The opinion of the court was delivered by: KEENAN
JOHN F. KEENAN, District Judge: this action was brought by Management Assistance Inc., ("MAI") against Asher B. Edelman, Raymond French, Charles P. Stevenson, Jr., Clark R. Mandigo, Arbitrage Securities Company ("Arbitrage"), Plaza Securities Company ("Plaza") and Minor Associates, L.P. ("Minor") for violations of sections 13(d), 14(a) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. Sections 78m(d), 78n(d), 78n(a) and 78t(a), and the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. Sections 1961-1968. Injunctive relief and damages are sought.
MAI is a New York corporation which is engaged in the development, manufacturing and marketing of information processing systems and in furnishing repair, preventive maintenance and reconditioning service for information processing equipment. Edelman beneficially owns 12.8% of the outstanding shares of MAI common stock and has mounted a proxy contest in a effort to gain control of the corporation. He seeks the election of French, Stevenson, Mandigo and himself as directors of MAI. Arbitrage, Plaza and Minor are partnerships under edelman's control that own MAI stock.
The original complaint and a motion for expedited discovery were filed on January 30, 1984.On February 2, defendants filed a motion to dismiss MAI's original complaint pursuant to Fed.R.Civ.P. 12(b)(6), or in the alternative for an order pursuant to Fed.R.Civ.P. 26(c) limiting discovery. MAI filed an amended complaint on February 6. Defendants then filed a motion to dismiss the amended complaint. That motion is denied as to all defendants except Stevenson and granted in part as to Stevenson for the reasons set forth below. On February 10, defendants answered the complaint, asserting three counterclaims against MAI. Plaintiff filed a motion to dismiss the first counterclaim on February 14. That motion is granted for the reasons set forth below.
MOTION TO DISMISS THE COMPLAINT
The amended complaint contains seven claims for relief. Two of these claims allege violations of section 13(d). The first claim is that defendants' made a false and misleading statement in their Schedule 13D with regard to the purported interest of two companies in acquiring all or part of MAI. The second claim alleges failure to fully disclose in the Schedule 13D the source of funds used to purchase MAI stock. The next three claims involve violations of section 14(a). The first of these claims alleges that defendants' proxy statement contained a false and misleading statement regarding the purported interest of the two companies. The next claim is for failure to disclose in the proxy statent that partnership securities were sold without a registration statement. The final section 14(a) claim is for failure to disclose in the proxy statement that the partnerships comprise a single investment company in violation of the Investment Company Act. The last two claims of the amended complaint allege that defendants violated RICO by acquiring an interest in MAI through funds derived from racketeering and by forming a separate and illegal enterprise with the purpose of obtaining control over MAI.
Defendants' motion seeks dismissal of the amended complaint on the grounds that it does not satisfy the requirement of rule 9(b) of the Federal Rules of Civil Procedure that claims of fraud be pleaded with particularity and that it fails to state a claim upon which relief can be granted.
Claims alleging fraud in connection with violations of sections 13(d) and 14(a) must be pleaded with particularity. See Trans World Corporation v. Odyssey Partners, 561 F. Supp. 1315, 1323 (S.D.N.Y. 1983) (Section 13(d)); Brayton v. Ostrau, 561 F. Supp. 156, 163 (S.D.N.Y. 1983) (Section 14(a)). The amended complaint contains factual allegations sufficient to satisfy the particularity requirements of rule 9(b).It is distinguishable from complaints that have been dismissed for failing to satisfy rule 9(b) in other actions. See Decker v. Massey-Ferguson, 681 F.2d 111, 115 (2d Cir. 1980) (complaint alleged fraud in failure to write down value of obsolete manufacturing facilities but did not allege figures that they were carried at or what those figures should be); Crystal v. Foy, 562 F. Supp. 422 (S.D.N.Y. 1983) (complaint alleged fraud in failure to disclose plant closing as a certainty but facts alleged in support demonstrated that closing was not certain).
Furthermore, the amended complaint differentiates the actions of the various defendants, as is required by rule 9(b). See Trans World Corporation v. Odyssey, supra, 561 F. Supp. at 1320. The documents attached to the amended complaint demonstrate that defendants acted as a group with respect to the allegedly misleading filings. The Schedule 13D complained of was filed on behalf of and signed by all defendants except Stevenson. The proxy statement seeking election of the four individual defendants as directors of MAI characterizes those defendants as the "Edelman group." Plaintiff's claim of joint responsibility for the content of these documents, therefore, unlike the assertion in Weinberger v. Kendrick, 432 F. Supp. 316, 321 (S.D.N.Y. 1977), is not a "bald assertion of joint participation."
Where fraud is alleged, the allegations in the amended complaint support an inference of scienter. Furthermore, plaintiff's factual allegations, including the documents annexed to the amended complaint, establish a sufficient basis to support the allegations of the amended complaint made on information and belief.
This Court also finds that each of the seven causes of action state a claim upon which relief can be granted and create issues of fact to be determined upon the hearing for the preliminary injunction and at trial. Defendants' motion to dismiss is denied. Two of the claims as they apply to defendant Stevenson, however, are excluded from this denial.
The first and second claims of the amended complaint are dismissed as to defendant Stevenson. Both of those claims allege violations of section 13(d) of the Securities Exchange Act. Section 13(d) requires persons who acquire beneficial ownership of five percent of a class of equity securities to file Schedule 13D, a statement containing certain information regarding the acquirer and the acquisition, with the SEC.
Defendant Stevenson argues that the amended complaint fails to allege a basis for holding him liable for the contents of the allegedly false and misleading Schedule 13D because it does not allege grounds for treating him as a beneficial owner of MAI stock. Defendant Stevenson contends that without such an allegation, the section 13(d) claims do not state a cause of action against him and, therefore, should be dismissed.
The complaint alleges grounds for finding that the other defendants are beneficial owners of MAI stock. The only interest alleged attributable to defendants Stevenson, however, is the interest held by Minor Associates. The limited partnership agreement of that entity, attached to the complaint, reflects that defendant Stevenson is the principal of a corporation that is a limited partner in Minor Associates. Under the terms of that agreement, limited partners have no rights concerning the running of the partnership and no right to demand and receive property other than cash in return for their contribution. This interest in MAI stock is an insufficient basis for treating defendant Stevenson as a beneficial owner of that stock.
The section 13(d) claim against defendant Stevenson is based, not on the allegation that he beneficially owns more than five percent of MAI stock, but on the allegation that he was a member of a group that acted to acquire ownership of more than five percent of MAI stock. Section 13(d)(3) includes as persons required to file Schedule 13D, persons acting as a group for the purpose of acquiring the securities of an issuer. In Transcon Lines v. A.G. Becker Incorporated, 470 F. Supp. 356, 374 (S.D.N.Y. 1979), however, Judge Sand held that a defendant, having no beneficial ownership in the issuer, was under no obligation file Schedule 13D as a member of a group.In its discussion, the Court cited the House Report to the Williams Act, of which section 13(d) is a part, stating that the purpose of Section 13(d)(3) was to "prevent a group of persons who seek to pool their voting or other interests in the securities of an issuer from evading the provision of the statute because no one individual owns more than [five percent] of the securities." Transcon Lines v. A.G. Becker, Incorporated, supra, ...