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June 10, 1986


The opinion of the court was delivered by: KNAPP



 All defendant move to dismiss the amended complaint. The Bolton defendants and Bear, Stearns & Co. move as well to dismiss the cross-claims of defendant Forbes, Walsh, Kelly & Co., Inc. For the reasons stated below, we direct that the complaint against Bear Stearns and Forbes Walsh Kelly's third counter-claim against the Bolton defendants be dismissed.

 This is the second time we have considered motions to dismiss in this action. We failed the first time to perceive a cognizable claim against Bear Stearns and by order dated April 20, 1984 dismissed the complaint and cross-claims against it while granting plaintiffs leave to replead. The parties have moved against the amended complaint.

 Plaintiff Donald Ross is a Canadian. Plaintiff Virginia Ross is his daughter. They allege that all defendants participated in an illegal manipulation of the securities of the Resort Urban Timesharing Corporation ("RUTI"). Richard E. Bolton and the company in which he was the principal, R.E. Bolton & Company, Inc. (the "Bolton defendants"), were the alleged masterminds and Bear Stearns & Co. an alleged aider and abettor in this fraudulent scheme.

 The amended complaint claims that the Bolton defendants initiated a series of purchases and sales in which they were positioned as both seller and buyer. That is, they successively sold RUTI securities to various investors, and within a few days bought the stock back at a higher price than that at which they sold it. At times the stock passed through the hands of one or two intervening parties prior to returning to them; however, at each stage of the transaction, the price of the securities was raised. Plaintiffs claim that, through this device, the Bolton defendants managed to drive up the price of the stock artificially, from $6 per unit at the time it was issued in August 1981, to 17 7/8 bid - 18 1/8 ask on December 20, 1982. Through this period, the corporation had no earnings.

 To illustrate the way in which the manipulation occurred, plaintiffs have pled 41 factual instances of Bolton's sale and repurchase transactions over the period between September 13, 1981 and December 16, 1982 which involved entities not party to this lawsuit. Each transaction shows the trade date, seller, number of units sold, customer, and price of purchase or sale. These examples reveal that over this 16 month period, the price per unit of RUTI securities rose from 14 to 18, and that Bolton positioned itself as the seller and buyer with between one to three intervening parties. The amount of time between each sale and repurchase ranged from four to twenty days.

 Bear Stearns was the clearing agent for these transactions. It had loaned money to Bolton which was collateralized by securities owned by Bolton. At various times during the period between August 1981 and December 1982, the value of these securities was substantially less than the amount of collateral required for the loans. Bolton's account with Bear Stearns was therefore under margin. Because it was under margin, plaintiffs claim that Bear Stearns must have scrutinized the account more closely than it otherwise would have.

 During December, 1982, Bear Stearns cancelled a number of trades in which Bolton was purchasing securities but continued to execute transactions in which Bolton was the seller. by this means, Bear Stearns allegedly reduced the amount of money Bolton & Co. owed to it. The amended complaint charges that, in light of the dramatic rise in RUTI securities, as well as Bear Stearns' greater scrutiny of the Bolton defendants' account, it knew or should have known of the alleged fraud and aided and abetted the manipulation by clearing transactions, often after the market had closed.

 Plaintiffs' specific injury arose out of their uncompleted participation in one of the Bolton defendants' alleged manipulations.

 Donald Ross was an employee of a securities firm. On December 14, 1982, Bolton told him by telephone that he needed to sell 26,900 units of RUTI securities immediately, and that another purchaser wanted them but could not complete the transaction on time. He suggested that, if Ross bought them, the other purchaser would buy them from Ross.

 On December 15, Ross spoke with John Walsh, a principal at Forbes Walsh Kelly. Walsh told him that Forbes Walsh would purchase the 26,900 RUTI units from him for $18.00 per unit.

 Ross consequently purchased the units. He bought them in his daughter's name at $17.50 per unit. Bear Stearns cleared the transaction.

 Forbes Walsh had agreed to purchase the securities from Ross on December 22. On that day, however, Forbes Walsh refused to perform. When Ross asked why, Walsh told him that Bolton had agreed to purchase the stock from Forbes Walsh for $18 1/2 per unit but had cancelled the transaction. Because Forbes Walsh could not resell to Bolton, it refused to purchase from Ross.

 Until this conversation, Ross had not known that Bolton was on both sides of the transaction. Until this time, Forbes Walsh had not known that fact either.

 On December 20, RUTI's price per unit was 17-7/8 bid -- 18-1/8 ask. On December 24, or two days after Forbes Walsh refused performance, the price was 5-1/4 bid -- 5-3/4 ask.

 Plaintiffs charge the Bolton defendants and Bear Stearns with violating section 10 of the Securities and Exchange Act of 1934, 15 U.S.C. § 78j, and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5; with violating the provisions of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et seq., for common law fraud, and with violating section 352-c of the New York General Business Law. They sue Forbes Walsh for breach of contract. Forbes Walsh cross-claims against the Bolton defendants and Bear Stearns ...

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