by Mr. Rosenfeld and/or Mr. Adler." According to the Plaintiffs,
the transfer of Activinet Ltd.'s shares in OSCM to Activinet,
S.A. was made without adequate consideration, and without
Letzter's knowledge or consent, and without an Activinet, Ltd.
At some point in or about October 1999, Defendants Rosenfeld,
Adler, and Conca, all directors of OSCM, entered into an
agreement with Defendant AMCI International ("AMCI") and its
directors Defendants Brown and Merrell, to sell OSCM's ownership
in CCM — OSCM's only significant asset — to AMCI in exchange for
60% of AMCI's stock and $5,000,000 in cash. The Plaintiffs
contend that OSCM's sale of its CCM stock to AMCI was done
without notice to OSCM's shareholders, and that it served no
business purpose other than to deliberately "remove OSCM's assets
from any influence, oversight, or control by Letzter." The
Plaintiffs sought a preliminary injunction before this Court to
prevent the sale of OSCM's assets to AMCI, but later withdrew
that request after stipulating that the sale was consummated in
In November 1999, Letzter sought to remove the restrictions on
the sale of his OSCM stock and to put the shares up for sale.
OSCM's directors, Defendants Rosenfeld, Adler, and Conca, refused
to waive the restrictions on the sale of the OSCM shares held by
Letzter. According to the Plaintiffs, OSCM's directors had no
legal justification to refuse Letzter's request, and their
motivation was actually to manipulate OSCM's stock price and to
"ensure that Mr. Letzter's proposed sales of his stock not
adversely affect its market price."
The Plaintiffs then commenced this lawsuit, setting forth five
causes of action. The first cause of action alleges breach of
fiduciary duty against Defendants OSCM, Adler, and Rosenfeld,
relating to their refusal to remove the restrictions on the sale
of Letzter's OSCM shares. The second cause of action is a
shareholder derivative claim by Letzter for conversion and breach
of fiduciary duty against Adler, Rosenfeld, and Activinet, S.A.
relating to the sale of Activinet, Ltd.'s assets to Activinet,
S.A. The third cause of action is a derivative claim of
securities fraud against Adler, Rosenfeld, Conca, AMCI, Merrell,
and Brown, alleging that the sale was accompanied by fraudulent
filings with the SEC by OSCM that the sale was in OSCM's best
interests and by AMCI that AMCI had secured financing that
justified the share price it used in entering into the sale with
OSCM. The fourth and fifth causes of action allege breach of
fiduciary duties against OSCM and AMCI respectively.
Defendants OSCM, AMCI, and Conca now move to dismiss the
complaint for lack of subject matter jurisdiction and failure to
state a claim. They contend that this Court lacks diversity
jurisdiction over the case pursuant to 28 U.S.C. § 1332 on the
grounds that neither Letzter, a non-domiciliary of the United
States, nor ITD, a foreign corporation, have residence in the
United States so as to support diversity jurisdiction. In
addition, the Defendants contend that the sole federal cause of
action by the Plaintiffs — the securities fraud claim — fails to
state a cause of action separate from the breach of fiduciary
duty claim, and that this Court therefore lacks federal question
jurisdiction over the case pursuant to 28 U.S.C. § 1331.
The Plaintiffs contend that diversity exists, at least as to
ITD, as it is a Delaware Corporation operating overseas, and is
thus a citizen only of Delaware for diversity purposes. OSCM is a
Florida corporation with its place of business in New York.
Rosenfeld and Adler are citizens and residents of Israel, while
Conca, Merrell, and Brown are all U.S. citizens residing in New
York State. AMCI is a Utah corporation doing business in New
The court may not dismiss a complaint under Fed.R.Civ.P.
12(b)(6) unless it
appears beyond doubt that the plaintiff can prove no set of facts
in support of his claim which would entitle him to relief. King
v. Simpson, 189 F.3d 284, 286 (2d Cir. 1999); Bernheim v.
Litt, 79 F.3d 318, 321 (2d Cir. 1996). The court must accept as
true all factual allegations in the complaint as true and draw
all reasonable inferences in favor of plaintiff. Id.; Jaghory v.
New York State Dep't of Educ., 131 F.3d 326, 329 (2d Cir. 1997).
