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GIANT GROUP, LTD. v. SANDS

May 16, 2001

GIANT GROUP, LTD., PLAINTIFF,
V.
GLENN SANDS; ARTHUR ANDERSEN LLP; L.H. FRIEND, WEINRESS, FRANKSON & PRESSON, INC.; AND FRIEDMAN ALPREN & GREEN LLP, DEFENDANTS.



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

OPINION

Defendants Arthur Anderson LLP ("Anderson"), Friedman Alpren & Green LLP ("Friedman") and Glenn Sands ("Sands") have each filed motions to dismiss this securities fraud action pursuant to Rules 9(b) and 12(b) of the Federal Rules of Civil Procedure. Plaintiff Giant Group, Ltd. ("Giant") opposes the motions. For the reasons set forth below, the motions will be granted.

The Parties

Giant is a corporation organized under the laws of Delaware, with its principal place of business in Beverly Hills, California. As a result of the transaction at issue in this case, Giant is the sole owner of all of the outstanding shares of Periscope Sportswear, Inc. ("Periscope"), a Delaware corporation.

Sands is an individual residing in New Jersey. At all times relevant to this action, Sands was the principal shareholder and chief executive officer of Periscope, and continued in that capacity until he was dismissed in April 2000.

Anderson, an independent public accounting firm, is a limited liability partnership organized and with offices in cities including Los Angeles, California, and New York, New York. At all relevant times, Anderson was Giant's outside auditor. Anderson also served as Periscope's outside auditor.

Friedman, also an independent public accounting firm, is a limited liability partnership organized under the laws of New York, with its principal place of business in New York, New York. Friedman was Periscope's independent auditor from 1987 through 1996.

Defendant L.H. Friend ("Friend") is a corporation organized under the laws of California, with its principal place of business in Irvine, California. At all times relevant to this action, Friend was engaged in the business of investment banking and underwriting.

Background

This action arose out of Giant's acquisition of Periscope on or about December 11, 1998. The complaint, filed on October 6, 2000, alleges that the defendants defrauded Giant, breached contractual obligations, and violated federal securities law by making false and misleading representations and failing to make necessary disclosures of material information regarding Sands' alleged participation in fraudulent schemes at Periscope. (Complaint ¶¶ 1-2, 4-6.) Specifically, the complaint alleges that if Giant had known of Sands' misconduct — alleged to include prebilling,*fn1 making material misstatements of Periscope's assets and receivables, committing customs fraud, embezzling Periscope's funds, and making material misstatements and omissions in Periscope's prospectus and annual and quarterly financial statements for the years ending in 1996 and 1997, as well as the first three quarters of 1998 (Complaint ¶ 3) — he would not have invested $35 million in Periscope.

In lieu of answering the complaint, Anderson filed a motion to dismiss the complaint on January 9, 2001, on the following grounds: (1) the action is barred by the one-year statute of limitations applicable to Rule 10b-5 securities fraud claims; (2) Giant has failed to plead scienter as per the requirements of the Private Securities Litigation Preform Act of 1995 ("PSLRA"); (3) failure to plead fraud with particularity under both the PSLRA and Fed.R.Civ.P. 9(b); and (4) the state law claims should be dismissed for lack of supplemental jurisdiction if the sole federal securities claim is dismissed.

On the same date, Friedman filed a motion to dismiss for (1) failure to state a claim upon which relief can be granted, pursuant to Fed.R.Civ.P. 12(b)(6); (2) failure to plead fraud with particularity pursuant to Rule 9(b); and (3) dismissal of the pendent state law claims for lack of subject matter jurisdiction, pursuant to Rule 12(b)(1).

Sands filed a motion to dismiss on January 10, 2001 for (1) failure to plead fraud with particularity; (2) failure to state a claim with regard to (a) misrepresentations; (b) omissions; and (c) aider and abettor liability; and (3) failure to plead a special relationship to establish a negligent representation claim.

Giant opposed the motions, which were deemed fully submitted on April 4, 2001.

I. Applicable Legal Standards

A. Failure to State a Claim Pursuant to Rule 12(b)(6)

In reviewing a motion to dismiss under Rule 12(b)(6), review must be limited to the complaint and documents attached or incorporated by reference thereto. See Kramer v. Time Warner, Inc., 937 F.2d 767, 773 (2d Cir. 1991). Courts must "accept as true the factual allegations of the complaint, and draw all inferences in favor of the pleader." Mills v. Polar Molecular Corp., 12 F.3d 1170, 1174 (2d Cir. 1993) (citing IUE AFL-CIO Pension Fund v. Herrmann, 9 F.3d 1049, 1052 (2d Cir. 1993)). Dismissal is warranted only when "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957) (footnote omitted). See also Bass v. Jackson, 790 F.2d 260, 262 (2d Cir. 1986).

