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