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IN RE STERLING FOSTER & CO.

June 27, 2002

IN RE STERLING FOSTER & CO., INC. SECURITIES LITIGATION, THIS DOCUMENT RELATES TO: JOE L. PRICE, PLAINTIFF,
V.
STERLING FOSTER & COMPANY, INC. FRANK MONROIG, TIMOTHY J. MATTHEWS, ATHANNASIOS DOGANTZIS, AND JASON JOHN MAROWSKI, DEFENDANTS.



The opinion of the court was delivered by: Spatt, District Judge.

          ORDER

The complaint arises out of claims by the Joe L. Price ("Price" or the "plaintiff") that Sterling Foster & Company, Inc. ("Sterling Foster"), Adam R. Lieberman ("Lieberman"), Frank Monroig ("Monroig"), Timothy J. Matthews ("Matthews"), Jason John Marowski ("Marowski") (collectively, the "Sterling Foster Defendants"), Athannasios Dogantzis ("Dogantzis"), and Bear Stearns Securities Corp. ("BSSC") (collectively, the "defendants") violated the Securities Act of 1933 (the "Securities Act"), 15 U.S.C. § 771(a)(2); the Securities and Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78j(b); the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1962; the Texas Securities Act; the Texas Business and Commerce Code; and the Texas Deceptive Trade Practices Act. This action also alleges common law claims for fraud and breach of contract. Presently before the Court are motions by the Sterling Foster Defendants and BSSC to stay, transfer, and/or dismiss the complaint.

I. BACKGROUND

A. The Procedural Nature of the Case

Price commenced this case on August 5, 1997, by filing a complaint in the United States District Court for the Eastern District of Texas, Texarcana Division. On October 9, 1997, an unexecuted return of service for Dogantzis was filed with the Court. Dogantzis has not appeared in this action. On November 26, 1997, the Sterling Foster Defendants filed a motion to stay, transfer or dismiss the action; on December 17, 1997, Price filed his opposition papers; and on January 5, 1998, the Sterling Foster Defendants filed their reply papers.

On January 5, 1998, BSSC filed a motion to stay or dismiss the action; and on February 17, 1998, Price filed his opposition papers.

One day later, on February 18, 1998, the Judicial Panel on Multidistrict Litigation ("J.P.M.L.") granted a motion by Sterling Foster to centralize a number of actions, including the present one, pursuant to 28 U.S.C. § 1407 for coordinated and consolidated pretrial proceedings in the Eastern District of New York. The J.P.M.L. also transferred the cases to the Eastern District of New York and assigned the Multidistrict Litigation to this Court. Therefore, when the present case was assigned to this Court, the motions by the Sterling Foster Defendants and BSSC were pending. On March 12, 1998, BSSC filed with this Court its reply papers in support of its motion to stay or dismiss the action.

B. The Complaint

The following facts are taken from the complaint. In March 1995, Price opened an account with Sterling Foster. Lieberman was Sterling Foster's President and a registered General Securities Principal. Monroig, Matthews, and Marowski were Sterling Foster employees and/or officers and were General Securities Principals and Representatives with Sterling Foster. Although the complaint does not specifically describe Dogantzis' role at Sterling Foster, it appears from the allegations contained therein that Dogantzis was a broker. The complaint alleges that Lieberman, Monroig, Matthews, Dogantzis, and Marowski participated in deceptive trade practices and fraudulent and manipulative sales practices. The complaint further asserts that Sterling Foster representatives and employees made numerous misrepresentations to Price in order to persuade him to purchase stock; omitted material facts when they sold stock to him; misled Price in regard to all aspects of Sterling Foster's firm, business and the methods they used to buy and sell securities (complaint ¶¶ 16-19).

On a date that is not specified in the complaint, a representative from Sterling Foster sold Price $528,161 of common stock in Embryo Development Corporation ("Embryo"). Monroig instructed Sterling Foster employees to tell clients that Sterling Foster would honor stop loss orders because they were "good selling points" (complaint ¶ 14). Price sent Sterling Foster a letter via certified mail instructing Sterling Foster to sell the stock when it dropped to a certain price.

Dogantzis received Price's letter and asked Monroig what steps he should take. Monroig rolled his eyes and said, "`Oh don't worry, just let the traders run it, we'll worry about it later'" (complaint ¶ 14). Sterling Foster did not honor Price's stop loss order causing him to suffer financial losses in excess of $219,435.

