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ATO RAM, II, LTD. v. SMC MULTIMEDIA CORP.

April 6, 2004.

ATO, RAM, II, LTD., a limited partnership, Plaintiff, -against- SMC MULTIMEDIA CORP., n/k/a VI SOLUTIONS, INC., a Delaware Corp., STRATOSPHERE MULTIMEDIA CORP., a Delaware corp., d/b/a STRATOSPHERE MULTIMEDIA CORP., a/k/a VISUAL INTERACTIVE SOLUTIONS, INC., STRATOSPHERE MULTIMEDIA CORP., a New York corp., d/b/a STRATOSPHERE MULTIMEDIA CORP. and VISUAL INTERACTIVE SOLUTIONS, STRATOSPHERE MULTIMEDIA LLC, a New York limited liability corp., d/b/a STRATOSPHERE MULTIMEDIA CORP. and VISUAL INTERACTIVE SOLUTIONS, LEE A. FEHR, PAUL MICHELIN, and JAMES PERRETTY, Defendants


The opinion of the court was delivered by: HAROLD BAER, JR., District Judge[fn1] [fn1] Dmitry Tuchinsky, a spring 2004 intern in my Chambers and a law student at New York Law School, provided substantial assistance in the research and drafting of this opinion.

OPINION & ORDER

Defendants VI Solution, Inc., Visual Interactive Solutions, Inc., Paul Michelin, and James Perretty ("defendants") move pursuant to Federal Rules of Civil Procedure ("Fed.R. Civ. P.") 12(b) and 9(b) to dismiss plaintiff ATO RAM, II, Inc.'s ("ATO RAM" or "plaintiff") security fraud claims. Those claims in broad brush allege that, among other things, the defendants fraudulently misrepresented the worth and prospective events of this company's stock. For the reasons set forth below, defendants' motion is granted and plaintiff is provided leave to replead its Securities and Exchange Act of 1934 § 10(b) and Rule 10b-5 cause of action.

I. BACKGROUND

  The facts alleged in the Amended Complaint ("Am. Compl."), which are presumed to be true for the purposes of this motion, are as follows.

  A. The Parties

  ATO RAM is a limited partnership organized in the Channel Islands in 1994. ATO RAM filed suit against five corporate defendants, all of whom have similar names and corporate aliases, and three corporate officers and/or directors. SMC Multimedia Corp. is a Delaware corporation that changed its name to VI Solutions, Inc. ("VI Solutions"). Stratosphere Multimedia Corp. is a Delaware corporation that changed its name to Visual Interactive Solutions ("SMC-DE/Visual Interactive"). Stratosphere Multimedia Corp. ("SMC-NY") is a New York corporation. Stratosphere Multimedia LLC ("SM") is a New York limited liability corporation, which plaintiff alleges is the successor in interest to SMC-DE/Visual Interactive and SMC-NY. Lee Fehr is a resident of New York and was an officer, director, and/or member of each corporate defendant at the time the alleged securities fraud occurred. Paul Michelin is either a resident of Florida or New York and was also an officer, director, and/or member of each corporate defendant at the time the alleged securities fraud occurred. James Perretty is a resident of Florida and an officer and director of one or more of SMC-DE/Visual Interactive, SMC-NY, and SM.*fn2

  B. The Alleged Fraud

  On September 23, 1999, ATO RAM purchased 62,500 shares of common stock in VI Solutions for $250,000.*fn3 These shares were unregistered, but defendants falsely represented that they were exempt from registration requirements under the Securities Act of 1933. Defendants also falsely represented that VI Solutions, a video-conferencing business, was preparing for an initial public offering, which they believed would substantially increase the value of VI Solutions stock. ATO RAM contends that defendants knew this offering would never take place because VI Solutions was a shell corporation. Instead, defendants fraudulently diverted the funds invested in VI Solutions by plaintiff to pay for the expenses and operating costs of their primary video-conferencing businesses, SMC-DE/Visual Interactive and SMC-NY. This practice rendered VI Solutions insolvent and deprived ATO RAM of the benefit of its investment. ATO RAM alleges that these misrepresentations and omissions of material fact constitute a scheme to defraud in connection with the offer and sale of approximately $1.5 million in securities — shares in VI Solutions — in violation of the Securities Act of 1933 ("Securities Act") §§ 5(a), (c), codified at 15 U.S.C. § 77e, and 17(a)(1), codified at 15 U.S.C. § 77q, and the Securities and Exchange Act of 1934 ("Exchange Act") § 10(b), codified at 15 U.S.C. § 78j, and Rule 10b-5.

  ATO RAM asserts that defendants fraudulently concealed facts that would have led it to discover the securities fraud through the exercise of reasonable diligence. However, on August 3, 2001, ATO RAM conducted a limited inspection of VI Solutions' corporate records pursuant to 8 Del. C. § 220, at which time it discovered defendants' misrepresentations and fraudulent omissions. ATO RAM filed the instant action on July 30, 2003.

  II. DISCUSSION

  Defendants move to dismiss on the grounds that this Court does not have personal jurisdiction over the defendants and that venue in this district is improper. Alternatively, defendants request a transfer of venue. Defendants also argue that ATO RAM's claims are not actionable because the statutes upon which it relies do not give rise to a private right of action, the claims are time-barred, and are not pled with the requisite degree of particularity. For the reasons set forth below, defendants' motion is granted, but plaintiff is given 20 days to file an amended pleading with respect to its Exchange Act § 10(b) and Rule 10b-5 claim, if it so chooses.

  A. Personal Jurisdiction

  Defendants first argue this Court lacks personal jurisdiction over the defendants because they do not have sufficient contacts with New York. Defendants' reliance on New York Civil Practice Laws and Rules `("N.Y.C.P.L.R.") § 302(a) is misplaced in this case because, as plaintiff notes, this is a securities fraud case. Section 302(a) is New York's long-arm statute, which, inter alia, confers jurisdiction over a non-domiciliary who commits a tortious act in another state that causes injury to person or property within the State. Whitaker v. Am. Telecasting, Inc. 261 F.3d 196, 209 (2d Cir. 2001). New York law of personal jurisdiction is controlling in a suit that is based on diversity jurisdiction. Karabu Corp. v. Gitner, 16 F. Supp.2d 319, 322 (S.D.N.Y. 1998) ("Personal jurisdiction over a non-domiciliary in a diversity case is determined according to the laws of the state in which the court sits. . . ."). This Court has federal question jurisdiction in the present matter because plaintiff's claims are based on violations of federal law.

  Where a case involves federal securities law violations, the United States, not the State of New York, may exercise jurisdiction over the defendants and personal jurisdiction is established upon a showing that the defendants have minimum contacts with the United States. GMS Group. Inc. v. Sentinel Trust Co. No. 97 Civ. 1342, 1997 WL 414147, at *2 (S.D.N.Y. July 23, 1997) (holding that "personal jurisdiction under the federal securities laws is national in scope, encompassing all individuals with minimum contacts with the United States as ...


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