Source: http://ny.findacase.com/research/wfrmDocViewer.aspx/xq/fac.20030702_0002113.SNY.htm/qx
Timestamp: 2016-10-26 23:47:45
Document Index: 684240891

Matched Legal Cases: ['§ 77', '§ 77', '§ 80', '§ 78', '§ 78', '§ 77', '§ 80', '§ 270', '§ 77', '§ 11', '§ 26', '§ 27', '§ 26', '§ 80', '§ 22', '§ 78', '§ 77', '§ 804', '§ 1658']

IN RE MERRILL LYNCH &AMP; CO., INC. RESEARCH REPORTS SECURITIES LITIGATION. THIS DOCUMENT RELATES TO: IN RE MERRILL LYNCH &AMP; CO., INC. GLOBAL TECHNOLOGY FUND SECURITIES LITIGATION, 02-CV-7854 (MP).
Plaintiff, a shareholder in the Merrill Lynch Global Technology Fund (the "Fund"), brings this action against the Fund, its directors, its investment adviser and affiliates, and the adviser's corporate parent, Merrill Lynch & Co., Inc. ("ML & Co."), and broker-dealer affiliate, Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"). Plaintiff alleges that the Fund's Registration Statements and Prospectuses failed to disclose several material facts.
The "material facts" that Defendants allegedly failed to disclose fall into three categories. (See e.g., Compl. ¶¶ 15, 213.)*fn1 First, that the Fund invested in the securities of companies with which MLPF&S had or sought investment banking business. (See e.g., Compl. ¶¶ 15(1), (2), (3)). Second, that MLPF&S issued purportedly misleading research reports on many of the securities held in the Fund's portfolio. (See e.g., Compl. ¶¶ 15(4)-(10)). Third, that the Fund invested in companies at market prices inflated by the misleading research reports "in order to enhance [MLPF&S's] ability to obtain investment banking business from those companies, without regard to whether they were good investments for investors in the Fund." (See e.g., Compl. ¶¶ 15(11)-(15).)
The Fund is a diversified open-end investment company registered with the U.S. Securities and Exchange Commission ("SEC") pursuant to the 1940 Act. (Compl. ¶¶ 30, 62.)*fn2 The Fund was first offered to the public in June 1998. The Fund is an aggressive growth product that seeks long-term capital appreciation through worldwide investment in equity securities of issuers that, in the opinion of its investment adviser, Merrill Lynch Investment Managers, L.P. ("MLIM"), derive a substantial portion of their income from products and services in technology related industries. (Compl. ¶ 30.) The Fund's main investment strategy is to invest in companies that MLIM believes are leaders in their product or service niches, or are likely to develop leadership positions. (Holland Decl. Ex. A, 1999 Prospectus at 3.)
Defendant Princeton Services, Inc. is a subsidiary of ML & Co. and the general partner of MLIM. (See Holland Decl. Ex. B, 1999 SAI at 17.) Defendant FAM Distributors, Inc. (formerly known as Merrill Lynch Funds Distributor, Inc.) distributed shares of the Fund. (Compl. ¶ 32.) Defendants Arthur Zeikel, Terry Glenn and Donald Burke are present or former executives of MLIM who served as directors and/or officers of the Fund during part or all of the Class Period. The ten other individual defendants served as independent directors of the Fund during part or all of that time. (Compl. ¶¶ 38-50.)
Defendant ML & Co. is a Delaware corporation that, through its subsidiaries and affiliates, provides financial services on a global basis. (Compl. ¶ 28.) Defendant MLPF&S is a securities broker-dealer and investment bank with its headquarters in New York, New York. MLPF&S is a wholly-owned subsidiary of ML & Co. (Compl. ¶ 29.)
Apart from their common ownership by ML & Co., MLPF&S and MLIM are entirely separate. They are in different businesses and are subject to different principal regulatory structures — the 1940 Act for MLIM, and the 1934 Act for MLPF&S. Plaintiff does not allege that MLPF&S and MLIM share management, employees, or offices. Nor does she allege any cross-ownership between them.
The Complaint contains six counts. Counts I and II allege violations of Sections 11 and 12(a)(2) of the Securities Act of 1933 ("1933 Act"), 15 U.S.C. § 77k, 1(a)(2), respectively. (Compl. ¶¶ 223-268.) Plaintiff also asserts claims in those Counts for control person liability under Section 15 of the 1933 Act, 15 U.S.C. § 77o. (Compl. ¶¶ 241-245, 264-268.) Count III alleges a violation of Section 34(b) of the Investment Company Act of 1940 ("1940 Act"), 15 U.S.C. § 80a-33(b), and also asserts control person liability under the 1940 Act. (Compl. ¶¶ 269-279.) Counts IV and V allege violations of Section 10(b) of the Securities Exchange Act of 1934 ("1934 Act"), 15 U.S.C. § 78b, and SEC Rule 10b-5. (Compl. ¶¶ 280-339.) Finally, Count VI asserts control person liability under Section 20(a) of the 1934 Act, 15 U.S.C. § 78t. (Compl. ¶¶ 340-346.)
1. Defendants had no Duty to Disclose the Allegedly Omitted
To state a claim under Sections 11 and 12(a)(2), a plaintiff must allege that the defendants had a legal obligation to disclose the allegedly omitted information. See 15 U.S.C. § 77k, 1(a)(2); In re Ultrafem Securities Litig., 91 F. Supp.2d 678, 699 (S.D.N.Y. 2000) (dismissing Sections 11 and 12(a)(2) claims where the plaintiffs failed to demonstrate that the defendants were obligated to disclose the omitted language); Geiger v. Solomon-Page Group, Ltd., 933 F. Supp. 1180, 1187-88 (S.D.N.Y. 1996) (dismissing Sections 11 and 12(2) claims because the defendants were not required to disclose allegedly omitted information); accord Oxford Asset Mgmt., Ltd. v. Jaharis, 297 F.3d 1182, 1189 (11th Cir. 2002) ("[t]o avoid dismissal of a section 11 omission claim, plaintiffs must properly allege . . . [that] defendants were under a duty to disclose the omitted material information"). Plaintiff has failed to plead facts sufficient to show that the Defendants had a duty to disclose the information allegedly omitted from the Fund's Prospectuses and Registration Statements.*fn3
a. Defendants had no Duty to Disclose that the Fund
invested in the securities of companies with which MLPF&S
had an investment banking relationship.
