The opinion of the court was delivered by: Haight, District Judge.
The complaint alleges that between the time of the issuance
of the Prospectus and the date upon which investors would be
asked to deliver the balance of the 10% downpayment, the
defendants issued other written and oral communications to
plaintiffs, the class members and other potential investors
"with the intent that said individuals rely upon said
communications in determining whether or not to purchase units
in Phase I of the Lodge." Complaint, ¶ 32. Based upon the
statements of the defendants contained in the Prospectus "and
in other written and oral communications including those
specified below, plaintiffs consummated purchases of units in
Phase I." ¶ 33.
Plaintiffs and class members relied upon the statements
contained in the Dowmar letter and the news release in deciding
whether to complete their 10% downpayment or to exercise their
right of cancellation. They characterize the statements quoted
from those documents as containing "material information which
removed uncertainties in the Prospectus concerning the
intentions and plans of Stratton with respect to the
development of the Conference Center and other facilities at
Stratton Mountain." ¶ 40. The statements made by defendants in
the Dowmar letter and the news release were knowingly false in
that at the time they were made defendants did not plan to add
a "village hall, a 500 person Conference Center in the summer
of 1986;" nor did they expect Stratton to become a "top meeting
and convention site;" the Stratton Mountain Village complex was
not planned to be completed within three years as represented
by defendants; and Stratton was not nor was it planned by
defendants to be a "year-round resort." ¶ 41.
The Prospectus further represented that in an effort to
mitigate and control potential conflicts of interest arising
from the several functions of Stratton and its affiliates as
operator or provider of rental services to other condominiums,
cluster homes, cooperative units and chalets on Stratton
Mountain competing with The Lodge for rental business, it had
"established internal operating procedures to assure that the
points of view of the various interests it represents will be
recognized." The Prospectus further represented and
acknowledged that Stratton, as Lodge agent, "owes a fiduciary
duty to [investors] to manage the affairs of [investors]
entrusted to Lodge agent to the best of its ability and in good
faith." ¶¶ 45, 46 (quoting from the Prospectus). Contrary to
those representations, Stratton never fulfilled its fiduciary
duty to investors to manage their affairs to the best of its
ability and in good faith and failed to take such steps as were
necessary to mitigate and control potential conflicts of
interest arising from Stratton's interests in other rental
facilities on Stratton Mountain. In fact, Stratton's actions
favored its other rental properties on Stratton Mountain over
The Laventhol & Horwath Market Study was based on the
assumption that the Conference Center would be constructed by
January 1, 1986, "when defendants knew that [the] Conference
Center would not be opened by that date." ¶ 48.
The Prospectus was misleading in that it omitted to state the
following material facts: Stratton had no present plan or
intention of constructing a Conference Center; the construction
by Stratton of the Conference Center was actually contingent
upon many other factors besides the obtaining of financing and
municipal approvals; Stratton did not intend to rely upon the
conclusions of Laventhol & Horwath with respect to the economic
viability and profitability of the Conference Center as set
forth in the market study; the construction of a conference
center would require additional investment by plaintiffs and
class members; and Stratton had virtually no experience in the
management of retail hotel properties. ¶ 49.
The plaintiffs and class members relied upon defendants'
representations. They would not have purchased units in Phase
I had defendants disclosed the true facts. "Prior to June 13,
1987," ¶ 52, plaintiffs and class members had not discovered,
nor could they have discovered by the exercise of reasonable
diligence, that defendants had made untrue statements of fact
and material omissions in connection with the "site of the
Lodge units." ¶ 52. That allegation is followed by the
concluding factual allegation in the complaint, which says:
On the basis of these allegations, plaintiffs allege against
all defendants fraud in violation of § 10(b) of the Securities
Exchange Act of 1934 (Count I); fraud in violation of 17(a)(2)
of the Securities Act of 1933 (Count II); offering and selling
securities by means of untrue statements in violation of §
12(2) of the 1933 Act (Count III); offering and selling
securities on the basis of untrue statements in violation of §
11 of the 1933 Act (Count IV); a civil RICO claim under
18 U.S.C. § 1964(c) (Count V); fraud in violation of various state
"Blue Sky" laws (Count VI); common law fraud (Count VII); and
negligent misrepresentation (Count VIII).
