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IN RE BLECH SECS. LITIG.

April 1, 1997

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 alleging securities and common law fraud, defendants Mordechai Jofen ("Jofen"), Nicholas Madonia ("Madonia") and Bear, Stearns & Co., Inc. ("Bear Stearns") have moved separately to dismiss the claims brought against them in Plaintiffs' Second Amended Complaint (the "Complaint") *fn1" 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 upon which relief can be granted pursuant to Federal Rule of Civil Procedure 12(b)(6).

 For the reasons set forth below:

 
1. Mordechai Jofen's motion to dismiss for failure to plead fraud with particularity will be granted in its entirety, with leave to replead.
 
2. Nicholas Madonia's motion to dismiss will be denied.
 
3. Bear Stearns' motion to dismiss will be denied with respect to the Section 10(b) and common law fraud claims and granted with respect to the Section 20(a) control person liability claims.

 Parties

 I. The Plaintiffs

 Each of the seventeen named plaintiffs *fn2" in these actions purchased stock in the securities of certain companies, (the "Blech Securities"), *fn3" between October 13, 1993, and September 7, 1994. They seek to bring this action on behalf of a class of persons similarly situated.

 II. The Moving Defendants

 Defendant 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. Madonia is a Certified Public Accountant who has performed accounting services for Defendant David Blech ("Blech") or D. Blech & Co., Inc. ("Blech & Co."), a broker-dealer whose managing director and sole shareholder was Blech.

 Defendant Jofen, Blech's cousin, is named as the designated trustee of the Edward Blech Trust. *fn4"

 The Blech Trusts are charitable remainder trusts established by Blech as settlor. 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.

 Defendant 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 Securities and Exchange Commission (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.

 III. The Remaining Non-Moving Defendants

 By opinion dated June 6, 1996, this Court granted the motions of various defendants to dismiss the claims asserted against them in the Amended Consolidated Complaint, granting leave to replead within twenty days. In re Blech Securities Litigation, 928 F. Supp. 1279 (S.D.N.Y. 1996). Plaintiffs filed their Second Amended Complaints on July 26, 1996. The Second Amended Complaint did not include allegations against twelve "Issuer Defendants" who had been named in the prior complaint. The remaining defendants, who have not moved to dismiss the Second Amended Complaint, are described below.

 Defendant David 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, having 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, Florida.

 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, companies that were named as issuer defendants in the prior complaint and whose stocks were Blech Securities.

 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.

 Prior Proceedings

 The prior proceedings in this action are set forth in the prior opinions of this court, familiarity with which is assumed. See In re Blech Securities Litigation, 928 F. Supp. 1279 (S.D.N.Y. 1996) ("Blech I "); In re Blech Securities Litigation, 1997 U.S. Dist. LEXIS 404, 1997 WL 20833 (S.D.N.Y. January 21, 1997) ("Blech II ").

 In re Blech Securities Litigation represents several class actions, which have been consolidated pursuant to a stipulation and pretrial order dated December 12, 1994. Plaintiffs filed an amended consolidated class action complaint (the "Amended Complaint") on March 28, 1995.

 By opinion dated June 6, 1996, this Court granted in part and denied in part the motions of various defendants to dismiss the claims alleged against them in the Amended Complaint. Specifically:

 
1. David Blech's and Blech & Co.'s motions to dismiss for failure to plead fraud with particularity were granted as to the complaint's RICO Claims and denied as to the remaining claims. Their motions to dismiss the control person claims for failure to state claim were granted. Their motions to dismiss the Section 10(b) and common law fraud claims were denied.
 
2. Mark Germain's motion to dismiss for failure to plead fraud with particularity was 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 was denied.
 
3. Mordechai Jofen's, and Nicholas Madonia's motions to dismiss for failure to plead fraud with particularity were granted in their entirety.
 
4. The Issuer Defendant's motions to dismiss for failure to plead fraud with particularity were granted in their entirety.
 
5. Bear Stearn's motion to dismiss for failure to plead fraud with particularity was granted as to the RICO claims, and its motion to dismiss for failure to state a claim was granted as to the Remaining Claims.
 
6. Baird Patrick's motion to dismiss for failure to plead fraud with particularity was granted as to the RICO Claims and denied as to the Remaining Claims. Its motion to dismiss for failure to state a claim was denied.
 
7. Chancellor's and Saxena's motions to dismiss for failure to plead fraud with particularity was granted as to the RICO Claims and denied as to the Remaining Claims. Their motions to dismiss for failure to state a claim were denied as to the claims brought by plaintiffs Dachenbach and Pekes and 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 were denied.
 
9. The motion to dismiss all claims arising from acts prior to October 21, 1991 was granted.

 Plaintiffs were granted leave to replead within twenty days of the decision.

 The Second Amended Complaint was filed on July 26, 1996. Jofen filed his motion to dismiss the Second Amended Complaint on August 30, 1996. Madonia filed his motion on September 3, 1996. Bear Stearns filed its motion on September 12, 1996. Oral argument was heard on November 20, 1996, at which time the motions were deemed fully submitted.

 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 98-103.

 Count Two, alleging control person liability in violation of Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a), is brought, for purposes of the instant motions, against Bear Stearns. Compl. PP 104-109.

 Count Three is brought against all defendants for common law fraud and deceit. Compl. PP 110-114.

 Facts

 The facts as presented here are drawn from the Second Amended 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. Many of the factual allegations relating to the market manipulation scheme are similar to those alleged in the prior complaint, the details of which are set forth in the prior opinion of the court. See Blech I, 928 F. Supp. at 1286-88. The allegations with respect to the overall scheme are summarized below. The specific allegations with respect to the moving defendants follow.

 I. Summary of the Manipulative Scheme

 This class action alleges a scheme to manipulate the market for Blech Securities during the period from July 1, 1991 through September 21, 1994 (the "Class Period"). The Complaint alleges that the Plaintiffs, who purchased Blech Securities at artificially inflated prices during the Class Period, suffered damages when the entire scheme collapsed on September 22, 1994, uniformly dropping ...


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