under Rule 9(b). See, e.g., Blech II, 961 F. Supp. at 584.
Moreover, Dietrich fails to identify any facts that would permit
a strong inference of scienter on Witz's part. Furthermore, he
fails to differentiate Witz from the other members of the
Regulation S scheme.
Accordingly, the Third Claim against Witz is dismissed for
failure to comply with Rule 9(b).
j. CS First Boston
The Amended Complaint does not include CS First Boston among
the Defendants who participated in the Regulation S scheme.
However, Dietrich erroneously includes a Section 10(b) violation
predicated on the Regulation S scheme against CS First Boston in
his opposition papers. Again, these papers cannot be used as a
substitute for the complaint. As CS First Boston is not alleged
to have participated in the scheme, the Third Claim is dismissed
as against it pursuant to Rule 12(b)(6).
2. Market Manipulation Scheme
According to Dietrich, the Market Manipulation scheme occurred
during the week of January 18, through January 22, 1993. The
Defendants alleged to have participated in this scheme are
Green-Cohn, Cohn, Greenfield, Schwalb, Bear Stearns, CS First
Boston, SB & H, Michael Zaman, and Claudia Zaman. Dietrich
acknowledges that at present he has insufficient evidence to
allege participation in the scheme by PaineWebber and
Oppenheimer. Additionally, Witz is not mentioned in the Amended
Complaint as related to this scheme.
"Manipulation is `virtually a term of art when used in
connection with securities markets.'" Santa Fe Indus., Inc. v.
Green, 430 U.S. 462, 476-77, 97 S.Ct. 1292, 51 L.Ed.2d 480
(1977) (quoting Ernst & Ernst v. Hochfelder, 425 U.S. 185, 199,
96 S.Ct. 1375, 47 L.Ed.2d 668 (1976)). A claim premised on market
manipulation, as alleged here, focuses on the "engaged in a
scheme to defraud" aspect of Section 10(b) and Rule 10b-5 and was
described by the Supreme Court in Hochfelder. In that case, the
Court defined market manipulation as conduct "designed to deceive
or defraud investors by controlling or artificially affecting the
price of securities." Hochfelder, 425 U.S. at 199, 96 S.Ct.
To set forth a claim for market manipulation under Section
10(b) and Rule 10b-5, a plaintiff must allege the following: (1)
damage (2) caused by reliance on defendants' misrepresentations
or omissions of material facts, or on a scheme by the defendants
to defraud, (3) scienter (4) in connection with the purchase or
sale of securities, (5) furthered by the defendants' use of the
mails or any facility of a national securities exchange. See
Cowen & Co. v. Merriam, 745 F. Supp. 925, 929 (S.D.N.Y. 1990);
Baxter v. A.R. Baron & Co., Inc., No. 94 Civ. 3913, 1995 WL
600720, at *5 (S.D.N.Y. Oct.12, 1995). Additionally, in order to
survive a Rule 12(b)(6) motion, a plaintiff asserting a market
manipulation claim must allege direct participation in a scheme
to manipulate the market for securities. See Blech II, 961
F. Supp. at 580; see also Green, 430 U.S. at 476, 97 S.Ct. 1292
(stating that market manipulation under Section 10(b) "refers
generally to practices, such as wash sales, matched order, or
rigged prices, that are intended to mislead investors by
artificially affecting market activity").
As demonstrated in the following section discussing reliance
and causation, Dietrich has adequately pleaded elements (1), (2),
and (4) of his claim. As set forth below, as to Green-Cohn, SB &
H, and CS First Boston, he has succeeded in establishing the
The essence of the Market Manipulation scheme in this action is
that the Defendants involved created market demand for, and
artificially inflated the market price and trading volume of,
Scorpion stock. The Amended Complaint alleges that the Defendants
perpetrated the manipulation
by engaging in wash or matched sales and other devices to
artificially increase the demand and sales volume of the Scorpion
Before addressing the specific claims against the Defendants,
it is important to keep in mind that where, as here, the
principal allegations of wrongdoing involve market manipulation
rather than false statements, the level of specificity required
by Rule 9(b) is somewhat relaxed. See Blech II, 961 F. Supp. at
585; Blech I, 928 F. Supp. at 1290-91. Where a complaint alleges
market manipulation under Section 10(b) and Rule 10b-5, more
generalized 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 585;
Blech I, 928 F. Supp. at 1290-91; see also Securities and
Exchange Comm'n v. Schiffer, No. 97 Civ. 5853, 1998 WL 226101,
at *3 (S.D.N.Y. May 5, 1998) (noting that a more relaxed pleading
standard exists for market manipulation claims under Rule 9(b)).