All defendants except Dowmar move to dismiss the complaint
under Rule 12(b)(6) for failure to state a claim upon which
relief may be granted. Defendants assert that none of the
alleged misstatements and omissions constitute material facts,
so that all counts must be dismissed; that no private right of
action is available under § 17 of the 1933 Act; that
plaintiffs' claims under §§ 11 and 12(2) are time barred and do
not allege misstatements and omissions falling within the
statute; that the claims under § 10(b) of the 1934 Act are time
barred, and do not allege loss causation; that the complaint
does not allege the existence of a RICO enterprise; that the
fraud claims are not pleaded with requisite specificity; that
the pendent state law and common law claims should be dismissed
for want of a viable federal claim, and that the state "blue
sky" law claims are not viable in any event; and that if any
claims are dismissed with leave to replead, plaintiffs should
be required to post an undertaking for payment of defendants
fees' and costs.
Plaintiffs respond that their complaint is sufficient and
timely; ask leave to replead if any portion of it is dismissed;
and resist the application for an undertaking for costs.
Before considering the sufficiency of the pleading and
plaitniffs' request to replead if necessary, I deal with those
assertions by defendants which if sound require dismissal of a
particular claim in any event.
The Claim under § 17(a) of the 1933 Act.
As Wexner goes on to observe, the reasoning of Kirshner has
been questioned by subsequent Second Circuit opinions, Yoder v.
Orthomolecular Nutrition Institute, Inc., 751 F.2d 555, 559 n.
3 (2d Cir. 1985); Zerman v. Ball, 735 F.2d 15, 23 (2d Cir.
1984) has been criticized by legal scholars; and a number of
district courts of the circuit have concluded, notwithstanding
Kirshner, that no private cause of action can be implied from §
17(a) See district court cases collected at 902 F.2d 174. While
leaving the question open, the Wexner court said at 174: "It is
apparent that the vitality of our holding in Kirshner is in
doubt, and the existence of a private right of action under §
17(a) is in need of re-examination."
Although Pinter and its progeny shift the gravamen of a §
12(2) claim from fraud to strict liability, the fact remains
that plaintiffs at bar allege fradulent misrepresentations and
ommisions in their effort to satisfy the statute of
limitations. Complaint, ¶ 53. Therefore the allegations must
comply with Rule 9(b). They do not. The complaint's allegations
in ¶¶ 52 and 53 in respect of timeliness are wholly conclusory.
Moreover, they depend upon allegations of fraud which are
devoid of Rule 9(b) specificity. See discussions of § 10(b)
claim, infra. More than one year elapsed between the issuance
of the identified 1984 documents and the filing of suit.
Plaintiffs cannot comply with § 13 pleading requirements by
offering allegations insufficient under Rule 9(b). The
complaint is subject to dismissal for failure to plead
compliance with § 13's one year rule.
In the alternative, defendants argue that § 13 bars the §§ 11
and 12(2) claims in any event because suit was filed more than
three years after the security "was bona fide offered to the
public" (the § 11 claim) and "more than three years after the
sale" (§ 12(2) claim).
Determination of these issues depends upon analysis of the
events which trigger the § 13 three-year limitation period.
I do not agree. The complaint nowhere quotes or incorporates
the Supplemental Prospectus by reference. More significantly,
the regulation by its own terms applies only to a
post-effective amendment's relationship to "the securities
offered therein;" the offering "of such securities" [i.e.,
offered in the amendment] "at that time" [i.e. the date of the
amendment] shall be deemed to be "the initial bona fide
offering thereof" [i.e., of such securities]. There is no
suggestion, even in plaintiffs' motion papers, that the
Supplemental Prospectus constituted an offering of securities
"at that time."
