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March 7, 1991


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 $1.375/share.

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.



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
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