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Hunt v. Biochem


December 11, 2006


The opinion of the court was delivered by: Shira A. Scheindlin, U.S.D.J.



A group of investors bring this action for common law fraud in connection with the purchase and holding of Enzo Biochem, Inc. ("Enzo") securities, against the corporation, certain of its officers and directors (collectively, the "Enzo defendants") and one outside consultant. Enzo has been a public company since 1970, engaged in the research and development of treatments to fight the human immunodeficiency virus ("HIV") and other diseases.*fn1 The gravamen of the consolidated complaints is that defendants conspired to fraudulently inflate the price of Enzo stock through a series of misrepresentations and omissions about the speed of development and effectiveness of Enzo's medical treatments in order to sell their shares in the company at artificially inflated prices. Plaintiffs allege that they suffered financial losses by relying on defendants' misstatements and omissions when deciding to purchase and hold an unspecified amount of Enzo stock and options. This Court has diversity jurisdiction over this matter pursuant to section 1332 of Title 28 of the United States Code. Venue is proper in this district pursuant to section 1391(a) of Title 28 of the United States Code.

Defendants now move to dismiss this suit on the ground that it is time barred, or, in the alternative, that it fails to satisfy Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure. Defendants argue that plaintiffs have failed to plead fraud with the requisite particularity and have failed to plead loss causation, reliance and the purchase or sale of a security. For the following reasons, defendants' motion to dismiss is granted with leave to replead as to all plaintiffs, except those whose claims are time-barred.


A. Overview of the Conspiracy

Beginning in 1998, defendants entered into a "pump and dump" scheme in which insiders first fraudulently inflated the price of Enzo stock through a series of misrepresentations and omissions and then sold their stock at artificially inflated prices. The false disclosures and omissions related to: (1) Enzo's patent estate; (2) the progress of its HIV pre-clinical and clinical trials; (3) the efficacy of its gene therapy; and (4) the timing of a major transaction with a pharmaceutical company.*fn3 The misrepresentations were made at an annual shareholders meeting in January 2000, in press releases and in news articles, and according to the Hunt but not the Roberts Complaint, through dissemination of insider information to stockbrokers, analysts and shareholders.

By April 1999, defendants were concealing that Enzo's Phase I trial of its HIV therapy was not going well.*fn4 In the first quarter of 2000, defendants fraudulently represented that the Phase I trials were successful so as to permit the Phase II trials to begin and to allow Enzo to open clinics to treat HIV positive and acquired immunodeficiency syndrome ("AIDS") patients in April 2000.*fn5 These misrepresentations artificially inflated Enzo's stock, causing some of the individual defendants to sell large amounts of stock in March of 2000. Soon thereafter, Enzo's stock price collapsed, at which point defendants began to again engage in misrepresentation and omission to boost the stock price.

By the end of the first quarter of 2001, Enzo's stock price had returned to the price level it had traded at over the prior two decades. The fall in price occurred because the market discovered defendants' exaggerations and omissions when Enzo's promises of medical and commercial success failed to materialize. The company had also disclosed data in March of 2001 indicating that the treatments whose efficacy defendants had touted had no therapeutic power. Plaintiffs do not specify the dates and amounts of Enzo securities (stocks and options) they purchased and held, but simply state that they each bought and held Enzo securities from 1998 to 2003 collectively.*fn6 Plaintiffs made "all" of their decisions to purchase and hold Enzo securities in reliance on the defendants' "representations" as described in the complaints.*fn7

B. Misrepresentations to Brokers

As part of defendants' scheme to artificially boost the price of Enzo stock, at unspecified dates in 1999, defendants Barry Weiner and Heiman Gross disseminated non-public information concerning Enzo's prospects to various brokers, including George Somkin, Bob Berlin, Phil Sloan, and Doug Yates, with the intent that they pass on such information to their clients thereby generating demand for the company's stock.*fn8 Yates relayed such information to broker Ed Stephen, who was in "constant communication" with plaintiffs Hunt, McMahon and Cavanagh, telling them that he had received inside information - most of which was ultimately false - from defendants Gross, Weiner, Elazar and Shahram*fn9 Rabbani ("Rabbanis") or Dean Engelhardt concerning "major material events" that were likely to result in a rise in Enzo's stock price if and when they occurred.*fn10 As part of the conspiracy to disseminate false information to pump the stock price, Keating, a paid consultant to Enzo, told plaintiffs that when Enzo announced its successful treatment for AIDS, its stock would trade at over $5,000 a share.*fn11

Defendants did not limit their dissemination of insider information to brokers. For example, in 1999, Gross told Robert Jernigan, an investment advisor, that a major diagnostic deal with a European company was expected to occur shortly.*fn12 Gross also made numerous misstatements to Jernigan as to the great successes of Enzo's gene therapy, HIV treatment, and Phase I trials.*fn13 Defendants provided false revenue estimates to an analyst from Brenner Securities who relied upon such bogus financials to project that Enzo stock would hit $111 per share sometime in mid-2000.*fn14

