The opinion of the court was delivered by: Lasker, District Judge.
Defendant Michael Milken moves under Rules 12(b) and 9(b),
Fed.R.Civ.P., to dismiss all claims against him in this
securities fraud class action suit, and under Rule 12(f) to
strike portions of the complaint.*fn1
For the reasons discussed below, the motion to dismiss and
the motion to strike are granted.
Plaintiffs are shareholders who bought stock in the
now-bankrupt First Capital Holdings Corp. ("First Capital")
between March 31, 1989 and May 31, 1991.
Their complaint alleges: 1) that Milken either caused or
helped defendant Robert Weingarten to establish First Capital,
a financial services and insurance holding company that derived
much of its revenue from its investment portfolio; 2) that
Milken, in his capacity as "junk bond chief" (Morse's term) of
the brokerage firm Drexel Burnham Lambert, underwrote First
Capital's financing through offerings of junk bonds; 3) that
"Drexel/Milken" exercised control over First Capital's
investment portfolio and caused it to invest heavily in junk
bonds issued by other clients of Milken and Drexel; 4) that
First Capital issued statements, including annual reports and
reports filed with the Securities and Exchange Commission
(SEC), which contained misrepresentations or misleading
omissions indicating that its financial condition was sound and
that its effective portfolio management reduced the risk
normally associated with junk bonds despite the fact that the
value of its junk bond portfolio was deteriorating rapidly; 5)
that defendants knew or were recklessly indifferent to the
falseness of their representations or the misleading nature of
their omissions; 6) that plaintiffs bought stock from March 31,
1989 through May 31, 1991 in reliance on those
misrepresentations or misleading omissions; and 7) that First
Capital collapsed, filing for bankruptcy on May 30, 1991*fn2
and thereby injuring plaintiffs.
Morse alleges that Milken's participation in these events was
part of a broader attempt by him to operate a scheme, which
Morse calls a "Daisy Chain," by which Milken would both arrange
financing for various entities with high-risk, high yield "junk
bonds" and cause the same entities to invest in junk bonds of
other Milken clients, all in an attempt to create an
artificially inflated market for financial products created by
Drexel and Milken.
As part of the alleged scheme, Morse claims, Drexel and
Milken knowingly "made materially false and misleading
statements . . . to prospective purchasers or sellers in order
to induce the purchase or sale of high-yield securities,"
Compl. at ¶ 61, and induced sales of high-yield securities by
advising "certain prospective purchasers and sellers that their
participation in the Drexel Daisy Chain would increase the
price of high-yield securities." Compl. at ¶ 62. The complaint
also alleges that Drexel and Milken "purchased and sold
high-yield securities while in possession of material
information, not generally available to the public, obtained
from their relationships with the issuers and purchasers. . .
." Compl. at ¶ 63.
According to Morse, the facts alleged constitute violations
of Sections 10(b) and 20(a) of the Securities Exchange Act of
1934, 15 U.S.C. § 78j(b) and 78t(a) (1988), Rule 10b-5
promulgated thereunder, 17 C.F.R. § 240.10b-5, and common law
fraud and negligent misrepresentation.
Milken argues that the claims against him must be dismissed
pursuant to Fed.R.Civ.P. 12(b)(6) for failure to state a claim
upon which relief can be granted and pursuant to Fed.R.Civ.P.
9(b) for failure to plead the circumstances constituting fraud
with particularity. He also maintains that portions of the
complaint should be stricken pursuant to Fed.R.Civ.P. 12(f).
Under Rule 12(b), the required inquiry is simply whether
Morse has alleged facts that, if true, would constitute a
violation of securities laws or applicable common law. Because
Morse alleges fraud, his claims must also comply with Rule
9(b), which provides: "In all averments of fraud or mistake,
the circumstances constituting fraud or mistake shall be stated
with particularity. Malice, intent, knowledge, and other
condition of mind of a person may be averred generally."
Construing Rule 9(b), the Court of Appeals for this Circuit has
recently held that "while Rule 9(b) permits scienter to be
demonstrated by inference, this `must not be mistaken for
license to base claims of fraud on speculation and conclusory
allegations.' An ample factual basis must be supplied to
support the charges." O'Brien v. National Property Analysts
Partners, 936 F.2d 674, 676 (2d Cir. 1991) (quoting Wexner v.
First Manhattan Co., 902 F.2d 169, 172 (2d Cir. 1990)).
Morse argues that his allegations support recovery against
Milken for primary violations of § 10(b), for aiding and
abetting primary violations by other defendants, for "control
person" liability pursuant to § 20(a), and ...