The absence of such a requirement is not surprising. It has been well-recognized for decades that many mutual fund investment advisers are affiliated with broker-dealers and investment banks. See generally Gartenberg v. Merrill Lynch Asset Mgmt., Inc., 528 F. Supp. 1038, 1040-42 (S.D.N.Y. 1981) (Pollack, J.), aff'd, 694 F.2d 923 (2d Cir. 1982). Indeed, Section 17 of the 1940 Act, entitled, "Transactions of Certain Affiliated Persons and Underwriters," specifically recognizes that mutual fund investment advisers may be affiliated with broker-dealers, and regulates in considerable detail the circumstances under which the affiliated entities may, and may not, transact business. See 15 U.S.C. § 80a-17.*fn4 The SEC has also promulgated extensive rules pursuant to Section 17. See 17 C.F.R. § 270.17a-1 — 270.17j-1. Despite this extensive congressional and regulatory oversight, no statute or rule requires the type of disclosure Plaintiff advocates here.
In an analogous context, the court in In re Digital Island Sec. Litig., 223 F. Supp.2d 546 (Del. 2002), found no duty to disclose the alleged omission under the federal securities laws. In that case, the plaintiffs brought a securities class action following the acquisition of Digital Island, Inc. The plaintiffs alleged that the defendants had violated Section 14(e) of the 1934 Act by failing to disclose in tender offer documents several agreements that Digital Island had with third parties. See id. at 551. The court granted the defendants' motion to dismiss, reasoning that the defendants had no duty under any SEC regulation or authority to disclose deals Digital Island had with customers. See id. at 552. The court found it significant that the information required to be included in documents concerning tender offers and solicitations related to tender offers was specifically set forth in two SEC regulations, and no portion of those regulations required the disclosure of the agreements at issue. See id.; accord Geiger, 933 F. Supp. at 1187-88 ("[t]he fact that the SEC does not require disclosure" of the omitted fact "is further support for this conclusion" that the alleged omission did not give rise to liability under Sections 11 and 12(a)(2) because "it reflects the SEC's expert view that such disclosure is not required").
Second, the Defendants cannot be held liable for failing to disclose that MLPF&S provided investment banking services to companies in the Fund's portfolio if that information was already public. Sections 11 and 12(a)(2) do not require the disclosure of publicly available information. See, e.g. Klein v. Gen. Nutrition Cos., 186 F.3d 338, 343 (3d Cir. 1999) (where the information was public knowledge, "[f]ederal securities laws do not require a company to state the obvious"); Wielgos v. Commonwealth Edison Co., 892 F.2d 509, 517 (7th Cir. 1989) ("It is pointless and costly to compel firms to reprint information already in the public domain"); Seibert v. Sperry Rand Corp., 586 F.2d 949, 952 (2d Cir. 1978) ("Although the underlying philosophy of federal securities regulations is that of full disclosure, there is no duty to disclose information to one who reasonably should already be aware of it.") (internal citations omitted).
Here, Plaintiff's own Complaint demonstrates that information concerning companies in which the Fund might invest and to whom MLPF&S provides investment banking services was publicly available. Plaintiff has attached to her Complaint an Excel spreadsheet, "Plaintiff's Exhibit 1," which purports to show that "Merrill Lynch performed investment banking services, which resulted in a consummated transaction, for at least 32.7% of the companies whose securities were held by the Fund." (Compl. ¶ 133.) Plaintiff explains at length in her Complaint that she obtained information in Plaintiff's Exhibit 1 from a variety of public sources, including SEC filings. (Compl. ¶¶ 126-128.) For example, Plaintiff's Exhibit 1 asserts that Merrill Lynch performed investment banking services for Doubleclick, and that this was disclosed in a February 17, 2000 Prospectus for Doubleclick that was filed with the SEC. (See Pl. Ex. 1 at 8.) Plaintiff's Exhibit 1 also states that the Fund disclosed its investment in Doubleclick in its March 31, 2000 Annual Report that also was filed with the SEC. (See id.) Indeed, Plaintiff's Exhibit 1 identifies 66 different companies held by the Fund where publicly-available SEC filings or other public information disclosed that MLPF&S was performing investment banking services for those companies. (See id. at 23.) Plaintiff therefore cannot show that such information was concealed from the markets or from Fund investors.
b. Defendants had no Duty to Disclose that MLPF&S issued
purportedly misleading research reports on many of the
securities held in the Fund's portfolio.
The Plaintiff claims that "there were inherent, material conflicts of interest concerning the issuance of Merrill Lynch's research reports, and the relationship between Merrill Lynch's research and investment banking department." (Compl. ¶ 14.)
Soon thereafter, The Boston Globe pointed out that analysts are often over-optimistic about long-term earnings forecasts for equity offerings because "the relationship between the analysts and the investment banking business . . . pays their bills." The Globe warns that the mounting evidence suggests that you "trust [analysts] at your peril." See Steve Baily & Steven Syre, Taking Analysts' Tempting Forecasts with Grain of Salt, The Boston Globe, October 23, 1996.