The issue to consider is not whether a plaintiff will ultimately
prevail but whether the claimant is entitled to offer evidence to
support the claims. Villager Pond, Inc. v. Town of Darien,
56 F.3d 375, 378 (2d Cir. 1995). The court must confine its
consideration "to facts stated on the face of the complaint, in
documents appended to the complaint or incorporated in the
complaint by reference, and to matters of which judicial notice
may be taken." Leonard F. v. Israel Discount Bank of N.Y.,
199 F.3d 99, 107 (2d Cir. 1999); Hayden v. County of Nassau,
180 F.3d 42, 54 (2d Cir. 1999).
A. As to diversity jurisdiction
Federal courts have subject matter jurisdiction based on
diversity of citizenship in actions between (1) citizens of
different states or (2) citizens of a state and citizens of a
foreign nation. 28 U.S.C. § 1332(a). However, citizens of the
United States domiciled abroad are neither citizens of a state of
the United States, for purposes of § 1332(a)(1), nor citizens of
a foreign nation for purposes of § 1332(a)(2). Cresswell v.
Sullivan & Cromwell, 922 F.2d 60, 68 (2d Cir. 1990). Such
citizens may not maintain an action in federal court based solely
on diversity jurisdiction. Id. Moreover, diversity jurisdiction
requires that at least one party to a dispute be a resident of
the United States. Creaciones Con Idea, S.A. de C.V. v.
MashreqBank, PSC, 75 F. Supp.2d 279, 282 (S.D.N.Y. 1999).
Here, Plaintiff Letzter is a U.S. citizen domiciled in Israel.
As a result, because not all of the Plaintiffs are entitled to
sue in federal court on the basis of diversity, they may not
maintain this suit on diversity grounds. Cresswell, 922 F.2d at
There is also a dispute among the parties as to the status of
Plaintiff ITD. The Defendants have submitted a certification from
the Secretary of State of Delaware certifying that no corporation
named "Integrated Technology and Development, Inc." or
"Integrated Technology & Development, Inc." is or ever has been
incorporated in the State of Delaware. The Plaintiffs have
submitted a Delaware certificate of incorporation for an entity
called "ITD-Integrated Technology and Development Inc." While the
Court questions whether the Plaintiffs' certificate, which bears
a demonstrably different corporate name than does the complaint,
is sufficient proof of ITD's residence for diversity purposes,
the Court need not reach that issue as Letzter's presence as a
Plaintiff is sufficient to destroy any diversity jurisdiction.
B. As to federal question jurisdiction
The Plaintiffs nevertheless maintain that the third cause of
action, alleging securities fraud, alleges a claim under the laws
of the United States thereby conferring federal question
jurisdiction on the Court. 28 U.S.C. § 1331.
The Plaintiffs do not specifically identify which section of
the federal securities laws the Defendants are alleged to have
violated. However, it appears that their claim of fraud is best
characterized as an action pursuant to section 10(b) of the
Securities Exchange Act of 1934, 15 U.S.C. § 78j, which prohibits
the use of "any manipulative or deceptive device" in the sale of
securities. In order to state a fraud claim under Section 10(b),
a plaintiff must allege that "in connection with the purchase or
sale of securities, the defendant, acting with scienter, made a
false material representation or omitted to disclose material
information and that [the] plaintiff's reliance on the
defendant's action caused [the plaintiff] injury." Koehler v.
Bank of Bermuda, 209 F.3d 130, 2000
WL 364993 (2d Cir. 2000). A plaintiff alleging securities fraud
must also comply with the requirements of Fed.R.Civ.P. 9(b), and
specify the statements that the plaintiff contends were
fraudulent, identify the maker of those statements, allege where
and when the statements were made, and explain why the statements
were fraudulent. Anatian v. Coutts Bank Ltd., 193 F.3d 85, 89
(2d Cir. 1999); Chill v. General Electric Co., 101 F.3d 263,
267 (2d Cir. 1996).
