Grand v. Nacchio

217 P.3d 1203

222 Ariz. 498

Richard GRAND and Marcia Grand, cotrustees of the R.M. Grand Revocable Living Trust, dated January 25, 1991, Plaintiffs/Appellants/Cross-Appellees, v. Joseph P. NACCHIO, a New Jersey resident; John A. McMaster, a New Jersey resident; Qwest Communications International, Inc., a Delaware corporation; and Qwest B.V., a foreign organization, Defendants/Appellees/Cross-Appellants.

No. 2 CA-CV2009-0014.

Court of Appeals of Arizona, Division 2, Department A.

September 29, 2009.

Munger Chadwick PLC, by Michael J. Meehan, Tucson and Tiffany & Bosco, P.A. by Richard G. Himelrick, Phoenix, Attorneys for Plaintiffs/Appellants/Cross-Appellees.

Stern & Kilcullen, LLC by Joel M. Silverstein, Roseland, New Jersey and Perkins Coie Brown & Bain P.A. by Joseph E. Mais and Brian C. Lake, Phoenix, Attorneys for Defendant/Appellee/Cross-Appellant Nacchio.

Lewis & Roca LLP by John N. Iurino and Sivan R. Korn, Tucson, Attorneys for Defendant/Appellee/Cross-Appellant McMaster.

Fennemore Craig, P.C. by A. Bates Butler III and James D. Burgess, Tucson, and Boies, Schiller & Flexner LLP by Jonathan Sherman, Washington, D.C., Attorneys for Defendant/Appellee/Cross-Appellant Qwest.

OPINION

ESPINOSA, Presiding Judge.

¶ 1 Appellants Richard and Marcia Grand, co-trustees of the R.M. Grand Revocable Living Trust (collectively, the Trust), challenge the trial court's dismissal of their complaint in this securities fraud action in response to the motions to dismiss filed by appellees Joseph P. Nacchio, John A. McMaster, and Qwest Communications International, Inc. We affirm.

Factual Background and Procedural History

¶ 2 This case began in 2002, when the Trust filed a securities fraud action concerning its purchase of shares in KPNQwest N.V. (KPNQwest), a joint venture between Qwest Communications International, Inc. (Qwest) and Koninklijke KPN N.V., a European telecommunications company. Nacchio was Qwest's CEO and the chairman of KPNQwest's "supervisory board." McMaster was a Qwest employee who became KPNQwest's CEO. In 2005, the trial court granted partial summary judgment in favor of appellees and the Trust appealed. This court affirmed the trial court in part and reversed in part, upholding the court's grant of summary judgment in favor of appellees on the Trust's claims for damages, but reversing summary judgment on the Trust's rescission claims. Grand v. Nacchio, 214 Ariz. 9, ¶ 2, 147 P.3d 763, 767 (App.2006).

¶ 3 Following remand, the Trust filed its third amended complaint (referred to in this decision as the complaint), which omitted its common law and federal claims and narrowed its theory of fraud "to focus upon [appellees]' failure to disclose a billion-dollar fraud." The complaint alleged the Trust had purchased over 285,000 shares of publicly traded stock in KPNQwest. Of those shares, 30,000 were purchased as part of KPNQwest's initial public offering (IPO) in November 1999, and the remaining 255,000 were purchased in the aftermarket between December 27, 1999 and May 19, 2000.

¶ 4 The Trust alleged that during the time it was purchasing its KPNQwest shares, Qwest was fraudulently inflating its own earnings with fictitious revenue. The Trust claimed appellees controlled KPNQwest throughout its existence, and that if Qwest's fraudulent activities had been known to the public, "KPNQwest's stock would have [been] unmarketable." The complaint sought to rescind the Trust's KPNQwest stock purchases pursuant to A.R.S. § 44-2001(A) of the Arizona Securities Act, A.R.S. § 44-1801 through 44-2126 (the Act), under theories of both direct and secondary liability.

¶ 5 Appellees separately moved to dismiss the complaint. The trial court granted appellees' motions, but only as to the 255,000 shares the Trust had purchased outside of the IPO. Thereafter, the Trust filed two unsuccessful motions to reconsider and subsequently stipulated to dismiss with prejudice its remaining claims concerning the 30,000 IPO shares, thereby disposing of the complaint in its entirety. This court has jurisdiction over this appeal pursuant to A.R.S. §§ 12-120.21(A)(1) and 12-2101(B). For the following reasons, we affirm.¹

Discussion

¶ 6 The Trust contends the trial court erred in dismissing the complaint, arguing all three claims it had alleged were sufficiently pled so as to withstand appellees' motions to dismiss. "In reviewing motions to dismiss for failure to state a claim, we assume that the allegations in the complaint are true and determine if the plaintiff is entitled to relief under any theory of law." Sensing v. Harris, 217 Ariz. 261, ¶ 2, 172 P.3d 856, 857 (App.2007). We must "assume the truth of the well-pled factual allegations and indulge all reasonable inferences therefrom." Cullen v. Auto-Owners Ins. Co., 218 Ariz. 417, ¶ 7, 189 P.3d 344, 346 (2008). However, "[b]ecause Arizona courts evaluate a complaint's well-pled facts, mere conclusory statements are insufficient to state a claim upon which relief can be granted." Id.