C. The January 2000 Shareholders' Meeting

Numerous misrepresentations were made at the annual shareholders' meeting in January 2000 that were largely responsible for the rise in Enzo stock from $44 to $133 within two weeks of the meeting.*fn15 At that meeting, Weiner and Engelhardt, Enzo's president and executive vice president, respectively, made several deliberate misstatements concerning Enzo's progress in developing a new HIV treatment and gene therapy. Engelhardt's misrepresentations were: (1) "It's all over, but the shouting," commenting on the progress of the Phase I trial;*fn16 (2) "it works, they both work" in reference to Enzo's gene therapy treatments for HIV and Hepatitis B;*fn17 and (3) that Enzo's treatment kills the AIDS virus.*fn18 In fact, the Phase I trial was "woefully behind" schedule.*fn19 It was not successful because there was no increase in patients' T-cell counts or decrease in the viral load which are the "standard [Food and Drug Administration's ("FDA")] markers of efficacy" for this type of treatment.*fn20

At the same shareholders' meeting, Weiner made the following misrepresentations: (1) that Enzo's Phase I clinical trial was proceeding satisfactorily and on schedule;*fn21 (2) that Enzo would open three clinics to treat HIV and AIDS patients by the end of 2000 and that Enzo could treat 9,500 patients per clinic at a charge of $30,000 per patient but failed to disclose that Enzo needed to have FDA approval - which Enzo had not even sought;*fn22 (3) that Enzo had submitted Phase I data to the FDA and was awaiting approval of Phase II even though it had no such data as it had only treated one patient and the results were not positive;*fn23 (4) that HGTV-43, a component of Enzo's new gene therapy, which delivered genes to certain cells to enhance immune responses in a process called transduction, had reduced successful transduction from a period of up to three months to eighteen hours;*fn24 (5) that Enzo had made a technical breakthrough because HGTV-43 achieved levels of stable transduction to patients' non-growing blood stem cells greater than thirty percent;*fn25 and (6) that the HGTV vector was ready for commercialization.*fn26 Weiner failed to mention that the absence of any positive test results had caused Enzo to modify its transduction process, that the new eighteen hour transduction process had negative results, and that this had delayed the development of Enzo's clinical trials.*fn27

Defendants repeated some of the same misrepresentations concerning the efficacy of the Enzo therapies to the press. In a January 20, 2000 Business Week article, Weiner was quoted as saying that the clinical trials have produced "[i]mpressive positive results."*fn28 A February 16, 2000 Dow Jones News Service article quoted Weiner as stating, "[w]e can stop the virus cold" and quoted Engelhardt as saying that Enzo's treatment "makes the virus disappear."*fn29

D. Defendants Sell Their Shares in Enzo

Within a few months after the January shareholder meeting, Enzo officers and directors sold large amounts of stock. John DeLucca sold all the Enzo shares that he owned for approximately two million dollars.*fn30 Weiner and the Rabbanis collectively transferred or sold 600,000 shares of Enzo stock on March 28, 2000, which had a market value of over forty-eight million dollars.*fn31 Engelhardt sold approximately $350,000 of shares in March of 2000.*fn32

Within two weeks of the March 28 sales, the value of Enzo stock dropped from $81 to $35 per share.*fn33 Enzo's failure to announce that it had achieved a cure for AIDS at a conference in early 2000, or to make good on its prior representations that it would begin Phase II trials and open new clinics by April 2000 "undoubtedly cast doubt in the market" as to the truth of the statements made at the January 2000 shareholder meeting.*fn34 While sophisticated investors began to realize that Enzo had overstated the efficacy of its cures, plaintiffs were not aware that defendants had intentionally perpetrated a classic pump and dump scheme.*fn35

E. Defendants' Second Pump

After the price of Enzo stock fell to $35, defendants once again attempted to artificially pump the price back up through a series of misrepresentations. Enzo issued a press release, dated April 13, 2000, claiming that overall the company was in good shape, well-positioned in the market and that its clinical trials were producing promising results.*fn36 The press release stated that the drop in Enzo's stock price could not be explained as an accurate reflection of any infirmity on Enzo's part but was merely a mirroring of the general loss in value that befell the entire biotech industry at the time.*fn37 Defendants knew these statements were false because the clinical trials were not going well, nor were they on schedule, and the HIV trials were producing unfavorable results.*fn38 The April 13 press release also claimed that Enzo had two hundred patents worldwide, when in reality Enzo only had thirty-six patents, the remainder being the same patents issued in other countries.*fn39

Once again, Weiner and Gross provided brokers with deliberately misleading information about Enzo that defendants knew would be disseminated to the brokers' clients - some of whom were contacted directly.*fn40 These misrepresentations included: (1) an announcement that Enzo had found a cure for liver cancer; (2) a "blockbuster news" announcement at an AIDS conference in June 2000; (3) a "major announcement" about its HIV therapy; (4) a planned secondary offering in the summer of 2000 with an offering price of $250 per share; (5) announcing a large joint venture with Hoffman LaRoche; and (6) that a Texas billionaire would underwrite the entire cost of human testing in return for Enzo's treatment of his daughter who suffered from AIDS.*fn41

