United States District Court, S.D. New York
April 6, 2004.
MOHAMMED FEZZANI, CIRENACA FOUNDATION, DR. VICTORIA BLANK, LESTER BLANK, JAMES AND JANE BAILEY, BAYDEL LTD., MARGARET AND PATRICK BURGESS, BOOTLESVILLE TRUST and ADAM CUNG, Plaintiffs, -against- BEAR, STEARNS & COMPANY, INC., BEAR STEARNS SECURITIES CORP., RICHARD HARRITON, ANDREW BRESSMAN, ARTHUR BRESSMAN, RICHARD ACOSTA, GLENN O'HARE, JOSEPH SCANNI, BRETT HIRSCH, GARVEY FOX, MATTHEW HIRSCH, RICHARD SIMONE, CHARLES PLAIA, JOHN McANDRIS, JACK WOLYNEZ, ROBERT GILBERT, FIRST HANOVER SECURITIES, INC., BANQUE AUDI SUISSE GENEVE, FOZIE FARKASH, RAWAIRAES, BASEL SHABLAQ, KEN STOKES, ISSAC R. DWECK, INDIVIDUALLY and as custodian for NATHAN DWECK, BARBARA DWECK, MORRIS L DWECK, RALPH L DWECK, MILLO DWECK, BEATRICE DWECK, RICHARD DWECK, JACK DWECK, ISSAC B. DWECK, HANK DWECK, MORRIS WOLFSON, ARIELLE WOLFSON, AARON WOLFSON, ABRAHAM WOLFSON, TO VIE WOLF-SON, ANDERER ASSOCIATES, BOSTON PARTNERS, WOLFSON EQUITIES, TURNER SCHARER, CHANA SASHA FOUNDATION, UNITED CONGREGATION MESARAH, FAHNESTOCK & CO., INC., DONALD & CO., BARRY GESSER, MICHAEL RYDER and APOLLO EQUITIES, Defendants
The opinion of the court was delivered by: RICHARD CASEY, District Judge
Memorandum Opinion & Order
This action was brought on February 2, 1999 by eleven investors
(collectively, `Plaintiffs") against more than fifty individual and
corporate defendants (collectively, "Defendants") arising out of the activities of A.R. Baron & Co. ("Baron"), a New York
securities broker-dealer. The complaint alleges claims for federal
securities fraud, violations of the Racketeer Influenced and Corrupt
Organizations Act ("RICO"), aiding and abetting breach of state-law
fiduciary duties, and common-law fraud. Now before the Court are seven
motions to dismiss the complaint. As detailed below, the motions are
GRANTED IN PART AND DENIED IN PART.
A. Baron's History
Baron was a broker-dealer which operated from 1992 until 1996.*fn1
(Compl. ¶ 1.) During that period, Baron and its employees engaged in
a widespread fraudulent scheme to manipulate the price of certain
securities. The majority of Baron's business consisted of underwriting
securities for initial public offerings. (Id. ¶ 5.) Baron
brokers used cold calling to sell as much stock as possible in the
companies. Because there was no true public market for the stocks, they
were able to control both purchases and sales. (Id. ¶ 7.)
Baron first sought to increase sales by disseminating favorable
information about the stocks while suppressing adverse information, as
well as inventing favorable information. (14 ¶ 8.) In addition, Baron
made unauthorized purchases on behalf of customers. (Id.) When
customers complained about the purchases, Baron transferred the
securities to an "error account," effectively making Baron the purchaser
of those securities and depleting its capital. (Id. ¶ 18.)
Alternatively, Baron would rebill the unauthorized trade to a different
customer's account. (Id. ¶ 21.) Baron also engaged in
"parking" stock. (Id.) "Parking" is defined in the complaint
as executing trades to a buyer, actually a coconspirator, by which the stock would be placed
in the coconspirator's account while Baron maintained the risk of loss.
The transactions would be reported to create a false appearance of
trading in certain securities, thereby increasing the securities' price
and inducing customers to execute transactions. (Id. ¶¶
These acts of manipulation were intended to inflate the market price of
the securities that Baron was selling and convince customers to purchase
those stocks. Baron and its coconspirators then sold the shares they held
before the stock price crashed. (Id. ¶ 10-11.) As stated
above, however, Baron's practices caused its capital to decrease, placing
it in constant danger of dipping below the minimum capital level required
by regulations. (Id. ¶ 23.) The National Association of Securities
Dealers ("NASD") and the Securities and Exchange Commission ("SEC")
investigated Baron on a number of occasions, imposing large fines and
temporarily suspending some of its brokers. (Id. ¶ 94.) By
the end of 1995, Baron had a net capital deficiency of $1,110,675;
customer complaints amounted to $80 million. (Id. ¶ 247.)
Baron temporarily went out of business in October 1995, as it had
previously done in 1993. (ld.) The company finally filed for bankruptcy
in July 1996. (Id.)
The complaint alleges that Baron's activities cost investors in excess
of $80 million and inflated the market value of the securities that Baron
manipulated by billions of dollars. (Id. ¶ 24.) Baron's
activities generated litigation, both civil and criminal, in more than
one federal district court, the bankruptcy courts, New York state supreme
court, and before arbitral tribunals. In 1994, a federal civil suit was
filed against Baron; the NASD initiated another investigation; and an
arbitration proceeding was commenced seeking over $1 million in damages.
(Id. ¶ 116.) By the end of 1994, the numerous litigation
actions sought over $10 million in damages. (Id.) In 1995, an investor brought another suit in federal court against Baron and
some of its brokers seeking $1 million in compensatory and $5 million in
punitive damages, (Id. ¶ 212.) On December 19, 1995, the
State of Alabama procured an order to show cause why Baron's broker
license should not be suspended for failure to report claims and
proceedings against it. (Id. ¶ 231.)
Baron's woes did not end with its 1996 bankruptcy. In March 1997, the
NASD filed a complaint against eighteen Baron representatives.
(Id. ¶ 269.) Then, on May 13, 1997, Baron and its employees
were indicted by a grand jury in New York Supreme Court, New York County.
(Id. ¶ 270.) All of the defendants in that criminal case
either pled guilty or were convicted of charges of, among other things,
enterprise corruption, the state-law analogue to RICO. (Id.
B. The Manipulated Securities
The claims here arise out of public offerings of stock in the following
companies: Cryomedical Sciences, Inc. ("CMSI"), Health Professionals,
Inc. ("HPI"), Cypros, Innovir, Voxel, Cardiac Sciences, Inc. ("Cardiac"),
PaperClip, Mammo, Symbollon, Aqua, Laser Video, and Jockey Club. Both
CMSI and HPI were cofounded by Jeffery Weissman, who, along with Andrew
Bressman, founded Baron. (Id. ¶ 64.) The complaint alleges
that Weissman engaged in manipulation of CMSI and HPI stock prices before
he and Bressman established Baron. (Id. ¶¶ 68-69.) After
Baron's conception, its brokers began using the boiler room tactics
described above to inflate the price of CMSI and HPI. (Id.
In mid-1992, Baron acted as underwriter for Cypros, a
bio-pharmaceutical company without any marketable products.
(Id. ¶ 91.) Baron placed 20% of the initial public offering
with itself and its coconspirators, in violation of NASD regulations.
(Id. ¶ 92.) Baron also executed a large amount of purchase
orders for customers who never agreed to buy Cypros shares.
(Id. ¶ 93.) The NASD later sanctioned Baron for the unauthorized trading in Cypros, and
suspended Baron's top executives for sixty days. (Id. ¶
Baron allegedly profited from the manipulation of CMSI, HPI, and Cypros
stock prices. However, Baron ran into some difficulty when HPI lost its
allure as an attractive investment. The SEC began an investigation of HPI
in 1993, and newspaper articles appeared that accused HPI of fraud.
(Id. ¶ 100.) Baron had misrepresented to customers that
Hoffman-LaRoche was offering to purchase HPI, and that HPI rejected the
offer because of the company's high value. (Id. ¶ 99.)
Baron's involvement with HPI was publicized in Barren's
Magazine, a widely read Wall Street publication. (Id.
¶¶ 101, 152.) The article caused HPI stock to drop in value, causing
Baron to attempt to resuscitate the price through purchasing
approximately 780,000 shares, then transferring the shares to unknowing
customers or parking the shares with coconspirators. (Id. ¶
104.) The manipulation financially strained Baron, causing its net
capital to fall below the level required by the NASD and resulting in a
short suspension from full trading activities. (Id. ¶ 107.)
Baron returned to its fraudulent activities with the initial public
offering of Innovir, a biomedical company with no revenue and high debts.
(Id. ¶ 109.) Baron instituted the same manipulation
techniques it had used with the other securities. In 1994, a new group of
brokers joined Baron and began manipulating certain securities: Mammo,
Symbollon, Aqua, and Laser Video. (Id. ¶ 113.) These
brokers made misrepresentations to Baron customers such as telling one of
the plaintiffs here that Mammo's technologies and equipment were being
installed and tested at Sloan Kettering Institute. (Id. ¶
115.) The price of Innovir rose from $21/2 per share to $4 15/16
per share; soon after Baron's bankruptcy, the price returned to $2 per
share and is now virtually nothing. (Id. ¶ 245.) Voxel was another company whose initial offering Baron underwrote.
(Id. ¶ 118.) Baron hid or deceptively explained Voxel's
lack of revenue, high debts, and short-term cash needs. (Id.
¶ 119.) Baron's brokers used high-pressure sales tactics and
unauthorized purchases to inflate the price of Voxel shares as well.
Shares of Voxel common stock went from $17/8 per share to $83/16 per
share, until Baron's bankruptcy when the price collapsed. (Id.
The complaint describes the sale of Mammo shares as one of the most
blatant of Baron's fraudulent enterprises. According to the complaint,
the market for Mammo shares consisted entirely of Baron and its
affiliates. (Id. ¶ 175.) When the price of Mammo
dropped 40%, Baron created fictitious sales of 300,000 to 400,000 shares,
including unauthorized customer trades. (Id.) Two such trades
in 1995 involved the accounts of Diaward Steel Works Ltd. and Jose
Mugrabi, neither of whom are plaintiffs in this suit. (Id.
