1999 Prospectus at 3.) MLIM's strategy for achieving this objective was to invest in technology companies that were market "leaders" or that MLIM believed "are likely to develop leadership positions." (Id.) Plaintiff has not alleged any facts demonstrating that the companies held by the Fund did not satisfy these criteria. And, as one of the world's largest investment banks, MLPF & S provided investment banking services and issued research reports for many of the world's leading technology companies. That the companies overlap should come as no surprise.
The Complaint does not allege any other facts to support Plaintiff's conclusory "suggestion." Plaintiff concedes that the New York Attorney General proceeding "did not address" the parties' conduct with respect to the proprietary mutual funds. (Compl. ¶ 9.) The Complaint does not refer to any documents or e-mails indicating that MLIM portfolio managers considered MLPF & S investment banking business when selecting companies for the Fund. Nor does the Complaint cite any sources, named or anonymous, which purportedly told Plaintiff or her counsel any such thing. The Complaint does not describe how a single investment decision by a MLIM portfolio manager (or any Defendant) was influenced by a desire to enhance MLPF & S investment banking business. It does not identify a single company purchased for the Fund which a MLIM portfolio manager did not think was appropriate. Nor does it explain how a MLIM portfolio manager's compensation depended on enhancing MLPF & S investment banking business.
The single, conclusory allegation that a large overlap between leading technology companies held by the Fund and those covered by MLPF & S "suggests" that MLIM had an improper motive in selecting those companies does not suffice to plead a violation of the 1933 Act. "[C]onclusory allegations, unwarranted deductions of facts or legal conclusions masquerading as facts will not prevent dismissal" of Section 11 claims. Oxford Asset Mgmt., 297 F.3d at 1191 (dismissing Section 11 claim for failure to plead sufficient facts to support conclusory allegations that omissions in a prospectus were objectively unreasonable). See also AIG Global Sec. Lending Corp. v. Banc of America Sec. LLC, 254 F. Supp.2d 373, 382 (S.D.N.Y. 2003) (Koeltl, J.) (dismissing securities fraud claims where "[t]he plaintiffs have failed to allege, in any specific sense, why these representations were in fact fraudulent"); Soto v. Morgan Stanley Dean Witter & Co., 2001 WL 958929 (S.D.N.Y. Aug.21, 2001) (Pollack, J.) (dismissing complaint for failure to plead facts in accordance with Fed.R.Civ.P. 8(a) where plaintiff had merely strung together an "unrestrained litany" of reports, newspaper articles, and market gossip).
In sum, Plaintiff has failed to plead any material omissions that the Defendants had a duty to disclose.
2. It is Apparent from the Face of the Complaint that Plaintiff May Not Recover Any Losses Alleged Herein.
It is an affirmative defense under Sections 11 and 12 that if the amounts recoverable represent other than the depreciation in value of the subject security resulting from such part of the prospectus, oral communication, or registration statement, with respect to which the liability of the defendant is asserted then such amount shall not be recoverable. See 15 U.S.C.A. §§ 77k(e), l(b). Where it is apparent from the face of the complaint that the plaintiff cannot recover her alleged losses, dismissal of the complaint pursuant to Fed.R.Civ.P. 12(b)(6) is proper. See Pani v. Empire Blue Cross Blue Shield, 152 F.3d 67, 74 (2d Cir. 1998) ("An affirmative defense may be raised by a pre-answer motion to dismiss under Rule 12(b)(6), without resort to summary judgment procedure, if the defense appears on the face of the complaint"); In re DoubleClick, Inc. Privacy Litig., 154 F. Supp.2d 497, 508 (S.D.N.Y. 2001) (Buchwald, J.) ("a court may properly dismiss a claim on the pleadings when an affirmative defense appears on its face").
Plaintiff's alleged losses stem from the fact that her Fund shares declined in value during the Class Period. (E.g., Compl. ¶¶ 217-221.)*fn8 Plaintiff contends that the allegedly omitted information concerning investment banking conflicts was first disclosed on April 8, 2002, when the New York Attorney General brought his ex parte proceeding. (Compl.l ¶ 7, 8.) However, Plaintiff's alleged "losses" occurred before that disclosure. Prior to April 8, the Fund's net asset value per share had declined approximately 76.5%, from a high of $32.49 on March 27, 2000 to $7.63 on April 5, 2002. (See http://finance.yahoo.com/magtx).*fn9 (This decline is an amount proportional to the decline in the entire technology sector. For example, the Dow Jones World Technology Index declined during the same period, by 69.3%.) No portion of that decline can be attributed to the alleged non-disclosure. See Akerman v. Oryx Communications, Inc., 810 F.2d 336 (2d Cir. 1987). Further, Plaintiff does not allege that on April 8, 2002, the Fund held shares in any of the companies mentioned in the New York Attorney General complaint. Thus, any decrease in the share price of those companies after April 8, 2002 would not have affected the Fund's net asset value. The decline in the Fund's price per share therefore cannot be attributed to the nondisclosures underlying Plaintiff's claims.
