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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,
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.
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
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
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
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
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
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).
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
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.
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 ...