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Eleventh Circuit Upholds Dismissal of Securities Fraud Case

By Lindsay M. Sestile, Litigation News Associate Editor – June 2, 2010

Plaintiffs in the Eleventh Circuit may be pleading their claims a little more carefully in the wake of the court’s decision upholding dismissal in SFM Holdings, Ltd. v. Banc of America Securities, LLC. The Eleventh Circuit found the district court did not err when it granted a motion to dismiss that relied on documents outside the four corners of the complaint.

In one of the largest securities fraud cases in Florida history, SFM Holdings sued Banc of America Securities for breach of fiduciary duty and constructive fraud. Although the plaintiff never had any direct contact with Banc of America, it had agreed to set up and let its independent investment advisers trade securities in a prime brokerage account with the bank. The advisers subsequently stole or lost in trading more than $12 million dollars.

In response to the complaint, Banc of America moved to dismiss and attached to its motion the Prime Broker Agreement—a document completed by the plaintiff to open the brokerage account. The agreement clearly stated that Banc of America was neither an adviser nor a fiduciary.

The district court dismissed the case based on the plain language of the Prime Broker Agreement. On appeal, the plaintiff focused its argument on its procedural rights. It argued the court should have provided proper notice and an opportunity for discovery when the court implicitly converted the motion to dismiss to a summary judgment motion by considering the agreement.

The Eleventh Circuit upheld the dismissal, noting the district court had not converted the motion to one for summary judgment. It further held it was proper for the court to consider and rely upon the agreement in granting the motion to dismiss.

Noting the general rule requiring conversion into a summary judgment motion, the Eleventh Circuit pointed out the exception. “In ruling upon a motion to dismiss, the district court may consider an extrinsic document if it is: (1) central to the plaintiff’s claim, and (2) its authenticity is not challenged.”

The appellate court rejected the plaintiff’s claim that the Prime Broker Agreement was not central to its claims. Although the plaintiff had not attached the agreement to the complaint, the plaintiff noted the brokerage account was opened by documents provided by Banc of America, and the documents were repeatedly described in the complaint as “account opening documents.”

Relying on previous precedent that such relationship-forming contracts are central to a plaintiff’s claim, the Eleventh Circuit concluded the district court did not err in considering the Prime Broker Agreement on a motion to dismiss.

Does the Decision Mark a Trend in Pleading Practices?
“This is actually one of the less extreme examples of a defendant attempting to use matters outside the complaint in a 12(b)(6) motion,” says Ian H. Fisher, Chicago, cochair of the ABA Section of Litigation’s Pretrial Practice and Discovery Committee.

“I have seen defendants ask the court to take judicial notice of materials from their websites. Even though judicial notice is really an evidentiary rule, not a procedural or pleadings rule, some courts have taken that opportunity to dismiss the case,” Fisher says.

J. Bradford McCullough, Bethesda, MD, cochair of the Dispositive Motions Subcommittee of the Section’s Pretrial Practice and Discovery Committee, agrees the court rightfully relied on the Prime Broker Agreement.

“If a plaintiff cannot make some argument around the an unambiguous agreement—that there was fraud or some subsequent agreement, for example—the court should dismiss the case rather than throw everyone into discovery and additional expense,” McCullough says.

Still, dismissal should not be lightly granted. “The challenge is in not killing meritorious claims while resolving non-meritorious ones as soon as possible,” says Fisher.

“A hybrid motion—something between a four-corners motion to dismiss and a motion for summary judgment—might save a lot of litigation costs and a lot of judicial resources,” Fisher opines.

What Can a Plaintiff Do to Avoid Early Dismissal?
As a plaintiff, you have to be careful how you draft a complaint, advises McCullough.

“If you have hesitation about attaching an agreement because it is controlling and contrary to your position, you should think twice about what causes of action you are pleading and whether there is a colorable basis for your claim,” he recommends.

“On the other hand, if you do not need to refer to an agreement to state a claim, you should carefully consider whether you should. Be careful what agreements you refer to and how central they are to your claim,” McCullough suggests.

Keywords: Litigation, dismissal, four-corners rule, Eleventh Circuit, SFM Holdings, Ltd., v. Banc of America Securities, LLC


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