Opinion ID: 63256
Heading Depth: 2
Heading Rank: 1

Heading: Federal Securities Fraud Claims

Text: Dorsey alleged in his complaint that the Defendants violated § 78j(b) of the Securities Exchange Act of 1934 (the Exchange Act), 15 U.S.C. §§ 78a-78mm, and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5 (collectively, the Rule 10b-5 claim). He further alleged that H. Barnes and J. Barnes violated § 78t(a) of the Exchange Act, which assigns joint and several liability to a controlling person for a controlled person's fraudulent acts. [2] To establish a claim for securities fraud under those provisions, Dorsey must plead with particularity that the Defendants' misstatement or omission of material fact was made with the intent to defraud, that he relied on the misstatement, and that the misstatement proximately caused his injuries. See Williams v. WMX Technologies, Inc., 112 F.3d 175, 177 (5th Cir.1997). The district court dismissed Dorsey's claims for two reasons, only one of which he appeals. [3] The district court found that Dorsey had failed to plead his claims arising from purchases of promissory notes made after March 5, 1999 with the requisite particularity under Rule 9(b) and the PSLRA. We hold that the district court properly dismissed Dorsey's federal securities law claims arising from purchases of promissory notes made after his initial February 1998 purchase. Dorsey's allegations regarding the solicitation and purchases after February 1998 appear in paragraphs 35 and 42 of his complaint: In 1998 and thereafter, many holders of the [promissory notes] were successfully solicited by the defendants to reinvest their annual interest payment under the Notes in additional Notes purportedly issued by PEI having the same terms and security as the notes originally purchased. These solicitations were conducted by PEI officers under the supervision and control of defendants [H.] Barnes and J. Barnes without any revised offering document or meaningful disclosure of the material facts concerning the PEI business. . . . . The fraudulent conduct of defendant [H.] Barnes and J. Barnes, acting individually and on behalf of PEI and CHF, continued to occur each year when they, directly and indirectly, solicited plaintiffs and other Class members to reinvest their interest earnings in additional notes without disclosing the absence of collateral security for the existing [sic] and the failure of CHF to repay loans made by PEI upon the sale of specific properties acquired, in part, with funds loaned by PEI. Dorsey's allegations fail to state a Rule 10b-5 claim for several reasons, first of which is his failure to allege the purchase of a security. Dorsey alleged that he and others were solicited to make purchases, but he does not allege that he acted on those solicitations and made purchases after his initial purchase in February 1998. Rule 9(b) does not allow the plaintiffs to force the defendantsor the courtto make such assumptions. Bagby v. Rydex Invs., No. 3:06-CV-0648-G, 2007 WL 507042, at  (N.D.Tex. Feb. 16, 2007). Dorsey argued on appeal that he made additional purchases. However, because our review is limited to his complaint and its proper attachments, we may not consider any additional evidence or pleadings. Even assuming Dorsey made additional purchases after his initial purchase in February 1998, he failed to allege specifically when those purchases were made. All purchases made before March 5, 1999 are barred by the statute of repose; therefore, the dates of any additional purchases are crucial to the success of his claim. Dorsey attempted to remedy the defects in his complaint on appeal by alleging new facts regarding precisely who solicited him to purchase additional promissory notes. Again, because our review is limited to the complaint and proper attachments, we may not consider any additional evidence or pleadings. Therefore, the district court's dismissal of Dorsey's federal securities fraud claims is affirmed.