A § 12(2) claim must be sued upon no more than three years
after the sale of the securities in question. It is common
ground that when plaintiffs paid the balance of their 10%
downpayments, their subscription agreements became
non-cancellable. It also appears to be undisputed that those
balances were paid more than three years before institution of
suit. Plaintiffs argue that the "sale" did not occur until June
25, 1985, when the Lodge units were delivered to the
plaintiffs. They argue in support of that contention that while
the Prospectus made the sale non-cancellable by investors after
payment of the 10% downpayment, it "also provided that the sale
could be cancelled by the defendants based on certain financial
contingencies, namely — the failure of an investor to obtain
the appropriate financing." Plaintiff's Brief at 32. Plaintiffs
argue that the sale cannot be deemed "final" when the seller
"retains the option to cancel the sale."
I disagree. Within the context of § 12(2), I conclude that a
"sale" occurs when the investor/purchaser becomes irrevocably
bound to the transaction. In Amoroso v. Southwestern Drilling
Multi-Rig, 646 F. Supp. 141, 144 (N.D.Cal. 1986), comparably
situated plaintiffs argued that so long as the transaction
remained contingent on certain conditions, there was no "sale."
The district court rejected that argument, holding that "each
purchaser entered an irrevocable commitment as soon as he
signed the Subscription Page. Only Southwestern Drilling — the
seller — remained free to withdraw." (emphasis in original).
The court then held:
I agree with that reasoning. Plaintiffs cite no pertinent
contrary authority. Accordingly their § 12(2) claim is also
barred under the § 13 three-year limitations period. Again,
there is no need to consider whether the complaint could be
repleaded to satisfy the one-year period.
Having concluded that these claims are time barred, I need
not reach defendants' further assertion that the alleged
misstatements and omissions do not fall within the statute.
Counts III and IV of the complaint will be dismissed without
leave to replead.
Claims under § 10(b) of the 1934 Act.
Plaintiffs' § 10(b) claims sounds entirely in fraud.
Defendants assert a number of bases for dismissal of this
claim. I will first consider whether fraud is alleged with the
specificity Rule 9(b) requires, and the question of time bar.
As will be seen, these issues are closely interrelated.
On this motion to dismiss, I consider only the allegations of
the complaint, including the quotations from the documents
referred to in those allegations. "On a motion to dismiss, the
district court must limit itself to a consideration of the
facts alleged on the face of the complaint, . . . and to any
documents attached as exhibits or incorporated by reference,"
Cosmas v. Hassett, 886 F.2d 8, 13 (2d Cir. 1989). That permits
consideration of the initial Prospectus, the Dowmar letter, and
the several Stratton news releases quoted in the complaint. I
disregard on this motion the Supplemental Prospectus,
apparently subsequently issued and discussed by the parties in
their briefs. That document is nowhere referred to on this
motion in the complaint and is not before me for purposes of
the present analysis.
In considering the sufficiency of the complaint measured by
Rule 9(b), it is useful to review the controlling principles.
Rule 9(b) provides: "In all averments of fraud or mistake,
the circumstances constituting fraud or mistake shall be stated
with particularity. Malice, intent, knowledge, and other
condition of mind of a person may be averred generally." Rule
9(b) must be read together with Rule 8(a) which requires only
a "short and plain statement of the claims for relief."
Ouaknine v. MacFarlane, 897 F.2d 75, 79 (2d Cir. 1990);
DiVittorio v. Equidyne Extractive Industries, Inc.,
822 F.2d 1242, 1247 (2d Cir. 1987). On a motion to dismiss, the court
assumes the truth of plaintiff's factual allegations, Ouaknine
at 78, reads the complaint generously, and draws all inferences
in favor of the pleader. Cosmas v. Hassett, 886 F.2d 8, 11 (2d
Cir. 1989); Yoder v. Orthomolecular Nutrition Institute, Inc.,
751 F.2d 555, 562 (2d Cir. 1985). But Rule 9(b) must be
enforced so as to accomplish its three goals: (1) providing a
defendant fair notice of plaintiff's claim, to enable
preparation of his defense; (2) protecting a defendant from
harm to his reputation or goodwill; and (3) reducing the number
of strike suits. DiVittorio at 1247.
