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IN RE BLECH SECS. LITIG.

June 6, 1996

IN RE BLECH SECURITIES LITIGATION; THIS DOCUMENT RELATES TO ALL ACTIONS


The opinion of the court was delivered by: SWEET

 Sweet, D.J.

 In these consolidated class actions brought for securities fraud, conspiracy, and common law fraud, each of the defendants has moved separately to dismiss the complaint against it on two grounds: first, for failure to plead fraud with particularity, pursuant to Federal Rule of Civil Procedure 9(b); second, for failure to state a claim on which relief can be granted, pursuant to Federal Rule of Civil Procedure 12(b)(6).

 For the reasons set forth below:

 
1. David Blech's and Blech & Co.'s motions to dismiss for failure to plead fraud with particularity will be granted as to the RICO Claims (Counts III and IV) and denied as to the Remaining Claims (Counts I, II and V). Their motions to dismiss the control person claims for failure to state a claim will be granted. Their motions to dismiss the Section 10(b) and common law fraud claims will be denied.
 
2. Mark Germain's motion to dismiss for failure to plead fraud with particularity will be granted as to the RICO Claims and denied as to the Remaining Claims. His motion to dismiss the Section 10(b) and common law fraud claims for failure to state a claim will be denied.
 
3. Mordechai Jofen's and Nicholas Madonia's motions to dismiss for failure to plead fraud with particularity will be granted in their entirety.
 
4. The Issuer Defendants' motions to dismiss for failure to plead fraud with particularity will be granted in their entirety.
 
5. Bear Stearns' motion to dismiss for failure to plead fraud with particularity will be granted as to the RICO claims, and its motion to dismiss for failure to state a claim will be granted as to the Remaining Claims.
 
6. Baird Patrick's motion to dismiss for failure to plead fraud with particularity will be granted as to the RICO Claims and denied as to the Remaining Claims. Its motion to dismiss for failure to state a claim will be denied.
 
7. Chancellor's and Saxena's motions to dismiss for failure to plead fraud with particularity will be granted as to the RICO Claims and denied as to the Remaining Claims. Its motion to dismiss for failure to state a claim will be denied as to the claims brought by plaintiffs Dachenbach and Pekes and will be granted as to the claims brought by the other plaintiffs.
 
8. The motions to dismiss the Section 10(b) claims arising from trades in securities not purchased by the named plaintiffs will be denied.
 
9. The motions to dismiss all claims arising from acts prior to October 21, 1991, will be granted.

 Parties

 I. The Plaintiffs

 Plaintiffs, Elizabeth Ann Bronson of Georgia, Raizy Levitin, Jay Schecter, and Abraham Garfinkel of New York, Dean L. Dachenbach of Wisconsin, Thomas L. Mays and Timothy D. Pekes of Vermont, and Robert Libauer of Maryland, each purchased stock in the securities of certain companies, the Blech Securities *fn1" , between October 13, 1993, and September 7, 1994. Compl. PP 8-15. They seek to bring this action on behalf of a class of persons similarly situated.

 II. The Blech & Co. Defendants

 Defendant David Blech ("Blech"), a resident of New York, was at all times material to this action managing director and sole shareholder of Blech & Co.

 Blech & Co., a New York corporation with its principal place of business in Manhattan, is a registered broker-dealer. During the period relevant to this case, Blech & Co. acted as an underwriter or market maker or both for numerous companies, primarily in the biotechnology field. Blech & Co. ceased operations on September 22, 1994, because it had failed to maintain minimum capital requirements. At that time, Blech & Co. was the principal market maker for the Blech Securities and had about six thousand customer accounts in offices in New York, Boston, Atlanta, and Boca Raton.

 Defendant Mark S. Germain ("Germain") was at all material times a Managing Director of Blech & Co. Germain served on the board of directors of ASI, Ecogen, Microprobe, Neoprobe, LXR, NeoRx, Pharmos, and Genemedicine.

 Defendant Nicholas Madonia ("Madonia") is named in the Complaint as the designated trustee of the Celestial Charitable Remainder Unitrust, the Century Charitable Remainder Unitrust, the Freedom Charitable Remainder One Trust, the Frontier Charitable Remainder Unitrust, the Island Charitable Remainder Unitrust, the Lake Charitable Remainder Unitrust, the Ocean Charitable Remainder Unitrust, the Sentinel Charitable Remainder Unitrust, and the Blech Family Trust. Defendant Mordechai Jofen ("Jofen"), Blech's cousin, is named as the designated trustee of the Edward Blech Trust. (These trusts will be referred to collectively as the "Blech Trusts"). The Blech Trusts are charitable remainder trusts established by Blech as settlor. Madonia is a Certified Public Accountant who has performed accounting services for Blech or Blech & Co. Blech is the income beneficiary and is entitled to receive annual minimum distributions from the trust assets of all of the Blech Trusts, except the Blech Family Trust and the Edward Blech Trust, whose income beneficiary is Blech's minor son Edward.

 III. The Issuer Defendants

 Defendant Advanced Surgical is a Delaware corporation with its principal place of business in New Jersey. During the period relevant to this action, both Blech and Germain served on the Advanced Surgical board of directors. Compl. P 22.

 Defendant Ariad is a Delaware corporation with its principal place of business in Massachusetts. Blech was a member of the Ariad board of directors from July 1991 until March 1994. Compl. P 23.

