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