The Wall Street Journal beats this drum again in 1998, pointing out that cautious investors would be "hard-pressed to scare up a bearish research report telling them which shares to dump." Of 2,066 ratings, 68% were "buys" or "strong buys," 31% were holds and less than 1% were "weak sells" or "strong sells." The reason for this bullish "speak no evil policy"? The Journal points out that anaylsts often won't issue a "sell" because they "don't like to anger companies that could be their firm's investment-banking clients." See John Hechinger, Heard in New England: Analysts May Hate to Say `Sell,' But a Few Companies Do Hear It, The Wall Street Journal, Apr. 8, 1998.
c. Defendants had no Duty to Disclose that the Fund
Invested in Companies to Aid Investment Banking Business for
The Complaint also fails to allege sufficient facts to support Plaintiff's allegation that the Defendants chose certain companies for the Fund in order to enhance MLPF&S' investment banking business. The only facts Plaintiff cites to support this contention are: (1) MLPF&S performed investment banking services for "at least 38.9 percent" of the companies held in the Fund's portfolio, and (2) MLPF&S issued research reports on "at least 80%, and possibly more than 90%" of the companies held by the Fund. (Compl. ¶¶ 140, 149.) The Complaint then concludes:
business was a material consideration in choosing the
securities which the Fund would buy.
(Compl. ¶ 150 (emphasis added).)
The allegation that MLPF&S provided investment banking services and issued research reports for many companies in the Fund's portfolio would not support a finding that the Fund's investment managers (MLIM) selected those companies to promote MLPF&S' investment banking business. The Fund invested in the world's leading technology companies. The Fund's investment objective is to seek long term capital appreciation by investing in companies that in MLIM's opinion "derive a substantial portion of their income from products and services in technology related industries." (Holland Decl. Ex. A, 1999 Prospectus at 3.) MLIM's strategy for achieving this objective was to invest in technology companies that were market "leaders" or that MLIM believed "are likely to develop leadership positions." (Id.) Plaintiff has not alleged any facts demonstrating that the companies held by the Fund did not satisfy these criteria. And, as one of the world's largest investment banks, MLPF&S provided investment banking services and issued research reports for many of the world's leading technology companies. That the companies overlap should come as no surprise.
The Complaint does not allege any other facts to support Plaintiff s conclusory "suggestion." Plaintiff concedes that the New York Attorney General proceeding "did not address" the parties' conduct with respect to the proprietary mutual funds. (Compl. ¶ 9.) The Complaint does not refer to any documents or e-mails indicating that MLIM portfolio managers considered MLPF&S investment banking business when selecting companies for the Fund. Nor does the Complaint cite any sources, named or anonymous, which purportedly told Plaintiff or her counsel any such thing. The Complaint does not describe how a single investment decision by a MLIM portfolio manager (or any Defendant) was influenced by a desire to enhance MLPF&S investment banking business. It does not identify a single company purchased for the Fund which a MLIM portfolio manager did not think was appropriate. Nor does it explain how a MLIM portfolio manager's compensation depended on enhancing MLPF&S investment banking buisness.
The single, conclusory allegation that a large overlap between leading technology companies held by the Fund and those covered by MLPF&S "suggests" that MLIM had an improper motive in selecting those companies does not suffice to plead a violation of the 1933 Act. "[C]onclusory allegations, unwarranted deductions of facts or legal conclusions masqueradng as facts will not prevent dismissal" of Section 11 claims. Oxford Asset Mgmt., 297 F.3d at 1191 (dismissing Section 11 claim for failure to plead sufficient facts to support conclusory allegations that omissions in a prospectus were objectively unreasonable). See also AIG Global Sec. Lending Corp. v. Bank of America Sec. LLC, 2003 WL 1738484, at *7 (S.D.N.Y. Mar. 31, 2003) (Koeltl, J.) (dismissing securities fraud claims where "[t]he plaintiffs have failed to allege, in any specific sense, why these representations were in fact fraudulent"); Soto v. Morgan Stanley Dean Witter & Co., 2001 WL 958929 (S.D.N.Y. Aug. 21, 2001) (Pollack, J.) (dismissing complaint for failure to plead facts in accordance with Fed.R.Civ.P. 8(a) where plaintiff had merely strung together an "unrestrained litany" of reports, newspaper articles, and market gossip).
2. It is Apparent from the Face of the Complaint that
Plaintiff May Not Recover Any Losses Alleged Herein.
It is an affirmative defense under Sections 11 and 12 that if the amounts recoverable represent other than the depreciation in value of the subject security resulting from such part of the prospectus, oral communication, or registration statement, with respect to which the liability of the defendant is asserted then such amount shall not be recoverable. See 15 U.S.C.A. §§ 77k(e), 1(b). Where it is apparent from the face of the complaint that the plaintiff cannot recover her alleged losses, dismissal of the complaint pursuant to Fed.R.Civ.P. 12(b)(6) is proper. See Pani v. Empire Blue Cross Blue Shield, 152 F.3d 67, 74 (2d Cir. 1998) ("An affirmative defense may be raised by a pre-answer motion to dismiss under Rule 12(b)(6), without resort to summary judgment procedure, if the defense appears on the face of the complaint"); In re DoubleClick, Inc. Privacy Litig., 154 F. Supp.2d 497, 508 (S.D.N.Y. 2001) (Buchwald, J.) ("a court may properly dismiss a claim on the pleadings when an affirmative defense appears on its face").
Plaintiff's alleged losses stem from the fact that her Fund shares declined in value during the Class Period. (E.g., Compl. ¶¶ 217-221.)*fn8 Plaintiff contends that the allegedly omitted information concerning investment banking conflicts was first disclosed on April 8, 2002, when the New York Attorney General brought his ex parte proceeding. (Compl. ¶¶ 7, 8.) However, Plaintiff's alleged "losses" occurred before that disclosure. Prior to April 8, the Fund's net asset value per share had declined approximately 76.5%, from a high of $32.49 on March 27, 2000 to $7.63 on April 5, 2002. (See http://finance.yahoo.com/magtx).*fn9 (This decline is an amount proportional to the decline in the entire technology sector. For example, the Dow Jones World Technology Index declined during the same period, by — 69.3%.) No portion of that decline can be attributed to the alleged non-disclosure. See Akerman v. Oryx Communications, Inc., 810 F.2d 336 (2d Cir. 1987). Further, Plaintiff does not allege that on April 8, 2002, the Fund held shares in any of the companies mentioned in the New York Attorney General complaint. Thus, any decrease in the share price of those companies after April 8, 2002 would not have affected the Fund's net asset value. The decline in the Fund's price per share therefore cannot be attributed to the non-disclosures underlying Plaintiff's claims.
