In the Supreme Court of the United States

Transcription

1 NO. In the Supreme Court of the United States PATRICK COLE, ET AL., v. Petitioners, KEVIN HARRIS; COMPLETE DEVELOPMENTS, LLC; I 3 LLC; KAREN STARR; AND KEELAN HARRIS, Respondents. On Petition for Writ of Certiorari to the United States Court of Appeals for the Sixth Circuit PETITION FOR WRIT OF CERTIORARI HARRY H. WISE, III Counsel of Record 250 West 57th Street, Suite 1316 New York, N.Y (212) (212) (fax) hwiselaw@aol.com Counsel for Petitioners May 2, 2012 Becker Gallagher Cincinnati, OH Washington, D.C

2 i QUESTION PRESENTED Victims of securities fraud who sue the wrongdoers for damages in federal court must file a complaint that meets the requirement of Rule 9(b) FRCP that the circumstances of the fraud be stated with particularity and additional requirements added by the Private Securities Litigation Reform Act of 1995 ( PSLRA ), including the requirement to plead facts giving rise to a strong inference of scienter. If a complaint is dismissed for failing to meet these requirements, should the dismissal be with prejudice, despite the general provision of Rule 15(a)(2) FRCP that courts should freely give leave to amend a pleading when justice so requires, on the grounds that to allow a plaintiff to file an amended complaint with more detail would frustrate the purpose of the PSLRA? In this case, the Sixth Circuit has so held (Appendix A: Opinion, pp. 2a-3a), affirming a first dismissal made with prejudice as a result of the PSLRA, and confirming a rule that had appeared to be dicta in its earlier decisions, beginning with Miller v. Champion Enterprises, Inc., 346 F.3d 660 (6 th Cir. 2003). Other circuits have rejected this idea. See, e.g., ACA Financial Guaranty Corp. v. Advest, Inc., 512 F.3d 46, (1 st Cir. 2008)( To the extent that Miller may embody a rule that the PSLRA modifies the operation of Rule 15(a), however, we disagree. ); Carol Gamble Trust 86 v. E-Rex, Inc., 84 Fed. Appx. 975, 979, 2004 U.S. App. LEXIS 88, *11, Fed. Sec. L. Rep. (CCH) 92,698 (9 th Cir. 2004)(rejecting Defendants suggestion that, under the PSLRA, plaintiffs have only a single bite at the apple. ).

3 ii LIST OF PARTIES Plaintiffs are more than two hundred individuals and small businesses, almost all of them citizens of Canada. They are included in the caption of the Amended Complaint, Appendix F hereto. Defendants are Kevin Harris, Complete Developments, LLC, I 3 LLC, Karen Starr, and Keelan Harris. STATEMENT PURSUANT TO RULE 29.6 The business-entity plaintiffs do not have parent corporations, and there are no publicly-held corporations owning 10% of their stock.

4 iii TABLE OF CONTENTS Question Presented... i List of Parties... Statement Pursuant to Rule ii ii Table of Authorities... vi Petition for a Writ of Certiorari... 1 Opinions Below... 1 Jurisdiction... 1 Statutory Authorities... 2 Statement of the Case... 2 Reasons for Granting the Petition... 7 I. The Circuits are Split on an Important Question of Law... 7 II. III. The Decision Below Conflicts with this Court s Decision in Tellabs... 9 The Decision Below is Mistaken, and Pernicious The Miller rule began as dictum in the district court decision The Miller rule is not found in, and is contrary to, the statute... 12

5 iv 3. The Miller rule is unsupported by the legislative history The Sixth Circuit had the correct rule in Morse v. McWhorter The affirmance in Miller did not change the rule The Miller rule has no obvious content The only possible effect of the Miller rule is pernicious IV. The PSLRA Supports a Grant of Certiorari in this Case Conclusion Appendix Appendix A: United States Court of Appeals for the Sixth Circuit Opinion (January 9, 2012)... Appendix B: United States District Court for the Northern District of Ohio, Eastern Division Memorandum Opinion & Order (January 4, 2010)... 1a 4a

