Fromer and others rely on their truth. See Cmplt. at ¶¶ 25-32.
III. Analysis of Plaintiffs' Federal Claims
Settling defendants in a federal securities action may sue for
contribution. See, e.g., In re Del-Val Financial Corp.
Securities Litigation, 868 F. Supp. 547, 553-4 (S.D.N.Y. 1994)
(citing Musick, Peeler & Garrett v. Employers Insurance of
Wausau, 508 U.S. 286, 113 S.Ct. 2085, 124 L.Ed.2d 194, (1993)).
Contribution provides that one of two or more joint wrongdoers
should not be required to pay more than its share of a common
burden. See Epstein v. Haas Securities Corp., 731 F. Supp. 1166
(S.D.N.Y. 1990); Stratton Group, Ltd. v. Sprayregen,
466 F. Supp. 1180, 1185 (S.D.N.Y. 1979).
In Musick, the Supreme Court noted that "parties against whom
contribution is sought are, by definition, persons or entities
alleged to have violated existing securities laws and who share
joint liability for that wrong under a remedial scheme
established by the federal courts." Musick, 508 U.S. at 292,
113 S.Ct. 2085. Accordingly, as in common law claims,
contribution for a § 10(b) violation is allowed only among "joint
tortfeasors". See also, In re Leslie Fay Companies, Inc.
Securities Litig., 918 F. Supp. 749, 756 (S.D.N.Y. 1996);
Stratton, 466 F. Supp. at 1185 ("The essence of contribution,
therefore, is the presence of joint tortfeasors").
1. Plaintiffs fail to allege they are joint tortfeasors
The definition of a joint tortfeasor is fairly broad. A finding
of liability is not required. Therefore, the fact that the
Restifo action settled, making an ultimate determination of
liability unavailable, does not preclude a contribution action.
See, e.g., In re Del-Val, 868 F. Supp. at 554 ("A party need not
actually be adjudged liable to the injured party to be a joint
tortfeasor.") (citing Stratton, 466 F. Supp. at 1185). Indeed, a
party need not even be sued by the plaintiff in the underlying
action in order to be liable for contribution. See Musick, 508
U.S. at 286, 113 S.Ct. 2085 (settling defendants' subrogated
insurers may sue non-parties for contribution).
What is required, however, is that the Complaint allege that
the parties — the Plaintiff and those Defendants from whom
contribution is sought — committed a tort, in this case
securities fraud. Yet this Complaint fails to allege that
Plaintiffs are tortfeasors. Nor does the Complaint allege that
Plaintiffs and any of the Defendants are joint tortfeasors. See
Cmplt. at ¶ 67 ("[r]esponsibility for the damages caused by the
plaintiffs herein rests on these defendants by reason of
their violations of Section 10(b) and Rule 10b-5 as alleged
herein.") (emphasis added). It is insufficient to claim, as
Plaintiffs do, that Yogel and the other Defendants are the
tortfeasors and that Fromer was merely an unwitting participant
in the scheme.*fn5
What is unusual here is that Plaintiffs steadfastly insist that
they did not violate the securities laws. Disputes over the term
"joint tortfeasor" typically arise when a defendant in a
securities fraud action seeks contribution from third parties:
The defendant becomes a third-party plaintiff but fails to allege
that the injuries suffered by plaintiffs in the underlying action
were caused by the third-party defendants' violation of the
securities laws. See, e.g., Monisoff v. American Eagle
Investments, Inc., 955 F. Supp. 40, 41-42 (S.D.N.Y. 1997); Ades
v. Deloitte & Touche, 90 Civ. 4959, 90 Civ. 5056, 1993 WL
362364, at *10 (S.D.N.Y. Sept.17, 1993); Department of Economic
Development v. Arthur Andersen & Co. (U.S.A.), 747 F. Supp. 922,
933 (S.D.N.Y. 1990). As stated in Ades:
A claim for contribution under the federal securities
laws . . . requires a third-party plaintiff to allege
all the elements of the offense[,] . . . namely that
the Third-Party Defendants either knowingly or
reckless[ly] made material misrepresentations to the
[injured parties] on which [these parties] relied in
the purchase of the [securities] and which
proximately caused loss to [the parties].