When Price asked Dogantzis why Sterling Foster had not honored his stop-loss order, Doganzis replied that if he had executed the order and, thus, sold Price's shares, the stock would have "tank[ed]" (complaint ¶ 14). On March 19, 1996, Price asked Matthews why Sterling Foster had not executed his stop-loss order. Matthews explained that even with the stoploss order, he needed Price's consent to sell, and Price was unavailable to give his consent. On December 18, 1996, Monroig told Price that if Sterling Foster had executed the "stop-loss" order, the stock may have declined somewhat in value. Monroig maintained that, ultimately, the price of the stock would have risen, and Price would have been angry and disappointed that Sterling Foster had executed the stop-loss order.

After Price lost money as a result of investing through Sterling Foster, its employees and representatives offered him "hot deals" purported to help him recover his losses. On April 26, 1996, Matthews said that he would infuse Price's account with capital as early as the following week in order to compensate him for the losses he incurred from selling the Embryo stock.

On June 14, 1996, Monroig told Price that Sterling Foster could make him $525,000 in approximately four-to-six months. Later in the conversation, Monroig said that he would make Price the sum of $100,000 in thirty days as a showing of good faith. Monroig also stated that if Sterling Foster failed to make $200,000 for Price in sixty days, then Price could file a lawsuit. Monroig summed up his position by stating, "`You know, I mean, you give us the opportunity to take care of what we need to take care of on our end, if, if we can't take care of it, you can litigate the case'" (complaint ¶ 20).

Various Sterling Foster employees and representatives suggested to Price that Sterling Foster could manipulate the price of various stocks. On January 11, 1996, Matthews told Price that on January 22, 1996, he would purchase 160,000 shares of Embryo common stock for the sum of $1.6 for one of his accounts. Therefore, explained Matthews, he knew that "`volume [was] coming into the stock'" (complaint ¶ 21). Price asked Matthews why he was waiting until January 22, 1996 to purchase the shares. Matthews replied that in order to establish a tax loss, he had to wait 30 days from the date he sold the stock to buy it back. Matthews also said that the client on whose behalf Price was purchasing the stock would have the money for the purchase "freed up" on January 22, 1996 (complaint ¶ 21),

Matthews indicated to Price that Sterling Foster could "`pre-arrange a profit in an IPO for Price'" by "cost averaging big blocks" of stock. Markowski told Price that instead of investing in an IPO, he would "`get [Price] in an in and out situation. Meaning, we're gonna buy the stock when it opens up for public trading and we're going to have the stock out of your account by the end of the day . . . Might be only two or three points . . . but these guys are doing whatever they've gotta do to make me money'" (complaint ¶ 21).

Dogantzis told Price, on more than one occasion, that Sterling Foster controlled the market and could guarantee that the price of a stock would rise. In one conversation, Dogantzis said that two-and-one-half-to-three-million shares of the stock would be purchased the following day, driving the price of the shares up eleven or twelve dollars. Dogantzis also told Price that when Lieberman "needs a paycheck," he tells Monroig to instruct the Sterling Foster's 400 brokers to "aggressively recommend" shares in a particular company. Dogantzis also explained that when 400 brokers are recommending a single stock, the price of that stock rises three or four points.

On May 6, 1996, Dogantzis explained that Sterling Foster could manipulate the market in a stock by telling 300 of their brokers to buy 2 million shares of stock. Regardless of what the company does, Sterling Foster's massive purchasing results causes the price of the stock to rise. Once Sterling Foster stops buying the shares, there is no interest in the stock.

The complaint also alleges that the Sterling Foster Defendants and Dogantzis misrepresented the commissions, mark-ups, or mark-downs they were charging Price. Dogantzis told Price that Sterling Foster did not charge commissions but rather charged a markup or markdown on the stock (complaint ¶ 22).

Price further claims that the Sterling Foster Defendants and Dogantzis made purchases and sales in his account without his permission (complaint 23). After Sterling Foster made an unauthorized purchase of ML Direct stock on behalf of Price, he contacted Monroig to request an explanation for the purchase. Monroig said that, "`maybe I did, in fact, contact you afterward. But . . . you're a tough guy to get hold of . . . So maybe the fact is, maybe I didn't contact you until a day or two after or a couple, or five days from what you're telling me'" (complaint ¶ 23).

