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.
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 Petroleum Technology Corp., 734 F. Supp. 608, 615 (S.D.N.Y. 1990) (citing Murray v. City of Milford, 380 F.2d 468, 470 (2d Cir. 1967)).
Subsections 9(a)(1) and (2) provide:
(a) It shall be unlawful for any person, directly or indirectly, by the use of the mails or any means or instrumentality of interstate commerce, or of any facility of any national securities exchange, or for any member of the national securities exchange --
(1) For the purpose of creating a false or misleading appearance of active trading in any security registered on a national securities exchange, or a false or misleading appearance with respect to the market for any such security, . . .
(B) to enter an order or orders for the purchase of such security with the knowledge that an order or orders of substantially the same size, at substantially the same time, and at substantially the same price, for the sale of any such security, has been or will be entered by or for the same or different parties, or
(C) to enter any order or orders for the sale of any such security with the knowledge that on order or orders of substantially the same size, at substantially the same time, and at substantially the same price, for the purchase of such security, has been or will be entered by or for the same or different parties.
(2) To effect, alone or with one or more other person, a series of transactions in any security registered on a national securities exchange creating actual or apparent active tarading in such security or raising or depressing the price of such securities, for the purpose of inducing the purchase or sale of such security by others.
15 U.S.C. § 78i(a)(1) and (2).
In order "to make out a violation of subsection 9(a)(1). . ., a plaintiff must prove the existence of (1) a wash sale or matched orders in a security[,] (2) done with scienter [and] (3) for the purpose of creating a false or misleading appearance of active trading in that security . . ." Chemetron Corp. v. Business Funds, Inc., 682 F.2d 1149, 1163 (5th Cir. 1982) (footnotes omitted). To make out a subsection 9(a)(2) claim, the plaintiff must show "(1) a series of transactions in a security creating actual or apparent trading in that security or raising or depressing the price of the that security, (2) carried out with scienter and (3) for the purpose of inducing the security's sale or purchase by others . . ." Id. at 1164 (footnotes omitted); See also Crane Co. v. Westinghouse Air Brake Co., 419 F.2d 787 (2d Cir. 1969), cert. denied, 400 U.S. 822, 27 L. Ed. 2d 50, 91 S. Ct. 41 (1970); Baum v. Phillips, Appel & Walden, Inc., 648 F. Supp. 1518 (S.D.N.Y. 1986). "The central purpose of section 9(a) is not to prohibit market transactions which may raise or lower the price of securities, but to keep an open and free market where the natural forces of supply and demand determine a security's price." Trane Co. v. O'Connor Securities, 561 F. Supp. 301, 304 (S.D.N.Y. 1983) citing Chris-Craft Industries, Inc. v. Piper Aircraft Corp., 480 F.2d 341, 383 (2d Cir.), cert. denied, 414 U.S. 910, 38 L. Ed. 2d 148, 94 S. Ct. 231, 94 S. Ct. 232 (1973).
The Commission has alleged that these defendants developed a scheme to increase artificially the price of Texscan common stock by matching the buy orders to be made by defendants Payne and Payne Financial Group, with the sell orders to be made by defendant Malenfant. A reasonable inference can be drawn from these allegations that the defendants knew what they were doing and were acting intentionally. The complaint further alleges that the purpose of this scheme was to create a misleading appearance of active trading in the Texscan common stock, so as to induce innocent investors to purchase Texscan stock and thus bid up the price of such stock. The complaint specifically alleges that the defendants acted with intent to manipulate the market in Texscan common stock. Thus, the complaint properly alleges violations of subsections 9(a)(1) and (2).
It was not necessary for the matched buy and sell orders to have been executed. Under § 21(d) of the Exchange Act, 15 U.S.C. § 78u(d), the Commission is empowered to obtain injunctive relief whenever a person is about to violate the securities laws. Section 21(d) of the Exchange Act states the following:
(1) Whenever it shall appear to the Commission that any person is engaged or is about to engage in acts or practices constituting a violation of any provision of this chapter, the rules or regulations thereunder, the rules of a national securities exchange or registered securities association of which such person is a member or a person associated with a member, . . . it may in its discretion bring an action in the proper district court of the United States, . . . to enjoin such acts or practices, and upon a proper showing a permanent or temporary injunction or restraining order shall be granted without bond. . . ."
15 U.S.C. § 78u(d)(1).
Failure by plaintiff to allege that the matched orders were executed prior to suspension of trading in Texscan common stock, is not dispositive of whether the defendants violated the securities laws. Therefore, the plaintiff has stated a claim under subsections 9(a)(1) and (2) of the Exchange Act.
Section 10(b) is the general antifraud provision of the Exchange Act, and it prohibits any person from using or employing "any manipulative or deceptive device" in connection with the sale of a security. In order to state a claim under section 10(b) and Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5, a plaintiff "must allege material misstatements or omissions indicating an intent to deceive or defraud in connection with the purchase or sale of a security." McMahan & Co. v. Wherehouse Entertainment, Inc., 900 F.2d 576, 581 (2d Cir. 1990) citing Luce v. Edelstein, 802 F.2d 49, 55 (2d Cir. 1986); Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S. Ct. 1375, 47 L. Ed. 2d 668 (1976).
The complaint alleges that Payne and Payne Financial Group engaged in or were about to engage in a manipulative scheme to match buy and sell orders of Texscan common stock. "The natural consequence of this course of conduct was to artificially stimulate the so-called market price of the stock while makeing it appear to be the product of the independent forces of supply and demand when, in reality, it was completely a creature of defendants' subterfuge." Securities and Exchange Comm'n v. Resch-Cassin & Co., 362 F. Supp. 964, 978 (S.D.N.Y. 1973). The complaint alleges further that the defendants omitted or were about to omit material facts in statements they made or were going to make to their customers. The defendants purchased or were about to purchase Texscan stock for their customers, and in so doing, failed to disclose their manipulative scheme. Assuming these allegations to be true, the plaintiff has stated a valid claim under 1 10(b).
For the reasons set forth above, defendants' motion to dismiss is denied.
Dated: New York, New York
March 12, 1992
Michael B. Mukasey,
U.S. District Judge
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