Opinion ID: 2974309
Heading Depth: 2
Heading Rank: 2

Heading: Cherry-picking

Text: The MUSA prohibits “any person, in connection with the offer, sale, or purchase of any security, directly or indirectly . . . [t]o engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.” Mich. Comp. Laws § 451.501. In addition, the MUSA renders unlawful “any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made . . . not misleading.” Mich. Comp. Laws § 451.810(a)(1). Common law fraud requires proof of the same basic elements as a claim under the MUSA; namely, Nos. 05-2280/2312 Moross Ltd. Partnership v. Fleckenstein Capital, et al. Page 7 (1) [t]hat defendant made a material representation; (2) that it was false; (3) that when he made it he knew that it was false, or made it recklessly, without any knowledge of its truth and as a positive assertion; (4) that he made it with the intention that it should be acted upon by plaintiff; (5) that plaintiff acted in reliance upon it; and (6) that he thereby suffered injury. U.S. Fid. & Guar. Co. v. Black, 313 N.W.2d 77, 82 (Mich. 1981) (quotation marks omitted). The common law further imposes an obligation on fiduciaries to act in their clients’ best interests and to not betray their clients’ confidence. See Fassihi v. Sommers, Schwartz, Silver, Schwartz & Tyler, P.C., 309 N.W.2d 645, 648 (Mich. 1981); see also Rose v. Nat’l Auction Group, Inc., 646 N.W.2d 455, 464 (Mich. 2001) (“A breach of fiduciary duty claim requires that the plaintiff reasonably reposed faith, confidence, and trust in the fiduciary.”) (citation and quotation marks omitted) (emphasis omitted). Moross alleged in its complaint that the defendants violated the MUSA, committed fraud, and breached their fiduciary duties by “misrepresenting how profits and losses in the Fund were to be allocated and failing to disclose [Fleckenstein’s] plan to keep profitable trades for his own account.” According to Moross, “[a]t the end of the trading day, Fleckenstein, as manager of both his personal account and RTM, assigned ‘winning’ trades to his own personal account, while ‘losers’ were assigned to RTM.” On appeal, Moross devotes little attention to its cherry-picking claim. It does argue, however, that “fact issues persist” with respect to the cherry-picking claim based on both Moulden’s expert report and the defendants’ voluntary transfer of $221,500 to the RTM Fund once Dickson voiced his suspicions of improper trading. The testimony of Collison, Moross’s other expert, is not mentioned in Moross’s briefs, and Collison actually was removed from Moross’s witness list that was filed with the district court. Despite the allegations in the complaint that Dickson “discovered” cherry-picked trades, Dickson’s deposition testimony reveals that he was unable to identify any trades that were improperly allocated to either the RTM Fund or Fleckenstein’s personal account. We are thus left to consider whether the evidence of Fleckenstein’s voluntary transfer and the expert report by Moulden are enough to create a genuine issue of material fact on this issue. Moulden’s evidence of “theoretical profits” does not support a claim that defendants improperly allocated trades after they were completed and profitable. The report, however, could provide circumstantial evidence that Fleckenstein monitored trades made with unassigned funds for a brief period of time and then allocated the trades to either his own account or the RTM Fund once he determined whether they were likely to be profitable. Moulden’s report is thus supportive of a claim that the defendants engaged in the manipulation of trades in which those that were likely to be profitable (based on an examination of short-term performance after the purchase of the trade) were assigned to Fleckenstein’s account and those likely to lose money were assigned to the RTM Fund. After years of discovery, however, Moross has never been able to articulate the precise nature of his cherry-picking claim or how Fleckenstein allegedly manipulated trades. Although “mere weaknesses in the factual basis of an expert witness’ opinion . . . bear on the weight of the evidence rather than on its admissibility,” McLean v. 988011 Ontario, Ltd., 224 F.3d 797, 801 (6th Cir. 2000) (quotation marks omitted), Moulden’s analysis still does not explain the mechanism through which Fleckenstein allegedly engaged in improper activity. Moross’s complaint charges that Fleckenstein allocated profitable trades to his own personal account, while losses were assigned to the RTM Fund