After Matthews made an unauthorized purchase and sale in Price's account, he told Price, "`I just wanted to try to get you as much money as I possibly could as far as a differential in any buys and sells that we had to do to make sure we could take care of your tax liability'" (complaint ¶ 23).

The complaint also alleges that Sterling Foster, Lieberman, Monroig, Mattews, Dogantzis, and Marowski failed to follow Price's instructions to sell stocks and liquidate positions; used manipulative trading practices; employed boiler room sales techniques; and conducted improper underwritings (complaint ¶¶ 24-26). It also alleges that Lieberman, Monroig, and Matthews failed to supervise the brokers handling Price's account and, in fact, instructed their brokers to make material misrepresentations. Price claims that the stocks Sterling Foster sold him were not registered for sale under the Texas Securities Act (complaint ¶ 15).

Price invested approximately $721,846 with the Sterling Foster Defendants and Dogantzis. He relied on the knowledge and expertise of Sterling Foster's employees and representatives to provide him with reasonable investment services and, as a result, lost more than $325,082.

BSSC was Sterling Foster's clearing firm. In that position, BSSC carried all of Sterling Foster's trades on its books, and all of Price's cash payments were made to BSSC. As such, Price alleges that BSSC "played an integral part in the fraudulent sales practices" (complaint ¶ 32). Because Sterling Foster was manipulating the market for most of the securities in Price's account, there was no independent competitive market existed for those stocks. Accordingly, the only reliable basis for determining the prevailing market price of each of these stocks was the price Sterling Foster paid for them. As such, the valuations listed on BSSC's monthly statements were based on Sterling Foster's market manipulation and, thus, were unrealistic valuations. BSSC was aware that Sterling Foster was manipulating the prices of the stocks and that the valuations they were reporting were not reliable. Accordingly, Price alleges that BSSC assisted in, and benefitted from, Sterling Foster's fraudulent practices.

In addition, BSSC did not disclose material conflicts of interest to Price. Richard Harriton, the officer in charge of BSSC's clearing operations, was the father of one Matthew Harriton, who was Embryo's Chief Financial Officer. Price lost the approximate sum of $219,435 as a result of his investment in Embryo.

It appears that Prices raises nine claims for relief. The first claim alleges that the defendants violated Section 10(b) of the Exchange Act by employing manipulative and deceptive devices in connection with the purchase and sale of securities. Price also asserts that Lieberman, Monroig, and Matthews were "control persons" within the meaning of Section 15 of the Securities Act, 15 U.S.C. § 770, and Section 20 of the Exchange Act, 15 U.S.C. § 78t(a). As part of the same claim, Price alleges that Sterling Foster, Lieberman, Monroig, Matthews, and BSSC are liable under the theory of respondeat superior.

In the second claim, Price alleges that the defendants violated Article 581-7 of the Texas Securities Act by selling him securities that were not registered for sale in Texas. The third claim alleges that the defendants violated Article 581-33 of the Texas Securities Act by selling securities by means of misrepresentations or omissions of material facts.

As fourth and fifth claims for relief, Price asserts common law fraud and breach of contract, respectively. In his sixth claim for relief, Price alleges statutory fraud under Texas Business and Commerce Code Sec. 27.01. As a seventh claim, Price alleges that the defendants violated four sections of the Texas Deceptive Trade Practices Act, see §§ 17.46(b)(2), (5), (7), (24), and as an eighth claim, Price contends that the defendants violated section 17.50(a)(3) of the same statute.

In his ninth claim, Price asserts civil RICO violations by the defendants under 18 U.S.C. § 1962.

II. DISCUSSION

A. The Motions to Stay or Transfer the Action

The motion filed by the Sterling Foster Defendants requests, among other things, that the Court: (1) stay the action pending the resolution of the "first-filed proceedings" in the Eastern District of New York; or (2) transfer the case to the Eastern District of New York. BSSC also moves for a stay of the proceedings pending resolution of the various actions previously filed in the Eastern District of New York. Since the defendants filed their motions, the J.P.M.L. transferred the case to this Court for coordinated pretrial proceedings with the other actions in the Multidistrict ...


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