To satisfy the particularity requirement of Rule 9(b), a
complaint must adequately specify the statements it claims were
false or misleading, give particulars as to the respect in
which plaintiff contends the statements were fraudulent, state
when and where the statements were made, and identify those
responsible for the statements. Cosmas at 11. Where multiple
defendants are asked to respond to allegations of fraud, the
complaint should inform each defendant of the nature of his
alleged participation in the fraud. DiVittorio at 1247.
However, no specific connection between fraudulent
representations or omissions need be pleaded as to defendants
who are insiders or affiliates personally participating in the
statements at issue. DiVittorio at 1247 (offering memorandum);
Luce v. Edelstein, 802 F.2d 49, 55 (2d Cir. 1986) (same).
A complaint may adequately identify the statements alleged to
be misrepresentations and properly indicate when, where and by
whom they were made, yet still fail Rule 9(b) scrutiny if the
complaint does not allege circumstances giving rise to a strong
inference that defendant knew the statements to be false,
Wexner v. First Manhattan Co., 902 F.2d 169, 173 (2d Cir.
1990), and intended to defraud plaintiff, Ouaknine at 80; Beck
v. Manufacturers Hanover Trust Co., 820 F.2d 46, 50 (2d
Cir. 1987), cert. denied, 484 U.S. 1005, 108 S.Ct. 698, 98
L.Ed.2d 650 (1988).
Knowledge is a state of mind. So is intent to defraud, or
"scienter." While Rule 9(b) permits conditions of mind to be
averred generally, the rule also requires that allegations of
scienter be supported by facts giving rise to a "strong
inference" of fraudulent intent. Ouaknine at 80; Beck at 50;
Connecticut National Bank v. Fluor Corp., 808 F.2d 957, 962 (2d
Allegations supporting an inference of fraudulent intent
frequently include defendant's statement that a fact exists or
an event will come to pass coupled with allegations that the
fact did not exist or the event did not occur, and
circumstances indicating that the statement was false when
made. See, e.g., Luce at 56 (alleged misrepresentation in
offering memorandum that general partners would make an initial
capital contribution of $385,000 and guarantee a $4.5 million
construction loan accompanied by allegations that general
partners contributed only $80,000 and did not guarantee the
loan); DiVittorio at 1248 (offering memorandum's statement that
proceeds of offering would be expended as quickly as possible
accompanied by allegation that proceeds were never so applied,
and estimate that property contained approximately 9,260,000
tons of coal accompanied by allegation that mines did not
contain nearly that much). See Ouaknine at 81 for a comparable
To satisfy the scienter requirement, a plaintiff need not
allege facts which show a defendant had a motive for committing
fraud, so long as plaintiff adequately identifies circumstances
indicating "conscious behavior" by the defendant from which an
intent to defraud may fairly be inferred. Cosmas at 13.
However, where a particular defendant's motive to defraud is
not apparent, the strength of the circumstantial allegations
must be correspondingly greater. Beck at 50.
Allegations may be based on information and belief when facts
are peculiarly within the opposing party's knowledge.
Luce at 54 n 1.; DiVittorio at 1247-48. However, that exception
to Rule 9(b)'s general requirement of particularized pleading
does not constitute a license to base claims of fraud on
speculation or conclusory allegations. Where pleading is
permitted on information and belief, a complaint must adduce
specific facts supporting a strong inference of fraud or it
will not satisfy a relaxed pleading standard. Wexner at 172.
The complaint at bar adequately identifies the documents upon
which the claims of fraud are based, and the alleged
misrepresentations and fraudulent omissions contained therein.
