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DIETRICH v. BAUER
March 4, 1999
DEL DIETRICH, PLAINTIFF,
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.
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
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.
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
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
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.
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
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.
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
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.
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
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
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
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.
During the week of alleged manipulation, Dietrich also asserts
that through a number of inter-Defendant trades, the Defendants
were able to increase the reported
trading volume of the stock. According to Dietrich, this was due
to wash transactions among the Defendants. Specifically, Dietrich
asserts that on January 18, 1993, Saturn sold approximately
470,000 shares of stock through Green-Cohn and two Bear Stearns
accounts, purportedly beneficially owned by principals of
Green-Cohn, purchased approximately 447,000 shares. Additionally,
at the same time SB & H was selling in excess of one million
shares, CS First Boston was acquiring for ultimate sale in excess
of one million shares.
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.
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.
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
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).
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
Accordingly, Witz's motion for reconsideration is denied.
III. Legal Standards for the Motions to Dismiss
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").
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 ...