The opinion of the court was delivered by: McKENNA, District Judge:
Defendants Chase Manhattan Bank, Matthias & Berg, Jeffrey P.
Berg, and Michael R. Matthias each move to dismiss the
plaintiff's claims under the Racketeer Influenced and Corrupt
Organizations Act ("RICO"), the Securities Exchange Act of
1934, and state law, and defendant Gruntal & Company moves to
dismiss plaintiff's RICO claim. For the reasons stated below,
the motion of Gruntal & Company is granted, and the motions of
Chase Manhattan Bank, Matthias & Berg, Jeffrey P. Berg and
Michael R. Matthias are granted in part and denied in part.
These motions and the underlying case arise out of a series of
fraudulent financial transactions, orchestrated by defendant
Bruce Black, which together deprived the plaintiffs of over
$800,000 and forced Jan & Craig's Window Factory, Ltd. into
Black was hired by Gruntal & Company as a registered
representative in 1986 after being discharged from a similar
position with Merrill Lynch for engaging in unauthorized
trading in customers' accounts. Black was dismissed by Gruntal
1987, also for engaging in unauthorized trading.
Black then joined defendant Woodmere Securities, and in the
winter of 1987-88, retained defendants Jeffrey Berg and Michael
Matthias as attorneys for himself and Woodmere in various
transactions. During the same period of time, Black transferred
his personal checking account with defendant Chase Manhattan
Bank to the Chase branch at 1149 Wantagh Avenue, Wantagh, New
York. The officer in charge of the branch was defendant Thomas
In September, 1988, Jan and Craig Kahn were introduced to
Black, who offered to obtain additional financing of not less
than $2,000,000 for the Window Factory. Later that month Jan &
Craig's Window Factory entered into a written Financial
Consulting Agreement with Woodmere by which Woodmere promised
to obtain the additional financing. The Window Factory then
issued checks to Woodmere Securities in the amount of
$125,000,*fn2 which represented an up-front retainer fee.
Black endorsed these checks in the names of "Woodmere
Securities, Inc./Bruce Black" and deposited them into his
personal checking account at Chase with the aid of Greene, who
knew that Black had no authority to deposit the checks into his
In October, 1988, plaintiff Roselyn Kahn, the mother of Jan
and Craig Kahn, transferred her securities account from
Shearson Lehman Hutton to Woodmere Securities, where Black
would act as her stockbroker. Roselyn Kahn instructed Woodmere
to sell all of the securities that had been transferred from
Shearson to Woodmere. Woodmere issued three checks to Roselyn
Kahn totalling in excess of $103,000, which represented the
proceeds from the sales of the securities. Black then endorsed
these checks with Roselyn Kahn's and his own names and
deposited them into his personal account at Chase with the
knowledge of Greene.
In November, 1988, Black suggested that Jan and Craig Kahn
merge the Window Factory into Grason Industries, Inc., a public
company whose sole asset was $265,000 in cash, which would
enable Woodmere to finance the business through a secondary
offering. Later in November, Black introduced the Kahns to
defendant Jeffrey Berg, a partner in the Los Angeles law firm
of Matthias & Berg, whom the Window Factory and Jan and Craig
Kahn retained to represent them in the merger. In addition to
a retainer agreement, the Window Factory executed two "Waiver
of Conflict of Interest" forms which stated that Matthias &
Berg represented Woodmere Securities (as well as Steven Scott
and Capital Resources & Marketing, who had identified Grason to
Black as a potential merger candidate) in ongoing matters
unrelated to the merger. The waivers did not reveal that
neither Black, Woodmere Securities, Scott, nor Capital
Resources & Marketing would be represented by independent legal
counsel in the merger.
In December, 1988, Jan and Craig Kahn delivered to Black two
checks totalling $92,742.06 drawn on the account of and also
made payable to plaintiff Four Seasons Manufacturing Co.
Pension Trust for the purpose of opening an investment account
with Woodmere for the Window Factory's pension plan. Black,
with the knowledge of Greene, endorsed the checks as "Bruce C.
Black, TTEE" and deposited them into his personal account at
Chase. That same month Black formed "D.L. Cabot & Co., Inc.,"
which replaced Woodmere as underwriter for the Window Factory's
securities. The Kahns executed a revised "Waiver of Conflict of
Interest" form with Matthias & Berg that stated that the law
firm represented D.L. Cabot in matters unrelated to the Window
Factory transactions. The waiver did not disclose that D.L.
Cabot would not have independent representation in those
transactions, nor was it revealed that Berg and Matthias
secretly owned 15% of D.L. Cabot.
In March, 1989, the merger between the Window Factory and
Grason was consummated in Denver. Prior to the merger, Black
altered the financial statements of
the Window Factory to reflect a net worth that was more than
$1,000,000 greater than its actual value, and Berg used those
statements at the closing of the merger. On March 15, 1989 the
Window Factory paid $40,000 to the existing shareholders of
Grason in satisfaction of one of the conditions of the deal,
and the Window Factory took control of Grason, whose sole asset
was $265,000 in cash. The Window Factory then turned over the
$265,000 to Black, who distributed not less than $10,000 to
Berg for legal services and absconded with the balance.
In early April, 1989, Black convinced Jan and Craig Kahn that
it would not be possible to raise $2,000,000 in a public
offering of Grason stock until some buying activity raised the
price of the stock. To that end, Jan Kahn, acting as custodian
for plaintiffs Brad Kahn and Brendan Kahn, issued two $10,000
checks from their college fund to D.L. Cabot for the purchase
of Grason stock, and Craig Kahn, acting as custodian for
plaintiff Alex Kahn, issued a similar $15,000 check. Black had
previously opened two more checking accounts with Greene at
Chase's Willow Wood Shopping Center branch in the names of
"D.L. Cabot & Co., Inc." and "D.L. Cabot & Co., Inc. Client
Trust Account." There was no proper corporate authorization
from D.L. Cabot & Co. in Chase's files for either account.
Black endorsed the checks "D.L. Cabot" and deposited them into
the D.L. Cabot account at Chase.
In July, 1989, Black was arrested and charged in the United
States District Court for the Eastern District of New York with
violating federal mail fraud statutes.