complaint is clear as to what the defendants got as a result of
the fraud (use of the money initially invested by Marvin
Rubinstein as well as a substantial increase in their ownership
percentage of Skyteller). Accordingly, the requirements of Rule
9(b) have been satisfied. See Mills, 12 F.3d at 1175.
That leaves the issue of scienter. With regard to motive and
opportunity,*fn2 courts have held that general allegations of
financial interest are insufficient to prove scienter. Sloane,
941 F. Supp. at 1377; see also Primavera, 173 F.R.D. at 123
("Although the desire to enhance income may motivate a person to
commit fraud, allegations that a defendant stands to gain
economically from fraud do not satisfy the heightened pleading
requirements of Rule 9(b)."). In the instant case, however,
Richard Postrel did more than gain economically as a result of
his fraud, he also increased his ownership percentage and control
in Skyteller. His motivation, therefore, was not purely
financial. Regarding opportunity, Richard Postrel was in the best
position to realize the fruits of his misrepresentations. Not
only is he Skyteller's Chief Executive Officer but he
orchestrated the First Data transaction to his benefit.
Accordingly, I find that plaintiff has adequately alleged
scienter under the motive and opportunity test.
I also find that plaintiff adequately alleged conscious
misbehavior on the part of Richard Postrel. The failure to carry
out a promise can constitute fraud when, at the time the promise
was made, the defendant secretly intended not to perform it.
Mills, 12 F.3d at 1175 ("A person who promises to perform a
specific act in the future, while secretly intending not to
perform, violates Rule 10b-5"); see also Finkel v. Stratton
Corp., 754 F. Supp. 318, 329 (S.D.N.Y. 1990), aff'd in part,
rev'd in part, 962 F.2d 169 (2d Cir. 1992) ("Allegations
supporting an inference of fraudulent intent frequently include
defendant's statement that a fact exists or an event will come to
pass coupled with allegations that the fact did not exist or the
event did not occur, and circumstances indicating that the
statement was false when made."); Pross v. Katz, 784 F.2d 455,
457 (2d Cir. 1986).
Perhaps the case most on point is Norwood Venture. There,
defendants purchased the stock of a sports apparel company, Apex.
Prior to the transaction, Apex made defendants aware that its
primary concern was the need for adequate funding on an immediate
and ongoing basis. 959 F. Supp. at 207. Defendants assured Apex
that they would provide Apex with such funding. Id. Plaintiff
alleged that despite these repeated representations, defendants
knew such immediate and ongoing funding would not occur until at
least one month after the transaction closed. Id. at 209. The
court held that these statements were more than factual
allegations coupled with a conclusion of fraudulent intent. Id.
Rather, they created a strong inference that defendants acted
with the required scienter which was sufficiently plead in light
of the PSLRA. Id. See also Walther v. Maricopa Int'l Invest.
Corp., 97 Civ. 4816, 1998 WL 186736, at *5-6 (S.D.N.Y. Apr.17,
1998) (allegations that defendant never disclosed to plaintiff
the high risk nature of the stocks being traded in plaintiff's
account, despite being aware of plaintiff's conservative
investment goals, gave rise to a strong inference of
recklessness, if not conscious misbehavior).
Here, it is alleged that Richard Postrel made repeated
misrepresentations to Marvin Rubinstein knowing them to be false
when made. His knowledge of their falsity
can be inferred from the allegation that it was Postrel who
somehow orchestrated the First Date transaction to obtain the 300
shares without paying for them.*fn3 Accordingly, I find that
plaintiffs have alleged conscious misbehavior on the part of
Richard Postrel in making these false promises and have thereby
satisfied the pleading requirements of the PSLRA.
For the reasons stated above, defendants' motion to dismiss the
federal securities fraud claim against Richard Postrel is denied.
In addition, because plaintiffs have satisfied the pleading
requirements for Section 10(b) and Rule 10b-5, the amended
complaint also satisfies the requirements for pleading common law
fraud. See Mishkin, 1998 WL 651065, at *30 n. 16 (citing Scone
Invests., L.P. v. American Third Market Corp., 97 Civ. 3802,
1998 WL 205338, at *10 (S.D.N.Y. Apr.28, 1998) for the
proposition that the "elements of common law fraud are
essentially the same as those which must be pleaded to establish
a claim under § 10(b) and Rule 10b-5").
C. Claims Against Jennifer Postrel
Plaintiffs bring two claims against Jennifer Postrel: (1) a
federal securities claim for violations of Section 10(b) and Rule
10b-5, and (2) a common law claim for aiding and abetting the
fraud of Richard Postrel. For the following reasons, both of
these claims are dismissed.