A press release dated October 2, 2000 stated that the "new data on the first individual treated in the Phase I clinical trial of HGTV-43, the company's HIV-1 gene medicine product, show that after nine-and-one-half-months Enzo engineered cells have successfully engrafted in the patient's bone marrow and were spawning new differentiated CD4 cells designed to fight the virus."*fn42 However, the engraftment had actually failed and Enzo's treatment had not met any of the recognized clinical markers of an effective HIV treatment - namely increased T-cell count and lower viral loads. The clinical data revealing that the engraftment had actually failed "was exposed to the public" at a meeting of the Recombinant DNA Advisory Committee (the "RAC meeting") of the National Institutes of Health on March 8, 2001.*fn43 At the RAC meeting, Enzo reported that no clinical patient's T-cell counts had improved and that the viral loads of several patients had increased.*fn44 Plaintiffs do not allege that the disclosure of this data caused a drop in Enzo's stock price.

F. Defendants' Misrepresentations Became Known

In June of 2001, pursuant to the Freedom of Information Act ("FOIA"), plaintiffs received the informed consent forms that Enzo gave to potential participants in its HIV clinical trials.*fn45 That consent form indicated that those who had high viral loads or low T-cell counts were excluded from participating in the study, which revealed the falsity of earlier press releases claiming that Enzo had begun to treat patients with AIDS.*fn46 More importantly, "Enzo's claims in the press releases that its treatment was effective were contradicted in its admission in the informed consent form that there was no anticipated therapeutic benefit."*fn47

Through 2000 and 2001, when Enzo failed to announce that it was in Phase II testing, that it had opened clinics, or that it had found any cures, the price of Enzo stock continued to drift lower "as sophisticated investors recognized that Enzo's claims were either outright false or hyped . . . . By the first quarter of 2001, Enzo stock was trading approximately where it had traded for the past two decades, as the market digested and corrected for the hype."'*fn48

G. The Prior Suit Against Enzo

Michael J. Rovell, one of plaintiffs' attorneys in this action, filed suit on March 6, 2002 against Enzo and several of the individual defendants named here in the United States District Court for the Eastern District of Virginia (the "Glaser action" or "Glaser Complaint").*fn49 After the trial court granted defendants' motion to dismiss the Glaser Complaint in its entirety, the Fourth Circuit affirmed in part, but found that the Glaser Complaint sufficiently pled that defendants had made several misrepresentations and remanded for further proceedings.*fn50 On remand, the trial court granted defendants' renewed motion to dismiss: (1) as to certain individual defendants because they did not make any of the alleged misrepresentations that the Fourth Circuit found to be actionable; and (2) as to all defendants because plaintiffs failed to adequately plead loss causation under the Supreme Court's decision in Dura Pharmaceuticals v. Broudo ("Dura"),*fn51 by failing to allege that Enzo's stock price fell after the truth was disclosed.*fn52 The Fourth Circuit affirmed the dismissal in all respects on September 21, 2006, after the briefing on this motion to dismiss was completed.*fn53


A. Motion to Dismiss

A motion to dismiss pursuant to Rule 12(b)(6) should be granted only if "'it appears beyond doubt that the plaintiff can prove no set of facts in support of [its] claim which would entitle [it] to relief. "'*fn54 When deciding a motion to dismiss, courts must accept all factual allegations in the complaint as true, and draw all reasonable inferences in plaintiff's favor.*fn55 "While the pleading standard is a liberal one, bald assertions and conclusions of law will not suffice."*fn56 Even though the plaintiff's allegations are taken as true, the claim may still fail as a matter of law if it appears beyond doubt that the plaintiff can prove no set of facts in support of its claim which would entitle it to relief, or if the claim is not legally feasible.*fn57 While consideration of a motion to dismiss under Rule 12(b)(6) is generally limited to consideration of the complaint itself, consideration of materials outside the complaint "is not entirely foreclosed."*fn58 It is permissible for the court to consider materials outside the record that were relied upon in drafting the complaint or that are integral to a complaint only if the court has determined that there are no disputes as to the authenticity, accuracy and relevance of such materials.*fn59

B. Statute of Limitations

"Where jurisdiction rests upon diversity of citizenship, a federal court sitting in New York must apply New York choice-of-law rules and statutes of limitations."*fn60 Under New York's borrowing statute, where a non-resident plaintiff sues based upon a cause of action that accrued outside New York, the court must apply the shorter limitations period of either New York or the state where the cause of action accrued.*fn61 The borrowing statute requires a court to apply the limitation period of the foreign jurisdiction even if "jurisdiction is unobtainable over a defendant in the foreign jurisdiction."*fn62 New York courts interpreting the borrowing statute hold that the cause of action accrues in the place of the injury, and where the "'injury is purely economic, the place of injury is usually where the plaintiff resides and sustains the economic impact of the loss.'"*fn63

