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CYBER MEDIA GROUP, INC. v. ISLAND MORTGAGE NETWORK
January 15, 2002
CYBER MEDIA GROUP, INC., DAVID MARCUS INDIVIDUALLY AND ON BEHALF OF LEONARD DREW, BRIAN WEINSTEIN, DOM GRAFFEO, DONALD BERMAN, HOWARD GREENBERG, LESTER MORSE, STEVEN MORSE, RANDY AMUS, ROGER GRUBER, ALDEN GREENLAWN, THOMAS SIFFORD, FRANCIS SIFFORD, JAMES ZELINSKI, GREG SABLIC, ROBERT FROME, MICHAEL WAINSTEIN, ARNOLD, GREENBERG, JACK SCHWARTZ, ROBERT FRIEDLAND, CLICK HERE TO ADVERTISE, INC., BLUE FOUNTAIN, INC., PETER MITAS, TIM NIELSON, GABRIEL LIBUTTI, STEVEN HOLMAN, JAN HOLMAN, PHILIP CARUSO, KEVIN KENT, COLUMBIA EQUITIES LTD., ETJ, INC., SEAN DODICK, LEADS DIRECT PATH INC., NEW MILLENNIUM ADVERTISING, INC., LUXE, INC., MAIN FRAME CONSULTING, INC., JAMES VARVARO, LOGON ENTERPRISES, INC., VITO FORACI, PLAINTIFFS,
ISLAND MORTGAGE NETWORK, INC., APPONLINE.COM, INC., EDWARD CAPUANO, PATRICK A. REILLY, JEFFREY SKULSKY, PAUL SKULSKY, CINDY EISELE, WERBLIN, CASUCCIO & MOSES, P.C., CITRIN, COOPERMAN & COMPANY, LLP, AND COURTNEY SMITH, DEFENDANTS.
The opinion of the court was delivered by: Seybert, District Judge.
The above named plaintiffs ("Plaintiffs") commenced this action on July
17, 2000 through filing a complaint and requesting that the Court issue
an order to show cause. Briefly, Plaintiffs allege in their initial
complaint that the above named defendants "knowingly and intentionally
communicated . . . misleading and false statements of material facts to
Cyber Media during negotiations wherein shareholders of Cyber Media would
"obtain shares of [Apponline.com, Inc. (`AOP')] in exchange for their
respective shares of Cyber Media." Compl. at ¶¶ 35 and 46.
Presently pending before the Court are four separate motions to dismiss
made by certain of the defendants.*fn1
In or about December 1999, AOP and Cyber Media Group, Inc. ("Cyber
Media") began negotiating the terms of a stock purchase agreement,
whereby AOP would offer shares of its common stock in exchange for common
stock held by shareholders of Cyber Media. See Amended Complaint
(hereinafter referred to as "Am. Comp.") ¶ 35. AOP was represented
in the negotiations by various individuals, including Capuano, Jeffrey
Skulsky, Paul Skulsky and Reilly. Id. at ¶ 36. Cyber Media and AOP
entered into an exclusivity agreement on February 8, 2000, which barred
Cyber Media from negotiating with any other prospective buyers for a
period of thirty days. Shortly thereafter, an agreement was reached
whereby AOP would purchase the outstanding shares of Cyber Media stock
using AOP stock and options (the "SPA"). Id. at ¶¶ 39-41.
Plaintiffs' first cause of action alleges common law fraud and is
asserted against defendants, Capuano, Reilly, Jeffrey Skulsky, Paul
Skulsky, Eisele, Werblin, Citrin and Smith, Plaintiffs' second cause of
action alleges violations of Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 (the "Exchange Act") and is asserted against
defendants Capuano, Reilly, Jeffrey Skulsky, Paul Skulsky, Eisele,
Werblin, Citrin and Smith. Plaintiffs' third cause of action alleges
violations of Section 18(a) of the Exchange Act and is asserted against
defendants Capuano, Reilly, Jeffrey Skulsky, Paul Skulsky, Eisele and
Smith. Plaintiffs' fourth cause of action alleges violations of the
Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1961
et. seq. ("RICO") and is asserted against defendants Capuano, Reilly,
Jeffrey Skulsky, Paul Skulsky, Eisele, Werblin, Citrin and Smith.
