The opinion of the court was delivered by: Chin, District Judge.
Plaintiffs Lawrence Arduini ("Arduini"), Joseph Messina
("Messina"), and the Arduini/Messina Partnership (the
"Partnership") bring this action against defendants National
Medical Financial Services Corporation ("NMFS"), Douglas R.
Colkitt ("Colkitt"), and Alan H.L. Carr-Locke ("Carr-Locke")
pursuant to § 10(b) of the Securities Exchange Act of 1934,
15 U.S.C. § 78j(b) (the "Exchange Act"), and Rule 10b-5 promulgated
thereunder. Plaintiffs also assert state law fraud claims.
The motion to dismiss plaintiffs' § 10(b) and Rule 10b-5 claim
is granted because any properly pled claim would be barred by the
applicable statute of limitations and also because plaintiffs
fail to state a claim upon which relief may be granted. I decline
to exercise supplemental jurisdiction over plaintiffs' state law
claims; therefore the amended complaint is dismissed in its
entirety. As against non-moving defendant Carr-Locke, the amended
complaint is dismissed for the reasons stated herein as well as
for failure to comply with Fed. R.Civ.P. 4(m). I do not reach
defendants' alternative motion to transfer this action.
Except where otherwise noted, all facts are drawn from
plaintiffs' amended complaint. At all relevant times NMFS, a
Delaware corporation with its principal place of business in
Nevada, was a public company engaged in the business of providing
accounting, billing, collection, and accounts receivable
management services to various types of medical providers.
(Am.Compl. ¶¶ 8, 14). Defendant Colkitt is, and at all relevant
times was, the chairman and principal shareholder of NMFS.
(Am.Compl. ¶ 9). Until February 1, 1997, Carr-Locke was the
president, chief executive officer and a director of NMFS.
Following Carr-Locke's resignation, Colkitt took over the
positions of chief executive officer and president of NMFS. (Am.
Compl. ¶ 10; Declaration of Andrew Lorin ("Lorin Decl.") Ex. 4,
NMFS 1996 10-K).
NMFS's 1996 and 1997 SEC disclosure documents describe an
"aggressive acquisition strategy" whereby NMFS acquired the
accounts receivable and client contracts of numerous billing and
collection companies. (Am.Compl. ¶¶ 16-18). These acquisitions
were the sole source of NMFS's revenues in 1996 and 1997;
approximately half of the revenues were derived from acquisitions
of companies "owned by, controlled by, or affiliated with"
Colkitt. (Am.Compl. ¶¶ 19-20). The market-maker for NMFS's stock
was First United Equities Corporation ("First United"), a
registered broker-dealer which is not a party to this action.
(Am. Compl. ¶ 21). The principals of First United are Howard
Irving Weinstein ("Weinstein"), Steven Mark Cohen ("Cohen"), and
Jonathan Winston ("Winston"), none of whom is a party to this
action. (Am. Compl. ¶¶ 22-24).
At the suggestion of Weinstein and Cohen, Messina purchased
170,000 shares of NMFS stock between August 26, 1996 and November
27, 1996 and Arduini purchased 85,000 shares of NMFS stock
between October 4, 1996 and the end of November 1996.
(Am.Compl. ¶¶ 35-41). Weinstein "persuaded" both Messina and
Arduini to sell their entire positions in NMFS in December 1996.
Messina incurred a loss of $150,000 on the sale; Arduini lost
$35,000. (Am.Compl. ¶¶ 38, 42). During approximately this same
time period, and ending January 10, 1997, Colkitt, an NMFS
"insider," sold more than 630,000 shares of NMFS stock for
consideration in excess of $4,900,000. (Am.Compl. ¶¶ 47-48).
Plaintiffs do not allege that Colkitt sold this stock at a
profit. Rather, plaintiffs allege Colkitt sold the stock as part
of a "classic `pump-and-dump' scheme" through which Colkitt,
Carr-Locke and other unnamed insiders "remov[ed] their support of
NMFS" by the stock sales. (Am. Compl. ¶ 13).
