Opinion ID: 4525035
Heading Depth: 1
Heading Rank: 2

Heading: The Allegations of PBMM’s Complaint

Text: PBMM is a nonprofit corporation that operates a charter school in Palm Beach County, Florida. It alleges that its investment bankers, a consultant, and members of its Board of Directors made fraudulent misrepresentations in connection with a 2014 Bond Offering made on PBMM’s behalf. The purpose of the Bond Offering, as stated in the offering documents presented to PBMM’s Board, was to raise funds to finance the purchase and development of two properties that PBMM leased for its school operations. According to the Complaint, Defendants knew, but did not disclose, that PBMM’s then-CEO 4 intended to use some of the Bond Offering proceeds to finance additional real estate transactions to which he had secretly committed PBMM without the Board’s knowledge or consent. PBMM asserts that Defendants advanced their private interests at the expense of PBMM’s and, in doing so, were aware that PBMM needed to limit its financial obligations because of its strained economic circumstances. PBMM contends that it did not uncover Defendants’ purported wrongful conduct until 2017 when discovery in a separate lawsuit revealed Defendants’ alleged securities fraud and tortious activities. III. Dismissal of PBMM’s Federal Securities Fraud Claims Neither § 10(b) of the Exchange Act nor Rule 10b-5 “expressly creates” a private right of action for securities fraud; however, the Supreme Court has long recognized that “‘a private right of action is implied under § 10(b).’” Janus Capital Grp., Inc. v. First Derivative Traders, 564 U.S. 135, 142 (2011) (quoting Superintendent of Ins. of N.Y. v. Bankers Life & Cas. Co., 404 U.S. 6, 13 n.9 (1971)). This private right of action is available only to “purchasers or sellers of securities[,]” and in “dealing with a private cause of action which has been judicially found to exist, and which will have to be judicially delimited one way or another unless and until Congress addresses the question[,]” the Court has cautioned against an “endless case-by-case erosion” of the purchaser-or-seller requirement through “shifting and highly factoriented” inquiries. Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 736, 749, 755 (1975). As a result, the private right to bring a federal securities fraud claim is accorded “narrow dimensions.” Janus Capital Grp., Inc., 564 U.S. at 142 (quoting Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148, 165 (2008)). In contrast, a “security” “is construed in a ‘flexible’ manner[]” to encompass the variety of “‘schemes devised by those who seek the use of the money of others on the promise of profits.’” Caiola v. Citibank, N.A., N.Y., 295 F.3d 312, 325 (2d Cir. 2002) (quoting SEC v. W.J. Howey Co., 328 U.S. 293, 299 (1946)). 5 In its Complaint, PBMM alleges that it issued bonds or, alternatively, caused Hapoalim and Chan to issue bonds and, on that basis, was a “seller” of a “security.” See, e.g., App. at 44, ¶ 192 (alleging that PBMM’s Board authorized “Hapoalim and Chan to issue the bond[]”); id. at 47, ¶ 209 (alleging that PBMM itself “issued the [b]ond and suffered and continues to suffer economic losses”). The District Court correctly concluded that PBMM was not the issuer of the bonds and could not ground its federal securities fraud claims on that status. We do not disturb that conclusion, and in this appeal, PBMM makes no attempt to defend the theory that it should be treated as a “seller” of “securities” because it issued or caused to be issued bonds. The District Court went further, however, and considered an argument raised for the first time in PBMM’s opposition to the motions to dismiss. There, PBMM argued that it was a “direct seller of promissory notes to the [PFA].” (Op. at 10) (citing Chan Opp’n Br. at 5 n.8). It appears that the District Court did not squarely reject PBMM’s notes-based theory of liability, that because it directly issued promissory notes, PBMM was a “seller” of “securities.” PBMM advances this same theory of liability on appeal. See, e.g., Appellant’s Br. at 12 (“[PBMM’s] transfer of the notes[] . . . is a ‘sale’ under the [Exchange Act], with [PBMM] as ‘seller’ thereunder.”). PBMM’s Complaint, however, is bereft of any mention of its issuance, conveyance, or sale of promissory notes and does not allege a violation of the Exchange Act on that basis. Whatever the merits of the District Court’s analysis of whether PBMM was a “seller” of a “security” based upon PBMM’s alleged sale of promissory notes, we find that the District Court’s dismissal of the Complaint was proper because a complaint may not be amended by advocating a different theory of liability in an opposition brief wholly unsupported by factual allegations in the complaint. See Wright v. Ernst & Young LLP, 152 F.3d 169, 178 (2d Cir. 1998) (holding a party may not amend its complaint by advancing a new theory of liability for the first time in its opposition to a motion to dismiss). The Court thus AFFIRMS the District Court’s dismissal of PBMM’s Complaint on an alternative basis. See Gmurzynska v. 6 Hutton, 355 F.3d 206, 210 (2d Cir. 2004) (“An appellate court is free to affirm a district court decision on any grounds for which there is a record sufficient to permit conclusions of law, even grounds not relied upon by the district court.”) (internal quotation marks and citation omitted). In so ruling, we express no view on whether the conveyance of promissory notes in the circumstances presented in this case rendered PBMM a “seller” of “securities.” IV. Dismissal with Prejudice and Denial of Leave to Amend In opposing the motions to dismiss, PBMM asked the District Court to grant it leave to amend in the event it found dismissal appropriate. Defendants did not affirmatively oppose PBMM’s request for leave to amend although some Defendants sought dismissal with prejudice. District courts should “freely give leave” to amend “when justice so requires[,]” Fed. R. Civ. P. 15(a)(2); however, denial of leave to amend may be warranted “for good reason, including futility, bad faith, undue delay, or undue prejudice to the opposing party.” TechnoMarine SA v. Giftports, Inc., 758 F.3d 493, 505 (2d Cir. 2014) (internal quotation marks omitted). “[O]utright refusal to grant . . . leave without any justifying reason appearing for the denial is not an exercise of discretion; it is merely abuse of that discretion and inconsistent with the spirit of the Federal Rules.” Foman v. Davis, 371 U.S. 178, 182 (1962). The District Court did not explain why it denied PBMM leave to amend and we cannot divine a reason for that denial. See Ronzani v. Sanofi S.A., 899 F.2d 195, 198-99 (2d Cir. 1990) (vacating dismissal of complaint with prejudice where district court did not provide an explanation for its denial of leave to amend and where appellate record did not permit an independent determination of futility). The District Court also did not explain why dismissal with prejudice was warranted. See City of Pontiac Policemen’s & Firemen’s Ret. Sys. v. UBS AG, 752 F.3d 173, 188 (2d Cir. 2014) (finding dismissal with prejudice appropriate because plaintiffs had already amended their complaint and it was “unlikely that the deficiencies raised with respect to the Amended Complaint were unforeseen by plaintiffs when they 7 amended[]” and because “plaintiffs have identified no additional facts or legal theories—either on appeal or to the District Court—they might assert if given leave to amend”). Because the District Court failed to address PBMM’s request for leave to cure any deficiency in its Complaint by amendment, we VACATE the District Court’s dismissal with prejudice and REMAND to the District Court to address whether granting PBMM leave to amend is appropriate under Fed. R. Civ. P. 15.