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November 4, 1996


The opinion of the court was delivered by: KNAPP


 Defendant Squadron Ellenoff (hereinafter "the defendant") moves to dismiss the Third Amended Complaint. The motion largely relies on arguments -- supported by an article in the New York Law Journal *fn1" -- which have influenced other courts to hold that Central Bank precludes the possibility of Rule 10b-5 conspiracy liability. We have explained our disagreement with that conclusion. See our Opinion of August 1, 1996, 936 F. Supp. 126. We shall not elaborate.

 We shall, however, direct attention to the official transcript of the oral argument before the Supreme Court in Central Bank. That transcript explains why the Court specified that "recklessness, not intentional wrongdoing, *fn2" is the theory underlying the aiding and abetting allegations in the case before us." 511 U.S. 164, 114 S. Ct. 1439, 1455, 128 L. Ed. 2d 119. It also prompts us to abjure the statement in our August 1 Opinion that "the facts in Central Bank do not raise even the shadow of a question related to possible conspiracy liability." 936 F. Supp. at 129. On the contrary, the transcript of oral argument reveals that at least two Justices, Kennedy and Scalia, were deeply concerned with "possible conspiracy liability", and apparently concluded that it could not be considered in light of the procedural situation established by the plaintiffs-respondents' position in the district court.

 By way of background, the Central Bank opinion specifically notes that the plaintiffs-respondents' complaint alleged only that the bank was "secondarily liable under § 10(b) for its conduct in aiding and abetting the fraud." 114 S. Ct. at 1443. However, the Court's description of the facts contains the following statement (Id.):

After an exchange of letters between Central Bank and AmWest in early 1988, Central Bank agreed to delay independent review of the appraisal until the end of the year, six months after the June 1988 closing of the bond issue. Before the independent review was complete, however, the authority defaulted on the 1988 bonds.

 The existence of an "agreement" gave rise to the suggestion that petitioner-defendant might properly have been charged with conspiracy. Justices Kennedy and Scalia gave this suggestion serious consideration, but apparently felt constrained to reject it since -- as just noted -- the complaint had specifically limited the issue to one of secondary liability.

 Rather early in the argument, Justice Kennedy raised the question by asking defendant-petitioner's counsel, in effect, why the case against his client could not be supported on a theory of conspiracy, saying: "Under the allegations of the complaint taken in the light most favorably to the plaintiff[s] [respondents], could there have been a cause of action or an allegation for liability * * * of the bank as co-conspirator?" In answer, counsel pointed out that the phraseology of the complaint made such a result impossible, saying: "What they chose to do here, Your Honor, was to not sue us as a primary violator, but instead to sue us as an aider and abettor."

 Later on, Justice Scalia came back to the question, asking: "What about a cause of action for conspiracy to violate 10(b)?" This provoked an observation by counsel that the question was "not presented here", and some discussion as to whether or not one could "become a co-conspirator by being reckless." Justice Scalia's final word on recklessness was: "I'm certain you cannot become a coconspirator by being very reckless. You have to have an agreement, the intent to make alliance with the other person." *fn3"

 The foregoing suggests that at least two of the Justices considered that a well pleaded complaint could successfully allege a claim for conspiracy to violate section 10(b).

 Against this background, let us look at the plaintiffs' Third Amended Complaint (hereinafter "the Complaint"). Our August 1 Opinion granted plaintiffs leave to file yet another complaint to test the validity of their counsel's assertion that defendant had participated in a conspiracy to violate section 10(b) and Rule 10b-5. In purported response to this permission, plaintiffs have filed a Complaint requesting a jury trial and containing eighty-five paragraphs of "background" material purporting to support two accusatory "counts." Count I alleges, among other things, the suggested conspiracy. Count II alleges a pendant state claim of common law fraud. Comparing this Complaint with previous ones filed by plaintiffs, defendant -- in the introductory passage of its memorandum in support of its motion to dismiss -- justifiably complains that "plaintiffs continue to escalate their attack by characterizing the firm's alleged role in the Towers debacle in progressively more radical terms."

 To deal with this situation, and to reduce the Complaint to fit the permission which our August 1 Opinion granted, we hereby: (a) dismiss Count II in its entirety; and (b) eliminate from Count I all references to anything but the above mentioned conspiracy. Interpreting, as we must for the purposes of this motion, all aspects of the Complaint "in the light most favorably to the plaintiff[s]," we find that factual allegations scattered throughout the "background" paragraphs adequately allege the claimed conspiracy. The rest can be ignored as surplusage. *fn4" Magistrate Judge Andrew J. Peck has been assigned to oversee pretrial matters. He will make sure that the parties' endeavors are confined to proving or disproving defendant's participation in Hoffenberg's conspiracy (the existence of which no one disputes).

 If the case goes to trial the jury will be instructed that it can find liability against the defendant only if it finds by clear and convincing evidence, *fn5" that:

(1) Sometime before December of 1988 Steven Hoffenberg and various others entered into a conspiracy to operate a "Ponzi" scheme;
(2) Sorkin, having become aware of this conspiracy, willfully and knowingly joined it for the purpose of furthering its unlawful objectives;
(3) In order to further such unlawful objectives, Sorkin knowingly and willfully violated section 10(b) and Rule 10b-5 by drafting an offer of rescission in such a way as to deceive its recipients as to the value of the securities to which it related;
(4) Having so done, until February 1993 when the conspiracy collapsed Sorkin knowingly and willfully maintained his membership therein and performed various overt acts in furtherance of its unlawful objectives;
(5) During that period, the conspirators -- in furtherance of such unlawful objectives --issued five misleading offerings for a total of $ 245 Million. Although it is not necessary to establish that Sorkin knew the exact terms of those offerings, it must be established by clear and convincing evidence that he was aware of their objectives and intended that they be issued; *fn6"

 Any verdict rendered pursuant to such instructions would come within the scope of Central Bank's observation that:

"Any person or entity, including a lawyer, accountant, or bank, 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. 114 S. Ct. at 1455.

 We are confident that the precedent set by such a verdict would not deter any attorney or accountant from giving legitimate professional advice. cf. Central Bank's discussion at 1453-4.

 As predicted in our August 1 Opinion, we certify the matter for interlocutory appeal pursuant to 28 U.S.C. § 1292(b). The requirement that "there be substantial ground for difference of opinion" is satisfied by the circumstance that the Second Circuit has not spoken on the question presented. As to the requirement that an appeal might "materially advance the ultimate termination of the litigation," should there be a reversal the litigation would terminate forthwith. On the other hand, an affirmance -- which would authoritatively establish that liability, or lack of it, might ultimately be left to a finder of fact -- could well make both parties eager to achieve a quick settlement.

 In summary, we reaffirm the conclusion stated in our August 1 Opinion that Central Bank does not preclude the possibility of Rule 10b-5 conspiracy liability. We accordingly deny the motion to dismiss the Third Amended Complaint (except to the extent above indicated), and certify the question for appeal to the Court of Appeals.


 New York, New ...

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