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DIETRICH v. BAUER

March 4, 1999

DEL DIETRICH, PLAINTIFF,
v.
RICHARD BAUER; GROUPE SCORPION, B.V.; JACK T. DAWSON; GREEN-COHN GROUP; MORTON COHN; VAN D. GREENFIELD; LEONARD SCHWALB; CS FIRST BOSTON; BEAR STEARNS; SMITH BENTON & HUGHES, INC.; MICHAEL ZAMAN; CLAUDIA ZAMAN; EMMET A. LARKIN & COMPANY; PAINEWEBBER; OPPENHEIMER & CO., INC.; EDWARD FISCH; BARRY WITZ; MARIO V. ANDRADE; WESTFIELD FINANCIAL CORPORATION; IDATA, INC.; ROBERT BOGUTSKI, AND KATHLEEN BOGUTSKI, DEFENDANTS.



The opinion of the court was delivered by: Sweet, District Judge.

                  OPINION

In this proposed class action, plaintiff Del Dietrich ("Dietrich") has moved for appointment of additional class representatives. Defendant Barry Witz ("Witz") has moved for reconsideration of an order extending Dietrich's time to serve him with the amended complaint and for dismissal of the amended complaint pursuant to Rules 12(b)(6) and 9(b) of the Federal Rules of Civil Procedure for failure to state a claim upon which relief can be granted and for failure to plead fraud with particularity. Defendants Jack T. Dawson ("Dawson"), Green-Cohn Group ("Green-Cohn"), Morton Cohn ("Cohn"), Van D. Greenfield ("Greenfield"), Leonard Schwalb ("Schwalb"), CS First Boston Corporation ("CS First Boston"), Bear Stearns & Co., Inc. ("Bear Stearns"), Smith Benton & Hughes, Inc. ("SB & H"), Michael Zaman, Claudia Zaman (together with Michael Zaman, the "Zamans"), PaineWebber Incorporated ("PaineWebber") and Oppenheimer & Co., Inc. ("Oppenheimer") (collectively, and together with "Witz," the "Defendants"), have also moved pursuant to Rules 12(b)(6) and 9(b) for dismissal of Dietrich's amended complaint.

For the reasons set forth below, Dietrich's motion for additional class representatives is denied, as is Witz's motion for reconsideration, and the Defendants' motions to dismiss will be granted in part and denied in part.

Specifically, the claims brought pursuant to (1) Section 12(1) and 12(2) of the Securities Act of 1933, 15 U.S.C. § 77l(1), (2) (the "1933 Act"), along with its California state counterparts; (2) the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1962 ("RICO"); (3) negligent misrepresentation; (4) and sections 17200 et seq. of the California Business Professions Code are dismissed as to all the Defendants. As to the primary liability claims brought under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (the "1934 Act"), SEC Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder, and common law fraud, the motions to dismiss of Dawson, Cohn, Greenfield, Schwalb, Bear Stearns, Oppenheimer, PaineWebber, the Zamans, and Witz are granted, and those of Green-Cohn and SB & H are denied. The motions to dismiss claims alleging controlling person liability under Section 20(a) of the 1934 Act, 15 West Page 323 U.S.C. § 78t(a), on the part of Greenfield, Cohn, and the Zamans are denied. CS First Boston's motion to dismiss the Section 10(b), Rule 10b-5, and common law fraud claims is granted in part and denied in part; any claim against CS First Boston for participation in the Regulation S scheme is dismissed, whereas the claim alleging participation in the market manipulation scheme is sustained.

In accordance with this decision, Dietrich will be given leave to replead certain of the dismissed claims.

Parties

Dietrich, a resident of Campbell, California, invested in the common stock of Scorpion Technologies ("Scorpion").

Defendant Richard Bauer has been a director of Scorpion since February 1989 and its chief executive officer and chairman of the board since September 1993. Bauer is also chief executive officer of Groupe Scorpion, B.V. ("Groupe Scorpion").

