12(b), and have also moved for summary judgment on plaintiff's
claims under § 10(b) pursuant to Fed.R.Civ.P. 56.
Plaintiff Azurite Corporation ("Azurite")*fn2 (hereinafter
referred to interchangeably as "plaintiff" or "plaintiffs")
was a shareholder of Graphic Scanning Corporation ("Graphic")
until February 25, 1986, when Azurite sold the last of its
shares. Graphic is a Delaware corporation which owns and
operates telephone paging and cellular telephone franchises.
Defendants Arnold Amster, Barry Lafer, and Joel Packer were
general partners of Lafer, Amster & Co., now known as Amster
& Co. ("Amster"). Amster is a registered broker-dealer located
in New York City. Defendants undertook a successful proxy
fight to gain control of Graphic during 1986. Defendant Joel
Packer ("Packer") was elected to the Board of Directors of
Graphic after the completion of the proxy fight, and served as
Chairman of the Board from September 1987 to December 1988.
Plaintiff alleges that in or about the eight months
preceding the successful proxy fight, defendants filed a
series of false and misleading statements with the Securities
and Exchange Commission ("SEC"), relating to purchases of
shares of Graphic stock. Defendants allegedly falsely
represented in these statements that they did not intend to
seek control of Graphic, but were purchasing shares solely for
investment purposes, when, in fact, defendants were purchasing
the shares with intent to wage a proxy fight for control.
Plaintiff further alleges that because of defendants' failure
to disclose the purpose of their purchases, the price of
Graphic's stock remained lower than it would have been had
defendants truthfully disclosed their intention to seek
control of Graphic. Plaintiff sold its stock after defendants
had filed statements indicating their involvement with Graphic
was for investment purposes only. Accordingly, plaintiff
alleges that it received less money for its stock than it
would have received if defendants had truthfully revealed the
purpose of their purchases.*fn3
Section 13(d) of the Securities Exchange Act of 1934,
15 U.S.C. § 78m(d), requires that persons, who acquire more than
five percent of a class of security, file a statement with the
SEC and the issuer that identifies the owners of the shares at
issue, the source of the funds purchasing such shares, the
purpose of the purchases, and other pertinent information. The
information is to be included in a form known as Schedule 13D,
as prescribed by the SEC. Amendments to previously filed
Schedules 13D are to be submitted when any material facts have
changed. See Rules 13d-1, 13d-2, 17 C.F.R. §§ 240.13d-1,
Defendants filed their first Schedule 13D related to Graphic
on August 19, 1985.*fn4 That statement explained that the
reporting group had acquired beneficial ownership of five
percent of the outstanding shares of Graphic stock and was
holding those shares for investment purposes only. Plaintiff
alleges that certain information in the August 1985 Schedule
13D was false. In particular, plaintiff claims that the
signatory of the statement, William R. Grant, a partner at
Lafer, Amster & Co., understated his beneficial holdings in
Graphic by some 500,000 shares. Complaint ¶¶ 21-23.
Defendants filed the first amendment to their Schedule 13D
on September 17, 1985, indicating an increase in their
holdings of Graphic stock. The amendment stated that the
holdings were still for investment purposes
only. Plaintiff contends that individual defendants Barry
Lafer and Arnold Amster met with officers of Graphic in
November 1985 and further represented that the stock purchases
were for investment purposes only. Complaint ¶ On November 27,
1985, defendants filed another amendment to their Schedule 13D,
indicating additional purchases. A further amendment followed
on December 3, 1985.
Plaintiff maintains that on or before February 3, 1986,
defendants changed the purpose of their investments in Graphic
and had decided to attempt to gain control of Graphic.