On point is Akerman. There, the Second Circuit affirmed the dismissal of claims under Sections 11 and 12(2) of the 1933 Act on the ground that the plaintiffs could not establish that the alleged accounting misstatements in a prospectus caused any losses. The price of the stock had declined from $4.75 per share at the initial public offering to $3.25 per share by the date the accounting error was disclosed to the public. The Court held that this price decrease of $1.50 per share did not constitute a loss actionable under the 1933 Act because it could not have been caused by misstatements which had not yet been revealed. Under the 1933 Act, "[t]he price decline before disclosure may not be charged to defendants." Akerman, 810 F.2d at 342; accord Beecher v. Able, 435 F. Supp. 397, 407 (S.D.N.Y. 1975) (Motley, J.) (price decline before misstatement revealed not attributable to the defendants under § 11(e)); Fox v. Glickman Corp., 253 F. Supp. 1005, 1010 (S.D.N.Y. 1966) (Metzner, J.) (same); see also Goodridge v. Harvey Group Inc., 778 F. Supp. 115, 129 (S.D.N.Y. 1991) (Lasker, J.) (section 12(2) claim "cannot prevail" where the plaintiff "failed to show that it suffered cognizable damages as a result of the material misrepresentations and omissions made").
Like the plaintiffs in Akerman, Plaintiff here alleges that she has sustained a loss by pointing to declines in the price of her Fund's shares which occurred before public disclosure of the allegedly concealed information. Such price declines may not be charged to Defendants under Section 11 or Section 12(a)(2). See Akerman, 810 F.2d at 341-43.*fn10 For this reason, as well, Plaintiff's 1933 Act claims fail.
3. Plaintiff has Failed to Allege a Direct Purchase from the Defendants
The Plaintiff's claim against the Defendants under Section 12(a)(2) of the Securities Act also fails because plaintiff has not sufficiently alleged that she purchased the mutual fund shares directly from any of the Defendants.
An essential element of a Section 12(a)(2) claim is that the plaintiff purchased his/her shares directly from a seller who makes use of a false or misleading prospectus. See Pinter v. Dahl, 486 U.S. 622, 643-47 & n. 21, 108 S.Ct. 2063, 100 L.Ed.2d 658 (1988). Under Section 12(a)(2), "only a defendant from whom the plaintiff purchased securities may be liable." Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42, 49 (2d Cir. 1991). Plaintiff does not allege that she purchased Global Technology Fund shares from a Merrill Lynch broker or that the Fund was sold exclusively through Merrill Lynch brokers.
It is axiomatic that a putative class representative must be able to individually state a claim against defendants, even though he or she purports to act on behalf of a class. See In re Delmarva Sec. Litig., 794 F. Supp. 1293, 1309 (D.Del. 1992) (dismissing Section 12(a)(2) claim where class plaintiffs lacked individual standing to assert claims against defendants); see also Warth v. Seldin, 422 U.S. 490, 502, 95 S.Ct. 2197, 45 L.Ed.2d 343 (1975) (standing requirement not met by alleging "that injury has been suffered by other, unidentified members of the class to which [plaintiffs] belong and which they purport to represent"); In re VeriFone Sec. Litig., 784 F. Supp. 1471, 1489-90 (N.D.Cal. 1992) (dismissing class claim where no named plaintiff had standing to bring claim personally), aff'd, 11 F.3d 865 (9th Cir. 1993).
B. Section 34(b) of the 1940 Act
Plaintiff's Section 34(b) claim under the 1940 Act fails because there is no private right of action under Section 34(b) and because her claims must be asserted derivatively, rather than directly. Moreover, Defendants had no duty to disclose the information allegedly omitted from the offering materials.
1. Section 34(b) Does Not Provide A Private Right Of Action
a. Contemporaneous Congressional Intent Is Required To Create An Implied Right Of Action
The 1940 Act does not create an express cause of action under Section 34(b) for private litigants. Hence, in order for plaintiff to have standing under Section 34(b), this Court must find that Congress intended to create an implied private right of action in that Act. Because there is no basis to conclude Congress so intended, plaintiffs claim under Section 34(b) must be dismissed. Dorchester Investors v. Peak Int'l Ltd., 134 F. Supp.2d 569 (S.D.N.Y. 2001).