investors, including Moross. Moulden’s report, however, does not address this type of cherry-picking. Moulden’s analysis is especially deficient given the high degree of regulation to which Fleckenstein was subjected as the fund’s manager. The Securities Division of Nos. 05-2280/2312 Moross Ltd. Partnership v. Fleckenstein Capital, et al. Page 8 Washington’s Department of Financial Institutions came to a similar conclusion when it wrote that Moulden’s report “does not address timing of the allocation of the trades.” In SEC v. Slocum, Gordon, & Co., 334 F. Supp. 2d 144 (D.R.I. 2004), the SEC was permitted to present a “thorough analysis of [the defendant’s] trades over the relevant period [in order to reveal] certain trends in firm security purchases supporting an inference of cherry picking. . . .” Id. at 172. Moulden’s circumstantial evidence of cherry-picking, however, is not thorough, nor does it reveal a pattern of behavior or disparities in performance between the RTM Fund and Fleckenstein’s personal account. In fact, Fleckenstein’s account performed almost as badly as the RTM Fund for the full calendar year of 1999, and worse than the RTM Fund in 2000. We therefore agree with the district court that Moulden’s report does not create a genuine issue of material fact. Evidence that Fleckenstein voluntarily transferred $221,500 to the RTM Fund also fails to provide a sufficient basis for a jury to rule in favor of Moross. This one fact, which can be interpreted either as an admission of wrongdoing or as a means to avoid the appearance of impropriety, is not enough to allow a rational trier of fact to find for the plaintiff by a preponderance of the evidence, especially when compared to all of the evidence that weighs against a conclusion of cherry-picking. See Anderson, 477 U.S. at 252 (holding that the summary judgment “inquiry, therefore, unavoidably asks whether reasonable [factfinders] could find by a preponderance of evidence that the plaintiff is entitled to a [judgment]”); see also Knecht v. Collins, Nos. 96-3682, 963735, 96-4114, 1999 U.S. App. LEXIS 13645, at  (6th Cir. June 15, 1999) (unpublished) (holding that a plaintiff’s speculative evidence “is not enough to survive summary judgment or for a rational trier of fact to conclude by a preponderance of the evidence that a due process violation has taken place”). The district court further held that Moross had not provided any coherent theory or evidence to support the calculation of damages, which Moross must prove in order to succeed on its claims. Finally, Moross’s argument that the district court improperly relied on the Securities Division’s letter, which “fails to address in any meaningful way the scope of the Division’s investigation; the methodology of the investigation; the witnesses interviewed; or the standard of the review,” is without merit. The district court did not even mention the letter until after the court had already determined that Moulden’s methodology was “seriously flawed” for a variety of reasons. We therefore conclude that the district court did not improperly consider the letter. In sum, Moross had four years to produce reliable evidence of cherry-picking, either direct or circumstantial, and it failed to do so. C. Misrepresentations relating to the 1996 Form ADV On appeal, Moross dedicates the majority of its attention to the alleged misrepresentations on the 1996 Form ADV. Moross claims that Fleckenstein’s 1996 Form ADV contained material omissions regarding his involvement with Pan American Silver and that Fleckenstein failed to disclose his practice of trading in securities for himself “that were also being bought, sold, or recommended for clients.” The district court “put[] aside defendants’ arguments that this claim is barred by Moross’ failure to plead it within the statute of limitations.” It held that (1) Fleckenstein did not have a duty to disclose his position in Pan American Silver because “Moross received the offering materials in December 1996, more than 5 months before Fleckenstein became a director in Pan American Silver,” and (2) “the Form ADV itself shows that Fleckenstein disclosed his intention to buy or sell securities also recommended to clients.” The defendants correctly assert that the “complaint contains no reference of any kind either to Mr. Fleckenstein’s position as director of Pan American Silver Corporation or to Mr. Fleckenstein’s ability to make investments in his own name along with investments for the RTM Fund.” Moross argues that the district court should have