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United States District Court, Eastern District of New York

January 24, 1991


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


Defendants Stuart Becker ("Becker") and Harry Shufrin ("Shufrin") move to dismiss the complaint pursuant to Fed.R.Civ.P. 9(b) (failure to plead fraud with particularity) and 12(b)(6) (failure to state a claim upon which relief can be granted).*fn1

Plaintiffs allege that they were fraudulently induced by defendants into purchasing securities in defendant Hardcastle, Ltd. ("Hardcastle"). Plaintiffs allege various state law grounds for relief, including common law fraud and Section 352-c of the New York General Business Law (Article 23-A) (the "Martin Act"), and claim violations of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) ("Section 10(b)"), and the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1962, 1964(c), (d) ("RICO").

Defendants Becker and Shufrin argue that the common law fraud, Section 10(b), and RICO claims in the complaint should be dismissed because they are not pleaded with the requisite particularity and fail to state a claim upon which relief can be granted.


Plaintiffs allege that Becker, Shufrin, and the three other named individual defendants were directors and "controlling persons" of defendant Hardcastle. (Complaint paras. 7-11, 31). Plaintiffs further allege the following:

  12. In April of 1985 defendant Shufrin with the
    knowledge and consent and under the direction of
    defendants Becker, Irvine and Reid, solicited
    Plaintiffs, in the Eastern District of New York,
    by use of the mails and telephone to subscribe
    for stock in defendant Hardcastle.

  13. Plaintiffs were advised by defendant Shufrin
    that the defendant Hardcastle was offering to
    sell shares of its common stock in $50,000 units
    of participation

    each of which represented 7%, of the defendant
    Hardcastle's stock.

  14. At or about the time of said solicitation,
    representations were made by Defendants to
    Plaintiffs as follows:

    a) That defendant Hardcastle was in the business
    of providing technological integration of
    computer systems and software programs for its

    b) That defendant Hardcastle owned state of the
    art equipment including computer systems,
    optical scanners, disc converters and laser

    c) That defendant Hardcastle was able to convert
    over 500 different computer and word processing

    d) That defendant Hardcastle had contracts for
    its services and was then doing business with
    numerous companies including but not limited to
    the following:

1. American Broadcasting Company

2. American Express Company

3. Bank of America

4. Bear Sterns [sic] and Company

5. CBS, Inc.

6. Citicorp

7. Dun and Bradstreet

8. International Business Machines

9. Merrill Lynch

10. National Broadcasting Company

11. New York State

12. City of New York

13. Xerox Corporation

14. United States of America

    e) That defendant Hardcastle had been expanding
    its technical capabilities in media conversion
    and required capital to add staff and purchase
    new equipment.

    f) That defendant Hardcastle had embarked upon
    an aggressive advertising campaign to market its

    g) That defendant Hardcastle's sales were at a
    level where the company was breaking even.

    h) That defendant Hardcastle's business was
    brisk and that sales were rapidly accelerating.

    i) That defendant Hardcastle had developed
    software to use for the Security and Exchange
    Commission's EDGAR project and for IRS filings.

    j) That defendant Hardcastle's services were
    unique and there was very little competition in
    the market place.

  15. By reason of their reliance upon the above
    representation of Defendant's [sic,] Plaintiffs
    executed in July of 1985, subscription
    agreements in the form attached (Ex. A),
    promissory notes in the form attached (Ex. B)
    and a shareholders agreement, (Ex. C).

  16. In further reliance on said representations
    the following Plaintiffs invested the following
    amounts in defendant Hardcastle Ltd. common
    stock: [amounts omitted]

  17. Defendants failed and neglected to prepare or
    deliver any offering memorandum to plaintiffs
    prior to their investment in the common stock of
    defendant Hardcastle.

  18. Plaintiff's relied upon the aforesaid
    representations made by the Defendants and were
    thereby induced to execute the agreements
    referred to in "15" above and invest the money
    referred to in "16" above.

  19. The representations of Defendant's alleged in
    "14" above were materially untrue and incorrect
    in July of 1985. . . .

  35. The statements and representations made by
    Defendants Shufrin and Becker to Plaintiffs with
    the acquiescence and consent of all other
    Defendants as alleged in paragraph 14 were
    untrue when made, constituted material facts,
    and were relied upon by all Plaintiffs in
    violation of See. 10B of the Securities Act and
    Rule 10b-5 promulgated thereunder and Article
    23a of the New York General Business Law all to
    Plaintiff's damage.

