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United States District Court, S.D. New York

April 6, 2004.


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.


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.


  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.


  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 a whole). Defendants acknowledge that they are domiciled within the United States and therefore their personal jurisdiction argument fails.

  B. Venue

  Defendants also argue that venue is improper. Once a venue challenge is raised, plaintiff has the burden of demonstrating that venue resides in the district in which the suit was filed. Greenwood Partners v. New Frontiers Media. Inc. No. 99 Civ. 9099, 2000 WL 278086, at *6 (S.D.N.Y. Mar. 14, 2000). If ATO RAM can establish that venue is proper under the Exchange Act, then it will also be proper for alleged violations of the Securities Act. Michaelson v. MacLennan. No. 75 Civ. 3017, 1976 U.S. Dist. LEXIS 15639, at *4 (S.D.N.Y. April 9, 1976) ("It has been held repeatedly that venue properly laid for claims arising under either of the securities acts satisfactorily establishes venue for those arising under the other."); accord Earl v. Walston & Co., Inc., No. 73 Civ. 327, 1973 WL 411, at M (S.D.N.Y. July 26, 1973); Zorn v. Anderson, 263 F. Supp. 745, 748 (S.D.N.Y. 1966). Federal securities laws have broad venue provisions. The Securities Act and Exchange Act lay venue in any district where the defendant: (1) is found; (2) inhabits; or (3) transacts business. Securities Act § 22; Exchange Act § 27. Both statutes also permit suit in the district where the acts occurred. Under the Securities Act, venue is proper "in the district where the offer or sale took place, if the defendant participated therein." Securities Act § 22. The Exchange Act is even more permissive and confers venue "in the district wherein any act or transaction constituting the violation occurred." Exchange Act § 27. Courts have interpreted this statutory language to mean that the commission of any non-trivial act in the district establishes venue for an Exchange Act claim, even if this act does not go to the core of the alleged violation. E.g. SST Global Tech., LLC v. Chapman, 270 F. Supp.2d 444, 453 (S.D.N.Y., 2003); Greenwood Partners, 2000 WL 278086, at *6. Where plaintiff alleges that multiple defendants agreed to participate in and benefit from a common scheme to defraud, the complaint need only assert that one of the defendants committed an act in furtherance of the scheme. Wyndham Assocs. v. Bintliff, 398 F.2d 614, 620 (2d Cir. 1968); accord Hallwood Realty Partners, L.P. v. Gotham Partners, L.P. 104 F. Supp.2d 279, 287 (S.D.N.Y. 2000); Ryan v. Alien, No. 97 Civ. 0055, 1997 WL 567717, at * 3 (S.D.N.Y. Sept. 11, 1997); Zorn, 263 F. Supp. at 748.

  ATO RAM claims that defendants encouraged it to invest in a shell corporation, VI Solutions, so that defendants could funnel ATO RAM's investment funds into their primary businesses, SMC-DE and SMC-NY. Am. Compl. ¶ 1, 33. Thus, plaintiff has alleged a multi-defendant scheme to defraud. ATO RAM further alleges that Fehr, a resident of New York, was an officer or director of each of the corporate defendants at the time of the alleged violations, Am. Compl. ¶ 12, and that SMC-NY and SM are New York business entities, Am. Compl. ¶ 9, 10. The domicile of certain co-conspirators is insufficient to establish venue as to all of the defendants. Leasco. Data Processing EQUIP. Corp. v. Maxwell 468 F.2d 1326, 1343 (2d Cir. 1972). Thus, these allegations by themselves are insufficient.

  The co-conspirator theory of proper venue on securities fraud cases applies to acts or transactions in furtherance of the scheme. While ATO RAM has offered the most minimal showing regarding defendants' acts or transactions, on a motion to dismiss the Court "must read the complaint generously, and draw all inferences in favor of the pleader." Cosmas v. Hasset, 886 F.2d 8, 11 (2d Cir. 1989). Even a perfunctory statement about venue will suffice. Witter v. Torbett, No. 82 Civ. 7424, 1983 WL 1356, at *2 (S.D.N.Y. June 28,1983) (holding that an allegation that "numerous acts or transactions constituting violations which are the basis of this complaint occurred in the Southern District of New York" established venue under the Exchange Act).

  Here, ATO RAM has alleged that Fehr, a New York resident, was an officer or director of all of the defendant corporations in September 1999 when it purchased stock in VI Solutions. Defendants concede that at the time the shares were sold, SMC-DE/Visual Interactive (the parent corporation of VI Solutions), was registered to do business in New York and maintained an office in New York. Finally, the Am. Compl. avers that

[t]he acts, practices and courses of business . . . occurred, to a substantial degree, in the Southern District of New York [and that] [defendants, directly and indirectly, have made use of the means and instrumentalities of interstate commerce and the mails in connection with the acts, practices, and courses of business alleged [ ] in the Southern District of New York . . ." Am. Compl. ¶¶ 4, 5.
ATO RAM's allegations lack much by way of specifics, but they are sufficient, albeit barely, to establish venue when coupled with ATO RAM's assertion that many of the defendants transacted business in New York at the time the alleged scheme was carried out Witter, 1983 WL 1356, at *2. Thus, defendants are unsuccessful in their venue challenge.