Defendant Groupe Scorpion, a Dutch company, is a wholly owned foreign subsidiary of Scorpion.

Dawson is an attorney who provided services for Scorpion.

Green-Cohn is a brokerage firm located in New York, New York.

Cohn is the owner of Green-Cohn.

Greenfield is the president of Green-Cohn.

Schwalb is the chief financial officer of Green-Cohn.

CS First Boston is a brokerage firm whose principal offices are located in New York, New York.

Bear Stearns is a brokerage firm whose principal offices are located in New York, New York. It acted as the clearing broker for Green-Cohn's transactions.

SB & H, whose offices are located in Englewood, Colorado, is a brokerage firm registered with the Securities and Exchange Commission ("SEC") since October 5, 1987.

Michael Zaman is president of SB & H.

Claudia Zaman is a financial principal of SB & H.

Defendant Emmet A. Larkin & Company ("Emmet Larkin") is a brokerage firm with offices in San Francisco, California.

PaineWebber is a brokerage firm whose principal offices are located in New York, New York.

Oppenheimer is a brokerage firm whose principal offices are located in New York, New York.

Defendant Edward Fisch maintains offices in Century City, California, and purportedly performed investment banking services for Scorpion in 1991.

Witz maintains offices in Century City, California, and allegedly performed investment banking services for Scorpion in 1991.

Defendant Mario V. Andrade, a resident of Bolivia, is the chairman of the board of Saturn Enterprises, Ltd. ("Saturn").

Defendant IData, Inc. is a transfer agent located in Dallas, Texas, and has served as Scorpion's transfer agent since May 1992.

Defendant Robert Bogutski is president of IData, Inc.

Defendant Kathleen Bogutski is secretary, treasurer, and manager of IData, Inc.

Defendant Westfield Financial Corporation ("Westfield Financial") is a brokerage firm whose principal offices are located in New York.

Prior Proceedings

In this action, filed on August 28, 1995, Dietrich alleges violations of Section 12(1) and 12(2) of the 1933 Act; Section 10(b) of the 1934 Act; Rule 10b-5; RICO; sections 25110, 25130, 25401, 25501, 25503, and 25504.1 of the California Corporations Code; and sections 17200 et seq. of the California Business Professions Code. Dietrich also brings related claims for common law fraud and negligent misrepresentation. Finally, of the Defendants at issue, Dietrich seeks to hold Dawson, Cohn, Greenfield, and the Zamans as controlling persons under Section 20(a) of the 1934 Act.

By opinion dated December 10, 1996, the Honorable Lawrence M. McKenna dismissed the complaint with leave to replead. See Dietrich v. Bauer, No. 95 Civ. 7051, 1996 WL 709572 (S.D.N Y Dec.10, 1996). On February 10, 1997, Dietrich filed an amended complaint ("Amended Complaint"). The instant motions were filed as follows: PaineWebber filed its motion to dismiss the Amended Complaint on April 14, 1997; Oppenheimer, CS First Boston, Green-Cohn, Cohn, Greenfield, Schwalb, and Bear Stearns on April 15, 1997; Dawson joined in the motions on April 24, 1997; Dietrich filed its motion for appointment of seven additional class representatives June 6, 1997*fn1; and Witz filed its motion for reconsideration and dismissal on December 4, 1997.

On December 1, 1998, this action was reassigned to this Court pursuant to recusal by Judge McKenna upon discovery of a conflict. A pretrial conference was held on December 14, 1998, at which time the instant motions were considered fully submitted.

Facts

The facts in this action have been set forth in detail in a prior opinion by Judge McKenna, familiarity with which is assumed. See Dietrich, 1996 WL 709572, at *1-*4. Those facts relevant to the instant motion are set forth below.

