By Ben Suter
*A complaint for violation of Rule 10b-5 against an investment advisor by his clients fails to adequately plead the “in connection with” prerequisite, where it does not tie specific misleading statements to particular losing securities transactions, defendants’ corresponding scienter and/or defendants’ alleged motive to purchase securities they knew would decline. **Section 215(b) of Investment Advisor Act creates limited private remedy to rescind or recover restitution under illegal contract, but does not create right to damages.
Hammer vs. Reetz, No. 16 Civ. 6590, 2017 U.S. Dist. LEXIS 28306 (S.D. N.Y., 2/24/17).
The Court’s Holdings
The Court holds that plaintiffs’ claims for violations of Section 10(b) of the 1934 Act and Rule 10b-5 fail because (i) the claims are time-barred by SOXA’s five-year statute of repose, and (ii) plaintiffs do not connect defendant’s alleged misrepresentations to their losses in particular securities and, hence, fail to comply with FRCP Rule 9(b) and Section 21-4(b) of the PSLRA. Plaintiffs’ claim for rescission and restitution under the Investment Advisors Act (“IAA”) fail because the IAA (i) does not create a right to damages or allow recovery for the diminution in value of a plaintiff's investments, and (ii) an investment advisor’s misrepresentations concerning registration status are insufficient to establish that the investment advisory contract was illegal.
Plaintiffs are family members who alleged that their former investment advisor, Gary J. Reetz, and his firm, Van Cleef, Jordan & Wood, Inc. (“Van Cleef”), made numerous misstatements and false assurances to them in connection with their retirement savings and investment accounts that Mr. Reetz managed over a period of more than a dozen years. Plaintiffs further alleged that (i) their assets were invested in unsuitable and underperforming securities, resulting in losses exceeding $2,000,000, and (ii) Van Cleef breached its contract with plaintiffs by failing to provide regular performance reports and hold biannual client meetings. Plaintiffs asserted three claims under Section 10(b)/Rule 10b-5 (for unsuitable investments, fraud and fraudulent misrepresentation), one claim under Section 215(b) of the IAA (for rescission and restitution) and various state-law claims, including breach of fiduciary duty, deceptive trade practices, professional negligence/ malpractice and breach of contract.
The Court’s Reasons
Regarding the 1934 Act claims, the Court concludes that the applicable five-year statute of repose, which defines temporally the right to initiate suit, precludes any claims based on securities purchased or sold prior to August 19, 2011. The Court also holds that the complaint fails to adequately plead the “in connection with” prerequisite because it does not tie specific misleading statements to (i) particular losing securities transactions, (ii) defendants’ corresponding scienter and/or (iii) defendants’ alleged motive to purchase securities they knew would decline. The Court further confirms that there is no separate claim for “so-called ‘scheme liability’” fraud under Section 10(b)/Rule 10b-5. Regarding the IAA claim, the Court holds that Section 215 (b) “creates a limited private remedy to rescind and recover restitution under an illegal contract,” but only if the illegality arises as a result of a violation of the IAA, which is not the case here. Finally, in dismissing plaintiffs’ federal law claims, the Court declines to exercise supplemental jurisdiction over plaintiffs’ state law claims, but it grants plaintiffs leave to replead.
(B. Suter: The case is a good reminder that the “in connection with” requirement of Section 10(b)/Rule 10b-5 can be a significant barrier to stating a claim if plaintiffs’ counsel fail to connect the dots between their losses and the alleged intentional wrongful conduct – especially when additional grounds for tossing the federal securities law claims exist, such as SOXA’s bright line five-year statute of repose and inappropriate “attempts to broaden the private cause of action under Section 10(b) to include a separate claim for ‘so-called “scheme liability.'")
(SLC Ref. No. 2017-16-09)
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