Glaser v. Enzo Biochem, Inc.

303 F.Supp.2d 724

Lawrence F. GLASER and Maureen Glaser, individually and on behalf of Kimberly, Erin, Hannah and Benjamin Glaser, Plaintiffs, v. ENZO BIOCHEM, INC., et al., Defendants.

No. CIV.A. 02-1242-A.

United States District Court, E.D. Virginia, Alexandria Division.

July 16, 2003.

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Jorge RiosTorres, Annandale, VA, Plaintiffs Counsel.

Cooley Godward, Reston, Jeffrey Scott Tibbals, Pepper Hamilton, Tysons Corner, VA, Defendant's Counsel.

MEMORANDUM OPINION

LEE, District Judge.

THIS MATTER is before the Court on Defendants', Enzo Biochem, Inc., Barry Weiner, Elazar Rabbani, Sharim Rabbani, John Delucca, Dean Engelhardt, and Heimon Gross, motions to dismiss pursuant to Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure. This case concerns Plaintiffs' claim that Defendants defrauded them by disseminating allegedly false information to the public and by manipulating the Enzo Biochem, Inc., stock to permit the Defendants to "pump and dump" the Enzo stock. This is the Plaintiffs' fourth attempt at pursuing their claims against Defendants. Defendant Heimon Gross filed a Separate motion to dismiss; however, his motion incorporates the other defendants' motion to a large extent. This Memorandum Opinion addresses all motions to dismiss before the Court, specifically the adequacy of Plaintiffs' Amended Complaint with respect to Rule 9(b) and the special pleading requirements of the Private Securities Litigation Reform Act, 15 U.S.C. § 78u-4(b), Rule 12(b)(6) and Section 10(b) of the Securities and Exchange Act of 1934. Furthermore, this Memorandum Opinion addresses the adequacy of Plaintiffs' Amended Complaint as to the common law fraud and the breach of fiduciary duty claims.

The first issue before the Court is whether Plaintiffs' federal securities fraud claims are barred by the relevant statute of limitations where Plaintiffs' allegedly had inquiry notice, of the securities fraud more than one year prior to filing their first complaint before the Court. The Court holds that Plaintiffs' claims are governed and barred by the one-year statute of limitations because Plaintiffs, through several media, had acquired notice of their potential claim. The Court further holds that the two-year limitations period established by the recently enacted Sarbanes-Oxley Act does not revive Plaintiffs' claims.

The second issue is whether Plaintiffs' Amended Complaint adequately pleads a federal securities fraud claim, under 15 U.S.C. § 78u-4(b), to withstand Defendants' motions to dismiss for failure to plead fraud with particularity and failure to state a claim upon which relief can be granted, where the Amended Complaint alleges that Plaintiffs were induced, through several allegedly false and materially misleading communications from Defendants, into purchasing over one million shares of Enzo Biochem, Inc., stock. The Court holds that Plaintiffs' Amended Complaint fails to allege fraud "in connection with" the sale or purchase of a security, fails to establish a misrepresentation of material facts, fails to raise a strong inference that Defendants acted intentionally, consciously, or recklessly, fails to allege direct or indirect reasonable reliance, and fails to allege loss causation. The Amended Complaint also fails to allege common law fraud claims against all Defendants because the Amended Complaint does not establish material facts which were misrepresented. Furthermore, the Amended Complaint fails to state a proper claim for breach of fiduciary duty against the Defendants because this case was not initiated as a derivative claim. For the reasons set forth below, the Court dismisses the Amended Complaint as to all counts and as to all Defendants.

I. BACKGROUND

Enzo Biochem, Inc., ("Enzo") is a publicly held biotechnology company engaged in the research, development and marketing of health care products. The Individual Defendants are officers and/or directors of Enzo — Heimon Gross was a consultant to Enzo and allegedly engaged in investor relations. Plaintiff Lawrence Glaser ("Glaser") and his family purchased over one million shares of Enzo over a six-year period, from 1994 to 2000. Plaintiffs engaged in thousands of purchases and sales of Enzo stock during this period.

Plaintiffs claim that the Defendants made false statements concerning: (1) Enzo's patent estate, (2) the progress of the pre-clinical and clinical trials of Enzo's HIV protocol, (3) the efficacy of Enzo's gene therapy, and (4) the timing of a major diagnostic transaction with a pharmaceutical company. Plaintiffs further allege that the Defendants conspired to increase the price of the Enzo stock so that they could sell their holdings at favorable prices: a "pump and dump." The Amended Complaint alleges that, as part of the "pump and dump" scheme, the Defendants stated: (1) that the clinical trials of the HIV protocol were successful and on schedule, (2) that the Phase II clinical study would begin shortly, and (3) that Enzo would be opening clinics to treat HIV/AIDS patients in April 2000. As part of the "dump," the Defendants allegedly sold some of their shares at all-time high prices for the Enzo stock. The Amended Complaint also alleges that the Defendants planned to "pump and dump" the Enzo stock a second time but abandoned the plan.

