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ABRASH v. FOX

November 2, 1992

SANDRA ABRASH, NORMA VERIDIANO, SANDY AIRBRUSH, INC. and ART & SOLE, LTD., Plaintiffs,
v.
BYRON FOX, GALVIN FOX & PALMER, JOHN GALVIN and SHELDON PALMER, individually and as partners of GALVIN FOX & PALMER, and GALVIN & PALMER, as successor in interest to Galvin Fox & Palmer, Defendants.



The opinion of the court was delivered by: MORRIS E. LASKER

 Sandra Abrash, Norma Veridiano, Sandy Airbrush, Inc. ("Airbrush, Inc.") and Art & Sole, Ltd. ("Art & Sole") sue Byron Fox, and his law firm, Galvin Fox & Palmer *fn1" , alleging securities fraud, common law fraud, malpractice, and breach of contract. Plaintiffs contend that Fox induced Abrash and Veridiano to purchase securities in Airbrush, Inc. by making various misrepresentations in violation of Section 10(b) of the Securities Exchange Act of 1934 and S.E.C. Rule 10b-5.

 Fox moves to dismiss the complaint for lack of subject matter jurisdiction on the grounds that Plaintiffs' claim for securities fraud, the sole predicate for federal jurisdiction, *fn2" fails to state a claim upon which relief can be granted. Fed. R. Civ. P. 12(b)(1), 12(b)(6).

 I.

 Abrash formed Art & Sole in 1988 to produce hand painted pictures and designs on athletic footwear. Abrash sought a person with suitable expertise to evaluate and follow through on various unfolding business opportunities and was introduced to Fox through Veridiano in March 1989. According to the Complaint, Fox represented to Abrash and Veridiano:

 (a) that Fox was duly competent and qualified to represent plaintiffs . . . and duly licensed to practice law in . . . New York;

 (b) that Fox would do all the necessary work to establish the francise (sic) organization and arrange for the filing of the patent application by July 1 [of 1989];

 (c) that Fox would act as business and legal advisor and negotiator with regard to . . . [new] business opportunities. . .;

 (d) [and] that $ 50,000 in capital, which included $ 15,000 to be paid immediately to Fox in legal fees, was sufficient to establish the franchise and initially capitalize the business.

 Plaintiffs contend that these representations were materially false or misleading.

 In June 1989, Airbrush, Inc. was formed on Fox's advice as a start-up vehicle for the franchise organization. Veridiano purchased 100 shares, representing 10% of the outstanding stock for $ 50,000, and Abrash purchased 900 shares in consideration for the transfer to Airbrush, Inc. of the right to use or license the Process developed by Art & Sole, Inc. Plaintiffs contend that they would never have entered into this transaction, but for Fox's misrepresentations.

 II.

 To sustain a claim under Section 10(b) and Rule 10b-5, a plaintiff must establish that the alleged material misstatement or omission took place "in connection with the purchase or sale of a security." Luce v. Edelstein, 802 F.2d 49, 55 (2d Cir. 1986) (citing Ernst & Ernst v. Hochfelder, 425 U.S. 185, 47 L. Ed. 2d 668, 96 S. Ct. 1375 (1976)). Fox contends that the alleged misrepresentations were not made "in connection with the purchase or sale of a security," but rather in relation to his legal representation of the plaintiffs. Abrash and Veridiano do not contest the legal authorities cited by Fox, but deny that the relationship of the misrepresentations to the securities was too remote. They argue that:

 simply because the misrepresentations were also made in connection with the legal retention as well as in connection with the securities transaction does not mean that [they] ...


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