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EPSTEIN v. HAAS SECURITES CORP.

February 21, 1990

LAURA EPSTEIN, PLAINTIFF,
v.
HAAS SECURITIES CORP., STANLEY ASLANIAN, F. SUPP. JR., L.F. ROTHSCHILD & CO., INC., EUGENE K. LAFF, ROBERT SCHOENTHAL, MATHEW R. DEANE, FRANCOIS MAYER, ROBERT R. ERRICO, ANDREW BERGER, JOEL MILLER, HENRY LORIN, HENLOR CAPITAL, LTD., IRWIN ZANDMAN, JOELLE HARRIS A/K/A MRS. JOELLE LORIN, ENN KUNNAPAS, LINDA KUNNAPAS, T.S. INDUSTRIES, WONDOOR, FRANK SHANNON, YARRIMUP (A PANAMANIAN CORPORATION), J.T. MORAN & CO., INC., JOHN T. MORAN, PAUL R. MIANO, MAUREEN STEFFENSON AND JOHN DOES I-X, DEFENDANTS. SOLANGE LANDAU, PLAINTIFF, V. TONI VALLEN, HAAS SECURITIES CORP., EUGENE K. LAFF, STANLEY ASLANIAN, JR., MARK BURGESS, L.F. ROTHSCHILD & CO., INC., ROBERT SCHOENTHAL, MATHEW R. DEANE, FRANCOIS MAYER, ROBERT R. ERRICO, ANDREW BERGER, JOEL MILLER, KUHNS BROTHERS, LAIDLAW, INC. F/K/A LAIDLAW ADAMS & PECK, INC., WALTER BAUR, HENRY LORIN, HENLOR CAPITAL, LTD., JOELLE HARRIS A/K/A MRS. JOELLE LORIN, ENN KUNNAPAS, LINDA KUNNAPAS, MAUREEN STEFFENSON, DR. IRWIN ZANDMAN, CAPITAL SHARES, INC., LAWRENCE C. CAITO, H. CLINTON POLLACK, FRANK SHANNON, YARRIMUP (A CORPORATION), J.T. MORAN & CO., INC., JOHN T. MORAN, PAUL R. MIANO, JACQUES M. DE STADELHOFEN, LEGAL ASSISTANT CORPORATION AND JOHN DOES I-IX, DEFENDANTS. R. CRAIG OVERTURF, PLAINTIFF, V. HAAS SECURITIES CORP., EUGENE K. LAFF, STANLEY ALSANIAN, JR., L.F. ROTHSCHILD & CO., INC., ROBERT SCHOENTHAL, MATHEW R. DEANE, FRANCOIS MAYER, ROBERT R. ERRICO, ANDREW BERGER, JOEL MILLER, HENRY LORIN, HENLOR CAPITAL, LTD., JOELLE HARRIS A/K/A MRS. JOELLE LORIN, ENN KUNNAPAS, LINDA KUNNAPAS, TONI VALLEN, MAUREEN STEFFENSON, DR. IRWIN ZANDMAN, CAPITAL SHARES, INC., LAWRENCE C. CAITO, H. CLINTON POLLACK, FRANK SHANNON, YARRIMUP (A CORPORATION), J.T. MORAN & CO., INC., JOHN T. MORAN, PAUL R. MIANO, JACQUES M. DE STADELHOFEN, LEGAL ASSISTANT CORPORATION AND JOHN DOES 1-10, DEFENDANTS. L.F. ROTHSCHILD & CO., INCORPORATED, PLAINTIFF, V. VICTOR M. CASTELAZO, SR., INDIVIDUALLY AND AS ANCILLARY GUARDIAN OF THE PROPERTY OF VICTOR M. CASTELAZO, III, AND LAURA CHRISTINA CASTELAZO, DEFENDANT. VICTOR M. CASTELAZO, SR., INDIVIDUALLY AND AS ANCILLARY GUARDIAN OF THE PROPERTY OF VICTOR M. CASTELAZO, III AND