district court to “enter a

new order either dismissing without prejudice or explaining its

dismissal with prejudice in a manner consistent with [our]

opinion,” Belizan II, 434 F.3d at 584.

In our view, it would not have been inconsistent with our

mandate for the district court to have considered the PostRemand Draft Complaint in order to determine whether the

plaintiffs could cure the deficiencies of their previous efforts,

nor would the court have erred in granting the plaintiffs’ postremand motion to amend. Nothing in the mandate required the

court to do so, however, and the court certainly did not abuse its

discretion by looking solely at the record as it stood before the

first appeal or by denying the post-remand motion to amend. Cf.

Doe v. McMillan, 566 F.2d 713, 720 (D.C. Cir. 1977) (“When

a plaintiff seeks to file an amended complaint this tardily [on

remand to district court], it is within the sound discretion of the

district court, in consideration of the potential prejudice to the

other party and the interest in eventual resolution of litigation,

to deny leave to amend”).

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B. Section 10

Section 10(b) of the ‘34 Act makes it unlawful “to use or

employ, in connection with the purchase or sale of any security

..., any manipulative or deceptive device or contrivance.” Rule

10b-5, 17 C.F.R. § 240.10b-5, promulgated to implement

§ 10(b), makes it unlawful

(a) To employ any device, scheme, or artifice to

defraud,

(b) To make an 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

under which they were made, not misleading, or

(c) To engage in any act, practice, or course of business

which operates ... as a fraud or deceit upon any person,

in connection with the purchase or sale of any security.

The PSLRA requires a plaintiff suing for securities fraud to

state with particularity both the facts constituting the alleged

violation and facts supporting a “strong inference” concerning

the requisite scienter, 15 U.S.C. § 78u-4(b)(1)-(2), that is, the

defendant’s intention “to deceive, manipulate, or defraud.”

Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193, n.12 (1976).

On remand, the district court concluded the plaintiffs could not

possibly cure the defects in their § 10(b) claim by amendment

because in the Pre-Appeal Draft Complaint they once again

“failed to ‘state with particularity facts giving rise to a strong

inference that the defendant[s] acted with [scienter]’” when the

defendants made the allegedly false or misleading statements or

omissions. Belizan III, 432 F. Supp. 2d at 56 (citing 15 U.S.C.

§ 78u-4(b)(2)). The Supreme Court recently held that the

“strong inference” of scienter required to make out a § 10(b)

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claim “must be more than merely plausible or reasonable — it

must be cogent and at least as compelling as any opposing

inference of nonfraudulent intent.” Tellabs, Inc. v. Makor Issues

& Rights, Ltd., 127 S. Ct. 2499, 2504-05 (2007).

In Belizan I, the district court had dismissed the

Consolidated Amended Complaint on the ground that the

plaintiffs had not raised a strong inference of scienter by, for

example, alleging a defendant had “‘failed to check information

[it] had a duty to monitor,’” 329 F. Supp. 2d at 91 (quoting

Novak v. Kasaks, 216 F.3d 300, 311 (2d Cir. 2000)), and by

“identify[ing] specific transactions that CIBC or Radin elected

not to investigate .... Nor [did] they specifically allege that

CIBC and Radin had access to particular pieces of information

that would have revealed IBF’s allegedly fraudulent and GAAPviolating inter-fund transfers.” Id.

In their Pre-Appeal Draft Complaint, the plaintiffs

attempted, and may well have managed, to breathe life into their

§ 10(b) claim by adding new allegations that Radin and CIBC

acted recklessly. The plaintiffs had already alleged in their

Consolidated Amended Complaint:

CIBC ... informed potential and actual purchasers of

IBF securities ... [that CIBC] had conducted extensive

investigations into the business, operations, business

strategy, prospects, financial condition, and accounting

and management control systems of IBF.

Consolidated Amended Compl. ¶ 96; Pre-Appeal Draft Compl.

¶ 112. This, coupled with the plaintiffs’ allegation that CIBC

became aware in January 2002 that the SEC was investigating

IBF, Consolidated Amended Compl. ¶ 31; Pre-Appeal Draft

Compl. ¶ 33, appears sufficient to allege that CIBC knew or

should have known of any misleading disclosure made as of that

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time.

In the Pre-Appeal Draft Complaint, the plaintiffs added the

allegation that Radin had said in each cover letter accompanying

its audit report:

In our opinion, the financial statements ... present

fairly, in all material respects, the financial position of

IBF Special Purpose Corporation VII as of December

31, 1999 and the results of its operations and its cash

flows for the period May 10, 1999 (inception) to

December 31, 1999 in conformity with the [GAAP].