In borrowing a foreign statute of limitations, a court must apply all extensions and tolls that are applicable in that state. When a defendant attempts to use the statute of limitations as an affirmative defense, the defendant "bears the burden of establishing by prima facie proof that the limitations period has expired since the plaintiff's claims accrued."*fn64 If defendant meets this burden, then the plaintiff has the burden to show that the limitations period should be tolled.*fn65 A motion to dismiss on the basis that a claim is time-barred "may only be granted when the allegations of the complaint make clear that the claim is barred by the limitations period."*fn66

C. Common Law Fraud

To recover damages for fraud under New York law, a plaintiff must prove: (1) a misrepresentation or omission of material fact; (2) which the defendant knew to be false; (3) which the defendant made with the intention of inducing reliance; (4) upon which the plaintiff reasonably relied; and (5) which caused injury to the plaintiff.*fn67 "The claim also requires a showing of proximate causation, such that the injury 'is the natural and probable consequence of the defrauder's misrepresentation or . . . the defrauder ought reasonably to have foreseen that the injury was a probable consequence of his fraud. "'*fn68

A claim for common law fraud under New York law must also satisfy the requirements of Federal Rule of Civil Procedure 9(b), including allegations that give rise to a strong inference of fraudulent intent.*fn69 Furthermore, in order to plead a conspiracy to defraud consistent with the particularity requirements of Rule 9(b), "[w]here multiple defendants are asked to respond to allegations of fraud, the complaint should inform each defendant of the nature of his alleged participation in the fraud."*fn70 In other words, "a complaint may not simply clump defendants together in vague allegations."*fn71


A. This Action Is Not Time-Barred

The parties agree that under New York's borrowing statute the applicable statute of limitations for a common law fraud claim is determined by the plaintiffs' state of residence.*fn72 The parties disagree, however, on two key issues - whether the limitations period has run, and assuming it has, whether the limitations period has been tolled.

1. The Limitations Period Has Run

Under the applicable statute of limitations in their home states, all plaintiffs must have commenced a common law fraud action within either three or four years from the date on which the fraud was discovered or could have been discovered through reasonable diligence.*fn73 Specifically: (1) the Hunt plaintiffs are residents of Georgia which has a four-year statute of limitations;*fn74 (2) the McMahon plaintiffs are residents of South Carolina which has a three-year limitations period;*fn75 (3) the Cavanagh plaintiffs are residents of Massachusetts which has a three-year limitations period;*fn76 (4) Pope is a resident of Florida which has a four-year limitations period;*fn77 and (5) Roberts is a resident of California which has a three-year limitations period.*fn78

Defendants claim that plaintiffs filed these actions just days before the sixth anniversary of the January 14, 2000 shareholders' meeting when many of the alleged misrepresentations were made, in a blatant attempt at forum shopping to take advantage of New York's six-year limitations period for fraud claims.*fn79 Defendants assert that plaintiffs should have learned of their fraud claims no later than March 8, 2001, at the RAC meeting when data was "exposed to the public" revealing that Enzo's procedure for engraftment had failed.*fn80 Alternatively, defendants argue that the limitations period began running in June 2001 when plaintiffs received certain documents pertaining to Enzo, through a FOIA request, which established defendants' misrepresentations.*fn81 Defendants also argue that plaintiffs' FOIA request pertaining to Enzo's clinical trials shows that plaintiffs "were well aware of their possible fraud claim" and were actively investigating the facts which might underlie this claim.*fn82 Because the Hunt and Roberts Complaints were filed four and a half years after receipt of the FOIA information, defendants argue that the claims of all plaintiffs are time-barred by their resident state's statute of limitations.

Plaintiffs do not allege when they learned or should have learned through due diligence that they had potential claims. Instead, plaintiffs assert that the date when each plaintiff discovered or should have discovered the facts underlying his or her claim cannot be determined at this stage of the litigation.*fn83 The allegations in the Complaints reveal that plaintiffs through reasonable diligence should have discovered that they had a potential claim more than four years before bringing this action. Plaintiffs cannot explain why they were not on inquiry notice of a possible claim after receiving documents in June of 2001 pursuant to their FOIA request, which provided hard evidence that defendants had lied about the efficacy of Enzo's clinical treatments.

The Complaints allege that defendants made a series of misrepresentations and omissions which began in 1999 and continued through 2000. The last misrepresentation identified in the Complaints is a press release dated October 2, 2000. Plaintiffs attach a chart of Enzo's stock price from 1992 to 2002, which shows that after hitting a record peak in the beginning of 2000, and then another notable yet smaller peak in the middle of that year, the stock price dropped in early 2001 to the price at which it had been trading in the beginning of 1999 and for the previous seven years.*fn84 Plaintiffs explain that this price decline resulted from the market having "digested and corrected for the hype."*fn85 After the stock price leveled off, plaintiffs received the response to their FOIA request in June of 2001.