6 v Appendix C: United States District Court for the Northern District of Ohio, Eastern Division Order (April 1, 2010)... 24a Appendix D: United States Court of Appeals for the Sixth Circuit Order Denying Rehearing (February 14, 2012)... Appendix E: Statutes and Rules Involved... Appendix F: Amended Complaint (September 29, 2009)... 44a 46a 49a

7 vi TABLE OF AUTHORITIES CASES ACA Financial Guaranty Corp. v. Advest, Inc., 512 F.3d 46 (1st Cir. 2008)... i, 8, 10, 13 Absolute Activist v. Ficeto, 672 F.3d 143 (2d Cir. 2012)... 3 Acito v. IMCERA Group, Inc., 47 F.3d 47 (2d Cir. 1995) Belizan v. Hershon, 434 F.3d 579 (D.C. Cir. 2006)... 8 Calif. Pub. Emps. Ret. Sys. v. Chubb Corp., 394 F.3d 126 (3d Cir. 2004)... 9 Carol Gamble Trust 86 v. E-Rex, Inc., 84 Fed. Appx. 975, 2004 U.S. App. LEXIS 88, Fed. Sec. L. Rep. (CCH) 92,698 (9 th Cir. 2004)... i, 8 In re Champion Enterprises, Inc. Securities Litigation, 145 F. Supp.2d 871 (E.D. Mich. 2001), aff d sub nom Miller v. Champion Enterprises, Inc., 346 F.3d 660 (6th Cir. 2003)... 10, 11, 12 Emerson v. Maples (In re Mark Benskin & Co.) 1995 U.S. App. LEXIS (6th Cir. 1995), cert. den., sub nom Fernandez v. Emerson, 516 U.S. 1072, 116 S.Ct. 774, 133 L.Ed.2d 726 (1996)... 5, 8

8 vii Eminence Capital, LLC v. Aspeon, Inc., 316 F.3d 1048 (9th Cir. 2003)... 8 Foman v. Davis, 371 U.S. 178, 83 S.Ct. 227, 9 L.Ed.2d 222 (1962) Frank v. Dana Corp., 649 F. Supp.2d 729 (N.D. Ohio 2009) Louisiana School Employees Retirement System v. Ernst & Young, LLP, 622 F.3d 471 (6th Cir. 2010)... 7 Luce v. Edelstein, 802 F.2d 49 (1986) In re Manulife Fin. Corp. Securities Litigation, 276 F.R.D. 87 (S.D.N.Y. 2011)... 9 Miller v. Champion Enterprises, Inc., 346 F.3d 660 (6th Cir. 2003)...passim Mizzaro v. Home Depot, Inc., 544 F.3d 1230 (11th Cir. 2008)... 8 Morrison v. National Australia Bank Ltd., U.S., 130 S.Ct. 2869, 78 U.S.L.W (June 24, 2010)... 2, 3 Morse v. McWhorter, 290 F.3d 795 (6th Cir. 2002) PR Diamonds v. Chandler, 364 F.3d 671 (6th Cir. 2004)... 6, 7

9 viii Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007)... 7, 8, 9, 10, 17 Werner v. Werner, 267 F.3d 288 (3d Cir. 2001)... 8 STATUTES 15 U.S.C. 78u-4(b)(3)(A)... 2, U.S.C. 1254(1) U.S.C U.S.C. 2101(c)... 1 Private Securities Litigation Reform Act of 1995, Pub. L , 109 Stat. 737, Dec. 22, passim RULES Fed. R. Civ. P. 9(b)... i, 5, 13 Fed. R. Civ. P. 15(a)...passim Fed. R. Civ. P. 15(a)(2)... i, 2 Fed. R. Civ. P. 17(a)(3)... 4 Sup. Ct. R

10 ix OTHER AUTHORITIES House Conf. Rep. No , 17 Senate Report No , U.S. Code Cong. and Ad. News... 13, 17

