MEMORANDUM OF OPINION AND ORDER
SARA LIOI, District Judge
Before the Court is pro se petitioner Richard Buxo's Petition for Writ of Habeas Corpus pursuant to 28 U.S.C. § 2241. Mr. Buxo names the United States of America and the United States Attorney General as respondents. Petitioner is presently incarcerated at the North Coast Correctional Institution in Grafton, Ohio. He asserts the projected release date designated for his federal sentence is incorrect. For the reasons stated below, the petition for writ of habeas corpus is DISMISSED.
BACKGROUND
Mr. Buxo was charged with five counts in an indictment filed in this Court in 2009. United States of America v. Benitez et al, No. 1:09-cr-00363 (N.D. Ohio, filed Aug. 12, 2009). At time the indictment was filed, Petitioner was in custody serving a sentence imposed by the State of Ohio. See Ohio v. Buxo, No. CR499677 (Cuy. Ct. Comm. Pls 2009).
On August 13, 2009, Mr. Buxo was transported from state prison, via writ of habeas corpus ad pro sequendum, to appear in this Court for his arraignment. He later pled guilty to conspiracy to possess with intent to distribute heroin, cocaine and cocaine base in violation of 21 U.S.C. §§ 841(a)(1) and (b)(1)(A) and 846. This Court imposed his sentence of 17 months on January 5, 2010, and ordered it to run concurrent with petitioner's unexpired state sentence. The Judgment and Commitment ("J C") recommended, in part, that the Bureau of Prisons ("BOP") place Mr. Buxo at North Coast to serve his federal sentence since he was already serving his state sentence at that facility. The J C included the notation that, for "purposes of determining credit for time served," Mr. Buxo was taken into federal custody on August 13, 2009.
Upon remand to the U.S. Marshal, the BOP designated North Coast as the facility where Mr. Buxo would serve his concurrent federal sentence. A copy of petitioner's March 1, 2010 "Inmate Data" sheet, generated by the BOP's Northeast Regional Office, reveals a statutory release date of March 22, 2011, on his federal sentence. Petitioner challenges this date as "erroneous," based on the J C issued by this Court. He wrote to the Ohio Department of Rehabilitation and Correction ("ODRC") asking for jail credit. The ODRC's Bureau of Computation representative, B. Vest, responded in a letter dated March 22, 2010. Mr. Vest first addressed petitioner's state imposed sentence when he explained: "your 2 year sentence is not mandatory and currently you have been given 33 days jail time credit." (Pet.'s Ex. C.) He further advised petitioner to write a letter to his sentencing judge if he sought additional jail credit. Mr. Vest concluded the letter stating Mr. Buxo's sentence computation and release date were reviewed by the division and "certified as 3-24-2011." (Pet.'s Ex. C.).
There is no copy of petitioner's letter to the ODRC attached to the petition. Therefore, it is not clear whether Mr. Buxo was requesting credit against his state or federal sentence. In the ODRC's Bureau of Sentence Computation response, "B. Vest" only refers to petitioner's "correspondence regarding your sentence computation." (Letter from ODRC to Buxo of 3/22/10).
Petitioner wrote a letter to this Court, construed as a motion to grant five months jail time credit. The motion was denied by Order dated June 23, 2009. It was explained to Mr. Buxo that the BOP had the delegated authority to calculate credit against a prisoner's sentence for time served. Moreover, if petitioner sought to challenge the computation of his federal sentence, he needed to first exhaust his administrative remedies. The Court further advised petitioner to file a petition for writ of habeas corpus pursuant to 28 U.S.C. § 2241 if he were unsuccessful in his efforts through the BOP's administrative process.
INITIAL REVIEW
This matter is before the Court for screening. 28 U.S.C. § 2243; Harper v. Thoms, No. 02-5520 2002, WL 31388736, at *1 (6th Cir. Oct. 22, 2002). At this stage, allegations in the petition are taken as true and liberally construed in petitioner's favor. Urbina v. Thoms, 270 F.3d 292, 295 (6th Cir. 2001). Because Mr. Buxo is appearing pro se, his petition is held to less stringent standards than those drafted by attorneys. Burton v. Jones, 321 F.3d 569, 573 (6th Cir. 2003). Even considering all of these factors, Mr. Buxo is not entitled to an award of the writ. See 28 U.S.C. § 2243 ("judge [. . .] shall forthwith award the writ [. . .], unless it appears [. . .] person detained is not entitled thereto.")
Petition for Writ "In Custody"
A district court shall direct a writ of habeas corpus "to the person having custody of the person detained." 28 U.S.C. § 2243; see Braden v. 30th Judicial Circuit Ct. of Ky., 410 U.S. 484, 494-95 (1973) ("The writ of habeas corpus does not act upon the prisoner who seeks relief, but upon the person who holds him in what is alleged to be unlawful custody.") Therefore, a court has jurisdiction over a habeas corpus petition only if it has personal jurisdiction over the petitioner's custodian. Id. at 495. For prisoners, it is the warden of the facility in which they are held who is the proper custodian. See Roman v. Ashcroft, 340 F.3d 314, 319 (6th Cir. 2004) (as a general rule, a petitioner should name as a respondent to his habeas corpus petition the individual having day-to-day control over the facility in which petitioner is being detained). This is known as the "immediate custodian rule" because it recognizes only the petitioner's "immediate" or "direct" custodian as the "person having custody" over him under § 2243. Courts have deemed these immediate custodians proper respondents to habeas corpus petitions as a "practical" matter "based on common sense administration of justice." Sanders v. Bennett, 148 F.2d 19, 20 (D.C. Cir. 1945).
Petitioner is a federal prisoner serving a sentence imposed by this Court to run concurrently with a sentence imposed by the State of Ohio. In order for petitioner's federal sentence to run concurrently with the state sentence, the BOP designated the North Coast state facility, where petitioner was already serving his state sentence, as the facility where he would begin service of his federal sentence. Because the proper forum to challenge the execution of a sentence is the district where a prisoner is confined, United States v. Giddings, 740 F.2d 770, 772 (9th Cir. 1984), the warden at North Coast is the proper custodian and respondent in this action. Moreover, because North Coast is located within the jurisdictional reach of this Court, it has personal jurisdiction over the warden at North Coast and venue is proper. See Dunne v. Henman, 875 F.2d 244, 249 (9th Cir. 1989) (challenge to execution of sentence by U.S. Attorney General must name warden of the state penitentiary where prisoner is confined as respondent and file in district court whose territorial limits include his place of confinement). Even though petitioner is challenging the execution of his sentence by the BOP, his failure to name the warden as respondent is not fatal. The matter is, however, otherwise subject to summary dismissal for the reasons outlined in this Memorandum.
