(5) plaintiffs' claims are time barred under the applicable
statute of limitations; and (6) the pendent state law claims
should be dismissed.
A district court should grant a motion to dismiss under
Fed.R.Civ.P. 12(b)(6) for failure to state a claim only if "it
is clear that no relief could be granted under any set of facts
that could be proved consistent with the allegations." H.J.
Inc. v. Northwestern Bell Tel. Co., 492 U.S. 229, 249-50, 109
S.Ct. 2893, 2906, 106 L.Ed.2d 195 (1989) (quoting Hishon v.
King & Spalding, 467 U.S. 69, 73, 104 S.Ct. 2229, 2232, 81
L.Ed.2d 59 (1984)); Annis v. County of Westchester,
36 F.3d 251, 253 (2d Cir. 1994).
In applying this standard, a district court must "read the
facts alleged in the complaint in the light most favorable" to
the plaintiff and accept these factual allegations as true.
H.J. Inc., 492 U.S. at 249, 109 S.Ct. at 2906; Scheuer v.
Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40 L.Ed.2d 90
(1974); Christ Gatzonis Elec. Contractor, Inc. v. New York City
Sch. Constr. Auth., 23 F.3d 636, 639 (2d Cir. 1994); see also
Leatherman v. Tarrant County Narcotics Intelligence and
Coordination Unit, 507 U.S. 163, 165, 113 S.Ct. 1160, 1163, 122
L.Ed.2d 517 (1993) (citing Fed.R.Civ.P. 8(a)(2) to demonstrate
liberal system of `notice pleading' employed by the Federal
Rules of Civil Procedure).
The court's duty "is merely to assess the legal feasibility of
the complaint, not to assay the weight of the evidence which
might be offered in support thereof." Geisler v. Petrocelli,
616 F.2d 636, 639 (2d Cir. 1980). Accord Goldman v. Belden,
754 F.2d 1059, 1067 (2d Cir. 1985). The appropriate inquiry,
therefore, is not "whether a plaintiff will ultimately prevail
but whether the claimant is entitled to offer evidence to
support the claims." Scheuer, 416 U.S. at 236, 94 S.Ct. at
1686; Ricciuti v. New York City Transit Auth., 941 F.2d 119,
123-24 (2d Cir. 1991) (plaintiff is not compelled to prove his
or her case at the pleading stage).
Additionally, a claimant is not required to set out in detail
the facts upon which he or she bases a claim. Conley v.
Gibson, 355 U.S. 41, 47, 78 S.Ct. 99, 103, 2 L.Ed.2d 80 (1957).
A claimant need only give a statement of his or her claim that
will give defendant "fair notice of what the . . . claim is and
the grounds upon which it rests." Id. Therefore, where a
complaint is filed that charges each element necessary to
recover, dismissal of the case for failure to set out evidential
facts can seldom be warranted. United States v. Employing
Plasterers Ass'n of Chicago, 347 U.S. 186, 189, 74 S.Ct. 452,
454, 98 L.Ed. 618 (1954). Individual allegations, however, that
are so baldly conclusory that they fail to give notice of the
basic events and circumstances of which the plaintiff complains
are meaningless as a practical matter and, as a matter of law,
insufficient to state a claim. Barr v. Abrams, 810 F.2d 358,
363 (2d Cir. 1987). Additionally, as previously noted, on a
motion to dismiss a complaint shall be deemed "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, 220 F.3d at 88-89
It is within this framework that the Court addresses the
I Claims Under the '34 Act In the Amended Complaint,
plaintiffs allege that each of the defendants violated
the provisions of the '34 Act. First, plaintiffs allege that
each of the defendants are primarily liable to plaintiffs under
§ 10(b) and Rule 10b-5 promulgated thereunder. Second, to the
extent the allegations do not support a claim for primary
liability under § 10(b) and Rule 10b-5 against Gorsetman,
Oxbridge, and Win Capital, plaintiffs allege that those
defendants are nevertheless liable under § 20(a) of the '34 Act
as "controlling persons."
A. Primary Liability under § 10(b) and Rule 10b-5
To state a claim under § 10(b) or Rule 10b-5, plaintiffs must
allege the following: defendants made "(1) misstatements or
omissions of material fact; (2) with scienter; (3) in connection
with the purchase or sale of securities; (4) upon which
plaintiffs relied; and (5) that plaintiffs' reliance was the
proximate cause of their injury." In re IBM Corp.,
163 F.3d 102, (2d Cir. 1998). Defendants, all of whom appear to join in
the arguments presented by counsel for Oxbridge and Gorsetman,
challenge the sufficiency of plaintiffs' allegations on a number
of levels. First, defendants contend that none of the notes
purchased by plaintiffs are "securities" under either the '33 or
'34 Acts. Second, defendants maintain that the allegations of
their misrepresentations and omissions pertained only to the
notes, not the URI warrants, and therefore were not "in
connection with" the sale or purchase of a security. Similarly,
defendants assert the alleged misrepresentations and omissions
of defendants Gorsetman and Oxbridge did not occur until months
after the subject transactions and likewise were not "in
connection with" the purchases of securities. Third, defendants
argue that the alleged oral misrepresentations are not
actionable because they contradict written materials provided to
plaintiffs at the time of the purchases. Finally, defendants
assert that the allegations of scienter fail to satisfy the
heightened pleading requirements of Federal Rule of Civil
Procedure 9(b) and § 78u-4(b) of the PSLRA. The Court will
address each of these contentions in turn.
