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APEX ARC, INC. v. GARVEY

July 13, 2000

APEX ARC, INC., PLAINTIFF,
V.
JOHN GARVEY, THOMAS T. MCCORMICK, MCQUAID, METZLER, MCCORMICK & VAN ZANDT LLP, AND CHASE MANHATTAN BANK, N.A., DEFENDANTS.



The opinion of the court was delivered by: Motley, District Judge.

MEMORANDUM OPINION DISMISSING COMPLAINT AND GRANTING LEAVE TO RE-PLEAD

OPINION

BACKGROUND

On January 20, 1997 plaintiff Apex Arc, Inc. ("Apex") purchased 47,579 voting units of American Biotherm Company, LLC ("AB Company"). AB Company lost nearly all of its value within a year after plaintiff's stock purchase. In the present action Apex seeks the return of its $725,000 investment in AB Company, claiming its stock purchase was motivated by misrepresentations and material non-disclosures.

Defendants are John Garvey ("Garvey"), Thomas T. McCormick ("McCormick") and McQuaid, Metzler, McCormick & Van Zandt LLP ("the McQuaid Firm"). Chase Manhattan Bank ("Chase") was also a defendant but the parties previously agreed to dismiss the complaint against Chase.

Plaintiff's basic contentions are summarized as follows. Apex was interested in investing in a technology referred to as the "biotherm process". The intended purpose of this biotherm process was to convert biosolid sludge into usable commodities such as fertilizer and energy pellets. An entity called the American Biotherm Corporation ("AB Corporation") owned the rights to purchase the biotherm process pursuant to an agreement with Hanover Research Corporation and Dehydro-Tech Corporation (collectively "Hanover"). Defendants created AB Company in October of 1996 to allow Apex to invest in the biotherm process without the encumbrance of debts owed by the AB Corporation. Defendants represented to Apex that AB Company could acquire the biotherm process from Hanover by incurring a debt of $1,410,000 ("the Hanover debt"). Defendants represented to Apex that this Hanover debt was AB Company's principal liability. Apex claims defendants concealed AB Company's debt to German investors in excess of $1 million ("the German debt"). Apex further claims that defendants concealed the fact that the biotherm process had been declared a failure by the Environmental Protection Agency. Apex also claims that defendants failed to disclose certain long term employment contracts. Thus, the basis of Apex's claim is that defendants concealed material facts and made false representations causing Apex to suffer financial harm from an illfated investment in AB Company.

Four causes of action remain pending from plaintiff's original seven count complaint. In Counts I and II plaintiff alleges violations of Section 10(b) of the Securities Exchange Act of 1934, as amended, 15 U.S.C. § 78j(b). In Count III plaintiff seeks to impose controlling person liability on defendants for securities law violations by AB Corporation and AB Company. In Count VI plaintiff alleges defendants engaged in common law fraud.

MOTION TO DISMISS

In order to prevail in a securities fraud case like the instant action plaintiff must show that defendant, with scienter, made false statements or omitted material facts and that plaintiff's reliance on such caused plaintiff's injury. Defendants McCormick and the McQuaid Firm have filed a motion to dismiss the complaint pursuant to Fed.R.Civ.P. 9(b), Fed. R.Civ.P. 12(b)(6) and § 21D(b)(3) of the Securities Exchange Act of 1934 as amended by the Private Securities Litigation Reform Act of 1995, 15 U.S.C.A. § 78u-4(b). The Second Circuit most recently outlined the pleading requirements for securities fraud cases in Novak v. Kasaks, 216 F.3d 300 (2nd Cir. 2000). In light of Novak, the pleading requirements are clear.

The following excerpts from the Second Circuit's opinion in Novak elucidate the relevant pleading requirements for a securities fraud case like the matter at hand:

Novak, at 305 (internal citations omitted).

In any private action arising under this chapter [15 U.S.C. § 78u-4(b)(2)] in which the plaintiff alleges that the defendant — (A) made an untrue statement of a material fact; or (B) omitted to state a material fact necessary in order to make the statements made, in the light of the circumstances in which they were made, not misleading; the complaint shall specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement ...

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