MOTION TO DISMISS FILED TODAY IN THE US CIRCUIT COURT OF EASTERN VIRGINIA...H-QUOTIENT VS MAX E. JONES:
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UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF VIRGINIA
ALEXANDRIA DIVISION
H-QUOTIENT, INC., )
)
Plaintiff, ) Civil Action No. 1:04-CV-468
v. )
)
MAX E. JONES (aka "Jigfish”), )
)
Defendant. )
DEFENDANT’S BRIEF IN SUPPORT
OF MOTION TO DISMISS AMENDED COMPLAINT
Michael M. York, VSB #44749
WEHNER & YORK, P.C.
11860 Sunrise Valley Drive, Suite 100
Reston, Virginia 20191-3307
703-476-8000
703-476-8300 (fax)
Counsel for Defendant
TABLE OF CONTENTS
TABLE OF AUTHORITIES 3
INTRODUCTION 5
STATEMENT OF THE ISSUES PRESENTED 7
ARGUMENT 8
1. THIS COURT SHOULD DISMISS THE AMENDED COMPLAINT FOR
LACK OF PERSONAL JURISDICTION OVER
THE DEFENDANT 8
2. THIS COURT SHOULD DISMISS THE AMENDED COMPLAINT BECAUSE VENUE IS NOT PROPER IN THE EASTERN DISTRICT OF VIRGINIA 12
3. THE AMENDED COMPLAINT FAILS TO STATE A CAUSE OF ACTION UNDER SEC. 10(b) OF THE SECURITIES AND EXCHANGE ACT OF 1934 12
4. THE AMENDED COMPLAINT FAILS TO STATE A CAUSE OF ACTION UNDER THE BLUE-SKY LAW, VA. CODE §§ 13.1-502 and 13.1-522 16
5. THE AMENDED COMPLAINT FAILS TO STATE A CAUSE OF ACTION FOR COMMON LAW FRAUD 17
6. THE AMENDED COMPLAINT FAILS TO STATE A CLAIM UNDER THE VIRGINIA COMPUTER CRIMES ACT,
VA. CODE § 18.2-152.12 19
CONCLUSION 19
TABLE OF AUTHORITIES
CASES
ALS Scan Inc, v. Digital Service Consultants, Inc., et al.,
293 F.3d 707 (4th Cir. 2002) 9, 10
Basic Inc. v. Levinson,
485 U.S. 224, 108 S.Ct. 978, 99 L. Ed. 2d 194, (1988) 14
Calder v. Jones, 465 U.S. 783, 104 S.Ct. 1482 (1984) 11
Dunn v. Borta, 369 F.3d 421 (4th Cir. 2004) 16
Evaluation Research Corp. v. Alequin,
247 Va. 143, 439 S.E.2d 387 (1994) 17
Helicopteros Nacionales de Colombia, SA v. Hall,
466 U.S. 408, 104 S. Ct. 1868 (1984) 9
In re Time Warner Inc. Sec. Litig.,
9 F.3d 259 (2d Cir. 1993) 15
International Shoe Co. v. Washington,
326 U.S. 310, 66 S. Ct. 154 (1945) 8, 9
Lambert v. Downtown Garage, Inc.,
262 Va. 707, 553 S.E. 2d 714 (2001) 18
Ottmann v. Hanger Orthopedic Group, Inc.,
353 F.3d 338 (4th Cir. 2003) 15
Phillips v. LCI Int’l, 190 F.3d 609 (4th Cir. 1999) 15
Rannoch, Inc., v. The Rannoch Corporation,
52 F. Supp. 2d 681 (E.D. Va. 1999) 8, 11
SEIU Health & Welfare Fund v. Philip Morris Inc.,
249 F.3d 1068 (D.C. Cir. 2001) 18
Weinstein v. Todd Marine Enterprises,
115 F. Supp. 2d 668 (E.D.Va. 2000) 12
Young v. New Haven Advocate, 315 F.3d 256 (4th Cir. 2002) 11
Yuzefsky v. St. John’s Wood Apartments,
262 Va. 97, 540 S.E. 2d 134, (2001) 18
Zippo Manufacturing Co. v. Zippo Dot Com, Inc.,
952 F. Supp. 1119 (W.D. Pa. 1997) 10
RULES, REGULATIONS AND STATUES
15 U.S.C. § 78j 13
15 U.S.C. § 78u-4(b) 15
28 U.S.C. § 1391 5, 12
17 C.F.R. § 240.10b-5 (2000) 13
Fed. R. Civ. P. 9 5, 12, 17
Fed. R. Civ. P. 12 5, 12
Va. Code § 13.1-502 16, 17
Va. Code § 13.1-522 16
Va. Code. § 18.2-152.3 19
Va. Code § 18.2-152.12 19
DEFENDANT’S BRIEF IN SUPPORT
OF MOTION TO DISMISS AMENDED COMPLAINT
COMES NOW the Defendant, Max E. Jones, by counsel, pursuant to Fed. R. Civ. P. 9(b) and 12(b)(1),(2),(3) and (6), and 28 U.S.C §1391, and in support of his Motion to Dismiss the Plaintiff’s Amended Complaint, states as follows:
INTRODUCTION
Max Jones is a disabled, retired dentist in Richardson, Texas. Essentially homebound, Jones spends much of his days monitoring the stock market, watching financial news programs and using the Internet to research companies and obtain information from numerous sources.