¶¶ 185-94.) In October 1995, Diaward sued Baron for fraud.
(Id. ¶ 212.)
Also in 1995, Baron underwrote an initial public offering of PaperClip,
obtaining subscriptions in excess of the maximum offering amount provided
for by the terms of the initial offering. (Id. ¶ 196.)
Baron used the investments beyond the maximum offering amount to support
the other securities it was manipulating. (Id. ¶ 196.)
Baron then used a "bait and switch" technique to procure investments from
customers, ostensibly for the PaperClip stock, that would be used to fund
other trades. (Id. ¶ 198.) Baron inflated the price of
PaperClip stock from $2.00 to a high of $113/8 per share. (Id.
Finally, Baron entered into a scheme in 1995 to purchase large
quantities of stock in Jockey Club at inflated prices and then resell
those shares to Baron customers. (Id. ¶ 233.) The Jockey
Club shares were, in reality, worth very little. (Id. ¶
234.) Baron either persuaded its customers to purchase the securities through misrepresentations and omissions,
or made unauthorized trades in customer accounts. (Id. ¶¶
C. Parties to this Action
Baron's widespread fraud is not contested. Baron is no longer in
business; its principals are currently incarcerated. Baron and some of
its senior executives are shielded from suit by bankruptcy proceedings.
At issue here, however, is Defendants' liability for defrauding
Plaintiffs, who were all Baron customers.
Plaintiffs all allege that they were defrauded into purchasing stocks
whose price was a result of Baron's manipulation. They further claim that
Defendants here are liable for their losses. To the extent relevant, the
Court discusses the Plaintiffs' individual allegations below.
To simplify the discussion, the Court has adopted the complaint's
grouping of Defendants. While Baron and some of its top executives are
not named in this suit, many of its employees are. Andrew Bressman,
Arthur Bressman, Richard Acosta, Glenn O'Hare, Joseph Scanni, Brett
Hirsch, Garvey Fox, Matthew Hirsch, Richard Simone, Charles Plaia, Mark
Goldman, John McAndris, Jack Wolynez, and Robert Gilbert are collectively
labeled as the "Baron Defendants." Andrew Bressman was Baron's President
and Chief Executive Officer; he pled guilty in state court to enterprise
corruption and grand larceny. (Id ¶ 27, 45.) Arthur Bressman is his
father, and steered prospective initial public offerings and other deals
to Baron, as well as advised his son. (Id.) All of the other
Baron Defendants were Baron brokers who have since been convicted of
state crimes. (Id.) Of all the Baron Defendants, only Acosta
has appeared in this case. Bear, Stearns & Co., Bear Stearns Securities Corp., and Richard
Harriton are described herein as the "Bear Stearns Defendants." Bear,
Stearns Securities Corp., a subsidiary of Bear, Stearns & Co.
(together referred to as "Bear Stearns") acted as Baron's clearing house
from April 1992 through approximately February 1993, and from July 1995
through July 1996. (Id. ¶ 28.) Harriton was, at the time of
the complaint, a senior director of Bear Stearns Securities Corp. and its
head of clearing operations. (Id. ¶ 50.) As a clearing
house, Bear Stearns processed transfers of securities and transaction
payments; it was Bear Stearns responsibility to ensure that trades made
through Baron were completed on the settlement date so that the
securities were delivered to the customer and cash paid to the seller
(Id. ¶ 79.) If a buyer or seller defaulted, Bear Stearns,
as clearing house, had to pay the cash or deliver the promised
securities; it then had to seek restitution from the defaulting party.
The complaint alleges that the Bear Stearns Defendants knew of Baron's
fraudulent activities, provided financial support to Baron, and directed
Baron at times to sell the manipulated securities to the public.
(Id. ¶ 29.) In addition, the Bear Stearns Defendants
allegedly aided Baron in arranging fictitious sales by knowingly
recording them as actual trades to deceive regulatory agencies. (Id) And,
at times, the Bear Stearns Defendants chose which of Plaintiffs' purchase
and sale orders it would execute based on the benefit to themselves.
(Id. ¶ 30.)
Donald & Co., First Hanover Securities, and Fahnestock & Co.
("Broker Defendants") are alleged to have knowingly engaged in parking
and other fictitious transactions to create the appearance of an active
market in the manipulated securities. (Id. ¶ 31.)
Isaac Dweck, Morris Wolfson, Basil Shiblaq, Ken Stokes, and Fozie
Farkash are collectively labeled as the "Individual Defendants."*fn2 These defendants
allegedly assisted Baron in the fraud by, among other things, providing
financing and engaging in parking transactions to create the appearance
of an active trading market. (Id. ¶ 32.) The Individual Defendants
were permitted to sell their securities at inflated prices before the
stocks crashed to their true values. (Id.)
Finally, Plaintiffs claim that Apollo Equities, Barry Gesser, and
Michael Ryder ("Apollo Defendants") paid bribes to Baron in exchange for
Baron recommending that Plaintiffs and other customers purchase
securities such as Jockey Club. (Id. ¶ 33.) This agreement,
outlined in the discussion of the Jockey Club stocks above, allegedly was
meant to, and did, artificially inflate market prices, deceive investors,
and cause Plaintiffs to purchase securities at the inflated prices.
(Id. ¶ 34.)
D. The Causes of Action and the Motions to Dismiss
Plaintiff's first claim for relief arises under section 10(b) of the
Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and its implementing regulation,
Rule 10b-5, 17 C.F.R. § 240.10b-5. Plaintiffs allege that they traded in
the manipulated securities as a result of Defendants' fraudulent
misrepresentations and omissions. (Id. ¶ 274.) Defendants'
acts allegedly caused Plaintiffs to believe that the price of the stocks
was the result of an orderly market, when, in fact, it was a result of
Defendants' and Baron's fraudulent manipulation. (Id.)
Defendants are also accused of using manipulative devices in connection
with the purchase and sale of securities, and engaging in practices
intended to and with the effect of defrauding Plaintiffs. (Id.
Defendants are each alleged to have violated section 10(b) and
Rule 1 Ob-5 through their own acts; Plaintiffs also claim that Defendants are
liable for Baron's acts as control persons of Baron pursuant to section
20(a) and (b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78.
(Id. ¶¶ 35, 279.) Plaintiffs seek damages on the first cause
of action in the amount of $6,500,000. (Id ¶ 288.)
The second cause of action alleges violations of section 9 of the
Securities and Exchange Act, 15 U.S.C. § 78i. The basis of this claim
is that Defendants knowingly or recklessly manipulated the market for
certain securities traded on national securities exchanges, with the
purpose of inducing the purchase or sale of the securities.
(Id. ¶¶ 290-93.) Plaintiffs allegedly relied on the
integrity of the market in executing their transactions. (Id.
¶ 291.) Damages are sought on this claim in the amount of $6,500,000.
Third, Plaintiffs sue for violations of section 10(b) and Rule 10b-5
based on Defendants knowing or reckless market manipulation.
(Id. ¶¶ 297-99.) Plaintiffs also seek $6,500,000 in damages
on their third cause of action. (Id. ¶ 300.)
Plaintiffs fourth assert claims under RICO, 18 U.S.C. § 1962. The
alleged pattern of racketeering activity included "tens of thousands of
acts" of securities, mail, and wire fraud. (Id. ¶ 302.) The complaint describes Baron as an enterprise and Defendants
as an enterprise-in-fact; Defendants allegedly participated in both
enterprises' conduct through a pattern of racketeering activity.
(Id. ¶¶ 302-05.) However, the RICO claim is only pursued
against the Baron Defendants. Plaintiffs again seek $6,500,000 in
damages, which they argue should be trebled, plus costs and attorney's
fees. (Id. ¶ 310.)
Claims five and six are based on New York State law. The fifth cause of
action alleges that Defendants aided and abetted Baron and its brokers in
violating Baron's fiduciary duties to Plaintiffs. (Id. ¶¶
315-16.) The sixth cause of action alleges common law fraud. (Id.
¶ 318-19.) Plaintiffs seek $6,500,000 in damages on both claims.
(Id. ¶¶ 317, 319.)
Seven groups of defendants have filed motions to dismiss the complaint.
Generally speaking, Defendants move to dismiss on the following grounds:
(1) the federal securities fraud and aiding and abetting claims are
barred by the applicable statute of limitations; (2) the securities fraud
and common-law fraud claims are not pled with sufficient particularity
under Federal Rule of Civil Procedure 9(b) and the Private Securities
Litigation Reform Act of 1995 ("PSLRA"), 15 U.S.C. § 78u-4(b)(2); and
(3) the securities fraud, aiding and abetting, and common-law fraud
claims fail to state causes of action under Federal Rule of Civil
Procedure 12(b)(6).*fn3 Defendants further ask that the Court not
exercise supplemental jurisdiction over the state-law claims if the
federal claims are all dismissed. II. DISCUSSION
A. Legal Standard on Motions to Dismiss
The Court can only grant a motion to dismiss pursuant to Rule 12(b)(6)
if it appears beyond doubt that Plaintiffs can prove no set of facts in
support of their claim that would entitle them to relief. Gant v.
Wallingford Bd. of Educ. 69 F.3d 669, 673 (2d Cir. 1995). Failure to
sufficiently plead the elements of a cause of action is grounds for
dismissal. Golding Assocs. L.L.C. v. Donaldson, Lufkin, Jenrette
& Securities Corp. 2003 WL 22218643, at *1 (S.D.N.Y. Sept. 25,
2003). Plaintiffs, alleging fraud and violations of federal securities
laws, must plead the elements of their causes of action with specificity.
Fed.R.Civ.P. 9(b) ("In all averments of fraud . . . the circumstances
constituting fraud . . . shall be stated with particularity."); PSLRA,
15 U.S.C. § 78u-4(b)(2). In addition, it is proper to dismiss claims
when it is apparent from the complaint and documents referenced therein
that they are barred by the applicable statute of limitations. See
In re Gen. Dev. Corp. Bond Litig., 800 F. Supp. 1128, 1135-36
(S.D.N.Y. 1992) (collecting cases).
