The opinion of the court was delivered by: THOMAS PLATT, JR., Senior District Judge
Defendants Richard Grossman, Richard Stuart Caterers, and Richard
Stuart Kosher Caterers move under the Federal Rules of Civil Procedure,
the Private Securities Litigation Reform Act of 1998 ["PSLRA"] and the
Sarbanes-Oxley Act of 2002 to dismiss the Amended Complaint of Plaintiffs
Meir Babaev and Michael Arbiv. Plaintiffs sued Defendants for fraud under
the Securities Exchange Act of 1934, and for State claims of breach of
contract, common law fraud and negligent misrepresentation. Oral argument
was heard April 2, 2004. For the following reasons, Defendants' motion is
This case involves the proprietors of a catering service who are
alleged to have fraudulently induced the proprietors of a waiter service
to purchase a 10% interest in the catering business. Both businesses
served religious celebrations at Jewish temples. Defendants allegedly promised Plaintiffs more frequent use of
the waiter service by the catering service in exchange for Plaintiffs'
investment in Defendants' business, as well as returns upon the
investment itself. See Defendants' Memorandum of Law in
Support of their Motion to Dismiss at 2-4.
Defendants allegedly told Plaintiffs that the business of the catering
service was about to expand and to become "a cash cow." However, the
catering service's business was in fact about to contract. Known to
Defendants, but unbeknownst to Plaintiffs, was the fact that a large
temple was severing its relationship with Defendants because the caterers
allegedly served non-kosher food to the temple's congregants. Plaintiffs
now seek a return of their investment of $133,609, plus interest, as well
as their costs. See id.; see also Plaintiffs' Brief in
Opposition to Defendant's Motion to Dismiss at 2-8.
The events at issue took place in 2001. Plaintiffs filed their original
Complaint in October 2003, and an Amended Complaint in December 2003. The
Complaint states that an employee of Defendants informed Plaintiffs that
Defendants "had defrauded them, in or about August/September 2001."
Complaint at ¶ 23. The Amended Complaint states that "about the first
week or so of November 2001," the same employee indicated "that he believed that all of Grossman's
representations were intentionally false and made to induce Plaintiffs to
make the required capital investment." Amended Complaint at ¶¶ 48, 51.
A. Regulations, rules and statutes
Federal Rule of Civil Procedure 12(b)(6) provides that a complaint may
be dismissed for failure to state a claim upon which relief may be
Section 10(b) of the Securities Exchange Act provides that it shall be
unlawful for a defendant, acting with scienter, to use in connection with
the sale of a security a deceptive device in contravention of the rules
of the Securities and Exchange Commission, such as a false statement or
the omission of a material fact. See 15 U.S.C. § 78j(b);
17 C.F.R. § 240.10b-5. The PSLRA provides that in alleging falsehoods or
omissions, a complaint shall specify the falsehood or omission, why its
is misleading, and state facts strongly inferring fraudulent intent.
See 15 U.S.C. § 78u-4(b). And Sarbanes-Oxley provides that no
securities fraud claim may be brought later than two years after the
discovery of the violation. See 28 U.S.C. § 1658(b)(2).
Sections 1332 and 1367 of Title 28 of the United States Code provide
that district courts have original jurisdiction of civil actions where
the matter in controversy exceeds $75,000 and is between citizens of different
States, and also have supplemental jurisdiction over related claims
forming part of the same controversy. District courts may decline to
exercise supplemental jurisdiction over such related claims ...