LAURA CHRISTINA CASTELAZO, COUNTERCLAIM PLAINTIFF, V. L.F. ROTHSCHILD & CO., INCORPORATED, TONI VALLEN, KUHNS BROTHERS & LAIDLAW, INC., WALTER H. BAUR, LEROY TWISTE, GOTTFRIED VON HOHENBERG, EUGENE K. LAFF, STANLEY ASLANIAN, JR., MARK BURGESS, ROBERT SCHOENTHAL, MATHEW P. DEANE, FRANCOIS MAYER, ANDREW M. BERGER, JOEL MILLER, HENRY LORIN, JOELLE LORIN, ENN H. KUNNAPAS, LINDA KUNNAPAS, MAUREEN STEFFENSON, HENLOR CAPITAL, LTD., J.T. MORAN & CO., INC., JOHN T. MORAN, PAUL MIANO, FRANK SHANNON, YARRIMUP (A CORPORATION), JACQUES M. DE STADELHOFEN, LEGAL ASSISTANT CORP., COUNTERCLAIM DEFENDANTS. JOHN T. GROEL, PLAINTIFF, V. L.F. ROTHSCHILD & CO., INC.; L.F. ROTHSCHILD, UNTERBERG, TOBIN, INC.; HAAS SECURITIES CORPORATION; STANLEY A. ASLANIAN; EUGENE K. LAFF; ETHEL SCHWARTZ; ROBERT A. SPIRA; THOMAS W. CLEGG; HENRY LORIN; FRANK SHANNON; ENN KUNNAPAS; MAUREEN STEFFENSON; JOELLE HARRIS; MATTHEW P. DEANE; ROBERT SCHOENTHAL; FRANCOIS J.P. MAYER; ANDREW L. BERGER; JOEL E. MILLER; ROBERT R. ERRICO AND JOHN DOES 1 THROUGH 10, DEFENDANTS. NANCY J. HERTZFELD AND FRANCES S. HERTZFELD, PLAINTIFFS, V. EUGENE K. LAFF, STANLEY ASLANIAN JR., MARJORIE A. LAFF, FRANK SHANNON, L.F. ROTHSCHILD & CO., INC., HAAS SECURITIES CORP., ROBERT SCHOENTHAL, MATTHEW R. DEANE, FRANCOIS MAYER, ROBERT R. ERRICO, ANDREW BERGER, JOEL MILLER, HENRY LORIN, HENLOR CAPITAL, LTD., JOELLE HARRIS A/K/A MRS. JOELLE LORIN, ENN KUNNAPAS, LINDA KUNNAPAS, MAUREEN STEFFENSON, DR. IRWIN ZANDMAN, CAPITAL SHARES, INC., LAWRENCE C. CAITO, YARRIMUP (A CORPORATION), J.T. MORAN & CO., INC., JOHN T. MORAN, PAUL R. MIANO AND JOHN DOES I-IX, DEFENDANTS. RON BASHAM, INDIVIDUALLY AND AS TRUSTEE OF THE ADVANCE PETROLEUM, INC. DEFINED BENEFIT PENSION PLAN AND TRUST, PLAINTIFF, V. L.F. ROTHSCHILD & CO., INC.; L.F. ROTHSCHILD, UNTERBERG, TOBIN, INC.; HAAS SECURITIES CORPORATION; STANLEY A. ASLANIAN; EUGENE K. LAFF; HENRY LORIN; HENLOR CAPITAL, LTD.; FRANK SHANNON; YARRIMUP (A CORPORATION); ENN KUNNAPAS; LINDA KUNNAPAS; MAUREEN STEFFENSON; JOELLE LORIN; IRWIN ZANDMAN; MATTHEW P. DEANE; ROBERT SCHOENTHAL; FRANCOIS J.P. MAYER; ANDREW L. BERGER; JOEL E. MILLER; ROBERT R. ERRICO; J.T. MORAN & CO., INC.; JOHN T. MORAN; PAUL R. MIANO; CAPITAL SHARES, INC.; LAWRENCE C. CAITO; AND JOHN DOES 1 THROUGH 10, DEFENDANTS.