In considering a motion to dismiss, the facts alleged in the complaint are presumed to be true and all factual inferences must be drawn in the plaintiff's favor and against the defendants. See Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 40 L.Ed.2d 90 (1974); Mills v. Polar Molecular Corp., 12 F.3d 1170, 1174 (2d Cir. 1993); Cosmas v. Hassett, 886 F.2d 8, 11 (2d Cir. 1989); Dwyer v. Regan, 777 F.2d 825, 828-29 (2d Cir. 1985). Accordingly, the factual allegations considered here and set forth below are taken primarily from the Amended Complaint and do not constitute findings of fact by the Court. They are presumed to be true only for the purpose of deciding the present motion.

This action is alleged to be brought on behalf of a class consisting of "[a]ll persons or entities who purchased or otherwise acquired shares of Scorpion securities during the period from and including May 13, 1992 through and including December 31, 1994." (Am.Compl. ¶ 41.) According to Dietrich, he invested $2,275 in shares of Scorpion in September 1991, $1,033 in December 1992, and $1,131 in December 1993. Dietrich does not identify from whom he bought the Scorpion shares.

Dietrich alleges, inter alia, that the Defendants engaged in two separate but interrelated schemes perpetuated from 1992 through late 1994, involving the unlawful sale of unregistered stock issued by Scorpion ("Regulation S scheme") and the unlawful manipulation of the trading price of Scorpion stock ("Market Manipulation scheme") as a means to maximize the profits for the participants in the scheme. Dietrich contends that these interconnected fraudulent schemes allowed the Defendants not only to substantially increase the price of Scorpion stock, but also to distribute to unknowing purported class members stock that should not have been issued absent a filing with the SEC of a registration statement for a secondary public offering.

I. Regulation S Scheme

In 1991 and early 1992, Scorpion, a publicly traded corporation listed on the NASDAQ market under the symbol "SCPNA," sought to register a secondary offering of Class A common stock for public sale. To this end, in November 1991, Scorpion filed a registration statement with the SEC, and in January 1992, filed a first amendment to this statement. In February 1992, the SEC informed Scorpion that it was under investigation. Scorpion's officers withdrew their registration statement, recognizing that the SEC investigation would prevent Scorpion from obtaining SEC approval for the offering during the pendency of the investigation.

At the time that the registration statement was withdrawn, Scorpion, through its officers, directors, and others, developed and carried out, between May 1992 and late 1994, a plan to sell securities by issuing stock ostensibly pursuant to Regulation S — SEC rules governing offers and sales made outside of the United States without registration under the 1993 Act — but with the intention of causing the stock to be sold to United States purchasers through securities broker/dealers within the United States, thus avoiding registration under Section 5 of the 1933 Act.

Under this plan, Scorpion transferred its common stock to foreign entities controlled by the Defendants and other participants in the plan. The alleged foreign entities to whom Scorpion transferred stock include Mayfair Financial, FRM Commodities, Tanaka Capital, Mahsa Poust, Saturn, Wellcome Mason, Osicom Technologies, Inc., Pentasonic, S.A., Gerard Peron, and Unison, J.V. They are not defendants in this action. The sole function of these foreign entities was to re-transfer Scorpion common stock to broker/dealers within the United States for sale to the public. Generally, no payment was made by the foreign entities to whom the stock was issued at the time of transfer. The foreign entities to which Scorpion issued Scorpion common stock did not publicly disclose their sale of the stock pursuant to Regulation D of the 1933 Act. Dietrich claims that the broker/dealers, including Bear Stearns, Green-Cohn, Emmet Larkin, SB & H, Oppenheimer, PaineWebber, and Westfield Financial, effectively functioned as underwriters and sellers of a secondary public offering.