As part of his daily routine, Max Jones visits several Web sites, including “ragingbull.com,” for the purpose of obtaining information, asking questions and sharing his views with other Internet users.
Max Jones has views and opinions contrary to those of the president and chairman of H-Quotient, Inc., Douglas Cohn. On numerous occasions, Max Jones has made his opinions about the Defendant and Cohn known through postings on the Web site.
However, not a single posting has contained defamatory material. Not a single posting has been demonstrably false. Not a single posting has been materially misleading. Indeed, virtually all of Max Jones’ postings have asked questions, some of them quite pointedly, about the management of H-Quotient, Inc., and about the accuracy of some of the company’s statements. At other times, Max Jones has expressed his views and opinions about the company and its leadership, and in every instance, he has made it clear that he was expressing his opinions, rather than stating facts.
The Plaintiff seems confused and unable to distinguish between a person who published false material for the purpose of obtaining money or inducing another person to buy a stock with a person who publishes questions and urges prospective purchasers and sellers to conduct their own research and use their common sense.
The Plaintiff has filed an Amended Complaint setting forth claims based on alleged violations of the Securities and Exchange Act of 1934, the Virginia Securities Act, the Virginia Computer Crimes Act, as well as common law fraud.
As a preliminary matter, the Plaintiff has not pled facts upon which this Court can assert personal jurisdiction over the Defendant. Even if jurisdiction were proper, the Plaintiff has not demonstrated that venue in this Court is appropriate for his federal claim, and thus the Court should dismiss the Amended Complaint. Finally, for the reasons set forth below, the Plaintiff has not set forth sufficient facts upon which any of his claims may be based.
ISSUES PRESENTED
7. Whether a federal court in Virginia can assert jurisdiction over a non-resident defendant based on statements published on a non-interactive, nationally available Web site.
8. Whether Plaintiff has satisfied the pleading requirements of an action for securities fraud under the Securities and Exchange Act of 1934.
9. Whether Plaintiff has satisfied the pleading requirements for an action under the Virginia Securities Act.
10. Whether the Plaintiff has satisfied the pleading requirements for common law fraud.
11. Whether failing to allege that the Defendant used a computer network without authority is fatal to a claim under the Virginia Computer Crimes Act.
ARGUMENT
I. THIS COURT SHOULD DISMISS THE AMENDED COMPLAINT FOR
LACK OF PERSONAL JURISDICTION OVER THE DEFENDANT.
Plaintiff urges this Court to adopt a view of in personam jurisdiction that would violate Constitutional due process. Plaintiff alleges that Defendant Max E. Jones (“Jones”), a resident of Texas, has made postings to a nationally accessible Web site known as “ragingbull.com.” Ragingbull” is a free, publically accessible, stocks-related site on which any party may post messages on any subject, but the majority of postings relate to publicly traded companies, including the Plaintiff, H-Quotient. Based solely on postings to this Web site, Plaintiff claims that Defendant is subject to jurisdiction of Virginia courts. If adopted, Plaintiff’s reasoning would enable this Court to exercise jurisdiction over any person who posts information on the Internet, anywhere in the world.
