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September 19, 1990


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


The court has before it motions to dismiss portions of the "second amended consolidated and supplemental complaint," referred to hereafter as "the Complaint." The court dismissed parts of an earlier pleading, the "consolidated and amended complaint" (hereafter called "the First Complaint), by Memoranda and Orders dated December 30, 1988, Bernstein v. Crazy Eddie, Inc., 702 F. Supp. 962 (E.D.N.Y. 1988) ("the December Order"), and June 16, 1989, In re Crazy Eddie Securities Litigation, 714 F. Supp. 1285 (E.D.N.Y. 1989) ("the June Order"). The court assumes familiarity with those decisions.

The First Complaint alleged claims by plaintiffs, as purchasers of the common stock of defendant Crazy Eddie, Inc. (Crazy Eddie), against Crazy Eddie and various of its former officers, directors, accountants, and underwriters. That pleading invoked the Securities Act of 1933 (the Securities Act), 15 U.S.C. § 77a et seq. (1982 & Supp. IV 1986), the Securities Exchange Act of 1934 (the Exchange Act), 15 U.S.C. § 78a et seq. (1982 & Supp. IV 1986), the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. § 1961 et seq. (1982 & Supp. IV 1986), and state law.

The First Complaint asserted, among other things, that the defendants made or aided and abetted the making of materially false and misleading statements and omissions in connection with three public offerings of Crazy Eddie securities and with the sale of Crazy Eddie securities in general, causing plaintiffs to purchase the securities at a price higher than they would have paid had the truth about Crazy Eddie been known.

In substance the First Complaint asserted the following. Crazy Eddie, a New York corporation founded by Eddie Antar and controlled by the Antar family, first sold shares to the public in September 1984. Between that time and November 1987, although not in all cases throughout that period, the individual defendants were its directors or officers. During that period defendant Peat Marwick Main & Co. (Peat Marwick) and its predecessor certified the financial statements that Crazy Eddie filed with the Securities and Exchange Commission (SEC) and disseminated to the public.

Crazy Eddie made three public offerings of securities underwritten by defendants Oppenheimer & Co., Inc. (Oppenheimer), Wertheim & Co., Inc. (Wertheim), Bear, Stearns & Co., Inc. (Bear Stearns) and Salomon Brothers, Inc. (Salomon). Crazy Eddie offered shares of common stock in March of 1985 and 1986, and convertible subordinated debentures in June of 1986.

The First Complaint described the alleged participation of the defendants in (1) material misstatements and omissions in registration statements and prospectuses, (2) the employment of devices, schemes, and artifices to defraud and the making of material misstatements and omissions falsely assuring investors of Crazy Eddie's strong financial condition, and (3) the commission of violations of RICO. The court will not repeat its earlier description of the detailed facts alleged.

The Complaint, filed in October 1989, is in substantial part identical to the First Complaint, but also asserts (1) new claims under the Exchange Act, RICO, and state law regarding Crazy Eddie's first public offering of stock in September 1984; (2) new claims under the Securities Act, the Exchange Act, RICO, and state law as to private sales by Oppenheimer of Crazy Eddie stock in December 1985 and March 1986; (3) amended "control person" claims under the Securities and the Exchange Acts; (4) amended RICO claims against several individual defendants; and (5) claims against three additional individual defendants, Allen Antar, Eddie Gindi, and Kathleen Morin, and against Penn & Horowitz, an accounting firm that performed auditing and other services in the early 1980's, and its successor J. Liebman & Co. The Complaint drops Crazy Eddie now in bankruptcy, as a defendant.

In addition, the Complaint adds a new plaintiff, James R. Schwebel, an alleged purchaser of the June 1986 debentures during the class period, and repleads the Securities Act, Exchange Act and state law claims based on the offering of the debentures. The court dismissed these claims because none of the plaintiffs was a debenture holder. See Bernstein, 702 F. Supp. at 972.

