UNITED STATES COURT OF APPEALS
FOR THE TENTH CIRCUIT

DAVE SHELDON,

Plaintiff-Appellant,

v. 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. Nos. 99-3202 & 99-3389-2- ORDER Filed December 4, 2000

Before TACHA , EBEL , and LUCERO , Circuit Judges.

This matter is before the court on appellees’ petit ion for rehearing of this court’s order and judgment filed October 30, 2000. The members of the hearing panel have considered appellees’ arguments regardin g the merits of this court’s disposition of this appeal, and conclude that the o riginal 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 ju dgment. 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

## F I L E D United States Court of Appeals Tenth Circuit 

### OCT 30 2000 

### PATRICK FISHER Clerk UNITED STATES COURT OF APPEALS
FOR THE TENTH CIRCUIT

DAVE SHELDON,

Plaintiff-Appellant,

v. 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. Nos. 99-3202 & 99-3389 (D.C. No. 98-CV-2277-JWL)

(D. Kan.)* This order and judgment is not binding precedent, e xcept under the

doctrines of law of the case, res judicata, and col lateral estoppel. The court generally disfavors the citation of orders and judg ments; nevertheless, an order and judgment may be cited under the terms and condi tions of 10th Cir. R. 36.3. -2- ORDER AND JUDGMENT *

Before TACHA , EBEL , and LUCERO , Circuit Judges.

After examining the briefs and appellate record, th is panel has determined unanimously to grant the parties’ requests for a de cision 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 Ac t of 1933, the Securities Exchange Act of 1934, and the Kansas Securities Actin the course of selling shares of Power Phone, Inc., both before and after its failed merger with TMC Agroworld, Inc. Sheldon also alleged liability und er common-law theories of fraud, breach of fiduciary duty, civil conspiracy, unjust enrichment, and negligent misrepresentation. For several reasons, the distri ct court ruled that Sheldon’s complaint failed to state an adequate federal-quest ion or diversity claim upon1 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 Fe deral Rules of Civil Procedure. The Second Amended Complaint added addi tional defendants. The Third Amended Complaint is the subject of this appe al and is referred to in this order and judgment as “the Complaint.” In making s ense of the jumbled factual allegations in that filing, we have the advantage o f 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). -3- which relief could be granted. Accordingly, it gra nted the motion to dismiss filed by defendants Jay Vermonty, Carmen Vermonty, Gersho n Tannenbaum, and Hector Cruz. Later, the court denied Sheldon’s req uest 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, a nd reverse and remand in part.

BACKGROUND 1 Sheldon’s securities claims arise from his serial p urchases of stock in Power Phone, Inc. from July 1, 1996 through April 2 1, 1997. Sheldon alleges that he invested in reliance on false information dissem inated primarily by defendant Jay Vermonty, Power Phone’s investor relations repr esentative, through press releases, asset statements, internet messages, and individual contacts with investors. Sheldon also alleges that several otherdefendants were involved in the2 We note that Sheldon’s filings spell “Monte Cristi” in several different

ways. In this Order and Judgment we use the “Monte Cristi” spelling. -4- misrepresentations. Carrion, Reyes, and Tannenbaum , who were officers of Power Phone, allegedly corroborated Vermonty’s stat ements so that they, like Vermonty, would benefit through stock transactions. Carmen Vermonty, Jay Vermonty’s wife, was supposedly an investor-relatio ns representative for Power Phone. Jack Savage allegedly drafted and distribut ed false Princeton Research reports in return for payment. Although the Compla int 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) PowerPhone was to merge with TMC Agroworld, Inc., a company with $50-$75 mi llion in documented assets, no liabilities, and an internationally-know n expert in free trade zones, defendant Carrion, at its head; (2) Power Phone hadacquired 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 ove r $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 Argent ina; and (6) generally Power-5-

Phone had appreciable revenues, assets, and confirm ed contractual arrangements. The Complaint provides specific time frames for eac h of the alleged misstatements. According to the Complaint, Sheldon eventually lear ned that none of the statements circulated about Power Phone was true. Specifically, he alleges that the company did not own the Santa Elena meat-packin g plant, a facility which “had been closed for years and [] would require mil lions of dollars to take it over from Argentina’s government, and, no one had been h ired to work there.” Appellant’s App. at 31. The Complaint further alle ges 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 f ederal and Kansas securities laws and that its sole Securities Exchange Commissi on filing is “full of false information.” Id. at 38. The stock price allegedly declined from $3.50 per s hare 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 decis ion to dismiss a complaint pursuant to Fed. R. Civ. P. 12(b)(6) forfailure to state a claim upon which relief may be granted or pursuant to Fed. R. Civ. P. 9(b) for failure to plead-6-

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 i n 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 onl y if “‘it appears beyond doubt that the plaintiff can prove no set of facts in sup port 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 Complaintis bereft of legally-significant allegations as to defendant Cru z. Without any further discussion, we affirm the district court’s dismissa l 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 ev ent: 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 comp any and transaction-specific disclosures and to deliver this information to potential investors. See id. In this3 As this court has stated,