On point is Akerman. There, the Second Circuit affirmed the dismissal of claims under Sections 11 and 12(2) of the 1933 Act on the ground that the plaintiffs could not establish that the alleged accounting misstatements in a prospectus caused any losses. The price of the stock had declined from $4.75 per share at the initial public offering to $3.25 per share by the date the accounting error was disclosed to the public. The Court held that this price decrease of $1.50 per share did not constitute a loss actionable under the 1933 Act because it could not have been caused by misstatements which had not yet been revealed. Under the 1933 Act, "[t]he price decline before disclosure may not be charged to defendants." Akerman, 810 F.2d at 342; accord Beecher v. Able, 435 F. Supp. 397, 407 (S.D.N.Y. 1975) (Motley, J.) (price decline before misstatement revealed not attributable to the defendants under § 11(e)); Fox v. Glickman Corp., 253 F. Supp. 1005, 1010 (S.D.N.Y. 1966) (Metzner, J.) (same); see also Goodridge v. Harvey Group Inc., 778 F. Supp. 115, 129 (S.D.N.Y. 1991) (Lasker, J.) (section 12(2) claim "cannot prevail" where the plaintiff "failed to show that it suffered cognizable damages as a result of the material misrepresentations and omissions made").
Like the plaintiffs in Akerman, Plaintiff here alleges that she has sustained a loss by pointing to declines in the price of her Fund's shares which occurred before public disclosure of the allegedly concealed information. Such price declines may not be charged to Defendants under Section 11 or Section 12(a)(2). See Akerman, 810 F.2d at 341-43.*fn10 For this reason, as well, Plaintiff's 1933 Act claims fail.
3. Plaintiff has Failed to Allege a Direct Purchase from
The Plaintiff's claim against the Defendants under Section 12(a)(2) of the Securities Act also fails because plaintiff has not sufficiently alleged that she purchased the mutual fund shares directly from any of the Defendants.
An essential element of a Section 12(a)(2) claim is that the plaintiff purchased his/her shares directly from a seller who makes use of a false or misleading prospectus. See Pinter v. Dahl, 486 U.S. 622, 643-47 & n. 21 (1988). Under Section 12(a)(2), "only a defendant from whom the plaintiff purchased securities may be liable." Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42, 49 (2d Cir. 1991). Plaintiff does not allege that she purchased Global Technology Fund shares from a Merrill Lynch broker or that the Fund was sold exclusively through Merrill Lynch brokers.
It is axiomatic that a putative class representative must be able to individually state a claim against defendants, even though he or she purports to act on behalf of a class. See In re Delmarva Sec. Litig., 794 F. Supp. 1293, 1309 (Del. 1992) (dismissing Section 12(a)(2) claim where class plaintiffs lacked individual standing to assert claims against defendants); see also Warth v. Seldin, 422 U.S. 490, 502 (1975) (standing requirement not met by alleging "that injury has been suffered by other, unidentified members of the class to which [plaintiffs] belong and which they purport to represent"); In re VeriFone Sec. Litig., 784 F. Supp. 1471, 1489-90 (N.D. Cal. 1992) (dismissing class claim where no named plaintiff had standing to bring claim personally), aff'd, 11 F.3d 865 (9th Cir. 1993).
1. Section 34(b) Does Not Provide A Private Right Of
a. Contemporaneous Congressional Intent Is Required To
Create An Implied Right Of Action
The 1940 Act does not create an express cause of action under Section 34(b) for private litigants. Hence, in order for plaintiff to have standing under Section 34(b), this Court must find that Congress intended to create an implied private right of action in that Act. Because there is no basis to conclude Congress so intended, plaintiff's claim under Section 34(b) must be dismissed. Dorchester Investors v. Peak Int'l Ltd., 134 F. Supp.2d 569 (S.D.N.Y. 2001).
The Supreme Court has held that in deciding whether an implied right of action exists, the courts must determine "whether Congress intended to create the private remedy asserted." Transamerica Mortgage Advisers, Inc. v. Lewis, 444 U.S. 11, 15-16 (1979) (holding no implied private right of action for damages exists under Section 206 of the Investment Advisers Act of 1940 ("Advisers Act")); accord Touche Ross & Co. v. Redin ton 442 U.S. 560, 571 (1979) (no implied private cause of action under Section 17(a) of the 1934 Act); see also Central Bank of Denver. N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (1994) (no implied right of action for aiding and abetting violations of SEC Rule 1Ob-5).
In Alexander v. Sandoval, 532 U.S. 275 (2001), the Supreme Court reiterated the importance of contemporaneous Congressional intent:
The judicial task is to interpret the statute
Congress has passed to determine whether it displays
an intent to create not just a private right but also
a private remedy [citing Transamerica]. Statutory
intent on this latter point is determinative. . . .
Without it, a cause of action does not exist and
courts may not create one, no matter how desirable
that might be as a policy matter, or how compatible
with the statute.
Id. at 286-87. Indeed, the Supreme Court has unambiguously "retreated from [its] previous willingness to imply a cause of action where Congress has not provided one." Correctional Services Corp. v. Malesko, 534 U.S. 61, 67 n. 3 (2001).
Courts in this circuit have applied these pronouncements in holding that no private right of action exists under Sections 26(f) and 27(i) of the 1940 Act. See Olmsted v. Pruco Life Ins. Co. of New Jersey, 283 F.3d 429, 432 (2d Cir. 2002), aff'g 134 F. Supp.2d 508 (E.D.N.Y. 2000) (Garaufis, J.).*fn11 In refusing to find a private right of action under those sections, the District Court in Olmsted stated that "[i]n view of [the 1940 Act's] comprehensive enforcement provisions expressly designating the SEC as the regulatory entity, it is highly improbable that `Congress absentmindedly forgot to mention an intended private action' as a supplemental enforcement mechanism." Id. at 513 (quoting Cannon v. University of Chicago, 441 U.S. 677, 742 (1979)).