Complaint ¶¶ 29-33.*fn5 A meeting was allegedly held on
February 3, 1986 at which defendants proposed and discussed a
proxy contest for control of Graphic. Complaint ¶¶ 36-37. On
February 4, 1986, defendants allegedly met with a limited
partner of Lafer, Amster & Co., and revealed their intent to
conduct a proxy fight for Graphic. Complaint ¶
No additional amendment to defendants' Schedule 13D was
filed until February 10, 1986. That amendment indicated the
purchase of additional shares of Graphic stock, but did not
state any change in the purpose of those purchases. On
February 18, 1986, defendants filed a further amendment to the
Schedule 13D. This amendment, known as amendment six,
indicated that defendants were considering waging a proxy
battle for Graphic. Defendants indicated in their filing that
these considerations were only preliminary and were derived
from information revealed by Graphic in a Form 8K filing dated
February 7, 1986. Plaintiff asserts that defendants' actions
prior to the February 10, 1986 filing demonstrate clearly that
defendants' intentions had changed prior to February 7, 1986.
Plaintiff contends that on February 3, 1986, defendants
purchased $1.7 million in Graphic convertible debentures, and
accumulated an additional $1.4 million in Graphic stock
between February 4 and February 7, 1986. Complaint ¶ 50. On
February 24 and 25, 1986, shortly after defendants filed
amendment six, plaintiff sold 340,000 shares of Graphic stock.
Complaint ¶ 48.
On March 3, 1986, defendants filed amendment seven to their
Schedule 13D. For the first time, defendants indicated a
decision to engage in a proxy battle for control of Graphic.
Plaintiff charges that this filing was materially false in
stating that defendants had not decided to pursue the
acquisition of control of Graphic until February 28, 1986, and
in other respects as well. Complaint ¶ 49.
After defendants revealed their intention to pursue a proxy
battle for Graphic, the price of Graphic stock increased. The
stock went from a trading range of around $7.00 per share to
around $9.00 per share. Complaint ¶ 51. Plaintiff sold its
shares prior to defendants' revelations, and thus prior to the
price increase. Accordingly, plaintiff demands over $30 million
in damages. Complaint ¶ 71.
Defendants have attacked plaintiff's complaint on three
grounds. First, they assert that plaintiff has failed to
allege its RICO claims with sufficient particularity as
required by Fed.R.Civ.P. 9(b). Second, defendants contend that
even if the RICO charges have been plead with sufficient
particularity, the RICO count should be dismissed under
Fed.R.Civ.P. 12(b)(6) for failing to state a claim for which
relief can be granted. Third, defendants argue that
plaintiff's securities law claim under Section 10(b) is time
barred, and thus summary judgment should be entered for
defendants on that claim pursuant to Fed.R. Civ.P. 56.
A) Sufficiency of Allegations of Fraud
Defendants have challenged the sufficiency of plaintiff's
complaint under Fed.R.Civ.P. 9(b). Rule 9(b) states:
In all averments of fraud or mistake, the
circumstances constituting fraud or mistake shall
be stated with particularity. Malice, intent,
knowledge, and other condition
of mind of a person may be averred generally.
In a motion to dismiss a complaint for failure to plead fraud
with particularity, a plaintiff's allegations must be taken as
true. See, e.g., Luce v. Edelstein, 802 F.2d 49, 52 (2d Cir.
1986). The complaint's fraud allegations must be specific
enough to allow the defendant "a reasonable opportunity to
answer the complaint" and must give "adequate information" to
allow the defendant "to frame a response." Ross v. A.H. Robins,
Co., 607 F.2d 545, 557-58 (2d Cir. 1979), cert. denied,
446 U.S. 946, 100 S.Ct. 2175, 64 L.Ed.2d 802 (1980). Rule 9(b) is
designed to provide a defendant fair notice of a plaintiff's
claim, in order to enable a defendant to prepare a defense,
protect defendant's reputation or goodwill from harm, and
reduce the number of strike suits. DiVittorio v. Equidyne
Extractive Industries, Inc., 822 F.2d 1242, 1247 (2d Cir.
1987). Rule 9(b) must be read, however, in conjunction with
Rule 8(a), which requires a plaintiff to plead only a short,
plain statement upon which he is entitled to relief. A.H.
Robins, Co., 607 F.2d at 557 n. 20.
