allegation is plausible under the circumstances). In addition,
the Complaint alleges no event occurring between the execution
of the Note and Attorney Narwold's statement that would
indicate that MicroGeneSys' decision not to repay was reached
two years after the failed IPO.
Moreover, to satisfy the scienter requirement it is not
necessary for Drexel to allege that Attorney Narwold was
involved in the negotiations of the Note in 1989, or that he
represented MicroGeneSys in its prior dealings with Drexel. Nor
is it necessary to allege that Narwold had knowledge of
MicroGeneSys' intention at the time of execution of the Note.
Drexel's Complaint alleges that Narwold was involved in a
discussion with plaintiff's counsel regarding repayment of the
Note, and spoke on the defendant's behalf during that
discussion. Thus, it is permissible to infer that MicroGeneSys
had informed Narwold, defendant's outside litigation counsel,
of the relevant details surrounding the transaction that took
place in February of 1989.
MicroGeneSys suggests that Drexel's Complaint cannot create
a "strong inference" of fraud because the only factual basis
for its fraud claims is Narwold's statement, which was made
during settlement discussions and may not be admissible at
trial. It is well settled, however, that a complaint should not
be dismissed for failure to state a claim unless it appears
beyond doubt that the plaintiff can prove no set of facts in
support of his claim that would entitle him to relief.
Conley v. Gibson, 355 U.S. 41, 47-48, 78 S.Ct. 99, 102-103, 2
L.Ed.2d 80 (1957). "Accordingly, doubt as to a party's ability
to prove his case, no matter how unlikely it seems he will be
able to prove it, is no reason for dismissing his pleadings for
failure to state a claim upon which relief can be granted."
Raine v. Lorimar Productions, Inc., 71 B.R. 450 (S.D.N.Y. 1987)
(citing Walker Distributing Co. v. Lucky Lager Brewing Co.,
323 F.2d 1, 4 (9th Cir. 1963); Carnivale Bag Co. Inc. v. Slide Mfg.
Corp., 395 F. Supp. 287, 291 (S.D.N.Y. 1975)).
II. Claim under § 12(2)*fn4
MicroGeneSys has also moved to dismiss Drexel's third claim
(based on § 12(2) of the Securities Act [15 U.S.C. § 77l(2)]),
for failure to state a claim, and failure to allege fraud with
The Second Circuit has determined that actions brought under
Section 12(2) of the Securities Act "do not require a showing
by the plaintiff of any kind of scienter on the part of
defendant." Wigand v. Flo-Tek, Inc., 609 F.2d 1028, 1034 (2d
Cir. 1979) (citing Franklin Savings Bank of New York v. Levy,
551 F.2d 521, 526, 527 (2d Cir. 1977). Section 12(2) liability
may result from negligent conduct, misstatements or omissions.
Billet v. Storage Technology Corp., 72 F.R.D. 583, 585
(S.D.N.Y. 1976). To the extent that plaintiffs need not allege
fraud or scienter in actions brought under Section 12 of the
Securities Act, Rule 9(b) is inapplicable. Id.
If a Section 12(2) claim is based on fraud, however, that
claim must comply with the pleading requirements of Rule 9(b).
Moran v. Kidder Peabody & Co., 609 F. Supp. 661, 666 (S.D.N Y
1985), aff'd, 788 F.2d 3
(2d Cir. 1986); see also In re Chaus Securities Litigation,
[1990 Transfer Binder] Fed.Sec.L.Rep. (CCH) ¶ 95,646 at 98,003,
1990 WL 188921 (S.D.N.Y. Nov. 20, 1990).
Here, Drexel's third claim, which alleges a violation of
Section 12(2) of the Securities Act, sounds in fraud; the
Complaint must therefore satisfy the pleading requirements of
Rule 9(b). The basis for the Court's conclusion is two-fold.
First, the alleged material omission by MicroGeneSys is the
same that Drexel generally refers to earlier in the Complaint,
specifically, in Drexel's first and second § 10(b) claims. See
Moran v. Kidder Peabody & Co., 609 F. Supp. at 666 (it may be
assumed that a claim under § 12 sounds in fraud if the alleged
misstatements are those generally referred to earlier in the
complaint). In both its § 10(b) and § 12(2) claims, Drexel
alleges the omission of the same material fact, namely, that
MicroGeneSys failed to disclose its intention not to repay the
Second, Drexel can only be alleging fraud, as opposed to
negligent or unintentional conduct, when it identifies the
material omission as follows:
In connection with the sale of such security,
defendant never notified plaintiff of its then
present intent not to repay the Note.
Complaint, at ¶ 37. By defining the material omission as
MicroGeneSys' failure to disclose its intent not to repay the
Note, Drexel is claiming that MicroGeneSys' "intent to defraud
was a material fact that should have been disclosed to Drexel."
Defendant's Reply Memorandum to Plaintiff's Memorandum in
Opposition to Defendant's Motion to Dismiss, at 14. Since it is
unreasonable to suggest that MicroGeneSys negligently or
unintentionally failed to disclose its intent to defraud or not
repay the Note, Drexel's claim sounds in fraud and Drexel must
satisfy the pleading requirements of Rule 9(b). Thus, Drexel
must allege facts that create at least a "strong inference"
that MicroGeneSys knew of the existence of a misrepresentation
or material omission in a prospectus or oral communication in
connection with the sale of a security. See Devaney v. Chester,
813 F.2d 566 (2d Cir. 1987) (court dismissed claim based on §
12(2) of the Securities Act for failure to plead the events
which gave rise to an inference of knowledge).
In this case, Drexel adequately alleges scienter. As in the
§ 10(b) claims discussed above, Attorney Narwold's statement
creates a "strong inference" that MicroGeneSys knew it was
III. State Law Claims
Since Drexel's federal law claims have not been dismissed
pursuant to Rule 12(b)(6) or Rule 9(b), this Court will retain
pendent jurisdiction over Drexel's state law claims. Pendent
jurisdiction exists whenever there is a claim "arising under
[the] Constitution, the Laws of the United States, and Treaties
made, or which shall be made, under their authority," U.S.
Const. art. III, § 2, and the relationship between that claim
and the state claim permits the conclusion that the entire
action before the court comprises but one constitutional
"case." United Mine Workers of America v. Gibbs, 383 U.S. 715,
725, 86 S.Ct. 1130, 1138, 16 L.Ed.2d 218 (1966). Before a
federal court exercises pendent jurisdiction, however, it must
determine that the state and federal claims derive from a
common nucleus of operative fact. Id. If a court finds that a
plaintiff's claims are such that he would ordinarily be
expected to try them all in one judicial proceeding, the
federal court has the power to hear all the claims. Id.
In this case, Drexel's state claims arise out of the
Agreement and Note that serve as the basis for its federal
claims. Thus, this court has the power to exercise pendent
jurisdiction over the state claims.
For the reasons set forth above, MicroGeneSys' motion,
pursuant to Rules 12(b)(6) and 9(b) of the Federal Rules of
Civil Procedure, for an order dismissing Drexel's § 10(b), §
12(2) and common law claims for failure to state a claim and
failure to plead fraud with particularity is denied. Defendant
shall file its answer
within the time provided for under Rule 12(a)(1).