Plaintiffs' fifth cause of action alleges violations of Section 349 of
the New York General Business Law and is asserted against defendants
Capuano, Reilly, Jeffrey Skulsky, Paul Skulsky, Eisele, Werblin, Citrin
and Smith. Plaintiffs' sixth cause of action alleges breach of
Defendants' covenant of good faith and fair dealing and is asserted
against defendants Capuano, Reilly, Jeffrey Skulsky, Paul Skulsky,
Eisele, Werblin, Citrin and Smith. Plaintiffs' seventh, eighth and ninth
causes of action each allege breach of contract and each is asserted
against defendants Capuano, Reilly, Jeffrey Skulsky, Paul Skulsky and
Eisele. Finally, Plaintiffs' tenth cause of action alleges unjust
enrichment and is asserted against defendants Capuano, Reilly, Jeffrey
Skulsky, Paul Skulsky, Eisele, Werblin, Citrin and Smith.
Plaintiffs set forth a number of specific allegations to support their
numerous claims. The incidents for which Plaintiffs have brought suit are
alleged to have begun in December 1999 when negotiations over the terms
of the SPA commenced and are alleged to have continued through the actual
signing of the SPA on March 10, 2000. Plaintiffs allege that during the
negotiation period, Defendants misrepresented the financial condition of
AOP through statements made both orally and in writing. See Am. Comp. at
¶ 48. Specifically, Plaintiffs claim that AOP did not disclose, or
materially misrepresented, to Plaintiffs certain alleged risk factors,
including: the net worth and value of AOP, which was stated in various
publically filed forms; the fact that the New York State Department of
Banking was conducting an ongoing investigation into alleged fraudulent
business operations; that various title insurance companies would not
accept non-certified funds from defendants; that AOP had acquired a
minimum of twenty five mortgage banking and brokerage firms in the recent
past; and that AOP was engaged in deceitful business practices. See id.
Plaintiffs allege that all material misstatements were intentionally made
and were designed to induce Plaintiffs to enter into the SPA and to
artificially inflate the price of AOP stock. See id. at ¶¶ 49-51.
Set forth below are Plaintiffs' specific allegations as categorized in
the Amended Complaint.
A. Alleged False and Misleading Statements Made in
Publically Filed Documents
Plaintiffs allege that Werblin, which prepared and audited AOP's
prospectus, dated January 14, 2000 ("Prospectus"), Form 10-QSB for the
Fiscal Period Ended March 31, 1999 ("March 10Q"), Form 10-QSB for the
Fiscal Period Ended June 30, 1999 ("June 10Q") and Form 10-QSB for the
Fiscal Period Ended September 30, 1999 ("September 10Q") (March 10Q, June
10Q and September 10Q shall be referred to collectively herein as
"Forms 10Q"), intentionally ignored, or failed to investigate and include, AOP's
true financial condition in such publically filed forms. See id. at
¶¶ 57-87. Plaintiffs further allege that Capuano, Reilly, Jeffrey
Skulsky and Paul Skulsky intentionally mislead Plaintiffs through the
issuing of the aforementioned false and misleading statements in
connection with the preparation and authorization of the filing of the
Prospectus and Forms 10Q and that Plaintiffs relied upon such
statements. See id. at ¶¶ 57-87.
B. Plaintiffs' Allegations of Verbal Misrepresentations
Plaintiffs allege that Paul Skulsky intentionally misrepresented that
AOP planned to establish an internet division of its services and that
such plans were also asserted in press releases dated March 16, 2000 and
March 20, 2000. See id. at ¶¶ 90-91. Moreover, Plaintiffs allege that
Defendants "had knowledge of AOP's actual financial condition at the time
of the preparation and filing of its Forms 10Q and 10-K yet authorized
its filing and continued to mislead and intentionally communicate false
information during the negotiation period." Id. ¶ 95.
