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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,
V.
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.

          MEMORANDUM AND ORDER

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

I FACTUAL BACKGROUND

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.

II PROCEDURAL HISTORY

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) (citations omitted).

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 present motions.

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.

First, Defendants contend that the allegations fail to allege any misstatement or omission made by the Defendants. Defendants further argue that any such allegations of a misstatement or omission are not adequately particularized pursuant to the heightened pleading requirements of Federal Rule of Civil Procedure 9(b) ("Rule 9(b)") and Section 78u-4(b) of the Private Securities Litigation Reform Act ("PSLRA"), and that Plaintiffs' filing of the Amended Complaint with Defendants grouped together must fail because the separate acts set forth by each defendant have not been pleaded. Second, Defendants argue that the Amended Complaint fails to allege facts supporting a strong inference that Defendants acted with scienter. Third, Citrin, Werblin and Reilly argue that Plaintiffs' attempted imposition of aiding and abetting liability is impermissible. Fourth, Defendants maintain that Plaintiffs have not alleged facts sufficient to sustain their "control person" claim under Section 20(a) of the Exchange Act. Finally, Smith's arguments for dismissal, other than those previously set forth, include: (1) The only statement attributable to Smith is not actionable; (2) Plaintiffs have failed to establish reasonable reliance on Smith's statement; and (3) Smith contends that liability pursuant to Section 18(a) of the Exchange Act is inapplicable because he has not filed any document pursuant to the Exchange Act nor have Plaintiffs alleged as much. The Court will address each contention in turn.

(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 ...


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