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HIRSCHFELD v. TOTAL HEALTH SYSTEMS

October 9, 1991

STANLEY E. HIRSCHFELD AND DOROTHY HIRSCHFELD, PLAINTIFFS,
v.
TOTAL HEALTH SYSTEMS, INC. AND JAY A. FABRIKANT, DEFENDANTS.



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

OPINION AND ORDER

In this action, the plaintiffs allege securities fraud in violation of
section 10(b) of the Securities Exchange Act of 1934  (15 U.S.C. § 78j
[1988]), and Rule 10b-5 of the Securities Exchange Commission. The
defendants Total Health Systems, Inc. and Jay A. Fabrikant now move to
dismiss the Complaint, pursuant to Rules 9(b) and 12(b)(6) of the Federal
Rules of Civil procedure, on two grounds: (1) statute of limitations; and
(2) failure to state a claim upon which relief can be granted. For the
reasons set forth below, the defendants' motion is granted.

BACKGROUND

1. The Parties

The plaintiffs Stanley Hirschfeld and Dorothy Hirschfeld are husband and wife and reside in Indiana. The defendant Total Health Systems, Inc. ("THS") is a New York corporation which operates various Health Maintenance Organizations ("HMOs") and has its principal place of business in Great Neck, New York. The defendant Jay Fabrikant, a New York resident, was chairman of the board of directors of THS as well as treasurer, chief operating officer, and 10% shareholder in the corporation.

According to the complaint, THS and Jay Fabrikant, along with a company called Copeland Securities Incorporated ("Copeland") and an individual named Kenneth W. Germain ("Germain"), "developed and undertook a plan to promote the stock of [THS] to the investment community by providing false and misleading information concerning [THS]'s business and financial condition and thereby increase the market price of [THS]'s stock" (¶ 8). The complaint also alleges that THS and Fabrikant "aided and abetted" Copeland and Germain (¶ 9).

2. The Allegations

According to the complaint, Thomas Cullen relied on the "Copeland Report," an investment publication, dated May 15, 1987, in recommending to the plaintiffs that they purchase shares of THS. The Copeland Report represented that THS would have:

  "a. Gross revenues for 1987 of $118,000,000 (it was
  not stated whether 1987 was the calendar year or
  [THS]'s fiscal year for 1987 ending June 30, 1987);
  b. Earnings of $1.15/share for 1987 or approximately
  $4,600,000;
  c. 104,000 commercial members and 38,000 Medicare
  members for 1987 (the Copeland Report stated that
  [THS] currently had 7,000 members and a potential
  acquisition, CoMed, Inc. a non-profit HMO in New
  Jersey, had 60,000 members)" (Amended Complaint
  ¶ 10).

The amended complaint contains one cause of action under Section 10(b) of the Securities Exchange Act and S.E.C. Rule 10b-5. Subject matter jurisdiction is based on 15 U.S.C. § 78aa ("The district courts of the United States . . . shall have exclusive jurisdiction of violations of this chapter or the rules and regulations thereunder, and of all suits in equity and actions at law brought to enforce any liability or duty created by this chapter or the rules and regulations thereunder").

The relevant allegations stated in the amended complaint are as follows:

  "11. [THS] and its then chief executive officer,
  Fabrikant, among other representatives, and Copeland
  and its then chief executive officer, Germain, among
  other representatives, knew that the information set
  forth in the Copeland Report was false and misleading
  in the following aspects, among others:
  a. Gross revenues were grossly exaggerated. Gross
  premium revenues for the three months ending March
  31, 1987, were $307,512. For the fiscal year ending
  June 30, 1987, or 45 days after issuance of the
  Copeland Report, gross premium revenues were
  $828,000;
  b. Net earnings before tax were grossly misleading.
  Net losses for the fiscal year ending June 30, 1987,
  or 45 days after issuance of the Copeland Report, were
  $8,600,000 of which $3,000,000 was non-recurring
  (including $2,035,000 of compensation to the officers
  and directors in the form of issuance of [THS] shares
  to them at prices substantially below market sale). No
  reference was made in the Copeland Report to the
  statement made by [THS] in a prospectus dated March
  18, 1987, that [THS] `anticipates that it will
  continue to sustain operating losses for at least one
  year from the date hereof' or March, 1988.
  c. Existing enrollment figures were misstated and
  enrollment predictions were without basis in fact.
  Enrollment as of the May 15, 1987 date of the Copeland
  Report was approximately 3,500 members, not 7,000
  members as represented. As of the date of the Copeland
  Report, [THS] had not qualified under federal
  regulations for Medicare members.

  Even if the CoMed acquisition was consummated,
  enrollment for 1987 would have been substantially less
  than predicted. . . .
  19. [THS] and Fabrikant knowingly aided and abetted
  Copeland and Germain and other Copeland
  representatives including Anthony Correra, in the
  violation of section § 10b of the Securities
  Exchange Act of 1934, 15 U.S.C. 78j, and Rule 10b-5
  promulgated thereunder, by knowingly making untrue
  statements of material facts and omitting to state
  material facts necessary in order to make the
  statements made, in light of the circumstance under
  which they were made, not misleading, by the use of
  means or instrumentalities of interstate commerce or
  of the mails. In particular [THS] and Fabrikant
  knowingly provided Anthony J. Correra, on or before
  May 15, 1987, untrue and misleading information on the
  business and financial condition of [THS]. [THS] and
  Fabrikant knew that Mr. Correra's purpose in gathering
  such information was to prepare a report on [THS] to
  be issued through Copeland to the securities industry
  and potential investors of [THS] to further [THS] and
  Fabrikant's plan in concert with Copeland and Germain
  to induce purchases of [THS]'s common stock and
  thereby increase its price."

As a result of the defendants' violations, counsel for the plaintiffs contends, the Hirschfelds were damaged in "an amount not less than $222,323 plus pre-judgment interest computed at market rate" (Amended Complaint ¶ 20).

PROCEDURAL SETTING

In moving to dismiss the complaint under Rule 12(b)(6), the defendants claim that the plaintiffs have failed to state a cause of action upon which relief can be granted. According to the defendants, the sole cause of action enunciated in the complaint is barred by the applicable statute of limitations. In addition, the defendants ...


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