 Defendant Ecogen is a Delaware corporation with its principal place of business in Pennsylvania. Blech served on Ecogen's board of directors from August 1990 through February 1994, and Germain served as a member of the board from August 1990 through September 1994. Compl. P 24.

 Defendant Genemedicine is a Delaware corporation with its principal place of business in Texas. During the relevant period, Germain served as chairman of the Genemedicine board of directors. Compl. P 25.

 Intelligent Surgical is a California corporation with its principal place of business in California. Compl. P 26.

 Defendant LXR Biotech is a Delaware corporation with its principal place of business in California. Germain was chairman of the board of directors from April 1993 to September 1994.

 Defendant Microprobe is a Delaware corporation with its principal place of business in Washington. From May 1992 through the end of the period relevant to this action, Germain was a member of the board of directors. Sanford Zweifach, a managing director of Blech & Co., was appointed to the board on July 1994. Compl. P 28.

 Neoprobe is a Delaware corporation with its principal place of business in Ohio. During the time relevant to this action, Germain served on the Neoprobe board of directors. Compl. P 29.

 Defendant Pharmos is a Nevada corporation with its principal place of business in Manhattan. Blech served as its Secretary and as a member of its board of directors from 1993 until February 1994. Germain sat on the board of directors from 1990 until at least September 1994. Compl. P 31.

 Texas Biotech is a Delaware corporation with its principal place of business in Texas. Blech, who was one of its founders, served on its board of directors at all times relevant to this action. Compl. P 32.

 Advanced Surgical, Ariad, Ecogen, GeneMedicine, Intelligent Surgical, LXR Biotech, Microprobe, Neoprobe, NeoRx, Pharmos and Texas Biotech will be referred to collectively as the "Issuer Defendants". Each of the Issuer Defendants is a medical or biotechnology company registered with the SEC, and the securities of each were traded on the NASDAQ market.

 IV. Chancellor and Saxena

 Defendant Chancellor Capital Management, Inc. ("Chancellor") is a corporation with its principal place of business in Manhattan. It has been registered with the SEC as an investment advisor since 1973. Chancellor's investment management activities on behalf of its managed accounts are conducted by four business units, one of which is the Alternative Asset Management Group ("AAMG"). Defendant Parag Saxena ("Saxena") was a managing director of Chancellor and a member of the AAMG.

 V. Bear Stearns

 Defendant Bear, Stearns & Company ("Bear Stearns") is an investment banking and securities trading and brokerage firm organized and existing under the laws of Delaware with its principal place of business in Manhattan. Bear Stearns is registered with the SEC and is a member of the National Association of Securities Dealers ("NASD"). Bear Stearns acted as Blech & Co.'s clearing agent for all securities transactions involving Blech & Co. from September 1993 through the end of the relevant class period. Compl. P 34.

 VI. Baird Patrick

 Defendant Baird Patrick & Co. ("Baird Patrick") is a registered broker-dealer with its principal place of business in Manhattan. Baird Patrick is registered with the SEC and is a member of the NASD. During the period of time relevant to this action, Baird Patrick was a market maker for certain Blech Securities. Compl. P 35.

 Prior Proceedings

 In re Blech Securities Litigation represents four class actions -- Libauer v. Blech, 94 Civ. 7696 (RWS), Garfinkel v. Blech, 94 Civ. 7873 (RWS), Bronson v. Blech, 94 Civ. 7959 (RWS), and Mays v. D. Blech & Co., 94 Civ. 7704 (RWS) -- consolidated pursuant to a stipulation and pretrial order dated December 12, 1994. Plaintiffs filed an amended consolidated class action complaint (the "Complaint") on March 28, 1995. Ariad filed its notice of this motion to dismiss on May 2, 1995, and the other defendants filed their motions at various times from that date through June 13, 1995. On August 25, 1995, Defendants' motions to stay discovery were granted in part and denied in part. Argument on the motions to dismiss was heard and the motions were deemed fully submitted on November 9, 1995.

 Causes of Action

 The first claim for relief sought by Plaintiffs ("Count One") is brought against all of the defendants for violations of Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5. Compl. PP 84-89.

 Count Two, for control person liability in violation of Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a), is brought against Blech, Blech & Co., Germain, Bear Stearns, and Baird Patrick. Compl. PP 90-96.

 Count Five is brought against all of the defendants for common law fraud and deceit, pursuant to the Court's supplemental jurisdiction. Compl. PP 111-15.

 Facts

 The facts as presented here are drawn from the Consolidated Complaint and do not constitute findings by the Court. Plaintiffs allege a scheme of market manipulation which had the purpose and effect of inflating the market prices of the Blech Securities, which were underwritten by Blech & Co. or for which Blech & Co. was a principal market-maker.

 The scheme was effected through a variety of deceptive devices, including sham transactions in which trades, which were reported on the NASDAQ system, took place at prearranged times and at prearranged prices. Certain of these purchases were made with the understanding that the same securities would be resold by the purchaser back to the seller or to another participant in the scheme. Other trades were arranged whereby Blech would supply the funds to the purchaser to be used to pay for the purchase. In still others, Blech Securities would be placed into accounts under Blech's control without the knowledge or authorization of the account holders. The manipulative scheme was also carried out by the ...


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