Court Opinion

ID: 626127
Source: CourtListenerOpinion
Date Created: 2012-03-27 14:14:42+00
Date Added: 2024-06-11T17:51:14.391660
License: Public Domain

11-1270-cv
BIV-NY v. Smith Barney

                           UNITED STATES COURT OF APPEALS
                               FOR THE SECOND CIRCUIT

                                     SUMMARY ORDER

RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO
A SUMMARY ORDER FILED ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS
GOVERNED BY FEDERAL RULE OF APPELLATE PROCEDURE 32.1 AND THIS COURT’S
LOCAL RULE 32.1.1. WHEN CITING A SUMMARY ORDER IN A DOCUMENT FILED WITH
THIS COURT, A PARTY MUST CITE EITHER THE FEDERAL APPENDIX OR AN ELECTRONIC
DATABASE (WITH THE NOTATION “SUMMARY ORDER”). A PARTY CITING A SUMMARY
ORDER MUST SERVE A COPY OF IT ON ANY PARTY NOT REPRESENTED BY COUNSEL.

       At a stated term of the United States Court of Appeals for the Second Circuit, held at the
Daniel Patrick Moynihan Courthouse, 500 Pearl Street, in the City of New York, on the 27th day
of March, two thousand twelve.

Present:
         ROBERT A. KATZMANN,
         REENA RAGGI,
                     Circuit Judges,
         JED S. RAKOFF,
                     District Judge.*
________________________________________________

JOHN FINN, PARAGON RESERVE COMPANY, TEXAS PGI, INC., AMERICAN EAGLE
OUTFITTERS, INC., AEO MANAGEMENT CO.,

           Plaintiffs,

BIV-NY, MICHAEL A. PASSIDOMO, Doctor, MICHAEL PUDER, Trustee of the MP Trust,

           Plaintiffs-Appellants,

                   v.                                                  No. 11-1270-cv

SMITH BARNEY, CITIGROUP GLOBAL MARKETS INC., CITIGROUP INC., CITI SMITH
BARNEY, CITIGROUP GLOBAL CAPITAL MARKETS, INC.,

         Defendants-Appellees.
________________________________________________

       *
          The Honorable Jed S. Rakoff, of the United States District Court for the Southern
District of New York, sitting by designation.
For Plaintiffs-Appellants:                ROBERT S. SCHACHTER (Jeffrey C. Zwerling, Hillary
                                          Sobel, Paul Kleidman, Justin M. Tarshis, on the brief),
                                          Zwerling, Schachter & Zwerling, LLP, New York, N.Y.
                                          (Michael E. Criden, Kevin Love, Criden & Love, P.A.,
                                          South Miami, Fla., on the brief)

For Defendants-Appellees:                 CHARLES E. DAVIDOW (Brad S. Karp, Susanna M.
                                          Buergel, on the brief), Paul, Weiss, Rifkind, Wharton &
                                          Garrison LLP, New York, N.Y.

       Appeal from the United States District Court for the Southern District of New York
(Swain, J.).

       ON CONSIDERATION WHEREOF, it is hereby ORDERED, ADJUDGED, and

DECREED that the judgment of the district court be and hereby is AFFIRMED.

       Plaintiffs-Appellants (“plaintiffs”) appeal from a final judgment entered on March 2,

2011 by the United States District Court for the Southern District of New York (Swain, J.), in

favor of Defendants-Appellees (“defendants” or “Citigroup”), based on a March 1, 2011

Memorandum Opinion and Order dismissing the Fourth Consolidated Amended Complaint (the

“complaint”) with prejudice. The complaint asserts (1) a market manipulation claim pursuant to

Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), 15 U.S.C. § 78j(b),

and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, and (2) a claim under Section

20(a) of the Exchange Act, 15 U.S.C. § 78t(a), against Citigroup, Inc. for allegedly acting as a

controlling person with respect to the underlying violation. On appeal, plaintiffs contend that the

district court (1) abused its discretion when it took judicial notice of certain documents

concerning defendants’ auction rate securities (“ARS”) bidding practices and (2) erred in

dismissing its complaint for failing to plead adequately manipulative conduct or reasonable

reliance. We assume the parties’ familiarity with the facts and procedural history of this case.