In Dietrich, it was found that:
[Dietrich's] Section 10(b) market manipulation claim,
which does not depend entirely on affirmative
misrepresentations, is sufficiently individualized
with regard to Defendant's CS First Boston's and
Green Cohn's alleged participation in a market
manipulation scheme. [Dietrich] has alleged that CS
First Boston and Green-Cohn engaged in matched sales
and/or wash transactions between January 18 and 23,
1993 in order to artificially inflate the price and
trading volume of Scorpion stock and make it
appealing to investors so that when the Defendants
sold Scorpion stock to the public, it could be sold
for profit at an artificially inflated price. Whether
. . . CS First Boston and Green-Cohn purchased the
stock for legitimate investment purposes, or whether
[they] did so to artificially inflate the price of
Scorpion stock is a question of fact that may not be
resolved on a motion to dismiss.
Dietrich, 1996 WL 709572, at *9 (citation omitted).
As to CS First Boston and Green-Cohn, nothing in the Amended
Complaint warrants any result other than that reached in
Dietrich. The allegations of matched and/or wash transactions
entered into by Green-Cohn and CS First Boston are sufficient
under Section 10(b), and the controlling person allegations
against Cohn and Greenfield are sufficient under Section 20(a) of
the 1934 Act.
Similarly, Dietrich's claim against SB & H, which did not take
part in the motions to dismiss the original complaint, is
sufficient, as are the controlling person allegations against the
Zamans.*fn4 According to Dietrich, as to market manipulation by
SB & H, at some point during the week of January 18, through
January 22, 1993, SB & H was selling in excess of one million
shares. At the same time, CS First Boston was acquiring in excess
of one million shares.
The Defendants oppose the sufficiency of this pleading by
urging that Dietrich has not adequately alleged "wash"
transactions, which have been defined as "transactions involving
no change in beneficial ownership." Hochfelder, 425 U.S. at 205
n. 25, 96 S.Ct. 1375. They contend that Dietrich has alleged only
that CS First Boston bought Scorpion stock at or about the time
SB & H was selling stock; that he has not alleged that beneficial
ownership of the stock remained with SB & H; that Dietrich has
not alleged that the shares bought by CS First Boston and sold by
SB & H were the same shares; and that he has not alleged that
any arrangement between CS First Boston and SB & H regarding the
Market manipulation claims of this type, however, do not arise
only out of "wash" transactions. A market manipulation claim can
also be based on matched orders — "orders for the purchase/sale
of a security that are entered with the knowledge that orders of
substantially the same size, at substantially the same time and
price, have been or will be entered by the same or different
persons for the sale/purchase of such security." Id. Dietrich's
allegations, although labeled "wash" transactions, describe
matched orders by SB & H and CS First Boston.
Moreover, as stated in Blech II, "[a]lthough Plaintiff
[has] not identified the specific securities involved in all of
these trades, the allegations are sufficient to satisfy the
purposes of Rule 9(b): providing defendants with notice of the
charges against them, protecting a defendant's reputation from
harm from unfounded allegations, and reducing strike suits."
Blech II, 961 F. Supp. at 585. See generally Pollack v. Laidlaw
Holdings, Inc., No. 90 Civ. 5788, 1995 WL 261518, at *9
(S.D.N.Y. May 3, 1995) ("Where the plaintiffs have alleged the
general time frame of the communications, the person who made the
statements, and the content of the statement, the inability to
provide the exact dates will not defeat a claim."). Furthermore,
contrary to the Defendants' contentions, as found in Dietrich,
allegations that CS First Boston, SB & H, and Green-Cohn engaged
in matched trades support an allegation that they acted with the
requisite intent to defraud. See Dietrich, 1996 WL 709572, at
*9 (citing Schreiber v. Burlington N., Inc., 472 U.S. 1, 6, 105
S.Ct. 2458, 86 L.Ed.2d 1 (1985)).