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

        OPINION

Plaintiffs, aggrieved investors or representatives of aggrieved investors, are suing a number of individuals and companies alleged to have played some role in a scheme to manipulate the prices of certain securities. Presently before the Court are motions of various defendants: for summary judgment on claims of control person liability; to dismiss claims of both aiding and abetting and primary liability under federal securities laws for failure to state a claim and for failure to plead fraud with particularity; to dismiss federal securities claims as untimely and because the applicable sections do not create a private cause of action; to dismiss claims under the RICO statute for failure to state a claim; and to dismiss claims for punitive damages, contribution, indemnification and common law fraud.

I. Background

Plaintiffs allege that from around 1984 until the end of 1987, various of the defendants in these cases agreed to artificially increase and maintain the price for certain securities (hereinafter "the manipulated securities"). Defendant Frank Shannon,*fn1 a resident of the United Kingdom and the principal of defendant Yarrimup (a corporation); defendant Lawrence Caito, a trader and control person of defendant Capital Shares, Inc. (hereinafter "Capital Shares"); and defendant L.F. Rothschild & Co., Inc. (hereinafter "Rothschild") are named by some of the plaintiffs as having been among the conspirators. The alleged goal of the conspiracy was to increase the market price of the manipulated securities while they were being distributed to the public. The conspirators are said to have made and supervised the making of markets for these securities and then to have dominated and controlled these markets. The conspirators' activity is alleged to have consisted of increasing the volume of the trading in the manipulated securities through buying and selling between accounts and by means of fictitious trades.

The broker-dealer defendants, including defendants Haas Securities Corporation (hereinafter "Haas"), Capital Shares, and J.T. Moran & Co., Inc., are alleged to have held themselves out as independent market makers for all or certain of the manipulated securities, when in fact their market making activities consisted at least in part of illegal and conspiratorial pricing of the markets by the use of material inside information as to market positions.*fn2 Other defendants are alleged to have participated in the conspiracy by allowing their brokerage accounts to be used as nominee accounts to purchase and sell the manipulated securities. Some defendants are alleged to have withdrawn and concealed profits from the conspiracy by use of controlled, nominee and foreign bank accounts. Defendant Shannon is specifically accused of having helped finance the purchase of manipulated securities in order to insure that the supply of these securities did not exceed the demand at given price levels and in return for the pledging of large amounts of the manipulated securities to him or to Yarrimup. Defendant Caito is alleged to have made markets for some of the manipulated securities through defendant Capital Shares.

On March 16, 1987, the alleged conspiracy was the subject of an extensive article in Barron's entitled: "The Abracadabra Man, Step Right Up and See Him Turn Pennies Into Millions." Plaintiffs maintain that the Article increased the selling pressure on the manipulated securities. On March 19, 1987, defendant Rothschild*fn3 is alleged to have directed defendant Haas, for whom Rothschild served as a clearing broker, not to increase the total amount of margin in several of the manipulated securities in any customer accounts. At the time it issued these instructions, Rothschild is accused of having non-public information concerning the conspiracy but failing to disclose this information to parties to whom it owed a duty. After complaints by Haas that its ability to trade the securities between customer accounts would be restricted, Rothschild is alleged to have rescinded its directions. Rothschild is also accused of having made decisions to sell out certain of Haas' proprietary positions in the manipulated securities to protect its own proprietary positions. There seems to be no dispute that Rothschild did extend large loans on margin to Haas and to Haas' customers to purchase the manipulated securities.

After the drastic decline in the stock market on Monday October 19, 1987, the activity to artificially raise the prices for the manipulated securities is said to have dramatically increased. On October 28, 1987, Haas closed its doors, ceased doing business and, shortly thereafter, declared bankruptcy. On October 28, 1987, the manipulated securities lost a great deal of their market value. The various plaintiffs in these actions, investors or representatives of investors whose accounts were allegedly used in the scheme and who incurred pecuniary losses, then filed suit, asserting a number of causes of action against the various defendants.

II. Discussion

A.  Motions of Robert Errico and Andrew Berger

The complaints of plaintiffs Landau, Overturf, and Nancy and Frances Hertzfeld name Robert Errico as a defendant and assert that he was a control person for the purposes of Section 20(a) of the Securities Exchange Act of 1934, 15 U.S.C.A. § 78t(a) (1981), and Section 15 of the Securities Act of 1933, 15 U.S.C.A. § 770 (1981). The complaints also assert claims of primary liability and of aiding and abetting against Mr. Errico. The complaints of these same plaintiffs, as well as those of plaintiffs Groel and Basham and counterclaim plaintiff Castelazo, assert similar claims against Andrew Berger. Both Mr. Errico and Mr. Berger move to dismiss the claims, or in the alternative, for summary judgment.

Fed.R.Civ.P. 56(c) stipulates that a motion for summary judgment shall be granted if there is "no genuine issue as to any material fact and . . . the moving party is entitled to a judgment as a matter of law." Materiality of facts is determined by applicable substantive law, and a genuine dispute exists over a material fact if a reasonable jury viewing the evidence could decide in favor of the nonmoving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48, 106 S.Ct. 2505, 2509-10, 91 L.Ed.2d 202 (1986).

