The opinion of the court was delivered by: Swain, District Judge.
15 U.S.C.A. § 78u-4(b) (West Supp. 2001). It is not sufficient
for a plaintiff to plead scienter with allegations that are
conclusory or based upon speculation. Rather, a "strong
inference" may arise only where a plaintiff alleges either (1)
facts showing that defendants had both motive and opportunity to
commit fraud; or (2) facts constituting strong circumstantial
evidence of conscious misbehavior or recklessness. See Suez
Equity Investors, L.P. v. Toronto-Dominion Bank,
99-100 (2d Cir. 2001); Rothman v. Gregor,
, 90 (2d
Cir. 2000). As the Second Circuit explained, courts have found
"strong inference" of scienter where the complaint alleged
sufficiently that the defendants: benefitted in a concrete and
personal way from the purported fraud; engaged in deliberately
illegal behavior; knew facts or had access to information
suggesting that their public statements were not accurate; or
failed to check information they had a duty to monitor. Novak
, 311 (2d Cir. 2000).
The complaint refers to the general release executed by
Plaintiffs in connection with the transfer of their holdings in
NewVest and the LLCs. (Compl. ¶ 52.) Defendant Stahl argues that
the Court should deem the release "integral" to the complaint
and, on the basis of its provisions, dismiss this action as
contractually barred. (Def. Stahl Mem. of Law in Supp. of Mot.
to Dismiss Compl. at 21-26.) The Court declines to do so. A
release, like any contract, can be vitiated if induced by fraud.
See, e.g., Bushkin, Gaims, Gaines, Jonas & Stream v. Garber,
677 F. Supp. 774, 776 (S.D.N.Y. 1988) (explaining that "the
`ritualistic' language of releases will not bar claims if the
release was the result of fraud or mutual mistake"). Under New
York law, a release may be set aside if induced by fraud.
Barrett v. United States, 622 F. Supp. 574, 584 (S.D.N.Y.
1985). To show fraud in the inducement, plaintiff must prove
that: there was a misrepresentation of material fact; the
representation was in fact false and was known to be false at
the time it was made; the misrepresentation was made for the
purpose of inducing plaintiff to rely on it; plaintiff did, in
fact, rely on the misrepresentation; and plaintiff was caused
injury as a proximate result of the misrepresentation or
concealment. Id.; Barrett v. United States, 660 F. Supp. 1291,
1309 (S.D.N.Y. 1987). Here, Plaintiffs allege that they were
induced by fraud to assign their NewVest stock and related LLC
interests to defendant Stahl. In connection with that very
assignment, Plaintiffs executed the release upon which defendant
Stahl now relies. In light of Plaintiffs' allegations concerning
the circumstances leading up to the execution of the release,
the release is not an appropriate basis for dismissal of the
action because Plaintiffs may be able to establish that it
should be abrogated as the product of fraud in the inducement.
See Aiena v. Olsen, 69 F. Supp.2d 521, 539 (S.D.N.Y. 1999).
In deciding whether to exercise supplemental jurisdiction over
the state law claims asserted by Plaintiffs in the Second
through Eleventh Causes of Action, the Court has discretion.
See Mauro v. Southern New England Telecomm., Inc.,
208 F.3d 384, 388 (2d Cir. 2000); Purgess v. Sharrock, 33 F.3d 134, 138
(2d Cir. 1994). Section 1367(a) of Title 28, establishing the
supplemental jurisdiction of the district court, provides, in
part, that the "district courts shall have supplemental
jurisdiction over all other claims that are so related to claims
in the action within [the courts'] original jurisdiction that
they form part of the same case or controversy." 28 U.S.C.A. §
1367(a) (West Supp. 2001). The "[d]istrict courts may
[,however,] decline to exercise supplemental jurisdiction over a
claim . . . if . . . (2) the claim substantially predominates
over the claim or claims over which the district court has
original jurisdiction." 28 U.S.C.A. § 1367(c)(3) (West Supp.
2001). The discretion implicit in the word "may" in subdivision
(c) of Section 1367 allows the court to consider whether an
exercise of jurisdiction is justified by the interests of
judicial economy, convenience, fairness to litigants, and
comity. See Carnegie-Mellon Univ. v. Cohill, 484 U.S. 343, 350
n. 7, 108 S.Ct. 614, 98 L.Ed.2d 720 (1988); Purgess, 33 F.3d
Here, the common law claims in the Second through Fifth Causes
of Action relate directly to the assignment of NewVest stock
that forms the basis of the Plaintiffs' First Cause of Action.
