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
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
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
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.