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AMZAK CORPORATION v. RELIANT ENERGY

August 18, 2004.

AMZAK CORPORATION, COUNTRYSIDE CABLE, INC., and GERALD KAZMA, Plaintiffs,
v.
RELIANT ENERGY, INC. and its successor in interest CENTERPOINT ENERGY, INC.; R. STEVE LETBETTER; STEPHEN W. NAEVE; and MARY P. RICCIARDELLO, Defendants.



The opinion of the court was delivered by: JOAN H. LEFKOW, District Judge

MEMORANDUM OPINION AND ORDER

On January 27, 2004, this court dismissed without prejudice the First Amended Complaint of plaintiffs, Amzak Corporation ("Amzak"), Countryside Cable, Inc. ("Countryside"), and Gerald Kazma ("Kazma"), against defendants, Reliant Energy, Inc. (and its successor in interest CenterPoint Energy, Inc.) ("Reliant Energy"), R. Steve Letbetter ("Letbetter"), Stephen W. Naeve ("Naeve") and Mary P. Ricciardello ("Ricciardello") (collectively "defendants"). On March 3, 2004, plaintiffs filed their Second Amended Complaint which, similar to the First Amended Complaint, alleges that defendants (1) violated § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated under § 78j(b), by knowingly making misrepresentations and by failing to state material facts concerning publicly traded securities in Reliant Energy; (2) violated § 20(a) of the Securities Exchange Act of 1934, 18 U.S.C. § 78t(a); (3) committed fraudulent misrepresentation under Illinois law; and (4) violated the Illinois Consumer Fraud and Deceptive Business Practices Act, 815 ILCS 505/1 et seq. Defendants have moved to dismiss the Second Amended Complaint for failure to state a claim upon which relief may be granted under Federal Rule of Civil Procedure 12(b)(6) and for failure to satisfy the pleading requirements of Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act of 1995, 15 U.S.C. § 78u-4(b) ("PSLRA"). For the reasons set forth below, defendants' motion is granted.

MOTION TO DISMISS STANDARDS

  A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) challenges the sufficiency of the complaint for failure to state a claim upon which relief may be granted. General Elec. Capital Corp. v. Lease Resolution Corp., 128 F.3d 1074, 1080 (7th Cir. 1997). Dismissal is appropriate only if it appears beyond a doubt that the plaintiff can prove no set of facts in support of its claim that would entitle it to relief. Conley v. Gibson, 355 U.S. 41, 45-46 (1957); Kennedy v. Nat'l Juvenile Det. Ass'n, 187 F.3d 690, 695 (7th Cir. 1999). In ruling on the motion, the court accepts as true all well pleaded facts alleged in the complaint, and it draws all reasonable inferences from those facts in favor of the plaintiff. Jackson v. E.J. Brach Corp., 176 F.3d 971, 977 (7th Cir. 1999); Zemke v. City of Chicago, 100 F.3d 511, 513 (7th Cir. 1996).

  In addition to the mandates of Rule 12(b)(6), Federal Rule of Civil Procedure 9(b) requires "all averments of fraud" to be "stated with particularity," although "[m]alice, intent, knowledge, and other condition of mind of a person may be averred generally." "The rule requires the plaintiff to state the identity of the person who made the misrepresentation, the time, place, and content of the misrepresentation, and the method by which the misrepresentation was communicated to the plaintiff." Vicom, Inc. v. Harbridge Merch. Servs., Inc., 20 F.3d 771, 777 (7th Cir. 1994); see also DiLeo v. Ernst & Young, 901 F.2d 624, 627 (7th Cir. 1990) ("Although states of mind may be pleaded generally [under Rule 9(b)], the `circumstances' must be pleaded in detail. This means the who, what, when, where, and how: the first paragraph of any newspaper story."). "`Because only a fraction of financial deteriorations reflects fraud,' . . . plaintiffs in securities cases must provide enough information about the underlying facts to distinguish their claims from those of disgruntled investors." Arazie v. Mullane, 2 F.3d 1456, 1458 (7th Cir. 1993) (quoting in part DiLeo, 901 F.2d at 628).