Here, the problem is that there is nothing in the Complaint
that can be read as an allegation or concession of fraudulent
conduct by the Plaintiffs. All that is alleged is Defendants'
fraud in the original Restifo action, see Cmplt. at ¶¶ 18-44,
and an independent fraud by Defendants on Plaintiffs in refusing
to contribute to the settlement. See Cmplt. at ¶ 46. These
allegations will not support a claim for contribution. Under the
federal securities laws, such a claim must be based on
allegations that all the parties violated securities laws, not
based on allegations that the Defendants defrauded Plaintiffs.
See Arthur Andersen, 747 F. Supp. at 934 ("claim for
contribution under the federal securities laws must be based on
allegations that the third-party defendant violated securities
laws, not based on allegations that the third-party defendants
defrauded [the third-party plaintiff]").
To present a valid claim that the parties are joint tortfeasors
subject to contribution, the use of certain words is not
required. All that is required are "allegations that the
[parties] were joint participants in the fraud alleged." In re
Del-Val, 868 F. Supp. at 554 (quoting Greene v. Emersons, Ltd.,
102 F.R.D. 33, 36 (S.D.N.Y. 1983), aff'd on other grounds sub
nom. Kenneth Leventhal & Co. v. Joyner Wholesale Co.,
736 F.2d 29 (2d. Cir. 1984); see also, Stratton, 466 F. Supp. at 1185 n.
6 (S.D.N.Y. 1979) ("The term `joint tortfeasors' means that two
or more persons are the joint participants or joint actors in the
wrongful production of an injury to a third person."); In re
Crazy Eddie Securities Litigation, 740 F. Supp. 149, 152
(S.D.N.Y. 1990) (same).
2. Plaintiffs fail to satisfy the scienter requirement
In this case, however, Plaintiffs try to have it both ways.
They acknowledge that they knowingly acted jointly with
Defendants but refuse to concede that they themselves knowingly
committed fraud. Plaintiffs argue that they are "not required to
concede [their] liability in order to assert a claim for
contribution." Plaintiffs' Memorandum of Law ("Pls.' Memo.") at
8, (quoting Epstein, 731 F. Supp. at 1186-87). Plaintiffs'
argument fails for several reasons.
First, Epstein itself does not support Plaintiffs' position.
While the Epstein court did not require a concession of
liability at the pleading stage, it did require that to prevail
on the claim, defendant (third-party plaintiff) must be "found"
liable or concede its own liability. See Epstein, 731 F. Supp.
at 1187 ("in order to assert a claim . . . [i]t is enough that
third-party plaintiffs assert that if they are adjudged liable
to plaintiffs, then they and third-party defendants are joint
tortfeasors.") (emphasis added). Because the underlying action
was pending, an issue remained as to
whether each of the parties would be found liable. Id. Here, a
judicial finding of liability is precluded as the parties have
settled the Restifo action and the statute of limitations on
related actions has run. A finding of liability here can only
occur through an admission.*fn6
Second, simply claiming to be an unwitting participant is
insufficient in a fraud claim. In failing to concede liability,
Fromer suggests that he did not knowingly participate in the
fraud, but relied on the other Defendants to supply him and other
investors with truthful and accurate information. An essential
element of a claim under § 10(b), and therefore any claim for
contribution arising thereunder, is scienter. See Ernst & Ernst
v. Hochfelder, 425 U.S. 185, 214, 96 S.Ct. 1375, 47 L.Ed.2d 668
(1976). The scienter element requires a showing that the party —
in this case Plaintiffs — knowingly or recklessly violated the
federal securities laws. See, e.g., In re Leslie Fay, 918
F. Supp. at 756 (S.D.N.Y. 1996). Each party must be liable for the
injury to third persons to be considered a joint tortfeasor.
Accordingly, to be considered a joint tortfeasor, the requisite
elements must be alleged or conceded by every party, Plaintiffs
Third, by arguing that one can knowingly act jointly to
unwittingly commit fraud, Plaintiffs appear to confuse one issue
— knowingly acting jointly — about which there is some dispute in
this circuit, with another issue — scienter as an element of
fraud — about which there is no dispute. District courts in this
circuit have defined "joint tortfeasors" in one of two ways. A
contribution claim may be based either on a fraud committed
jointly (and thus participants were acting jointly knowingly), or
on individual acts of fraud lumped together and considered
jointly (and thus participants were not acting jointly knowingly,
though each was still committing fraud knowingly).
