The opinion of the court was delivered by: PETER K. LEISURE
This is an action for federal securities laws violations. The Securities and Exchange Commission (the "Commission") alleges that defendants participated in schemes to defraud relating to U.S. Environmental ("USE") stock. According to the Complaint, the alleged fraudulent schemes had several different aspects, including misrepresentations relating to a "blind pool" public offering of the stock of Windfall Capital Corporation ("Windfall"); fraud relating to the merger of Windfall with USE (the merger was allegedly prearranged and the offering controlled); misrepresentations relating to USE in filings with the SEC, press releases, and other documents disseminated to the public; manipulation of the market for USE stock; fraudulent sale of USE stock to the public at manipulated prices; fraudulent transactions relating to restricted stock of USE; and concealment of fraudulent conduct. Defendant John Romano ("Romano") was a trader at defendant Castle Securities Corp., a broker-dealer whose business is alleged to have consisted principally of retail securities brokerage, underwriting, and market making activities. Romano is named in the First, Third, Fifth and Sixth Claims For Relief, and is alleged to have participated in those aspects of the schemes concerning manipulation of the market for USE stock and fraudulent sale of USE stock to the public at manipulated prices.
Romano has moved to dismiss the Complaint as against him for failure to state a claim upon which relief can be granted, see Fed. R. Civ. P. 12(b)(6), and for failure to plead fraud with particularity, see Fed. R. Civ. P. 9(b). For the reasons stated below, the motion is granted in part and denied in part.
Dismissal under Rule 12(b)(6) is proper only if, "accepting as true the material facts alleged in the complaint and drawing all reasonable inferences in plaintiff's favor . . . 'it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.'" Kaluczky v. City of White Plains, 57 F.3d 202, 206 (2d Cir. 1995) (quoting Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957)) (citation omitted). Rule 9(b) "permits plaintiffs to allege fraudulent intent generally while the circumstances amounting to fraud must be averred 'with particularity.'" Powers v. British Vita, P.L.C., 57 F.3d 176, 184 (2d Cir. 1995). Mindful of these standards, the Court takes up in turn the Commission's various claims for relief against Romano.
I. The First Claim For Relief.
The Commission's First Claim For Relief (Complaint PP 1-130) alleges that Romano and several other defendants conspired to violate Sections 5(a) and (c) and 17(a) of the Securities Act of 1933 (the "Securities Act"), 15 U.S.C. §§ 77e(a),(c), 77q(a), and Section 10(b) of the Securities Exchange Act (the "Exchange Act"), 15 U.S.C. § 78j(b), and Rules 10b-5 and 10b-6 thereunder, 17 C.F.R. §§ 240.10b-5, 240.10b-6.
Romano argues that the Supreme Court's decision in Central Bank, N.A. v. First Interstate Bank, N.A., 128 L. Ed. 2d 119, 114 S. Ct. 1439 (1994), forecloses the Commission from pursuing this theory of liability. The Court agrees.
In Central Bank, the Court held that there is no private cause of action for aiding and abetting a Rule 10b-5 violation. 114 S. Ct. at 1455. However, as the Central Bank dissent pointed out, the Court's reasoning was more expansive, supporting an extension of the holding to actions brought by the Commission, as well as private parties, see id. at 1460 ("The majority leaves little doubt that the Exchange Act does not even permit the Commission to pursue aiders and abettors in civil enforcement actions under § 10(b) and Rule 10b-5.") (Stevens, J., dissenting) (emphasis in original) (citation omitted), and to other forms of secondary liability, such as civil conspiracy, as well as aiding and abetting, see id. at 1460 n.12 ("The Court's rationale would sweep away the decisions recognizing that a defendant may be found liable in a private action for conspiring to violate § 10(b) and Rule 10b-5.") (Stevens, J., dissenting) (emphasis in original) (collecting authorities).
