The opinion of the court was delivered by: Kaplan, District Judge.
This insider trading case is before the Court on the motion of
defendants Dominic Alba, Dominic Spinelli, Josephine DeCicco and
Claudio Spinelli (the "Alba Defendants") to dismiss the complaint
on the grounds that it fails to plead fraud with the
particularity required by FED.R.CIV.P. 9(b) and fails to state a
claim upon which relief may be granted. Given the nature of the
motion, the well pleaded factual allegations of the complaint are
assumed to be true, and plaintiff is entitled to the benefit of
all inferences reasonably drawn therefrom.
This case arises out of alleged insider trading in 1995 based
on material non-public information concerning the intention of
International Business Machines Corporation ("IBM") to make a
hostile tender offer for the common stock of Lotus Development
Defendant Lorraine Cassano was a secretary employed by IBM. By
late April or early May 1995, she learned from documents that she
was asked to copy that IBM was preparing to acquire Lotus, a fact
confirmed to her by her supervisor, a financial analyst working
on the project, on May 5. On or about May 31, she learned that
the IBM board had met and authorized the commencement of the
tender offer and that the bid would be announced on or about June
5. All of this information was non-public.
Cassano began informing her husband, defendant Robert Cassano,
of IBM's plans in early May and kept him informed as she learned
additional facts. On May 31 and June 1, Robert Cassano told a
friend and co-worker, defendant P. Gerard Mazzone, of IBM's
intentions and of the scheduled June 5 public announcement and
asked Mazzone to secretly purchase stock for him in Mazzone's
securities account. Mazzone agreed and, commencing on June 2,
1995, purchased 860 shares of Lotus for $24,490 — stock he later
sold for a profit of $27,520 which was shared between Mazzone and
On the morning of June 2, Mazzone shared the information he had
been given by Cassano with Richard Cofrancesco, including the
fact that the source of his information was an IBM employee.
Cofrancesco, who never before had had a securities account or
made any securities investments, immediately telephoned Dominic
Alba, his cousin's husband, told him of IBM's plans, and sought
advice as to how to profit from this information. Alba helped
Cofrancesco open a brokerage account and told him to buy Lotus
June $35 call option contracts. Cofrancesco did so
and made a profit in a single trading day of $24,688 on an
investment of $688. Alba himself bought twenty Lotus June $35
call options, which he sold on June 5, thus realizing a one day
trading profit of $49,375 on his investment of $1,375.
Alba, according to the complaint, was not content to keep the
tip he had received from Cofrancesco to himself. He promptly told
his business partner, defendant Dominic Spinelli, with whom he
owned a pizzeria, that he had learned from a reliable source that
IBM was planning to take over Lotus and that IBM's plan would be
announced on or shortly after June 5. Following this
conversation, Spinelli also bought twenty Lotus June $35 call
options on which he earned a profit identical to Alba's in the
same span of time.
Both Alba and Spinelli tipped others. On June 2, Alba told his
friend, defendant Josephine DeCicco, and Spinelli told Claudio
Spinelli of the information they had obtained. Alba helped
DeCicco open an account with Alba's broker and she too bought
twenty Lotus June $35 calls. Claudio Spinelli bought 15 calls.
Prior to these purchases, DeCicco never had maintained a
brokerage account, and Claudio Spinelli never had invested in
stocks or options.
Eventually, the trading of the Alba Defendants came to the
attention of Commission investigators who questioned them about
their activities. Alba and Dominic Spinelli both falsely denied
to investigators that they knew anyone other than themselves who
had purchased Lotus stock or options when, in fact, both knew
that Claudio Spinelli, Cofrancesco and DeCicco had done so.
DeCicco and Claudio Spinelli both falsely told investigators that
they knew of no one else who had invested in Lotus on June 2,
when DeCicco knew of Alba's purchase and Claudio Spinelli knew of
Dominic Spinelli's purchase. Finally, DeCicco and Dominic
Spinelli both falsely told investigators that they had decided to
purchase Lotus options based on media reports when in fact both
had based their decisions on tips from Alba.
The complaint charges the Alba Defendants with violation of
Section 14(e) of the Securities Exchange Act of 1934 (the
"Exchange Act")*fn1 and Rule 14e-3 thereunder.*fn2 It seeks
injunctive relief pursuant to Section 21(d) of the Exchange
Act.*fn3 The Alba Defendants assert that the Rule 14e-3 claim is
one of fraud and that the complaint fails to plead that fraud
with particularity, in that it fails adequately to allege that
the defendants knew or had reason to know that the information as
to the IBM tender offer for Lotus came from persons associated
with IBM. In any case, they contend, the complaint fails to state
a legally sufficient claim because it alleges no facts suggesting
that they are now or hereafter will be likely to violate the
Exchange Act, which is the statutory standard for the issuance of
injunctive relief at the behest of the Commission.
The Commission assumes arguendo that Rule 9(b) applies to its
complaint despite its assertion that there is "substantial doubt"
as to whether that actually is so.*fn4 The Alba Defendants
concede, at least for purposes of this motion, that the
Commission need allege only facts showing that defendants had
reason to know the ultimate source of the tips they received and
need not plead that they actual knew that it came from IBM.*fn5
Hence, the scope of the debate here is quite limited. Giving the
Alba Defendants the benefit of a reading of the Rule 9(b)
standard most favorable to their motion, the question is whether
the complaint alleges facts giving rise to a ...