B. Claims Under Sections 9 and 10(b) and Rule 10b-5
1. Statute of Limitations on Plaintiffs' Security Fraud
Defendants move to dismiss the complaint on the ground that the
security fraud claims are barred by the applicable statute of
limitations. Section 9 of the Securities Exchange Act of 1934 states, "No
action shall be maintained to enforce any liability created under this
section unless brought within one year after the discovery of the facts
constituting the violation and within three years after such violation."
15 U.S.C. § 78i(e). The same limitations periods apply to claims
based on § 10(b) and Rule 10b-5. Lampf, Pleva, Lipkind, Prupis
& Petigrow v. Gilbertson, 501 U.S. 351, 364 (1991). Thus, the
first three causes of action here are time-barred unless filed within one
year from the date Plaintiffs discovered Defendants' fraud and three
years from any violations of the federal securities laws.
(a) Three-Year Prong
The Court begins its analysis with three-year prong of the statute of
limitations because its application is more straightforward. Plaintiffs
cannot sue for any act of securities fraud that occurred more than three
years before they filed the complaint in this See id at 363. "The
three-year period is an absolute limitation which applies whether or not
the investor could have discovered the violation." Jackson Life Ins.
Co. v. Merrill Lynch & Co., 32 F.3d 697, 704 (2d Cir. 1994).
Thus, "no claims under . . . Section 10(b) of the Exchange Act, or
Rule 10b-5 may be brought more than three years after the sale or public
offering from which those claims arise." Stamm v. Corp. of
Lloyd's, No. 96 Civ. 5158 (SAS), 1997 WL 438773, at *4 (S.D.N.Y.
Jan. 4, 1997). This is true for Plaintiffs' claims under section 9 as
well. See Lampf, 501 U.S. at 363.
The Second Circuit has held that "[t]he statute of limitations in
federal securities law cases starts to run on the date that the parties
have committed themselves to complete the purchase or sale transaction."
Grondahl v. Merritt & Harris, Inc., 964 F.2d 1290, 1294 (2d
Cir. 1992) (emphasis omitted); see also In re Colonial Ltd. P'ship
Litig., 854 F. Supp. 64, 85 (D. Conn. 1994); Vassilatos v.
Ceram Tech Int'l, Ltd. No. 92 Civ. 4574 (PKL), 1993 WL 177780, at
*2 (S.D.N.Y. May 19, 1993). Or, as the Seventh Circuit has put it, "In
securities fraud cases, the federal rule is that the plaintiffs cause of
action accrues on the date the sale of the instrument is completed."
McCool v. Strata Oil Co. 972 F.2d 1452, 1460 (7th Cir. 1992)
(internal quotation marks and citation omitted).
Thus, any claim of fraud arising from a purchase of securities that
occurred prior to February 2, 1996-three years before the complaint was
filed-is time-barred. See Scott v. Steingold, No. 97C7871, 1999 WL 618109, at *4(N.D. Ill Aug. 9, 1999) (stating
three-year period begins on date securities sold); Aizuss v.
Commonwealth Equity Trust 847 F. Supp. 1482, 1486 (E.D. Cal. 1993)
("Of the multitude of purchases listed in the first amended complaint,
only three . . . are alleged to have occurred within three years of the
filing of the original complaint. . . . "). The date of Plaintiffs'
investments is the latest possible date on which the three-year
limitations period could have begun. See Isanaka v. Spectrum Techs.
USA Inc. 131 F. Supp.2d 353, 357 (N.D.N.Y. 2001) ("[A] violation
of section 10(b) and Rule 10b-5 can take place before and up to the time
when the sale of securities took place, but not after the investment is
made." (internal quotation marks and citation omitted)).
Most of the securities fraud allegations in the complaint occurred
prior to 1996, as Baron ceased its activities in July of that year.
(See Compl. ¶ 268.) The entire complaint centers on
fraudulent activities from 1992 until July 1996, the period in which
Baron operated as a securities broker-dealer. (Id. ¶ 1.)
None of Defendants' allegedly fraudulent acts are claimed to have
occurred after July 1996. Thus, the only securities fraud claims that can
survive the three-year limitations period are those arising from
purchases that took place between February 2, 1996 and Baron's bankruptcy
Throughout the 102-page complaint, only three securities purchases
occurred between February and July 1996. In February 1996, a Baron broker
made an unauthorized purchase of over 120,000 Jockey Club shares in
Plaintiff James Bailey's account. (Id. ¶ 240.) On or about
April 30, 1996, a Baron broker caused two unauthorized purchase of
PaperClip shares, one in Margaret Burgess's account, and the other in the
Burgesses' joint account; the Burgesses refused to authorize payment for
the transactions and losses were recorded in their accounts.
(Id. ¶ 255.) All other transactions entered into by Plaintiffs occurred before February
2, 1996. Thus, all of the securities fraud claims arising from the other
transactions are barred by the three-year limitations period unless, as
Plaintiffs argue, the period was tolled.
Tolling the Statute of Limitations as to the Bear
Plaintiffs assert that the class action complaint in Berwecky v.
Bear Stearns & Co., No. 97 Civ. 5318 (S.D.N.Y. filed July
21, 1997), tolled the statute of limitations as to the claims against the
Bear Stearns Defendants. Plaintiffs are members of the class in that
case, which Judge Sprizzo certified. See Berwecky v. Bear Stearns
& Co., 197 F.R.D. 65, 71 (S.D.N.Y. 2000). Plaintiffs argue that,
because they were putative class members, the statute of limitations as
to their claims against the defendants in Berwecky was tolled,
even though Plaintiffs opted out of the class.
In American Pipe & Construction Co. v. Utah, 414 U.S. 538
(1974), the Supreme Court held that putative class members could move to
intervene in the suit after the district court had denied class
certification under Federal Rule of Civil Procedure 23, even though the
statute of limitations as to the intervening plaintiffs had run. See id
at 553-54. The Court held that the filing of the class action "suspends
the applicable statute of limitations as to all asserted members of the
class who would have been parties had the suit been permitted to continue
as a class action." Id. at 554. The Supreme Court later held
that the American Pipe rule also applies to putative class
members who file separate suits instead of moving to intervene after a
district court denies class certification. See Crown, Cork &
Seal Co. v. Parker, 462 U.S. 345, 350 (1983).
It must first be noted that there is some dispute over whether the
three-year limitation period can ever be tolled. The Supreme Court held
in Lampf, because the purpose of the 3-year limitation is
clearly to serve as a cutoff . . . tolling principles do not apply to
that period." 501 U.S. at 363. However, some lower courts have interpreted that statement only to
apply to equitable tolling and not to principles of legal
tolling. See, e.g. Joseph v. Wiles. 223 F.3d 1155.1166-67(10th Cir.
2000); Official Comm. of Asbestos Claimants of G-I Holding, Inc. v.
Heyman, 277 B.R. 20, 31-32 (S.D.N.Y. 2002). The Court therefore will
address the merits of Plaintiffs' tolling argument.
This case presents a different question from American Pipe
and Crown, Cork. Those cases involved tolling of the
limitations period to allow intervention or separate suits
after class certification was denied Plaintiffs commenced this
suit before Judge Sprizzo made a determination on class
certification. And Judge Sprizzo certified the class. These distinctions
lead the Court to conclude that the rationale behind American
Pipe and Crown, Cork does not apply here.
The Supreme Court crafted its rulings to uphold "the principal purposes
of the class-action procedure-promotion of efficiency and economy of
litigation." Crown, Cork. 462 U.S. at 349. Federal Rule of
Civil Procedure 23 was meant to encourage putative class members to allow
the named plaintiffs to pursue their claims for them. See
Id. at 350-51. Failing to toll the statute of limitations would
force class members to intervene or take other action to protect their
rights, and would disenable the efficient function of the class-action
system. See id at 350. Thus, tolling the statute of limitations
until after a determination on class certification is made means that
putative class members are not forced to bring separate suits or seek to
intervene in anticipation of certification being denied.
Tolling the statute of limitations for those individuals who file
separate suits before class certification is determined does nothing to
promote judicial efficiency. Instead, holding as Plaintiffs urge the
Court to do would simply allow putative class members the benefits of the
American Pipe doctrine free of the concomitant burden; that is,
Plaintiffs here could rely on the class action plaintiffs without having to put their faith in the class
representatives to adjudicate their rights.
Other courts have reached the same conclusion. See, e.g. In re
Worldcom, Inc. Sees. Litig. 2003 WL 22738546, at *15 (S.D.N.Y. Nov.
21, 2003); In re Ciprofloxacin Hydrochloride Antitrust Litig.
261 F. Supp.2d 188, 221 (E.D.N.Y. 2003); Primavera Familienstifung v.
Askin, 130 F. Supp.2d 450 (S.D.N.Y. 2001); Wahad v. City of
New York, 1999 WL 608772, at *5-*6 (S.D.N.Y. Aug. 12, 1999); In
re Brand Name Prescription Drugs Antitrust Litig. No. 94 Civ.
897, 1998 WL 474146, at *8 (N.D. Ill. Aug. 6, 1998); Wachovia Bank
& Trust Co. N.A. v. Nat'l Student Mktg. Corp., 461 F. Supp. 999,
1012 (D.D.C.1978), aff'd, 650 F.2d 342, 346 n. 7 (D.C. Cir. 1980).
These cases instruct that plaintiffs who file separate suits
before class certification is determined cannot benefit from
the class action's tolling of the statute of limitations. "Applying the
tolling doctrine to separate actions filed prior to class certification
would create the very inefficiency that American Pipe sought to
prevent." Worldcom, 2003 WL 22738546, at *15. In
Worldcom, Judge Cote rejected the same argument that Plaintiffs
assert here. In that case, as in this one, the plaintiffs maintained that
the statute of limitations should be tolled for class members who filed
separate suits before a decision was made on class
certification. See Id. at * 16. In disagreeing with
the plaintiffs, Judge Cote aptly noted, Plaintiffs who choose, as is
their right, to pursue separate litigation may not enjoy the benefits of
that separate litigation without bearing its burdens. One of the burdens
plaintiffs bear is the obligation to commence their actions within the
applicable statute of limitations." Id.