Plaintiffs make several responses to defendants' argument. First, although they do plead that data was "exposed to the public" indicating that Enzo's procedure had failed, at the RAC meeting on March 8, 2001, they do not allege they were at that meeting or should have any knowledge of what occurred there.*fn86 They then argue that even if they were at the meeting, they would not have understood the significance of what occurred given that the discussion was highly technical and laden with scientific jargon incomprehensible to the layperson.*fn87 Second, they note that defendants deny that the RAC panel found that there had been a failure of engraftment, suggesting that if defendants are correct then the truth was not revealed at the RAC meeting and plaintiffs were not on notice that they had a fraud claim.*fn88

Although plaintiffs do not specify when they knew of or suspected the alleged fraud, they suggest - albeit, not with great clarity - that they realized the fraud on or about the date on which they commenced this action:

Significantly, this [RAC] meeting occurred approximately 13 months after the [January] shareholder's [sic] meeting so that it is not as damning that no progress had been made in terms of moving from Phase I to Phase II, then [sic] at the time these Complaints were filed, in which almost 60 months had passed without any progress being made by Enzo regarding gene therapy.*fn89

This reply misses the mark. The question is when plaintiffs should have known of their fraud claim, not whether the length of time between defendants' misrepresentation and the non-materialization of a promised event made it more likely that defendants had engaged in fraudulent conduct. However, it is telling that plaintiffs exhaustively discuss why the RAC meeting did not place them on notice of possible claims but never address why the response to their FOIA request did not put them on inquiry notice of defendants' fraud. Assuming plaintiffs' allegations are true, as I must, plaintiffs should have been on notice of their claims no later than June of 2001. Accordingly, all plaintiffs' claims are time-barred unless they can show that the limitations period has been tolled.*fn90

2. The Foreign Tolling Statutes Are Applicable

In an attempt to avoid the time-bar, plaintiffs argue that defendants have ignored New York's borrowing statute which requires a court to apply the tolling rules of the foreign state.*fn91 Each plaintiff's state of residence - with the exception of Georgia - has a statute that tolls the limitations period for the time that defendants are absent from the state.*fn92 Plaintiffs argue that the date they should have discovered their claims is irrelevant because their resident states' statutes of limitations are tolled based on defendants' absence, resulting in the application of New York's six-year statute because the borrowing statute requires a court to apply the shorter limitations period.*fn93 Under this theory, because the complaints were filed less than six years after the earliest alleged misrepresentations, it does not matter when plaintiffs discovered or should have discovered the fraud.*fn94

Defendants contend that the foreign tolling provisions should not apply because: (1) they violate the Commerce Clause of the United States Constitution; and (2) they contradict the purposes behind New York's borrowing statute. Alternatively, defendants argue that the tolling provisions cannot apply because the defendants are amenable to personal jurisdiction in each of plaintiffs' resident states.*fn95

3. The Tolling Statutes Are Not Unconstitutional As Applied

Defendants assert that applying the tolling provisions of plaintiffs' resident states to non-residents who are engaged in interstate commerce violates the Commerce Clause.*fn96 Defendants rely on a line of cases beginning with the Supreme Court's decision in Bendix Autolite Corp. v. Midwesco Enterprises which held that when "a [s]tate denies ordinary legal defenses or like privileges to out-of-state persons or corporations engaged in commerce, the state law will be reviewed under the Commerce Clause to determine whether the denial is . . . an impermissible burden on commerce."*fn97

Bendix found that Ohio's tolling statute was unconstitutional under the Commerce Clause because the burden imposed on interstate commerce exceeded any local interest that the state might advance. In order to avoid tolling, a foreign corporation had to appoint an agent for service of process which would then subject it to the general jurisdiction of the Ohio courts.*fn98 The Court found that:

Ohio cannot justify its statute as a means of protecting its residents from corporations who become liable for acts done within the State but later withdraw from the jurisdiction, for it is conceded by all parties that the Ohio long-arm statute would have permitted service on [defendant] throughout the period of limitations.*fn99

In Bendix and its progeny, the tolling statutes were unconstitutional as applied, because the absent defendants were subject to jurisdiction in the forum states throughout the limitations period - generally through the exercise of long-arm jurisdiction.*fn100 Here, by contrast, all of the four states at issue (California, Florida, Massachusetts and South Carolina) prohibit the use of the tolling provision if the absent defendant is subject to personal jurisdiction in the state during the limitations period. Because this Court has found that defendants were not amenable to personal jurisdiction in those states during the limitations period, this case is distinguishable from Bendix and the tolling statutes are not unconstitutional as applied.

4. New York Applies Foreign Tolling Statutes Based on Defendants' Absence from Plaintiffs' Resident States

Defendants next argue that it is incongruous to apply the shorter limitations period of a foreign state that lacks jurisdiction over a defendant, but then toll the running of that period precisely for that reason.*fn101 The New York Court of Appeals has held that New York's borrowing statute requires application of the limitation period of a foreign jurisdiction if it bars the claim, and that it "matters not that jurisdiction is unobtainable over a defendant in the foreign jurisdiction."*fn102 When borrowing a foreign statute of limitations, New York courts have long been required to also borrow all tolling provisions that are applicable in the foreign state, including tolls based on absence from the jurisdiction.*fn103

5. Defendants Have Not Shown They Are Amenable to Jurisdiction in the Relevant States

Plaintiffs assert that because defendants are not amenable to personal jurisdiction in plaintiffs' resident states, the tolling statutes apply and the action is not time-barred.*fn104 As I have now determined that the tolling statutes apply, the burden shifts to defendants to establish that they are exempt from these statutes.*fn105 Defendants first note that they were all defendants in the Glaser action "where personal jurisdiction [in Virginia] was asserted and not challenged," and there is no reason to conclude that Virginia is any different than the states at issue here.*fn106 However, because jurisdiction was never challenged in the Glaser action, it provides no guidance as to whether defendants are amenable to jurisdiction in plaintiffs' home states.