11 1 PETITION FOR A WRIT OF CERTIORARI Plaintiffs respectfully petition for a writ of certiorari to review the decision of the U.S. Court of Appeals for the Sixth Circuit affirming a final judgment of dismissal with prejudice. OPINIONS BELOW The opinion of the Court of Appeals is reported at 444 Fed. Appx. 888, 2012 U.S. App. LEXIS 446, 2012 FED App. 0016N (6 th Cir.)(6 th Cir. Ohio 2012). That court s decision denying rehearing en banc is not yet reported. The district court s Memorandum Decision and Order dismissing, inter alia, the federal securitieslaw claims with prejudice is reported at 2010 U.S. Dist. LEXIS 2689 (N.D. Ohio Jan. 4, 2010). That court s Order denying reconsideration is not reported. JURISDICTION Final judgment was entered on January 4, 2010, and an Amended Judgment was entered on April 1, The Amended Judgment was affirmed by the Court of Appeals in a Decision entered on January 9, This petition is timely under 28 U.S.C. 2101(c) and Supreme Court Rule 13.3 because it is being filed within 90 days of the entry of the Sixth Circuit s Order denying rehearing en banc, which was entered on February 14, This Court has jurisdiction to review the decision of the Court of Appeals pursuant to 28 U.S.C. 1254(1).

12 2 STATUTORY AUTHORITIES The relevant statutory provisions are sections of the Private Securities Litigation Reform Act of 1995, Pub. L , 109 Stat. 737, Dec. 22, 1995 most importantly 15 U.S.C. 78u-4(b)(3)(A), which provides that if statutory pleading requirements are not met the court shall, on the motion of any defendant, dismiss the complaint. The full text of the provisions is set forth in Appendix E. Also relevant is Rule 15(a)(2) of the Federal Rules of Civil Procedure, which reads: Other Amendments. In all other cases, a party may amend its pleading only with the opposing party s written consent or the court s leave. The court should freely give leave when justice so requires. Rule 15 FRCP is also set forth in Appendix E. STATEMENT OF THE CASE This is an action in which more than 200 plaintiffs seek damages from defendants for alleged federal-law securities fraud and upon various state-law claims for relief. Subject-matter jurisdiction exists pursuant to federal-question jurisdiction. 28 U.S.C Plaintiffs, mostly Canadian citizens, 1 allege that the 1 While this case was on appeal, this Court decided Morrison v. National Australia Bank Ltd., U.S., 130 S.Ct. 2869, 78 U.S.L.W (June 24, 2010), which limits the extraterritorial reach of private Rule 10b-5 securities-fraud cases. Plaintiffs submit that their investments were domestic transactions, 130 S.Ct. at 2885, and thus within the ambit of the rule, because the

13 3 three individual defendants, Kevin Harris, Keelan Harris, and Karen Starr, used the two business-entity defendants, Complete Developments, LLC and a company known both as International Investments, Inc. and as I 3, LLC, located in Warren, Ohio, to conduct a multi-million-dollar Ponzi scheme, pretending to use plaintiffs investments to trade foreign currencies while simply using the funds of newer investors to pay fake profits to earlier ones, and taking millions of dollars for themselves. Suit was brought in the United States District Court for the Northern District of Ohio, Eastern Division (Youngstown) by one plaintiff, Patrick Cole, on June 3, 2009, acting for himself and unspecified other investors whom the complaint described as assignors, seeking total damages of $22 million. Plaintiff s motion for a temporary restraining order was granted, but the order provided that the TRO would only take effect upon the submission of a TRO bond in the amount of $10,000, Plaintiff did not submit the required bond, and thus the TRO did not come into effect. Defendants then moved to dismiss for lack of jurisdiction and failure to join indispensable parties, arguing that plaintiff Cole had not shown sufficient authorization to represent others and that the failure to join all investors prejudiced defendants, and also contracts were made in Ohio, when their wired funds arrived there. See Additional Citation, filed on 8/19/2010, docket, Cole v. Harris, Appeal No (6 th Cir.). A recent Second Circuit decision so interprets Morrison. See Absolute Activist v. Ficeto, 672 F.3d 143, 150 (2d Cir. 2012).