¶ 73. In our view, this shows Radin had audited IBF’s Fund VII

during the class period and therefore may show it knew or

should have known of any misleading disclosure in IBF’s

financial documents regarding that fund.

The Plaintiffs also added the allegation that CIBC and

Radin knew or should have known of a specific misleading

disclosure in view of their claim to have reviewed IBF’s

financial documents. They point to an October 2001 private

placement memorandum for Fund VII that allegedly stated:

Of the loans made or acquired through June 30, 2001,

loans and participations in the amount of $37.2 million

of principal have been repaid, sold to IBF or affiliated

companies, or refinanced and $42.1 million of

principal remains outstanding under 26 commercial

loans and participations. Of the $37.2 million amount,

$14.1 million was prepaid by borrowers, $14.3 million

was purchased by affiliated funds, $2.4 million was

purchased by IBF, and the balance was refinanced.

Pre-Appeal Draft Compl. ¶¶ 69, 105. Based upon these data, the

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*

 We calculate that IBF and its affiliates bought about 45%

(($ 2.4 million + $14.3 million)/ $37.2 million) of the principal of

loans and participations repaid or sold — still a sizeable portion.

plaintiffs alleged that “over fifty percent of the repaid loans and

participations were either purchased by affiliated funds or by

IBF.”* Id. ¶ 105. Plaintiffs further alleged Radin and CIBC,

upon learning this, had a duty to investigate IBF’s practices, id.

¶¶ 77-78, 113-15, and their failure to do so was reckless, id.

¶¶ 78, 114.

These allegations are not of the kind the district court

rejected in Belizan I; they do not rely upon a bare inference that

Radin and CIBC must have known the true nature of IBF’s

financial practices. Instead, they “specifically allege that CIBC

and Radin had access to particular pieces of information that

would have revealed IBF’s allegedly fraudulent and GAAPviolating inter-fund transfers,” which the district court suggested

in Belizan I would be sufficient. See 329 F. Supp. 2d at 91.

Nevertheless, because the district court in Belizan I did not

“[have] the opportunity to consider the matter in light of the

prescriptions,” 127 S. Ct. at 2513, announced by the Supreme

Court in Tellabs, we remand this case for the district court to

determine whether the inference that Radin and CIBC acted

recklessly in the face of these allegations is, as required by

Tellabs, “at least as compelling as any opposing inference of

nonfraudulent intent.” 127 S. Ct. at 2505.

C. Section 11

Under § 11 of the ‘33 Act, an “accountant ... whose

profession gives authority to a statement made by him, who has

with his consent been named as having ... prepared or certified

any report or valuation which is used in connection with [a]

registration statement,” may be held liable for the loss incurred

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by one who acquired the security for which the statement was

issued if such statement “contained an untrue statement of a

material fact or omitted to state a material fact ... necessary to

make the statements therein not misleading.” In the

Consolidated Amended Complaint the plaintiffs alleged Radin

violated § 11 when it “signed the Registration Statements and/or

certified the financial statements therein as IBF’s outside

auditors.”

Notwithstanding the plaintiffs’ use of the plural, the only

fund IBF offered publicly, and therefore the only one for which

a registration statement was filed, was Fund VI. In Belizan I the

district court found the plaintiffs had failed to allege that Fund

VI made any loans to or acquired any non-performing loans

from other IBF entities on Radin’s watch, and rejected their

argument that the “‘Fund VI public offerings were actually part

of an integrated offering involving all of the IBF funds.’”

Belizan I, 329 F. Supp. 2d at 94. On remand, the district court

found, without explanation, “the [pre-appeal] draft complaint in

no way cured the infirmities that doomed the claims against

CIBC and Radin under section[] 11.” Belizan III, 432 F. Supp.

2d at 56-57.

In their Consolidated Amended Complaint, the plaintiffs

alleged Radin had violated § 11 by attesting that IBF’s

“financial reports” complied with GAAP when, in fact, the

statements were materially false or misleading. On appeal, the

plaintiffs argue four paragraphs in the Pre-Appeal Draft

Complaint show they could, if given the opportunity, salvage

their § 11 claim.

This argument fails because it depends upon allegations in

the Pre-Appeal Draft Complaint identical to those previously

made in the Consolidated Amended Complaint, the adjudicated

insufficiency of which the plaintiffs did not dispute in their first

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appeal and therefore became the law of the case. See

Confederate Mem’l Ass’n v. Hines, 995 F.2d 295, 298 (D.C. Cir.

