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ELLISON v. AMERICAN IMAGE MOTOR CO.
February 19, 1999
PETER C. ELLISON, ON BEHALF OF HIMSELF AND ALL OTHERS SIMILARLY SITUATED, PLAINTIFF,
AMERICAN IMAGE MOTOR CO., INC., ET AL., DEFENDANTS.
The opinion of the court was delivered by: Chin, District Judge.
On March 13, 1997, the Securities and Exchange Commission (the "SEC")
riled suit in this Court against Global Financial Traders ("Global"),
BGSG Holding Corporation ("BGSG"), John J. Kenna, Michael R. Reilly,
Vincent J. Iovine, and David S. Coleman for securities fraud. Two months
later, plaintiff Peter C. Ellison, on behalf of himself and all others
similarly situated, filed the instant suit, also alleging securities
fraud. Ellison, however, attempts to cast a far wider net than did the
SEC. Indeed, Ellison names at least twenty more defendants in this case
than were named in the SEC's action.
Ellison seek damages against numerous corporate and individual
defendants for allegedly fraudulent conduct in connection with the
solicitation, sale, and distribution of the common stock (the "Stock") of
American Image Motor Co. Inc. ("American Image"). Although the number of
defendants in this case is vastly greater than in the SEC action, the
conduct alleged here essentially mirrors the allegations in the SEC
The following three groups of defendants move to dismiss the complaint
for failure to state a claim upon which relief can be granted pursuant to
Fed.R.Civ.P. 12(b)(6) and for failure to plead fraud with particularity
pursuant to Fed.R.Civ.P. 9(b): (1) The Law Firm Eversheds and its partners
David G.R. Carnegie, Michael J.T. Chamberlayne, and Gordon A. Yablon (the
"Eversheds Defendants")*fn1; (2) Northeast Securities, Inc., Vincent J.
Iovine, and Brian M. Fogel (the "Northeast Defendants"); and (3)
Wilson-Davis & Co. and David S. Coleman (the "Wilson-Davis Defendants").
For the reasons stated herein, the motions to dismiss are granted in
part and denied in part.
This case concerns an alleged scheme to manipulate the market. In
addition to the three groups of defendants moving to dismiss, the
following three groups have also been named as defendants: (1) Global,
BGSG, Kenna, Reilly, and Maria Sonner (the "Global Defendants"); (2)
Harris, Ltd., Lybster, Ltd., Toryl, Ltd., and Minimum Effort, Ltd. (the
"Liberian Corporations"); and (3) American Image and six of its officers
and/or owners (the "American Image Defendants"). Ellison has also named
"John Does 1-25," repreresenting additional "unknown" parties "who are
believed to have acted in concert with the defendants." (Cmplt. ¶
34; see also id. ¶¶ 5-19, 25, 27-34).
a. Plaintiff and Others Similarly Situated
Ellison, a subscrier of the Newsletters, purchased Stock on October
13, 1996 at $5.625 per share and on November 18, 1996 at $5.75 per
share. (Id. ¶ 14 and Schedule A). The individuals similarly situated
to Ellison ("Class Members") are alleged to have purchased American Image
Stock during the period September 23, 1996 to March 13, 1997 (the "Class
Period"). Class Members are also subscribers to the Newsletters, who
relied to their detriment on alleged misrepresentations about American
Image and its Stock.
American Image is a privately-held California company that was formed
on August 20, 1996 for the purpose of acquiring Cycle Imagery, a
California company that builds high quality, hand-crafted motorcycles.
(Id. ¶¶ 27, 61). American Image "went public" on September 26, 1996
through a reverse merger with a shell company called Wall Street
Information Services Holding, Inc. ("WSI"). WSI's name was changed to
American Image Motor Company in conjunction with the merger. (Id. ¶
According to the complaint, as of September 1996, American Image had
12,500,000 shares of outstanding stock, "3,000,000 of which defendants
considered to be `public' and 9,500,000 of which were issued in American
Image's acquisition of Cycle Imagery." (Id.). The Stock was not
registered with the SEC. (Id. ¶¶ 27(c), 61). American Image also "does
not file annual, quarterly, or any other periodic reports with the SEC."
(Id. ¶ 27(c)). The Stock is traded on the National Association of
Securities Dealers Automated Quotations ("NASDAQ") over-the-counter
bulletin board. (Id.).
Kenna, Reilly, and Sonner are the officers and principals who
controlled Global Financial Traders, Inc., the publisher of the
Newsletters. Reilly and Kenna also owned BGSG Holding Corp. ("BGSG"), the
company that was used to receive the proceeds of the alleged market
manipulation scheme. (Id. ¶¶ 2-10; 15-19).
