Rose v. Redwood Financial, Inc.

Background

Dr. Patricia T. Rose sold all of her Redwood Financial, Inc. stock back to Redwood on September 24, 2018, for $55 per share. The stock purchase agreement described Rose as a sophisticated investor and stated that she was familiar with Redwood’s financial condition, operations, and industry. In January 2019, Rose learned that Redwood’s stock price had risen to approximately $92 per share and later averaged about $95 during 2019.

Rose alleged that Redwood failed to disclose that its wholly owned subsidiary, HomeTown Bank, was converting from a national bank to a state-charter bank. HomeTown had received approval for the conversion before Rose’s sale, but Redwood did not publicly disclose it until after the sale. Rose alleged that Redwood had a duty to disclose the conversion, that the omission was material, and that she would not have entered the stock purchase agreement had she known about it.

Rose sued in Hennepin County District Court. Redwood removed the case to federal court. Rose asserted claims for fraudulent misrepresentation, violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, a violation of Minnesota Statute section 80A.68, and declaratory judgment.

Federal securities claim

Redwood moved to dismiss under Rule 12(b)(6), which tests whether a complaint states a legally sufficient claim. For a federal securities-fraud claim under Section 10(b) and Rule 10b-5, the Private Securities Litigation Reform Act requires particularized allegations of a material misrepresentation or omission and facts creating a strong inference of scienter, meaning intentional or severely reckless misconduct.

The court addressed scienter as the dispositive issue. Rose alleged that Redwood withheld information about the conversion to obtain a lower price for her shares. The court held that a general desire for financial gain was not enough to establish the required strong inference of scienter. The court also reasoned that Redwood had not disclosed the conversion during the earlier conversion process, Rose—not Redwood—initiated the stock sale, and the request to waive publication of the conversion did not establish fraudulent intent because a waiver mechanism existed and the Minnesota Department of Commerce granted it.

The court concluded that Rose had not adequately pleaded scienter and that her federal securities claim therefore failed as a matter of law. It did not decide the claim’s remaining elements because those elements overlapped with Rose’s state-law claims. The court also reserved for the state court the question of whether the conversion was material.

State-law claims and disposition

After dismissing the only claim supporting original federal jurisdiction, the court declined to exercise supplemental jurisdiction over the remaining state-law claims. The case had begun in state court, the remaining claims depended solely on state law, and the federal court had not yet invested substantial resources in the matter.

The court ordered that Redwood’s motion to dismiss was granted in part. Count 2, the federal securities-law claim, was dismissed with prejudice. Counts 1, 3, and 4 were remanded to Hennepin County District Court. The order directed that judgment be entered accordingly.