1993) (taking it “as a given for purposes of [the] appeal” that

appellants admitted their complaint failed to state a claim when

they had not “mount[ed] any serious attempt to defend [its]

sufficiency”); Laffey v. Nw. Airlines, Inc., 740 F.2d 1071, 1089-

90 (D.C. Cir. 1984) (“Adherence to the rule that a party waives

a contention that could have been but was not raised on a prior

appeal is, of course, necessary to the orderly conduct of

litigation. Failure to follow this rule would lead to the bizarre

result ... that a party who has chosen not to argue a point on a

first appeal should stand better as regards the law of the case

than one who had argued and lost.”) (internal quotation marks,

citations, and alterations omitted). Accordingly, although

troubled by the conclusory nature of the district court’s decision,

we are constrained to affirm the judgment with respect to the

§ 11 claim.

D. Section 12

Under § 12(a)(2) of the ‘33 Act, a person who “offers or

sells a security ... by means of a prospectus ... which includes an

untrue statement of a material fact or omits to state a material

fact necessary in order to make the statements ... not

misleading” is liable for losses suffered as a result by the buyers

of the security. In the Consolidated Amended Complaint, the

plaintiffs alleged CIBC had violated the prospectus delivery

requirements of § 12(a)(2) by soliciting plaintiffs to buy

securities using materials that “contained untrue statements of

material facts, omitted other facts necessary to make the

statements not misleading, and concealed and failed to disclose

material facts.” The district court initially dismissed the

§ 12(a)(2) claim for want of standing to sue because no plaintiff

alleged he had been offered or sold securities by CIBC in a

public offering. 329 F. Supp. 2d at 95. Alternatively, the

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district court held the § 12(a)(2) claim fell short because the

plaintiffs had failed to plead with specificity facts indicating the

claim had been filed within the time limit set in § 13 of the ‘33

Act, 15 U.S.C. § 77m. Belizan I, 329 F. Supp. 2d at 95 (citing

Davidson v. Wilson, 973 F.2d 1391, 1402 n.8 (8th Cir. 1992)

(holding compliance with § 13 must be pleaded with specificity

because timeliness is a substantive requirement of a § 12(a)(2)

claim)). Section 13 limits liability for a violation of § 12(a)(2)

to a claim 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.”

In the Pre-Appeal Draft Complaint, the plaintiffs attempted

to cure their lack of standing; newly added anonymous plaintiff

John Doe alleged he “purchased Fund VI bonds pursuant to the

registration statements filed with the SEC from 1999 through

2001.” Pre-Appeal Draft Compl. ¶ 9. To establish the

timeliness of their claim, the plaintiffs again alleged

“Defendants’ fraud was first revealed by the initiation of the

SEC’s action against Defendant Hershon and others on July 23,

2002” and newly alleged the “Plaintiffs initiated their claims

against Defendant CIBC on June 23, 2003.” Id. at ¶ 3.

The district court incorporated into its opinion on remand

its ruling on the plaintiffs’ motion for reconsideration of their §

12 claim. 432 F. Supp. 2d at 56. The court stated without

elaboration that the Pre-Appeal Draft Complaint shared

“important failings” with the Consolidated Amended Complaint;

from its opinion, however, we cannot discern what failings it

shares and why the plaintiffs could not cure them. It is not

sufficient for the district court simply to wave away the

plaintiffs’ attempt to cure the deficiencies the court had found in

their original § 12(a)(2) claim with the bare conclusion that the

revised “draft complaint in no way cured the infirmities that

doomed” the Consolidated Amended Complaint. Thus, the

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district court abused its discretion by dismissing the plaintiffs’

§ 12(a)(2) claim without explaining why the addition of a “John

Doe” plaintiff and the dates he purchased Fund VI securities did

not establish at least one plaintiff’s standing and sufficiently

plead the facts necessary to satisfy the statute of limitations. We

therefore remand the case for the district court to reconsider

whether the plaintiffs did or could perfect their § 12(a)(2) claim,

and if not, to explain why.

III. Conclusion

We conclude the district court did not abuse its discretion

in dismissing the plaintiffs’ § 11 claim with prejudice because

the plaintiffs merely offered to reallege the allegations of the

Consolidated Amended Complaint, the insufficiency of which

is the law of the case. We hold the district court did abuse its

discretion by dismissing with prejudice the § 10(b) claim, which

the plaintiffs attempted to cure with new and more specific

allegations indicating that CIBC and Radin acted recklessly by

failing to check facts each had a duty to monitor, and the

§ 12(a)(2) claim against CIBC, for which the plaintiffs added

allegations meant to establish their standing and demonstrate the

timeliness of their claim. Accordingly, we remand the case for

the district court to evaluate the new allegations the plaintiffs

offered to perfect their §§ 10(b) and 12 claims and to determine

whether the plaintiffs could “possibly cure the deficienc[ies]” in

those two claims.

So ordered.

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