The opinion of the court was delivered by: Legrome D. Davis, J.
Plaintiff investors in Diagnostic Ventures, Inc. (DVI) sue for
violations of Section 10(b) of the Securities Exchange Act of 1934, 15
U.S.C. § 78j(b) and Rule 10b-5, 17 C.F.R. § 240.10b-5,*fn1
and imposition of liability under Section 20(a) of the
Exchange Act, 15 U.S.C. § 78t(a). Jurisdiction is the Exchange Act, 15
U.S.C. § 78aa, and federal question, 28 U.S.C. §
Defendant Terry Cady -- a former executive of DVI Business Credit, Inc. (DVI BC), a subsidiary of DVI -- moves for summary judgment (Doc. No. 684). Fed. R. Civ. P. 56. Among other reasons reached here, the motion asserts that the record is devoid of evidence to support an essential element of a private securities action -- reliance by investors on Cady's allegedly deceptive statements and acts.*fn2 Lead Plaintiffs oppose summary judgment, asserting that Stoneridge Inv. Partners, LLC v. Scientific--Atlanta, Inc., 552 U.S. 148, 157, 159 (2008) does not preclude Rule 10b-5 "claims against insiders that had the level of involvement in the frauds that Cady had." Pls. Br., Doc. No. 699 at 1, 18-19, 20 n.9. In their view, it should be presumed that investors relied on Cady's allegedly deceptive statements and conduct because he was the president, chief executive officer, and a director of DVI BC as well as a senior vice president of DVI, Inc. Id. at 19-21 & nn.9, 10. Among other reasons, Cady's actions were "necessarily communicated to the public by virtue of DVI's consolidated financial statements" because those statements "included the results of DVI BC's operations and . . . necessarily reflected Cady's actions" as an executive officer. Id. Also: "Although Cady did not sign DVI's consolidated financial statements, [he] adopted those statements (as shown in his November 2002 certification)." Id. at 18-19 (footnote omitted).
The motion for summary judgment asserts that Cady cannot be held liable within the meaning of § 20(a), primarily because the record does not contain proof of a threshold requirement -- that Cady actually controlled DVI, the alleged violator of the securities laws, § 10(b). Def. Br., Ex. B, Doc. No. 684 at 15-20; Def. Reply Br., Doc. No. 719 at 16-20. Lead Plaintiffs contend that triable disputes exist as to this issue. Pls. Br., Doc. No. 699 at 3-14.
The motion for summary judgment will be granted. The record does not show that investors relied on any conduct or statements made by Cady. Within the meaning of § 20(a), he is not a person who had actual power or influence over the allegedly controlled person, DVI.
I. PROCEDURAL AND FACTUAL BACKGROUND
The Complaint, as filed on
September 23, 2003, and amended for the fifth time and
deemed filed on May 23, 2006 (Doc. Nos. 288, 298), alleges that Cady,
individually and collectively with other DVI officers and directors,
participated in a deceptive scheme to defraud purchasers of DVI's
securities and made untrue statements of material fact or omitted
material facts necessary to clarify prior misleading statements -- all in
violation of § 10(b) and Rule 10b-5(a), (b), and (c).*fn3
Compl. ¶ 493, Doc. No. 298. Specifically, it is averred that
Cady engaged in numerous schemes to artificially inflate the price of
DVI's securities by concealing and delaying disclosure of accounting
irregularities and deceptive lending practices or by failing to take
corrective steps despite his knowledge of the improprieties. Id. ¶¶
6(1)(a)(iv), 6(3), 7, 9, 29, 37, 47, 289, 291-296, 300, 489-508 (Count
I). It is contended that these averments invoke "a presumption of
reliance under the 'fraud-on-the-market' theory."*fn4
Id. ¶¶ 486-487. In addition, it is averred that Cady is liable under §
20(a) because he controlled DVI in its commission of primary
violations of § 10(b). Id. ¶¶ 44-45(a), 290, 501-502, 566-574 (Count
The Complaint avers that at the time Plaintiffs purchased DVI's securities, they "did not know DVI's true financial condition or the scheme to conceal it." Compl. ¶ 564 (Count V against Defendant Clifford Chance). Also, "they did not know of any of the false and/or misleading statements and omissions" in DVI's public filings. Id. ¶¶ 506, 572 (Count I against Cady, an Individual Defendant).
Despite conclusory allegations of Rule 10b-5(b) liability, the Complaint does not aver that Cady made any public statements or signed any company documents that affected the market for DVI's securities, as was previously ruled under a previous version of the Complaint. May 31, 2005 Order & Mem., Doc. No. 181; In re DVI, Inc. Sec. Litig., No. 03-5336, 2005 WL 130795, at *7, 9 (E.D. Pa. May 31, 2005) (ruling on the Third Amended Complaint, Doc. No. 88).
On November 1, 2004, Cady moved to dismiss the Third Amended Complaint (Def. Mot., Doc. No. 107). Dismissal was granted in part as to the Rule 10b-5(b) claims because "Plaintiffs have not pled with the requisite particularity that . . . Cady . . . made any statements or signed any Company documents." DVI, 2005 WL 130795, at *7, 9. However, a question remained that our Court of Appeals had not addressed at that time: "whether signatories to financial statements can be held to have adopted that document as a statement." Id. at *8. The Rule 10b-5(b) claims were permitted to "proceed on that basis, assuming that Plaintiffs have sufficiently pled the other elements of their securities fraud claim." Id. at *8. The motion to dismiss the § 10(b) and Rule 10b-5 claims and the § 20(a) claims was denied. Id. at *12, 13-14.