  Conversely, defendants argue that the case should be transferred to "a court in the State of Florida which would also have appropriate jurisdiction" for the convenience of the parties and witnesses. Defendants' Reply Br. at 3. Defendants argue that the alleged violations did not occur in New York, none of the parties or witnesses (except Fehr) are located in New York, the Florida courts are familiar with federal securities law, and the State of Florida has an interest in resolving the matter because some of the defendants currently conduct business there. The decision to transfer venue is within the sound discretion of the Court, Funke v. Life Fin. Corp. No. 99 Civ. 11877, 2003 WL 21182763, at *6 (S.D.N.Y. Jan. 28, 2003), but plaintiff's choice of forum should not be disturbed unless the balance weighs strongly in favor of defendants, Gulf Oil v. Gilbert, 330 U.S. 501, 508 (1947). As a threshold matter, the Court must determine whether venue would be proper in the district to which transfer is sought. Funke, 2003 WL 21182763, at *5.

  Defendants, who do not specify where in Florida they reside, can be found, or conduct business*fn4 or identify the appropriate transferee court in Florida, have fallen short of their burden of demonstrating the availability of a more appropriate forum. S.E.C. v. Lybrand, No. 00 Civ. 1387, 2000 WL 913894, at *5 (S.D.N.Y. July 6, 2000). Defendants have not established that venue is proper as to all of the defendants in Florida. Indeed, correspondence and affidavits of service appended to defendants' Notice of Motion state that Fehr, a New York resident, cannot be found in Florida and provides a New York address for him. Defendants' Notice of Motion, Ex. C, D. Defendants, quite obviously, have not alleged that any act or transaction relating to the securities fraud violations occurred in Florida, which might lay venue in Florida as to all defendants under the co-conspirator theory of venue. Thus, transfer would require severance, which the Court is not inclined to do because of the prejudice to plaintiff and the burden on the courts that would result from identical litigation in two different fora. Sec. & Exch. Comm'n v. Thrasher, No. 92 Civ. 6987, 1993 WL 437752, at *4 (S.D.N.Y. Oct. 25, 1993) ("Judicial economy, trial efficiency, and consistency of judgments would all be best served if a severance and transfer motion were denied.") On this basis alone, transfer should be denied. Nonetheless, defendants' arguments regarding convenience to the witnesses are similarly insufficient as they have not identified the witnesses or the substance of their testimony for the Court to evaluate their significance. Lybrand, 2000 WL 913894, at *6. Defendants' other arguments are similarly unpersuasive and their transfer application is therefore denied.

  C. Statute of Limitations

  Defendants seek dismissal on the grounds that ATO RAM's securities law claims are time-barred under the applicable statutes of limitations.*fn5 As plaintiff observes, section 804 of the Sarbanes-Oxley Act ("Sarbanes-Oxley"), P.L. No. 107-204, 116 Stat. 745 (2002), extended the statute of limitations for private securities fraud cases. Sarbanes-Oxley provides:

[A] private right of action that involves a claim of fraud, deceit, manipulation, or contrivance in contravention of a regulatory requirement concerning the securities laws, as defined in section 3(a)(47) of the Securities Exchange Act of 1934 (15 U.S.C. § 78c(a)(47)), may be brought not later than the earlier of (1) 2 years after the discovery of the facts constituting the violation; or (2) 5 years after such violation. Sarbanes-Oxley Act, Pub.L. No. 107-204, § 804(a), 116 Stat 745 (2002).
Although the Exchange Act § 3(a)(47) defines securities laws to include both the Securities Act and Exchange Act, Sarbanes-Oxley did not extend the statute of limitations for Securities Act § 12 violations. In re Worldcom. Inc. Sees. Litig., 294 F. Supp.2d 431, 444 (S.D.N.Y. 2003); In re Merrill Lynch & Co. Inc. Research Reports Sees. Litig., 272 F. Supp.2d 243, 265 (S.D.N.Y. 2003); see also Lawrence E. Jaffe Pension Plan v. Household Int'l, Inc. No. 02 C 5893, 2004 WL 574665, at *13 (N.D. Ill. Mar. 22, 2004) (noting that the small number of courts to consider the issue have unanimously concluded that Sarbanes-Oxley's extended statute of limitations does not apply to § 12 claims because they do not sound in fraud) (citing cases).

  The Am. Compl. alleges that ATO RAM purchased VI Solutions stock on September 23, 1999 and that defendants' fraudulent concealment prevented it from learning of the alleged fraud until August 3, 2001 when ATO RAM inspected VI Solutions' corporate records.*fn6 Accepting ATO RAM's allegations as true, ATO RAM's Securities Act § 12 claim accrued on August 3, 2001 and is therefore time-barred under the applicable one-year statute of limitations.