The Second Circuit found the District Court's opinion in Olmsted to be "thorough and well-reasoned," and affirmed. Olmsted, 283 F.3d at 431-32. Citing the Supreme Court's holding in Sandoval that Congressional intent to create a right of action is "determinative," the Second Circuit stated that "[a] court must `begin [its] search for Congress's intent with the text and structure' of the statute . . . and cannot ordinarily conclude that Congress intended to create a right of action when none was explicitly provided." Olmsted, 283 F.3d at 432 (quoting Sandoval, 532 U.S. at 288). Since "[n]o provision of the [1940 Act] explicitly provides for a private right of action for violations of either § 26(f) or § 27(i)," the Second Circuit concluded that "we must presume that Congress did not intend one." Id. The Second Circuit in Olmsted further noted that such presumption is "strengthened" by the fact that Sections 26(f) and 27(i) "do not contain rights-creating language." Id. Rather, "[s]tatutes that focus on the person regulated rather than the individuals protected create no implication of an intent to confer rights on a particular class of persons." Id. at 433 (quoting Sandoval, 532 U.S. at 289) (internal citations omitted)).
The Second Circuit also noted in Olmsted that Section 42 of the 1940 Act provides for enforcement of all 1940 Act provisions by the SEC, but not by private litigants. See id. Accordingly, the Court concluded that the 1940 Act's text "creates a strong presumption that Congress did not intend to create private rights of action for violations of §§ 26(f) and 27(i)," and affirmed the District Court's opinion. Id.*fn12 That holding is equally applicable here.
b. There Is No Evidence Of Congressional Intent To Create
An Implied Right Of Action Under Section 34(b)
It shall be unlawful for any person to make any
untrue statement of a material fact in any
registration statement, application, report, account,
record, or other document filed or transmitted
pursuant to this Act or the keeping of which is
required pursuant to section 80a-30(a) of this title.
It shall be unlawful for any person so filing,
transmitting, or keeping any such document to omit to
state therein any fact necessary in order to prevent
the statements made therein, in the light of the
circumstances under which they were made, from being
materially misleading. For the purposes of this
subsection, any part of any such document which is
signed or certified by an accountant or auditor in
his capacity as such shall be deemed to be made,
filed, transmitted, or kept by such accountant or
auditor, as well as by the person filing,
transmitting, or keeping the complete document.
15 U.S.C. § 80a-33(b). As with the sections of the 1940 Act at issue in Olmsted, this text does not contain "rights-creating language," but rather merely describes prohibited actions. The absence of rights-creating language thus strengthens the presumption that Congress did not intend to imply a private right of action under the Section 34(b). Olmsted, 283 F.3d at 432. Likewise, the observations of the Second Circuit in Olmsted about the enforcement scheme of the 1940 Act are equally applicable here. Since Section 42 of the 1940 Act explicitly provided for SEC enforcement of "all [1940 Act] provisions," private rights of action must have been foreclosed under other sections unless explicitly granted. Olmsted, 283 F.3d at 433. In reaching this conclusion, the Court noted that "the express provision of one method of enforcing a substantive rule suggests that Congress intended to preclude others." Olmsted, 283 F.3d at 433 (quoting Sandoval, 532 U.S. at 290).
In Olmsted, Judge Garaufis held that "Congress did
not intend to give investors a private right of
action under [various other sections of the [1940
Act]]. To infer otherwise would encroach upon the
powers of legislation reserved for Congress. This
court will not graft onto [provisions of the [1940
Act]] a remedy which Congress did not intend to
134 F. Supp.2d. at 581.*fn13 Accordingly, the Court "agree[d] with the analysis of Olmsted and decline[d] to infer a private right of action under Section 34(b) of the [1940 Act]." Id.
Similarly, in White v. Heartland High-Yield Mun. Bond Fund, 237 F. Supp.2d 982 (E.D. Wis. 2002), the Court held that no implied private right of action exists under Sections 22 and 34(b) of the 1940 Act. The Court quoted extensively from the Second Circuit's opinion in Olmsted and found that its rationale "applies to §§ 22 and 34(b) with equal force." Id. at 987. See also meVC Draper Fisher Jurvetson Fund I, Inc. v. Millennium Partners, Inc., No. 03 Civ. 862, 2003 WL 941552 at *7 (S.D.N.Y. Mar. 6, 2003) (Sand, J.) (no implied private right of action exists under Section 12(d)(1)(A) of the 1940 Act). Notably, since the Second Circuit's decision in Olmsted, there appear to have been no decisions in which a court has found an implied private right of action under any section of the 1940 Act.*fn14
In sum, the express language of Section 34(b), the contemporaneous legislative history of that provision, and the existence of express remedies under other sections of the 1940 Act make clear there can be no implied private right of action under Section 34(b).
2. These Section 34(b) Claims May Only be Brought
Count III of the Complaint fails for the additional reason that such a claim must be brought derivatively on behalf of the Fund, rather than directly as a class action. Whether a suit is properly derivative or direct may be determined based upon the face of the Complaint. Olesh v. Dreyfus Corp., No. CV-94-1664, 1995 WL 500491, at *6 (E.D.N.Y. Aug. 8, 1995). And it is well-settled that state law controls whether a claim brought by a mutual fund shareholder under the 1940 Act should be brought derivatively or directly. Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90, 108-09 (1991) (courts should look to the law of the fund's state of incorporation to determine whether a plaintiff who brought a derivative suit under the 1940 Act can avail himself of the "demand futility" exception). See, e.g., Strougo v. Bassini, 282 F.3d 162, 168-169 (2d Cir. 2002); Marquit v. Dobson, No. 98 Civ. 9089, 2000 WL 4155, at *1 (S.D.N.Y. Jan 3, 2000) (holding that "[u]nder the Investment Company Act, the law of the state in which the corporation is incorporated governs whether a claim is derivative or direct") (emphasis added); accord Boland v. Engle, 113 F.3d 706, 715 (7th Cir. 1997) (stating that federal courts should apply state corporation law in determining whether a claim under the 1940 Act is direct or derivative); Green v. Nuveen Advisory Corp., 186 F.R.D. 486, 489 (N.D. 11. 1999) (concluding that for claims under the ICA, courts should generally look to the corporation law of the state where an investment company is incorporated).