14 4 moved for the adoption of the form of TRO as a preliminary injunction. All defendants then filed a Notice that they would refuse to provide any documentary or testimonial discovery, invoking the Fifth Amendment Right Against Self-Incrimination, and asserting an objective and reasonable belief that their submission to any civil discovery or testimony may subject them to criminal prosecution. (See Appendix B at p. 7a). The parties stipulated to adopt the TRO as a preliminary injunction. Defendants motion to dismiss the complaint was denied, with Judge Peter C. Economus ruling that under Rule 17(a)(3) FRCP plaintiff should be given time to join all real parties in interest. The case was then assigned to Magistrate Judge George J. Limbert, and the parties stipulated to have him handle all aspects of the case. Pursuant to a casemanagement-conference order, an Amended Complaint was filed on September 29, 2009, listing over 200 plaintiffs. 2 Defendants Kevin Harris, Complete Developments, LLC, and I 3 LLC then moved for dismissal of the Amended Complaint, for, among other reasons, failure to plead fraud with the particularity required by Rule 9(b) of the Federal Rules of Civil Procedure and by provisions of the Private Securities Litigation Reform Act of 1995 ( PSLRA ). Defendant Keelan Harris, represented by new counsel, joined in that motion. 2 For the Court s convenience, a copy of the Amended Complaint is reproduced as Appendix F hereto.

15 5 Plaintiffs cross-moved for relief from the automatic stay of discovery provided by the PSLRA during the pendency of a motion to dismiss. On January 4, 2010, Magistrate Judge Limbert granted defendants motion to dismiss the complaint. (Appendix B: Memorandum Opinion and Order). He held that the Amended Complaint failed to plead the fraud with the particularity required by Rule 9(b) FRCP and by the PSLRA because it did not allege the time, place, content, and medium of allegedly fraudulent statements made to each plaintiff (Id., pp. 11a-12a), and it did not sufficiently specify each defendant s role in the fraud. (Id., p. 12a). 3 The common-law fraud claim was dismissed without prejudice, but the federal securities-fraud claims were dismissed with prejudice upon a finding that that result was warranted by the PSLRA. (Id., pp. 19a-20a). Having dismissed all federal claims, Magistrate Judge Limbert sua sponte dismissed without prejudice the state-law claims as a matter of discretion. The motion for relief from the discovery stay was denied as moot. Judgment was entered that day. Plaintiffs moved for reconsideration, and for summary judgment, including in the motion papers 3 Magistrate Judge Limbert made no finding as to whether plaintiffs had adequately alleged facts showing scienter. The Amended Complaint explicitly alleges that defendants conducted a Ponzi scheme (See Amended Complaint, 11, Appendix F at p. 56a). The Sixth Circuit has held that pursuit of a classic Ponzi scheme unequivocally evidences fraudulent intent. Emerson v. Maples (In re Mark Benskin & Co.) 1995 U.S. App. LEXIS 16053, *12 (6 th Cir. 1995), cert. den., sub nom Fernandez v. Emerson, 516 U.S. 1072, 116 S.Ct. 774, 133 L.Ed.2d 726 (1996).

16 6 hundreds of pages of bank statements, obtained in expedited discovery, showing the Ponzi scheme fraud. Defendants filed no papers in opposition to the motion, 4 but it was nonetheless denied by Magistrate Judge Limbert (Appendix C: Order), who issued an Amended Judgment to dismiss the case, additionally, as against the remaining defendant, Karen Starr, who had not appeared. On appeal, the Sixth Circuit affirmed, in an unpublished opinion, for the reasons stated in the magistrate judge s Memorandum Opinion and Orders (Appendix A: Opinion, p. 3a), stating, in addition, Both Miller and PR Diamonds support the denial of the motion to amend, and the court was justified in relying on those cases. (Id.). A petition for rehearing en banc was denied. (Appendix D). While the appeal was pending, the federal government brought a civil case against, inter alia, the same defendants, based on the fraud plaintiffs had alleged, U.S. Commodities Futures Trading Commission v. Complete Developments, LLC, et al, 10- cv-2287 (N.D. Ohio, filed Oct. 7, 2010), and a criminal case against Kevin Harris. United States of America v. Kevin Harris, 10-cr-0437 (N.D. Ohio, filed Oct. 7, 2010). Mr. Harris pleaded guilty to the fraud, and earlier this year was sentenced to serve more than seven years in prison, and to pay restitution to, inter alia, the plaintiffs in this case. See Judgment, entered March 9, 2012, United States of America v. Harris, supra. 4 Defendants have taken no actions to defend the lawsuit since winning its dismissal, and did not appear as parties on the appeal.

