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January 4, 1996

MYRON SHAIN, individually and on behalf of all others similarly situated, Plaintiffs, against DUFF & PHELPS CREDIT RATING COMPANY, Defendant.


The opinion of the court was delivered by: KNAPP



 This is a proceeding arising from the alleged "Ponzi scheme" involving the securities of Towers Financial Corporation ("Towers"). It is related to In Re Towers Financial Corporation Noteholders Litigation 93 Civ. 0810 (WK) (AJP), 1996 U.S. Dist. LEXIS 2311, but not consolidated into that action. As such, we referred the action to Magistrate Judge Peck for all pretrial matters. The background facts about the alleged Ponzi scheme are more fully described in Magistrate Judge Peck's Report and Recommendation to this Court dated September 20, 1995.

 The instant action was brought by plaintiff Myron Shain ("plaintiff"), a purchaser of $ 200,000 of Towers Notes, on behalf of himself and an alleged class of similarly situated purchasers, against defendant Duff & Phelps Credit Rating Company ("defendant"), a securities rating service. The complaint asserts federal securities law claims against defendant for alleged violations of Sections 12(1) and 12(2) of the Securities Act of 1933, and also asserts three pendent state law claims. Defendant moved to dismiss the complaint for failure to state a claim upon which relief can be granted, and for failure to plead fraud with particularity. In his Report and Recommendation dated December 12, 1995, Magistrate Judge Peck recommends that the federal securities law claims be dismissed with prejudice and that the state law claims be dismissed without prejudice. For the reasons that follow, we agree, and adopt the Magistrate Judge's Report and Recommendation in its entirety.


 The facts underlying the instant action are described in detail in the Report and Recommendation.

 In brief, the complaint alleges that the defendant "actively foisted a uniform and consistent set of misrepresentations and omissions on the . . . [purported] Class [of purchasers] via the [two] . . . Brokers who reiterated them to, or relied on them for, the Class." (Complaint P 11). Further, the complaint alleges that defendant knew that the false information would be provided by the two brokers to their clients, and intended that the purported class of purchasers would use and rely on this false information in purchasing or retaining Towers Notes. (Complaint PP 33, 35). Finally, in conclusory fashion, the complaint alleges that defendant


directly or indirectly caused and induced the plaintiff and the . . . class to purchase Towers Notes. [Defendant] was fully and substantially involved in, and intended to be fully and substantially involved in, the sales and marketing of the Notes.

 (Complaint P 40).


 Section 12(1) of the Securities Act of 1933, 15 U.S.C. § 771, imposes strict liability for rescission on those who offer or sell securities without complying with applicable statutory registration and prospectus requirements. Pinter v. Dahl (1988) 486 U.S. 622, 647, 100 L. Ed. 2d 658, 108 S. Ct. 2063. Further, the Supreme Court has held that § 12 liability is "not limited to persons who pass title," id. at 643, but includes anyone "who successfully solicits the purchase, motivated at least in part by a desire to serve his own financial interests or those of the securities owner." Id. at 647.

 In the instant case, plaintiff asserts that defendant "solicited" the sale of Towers Notes, and is thus strictly liable under § 12. The plaintiff, however, does not allege that defendant directly "solicited" him, nor indeed that defendant ever had any direct communication with plaintiff about the Notes. Rather, plaintiff alleges that defendant "solicited" the sale of Towers Notes through the "Class Brokers."

 The Magistrate Judge rejects plaintiff's theory of liability, finding that the fact that defendant provided information to two brokers who passed that information on to the plaintiff does not give rise to § 12 liability. As the Supreme Court noted in Pinter, liability cannot be imposed upon "those who merely assist in another's solicitation efforts." 486 U.S. at 651 n. 27. Moreover, the Magistrate Judge cites numerous district court cases in this Circuit that stand for the proposition that persons are not liable under § 12 for solicitation unless they directly or personally solicit the buyer.

 Because we find the Magistrate Judge's review and analysis of relevant caselaw thorough, we adopt his conclusion that, absent an allegation that defendant had direct contact with plaintiff, defendant, as a matter of law, is not subject to § 12 liability.

 Defendant has also moved for dismissal of plaintiff's pendent state law claims. When federal claims are dismissed before trial, the Supreme Court has stated that the district court ordinarily should decline the exercise of pendent jurisdiction over the state claims by dismissing the state claims without prejudice. Carnegie-Mellon v. Cohill (1988) 484 U.S. 343, 350 n. 7, 98 L. Ed. 2d 720, 108 S. Ct. 614. The Magistrate Judge therefore recommends that we dismiss plaintiff's pendent state law claims without prejudice. Finding such a recommendation wholly reasonable, we direct the clerk to enter an order dismissing the federal securities law claims with prejudice, and dismissing the state law claims without prejudice.


 New York, New York

 January 4, 1996



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