Here, the Fund is incorporated under Maryland law. (Holland Decl. Ex. B, 1999 SAI at 44.). In Maryland, "a stockholder cannot sue individually to recover damages for injuries to the corporation." Goodman v. Poland, 395 F. Supp. 660, 687 (Md. 1975); see also Indurated Concrete Corp. v. Abbott, 74 A.2d 17, 22 (Md. 1950). That principle is dispositive of plaintiff's purported claim under Section 34(b).
Directly on point is Waller v. Waller, 49 A.2d 449 (Md. 1946) — still the leading case in Maryland on shareholder standing. There, a shareholder sued several parties, alleging that they had conspired to ruin the shareholder and the corporation. The plaintiff further alleged that the object of the conspiracy was primarily to harm the shareholder plaintiff. The Maryland Court of Appeals disagreed, holding that the shareholder's claims were derivative in nature:
It is the general rule that an action at law to
recover damages for an injury to a corporation can be
brought only in the name of the corporation itself
acting through its directors, and not by an
individual stockholder, though the injury may
incidentally result in diminishing or destroying the
The reason for this rule is that the cause of action
for injury to the property of a corporation or for
impairment or destruction of its business is in the
corporation, and such an injury, although it may
diminish the value of the capital stock, is not
primarily or necessarily a damage to the stockholder,
and hence the stockholder's derivative right can be
asserted only through the corporation.
Id. Thus, the Waller court affirmed the dismissal of plaintiff's claim, holding that the stockholder could not maintain a direct action "to recover damages for . . . breach of trust which depreciated the capital stock or rendered it valueless." Id.; see also Werbowsky v. Collomb, 766 A.2d 123, 135 (Md. 2001).
In deciding whether a shareholder may bring a direct
suit, the question the Maryland courts ask is not
whether the shareholder suffered injury; if a
corporation is injured those who own the corporation
are injured too. The inquiry, instead, is whether the
shareholders' injury is "distinct" from that suffered
Where, as in the instant case, a plaintiff shareholder has not sustained any injury distinct from that allegedly inflicted upon an investment company, courts have routinely dismissed the claims asserted directly, rather than derivatively. Thus, in In re Dreyfus Aggressive Growth Mut. Fund Litig., No. 98 Civ. 4318, 2000 WL 10211 (S.D.N.Y. Jan. 6, 2000), plaintiffs asserted claims under Section 34(b) and other sections of the 1940 Act, as well as under Sections 11 and 12 of the 1933 Act. Plaintiffs sought to represent a class of investors in two open-ended funds, each incorporated in Maryland, which allegedly performed poorly because of undisclosed self-dealing transactions by the portfolio manager and heavy investment in risky "micro-cap" securities. The Court applied Maryland law and dismissed the 1940 Act claims for failure to bring them derivatively, since the plaintiffs there merely alleged injury that "was derived from harm to the Funds themselves." Id. at *4; see also Nuveen, 186 F.R.D. at 489-90 (applying Massachusetts and Minnesota law and dismissing plaintiffs' claims under Section 34(b) and other sections of the 1940 Act for failure to bring them derivatively, because the injury to the fund shareholders from diminution in price of fund shares caused by the allegedly improper advisory fees was not distinct from an injury to the fund itself).
• "The acts of the [Merrill Lynch] defendants . . .
caused the Fund to purchase [the securities covered
by the research reports] at inflated prices . . ."
(Compl. ¶ 154);
• "The inflated prices also caused the Fund to pay
excessive advisory fees, thus reducing the value of
the Class Members' shares" (Id. at ¶ 155);
• ". . . [Merrill Lynch's] market manipulation and
promised research reports alleged above inflated the
price of these securities and caused the Fund to
purchase these securities at inflated prices or to
value these securities at inflated prices causing
the Class to overpay for the Fund securities they
purchased during the Class Period" (Id. at ¶ 183);
• "As of September 26, 2002, the per share price [of
the Fund] had declined from a high of $32.49 on
March 27, 2000 to approximately $4.15 per
share. . . . Accordingly, members of the Class have
lost hundreds of millions of dollars as a result of
defendants' unlawful conduct" (Id. at ¶¶ 220-221);
• In Count III, which asserts Plaintiff s claim
under Section 34(b), Plaintiff alleges that "[a]s a
direct and proximate result of defendants' unlawful
conduct as alleged herein, plaintiff and the other
members of the Class suffered damages in connection
with their purchases of Fund shares during the Class
Period" (Id. at ¶ 274).
Even assuming a private right of action under Section 34(b), contrary to the foregoing, and that the shareholder's injury could be found to be distinct from that of the corporation, Plaintiff's claim still fails because the information allegedly withheld from the shareholders was a matter of public knowledge. (See Point III.A. 1, supra.)