Rule 9(b) of the Federal Rules of Civil Procedure requires that "[i]n 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." The particularity standard of Rule 9(b) applies not only to a claim of common law fraud but also to a claim of securities fraud under section 10(b) of the Securities Exchange Act of 1934. Decker v. Massey-Ferguson, Ltd., 681 F.2d 111, 114 (2d Cir. 1982).

Rule 9(b) must be harmonized with the pleading requirement of Rule 8 that a plaintiff plead only a "short and plain" statement of the claim (Rule 8(a)) and that each averment should be "simple, concise and direct" (Rule 8(e)(1)). Ross v. A.H. Robins Co., 607 F.2d 545, 557 n. 20 (2d Cir. 1979), cert. denied, 446 U.S. 946, 100 S.Ct. 2175, 64 L.Ed.2d 802 (1980); Quaknine v. MacFarlane, 897 F.2d 75, 79 (2d Cir. 1990). Rule 9(b) is designed to provide the defendant with fair notice of the plaintiff's claim to enable the defendant to prepare a defense, to protect the defendant from harm to his reputation or goodwill, and to reduce the number of strike suits. DiVittorio v. Equidyne Extractive Indus., Inc., 822 F.2d 1242, 1247 (2d Cir. 1987). The fraud allegations must be specific enough to allow the defendant "a reasonable opportunity to answer the complaint" and must give the defendant "adequate information to frame a response." Ross, 607 F.2d at 557-58.

To comply with Rule 9(b), the complaint "must allege the time, place, speaker, and sometimes even the content of the alleged misrepresentation." Quaknine, 897 F.2d at 79. Although scienter need not be alleged with great specificity, there must be some factual basis for conclusory allegations of intent. Id. at 79-80; Goldman v. Belden, 754 F.2d 1059, 1070 (2d Cir. 1985). When there are multiple defendants, the complaint "should inform each defendant of his alleged participation in the fraud." DiVittorio, 822 F.2d at 1247.

The court finds that the complaint alleges fraud with sufficient particularity to allow defendants Shufrin and Becker "a reasonable opportunity to answer the complaint" and is in compliance with requisite specificity of Rule 9(b). Ross, 607 F.2d at 557. Paragraphs 12 to 19 detail the circumstances surrounding the alleged misrepresentations and the content of the alleged misrepresentations. Although paragraph 14 states that the misrepresentations were made by "Defendants," paragraph 35 alleges that the statements and misrepresentations alleged in paragraph 14 were "made by Defendants Shufrin and Becker to plaintiffs with the acquiescence and consent of all other Defendants. . . ." When read together, paragraphs 14 and 35 allege that Shufrin and Becker made the alleged misrepresentations. The complaint affords Shufrin and Becker "adequate information to frame a response." Ross, 607 F.2d at 558.

The court's review of the complaint does reveal, however, that it fails to allege scienter; it does not allege that the defendants knew of the falsity of the alleged misrepresentations and that defendants intended that plaintiffs rely thereon. Murray v. Xerox Corp., 811 F.2d 118, 121 (2d Cir. 1987) (misrepresentation must be "known to be false" by defendant and "made for the purpose of inducing [plaintiff] to rely on it"). Although scienter need not be alleged with great specifity and there need only be "some factual basis for conclusory allegations of intent", Quaknine, 897 F.2d at 79-80, the complaint does not even contain conclusory allegations that defendants knew of the falsity of the alleged misrepresentations and that defendants intended that plaintiffs rely upon the statements.*fn2

We find that the fraud and Section 10(b) claims are sufficient except for the failure to allege scienter.


In order to state a claim for damages under RICO, a plaintiff must plead:

(1) that the defendant

(2) through the commission of two or more acts

(3) constituting a "pattern"

(4) of "racketeering activity"

  (5) directly or indirectly invests in, or
    maintains an interest in, or participates in

(6) an "enterprise"

  (7) the activities of which affect interstate or
    foreign commerce.

Moss v. Morgan Stanley, Inc.,
719 F.2d 5, 17 (2d Cir. 1983), cert. denied, 465 U.S. 1025, 104 S.Ct. 1280, 79 L.Ed.2d 684 (1984); Town of West Hartford v. Operation Rescue, 915 F.2d 92, 100 (2d Cir. 1990).*fn3

The plaintiff is required to allege "at least" two predicate acts of racketeering activity. H.J. Inc. v. Northwestern Bell Telephone Co., 492 U.S. 229, 109 S.Ct. 2893, 2899, 106 L.Ed.2d 195 (1989) (citing Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 496 n. 14, 105 S.Ct. 3275, 3285 n. 14, 87 L.Ed.2d 346 (1985)).

