Wednesday, December 10, 2014

No Last Minute Jersey RICO Puzzle for Overstock.com

Overstock.com v. Goldman Sachs, No. A135682 (D1d1, as modified Nov. 25, 2014)

As discussed in my last post, this case involves allegations that Goldman Sachs and Merrill Lynch engaged in illegal naked short selling of shares of Overstock.com. The bulk of the opinion addresses merits arguments related to the trial court’s granting of summary judgment in favor of the defendants.
There is, however, one procedural point of note. 


Very late in the case, defendants stipulated to allow plaintiffs to amend their complaint to add a claim under New Jersey’s RICO act, subject to defendants’ demurrer. The trial court sustained a demurrer to the claim, finding it to be too vaguely pleaded to state a claim that sounds in fraud. The court upholds this ruling. In doing so, it notes that the complaint was defective because the count simply referred to “the actions described above” without assigning any particular act that constituted fraud in the offering, sale or purchase of securities—a key element of the claim. The decision can be fairly read as a rejection what is sometimes derisively called puzzle pleading—where the body of the complaint sets out a broad array of alleged acts which the counts incorporate wholesale, without any explanation as to which acts or statements satisfy the actual elements of the claim. Federal courts have caught on to this game, but California state courts, less so. See, e.g., In re Level 3 Commc'ns, Inc. Sec. Litig., 667 F.3d 1331, 1339 n.8 (10th Cir. 2012).

The trial court further denied plaintiffs leave to amend to fix the pleading issues. In affirming, the court explains some important principles. First, the fact that the plaintiff might be able to cure defects in a pleading does not automatically entitle it to amend. An opportunity to amend is “always of grace, not of right” and the trial court maintains significant discretion in affording or denying leave. 

 In addition to futility, the court can consider prejudice, the number of prior amendments, and the timing of the amendment is connection with the progress of the litigation.  Here, plaintiffs’ proposed amendment was based on “a fundamentally different and highly complex claim that could not fairly be injected into the case only two months before summary judgment motions were due and only six months before the already re-scheduled trial date.”  Under the circumstances, the trial court did not abuse its discretion in denying leave. 

Affirmed in part and reversed in part.

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