payments made by the Company." Complaint at ¶ 88. Like R.K.
Patel and Levine, Robbins, as one of the Director Defendants,
allegedly "delegated full authority" to A. Patel and Shah to
seek expedited approval from the FDA of Par products, id.; was
aware of the bribery scheme, id. at ¶ 124; acted to conceal it,
id. at ¶ 19; and signed some of Par's allegedly misleading
statements, id. at ¶ 20. Again, these allegations are
sufficient to state a prima facie case of § 20(a) controlling
Aiding and abetting liability against Robbins has also been
sufficiently pleaded, for the same reasons noted
supra with respect to R.K. Patel.
Robbins also asks the Court to dismiss the complaint on the
grounds that it does not satisfy the particularity
requirements of Rule 9(b). The complaint specifies the
statements alleged to be false or misleading, the time and
place in which such statements were made, and which of the
defendants made the statements (either directly or
indirectly), and explains why plaintiffs believe the
statements were false or misleading. Robbins is specifically
alleged to have signed Par's Form 10-K's for 1986 and 1987 and
to have had access, as the sole member of the audit committee
to Par's books and records, which plaintiffs allege included
information as to the alleged payments. Thus, the allegations
of the complaint are adequate to give Robbins notice of the
charges against him, and they satisfy the requirements of Rule
9(b). See Goldman v. Belden, 754 F.2d at 1069-70; In re Coleco
Securities Litigation, 591 F. Supp. 1488, 1489 (S.D.N.Y. 1984);
Gross v. Diversified Mortgage Investors, 431 F. Supp. 1080
For these reasons, Robbins' motion to dismiss Count I of the
complaint is denied.
3. Shah and Quad
Defendant Shah is not an officer or director of Par, but
instead is the president and chief executive officer of Quad.
Shah, along with A. Patel, allegedly made the illegal payments
to FDA officials. The complaint asserts liability against Shah
and Quad on the ground that they aided and abetted the primary
violation. Shah argues that the claim against him must be
dismissed because there is no allegation that he intended to
assist Par in making misstatements, or that he rendered
substantial assistance to any acts of securities fraud by Par.
Quad joins in his argument.
Shah does not dispute (for purposes of this motion) that he
rendered substantial assistance to the bribery scheme. He
argues, however, that the complaint does not sufficiently
allege scienter to hold him as an aider and abettor. He also
argues that the complaint makes no allegations that he
assisted in the preparation or dissemination of Par's
misleading statements, nor is it alleged that he had any
authority to determine the contents or timing of Par's
statements. Shah submits, therefore, that he is not alleged to
have given substantial assistance to the primary violation and
therefore cannot be held liable as an aider and abetor.
Shah and Quad first argue that plaintiffs have not alleged
the requisite scienter. The complaint, however, expressly
alleges that Shah and Quad "knew that the adverse facts
specified herein existed and that such adverse facts had not
been disclosed to the investment community," ¶ 22; that "[e]ach
of the defendants herein knew . . . [the] misleading statements
. . . would adversely affect the integrity of the market for
Par common stock and artificially inflate or maintain the price
. . .," and in doing so acted knowingly, ¶ 23. These
allegations, which support an inference that Shah and Quad
intended to aid the other defendants in their alleged plan to
defraud investors, are sufficient to meet the heightened
scienter requirement described in IIT, An International
Investment Trust, 619 F.2d 909 (2d Cir. 1980) and Edwards &
Hanly v. Wells Fargo Securities Clearance Corp., 602 F.2d 478,
484 (2d Cir. 1979), cert. denied, 444 U.S. 1045, 100 S.Ct. 734,
62 L.Ed.2d 731 (1980), which held that, in the absence of a
duty to disclose, the scienter requirement scales upward such
that the defendant must act with "something closer to actual
intent to aid in
a fraud," Edwards & Hanly, 602 F.2d at 485, or "'`scienter of
the high "conscious intent" variety'." IIT, An International
Investment Trust, 619 F.2d at 925 (quoting Woodward v. Metro
Bank of Dallas, 522 F.2d 84, 97 (5th Cir. 1975)).
Shah and Quad next argue that the complaint does not
adequately allege substantial assistance on their part.
Although some cases have held that the alleged aider and
abettor must have substantially assisted the preparation or
dissemination of the fraudulent statements, see, e.g., In re
Union Carbide Business Securities Litigation, 666 F. Supp. 547,
564 (S.D.N.Y. 1987); Terrydale Liquidating Trust v. Gramlich,
549 F. Supp. 529, 531 (S.D.N.Y. 1982), it is well established
that silence or inaction can be substantial assistance when it
is "designed intentionally to aid the primary fraud or it was
in conscious and reckless violation of a duty to act."