On December 4, 2006, Lead Plaintiffs moved under Fed. R. Civ. P. 23(a) and 23(b)(3) (Doc. No. 406) to certify a class of all of the investors who purchased DVI securities during August 10, 1999 to August 13, 2003 -- the period in which the company allegedly made misrepresentations. In addition to "fraud-on-the-market," the motion for class certification invoked the presumption of reliance set forth in Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 153-54 (1972) -- a theory not stated in the Complaint. Pls. Reply Br., Doc. No. 451 at 101-04.
On April 29, 2008, class certification was granted as to all Defendants but Clifford Chance. Apr. 29, 2008 Mem. & Order, Doc. No. 609; May 30, 2008 Am. Order, Doc. No. 611; In re DVI Inc. Sec. Litig., 249 F.R.D. 196 (E.D. Pa. Apr. 29, 2008). That decision relied in large part on Stoneridge, 552 U.S. at 159-162 (Jan. 15, 2008) (declining to extend the reach of the § 10(b) private cause of action by presuming that investors in an efficient market rely on non-public transactions reflected in public statements). In pertinent part, this Court ruled that "Lead Plaintiffs do not allege that Clifford Chance directly made any public misstatements that affected the market for DVI securities." DVI, 249 F.R.D. at 217. Lead Plaintiffs were not entitled to the fraud-on-the-market presumption to establish reliance as to Clifford Chance because "none of [Clifford Chance's] alleged conduct was publically disclosed such that it affected the market for DVI's securities." Id. at 218, 216-18 & nn.38, 39. Additionally, "the Affiliated Ute presumption is equally inapplicable because Clifford Chance owed no duty of disclosure to DVI's investors." Id. at 218. Because neither presumption of reliance could be established through class-wide proof, it was ruled that "individual issues of reliance will predominate over common issues of law and fact with respect to Clifford Chance." Id. Lead Plaintiffs could not meet Rule 23(b)(3)'s predominance requirement and class certification was denied as to Clifford Chance.*fn6
On September 12, 2008, Lead Plaintiffs petitioned under Fed. R. Civ. P. 23(f) for leave to appeal the interlocutory denial of class certification as to Clifford Chance. In addition to arguments that had been presented to the district court, they asserted for the first time that Clifford Chance was primarily liable under Rule 10b-5(b) for mis-statements made in the 10-Q. In essence, their position was that Clifford Chance's deceptive conduct was communicated to the public through DVI's public filings. They asserted that Stoneridge only requires publication of the fraudulent acts, but does not require public attribution of those acts to a particular defendant.
On March 29, 2011, our Court of Appeals affirmed the denial of class certification as to Clifford Chance because individual issues of reliance predominated. In sum, it was held that Plaintiffs could not invoke the fraud-on the market presumption of reliance as to Clifford Chance because they did not contend its "alleged role in masterminding the fraudulent 10-Q was disclosed to the public" or attributed to that defendant. DVI, 639 F.3d at 649 (discussed infra).
On April 30, 2009, before the ruling on class certification was issued, Clifford Chance moved for summary judgment, asserting as material, uncontested facts:
1. Plaintiffs do not contend that they relied on any conduct by Clifford Chance in purchasing or selling securities.
2. There is no evidence in the factual record that plaintiffs relied on any conduct by Clifford Chance in purchasing or selling DVI securities.
3. At the time they purchased the securities at issue, plaintiffs did not know about the fraudulent scheme in which Clifford Chance allegedly participated. . . . Complaint ¶ 564.
Defs. Statement of Facts, Doc. No. 688 at 1. On January 4, 2013, summary judgment was entered in favor of Clifford Chance and against Plaintiffs as to all claims contained in the Complaint. (Jan. 4, 2013 Order & Mem., Doc. Nos. 847, 848). In pertinent part, it was ruled that Janus Capital Grp., Inc. v. First Derivative Traders, 131 S. Ct. 2296 (U.S. June 13, 2011) and Stoneridge as well as the rulings by our Court of Appeals in DVI controlled the outcome -- "Plaintiff investors have not produced any evidence of individualized reliance" and therefore, "Clifford Chance cannot be held liable for assisting in the alleged deceptive scheme or for making any mis-statements in DVI's public filings." Jan. 4. 2013 Order & Mem. at 13-14.
II. SUMMARY JUDGMENT FINDINGS OF UNDISPUTED MATERIAL FACT
1. DVI was a Delaware corporation with two operating subsidiaries, DVI Financial Services, Inc. (DVI FS) and DVI BC. Defendant Cady's Statement of Facts (SOF) ¶ 1, Doc. No. 684, Ex. A; Lead Plaintiffs' Response to Defendant Cady's Statement of Material Facts (RSOF)
¶ 1, Doc. No. 703; Compl. ¶ 25.
2. DVI was in the business of extending credit to healthcare ...