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       We first turn to plaintiffs’ contention that the district court improperly took judicial

notice of various documents, including (i) the 2006 SEC Order disclosing the auction practices

of certain ARS broker-dealers, including Citigroup; (ii) news articles respecting the 2006 SEC

Order; (iii) ARS prospectuses that explained Citigroup’s auction bidding practices and disclosed

the risk of auction failures; (iv) a section of the Smith Barney website disclosing information

respecting Citigroup’s auction practices; and (v) confirmation documents provided to the two

plaintiffs with Citigroup accounts directing them to the Smith Barney website. We review a

district court’s determination whether to take judicial notice of documents under an

abuse-of-discretion standard. Staehr v. Hartford Fin. Servs. Grp., Inc., 547 F.3d 406, 424 (2d

Cir. 2008). The district court may take judicial notice of documents where the documents “can

be accurately and readily determined from sources whose accuracy cannot reasonably be

questioned.” Fed. R. Evid. 201(b)(2). “Because the effect of judicial notice is to deprive a party

of the opportunity to use rebuttal evidence, cross-examination, and argument to attack contrary

evidence, caution must be used in determining that a fact is beyond controversy under Rule

201(b).” Int’l Star Class Yacht Racing Ass’n v. Tommy Hilfiger U.S.A., Inc., 146 F.3d 66, 70 (2d

Cir. 1998).

       Here, we cannot conclude that the district court abused its discretion in taking judicial

notice of the above-listed documents. These documents were publicly available both prior to

and during the class period, and, contrary to plaintiffs’ assertion, the district court took judicial

notice of the documents for the purpose of establishing that the information was publicly

available; it did not consider the documents for their truth.1 See Staehr, 547 F.3d at 425 (“[T]he

       1
         We further observe that because plaintiffs’ own complaint quotes certain disclosures
from the Smith Barney website, they cannot seriously argue that the website disclosures are
“outside of the pleadings,” do not “form the basis of Plaintiffs’ claims,” or that “Plaintiffs neither
incorporated nor relied upon the website in stating their claim.” Pls.’ Br. 16, 20.

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District Court did not abuse its discretion in denying Appellants’ motion to strike the materials

submitted by Appellees for judicial notice purposes [because] [t]he materials . . . were offered to

show that certain things were said in the press, and that assertions were made in lawsuits and

regulatory filings . . . .”). Indeed, other courts in this Circuit have taken judicial notice of

substantially similar documents (including the 2006 SEC Order, ARS prospectuses, website

disclosures, and media reports) when considering motions to dismiss for alleged violations of the

securities laws in connection with the sale of ARS. See In re UBS Auction Rate Sec. Litig., 2010

WL 2541166, at *7 & n.6, *10, *13 (S.D.N.Y. June 10, 2010); In re Merrill Lynch Auction Rate

Sec. Litig., 704 F. Supp. 2d 378, 386 n.5, 396 n.11 (S.D.N.Y. 2010), aff'd, Wilson v. Merrill

Lynch & Co., Inc., --- F.3d ----, 2011 WL 5515958 (2d Cir. 2011). Accordingly, we conclude

that the district court did not abuse its discretion in taking judicial notice of these documents.

        We next turn to plaintiffs’ argument that the district court erred in dismissing its market

manipulation claim for failure to state a claim upon which relief can be granted. We review de

novo a district court’s dismissal of a complaint for failure to state a claim upon which relief can

be granted, “accepting all factual allegations in the complaint as true, and drawing all reasonable

inferences in the plaintiff’s favor.” Holmes v. Grubman, 568 F.3d 329, 335 (2d Cir. 2009)

(internal quotation marks omitted). “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, 129 S. Ct. 1937, 1949 (2009) (internal quotation marks omitted). “A claim has

facial plausibility when the plaintiff pleads factual content that allows the court to draw the

reasonable inference that the defendant is liable for the misconduct alleged.” Id. “Th[is]

plausibility standard . . . asks for more than a sheer possibility that a defendant has acted

unlawfully.” Id.

                                                    4
       Section 10(b) of the Exchange Act makes it unlawful “[t]o use or employ, in connection

with the purchase or sale of any security . . . , any manipulative or deceptive device or

contrivance in contravention of such rules and regulations as the Commission may prescribe as

necessary or appropriate in the public interest or for the protection of investors.” 15 U.S.C. §

78j(b). Rule 10b-5, in relevant part, states:

       It shall be unlawful for any person, directly or indirectly, by the use of any means or
       instrumentality of interstate commerce, or of the mails or of any facility of any
       national securities exchange,

       (a) To employ any device, scheme, or artifice to defraud,

       (b) To make any untrue statement of a material fact or to omit to state a material fact
       necessary in order to make the statements made, in the light of the circumstances
       under which they were made, not misleading, or

       (c) To engage in any act, practice, or course of business which operates or would
       operate as a fraud or deceit upon any person, in connection with the purchase or sale
       of any security.

