The opinion of the court was delivered by: MATTHEW KENNELLY, District Judge
MEMORANDUM OPINION AND ORDER
The plaintiffs in this case lost millions of dollars after
their shares of SmartServ Online, Inc. (SSOL), lost ninety-eight
percent of their value between January 2000 and June 2002. They
claim that a prominent investment advisor, John Spatz,
fraudulently induced them to invest in SSOL, causing them
significant losses. The Plaintiffs have sued Spatz, his employer,
Citigroup Global Markets, Inc., and its parent company,
Citigroup, Inc. (collectively, Citigroup), under sections 10(b)
and 20(a) of the Securities Exchange Act of 1934,
15 U.S.C. §§ 78j(b) and 78t(a). Plaintiffs have also asserted a state law
claim of negligent supervision. Defendants have moved for summary
judgment. For the following reasons, the Court grants the motion.
The plaintiffs are 155 individuals who purchased SSOL's
publicly traded stock between January 2000 and May 2002.
Citigroup is a global financial services firm that provides
investment and asset management services. John Spatz is an
institutional stockbroker employed by Citigroup. Howard Borenstein, Mel Stewart, and Angelo Armenta
are retail stockbrokers (collectively, "the brokers"), who claim
that they relied on Spatz's fraudulent misstatements when they
advised the plaintiffs to buy SSOL stock.
Plaintiffs allege that Citigroup and Spatz, in collaboration
with insiders at SSOL, fraudulently induced the plaintiffs to
purchase shares of SSOL stock by making a number of
misrepresentations to the brokers. Among other things, Spatz
allegedly told the brokers that SSOL had signed substantial
contracts with large corporations including Microsoft, Smith
Barney, and Verizon Wireless; that institutional investors at
Citigroup thought highly of SSOL and were going to invest
substantially in the stock; and that SSOL had obtained large
sources of financing. Plaintiffs claim that Spatz knew these
statements were false when he made them and used the retail
public to artificially inflate the price of SSOL stock. They
further allege that if they had known the truth behind Spatz's
misrepresentations, they would have sold their stock before its
value dropped and avoided the losses they suffered.
The brokers first met Spatz and began consulting with him in
June 2000. At that time, SSOL's stock was priced at more than
eighty dollars per share. Two years later, the stock barely
exceeded one dollar. The stock prices of SSOL's competitors
suffered a similar fate during the same time period: 724
Solutions lost 98.9% of its value; Aether Systems lost 98.39% of
its value; and Openwave Systems lost 94.35% of its value.
Summary judgment is appropriate when the pleadings,
depositions, answers to interrogatories, admissions, and
affidavits, if any, show that there is no genuine issue as to any
material fact and that the moving party is entitled to judgment
as a matter of law. FED. R. CIV. P. 56(c). The Court must view the facts in favor of the plaintiffs
and draw all reasonable inferences in their favor. Anderson v.
Liberty Lobby, Inc., 477 U.S. 242, 255 (1986).
1. Federal securities law claims
The Securities Exchange Act of 1934 makes it unlawful for any
use or employ, in connection with the purchase or
sale of any security registered on a national
securities exchange . . . any manipulative or
deceptive device or contrivance in contravention of
such rules and regulations as the [Securities and
Exchange] Commission may prescribe as necessary or
appropriate in the public interest or for the
protection of investors.
15 U.S.C. § 78(j)(b). Securities and Exchange Commission Rule
10b-5 prohibits the making of any "untrue statement of material
fact" in connection with the sale of securities.
17 C.F.R. § 240.10b-5. Implied by this statute and implementing regulation is
a private cause of action, which closely resembles a common law
action for fraud. Dura Pharms. v. Broudo, ___ U.S. ___,
125 S.Ct. 1627
, 1631 (2005). To prevail on such a claim, a plaintiff
must demonstrate that the defendant made a material
misrepresentation or omission with scienter in connection with
the purchase or sale of securities, that the plaintiff reasonably
relied on the misrepresentation, and that the plaintiff suffered
economic loss which was caused by the misrepresentation. Id. In
addition, a plaintiff may recover from an individual or entity,
including a brokerage firm, if the plaintiff demonstrates that
the firm "directly or indirectly" controlled a person liable for
securities fraud and the firm did not act in good faith.
15 U.S.C. § 78t(a); Harrison v. Dean Witter Reynolds, 79 F.3d 609,
614-15 (7th Cir. 1996).
The plaintiffs argue that based on the evidence they have
offered, a jury reasonably could find that Spatz committed
securities fraud and that Citigroup is jointly and severally
liable as a controlling entity. The defendants, on the other
hand, insist that no jury reasonably could find that Spatz's alleged misrepresentations caused plaintiffs'
losses, because the entire technology industry of which SSOL
was a part suffered an economic collapse during the relevant
time period, meaning the plaintiffs would have lost their
investment irrespective of Spatz's alleged misrepresentations.
The defendants also make other arguments, but we need not address
them, because this one is dispositive of the federal claims.
Loss causation is a required element of a 10b-5 action and is
similar to the proximate cause element in a common law fraud
action. See Dura Pharms., 125 S.Ct. at 1632. To present
evidence of loss causation, "it [i]s not sufficient for an
investor to allege only that it would not have invested but for
the fraud. Such an assertion alleges transaction causation, but
it does not allege loss causation. Rather, it is also necessary
to allege that, `but for the circumstances that the fraud
concealed, the investment . . . would not have lost its value.'"
Caremark, Inc. v. Coram Healthcare Corp. 113 F.3d 645, 648-49
(7th Cir. 1997) (quoting Bastian v. Petren Resources Corp.,
892 F.2d 680, 683 (7th Cir. 1990)) (citation omitted). In other
words, transaction causation is proof that a knowledgeable
investor would not have made the investment in question; loss
causation is proof that a particular misrepresentation had a
causal connection with the loss in value of the plaintiff's
investment.*fn1 See id.
In Bastian, the plaintiffs were investors in oil and gas
limited partnerships who sued the promoters of the partnerships after their investments lost money.
Bastian, 892 F.2d at 682. The district court granted the
defendants' motion to dismiss because the plaintiffs failed to
allege loss causation, and the plaintiffs appealed. Id. The
Seventh Circuit upheld the district court's order agreeing that
the plaintiffs failed to allege "why the[ir] investment was
wiped out." Id. at 684 (emphasis in original). The court said
that gas and oil prices steadily declined during the time period
in question, suggesting that the plaintiffs' loss was caused not
by the defendants' ...