In personam jurisdiction
The determination of in personam jurisdiction is a two-step process – a plaintiff must first show that the facts of his claim fall within the reach of Virginia’s long-arm statute, and then must show that the facts of the claim satisfy the Due Process requirements of the U.S. Constitution. International Shoe Co. v. Washington, 326 U.S. 310, 66 S. Ct. 154 (1945). Virginia’s long-arm statute has been held to confer jurisdiction to the maximum extent permissible by Due Process, so the jurisdiction question turns solely on whether the Constitutional requirements have been satisfied. See Rannoch, Inc., v. The Rannoch Corporation, 52 F. Supp. 2d 681, 683 (E.D. Va. 1999).
Constitutional due process
In order to exercise personal jurisdiction over a non-resident defendant, a court must find that the defendant has “certain minimum contacts” with the forum state. International Shoe, 326 U.S. 310, 316 (1945).
General and specific jurisdiction
The “minimum contacts” standard can be satisfied in one of two ways, by asserting “specific” or “general” jurisdiction. See Helicopteros Nacionales de Colombia, SA v. Hall, 466 U.S. 408, 104 S. Ct. 1868 (1984). “Specific” jurisdiction can be established by showing that the defendant’s minimum contacts with the forum state are the basis for the lawsuit, and determining whether the defendant “purposefully availed” himself of the forum state, whether the plaintiff’s claims arise out of those activities directed at the state, and whether the exercise of jurisdiction would be “reasonable” under the Constitution. See ALS Scan Inc, v. Digital Service Consultants, Inc., et al., 293 F.3d 707, 712 (4th Cir. 2002).
If specific jurisdiction cannot be established, a defendant also can be subject to “general” jurisdiction if the defendant has extensive, persistent, general contact with the forum state, but these contacts must be “continuous and systematic.” Helicopteros, 466 U.S. 414.
In the Plaintiff’s Bill of Complaint, there is no allegation that the Defendant has purposefully availed himself of, or has had any minimum contacts with, Virginia. Indeed, the only contact alleged by Plaintiff is the posting of information on a Web site equally accessible to Internet browsers worldwide. Plaintiff likewise makes no allegations that remotely suggest the “continuous and systematic” level required for general jurisdiction.
Specific jurisdiction in Internet cases
The question of specific jurisdiction in Web-publication cases has been examined by the federal courts in Virginia. The leading case on the matter is ALS Scan, Inc. v. Digital Service Consultants, Inc., et al., 293 F.3d 707 (4th Cir. 2002). In ALS Scan, the Fourth Circuit adopted a “sliding scale” test, first announced in Zippo Manufacturing Co. v. Zippo Dot Com, Inc., 952 F. Supp. 1119 (W.D. Pa. 1997), to determine when and how the Internet can be used as a basis for personal jurisdiction over a non-resident defendant:
At one end of the spectrum are situations where a defendant clearly does business over the Internet. If the defendant enters into contracts with residents of a foreign jurisdiction that involve the knowing and repeated transmission of computer files over the Internet, personal jurisdiction is proper. At the opposite end are situations where a defendant has simply posted information on an Internet Web site which is accessible to users in foreign jurisdictions. A passive Web site that does little more than make information available to those who are interested in it is not grounds for exercise [of] personal jurisdiction.
ALS Scan, Inc., 293 F.3d at 713-714, quoting Zippo Manufacturing, 952 F. Supp at 1124 (emphasis added).
By this test, the Defendant’s activities place him at the far, low end of the scale. The Web site at issue is passive. The Plaintiff does not allege that the Defendant engages in any commercial activity on the Web site, merely that the Defendant posted information about the Plaintiff.