Where a RICO claim includes allegations of fraudulent
conduct, the Second Circuit has required that the pleading of
fraud meet the requirements of Rule 9(b). Hecht v. Commerce
Clearing House, Inc., 897 F.2d 21, 25 (2d Cir. Jan. 25, 1990).
The Second Circuit has made a distinction between the pleading
of fraud in a RICO conspiracy, and the pleading of the
conspiracy itself. "Rule 9(b) applies only to fraud or mistake,
not to conspiracy. [The] pleading of a conspiracy, apart from
the underlying acts of fraud, is properly measured under the
more liberal requirements of Rule 8(a)." Id. at 26 n. 4. See
also, Rose v. Bartle, 871 F.2d 331, 366 (3rd Cir. 1989); Andreo
v. Friedlander, Gaines, Cohen, Rosenthal & Rosenberg,
660 F. Supp. 1362, 1372 (D.Conn. 1987).
A plaintiff alleging a violation of RICO must plead the
conspiracy in a clear and concise fashion pursuant to Rule 8,
and must plead any underlying allegations of fraud which
account for any of the required predicate acts of a RICO
conspiracy with particularity. In the case before the Court,
plaintiff alleges three fraudulent activities as predicate
acts. First, plaintiff alleges that defendants filed false
Schedule 13D amendments in violation of federal securities
laws. Defendants do not challenge the sufficiency of the
pleading of securities fraud. Second, plaintiff alleges that
defendants used the mails to distribute the false Schedule 13D
amendments. Third, plaintiff contends that defendants used the
telephone and other instruments of wire transmission in
furtherance of their fraudulent acts. Defendants do challenge
the sufficiency of the pleading of these acts of mail and wire
"In alleging mail fraud, the plaintiff must set forth the
contents of the items mailed and specify how each of the items
was false and misleading." Official Publications, Inc. v. Kable
News Co., Inc., 692 F. Supp. 239, 245 (S.D.N.Y. 1988), aff'd in
part, rev'd in part, 884 F.2d 664 (2d Cir. 1989). Plaintiff has
sufficiently pled the content of the alleged mail fraud.
Plaintiff asserts that it was the false Schedule 13D amendments
which were sent through the mail to the SEC and Graphic. The
Court finds that the content of the items mailed has been
sufficiently pleaded, as has been the nature of the false
The Court's inquiry cannot end here, however. Plaintiff has
based his claim of mail fraud on information and belief and
not on actual knowledge. Complaint ¶ 21. In general,
allegations of fraud cannot be based on information and belief.
Luce, supra, 802 F.2d at 54. However, that requirement is
relaxed where the matter pled is peculiarly within the
knowledge of the defendant. DiVittorio, supra, 822 F.2d at
1247. The Court finds that the question of how the originals of
the Schedule 13D amendments were transmitted to the SEC, how
copies were transmitted to Graphic, and who among the
defendants was responsible for the transmittal of the
amendments, represent information and knowledge peculiarly
within the control of defendants prior to discovery. In any
event, defendants can clearly glean from the complaint the
nature of plaintiff's mail fraud allegations and prepare their
Plaintiff's allegations of wire fraud are more troubling.