17 C.F.R. § 240.10b-5.

       In the context of the securities laws, the term “manipulation” refers to “intentional or

willful conduct designed to deceive or defraud investors by controlling or artificially affecting

the price of securities.” Ernst & Ernst v. Hochfelder, 425 U.S. 185, 199 (1976); see also Santa

Fe Indus., Inc. v. Green, 430 U.S. 462, 476 (1977) (“Manipulation is virtually a term of art when

used in connection with securities markets. The term refers generally to practices, such as wash

sales, matched orders, or rigged prices, that are intended to mislead investors by artificially

affecting market activity.” (internal quotation marks and citations omitted)). “Market

manipulation requires a plaintiff to allege (1) manipulative acts; (2) damage (3) caused by

reliance on an assumption of an efficient market free of manipulation; (4) scienter; (5) in

connection with the purchase or sale of securities; (6) furthered by the defendant’s use of the

                                                  5
mails or any facility of a national securities exchange.” ATSI Commc’ns, Inc. v. Shaar Fund,

Ltd., 493 F.3d 87, 101 (2d Cir. 2007). “In order for market activity to be manipulative, that

conduct must involve misrepresentation or nondisclosure.” Wilson, 2011 WL 5515958, at *8.

The “market is not misled when a transaction’s terms are fully disclosed.” Id. (internal quotation

marks omitted). “In this regard, the prohibition of manipulative practices in Section 10(b) is

fully consistent with the fundamental purpose of the Exchange Act to substitute a philosophy of

full disclosure for the philosophy of caveat emptor.” Id. (internal quotation marks and

alternations omitted).

        In this case, we conclude that defendants’ disclosures preclude plaintiffs’ claim that the

defendants’ conduct was manipulative. The core allegation in the complaint is that plaintiffs

purchased Citigroup ARS believing that auction clearing rates were determined solely by

investor supply and demand when, in fact, defendants were increasingly intervening in the ARS

market without plaintiffs’ knowledge. In light of defendants’ disclosures that, inter alia,

Citigroup could “in its sole discretion” “routinely place one or more bids in an auction for its

own account . . . to prevent a failed auction,” and “[b]ids by Citigroup . . . are likely to affect (i)

the auction rate . . . and (ii) the allocation of ARS being auctioned,” J.A. 252, plaintiffs cannot

plausibly allege that Citigroup was intervening in the ARS market without their knowledge or

that they reasonably believed that auction clearing rates were determined by “the natural

interplay of supply and demand,” id. at 208.2 As we recently observed in Wilson, “there can be

        2
         Plaintiffs can hardly claim ignorance of defendants’ disclosures given that their own
complaint quotes some of the disclosures. See J.A. 220 (“Citigroup is permitted, but not
obligated, to submit orders in auctions for its own account either as a bidder or a seller and
routinely does so in the auction rate securities market in its sole discretion.”) (emphasis added).

                                                   6
no dispute that the general phenomenon of ARS dealers placing bids to prevent failed auctions

(i.e., ‘support bidding’) was publicly disclosed by . . . July 2007” -- before the beginning of the

class period in this case. Wilson, 2011 WL 5515958, at *9.

       Plaintiffs argue that notwithstanding the disclosures defendants’ conduct was misleading

due to the increasing frequency with which Citigroup placed support bids. However, unlike in

Wilson, the plaintiffs in this case do not allege that Citigroup placed support bids in every

auction and, even assuming that there was such an allegation, “we do not see how that allegation

can be actionable given [defendants’] disclosure that it ‘may routinely’ place [support] bids.” Id.

at *11. Accordingly, we affirm the district court’s dismissal of plaintiffs’ market manipulation

claim for failing to allege manipulative conduct. Having concluded that the complaint fails to

state a claim for any primary violation of the securities laws, we also affirm the district court’s

dismissal of plaintiffs’ Section 20(a) claim alleging that Citigroup Inc. is liable as a controlling

person. See id. at *16.

       We have considered plaintiffs-appellants’ remaining arguments and find them to be

without merit. For the reasons stated herein, the judgment of the district court is AFFIRMED.

                                           FOR THE COURT:
                                           CATHERINE O’HAGAN WOLFE, CLERK

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