However, "proof of two acts of racketeering activity without more does not suffice to establish a RICO pattern." United States v. Indelicato, 865 F.2d 1370, 1381 (2d Cir.) (en banc), cert. denied, ___ U.S. ___, 110 S.Ct. 56, 107 L.Ed.2d 24 (1989); United States v. Long, 917 F.2d 691, 697 (2d Cir. 1990). In order to show a "pattern of racketeering activity", the plaintiff must show (1) a "relationship" between the predicate acts and (2) "that the predicates themselves amount to, or that they otherwise constitute a threat of, continuing racketeering activity." H.J. Inc. 109 S.Ct. at 2900-01 (emphasis in original); Long, 917 F.2d at 696-97. "It is this factor of continuity plus relationship which combines to produce a pattern." H.J. Inc. 109 S.Ct. at 2900 (emphasis in original).

The required "relationship" between the predicate acts is established if the acts "have the same or similar purposes, results, participants, victims, or methods of commission, or otherwise are interrelated by distinguishing characteristics and are not isolated events." Id. at 2901; United States v. Simmons, 923 F.2d 934, 951 (2d Cir. 1991).

The relatedness of racketeering activities is not alone enough to satisfy the "pattern" element of RICO. To establish a pattern, the plaintiff must show that "the predicates themselves amount to, or that they otherwise constitute a threat of, continuing racketeering activity." H.J. Inc., 109 S.Ct. at 2901. Although the predicates may be part of a single "scheme", the plaintiff must show continuity of the racketeering activity. Id. at 2898-2902; United States v. Coiro, 922 F.2d 1008, 1016 (2d Cir. 1991). Continuity is established as follows:

    "Continuity" is both a closed- and open-ended
  concept, referring either to a closed period of
  repeated conduct, or to past conduct that by its
  nature projects into the future with a threat of
  repetition. It is, in either case, centrally a
  temporal concept — and particularly so in the RICO
  context, where what must be continuous, RICO's
  predicate acts or offenses, and the relationship
  these predicates must bear one to another, are
  distinct requirements. A party alleging a RICO
  violation may demonstrate continuity over a closed
  period by proving a series of related predicates

  over a substantial period of time. Predicate acts
  extending over a few weeks or months and
  threatening no future criminal conduct do not
  satisfy this requirement: Congress was concerned
  in RICO with long-term criminal conduct. Often a
  RICO action will be brought before continuity can
  be established in this way. In such cases,
  liability depends on whether the threat of
  continuity is demonstrated.

H.J. Inc., 109 S.Ct. at 2902 (citations omitted).

In their attempt to state a RICO claim, plaintiffs allege:

  36. Plaintiffs incorporate by reference all
    previous allegations.

  37. All Defendants agreed and conspired with each
    other to run Defendant Hardcastle through a
    pattern of racketeering activity and have
    thereby violated Section 1962(d) of RICO, and
    have caused Plaintiffs to suffer damages as a
    result of that violation.

(Complaint paras. 36-37).

Plaintiffs have failed to allege at least two predicate acts.*fn4 Plaintiffs have not adequately alleged that defendants' acts constituted a "pattern" of racketeering activity. They have not adequately alleged a relationship between predicate acts, and that the acts themselves amount to, or that they otherwise constitute a threat of continuing racketeering activity. H.J. Inc., 109 S.Ct. at 2900-01; Long, 917 F.2d at 696-97. Plaintiffs merely incorporate the securities fraud claim allegations and then recite in a conclusory fashion the language of the RICO statute. The complaint fails to state a RICO cause of action.

The RICO claim is hereby dismissed.


The New York Court of Appeals has held that no private right of action lies under the Martin Act, N.Y.Gen.Bus.Law § 352-c. CPC Int'l v. McKesson Corp., 70 N.Y.2d 268, 519 N.Y.S.2d 804, 807, 514 N.E.2d 116, 119 (1987). See Cohen v. Prudential-Bache Securities, Inc., 713 F. Supp. 653, 664 (S.D.N.Y. 1989); Apex Oil Co. v. DiMauro, 713 F. Supp. 587, 607-08 (S.D.N.Y. 1989). Accordingly, plaintiffs' claim under the Martin Act is hereby dismissed.


The fraud, Section 10(b), and RICO claims are dismissed with leave to replead within thirty (30) days from date.

The Martin Act claim is dismissed with prejudice.


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