The Court reasoned, in particular, that "the text of the statute controls" the scope of prohibited conduct under § 10(b). Id. at 1446; see also Central Bank, 114 S. Ct. at 1447 ("'the ascertainment of congressional intent with respect to the scope of liability created by a particular section of the Securities Act must rest primarily on the language of that section.'") (quoting Pinter v. Dahl, 486 U.S. 622, 653, 100 L. Ed. 2d 658, 108 S. Ct. 2063 (1988)). This reasoning requires that the Commission's First Claim for Relief be dismissed with prejudice, pursuant to Rule 12(b)(6). The Commission is authorized to bring an enforcement action, only in the event of an imminent or actual "violation" of the Securities Acts, see 15 U.S.C. § 77t(b),(d) (Securities Act); 15 U.S.C. § 78u(d) (Exchange Act); and the Commission has failed to identify any statutory text that makes it a (civil) violation of the Securities Acts (or of federal law more generally) to conspire to violate any one or all of the substantive provisions of the Securities Acts at issue here. Under the reasoning of Central Bank, the Commission's failure in this regard is dispositive. See In re Glenfed, Inc. Securities Litigation, 60 F.3d 591 (9th Cir. 1995) ("The Court's rationale [in Central Bank] precludes a private right of action for conspiracy liability."); In re Syntex Corp. Securities Litigation, 855 F. Supp. 1086, 1098 (N.D. Cal. 1994) ("The Court's rationale in Central Bank of Denver also forecloses [a private civil] conspiracy liability theory. Section 10(b) is silent as to conspiracy liability and there is no provision in the securities statutes authorizing a private cause of action for such conduct. Moreover, that other statutes contain express provisions imposing liability for conspiracy suggests that Congress did not intend § 10(b) to do the same.") (citing Act of Mar. 4, 1990, § 37, 35 Stat. 1096, as amended, 18 U.S.C. § 371 (criminal conspiracy statute); Packers and Stockyards Act, 1921, ch. 64 § 202, 42 Stat. 161, as amended, 7 U.S.C. § 192(f),(g) (civil conspiracy provision).
The Commission argues that, "because the Complaint alleges that each of the conspirators was personally involved in a plan or scheme relating to USE securities, and acted with scienter, the First Claim For Relief adequately pleads that the coconspirators are primarily liable for the violations." Memorandum of Law in Opposition to Defendant Romano's Motion to Dismiss the Complaint ("Opp. Mem."), at 20. The Court disagrees. To state a claim of primary liability against a defendant for a violation of the Securities Acts, under the reasoning of Central Bank, one must allege that the defendant actually violated a provision of the Securities Acts. See Central Bank, 114 S. Ct. at 1455 ("Any person or entity . . . who employs a manipulative device or makes a material misstatement (or omission) on which a purchaser or seller of securities relies may be liable as a primary violator under 10b-5, assuming all of the requirements for primary liability under Rule 10b-5 are met.") (emphasis in original). The defendant's "personal involvement in a scheme or plan" to violate the Securities Acts, without more, is insufficient.
The Commission points out that the Supreme Court has recognized an implied private right of action for civil conspiracy under a provision of the Commodity Exchange Act. See Merrill Lynch, Pierce, Fenner & Smith Inc. v. Curran, 456 U.S. 353, 394, 72 L. Ed. 2d 182, 102 S. Ct. 1825 (1982). This observation is correct but unavailing. The Court was aware of the holding in Curran when it decided Central Bank, see 114 S. Ct. at 1459 n.9 (Stevens J., dissenting); but, as described above, the import of the Court's analysis in Central Bank for claims such as the First Claim For Relief is clear, and contrary to the Commission's position. See In re Glenfed, supra; In re Syntex, supra.
The Commission also seeks to distinguish civil conspiracy from aiding and abetting liability, on the ground that "the policy concerns expressed by the Central Bank majority [about aiding and abetting liability] are not present in the context of civil conspiracy." Opp. Mem. at 22. This argument, however, misperceives the role assigned to "policy considerations" in the Central Bank opinion. The normative concerns that the Court expressed in Central Bank about aiding and abetting liability were offered in response to the "various policy arguments" that the Commission had made to support a civil aiding and abetting cause of action. See Central Bank, 114 S. Ct. at 1453-54. The Court's first answer to these arguments was that:
Policy considerations cannot override our interpretation of the text and structure of the [Exchange] Act, except to the extent that they may help to show that adherence to the text and structure would lead to a result ...