The opinion of the court was delivered by: Leisure, District Judge:
This is a class action for violations of the Racketeer
Influenced and Corrupt Organizations Act, 18 U.S.C. § 1961 et
seq. ("RICO"), and for violations of § 10(b) of the Securities
Exchange Act of 1934, 15 U.S.C. § 78j(b) (the "1934 Act"), and
Rule 10b-5 promulgated thereunder, and § 9(a) of the 1934 Act.
Each defendant is named in each of the five claims in the
complaint. Defendant Securities Settlement Corporation ("SSC")
and defendant Joel S. Nadel*fn1 ("Nadel") (collectively
referred to herein as "the Moving Defendants"), have separately
moved on similar grounds, pursuant to Fed.R.Civ.P. 12(b)(6) and
Fed.R.Civ.P. 9(b), for dismissal of the complaint in this
action. For the reasons discussed below, the motions of the
Moving Defendants are granted.
The plaintiffs in this action are Elizabeth Freeman Connolly
("Connolly") and SMC Trading Company, a partnership in which
Connolly was a general partner. Complaint ¶¶ 12, 13. The
complaint names seven individuals as defendants (the
"Individual Defendants"), as well as SSC. Plaintiffs aver that
they maintained securities trading accounts with Equities
International Securities ("Equities"), and sue on behalf of a
class consisting of similar customers of Equities who, like
themselves, allegedly sustained losses in their accounts as the
result of unauthorized trades and securities fraud. Complaint
¶¶ 5, 12, 13. More specifically, plaintiffs allege that during
1987 and 1988 the Individual Defendants conducted a scheme to
defraud plaintiffs by using Equities
as a vehicle to manipulate the prices of various
securities, to sell unregistered securities, to
underwrite the initial public offerings of
securities in which the individual defendants had
or gained an interest, to engage in unauthorized
purchases and sales from the accounts of customers
of [Equities], to park securities in the accounts
of customers of [Equities] in order to give
[Equities] the appearance of solvency and of a
legitimate business enterprise, all to the benefit
of the individual
defendants herein. [SSC] aided and abetted these
Defendant SSC is alleged to have acted as Equities's clearing
house during the relevant time period, Complaint ¶ 24, and to
have "indicated" that it was the broker of record with respect
to two securities. Complaint ¶¶ 65, 75. It is alleged that
because SSC acted as Equities's clearing house, it "knew, or in
the exercise of reasonable diligence should have known," of the
illegal activities of Equities and the other defendants.
Complaint ¶¶ 24, 34, 40, 46, 51, 57, 65, 70, 75, 79. Defendant
Nadel is alleged to have owned manipulated securities,
Complaint ¶ 31, and to have owned or controlled "a number of"
publications that give advice on securities to the public.
Complaint ¶ 63. It is also alleged that Equities paid Nadel
$6,000 to use his publications to tout the stock for which
Equities was the underwriter, and that Nadel did so without
disclosing that fact. Complaint ¶ 63. Finally, it is alleged
that Nadel voluntarily agreed to leave the securities industry
under pressure from the Securities and Exchange Commission, a
fact not disclosed to the public or to plaintiffs. Complaint ¶
"The court's function on a Rule 12(b)(6) motion is not to
weigh the evidence that might be presented at a trial but
merely to determine whether the complaint itself is legally
sufficient." Festa v. Local 3 International Brotherhood of
Electrical Workers, 905 F.2d 35, 37 (2d Cir. 1990); see also
Ryder Energy Distribution Corp. v. Merrill Lynch Commodities,
Inc., 748 F.2d 774, 779 (2d Cir. 1984) ("The function of a
motion to dismiss `is merely to assess the legal feasibility of
the complaint, not to assay the weight of the evidence which
might be offered in support thereof.'" (quoting Geisler v.
Petrocelli, 616 F.2d 636, 639 (2d Cir. 1980))).
Thus, a motion to dismiss must be denied "unless it appears
beyond a doubt that the plaintiff can prove no set of facts in
support of his claim which would entitle him to relief."
Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40
L.Ed.2d 90 (1974) (citing Conley v. Gibson, 355 U.S. 41, 45-46,
78 S.Ct. 99, 101-02, 2 L.Ed.2d 80 (1957)); see also Morales v.
New York State Dep't of Corrections, 842 F.2d 27, 30 (2d Cir.
1988). In deciding a motion to dismiss, the Court must accept
the plaintiff's allegations of fact as true, together with such
reasonable inferences as may be drawn in his favor. Papasan v.
Allain, 478 U.S. 265, 283, 106 S.Ct. 2932, 2934, 92 L.Ed.2d 209
(1986); Murray v. Milford, 380 F.2d 468, 470 (2d Cir. 1967);
Hill v. Sullivan, 125 F.R.D. 86, 90 (S.D.N.Y. 1989) ("all
allegations in plaintiffs' amended complaint must be accepted
as true and liberally construed."); see also Scheuer, supra,
416 U.S. at 236, 94 S.Ct. at 1686. Federal Rule of Civil
Procedure 8(a) requires only a "`short and plain statement of
the claim' that will give the defendant fair notice of what
plaintiff's claim is and the ground upon which it rests."
Conley, supra, 355 U.S. at 47, 78 S.Ct. at 103 (quoting
Nevertheless, "the complaint must set forth enough
information to suggest that relief would be based on some
recognized legal theory." Fort Wayne Telsat v. Entertainment
and Sports Programming Network, 753 F. Supp. 109, 111 (S.D.N Y
1990) (Leisure, J.). "The District Court has no obligation to
create, unaided by plaintiff, new legal theories to support a
complaint." District of Columbia v. Air Florida, Inc.,
750 F.2d 1077, 1081-82 (D.C. Cir. 1984). "In practice `a complaint . . .
must contain either direct or inferential allegations
respecting all the material elements necessary to sustain a
recovery under some viable legal theory.'" Car Carriers, Inc.
v. Ford Motor Co., 745 F.2d 1101, 1106 (7th Cir. 1984) (quoting
Sutliff, Inc. v. Donovan Cos., 727 F.2d 648, 654 (7th Cir.
1984) (Posner, J.) (emphasis in original) (quoting French
Quarter Apartments Ltd. v. Georgia-Pacific Corp., 655 F.2d 627,
641 (5th Cir. 1981), cert. dism'd, 462 U.S. 1125, 103 S.Ct.
3100, 77 L.Ed.2d 1358 (1983))), cert. denied, 470 U.S. 1054,
105 S.Ct. 1758, 84 L.Ed.2d 821 (1985).
Having set forth the standards for evaluating motions under
Rule 12(b)(6), the Court now addresses the sufficiency of
plaintiffs' claims. Those claims will be discussed in logical,
rather than numerical order.
I. Fourth Claim: Section 10(b) and ...