Therefore, the statute of limitations as to the Bear Stearns Defendants
was not tolled by the filing of the Berwecky class action. All
of their securities fraud claims with the exception of the three trades
noted above are barred by the three-year statute of limitations.
Accordingly, the first three causes of action asserted by Plaintiffs Fezzani, Cirenaca
Foundation, the Blanks, Jane Bailey, Baydel Ltd., Bootlesville Trust, and
Cung against the Bear Stearns Defendants are dismissed as time-barred.
Tolling the Statute of Limitations as All Other
Plaintiffs also maintain that the statute of limitations as to the
securities fraud claims against all other Defendants was tolled by the
proceedings before the bankruptcy court. Pursuant to the Securities
Investor Protection Act of 1970 ("SIPA"), 15 U.S.C. § 78aaa-78111, a
trustee was appointed to stand in the place of Baron as debtor in the
bankruptcy proceedings. See 15 U.S.C. § 78fff-1. Plaintiffs
state that the trustee filed complaints against all Defendants other than
the Bear Stearns Defendants on behalf of all those eligible to recover
under SIPA, including Plaintiffs. Plaintiffs argue that these actions are
akin to class actions and therefore qualify to toll the statute of
limitations under American Pipe and Crown, Cork.
This novel theory is completely barren of precedential support. In any
event, even if the trustee's actions were analogous to a class action,
the Court has already determined that the purposes of the American
Pipe tolling doctrine are incompatible with Plaintiffs' actions
here. Therefore, this tolling argument must also fail.
The only securities fraud claims not barred by the three-year
limitation period are those arising from the three trades noted above.
The Court now turns to the application of the one-year prong as to
Bailey's and the Burgesses' claims,
(b) One-Year Prong
The one-year prong of the statute of limitations runs from the date on
which Plaintiffs discovered Defendants' fraud. "`[D]iscovery under the
1934 Act limitations provisions includes constructive or inquiry notice, as well as actual notice."
Menowitz v. Brown, 991 F.2d 36, 41 (2d Cir. 1993). A plaintiff
is put on inquiry notice when the circumstances were "such as to suggest
to a person of ordinary intelligence the probability that" the person was
defrauded. Armstrong v. McAlpin, 699 F.2d 79
, 88 (2d Cir. 1983);
see also In re In-Store Adver. Sees. Litig. 840 F. Supp. 285,
288-89 (S.D.N.Y. 1993). "To trigger the underlying duty to inquire . . .
defendants] must establish that plaintiff[s] acquired information that
suggested the probability and not merely the possibility that
fraud had occurred." Lenz v. Associated fans & Rests, Co. of
Am., 833 F. Supp. 362, 370 (S.D.N.Y. 1993).
Once there is a duty to inquire, Plaintiffs' actions dictate the date
they are held to have knowledge of the fraud. "The duty of inquiry
results in the imputation of knowledge of a fraud in two different ways,
depending on whether the investor undertakes some inquiry. If the
investor makes no inquiry once the duty arises, knowledge will be imputed
as of the date the duty arose." LC Capital Partners, LP v. Frontier
Ins. Group, Inc., 318 F.3d 148, 154 (2d Cir. 2003). If an inquiry is
made, constructive knowledge of the fraud will be attributed to
Plaintiffs at the time that they possessed "knowledge of facts which in
the exercise of reasonable diligence should have led to actual
knowledge." Robertson v. Seidman & Seidman, 609 F.2d 583,
587 (2d Cir. 1979) (internal quotation marks and citations omitted).
Thus, if Plaintiffs possessed actual knowledge of the fraud more than
one year before filing the complaint, their securities fraud claims are
time-barred. If, more than one year prior to filing suit, Plaintiffs were
put on inquiry notice and failed to exercise reasonable diligence, then
the securities fraud claims would also be time-barred. Finally, if
Plaintiffs acted with reasonable diligence, the Court must determine
whether a reasonable investor would have discovered the fraud prior to February 2, 1998 (one year prior to when they filed the complaint).
Defendants argue that Plaintiffs were put on inquiry notice of the
fraud as early as 1996 and 1997, when a series of government
investigations were initiated as to Baron and its employees. Plaintiffs
respond with three arguments: (1) Plaintiffs had no actual or
constructive knowledge of Baron's fraud prior to February 2, 1998; (2)
even if Plaintiffs had such knowledge, they had no reason to know or to
inquire more than they did about Defendants participation in the fraud;
and (3) the statute of limitations should be tolled by the filing of the
class action and other suits against Defendants.
First, the Court finds that Plaintiffs were on inquiry notice about
Baron's fraud more than one year prior to filing suit. The complaint
details numerous examples of public information that would have alerted a
reasonable person to Baron's fraud many years before this suit was
commenced. The Court discusses the most prominent examples.
The SEC began an investigation of Baron's activities in 1993. (Compl.
¶ 100.) In May 1994, a civil suit was filed against Baron seeking $2
million in damages for its fraudulent practices. (Id. ¶
116.) A flood of private litigation apparently followed that suit, as
well as a formal NASD investigation of Baron. (Id.) In July
1995, the NASD imposed sanctions on Baron for unauthorized trading, in
what Plaintiffs describe as a "widely publicized settlement."
(Id. ¶ 155.) In October 1995, Baron and some of its
officers were again sued for fraud. (Id. ¶ 212.)
Baron and some of its officers filed for bankruptcy in July 1996.
(Id. ¶ 268.) In May 1997, Baron and its former
employees, including the Baron Defendants here (with the exception of
Arthur Bressman), were indicted in New York Supreme Court in connection
with their fraudulent activities. (Id. ¶ 270.)
The aforementioned facts were all in the public domain and thus
Plaintiffs, including Bailey and the Burgesses, are charged with knowledge of them. See Dietrich
v. Bauer. 76 F. Supp.2d 312, 343 (S.D.N.Y. 1999). As the Court in
The information that triggers inquiry notice of
the probability of an alleged securities fraud is
any financial, legal, or other data, including
public disclosures in the media about the
financial condition of the corporation and other
lawsuits alleging fraud committed by the
defendants, available to the plaintiff providing
him with sufficient storm warnings to alert a
reasonable person to the [probability] that there
were either misleading statements or significant
omissions involved in the sale of the
Id. (internal quotation marks and citation omitted). The
various civil lawsuits, regulatory investigations, and criminal
indictments were, to say the least, sufficient storm warnings to put
Plaintiffs on inquiry notice at least in May 1997. Thus, Plaintiffs were
on inquiry notice more than one year prior to filing the complaint as to
all Defendants that they allege participated in Baron's fraud. See
In re Merrill Lynch Ltd. P'ships Litig., 7 F. Supp.2d 256, 266
(S.D.N.Y. 1997) ("A plaintiff need not be aware of all aspects of the
alleged fraud to be on inquiry notice; rather a plaintiff is on inquiry
notice `at the time at which the plaintiff should have discovered the
general fraudulent scheme.'" (quoting In re Integrated Resources. Inc.
Real Estate Ltd. P'ships Sec. Litig. 851 F. Supp. 556, 568 (S.D.N.Y.
Plaintiffs are correct, however, that the issue before the Court is
whether they knew or should have known of Defendants* fraud prior to
February 1998.*fn4 See Klein v. Goetzmann 810 F. Supp. 417, 425 (N.D.N.Y. 1993) (stating issue was whether plaintiffs
should have discovered individual defendant's participation in general
fraudulent scheme of which plaintiffs had inquiry notice). The Court
cannot conclude on the information in the complaint that Plaintiffs could
have stated a cause of action for securities fraud against any defendant
before February 1998.
Bear Stearns Defendants*fn5
As the Second Circuit has noted with regard to a similar case also
involving Bear Stearns as a clearing broker, "[T]his is not a typical
storm warnings case . . . ." Levitt v. Bear Stearns & Co.,
340 F.3d 94, 103 (2d Cir. 2003). In Levitt, the Second Circuit
reversed Judge Spatt's exhaustive opinion in which he had determined that
the plaintiffs had constructive knowledge of Bear Stearns' fraud more
than one year prior to filing suit. See Id. at 104.
An earlier suit had been filed against Bear Stearns alleging
participation in the same fraudulent scheme involved in the suit before
Judge Spatt. Id. at 103. The Levitt court held that
there were some allegations against Bear Stearns in the suit pending
before Judge Spatt that had not been made in the prior case.
Id. The district court erred in not examining whether any of
the additional factual allegations would have been necessary for
Plaintiffs to have known in order to state a claim against Bear Stearns
more than one year before the complaint was filed. See Id. Additionally, the
court held that the knowledge derived or imputed from the prior suit
against Bear Stearns must have been sufficient to state a claim against
Bear Stearns as a primary wrongdoer, that is, one directly liable under
the federal securities laws, and not merely as an aider and abettor.
The Bear Stearns Defendants maintain that the complaint establishes
Plaintiffs' actual or constructive knowledge of their alleged
participation in the fraud, at the latest, by July 1997 when the
Berwecky class action was filed. It would have taken no
Herculean effort to identify Bear Stearns' integral relation to Baron's
operations from public information available before 1997, and, after the
class action was filed, to identify a potential claim against the Bear
Stearns Defendants for securities fraud. However, the Second Circuit's
decision in Levitt suggests that such identification is not
First, this Court would need to determine that the allegations raised
against Bear Stearns in the Berwecky suit were sufficient to
state a cause of action against the Bear Stearns Defendants for direct
violations of the securities laws. The Second Circuit's opinion would
also require this Court to determine whether the facts alleged in
Berwecky were sufficient fodder for Plaintiffs here to allege
securities fraud claims then with sufficient particularity to
meet the pleading requirements of Rule 9(b) and the PSLRA. See
Id. at 103-04. In sum, the Court would need to decide whether
the complaint in Berwecky should survive a motion to dismiss
for failure to state a claim and failure to plead with particularity.