Failure to Exhaust Administrative Remedies
Exhaustion of administrative remedies is required prior to challenging the computation of a sentence and the application of jail time credit. See Little v. Hopkins, 638 F.2d 953, 953-54 (6th Cir. 1981); see also United States v. Wilson, 503 U.S. 329, 335 (1992) (prisoner can seek judicial review of sentence computation after exhausting administrative remedies).
The Bureau of Prisons has a three-part administrative remedy program designed to address a federal inmate's concerns regarding any aspect of his or her confinement. 28 C.F.R. § 542.10. This procedure is found in Program Statement 1330.13, Administrative Remedy Program, and is also codified in 28 C.F.R. § 542. The program is designed to allow inmates to voice their grievances and provides an opportunity to resolve issues in-house prior to an inmate seeking judicial relief.
Under the program, an inmate must first attempt informal resolution of the complaint. If unsuccessful, the inmate must then raise his or her complaint to the warden of the institution where he or she is confined. 28 C.F.R. § 542.13. The inmate may then appeal the warden's response to the Regional Director and then again to the General Counsel of the Bureau of Prisons if dissatisfied with the Regional Director's response. 28 C.F.R. § 542.15. Once an inmate has received a final response from the General Counsel, exhaustion of administrative remedies is complete.
There is no indication Mr. Buxo pursued any administrative remedies through the BOP regarding the calculation of his sentence. It appears the petitioner's attempts to resolve this issue prior to filing his present petition did not include any notice to the BOP. Thus, he has not exhausted his administrative remedies as required prior to filing his petition in federal court. While it is appropriate for this Court to dismiss the petition based on this reason alone, the Court will also proceed to the merits of the case.
Credit Against Petitioner's Federal Sentence
Petitioner claims his scheduled release date from his federal sentence should be in January 2011. He asserts this Court's J C ordered his sentence to commence on August 13, 2009. Based on this belief, Mr. Buxo complains the BOP data sheet is incorrect because it reflects a scheduled release date of March 2, 2011, on his 17 month sentence.
"If, while under the primary jurisdiction of one sovereign, a defendant is transferred to the other jurisdiction to face a charge, primary jurisdiction is not lost but rather the defendant is considered to be `on loan' to the other sovereign." United States v. Cole, 416 F.3d 894, 896-97 (8th Cir. 2005). "As between the state and federal sovereigns, primary jurisdiction over a person is generally determined by which one first obtains custody of, or arrests, the person." Id. Issuance of a writ of habeas corpus ad prosequendum does not change a defendant's custody status. Id. Therefore, petitioner's removal from the state by federal writ did not relinquish primary custody of the state. Munz v. Michael, 28 F.3d 795, 798 (8th Cir. 1994) (writ of habeas corpus ad prosequendum does not alter prisoner's custody status, but merely changes location of custody). The only function of such a writ is to cause the removal of a prisoner to the proper jurisdiction for prosecution. 28 U.S.C. § 2241(c)(5); United States v. Boyes, 305 F.2d 160, 161 (6th Cir. 1962). A writ of habeas corpus ad prosequendum is only a `loan' of the prisoner to another jurisdiction for criminal proceedings in the receiving jurisdiction. See Gipson v. Young, No. 85-5158, 1986 WL 16497, at *2 (6th Cir. Feb. 6, 1986).
A review of the petition and attachments reveal the BOP awarded Mr. Buxo credit from April 20, 2009 through April 27, 2009, on his federal sentence. The ODRC Offender Search site shows petitioner was admitted to North Coast on April 28, 2009, to begin service of his 2 year state sentence. See www.drc.state.oh.us/OffenderSearch. The BOP did not, however, find petitioner was entitled to credit on his federal sentence for period of time he was held via federal writ. Instead, the BOP commenced his sentence on the date it was imposed.
Sentence Commencement
As a threshold matter, the Court must clarify Mr. Buxo's custodial status during the period of time in which he is seeking credit on his federal sentence. See United States v. Insley, 927 F.2d 185, 186-87 (4th Cir. 1991) (holding that "official detention" in 18 U.S.C. § 3585 — the successor statute to section 3568 — means "physical incarceration"). This requires an explanation of when a prison sentence actually "commences."
It is a legal axiom that the state from which a prisoner is transported retains primary jurisdiction over that prisoner as long as the prisoner is serving an unexpired state sentence. See Thomas v. Brewer, 923 F.2d 1361, 1366-67 (9th Cir. 1991) (producing state prisoner under writ of habeas corpus ad prosequendum does not relinquish state custody); Salley v. United States, 786 F.2d 546, 547-48 (2d Cir. 1986) (defendant produced and sentenced in federal court via writ of habeas corpus ad prosequendum did not begin to serve consecutive federal sentence until delivered into federal custody). Federal custody commences only when the state authorities relinquish the prisoner on satisfaction of the state obligation. Thomas v. Whalen, 962 F.2d 358, 361 n. 3 (4th Cir. 1992); Hernandez v. United States Attorney General, 689 F.2d 915, 918-19 (10th Cir. 1982); Roche v. Sizer, 675 F.2d 507, 509-10 (2d Cir. 1982).
At the time Mr. Buxo was removed from state prison to appear before this Court via writ of habeas corpus ad prosequendum, he was still in state custody. Therefore, because "[a] sentence to a term of imprisonment commences on the date the defendant is received in custody awaiting transportation to, or arrives voluntarily to commence service of sentence at, the official detention facility at which the sentence is to be served," 18 U.S.C. § 3585, Mr. Buxo's sentence could not have "commenced" at that time. Further, he was clearly not received into exclusive federal custody while his state sentence remained unexpired. See Coleman v. United States, No. 94-5127, 1994 WL 573917 (6th Cir. Oct. 17, 1994) (where neither state nor federal court specified intent that sentences run concurrently, no entitlement to credit for time spent in state custody). However, because this Court specified that petitioner's federal sentence was to run concurrently to his state sentence, the computation of Mr. Buxo's federal sentence would run from the date the Court imposed the sentence, not the date his state sentence expires.
