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Joyce v. Morgan Stanley & Co.

March 29, 2007


The opinion of the court was delivered by: Samuel Der-yeghiayan, District Judge


This matter is before the court on Defendant Morgan Stanley & Co., Incorporated's ("Morgan Stanley") motion to dismiss. For the reasons stated below, we grant the motion to dismiss.


On December 12, 1999, 21st Century Telecom Group, Inc. ("21st Century") allegedly entered into a merger agreement ("Merger Agreement") whereby all of its common shares would be acquired by RCN Telecom Services of Illinois, Inc. ("RCN"). At the time of the merger, Plaintiff Edward T. Joyce ("Joyce") was allegedly Chairman of the Board for 21st Century. Plaintiff Glenn Milligan ("Milligan") was allegedly 21st Century's founder and at one time served as President and CEO and was a member of the Board of Directors at the time of the merger. In addition to Plaintiffs Joyce and Milligan, Plaintiffs MaryKay Joyce, Joyce Retirement Plans, Edward R. Joyce, Amy Joyce, Katherine Mary Joyce, Julie Joyce Sherlock, Ava Milligan, Joseph D Keenan III, Sally Keenan, Katharine Keenan, Joseph Keenan IV, Arthur Aufmann, and Aufmann Profit Sharing Trust (collectively referred to as "Plaintiffs") all owned or had options to buy certain percentages of 21st Century common stock as of December 12, 1999.

Plaintiffs allege that at the beginning of negotiations between RCN and 21st Century, RCN was represented by Morgan Stanley as its investment advisor and 21st Century was represented by its own management team. RCN allegedly then changed its investment advisor to Solomon Smith Barney, and, "[a]t the insistence of RCN," 21st Century engaged the services of Morgan Stanley "to assist in negotiating the terms of the Merger Agreement and to provide financial advice to 21st Century for the benefit of 21st Century and its stockholders." (Sec. Amend. Compl. Par. 2). Plaintiffs contend that Morgan Stanley's financial advice and assistance were also to ensure that the interests of 21st Century's stockholders were "sufficiently protected." (Sec. Amend. Compl. Par. 2). Plaintiffs allege that 21st Century believed that Morgan Stanley was "intimately aware of RCN's business," and would thus be able to effectively assist 21st Century with the negotiations of the Merger Agreement with RCN. (Sec. Amend. Compl. Par. 16). Plaintiffs further contend that Morgan Stanley sent 21st Century a letter acknowledging the relationship ("Engagement Letter") to formalize the engagement.

Plaintiffs contend that Morgan Stanley later submitted a fairness opinion ("Fairness Opinion") to 21st Century's Board of Directors and that the Fairness Opinion was allegedly also submitted to 21st Century's shareholders with Morgan Stanley's consent, along with the proposed merger documents. Plaintiffs allege that Morgan Stanley's Fairness Opinion concluded that "the merger was fair to 21st Century shareholders." (Sec. Amend. Compl. Par. 21). Plaintiffs assert that Morgan Stanley attempted to negotiate price protections for 21st Century's stockholders because "Morgan Stanley knew it was important to protect 21st Century shareholders from the risk of owning RCN stock." (Sec. Amend. Compl. Par. 22). RCN allegedly refused to agree to any price protections. Plaintiffs allege that based on Morgan Stanley's advice, 21st Century entered into the Merger Agreement with RCN on December 12, 1999, and 21st Century's shareholders subsequently voted to approve the merger between 21st Century and RCN.

Plaintiffs contend that starting on December 12, 1999, 21st Century shareholders were at risk because at that point there was no market for 21st Century stock. On December 12, 1999, RCN common stock was allegedly selling for approximately $45 per share. However, on April 28, 2000, the effective date of the merger, RCN's stock price allegedly fell to $28.62 per share. Plaintiffs claim that over the next couple of months, the price of RCN's stock "dropped even more precipitously and then soon became worthless." (Sec. Amend. Compl. Par. 34).

Plaintiffs allege that Morgan Stanley knew that certain investment procedures were available to 21st Century and its shareholders that would have protected them from the risk of exchanging 21st Century common stock for RCN common stock, but that Morgan Stanley failed to advise shareholders of those procedures. Plaintiffs contend that such price protection mechanisms available to 21st Century and its shareholders was the purchase of a "put" for the period of December 12, 1999, to April 28, 2000, and then to purchase a "collar" or enter into a "prepaid forward" for the period of time after April 28, 2000. (Sec. Amend. Compl. Par. 27). Plaintiffs claim that Morgan Stanley did not advise Plaintiffs of available price protection mechanisms even though Morgan Stanley knew of the importance of price protection.