Unlike the particularized allegations of market manipulation as
to CS First Boston, SB & H, and Green-Cohn, Dietrich makes no
such allegations against the remaining Defendants. Without more,
Dietrich's representations that Bear Stearns, PaineWebber, and
Oppenheimer sold Scorpion stock during this time period will not
support a claim for market manipulation. Additionally, there are
no allegations linking Dawson or Witz to the scheme. Therefore,
the Fourth Claim is dismissed as to Dawson, Bear Stearns,
PaineWebber, Oppenheimer, and Witz.
B. Transaction and Loss Causation
To succeed on his Section 10(b) and Rule 10b-5 claims, Dietrich
must show reliance on the Defendants' misrepresentations, thereby
sustaining injury. As explained by the Second Circuit:
The causation analysis encompasses two related, yet
distinct elements — reliance and causation — elements
that, in effect, correspond respectively with common
law notions of "but for" and proximate causation. To
satisfy the reliance element requires a showing that
the violations under consideration caused the
plaintiff to engage in the transaction, i.e.,
transaction causation. To satisfy the causation
element requires a showing that the violation caused
the plaintiff's alleged economic loss, i.e., loss
Litton Indus., Inc. v. Lehman Bros. Kuhn Loeb, Inc.,
967 F.2d 742, 747 (2d Cir. 1992) (citations omitted); see Burke v.
Jacoby, 981 F.2d 1372, 1378 (2d Cir. 1992); Bennett v. United
States Trust Co., 770 F.2d 308, 313 (2d Cir. 1985); Ernst & Co.
v. Marine Midland Bank, N.A., 920 F. Supp. 58, 61 (S.D.N Y
As to transaction causation, "[i]n certain circumstances, a
plaintiff bringing a section 10(b)/rule 10b-5 claim benefits from
a rebuttable presumption of transaction causation or reliance."
Litton, 967 F.2d at 747. One of the circumstances is where "a
plaintiff's claim is based on a defendant's failure to disclose
material information." Id. at 748 (citing the line of cases
beginning with SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 849
(2d Cir. 1968) (en banc), and culminating in Affiliated Ute
Citizens v. United States, 406
341 U.S. 128, 153-54, 92 S.Ct. 1456, 31 L.Ed.2d 741 (1972)).
"Because, in such situations, the plaintiff is unaware of the
omitted information, the record generally fails to provide a
basis from which a finder of fact may evaluate how the plaintiff
would have reacted if he or she had been aware of the withheld
Thus to demonstrate transaction causation in a case alleging
omission or nondisclosure, "actual reliance need not be shown,
but a plaintiff must establish that the facts at issue were
material, i.e., that a reasonable investor might have
considered them important in marking his investment decision."
Lazzaro v. Manber, 701 F. Supp. 353, 364 (E.D.N.Y. 1988)
(citing Schlick v. Penn-Dixie Cement Corp., 507 F.2d 374,
380-82 (2d Cir. 1974)); see Affiliated Ute, 406 U.S. at 153-54,
92 S.Ct. 1456.
Here, a reasonable investor might have considered as important
the fact that the Scorpion stock he purchased was unregistered,
or the fact that manipulation was employed to increase
artificially the price and trading volume of the stock. Failure
by the Defendants to disclose this information brings Dietrich's
claim within the presumption of reliance. See Litton, 967 F.2d
at 747-48; Schlick, 507 F.2d at 380-81.
The second situation in which a rebuttable presumption of
transaction causation is available is in "fraud on the market"
[A] plaintiff may also, subject to rebuttal,
establish transaction causation by means of the
"fraud on the market" theory, which permits a
plaintiff to rely on the integrity of open,
well-developed markets rather than requiring proof of
direct reliance on a defendant's conduct, which
ordinarily would be difficult to come by given the
difference between today's markets and the
face-to-face transactions underlying the old common
law fraud cases, in which reliance played an
Litton, 967 F.2d at 748; see Blech II, 961 F. Supp. at 586.
The Amended Complaint's Third and Fourth Claims come within this
presumption as well.