Eagle Equity Funds, LLC v. Centrais Eletricas Brasileiras S/A - Eletrobras

Background

The plaintiffs alleged that they owned 694 Eletrobras bearer bonds, which they valued at more than $5 billion, and that they later purchased 2,937 Eletrobras American Depository Receipts on the New York Stock Exchange. Eletrobras maintained that the bearer bonds were invalid and unenforceable. The plaintiffs had pursued related litigation in Brazilian courts and alleged that Eletrobras made false or misleading statements, or omitted important information, in filings with the U.S. Securities and Exchange Commission.

The plaintiffs asserted claims under Section 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5, including claims based on misleading statements, fraudulent schemes, and misleading omissions. They also asserted control-person claims against the two individual defendants under Section 20(a) of the Exchange Act and brought state-law claims. The federal claims sought injunctive and declaratory relief, not money damages.

Rule 12(b)(6) Standard

The defendants moved to dismiss under Rule 12(b)(6), which tests whether a complaint states a legally plausible claim. The court accepted the complaint’s factual allegations as true for purposes of the motion but required enough factual content to support a reasonable inference that the defendants were liable.

Claims Based on the American Depository Receipts

The court held that the plaintiffs did not allege a cognizable injury from their purchases of the American Depository Receipts. Alleging that the securities were purchased at artificially inflated prices was not enough because, at the time of purchase, the alleged overpayment was offset by ownership of securities with equivalent value. The plaintiffs’ claims that the statements deterred them from buying additional securities also could not support a private Section 10(b) claim.

The court further held that the plaintiffs could not rely on alleged harm to their bearer bonds to establish injury connected to their purchases of the American Depository Receipts. The securities-fraud laws require the alleged injury to arise from the security involved in the purchase or sale at issue.

The court also held that the plaintiffs could not plausibly allege reliance. According to their own allegations, they had spent years challenging Eletrobras’s position that the bearer bonds were unenforceable before purchasing the American Depository Receipts. The court therefore concluded that they disbelieved the challenged statements and bought the American Depository Receipts despite those statements, rather than relying on them. The court dismissed the plaintiffs’ Section 10(b) and Rule 10b-5 claims based on the American Depository Receipts for lack of cognizable injury and lack of reliance.

Claims Based on the Bearer Bonds

The court concluded that the plaintiffs had disclaimed or abandoned any claims based on the bearer bonds themselves because their opposition papers repeatedly stated that their Exchange Act claims were not based on those bonds. To the extent the plaintiffs continued to assert such claims, the court held that they failed as a matter of law.

The court applied the purchaser-seller rule, which limits private Section 10(b) and Rule 10b-5 claims to plaintiffs who purchased or sold the securities in connection with the alleged misrepresentation. Eagle purchased its bearer bonds before the earliest alleged misrepresentation. AHG purchased its bonds in November 2013, so claims based on later statements could not be connected to that purchase; the court also found no plausible reliance on earlier statements. The court held that these requirements applied even though the plaintiffs sought only declaratory and injunctive relief, and dismissed any remaining bearer-bond securities-fraud claims.

Other Claims

Because the plaintiffs failed to plead a primary violation of Section 10(b), the court dismissed their control-person claims under Section 20(a). To the extent the plaintiffs asserted a separate claim under the Declaratory Judgment Act, the court dismissed it along with the other federal claims.

After dismissing the federal claims, the court declined to exercise supplemental jurisdiction over the state-law claims and dismissed them as well.

Disposition

Judge Jesse M. Furman granted the defendants’ motion to dismiss and dismissed the complaint in its entirety. The court denied leave to amend, concluding that amendment would almost certainly be futile, that the plaintiffs had not identified facts that would cure the defects, and that they had already been given an opportunity to amend. The Clerk was directed to enter judgment for the defendants and close the case.