Petitioner's argument fails simply because he is incorrect in his assertion that he received no credit for the period of time in question. He did receive credit from August 13, 2009, until his federal sentence was imposed on January 5, 2010. That credit was applied to his state sentence. There is nothing in the record that indicates Mr. Buxo's state sentence was suspended from August 13, 2009 until January 5, 2010, while federal authorities borrowed him from the State. Thus, his assertion that he received no credit for that time served is incorrect.
Since it has been established that the petitioner received credit against his state sentence, the next step is to determine if he may also receive credit against his federal sentence for that time period.
18 U.S.C. § 3585
Prior custody credit is governed by 18 U.S.C. § 3585(b), which states:
A defendant shall be given credit toward the service of a term of imprisonment for any time he has spent in official detention prior to the date the sentence commences
(1) as a result of the offense for which the sentence was imposed; or
(2) as a result of any other charge for which the defendant was arrested after the commission of the offense for which the sentence was imposed;
that has not been credited against another sentence.
18 U.S.C. § 3585(b) (emphasis added). Because petitioner received credit toward his state sentence while he was awaiting federal sentencing, he may not receive credit for this time toward his federal sentence.
See 18 U.S.C. § 3585(b);
Wilson, 503 U.S. at 337;
McClain v. Bureau of Prisons, 9 F.3d 503, 505 (6th Cir. 1993). If petitioner were credited for this time against his federal sentence, he would receive improper double credit.
See 18 U.S.C. § 3585(b). The BOP's computation of his sentence to commence on the date the federal sentence was imposed is the fullest expression of the Court's authority to run the sentences concurrently.
Petitioner also claims this Court intended he receive credit for the period of time he was out on the federal writ from the State of Ohio, which was from August 13, 2009 until January 5, 2010. Petitioner has misinterpreted the J C. This Court stated petitioner was in federal custody on August 13, 2009, for purposes of determining credit for time served. That purpose has been satisfied, but against his state sentence. As the record clarifies, petitioner was not in exclusive federal custody at that time. He has, however, been credited for "time served" on his state sentence for that period.
CONCLUSION
For the foregoing reasons, petitioner's Motion to Proceed in forma pauperis is GRANTED (Doc. No. 2), and this action is DISMISSED pursuant to 28 U.S.C. § 2243. The Court certifies, pursuant to 28 U.S.C. § 1915(a)(3), that an appeal from this decision could not be taken in good faith.
The statute provides, in relevant part:
* * *
A court, justice or judge entertaining an application for a writ of habeas corpus shall forthwith award the writ . . .,
unless it appears from the application that the applicant or person detained is not entitled thereto.
28 U.S.C. § 2243 (emphasis added).
28 U.S.C. § 1915(a)(3) provides: "An appeal may not be taken in forma pauperis if the trial court certifies that it is not taken in good faith."
IT IS SO ORDERED.
Dated: November 23, 2010
s artificial support at any time, plaintiffs claim, would have resulted in the immediate failure of the ARS market. That is what occurred on February 13, 2008. Without full and truthful disclosure, plaintiffs were allegedly left to conclude from Mr. Boyd's statements that the ARS market was liquid during this period and that normal market forces were sustaining it. Plaintiffs further contend that some of these communications falsely implied that any problems in the ARS market were limited to those ARS insured by the monoline insurance companies and not student loan-backed ARS.
On February 14, 2008, after the ARS market collapsed, Mr. Hjalber demanded to know when auctions began to fail or to be propped up by brokers. On the same day, Mr. Boyd allegedly replied,
Jan, in our space (student loan) as far as I know the first one occurred last week. There were failed student loan asset backed deals and sub prime stuff that may have experienced some problems the week before . . . but much earlier? What does that mean like a month ago? No. We have so many bonds rolling daily and our first problem was Friday.
If there was a problem any earlier we would have been the first to know. Think about it . . . even with all the insured paper we were trading and the news being what it is we never had a problem selling those on neg. credit watch. I have already received the accounting treatment for our type securities and am putting a presentation together for you. Due to the fact that at this time it is felt this is a temporary situation it could take up to a year for these to be qualified as impaired and long term rates are well below ours. (Am. Compl. ¶ 83.) (emphasis in original)
Plaintiffs allege that this representation was false because the ARS market actually became illiquid by Fall 2007.
When the ARS market collapsed, plaintiffs became unable to sell their ARS holdings. At that time, plaintiffs allegedly held approximately $641,800,000 of ARS. The ARS market remains illiquid, rendering it impossible to sell ARS except at a steep discount.
Counsel for defendants represented at oral argument that certain ARS issuers have redeemed the securities, with the result that, of the $641.8 million in ARS at issue, plaintiffs currently hold under $400 million. See Tr. 23:3-5.
C. Public Information
On May 31, 2006, following an investigation into certain practices by broker-dealers, underwriters, and auction managers in the ARS market, the SEC issued a consent cease-and-desist order concerning some of the activities that form the basis of this action (the "2006 SEC Order"). The 2006 SEC Order is a matter of public record and is available online at the SEC's website: http://www.sec.gov/litigation/admin/2006/33-8684.pdf. Neither defendant was a party to the 2006 proceedings before the SEC or the 2006 SEC Order.
Among other things, the 2006 SEC Order described the practice by certain broker-dealers of submitting support bids to prevent auction failures. In its findings, the SEC noted,
Without adequate disclosure, certain Respondents bid to prevent auctions from failing. Failed auctions occur when there are more securities for sale than there are bids for securities and result in an above-market rate described in the disclosure documents. These Respondents submitted bids to ensure that all of the securities would be purchased to avoid failed auctions and thereby, in certain instances, affected the clearing rate. . . . To the extent that certain practices affected the clearing rate, investors may not have been aware of the liquidity and credit risks associated with certain securities.
2006 SEC Order, at 6 n. 5. The 2006 SEC Order "does not prohibit broker-dealers from bidding for their proprietary accounts when properly disclosed." See id. at 6 n. 6. One of the parties to the 2006 SEC Order was Merrill Lynch, from whom Dow Corning also claims to have purchased ARS. Dow Corning has a separate lawsuit against Merrill Lynch pending in the Southern District of New York.
Defendants have submitted news reports indicating that in 2005, around the time the SEC's investigation was ongoing, accounting firms began to recommend that companies re-classify their ARS holdings as investments rather than cash equivalents. One article cited the position of PriceWaterhouseCoopers that the shift "reflects the risk that buyers of auction-rate debt will have to hold the securities longer than they had intended." Haworth Cert., Ex. 21. Corning, Inc. apparently reclassified its ARS holdings at this time from cash equivalents to investments. Its Treasurer, Mr. Mark Rogus, was quoted in the article as saying, "We buy these securities because they offer us a more attractive short-term yield than other securities. . . . I'm not planning on changing my investment actions because accountants tell us we need to put these in another bucket." Id.
