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July 8, 1991


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


In a single motion, defendants Black, Davis, Joseph, Kissick, Klein and Wright move to dismiss the claims against them pursuant to Fed.R.Civ.P. 12(b)(1) for lack of subject-matter jurisdiction and 12(b)(6) for failure to state a claim upon which relief can be granted,*fn1 and defendant McHale moves to dismiss Counts I and II of the complaint on the same grounds. The remaining defendant, Drexel Burnham Lambert, Inc. ("Drexel")*fn2 has filed a petition in bankruptcy.

Plaintiff, the National Bank of Yugoslavia (the "Bank"), brings this action against all defendants under section 10(b) of the Securities Exchange Act of 1934 (the "1934 Act"), 15 U.S.C. § 78j(b) (1988), Rule 10b-5, 17 C.F.R. § 240.10b-5 (1990), and section 12(2) of the Securities Act of 1933 (the "1933 Act"), 15 U.S.C. § 77l(2), as well as against Mr. McHale and Drexel for common-law fraud and negligent misrepresentation.

The claims arise out of a series of transactions in which the Bank placed approximately $71 million with Drexel (for investment, says the Bank; as short-term loans to Drexel, say defendants) shortly before Drexel's bankruptcy. In this motion, defendants contend that the transactions did not involve "securities" within the meaning of the federal securities laws, and that those claims must be dismissed. The Bank counters that the notes it purchased from Drexel were "securities" under the circumstances.


The complaint alleges the following:

The Bank is the central bank for the government of Yugoslavia, and is responsible for maintaining and investing Yugoslavia's monetary reserves and for its external liquidity. (Complaint ¶¶ 3, 17). Yugoslavian law requires that safety be its most important investment criterion, and accordingly "it invests Yugoslavian reserves directly or indirectly (i) with commercial banks ranking in the top 100 worldwide in terms of assets, or (ii) in high quality debt securities issued or guaranteed by governments of the most developed countries." (Complaint ¶ 17).

In June 1989, Mr. McHale, describing himself as a Drexel "Senior Economist," sent a telex to the Bank requesting a meeting concerning "central bank reserve management." (Complaint ¶¶ 20-21). The telex stated that Drexel was a leading financial intermediary with many central banks in various investment transactions. (Complaint ¶ 21). When Mr. McHale and an associate met with Bank representatives later that month, those representatives informed him of the Bank's conservative investment policy. (See Complaint ¶¶ 22-28). In reliance on Mr. McHale's statements that Drexel would act in accordance with those policies, the Bank promptly entered into a number of transactions with Drexel. (Complaint ¶¶ 26, 29-30).

On September 22, 1989, Drexel accepted 70 million deutsche marks from the Bank, and agreed to return it, with interest, on December 27, 1989. (Complaint ¶ 31). On September 27, 1989, Drexel accepted an additional $40 million from the Bank, and agreed to return that amount on December 29, 1989, with interest. (Complaint ¶ 33). The Bank believed that Drexel would invest those sums in accordance with its investment policy. (Complaint ¶¶ 32, 34).

Both transactions took place over the Reuters Screen System, a computer communications network. (Complaint ¶¶ 16, 31, 33). The parties negotiated some terms of the transactions, including the interest rate. Drexel stated that it would "borrow" the sums. The Bank said that it could "offer" and "give" the funds, and that it would "place" them with Drexel. (Affidavit of Francis Holozubiec sworn to March 11, 1991 exhibit B at 48, 53).

Later, the Bank and Drexel agreed to "roll over" the deposits. The Bank accepted postponement of the return of its money until February and March 1990, and the parties agreed upon different interest rates. (Id. at 114-15, 120; Complaint ¶¶ 33-38). The complaint characterizes both the initial transactions and the "roll overs" as "time deposits." (Complaint ¶ 38).

Contrary to Drexel's representations and the Bank's expectations, Drexel did not invest the funds with top banks or in high-quality government or government-backed debt securities. (Complaint ¶ 40). Rather, Drexel used the money for itself, to alleviate its liquidity problems. (Complaint ¶ 40).

In February 1990 Drexel informed the Bank of Drexel's liquidity problems and that approximately $71 million of the funds could not be returned. (Complaint ¶¶ 48-49). This action followed.

The Bank alleges that the individual defendants other than Mr. McHale, who are Drexel officials, are liable as "controlling persons" under section 20(a) of the 1934 Act, 15 U.S.C. § 78t(a), and section 15 of the 1933, 15 U.S.C. § 77o. It asserts that Mr. McHale is liable as an aider and abettor of Drexel's primary securities fraud. (Complaint ¶ 55).


I. The Standard for Dismissal

On a motion to dismiss for failure to state a claim, the allegations in the complaint must be taken as true. They are read in the light most favorable to the plaintiff. The complaint must not be dismissed unless it appears beyond question that plaintiff cannot prove any set of facts in support of its claim which would entitle it to relief. Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40 L.Ed.2d 90 (1974); Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-102, 2 L.Ed.2d 80 (1957).

The parties dispute whether their Reuters Screen System communications may be considered in deciding this motion. The complaint refers to the Reuters Screen System communications, which are integral to the time deposits and the Bank's claims. Their terms are undisputed, and the Bank has submitted them in connection with this motion. Therefore, the communications may be deemed incorporated by reference into the complaint, and they will be considered here. See Feder v. Macfadden Holdings, Inc., 698 F. Supp. 47, 50 (S.D.N.Y. 1988); see also Field v. Trump, 850 F.2d 938, 949 (2d Cir. 1988), cert. denied, 489 U.S. 1012, 109 S.Ct. 1122, 103 L.Ed.2d 185 (1989); Furman v. Cirrito, 828 F.2d 898, 900 (2d Cir. 1987).

However, their significance will be evaluated in light of the Bank's allegations that they were but a part of its overall relationship with Drexel.

II. Notes as ...

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