17 7 REASONS FOR GRANTING THE PETITION I. The Circuits are Split on an Important Question of Law. This Court has described meritorious private securities-fraud actions as an essential supplement to criminal prosecutions and civil enforcement actions. Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 313, 127 S.Ct. 2499, 2504, 168 L.Ed.2d 179 (2007). And, indeed, had this case not been dismissed with prejudice, it might have allowed plaintiffs (who had already obtained, in expedited discovery, banking records of the several accounts defendants used in their fraudulent business) to track down, months before the federal government acted against the fraud, whatever money defendants had not yet spent or secreted. The decisions of the Sixth Circuit holding that Rule 15(a) FRCP is either inapplicable in securities-fraud cases or limited in some unarticulated way, see Miller, supra, 346 F.2d at 692; PR Diamonds v. Chandler, 364 F.3d 671, 700 (6 th Cir. 2004); Louisiana School Employees Retirement System v. Ernst & Young, LLP, 622 F.3d 471, 486 (6 th Cir. 2010) 5, put it at odds with 5 In these cases, the discussion of the PSLRA s effect on Rule 15(a) might be described as dicta or a makeweight because there were other factors supporting denial of amendment, most prominently a failure by plaintiff to allege facts suggesting a defendant s scienter. See Miller, 689 F.3d at 689, PR Diamonds, 364 F.3d at 684, Louisiana, 622 F.3d at 485. In this case the rule has taken on a life of its own, because no other equitable factors cut against amendment: most importantly, the Amended Complaint charges a Ponzi scheme, which the Sixth Circuit has

18 8 every other circuit court that has directly considered the issue. See ACA Financial Guaranty Corp. v. Advest, Inc., 512 F.3d 46, (1 st Cir. 2008); Mizzaro v. Home Depot, Inc., 544 F.3d 1230, 1255 (11 th Cir. 2008); Belizan v. Hershon, 434 F.3d 579, (D.C. Cir. 2006); Carol Gamble Trust 86 v. E-Rex, Inc., 84 Fed. Appx. 975, 979, 2004 U.S. App. LEXIS 88, *11, Fed. Sec. L. Rep. (CCH) 92,698 (9 th Cir. 2004); see also, Eminence Capital, LLC v. Aspeon, Inc., 316 F.3d 1048, 1052 (9 th Cir. 2003)( In this technical and demanding corner of the law, the drafting of a cognizable complaint can be a matter of trial and error. ); Werner v. Werner, 267 F.3d 288, 297 (3d Cir. 2001). Indeed, the First Circuit holds that to interpret the PSLRA as constricting the operation of Rule 15(a) would be contrary to the purposes of the Act. ACA, supra, 512 F.3d at 56. Quoting Tellabs, that Court stated that the PSLRA serves twin goals: to curb frivolous, lawyer-driven litigation, while preserving investors ability to recover on meritorious claims. Id. The court then said: The heightened pleading standard furthers the goal of deterring frivolous litigation by erecting a significant hurdle for a plaintiff to clear before her complaint can survive a motion to dismiss. A blanket rule that the PSLRA modifies Rule 15(a) would tip the scales too far, compromising acknowledged shows scienter. Emerson, supra n. 3, 1995 U.S. App. LEXIS at *12.