The Supreme Court has held that in deciding whether an implied right of action exists, the courts must determine "whether Congress intended to create the private remedy asserted." Transamerica Mortgage Advisors, Inc. v. Lewis, 444 U.S. 11, 15-16, 100 S.Ct. 242, 62 L.Ed.2d 146 (1979) (holding no implied private right of action for damages exists under Section 206 of the Investment Advisers Act of 1940 ("Advisers Act")); accord Touche Ross & Co. v. Redington, 442 U.S. 560, 571, 99 S.Ct. 2479, 61 L.Ed.2d 82 (1979) (no implied private cause of action under Section 17(a) of the 1934 Act); see also Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 114 S.Ct. 1439, 128 L.Ed.2d 119 (1994) (no implied right of action for aiding and abetting violations of SEC Rule lOb-5).
In Alexander v. Sandoval, 532 U.S. 275, 121 S.Ct. 1511, 149 L.Ed.2d 517 (2001), the Supreme Court reiterated the importance of contemporaneous Congressional intent:
The judicial task is to interpret the statute
Congress has passed to determine whether it displays
an intent to create not just a private right but also
a private remedy [citing Transamerica]. Statutory
intent on this latter point is determinative. . . .
Without it, a cause of action does not exist and
courts may not create one, no matter how desirable
that might be as a policy matter, or how compatible
with the statute.
Id. at 286-87, 121 S.Ct. 1511. Indeed, the Supreme Court has unambiguously "retreated from [its] previous willingness to imply a cause of action where Congress has not provided one." Correctional Services Corp. v. Malesko, 534 U.S. 61, 67 n. 3, 122 S.Ct. 515, 151 L.Ed.2d 456 (2001).
Courts in this circuit have applied these pronouncements in holding that no private right of action exists under Sections 26(f) and 27(i) of the 1940 Act. See Olmsted v. Pruco Life Ins. Co. of New Jersey, 283 F.3d 429, 432 (2d Cir. 2002), aff'g 134 F. Supp.2d 508 (E.D.N.Y. 2000) (Garaufis, J.).*fn11 In refusing to find a private right of action under those sections, the District Court in Olmsted stated that "[i]n view of [the 1940 Act's] comprehensive enforcement provisions expressly designating the SEC as the regulatory entity, it is highly improbable that `Congress absentmindedly forgot to mention an intended private action' as a supplemental enforcement mechanism." Id. at 513 (quoting Cannon v. University of Chicago, 441 U.S. 677, 742, 99 S.Ct. 1946, 60 L.Ed.2d 560 (1979)).
The Second Circuit found the District Court's opinion in Olmsted to be "thorough and well-reasoned," and affirmed. Olmsted, 283 F.3d at 431-32. Citing the Supreme Court's holding in Sandoval that Congressional intent to create a right of action is "determinative," the Second Circuit stated that "[a] court must `begin [its] search for Congress's intent with the text and structure' of the statute . . . and cannot ordinarily conclude that Congress intended to create a right of action when none was explicitly provided." Olmsted, 283 F.3d at 432 (quoting Sandoval, 532 U.S. at 288, 121 S.Ct. 1511). Since "[n]o provision of the [1940 Act] explicitly provides for a private right of action for violations of either § 26(f) or § 27(i)," the Second Circuit concluded that "we must presume that Congress did not intend one." Id. The Second Circuit in Olmsted further noted that such presumption is "strengthened" by the fact that Sections 26(f) and 27(i) "do not contain rights-creating language." Id. Rather, "[s]tatutes that focus on the person regulated rather than the individuals protected create no implication of an intent to confer rights on a particular class of persons." Id. at 433 (quoting Sandoval, 532 U.S. at 289, 121 S.Ct. 1511) (internal citations omitted).
The Second Circuit also noted in Olmsted that Section 42 of the 1940 Act provides for enforcement of all 1940 Act provisions by the SEC, but not by private litigants. See id. Accordingly, the Court concluded that the 1940 Act's text "creates a strong presumption that Congress did not intend to create private rights of action for violations of §§ 26(f) and 27(i)," and affirmed the District Court's opinion. Id.*fn12 That holding is equally applicable here.
b. There Is No Evidence Of Congressional Intent To Create An Implied Right Of Action Under Section 34(b)
An analysis similar to that in Olmsted shows that no private right of action may be implied under Section 34(b). Section 34(b) states in its entirety:
It shall be unlawful for any person to make any
untrue statement of a material fact in any
registration statement, application, report, account,
record, or other document filed or transmitted
pursuant to this Act or the keeping of which is
required pursuant to section 80a-30(a) of this title.
It shall be unlawful for any person so filing,
transmitting, or keeping any such document to omit to
state therein any fact necessary in order to prevent
the statements made therein, in the light of the
circumstances under which they were made, from being
materially misleading. For the purposes of this
subsection, any part of any such document which is
signed or certified by an accountant or auditor in
his capacity as such shall be deemed to be made,
filed, transmitted, or kept by such accountant or
auditor, as well as by the person filing,
transmitting, or keeping the complete document.