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Holmes v. Grubman

June 3, 2009

WILLIAM K. HOLMES, HOLMES CAPITAL, LLC, BREWDOG, LLC, BIMINISTAR, LLC, AND EBH INVESTMENTS CO., LLC, PLAINTIFFS-APPELLANTS,
v.
JACK GRUBMAN AND CITI GROUP GLOBAL MARKETS, INC. F/K/A SMITH BARNEY CO., INC., DEFENDANTS-APPELLEES.



SYLLABUS BY THE COURT

Plaintiffs-appellants, William K. Holmes and entities under his control, filed this appeal from an order of the United States District Court for the Southern District of New York (Denise Cote, Judge), dismissing with prejudice their claims, brought under Georgia law, against defendants-appellants Salomon Smith Barney & Co, Inc. ("SSB"), a brokerage firm, and Jack Grubman, an SSB financial analyst. Among other things, plaintiffs alleged that defendants made fraudulent misrepresentations designed to cause plaintiffs to hold certain securities rather than sell them. On appeal, plaintiffs argue that the District Court erred in (1) denying leave to amend their complaint, (2) finding that they failed to state a claim for relief under Georgia's "blue sky" law, which prohibits various fraudulent and deceitful practices in the distribution, sale, and purchase of securities, and holding that (3) Georgia courts would not recognize a claim for fraud based on defendants' alleged misrepresentations that caused plaintiffs to forbear the sale of publicly traded securities, (4) plaintiffs failed to plead adequately proximate cause under Georgia law, and (5) SSB did not owe plaintiffs a fiduciary duty under Georgia law. Finding that the District Court correctly denied plaintiffs leave to amend their complaint and that plaintiffs failed to state a claim under Georgia's blue sky law, we affirm in part. Because the state's highest court has not addressed the remaining issues, and because we are unable to predict with confidence that court's positions on these issues, we certify three questions to the Supreme Court of Georgia.

Affirmed in part, insofar as the judgment of the District Court (1) denied plaintiffs leave to amend their complaint and (2) held that plaintiffs failed to state a claim under Georgia's blue sky law.

The opinion of the court was delivered by: JOSÉ A. Cabranes, Circuit Judge

Argued: April 7, 2008

Before: CABRANES and WALKER,Circuit Judges.*fn1

Questions certified.

This case, which was filed in U.S. District Court for the Middle District of Georgia but consolidated with the WorldCom Securities Litigation in the U.S. District Court for the Southern District of New York (Denise Cote, Judge), presents several issues, four of which encompass questions of Georgia law. Plaintiffs-appellants, William K. Holmes and four entities under his control (collectively, "Holmes" or "plaintiffs"), once held a substantial number of shares in WorldCom, the now-defunct telecommunications giant, and allegedly refrained from selling those shares on the advice of their brokerage firm, defendants-appellees Citigroup Global Markets, Inc. ("CitiGroup"), then Salomon Smith Barney & Co., Inc. ("SSB"), and Jack Grubman, an SSB financial analyst.*fn2 Holmes's decision, allegedly induced by defendants fraudulent misrepresentations, resulted in the financial demise of Holmes and the entities.

We consider whether the District Court erred in (1) denying plaintiffs' untimely motion to amend their complaint*fn3 or (2) dismissing plaintiffs' claim under Georgia's "blue sky" law on the grounds that plaintiffs failed to state a claim under the relevant statute. Further, resolution of this appeal requires us to consider whether: (3) Georgia courts would recognize plaintiffs' claims of fraud based on defendants' alleged intent to cause plaintiffs to refrain from selling securities, (4) plaintiffs have adequately pleaded proximate cause under Georgia law, and (5) SSB owed plaintiffs a fiduciary duty under Georgia law. We affirm the judgment of the District Court with respect to the first two of these five issues. Because the state's highest court has not directly addressed the remaining issues and because we are unable to predict with certainty how the court would rule on them in the instant case, we certify the final three questions to the Supreme Court of Georgia.

BACKGROUND

Where, as here, we consider a District Court's dismissal of a complaint pursuant to Federal Rule of Civil Procedure 12(b)(6), we "accept[ ] all factual allegations in the complaint as true." Burch v. Pioneer Credit Recovery, Inc., 551 F.3d 122, 124 (2d Cir. 2008) (internal quotation marks omitted). In 1998, plaintiffs owned approximately 2.1 million shares of WorldCom stock. Holmes alleges that on June 25, 1999, he ordered his SSB broker to sell all of his WorldCom stock. At that time, WorldCom stock was trading at approximately $92.00 per share. According to Holmes, the broker advised him not to sell the stock and observed that recent research reports by Jack Grubman had taken a favorable view of WorldCom. Holmes believed that the advice given by Grubman in his reports was reliable because, as Holmes put it, Grubman's reputation for excellence in analysis of telecommunications securities imbued him with "quasi-celebrity status" as a "swashbuckling deal broker" who "knew 'everyone who was anyone' in the telecom sector . . . including [WorldCom CEO Bernard] Ebbers." Joint Appendix ("J.A.") at 1848 (3d. Am. Comp. ¶ 153).