C. The Liberian Corporations
Kenna, Reilly, and Sonner were also the beneficial owners of Harris,
Ltd. ("Harris"), Lybster, Ltd. ("Lybster"), Toryl, Ltd. ("Toryll"), and
Minimum Effort, Ltd. ("Minimum Effort") — four Liberian
Corporations through, which Reilly, Kenna, and Sonner traded the Stock.
(Id.; see also id. ¶ 25).
d. The Eversheds Defendants
The Law Firm Eversheds ("Eversheds") is headquartered in England, with
offices in the British Channel Islands.*fn3 Carnegie, Chamberlayne, and
Yablon are Eversheds partners and, in different combinations, officers of
the Liberian Corporations. (Id. ¶ 26). The Liberian Corporations
retained Eversheds to provide corporate services, and were "nominally
headquartered" at Eversheds's offices in St. Helier, on the island of
Jersey in the Channel Islands. (Id. 65; see also id. ¶ 26). The
Eversheds Defendants opened trading accounts with Northeast and
Wilson-Davis in the names of the Liberian Corporations. (Id. ¶ 26).
The Eversheds Defendants also authorized wire transfers from the
Corporations' accounts at certain brokerages to other accounts both in
and outside the United States. (Id. ¶¶ 113-14).
The professional services that Eversheds provided to the Liberian
Corporations, and its involvement with these entities, are neither
unusual nor illegal. Indeed, the allegations against the Eversheds
Defendants concern nominee services that are expressly permitted under
English law. (See generally Solicitors Act 1974, § 31; Solicitors
Practice Rules 1990, Rule 5; Solicitors' Separate Business Code 1994,
§ 5(4); Solicitors' Incorporated Practice Rules 1988; Solicitors'
Overseas Practice Rules 1990, Rules 9 and 18A; Eversheds Mem.App.Ex. B).
Northeast and Wilson-Davis are broker-dealers that are registered with
the SEC. Northeast acted as "market maker" for the Stock. (Id. ¶
23). In addition, at relevant times, Iovine was employed by Northeast as
its head trader, and was the account executive for the Liberian
Corporations' trading accounts. (Id. ¶ 20). Fogel was Iovine's
assistant "in trading" the Stock. (Id. ¶ 21). Coleman was head trader
at Wilson-Davis for the Stock and was the account executive for the
Liberian Corporations' trading accounts. (Id. ¶ 22). The two groups
of defendants are referred to collectively as the "Broker Defendants."
2. The Allegedly Fraudulent Scheme
Ellison contends that during the Class Period, the Global Defendants,
"acting in concert with others, swindled open market purchasers of the
common stock of American Image." (Id. ¶ 2). The scheme operated as
follows: (1) just prior to American Image's reverse merger, Kenna and
Reilly "obtained a large, undisclosed position in Stock at a nominal
price" in the name of the Liberian Corporations*fn4; (2) the Liberian
Corporations opened several trading accounts at Northeast and
Wilson-Davis, giving Kenna and Reilly authority to trade in these
accounts; (3) Global and American Image aggressively promoted the sale of
the Stock through the Newsletters, through a telemarketing campaign, and
by disseminating allegedly false and misleading information about
American Image to the public; and finally, (4) Kenna and Reilly sold
their Stock to the investing public at an inflated price, thereby
"defrauding the investing public of many millions of dollars." (Id.
The vast majority of the allegations in the prolix complaint detail the
ways in which the Global and American Image Defendants effectuated
Kenna's and Reilly's fraudulent scheme. Indeed, the most detailed
allegations in the complaint concern the misconduct of the Global and
American Image Defendants, such as the purportedly systematic campaign to
gain subscribers to the Newsletters; the elaborate effort to hold the
Newsletters out as legitimate sources of investment advice, the
misleading and fraudulent recommendation of the Stock to its burgeoning
number of subscribers; the telemarketing efforts to convince investors to
buy the Stock; and the campaign to convince investors to buy the Stock by
disseminating numerous misleading disclosures. (See id. ¶¶ 3, 6,
27(c), 40-64, 73, 76-85, 87-96; 110, 118-35, 141 (allegations as to
Global and American Image Defendants' wrongdoing spans more than
twenty-five of the fifty-seven pages of factual allegations in the
In addition to Global's recommendation of the Stock to its Newsletters'
subscribers, American Image's promotional activity, and other explicit
facts about Kenna and Reilly, Ellison alleges the involvement of a number
of other defendants, including the Eversheds Defendants, Northeast
Defendants, and Wilson-Davis Defendants. The factual allegations at
appear in the complaint as to these additional defendants are summarized
In late September 1996, Iovine and Fogel began buying the Stock. (Id.
¶ 72). Iovine purchased 13,889 shares for his personal account and
Fogel purchased 7,017 shares for his personal account. (Id. ¶ 74). As
previously noted, Iovine was the registered representative on the five
Northeast accounts, Fogel was Iovine's assistant on these accounts, and
Northeast itself "acted as market maker" for the Stock. (Id. ¶ 100).