Thus, the Levitt case erects high barriers to dismissal of a
suit under the one-year limitations period against secondary wrongdoers.
The facts stated in the complaint, together with the documents referenced
therein, provide no basis for making these determinations. Therefore, the
Bear Stearns Defendants' motion to dismiss under the one-year prong must be
denied as to James Bailey's and the Burgesses' securities fraud claims.
All Other Defendants
If a prior suit involving the fraud allegations stemming from the same
acts by the same defendant is not enough to constitute discovery under
the statute of limitations, then neither are the other allegations in the
complaint. While the Court finds that Plaintiffs certainly had a duty to
inquire as to the overall scheme at the latest in 1997 when the Baron
Defendants were indicted, the Court cannot factual determine at this
stage whether a reasonable investor would have discovered the other
Defendants' fraud any earlier than February 2, 1998. The Court therefore
holds that Bailey's and the Burgesses first three causes of action
against Defendants are not barred by the one-year limitations period.
The Court concludes that all Plaintiffs' securities fraud claims are
time-barred under the three-year limitations period except for those
brought by the Burgesses and James Bailey. Thus, the first three causes
of action brought by Plaintiffs Fezzani, Cirenaca Foundation, the Blanks,
Jane Bailey, Baydel Ltd., the Bootlesville Trust, and Cung are dismissed.
The Court shall refer to Bailey and the Burgesses hereinafter as
2. Failure to State a Claim / Particularity of
Allegations Regarding Remaining Plaintiffs Transactions
Defendants also move to dismiss all three securities fraud claims on
the grounds that Remaining Plaintiffs have failed to meet the heightened
pleading requirements under Federal Rule of Civil Procedure 9(b) and the
PSLRA, and have failed to state a claim under Rule 12(b)(6).
"To state a cause of action under section 10(b) and Rule 1 Ob-5, a
plaintiff must plead that the defendant made a false statement or omitted a material fact, with
scienter, and that plaintiffs reliance on defendant's action caused
plaintiff injury." San Leandro Emergency Med. Group Profit Sharing
Plan v. Philip Morris Cos. 75 F.3d 801, 808 (2d Cir. 1996). Section
10(b) and Rule 10b-5 also prohibit market manipulation. To state a claim
on this theory, "Plaintiffs must plead with particularity the
manipulative scheme itself, the intent to defraud the investing public,
reliance on the integrity of the market (i.e. that they believed it was
not manipulated) and resulting damages. In re Initial
Public Offering Sees. Litig. 241 F. Supp.2d 281, 296 (S.D.N.Y.
On a market manipulation theory under section 9 a complain must allege:
"(1) a series of transactions in a security creating actual or apparent
trading in that security or raising or depressing the price of that
security, (2) carried out with scienter, (3) for the purpose of inducing
the security's sale or purchase by others, (4) was relied on by the
plaintiff, (5) and affected plaintiffs purchase or selling price."
Connolly v. Havens, 763 F. Supp. 6, 11 (S.D.N.Y. 1991) (internal
quotation marks and citation omitted).
Scienter, the requisite state of mind, is defined as "an intent to
deceive, manipulate or defraud." Ernst & Ernst v.
Hochfelder, 425 U.S. 185, 193 n.12 (1976). The PSLRA states with
regard to scienter:
In any private action arising under this chapter
in which the plaintiff may recover money damages
only on proof that the defendant acted with a
particular state of mind, the complaint shall,
with respect to each act or omission alleged to
violate this chapter, state with particularity
facts giving rise to a strong inference that the
defendant acted with the required state of mind.
15 U.S.C. § 78u-4(b)(2). Thus, "[P]laintiffs must allege facts
that give rise to a strong inference of fraudulent intent." Acito v.
IMCERA Group, Inc. 47 F.3d 47
, 52 (2d Cir. 1995). This standard can
be satisfied by either demonstrating motive and opportunity to commit
fraud or strong circumstantial evidence of conscious misbehavior or recklessness. Id.
Defendants argue that Plaintiffs have failed to satisfy the standard on
both their misrepresentation/omission and market manipulation claims.
Remaining Plaintiffs' allegations must satisfy the standard as to
each defendant. See In re Blech Secs. Litig., 961 F. Supp. 569,
580 (S.D.N.Y. 1997) ("Blech II"). However, the only
relevant allegations relate to PaperClip and Jockey Club securities
because these are the only securities that Remaining Plaintiffs
As an initial matter, the Court rejects the argument that Remaining
Plaintiffs lack standing under section 10(b) and Rule 10b-5 because all
their purchases were unauthorized. The Second Circuit has held that
"claims under Rule 1 Ob-5 arise when brokers purchase or sell securities
on their clients' behalf without specific authorization." Caiola v.
Citibank. N. A., NY. 295 F.3d 312, 323 (2d Cir. 2002). In
Caiola, the court determined that the plaintiff had
sufficiently pled the purchase or sale of securities when he alleged that
Citibank had made purchases on his behalf; it was irrelevant that he did
not authorize those purchases. Id. at 324.
This result is also dictated by the Supreme Court's decision in
SEC v. Zandford, 535 U.S. 813 (2002). In Zandford,
the Court construed the phrase "in connection with the purchase or sale
of any security" to encompass a broker's unauthorized sales of customer
securities for the broker's own benefit. See Id. at
820-21. Because the fraud coincided with the sale of securities, it fell
within section 10(b)'s flexible ambit. See id at 822-23;
see also In re Enron Corp. Sees., Derivatives, & ERISA
Litig. 235 F. Supp.2d 549, 577-78 (S.D. Tex. 2002). Therefore,
Remaining Plaintiffs' claims do not fail merely because Baron made the
stock purchases without their permission. a. Bear Steams Defendants*fn6
Allegations of Misrepresentations/Omissions The Bear Stearns Defendants attack the securities fraud claims based on
misrepresentations and omissions on the following grounds: (1) all
misrepresentations and omissions were made by Baron and its employees,
not by the Bear Stearns Defendants; (2) the complaint fails to allege
that Plaintiffs relied on any of the Bear Stearns Defendants' statements
or omissions; and (3) there are no allegations that their statements or
omissions caused the economic loss claimed. In addition, Harriton argues,
with regard to the PaperClip allegations, that Plaintiffs fail to claim
he took any direct action or affirmative act on which they relied.
The complaint alleges that the Bear Stearns Defendants were "on notice
of the unauthorized trading in Bailey's account because, as clearing
broker, Bear Stearns generated customer confirmations of trades and made
a daily tally of commissions. (Compl. ¶ 241.) In addition, the Bear
Stearns Defendants were "likely aware of Jockey Club's reputation in the
community," and "noticed that" Baron was not charging commissions for
selling shares of Jockey Club when it normally charged excessive
commissions. (Id. ¶ 241-42.) With regard to PaperClip, the
Bear Stearns Defendants allegedly were informed of the "bait-and-switch"
scheme and overselling during the initial public offering. (Id.
¶¶ 196-200.) Harriton was informed that Baron would use the fraudulently obtained funds to clear up its trade-date debit,
something that would benefit the Bear Stearns Defendants.
Plaintiffs argue that Bear Stearns made material misrepresentations
when it sent the confirmation notices underreporting commissions earned
by Baron, and that the notices were an intentional misrepresentation that
the price paid for the security was reasonably related to that in an open
market. In addition, Bear Stearns sent monthly account statements stating
the market value of stocks in each customer's portfolio; market values
which the Bear Stearns Defendants allegedly knew were false. Finally,
Bear Stearns allegedly sent a welcome letter to Plaintiffs, presumably
also to Remaining Plaintiffs, designed to inspire Plaintiffs to feel
confident about investing in Baron, something the Bear Stearns Defendants
knew was not warranted.
Along with these misrepresentations, Plaintiffs submit that the
complaint adequately alleges the Bear Stearns Defendants' omissions
because they knew of, but failed to disclose Baron's manipulative
schemes, the high commissions that Baron was receiving, Baron's nearly
continuous insolvency, and that the price of the securities would
collapse if Baron went out of business.
The misrepresentations alleged do not state a claim against the Bear
Stearns Defendants with regard to Remaining Plaintiffs' purchases of
Jockey Club and PaperClip securities. First, the confirmation notices and
market accounts misrepresenting the value of the securities are
irrelevant because they occurred after-the-fact. The gravamen of a
securities fraud claim based on misrepresentations or omissions is that
the plaintiff made a securities transaction that he or she would not have
made had the defendant spoke or refrained from speaking. See Kalnit
v. Eichler, 85 F. Supp.2d 232, 240 (S.D.N.Y. 1999). Remaining
Plaintiffs cannot claim that the confirmation notices or monthly
statements caused their injuries because their injuries had already
occurred, that is, the stock purchases had already been made. The fraud was
complete once the purchases were made. See Alfadda v. Fenn,
935 F.2d 475.478-79 (2d Cir. 1991) (holding securities fraud
complete upon purchase of securities); Flickinger v. Harold C. Brown
& Co., 947 F.2d 595, 598 (2d Cir. 1991) (holding no claim for
securities fraud when purchase of securities completed before alleged
fraud occurred); Dietrich, 76 F. Supp. at 341 ("[A]n alleged
fraud cannot be in connection with the purchase or sale of a security if
the transaction occurs prior to the fraud."); Samuel M. Feinberg
Testamentary Trust v. Carter. 652 F. Supp. 1066, 1080 (S.D.N.Y.
1987) ("Where the only manipulative or deceptive acts identified in a
complaint occur after a challenged securities purchase or sale, a court
must dismiss the complaint as failing to state a cause of action for
federal securities fraud.").
