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Zazzali v. Alexander Partners, LLC

United States District Court, Third Circuit

September 25, 2013

JAMES R. ZAZZALI, Plaintiff,
ALEXANDER PARTNERS, LLC, et al., Defendants.


GREGORY M. SLEET, District Judge.


On June 27, 2012, the plaintiff, James R. Zazzali ("Zazzali"), Trustee of the Diversified Business Services & Investments, Inc. ("DBSI") Private Actions Trust (the "PAT"), filed this suit against over 200 named defendants and 500 "John Doe" defendants. (D.I. 1.) The 245-paragraph Complaint alleges (1) violations of § 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and SEC Rule 10b-5, (2) violations of § 20(a) of the Exchange Act, (3) breaches of contract, (4) common law fraud, (5) negligence, and (6) breaches of fiduciary duties. ( Id. )

A number of defendants have filed motions to dismiss under Rule 12(b)(6) of the Federal Rules of Civil Procedure, arguing that Zazzali has failed to state claim upon which relief may be granted and, in certain instances, has failed to meet the heightened pleading standards of Rule 9(b) and the Private Securities Litigation Reform Act of 1995 (the "PSLRA"). Various defendants have also challenged the Complaint's viability in light of the filing time limits found in 28 U.S.C. § 1658(b).[1] Zazzali consolidated his response to these motions m a single answering brief.[2] (D.I. 322.) For the reasons that follow, the court will grant-in-part and deny-in-part the present motions.


This action stems, in part, from the November 2008 bankruptcy filing of ninety-three Diversified Business Services & Investments, Inc. ("DBSI") entities. (D.I. 1 at ¶ 9.) On September 11, 2009, the bankruptcy court approved the appointment of Zazzali as the Chapter 11 Trustee for the DBSI entities. (Id at ¶ 10.) On October 26, 2010, the bankruptcy court issued its Findings of Fact, Conclusions of Law, and Order Confirming Second Amended Joint Chapter 11 Plan of Liquidation. ( Id. at ¶ 12.) Zazzali serves as trustee for two of the four trusts-the PAT and the Estate Litigation Trust-that were formed pursuant to this confirmation order. ( Id. at ¶ 13.)

The Second Amended Joint Chapter 11 Plan of Liquidation created the PAT to hold certain causes of actions assigned by creditors and equity holders of DBSI. ( Id. at ¶ 14.) One category of claims held by the PAT are claims against "securities brokers/dealers" that provided services to DBSI. ( Id. at ¶ 14 n.5.) In general terms, Zazzali claims that certain members of the PAT acquired securities in the DBSI entities from one or more of the defendants named in this action. He alleges that the defendants were securities brokers, the registered representatives of brokers, or control persons of brokers that facilitated the sale of DBSI securities in what eventually turned out to be a classic "Ponzi scheme."[3] ( Id. at ¶ 2, 21.)


Rule 12(b)(6) allows a party to move to dismiss a complaint for failing to state a claim upon which relief may be granted. Fed.R.Civ.P. 12(b)(6). Dismissal is warranted where "it is clear that no relief could be granted under any set of facts that could be proved consistent with the allegations." Swierkiewicz v. Sorema N.A., 534 U.S. 506, 514 (2002). The court "accept[s] all factual allegations as true, construe[s] the complaint in the light most favorable to the plaintiff, and determine[s] whether, under any reasonable reading of the complaint, the plaintiff may be entitled to relief." Phillips v. Cnty. of Allegheny, 515 F.3d 224, 233 (3d Cir. 2008).

A well-pleaded complaint, however, must contain more than mere labels and conclusions. See Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). The court conducts a two-part analysis to determine whether dismissal is appropriate. See Fowler v. UPMC Shadyside, 578 F.3d 203, 210 (3d Cir. 2009). First, the factual and legal elements of a claim are separated. Id. The court accepts all well-pleaded facts as true but may disregard any legal conclusions. Id. at 210-11. The court notes, however, that where allegations "are no more than conclusions, [they] are not entitled to the assumption of truth." Iqbal, 556 U.S. at 679. After separating the legal and factual elements, the court asks whether the facts alleged are sufficient to demonstrate that the plaintiff has a "plausible claim for relief." Fowler, 578 F.3d at 211. "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." Iqbal, 556 U.S. at 678. The heightened pleading requirements imposed by Rule 9(b) and the PSLRA are addressed below.


