volume of these sham transactions became too great for them to continue and risked that the clearing broker for the purchaser would refuse to complete the trade. If the individuals denied knowledge of ("D.K.'d" -- that is, refused to confirm and to pay for) the purchases, the individuals risked discovery, the loss of professional reputation, and other sanctions.
In another variant of this scheme to inflate and artificially maintain the Blech Securities' trading volumes and market prices (including the securities of the Issuer Defendants), Blech directly instructed one or more of his confederates to use brokerage accounts at major brokerage firms and through specific accounts to place a bid for a specific number of shares or units of one or more of the Blech Securities for which Blech & Co. and/or Baird Patrick was a market maker, at just above the composite bid price. Compl. PP 68-72.
II. Gifting of Securities
Blech and Blech & Co. distributed securities of companies being underwritten by Blech & Co. at nominal prices to certain defendants and unidentified others, including Saxena, in exchange for the understanding that such persons (including Saxena) would cause their funds (including Chancellor) to purchase stock in those same companies at inflated prices after their public offerings. See, e.g., PP 55-56.
The SEC has made similar allegations (with a special focus on non-disclosure to Chancellor's clients), and Chancellor and Saxena have agreed to settle the SEC's charges by paying $ 500,000 and $ 250,000 in penalties, respectively. In addition, Chancellor has agreed to retain outside legal counsel to review its policies and procedures and not to commit future violations of the federal securities laws. See, e.g., Compl. P 60. Specifically, the SEC's complaint charged, among other things, that during the relevant period and on an ongoing basis, Saxena provided assistance, in the form of advice and opinions concerning the industries and the management of particular health care and biotechnology companies, to Blech and Blech & Co. In return, Blech and Blech & Co. offered Saxena the opportunity to purchase the securities of those companies near the time of their formation for nominal consideration. The SEC has also charged Saxena with receiving from Blech 25,000 shares of Ariad for one-tenth of a cent apiece; 4,000 shares of insider stock in Neurogen for 2.5 cents each; and 10,000 shares of ICOS Corp. for one cent each. On Saxena's recommendation, Chancellor then purchased for its clients 40,000 shares of Neurogen stock at $ 6 a share and 200,000 shares of ICOS stock at $ 8 a share when those companies later went public in initial stock offerings. Chancellor was also charged with buying portions of secondary offerings of these stocks, as well as several other stocks associated with Blech including BioTechnology General Corp., Ecogen, DNA Plant Technology Corp. and Liposome Technology Inc. Compl. PP 57-59.
III. Other Manipulative Conduct
The Complaint describes additional examples of manipulative conduct. For example, it alleges that Blech, through Blech & Co., refused to accept sell orders from investors who wished to dispose of Blech Securities and refused to sell customers certain securities in which Blech & Co. made a market unless the buyer also agreed to purchase Blech Securities. The purpose and effect of this conduct was to maintain the inflated market prices of Blech Securities sold to the public. Compl. P 81.
IV. The Collapse of Blech & Co.
The alleged scheme collapsed on September 22, 1994, when Blech & Co. failed to open for business because it could not meet the applicable net capital requirements of the SEC and the NASD. Blech & Co.'s clearing agent, Bear Stearns, began to dishonor trades made by Blech's confederates. Bear Stearns' refusal to accept and pay for securities purchased by Blech through Blech & Co. produced a domino effect. Trades involving millions of dollars of Blech Securities -- supposedly purchased by third parties, but many of which were in fact part of the illegal and manipulative conduct alleged in the Complaint -- could not settle. Compl. P 83. As a result, the prices of the Blech Securities fell dramatically. See, e.g., Compl. PP 22(c), 23(c), 24(c), 25(c), 26(c), 27 (c), 28 (c), 29(c), 30(c), 31(c) and 32(c).
I. The Motions to Dismiss for Failure to Plead Fraud With Particularity Will Be Granted in Their Entirety as to Jofen, Madonia, and the Issuer Defendants and Will Be Granted Only With Regard to the RICO Claims as to Blech, Blech & Co., Germain, Baird Patrick, Chancellor and Saxena
A. The Legal Standard Presented by Rule 9(b)
Rule 9(b) requires that in all allegations of fraud, the circumstances constituting the fraud must be stated with particularity. See Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1127 (2d Cir. 1994); In re Time Warner Inc. Secs. Litig., 9 F.3d 259, 265 (2d Cir. 1993), cert. denied, 114 S. Ct. 1397; Shemtob v. Shearson, Hammill & Co., 448 F.2d 442, 444-45 (2d Cir. 1971). Although this requirement is read in conjunction with the admonition of Rule 8 that a pleading shall contain "a short and plain statement of the claim. . . .," see Ouaknine v. MacFarlane, 897 F.2d 75, 79 (2d Cir. 1990), and there is no requirement that "detailed evidentiary matter" be pleaded, Goldman v. Belden, 754 F.2d 1059 (2d Cir. 1985); Ross v. A. H. Robins Co., 607 F.2d 545, 557 n.20 (2d Cir. 1979), cert. denied, 446 U.S. 946, 64 L. Ed. 2d 802, 100 S. Ct. 2175 (1980), the pleading must be sufficiently particular to serve the three goals of Rule 9(b). They are (1) to provide a defendant with fair notice of the claims against it; (2) to protect a defendant from harm to its reputation or goodwill by unfounded allegations of fraud; and (3) to reduce the number of strike suits. See DiVittorio v. Equidyne Extractive Indus., Inc., 822 F.2d 1242, 1247 (2d Cir. 1987); O'Brien v. Price Waterhouse, 740 F. Supp. 276, 279 (S.D.N.Y. 1990), aff'd, 936 F.2d 674 (2d Cir. 1991).
Not all elements of a fraud claim need be plead with equal particularity. Rule 9(b) provides that "malice, intent, knowledge, and other condition of mind of a person may be averred generally." See Shields, 25 F.3d at 1128. The Court of Appeals has held that "allegations of scienter . . . are not subjected to the more exacting consideration applied to the other components of fraud." Breard v. Sachnoff & Weaver, Ltd., 941 F.2d 142, 143 (2d Cir. 1991) (quoting Ouaknine, 897 F.2d at 81). All that is required under Rule 9(b) is that there exist a "minimal factual basis for . . . conclusory allegations of scienter." Cohen v. Koenig, 25 F.3d 1168, 1173 (2d Cir. 1994) (quoting Connecticut Nat'l Bank v. Fluor Corp., 808 F.2d 957, 962 (2d Cir. 1987)). "In fact, conclusory allegations of scienter are sufficient 'if supported by facts giving rise to a "strong inference" of fraudulent intent.'" IUE AFL-CIO Pension Fund v. Herrmann, 9 F.3d 1049, 1057 (2d Cir. 1993), cert. denied, 130 L. Ed. 2d 38, 115 S. Ct. 86 (1994). (quoting Ouaknine, 897 F.2d at 80). There are two independent ways to give rise to such an inference. A plaintiff may either (1) identify circumstances indicating conscious or reckless behavior by the defendants, or (2) allege facts showing both a motive for committing fraud and a clear opportunity for doing so. Shields, 25 F.3d at 1128; Cosmas v. Hassett, 886 F.2d 8, 13 (2d Cir. 1989).
B. The RICO Claims Against All Parties Will Be Dismissed for Failure to Plead Fraud With Particularity