Furthermore, since the moving defendants are the corporate
entities directly involved in the venture or Stratton officers
and directors, no specific connection between fraudulent
representations or omissions in those documents and particular
defendants is necessary. Luce at 805.
The gravamen of plaintiffs' fraud claims is that when the
defendants stated their expectations or intentions with respect
to the Stratton Mountain project, they did not hold the
represented expectations, and had no intention of acting as
they said they would. Plaintiffs' allegations are conceptually
adequate to state claims for fraud, since "[m]aking a specific
promise to perform a particular act in the future while
secretly intending not to perform may violate Section 10(b) .
. . if the promise is part of the consideration for a sale of
securities." Pross v. Katz, 784 F.2d 455, 457 (2d Cir. 1986).
The latter element is satisfied by plaintiff's allegations that
they relied upon defendants' statements of expectation and
intent in making their investment decisions. Accordingly I
reject defendants' first argument that none of the alleged
misstatements and omissions constitutes material facts.
But the complaint fails to pass Rule 9(b) muster in its
allegations of defendants' knowledge of falsity and scienter.
Here the allegations are entirely conclusory. In essence, they
proceed from the proposition that since certain future acts did
not come to pass, defendants never intended to accomplish them,
concealed that state of mind from investors when preparing the
Prospectus and the subsequent documents. Such bald and
conclusory allegations are insufficient in law. They must be
accompanied with specific allegations of fact giving rise to a
strong inference of fraud. The complaint contains no such
Plaintiffs' references in a paragraph such as ¶ 53 of the
complaint to "a series of misleading oral and written
communications" which "continued through the June 13, 1987
meeting of Lodge members" is entitled to no consideration
because there is a total absence of specificity. Plaintiffs do
not say what such oral or written representations consisted of,
who made them, when they were made and to whom, and the manner
in which they were false.
Placing such allegations to the side, I am concerned only
with those particular statements which are sufficiently
identified in the complaint. But they do not satisfy the rule
because the complaint does not adequately allege circumstances
from which defendants' knowledge of falsity and intent to
defraud may be inferred.
Defendants also contend that plaintiffs' § 10(b) claim fails
to allege loss causation. I agree. A viable § 10(b) claim must
allege both transaction causation and loss causation. The
complaint alleges in essence that if defendants had not said
the things they said and had said what they omitted, plaintiffs
would not have invested. This is "but for" or loss transaction
pleading, which by itself is insufficient. Plaintiffs must also
allege that the specified misrepresentations and omissions
"proximately relate to the alleged reasons for the investors'
losses." In re Gas Reclamation, Inc. Securities Litigation,
733 F. Supp. 713, 722 (S.D.N.Y. 1990). That is loss causation.
Defendants argue in their brief that "the defendants'
misrepresentations regarding the building of a first class
resort with a conference center facility is the primary reason
why the Lodge units purchased by plaintiffs are today
substantially unmarketable." Plaintiffs' Brief at 42.
Defendants cite ¶¶ 51 and 56 for that proposition. ¶ 56 does no
more than generally allege fraud in language tracking the
statute. ¶ 51 alleges:
Had defendants disclosed the true facts to the
plaintiffs and the class members, they would not
have purchased units in Phase I of the Lodge
which, in light of the true facts, are today
The first part of this sentence relates only to transaction
causation. The last phrase arguably pleads loss causation, but
is not sufficient given other plausible explanations for the
investors' ultimate disappointment, such as changes in the tax
laws and a downturn in the real estate market. Where "there is
a genuine dispute as to the reasons for the failure" of a
project, In re Gas Reclamation, Inc. Securities Litigation, at
722, a plaintiff must allege loss transaction with greater
particularity; and those allegations must appear in the
complaint, subject to Rule 11 scrutiny. It will not do to
advance such theories in a brief.
I turn to the timeliness of the 10(b) claim.