19 (Id.) 9 plaintiffs ability to have meritorious claims presented in court. Moreover, the Sixth Circuit decisions have not only created conflict between circuits, they have also led to intra-circuit conflicts in that circuit and in the Third Circuit, as discussed by judge Dolores K. Sloviter in her partial dissent in Calif. Pub. Emps. Ret. Sys. v. Chubb Corp., 394 F.3d 126 (3d Cir. 2004): Our courts seem to have given inconsistent signals. The same differences also appear in the decisions of other circuit courts. 394 F.3d at 170 (citations omitted). That such an important category of action occasions differing applications of Rule 15(a) FRCP, differences that are outcome determinative, in different circuits is a problem that ought to be addressed by this Court. The same motion to dismiss for failure to plead with sufficient detail should not lead to radically different results in different circuits dismissal with leave to replead in one, see, e.g., In re Manulife Fin. Corp. Securities Litigation, 276 F.R.D. 87, 105 (S.D.N.Y. 2011), dismissal with prejudice in another. (this case). II. The Decision Below Conflicts with this Court s Decision in Tellabs. In Tellabs, supra, this Court stated that, apart from the special requirements of the PSLRA, courts considering motions to dismiss securities-fraud complaints must, as with any motion for failure to plead a claim on which relief can be granted, accept all factual allegations as true. 551 U.S. at 322, 127 S.Ct. at The First Circuit thus reads one of the

20 10 lessons of Tellabs to be: In the absence of a legislative directive to the contrary in the PSLRA, ordinary procedural rules applicable to motions to dismiss apply to motions to dismiss securities-fraud claims as well. ACA, supra, 512 F.3d at 56. That court then held that this means that Rule 15(a) applies as in the normal course. Id. This led one district judge in the Sixth Circuit to opine that, after Tellabs, [I]t may be an open question whether the PSLRA constricts the traditional liberality of amendment under Rule 15. Frank v. Dana Corp., 649 F. Supp.2d 729, 746 (N.D. Ohio 2009). By its decision in this case, the Sixth Circuit has said that the question is not open, and that the PSLRA does constrict, in some unarticulated way, in securities-fraud suits, the liberality of amendment provided by Rule 15(a) in every other variety of federal lawsuit. The conflict with this Court s decision is a second reason justifying the grant of the writ here and the reversal of the decision below. III. The Decision Below is Mistaken, and Pernicious. 1. The Miller rule began as dictum in the district court decision. The idea that the enactment of the Private Securities Litigation Reform Act of 1995, Pub. L , 109 Stat. 737, Dec. 22, 1995 (hereinafter, PSLRA ), changed, sub silentio, the way Rule 15(a), FRCP, is applied in securities-fraud lawsuits, limiting, in some way, plaintiffs ability to amend their complaints, was the creation of District Judge John Feikens in the Miller case, In re Champion Enterprises, Inc. Securities Litigation, 145 F. Supp.2d 871 (E.D. Mich. 2001), aff d sub nom Miller v.

21 11 Champion Enterprises, Inc., 346 F.3d 660 (6 th Cir. 2003). As he put it: This narrow but essential question is a matter of first impression not only in this circuit but throughout the federal court system. 145 F. Supp.2d at 872. Judge Feikens did not did not have before him, however, the question whether the first, or even the second, dismissal of a securities-fraud complaint should be affected by the PSLRA. The question before him was whether plaintiffs who had attempted three times to amend their complaint should be allowed a fourth try, where they had, in each pleading, including the proposed new one, failed to allege facts from which scienter could be inferred. 145 F. Supp.2d at 877. As Judge Feikens put it: Id. Plaintiffs have failed to get it right four times. I doubt that, even given the guidance of my Opinion, they would be able to succeed on their fifth try. That Judge Feikens was concerned not with amendment in general but with the vice of repeated amendments is evident throughout his opinion: The Reform Act requires a uniform pleading standard; this standard is meaningless if judges on a case-by-case basis grant leave to amend numerous times. 145 F. Supp.2d at 873.