Plaintiffs contend that summary judgment is inappropriate at this time because "significant relevant discovery has yet to be completed." Specifically, some of the plaintiffs complain that they have yet to take several depositions. It is apparent, however, that almost all of the principal participants in the events which form the basis for these motions have already been deposed by at least some of the plaintiffs. In addition, plaintiffs offer no explanation of how additional depositions of these individuals would make the existence of genuine issues of material fact any more likely. Nor do plaintiffs even indicate the nature of the testimony they would seek to elicit. As a matter of law, an opponent of a summary judgment motion who claims to be unable to produce evidence in opposition to the motion because of unfinished discovery must file an affidavit explaining:

  1) the nature of the uncompleted discovery, i.e.,
  what facts are sought and how they are to be
  obtained; and
  2) how those facts are reasonably expected to
  create a genuine issue of material fact; and
  3) what efforts the affiant has made to obtain
  those facts; and

4) why those efforts were unsuccessful.

Burlington Coat Factory Warehouse Corp. v. Esprit De Corp., 769 F.2d 919, 926 (2d Cir. 1985). See also Fed.R.Civ.P. 56(f). In neither their memoranda nor in any of their affidavits have plaintiffs made such a showing. The Court will therefore treat both motions as motions for summary judgment.

1.  Control Person Liability

The parties disagree as to the legal standards which govern control person liability.*fn4 Defendants Errico and Berger contend that in order to establish a prima facie case of control person liability, plaintiffs must demonstrate a primary violation, that the defendant was a culpable participant in the alleged violation, and that the defendant actually controlled the primary violator.*fn5 For their part, plaintiffs maintain that they need only show a primary violation by Rothschild,*fn6 that defendants' role in Rothschild implied control person status, and that defendants were either negligent or knew of the violation.*fn7 However, the Court need not decide which legal standards to apply, for the claims against defendant Errico cannot withstand scrutiny under either standard and the claims against defendant Berger can withstand scrutiny under both.

Although plaintiffs argue that defendant Errico had the "obligation, duty and power" as director of compliance at Rothschild to "control and supervise" the activities of Rothschild, they offer no evidence to support this conclusion. Plaintiffs themselves describe Mr. Errico's role as "assuring that the actions of Rothschild, and its Executive Committee, were in conformity with the applicable federal securities laws and the rules and regulations promulgated thereunder." This description of Errico's role at Rothschild can hardly be said to imply control person status. There has been no suggestion that a director of compliance would as a general matter decide what action to take or direct or supervise the implementation of that action. It is undisputed that Errico was not a member of Rothschild's executive committee, which appears to have been the primary decision making body in Rothschild.

Plaintiffs have not offered evidence that Errico actually controlled Rothschild in practice. Plaintiffs refer to testimony indicating that Errico had frequent communications with Haas; might have authored a letter notifying Haas that Rothschild was imposing restrictions on Haas' business activities; participated in the decision to send the letter; received the return letter from Haas; brought the existence of a Barron's article outlining Haas' activities to the attention of a member of the executive committee; reported directly to one of the co-chief executive officers of Rothschild; used the term "we" when testifying about the restrictions put on Haas' activity; and could not identify any specific person designated by Rothschild's executive committee to oversee the firm's relationship with Haas. Plaintiffs also point out that there is no evidence that Errico was supervised or instructed by anybody in practice. This evidence, taken as a whole and with all the inferences drawn in plaintiffs' favor, can demonstrate no more than that Errico participated in the affairs of Rothschild as they related to Haas, not that he controlled them. None of the evidence demonstrates that Errico formulated any of the Rothschild's policies toward Haas. In fact, the evidence indicates that Errico acted as one would expect a director of compliance to act, advising the policy-makers and reporting directly to them.

The evidence with respect to defendant Berger is an entirely different matter. Unlike Errico, Berger was a member of the Rothschild's executive committee, and there is testimony to the effect that Berger was one of the top five executives at Rothschild. Berger himself indicates that the "executive committee discussed the firm's business and made decisions regarding the business" and that the committee was a "decision making committee." There is additional testimony to the effect that as a matter of practice committee members would report to the committee about their areas of responsibility, discussions of these matters would ensue, and a collective decision would eventually be made. Based upon this evidence, a factfinder could conclude that Berger's role at Rothschild implied control person status.