Plaintiff alleges that defendants used the telephone to
further their schemes. However, the Complaint is remarkably
thin in its assertions regarding wire fraud. Telling, in its
papers in response to this motion, plaintiff attempts to link
its wire fraud allegations to its successfully pleaded mail
fraud claims. Wire fraud is a separate act from mail fraud and
must, itself, be pled with particularity. The Complaint
contains only vague references to the use of the telephone or
other means of wire transmissions, and fails to aver who made
use of the wire facilities and for what purpose. Accordingly,
the Court cannot find that plaintiff has sufficiently pled its
allegations of wire fraud, and thus any claims of wire fraud
must be dismissed under Rule 9(b). Leave to replead is
Defendants further attack the sufficiency of plaintiff's
complaint on the grounds that it fails to allege the elements
of RICO with particularity. In light of the Second Circuit's
language in Hecht, supra, the Court rejects defendants'
arguments. The pleading of RICO elements goes to the existence
of a sufficient conspiracy to trigger the RICO statute. Some of
those elements, namely the predicate acts, involve fraud, and
those fraud elements must be pled with particularity. However,
those elements, such as the existence of an enterprise, the
existence of a pattern of racketeering, and the existence of
continuity go to the alleged RICO conspiracy. These elements do
not need to be pled with particularity, and must only meet the
requirements of Rule 8. The Court finds that plaintiff has
provided a clear and concise statement of their claims
sufficient to meet the requirements of Rule 8.*fn8
B) Motion to Dismiss
Defendants contend that plaintiff's RICO claims should be
dismissed for failure to state a claim upon which relief can
be granted, pursuant to Fed.R.Civ.P. 12(b)(6). "Dismissal of
a complaint for failure to state a claim is a 'drastic step'".
Meyer v. Oppenheimer Management Corp., 764 F.2d 76, 80 (2d Cir.
1985) (citations omitted). "The function of a motion to dismiss
'is merely to assess the legal feasibility of the complaint,
not to assay the weight of the evidence which might be offered
in support therof.'" Ryder Energy Distribution Corp. v. Merrill
Lynch Commodities, Inc., 748 F.2d 774, 779 (2d Cir. 1984)
(citations omitted). Thus, a motion to dismiss must be denied
"unless it appears beyond doubt that the plaintiff can prove no
set of facts in support of his claim which would entitle him to
relief." Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683,
1686, 40 L.Ed.2d 90 (1974), citing Conley v. Gibson,
355 U.S. 41, 45-46, 78 S.Ct. 99, 101-102, 2 L.Ed.2d 80 (1957); Morales
v. N.Y. State Dept. of Corrections, 842 F.2d 27, 30 (2d Cir.
1988). In deciding a motion to dismiss, the Court must accept
the plaintiff's allegations of facts as true together with such
reasonable inferences as may be drawn in its favor. Murray v.
City of Milford, Connecticut, 380 F.2d 468, 470 (2d Cir. 1967).
See also Scheuer, supra, 416 U.S. at 236, 94 S.Ct. at 1686.
Defendants assert four grounds for dismissing plaintiff's
RICO claims. First, defendants contend that the complaint
fails to allege that defendants derived income from a pattern
of racketeering activity. Second, defendants claim that
plaintiff has not alleged any injury as a proximate result of
the purported RICO activity. Third, defendants assert that
plaintiff has failed to allege that defendants conducted the
affairs of an enterprise through a pattern of RICO activity.
Fourth, defendants claim plaintiff has not alleged a pattern
of racketeering. In addition, in letters addressed to the
Court and sent after this motion had been fully submitted,
defendants assert that the complaint should be dismissed for
failure to allege continuity of racketeering activity as
defined by the United States Supreme Court in H.J. Inc. v.
Northwestern Bell Telephone Co., ___ U.S. ___, 109 S.Ct. 2893,
106 L.Ed.2d 195 (1989). The Court will address these
contentions in turn.
Defendants first maintain that plaintiff has failed to
allege that defendants received and invested income from their
racketeering as required under 18 U.S.C. § 1962(a).*fn9
Plaintiff claims that defendants, by failing to reveal the true
purpose of their stock purchases in their Schedule 13D filings,
managed to obtain large quantities of Graphic stock at a price
at least $2.00 per share less than they would have paid if they
had truthfully revealed their intent to wage a proxy battle.
The difference between the price defendants paid for the stock
and the price they would have paid if their reporting had been
truthful is, according to plaintiff, the income from
racketeering as defined in § 1962(a).