Dow Corning is a joint venture between Corning Inc. and Dow Chemical Co.
The publicly available prospectuses for several (but not all) of the ARS purchased by plaintiffs disclose, among other things, that ARS may entail liquidity risk and that broker-dealers may place support bids to prevent auction failures. For example, the prospectus for the Educational Funding of the South, Inc. Senior 2007-1 A-11 Bonds (Cusip no. 28148XBA8), into which plaintiffs allegedly invested $34.9 million, provides in relevant part:
A Broker-Dealer may purchase 2007-1 Auction Bonds for its own account, but it is not obligated to do so. In the event that there were insufficient Orders for the 2007-1 Auction Bonds and an Auction failed, the rate for the 2007-1 Auction Bonds would be the Maximum Rate, which might be a rate less than the prevailing market rate for similar bonds. Existing Holders may not be able to sell some or all of their 2007-1 Auction Bonds at an Auction for the 2007-1 Auction Bonds if the Auction fails, that is,
if there are more 2007-1 Auction Bonds offered for sale than there are Potential Holders bidding for 2007-1 Auction Bonds.
Educational Funding of the South, Inc., Student Loan-Backed Bonds, Series 2007-1 Official Statement, at xiv-xv, available at http://emma.msrb.org/MS265075-MS240383-MD469234.pdf.
III. PROCEDURAL HISTORY
Plaintiffs filed suit on November 4, 2009. When defendants informed Magistrate Judge Shwartz that they intended to file a motion to dismiss in lieu of an answer, Judge Shwartz ordered defendants to submit a letter to plaintiffs on February 10, 2010, identifying the perceived deficiencies in the complaint. In response, plaintiffs filed an amended complaint on March 10, 2010. Defendants now move to dismiss the amended complaint.
IV. STANDARD OF REVIEW
"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) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)); see also Phillips v. County of Allegheny, 515 F.3d 224, 234 (3d Cir. 2008) ("[S]tating . . . a claim requires a complaint with enough factual matter (taken as true) to suggest the required element. This does not impose a probability requirement at the pleading stage, but instead simply calls for enough facts to raise a reasonable expectation that discovery will reveal evidence of the necessary element.") (internal quotations omitted). When considering a motion to dismiss under Iqbal, the Court must conduct a two-part analysis. "First, the factual and legal elements of a claim should be separated. The District Court must accept all of the complaint's well-pleaded facts as true, but may disregard any legal conclusions. Second, a District Court must then determine whether the facts alleged in the complaint are sufficient to show that the plaintiff has a `plausible claim for relief.'" Fowler v. UPMC Shadyside, 578 F.3d 203, 210-11 (3d Cir. 2009) (internal citations omitted). "A pleading that offers labels and conclusions or a formulaic recitation of the elements of a cause of action will not do. Nor does a complaint suffice if it tenders naked assertions devoid of further factual enhancement." Iqbal, 129 S. Ct. at 1949 (internal quotations and alterations omitted). "In deciding a Rule 12(b)(6) motion, a court must consider only the complaint, exhibits attached to the complaint, matters of public record, as well as undisputedly authentic documents if the complainant's claims are based upon these documents." Mayer v. Belichick, 605 F.3d 223, 230 (3d Cir. 2010).
Because plaintiffs bring claims for securities fraud, the amended complaint must satisfy the heightened pleading standards of Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act ("PSLRA"). "In 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). "Rule 9(b) requires, at a minimum, that plaintiffs support their allegations of securities fraud with all of the essential factual background that would accompany `the first paragraph of any newspaper story' — that is, the `who, what, when, where and how' of the events at issue." In re Alpharma Inc. Sec. Litig., 372 F.3d 137, 148 (3d Cir. 2004) (quoting In re Rockefeller Center Properties, Inc. Sec. Litig., 311 F.3d 198, 217 (3d Cir. 2002)).
For securities fraud claims, the PSLRA further requires a complaint to "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. . . . In any private action arising under this chapter in which the plaintiff may recover money damages only on proof that the defendant acted with a particular state of mind, 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)(1)-(2).
V. DISCUSSION
First, defendants move to have the claims against BB T (the parent company of Scott Stringfellow) dismissed on the grounds that the amended complaint does not allege any wrongdoing by BB T itself or by its employees. With respect to Scott Stringfellow, defendants argue that the amended complaint fails to state a claim on six principal grounds: (1) it fails to plead fraud adequately under Rule 9(b) and the PSLRA; (2) it is barred by the statute of limitations; (3) the Michigan Uniform Securities Act does not apply to secondary market transactions; (4) it fails to plead breach of fiduciary duty adequately; (5) it fails to plead common law fraud adequately; and (6) it fails to plead negligent misrepresentation adequately.
A. The Claims Against BB T
The amended complaint contains no allegations whatsoever that describe conduct by BB T or its employees concerning ARS. Instead, as reflected in the Court's recitation of the allegations, the amended complaint ascribes much of the conduct at issue to both BB T and Scott Stringfellow under the name "defendants." "Rule 9(b) is not satisfied where the complaint vaguely attributes the alleged fraudulent statements to `defendants.'" Eli Lilly Co. v. Roussel Corp., 23 F. Supp. 2d 460, 492 (D.N.J. 1998) (quoting Mills v. Polar Molecular Corp., 12 F.3d 1170, 1175 (2d Cir. 1993)). The only person specifically alleged to have made any misrepresentations or material omissions to plaintiffs is Mr. Boyd, an employee of Scott Stringfellow. As a registered broker-dealer, Scott Stringfellow could underwrite and manage ARS auctions. BB T is a bank holding company, not a registered broker-dealer. Accordingly, the Court will construe references to "defendants" in the amended complaint as references to Scott Stringfellow and its employees.
Although BB T is the sole shareholder of Scott Stringfellow, corporate parents are not liable for the torts of their subsidiaries absent a basis to pierce the corporate veil. See United States v. Bestfoods, 524 U.S. 51, 61-62 (1998). There are no allegations in the amended complaint that would supply a basis to pierce the veil, such as undercapitalization.