Despite Berger's claim that he took no part in the executive committee's activities relating to Haas, there is also sufficient evidence in the record for a factfinder to determine that Berger, as part of a group, actually controlled Rothschild generally and Rothschild's relationship with Haas specifically. Berger himself testified that the committee did discuss the business of Haas' securities. In their answers, defendants Schoenthal, Miller and Deane, other members of the executive committee, admit that the executive committee "made the managerial decisions which governed certain of Rothschild's actions and policies with regard to certain of Haas' activities." In fact, Deane indicates that matters concerning Haas and its securities became the exclusive province of the executive committee in late June or early July 1987. More specifically, there is evidence to the effect that Deane reported the appearance of the Barron's article to the committee; that the committee received internal analyses of certain of Haas' securities indicating that various stocks for which Haas made markets were overvalued and the likely subject of illegal manipulation; that the committee collectively decided to exert pressure on Haas during the summer of 1987; and that the committee agreed that the proposed debt reduction schedule for Haas was acceptable. Berger himself testified that the committee's perceptions of Haas' difficulties precipitated the institution of changes in the relationship between Rothschild and Haas. Finally, it was reportedly Berger who told defendant Laff to sign personal guarantees of the debts Haas owed to Rothschild "before the sun sets."

Defendant Errico's motion for summary judgment with respect to the claims asserted against him under the theory of control person liability is granted. Defendant Berger's motion for summary judgment on these same claims is denied.

2.  Aiding and Abetting

Errico and Berger contend that the claims of aiding and abetting asserted against them by plaintiffs should be dismissed because they fail to satisfy Fed.R.Civ.P. 9(b) and fail to state a claim. Rule 9(b) provides that: "In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." To pass scrutiny under Rule 9(b), the allegations in a complaint must give defendants "fair notice of plaintiffs' claims and the grounds upon which they rest" and provide "adequate information to frame a response." In re Gas Reclamation, Inc. Securities Litigation, 659 F. Supp. 493, 503 (S.D.N.Y. 1987) (hereinafter "In re Gas"). As a general matter, "a complaint should not be dismissed for failure to state a claim 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." Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-02, 2 L.Ed.2d 80 (1957). In order to assert a claim for aiding and abetting, plaintiffs must allege:

  (1) a securities law violation by the primary
  wrongdoer; (2) knowledge of the purported
  violation on the part of the aider and abettor;
  and (3) conduct by the aider and abettor
  constituting substantial assistance in achieving
  the primary wrongdoer's fraud.

In re Gas, supra, at 503. The Court finds that plaintiffs' complaints assert viable claims of aiding and abetting against Berger and Errico and state these claims with sufficient particularity.

With respect to Errico, plaintiffs' complaints assert that Rothschild committed various securities law violations, that Errico as Rothschild's compliance director was charged with assuring that Rothschild's actions were in compliance with the securities laws, and that Errico "intentionally or with reckless disregard" failed to discharge this responsibility. Where a duty is owed by the aider and abettor, recklessness is sufficient to satisfy the knowledge requirement. ITT, an Int'l Inv. Trust v. Cornfield, 619 F.2d 909, 923 (2d Cir. 1980); Mishkin v. Peat, Marwick, Mitchell & Co., 658 F. Supp. 271, 273 (S.D.N.Y. 1987); Bernstein v. Crazy Eddie, Inc., 702 F. Supp. 962, 978 (E.D.N.Y. 1988). Plaintiffs have all plead that Errico owed them a duty of care and the Court is not prepared to find as a matter of law that no such duty existed. Moreover, the facts asserted against Errico are sufficiently specific to give him notice of the charges against him.

There can be little doubt that the numerous allegations against the executive committee are sufficient when taken as a whole to state a claim of aiding and abetting. Berger contends however that the allegations against him as an individual fail to satisfy Rule 9(b). Complaints which assert allegations of fraud against multiple defendants should "inform each defendant of the nature of his alleged participation in the fraud." DiVittorio v. Equidyne Extractive Indus., Inc., 822 F.2d 1242, 1247 (1987). Where the fraud was perpetrated by a collective body, however, a plaintiff need not refer to each member of the body in each factual allegation in his complaint. Plaintiffs allege that the executive committee controlled the managerial decisions which governed Rothschild's relationship with Haas and that Berger, as a member of the executive committee, took part in these decisions. Specifically, the executive committee is alleged to have directed that increasingly restrictive limitations be put on the brokerage activities of Haas, sold out certain of Haas' proprietary positions in the manipulated securities, failed to disclose information about Haas and the conspiracy to plaintiffs, and traded in the manipulated securities on the basis of material, non-public information in violation of Rule 10b-5, 17 C.F.R. § 240.10b-5 (1988). The Court finds that plaintiffs have stated their claim of aiding and abetting against Berger with sufficient particularity.

B.  Motions of Rothschild, Deane, Schoenthal, Miller, Berger
    and Errico to Dismiss ...

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