Despite their previous poor fortune with NMFS stock, in January
and February of 1997, Messina and Arduini again purchased NMFS
stock, this time in the name of the Partnership. (Am.Compl. ¶¶
51-56). Plaintiffs allege that Weinstein and Cohen induced these
purchases, a total of 244,900 shares, by representing that NMFS
insiders, including Colkitt, had executed a "lockup" agreement
under which they would not be permitted to sell their NMFS
shares for a specified period of time, and that NMFS would be
making additional acquisitions in 1997. (Am.Compl. ¶¶ 51, 55).
The Partnership sold its NMFS stock in April 1997, incurring a
loss of $1,746,000. (Am.Compl. ¶ 58).
As disclosed in NMFS's third quarter 1997 10-Q, on or about
October 1, 1997 all NMFS's contracts with companies owned by,
controlled by, or affiliated with Colkitt lapsed and were not
renewed. (Am. Compl. ¶ 66; Lorin Decl. Ex. 7 at 10). NMFS
restructured its operations effective January 1, 1998. As part of
this restructuring, NMFS wrote-off the remainder of its acquired
contracts. (Am. Compl. ¶ 68). NMFS's total write-off exceeded
$10,900,000. (Am.Compl. ¶ 69). All of these facts were disclosed
in NMFS's 1997 10-K. (Lorin Decl. Ex. 8 at 1, 14, 19). The lapsed
contracts were then transferred, without consideration, to other
entities Colkitt or Carr-Locke owned, controlled, or were
affiliated with. (Am. Compl. ¶ 71). NMFS stock is no longer
publicly traded and as of February 1999 has no market value.
(Am.Compl. ¶ 78).
In essence, plaintiffs allege that all defendants engaged in a
course of conduct designed to deceive the investing public,
including plaintiffs, about NMFS's value by omitting from NMFS's
1996 and 1997 SEC disclosure documents certain material
information — namely Colkitt's intention not to renew the
contracts that provided NMFS with the bulk of its revenue and
instead to transfer those contracts to other Colkitt and
Carr-Locke companies without consideration. As a consequence,
plaintiffs contend the market price of NMFS stock was
artificially inflated and consequently that plaintiffs were
induced to purchase NMFS common stock at excessive prices and
Colkitt was able to sell his NMFS stock for close to $5,000,000.
Plaintiffs further allege that defendant Colkitt, knowing of his
intention not to renew the contracts, "removed his support" from
NMFS presumably causing plaintiffs to lose money on their
Plaintiffs contend that NMFS's market-maker, First United, was
part of this scheme. Prior to any of plaintiffs' purchases, NMFS
loaned First United $5,200,000. (Am. Compl. ¶ 26; Lorin Decl. Ex.
2 at 7, NMFS Form 10-Q, second quarter 1996). First United repaid
$2,000,000 of the loan and Colkitt guaranteed the remainder of
First United's obligations. First United's obligations were
subsequently assigned to Russell Data, Inc., a company controlled
by Colkitt. (Am. Compl. ¶ 26; Lorin Decl. Ex. 3 at 7, NMFS Form
10-Q, third quarter 1996). NMFS also paid First United a
"finder's fee" of $490,000 in connection with an acquisition NMFS
made in March 1997. (Am.Compl. ¶ 27). According to plaintiffs,
these transactions induced First United to participate in
defendants' fraudulent scheme. (Am.Compl. ¶¶ 26, 27).
Plaintiffs commenced this action on October 29, 1998. Their
initial complaint included causes of action for securities and
common law fraud, self-dealing, corporate waste, breach of
fiduciary duty, conspiracy, and violations of the Racketeer
Influenced and Corrupt Organizations Act, 18 U.S.C. § 1962 et.
seq. In response, all defendants (except for Carr-Locke) moved
to dismiss the complaint for failure to state a claim, failure to
plead fraud with particularity, improper venue, and lack of
personal jurisdiction, or in the alternative for transfer of
Plaintiffs did file an amended complaint. The amended complaint
is narrower, asserting only causes of action for securities fraud
and common law fraud. The remaining defendants (except for
Carr-Locke) have again moved to dismiss on substantially the same
grounds as asserted before.