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DILLON v. MILITANO

March 6, 1990

JOHN DILLON, INDIVIDUALLY AND ON BEHALF OF ALL OTHERS SIMILARLY SITUATED, PLAINTIFF,
v.
VINCENT MILITANO, MILTON SONNEBERG, MOORE & SCHLEY CAMERON & CO., STANLEY CHASE AND SECURITIES SETTLEMENT CORP., DEFENDANTS.



The opinion of the court was delivered by: Milton Pollack, Senior District Judge:

OPINION

Plaintiff, a putative class representative, filed suit against the defendants alleging violations of Sections 9(a)(2), (3), (4), 10(b) and 20 of the Securities Exchange Act of 1934, 15 U.S.C. § 78i, 78j and 78t, as amended, and Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder.*fn1

Plaintiff alleged that the defendants had engaged in a scheme to corner the market in the common stock of Chase Medical Group, Inc., listed and traded on the American Stock Exchange ("AMEX" hereafter).

Defendant Securities Settlement Corp. has moved under Rule 12(b)(6), Fed.R. Civ.P. to dismiss the complaint against it for failure to state a claim upon which relief can be granted. Securities Settlement Corp. also seeks to dismiss the complaint pursuant to Rule 9(b), Fed.R.Civ.P.

For the reasons stated below, Securities Settlement Corp.'s 12(b)(6) motion will be granted.

Background

Vincent Militano and Milton Sonneberg, two brokers employed by Moore & Schley, Cameron & Co. ("Moore & Schley"), allegedly schemed to corner the market in Chase Medical Group, Inc., common stock.*fn2 From August, 1988 through January, 1989, when the AMEX suspended trading in Chase Medical stock, Militano and Sonneberg bought up 108% of the public float of the stock. The price of the stock rose from $4.50 per share to a high of $13.625.

In order to make the scheme successful, Dillon and Militano used customer accounts without authorization, purchased shares from naked short sellers and fraudulently obtained extensions of the time to meet margin requirements.

Securities Settlement Corp. ("SSC"), Moore & Schley's customary clearing broker, cleared all the trades in question.

The three Counts of the complaint make undifferentiated charges against the various defendants.*fn3

In order to state a claim against SSC, the plaintiff must show a primary violation of one of the applicable sections of the 1934 Act or a secondary violation through "control" or by aiding and abetting validly pleaded.

Primary Violations

1. Section 9

The complaint explicitly removes SSC from primary liability for § 9 violations. "Defendants (other than . . . Securities Settlement Corp.)" accumulated the position in Chase Medical stock. Complaint ¶ 6.

2. Section 10(b) and Rule 10b-5

While there is no specific allegation that SSC violated § 10(b) and Rule 10b-5, several paragraphs of the complaint and Counts II and III allege that SSC or "all defendants" knowingly and/or recklessly made material misrepresentations and omissions.*fn4

Clearing firms, such as SSC, relieve brokerage firms, such as Moore & Schley, of the huge costs associated with "back-of-fice" operations. The Securities and Exchange Commission, and many stock exchanges, permit brokerage firms like Moore & Schley to contract with clearing firms like SSC, who, for a fee, will meet certain record-keeping and other regulatory requirements for the brokerage firm. The brokerage firm typically is known as the "introducing firm," and the clearing firm handles the "mechanical, record-keeping functions related to the clearance and settlement ...


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