Section 12 claims are commonly referred to as eithe r § 12(1) or § 12(2) claims. In 1995, however, Congress added an other subsection to § 12. **See** Private Securities Litigation Reform Act of 1995, Pub. L. No. 104-67, § 105, 109 Stat. 737, 757 (codi fied 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). -7- case, Sheldon alleges that the event requiring comp liance with the Securities Act was the merger between Power Phone and TMC Agroworl d. Section 12(2) provides, in pertinent part, that anyperson who offers or sells a security by use of the mails or interstate facili ties by means of a prospectus or oral communication which includes any untrue statem ent 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) clai m 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 pub lic offering. In his Complaint, Sheldon alleged that the defendants “fai led to make a proper ‘33 Act-8-

registration for the initial public offering of the ‘merger’ between TMC and the ‘Shell’ of [Power Phone] as required for this speci fic 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 di sappearing and the subsidiary surviving the merger. Both the shareholder-princip als of the disappearing target and Datronics received stock in the surviving subs idiary. After the merger, Datronics distributed some of its shares to its shareholders as a dividend. In this way, formerly privately-held companies became publi cly 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 Ac t, 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 resu lted in an initial public offering of stock. We note, however, that a “courtshould be especially reluctant-9-

to dismiss on the basis of the pleadings when the a sserted theory of liability is novel or extreme, since it is important that new le gal 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 plaintif f’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 Agrowor ld are sufficient to survive defendants’ motion to dismiss. Accordingly, the di strict court’s dismissal of the claim was premature. Sheldon also makes a claim under § 12(1) of the Sec urities Act, 15 U.S.C. § 77l(a)(1), which provides a right of action for t he immediate purchaser to rescind the sale and demand a return of the purchas e price against an individual who offered or sold unregistered securities require d to be registered. The purchaser must bring the action “within one year af ter 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) clai m as time-barred. The court determined that Sheldon’s last purchase of st ock occurred in April of 1997, but that this action not filed until June 1998, mor e than one year later. On the facts of this case, we agree with the district court’s ruling. A § 12(a)(1) claim-10-

“contemplates a buyer-seller relationship not unlik e 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. Accordi ngly, the § 12(1) claim was properly dismissed.

Claims under the Securities Exchange Act of 1934 Count V of Sheldon’s Complaint alleges violations o f 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 pl aintiff 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 particula rity, 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 262-63.4 Accordingly, we disregard the content of papers that Sheldon filed with the

court subsequent to his filing of the Third AmendedComplaint. We note, however, that the documents denominated Exhibit 1-Athrough Exhibit 6-D, which were filed with the initial Complaint and ref erenced in the Third Amended Complaint as Exhibits 1- through 6, are appropriate ly included in the record on appeal. -11- In reviewing a dismissal under Rule 9(b), we confin e 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 ormistake, the circumstances constituting fraud or mistake shall b e stated with particularity. . . .” More specifically, this court requires a complaint alleging fraud to set forth the time, place and con tents of the false representation, the identity of the party making th e 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 i t adequately met Rule 9(b) requirements. First, as the district cou rt acknowledged, the Complaint alleged misrepresentations with background informat ion 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-12-

unowned and inoperable meat-packing plant, a nonexi stent lumber company, and fabricated contracts. Accepting Sheldon’s allegati ons as true, these are patently false statements of present fact. The district cou rt erred in determining they were “‘mere conclusory allegations of falsity’” and in c haracterizing 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 wil l not suffice, great specificity is not required if the plaintiff alleges enough fac ts 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 fra ud 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 requirem ents for securities); § 78m (setting out, among other things, subsequent report ing requirements). The Complaint does not provide sufficient allegations t o 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 is5 To the extent Sheldon seeks to make claims under any other provisions of

the Exchange Act, these claims are inadequately ple d and properly dismissed. -13- entitled to pursue a private right of action under these provisions. See generally , Lora C. Siegler, Availability of Implied Private Action for Violati on 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 clai ms 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 join tly and severally liable with the primary violator.” Maher , 144 F.3d at 1304-05. “[T]o state a prima facie ca se of control person liability, the plaintiff must establ ish (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 co ntrol person claims for failure to state a primary violation. As discussed above, we have concluded that certain of his claims of primary securities violati ons should have survived defendants’ motion to dismiss. On remand, the district court should allow the concomitant control person claims to proceed.-14- Diversity Claims Sheldon has asserted numerous diversity claims. Th e district court dismissed his claims under the Kansas Securities Ac t, along with claims of common law fraud and common law conspiracy with pre judice, essentially for failure to plead fraud with particularity. The cou rt dismissed state-law claims of unjust enrichment and negligent misrepresentation w ithout 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 existenc e of fiduciary relationship depends upon whether “there has been aspecial confidence reposed in one who, in equity and good conscience, is boundto 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. Wh ether to allow amendment of a complaint is a matter left to the district court’s discretion. See Trotter v-15-

Regents of the Univ. of N.M. , 219 F.3d 1179, 1185 (10th Cir. 2000). In light o f the poor quality of Sheldon’s pleadings, the distri ct court did not abuse its discretion in denying a request to amend. Because we are remanding certain claims to the district court for further proceeding s, however, the issue of amendment as to these claims is best left to the di strict court’s discretion on remand.

CONCLUSION In sum, we reverse the dismissal of the following c laims against defendants Jay Vermonty, Carmen Vermonty, and Gershon Tannenbaum: § 12(2) Security Act claims; § 10(b) Exchange Act claims; controllin g person liability claims under the Securities Act and the Exchange Act; Kans as Securities Act claims; and common-law fraud, conspiracy, and unjust enrichmentclaims. These claims are remanded for further proceedings consistent with th is 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 r esources 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 signific ant improvement in the quality of his filings, his entire case may be vulnerable t o a subsequent legal challenge.-16- No. 99-3389 The claims made in this case against defendants Pow er Phone, Inc., Noah Steinberg, Dr. Enrique R. Carrion, TMC Agroworld, I nc., The Monte Cristi Group, Manhattan Transfer Registrar Company, Prince ton Research, Inc., and Jack Savage are identical to those discussed above in Case No. 99-3202. The district court dismissed all claims against these d efendants for the same reasons and in the same manner as they were dismissed again st 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 maybe dealt with on remand. Entered for the Court

David M. Ebel Circuit Judge