United States District Court, S.D. New York
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
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
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
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
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
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.
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
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.
THIS CONSTITUTES THE DECISION AND ORDER OF THE COURT.