The jurisdiction issue before this Court is nearly identical to the one decided in Young v. New Haven Advocate, 315 F.3d 256 (4th Cir. 2002), in which a warden of a Virginia prison brought suit against newspapers in Connecticut, alleging that he had been defamed in news articles published on the defendant newspapers’ Web sites. The Fourth Circuit held, citing ALS Scan, that there was no basis to assert personal jurisdiction over the non-resident defendants. “[T]he fact that the newspapers’ websites could be accessed anywhere, including Virginia, does not by itself demonstrate that the newspapers were intentionally directing there website content to a Virginia audience.” Young, 315 F.3d at 263. The court went on to examine the content of the article at issue in the case and the content of the site in general and concluded that the “newspapers did not post materials on the Internet with the manifest intent of targeting Virginia readers. Accordingly, the newspapers could not have ‘reasonably anticipated being haled into court [in Virginia] to answer for the truth of the statements made in their articles.’” Young, 315 F.3d at 256 quoting Calder v. Jones, 465 U.S. 783, 790, 104 S.Ct. 1482 (1984).
In this present case, there is no allegation that the Defendant’s posts to ragingbull.com Web site are specifically directed at Virginia residents, and no allegation that Virginia residents have been directly harmed by any actions of the Defendant. See Rannoch, Inc. v. The Rannoch Corp., 52 F. Supp. 2d 681, 684-686 (E.D. Va. 1999) (placing a Web site on the Internet with the knowledge that the site may be accessed in Virginia is not an act directed toward the forum state for purposes of due process).
The only allegation of harm to the Plaintiff is one of decreased stock price. But the Plaintiff is a public company, with shares available for purchase by any person in the world; there is no allegation that Plaintiff’s stockholders are in some way specific to Virginia.
II. THIS COURT SHOULD DISMISS THE COMPLAINT BECAUSE VENUE
IS NOT PROPER IN THE EASTERN DISTRICT OF VIRGINIA.
Venue is not proper under 28 U.S.C. § 1391. As discussed above, Plaintiff has not made allegations sufficient to permit the exercise of personal jurisdiction over Defendant Jones. Consequently, venue would be proper only in a judicial district where the defendant resides, or where a substantial part of the events giving rise to the claims occurred, or a substantial part of the property that is the subject of the action is situated. 28 U.S.C. § 1391(a). As discussed above, there is no allegation that any of the events giving rise to the claims occurred in the Eastern District of Virginia – the Defendant resides in Texas and the only actions alleged by the Plaintiff are postings to a nationally accessible Web site. See, e.g., Weinstein v. Todd Marine Enterprises, 115 F. Supp. 2d 668, 675 (E.D.Va. 2000).
III. THE AMENDED COMPLAINT FAILS TO STATE A CAUSE OF ACTION UNDER SEC. 10(b) OF THE SECURITIES AND EXCHANGE ACT OF 1934.
The Plaintiff’s Amended Complaint fails to state a claim upon which relief can be granted, and it fails to plead fraud with particularity. Accordingly, the Amended Complaint should be dismissed pursuant to Fed. R. Civ. P. 12(b)(6) and Fed. R. Civ. P. 9(b).
The Plaintiff makes no allegation that any statement posted by the Defendant was made in connection with the purchase or sale of any security. Section 10(b) of the Securities Exchange Act makes it plain that, to be unlawful, any false statement must be made “in connection with the purchase or sale of [a] security.” 15 U.S.C. § 78j. In its Amended Complaint, the Plaintiff fails to identify any purchase or sale that occurred in connection with any allegedly false statement made by the Defendant.
The Securities Exchange Commission has promulgated Rule 10b-5, which forbids the use, in connection with the purchase or sale of any security, of (1) any device, scheme, or artifice to defraud; (2) any untrue statement of a material fact; (3) the omission of a material fact necessary in order to make the statements made not misleading; or (4) any other act, practice, or course of business that operates as a fraud or deceit. 17 C.F.R. 240.10b-5 (2000).
In its Amended Complaint, the Plaintiff alleges that the Defendant “has been and is now making untrue statements of material facts” to prospective purchasers and sellers of Plaintiff’s stock. In its Amended Complaint, the Plaintiff sets forth no specific statements by the Defendant it claimed were untrue. Rather, the Plaintiff attached a nine-page appendix containing approximately two dozen Web site messages claimed to be posted by the Defendant. These messages were said to be selected by the Plaintiff from a claimed universe of more than 4,000 messages.