1. The Complaint Fails to Satisfy Rule 10b-5(b)'s Pleading
To state a claim for a violation of Rule 10b-5(b), a plaintiff must plead with particularity that the defendant (1) made a false statement or omitted to state a material fact, which it had a duty to disclose (2) with scienter, (3) upon which the plaintiff relied, and (4) which caused the plaintiff's injury. See, e.g., Kalnit v. Eichler, 264 F.3d 131, 138 (2d Cir. 2001). Plaintiff must plead these elements with the particularity required by Fed.R.Civ.P. 9(b), which applies to all averments of fraud, as well as the Private Securities Litigation Reform Act (the "Reform Act"), which was enacted in 1995 for the express purpose of curbing abusive securities litigation. As shown below, Plaintiff has failed to adequately allege several of these elements.
a. Plaintiff Fails to Allege Any Facts Giving Rise to a
As with her claims under the 1933 Act, to state a claim under Rule 1Ob-5, Plaintiff must establish that the Defendants had a duty to disclose any allegedly omitted material information. See, e.g., In re Canandaigua Sec. Litig., 944 F. Supp. 1202, 1208 (S.D.N.Y. 1996) (Pollack, J.) ("[m]ere non-disclosure of information will not necessarily give rise to 10b-5 liability even if the information was material; a plaintiff must also establish that the defendants had a duty to disclose" because "there is no affirmative duty of disclosure" under Rule 1Ob-5) (citations omitted). As with their 1933 Act claims, Plaintiff has failed to allege any facts and their particulars giving rise to such a duty. (See Point III.A. 1, supra.)
More conclusive against Plaintiff's lawsuit is her failure to show that the loss was caused by the alleged misrepresentations and omissions of Merrill Lynch and the Fund's distributors, advisers and directors. "To establish loss causation a plaintiff must show[] that the economic harm that it suffered occurred as a result of the alleged misrepresentations." Citibank, N.A. v. K-H Corp., 968 F.2d 1489, 1495 (2d Cir. 1992) (emphasis in original). See also Spencer Trask Software and Info. Serv. v. RPost Int'l Ltd., No. 02 Civ. 1276, 2003 WL 169801, at *20 (S.D.N.Y. Jan. 24, 2003) (Leisure, J.) (dismissing Rule 10b-5 claim for lack of loss causation where plaintiffs failed to link defendants' alleged misrepresentations to the alleged decline in the value of the investment). If, as set out in this Court's opinion in the 24/7 Real Media and Interliant case, the underlying "fraud" allegedly perpetrated by Merrill Lynch and its analysts was not the proximate cause of the loss in the companies' share price, then the omission of information concerning this "fraud" by the Fund or its affiliates could not itself be a proximate cause of the loss. See 24/7 Real Media & Interliant Opinion. Plaintiff here has done no more to plead loss causation than the Plaintiffs in that case.
c. Plaintiff Fails to Allege Scienter on the Part of the
Fund, Fund Advisers, or Fund Directors
The Second Circuit has explained that "[t]he requisite state of mind, or scienter, in an action under section 10(b) and Rule 10b-5 that the plaintiff must allege is `an intent to deceive, manipulate or defraud.'" Kalnit, 264 F.3d at 138 (citations omitted). The Reform Act requires a complaint to "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2) (emphasis added). A plaintiff can establish this intent by showing either that "defendants had both motive and opportunity to commit fraud," or by alleging facts "that constitute strong circumstantial evidence of conscious misbehavior or recklessness." Kalnit, 264 F.3d at 138 (citation omitted). Moreover, as this Court has stated,
[T]o establish scienter in misrepresentation cases,
facts must be alleged which particularize how and why
each defendant actually knew, or was reckless in
not knowing, that the statements were false at the
time made. . . . To establish scienter in omission
cases, facts must be alleged which show that each
defendant knew, or was reckless in not knowing, the
information the plaintiff alleges the defendant
failed to disclose. . . . Conclusory allegations are
not sufficient to establish intent to deceive.
Silva Run Worldwide Ltd. v. Bear Stearns & Co., No. 96 Civ. 5102, 2000 WL 1672324, at *4 (S.D.N.Y. Nov. 6, 2000) (Knapp, J.) (emphasis added; citation omitted). The Complaint here fails to satisfy these pleading requirements.
i. Plaintiff Fails to Allege Particularized Facts
Demonstrating Motive and Opportunity
Motive would entail concrete benefits that could be
realized by one or more of the false statements and
wrongful nondisclosures alleged. Opportunity would
entail the means and likely prospect of achieving
concrete benefits by the means alleged.
Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1130 (2d Cir. 1994). The Second Circuit has rejected allegations such as a desire for the corporation to appear profitable as "insufficient" to plead motive. Kalnit, 264 F.3d at 139-140; see also Chill v. Gen. Elec. Co., 101 F.3d 263, 268 (2d Cir. 1996) (rejecting as a motive the corporation's interest in justifying to its shareholders a large investment in its subsidiary: "such a generalized motive, one which could be imputed to any publicly-owned, for-profit endeavor, is not sufficiently concrete for purposes of inferring scienter"); San Leandro Emergency Med. Group Profit Sharing Plan v. Phillip Morris Cos., 75 F.3d 801, 814 (2d Cir. 1996) (companies' desire to maintain a high bond or credit rating is a desire shared by all companies and does not qualify as a sufficient motive for inferring scienter). The Complaint here does not allege any "concrete benefits" that would accrue to the Fund, Fund Advisers or Fund Directors as a result of the alleged omissions. There is no allegation that these defendants received any investment banking fees, or that their compensation was based upon any such fees. Indeed, the purported motive of these defendants to obtain investment banking business for MLPF&S defies economic reason. Plaintiff alleges that MUM only invested the Fund's assets in certain companies because it knew that MLPF&S either had or was seeking an investment banking relationship with that company, without regard to whether those companies were good investments for the Fund. (Compl. ¶ 15.) However, since MLIM's advisory fees are based on a percentage of the Fund's net assets, if the Fund's assets diminished, MLIM's advisory fees also declined. Plaintiff's premise thus contradicts the assumption that the Fund, Fund Advisers and Fund Directors were acting in their own economic self-interest. Because courts assume that defendants act in their "informed self-interest," the allegations in the Complaint affirmatively refute scienter. See, e.g., Shields, 25 F.3d at 1130 ("[i]n looking for a sufficient allegation of motive, we assume that the defendant is acting in his or her informed economic self-interest"); Dileo v. Ernst & Young, 901 F.2d 624, 629 (7th Cir. 1990) ("indulging ready inferences of irrationality would too easily allow the inference that ordinary business reverses are fraud. One who believes that another has behaved irrationally has to make a strong case").