permitted it to amend its complaint to Nos. 05-2280/2312 Moross Ltd. Partnership v. Fleckenstein Capital, et al. Page 9 include these claims, but there is no evidence in the record that Moross sought such an amendment. Instead, Moross first mentioned these claims in May of 2003 as part of its response to the defendants’ motion for summary judgment. Even if Moross had sought to amend its complaint, the claims would have been barred by Michigan’s three-year statute of limitations for breach of fiduciary duty and six-year statute of limitations for fraud. See Mich. Comp. Laws § 600.5805(8), (10); Boyle v. Gen. Motors Corp., 661 N.W.2d 557, 559 n.3 (Mich. 2003) (holding that “a plaintiff now has, in any case, the full period of six years from the date of the fraudulent act” to bring an action for fraud); Miller v. Magline, Inc., 256 N.W.2d 761, 774 (Mich. Ct. App. 1977) (stating that a breach of fiduciary duty claim sounds in tort and is governed by the three-year statute of limitations under Michigan law). The Form ADV and the Offering Memo—Moross’s basis for these new claims—were submitted in 1996, over six years before Moross’s introduction of the claims in his 2003 response to the defendants’ motion for summary judgment. Moross argues, however, that these claims would “relate back” to the date of the filing of the original complaint. Under Rule 15(c)(2) of the Federal Rules of Civil Procedure, an amended complaint relates back to the original complaint when “the claim or defense asserted in the amended pleading arose out of the conduct, transaction, or occurrence set forth or attempted to be set forth in the original pleading.” Moross’s claims of misrepresentation and lack of disclosure about self-dealing, however, allege completely different conduct from the conduct underlying its claim of cherry-picking. The Form ADV claim alleged misrepresentations and omissions made in the defendants’ offering materials, whereas the cherry-picking claim alleged the purposeful allocation of unprofitable trades to the RTM Fund. In addition, Moross’s new claims do not constitute “added events leading up to the same injury” or “an added theory of liability for the same occurrence.” See Miller v. Am. Heavy Lift Shipping, 231 F.3d 242, 248-49 (6th Cir. 2000) (citation and quotation marks omitted) (discussing Rule 15(c)(2)). The new claims, which raise the issue of whether the defendants properly adhered to the statements made in their offering materials regarding self-dealing, involve a completely different set of factual disputes from the circumstances regarding the cherry-picking claim. Finally, “[u]ndue delay in filing, lack of notice to the opposing party, bad faith by the moving party, repeated failure to cure deficiencies by previous amendments, undue prejudice to the opposing party, and futility of amendment are all factors which may affect the decision” of whether an amended complaint relates back to the original. Hageman v. Signal L.P. Gas, Inc., 486 F.2d 479, 484 (6th Cir. 1973). Moross waited a year and a half after filing its complaint before inserting the Form ADV claims of misrepresentation and self-dealing into a response to the defendants’ motion for summary judgment. As the defendants argue, “[i]t was as if Plaintiff at the last minute had simply pulled the form out of thin air.” The undue delay in raising the Form ADV claims and their likely futility due to the statute of limitations support the district court’s decision to grant the defendants’ motion to dismiss. D. Claim for accounting Moross further requested that the defendants provide an equitable accounting so that it could “determine the basis for the limited credit previously provided by Defendants.” But the defendants have already produced all of the trading records from the RTM Fund and the Fleckenstein Account for the entire period that Moross was an investor in the RTM Fund. In addition, the defendants provided Moross with accounting records prepared by Ernst & Young, the defendants’ accountant. Because the district court properly held that Moross “fails to articulate what additional information it needs for an equitable accounting claim,” we find no error in the district court’s grant of summary judgment on this claim. Nos. 05-2280/2312 Moross Ltd. Partnership v. Fleckenstein Capital, et al. Page 10 E. Motion for sanctions under Rule 11 and 28 U.S.C. § 1927 In June of 2003, the defendants moved for sanctions under Rule 11 of the Federal Rules of Civil Procedure, which provides that an individual who files a pleading or