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AZURITE CORP. LTD. v. AMSTER & CO.

February 13, 1990

AZURITE CORP. LTD., INDIVIDUALLY AND ON BEHALF OF ALL OTHERS SIMILARLY SITUATED, PLAINTIFFS,
v.
AMSTER & CO., FORMERLY KNOWN AS LAFER, AMSTER & CO., ARNOLD MARVIN AMSTER, BARRY STUART LAFER, AND JOEL RICHARD PACKER, DEFENDANTS.



The opinion of the court was delivered by: Leisure, District Judge.

  OPINION AND ORDER

This is an action for damages arising out of an alleged conspiracy to violate federal securities laws by failing to disclose legally-required, material information relating to a proposed proxy contest for control of a corporation.*fn1 Plaintiffs allege that defendants have violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Plaintiffs also seek recovery under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et seq. Defendants have now moved to dismiss plaintiffs' claims pursuant to Fed.R.Civ.P. 9(b) and 12(b), and have also moved for summary judgment on plaintiff's claims under § 10(b) pursuant to Fed.R.Civ.P. 56.

BACKGROUND

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, 240.13d-2.

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.

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.

DISCUSSION

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

  ...

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