II. DISCUSSION

The Court grants the motions to dismiss as to the federal securities claims because (1) the federal securities claims are barred by the statute of limitations, (2) the Amended Complaint fails to plead material facts which were misrepresented, (3) the Amended Complaint fails to raise a strong inference that Defendants acted intentionally, consciously, or recklessly or that the Defendants had the motive and opportunity to defraud Enzo's investors, (4) fails to plead with particularity either direct or indirect reliance, and (5) fails to allege loss causation. The Court grants the motions to dismiss as to the common law fraud claims because the Amended Complaint fails to establish material facts which were misrepresented. Furthermore, the Court grants Plaintiffs' motions to dismiss as to the breach of fiduciary claim because the claim was not initiated as a derivative action.

A. Standard of Review

1. Fed.R.Civ.P. 12(b)(6) — Failure to State a Claim Upon Which Relief May Be Granted

A Rule 12(b)(6) motion should not be granted unless it appears beyond a doubt that the plaintiff can prove no set of facts in support of his claim that would entitle him to relief. Fed.R.Civ.P. 12(b)(6); Conley v. Gibson. 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957). In considering a Rule 12(b)(6) motion, the Court must construe the complaint in the light most favorable to the plaintiff, read the complaint as a whole, and take the facts asserted therein as true. Mylan Labs., Inc. v. Matkari, 7 F.3d 1130, 1134 (4th Cir.1993). However, a court is not limited to the four corners of the complaint. A court may consider any document that is explicitly relied upon in the complaint. In re Burlington Coat Factory Sec. Lit., 114 F.3d 1410 (3d Cir.1997); Gasner v. County of Dinwiddie, 162 F.R.D. 280 (E.D.Va.1995). A court can also consider the text of an undisputedly authentic document that is integral to the plaintiff's claim, even if the document is not attached or named in the complaint. Id. Conclusory allegations regarding the legal effect of the facts alleged need not be accepted. See Labram v. Havel, 43 F.3d 918, 921 (4th Cir.1995). Because the central purpose of the complaint is to provide the defendant "fair notice of what the plaintiffs claim is and the grounds upon which it rests," the plaintiff's legal allegations must be supported by some factual basis sufficient to allow the defendants to prepare a fair response. Conley, 355 U.S. at 47, 78 S.Ct. 99.

This initial standard sets out how the Court construes the Complaint. The follow-on sections provide the substance in analyzing a 12(b)(6) motion. The substantive pleading standards are set forth in Section 10(b) of the Securities Exchange Act of 1934, Rule 1013-5, and the Private Securities Litigation Reform Act.

2. Section 10(b) of the Securities Exchange Act of 1934 & Federal Rule of Civil Procedure 9(b)

To establish liability under Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78j(b), and under Rule 10b-5, 17 C.F.R. § 240.10b-5, a plaintiff must allege that "(1) in connection with a purchase or sale of securities, (2) the defendant made a false statement or omission of material fact (3) with scienter (4) upon which the plaintiff justifiably relied (5) that proximately caused the plaintiff damages." Phillips v. LCI Int'l, Inc., 190 F.3d 609, 613 (4th Cir.1999). See 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5. Plaintiffs allege both securities fraud and fraud on the market; thus, the Court analyzes Plaintiffs' claims under a "face to face"¹ standard and a "fraud on the market"² standard.

To state a valid claim for securities fraud resulting from a face to face transaction, the plaintiff must allege all five elements discussed in Phillips. When proceeding under a fraud on market theory, the plaintiff need not plead direct reliance or that the fraudulent practice was in connection with a particular sale or purchase of securities. Instead, the plaintiff need only show the means of dissemination and the materiality of the misrepresentation. SEC v. Texas Gulf Sulphur Co., 401 F.2d 833 (2d Cir.1968); Miller v. Asensio, 101 F.Supp.2d 395 (D.S.C.2000).

In addition to meeting the requirements under Section 10(b), a plaintiff must also meet the requirements of Rule 9(b) of the Federal Rules of Civil Procedure that "the circumstance constituting fraud ... be stated with particularity" in the complaint. Section 10(b) provides the elements that the plaintiff will have to prove in order to succeed on his claim....