Surprisingly, it appears that no Court has been directly
faced with the question of whether the ability to purchase
stock at a price less than its true market value due to fraud
is income under § 1962(a). Defendants, in asserting that such a
"discount" is not income rely on Hemmings v. Barian,
822 F.2d 688 (7th Cir. 1987). In Hemmings, the plaintiff claimed that
the defendant had promised to make payments to the plaintiff on
a loan but had failed to do so and had then spent the money not
delivered to the plaintiff in a new enterprise. Judge Richard
Posner refused to find that the plaintiff had properly alleged
a violation of § 1962(a). However, the grounds for his finding
are less than pellucidly clear, as illustrated by the
dramatically different readings given the case by the parties
in the instant case. It appears that Judge Posner felt that the
money used by the defendant to fund the new enterprise was not
itself received by fraud, even though that same money might
have gone to the plaintiff who was fraudulently denied
repayment of his loan.
Defendants contend that Judge Posner's ruling should be read
to mean that money saved as a result of fraudulent activity
cannot be income for the purpose of § 1962(a). The Court does
not draw this conclusion from Judge Posner's opinion. Instead,
it appears that Judge Posner was focusing on the plaintiff's
failure to plead a connection between the fraud and the income
invested in the alleged enterprise. Hemmings, 822 F.2d at 692.
Further, the Court finds that the meaning proposed by the
defendant would unreasonably restrict the meaning of income in
a RICO action. The Court cannot find that savings, which are
the direct result of fraudulent or otherwise illegal activity,
are not income. It is clear that, if defendants had purchased
their stock at an artificially low price created by their
illegal activity and had then immediately resold it after the
price had moved to its true market level, the difference
between the amount paid and the amount earned would be
considered income. Defendants want the Court to find that,
because they did not sell the stock they purchased at the
artificially low price, but instead simply used the savings
they garnered to purchase more stock than they would have had
if the price had been at its true market value, they did not
derive any income. This would be an unseemly result that the
Court will not adopt.
Plaintiff has clearly pleaded the receipt of income and its
investment into an enterprise engaged in interstate commerce.
Plaintiff avers that defendants received illegal discounts on
purchases of Graphic stock made prior to March 3, 1986.
Complaint ¶¶ 50, 65. Further, plaintiff alleges that the
savings received as a result of the illegally obtained lower
stock price were invested in Graphic and G & P Independent
Management Corp. ("G & P"), a corporation set up by defendants,
allegedly for the sole purpose of gaining control of Graphic.
Complaint ¶¶ 10, 66. The Court finds that these averments,
viewed in a light most favorable to plaintiff, state a
sufficient claim to survive a motion to dismiss.
Defendants' second assertion is that plaintiff has failed to
allege injury under § 1962(a). "Violation of § 1962(a) consists
of using or investing the proceeds of a pattern of racketeering
activity. One who has sustained injury as a result of the
investment may sue for a violation of section 1962(a). By
contrast, it cannot be said that one who has suffered injury by
reason of the predicate acts of racketeering has thereby been
injured by the investment of the proceeds." In re Gas
Reclamation, Inc. Securities Litigation, 659 F. Supp. 493, 511
(S.D.N.Y. 1987); Grider v. Texas Oil & Gas Corp.,
868 F.2d 1147, 1149 (10th Cir.), cert. denied, ___ U.S. ___, 110 S.Ct.
76, 107 L.Ed.2d 43 (1989).
Plaintiff has not alleged injury from defendants' investment
of income received from their racketeering activity. Plaintiff
has alleged that it was harmed by defendants' predicate acts
of securities and mail fraud due to the resulting artifically
low stock price. However, plaintiff has not pled how it was
harmed by defendants' investment of funds obtained as result
of the predicate acts. Accordingly, plaintiff's claims under
§ 1962(a) must be dismissed.
Defendants further challenge plaintiff's pleading on the
grounds that the complaint does not allege that defendants
engaged in a pattern of racketeering and conducted the affairs
of a RICO enterprise through a pattern of racketeering. The
courts have been struggling with the definitions of "pattern"
and "enterprise" since the passage of the RICO statute. The
Supreme Court moved last term toward resolving a growing
dispute among the Circuits over the meaning of basic terms
within the statute. H.J. Inc., supra, 109 S.Ct. 2893.
