The opinion of the court was delivered by: MAXINE CHESNEY, District Judge
ORDER GRANTING PLAINTIFFS' MOTION FOR RECONSIDERATION
Before the Court is plaintiff's motion filed August 19, 2005,
seeking reconsideration of the Court's August 5, 2005 order
dismissing plaintiffs' claims under § 11 and § 15 of the
Securities Act of 1933, as asserted against defendant Ellen
Hancock ("Hancock"). Hancock has filed opposition to the motion;
plaintiffs have filed a reply. For the reasons set forth below,
the motion is GRANTED.
A motion for reconsideration may be based on any of the
following: (1) a difference in fact or law from that originally
presented to the Court and which, in the exercise of reasonable
diligence, the party seeking reconsideration did not know at the
time of the challenged order; (2) the emergence of new material
facts or a change of law occurring after the issuance of the
challenged order; or (3) a manifest failure by the Court to
consider material facts or dispositive legal arguments. See
Civil L.R. 7-9(b). DISCUSSION
The Court dismissed the § 11 claim, as asserted against
Hancock, on the ground the claim was not pleaded with the
particularity required by Rule 9(b) of the Federal Rules of Civil
Procedure. (See Order Granting in Part and Denying in Part
Underwriter Defendants' Motion to Dismiss; Granting Individual
Defendants' Motion to Dismiss ("August 5 Order"), filed August 5,
2005, at 68.) Relying on In re Daou Systems, Inc. Sec. Litig.,
411 F.3d 1006, 1027 (9th Cir. 2005) and In re Stac Electronics
Sec. Litig., 89 F.3d 1399, 1404-05 (9th Cir. 1996), the Court
found the § 11 claim, as asserted against Hancock, was "grounded
in fraud," and thus subject to the pleading requirements of Rule
9(b), because Hancock was alleged to have participated in a broad
scheme to defraud investors by, among other things, falsifying
Exodus's financial results, and plaintiffs did not allege that
Hancock acted negligently or mistakenly. (See id.)
Plaintiffs seek reconsideration of that ruling on the ground
they alleged non-fraud bases for Hancock's liability, and that
their claim for violation of § 11 expressly disavowed any
allegation of fraud. Plaintiffs point out that, although they did
not expressly allege that Hancock acted negligently or
mistakenly, they alleged that Hancock was liable under § 11
because she signed a Registration Statement containing untrue
statements of material fact and because she was an officer and
director of Exodus when the Registration Statement became
effective. (See Third Amended Complaint ("TAC") ¶¶ 351-352.)
Such allegations, as plaintiffs correctly note, state a non-fraud
basis for Hancock's liability under § 11. See
15 U.S.C. § 77k(a) (providing signer of registration statement and director
of issuer are proper defendants under § 11); see also,
e.g., Daou, 411 F.3d at 1027 (noting "defendants will be
liable [under § 11] for innocent or negligent material
misstatements or omissions"). Additionally, Daou and Stac are
distinguishable on their facts. In Daou, the Ninth Circuit
stated that a § 11 claim is "grounded in fraud," and thus subject
to the pleading requirements of Rule 9(b), when a plaintiff
"allege[s] a unified course of fraudulent conduct and rel[ies]
entirely on that course of conduct as the basis of a claim" or
"when the complaint makes a `wholesale adoption'" of fraud claims for
purposes of the § 11 claim. See Daou, 411 F.3d at 1027-28
(emphasis added). In the Third Amended Complaint, although
plaintiffs' § 10(b) claim incorporates all prior allegations of
the complaint, (see TAC ¶ 356), the § 11 claim does not do so.
(See id. ¶ 343); cf. Daou, 411 F.3d at 1027-28 (holding §
11 claim governed by Rule 9(b) pleading requirements where
complaint "fully incorporate[d] all allegations previously
averred in the complaint for purposes of all their claims" and
plaintiffs did not rely on non-fraud basis of liability for § 11
claim); see also Stac, 89 F.3d at 1404-05 (rejecting
"nominal efforts" to disclaim fraud as a basis for § 11 claim
where "no effort [was] made to show any other basis" for § 11
claim). Under the circumstances, the Court finds plaintiffs' § 11
claim, as asserted against Hancock, is not grounded in fraud,
and, consequently, is not subject to the pleading requirements of
Rule 9(b).*fn1
Accordingly, the Court will GRANT plaintiffs' motion for
reconsideration and DENY defendants' motion to dismiss the § 11
claim, as asserted against Hancock.
The Court dismissed the § 15 claim, as asserted against
Hancock, on the ground that plaintiffs did not allege any
violation of the securities laws by Exodus, the entity Hancock is
alleged to have controlled. (See August 5 Order at 70; see
also TAC ¶ 343.) Plaintiffs move for reconsideration on the
ground that, in paragraph 345 of their Third Amended Complaint,
they allege a § 11 violation by Exodus. (See TAC ¶ 345.) In
that paragraph, plaintiffs allege that in connection with a
February 6, 2001 public offering, "Exodus issued a Registration
Statement and Prospectus containing a number of false and
misleading statements." (See id.) Plaintiffs thereafter
allege why such statements were false and misleading. (See
id. ¶¶ 349-350.) Under § 11, as plaintiffs correctly note,
"[l]iability against the issuer is virtually absolute, even for
innocent misrepresentations." See Herman & MacLean v. Huddleston, 459 U.S. 375, 382 (1983).
As plaintiffs have stated a § 11 claim against Exodus,
plaintiffs have also stated a § 15 claim against Hancock. See
August 5 Order at 69 (noting that to state a claim for violation
of § 15, plaintiffs must "plead a primary violation of federal
securities laws and that the defendant exercised control over the
primary violator") (citation omitted).
Accordingly, the Court will GRANT plaintiffs' motion for
reconsideration, and DENY defendants' motion to dismiss the § 15
claim, as asserted against Hancock.
For the reasons set forth above, plaintiffs' motion for
reconsideration of the Court's dismissal of the § 11 and § 15
claims, as asserted against Hancock, is GRANTED, and defendants'
motion to dismiss said claims is DENIED. Hancock shall ...