II. Market Manipulation Scheme

According to Dietrich, during the week of January 18, 1993, the Defendants, including CS First Boston, Bear Stearns, Green-Cohn, and SB & H, planned and carried out a scheme to defraud investors by artificially creating a market demand for Scorpion stock. The Defendants involved accomplished this through their trading activity and by creating false rumors of institutional interest in Scorpion stock and expected fourth quarter earnings of $.15/share. The result of the rumors and trading activity was that the Defendants were able to increase the demand for Scorpion common stock, tripling the market price. When the market opened on January 18, 1993, the stock was trading at a low of $.75/share. The trading volume for the prior ninety days was 350,000 shares. At approximately 2:30 p.m. Eastern standard time, Bloomberg's newswire reported a rumor of institutional buying of Scorpion stock. The total volume of trading for January 18, 1993, exceeded 5.7 million shares. On January 19, 1993, 4.1 million shares of Scorpion stock were traded, with an average price of $.75/share. On January 20, 1993, the Scorpion stock rose from $.78/share to $1.28/share with a volume of 6.6 million. At some point during the day of January 22, 1993, the stock peaked at over $2.00/share with a volume of over 5.5 million.

Dietrich represents that the Regulation S and Market Manipulation schemes caused him injury, in that at the time Dietrich bought his shares of Scorpion common stock the true value was zero. Currently, the stock has no market and is valueless. Dietrich has not sold his interest in Scorpion.

Discussion

  I. Dietrich's Motion for Appointment of Additional Class
    Representatives Is Denied

By means of a motion to add class representatives, Dietrich seeks to designate seven additional proposed representatives in this litigation. The purpose, according to Dietrich, of the proposed intervention by these additional class members is the preservation and protection of the claims under Section 12(1) of the 1933 Act.

This motion is premature and without procedural foundation because no class has been certified. Dietrich wishes to add additional representatives to a class that does not exist. Indeed, Dietrich has not cited any controlling, or convincing, authority for the appointment of class representatives prior to certification of the alleged class that they would represent. In Trief v. Dun & Bradstreet Corp., 144 F.R.D. 193 (S.D.N Y 1992), cited by Dietrich, the court did allow an additional class representative to intervene, but only in connection with the certification of a class, which was conceded by the defendants in that case to be appropriate and granted by the court. See id. at 197-203.

Dietrich seeks to bolster the Section 12 claims in his Amended Complaint by adding additional class representatives in order to withstand the current round of motions to dismiss, and then proceed — for the first time — to the class certification stage. However, Dietrich cannot salvage his Section 12 claims by contending that the proposed new representatives have standing to prosecute when they are not named as plaintiffs and when, as discussed below, he himself lacks standing to prosecute those claims. It is well established that a named plaintiff must have standing in order to sustain a claim, and as this Court has stated, "a plaintiff may not use the procedural device of a class action to bootstrap himself into standing he lacks under the express terms of the substantive law." German v. Federal Home Loan Mortgage Corp., 885 F. Supp. 537, 548 (S.D.N.Y. 1995).

Dietrich's effort to add new class representatives in an effort to resuscitate his Amended Complaint is procedurally inappropriate, and his motion is therefore denied.

  II. Witz's Motion to Vacate the Order Extending Time of
      Service Is Denied

Witz moves for reconsideration of an order dated July 31, 1997 (the "Order"), extending Dietrich's time to serve Witz with the Amended Complaint, and for dismissal of the action against him because Dietrich did not serve him with the complaint within 120 days of the institution of the action as required by Rule 4(m) of the Federal Rules of Civil Procedure. According to Witz, he has been prejudiced by the late service of the complaint because Terry Marsh ("Marsh"), President and Chief Executive Officer of Scorpion, was indicted approximately a year after the commencement of this action and has advised that because of the pending indictment against him, he would decline now to testify in this action on Fifth Amendment grounds.