Direct Liability

¶ 7 The Trust first alleged in the complaint appellees were directly liable under §§ 44-1991(A), 44-2001(A), and 44-2003(A) of the Act. Under § 44-1991(A)(3), it is a fraudulent practice to "[e]ngage in any transaction, practice or course of business which operates or would operate as a fraud or deceit" in connection with a transaction involving the purchase or sale of securities. Much of the complaint is devoted to outlining the various ways in which appellees were involved in violations of that provision. Section 44-2001(A) allows a purchaser injured by a violation of § 44-1991(A)(3) to bring a private cause of action for rescission or damages. See Grand, 214 Ariz. 9, ¶¶ 27-28, 147 P.3d at 772-73; Standard Chartered PLC v. Price Waterhouse, 190 Ariz. 6, 18, 945 P.2d 317, 329 (App.1996). Section 44-2003(A) identifies those against whom an action pursuant to § 44-2001 may be brought: "any person ... who made, participated in or induced the unlawful sale or purchase." See Standard Chartered, 190 Ariz. at 18, 945 P.2d at 329.

¶ 8 Accordingly, to assert a direct claim of liability under § 44-2003(A), the Trust was required to allege that appellees either had "made, participated in or induced the unlawful sale or purchase." Having dropped its prior claims of inducement, the Trust argues that appellees "participated" in the Trust's KPNQwest stock purchases. This court has held that "participated in," for purposes of § 44-2003(A), means "`to take part in something'" or "`have a part or share in something.'" Standard Chartered, 190 Ariz. at 21, 945 P.2d at 332, quoting Webster's Third New International Dictionary 1646 (1969). Therefore, the determinative issue here is whether the complaint sufficiently alleged appellees "participated in" — that is, took part in or had a share in — the Trust's aftermarket purchases of KPNQwest stock.

¶ 9 At the outset, the Trust did not directly allege in the complaint that appellees had "participated in" the Trust's aftermarket stock purchases. However, the Trust contends the complaint contains factual allegations that appellees participated in the stock purchases in several ways. First, the Trust claims the complaint alleged that appellees had "targeted" Richard Grand "with a stream of reassuring written communications," including notifications sent by electronic mail (e-mail) concerning market conditions and other information, favorable analyst reports, and misleading press releases. In addition, a KPNQwest employee provided Grand with information about a broker. Appellees also "promoted KPNQwest by linking the new company to the management strength and financial growth with which Qwest was publicly perceived" and "misled the Grands and other public investors by taking part in an enterprise (KPNQwest) and activity (a fraudulent scheme) under which KPNQwest's stock traded under a deceptive banner of management integrity that did not exist." Finally, the Trust contends that the complaint alleged appellees were "information gatekeepers" who "controlled the disclosures that were made to the market."

¶ 10 These allegations, however, fall short of demonstrating appellees had "participated in" the Trust's purchases of KPNQwest stock for purposes of § 44-2003(A). Rather, based on the factual allegations in the complaint, the circumstances of this case are like those in Standard Chartered. There, this court held that an outside auditor who had supplied and approved incorrect and misleading financial information that was used by the parties to the sale had not "participated in" the stock sale for purposes of § 44-2003(A) as a matter of law. 190 Ariz. at 12, 21, 945 P.2d at 323, 332. As the trial court correctly explained, "it stretches the statutory language `... participate in the unlawful sale ...' too far to impose liability" on appellees as to the aftermarket sales because to hold otherwise "would be to impose liability on all publicly traded companies and their management without any showing of inducement and only upon the showing that by creating an open market, they later `participate in' each and every sale conducted in that market." Instead, this court held in Standard Chartered that the private civil remedy set forth in §§ 44-2001 and 44-2003 does not apply to all violations of § 44-1991, but "only against the narrower range of persons `who made, participated in or induced the unlawful sale.'" 190 Ariz. at 22, 945 P.2d at 333, quoting § 44-2003(A). "Had the legislature intended so extensive a private remedy, it could simply have done so against any person who violated section 44-1991." Id.² ¶ 11 The closest the complaint came to alleging that appellees "participated in" the Trust's aftermarket purchases was its allegation that a KPNQwest employee provided Grand with a referral to a broker. Notably, however, neither the complaint, its exhibits, nor Grand's declaration alleged that the Trust had used this broker to make its purchases. And...