Defendants next argue that the Complaints establish that they are amenable to specific jurisdiction in plaintiffs' home states under the "effects" test adopted by the Supreme Court in Calder v. Jones.*fn107 Specifically, plaintiffs allege that defendants

engaged in an intentional tortious conspiracy that caused a substantial injury (i.e., had a substantial 'effect') in the various forum states. As such, if the conspiracy were properly pled with sufficient detail each individual defendant would be subject to service and jurisdiction in those forum states under Calder, thus rendering the tolling provisions inapplicable.'*fn108

But generally speaking, the tortious acts described by the Complaints are misrepresentations that were aimed at a general nationwide audience through press releases, statements to the press and at a shareholders' meeting.'*fn109

The Roberts Complaint only describes intentional misrepresentations that were aimed at actual or potential purchasers of Enzo securities. It does not allege any actions that defendants took which are specifically directed to any particular plaintiff. Defendants argue that because Enzo is registered to sell securities in each of plaintiffs' home states, this constitutes purposeful availment of the benefit and legal protection of the laws so as to confer specific jurisdiction over Enzo for the sale of securities in each of those states.*fn110 But defendants have not cited any authority for the proposition that all publicly traded companies are subject to personal jurisdiction in all fifty states merely by selling their securities nationwide.*fn111 Thus, defendants are not amenable to the personal jurisdiction in California based solely on the allegations in the Roberts Complaint.

By contrast, the Hunt Complaint alleges that defendants Weiner and Gross spread misinformation to brokers with the knowledge and the intent that these brokers would pass on these misstatements to their clients who would rely on them to buy and hold Enzo securities. Plaintiffs McMahon, Cavanagh and Hunt allege that their broker disseminated misinformation that originated from Weiner and Gross.*fn112 The Hunt Complaint also alleges that "as part of the conspiracy" defendants paid a consultant who "told plaintiffs that when Enzo announced its successful treatment for AIDS" the market price of Enzo securities would soar.*fn113 If these allegations are true, it is possible that plaintiffs were told such misrepresentations in their home states which might confer jurisdiction over defendants. However, the Hunt Complaint does not allege where these contacts occurred. While these misrepresentations may have misled plaintiffs, based on the information presented to the Court at this time, they do not establish that defendants had sufficient minimum contacts with plaintiffs' resident states to support the exercise of personal jurisdiction. That is, even if the alleged misrepresentations are actionable in New York - where jurisdiction has not been challenged - there are no allegations that defendants or their agents had any direct contacts with plaintiffs' resident states.*fn114

Because I conclude that defendants are not amenable to personal jurisdiction in plaintiffs' resident states, the tolling statutes apply and the motion to dismiss this action as time-barred is denied. Defendants may renew this motion at the close of discovery when more evidence might be presented to the Court that would support a finding that defendants were indeed amenable to jurisdiction in plaintiffs' resident states.

B. Rule 9(b) - Pleading Fraud with Particularity

1. The Claims Against DeLucca and the Rabbanis Are Dismissed Based on Plaintiffs' Failure to Plead Fraud with Particularity

DeLucca, the Rabbanis, and Gross move to dismiss based on plaintiffs' failure to allege that they made any misleading statements, offering instead only conclusory statements that they participated in a pump and dump scheme.*fn115 While plaintiffs concede that they never alleged that DeLucca or the Rabbanis "made a single misleading statement," they note that they did plead that these defendants "conspired with each other" and the other defendants.*fn116 The only specific allegations in the Complaints as to any actions by DeLucca or the Rabbanis are that they sold their shares in Enzo.*fn117 Plaintiffs' general allegations that these defendants "conspired with each other" and sold their shares are impermissibly vague and therefore all claims against DeLucca and the Rabbanis must be dismissed.

2. The Roberts Complaint Is Dismissed as to Gross for Failure to Plead Fraud with Particularity

The Roberts Complaint mentions Gross in four paragraphs, alleging that he told: (1) shareholders that DeLucca had sold his shares because his pending divorce required him to; and (2) unnamed persons that Weiner and the Rabbanis transferred their shares to trusts for their children instead of selling them.*fn118 There is no allegation that Gross knew that these statements were false and no specification as to whom and when they were made. Therefore, the Roberts Complaint fails to plead fraud against Gross with the particularity required by Rule 9(b).