Schwebel also filed a class action (89 CV 165) on January 17, 1989 (Schwebel Complaint), alleging claims under Section 11 and 12 of the Securities Act, Sections 10(b) and 20 of the Exchange Act, and state law against many of the defendants named in the First Complaint for misconduct relating to the sale of the debentures. The court treats Schwebel's class action as consolidated with that of plaintiffs for purposes of discovery, but will address claims raised in that complaint here.

Several individual defendants — Eddy Antar, Solomon E. Antar, Edmond Levy, Steve Pasquariello, Carl G. Zimel, and Isaac Kairey — move to dismiss portions of the Schwebel Complaint and the Complaint. The underwriters Oppenheimer, Wertheim, Bear Stearns, and Salomon, and also Peat Marwick have, by letter, joined in the individual defendants' motions. Penn & Horowitz moves to dismiss the Complaint.

The default entered against Eddie Antar (Antar) has made his motion moot.

I. Motions to Dismiss After Answer

Plaintiffs argue that because a motion to dismiss a complaint for failure to state a claim "shall be made before pleading if a further pleading is permitted," Fed.R.Civ.P. 12(b), the court should not consider the letters of the underwriters and Peat Marwick submitted after the filing of answers. The letters are sufficient to join in the motions. Defendants did not waive arguments by filing answers. The court treats their motions as made pursuant to Rule 12(h)(2) for judgment on the pleadings. See C.A. Wright & A.R. Miller, Federal Practice and Procedure, § 1361 at 444 (1990); Zebrowski v. Denckla, 630 F. Supp. 1307, 1308 n. 1 (E.D.N.Y. 1986).

II. The Securities Act

Counts I through IV of the Complaint and Count I and II of the Schwebel Complaint allege violations of the Securities Act.

Count I of the Complaint says that Eddy (distinguished from Eddie) Antar, Zimel, Oppenheimer, and Peat Marwick, and other individual defendants, violated Section 11 of the Securities Act, 15 U.S.C. § 77k, by making misleading statements in the registration statements for the March 13, 1985 offering of Crazy Eddie shares and for the offerings of stock by Oppenheimer under the December 1985 and March 1986 Oppenheimer Prospectuses (the Oppenheimer Sales).

Count II claims Zimel and other individual defendants, and Peat Marwick, Wertheim, Bear Stearns, and Salomon committed similar violations for the March 7, 1986 offering of shares and the 1986 offering of debentures.

Count III asserts that Oppenheimer and several individual defendants violated Section 12(2) of the Securities Act, 15 U.S.C. § 771(2), by making misleading statements in the March 13, 1985 offerings of stock and in the Oppenheimer Sales.

Count IV claims Wertheim, Bear Stearns, and Salomon, and several individual defendants, committed similar violations in the March 7, 1986 offering of stock and the 1986 offering of debentures.

Count I of the Schwebel Complaint asserts that Peat Marwick, Wertheim, Bear Stearns, Salomon, Eddy Antar, Zimel, and other individual defendants and Crazy Eddie violated Section 11 of the Securities Act by making misleading statements in registration statements for the 1986 debenture offering.

Count II of the Schwebel Complaint claims that the defendants named in Count I violated Section 12(2) of the Securities Act by making misstatements in the 1986 debenture offering.

A.  Eddy Antar in Count II of the Complaint

Eddy Antar urges that, because Count II of the Complaint omits his name from the sub-caption and from the paragraph stating against whom the count is brought, the court should dismiss the count as to him. The court elsewhere describes Eddy Antar as having committed the alleged violations. Clearly the count gave notice of a claim against him. Plaintiffs may amend to add his name where needed.