Here, there are no allegations of additional purchases by or on behalf
of Remaining Plaintiffs after they received a confirmation notice or a
monthly account statement. Thus, Remaining Plaintiffs can seek no solace
in their allegations regarding the confirmation notices and account
Second, Remaining Plaintiffs cannot predicate liability on the "welcome
letter." Plaintiffs argue that the welcome letter was a material
misrepresentation because the Bear Stearns Defendants knew that Baron was
not worthy of the confidence and sense of security that the letter was
meant to inspire. The welcome letter cannot be a misrepresentation on the
part of the Bear Stearns Defendants because it was issued by Baron. (See
compl. ¶ 156.) The complaint merely alleges that Bear Stearns
approved the letter, not that it wrote or distributed it.
(Id.) The Bear Stearns Defendants cannot be held liable for
misrepresentations that they did not make. See Dinsmore v.
Squadron, Ellenoff, Plesent, Scheinfeld, & Sorkin, 135 F.3d 837,
842-43 (2d Cir. 1998); Scone Invs. L.P. v. Am. Third Mkt.
Corp. No. 97 Civ. 3802, 1998 WL 205338, at *6-7. This result is
dictated by the fact that section 10(b) and Rule 10b-5 do not provide a cause of action for
aiding and abetting securities fraud. Cent. Bank of Denver, N.A. v.
First Interstate Bank of Denver, N.A. 511 U.S. 164, 191 (1994).
Plaintiffs suggest that the Second Circuit's decision in SEC v. U.S.
Environmental. Inc. 155 F.3d 107 (2d Cir. 1998), supports their claims
regarding the Bear Stearns' Defendants misrepresentations. That case,
however, dealt with the liability of a brokerage firm employee for
participation in a market manipulation scheme. See id at 112.
It lends little aid to Plaintiffs' allegation in the
misrepresentation/omission context. In any event, the court in U.S.
Environmental held that the defendant employee could be held liable
as a primary violator of section 10(b) when he executed trades,
at the direction of a stock promoter, that he knew or should have known
were manipulative. See Id. at 110. Thus, it was no
great stretch to hold the defendant accountable as a primary violator.
Here, Baron sent the welcome letter, not the Bear Stearns Defendants.
And, while Bear Stearns sent the confirmation notices and account
statements, they were sent after the harm occurred. Therefore, Remaining
Plaintiffs have not stated a claim against the Bear Stearns Defendants
based on material misrepresentations.
Similarly, the alleged omissions are insufficient to state a claim
under section 10(b) and Rule 10b-5. A duty to disclose "arises when one
party has information that the other [party] is entitled to know because
of a fiduciary or other similar relation of trust and confidence between
them." Grandon v. Merrill Lynch & Co. 147 F.2d 184, 189
(2d Cir. 1998) (internal quotation marks omitted) (quoting Chiarella
v. United States, 445 U.S. 222, 228 (1980)). It has been
consistently held that clearing brokers owe no duty of disclosure to
customers of introducing brokers such as Baron. See Connolly,
763 F. Supp. at 10; Dillon v. Militano, 731 F. Supp. 634, 634
(S.D.N.Y. 1990); In re Blech Secs. Litig., 928 F. Supp. 1279, 1295-96
(S.D.N.Y. 1996) ("Blech I)
Plaintiffs argue that the cases cited above to not change the rule that
"once one undertakes to speak, that disclosure may not be misleading."
(Plfs.' Mem. at 26.) This proposition of law says nothing about the Bear
Stearns Defendants' omissions, but relates to their purported
misrepresentations; a claim, the Court has already held, that cannot be
The Court holds that the complaint fails to state a claim against the
Bear Stearns Defendants for securities fraud based on misrepresentations
and omissions. Therefore, Remaining Plaintiffs' first cause of action
against the Bear Stearns Defendants is dismissed.
Allegations of Market Manipulation
Defendants, including the Bear Stearns Defendants, argue that
Plaintiffs' claim under section 9 of the Securities Exchange Act must
fail because the complaint does not allege that the manipulated
securities were registered on a national securities exchange.
Section 9 prohibits certain acts of manipulation with regard to
securities traded on a national securities exchange. See
15 U.S.C. § 78i(a). Here, the complaint alleges that the manipulated
securities were traded through the National Association of Securities
Dealers Automated Quotations System ("NASDAQ"). (Compl. ¶ 293.) This
is the only allegation regarding the markets on which the manipulated
securities were traded. NASDAQ has been held not to be a national
securities exchange within the meaning of section 9. See
Connolly, 763 F. Supp. at 12 n.4; Martin v. Prudential-Bache
Sees. Inc. 820 F. Supp. 980, 983-84 (W.D.N.C. 1991); Cowen
& Co. v. Merriam, 745 F. Supp. 925, 930-31 (S.D.N.Y. 1990);
Cammer v. Bloom, 711 F. Supp. 1264, 1277 n.18 (D.N.J. 1989);
Garvin v. Blinder Robinson & Co. 115 F.R.D. 318, 320 n.3
(E.D. Pa. 1987).
Plaintiffs contest this conclusion, but cite no case holding that
NASDAQ qualifies as a national securities exchange; the Court has located no such
precedent. Plaintiffs argue that NASDAQ has dramatically changed since
these cases were decided and is now the most important national
securities exchange as the volume of trading surpasses that on the New
York Stock Exchange. However, NASDAQ's volume of trading and national
importance say nothing about the way in which securities are traded
there. See Bd. of Trade v. SEC. 923 F.2d 1270, 1275 (7th Cir.
1991) ("[W]e can be certain that volume plays no role in the
determination of whether a market constitutes an exchange. . . .")
(Flaum, J., dissenting).
Given the unanimous authority on this issue and Plaintiffs' failure to
articulate any justification for departing from that authority, the Court
holds that NASDAQ is not a national securities exchange, and thus
Remaining Plaintiffs have failed to state a claim under section 9 of the
Securities Exchange Act. The second cause of action is dismissed as to
all Defendants. Market manipulation claims under section 10(b) and
Rule 10b-5, however, do not require allegations of trading on a national
The Bear Stearns Defendants maintain that the third cause of action
should also be dismissed against them because: (1) clearing brokers
cannot be held liable for the actions alleged in the complaint; (2) the
allegations of manipulation in PaperClip stock only relate to the initial
public offering and the Burgesses have not alleged that the purchases
occurred during the initial offering; (3) the complaint fails to
adequately allege which manipulative acts were taken by which defendant,
improperly lumping defendants together.
"Market manipulation comprises a class of conduct prohibited by Section
10(b), which typically involves `practices such as wash sales, matched
orders, or rigged prices, that are intended to mislead investors by
artificially affecting the market activity."' In re Blech Sees.
Litig. No. 94 Civ. 7696, 2002 WL 31356498 (S.D.N.Y. Oct. 17, 2002) ("Blech III'.
"A plaintiff asserting a market manipulation claim must allege direct
participation in a scheme to manipulate the market for securities."
Blech II, 961 F. Supp. at 580. As has been stated above, no
claim can lie against the Bear Stearns Defendants for aiding and abetting
Baron's market manipulation in the PaperClip and Jockey Club securities.
See Cen. Bank of Denver, 511 U.S. at 191. However, similar
claims of market manipulation against Bear Stearns have withstood motions
to dismiss in some circumstances. See Blech III. 2002 WL
31356498, at *4
In Blech III, Judge Sweet confronted similar claims
as the Court does here. Judge Sweet distinguished between allegations of
primary and secondary liability:
When Plaintiffs allege mere clearing conduct
against Bear Stearns, such allegations amount to
no more than a non-existent claim of aiding and
abetting because, at most, they allege only that
Bear Stearns knowingly and substantially assisted
. . . [in the fraud] by clearing the fraudulent
trades. . . . However, the Complaint crosses the
line dividing secondary liability from primary
liability when it claims that Bear Stearns
`directed' or `contrived' certain allegedly
fraudulent trades. Under these circumstances, the
Complaint adequately alleges that Bear Stearns
engaged in conduct, with scienter, in an attempt
to affect the price of . . . securities.
Id. Here, the allegations against the Bear Stearns
Defendants, and certainly against Harriton, do not cross the threshold
laid out in Blech III. The complaint alleges that the Bear
Stearns Defendants were "on notice" of Baron's unauthorized trading in
Jockey Club, were "closely monitoring" the transactions, and were "likely
to have been aware of Jockey Club's reputation in the community." (Compl.
¶¶ 241, 242.)
Similarly, with regard to Baron's dealings in PaperClip, the Bear
Stearns Defendants had knowledge of Baron's fraud through conversations
between Harriton and Andrew Bressman. (Id. ¶¶ 197-99.)
Harriton allegedly "agreed that Bear Stearns would go along with the
plan." (Id. ¶¶ 199.) In contrast, the plaintiffs in Blech III alleged that Bear
Stearns "contrived and agreed to fund" the fraudulent sale of certain
securities. 2002 WL 31356498, at *4. Knowledge of Baron's fraud and
clearing fraudulent transactions are insufficient to make the Bear
Stearns Defendants primary violators on the basis of market manipulation.
All the complaint alleges, with regard to the market manipulation of
PaperClip and Jockey Club, is that the Bear Stearns Defendants knew of
Baron's fraud and cleared the transactions that were fraudulently made.
In a regime under which aiding and abetting liability existed, Remaining
Plaintiffs market manipulation claims against the Bear Stearns Defendants
might survive. They have not, however, stated a claim for primary
violations. Remaining Plaintiff's third cause of action against the Bear
Stearns Defendants accordingly is dismissed.
b. Broker Defendants
There are no allegations in the complaint that the Broker Defendants
committed any fraudulent acts specifically with regard to Jockey Club and
PaperClip securities. The complaint merely states that the Broker
Defendants conspired with Baron `to create an artificial appearance of
trading activity through repeatedly `parking' of Baron securities in
customer and proprietary trading accounts at each firm." (Compl. ¶
123.) Such pleading is entirely insufficient.
It may be true that market manipulation claims are not held to as high
a pleading standard as other fraud claims because the "facts relating to
a manipulation scheme are often known only by the defendants."