3. Gross' Motion to Dismiss the Hunt Complaint Based on Its Failure to Plead Fraud with Particularity Is Denied

The Hunt Complaint makes more detailed allegations against Gross, describing misrepresentations that he relayed to specific brokers, one of whom was disseminating misinformation directly to plaintiffs.*fn119 The Hunt Complaint therefore sufficiently alleges the misrepresentations Gross made, to whom they were made, and when they were made. These allegations are sufficient to defeat Gross' motion to dismiss the Hunt Complaint pursuant to Rule 9(b) for failing to plead the alleged misrepresentations.

C. The Complaints Must Be Dismissed for Failure to State a Claim

1. Plaintiffs Fail to Properly Plead Loss Causation*fn120

Defendants argue that plaintiffs have failed to adequately plead loss causation based on the absence of any allegation that the price of Enzo stock fell after the truth of defendants' misrepresentations was revealed.*fn121 Defendants contend that because there was no corrective disclosure before the economic loss occurred, the alleged deception could not have caused plaintiffs' economic loss.*fn122

Plaintiffs argue that their theory of loss causation is not simply that they bought Enzo shares at an inflated price and then suffered a loss when the price fell - which is the theory rejected by the Supreme Court in Dura.*fn123 Rather, plaintiffs allege that by the end of the first quarter of 2001, the market learned that defendants had overstated and/or lied about Enzo's prospects.*fn124 The market demand for Enzo stock then subsided and its price fell. Plaintiffs assert that based on these allegations they have adequately pled that the materialization of an undisclosed condition caused their loss.*fn125

But plaintiffs' only support for the claim that the market learned of defendants' misstatements is that: (1) Fidelity sold all of its shares by the end of 2000;*fn126 and (2) an analyst who had previously predicted that Enzo's stock might reach $111 per share later revised his estimate to $40 per share after learning that Enzo needed FDA approval before its gene therapy could be commercialized.*fn127 Neither of these statements can be viewed as a corrective disclosure, nor is there any allegation of the materialization of an undisclosed risk.*fn128 These two conclusory assertions do not sufficiently plead that a corrective disclosure was a proximate cause of plaintiffs' losses. As a result, the Complaint must be dismissed for failing to adequately plead loss causation.

2. Plaintiffs Fail to Adequately Plead Their Holder Claims

Plaintiffs allege that they were fraudulently induced to retain ownership of shares that they bought prior to any alleged misrepresentations or omissions.*fn129 Defendants assert that these holder claims are not actionable under the common law of plaintiffs' resident states and, even if they are, they are not properly pled.*fn130

New York applies the substantive law of each plaintiff's resident state. "Even if the fraud occurred in New York, where the action is purely economic, it is governed by the law where plaintiffs suffered their injury which generally is the place where plaintiffs resided and sustained the economic impact of their loss."*fn131 While the viability of so-called holder claims has been addressed in California, Florida, and Massachusetts, it has not been addressed in South Carolina.

a. California, Florida and Massachusetts

In Small v. Fritz Companies, Inc., the Supreme Court of California recognized common law holder claims but imposed a heightened pleading standard on the element of reliance on alleged misrepresentations.

In a holder's action a plaintiff must allege specific reliance on the defendants' representations: for example, that if the plaintiff had read a truthful account of the corporation's financial status, the plaintiff would have sold the stock, how many shares the plaintiff would have sold, and when the sale would have taken place. The plaintiff must allege actions, as distinguished from unspoken and unrecorded thoughts and decisions, that would indicate that the plaintiff actually relied upon the misrepresentations. Plaintiffs who cannot plead with sufficient specificity to show a bona fide claim of actual reliance do not stand out from the mass of stockholders who rely on the market.*fn132

In Rogers v. Cisco Systems, Inc., the federal court predicted that Florida would recognize a cause of action in fraud for holder claims and would require the same specificity as in Small.*fn133 In Rogers, plaintiffs alleged that they relied on defendant's misrepresentations in deciding to retain their shares, but had they known the true financial condition of the company they would have sold their shares before the stock price plummeted as a result of the company's disclosure of accurate financial reports.*fn134 The court found that plaintiffs' allegations were too vague to be actionable: "The Plaintiffs allege that they would have sold their stock had they known the truth about Cisco's financial status. However, they do not allege specifically, how many shares they would have sold and when they would have sold them."'*fn135 Rogers dismissed with leave to amend in accordance with Small's heightened pleading requirements.

While plaintiffs argue that California and Florida courts recognize holder claims, they conveniently ignore Small's heightened pleading requirement of the reliance element. Plaintiffs do concede, however, that under Rogers plaintiff Pope, a resident of Florida, has not adequately pled her holder claims.*fn136 In fact, based on the heightened pleading requirements with respect to holder claims in California and Florida, the holder claims of both Roberts and Pope must be dismissed.