The majority view appears to be that contribution among joint
tortfeasors is limited to "joint participants" in the fraud
alleged by the plaintiff. See, e.g., Advanced Magnetics, Inc. v.
Bayfront Partners, Inc. v. Painewebber Inc., 92 Civ. 6879, 1998
WL 647167, at *4 (S.D.N.Y. Sept.22, 1998); see also, In re Crazy
Eddie, 740 F. Supp. at 152 (E.D.N.Y. 1990); Connecticut National
Bank v. Reliance Insurance Co., 704 F. Supp. 506, 509 (S.D.N Y
1989); Greene, 102 F.R.D. at 36; Stratton, 466 F. Supp. at
1185. Other district courts have applied a more expansive
definition, holding that contribution among joint tortfeasors is
available among independent tortfeasors so long as the parties
are concurrently liable for damages. See, e.g., In re Leslie
Fay, 918 F. Supp. at 756; In re Del-Val, 868 F. Supp. at 554;
Ades, 1993 WL 362364, at *15; McCoy v. Goldberg, 778 F. Supp. 201
(S.D.N.Y. 1991). The Second Circuit has not resolved the
split. See Kenneth Leventhal & Co. v. Joyner Wholesale Co.,
736 F.2d 29, 31 n. 1 (2d Cir. 1984) ("We do not reach this issue" of
the definition of joint participants in fraud).
This issue, however, is not presented here. Plaintiffs'
contribution claim is equally deficient under either definition
of "joint tortfeasor." This is not a case like In re Del-Val or
Ades where the "joint tortfeasor" standard was held to be
satisfied by separate fraudulent actions upon which third parties
relied. Those cases only hold that the parties need not have
knowingly acted jointly to injure a plaintiff. But all the
parties must have knowingly committed fraud. "Independent
violations of the securities laws that injure the same plaintiff
are sufficient to support actions for contribution as long as the
third-party complaint adequately alleges
that the third-party defendant has violated the securities laws
and participated in the underlying fraud." In re Del-Val, 868
F. Supp. at 554 n. 8 (citing McCoy v. Goldberg, 778 F. Supp. 201,
204-5 (S.D.N.Y. 1991)). There is no reason to exempt Plaintiffs
from this requirement.
Fourth, and finally, Plaintiffs display a fundamental
misunderstanding of the theory of contribution, which is designed
to achieve "a fair distribution of fault among parties involved
in a wrong." See Greene, 102 F.R.D. at 36. As currently
alleged, however, Plaintiffs' theory of contribution is precisely
the opposite of shared liability.
Plaintiffs allege that each of the Defendants against whom they
move for contribution "participated in, and/or aided and abetted,
the fraudulent solicitation of investments from the Restifo
Plaintiffs."*fn7 By contrast, Plaintiffs do not admit to any
violation of the Exchange Act. Fromer alleges that he was at most
an unwitting participant, and was, in fact, defrauded himself.
FTD does not allege it was involved at all. In constructing the
Complaint in this way, Plaintiffs essentially seek to shift the
blame to Defendants. As recently explained by Judge Charles
Haight in Advanced Magnetics, Inc. v. Bayfront Partners, Inc. v.
Painewebber Inc., 92 Civ. 6879, 1998 WL 647167, at *5 (S.D.N Y
[Plaintiffs] are not saying in effect, "If we
committed fraud, [Defendants] had a hand in that
wrongdoing." To the contrary, [Plaintiffs] appear to
be saying, "If we are somehow adjudged liable, it is
really [Defendants'] fault because we relied on what
they told us." It strains the bounds of logic to
conclude that [Plaintiffs] could share any fault
under their theory of contribution. [Plaintiffs] are
attempting to bootstrap a defense to fraud into a
case for "joint tortfeasor" liability. Put another
way, the contribution claim fails because . . .
[Plaintiffs'] allegations amount to a claim that
[Plaintiffs] acted without scienter and there was
therefore no fraud in which to participate.
Plaintiffs' allegations attempt to blame Defendants for the
fraud rather than demonstrate that two actors — whether
independently or jointly — contributed to a fraud against the
Restifo plaintiffs. For these reasons, no argument can be made
that Defendants and Plaintiffs are "joint tortfeasors" under