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January 16, 1990


The opinion of the court was delivered by: Robert L. Carter, District Judge.


The issues before the court are defendants' motion for dismissal on numerous grounds and plaintiff's motion for class certification. Plaintiff Lester Brickman brought this action against defendants Tyco Toys, Inc. ("Tyco"), Tyco's former officers and inside directors, and several other individual and corporate defendants*fn1 alleging violations of federal securities laws, negligent misrepresentation and breach of fiduciary duty in connection with three purportedly improper transactions. In an opinion dated October 4, 1989, Brickman v. Tyco Toys, Inc., 722 F. Supp. 1054 (S.D.N.Y. 1989) (Carter, J.), familiarity with which is presumed, the court dismissed plaintiff's claims for misrepresentation and breach of fiduciary duty and dismissed the securities claim as to three of the defendants, all without prejudice. Plaintiff has repleaded his securities claim against all individual defendants but Geoffrey Selzer, as well as his claim for breach of fiduciary duty on behalf of Tyco against all individual defendants.*fn2 Second Amended Complaint, ¶¶ 82-96.

The facts germane to the instant motions are similar to those set forth in the court's previous opinion and can be stated briefly here. Plaintiff, a shareholder of Tyco, asserts that a public offering of Tyco common stock on February 20, 1986 (the "Public Offering"), and a series of transactions conducted by the defendants thereafter, were part of an unlawful scheme to divert funds from Tyco to other business entities in which the defendants had an interest. The first of these transactions was a $2.5 million loan made by Tyco to Savoy Industries (the "Tyco Loan") on April 22, 1987.*fn3 Plaintiff asserts that the defendants' participation in, and failure to disclose material facts regarding the Tyco Loan and subsequent transactions constitute a violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), 78t (1981 & Supp. 1989), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, as well as a breach of defendants' fiduciary duty to Tyco shareholders.


Defendants seek to dismiss plaintiff's federal and state law claims on numerous grounds and oppose plaintiff's motion for class action certification. First, defendants contend that plaintiff may not maintain both a derivative claim on behalf of Tyco, and a direct claim against Tyco in the same action. Defendants also seek to have plaintiff's securities claim dismissed as to all defendants on the ground that the Rule 10b-5 allegations in the complaint fail to state a claim upon which relief may be granted under Rule 12(b)(6), F.R.Civ.P. Defendants also move for dismissal of the Rule 10b-5 claim against Benson Selzer under Rule 12(b)(6), arguing that he owed no duty of disclosure to plaintiff.

Next, defendants once again move for dismissal of plaintiff's securities fraud claim against Benson Selzer for failure to plead fraud with sufficient particularity in violation of Rule 9(b), F.R.Civ.P. They assert that the complaint does not aver facts supporting an inference of controlling person liability or of scienter of Benson Selzer, and that plaintiff has failed to plead with particularity that Benson Selzer aided and abetted a Rule 10b-5 violation.

As to plaintiff's derivative claims, defendants argue that plaintiff lacks the capacity to prosecute the derivative claims because he has failed to make a demand upon the board of directors. They further assert that the derivative claims against Benson Selzer, Geoffrey Selzer, and Harry J. Pearce must be dismissed because these defendants are not charged with any breach of fiduciary duty.

Finally, in opposing plaintiff's motion for class certification, defendants argue that plaintiff is not properly a member of the class that would be appropriate in this suit, and therefore his claims are not typical of the class. Defendants further contend that because plaintiff seeks to assert both a derivative claim on behalf of Tyco and a class action claim against Tyco and the director defendants, he fails to satisfy the adequacy of representation requirement of Rule 23(a)(4), F.R.Civ.P.

Plaintiff responds first that there is no conflict inherent in the concurrent prosecution of direct and derivative claims. As to his securities cause of action, he argues that the incidents of non-disclosure alleged in the complaint make out a claim, and that that claim is alleged sufficiently and with an adequate degree of particularity as against defendant Benson Selzer.

Regarding the derivative claim, plaintiff concedes his failure to make a demand upon the Tyco board but argues that such demand should be excused as futile. He further contends that defendants Pearce, Benson Selzer and Geoffrey Selzer owed a fiduciary duty to Tyco by virtue of influence exerted by these defendants over the corporation.

In defending his motion for class certification, plaintiff argues that his stock purchases and alleged injury make his claims typical of the proposed class and reiterates his position that there is no inherent conflict in simultaneous class and derivative actions.




Whatever its relevance to the issue of class certification,*fn4 the fact that plaintiff seeks to prosecute direct class and derivative actions simultaneously does not provide a basis for dismissal for failure to state a claim under Rule 12(b)(6), F.R. Civ.P. Indeed, all of the cases cited by defendants in support of such dismissal in fact speak only to the issue of class certification under Rule 23, F.R.Civ.P. See, e.g., Kamerman v. Steinberg, 113 F.R.D. 511, 515-16 (S.D.N.Y. 1986) (Motley, J.), modified, 123 F.R.D. 66 (S.D.N Y 1988); Petersen v. Federated Development Co., 416 F. Supp. 466, 475 n. 6 (S.D.N.Y. 1976) (Haight, J.); Hawk Indus., Inc. v. Bausch & Lomb, Inc., 59 F.R.D. 619, 624 ...

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