Armstrong v. McAlpin, 699 F.2d at 91 (citing IIT, An
International Investment Trust v. Cornfeld, 619 F.2d at
Even assuming that the bribery itself was not action enough
to amount to substantial assistance to the securities fraud,
the complaint sufficiently alleges that the intentional
failure of Shah and Quad to disclose the bribery scheme was
designed to aid that fraud. The failure of these defendants to
disclose the existence of the bribery scheme, of course,
assisted the securities fraud, since disclosure would have
destroyed the securities scheme. It is also a fair inference
from the complaint that Shah's and Quad's failure to disclose
was designed intentionally to aid the securities fraud, since
the securities fraud provided Shah and Quad with protection
from disclosure of the bribery by the other defendants.
Disclosure of the bribery scheme would likely have led to
criminal penalties for Shah and Quad. In those respects, this
case is similar to Brennan v. Midwestern Life Insurance Co.,
417 F.2d 147 (7th Cir. 1969), cert. denied, 397 U.S. 989, 90
S.Ct. 1122, 25 L.Ed.2d 397 (1970), in which aiderabettor
liability was found where the defendant did not disclose the
wrongdoing, which was being committed by a dealer in
defendant's stock, because the wrongdoing benefitted its plans
to merge with another company.
Furthermore, Shah and Quad were more than mere bystanders to
the securities fraud. Shah, on behalf of Quad and the other
defendants, personally implemented the bribery scheme. While
the bribery alone did not assist the preparation of misleading
statements, nor was it the proximate cause of plaintiffs'
harm,*fn14 the combination of these defendants' participation
in the bribery, knowledge of the securities fraud, and
intentional inaction for their own benefit, support a
conclusion that Shah and Quad "associate[d] themselves with
the venture or participate[d] in it as something they wish[ed]
to bring about," IIT, An International Investment Trust v.
Cornfeld, 619 F.2d at 927 (citing United States v. Peoni,
100 F.2d 401, 402 (2d Cir. 1938) (L. Hand, J.)).
Accordingly, the motions to dismiss the claim of aiding and
abetting liability against defendants Shah and Quad are
III. THE RICO CLAIMS
Counts II and III of the complaint charge that all of the
defendants except Par violated RICO by conducting the affairs
of an enterprise (Par) through a pattern of racketeering
activity. The pattern of racketeering activity allegedly
consisted of a scheme or schemes to commit the following
alleged predicate acts: (1) bribing FDA officials in violation
of 18 U.S.C. § 201, (2) mailing false and materially misleading
financial statements in violation of the mail fraud statute,
18 U.S.C. § 1341, and (3) the wire fraud statute, 18 U.S.C. § 1343,
and (4) violating § 10(b) of the Exchange Act and Rule
10b-5. Complaint at ¶ 134. Count II claims a substantive
violation of RICO, 18 U.S.C. § 1962(c), while Count III claims
a violation of the RICO conspiracy provision,
18 U.S.C. § 1962(d).*fn15
The elements of a RICO claim are (1) the existence of an
"enterprise" engaged in or affecting interstate commerce; (2)
a pattern of racketeering activity by the defendants; (3) a
nexus between the pattern of racketeering activity and the
enterprise; and (4) an injury to plaintiff in his business or
property "by reason of" the violation of RICO. Sedima, S.P.R.L.
v. Imrex Co., 473 U.S. 479, 105 S.Ct. 3275, 87 L.Ed.2d 346
A. Does the Complaint Allege Predicate Acts?
In § 1961(1), the RICO statute defines "racketeering
activity" by listing numerous predicate acts. Thus, the initial
question in evaluating this claim is whether it alleges that
the defendant has committed any of the predicate acts. The
bribery, mail fraud and wire fraud alleged by plaintiffs in
this case are specifically included in § 1961(1) and are
therefore sufficiently pleaded as predicate acts. With respect
to the allegation that defendants violated § 10(b) and Rule
10b-5, however, plaintiffs have not alleged a "predicate act"
under § 1961(1).
Section 1961(1)(D) lists "fraud in the sale of securities"
as a predicate act. In Moss v. Morgan Stanley, 719 F.2d 5, 18
n. 4 (2d Cir. 1983), the Second Circuit declined to address the
"complex and far-reaching question" of the scope of this
language, and the issue of whether it covers all securities
fraud under § 10(b) apparently remains undecided.
