Court Opinion

ID: 2718309
Source: CourtListenerOpinion
Date Created: 2014-08-15 17:00:11.818805+00
Date Added: 2024-06-11T10:02:22.022621
License: Public Domain

NOT PRECEDENTIAL

                    UNITED STATES COURT OF APPEALS
                         FOR THE THIRD CIRCUIT
                              ____________

                                     No. 13-2328
                                    ____________

                    BRADD GOLD, individually and on behalf
                        of all others similarly situated,
                                                      Appellant

                                         v.

                        FORD MOTOR COMPANY;
                 FORD MOTOR COMPANY CAPITAL TRUST II

                  On Appeal from the United States District Court
                            for the District of Delaware
                             (D. C. No. 1-10-cv-00587)
                   District Judge: Honorable Leonard P. Stark

                             Argued on April 8, 2014

              Before: AMBRO, JORDAN and ROTH, Circuit Judges

                         (Opinion filed: August 15, 2014)

Norman M. Monhait, Esquire (Argued)
P. Bradford deLeeuw, Esquire
Rosenthal, Monhait & Goddess
919 North Market Street
Suite 1401
Wilmington, DE 19801

            Counsel for Appellant

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Sean M. Marotta, Esquire (Argued)
Christopher T. Handman, Esquire
Hogan Lovells US
555 Thirteenth Street, N.W.
Columbia Square
Washington, DC 20004

Stuart J. Baskin, Esquire
Christopher R. Fenton, Esquire
Jerome S. Fortinsky, Esquire
Shearman & Sterling
599 Lexington Avenue
New York, NY 10022

Jon E. Abramczyk, Esquire
Morris, Nichols, Arsht & Tunnell
1201 North Market Street
P.O. Box 1347
Wilmington, DE 19899

             Counsel for Appellees

                                     OPINION

ROTH, Circuit Judge:

      Bradd Gold appeals the District Court’s orders granting defendants’, Ford Motor

Company (Ford) and Ford Motor Company Capital Trust II (the Trust), motion to dismiss

under Fed. R. Civ. P. 12(b)(6) and denying Gold’s motion to amend. We will affirm.

I.    Background

      This case concerns whether Ford and the Trust violated Section 10(b) of the

Securities Exchange Act of 1934 by failing to comply with a ten-day notice requirement

under SEC Rule 10b-17. 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-17, before they

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announced a distribution of trust preferred securities. In 2002, Ford created a Delaware

statutory business trust to raise capital through the issuance of 90 million trust preferred

securities. Gold purchased approximately 21,800 trust preferred securities. The Trust

used the proceeds from the sale to purchase debentures from Ford. Under the debenture

contract, Ford makes quarterly interest payments to the Trust on the debentures, and then

the Trust distributes the interest payments in quarterly payments to the holders of the trust

preferred securities. In addition, Ford can exercise an option to defer quarterly interest to

the Trust for a maximum of 20 quarters.

       In April 2009, Ford exercised its right to defer interest payments on the debentures

to the Trust; the Trust then deferred the quarterly payments to the security holders,

including Gold. On June 30, 2010, at 8:59 a.m., Ford announced that it would resume

payments to the Trust and make payments on the previously deferred distributions on

July 15, 2010, to the June 30 record holders—the owners listed in the Trust’s books as of

June 30. The record holder of a security on the record date, however, is not necessarily

entitled to retain a distribution. Rather, the New York Stock Exchange (NYSE), or other

relevant exchange, independently sets what is known as an “ex-distribution date,” which

determines who is entitled to a distribution when a security is sold close in time to the

distribution. If the security is purchased on or after the ex-distribution date, the seller

may retain the distribution; however, if the security is purchased before the ex-

distribution date, the seller must give the distribution to the buyer. Although the NYSE

traditionally sets the ex-distribution date as two business days prior to the record date, it

has discretion to set a different ex-distribution date. NYSE Rule 235.

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       The NYSE announced on June 30, 2010, at 1:20 p.m., that the ex-distribution date

for the Trust’s distribution would be July 1, 2010. Sales on June 28, 29, and 30 would

include a “due bill,” requiring the sellers of the Trust’s securities on those three days to

pass on the distribution payments to the buyers of their securities. On June 30, after

Ford’s distribution announcement, but before the NYSE set the ex-distribution date, Gold

sold 13,800 trust securities. Because his sales occurred before the July 1 ex-distribution

date set by the NYSE, and during the “due bill period,” Gold was not entitled to the July

15, 2010, distribution for the 13,800 trust securities he sold.

       On July 8, 2010, Gold filed a Complaint in the District of Delaware in his capacity

as an individual shareholder and on behalf of a purported class, alleging that Ford and the

Trust violated Section 10(b) of the Securities Exchange Act of 1934. 15 U.S.C. § 78j(b).

On November 15, 2010, Gold filed an Amended Complaint asserting that Ford’s decision

to announce the July distribution on the same day as the record date violated Rule 10b-

17, which requires the issuer to inform the National Association of Securities Dealers,

Inc., now the Financial Industry Regulatory Authority (FINRA), of the record date for a

distribution “no later than 10 days prior to the record date.” 17 C.F.R. § 240.10b-17.

Ford and the Trust moved to dismiss the Amended Complaint. The District Court

granted the motion, holding that Gold failed to plead loss causation. See Gold v. Ford

Motor Co., 852 F. Supp. 2d 535, 541 (D. Del. 2012).

