the business of buying, selling and brokering securities.
Sharpe is a New York corporation with its principal place of business in New York, New York and is generally engaged in the business of buying, selling and brokering securities.
Defendant, Marine Midland, is a national banking association with offices in New York, New York.
The Plaintiffs filed this action on September 28, 1995. The complaint alleged violations of the 1934 Act and additional state law claims.
This motion to dismiss was filed on December 11, 1995 and by consent of the parties was adjourned until March 6, 1996. Oral argument was heard on March 6 and the motion was considered fully submitted at that time.
For the purpose of this motion to dismiss the allegations of the complaint are taken as true. According to the complaint, each of the three plaintiffs did business with Armor Pension Managers ("Armor"), IILP, d/b/a Westside Fund ("Westside"). Armor was a California limited partnership with offices located in Los Angeles, California. Armor was the "alter-ego" of Stanley I. Berk ("Berk"), Armor's general partner, who was a professional money manager. Armor/Westside are often referred to, hereinafter, as "Berk's alter-egos".
Blech & Company ("Blech"), not a party in this action, is a brokerage firm in New York. At all relevant times herein, Blech was a broker-dealer and underwriter of securities, and was regarded as a major market maker in over-the-counter biotechnological securities (the "Securities").
According to the complaint, on September 22, 1994 Blech failed to open for business. With the closing of Blech, prices of approximately one dozen Securities, for which Blech appeared to be the primary market maker, plummeted, leaving a number of brokerage houses holding hundreds of thousands of shares of these Securities which had been purchased by Berk. Berk apparently never paid for these Securities.
Berk and Armor had a contractual relationship with Marine, whereby Marine served as a custodian and paying agent for these customers and operated as the bank which would pay for the Securities purchased by Berk and Armor, holding them on its customers' behalf.
Berk or his alter egos, in five separate transactions, purchased many hundreds of thousands of shares of various of the Securities from Ernst on September 13, 1994 with settlement dates on September 26, 1994. According to the complaint, "payment was due from Marine Midland, although no payment was ever made." In each of the five transactions, the complaint alleges that Marine Midland issued an affirmation to Ernst usually within three days of the purchase date, but that on the settlement dates Midland denied that it knew of the trade. In each instance Berk or his alter-ego failed to pay for the trades. Ernst estimates its losses at $ 1,215,688.75 from these transactions.
The complaint describes eight transactions involving Berk or his alter-egos and PaineWebber. Each of the transactions occurred between September 14 and 19, 1994 with settlement dates between September 26 and 29. In each case it is alleged that Marine failed to pay for the Securities and issued an affirmation within three days of the trade. PaineWebber estimates its net loss at $ 1,468,694.
Sharpe describes two transactions on September 14, 1994 in which Berk or his alter-ego purchased 35,000 shares of a security, with settlement dates of September 21. In the first case, Marine accepts the trade of the 21st of September, but never makes the payment. In the second case, Marine accepts the trade of the 22nd of September, but denies it on September 27, 1994 for "insufficient funds." Sharpe estimates its losses at $ 178,000.
The complaint alleges that Marine was aware prior to September 21 that its customer had no available funds. Marine notified Berk and his alter egos on September 23 that their accounts were overdrawn and had been for a number of days and that unless it received "good funds" to cover the overdraft position by 10:45 AM on that day, Marine would be "Dking
all trades for their accounts."
The complaint in this action alleges 10b-5 fraud against Marine for engaging, "directly and indirectly, in a scheme to defraud the Plaintiffs by ... issuing Affirmations that funds were, or would be available to consummate the trades made by Berk ... when, in fact, Marine Midland knew or should have known, that funds were not, and would not be available to complete these Delivery Versus Payment ("DVP") transactions."
The complaint also alleges state law causes of action for common law fraud, breach of contract, negligent misrepresentation, negligence, and promissory estoppel.
I. Standards for Evaluating a 12(b)(6) Motion