"For purposes of a motion to dismiss, [the Second Circuit has] deemed a complaint to include any written instrument attached to it as an exhibit or any statements or documents incorporated in it by reference . . ., as well as public disclosure documents required by law to be, and that have been, filed with the SEC, and documents that the plaintiffs either possessed or knew about and upon which they relied in bringing the suit." Rothman v. Gregor, 220 F.3d 81, 88 (2d Cir. 2000) (citing Cosmas v. Hassett, 886 F.2d 8, 13 (2d Cir. 1989); Kramer, 937 F.2d at 774; and Cortec Industries, Inc. v. Sum Holding L.P., 949 F.2d 42, 47-48 (2d Cir. 1991), cert. denied, 503 U.S. 960, 112 S.Ct. 1561, 118 L.Ed.2d 208 (1992)). In addition, courts may take judicial notice of additional facts meeting the test set forth in Federal Rule of Evidence 201. Kramer, 937 F.2d at 774.

Although "limited quotation does not constitute incorporation by reference," Cosmas v. Hassett, 886 F.2d 8, 13 (2d Cir. 1989) (quoting Goldman v. Belden, 754 F.2d 1059, 1066 (2d Cir. 1985)), the "line between incorporating by reference and not doing so . . . is fine," Kas v. Chase Manhattan Bank, N.A., No. 90 CIV. 44(KMW), 1990 WL 113185, *4 (S.D.N.Y. July 30, 1990) (citing Ruff v. Genesis Holding Corp., 728 F. Supp. 225, 227 n. 2 (S.D.N.Y. 1990) ("Because the PPM was referred to extensively throughout the Complaint, rather than merely quoted from sporadically, we regard it as having been incorporated by reference into the Complaint.") (distinguishing Cosmas)).

While a court may transform a 12(b)(6) motion into a summary judgment motion pursuant to Rule 56(c) if the parties submit evidence beyond the pleadings, such action is inappropriate unless the parties are given notice and an opportunity to respond appropriately. Fed.R.Civ.P. 12(b) ("If, on a [12(b)(6) motion], . . ., matters outside the pleading are presented to and not excluded by the court, the motion shall be treated as one for summary judgment . . . and all parties shall be given reasonable opportunity to present all material made pertinent to such a motion by Rule 56."); Friedl v. City of New York, 210 F.3d 79, 83 (2d Cir. 2000). Even where additional materials are submitted by one party, a trial court should not transform a 12(b)(6) motion into a summary judgment motion where, as here, the motion has been filed in lieu of an answer, and the parties have neither completed discovery nor formally requested that the motion be converted. See 2 Broadway L.L.C. v. Credit Suisse First Boston Mortg. Capital L.L.C., No. 00 Civ. 5773 GEL, 2001 WL 410074, *5 & n. 3 (S.D.N.Y. Apr.23, 2001).

In any case, a court need not convert a 12(b)(6) motion into a summary judgment motion to consider additional materials "[w]here plaintiff has actual notice of all the information in the movant's papers and has relied upon these documents in framing the complaint." Cortec, 949 F.2d at 47-8. See also Envirosource, Inc. v. Horsehead Resource Dev. Co., Inc., No. 95 CIV. 5106(AGS) 1996 WL 363091 at * 5 (S.D.N.Y. July 1, 1996) ("In ruling on a Rule 12(b)(6) motion, the Court may properly take notice of documents outside the four corners of the complaint where, as here, the plaintiff has actual notice of the documents and has relied upon them in framing the complaint."). Pursuant to Cortec, at least two District Courts within this Circuit have considered materials submitted to judges in related actions, pursuant to a motion to dismiss, where the plaintiff not only had notice thereof, but in fact "relied upon these documents in framing the complaint." Novo Nordisk of North America, Inc. v. Genentech, Inc., 885 F. Supp. 522, 526 (S.D.N.Y. 1995) (Motley, J.); see also Bath Petroleum Storage, Inc. v. Market Hub Partners, L.P., 129 F. Supp.2d 578, 591 (W.D.N.Y. 2000) (considering various documents filed in related actions, including documents the parties filed with various agencies, correspondence between them and the agencies, and the agencies' decisions, because plaintiff was on notice of and relied upon them in bringing the action), aff'd, 229 F.3d 1135 (2d Cir. 2000), petition for cert. filed, No. 00-1321, 69 U.S.L.W. 3593 (Feb. 15, 2001).

B. Rule 10b-5


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