Opinion ID: 447943
Heading Depth: 2
Heading Rank: 4

Heading: The Complaint Against John Sykes and the Imposition of Sanctions

Text: 49 The district court found the Complaint's allegations to be totally insufficient against John Sykes and so without foundation that an award of costs, including attorney's fees, was appropriate. In reaching its conclusion, the court stated that the Complaint contained only one specific allegation against John Sykes, i.e., the fact that he had sold some 26% of his Sykes common stock holdings during the period in question. 580 F.Supp. at 1381. The court noted that the Sykes first-quarter report for 1983 stated that John Sykes was retiring during the class period and the court found it reasonable and logical that John Sykes would liquidate a significant portion of his stock holdings in connection with his retirement. Id. We conclude that the Complaint was sufficient to state a claim against John Sykes and that the district court's conclusions impermissibly reached beyond the scope of the Complaint, and, indeed, invaded the province of the trier of fact. 50 The Complaint's allegations against John Sykes were not limited to the assertion that he sold a block of his Sykes common stock. The Complaint alleged that the unqualifiedly optimistic statements were published and disseminated by the defendants. (Complaint p 31.) The attribution of the statements to all defendants was supported by allegations that (1) the challenged statements were made in corporate documents distributed by Sykes (id. paragraphs 32-35) (For example, oral statements made by Belden and Robert Sykes were transcribed by the Company and distributed to the public, see id. p 34.); (2) all of the individual defendants were officers, directors, and controlling persons of Sykes (id. paragraphs 7-11); and (3) the individual defendants caused Sykes to engage in the unlawful acts and conduct alleged herein (id. p 11). John Sykes was not simply an outside director who would not have been involved in the day-to-day operations of the Company. Rather, he was a vice president and, as the district court opinion noted, a founder of the Company. The Complaint asserted that 51 each of the individual defendants had access to the adverse non-public information about the operations and future business prospects of Sykes as alleged herein and acted to conceal that information from plaintiff and the members of the class defined herein and the investing public. 52 (Id.; see also id. p 31.) 53 Thus, the allegation that John Sykes sold a substantial portion of his common stock during the period when the Company was disseminating the allegedly misleading statements must be read in conjunction with the allegations that John Sykes, as a director and an officer of the Company, knew the undisclosed facts and caused the Company to make the challenged statements. The Complaint was sufficient to state a claim against John Sykes. 54 The district court's reliance on the information found in the Sykes first-quarter report, i.e., that John Sykes was retiring during the class period, as a basis for inferring that his retirement was the reason for his stock sales, has several flaws. First, it relied on facts and assumptions outside of the pleadings, which should not have been considered on a Rule 12(b)(6) motion. Second, assuming that there is no dispute as to the fact and timing of John Sykes's retirement, the question of whether that retirement was the motivation for his stock sales is a question that would be inappropriate for decision even on a summary judgment motion. See, e.g., Wechsler v. Steinberg, 733 F.2d 1054, 1058 (2d Cir.1984) (questions of knowledge and intent usually inappropriate for decision on summary judgment); Rodriguez v. Board of Education, 620 F.2d 362, 365 (2d Cir.1980) (in converting defendants' Rule 12(b)(6) motion into a Rule 56 motion, the judge was required to draw all reasonable inferences and resolve all genuine disputes in favor of the plaintiff). Third, the Complaint's allegation as to John Sykes's stock sale is broad enough to encompass not only the implication that John Sykes wanted to sell because he knew the prospects were not rosy, but also the implication that he wanted the market price of the stock inflated so that he could sell at a high price rather than a low one. Hence, even if the court was correct that John Sykes's motivation in selling his stock was to fund retirement activities, plaintiff would doubtless argue that the desire to sell the stock to fund retirement was an incentive for John Sykes to cause the making of inflationary misstatements. Such an implication would give substance to the contention that the alleged misrepresentations and omissions were deliberate. 55 Thus, not only do we find the Complaint sufficient to state a claim against John Sykes, we find that the district court's inferences as to a possible reason for John Sykes's stock sales invaded the province of the jury and that even those inferences did not supply a complete answer to the fair import of the Complaint. 56 The dismissal of the Complaint against John Sykes having been improper, the imposition of sanctions pursuant to Rule 11 cannot stand.