A threshold issue for the Court in this case is whether
there existed an enterprise through which the defendants
carried out their alleged racketeering activities. The statute
defines an "enterprise" as "[A]ny individual, partnership,
corporation, association, or other legal entity, and any union
or group of individuals associated in fact though not a legal
entity." 18 U.S.C. § 1961(4). "'[An] enterprise is an entity,
for present purposes a group of persons associated together for
a common purpose of engaging in a course of conduct.'" United
States v. Indelicato, 865 F.2d 1370, 1376 (2d Cir.), cert.
denied sub nom. Furnari v. United States, ___ U.S. ___, 109
S.Ct. 3192, 105 L.Ed.2d 700 (1989), quoting United States v.
Turkette, 452 U.S. 576, 583, 101 S.Ct. 2524, 2525, 69 L.Ed.2d
246 (1981). Reading the Complaint in the light most favorable
to the plaintiff, it is apparent that plaintiff has plead the
existence of at least one enterprise. It is elemental that an
enterprise does not need to be formally created, but can exist
as an association in fact. Plaintiff has pled that defendants,
acting as a association in fact, conducted their activities
aimed at manipulating the price of Graphic's stock. Further,
plaintiff alleges that G & P acted as the RICO enterprise after
it was incorporated on February 21, 1986.
Having found that there is an enterprise, the Court turns to
the question of the existence of a pattern of racketeering.
Two cases provide particular guidance in this area: the
Supreme Court's decision in H.J. Inc., supra, and the Second
Circuit's ruling in Beauford v. Helmsley, 865 F.2d 1386 (2d
Cir.), vacated and remanded, ___ U.S. ___, 109 S.Ct. 3236, 106
L.Ed.2d 584 (1989), reaffirmed 893 F.2d 1433 (2d Cir.), cert.
denied, ___ U.S. ___, 110 S.Ct. 539, 107 L.Ed.2d 537 (1989).
The Supreme Court found that the definition of a RICO pattern
has two elements: relationship and continuity. "[T]o prove a
pattern of racketeering activity a plaintiff . . . must show
that the racketeering predicates are related, and that they
amount to or pose a threat of continued criminal activity." 109
S.Ct. at 2900 (emphasis in original).
The requirement of relationship among predicate acts is
intended to limit the broad reach of the RICO statute.
"Congress's goal in fashioning its definition of 'pattern of
racketeering' was to exclude from the reach of RICO criminal
actions that were merely 'isolated' or 'sporadic.'"
Beauford, supra, 865 F.2d at 1391. But this does not mean that
the term relationship should be read too narrowly. "[A] RICO
pattern may be established without proof of multiple schemes,
multiple episodes, or multiple transactions; and  acts that
are not widely separated in time or space may nonetheless
properly be viewed as separate acts of racketeering activity
for purposes of establishing a RICO pattern." Id. The Supreme
Court stated, "'[C]riminal conduct forms a pattern if it
embraces criminal acts that have the same or similar purposes,
results, participants, victims, or methods of commission, or
otherwise are interrelated by distinguishing characteristics
and are not isolated events.'" H.J. Inc., supra, 109 S.Ct. at
Plaintiff has alleged multiple acts of false filings with
the SEC and transmittal of those filings through the use of
the mails. These acts could be considered part of a single
scheme to defraud Graphic's shareholders and officers. Even if
there is only a single scheme, that does not defeat
plaintiff's RICO claim. Beauford, supra, 865 F.2d at 1391. The
acts alleged by plaintiff are related and are not "isolated" or
"sporadic." Therefore, the Court finds that plaintiff has
sufficiently pleaded relationship.
The more difficult question is whether plaintiff has
sufficiently pled continuity. The concept of continuity has
proven to be the most indistinct of all the interpretations
given to the statutory frame of RICO by the courts. Justice
Blackmun, writing for the Court, addressed the definition of
continuity in a RICO enterprise in detail in H.J. Inc.,
indicating that the term should be read broadly.