"[A] litigant may not bring a cause of action for aiding and
abetting a section 10(b) violation." Mishkin, 1998 WL 651065,
at *12 (citing Central Bank of Denver v. First Interstate Bank
of Denver, 511 U.S. 164, 114 S.Ct. 1439, 128 L.Ed.2d 119
(1994)). Thus, the only form of Section 10(b) liability which
remains viable is that of a primary violator. Id. The only
misrepresentation allegedly made by Jennifer Postrel was in the
Confidential Information Memorandum sent to Marvin Rubinstein on
September 11, 1996. Marvin Rubinstein's last purchase of
Skyteller stock was on August 1, 1996. As a result, Marvin
Rubinstein could not have possibly relied on the information
contained in this Memorandum. See Mills, 12 F.3d at 1175 ("A
statement cannot be fraudulent if it did not affect an investment
decision of the plaintiff.") (citations omitted). As this is the
only allegation of misrepresentation on the part of Jennifer
Postrel, any claims based on Section 10(b) and Rule 10b-5 must
Plaintiffs allege, however, that Jennifer Postrel is liable for
violations of Section 10(b) and Rule 10b-5 as a control person
under Section 20 of the 1934 Act.*fn4 Primary liability may be
imposed "`not only on persons who made fraudulent
misrepresentations but also on those who had knowledge of the
fraud and assisted in its perpetration.'" Securities & Exchange
Comm'n v. First Jersey Securities, Inc., 101 F.3d 1450, 1472 (2d
Cir. 1996) (quoting Azrielli v. Cohen Law Offices, 21 F.3d 512,
517 (2d Cir. 1994)). "In order to establish a claim for control
person liability under Section 20, plaintiffs must establish (1)
a primary violation of the 1934 Act, (2) control of the primary
violator by the defendant, and (3) the defendant's culpability in
the fraud perpetrated by the controlled person."*fn5 Novak,
997 F. Supp. at 435 (citing
First Jersey, 101 F.3d at 1472); see also Mishkin, 1998 WL
651065, at *25.
Control is defined as the "possession, direct or indirect, of
the power to direct or cause the direction of the management and
policies of a person whether through the ownership of voting
securities, by contract or otherwise." 17 C.F.R. § 230.405.
Officer or director status alone, however, is not enough to
establish control person liability. Sloane, 941 F. Supp. at 1378
(quoting Hemming v. Alfin Fragrances, Inc., 690 F. Supp. 239,
245 (S.D.N.Y. 1988) for the proposition that "[a] person's status
as an officer, director, or shareholder, absent more, is not
enough to trigger liability under § 20"). "Accordingly, when a
defendant does not clearly occupy control status, the plaintiff
must plead facts from which control status can be inferred."
Sloane, 941 F. Supp. at 1378.
Here the only allegation that even hints at control is the
allegation that Jennifer Postrel is the de jure or de facto
Treasurer and/or Chief Financial Officer of Skyteller. This is
not sufficient to establish control person liability. The fact
that Jennifer Postrel is the wife of Richard Postrel is of no
legal significance. To impute control from this relationship
alone not only flies in the face of logic, but would require
impermissible stereotyping. Accordingly, the federal securities
fraud claim against Jennifer Postrel must fail. As there is no
aiding and abetting liability under the federal securities laws,
plaintiffs' common law aiding and abetting claim is also
deficient. There are simply no allegations that Jennifer Postrel
participated in or assisted Richard Postrel in executing the
fraud perpetrated against Marvin Rubinstein.*fn6 Jennifer
Postrel's motion to dismiss is granted, but plaintiffs may have
leave to amend within thirty days of the date of this Order.
D. Breach of Fiduciary Claim
Pursuant to New York choice of law rules, a breach of fiduciary
duty claim is governed by a relevant company's state of
incorporation. See High View Fund, 27 F. Supp.2d at 428, n. 6.
As Skyteller was incorporated in Delaware, its rules govern this
claim. The Delaware Court of Chancery has stated:
In determining whether a complaint states an
individual or a derivative cause of action, the Court
is not bound by the designation employed by the
plaintiff. Rather, the nature of the action is
determined from the body of the complaint. To set out
an individual action, the plaintiff must allege
either an injury which is separate and distinct from
that suffered by other shareholders, or a wrong
involving a contractual right of a shareholder.
Moran v. Household Intern., Inc., 490 A.2d 1059, 1069-70
(Del.Ch.), aff'd, 500 A.2d 1346 (Del. 1985) (citations and
internal quotation omitted).
Here, plaintiffs' allegations contain elements of both. The
Amended Complaint states that
Richard Postrel breached, violated and neglected his
fiduciary duties to plaintiffs by virtue of the
foregoing conduct, and also by virtue of other
conduct including, but not limited to, causing
Skyteller to fail to make distribution to plaintiffs,
or to make distributions in an untimely or
discriminatory manner; causing Skyteller to enter
into partnerships and other business arrangements
that were designed to, and did, have the effect of
enriching themselves and increasing the value of his
ownership of Skyteller while depriving plaintiffs of
such benefits and diluting the value of plaintiffs'
ownership of Skyteller; by improperly providing
equity or other things of value, belonging to
to various persons, including Skyteller's attorney,
Am. Cmpl., ¶ 50. Presumably, the "foregoing conduct" includes
Richard Postrel's misrepresentations concerning Skyteller's
supposed cash crisis. These misrepresentations were made to
deceive Marvin Rubinstein into investing an additional $20,000.
Id., ¶ 25. But the corporation did not benefit; instead,
Richard Postrel misappropriated the money for his own use. Id.
Although Richard Postrel assured repayment of the monies
advanced, he never repaid any portion of the $20,000. Id., ¶
26. These allegations are specific to Marvin Rubinstein and thus
represent an individual claim against Richard Postrel for breach
of fiduciary duty.