The First Cause of Action alleges fraud in violation of Section
10(b) of the Exchange Act and Rule 10b-5, over which claim the
Court has exclusive jurisdiction. Finkielstain v. Seidel,
857 F.2d 893, 896 (2d Cir. 1988). As noted above, all of Plaintiffs'
interests in the NewVest-related entities were transferred at
the same time, pursuant to the same Assignment Agreement.
(Compl. ¶ 51.) Furthermore, it appears that issues as to the
value of the NewVest stock transferred would implicate the value
of the LLCs, in that the Stockholders Agreement provided that
all net profits of the LLCs would be channeled through the
corporation. (St. Agrmt. at 2.)
Plaintiffs' state law claims in the Second through Fifth
Causes of Action are, accordingly, so related to their federal
claims as to form part of the same case or controversy as
required by section 1367(a). The Second Cause of Action asserts
common law fraud and fraud in the inducement by defendants
Savastano and Stahl, relating to the transfer of interests in
the NewVest entities to defendant Stahl. The Third Cause of
Action asserts breach of fiduciary duty under the parties'
Stockholders Agreement by these defendants, also allegedly
resulting in the conveyance of interests in NewVest to defendant
Stahl. The Fourth Cause of Action asserts breach of contract by
defendant Savastano, for failure to disclose information, which
failure is alleged to have directly resulted in Plaintiffs'
conveyance of their interests. The Fifth Cause of Action,
against defendants Savastano and Stahl alleges breach of
contract and implied covenant of good faith and fair dealing,
again relating to the alleged failure to disclose material
information relating to NewVest's investment portfolio. Because
Plaintiffs federal claim as related to the transfer of corporate
stock in NewVest has "survived defendants' motions to dismiss,
plaintiffs' [related] state law claims cannot be said to
predominate for purposes of Section 1367(c)(2)." Marisol A. by
Forbes v. Giuliani, 929 F. Supp. 662, 686 (S.D.N.Y. 1996). For
the foregoing reasons, supplemental jurisdiction is proper and
this Court hereby exercises that jurisdiction over plaintiffs'
common law claims asserted in the Second through Fifth Causes of
Action to the extent those claims relate to the transfer of
interests in NewVest entities pursuant to the Assignment
Judicial economy would not be served, however, by the exercise
of jurisdiction over the state law claims in the Sixth through
Eleventh Causes of Action, because resolution of the issues
raised in those claims is not necessary to resolution of the one
federal claim. Moreover, these common law claims do not arise
from the same nucleus of operative facts as the surviving
federal securities law claim — the assignment of NewVest stock.
See Burke v. Dowling, 944 F. Supp. 1036, 1070 (E.D.N.Y. 1995)
(court would not exercise supplemental jurisdiction over state
law claims arising from securities transactions distinct from
those transactions from which federal claims arose). Plaintiffs'
Sixth through Eleventh Causes of Action involve issues of fact
and law far more wide-ranging, and dealing with a larger group
of persons, than those implicated by the federal claims. The
proof required to decide these state law claims is thus much
different from, and to a significant extent broader than, that
required for resolution of the federal claims. See McConnell v.
Costigan, No. 00-4598, 2000 WL 1716273, at *4-5 (S.D.N.Y. 2000).
The parties have a convenient, competent state forum in which
these state law issues can be resolved and there is nothing
unfair in requiring them to look to that forum. Plaintiffs'
common law claims as asserted in the Sixth through Eleventh
Causes of Action will therefore be dismissed without prejudice.
For the foregoing reasons, the Defendants' motions to dismiss
are denied, insofar as brought pursuant to Federal Rule of Civil
Procedure 12(b)(1) and 12(b)(6) and Federal Rule of Civil
Procedure 9(b), with respect to Plaintiffs' First through Fifth
Causes of Action, alleging fraud in violation of Section 10(b)
of the Exchange Act and Rule 10b-5, in so far those causes of
action relate to the transfer of interests in NewVest and the
LLCs pursuant to the Assignment Agreement. The motion to dismiss
is granted pursuant to Rule 12(b)(6) with respect to the First
Cause of Action insofar as Plaintiffs' federal securities law
claim is premised on the transfer of their interests in the
LLCs. The Court declines to exercise supplemental jurisdiction
over Plaintiffs' Sixth through Eleventh Causes of Action.
Accordingly, the state law claims asserted in the Sixth through
Eleventh Causes of Action are dismissed without prejudice. In
that the only claims asserted against defendants Marks Paneth &
Shron LLP, Steven Eliach, Timothy E. Andrews, Thelen Reid &
Priest LLP and Harry G. Heching appear in the Ninth, Tenth and
Eleventh Causes of Action, this case is dismissed as against
those defendants, without prejudice, in its entirety and the
caption shall be amended accordingly.
IT IS SO ORDERED.