Based on the broker's advice and Grubman's reports, Holmes not only refrained from selling the WorldCom stock, but also purchased additional shares as the price per share declined.In October 2000, Holmes was forced to sell his WorldCom stock so that his SSB account would satisfy SSB's minimum balance requirement. According to Holmes, these "margin call" sales resulted in losses of nearly $200 million. The Holmes entities then filed for Chapter 11 bankruptcy in the U.S. Bankruptcy Court for the Middle District of Georgia.

In June 2003, plaintiffs brought the instant action seeking compensatory and punitive damages under Georgia law in the same Bankruptcy Court as an adversary proceeding related to the Chapter 11 bankruptcy proceeding. Shortly thereafter, plaintiffs filed an amended complaint alleging, among other things, that SSB and Grubman made negligent and fraudulent misrepresentations designed to induce them to purchase and to refrain from selling WorldCom securities. The gravamen of this compliant was that defendants operated under a conflict of interest, commencing in April 1998, when SSB began to provide underwriting services to WorldCom at the same time that Grubman made purportedly objective investment recommendations in his reports to investors such as Holmes. Holmes alleged that SSB knew that WorldCom stock was grossly overvalued but nevertheless promoted it to him and other account holders in order to secure WorldCom's investment banking business.

The case was transferred to the U.S. District Court for the Southern District of New York and consolidated, for pre-trial purposes, in the multi-district WorldCom Securities Litigation. See Holmes v. Grubman (In re WorldCom, Inc. Sec. Litig.), No. 02 Civ. 3288, 2006 WL 751382, at *1 (S.D.N.Y. Mar. 24, 2006) ("Holmes I" or "March 2006 Opinion"). After the transfer, Holmes filed a second amended complaint and defendants moved to dismiss. On March 24, 2006, the District Court granted defendants' motion on the grounds that (1) under Georgia tort law, plaintiffs cannot recover damages arising from their decision to hold securities instead of selling them, id. at *2; (2) plaintiffs failed to identify the statutory provision giving rise to their securities claim under Georgia's securities laws, id. at *3; and (3) plaintiffs failed to plead adequately their breach of contract claim, id. The District Court, sua sponte, permitted plaintiffs to file a third amended complaint, with the following instructions:

To the extent [plaintiffs] wish to pursue a claim under Georgia's [blue sky law], they must identify the specific provision they seek to enforce. To the extent they believe they can file a breach of contract claim that is consistent with the factual assertions in their pleading, they must identify the provision of the contract that was breached. They should address to the extent that they were able to do so the other deficiencies in the Complaint to which the defendants refer in their motion papers since they will be given no further opportunity to amend their pleading to cure those deficiencies.

Id. at *3 (emphasis added).

Plaintiffs filed a third amended complaint, alleging that defendants recommended that investors purchase WorldCom stock solely as a means to retain WorldCom's investment banking business and despite defendants' knowledge of WorldCom's weak prospects. See Holmes v. Grubman (In re WorldCom, Inc. Sec. Litig.), 456 F. Supp. 2d 508, 511 (S.D.N.Y. 2006) ("Holmes II"). The third amended complaint contained the following seven causes of action: (1) fraudulent misrepresentation and omission of WorldCom's financial condition and the defendants' conflict of interest; (2) breach of fiduciary duty; (3) negligent misrepresentation for misleading information and omissions; (4) negligence in making disclosures; (5) violation of Georgia's blue sky laws, as codified at section 10-5-12 of the Annotated Georgia Code; (6) breach of contract; and (7) a "holder" claim-i.e., one based on Holmes's decision, allegedly induced by SSB, to forbear the sale of WorldCom securities-solely to preserve the issue for appeal. Id. at 511-12 & n.3. For the first time, plaintiffs alleged that defendants made fraudulent misrepresentations that induced plaintiffs to purchase WorldCom securities prior to June 25, 1999. Id. at 511.

Defendants moved to dismiss the third amended complaint for failure to state a claim upon which relief can be granted. See Fed. R. Civ. P. 12(b)(6). Granting defendants' motion, the District Court held that (1) the third amended complaint's inclusion of claims arising from pre-June 25, 1999 purchases of WorldCom securities were new claims, untimely raised in the third amended complaint and unauthorized by the March 2006 Opinion, Holmes II, 456 F. Supp. 2d at 513; (2) plaintiffs failed to plead proximate cause with respect to the fraud, negligence, and negligent misrepresentation claims because they did not provide "fair notice of any disclosure that could be said to have played a role in the decline in WorldCom's stock price and that was concealed by the defendants' fraud or negligence,"*fn4 id. at 515; (3) the defendants did not owe plaintiffs a fiduciary duty under Georgia law, id. at 517-18; (4) the complaint's invocation of Georgia's blue sky law, "Title 10, Chapter 5, Section 12 of the Official Code of Georgia"-which contains twenty-three different prohibitions-did not satisfy the March 2006 Opinion's requirement that plaintiffs plead a violation of a specific provision of the statute, id. at 518; and (5) plaintiffs would not be given yet another opportunity to re-plead the claim, id. Also, the District Court dismissed again plaintiffs' (6) breach of contract claim and (7) "holder" claim. Id. at 519.

This appeal ...


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