The Defendant invites the Court to examine these messages. If there is a central theme to the postings, it is skepticism about the Plaintiff’s public statements and press releases. Most often, the postings are in the form of rhetorical questions, asking the reader to apply common sense, seek out facts from the public record and come to his or her own conclusion about H-Quotient and its president, Douglas Cohn.
For example, a message posted on Feb. 10, 2003, questions the credibility of an announced stock repurchase plan. The full message reads: “Hawkeye, give me a common sense answer about the buy back PR (press release). Would you pay anyone ($)1.20 for this stock when you could probably buy all you wanted between .90 and 1.10 or lower? I am just curious about the mentality around here.”
Finally, the Plaintiff makes no allegation that it – or anyone – has relied on any of the Plaintiff’s statements. Additionally, Plaintiff makes no allegation that it has been injured through the purchase or sale of any of its securities. The Plaintiff does allege that its share price decreased during a certain time period. However, this allegation is not synonymous with an allegation that the Plaintiff was injured. There is no allegation that the Plaintiff actually bought or sold any of its shares during this time period and, if so, whether the sale resulted in a loss or gain. Further, as the selected message makes plain, the Plaintiff had announced it intended to repurchase its shares. Accordingly, a decreased share price would actually have benefited the Plaintiff in such a repurchase, if it in fact took place.
Perhaps the most obvious failure in the pleading is the failure to set forth even a single sale or purchase of stock that was made in reliance on any of Defendant’s statements. Failure to plead reliance is fatal to Plaintiff’s claim. The Supreme Court, in Basic Inc. v. Levinson, said, “We agree that reliance is an element of a Rule 10b-5 cause of action.” 485 U.S. 224, 243, 108 S.Ct. 978,989; 99 L. Ed. 2d 194, 215 (1988).
Private Securities Litigation Reform Act Requirements
Finally, the Plaintiff has failed to comply with the pleading requirements contained in the Private Litigation Reform Act of 1995, 15 U.S.C. § 78u-4(b). Federal law now requires plaintiffs in securities-fraud actions to “specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed.” 15 U.S.C. § 78u-4(b)(1)(B).
A similar requirement exists regarding the pleading of facts that give rise to an inference that the defendant acted with the required state of mind. 15 U.S.C. § 78u-4(b)(2). The Fourth Circuit has not adopted a specific standard for determining what facts must be pled to establish scienter, but even under the most lenient standard enunciated by the Second Circuit, a plaintiff must allege “specific facts that either (1) constitute circumstantial evidence or reckless behavior or (2) establish a motive to commit fraud and an opportunity to do so.” Phillips v. LCI Int’l, 190 F.3d 609, 620 (4th Cir. 1999), quoting In re Time Warner Inc. Sec. Litig., 9 F.3d 259, 268-69 (2d Cir. 1993).
In any event, the Fourth Circuit has determined that the plaintiff must set forth allegations upon which a “strong inference of scienter” can be based. Ottmann v. Hanger Orthopedic Group, Inc., 353 F.3d 338, 349 (4th Cir. 2003).
IV. THE AMENDED COMPLAINT FAILS TO STATE A CAUSE OF ACTION UNDER THE BLUE-SKY LAW, VA. CODE §§ 13.1-502 and 13.1-522.
The Plaintiff has failed in numerous respects to set forth sufficient facts upon which an action under the Virginia Securities Act can be based. Virtually none of the elements of the statute are pled.
Most importantly, the Plaintiff has not alleged that it purchased a security from the Defendant. Privity between the purchaser and seller is a requirement of the statute. See Dunn v. Borta, 369 F.3d 421, 432 (4th Cir. 2004). The Virginia Blue Sky Law simply does not apply to third-party transactions of the type implied by the Plaintiff in its Amended Complaint.
Even if Plaintiff could allege that it purchased securities from the Defendant, it could hardly claim that it did so “by means of an untrue statement.” Such an assertion is necessary to comply with Va. Code 13.1-502(2).
