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
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
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
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
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).
Counts I through IV of the Complaint and Count I and II of
the Schwebel Complaint allege violations of the Securities
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
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
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
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
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.
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,
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
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 (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
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