Plaintiffs concede that they do not know (and cannot allege) what involvement, if any, BB T had with the events described herein. See Opp'n at 29-30; Tr. 36:12-13. They contend that BB T's knowledge of the alleged fraud and involvement in it are facts entirely in control of defendants, and that the claims against BB T should not be dismissed without discovery. That is not a basis to deny a motion to dismiss, particularly in a case governed by the PSLRA, which imposes a stay of discovery when the sufficiency of the complaint is challenged. See 15 U.S.C. § 78u-4(b)(3). Defendants' motion to dismiss the claims against BB T is granted without prejudice.
If discovery subsequently reveals a factual basis to re-join BB T as a defendant, plaintiffs may seek leave to amend their complaint at that time, if they can meet the PSLRA pleading standards as to BB T.
B. Federal Claims
1. Failure to State a Claim Under Section 10(b) and Rule 10b-5
Defendants argue that plaintiffs failed to plead securities fraud with the particularity required by Rule 9(b) and the PSLRA. To state a claim for material misstatements or omissions under Section 10(b) and Rule 10b-5, plaintiffs must plead that defendants "(1) made a misstatement or an omission of a material fact (2) with scienter (3) in connection with the purchase or the sale of a security (4) upon which plaintiffs reasonably relied and (5) that plaintiffs' reliance was the proximate cause of their injury." In re Alpharma, 372 F.3d at 147 (quoting In re Ikon Office Solutions, Inc., 277 F.3d 658, 666 (3d Cir. 2002)) (alterations omitted). The Court will begin its analysis with scienter.
Defendants do not dispute in their brief that the allegedly misleading statements were made in connection with the purchase or sale of a security.
i. Scienter
Under the PSLRA, plaintiffs must plead with particularity facts giving rise to a "strong" inference of scienter. See 15 U.S.C. § 78u-4(b)(2). Plaintiffs meet this heightened threshold if, considering the amended complaint as a whole, together with facts of which the Court may take judicial notice, "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). It is no longer sufficient in this circuit for a plaintiff to plead only that the defendant had the motive and opportunity to commit fraud. Inst'l Investors Grp. v. Avaya, Inc., 564 F.3d 242, 276-77 (3d Cir. 2009). A court considering the sufficiency of scienter allegations must "weigh the `plausible nonculpable explanations for the defendant's conduct' against the `inferences favoring the plaintiff.'" Id. at 267 (quoting Tellabs, 551 U.S. at 324).
Plaintiffs have alleged two sets of facts that they argue give rise to a strong inference of scienter. First, plaintiffs allege that defendants' actions were undertaken because they wished to earn commissions and fees from the ARS market and to maintain favorable business relationships with various market players, including ARS issuers and investors. (Am. Compl. ¶ 46.) These motives are common to all for-profit enterprises and are therefore insufficient, without more, to give rise to a strong inference of scienter. See In re Citigroup Auction Rate Sec. Litig., 700 F. Supp. 2d 294, 305 (S.D.N.Y. 2009); cf. Inst'l Investors Grp., 564 F.3d at 278 ("Motives that are generally possessed by most corporate directors and officers do not suffice; instead, plaintiffs must assert a concrete and personal benefit to the individual defendants resulting from this fraud.") (quotations and alterations omitted).
Plaintiffs also allege that defendants concealed their knowledge of the increasing illiquidity in the ARS market and their growing use of undisclosed support bids to prevent auction failure because they needed to keep that market alive in order to have a market in which to unload their own ARS holdings on investors, including plaintiffs. (Am. Compl. ¶ 58.) From Fall 2007, when the ARS market began to deteriorate, through February 13, 2008, when it collapsed, defendants allegedly increased their support bids, which in turn increased their inventory of ARS. Plaintiffs allege that defendants, due to their positions in some ARS auctions as auction managers, knew who was submitting bids at auction. As a result, plaintiffs allege that defendants knew that demand for ARS by investors was shrinking and that other broker-dealers were correspondingly increasing the volume of their support bids to prevent auction failures. The Court can reasonably infer from these allegations, which are presumed true for the purposes of a 12(b)(6) motion, that defendants would have known that the ARS market was deteriorating and would be illiquid if broker-dealers ceased making support bids. Due to the deteriorating ARS market, defendants allegedly needed to unload their own inventory of ARS on investors, such as plaintiffs, in order to reduce their own exposure before the ARS market entirely collapsed. Plaintiffs contend that this motivated defendants to mislead them concerning the illiquid state of the ARS market and defendants' own activity on their proprietary accounts.
Accepting as true, for the purposes of this motion only, that defendants (1) knew that the ARS market would be illiquid without intervention by brokers beginning in Fall 2007 and (2) held large inventories of ARS, which they needed to sell, "it is quite reasonable to infer that [defendants] then had a motive to conceal the ARS illiquidity risk from customers to whom [they] hoped to sell ARS from [their] own portfolio." Defer LP v. Raymond James Fin., Inc., No. 08 Civ. 3449 (LAK), 2010 WL 3452387, at *5 (S.D.N.Y. Sept. 2, 2010). Plaintiffs do not allege whether defendants actually unloaded (or attempted to unload) their own inventory of ARS. "[O]missions and ambiguities [in the complaint] count against inferring scienter." Tellabs, 551 U.S. at 326. However, the identities of participants in the ARS market were allegedly opaque and not readily ascertainable if one was not a broker-dealer.
Plaintiffs allege that defendants continued to increase their ARS inventory through February 13, 2008. (Am. Compl. ¶ 51.) That allegation could lead to at least two different inferences: (1) that defendants were (wrongly) bullish on the ARS market; or (2) that defendants took the risk of increasing their own long positions in ARS to keep the market from complete collapse and to buy time for an orderly disposition of their holdings. The former would be a possible nonculpable explanation for defendants' allegedly inaccurate assurances regarding the state of the ARS market, see In re Citigroup, 700 F. Supp. 2d at 305, and the latter a plausible culpable motive, particularly when the other facts alleged do not suggest a bullish state of mind by defendants, but rather concealed knowledge of looming illiquidity.
Defendants rely on Ashland Inc. v. Morgan Stanley Co., Inc., 700 F. Supp. 2d 453 (S.D.N.Y. 2010), to argue that the culpable inference is less compelling than the nonculpable one. In Ashland, the plaintiff alleged that Morgan Stanley purchased ARS to create the illusion of a liquid market to deceive plaintiff, knowing that such purchases were essential to maintaining liquidity in the market for Morgan Stanley-brokered ARS. Id. at 459. The Ashland court commented in dicta that this Ponzi scheme-like motivation ascribed to Morgan Stanley, even if sufficiently pled, would have been "economically irrational," because by buying up ARS to create the illusion of a liquid market to deceive plaintiff, Morgan Stanley would have also put itself in an illiquid position. Id. at 469.