Baxter v. A.R. Baron & Co., No. 94 Civ. 3913, 1996 WL
586338, at *8 (S.D.N.Y. Oct. 11, 1996). However, a complaint still must
state "what manipulative acts were performed, which defendants performed
them, when the manipulative acts were performed, and what effect the
scheme had on the market for the securities at issue." Baxter v.
A.R. Baron & Co., No. 94 Civ. 3913, 1995 WL 600720, at *6(S.D.N.Y. Oct. 12, 1995). The general
statements noted above do not specify which Defendants were involved,
which securities were manipulated in what way, how such manipulation
affected the market for the specific security, and in what way
Remaining Plaintiffs were harmed by the manipulation. Accordingly, the
third cause of action is dismissed as to the Broker Defendants for
failure to plead with particularity. The first cause of action is
dismissed for failure to state a claim.
c. Individual Defendants
The extent of the allegations against the Individual Defendants are
that some of them traded in PaperClip securities. None are mentioned in
connection with the Jockey Club scheme. Therefore, only the Burgesses may
have a sustainable claim against the Individual Defendants because James
Bailey's account experienced no transactions in PaperClip stocks.
Beatrice, Isaac, Jack, Morris, Nathan, and Ralph Dweck received shares in
the initial public offering of PaperClip. (Compl. ¶ 259.) Basil
Shiblaq received 80,000 shares in the PaperClip initial offering, more
than the number for which he subscribed. (Id. ¶ 202.)
Individual Defendants are also alleged to have profited from sales of
PaperClip. (Id. ¶ 262.) Thus, the securities fraud claims
against these defendants rest on a few allegations that they purchased or
sold, and profited from, PaperClip securities.
No misrepresentations or even omissions have been alleged on the part
of the Individual Defendants. The securities fraud claims against the
Individual Defendants focus on market manipulation. However, the
complaint is also insufficient to state a claim for market manipulation
As with many other areas of the complaint, Plaintiffs' claims against
the Individual Defendants for market manipulation suffer from the defect
of group pleading. The only specific allegations as to the Individual Defendants are not adequately
specific to establish a claim for market manipulation. Allegations that
some Individual Defendants owned PaperClip securities and benefitted from
the market manipulation performed by Baron is not enough. See
Baron, 1995 WL 600720, at *7. Furthermore, the complaint contains no
specifications as to how the Individual Defendants' actions affected
Remaining Plaintiffs' transactions (which were all unauthorized).
Finally, there are no allegations as to how each Individual Defendant
acted with scienter. Indeed, in the few instances when the complaint
mentions an Individual Defendant by name in connection with manipulated
securities, there are no allegations of any intent to deceive. The
Burgesses' third cause of action is dismissed as to the Individual
Defendants for failure to plead with sufficient particularity. Their
first cause of action is dismissed for failure to state a claim, as are
both James Bailey's first and third causes of action against the
d. Apollo Defendants
The complaint does not allege that the Apollo Defendants made any
statements or had a fiduciary duty to speak. Neither does it allege that
Remaining Plaintiffs relied on anything said or not said by the Apollo
Defendants. Plaintiffs argue that the Apollo Defendants can be held
liable for misrepresentations or omissions regarding Jockey Club
securities because they masterminded and directly participated in the
fraudulent conduct. As Plaintiffs themselves recognize, however, there is
difference between violations based on misrepresentations or omissions
and those based on market manipulation. See Rule 10b-5,
17 C.F.R. § 240.10b-5(a), (b) (distinguishing between violations through
any "device, scheme, or artifice to defraud," and material
misrepresentations or omissions).
Plaintiffs rely on the general principle stated in SEC v. First
Jersey Securities. Inc., 101 F.3d 1450 (2d Cir. 1996), that "[p]rimary liability may be imposed not
only on persons who made fraudulent misrepresentations but also on those
who had knowledge of the fraud and assisted in its perpetration." Id. at
1471 (internal quotation marks omitted). The court in First Jersey
Securities held that the sole owner of a broker-dealer could be held
liable as a primary violator of section 10(b) and Rule 10b-5 when the
broker-dealer engaged in widespread fraud against its customers.
See Id. The court determined that the individual
owner was properly liable because he helped plan the pattern of trading
that violated the securities laws. See id at 1472. First Jersey
Securities, therefore, stands for the proposition that one
intricately involved in the planning and execution of a fraudulent
scheme can be held accountable as a primary violated of section
10(b) and Rule 1 Ob-5. There is little in the Second Circuit's discussion
to support the contention that the Apollo Defendants could be held liable
for Baron's misrepresentations or omissions.
Plaintiffs also cite Breard v. Schnoff & Weaver Ltd.,
941 F.2d 142, 144 (2d Cir. 1991), and In re Union Carbide Corp. Consumer
Products Business Securities Litigation, 676 F. Supp. 458, 468-69
(S.D.N.Y. 1987). The court in Breard held that the law firm
that wrote an offering memorandum replete with material
misrepresentations could be held liable by individuals who relied on the
memorandum in purchasing shares in the company. See 941 F.2d at
143-44. Similarly, in Union Carbide, the court concluded that
an investment firm could be held liable as a primary violator for
fraudulent sales projections that it prepared but that were officially
disseminated by its corporate client. See 676 F. Supp. at
467-69. Both Breard and Union Carbide involved
defendants who prepared the fraudulent statements that were
then disseminated to the public by another entity. Here, not only did the
Apollo Defendants not prepare any fraudulent statements, the complaint
does not identify any fraudulent statements at all in connection with
Jockey Club securities. However, James Bailey has established a claim against the Apollo
Defendants on the basis of market manipulation. In contrast to the other
Defendants, there are sufficient allegations against the Apollo
Defendants relating to their role in the Jockey Club scheme. It was the
Apollo Defendants who approached Baron about causing shares to be sold to
Baron customer accounts. (Compl. ¶ 233.) The Apollo Defendants also
proposed to split the proceeds of the fraudulent transactions with Baron
brokers. (Id.) The complaint then details how the Apollo
Defendants and Baron carried out the plan. (Id. ¶¶ 234-36.)
As part of the scheme, Bailey received unwanted securities that caused
him to lose funds from his account. Thus, there are sufficient
allegations regarding the scheme to defraud and the harm suffered.
See In re Initial Public Offering Sees. Litig., 241 F. Supp. at
296. There are no allegations, however, regarding the Apollo Defendants'
manipulation of PaperClip securities, the only securities allegedly
received by the Burgesses. Thus, the Burgesses have not stated a claim
for market manipulation against the Apollo Defendants.
The complaint also adequately pleads scienter as to the Apollo
Defendants. The facts alleged give rise to a strong inference that the
purpose of the Apollo Defendants' plan was to defraud the public. This
intent is inferred from their bribe of Baron to sell stock that was
without value, and their proposition that they and Baron split the
proceeds of the sales. The complaint sufficiently alleges conscious
misbehavior and motive/opportunity to commit fraud.
The Court therefore concludes that Bailey's third cause of action
against the Apollo Defendants survives a motion to dismiss. Remaining
Plaintiffs' first cause of action and the Burgesses' third cause of
action are dismissed for failure to state a claim.
C. Claims Based On Control Person Liability
The complaint alleges that the Bear Stearns Defendants, Kenneth Stokes,
the Dwecks, and the Wolfsons and the entities associated with them, see
supra note 2, were control persons of Baron who are therefore
responsible for Baron's wrongdoing.*fn7 (Compl. ¶ 35.) Section
20(a) of the Securities Exchange Act provides:
Every person who, directly or indirectly, controls
any person liable under any provision of this
chapter or any rule or regulation thereunder shall
also be liable jointly and severally with and to
the extent as such controlled person is liable,
unless the controlling person acted in good faith
and did not directly or indirectly induce the act
or acts constituting the violation or cause of
15 U.S.C. § 78t(a). To state a claim for control person liability,
the complaint must allege: (1) a primary violation by Baron, and (2)
control of Baron by each defendant. First Jersey Sees., Inc.
101 F.3d at 1472 (citations omitted). There is some dispute over whether
a third requirement is that the defendant acted culpably in the fraud.
See Neubauer v. Eva-Health USA, Inc. 158 F.R.D. 281. 284
(S.D.N.Y. 1994) (collecting cases on both sides of the dispute). The one
and three-year statute of limitations also apply to claims under section
20. See Dodds v. Cigna Sees. Inc. 12 F.3d 346
, 349 (2d Cir.
1993) (applying statute of limitations in section 9(e) to claims under
section 20). Thus, any claims based on primary violations by Baron that
occurred before February 2, 1996 are time-barred. There is no argument
that the complaint fails to allege primary violations by Baron; instead,
the defendants who are named in this count maintain that the complaint
fails to allege control and culpable conduct.*fn8
"[C]ontrol over a primary violator may be established by showing that
the defendant possessed `the power to direct or cause the direction or
the management and policies of a person, whether through the ownership of
voting securities, by contract, or otherwise."' Id. at 1472-73 (quoting
17 C.F.R. § 240.12b-2). Allegations of influence are not the same as
the power to direct the management and policies of the primary violator.
See Blech II 961 F. Supp. at 587. "Actual control is essential
to control person liability." Id. at 586. However, the Rule 9(b)
heightened pleading standard does not apply to averments of control
person liability. See Duncan v. Fencer, No. 94 Civ. 0321 (LAP),
1996 WL 19043, at *18 (S.D.N.Y. Jan. 18, 1996).
Here, the complaint provides sparse facts regarding Defendants' control
over Baron, a defect Plaintiffs recognize in their Memorandum of Law.