  Sarbanes-Oxley does, however, revive ATO RAM's Exchange Act § 10(b) and Rule 10b-5 cause of action. Sarbanes-Oxley, enacted on July 30, 2002, states that its provisions "shall apply to all proceedings addressed by this section that art commenced on or after the date of enactment of this Act" Sarbanes-Oxley Act § 804(b), P.L. No. 107-204, 116 Stat 745 (2002). Many courts have interpreted this statutory language to means that the extended statute of limitations applies to private securities fraud claims that had accrued at the time of enactment, but were not already time-barred. In re Enter. Mortgage Acceptance Co. L.L.C. Sees. Litig., 295 F. Supp.2d 307, 312-13 (S.D.N.Y. 2003); see also fare Enron Corp. Sees., Derivative & Erisa Litig., No. MDL-1446, Civ.A. H-01-3624, 2004 WL 405886, at *12 (S.D. Tex. 2004); Glaser v. Enzo Biochem, Inc., No. CIV.A. 02-1242-A, 2003 WL 21960613, *5 (E.D. Va. July 16, 2003); In re Heritage Bond Litig., 289 F. Supp.2d 1132, 1148 (CD. Cal. 2003); but see Roberts v. Dean Witter Reynold Inc., No. 8:02-CV-2125-T-26EAJ, 2003 WL 1936116, at *3 (M.D. Fla. Mar. 31, 2003) (ruling that Sarbanes-Oxley applied retroactively to all claims, even those already time-barred, because "Congress intended to lengthen the statute of limitations to enable people who lost their life-savings to companies like Enron to recover some of their investments"). Plaintiff's claims were not yet barred when Sarbanes-Oxley was enacted and, accordingly, the amended statute of limitations applied. Therefore, ATO RAM's Exchange Act § 10(b) and Rule 10b-5 claim is timely.

  D. Failure to Plead with Requisite Particularity

  Defendants' final challenge is that ATO RAM failed to plead its Exchange Act § 10(b) and Rule 10b-5 claim with the degree of particularity required by Fed.R.Civ.P. 9(b). To adequately plead an Exchange Act § 10(b) and Rule 10b-5 violation, "plaintiff must plead that the defendant, in connection with the purchase or sale of securities, made a materially false statement or omitted a material fact, with scienter, and that the plaintiffs reliance on the defendant's action caused injury to the plaintiff." Ganino v. Citizens Utilities Co., 228 F.3d 154, 161 (2d Cir. 2000) (emphasis supplied). Under the Private Securities Litigation Reform Act, Pub.L. No. 104-67, 109 Stat 737, codified at 15 U.S.C. § 78u-4(b)(2), plaintiff must "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." ATO RAM has failed to meet this requirement. In one terse statement, plaintiff alleges that "[t]he defendants knew or were reckless in not knowing of the activities" alleged to constitute the 10(b) and Rule 10b-5 violation. Am. Compl. ¶ 38. Under existing law, ATO RAM must do significantly more. To meet the requirements of Fed.R.Civ.P. 8 and 9(b), ATO RAM must plead facts that demonstrate that defendants had motive and opportunity to commit the fraud or "facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness." Kalnit v. Eichler, 264 F.3d 131, 138-39 (2d Cir. 2001). ATO RAM alleges no facts as to defendants9 intent and instead relies on a conclusory allegation, which simply does not meet the minimum pleading standard, and therefore ATO RAM's Exchange Act § 10(b) and Rule 1 Ob-5 claim must be dismissed.*fn7 Put another way, "where's the beef?"

  Although ATO RAM's Am. Compl. is currently insufficient, "Fed.R. Civ. P. 15(a) provides that leave to amend "shall be freely given when justice so requires.'" Devaney v. Chester, 813 F.2d 566, 569 (2d Cir. 1987). In Fed.R.Civ.P. 9(b) cases such as this one, where plaintiff has not already attempted to correct a particularity deficiency, and when discovery has not yet ensued, courts typically grant leave to amend. Id. (citing cases). Therefore, ATO RAM is granted leave to replead this claim within 20 days from the date of entry of this Opinion and Order.


  For the foregoing reasons, defendants' motion to dismiss is granted. Jurisdiction and venue are proper. Plaintiffs Securities Act §§ 5 and 17 claims are deficient because the statute does not provide for a private right of action under these sections and they are dismissed. I have construed plaintiffs § 5 claim as a § 12 claim, but it is nevertheless time-barred and it too is dismissed. Plaintiffs Exchange Act § 10(b) and 10b-5 claim is timely, but it is dismissed with leave to replead because plaintiff has failed to adequately allege scienter. If plaintiff's Second Amended Complaint is not filed within 20 days from the date of entry of this Opinion and Order, the case will be dismissed with prejudice. The Cleric of the Court is instructed to close this motion and all other open motions.


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