Since § 10(b) of the 1934 Act did not expressly grant a
private right of action, which has instead been implied by the
courts, the Act contains no controlling statute of limitations
for a § 10(b) claim. In those circumstances, the Second Circuit
and other circuits have held that the statute of limitations
should be adopted by reference to the pertinent laws of the
forum state. Under that rule this Court looked to New York law,
particularly the borrowing rules found in N.Y. CPLR § 202. The
Second Circuit, applying that statute to a § 10(b) action, has
held that the cause of action accrues where its economic impact
is felt, normally the plaintiff's residence. Thus if a suit
brought in the place of plaintiff's residence would be
time-barred, the suit in a New York federal court was
time-barred. See Ceres Partners v. GEL Associates,
918 F.2d 349, 350-353 (2d Cir. 1990).
Ceres changes the statute of limitations applicable to §
10(b) claims. In that case the Second Circuit expressed its
agreement with the Third Circuit's decision in In re Data
Access Systems Securities Litigation, 843 F.2d 1537 (3rd Cir.)
cert. denied, 488 U.S. 849, 109 S.Ct. 131, 102 L.Ed.2d 103
(1988), which declared a uniform federal statute of limitations
requiring that a § 10(b) suit be brought "one year after the
plaintiff discovers the violation, and in no event more than
three years after such violation." 843 F.2d at 1550. In Ceres
the Second Circuit adopted the same rule. 918 F.2d at 364.
The Ceres court did not need to decide the question of
retroactive application of its ruling because the plaintiff's
claim would have been time barred under both its newly
announced federal period of limitations and the prior Second
Circuit rule, which looked to New York law. The plaintiff in
Ceres resided in New Jersey. The Second Circuit concluded that
under New York choice of law, New Jersey law furnished the
controlling statute of limitations. Since § 27 of the 1934 Act
grants the federal district courts exclusive jurisdiction to
enforce its provisions, the district court in New Jersey would
be bound to follow the ruling of the Third Circuit in Data
Access. Ceres, 918 F.2d at 353. Plaintiff's claim was barred
because it conceded "that it cannot meet the
one-year/three-year test." Id. at 353.
Under Ceres, the federal one-year/three-year period applies
to plaintiffs Finkel and Magnuson, who reside in New Jersey. No
question of retroactivity arises because the Third Circuit
decided Data Access on April 8, 1988 (en banc decision) and
plaintiffs at bar filed their complaint on June 1, 1988.
Accordingly Finkel's and Magnuson's § 10(b) claims are barred
unless they can satisfy the one-year/three-year limitations
The Ceres plaintiff's claim was time barred since
acknowledged acquisition of the pertinent information more than
one year prior to the institution of suit. 918 F.2d at 356.
Plaintiffs at bar make no such concession. They contend that
the fraud continued, concealed by the defendants, and could not
have been discovered by plaintiffs by the exercise of
reasonable diligence "until the meeting of Lodge members on
June 23, 1987." Plaintiffs' Brief at 40. The complaint alleges
at ¶ 53 that "a series of misleading oral and written
communications" continued "through the June 13, 1987 meeting of
Lodge members," although the complaint does not specify what
occurred at that meeting or how it came about that plaintiffs
were for the first time made aware of the fraud of which they
now complain or put on notice of its possibility.
The problem with the complaint is that plaintiffs'
allegations that they had not and could not have discovered
defendants' misrepresentations and material omissions until the
June 13, 1987 meeting of the Lodge members (whatever that was)
is entirely conclusory; and the allegation of a "series of
misleading oral and written communications" pleaded in support
of that conclusion fails to comply with Rule 9(b). These
communications are alleged to include "a continuing series of
statements designed to cause plaintiffs and the class members
to believe that the Conference Center would be built." But no
specifics are furnished, as the rule requires. These particular
paragraphs of the complaint must be disregarded as a pleading
nullity. That being so, they cannot form the basis for an
argument that plaintiffs complied with the one-year rule.
