The opinion of the court was delivered by: Louis L. Stanton, U.S.D.J.
Defendant Malcolm Bricklin is the founder, chief executive officer, and board chairman of defendant Visionary Vehicles LLC. Plaintiff Chinese Automobile Distributors of America LLC ("CADA") complains that Bricklin's false and misleading representations duped it into making a second $2,000,000 investment in Visionary, which is now apparently moribund. Count Three of the complaint--the sole federal claim in this action--asserts that in connection with that second investment Bricklin and Visionary committed securities fraud in violation of Section 10(b) of the Securities and Exchange Act of 1934 (15 U.S.C. § 78j) and Securities and Exchange Commission Rule 10b-5 (17 C.F.R. § 240.10b-5) promulgated thereunder.
Defendant Scott Gildea (by his own motion) and the remaining defendants (by a collective motion) move to dismiss Count Three pursuant to Fed. R. Civ. P. 12(b)(6) for failure to state a claim upon which relief can be granted, and pursuant to the Private Securities Litigation Reform Act of 1995 ("PSLRA") (15 U.S.C. § 78u-4(b)) and Fed. R. Civ. P. 9(b) for failure to plead securities fraud with sufficient particularity. Defendants argue that dismissal of Count Three is required because (among other claimed deficiencies) the complaint fails to allege facts showing that Bricklin's alleged representations were fraudulent, and does not plead "loss causation" as required for a securities fraud claim under Section 10(b) and Rule 10b-5.
The facts set forth below are drawn from the allegations of the complaint and are presumed to be true for the purposes of deciding the motions.
Bricklin planned to make Visionary the exclusive North American distributor of luxury vehicles manufactured in China by Chery Automobile Company, thereby positioning it to sell Chery cars "at a substantial discount off of the price of existing European and Asian luxury models." Compl. ¶¶ 13-15, 20(c). In December 2004, Visionary and Chery entered into a letter of intent to form a joint venture whereby Chery would build automobiles according to Visionary's specifications, which Visionary would then import and distribute to dealers in the United States. Id. ¶¶ 14-15. "Visionary said it planned to create a dealer network of 250 dealers who would sell" the imported Chery cars. Id. ¶ 15. In exchange for an initial investment of $2,000,000, automobile dealers could become part of the network, receive shares or "units" in Visionary, and obtain the exclusive right to sell the imported cars in specified territories. Id. ¶¶ 15-16.
"The Visionary Vehicles/Chery joint venture appeared to be an attractive investment opportunity" (id. ¶ 17), so CADA invested $2,000,000 in Visionary in October 2005 in exchange for about 800,000 units in Visionary and several sales territories. Id. ¶ 18. In February and March 2006, CADA invested an additional $2,000,000 in exchange for more Visionary units and additional territories. Id. ¶ 21. Bricklin (acting on behalf of Visionary) induced the additional investment by fraudulent representations that:
a. The relationship between Malcolm Bricklin and Chery was very strong. Chery credited Malcolm Bricklin, Visionary Vehicles, and the publicity surrounding the joint venture, for much of Chery's success and growth in 2005. Chery preferred to deal with Malcolm Bricklin rather than any other automobile manufacturer and, therefore, Chery would extend the time required to fund the joint venture beyond the original deadline by which funding had to be obtained.
b. Visionary Vehicles was successfully selling the Territories and had commitments of $50,000,000 (fifty million dollars). However, Visionary Vehicles needed an additional $2,000,000 (two million dollars) to survive until the joint venture with Chery was formed and approved.
c. Visionary Vehicles required additional funding to make payroll. If Visionary Vehicles was unable to meet its payroll demands, Visionary Vehicles would lose important personnel who would be instrumental in obtaining the exclusive distribution agreement with Chery.
d. Visionary Vehicles was in danger of filing for bankruptcy. If Visionary Vehicles did file for bankruptcy, Plaintiff could lose its First Investment.
Those representations are claimed to false because, among other things:
a. Visionary Vehicles raised far less than $50 million in commitments ...