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
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
Count One of the complaint alleges that each of the defendants
securities fraud under Section 10(b) of the Securities and
Exchange Act of 1934, 15 U.S.C. § 78j(b), 78t(a), (the "Exchange
Act")*fn2, and Rule 10b-5 promulgated thereunder. Rule 10b-5
It shall be unlawful for any person, directly or
indirectly, by the use of any means or
instrumentality of interstate commerce, or of the
mails or of any facility of any national securities
(a) To employ any device, scheme, or artifice to
(b) To make any untrue statement of a material fact
or to omit to state a material fact necessary in
order to make the statements made, in the light of
the circumstances under which they were made, not
(c) To engage in any act, practice, or course of
business which operates or would operate as a fraud
or deceit upon any person, in connection with the
purchase or sale of any security.
17 C.F.R. § 240.10b-5 (1990).