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September 29, 1999


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.

Defendants NMFS and Colkitt move to dismiss plaintiffs' amended complaint for failure to state a claim upon which relief may be granted, failure to allege fraud with requisite particularity, lack of personal jurisdiction as to Colkitt, and improper venue, pursuant to Fed.R.Civ.P. 12(b)(6), 9(b), 12(b)(2) and 12(b)(3).*fn1 In the alternative, NMFS and Colkitt request that this action be transferred to the Middle District of Pennsylvania pursuant to 28 U.S.C. § 1404(a).

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.


A. The Facts

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 investments.

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).

B. Prior Proceedings

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 venue.*fn2

On February 3, 1999, I held a conference with the attorneys for plaintiffs and moving defendants. I indicated that because I would be inclined to grant leave to replead even if I were to grant the motion to dismiss, I would instead deny defendants' motion without prejudice and allow plaintiffs to file an amended complaint, taking into account the arguments raised in defendants' motion to dismiss. I specifically cautioned plaintiffs that if defendants were to move to dismiss the amended complaint, and I were to grant the motion, I would deny leave.

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.


A. Motion to Dismiss ...

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