The opinion of the court was delivered by: Curtin, District Judge.
This case involves an allegation of securities fraud. Plaintiff, Walter
J. Panfil, is the former president of Network Consultant's, Inc., a New
York corporation involved in the telecommunications business. On November
30, 1984, Network Consultant's agreed to merge into A.C. Teleconnect
Corp., a subsidiary of defendant ACC Corporation ("ACC"). As majority
shareholder in Network Consultant's, Mr. Panfil received cash and a
considerable number of shares in ACC from the merger. He was also
appointed as a director of A.C. Teleconnect from 1984 to 1986.
On October 29, 1987, the Board of Directors of ACC, by unanimous
written consent, adopted a stock repurchase plan whereby executive
officers of ACC were authorized to purchase up to 400,000 shares of ACC
common stock, at a price not exceeding $2.00 per share, the stock to be
retired as treasury stock. Thereafter, Mr. Panfil sold 197,000 of his ACC
shares to the three defendants in this case: 80,000
shares to ACC on October 29, 1987 at $1.625/share; 58,500 shares to
Richard T. Aab, Chairman and Chief Executive Officer of ACC, on February
18, 1988 at $1.375/ share; and 58,500 shares to Sykes Associates, Robert
F. Sykes, General Partner and director of ACC, on February 18, 1988 at
Mr. Panfil alleges that at the time these purchases were made,
defendants knew that ACC "intended to pursue Rochester Telephone Company
to facilitate a combination of these businesses." Item 6, ¶ 20
(proposed Amended Complaint). See also id., ¶ 16; Item 7 (Panfil
affidavit). Defendants admit that merger negotiations did occur between
the two companies, but did not begin until sometime after Mr. Panfil sold
the last of his shares. See Item 4 (Bittner and Drees affidavits). On
November 18, 1988, a two-paragraph article appeared in the Wall Street
Journal noting that ACC was "holding discussions with certain companies
that have indicated an interest in acquiring it." Item 8, Exh. A. ACC
stock, which had been trading generally at less than $3.00 per share,
closed at $5.37 per share that day. Item 8, at 2. On December 5, 1988,
Rochester Telephone and ACC signed a letter of intent to merge. Item 4,
at 2. This merger was never consummated. Id.
Plaintiff claims that defendants' failure to inform Mr. Panfil of the
"intent[ion] to pursue Rochester Telephone Company" prior to purchasing
his stock violates § 9(a)(4) of the Securities Exchange Act of 1934
("1934 Act"), 15 U.S.C. § 78i(a)(4); §§ 10(b) and 20(a) of the
1934 Act, 15 U.S.C. § 78j(b), 78t(a), and rule 10b-5,
17 C.F.R. § 240.10b-5 (1990) promulgated thereunder; § 1962(c)
and § 1964(c) of the Racketeer Influenced and Corrupt Organizations
Act, 18 U.S.C. § 1962(c), 1964(c) ("RICO"); the New York General
Business Law; and the common law. Defendants argue that their failure to
inform Mr. Panfil of their alleged intentions, even if true, was not
"material" under the 1934 Act. Defendants also argue that Mr. Panfil
fails to state a RICO claim. Items 4, 12. The court chooses to address
plaintiff's § 9(a) claim. Defendants move to dismiss the complaint
under Rules 12(c), 9(b) and 56 of the Federal Rules of Civil Procedure.
I. MOTION FOR JUDGMENT ON THE PLEADINGS
In considering defendants' Rule 12(c) motion, the court must accept as
true all of the facts, and the favorable inferences derived therefrom,
alleged in the complaint. Madonna v. United States, 878 F.2d 62, 65 (2d
Cir. 1989); Bloor v. Carro, Spanbock, Londin, Rodman & Fass, 754 F.2d 57,
61 (2d Cir. 1985). The court may not dismiss the case unless "`the
plaintiff can prove no set of facts in support of his claim which would
entitle him to relief.'" Madonna, 878 F.2d at 65 (quoting Conley v.
Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-02, 2 L.Ed.2d 80 (1957)).
See also Bloor, 754 F.2d at 61. Although it is within the court's
discretion to consider additional materials and convert the motion to one
for summary judgment, Sellers v. M C. Floor Crafters, Inc., 842 F.2d 639,
642 (2d Cir. 1988); Falls Riverway Realty v. City of Niagara Falls,
754 F.2d 49, 53 (2d Cir. 1985), the court finds that Mr. Panfil's
affidavit does no more than reinforce the presumption to which he is
already entitled, i.e., that defendants intended to pursue ACC's merger
with Rochester Telephone before they bought his shares. Accordingly, the
case will be considered on the pleadings. See State Bank of India v.
Walter E. Heller & Co., 655 F. Supp. 326, 327 (S.D.N.Y. 1987).
II. SECTIONS 10(b) and 20(a) of the 1934 ACT
Plaintiff argues that the defendants' failure to inform him of their
intention to pursue merger discussions with Rochester Telephone Company
prior to their purchase of his stock violates §§ 10(b) and 20(a) of the
1934 Act, 15 U.S.C. § 78j(b), 78t(a), and rule 10b-5,
17 C.F.R. § 240.10b-5 (1990) promulgated thereunder. Rule 10b-5 makes
it unlawful for any person
17 C.F.R. § 240.10b-5 (emphasis added). Section 20(a) extends 10b-5
liability to all those directly or indirectly in control of any party
liable under 10b-5. 15 U.S.C. § 78t(a). For liability to arise from
the omission of material nonpublic information under this statute, the
charged party must have an affirmative duty to disclose this
information. Dirks v. SEC, 463 U.S. 646, 654, 103 S.Ct. 3255, 3261, 77
L.Ed.2d 911 (1983); Chiarella v. United States, 445 U.S. 222, 235, 100
S.Ct. 1108, 1118, 63 L.Ed.2d 348 (1980); National Union Fire Ins. Co. v.
Turtur, 892 F.2d 199, 207 (2d Cir. 1989); Moss v. Morgan Stanley, Inc.,
719 F.2d 5, 12 (2d Cir. 1983), cert. denied sub nom., Moss v. Newman,
465 U.S. 1025, 104 S.Ct. 1280, 79 L.Ed.2d 684 (1984). This duty arises
from the existence of a fiduciary relationship. Dirks, 463 U.S. at 654,
103 S.Ct. at 3261; Chiarella, 445 U.S. at 227-35, 100 S.Ct. at 1114-18.
The relationship between shareholders of a corporation and corporate
officers or directors "who have obtained confidential information by
reason of their position with that corporation" is a fiduciary
relationship. Id. at 228, 100 S.Ct. at 1114-15. See also Dirks, 463 U.S.
at 654, 103 S.Ct. at 3261. The officer or director must therefore
disclose material facts before trading on them. Id.
This duty, however, extends only to material facts. Rule 10b-5,
17 C.F.R. § 240.10b-5; Basic Inc. v. Levinson, 485 U.S. 224, 238, 108
S.Ct. 978, 986-87, 99 L.Ed.2d 194 (1988). In Basic, the Supreme Court
articulated the test for determining whether a given fact is material in
the context of pre-merger negotiations. "`[T]here must [have been] a
substantial likelihood that the disclosure of the omitted fact would have
been viewed by the reasonable investor as having significantly altered
the `total mix' of information made available.'" Id. at 231-32, 108
S.Ct. at 983 (quoting TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438,
449, 96 S.Ct. 2126, 2132, 48 L.Ed.2d 757 (1976)). This
`will depend at any given time upon a balancing of both
the indicated probability that the event will occur and
the anticipated magnitude of the event in light of ...