V. THE AMENDED COMPLAINT FAILS TO STATE A CAUSE OF ACTION FOR COMMON LAW FRAUD.
Here again, the Plaintiff has failed to set forth the most basic of the pleading requirements for fraud – that any particular statement was materially false. Additionally, the Plaintiff has failed to identify any particular person to whom such a false statement was made, much less whether any particular person relied on such a statement. Finally, the Plaintiff does not, and indeed cannot, allege that it was damaged as a result of any particular statement.
With respect to fraud allegations, the Plaintiff is required to plead all elements of fraud with particularity. Fed. R. Civ. P. 9(b). It is evident that the Plaintiff has failed to do so. The Plaintiff has offered a raft of bulletin board messages without stating which are claimed to be false. Just as importantly, the Plaintiff has set forth no averments explaining why any particular statements were false.
This basic element, that a particular false statement was made, with the knowledge that it was false, is at the core of a claim for fraud. See Evaluation Research Corp. v. Alequin, 247 Va. 143, 439 S.E.2d 387 (1994). Indeed, the Plaintiff has failed even to identify a single statement that it claims to be false.
A review of the Plaintiff’s listing of messages posted on the Web site shows that, without exception, the Defendant’s statements were expressions of opinion. In the context of a fraud action, the Virginia Supreme Court has stated unequivocally that a person’s opinion cannot be sued upon as a false statement. “Whether a supplier’s, or other person’s, statement is alleged to have violated a common law or statutory standard, as in this case, ‘it is well settled that a misrepresentation, the falsity of which will afford ground for an action for damages, must be of an existing fact, and not the mere expression of an opinion. The mere expression of an opinion, however strong and positive the language may be, is no fraud.’” Lambert v. Downtown Garage, Inc., 262 Va. 707, 712, 553 S.E. 2d 714, 717 (2001), quoting Yuzefsky v. St. John’s Wood Apartments, 262 Va. 97, 110-11, 540 S.E. 2d 134, 142 (2001).
And, as with all of the Plaintiff’s claims, it has failed to establish that it has standing to bring these claims. It has failed to allege that it sold or purchased securities as a direct result of any claimed statements by the Defendant and was injured as a result.
At best, taking all pleaded facts as true and giving all reasonable inferences to the Plaintiff, this Court should determine that any perceived injury sustained by the Plaintiff is too remote to be remedied. The doctrine of remoteness has been a portion of our jurisprudence for more than 200 years. It is universally recognized that injuries that are remote, contingent, derivative and indirect cannot be the basis of a cause of action. See SEIU Health & Welfare Fund v. Philip Morris Inc., 249 F.3d 1068 (D.C. Cir. 2001).
VI. THE AMENDED COMPLAINT FAILS TO STATE A CLAIM UNDER THE VIRGINIA COMPUTER CRIMES ACT, VA. CODE § 18.2-152.12.
The plain wording of the statute makes clear that to violate the state computer fraud statute, one must have used a computer or computer network without authorization. Not only has the Plaintiff failed to allege such unauthorized use of a computer or computer network, the Plaintiff based its entire case on messages posted on a Web site that is “open to the public, free of charge, and which may be viewed by any persons with access to the Internet ….” Amended Complaint, 16.
CONCLUSION
WHEREFORE, for all the above stated reasons Defendant prays that this honorable Court will dismiss the Plaintiff’s Complaint, with prejudice, and award to Defendant all costs and fees associated with this Motion.
Respectfully submitted,
____________________________________
Michael M. York, VSB #44749
WEHNER & YORK, P.C.
11860 Sunrise Valley Drive, Suite 100
Reston, Virginia 20191-3307
703-476-8000
703-476-8300 (fax)
Counsel for Defendant
CERTIFICATE OF SERVICE
I hereby certify that on this 6th day of August, 2004, a true and correct copy of the foregoing document was served via facsimile and first-class mail, postage prepaid, to:
George LeRoy Moran, Esquire
4041 University Drive, Suite 201
Fairfax, Virginia 22030-3410
703-359-8088
703-359-8094 (fax)
__________________________________
Michael M. York
ragingbull.lycos.com |