By the plain language of § 1961(1)(D), securities fraud is
only a predicate offense if the fraud occurs in the actual sale
of a security.*fn16 Plaintiffs have given the Court no basis
for holding that the language Congress used should not be read
literally. Nor have plaintiffs directed the Court to any
legislative history suggesting that Congress meant to make all
violations of § 10(b) predicate acts under RICO. Thus, giving §
1961(1)(D) its plain meaning, RICO does not incorporate all
violations of § 10(b) and Rule 10b-5, but rather is limited to
those fraudulent acts that occur in an actual sale transaction.
It is reasonable to assume that Congress, had it wanted to
make the RICO predicate acts coextensive with § 10(b), would
have used the same or similar language in § 1961(1)(D) that it
used in § 10(b). Had Congress intended RICO to be coextensive
with § 10(b), it certainly knew how to do so.*fn17 However,
"fraud in the sale of securities" is quite limited in
comparison to the broader language Congress used in § 10(b),
which prohibits fraud "in connection with the purchase or sale
of any security." The "in connection with" language provides
standing only to plaintiffs who have either purchased or sold
securities, but it does not limit liability to defendants who
sold or bought from the plaintiffs. Thus, under the "in
connection with" requirement, a defendant may be held liable
even though he was not a party to a securities
transaction.*fn18 This concept arose directly out of the "in
connection with" language.*fn19 The language in § 1961(1)(D)
— "fraud in the sale of securities" — is much less
susceptible to such an interpretation, and to stretch the
language so far in the absence of any evidence that Congress
intended such a result would be an act of judicial legislation.
When one considers that Congress "enacted this legislation
in 1970 against the developed backdrop of almost forty years
of federal securities law," International Data Bank, Ltd. v.
Zepkin, 812 F.2d 149, 152 (4th Cir. 1987), the fact that
Congress opted not to use the language "in connection with the
purchase or sale of any security," or something similar, must
be considered significant and meaningful. Additionally,
Congress chose not to use the broad language it used in
defining other predicate acts in § 1961(1), such as bankruptcy
fraud, where it used the language "any offense involving fraud
connected with a case under title 11." Congress could have
incorporated the broad reach of § 10(b) quite simply by using
similar language, but it did not do so.
The Court's conclusion is that the phrase "fraud in the sale
of securities" as used by Congress in § 1961(1)(D) must be read
to mean what it says, such that only fraud that occurs as part
of the actual securities transaction is a predicate act under
that provision. In this case, it is not alleged that defendants
sold any securities to plaintiffs. Instead, plaintiffs claim
that defendants' issuance of misleading statements caused them
to buy their shares on the open market at artificially inflated
prices. Therefore, defendants have not committed "fraud in the
sale of securities" as is required by § 1961(1)(D), and
plaintiffs have not stated a RICO claim based on defendants'
alleged securities fraud.*fn20
B. Do the Plaintiffs have Standing?
With respect to the other alleged predicate acts, defendants
argue that plaintiffs lack standing to bring the RICO claims.
In Sedima, the Supreme Court held that a "plaintiff only has
standing [under 1964(c)] if, and can only recover to the extent
that, he has been injured in his business or property by the
conduct constituting the violation." Id. 473 U.S. at 496, 105
S.Ct. at 3285. Thus, plaintiffs must allege facts indicating
their injury was proximately caused by the RICO pattern of
racketeering activity or the individual RICO predicate acts.
See Hecht v. Commerce Clearing House, Inc., 897 F.2d 21 (2d
Cir. 1990). In Hecht, the Court of Appeals explained the RICO
causation requirement as follows: "the RICO pattern or acts
proximately cause a plaintiff's injury if they are a
substantial factor in the sequence of responsible causation,
and if the injury is reasonably foreseeable or anticipated as a
natural consequence." Id. at 24. Thus, factual causation is
insufficient. Id. at 24.
In this case, plaintiffs' allege they were "damaged as a
result of the pattern of racketeering activity . . . and
incurred substantial monetary damages, including paying an
artificially inflated purchase price for their shares of Par
common stock." The issue, then, is whether the alleged
predicate acts that remain — bribery, mail fraud and wire
fraud — proximately caused the plaintiffs to buy Par stock at
an artificially inflated price.
In Roeder v. Alpha Industries, Inc., 814 F.2d 22 (1st Cir.