However, this Court is not persuaded that the culpable inference is economically irrational in this case. It would not be economically irrational to attempt to pump up investor demand for ARS and to conceal the risk of auction failure from Fall 2007 through February 13, 2008 in an attempt to buy enough time to exit the ARS market, as defendants are alleged to have done. See Defer LP, 2010 WL 3452387, at *5. By the same token, the allegations do not support a strong inference of scienter for conduct occurring before Fall 2007, since the ARS market at that time was not yet alleged to be illiquid. Having weighed the culpable inference against the nonculpable inference based on the facts, as alleged, the Court concludes that plaintiffs have adequately pled scienter for those alleged material misrepresentations or omissions that occurred from Fall 2007 through February 13, 2008. ii. Actionable Statements or Omissions
This opinion should not be read to limit discovery solely to that time period if discovery from other time periods is reasonably calculated to lead to admissible evidence.
It is a violation of Section 10(b) and Rule 10b-5 "[t]o 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." 17 C.F.R. § 240.10b-5(b). Since the Court has determined that the amended complaint adequately alleges scienter with respect to statements made from Fall 2007 through February 13, 2008, it will only consider alleged misstatements and omissions that occurred during that period. See Defer LP, 2010 WL 3452387, at *9.
Plaintiffs identify eleven communications from Mr. Boyd from Fall 2007 through February 13, 2008 that they allege are misleading, in violation of Section 10(b) and Rule 10b-5. These are the communications between Mr. Boyd and Mr. Hjalber, Mr. Looker, and Ms. Szafranski, which allegedly took place on November 7, 2007, November 20, 2007, December 17, 2007, January 8, 2008, January 24, 2008, January 29, 2008, January 30, 2008, February 1, 2008 (twice), February 11, 2008, and February 13, 2008. Mr. Boyd allegedly represented that plaintiffs' ARS holdings were "very safe" and "clearing no problem." The emails from Mr. Boyd are generally positive about the ARS market, reporting, e.g., "Good news on the auction front," and "Rates are very good for us!" Mr. Boyd allegedly compared the guarantee on the student loan debt underlying plaintiffs' ARS to be "[t]he equivalent of U.S. Treasury bonds."
Plaintiffs allege that these statements were false or contained material omissions for the same reason: they did not state that the ARS market at that time would be illiquid absent intervention by brokers (including defendants). An omission is material under Section 10(b) and Rule 10b-5 if a reasonable investor would find that it "significantly altered the `total mix' of information made available." Basic, Inc. v. Levinson, 485 U.S. 224, 231-32 (1988) (quoting TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976)). In addition, "[t]o be actionable, a statement or omission must have been misleading at the time it was made; liability cannot be imposed on the basis of subsequent events." In re NAHC, Inc. Sec. Litig., 306 F.3d 1314, 1330 (3d Cir. 2002). The alleged fact that the ARS market was illiquid, absent intervention by brokers, from Fall 2007 through February 13, 2008, when the statements were made, undoubtedly would have been material.
Defendants contend that some of these communications concerned different types of securities than student loan-backed ARS or addressed default risk rather than credit risk. Even if true, Mr. Boyd nonetheless would have been obligated to inform defendants of the allegedly known and serious liquidity risk associated with student loan-backed ARS, when offering positive commentary about the ARS market in general, in order to make those statements not misleading. The truth, half-truth, or significance of Mr. Boyd's statements will be addressed in their full context at a future time with the aid of a factual record, when the merits are considered.
iii. Reasonable Reliance
Defendants argue that the amended complaint does not sufficiently allege reasonable reliance on the alleged misstatements. "The `reasonable reliance' element of a Rule 10b-5 claim requires a showing that the plaintiff exercised that diligence that a reasonable person would have exercised to protect his interests." Osio v. DeMane, Nos. 05-2283 05-2280 (JLL), 2006 WL 2129460, at *5 (D.N.J. July 24, 2006). To determine whether plaintiffs have sufficiently alleged reasonable reliance, the Court should consider the allegations concerning: "(1) whether a fiduciary relationship existed between the parties; (2) whether the plaintiff had the opportunity to detect the fraud; (3) the sophistication of the plaintiff; (4) the existence of long standing business or personal relationships; and (5) the plaintiff's access to the relevant information." AES Corp. v. Dow Chemical Co., 325 F.3d 174, 178-79 (3d Cir. 2003).
Prongs 2 and 5: Both of these prongs concern what information was available to plaintiffs that should have led them not to rely on any alleged misstatements or omissions. Defendants' principal argument is that news articles from 2005 reporting the change in accounting treatment of ARS from cash equivalents to investments, the 2006 SEC Order, and several of the prospectuses for plaintiffs' ARS holdings publicized the risk that auctions might fail and the practice of brokers to submit support bids to prevent auction failures — the very facts supposedly concealed by defendants. See In re Citigroup, 700 F. Supp. 2d at 307 (holding that the plaintiff's alleged reliance on integrity of ARS market was unreasonable where publicly available sources "all disclosed that Defendants could engage in the very conduct of which Plaintiff complains"). That argument is not persuasive as a basis for dismissing this case. Plaintiffs allege that defendants concealed the fact that the ARS market was illiquid, absent intervention by broker-dealers, from Fall 2007 through February 13, 2008. The publicly available information cited by defendants did not inform plaintiffs that Scott Stringfellow and other broker-dealers were, as alleged, using a crescendo of support bids to prop up an illiquid market in the Fall of 2007 through February 13, 2008. Prong 1: Whether a fiduciary relationship existed between the parties cannot be resolved on the pleadings, as discussed below.
Prong 3: Plaintiffs are large, sophisticated corporate investors. See Ashland v. Morgan Stanley, 700 F. Supp. 2d at 471 (holding that it was unreasonable for sophisticated corporate investor to rely on alleged misstatements "in the absence of performing any diligence, prior to investing tens of millions of dollars"). However, that is mitigated in this case by the fact that, as alleged, due diligence by plaintiffs would not have revealed the truth underlying the alleged misleading statements; allegedly only broker-dealers knew or could know that the ARS market was illiquid, absent intervention by those broker-dealers.
Prong 4: The relationship between the parties allegedly dates back to 2002.