"Continuity" is both a closed- and open-ended
concept, referring either to a closed period of
repeated conduct, or to past conduct that by its
nature projects into the future with a threat of
repetition. . . . A party alleging a RICO
violation may demonstrate continuity over a
closed period by proving a series of related
predicates extending over a substantial period of
time. Predicate acts extending over a few weeks
or months and threatening no future criminal
conduct do not satisfy this requirement: Congress
was concerned in RICO with long-term criminal
conduct. Often a RICO action will be brought
before continuity can be established in this way.
In such cases, liability depends on whether the
threat of continuity is demonstrated.
109 S.Ct. at 2902 (emphasis in original) (citations omitted).
Just as Justice Blackmun indicates that "continuity" should
not be defined narrowly, Justice Blackmun's own efforts to
provide guidance should not be given too constricted a reading
or be read in isolation. Thus a court should not merely look
at the duration of the enterprise and activities alleged,
check that against the time periods outlined by the Supreme
Court, and decide whether continuity exists. The determination
of the existence or non-existence of continuity requires the
court to look beyond the bare enterprise and predicate acts.
It is necessary for the court to examine the "overall context
in which the acts took place" in order to ascertain whether
sufficient continuity exists. United States v. Kaplan,
886 F.2d 536, 542 (2d Cir. 1989); Procter & Gamble
v. Big Apple Industrial Buildings, Inc., 879 F.2d 10, 17 (2d
Cir. 1989), cert. denied, ___ U.S. ___, 110 S.Ct. 723, 107
L.Ed.2d 743 (1990); Amsler v. Corwin Petroleum Corp.,
715 F. Supp. 103, 104 (S.D.N.Y. 1989). See Beauford, supra, 865 F.2d
In the instant case, plaintiff has alleged a series of
illegal acts spread over a period of, at most, seven months in
which defendants committed various related acts of mail and
securities fraud. Based on the Complaint, the securities and
mail fraud scheme concluded on March 31, 1986 with the filing
of amendment seven which truthfully reported defendants'
intent to wage a proxy battle for control of Graphic. While
plaintiff alleges that amendment seven was materially false,
Complaint ¶ 49, it does not allege that defendants continued to
file false Schedule 13D amendments after March 3, 1986.
Further, the fraud alleged was directed against plaintiff
Azurite and other shareholders and was designed to obtain a
discount by manipulating the stock price through false Schedule
13D filings. Once the true nature of defendants' activities was
revealed and the stock price moved to its approximate market
level, the fraud aimed at the stock price necessarily ended.
The fact that the scheme alleged was a closed-end,
short-term scheme is not sufficient, in and of itself for the
Court to find that continuity does not exist. However, other
courts have indicated that there is a burden on plaintiffs
alleging short-term, closed-end schemes to demonstrate in
their pleadings the threat of continuity. Simply pleading such
a scheme, without more, is insufficient. Airlines Reporting
Corp. v. Aero Voyagers, Inc., 721 F. Supp. 579, 584 (S.D.N Y
1989). In a letter to the Court written after the decision in
H.J. Inc., plaintiff indicated that because defendants continue
to control Graphic and G & P, continue to hold the stock in
Graphic, and are in the business of investing in corporations,
the Court should conclude that there is a threat of continuity
sufficient to support plaintiff's claims. Plaintiff urged the
Court to allow it to use discovery to determine that the
actions in the instant case were part of defendants' regular
course of business. Plaintiff relies on language in H.J. Inc.
stating, "[A] threat of continuity might be established at
trial by showing that the alleged bribes were a regular way of
conducting . . . business, or a regular way of conducting or
participating in the conduct of the alleged and ongoing RICO
enterprise." 109 S.Ct. at 2906.