       On April 27, 2012, Gold moved to amend his Complaint, submitting a Proposed

Amended Complaint. The District Court denied the motion, determined that there is no

private right of action under Rule 10b-17, and found that the Proposed Amended

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Complaint failed to adequately plead loss causation and scienter. See Gold v. Ford Motor

Co., 937 F. Supp. 2d 526, 532 (D. Del. 2013). Gold appealed.

II.    Standard of Review1

       We exercise plenary review over a District Court’s grant of a motion to dismiss

under Fed. R. Civ. P. 12(b)(6). Eid v. Thompson, 740 F.3d 118, 122 (3d. Cir. 2014). “To

survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted

as true, to ‘state a claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, 556
U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v Twombly, 550 U.S. 544, 570 (2007)). We

review a district court’s denial of leave to amend a complaint for abuse of discretion.

Renchenski v. Williams, 622 F.3d 315, 324-25 (3d Cir. 2010).

III.   Discussion

       Gold argues that Ford and the Trust violated section 10(b) of the Securities

Exchange Act by failing to comply with SEC Rule 10b-17. Section 10(b) makes it

unlawful (1) to “use or employ … any manipulative or deceptive device or contrivance,”

(2) “in connection with the purchase or sale of any security,” and (3) “in contravention of

[Securities and Exchange Commission] rules and regulations.” 15 U.S.C. § 78j(b); see

also McCabe v. Ernst & Young, LLP, 494 F.3d 418, 424 (3d Cir. 2007) (citing and

quoting 15 U.S.C. § 78j(b)). The Supreme Court has identified six required elements of a

Section 10(b) action: (1) a material misrepresentation or omission, (2) scienter, (3) a

1
 The District Court had jurisdiction under 28 U.S.C. § 1331 and 15 U.S.C. § 78aa; we
have jurisdiction under 28 U.S.C. § 1291.
                                                5
connection with the purchase or sale of a security, (4) reliance, (5) economic loss, and (6)

loss causation. Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 341-42 (2005).

       We hold that Gold’s Amended Complaint fails to plead scienter. In addition, his

Proposed Amended Complaint fails to adequately plead scienter and, thus, amendment

would be futile.2 See In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1434 (3d

Cir. 1997) (internal citations omitted).

       The Private Securities Litigation Reform Act (PSLRA) established a heightened

pleading requirement for Section 10(b) securities fraud cases: “the complaint shall, with

respect to each act or omission alleged to violate this chapter, 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). The “PSLRA alters the normal operation of inferences under

Fed. R. Civ. P. 12(b)(6)” by requiring a strong inference of scienter. In re Digital

Securities Litig., 357 F.3d 322, 328 (3d Cir. 2004) (internal citations omitted). A

complaint survives a motion to dismiss “only if a reasonable person would deem the

inference of scienter cogent and at least as compelling as any opposing inference one

could draw from the facts alleged.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551
U.S. 308, 324 (2007). Under the PSLRA, a plaintiff properly pleads scienter by alleging

facts that “constitute circumstantial evidence of either reckless or conscious behavior.”

Institutional Invs. Grp. v. Avaya, Inc., 564 F.3d 242, 276-77 (3d Cir. 2009) (internal

2
 Because we hold that Gold failed to plead scienter, we need not reach whether Rule
10b-17 includes a private right of action or whether Gold adequately pleaded loss
causation. See Brightwell v. Lehman, 637 F.3d 187, 191 (3d Cir. 2011) (internal citations
omitted) (“We may affirm a district court for any reason supported by the record.”).
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citation and quotation marks omitted). Indeed, “motive and opportunity may no longer

serve as an independent route to scienter.” Id. at 277.

       Gold argues that Ford and the Trust acted recklessly or consciously disregarded an

obvious risk of misleading the public by failing to provide the ten-day notice to FINRA.

Gold points to Ford’s history of complying with the Rule 10b-17 notice requirement as

showing Ford and the Trust’s knowledge of a “bright line legal rule” and a “deliberate

choice to disregard a known legal requirement.” We disagree. Ford’s prior compliance

with the ten-day notice requirement does not reasonably allow a “strong inference” that

its failure to provide the notice on one occasion was the result of conscious misbehavior.

This speculation is insufficient under Twombly/Iqbal and Rule 12(b)(6)—let alone the

heightened pleading requirements under the PSLRA. Simply put, missing a deadline is

not scienter.

       Gold contends that, because the SEC regulation states that it constitutes a

“manipulative or deceptive device or contrivance” to fail to give notice, it follows that

Ford’s failure to provide the notice must also be conscious misbehavior. This assertion

speaks too broadly about Rule 10b-17, and would mean that every violation of the notice

requirement establishes scienter. Scienter, however, is an additional statutory

requirement imposed by the PSLRA. 15 U.S.C. § 78u-4(b)(2). We cannot accept that

every violation of Rule 10b-17 is manipulative or deceptive such that it constitutes

conscious misbehavior that establishes scienter.

       Nor do we accept Gold’s argument that Ford and the Trust acted recklessly.

Recklessness is “an extreme departure from the standards of ordinary care, and which

                                             7
presents a danger of misleading buyers or sellers that is either known to the defendant or

is so obvious that the actor must have been aware of it.” Avaya, 564 F.3d at 267 n.42

(internal citation and quotation marks omitted). The facts in the Amended Complaint and

Proposed Amended Complaint do not allege an extreme departure from ordinary care.

Ford missed a deadline, but negligence is not scienter. See McLean v. Alexander, 599
F.2d 1190, 1198 (3d Cir. 1979).

       Thus, we conclude that the District Court did not err in dismissing Gold’s

Amended Complaint and did not abuse its discretion in denying Gold’s leave to amend.

III.   Conclusion

       For the foregoing reasons, we will affirm the judgment of the District Court.

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