As this discussion suggests, applying the factors set forth in AES to the allegations in the amended complaint does not conclusively show that plaintiffs' reliance was unreasonable as a matter of law. It is for the trier of fact to weigh these considerations and determine whether plaintiffs' reliance on the alleged misstatements and omissions was "reasonable" under the circumstances.
iv. Loss or Loss Causation
Defendants contend that plaintiffs have not alleged a cognizable "loss" because the ARS are merely illiquid, not valueless — they are still paying interest according to the terms of their respective prospectuses. Some (but not all) of plaintiffs' ARS have been redeemed by the issuer. This reasoning likely reduces the measure of damages, but it is not a basis to dismiss the amended complaint for failure to allege a loss due to plaintiffs' inability to sell the ARS. It stands to reason that if there is currently no market for a security, it is worth less now than it was prior to February 13, 2008, when there was a market. See United States v. Fletcher, 562 F.3d 839, 844 (7th Cir. 2009) (commenting that "an illiquid asset is worth less than a liquid one").
2. Statute of Limitations
The statute of limitations for securities fraud expires upon the earlier of "(1) 2 years after the discovery of the facts constituting the violation; or (2) 5 years after such violation." 28 U.S.C. § 1658(b). Plaintiffs filed suit on November 4, 2009. The parties entered into a 90-day tolling agreement on July 31, 2009. Thus, claims arising from any alleged acts or omissions prior to August 6, 2004 are time-barred. Claims arising from any alleged acts or omissions thereafter are timely unless plaintiffs discovered, or in the exercise of reasonable diligence should have discovered, the facts constituting the particular violation before August 6, 2007. See Merck Co., Inc. v. Reynolds, 130 S. Ct. 1784, 1795-96 (2010). The statutory phrase "facts constituting the violation" means all elements of securities fraud, including scienter. Id. at 1796.
Defendants argue that plaintiffs were on notice of the facts constituting the alleged fraud in May 2006 at the latest because it was public knowledge, through the 2006 SEC Order and the 2005 change in accounting standards, that broker-dealers were permitted to submit support bids and that ARS were not cash-equivalents due to the risk of auction failure. That argument is unavailing. The statute of limitations does not begin to run until a claim accrues. See O'Connor v. City of Newark, 440 F.3d 125, 129 (3d Cir. 2006) (recognizing "the common-sense proposition that an applicable statute of limitations begins to run at the time the claim accrues"). One of the elements necessary for plaintiffs' 10b-5 claim to accrue is the existence of one or more misleading statements. The alleged misleading statements by Mr. Boyd that are identified in the amended complaint occurred between November 7, 2007 and February 13, 2008; all of them were allegedly made after August 6, 2007. Assuming, without deciding, that the two-year statute of limitations began to run when Mr. Boyd allegedly made those statements, this lawsuit is sufficiently timely to proceed beyond a motion to dismiss.
B. State Law Claims
1. Choice of Law
In considering plaintiffs' claims arising under state law, the Court must first decide what state's law applies to each claim, as alleged. A federal court applying state law "must apply the law of the forum state, including its choice of law rules." Barbey v. Unisys Corp., 256 F. App'x 532, 533 (3d Cir. 2007) (citing Klaxon Co. v. Stentor Electric Mfg. Co., 313 U.S. 487, 496 (1941)). In tort cases, the New Jersey Supreme Court has adopted the "most significant relationship" test for conducting the choice of law analysis. See Cooper v. Samsung Elecs. Am., Inc., 374 F. App'x 250, 254-55 (3d Cir. 2010) (citing P.V. v. Camp Jaycee, 962 A.2d 453 (N.J. 2008)). Under this test, where a conflict of laws exists, New Jersey will apply the law of the state where the injury occurred unless another state has a more significant relationship to the dispute. Id. Because the alleged injury to plaintiffs in this case is economic (the value of their ARS investments), it is deemed to have occurred in the state where plaintiffs have their principal place of business. See Restatement (Second) of Conflict of Laws § 148, cmt. i; cf. Fu v. Fu, 733 A.2d 1133, 1141 (N.J. 1999) (commenting that in the choice of law analysis the injury is often deemed to occur in the state where the plaintiff resides). Mr. Boyd allegedly operated out of the New Jersey and Florida offices of Scott Stringfellow. Thus, where a conflict of laws exists, the Court will apply Michigan law unless New Jersey or Florida has a more significant relationship to this case.
Plaintiffs are alleged to have relied on defendants' misrepresentations in a different state (Michigan) than where the misrepresentations were allegedly made (New Jersey or Florida). Accordingly, the Court must consider the following factors to determine whether New Jersey or Florida has a more significant relationship to the case than Michigan: "(a) the place, or places, where the plaintiff acted in reliance upon the defendant's representations, (b) the place where the plaintiff received the representations, (c) the place where the defendant made the representations, (d) the domicil, residence, nationality, place of incorporation and place of business of the parties, (e) the place where a tangible thing which is the subject of the transaction between the parties was situated at the time, and (f) the place where the plaintiff is to render performance under a contract which he has been induced to enter by the false representations of the defendant." Cooper, 374 F. App'x at 255 (citing Restatement (Second) of the Conflict of Laws § 148(2)). According to the amended complaint, factors (a), (b), and (f) weigh in favor of Michigan law. Factor (d) weighs in neither direction, and factor (e) is inapplicable. Accepting as true the allegations in the amended complaint, neither New Jersey nor Florida has a more significant interest in applying its law to this dispute than Michigan, the state where the injury allegedly occurred. The Court will apply the law of Michigan to determine whether the state law counts state a claim for relief.
2. The Michigan Uniform Securities Act
The Michigan Uniform Securities Act (the "Michigan Act") establishes civil liability for "[a]ny person who . . . [o]ffers or sells a security by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading, the buyer not knowing of the untruth or omission, and who does not sustain the burden of proof that he or she did not know, and in the exercise of reasonable care could not have known, of the untruth or omission." Mich. Comp. Laws § 451.810(a)(2). Defendants are alleged to have sold ARS to plaintiffs. (Am. Compl. ¶¶ 14, 15, 30, 76.)
Although Mich. Comp. Laws § 451.810(a)(2) has been superceded by a new version, it remains in effect for events occurring prior to October 1, 2009. See Mich. Comp. Laws § 451.2703(1).