  Further, in addition to Rule 9(b), the PSLRA imposes "heightened pleading requirements" to discourage claims of "so-called `fraud by hindsight.'" In re Brightpoint, Inc. Sec. Litig., No. IP99-0870-C-H/G, 2001 WL 395752, at *3 (S.D. Ind. Mar. 29, 2001). Section 78u-4(b) "requires a court to dismiss a complaint that fails to (1) identify each of the allegedly material, misleading statements, (2) state facts that provide a basis for allegations made on information and belief, or (3) state with particularity `facts giving rise to a strong inference that the defendant acted with the required state of mind.'" Id. at *4.

  ALLEGATIONS OF THE COMPLAINT

  Reliant Energy is an international energy services and energy delivery company providing services in North America and Western Europe. (Sec. Am. Compl. ¶ 5.) During the time periods relevant to this action, Reliant Energy was the owner of approximately 82.4% of the stock of Reliant Resources, Inc. ("Reliant Resources"), an energy services company marketing power and natural gas in North America and Western Europe. (Sec. Am. Compl. ¶ 5.) Also, defendants Letbetter, Naeve, and Ricciardello ("individual defendants") were executive officers of Reliant Energy and/or Reliant Resources. (Sec. Am. Compl. ¶¶ 7-9.) On May 10, 2002, Reliant Resources disclosed that it had engaged in so-called "roundtrip transactions" in which "it had engaged in transactions with other power traders to buy and sell power to each other simultaneously, and at the same price. . . ." (Sec. Am. Compl. ¶ 64.) Reliant Resources announced that it was undertaking a review of these transactions. (Id.) On May 13, 2002, after the review had taken place, Reliant Resources announced in a press release that the roundtrip transactions had the effect of improperly increasing revenues and improperly inflating trading volume. (Sec. Am. Compl. ¶ 65.)

  Plaintiffs allege that defendants made materially false and misleading statements in SEC filings, press releases and other communications regarding Reliant Energy's revenues before the disclosure of the round-trip trades, and that those statements artificially inflated Reliant Energy's stock price during the August 2, 1999 to May 10, 2002 time period. (Sec. Am. Compl. ¶ 87.) Plaintiffs describe a numbers of actions they undertook with respect to Reliant Energy stock during that time period. On or about October 1, 2000, plaintiffs secured loans from Harris Bank by pledging their Reliant Energy stock as collateral. (Sec. Am. Compl. ¶ 14.) Plaintiffs allege that this transaction effected a transfer to the bank of "conditional and defeasible interests" in their Reliant Energy stock. (Id.) When the price of the Reliant Energy stock fell in June and July of 2001 (due to normal market forces and not fraud), the Reliant Energy stock became insufficient collateral for plaintiffs' loans with their bank. Rather than allow the bank to foreclose on the stock, plaintiffs transferred to the bank additional assets to serve as additional collateral. According to plaintiffs, by doing this they "purchase[d] from Harris Bank with cash from assets other than Reliant Energy stock the conditional and defeasible interests in such pledged shares of Reliant Energy stock, thereby in effect redeeming their interests." (Sec. Am. Compl. ¶ 15.)

  Plaintiffs allege a second similar scenario that took place in the fall of 2001 when the share price of Reliant Energy stock once again dropped and rendered plaintiffs' collateral insufficient. The loan agreements at this point were with LaSalle Bank. Plaintiffs again point out that they posted additional collateral to LaSalle Bank in order to avoid foreclosure on their Reliant Energy shares. (Sec. Am. Compl. ¶ 18.)

  Plaintiffs assert damages because, on May 10 and 13, 2002, in the wake of the curative statements disclosing the round trip trades, Reliant Energy's stock fell from $24.60 on May 9, 2002 to $15.87 on May 14, 2002. (Sec. Am. Compl. ¶ 66.) Plaintiffs claim that absent the alleged misrepresentations they would not have transferred the additional collateral amounts to their banks and would have instead allowed the banks to foreclose on the shares. (Sec. Am. Compl. ¶¶ 87-88.) Plaintiffs also allege that they would have sold their Reliant Energy shares to several buyers who approached them during the time period, but did not do so because of the alleged misrepresentations. (Sec. Am. Compl. ¶¶ 101-05.)

  DISCUSSION

  A. Count I: Section 10(b)

  Section 10(b) of the Securities Exchange Act of ...


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