B. The Tracing Requirement

Eddy Antar, Zimel, Oppenheimer and Peat Marwick contend that the Complaint insufficiently alleges "tracing" of the purchase of their shares to the March 13, 1985 offering and the Oppenheimer Sales. See Barnes v. Osofsky, 373 F.2d 269, 271-73 (2d Cir. 1967). Eddy Antar, Zimel, Peat Marwick, Wertheim, Bear Stearns and Salomon make a similar argument as to the tracing allegations (a) in the Complaint with respect to the March 7, 1986 stock offering or the 1986 debenture offering, and (b) in the Schwebel Complaint with respect to 1986 debenture offering.

The court held that under Section 11 or 12, while plaintiffs need not prove, they must allege that their shares are traceable to the 1985-86 offerings. Bernstein, 702 F. Supp. at 972.

The four counts of the Complaint state that plaintiffs "purchased or otherwise acquired Crazy Eddie securities issued pursuant to and traceable to those defective Registration Statements." While it would have been more informative if plaintiffs had at least pleaded the dates on which they bought their shares, the court will not find the general allegation insufficient. Defendants may move for summary judgment if the facts so justify.

The Schwebel Complaint fails to allege that the convertible debentures Schwebel purchased were traceable to the 1986 debenture offering. The court dismisses the Securities Act claims with leave to replead facts tracing the purchase to the debenture offering.

C. Statute of Limitations

Section 13 of the Securities Act, 15 U.S.C. § 77m, bars Section 11 and 12(2) claims

  unless brought within one year after discovery of
  the untrue statement or the omission, or after
  such discovery should have been made by the
  exercise of reasonable diligence. . . . In no
  event shall any such action be brought to enforce
  a liability created under [Section 11] . . . more
  than three years after the security was bona fide
  offered to the public . . ., or under [Section
  12(2)] more than three years after the sale.

i. The Oppenheimer Sales

Plaintiffs first made Securities Act claims against Oppenheimer for the Oppenheimer Sales in the Complaint filed in October 1989, over three years after those sales in December 1985 and March 1986, and more than a year after January 1988, the date plaintiffs admit they could have discovered defendants' fraud. The claims are thus time barred unless they relate back to the First Complaint filed March 1, 1988.

Rule 15(c), Fed.R.Civ.P., provides:

  Whenever the claim or defense asserted in the
  amended pleading arose out of the conduct,
  transaction, or occurrence set forth or attempted
  to be set forth in the original pleading, the
  amendment relates back to the date of the
  original pleading.

An amendment will relate back if the original pleading gives the adversary "all the notice that statutes of limitations are intended to afford," namely, fair notice of "the general fact situation out of which the claim arises." J. Moore, Moore's Federal Practice, 15.15[3] (1989); see Rosenberg v. Martin, 478 F.2d 520, 526 (2d Cir. 1973).

In alleging material misstatements or omissions by Oppenheimer in the March 1985 offering, the First Complaint limited the misconduct charged to a failure to conduct a reasonably diligent inquiry into Crazy Eddie's business operations when preparing the offering. The pleading made no mention of the Oppenheimer Sales, which were separate transactions based on different registration statements and prospectuses.

Moreover, the First Complaint states no facts justifying an inference that Oppenheimer participated in some broader conspiracy to defraud. Indeed, the First Complaint expressly excepts Oppenheimer from the charge levelled against all of the other defendants of knowing and reckless disregard of "the truth that the Company's financial statements materially overstated its inventory and net income."

Oppenheimer thus did not get the fair notice required to relate back the present Securities Act claims based on the Oppenheimer Sales. See FDIC v. Chizner, 110 F.R.D. 114, 118 (E.D.N.Y. 1986); Marine Midland Bank v. Keplinger Associates, Inc., 94 F.R.D. 101, 104 (S.D.N.Y. 1982).

Plaintiffs suggest that a so-called Standstill Agreement of May 10, 1988 between plaintiffs and Oppenheimer tolled the limitations period on the new claims. That agreement provided for Oppenheimer's dismissal from this action and a tolling of the limitations period to allow reinstatement of any claims against ...

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