The opinion of the court was delivered by: HARRY D. LEINENWEBER
Defendant, Scattered Corporation ("Scattered"), is an Illinois corporation engaged in the business of buying and selling securities. During a period between February 26, 1993 and June 29, 1993, Scattered sold approximately 170 million shares of LTV Corporation stock ("old LTV shares" or "old LTV stock"). LTV was one of the nation's largest steel producers, and was embroiled in a long and complicated bankruptcy proceeding. On February 26, 1993, LTV announced a reorganization plan, which would allow the company to emerge from bankruptcy. Under the plan, current shareholders would be given warrants granting the holder a right to receive "New LTV" stock ("new LTV stock") when, and if, issued. The new LTV stock would replace the old LTV stock, which would cease to exist. Holders of old LTV shares would receive approximately 1.08 warrants for each 100 shares of old LTV stock. This plan was approved by the bankruptcy court on May 27, 1993, and became effective on June 28, 1993. Sale of old LTV stock was halted on June 29, 1993.
Plaintiffs are persons and entities who bought LTV stock from Scattered between February 26, 1993 and June 29, 1993. During this period, plaintiffs allege Scattered sold approximately 170 million shares of LTV stock short. That is, Scattered sold Old LTV shares that it did not own or intend to borrow. Plaintiffs claim that Scattered sold enough stock short to create a false market, driving the price of LTV shares down. They allege that Scattered never intended to deliver the "old LTV" shares they sold. Rather, according to plaintiffs, Scattered intended to cover its sales in one of two ways. First, Scattered could delay issuing the shares until it received "new LTV" shares, which were worth a fraction of the price of "old LTV" shares. Alternatively, Scattered intended never to deliver anything, expecting the shares to be cancelled without further costs to clear.
Plaintiffs also seek to impose a constructive trust on defendants', CSX (f/k/a the Midwest Stock Exchange) and MCC, a wholly owned subsidiary of CSX. Plaintiffs claim that these parties currently possess around $ 5 million of Scattered's profits from the allegedly illegal trading.
Before the court are the following motions: (1) plaintiffs' motion for class certification, (2) Scattered's motion to dismiss, (3) defendants' CSX and MCC's motion to dismiss, (4) defendant motion to strike, (5) plaintiffs' interpleader motion, (6) Scattered's motion to dismiss the interpleader, and (7) plaintiffs' motion for a constructive trust.
The court grants plaintiffs' motion for class certification, reserving the right to create sub-classes in the future if necessary. It also grants defendants' motion to dismiss and gives plaintiffs 7 days to re-plead. In addition, the court finds that the other motions before the court are moot. The court offers the following rationale in support of its decision to grant Scattered's motion to dismiss.
I. Standard of Review for Motion to Dismiss
For the purpose of deciding defendant's motion to dismiss, the court assumes the truth of all well-pled factual allegations in the complaint and draws all possible inferences therefrom in favor of plaintiff. Webster v. New Lenox School Dist. No. 122, 917 F.2d 1004, 1005 (7th Cir. 1990). Dismissal is not warranted unless it appears beyond doubt that plaintiff could prove no set of facts that would entitle him to relief. Caldwell v. City of Elwood, 959 F.2d 670 (7th Cir. 1992).
In order to state a claim under Rule 10b-5, 17 C.F.R. § 240.10b-5,
the plaintiff must demonstrate that Scattered: (1) made an untrue statement of material fact or omitted a material fact that rendered the statements made misleading, (2) in connection with a securities transaction, (3) with the intent to mislead, and (4) which caused plaintiff's loss. Schlifke v. Seafirst Corp., 866 F.2d 935 (7th Cir. 1989). The court in Schlifke also stated that the express language of Rule 10b-5 proscribes omissions that render affirmative statements misleading; thus, incomplete disclosures, or "half-truths," implicate a duty to disclose whatever additional information is necessary ...