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SEC v. MALENFANT

March 12, 1992

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, against MARK P. MALENFANT, THOMAS C. PAYNE, AND PAYNE FINANCIAL GROUP, Defendants


The opinion of the court was delivered by: MICHAEL B. MUKASEY

 MICHAEL B. MUKASEY, U.S.D.J.

 The Securities and Exchange Commission brought this action against defendants Thomas C. Payne, Payne Financial Group and Mark P. Malenfant, alleging that they have manipulated the price of Texscan common stock, or were about to do so, in violation of Sections 9(a)(1), 9(a)(2) and 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. §§ 78i(1), 78i(2) and 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder. Defendants have been preliminarily enjoined form violating the above sections of the Exchange Act; from destroying any relevant documents; and from disposing of any Texscan stock or sales proceeds therefrom.

 The defendants Payne and Payne Financial Group move to dismiss the complaint for failure to state a claim upon which relief can be granted, pursuant to Fed.R.Civ.P. 12(b)(6). For the reasons set forth below, defendants' motion is denied.

 I.

 The facts as alleged in the complaint are as follows; Malenfant is a stockbroker with a securities firm registered with the Commission. Payne is president of Payne Financial Group, a public relations firm. The complaint alleges that defendants Malenfant, Payne and Payne Financial Group engaged in a scheme to defraud public investors in Texscan common stock. Texscan is a Delaware corporation that manufactures cable television products and is traded on the American Stock Exchange.

 In March 1991, defendant Malenfant contacted Talton R. Embry, a director of Texscan and a principal of Magten Asset Management Corporation, and investment advisor. Complaint P15. Malenfant discussed with Embry his desire to purchase all the Texscan common stock owned by Magten's clients, which at the time was approximately 35 percent of the outstanding stock of Texscan. Complaint PP12, 15. During the week of April 15, 1991, employees of Payne Financial Group began aggressively to promote the purchase of Texscan common stock. Complaint PP23, 25. These employees told stockbrokers that, among other things, Texscan stock would be trading at between $ 12 and $ 20 per share very shortly. Complaint PP25. The employees did not disclose that Payne, Payne Financial Group or others were conducting an unlawful scheme to manipulate the price of Texscan common stock upwards. Id.

 On April 16, 1991, defendant Payne contacted Embry and identified himself as a customer of defendant Malenfant. Complaint P16. In that conversation Payne told Embry that he and his employees "controlled" over 300 retail stockbrokers through his company, Payne Financial Group. Id. Payne told Embry that he could arrange for the sale of Magten's customer holdings of Texscan common stock at increasing prices which would drive the price of Texscan common stock to between $ 9 and $ 10 per share. Id. The price of Texscan common stock at the close of the market on April 15, 1991 was $ 5.125 per share. Id. Payne further proposed to Embry that Magten sell 150,000 share blocks in lots of 10,000 shares at prices increasing by 12.5 cents or 25 cents until the price reached $ 10. Complaint P17. Finally, Payne told Embry that he wanted an option to purchase 150,000 shares of Texscan common stock from Magten customer accounts at $ 6 per share, and that he would exercise the option at some point after the stock reached $ 12 to $ 15. Complaint P18.

 On April 18, 1991, Malenfant told Embry he was working with Payne, and that Malenfant would place the orders to sell Texscan common stock in Magten customer accounts and that Payne would place matching buy orders. Complaint P19. Malenfant repeated Payne's earlier representations to Embry that blocks of Texscan stock would be sold at increasing price increment. Id. Malenfant also told Embry that he and Payne already owned Texscan common stock. Complaint P20. The manipulative scheme resulted in artificial increases in the volume and price of Texscan common stock beginning on April 16, 1991. Complaint P26. The following chart list the closing prices of Texscan common stock and the volume traded for the period April 8, 1991 through April 19, 1991, the last day on which the stock was traded before the trading suspension ordered by the Commission: DATE CLOSING PRICE VOLUME 4/8 5.875 18,600 4/9 6 7,700 4/10 6.625 4,300 4/11 6 5,000 4/12 5.625 4,200 Weekend -- Market closed 4/15 5.125 7,000 4/16 5.75 37,100 4/17 7.25 70,800 4/18 7.75 73,600 4/19 8 71,200

 Complaint P27. Thirty thousand shares of Texscan share of Texscan common stock were traded in the last half hour of trading on April 19, 1991. Complaint P28. Texscan made no major corporate announcements which might have caused the unusual volume and price increases. Complaint P29. The Commission suspended trading in Texscan stock on April 22, 1991, before any of Magten's customers' positions in Texscan stock could be sold as part of the scheme. Complaint P21. While trading in Texscan cmmon stock remained suspendedk, Payne and Malenfant indicated to Embry that they intended to continue with their plain to drive up the price of Texscan stock after the suspension was lifted. Complaint P22.

 Payne and Payne Financial Group make three arguments for dismissal. The first is that the complaint fails to allege that Payne possessed the requisite knowledge that an order or orders of substantially the same size, at substantially the same time, and at substantially the same price had been or would be entered on the reverse side of the transaction. The second is that since Embry did not sell Magten customers' positions in Texscan common stock before trading in the security was suspended by the Commission on April 22, 1991, no agreement to match orders could have existed between Embry and Payne or Payne Financial Group, and therefore no violation could have occurred. Finally defendants argue that their campaign of telephone calls to stockbrokers, aggressively promoting of Texscan stock, is common practice in the securities industry, and therefore cannot be a violation of § 9(a)(2) of the Exchange Act.

 II.

 Under Fed.R.Civ.P. 12(b)(6), "a complaint should no 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 which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957) (footnote omitted). In addition "[when] deciding a motion to dismiss, the Court must accept the plaintiff's allegation of facts as true together with such reasonable inferences as may be drawn in its favor." Landy v. Mitchell ...


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