C. Other Alleged Acts, Omissions and Misrepresentations
Plaintiffs allege that Smith engaged in negotiations in October 1999
with a venture capital fund that held stock in AOP in an effort to become
CEO of the venture capital fund, Inculab. See id. at ¶¶ 104-06.
Plaintiffs further allege that as part of Smith's compensation for his
duties as CEO of Inculab, he was to receive stock in Inculab, which value
was directly tied to the value of the stock of AOP. See id. at ¶¶
106-09. Plaintiffs assert that the stock price of AOP increased because
Smith noted on CNN that AOP was a "double your money stock." Id. at
111-112. Finally, Plaintiffs assert that the principals of Cyber Media
were directed to watch CNN when Smith was to name AOP as a "double your
money stock" and that such statements caused AOP's stock price to surge,
which in turn caused Inculab's asset value to increase, thereby
increasing the value of the compensation package offered to Smith by
Inculab. See id. at ¶¶ 112-115.
As previously noted, Plaintiffs commenced suit by filing a complaint
and requesting that the Court issue an order to show cause. The return
date for. Plaintiffs' order to show cause was adjourned indefinitely as a
result of Island and AOP's pending bankruptcy proceedings. The remaining
parties were directed by the Court to submit briefs on the issue of
whether the action should proceed without Island and AOP. Subsequently,
following multiple stipulations and orders of the Court dismissing the
pending motions without prejudice and adjourning the time in which to
answer and/or respond to the complaint and granting a stay during the
pendency of certain bankruptcy proceedings, the action was restored to the
Court's calendar by stipulation and order of the parties signed by the
Court on January 25, 2001. Following the Court's lifting of the stay,
Plaintiffs filed an amended complaint
and a revised amended complaint on July 26, 2001.*fn2 Subsequently, all
pending motions were restored to the calendar.
III DEFENDANTS' MOTIONS TO DISMISS
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 the 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), overruled on other grounds by Harlow v.
Fitzgerald, 457 U.S. 800, 102 S.Ct. 2727, 73 L.Ed.2d 396 (1982); 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
[amended] 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) (noting that 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. See Barr v. Abrams, 810 F.2d 358, 363 (2d
Cir. 1987). Additionally, 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 v. Gregor, 220 F.3d 81, 88-89 (2d Cir. 2000)
Defendants Citrin, Werblin, Reilly and Smith have each moved to dismiss
Plaintiffs' Amended Complaint in four separate motions. Each motion
alleges that Plaintiffs have failed to allege a cause of action upon
which relief can be granted as to each of the claims asserted in the
Amended Complaint with respect to each defendant*fn3. With respect to
certain of the claims, the Court will address each defendant's claim
individually, however, where appropriate, the Court will address the
claims in a consolidated manner.
It is within the framework set forth above that the Court addresses the
A. Federal Securities Law Claims
(1) Securities Fraud Claim pursuant to Section 10(b)
of the Exchange Act
To state a claim under Section 10(b) or Section 10b-5*fn4, Plaintiffs
must allege that: 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 [P]laintiffs relied; and (5) that
[P]laintiffs' reliance was the proximate cause of their injury." IBM
Corp. Sec. Litig., 163 F.3d 102, 106 (2d Cir. 1998) (quoting Time Warner
Inc. Sec. Litig., 9 F.3d 259, 264 (2d Cir. 1993)). Defendants Werblin,
Citrin and Reilly challenge the sufficiency of Plaintiffs' allegations on
a number of levels. Smith similarly challenges the sufficiency of
Plaintiffs' allegations but bases his challenges on different grounds.
(a) Misstatements or Omissions made by Defendants and
Heightened Pleading Requirements Rule 9(b) and
Section 78u-4(b) of the PSLRA.
Plaintiffs alleging fraud pursuant to Section 10b-5 must plead that
Defendants made a misstatement or omission of material fact. Rule 9(b)
and the PSLRA each require fraud to be pleaded with particularity.
Moreover, where violations by multiple defendants are alleged, Plaintiffs
must set forth the specific nature of each defendant's participation in
the alleged ...