At the same time that Iovine and Fogel were buying the Stock, Kenna and
Reiliy were also buying the Stock through the Liberian Corporations'
Kenna and Reilly had an "arrangement" with Iovine and Fogel, "whereby
if Iovine and Fogel did have Stock available for sale to another dealer,
the Liberian Corporations would make Stock in the Liberian Corporations'
accounts at Northeast available to Iovine and Fogel." (Id. ¶ 139).
Moreover, Iovine and Fogel informed Kenna and/or Reilly when either of
them would execute an "inter-dealer" transaction in the Stock. Kenna and
Reilly instructed them "to raise, lower or maintain the quotations by
Northeast for American Image Stock, and [they] followed these
instructions." (Id. ¶ 140). If Fogel or Iovine could not contact
Kenna or Reilly, Northeast made "limited trades with the understanding
that the [Liberian Corporations'] accounts would make up any shortfalls
at the end of the day." (Id.).
The Liberian Corporations also established a brokerage account at
Wilson-Davis in May 1996. Again, the account forms were executed by
Eversheds. Although they were not granted express written authority to
direct trading in this account, "Reilly and Kenna ultimately directed
trading" of the Stock in this account. (Id. ¶ 69). Coleman of
Wilson-Davis purchased 7,000 shares of Stock for his own account from the
Liberian Corporations' account at Wilson-Davis on September 25, 1996, and
he purchased an additional 6,000 shares the next day. Coleman paid
approximately $3 to $3.50 per share. (Id. ¶ 71). Just prior to these
purchases, the Stock was purportedly trading at one cent per share.
Coleman sold the shares he purchased in the next few days for
approximately $4.50 to $5 per share. (Id. ¶ 71). While Coleman was
buying the. Stock for his own account, the Liberian Corporations'
accounts were likewise buying the Stock. Ellison alleges that the
"initial purchases" by the Liberian Corporations and these brokers
"established a fictitious initial market price of approximately $3.00 per
share for the Stock, which was subsequently further inflated by the
promotional efforts of the Global Defendants . . . and the manipulation of
the Stock's price by the Broker Defendants and the Global Defendants."
(Id. ¶ 75). After the initial sales, Global and American Image
stepped up efforts to promote the Stock through the Newsletters,
telemarketing, and allegedly misleading press releases about the
From October 4, 1996 through January 29, 1997, the Northeast Accounts
sold a net amount of $2,933,164 worth of Stock. (Id. ¶ 100). From
September 25, 1996 through January 16, 1997, Wilson-Davis earned
approximately $42,521 in commissions on American Image, trades, $29,340 of
which Coleman earned. The combined trading by Northwest and Wilson-Davis
accounted for approximately forty-seven percent of the total trading
volume in the Stock for the period from September 30, 1996 through
January 29, 1997. (Id. ¶ 104). From September 25, 1996 to March 6,
1997, the combined Northeast and Wilson-Davis. accounts including
Iovine's and Fogel's accounts sold approximately 1,020,452 shares of
Stock. (Id. ¶ 102). The Northeast Defendants and the Wilson-Davis
Defendants are alleged to have received "substantial, commission income
from the trading in the Stock." (Id. ¶ 107).
On March 13, 1997, Global announced that it had been named as the
subject of an SEC enforcement action and that it would withhold further
recommendations on American Image and other small cap stocks. (Id. ¶
115). As a result, the trading price for the Stock fell below $1 share.
The SEC filed a complaint against Global, BGSG, Kenna, Reilly, Iovine,
and Coleman on March 13, 1997, asserting violations of § 10(b) of the
Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5,
17 C.F.R. § 240.10b-5. SEC v. Global Financial Traders, Ltd., No. 97
Civ. 1753(DC). The SEC contended that between August 1996 and March
1997, "Global, BGSG, Reilly and Kenna . . . defrauded the investing
public of at least $5.1 million through the sale of American Image . . .
common stock." (SEC Cmplt. ¶ 1). The SEC also alleged that Iovine and
Coleman "effected large transactions in American Image stock . . . .
primarily for a handful of related customer accounts controlled by, and
whose beneficial owners are, Reilly and Kenna." (Id.). The SEC v. Global
Financial Traders case is still pending in this Court although the
majority of defendants have now settled with the SEC.
Ellison filed the instant suit on May 16, 1997 acknowledging that the
case "is factually related to [the SEC action]." (Cmplt. ¶ 1(d)).
Ellison, however, states that the instant action "differs materially in
that it names numerous additional defendants and alleges additional legal
theories . . . to secure a monetary recovery for [Ellison] and other
persons similarly situated." (Id.).
These motions followed. On March 17, 1998, the Court granted Ellison's
motion to appoint certain individuals as lead plaintiffs in the action
and to approve the selection of Weiss & Yourman as ...