Plaintiff's reliance on Justice Blackmun's closing paragraph
is misplaced. The pleading in H.J. Inc. indicated that the
alleged bribery was extensive in its duration and was on-going
at the time the complaint was filed. No such allegation can be
found in the complaint before this Court. Plaintiff's pleading
is clear: illegal acts were committed by defendants between
August 1985 and March 1986 that resulted in injury to plaintiff
Azurite and the putative class in February 1986 when those
stockholders sold their stock at a price below the true market
value. There the pleading ends. There is nothing in the
pleading alleging that defendants committed these same or
similar acts before, or that they committed them again in the
period between March 1986 and February 1989 when this action
was filed. Further, there is nothing in the pleadings that
would give rise to even an inference of a threat of similar
future activities by defendants. Plaintiff's letter to the
Court is not a part of its pleadings, and the accusations
contained therein will not be so considered.*fn10 Plaintiff
has not shown any threat of continuity. In light of the brief
duration of the alleged scheme, and the failure to plead any
threat of on-going or past activity, the Court finds that
plaintiff's RICO claims must be dismissed in their entirety.
C) Summary Judgment Motion
Defendants have further moved for summary judgment pursuant
to Fed.R. Civ.P. 56 with respect to plaintiff's federal
securities laws claims on the ground that the action was not
brought within the applicable statute of limitations.
Traditionally, federal courts have adopted analogous state
law statutes of limitations where the federal law at issue
does not provide one of its own. Such has long been the case
with private actions brought under § 10(b) of the Securities
Exchange Act of 1934. However, recently the Third Circuit
adopted a one year statute of limitations for claims arising
under § 10(b). In re Data Access Systems Securities Litigation,
843 F.2d 1537 (3rd Cir.) (en banc), cert. denied, ___ U.S. ___,
109 S.Ct. 131, 102 L.Ed.2d 103 (1988). The Third Circuit acted
in response to two Supreme Court decisions which adopted
uniform federal statutes of limitations for two specific
federal claims. See Agency Holding Corp. v. Malley-Duff &
Associates, Inc., 483 U.S. 143, 107 S.Ct. 2759, 97 L.Ed.2d 121
(1987) (RICO); DelCostello v. International Brotherhood of
Teamsters, 462 U.S. 151, 103 S.Ct. 2281, 76 L.Ed.2d 476 (1983)
(collective bargaining agreements). Defendants urge the Court
to follow the lead of the Third Circuit and adopt a uniform one
year statute of limitations for actions under § 10(b).
The Second Circuit has long applied New York State's statute
of limitations for common law fraud to actions brought under
§ 10(b), which provides that actions shall be brought within
six years of discovery. Armstrong v. McAlpin, 699 F.2d 79, 86
(2d Cir. 1983). This Court, and other courts in this District
have faced the request to change the law in this Circuit
presented by defendants with some frequency since Data Access,
and have repeatedly rejected that request. See, e.g., Matignon
Finance, Inc. v. Ameritel Communications Corp., 1989 WL 153282,
1989 U.S.Dist. LEXIS 14937, 15-16 (S.D.N.Y. 1989); Huang v.
Sentinel Government Securities, 709 F. Supp. 1290, 1301 n. 10
(S.D.N.Y. 1989); Eickhorst v. American Completion and
Development Corp., 706 F. Supp. 1087, 1102 (S.D.N.Y. 1989);
Metropolitan Securities v. Occidental Petroleum Corp.,
705 F. Supp. 134, 138 (S.D.N.Y. 1989). The Court rejects that
challenge once again today. The Court shall apply the New York
statute of limitations to plaintiff's claims under § 10(b).
Accordingly, defendants' motion for summary judgment on
plaintiff's federal securities laws claims is denied.
Defendants' motion to dismiss is granted in part and denied
in part. Defendants' motion for summary judgment is denied.
Plaintiff's wire fraud claims are dismissed pursuant to Rule
Plaintiff's claims under 18 U.S.C. § 1962(a) are dismissed
for failure to allege investment injury.
Plaintiff's RICO claims are dismissed in their entirety for
failure to allege continuity.
Plaintiff's § 10(b) claims shall be governed by New York
State's statute of limitations for common law fraud.
Leave to replead is granted.*fn11