Defendants argue that the Michigan Act should be interpreted to apply only to initial sales of securities and not to re-sales of securities in the secondary market. The Michigan Act does not expressly limit its applicability to initial sales. However, defendants note that the language of the Michigan Act strongly resembles — and is modeled after — Section 12(a)(2) of the Securities Act of 1933. See Sheldon Co. Profit Sharing Plan Trust v. Smith, 858 F. Supp. 663, 672-73 (W.D. Mich. 1994). The Securities Act of 1933, as interpreted by the Supreme Court, applies only to initial sales of securities by an issuer and not to secondary market transactions. See Gustafson v. Alloyd Co., Inc., 513 U.S. 561, 575-78 (1995). Defendants are not alleged to be ARS issuers; their alleged sales of ARS to plaintiffs, if any, would have occurred on the secondary market.
"A federal court under Erie is bound to follow state law as announced by the highest state court." Sheridan v. NGK Metals Corp., 609 F.3d 239, 253 (3d Cir. 2010) (quoting Edwards v. HOVENSA, LLC, 497 F.3d 355, 361 (3d Cir. 2007)). The parties have not cited any decisions by the Michigan Supreme Court construing the Michigan Act. However, cited decisions by Michigan federal district courts have applied the Michigan Act to secondary market transactions. See Knapp v. Patel, No. 1:91-CV-957, 1992 WL 415384, at *6 (W.D. Mich. Sept. 2, 1992) ("The Court's review of Michigan cases arising under Section 410(a)(2) [codified as § 451.810(a)(2)], however, indicates that no distinction is made between initial and secondary offerings in analyzing these causes of action.") (citing federal cases); Kirkland v. E.F. Hutton Co., 564 F. Supp. 427, 444 (E.D. Mich. 1983). The Court declines to predict, on the current record, that the Michigan Supreme Court would limit liability under the Michigan Act to initial sales of securities. Defendants' motion to dismiss this Count is denied.
3. Breach of Fiduciary Duty
Defendants contend that this count should be dismissed because no fiduciary relationship existed between themselves and plaintiffs. Under Michigan law, the existence of a fiduciary duty between a broker and client is determined by whether the trading account is discretionary or non-discretionary. "In a non-discretionary account, the customer, rather than the broker, determines which purchases and sales to make and no fiduciary relationship arises. In a discretionary account, the broker does not need customer authorization before making a transaction, and has a fiduciary relationship with the customer." Vestax Sec. Corp. v. Desmond, 919 F. Supp. 1061, 1072 (E.D. Mich. 1995) (internal citations omitted).
New Jersey law is in accord with Michigan. See S.E.C. v. Pasternak, 561 F. Supp. 2d 459, 506 (D.N.J. 2008) ("The crux of a fiduciary relationship is the relinquishment of control and discretion by the customer."). Florida imposes a limited fiduciary duty on a broker of a non-discretionary account. See Gochnauer v. A.G. Edwards Sons, Inc., 810 F.2d 1042, 1049 (11th Cir. 1987).
Defendants argue that plaintiffs' trading account was non-discretionary and attach to their motion certain trading authorizations from Dow Corning and Hemlock Semiconductor and a terms and conditions document prepared by Scott Stringfellow and executed by Hemlock Semiconductor. The terms and conditions document states, in relevant part, "Client understands that the Firm is not acting in a fiduciary capacity on Client [sic] behalf. Client is responsible for making all investment decisions for securities purchased, held or sold in the Account." No terms and conditions document executed by Dow Corning has been submitted. The parties do not dispute the authenticity of any of these documents.
The trading authorizations do not expressly state that the account is non-discretionary; instead, they list the persons who are authorized to make trading decisions on plaintiffs' behalf. Mr. Boyd is not among those so authorized. Defendants' argument would require the Court to infer from these documents that all the trading accounts were non-discretionary. That inference is inappropriate on a motion to dismiss; it is for the trier of fact, with the aid of testimony and other supporting evidence, to make or reject that inference.
Even if the trading accounts were non-discretionary, Michigan courts recognize that a broker of a technically non-discretionary account can, in some cases, usurp control of investment decisions, making the account discretionary. See Vestax, 919 F. Supp. at 1072-73. Plaintiffs allege that Mr. Boyd made all the investment decisions regarding ARS. (Am. Compl. ¶ 37.) Michigan courts consider the following factors to determine whether a broker has usurped control over a technically non-discretionary account: (1) "the age, education and intelligence and investment experience of the customer;" (2) whether "the broker was socially or personally involved with the customer;" (3) whether "many of the transactions occurred without the customer's prior approval;" and (4) whether "the broker and the customer speak frequently with each other regarding the status of the account or the prudence of a particular transaction." Id. This is a fact-intensive inquiry that is best not decided on the pleadings, particularly since a claim for breach of fiduciary duty need not be alleged with the same specificity as a claim under the PSLRA. See Lautenberg Found. v. Madoff, No. 09-816 (SRC), 2009 WL 2928913, at *15 (D.N.J. Sept. 9, 2009).
If a fiduciary duty existed, the allegation that defendants concealed the illiquidity of the ARS market from plaintiffs from Fall 2007 through February 13, 2008 in order to unload their own ARS holdings on them would state a claim for a breach of that duty. Defendants' motion to dismiss this claim is denied.
4. Common Law Fraud and Negligent Misrepresentation
The elements of common law fraud under Michigan law are: "(1) the defendant made a material representation; (2) the representation was false; (3) when the defendant made the representation, the defendant knew that it was false, or made it recklessly, without knowledge of its truth as a positive assertion; (4) the defendant made the representation with the intention that the plaintiff would act upon it; (5) the plaintiff acted in reliance upon it; and (6) the plaintiff suffered damage." Unibar Maint. Servs., Inc. v. Saigh, 769 N.W.2d 911, 920 (Mich. Ct. App. 2009) (quotations omitted). The elements of negligent misrepresentation in Michigan are: (1) a false representation; (2) negligently made; (3) inuring to the benefit of defendant; (4) privity of contract between plaintiff and defendant; and (5) justifiable reliance by plaintiff to his detriment. See id. at 919. Because the amended complaint states a claim for securities fraud based on one or more misrepresentations during the period from Fall 2007 through February 13, 2008, it states a claim for common law fraud and negligent misrepresentation during this period.
VI. CONCLUSION ORDER
For the reasons set forth in this opinion, defendants' motion to dismiss is GRANTED IN PART AND DENIED IN PART. The amended complaint states a claim under federal and state law with respect to the conduct of Scott Stringfellow during the period from Fall 2007 through February 13, 2008. The claims against BB T are DISMISSED WITHOUT PREJUDICE.