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February 19, 1999


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 case.

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.


A. The Facts

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).

1. The Parties

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.

b. American Image

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. ¶ 61).

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.).

b. Global Defendants

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 Liberian 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).

e. Broker Defendants

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. ¶¶ 3-9).

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 complaint)).

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 below.

In January 1996, the Liberian Corporations established brokerage accounts at Bear, Stearns Securities Corporations ("Bear Stearns"), acting as a clearinghouse broker for Northeast. The account forms were executed by Eversheds. (Id. ¶ 66). Kenna and Reilly also opened their own trading accounts at Bear Stearns in June 1996. (Id. ¶ 67). Eversheds authorized Kenna and Reilly to direct trades in the Liberian Corporations accounts. In fact, the complaint alleges that Kenna and Reilly directed trades in all five Bear Stearns accounts. (Id. ¶ 68).

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' accounts.

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 company.

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).

Proceeds from the sale of the Stock at both Northeast and Wilson-Davis were transferred to various Eversheds bank accounts in New York and elsewhere. (Id. ¶¶ 111-14). Eversheds authorized these transfers and wired itself $38,975 in partial payment of its fees. (Id.). Eversheds also arranged for the proceeds of the Stock sales from the accounts at Northeast and Wilson-Davis "to be utilized to pay American Image the subscription price for the shares of Stock acquired by Reilly and Kenna, and issued to the Liberian Corporations' brokerage accounts." (Id. ¶ 113).

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.

B. Prior Proceedings

1. SEC Action

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.

2. Ellison Action

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 ...

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