Witz's reconsideration motion is governed by Local Rule 6.3, which provides, in pertinent part: "There shall be served with the notice of motion a memorandum setting forth concisely the matters or controlling decisions which counsel believes the court has overlooked." Thus, to be entitled to reconsideration, the movant must demonstrate that the Court overlooked controlling decisions or factual matters that were put before it on the underlying motion. See Ameritrust Co. Nat'l Ass'n v. Dew, 151 F.R.D. 237, 238 (S.D.N.Y. 1993); Fulani v. Brady, 149 F.R.D. 501, 503 (S.D.N.Y. 1993), aff'd sub nom. Fulani v. Bentsen, 35 F.3d 49 (2d Cir. 1994); East Coast Novelty Co. v. City of New York, 141 F.R.D. 245, 245 (S.D.N.Y. 1992); B.N.E. Swedbank, S.A. v. Banker, 791 F. Supp. 1002, 1008 (S.D.N.Y. 1992); Novak v. National Broadcasting Co., 760 F. Supp. 47, 48 (S.D.N Y 1991); Ashley Meadows Farm, Inc. v. American Horse Shows Ass'n, 624 F. Supp. 856, 857 (S.D.N.Y. 1985).

Local Rule 6.3 is to be narrowly construed and strictly applied so as to avoid repetitive arguments on issues that have been considered fully by the court. See American Alliance v. Eagle Ins., 163 F.R.D. 211, 213 (S.D.N.Y. 1995) (citing Caleb & Co. v. E.I. DuPont De Nemours & Co., 624 F. Supp. 747, 748 (S.D.N Y 1985)). In deciding a reconsideration motion, the Court must not allow a party to use the motion as a substitute for appealing from a final judgment. See Morser v. AT & T Information Sys., 715 F. Supp. 516, 517 (S.D.N.Y. 1989); Korwek v. Hunt, 649 F. Supp. 1547, 1548 (S.D.N.Y. 1986), aff'd, 827 F.2d 874 (2d Cir. 1987). Therefore, a party may not "advance new facts, issues or arguments not previously presented to the court." Morse/Diesel, Inc. v. Fidelity & Deposit Co. of Md., 768 F. Supp. 115, 116 (S.D.N.Y. 1991); see Litton Indus., Inc. v. Lehman Bros. Kuhn Loeb Inc., No. 86 Civ. 6447, 1989 WL 162315, at *3 (S.D.N.Y. Aug.4, 1989). The decision to grant or deny the motion is within the sound discretion of the district court. See Schaffer v. Soros, No. 92 Civ. 1233, 1994 WL 592891 (S.D.N Y Oct. 31, 1994).

Because Witz's motion does not present "matters or controlling decisions the court overlooked that might materially have influenced its earlier decision," Morser, 715 F. Supp. at 517, the motion is denied.

In the Order, Judge McKenna granted Dietrich's motion for an extension of time to effectuate service of the summons and complaint on Witz. Rule 4(m) provides, in relevant part, that:

  If the service of the summons and complaint is not
  made upon the defendant within 120 days of filing the
  complaint, the court, upon its own initiative after
  notice to the plaintiff, shall dismiss the action
  without prejudice as to that defendant or direct
  that service be effectuated within a specified time;
  provided that if the plaintiff shows good cause for
  the failure, the court shall extend the time for
  service for an appropriate period.

Fed.R.Civ.P. 4(m) (emphasis added).

Pursuant to the Rule, where a party shows "good cause" for his failure to effect service within 120 days of filing, the Court must extend the time for service for an appropriate period. If "good cause" is not shown, then the Court may either dismiss the action or order service within a specified period of time. See Landy v. Irizarry, 884 F. Supp. 788, 793 (S.D.N.Y. 1995). In assessing whether good cause exists for late service, consideration is made as to whether the plaintiff has made reasonable efforts to effect service and whether the defendant will suffer prejudice from the delay. See National Union Fire Ins. v. Barney Assoc., 130 F.R.D. 291, 293 (S.D.N.Y. 1990).

Submissions by Witz fail to demonstrate that Dietrich's efforts to effectuate service lacked diligence. See generally United States v. Ayer, 857 F.2d 881, 885 (1st Cir. 1988); Landy, 884 F. Supp. at 793 n. 7. Moreover, Witz has not established that he has been prejudiced by late service.