1987), much like the present case, the plaintiff alleged that a
bribery scheme and the nondisclosure thereof violated the
securities laws and RICO. In his RICO claim, the plaintiff
claimed that he had been injured because he purchased stock at
an inflated price before disclosure of the bribery, and because
the stock declined in value after disclosure. After dismissing
the securities fraud claim, the court ruled that the bribery
scheme did not proximately cause the inflation of the stock
price, saying that "an inflated market price of Alpha's stock
would not be 'by reason of the bribery. If the price of [the
company's] stock was higher than it should have been, this was
'by reason of nondisclosure." 814 F.2d at 29. The same
conclusion is warranted here. In this case, to the extent
plaintiffs were injured, it was because they were induced to
purchase Par stock at a price that did not reflect the fact
that Par's success was at least partly the result of the
bribery scheme. Had there been disclosure, the plaintiffs
clearly would not have bought the stock at that price and
therefore would have suffered no injury. Thus, plaintiffs'
claim in this case that they were injured by reason of the
bribery predicate acts is without merit.*fn21
Finally, defendants argue that the portion of the RICO claim
based on mail and wire fraud predicate acts fails to state a
claim because plaintiffs have not alleged reliance on the
claimed misleading statements. In ¶ 128 of the complaint,
however, plaintiffs allege that they "relied, to their damage,
on the reports and statements . . . and/or the integrity of the
market price of Par common stock." Thus, reliance on the
misleading statements has been alleged, and plaintiffs must be
allowed the opportunity to prove it.*fn22
C. The RICO Conspiracy Claim
The second RICO claim alleges that defendants Levine, A.
Patel, R.K. Patel, Robbins, Shah and Quad conspired to violate
RICO, and are therefore liable to plaintiffs under §
Section 1962(d) makes it "unlawful for any person to
conspire to violate any of the provisions of subsections (a),
(b), or (c) of this section." Having limited the alleged
predicate acts to mail and wire fraud, the Court reads the
complaint as alleging that the defendants conspired to inflate
artificially the price of Par's stock through a pattern of
mail and wire fraud in violation of § 1962(c).
As with their substantive RICO claim, to have standing to
assert their conspiracy claim against the defendants,
plaintiffs must allege that they have been injured by the
conspiracy. The Second Circuit recently held that, because an
agreement cannot by itself cause injury, "injury from an overt
act is necessary and sufficient to establish civil standing
for a RICO conspiracy violation." Hecht, at 25. The court
further held that those overt acts must also be § 1961
predicate acts in order to confer standing. Id.
Since Shah and Quad are not alleged to have committed any of
the predicate acts of mail and wire fraud, plaintiffs do not
have standing to assert a RICO conspiracy claim against them.
With respect to the Director Defendants, however, who are
alleged to have engaged in mail and wire fraud by mailing
false and materially misleading financial statements and
causing the same to be transmitted by wire communication, the
complaint's allegations of overt predicate acts in furtherance
of the alleged conspiracy are sufficient to give plaintiffs
standing under RICO. Accordingly, defendants' motions to
dismiss Count III of the complaint is granted as to Shah and
Quad and denied as to the Director Defendants.
IV. THE STATE LAW CLAIMS
Since federal claims have been stated against each of the
defendants, principles of pendent jurisdiction support this
Court's exercise of jurisdiction over Counts IV and Count V.
Count V, however, which alleges negligent misrepresentation
by the Director Defendants and Par, fails to state a claim
upon which relief may be granted. Under New York law, a claim
for negligent misrepresentation must generally be based on
formal contractual privity between plaintiff and defendant,
see Ultramares Corp. v. Touche, 255 N.Y. 170, 179, 174 N.E. 441
(1931), but this requirement is occasionally relaxed where the
defendant intentionally directed a misstatement at a "settled
and particularized class," the identity of the members of which
the defendant was aware before the misstatement was made.
Brickman v. Tyco Toys, Inc., 722 F. Supp. 1054, 1062 (S.D.N Y
1989), quoting White v. Guarente, 43 N.Y.2d 356, 363, 401
N YS.2d 474, 479, 372 N.E.2d 315, 320 (1977). Here, plaintiffs
were not such a particularized group when the
misrepresentations were made, but simply members of the general
investing public who might choose to invest in Par based on the
company's statements. Moreover, the alleged misstatements were
made in annual reports, quarterly reports, press releases, a
magazine article and documents filed with the SEC, indicating
that they were not directed by defendants at any specific
group. Accordingly, Count V of the complaint fails to state a
claim for negligent misrepresentation against the defendants.
See Brickman v. Tyco Toys, Inc., supra.
In summary, Counts I, II and III of the complaint are
dismissed in certain respects, as described above, and Count
V of the complaint is dismissed in its entirety. With respect
to the remainder of the complaint, defendants' motions to
dismiss are denied. Plaintiffs are ordered to file and serve,
within 10 days of the entry of this opinion and order, an
amended complaint to accord with this opinion.