The court addresses each count of Zazzali's Complaint in turn.

A. Count One: Violations of § 10(b) of the Exchange Act and SEC Rule 10b-5

1. Section 10(b) and Rule 10b-5

Section 10(b) of the Exchange Act makes it unlawful through "any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange" to:

use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [Securities and Exchange Commission] may prescribe as necessary or appropriate in the public interest or for the protection of investors."

Securities Exchange Act of 1934, Pub. L. No. 73-291, § 10(b), 48 Stat. 881, 891 (codified as amended at 15 U.S.C. § 78j). Rule 10b-5, promulgated by the SEC to implement § 10(b) of the Exchange Act, provides that:

[i]t 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. The Supreme Court has instructed that the elements of a private securities action under § 10(b) are: "(1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation." Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148, 157 (2008).

2. Heightened Pleading Requirements

Section 10(b) claims generally are subject to the heightened pleading requirements of both the PSLRA, see Institutional Investors Grp. v. Avaya, Inc., 564 F.3d 242, 252-53 (3d Cir. 2009), and Federal Rule of Civil Procedure 9(b), see In re Rockefeller Ctr. Props., Inc. Sec. Litig., 311 F.3d 198, 216-17 (3d Cir. 2002). While both standards are applicable to Zazzali's § 10(b) claims, "[t]o the extent that Rule 9(b) conflicts with the PSLRA, the statute supersedes it." Key Equity Investors, Inc. v. Sel-Leb Mktg. Inc., 246 F.App'x 780, 784 n.5 (3d Cir. 2007).

The PSLRA imposes two distinct pleading requirements on a plaintiff bringing a securities fraud action and requires that both be met in order for the claim to survive a motion to dismiss. See Avaya, Inc., 564 F.3d at 252. First, the complaint must "specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed." Private Securities Litigation Reform Act of 1995, Pub. L. No. 104-67, § 101, 109 Stat. 737, 747 (codified at 15 U.S.C. § 78u-4(b)(l)). Further, the complaint must "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).

Rule 9(b) provides that "[i]n alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person's mind may be alleged generally." Fed.R.Civ.P. 9(b). The particularity requirements of Rule 9(b) with regard to the circumstances constituting fraud are "comparable to and effectively subsumed by the requirements of... the PSLRA." Avaya, Inc., 564 F.3d at 253 (internal quotation omitted). Rule 9(b)'s scienter requirement, on the other hand, has been superseded by the PSLRA. See In re Wilmington Trust Sec. Litig., 852 F.Supp.2d 477, 489 (D. Del. 2012).

3. Analysis

For reasons discussed below, the court finds that Zazzali has adequately stated a claim for securities fraud under § 10(b) with respect to a narrow category of alleged misrepresentations.

a. Applicability of Rule 9(b) and PSLRA pleading requirements

As an initial matter, the court rejects Zazzali's argument that, as a trustee, his complaint should be held to relaxed pleading standards. (D.I. 322 at 3-4, 21-22.) For at least two reasons, the court is unconvinced that his Complaint should escape the heightened pleading requirements of Rule 9(b) and the PSLRA. First, most of the decisions cited by Zazzali discuss more liberal pleading requirements that might apply in the bankruptcy context. See, e.g., In re DBSI, Inc., No. 08-12687-PJW, 2011 WL 1810632, at *3 (D. Del. May 5, 2011) ("Rule 9's requirements... are relaxed in the bankruptcy context, particularly in cases such as the present in which a trustee has been appointed.") The present action is not a bankruptcy case, and Zazzali fails to point to a non-bankruptcy decision extending his proposed rule beyond that realm.[4] Additionally, none of Zazzali' s referenced decisions support lowering the independent pleading bar imposed by the PSLRA. The particularity requirements set forth under the PSLRA were intended to '"substantially heighten' the existing pleading requirements, " In re Rockefeller Ctr. Props., Inc. Sec. Litig., 311 F.3d at 217, and they do not contain an exemption for trustee-initiated ...

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