Witz's prejudice argument is based upon his assertion that prior to the filing of a criminal indictment against Marsh, the former President and Chief Executive Officer of Scorpion, in August 1996, Marsh would have been willing to testify in the pending action if subpoenaed to appear at a deposition or a trial. Witz claims that Marsh's testimony "would serve to establish that the alleged scheme and plan to evade the registration provisions of the federal securities laws and to evade Regulation S never existed." (Witz Decl. ¶ 4.) According to Witz, Marsh told him that, because of the indictment, Marsh would invoke his constitutional privilege against self-incrimination with respect to all matters relating to Scorpion if he were now subpoenaed to testify.

Witz's prejudice argument fails because Marsh's purported offer of exculpatory testimony is inadmissible hearsay. Moreover, Witz fails to explain exactly what Marsh's testimony would have been, or how it would have exculpated Witz. Finally, it is unclear — Dietrich suggests false — that Marsh would have been willing to testify in this action prior to his criminal indictment in August 1996. Marsh invoked his Fifth Amendment privilege against self-incrimination at least as early as February 23, 1995, when he was deposed in federal litigation in California involving Scorpion.

Accordingly, Witz's motion for reconsideration is denied.

III. Legal Standards for the Motions to Dismiss

A. Rule 12(b)(6)

In deciding the merits of a motion to dismiss for failure to state a claim, all material allegations composing the factual predicate of the action are taken as true, for the court's task is to "assess the legal feasibility of the complaint, not assay the weight of the evidence which might be offered in support thereof." Ryder Energy Distribution v. Merrill Lynch Commodities, Inc., 748 F.2d 774, 779 (2d Cir. 1984) (quoting Geisler v. Petrocelli, 616 F.2d 636, 639 (2d Cir. 1980)). Thus, where it is beyond doubt that the plaintiff can prove no set of facts in support of his claim which would warrant relief, the motion for judgment on the pleadings must be granted. See H.J. Inc. v. Northwestern Bell Tel. Co., 492 U.S. 229, 250, 109 S.Ct. 2893, 106 L.Ed.2d 195 (1989); Hishon v. King & Spalding, 467 U.S. 69, 73, 104 S.Ct. 2229, 81 L.Ed.2d 59 (1984); Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957).

Additionally, on a Rule 12(b)(6) motion, consideration is limited to the factual allegations in the complaint, "to documents attached to the complaint as an exhibit or incorporated in it by reference, to matters of which judicial notice may be taken, or to documents either in plaintiff['s] possession or of which plaintiff[] had knowledge and relied on in bringing suit." Brass v. American Film Technologies, Inc., 987 F.2d 142, 150 (2d Cir. 1993); see Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42, 47-48 (2d Cir. 1991). Matters suggested in Dietrich's opposing papers that interpret allegations in the Amended Complaint broadly or facts that are offered but that do not appear in the Amended Complaint will not be considered. See Sheppard v. TCW/DW Term Trust 2000, 938 F. Supp. 171, 178 (S.D.N.Y. 1996) (explaining that the court could not consider allegations contained in plaintiffs' opposition to defendants' motion to dismiss but could only consider allegations within the complaint); O'Brien v. National Property Analysts Partners, 719 F. Supp. 222, 229 (S.D.N.Y. 1989) (stating that "it is axiomatic that the complaint cannot be amended by the briefs in opposition to a motion to dismiss").

B. Rule 9(b)

Rule 9(b) of the Federal Rules of Civil Procedure requires that in all allegations of fraud, the circumstances constituting the fraud must be stated with particularity. See Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1127 (2d Cir. 1994); In re Time Warner, Inc. Sec. Litig., 9 F.3d 259, 265 (2d Cir. 1993); Shemtob v. Shearson, Hammill & Co., 448 F.2d 442, 444-45 (2d Cir. 1971). The pleading must be sufficiently particular to serve the three goals of Rule 9(b), which are (1) to provide a defendant with fair notice of the claims against him; (2) to protect a defendant from harm to his reputation or goodwill by unfounded allegations of fraud; and (3) to reduce the number of strike suits. See Di Vittorio v. Equidyne Extractive Indus., Inc., 822 F.2d 1242, 1247 (2d Cir. 1987); O'Brien v. Price Waterhouse, 740 F. Supp. 276, 279 (S.D.N.Y. 1990), aff'd, 936 F.2d 674 (2d Cir. 1991).