ii. Plaintiff Fails to Allege Particularized Facts
Demonstrating Strong Circumstantial Evidence of Conscious
Plaintiff's allegations also fail to identify circumstances indicating "conscious misbehavior" by the Fund, Fund Advisers and Fund Directors. To survive dismissal under the "conscious misbehavior" theory, a plaintiff must allege reckless conduct with specificity, which is "at the least, conduct which is highly unreasonable and which represents an extreme departure from the standards of ordinary care to the extent that the danger was either known to the defendant or so obvious that the defendant must have been aware of it." Honeyman v. Hoyt (In Re Carter-Wallace, Inc. Secs. Litig.), 220 F.3d 36, 39 (2d Cir. 2000) (citation omitted). To satisfy this "highly fact-based inquiry," a complaint must "specifically allege[] defendants' knowledge of facts or access to information contradicting their public statements." Kalnit, 264 F.3d at 142 (citation omitted).
The Complaint here fails to satisfy this standard. Plaintiff does not allege any communications between MLPF&S and the Fund, Fund Advisers or Fund Directors concerning research reports or investment banking fees. Nor does Plaintiff allege any other facts to suggest that the Fund, Fund Advisers or Fund Directors knew any of the MLPF&S research reports were misleading, or any facts (other than publicly available information) that they knew that MLPF&S was performing investment banking services for companies in the Fund's portfolios. Instead, Plaintiff makes the conclusory allegation that "[t]he sheer number of these companies in the Fund's portfolio covered by the Merrill Lynch research department suggests that the opportunity for the Fund's affiliates to obtain investment banking business was a material consideration in choosing the securities which the Fund would buy." (Compl. ¶ 150 (emphasis added).) Such a "suggestion" is insufficient to satisfy the Reform Act and Second Circuit's pleading requirements for scienter.
In addition, as previously noted, there was no duty to disclose that MLPF&S provided investment banking services to companies in the Fund's portfolio. (See Point III.A. 1, supra.) Therefore, the Defendants' "recklessness cannot be inferred from the failure to disclose" facts they had no duty to disclose. Kalnit, 264 F.3d at 143.
2. The Complaint Fails to Satisfy Rule 10b-5(a) and (c)'s
To the extent that the Plaintiff's "scheme" merely repackages her 10b-5(b) claim, such allegations fail for the reasons set out above. See Schnell v. Conseco, Inc., 43 F. Supp.2d 438, 448 (S.D.N.Y. 1999). To the extent that Plaintiff has merely rehashed the "scheme" set out in the 24/7 Real Media and Interliant complaints, such allegations fail for the reasons set out in this Court's opinion in that matter.
Plaintiff's more novel claim — that Fund personnel engaged in a scheme to "park" securities in the Fund even while the market collapsed — fails because Plaintiff has not alleged the barest minimum of facts to support such an assertion. Plaintiff has not stated which securities were parked, when they were parked, or why the Fund's purchase of them was parking, as opposed to a legitimate investment. Plaintiff's only support for her assertion is that (1) a company looks for an underwriter that will support the price of the company's stock through market making activities; (2) a broker-dealer's ability to place a company's securities in a proprietary mutual fund can have a positive impact on supporting the stock price; and (3) Merrill Lynch proprietary funds had many of the same officers and directors and invested their portfolios in a "disproportionately" high percentage of the same securities. (Compl. ¶ 158-67.) For the reasons more thoroughly examined in Point III.A.1.c, supra, the conclusory allegation that the Merrill Lynch Global Technology Fund and those associated with it invested in a "disproportionately" high percentage of securities covered by Merrill Lynch research reports, or that Merrill Lynch proprietary funds overlapped in their investments, is insufficient to state a claim upon which relief may be granted in the absence of some fact that shows either the disproportion complained of or some other evidence of wrongdoing.*fn15
D. Control Person Liability under 1933 Act, 1934 Act, and
Plaintiff also asserts claims for control person liability under Section 15 of the 1933 Act, Section 20 of the 1934 Act and (presumably, since she does not cite a section) Section 48 of the 1940 Act. (See Compl. ¶¶ 241-245, 264-268, 275-277, 340-346.) Because Plaintiff has failed to state a claim against the Defendants for a primary violation of the federal securities law, her claims for control person liability necessarily fail. See e.g., Shields, 25 F.3d at 1132 (affirming dismissal of Section 20 claim where the primary violation asserted by plaintiff under Rule 10b-5 was not adequately pled and thus was properly dismissed); In re Ultrafem, 91 F. Supp.2d at 701 (dismissing Section 15 claim because plaintiffs did not establish a primary violation of Sections 11 or 12).
E. Plaintiff's 1933 Act and 1934 Act Claims are Time-Barred
As prescribed in Section 13 of the 1933 Act, any claim under Section 11 or Section 12(a)(2) must be brought "within one year after the discovery of the untrue statement or the omission, or after such discovery should have been made by the exercise of reasonable diligence." 15 U.S.C. § 77m. For claims arising under Section 10(b) of the 1934 Act, which are brought after the enactment of the Sarbanes-Oxley Act, the applicable statute of limitations is two years. See Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, § 804, 116 Stat. 745 (codified at 28 U.S.C. § 1658).
For the reasons set forth in Point III.A.1.b, supra, Plaintiff was on inquiry notice of her claim that MLPF&S purportedly issued misleading research reports over two years before she sued. Plaintiff was also on inquiry notice that the Fund invested in the securities of companies with which MLPF&S had or sought investment banking business over two years before bringing her suit. (See Point III.A.1.a and c, supra.) These claims are thus time-barred.