(i) Whether the Notes Issued to Plaintiffs were
"Securities" under the '34 Act.
Section 3(a)(10) of the '34 Act defines a "security", in
relevant part, as "any note" or "warrant", but excludes from its
definition "any note . . . which has a maturity at the time of
issuance of not exceeding nine months. . . ."
15 U.S.C. § 78c(a)(10). As such, defendants argue that since the URI Note
and July 9, 1998 Firestorm Note are short-term notes with a
maturity date of less than nine months, they are a not a
"security" covered by § 10b and Rule 10b-5. Defendants'
literalist approach to this definition, an apparent source of
much discourse among the courts in this circuit and others, has
been explicitly rejected by the Second Circuit. See Zeller v.
Bogue Elec. Mfg. Corp., 476 F.2d 795 (2d Cir.), cert. denied,
414 U.S. 908, 94 S.Ct. 217, 38 L.Ed.2d 146 (1973). In Zeller,
the Second Circuit held that "the mere fact that a note has a
maturity of less than nine months does not take the case out of
Rule 10b-5, unless the note fits the general notion of
`commercial paper'. . . ." Id. at 800. See also Reves v.
Ernst & Young, 494 U.S. 56, 70-71, 110 S.Ct. 945, 108 L.Ed.2d
47 (1990) (declining to determine whether exclusion of
short-term notes in § 3(a)(10) should be given literal effect);
SEC v. American Bd. of Trade, Inc., 751 F.2d 529, 538 (2d Cir.
1984) (noting that decisional law bars a literal reading of §
3(a)(10) and that a note with maturity less than nine months may
be a "security"); cf. Exchange Nat'l Bank v. Touche Ross &
Co., 544 F.2d 1126, 1138
(2d Cir. 1976) (enumerating categories in which notes with a
maturity exceeding nine months may not constitute a "security")
and Chemical Bank v. Arthur Andersen & Co., 726 F.2d 930, 939
(2d Cir. 1984) (same). Following the development of various
approaches by several circuits to the vexing issue of whether a
note constitutes a security under federal securities laws,
significant guidance was finally provided by the Supreme Court
in Reves v. Ernst & Young, 494 U.S. 56, 110 S.Ct. 945, 108
L.Ed.2d 47 (1990).
In determining whether a note fits within the definition of a
"security", courts apply the "family resemblance" test
articulated by the Supreme Court in Reves. See Pollack v.
Laidlaw Holdings, Inc., 27 F.3d 808, 811 (2d Cir. 1994). "Under
the family resemblance test, a note is presumed to be a security
unless the note resembles one of the several
judicially-enumerated instruments that are not securities,"
Id. (citing Reves, 494 U.S. at 65, 110 S.Ct. 945). The types
of notes not included within the definition of a security are:
the note delivered in consumer financing, the note
secured by a mortgage on a home, the short-term note
secured by a lien on a small business or some of its
assets, the note evidencing a character loan to a
bank customer, short-term notes secured by an
assignment of accounts receivable, . . . a note which
simply formalizes an open-account debt incurred in
the ordinary course of business . . . [and] notes
evidencing loans by commercial banks for current
Id. at 812 and fn. 4. Upon reviewing the notes at issue
herein and drawing all reasonable inferences in favor of
plaintiffs, as we must at this juncture, the Court concludes
that they do not fit squarely into one of the enumerated
categories. Specifically, the URI Note issued in connection with
the URI warrants, both of which documents either expressly
incorporate or compel definitional reference to the terms of a
"Purchase Agreement" dated April 11, 1997 between URI and
Oxbridge Capital L.P., render the URI Note dissimilar to any of
the listed categories. Moreover, the July 9, 1998 Firestorm Note
also is dissimilar to any of the enumerated categories in that
it expressly grants plaintiffs an interest in the producer's net
profit as additional consideration. Gorsetman Aff., Ex. F.
Although defendants contend that an interest in profits only was
in consideration for "additional undertakings" to be performed
by Craig Roer, and not the July 9, 1998 Firestorm Note, the July
9, 1998 Letter Agreement clearly states that the share in
profits is "in exchange for the extension of the Loan and
[plaintiffs'] additional undertakings set forth [herein]".
Gorsetman Aff., Ex. G (emphasis added).