The Court of Appeals has required that allegations of fraud specify adequately the statements made that were false or misleading, give particulars as to the respect in which it is contended that the statements were fraudulent, and state the time and place the statements were made and the identity of the person who made them. See McLaughlin v. Anderson, 962 F.2d 187, 191 (2d Cir. 1992); Cosmas, 886 F.2d at 11.

Not all elements of fraud need be pleaded with equal particularity, however. See In re Blech Sec. Litig., 961 F. Supp. 569, 580 (S.D.N.Y. 1997) [hereinafter Blech II]. For example, allegations of scienter are not subject to the same exacting scrutiny applied to the other components of fraud, such as direct participation. See id. Scienter can be alleged by conclusory allegations if they are supported by facts giving rise to a strong inference of fraudulent intent. See IUE AFL-CIO Pension Fund v. Herrmann, 9 F.3d 1049, 1057 (2d Cir. 1993). The inference may be established either "(a) by alleging facts to show that defendants had both motive and opportunity to commit fraud, or (b) by alleging facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness." Shields, 25 F.3d at 1128; see Time Warner, 9 F.3d at 268-69.

Additionally, this Court has also noted that, in a complaint alleging market manipulation under Section 10(b), where the exact mechanism of the scheme is likely to be unknown to the plaintiff, allegations of the nature, purpose, and effect of the fraudulent conduct and the roles of the defendants are sufficient for alleging participation. See Blech II, 961 F. Supp. at 580; In re Blech Sec. Litig., 928 F. Supp. 1279, 1291 (S.D.N.Y. 1996) [hereinafter Blech I]. The complaint must specify "what manipulative acts were performed, which defendants performed them, when the manipulative acts were performed, and what effect the scheme had on the market for the securities at issue." Id.

When, as in this case, a complaint is made against multiple defendants, "the pleading must give notice to each defendant of its alleged misconduct." Id. at 1292 (emphasis added). This requirement exists because each defendant named in the complaint is entitled to be apprised of the circumstances surrounding the fraudulent conduct with which he individually stands charged. See id. at 1292-93 (citing Red Ball Interior Demolition Corp. v. Palmadessa, 874 F. Supp. 576, 584 (S.D.N.Y. 1995)); see also Granite Partners, L.P. v. Bear, Stearns & Co. Inc., 17 F. Supp.2d 275, 286 (S.D.N.Y. 1998). Without this requirement, the policies of giving fair notice to, and protecting the reputation of, each defendant would be frustrated — parties might be improperly swept into the discovery stage of a litigation with other parties against whom fraud has been properly alleged. As a result, Rule 9(b) is not satisfied by a complaint in which "`defendants are clumped together in vague allegations.'" Blech I, 928 F. Supp. at 1294 (quoting Three Crown Ltd. Partnership v. Caxton Corp., 817 F. Supp. 1033, 1040 (S.D.N.Y. 1993)).

IV. Dietrich's Section 12(1) and (2) Claims Are Dismissed

The Amended Complaint alleges violations of Section 12(1) and (2) of the 1933 Act. These claims allege that the "Selling Defendants" sold Scorpion securities without a registration statement. The term "Selling Defendants" is defined as follows:

  In connection with the scheme and transactions
  described above [to sell unregistered securities],
  Defendants Green-Cohn; Bear Stearns; SB & H;
  Westfield Financial; and Emmet Larkin (the "Selling
  Defendants") functioned as "sellers" of securities
  for purposes of Section ...

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