Plaintiffs argue that the Wolfsons, the Dwecks, and Kenneth Stokes
"played a significant role in the relationship between Baron and other
. . . Defendants." (Plfs.' Mem. at 50.) The Wolfsons were "important as
parking participants, a key link to Bear Stearns, and recipients of
enormous payments." (Id.) "Stokes was also a participant in
parking . . . ." (Id.) Participation, even significant
participation, in Baron's scheme to defraud is not equivalent to
directing Baron to engage in that scheme. The complaint therefore fails
to state a cause of action under section 20(a) as to the Wolfsons and the
entities associated with them, the Dwecks, and Stokes.*fn9 Plaintiffs contend that the Bear Stearns Defendants actually controlled
Baron because, at certain times, they took over Baron's offices and
executed transactions, as well as approved or disapproved of all of
Baron's trading orders after November 1995. According to the complaint,
towards the end of 1995, Bear Stearns assumed control of all trading
activities at Baron and sent its employees to Baron's offices to enforce
that control. (Compl. ¶ 208.) However, as noted above, the statute of
limitations bars this claim and no tolling doctrine applies. Therefore,
the claims against the Bear Stearns Defendants are time-barred.*fn10
D. Aiding and Abetting Breach of Fiduciary Duty
Plaintiffs also seek to hold all Defendants liable for aiding and
abetting Baron's breach of its fiduciary duties to Plaintiffs. Defendants
move to dismiss this claim on a variety of grounds. The majority of the
claim is time-barred because New York imposes a three year statute of
limitations on suits for breach of fiduciary duties. See N.Y.
C.P.L.R. 214(4) (setting three-year limitations period for damages to
property); see also Ackerman v. Nat'l Prop. Analysts, Inc.,
887 F. Supp. 494, 507 (S.D.N.Y. 1992) (dismissing aiding and abetting breach
of fiduciary duties claims because time-barred); Loengard v. Santa
Fe Indus. Inc. 573 F. Supp. 1355, 1359 (S.D.N.Y. 1983) (same). Any
aiding and abetting claims that arose from Baron's actions before
February 2, 1996 are accordingly barred by the statute of limitations.
For those claims that are not time-barred, Plaintiffs must allege (1)
Baron's breach of its fiduciary duties, (2) knowledge of that breach by
each defendant, (3) substantial assistance by the defendants in the breach, and (4) a nexus between Plaintiffs'
injuries and Defendants' conduct. See Ackerman, 887 F. Supp. at
508. Only the Burgesses and James Bailey are alleged to have sustained
losses. The complaint adequately alleges that Baron violated its
fiduciary duties to Remaining Plaintiffs through its unauthorized
transactions in their accounts. See De Kwiatkowski v. Bear, Stearns
& Co. 306 F.3d 1293, 1306 (2d Cir. 2002). However, the
complaint does not state in connection with any of the unauthorized
transactions that any defendant participated in the breach of fiduciary
duties. The one exception is the allegations with regard to the Apollo
Defendants. The complaint alleges that the Apollo Defendants proposed
that Baron place Jockey Club securities in their customers' accounts with
authorization, and that, in February 1996, Baron brokers made an
unauthorized purchase for James Bailey's account. (Compl. ¶¶ 234-40.)
Therefore, all aiding and abetting claims are dismissed except for James
Bailey's claim against the Apollo Defendants.
E. Common-Law Fraud
Finally, Defendants move to dismiss the sixth cause of action for
common-law fraud. To avoid a motion to dismiss, Plaintiffs must plead "a
material false representation, an intent to defraud thereby, and
reasonable reliance on the representation causing damage. . . . "
S.Q.K.F.C., Inc. v. Bell Atlantic TriCon Leasing Corp. 84 F.3d 629,
633 (2d Cir. 1996) (internal quotation marks and citations omitted).
In response to Defendants' arguments that the complaint fails to identify
which defendants made what statements on what dates, Plaintiffs argue
that each defendant can be held liable for the misrepresentations of
their codefendants because they were involved in a conspiracy, and that
no misrepresentations need be pled because fraud through market
manipulation is actionable under New York law. The Court rejects both
Plaintiffs rely on First Federal Savings & Loan Association of
Pittsburgh v. Oppenheim, Appel, Dixon & Co. 629 F. Supp. 427, 443 (S.D.N.Y.
1986), for the proposition that Defendants are liable for Baron's
fraudulent acts because Defendants were coconspirators with Baron. The
plaintiffs in First Federal, however, had sued the defendants
for civil conspiracy to defraud. See id Here, the
cause of action was for common-law fraud and made no mention of civil
conspiracy. Considering a separate cause of action now would effectively
allow Plaintiffs to amend their complaint through a memorandum of law on
a motion to dismiss. This the Court cannot permit. See Goel v. U.S.
Dep't of Justice, No. 03 Civ. 0579 (HB), 2003 WL 22047877, at *1 n.4
(S.D.N.Y. Aug. 29, 2003) ("Allegations in a memorandum of law . . cannot
serve as a means to amend . . . [a] complaint and therefore this
additional allegation will not be treated as part of . . . [the]
complaint.")-Additionally, Plaintiffs maintain that there is a cause of
action under New York law for fraud based on market manipulation. There
is case law in this district to support their contention. See Blech
n. 961 F. Supp. at 587; Minpeco, S.A. v. ContiCommodity Servs.,
Inc. 552 F. Supp. 332, 336-38 (S.D.N.Y. 1982). The court in Minpeco
confronted a situation in which the plaintiffs brought suit for
common-law fraud based on the defendants' actions rather than their
statements. See 552 F. Supp. at 336. The plaintiffs sought to
establish liability based on the defendants' fraudulent acts in
manipulating the silver market. See Id. at 334-35.
The court first stated that New York law imposed no duty to speak on the
defendants who were on opposite sides of the market from the plaintiffs.
See Id. Finding no New York cases directly on point,
the court then reasoned that "a duty to speak does arise where defendants
have engaged in `some act or conduct which deceived plaintiffs.'" Id
(quoting Moser v. Sprizzirro, 295 N.Y.S.2d 188, 189 (App. Div.
1968)). The gravamen of a common-law fraud claim is the fraudulent
production of a false impression in the mind of another, regardless of
whether the result was carried out by word or deed. Id. The
court concluded that the complaint stated a cause of action for fraud
because the defendants' actions in creating an artificial price in the
silver market lured the plaintiffs into the market to their detriment.
Id. at 337.
Even assuming that Minpeco's approach is correct, the
common-law fraud claims are still infirm. As explained above, the only
sustainable market manipulation claim for the period February 1996 until
the date of the complaint was against the Apollo Defendants. Scrutiny of
the rest of the complaint that is time-barred under the federal
securities laws yields no other action that satisfies the elements of a
market manipulation claim. Plaintiffs repeatedly assert Defendants'
responsibility for actions Baron's actions, do not specify who committed
which acts, and assert fraud merely based on Defendants' profits from
their investments with Baron. Thus, only the claims against the Apollo
Defendants might survive with the help of the Minpeco
But the presence of market manipulation does not absolve Plaintiffs
from satisfying the other elements of New York fraud. Judge Sweet in
Blech II relied on Minpeco in determining that market
manipulation could form the basis for a common-law fraud claim.
See 961 F. Supp. at 587. However, he also held that plaintiffs
had to plead reliance on the market. See Id. The
transactions for which the Apollo Defendants are allegedly liable were
all unauthorized. It is not possible for Plaintiffs to have relied on the
integrity of the market in making a decision to purchase securities when
they never made such a decision. Thus, unlike a federal securities claim,
Plaintiffs cannot assert common-law fraud based on unauthorized
transactions. The common-law fraud claims are therefore dismissed for
failure to state a claim.
F. Leave to Replead
Plaintiffs argue that they should be permitted leave to replead any
claims which have been dismissed. The general rule is that leave to replead should be
granted when a complaint is dismissed. In re Initial Public
Offerings Sec. Litig. 241 F. Supp.2d at 397. However, repleading
should not be granted when a claim is dismissed under Rule 12(b)(6)
because such repleading would be fufile. See Lucente v. Int'l Bus.
Mach. Corp. 310 F.3d 243, 258 (2d Cir. 2002). Thus, Plaintiffs will
not be granted leave to replead on causes of action dismissed for failure
to state a claim. They will, however, be granted leave to replead when
the Court has dismissed for failure to plead with sufficiently
The Court summarizes its holdings here:
(1) The first, second, and third causes of action based on primary
violations of the securities laws as they relate to Plaintiffs Fezzani,
Cirenaca, Jane Bailey, the Blanks, Baydel, Bootlesville, and Cung are
dismissed against all Defendants except Arthur Bressman (who has not
appeared in this action) because they are time-barred;
(2) James Bailey's and the Burgesses' first three causes of action
against the Bear Stearns Defendants are dismissed for failure to state a
(3) James Bailey's and the Burgesses' second cause of action as to all
Defendants is dismissed for failure to state a claim;
(4) James Bailey's and the Burgesses' first cause of action against the
Individual and Broker Defendants is dismissed for failure to state a
(5) James Bailey's and the Burgesses' third cause of action against the
Broker Defendants is dismissed with leave to replead for failure to plead
(6) James Bailey's third cause of action against the Individual
Defendants is dismissed for failure to state a claim;
(7) The Burgesses' third cause of action against the Individual
Defendants is dismissed with leave to replead for failure to plead with
(8) James Bailey's and the Burgesses' first cause of action is
dismissed against the Apollo Defendants for failure to state a claim;
(9) The control person liability claims against Bear Stearns are
dismissed as untimely; all other control person claims are dismissed for
failure to state a claim;
(10) All claims against Bank Audi are dismissed for improper service of
(11) All claims for aiding and abetting breach of fiduciary duty are
dismissed for failure to state a claim, except for those of James Bailey
against the Apollo Defendants; and
(12) All claims for common-law fraud are dismissed for failure to state
The effect of this decision is to leave the following claims intact:
the RICO claims against the Baron Defendants, the federal securities
fraud claims against Arthur Bressman, James Bailey's third cause of
action based on market manipulation against the Apollo Defendants, and
his aiding and abetting breach of fiduciary duty claim against the Apollo
Defendants. Finally, Remaining Plaintiffs have sixty days from the date
this decision is entered to replead their third cause of action against
the Broker Defendants; the Burgesses also have sixty days to replead
their third cause of action against the Individual Defendants.