brief with a federal court “is certifying that to the best of the person’s knowledge, information, and belief” that the factual allegations have evidentiary support. Fed. R. Civ. P. 11(b)(3). The defendants claimed that Moross knew that it could not support its cherry-picking claim when it filed this action and that it then refused to dismiss the claim even after discovery revealed no evidence of cherry-picking. On appeal, the defendants further contend that Moross “falsely represented that Mr. Dickson personally discovered facts supporting a cherry picking claim in the Complaint.” The defendants also moved for sanctions under 28 U.S.C. § 1927, which provides that “[a]ny attorney . . . who so multiplies the proceedings in any case unreasonably and vexatiously may be required by the court to satisfy personally the excess costs, expenses, and attorneys’ fees reasonably incurred because of such conduct.” According to the defendants, Moross has vexatiously multiplied the proceedings by pursuing a frivolous cherry-picking claim and adding other claims at the last minute. The district judge denied the defendants’ motion for sanctions, commenting that “I traditionally do not award sanctions.” Although the denial of a motion for sanctions is reviewed under the abuse-of-discretion standard, this circuit has remanded close questions regarding a motion for sanctions where a district court denies sanctions without explanation. See Palmer v. Nationwide Mut. Ins. Co., 945 F.2d 1371, 1377 (6th Cir. 1991) (remanding the denial of sanctions because, “particularly in the close or serious sanction cases, . . . the district court should set out its analysis and discrete findings with respect to its decision on the allowance or rejection of sanctions”) (quotation marks omitted). Appellate courts in other circuits have also found an abuse of discretion where the district court denies sanctions in a close case with no explanation. See, e.g., S. Bravo Sys., Inc. v. Containment Techs. Corp., 96 F.3d 1372, 1375 (Fed. Cir. 1996) (“When the requesting party makes a strong showing that Rule 11 violations may have occurred, . . . the district court should provide some explanation for disregarding the proffered showing.”) In the present case, the district court was remiss in not providing some explanation for denying defendants’ claim that Moross was purposely prolonging this litigation in order to increase the defendants’ legal expenses. The issue of sanctions is not so close, however, that the district court’s lack of explanation constitutes an abuse of discretion. Sanctions are awarded where an attorney pursues claims that he should know are “frivolous.” Tareco Props, Inc. v. Morriss, 321 F.3d 545, 550 (6th Cir. 2003). In this case, Moross provided the expert testimony of Paul Moulden in order to demonstrate circumstantially that Fleckenstein did not allocate trades to either his own account or the RTM Fund until he had forecasted their likelihood of profitability. The $221,500 voluntary transfer on the part of Fleckenstein, moreover, can be seen as raising at least an inference of consciousness of guilt. We therefore find that the district court did not abuse its discretion in denying the defendants’ motion for sanctions. F. Sanctions for this appeal The defendants have also moved for sanctions under Rule 38 of the Federal Rules of Appellate Procedure, which provides that a court of appeals may award “just damages and single or double costs to the appellee” if it determines that an appeal is frivolous. An appeal is frivolous where an appellant “essentially had no reasonable expectation of altering the district court’s judgment based on law or fact.” Wilton Corp. v. Ashland Castings Corp., 188 F.3d 670, 677 (6th Cir. 1999). Although we agree with the district court that Moross’s evidence is insufficient to survive summary judgment, a close enough question is presented to allow this appeal to escape categorization Nos. 05-2280/2312 Moross Ltd. Partnership v. Fleckenstein Capital, et al. Page 11 as frivolous. In addition, despite Moross’s Form ADV claim ultimately proving meritless, the district court declined to decide whether it was barred by the statute of limitations. The district court’s focus on the merits of the Form ADV claim permitted Moross to reasonably believe that the statute of limitations issue was a close question. We therefore deny the defendants’ motion for sanctions under Rule 38. As the prevailing parties, however, the defendants will be entitled to recover the normal costs of this appeal.