The opinion of the court was delivered by: Motley, District Judge.
MEMORANDUM OPINION DISMISSING COMPLAINT AND GRANTING LEAVE TO
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
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 ...