The Supreme Judicial Court of Massachusetts has twice held defendants liable for directly making misrepresentations to plaintiffs with the intention of inducing them to hold stock. In Fottler v. Moseley, plaintiff gave a sell order to defendant, a stockbroker, who then allegedly lied to plaintiff who recalled his sell order in reliance upon the misinformation.*fn137 Addressing whether plaintiffs loss was attributable to the alleged fraud, the court stated, "[i]f the fraud operated on plaintiff[ ] . . . so that he kept his stock when otherwise he would have sold it, and such was the direct, natural, and intended result, then we think that the causal relation between the fraud and the loss is sufficiently made out."*fn138 Similarly, in David v. Belmont, the court permitted a holder claim where the evidence established that plaintiff had intended to sell stock he had purchased from defendants but then retained the stock in reliance upon misrepresentations received directly from defendants' employee.*fn139 These decisions demonstrate that Massachusetts also imposes a heightened pleading standard for holder claims, requiring a plaintiff to specify the casual relation between the alleged fraud and resulting harm. Because the Cavanagh plaintiffs fail to plead how they specifically relied on the alleged misrepresentations their holder claims must be dismissed.

b. South Carolina

Neither party cites any controlling law from South Carolina on holder claims, nor has the Court found any. As a result, this Court must predict whether that state would allow holder claims.*fn140

In order to make such a prediction, the Court must consider any analogous cases from other jurisdictions. Defendants rely on this Court's recent decision in In re WorldCom, Inc. Securities Litigation that predicted whether Georgia would recognize holder claims."*fn141 The WorldCom Court concluded that Georgia courts would dismiss plaintiffs' holder claims because plaintiffs failed to plead what statements induced them to hold their shares, when they would have sold their stock and in what amounts.*fn142

Plaintiffs urge this court to follow the approach taken in Gutman v. Howard Savings Bank, where a federal court in New Jersey was forced to predict how the state courts of New Jersey would treat such claims."*fn143 That court began its analysis by noting the general rule that fraud is actionable regardless of whether the victim is induced to act or refrain from acting in reliance upon the fraudulent act.*fn144 But the court also noted that in Blue Chip Stamps v. Manor Drug Stores,*fn145 the United States Supreme Court expressed policy concerns against the application of this rule in cases alleging securities fraud.*fn146 Nonetheless, the Gutman court distinguished Blue Chip Stamps by noting that in the typical securities case there is no personal contact between the parties.*fn147 This was not true in the case before that court. "One critical feature of the present case [Gutman] is generally absent from the securities market as described by Blue Chip Stamps. Plaintiffs had direct dealings with defendants in which the latter made certain of the representations complained of."*fn148 The Gutman court found that because defendants made representations directly to the plaintiffs, this was an "ordinary case of deceit" and should not be dismissed.*fn149 However, the court explicitly limited holder claims to instances alleging direct misrepresentations in order to prevent speculative claims.

Here, plaintiffs do not allege that defendants made any misrepresentations directly to them.*fn150 In the absence of such allegations, I predict that South Carolina would adopt the reasoning of the United States Supreme Court in Blue Chip Stamps, thereby barring holder claims.*fn151 If, however, there were allegations of direct misstatements and reliance, then I conclude that South Carolina would permit such claims. In sum, all of the holder claims are dismissed for failure to state a claim.

3. Plaintiffs Have Sufficiently Pled the Elements of a Purchase or Sale and of Reliance

Defendants next argue that plaintiffs have failed to plead the dates and amounts of the purchase or sale of the securities in issue. While defendants are technically right, plaintiffs have now produced their trading records showing the dates of purchase and the price paid. It is a simple matter for plaintiffs to amend their Complaints to add this information.

Defendants also challenge the pleadings for their failure to allege individual and justifiable reliance.*fn152 Plaintiffs are not required to plead evidence - they are only required to provide sufficient detail to give the defendant fair notice of their claim. Here, plaintiffs have alleged that defendants intentionally made misstatements concerning the success of Enzo's medical treatments and their potential commercial value, and that they relied on such misstatements when they purchased their shares.*fn153 Plaintiffs also plead that they relied on defendants' statements at the annual shareholders' meeting, in press releases, in news articles and to brokers and analysts, all of which are identified with specificity.*fn154 This is sufficient to plead reliance.

D. Leave to Amend

Plaintiffs have requested leave to amend their Complaints should this Court find the Complaints deficient.*fn155 Rule 15(a) provides that leave to amend "shall be freely granted when justice so requires." Accordingly, "[i]t is the usual practice upon granting a motion to dismiss to allow leave to replead."*fn156 Therefore, plaintiffs are granted leave to replead within twenty days of this Opinion and Order in a manner consistent with this Opinion.


For the foregoing reasons, defendants' motion to dismiss the Complaint as time-barred is denied with leave to renew, except as to the Hunt plaintiffs, whose claims are time-barred. The motion to dismiss by DeLucca and the Rabbanis are granted as to all claims based on plaintiffs' failure to plead fraud with particularity. The motion to dismiss by Gross is granted as to the Roberts Complaint and denied as to the Hunt Complaint. In addition, all claims are dismissed for failure to allege loss causation and all of the holder claims are dismissed. Plaintiffs, other than the Hunt plaintiffs, are granted leave to replead within twenty days of this Opinion and Order. The Clerk of the Court is directed to close this motion [Docket No. 18].


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