The Plaintiffs' complaint is long on accusations and short on
details. Only one statement alleged to be false is identified
with sufficient particularity to comply with the requirements of
Rule 9(b). Specifically, the Plaintiffs allege that AMCI filed a
Statement of Beneficial Ownership, SEC Form 13D, on November 5,
1999 and a proxy statement on December 20, 1999 that falsely
claimed that AMCI had received a "firm commitment" of a
$25,000,000 investment in the company. According to the
Plaintiffs, this false claim allowed AMCI to overinflate its
corporate value when negotiating the terms of the transaction
While the Plaintiffs' claim does allege a specific statement
that could support a claim of securities fraud, the Plaintiffs
have failed to allege the necessary element of reliance on the
misrepresentation. Koehler, supra. The Court may consider the
content of the SEC filings as they are incorporated by reference
in the complaint. Leonard F. v. Israel Discount Bank of N.Y.,
199 F.3d 99, 107 (2d Cir. 1999); Hayden v. County of Nassau,
180 F.3d 42, 54 (2d Cir. 1999). According to the statements
referenced by the Plaintiffs, the exchange between OSCM and AMCI
was agreed to on October 26 and executed on October 27, 1999, at
least a week before the allegedly fraudulent statement was made
in AMCI's 13D form filed on November 5, 1999. The Plaintiffs are
therefore unable to demonstrate that the alleged false statement
made on November 5, 1999 somehow caused them to suffer the loss
on October 27, 1999. Accord Koehler, 209 F.3d 130 (to state a
claim for fraud, the plaintiff "would have had to show that
[obtaining knowledge of the misrepresentations] . . . would have
succeeded in preventing the loss suffered.")
The remaining allegations by the Plaintiff fail to allege any
false statements allegedly made by AMCI with the requisite degree
of specificity. Therefore, the Plaintiffs fail to state a claim
for securities fraud under Section 10(b), and their third cause
of action must be dismissed pursuant to Fed.R.Civ.P. 12(b)(6).
C. As to the Plaintiffs' request for leave to amend
A motion to dismiss for subject matter jurisdiction under Rule
12(b)(1) is reviewed under the same standards as a motion to
dismiss for failure to state a claim under Rule 12(b)(6). Moore
v. PaineWebber, Inc., 189 F.3d 165, 169 n. 3 (2d Cir. 1999);
Jaghory, 131 F.3d at 329 (2d Cir. 1997). Specifically, the
Court must review the allegations in the light most favorable to
the Plaintiffs, and draw all reasonable inferences in their
favor. Id. However, if, despite this review, the Plaintiffs
fail to demonstrate a basis for federal jurisdiction, that case
must be dismissed.
Because the securities fraud claim is the lynchpin of the
Plaintiffs' federal question jurisdiction, and because the
Plaintiffs cannot establish diversity jurisdiction, the
Defendants motion to dismiss for lack of subject matter
jurisdiction pursuant to Fed.R.Civ.P. 12(b)(1) should be granted.
However, in the alternative to dismissal the Plaintiffs request
leave to amend the complaint. Where amendment of the complaint
can only be had by leave of the court under Fed.R.Civ.P. 15(a),
the court is precluded from granting such leave if subject matter
jurisdiction under the original complaint is lacking. American
Charities for Reasonable Fundraising Regulation, Inc. v.
Shiffrin, 46 F. Supp.2d 143, 154 (D.Conn. 1999), citing
Unions-Printers League Income and Security Fund v. Continental
Assurance Co., 700 F.2d 889, 890 (2d Cir. 1983). However, if the
plaintiff can still amend the complaint as of right, no judicial
intervention is necessary to permit the amendment, and the
absence of federal subject matter jurisdiction poses no obstacle.
Reviewing the docket in this case, it appears that none of the
Defendants have served any responsive pleading to date. The
Plaintiffs, therefore, may amend their complaint as a matter of
right pursuant to Fed.R.Civ.P. 15(a). Should the Plaintiffs fail
to amend their complaint as of right within the time provided in
Rule 15(a), or should any such amendment fail to cure the
jurisdictional defects in the original complaint, the case will
be dismissed pursuant to Fed.R.Civ.P. 12(b)(1), and the matter
will be remanded to state court for further proceedings on the
Plaintiffs' common law claims.
For the foregoing reasons, the Defendants' motion to dismiss
the third cause of action, alleging securities fraud, is GRANTED.
The Defendants motion to dismiss the complaint for lack of
subject matter jurisdiction is DENIED without prejudice to
re-filing following the expiration of the time period provided in
Fed. R.Civ.P. 15(a) for the Plaintiffs to amend the complaint as
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