22 12 The Reform Act could not achieve this purpose if plaintiffs were allowed to amend and amend until they got it right. Id. [In the opinion s Conclusion] It is clear from the above exercise in futility why the Reform Act can not [sic] be interpreted to allow repeated amendment. 145 F. Supp.2d at 877. It is also clear that Judge Feikens found that the proposed amendment in the case before him would be futile, as an entire section of his opinion discusses. 145 F. Supp.2d at Of course, these facts multiple unsuccessful attempts to amend and the evident futility of the amendment proposed render Judge Feikens s discussion of the effect of the PSLRA completely dictum, because repeated unsuccessful efforts to amend the complaint and the perceived futility of the proposed amendment are each sufficient to support a with prejudice dismissal under standard Rule 15(a) jurisprudence. See infra, Point III(7). 2. The Miller rule is not found in, and is contrary to, the statute. In announcing the new rule, Judge Feikens relied on the language in the PSLRA providing that where the statutory pleading requirements are not met the court shall, on the motion of any defendant, dismiss the complaint. 15 U.S.C. 78u-4(b)(3)(A). 145 F. Supp.2d at 873. Nowhere in the statute is there

23 13 language referring to amendment of pleadings or to the operation of Rule 15(a). Indeed, the language of the statute cuts against a finding that it was meant to limit the ability to amend, because, if Congress had wished such a result, it easily could have said so. Because the statute does not say dismiss with prejudice, or dismiss without granting leave to replead, or even dismiss, and leave to replead shall be sparingly granted, the language of the statute shows that Congress did not intend to change the rules concerning amendment of complaints. See ACA, supra, 512 F.3d at The Miller rule is unsupported by the legislative history. The new pleading requirements in the PSLRA were based on the interpretation of Rule 9(b) by the Second Circuit, viewed as the most stringent. Senate Report No , p. 15, 1995 U.S. Code Cong. and Ad. News, p. 694; House Conf. Rep. No , p. 41, 1995 U.S. Code. Cong. and Ad. News, p There is no discussion in the legislative history of any intent to limit the ability of a plaintiff to amend the complaint, and the Second Circuit, the very court that had developed the strict pleading standard included in the statute, had repeatedly held that, because of the more difficult pleading requirements, amendment should be even more readily available to a securities-fraud plaintiff when the complaint is dismissed for failure to allege fraud with particularity. See Acito v. IMCERA Group, Inc., 47 F.3d 47, 55 (2d Cir. 1995); Luce v. Edelstein, 802 F.2d 49, (1986).

24 14 4. The Sixth Circuit had the correct rule in Morse v. McWhorter. Relying on the Second Circuit authority, the Sixth Circuit, in Morse v. McWhorter, 290 F.3d 795 (6 th Cir. 2002), held, seven years after the enactment of the PSLRA: In the securities litigation context, leave to amend is particularly appropriate where the complaint does not allege fraud with particularity. 290 F.3d at 800. That holding has never been overruled, was reaffirmed in Miller, and should have allowed plaintiffs in this case to have at least one opportunity to file an amended complaint addressing the shortcomings in their pleading found by the magistrate judge. 5. The affirmance in Miller did not change the rule. The plaintiffs whose case had been dismissed by Judge Feikens brought their appeal to the Sixth Circuit the year after the decision in Morse, and they argued that its teaching should allow them to re-plead. The circuit court rejected their argument, but, in doing so, reaffirmed, not just once, but twice, the holding of Morse that leave to replead is particularly apt in securities-fraud cases. 346 F.3d at ; Id. at 690. After reaffirming the holding in Morse, the Miller panel went on to say: However, we nonetheless agree with the district court that the facts alleged in the [proposed amended complaint] do not give rise to the strong inference of scienter required under the PSLRA, and therefore are futile. 346 F.3d at 690. This shows that the Miller affirmance was based on the same traditional ground, futility, relied upon by the district court, and thus that the additional assertion that, We