The three-year rule requires that a § 10(b) claim be sued
upon in no event more than three years after the violation.
Disregarding the more recent oral and written statements just
referred to as insufficiently pleaded, we are left with the
October 1984 Dowmar letter and Stratton News Release.
Plaintiffs specifically allege these documents to have
contained false and fraudulent reassurances. But a complaint
filed on June 1, 1988 is not timely under the three-year rule,
measured from 1984; and the allegations in ¶¶ 52 and 53 are
equally inadequate as a vehicle for bringing the complaint
within the statute. The New Jersey plaintiffs' § 10(b) claim as
presently pleaded is time-barred.
As for the New York plaintiffs, the Second Circuit rule in
effect at the time plaintiffs filed their complaint looked to
New York substantive law. The New York Statute of limitations
for actions based on fraud is six years, N.Y. CPLR § 213(8),
so their claims were timely filed unless Ceres should be
applied retroactively, a question the Second Circuit left open.
Defendants argue for retroactive application and say that the
Third Circuit has applied Data Access retroactively, citing
Hill v. Equitable Trust Co., 851 F.2d 691 (3d Cir. 1988). The
Third Circuit in Hill looked to Chevron Oil Co. v. Huson,
404 U.S. 97, 106-07, 92 S.Ct. 349, 355-56, 30 L.Ed.2d 296 (1971),
for the qualifications making a decision prospective only.
Those qualifications are:
(1) The holding must establish a new principle of
law, either by overruling clear past precedent on
which litigants may have relied, or by deciding an
issue of first impression whose resolution was not
(2) The merits and demerits in each case must be
weighed by looking to the history of the rule in
dispute, its purpose and effect, and whether
retrospective operation will further or retard the
(3) Retrospective application must create the risk
of producing substantially inequitable results.
In Hill the Third Circuit applied Data Access retroactively
because, on the particular facts of the case, the federal
limitations period adopted in Data Access was identical to the
state statutory provisions adopted by the district court under
the prior rule. "Thus, plaintiffs fare the same whether our new
Data Access holding or the Maryland statute applies." 851 F.2d
The situation is entirely different with respect to the New
York plaintiffs at bar. Under the New York statute and the
Second Circuit rule in existence at the time of filing, their
§ 10(b) claim was timely. It would be inequitable to apply
Ceres retroactively so as to transform an action timely when
filed into one barred forever by the statute of limitations.
Accordingly the New York plaintiffs' 10(b) claim is not barred
by the statute of limitations.
In sum, the complaint fails to allege a viable § 10(b) claim
because it does not comply with Rule 9(b) and loss causation is
not adequately alleged. As to the New Jersey plaintiffs, the
timeliness of the action is problematical given the
inadequacies of the pleading.
I grant plaintiffs leave to replead the § 10(b) claim, and
deny defendants' request that plaintiffs be required to post
security. In framing an amended complaint, plaintiffs and
counsel should keep Rule 11 in mind.
The Other Claims.
I need not consider the civil RICO claim unless plaintiffs
can adequately allege fraud. Since the RICO predicate acts
arise out of fraud, Rule 9(b) criteria applied with equal
force, and the RICO claim is inadequately pleaded. See Beck at
49; Moss v. Morgan Stanley, Inc., 719 F.2d 5, 18-19 (2d Cir.
1983), cert. denied sub nom. Moss v. Newman, 465 U.S. 1025, 104
S.Ct. 1280, 79 L.Ed.2d 684 (1984). I reach no other RICO
As for the state and common law claims, plaintiffs allege no
independent basis for subject matter jurisdiction. Accordingly
I will dismiss those claims if plaintiffs cannot allege a
viable federal claim.
For the foregoing reasons, Counts II, III and IV of the
complaint are dismissed without leave to replead. Counts I, V,
VI, VII and VIII are dismissed with leave to replead within
thirty (30) days of the date of this Opinion.
It is SO ORDERED.
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