The opinion of the court was delivered by: Sweet, District Judge.
Defendants DCI Telecommunications, Inc. ("DCI"), Joseph J.
Murphy ("Murphy"), Russell B. Hintz ("Hintz"), and relief
defendant Grace P. Murphy (collectively "Defendants") have moved
to dismiss the First, Second, and Sixth Claims of the complaint
in their entirety and the Fifth and Seventh Claims in part,
pursuant to Rule 12(b)(6), Fed.R.Civ.P. For the reasons set forth
below, the motion is denied.
Plaintiff Securities and Exchange Commission ("SEC") is a
governmental agency charged with the task of ensuring compliance
with federal securities laws.
DCI is a Colorado corporation headquartered in Stratford,
Murphy, a Connecticut resident, is the Chairman of the Board,
Chief Executive Officer, President, and a major shareholder of
Hintz, a Connecticut resident, is the Chief Financial Officer
Grace Murphy resides in Connecticut with her husband, Joseph
This case involves alleged violations of Generally Acceptable
Accounting Principles ("GAAP") which, if true, may constitute
violations of the books and records provisions and the reporting
provisions of the Securities and Exchange Act of 1934,
15 U.S.C. § 78j(b), 78t(a), (the "Exchange Act"), as well as the
anti-fraud provisions of the Securities Act of 1933, 15 U.S.C. § 77q
(a)(2) & (3), (the "Securities Act").
Specifically, the complaint alleges that the Defendants
improperly accounted for seven acquisitions and grossly
overvalued a purported $15 million contract and $5 million
promissory note, which caused the financial statements in five
Forms 10-K and twelve Forms 10-Q that DCI filed with the SEC over
a five-year period to be materially false and misleading. DCI's
SEC filings allegedly overstated their assets by 40% to 1408%
during this period. In addition, the complaint alleges that DCI
unlawfully raised additional funds by causing its employees to
sell S-8 stock to the public and then "kick back" sales proceeds
On August 18, 2000, Defendants moved to dismiss the First,
Second, and Sixth Claims in the Complaint in their entirety, and
to dismiss the control person elements of the Fifth and Seventh
Claims. In brief, the defendants contend that because the
Complaint fails to aver that the alleged GAAP violations were
intended to, or did, have any impact on DCI's stock price, the
fraud allegations fail to state a claim as a matter of law. With
regard to the sale of unregistered securities claim, Defendants
contend that the SEC has failed to allege the necessary element
of a preexisting plan to ensure DCI received the benefit of its
employees' sale of S-8 stock to the public.
The SEC filed a memorandum in response on September 19, 2000,
and the motion was deemed fully submitted upon the filing of the