25 15 agree with the district court that the purpose of the PSLRA would be frustrated if district courts were required to allow repeated amendments to complaints filed under the PSLRA 346 F.2d at 692, was dictum and addressed a straw-man argument, since district courts are never required to allow repeated amendments regardless of the equities of the case. 6. The Miller rule has no obvious content. In none of the Sixth-Circuit decisions in which it has suggested that the PSLRA limits in some way a securities-fraud plaintiff s ability to amend a dismissed complaint has there been an explanation of what that effect actually is. Only two effects seem possible: (1) it prevents, in all cases, the district judge from granting leave to amend; or (2) it leaves the issue up to the discretion of the district judge. Surely it cannot be the case that there is no situation in which amendment should be allowed, and, if that is true, how is the district judge to exercise his or her discretion, if not in accord with well-established equitable factors considered under Rule 15(a) in general? 7. The only possible effect of the Miller rule is pernicious. Under well-established Rule 15(a) jurisprudence, leave to amend should be freely given except where there is undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party by virtue of

26 16 allowance of the amendment, futility of the amendment, etc. Foman v. Davis, 371 U.S. 178, 182, 83 S.Ct. 227, 230, 9 L.Ed.2d 222 (1962). 6 The effect of this is straightforward: amendment is allowed except when it would be inequitable, for some reason, to do so. Since that is the general rule, the only possible change that can be made by the PSLRA is to bar amendment despite the fact that the equities show that amendment should be allowed. Thus, the only practical effect of the Miller rule is a pernicious one, granting, at the outset of the lawsuit, a procedurebased victory, on the merits, to defendants who do not deserve it, which is exactly what happened in this case. 7 Such a rule should not be allowed to stand. 6 All of these factors supported a without prejudice dismissal in this case: there was no showing of bad faith or dilatory motive, no previous attempt had been made to cure a deficiency in the fraud allegations (the complaint was amended solely to add additional plaintiffs), and there was no suggestion of possible prejudice to defendants in allowing amendment or that an amendment could not cure all the deficiencies found. 7 At the time the case was dismissed, defendants had already announced that they would refuse to cooperate in discovery, asserting a Fifth Amendment privilege to avoid self-incrimination. (Notice, Docket Entry # 25, Cole v. Harris, 09-cv-1270 (N.D. Ohio)). Months after the dismissal, the federal government brought civil and criminal proceedings based on the fraud alleged by plaintiffs. U.S. Commodities Futures Trading Commission v. Complete Developments LLC, et al., 10-cv (N.D. Ohio); United States of America v. Kevin Harris, 10-cr (N.D. Ohio).

27 17 IV. The PSLRA Supports a Grant of Certiorari in this Case. Finally, the PSLRA itself supports a grant of certiorari in this case and a reversal of the decision below. As the committee reports show, the pleading standard in the PSLRA was enacted in part because various circuit courts had developed different standards for applying to securities-fraud cases Rule 9(b) s mandate that fraud be alleged with particularity. Senate Report No , p. 15, 1995 U.S. Code Cong. and Ad. News, p. 694; House Conf. Rep. No , p. 41, 1995 U.S. Code. Cong. and Ad. News, p. 740; see also Tellabs, supra, 551 U.S. at , 127 S.Ct. at (2007); but see Id., 551 U.S. at 333; 127 S.Ct. at 2515 (Scalia, J., concurring). Just as the statute sought to achieve national uniformity in one procedural aspect of these important lawsuits, this Court should, by granting certiorari and reversing the decision below, create uniformity in the application of Rule 15(a) FRCP to such suits, holding that the rule applies in private securities-fraud actions just as it applies in every other variety of federal lawsuit.

28 18 CONCLUSION Because the liberality of amendment provided by Rule 15(a) FRCP should be uniformly applied in securities-fraud suits throughout the federal system, this Court should grant certiorari and reverse the decision below, remanding the case to have the rule applied in this case as it is applied in every other variety of federal lawsuit. Respectfully submitted, Harry H. Wise, III Counsel of Record 250 West 57 th Street, Suite 1316 New York, N.Y (212) (212) (fax) Attorney for Plaintiffs-Petitioners