Dinnen v. Kneen: Defendants' Motion to Dismiss Claims in Amended Complaint Granted.
In Dinnen v. Kneen, No. 16-cv-00882-PAB-STV, 2017 BL 332704 (D. Colo. Sept. 19, 2017), the United States District Court for the District of Colorado granted PdC, LLC, Timothy Kneen, Michael Roberts, Timothy Flaherty, and Carl Vertuca’s (“Defendants”) Motion to Dismiss, finding that Michael W. Dinnen’s (“Plaintiff”) Amended Complaint failed to sufficiently allege scienter in the Section 10(b) claim under the heightened pleading requirements of the Private Securities Litigation Reform Act (“PSLRA”).
According to the Amended Complaint, Plaintiff alleged Defendants made false and misleading statements between 2007 and 2014 regarding Plaintiff’s investment in a luxury real estate project in Mexico. Plaintiff alleged that he was “repeatedly assured” that his investments were safe and he would double his money. Plaintiff also alleged Defendants provided a “largely fictitious table” of financial projections. Plaintiff claimed Defendants sent an e-mail that contained numerous false representations in connection to the offer and sale of the luxury villas. Plaintiff further claimed Defendants failed to disclose ongoing litigation during Plaintiff’s investment. Plaintiff lastly alleged Defendants misrepresented the permits they had obtained to begin construction of the luxury villas. Plaintiff sought to enforce his rights under a letter of intent, in which he described plans to loan up to six million dollars to Defendants. In reliance on the letter of intent, Plaintiff wired $250,000 to Defendants.
Under section 10(b) of the Exchange Act, it is unlawful for any person to employ any manipulative or deceptive device in connection with the purchase of a security.15 U.S.C. § 78j (2012). Therefore, a plaintiff must allege that defendants in connection with the purchase or sale of a security, “made an untrue statement of material fact, or failed to state a material fact,” with scienter; and “that plaintiff relied on the misrepresentation, and sustained damages as a proximate result of the misrepresentation.” In order to state a claim under Section 10(b) and SEC Rule 10b-5, defendants must have made fraudulent statements “in connection with” the sale of a security. A security is characterized by “an investment of money in a common enterprise with profits to come solely from efforts of others.” The PSLRA amended the Securities Acts of 1933 and 1934 to impose specific and more stringent pleading requirements on complainants alleging securities fraud under Section 10(b). Those requirements are that plaintiff must “specify each statement alleged to have been misleading,” why the statement is misleading, and, regarding each act or omission, “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” In regard to state claims, according to 28 U.S.C. § 1367(c)(3), the district courts may decline to exercise supplemental jurisdiction over a claim, if the district court has dismissed all claims over which it has original jurisdiction.
The court found Plaintiff failed to meet the pleading requirements of the PSLRA and evaluated the facts the Plaintiff provided. The court held Defendants’ statement that Plaintiff would double his money was mere puffery and no reasonable investor would rely on such representations. The court also held the table of financial projections must be viewed only as “estimates” and not binding, which do not demonstrate fraudulent intent. In regard to the e-mail, it was not sent to Plaintiff, therefore irrelevant to Plaintiff’s claim. Further, Defendants could not have disclosed the ongoing litigation at the time Plaintiff made the investment, therefore Defendants did not violate the securities laws by failing to inform Plaintiff of litigation. The statements related to permits were not sent to Plaintiff before his decision to invest, having no effect on Plaintiff’s decision to invest. The statements related to permits are not actionable under the provisions of the Exchange Act relied upon by the Plaintiff.
Consequently, the court held Plaintiff did not have a claim under 10(b) for misrepresentations with respect to that investment. The letter of intent, additionally, did not contain any reference to the rights of individuals who provided funds. Therefore, the court held that Plaintiff’s $250,000 contribution to Defendants was not a security.
For the above reasons, the court granted Defendant’s motion to dismiss claims in the Amended Complaint. It further ordered to dismiss several of Plaintiff’s claims for relief with prejudice pursuant to Fed. R. Civ. P. 12(b)(6), and the state claims without prejudice pursuant to 28 U.S.C. § 1367(c)(3).
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