Plaintiffs further allege that Morgan Stanley "intentionally failed to give the advice" concerning price protection mechanisms available to 21st Century shareholders because the price of RCN stock could have been depressed by the implementation of the price protections. (Sec. Amend. Compl. Par. 29). Plaintiffs contend that Morgan Stanley, as a former client of RCN, "was motivated to support the price of RCN stock," and "its primary goal of the engagement was to protect RCN's interests -- not 21st Century's." (Sec. Amend. Compl. Par. 29, 33). Plaintiffs claim that if Morgan Stanley had advised 21st Century and its shareholders of the available price protection mechanisms, Plaintiffs would have implemented one or more of the recommended hedging strategies. Plaintiffs allege that Morgan Stanley intentionally failed to disclose price protection strategies available to 21st Century and its shareholders so that Morgan Stanley could protect its relationship with RCN.

On September 1, 2006, the instant action was removed from the Circuit Court of Cook County, Illinois to federal court in the Northern District Illinois. On October 18, 2006, Plaintiffs filed an amended complaint, which had attached as exhibits the Engagement Letter and the Fairness Opinion. On December 20, 2006, we granted Plaintiffs leave to file a second amended complaint in order for Plaintiffs to plead facts relating to when Plaintiffs first discovered that they were wrongfully injured. The second amended complaint includes a fraud claim against Morgan Stanley. Morgan Stanley moves for dismissal of the instant action pursuant to Federal Rule of Civil Procedure 12(b)(1) and Federal Rule of Civil Procedure 12(b)(6).


Federal Rule of Civil Procedure 12(b)(1) ("Rule 12(b)(1)") requires a court to dismiss an action when it lacks subject matter jurisdiction. United Phosphorus, Ltd. v. Angus Chemical Co., 322 F.3d 942, 946 (7th Cir. 2003). If the concern of the court or party challenging subject matter jurisdiction is that "subject matter jurisdiction is not evident on the face of the complaint, the motion to dismiss pursuant to Rule 12(b)(1) would be analyzed as any other motion to dismiss, by assuming for purposes of the motion that the allegations in the complaint are true." Id.; see also Ezekiel v. Michel, 66 F.3d 894, 897 (7th Cir. 1995)(stating that when reviewing a motion to dismiss brought under Rule 12(b)(1), this court "must accept as true all well-pleaded factual allegations, and draw reasonable inferences in favor of the plaintiff"). However, if the complaint appears on its face to indicate that the court has subject matter jurisdiction, "but the contention is that there is in fact no subject matter jurisdiction, the movant may use affidavits and other material to support the motion." United Phosphorus, Ltd., 322 F.3d at 946 (emphasis in original). For the purpose of determining subject matter jurisdiction, this court "may properly look beyond the jurisdictional allegations of the complaint and view whatever evidence has been submitted on the issue to determine whether in fact subject matter jurisdiction exists." Ezekiel, 66 F.3d at 897 (quoting Capitol Leasing Co. v. FDIC, 999 F.2d 188, 191 (7th Cir. 1993)). The burden of proof in a Rule 12(b)(1) motion is "on the party asserting jurisdiction." United Phosphorus, Ltd., 322 F.3d at 946.

In ruling on a motion to dismiss brought pursuant to Federal Rule of Civil Procedure 12(b)(6) ("Rule 12(b)(6)"), the court must draw all reasonable inferences that favor the plaintiff, construe the allegations of the complaint in the light most favorable to the plaintiff, and accept as true all well-pleaded facts and allegations in the complaint. Thompson v. Ill. Dep't of Prof'l Regulation, 300 F.3d 750, 753 (7th Cir. 2002); Perkins v. Silverstein, 939 F.2d 463, 466 (7th Cir. 1991). The allegations of a complaint should not be dismissed for a failure to state a claim "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46 (1957); see also Baker v. Kingsley, 387 F.3d 649, 664 (7th Cir. 2004)(stating that although the "plaintiffs' allegations provide[d] little detail about the management committee's funding decisions, [the court could not] say at [that] early stage in the litigation that plaintiffs [could] prove no set of facts in support of their claim that would entitle them to relief"). Nonetheless, in order to withstand a motion to dismiss, a complaint must allege the "operative facts" upon which each claim is based. Kyle v. Morton High Sch., 144 F.3d 448, 454-55 (7th Cir. 1998). With the possible exception of the requirement of Federal Rule of Civil Procedure Rule 9(b) ("Rule 9(b)"), under the current notice pleading standard in federal courts, a plaintiff need not "plead facts that, if true, establish each element of a 'cause of action. . . .'" Sanjuan v. Am. Bd. of Psychiatry & Neurology, 40 F.3d 247, 251 (7th Cir. 1994)(stating that "[a]t this stage the plaintiff receives the benefit of imagination, so long as the hypotheses are consistent with the complaint" and that "[m]atching facts against legal elements comes later"); Dunkin' Donuts, Inc. v. Tejany & Tejany, Inc., 2006 WL 163019, at *1 (N.D. Ill. 2006)(citing Swierkiewicz v. Sorema, N.A., 534 U.S. 506, 511 (2002)); Walker v. Thompson, 288 F.3d 1005, 1007 (7th Cir. ...

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