The opinion of the court was delivered by: John T. Curtin United States District Judge
Plaintiff Transit Rail, LLC ("Transit Rail") brings this civil action seeking compensatory and punitive damages for securities fraud in violation of the Securities Exchange Act of 1934 (the "1934 Act"), based on defendants' alleged conduct relating to plaintiff's purchase of securities of New York Regional Rail Corp. ("NYRR") during the years 2004-05. Now pending for decision are motions filed by defendants John Marsala (Item 94) and Westminster Securities Corp. (Item 102), pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, to dismiss the complaint for failure to state a claim upon which relief can be granted.*fn1
Oral argument of these motions was heard by the court on June 12, 2007. The court's ruling follows.
The complaint in this action was filed on August 9, 2005, and was amended on January 30, 2006, upon consent of the parties (see Item 85). The original complaint was 36 pages long, with 193 numbered paragraphs and 7 causes of action. The amended complaint (Item 96) also sets forth 7 causes of action, but is 59 pages long, with 317 numbered paragraphs. What follows next is the court's best effort to summarize the factual allegations in the amended complaint as they relate to the issues raised by the pending motions.
NYRR is a publicly traded company which operates a freight transportation business from its corporate offices in West Seneca, New York. During the pertinent time period, most of NYRR's operations were conducted through its subsidiaries, JS Transportation, Inc. and GM Trucking and Associates, Inc.
Plaintiff claims that it was solicited in September 2003 by Ronald Bridges,*fn2 one of NYRR's corporate directors, to purchase NYRR stock as a means of raising capital sufficient to cover the company's outstanding liabilities and debts, which would allow it "to grow, prosper, and be profitable" (Amended Complaint, Item 96, ¶ 44). Bridges introduced plaintiff to defendant John Marsala, identified in the amended complaint as NYRR's controlling stockholder. Plaintiff alleges that Marsala and Bridges provided plaintiff with a consolidated financial statement for NYRR as of June 2003, and made other representations about the company's corporate structure, operations, and financial condition, which ultimately induced plaintiff to acquire a controlling interest in NYRR. According to the amended complaint, the June 2003 financial statement indicated that NYRR had total liabilities of $2,568,183.00 (id. at ¶¶ 32, 181), but plaintiff later discovered that the actual liabilities exceeded $7,000,000.00 (id. at ¶ 182). In the meantime, on February 4, 2004, plaintiff entered into an agreement with NYRR (the "Investment Agreement"), and with Marsala and NYRR (the "Tri-Party Agreement;" together, the "Purchase Agreements"), for the purchase of 2,500 shares of newly issued Series D Preferred stock at a price of $2,500,000.00, and 2,083,333 shares of common stock at a price of approximately $250,000.00, which took place in a series of transactions between February 2004 and January 2005 (id. at ¶¶ 55-60).
Plaintiff alleges that in making its decision to purchase the NYRR stock, it also relied on the "Form 10-K" financial disclosure documents filed with the Securities and Exchange Commission (referred to by plaintiff as the "10-K filings"), reporting the company's financial health for the years 2001, 2002, and 2003. These filings disclosed a working capital deficiency and recurring operating losses, but plaintiff claims it was assured by Bridges and Marsala that the capital infusion from the stock purchases would resolve NYRR's existing liabilities, opening the door for "significant opportunities for growth and profitability" (Item 96, ¶ 43). According to the amended complaint, Marsala and Bridges participated in the preparation of the 10-K filings and other publicly filed documents reporting NYRR's financial status, along with the following named defendants: Darryl Caplan, identified as a director, officer and/or legal counsel for NYRR and its subsidiaries; Joel Marcus, identified as NYRR's chief financial officer ("CFO"); Andrea Cosgrove, identified as NYRR's bookkeeper and "inside accountant" (id. at ¶ 27); Stacey Sage, identified as an employee of JS Transportation, Inc. (alleged to be a subsidiary of NYRR) and/or GM Trucking and Associates, Inc. (alleged to be a subsidiary of NYRR and/or JS Transportation); and Feldman Sherb & Co. (referred to in the amended complaint as "FS") and Sherb & Co. (referred to in the amended complaint as "Sherb"), identified as the auditors of the 10-K filings and financial reports relied upon by plaintiff (see id. at ¶¶ 46-48).
Plaintiff also claims that Marsala did not disclose that he had previously been convicted in the United States District Court for the District of New Jersey upon a plea of guilty to charges of conspiracy to commit securities fraud in violation of 18 U.S.C. § 371, which resulted in an order issued by the Securities and Exchange Commission on September 30, 1998 barring Marsala from associating with any securities broker, dealer, or investment adviser, or from participating in an offering of penny stock, for a period of five years (referred to in the amended complaint as the "Bar Order") (id. at ¶¶ 86-88).
According to the amended complaint, Marsala was "associated" with defendant Westminster, a securities broker-dealer within the meaning of the 1934 Act, which employed Marsala as its information technology ("IT") manager. Plaintiff claims that Westminster provided Marsala with office space and computer access which he used to solicit purchases of NYRR stock, in violation of the Bar Order. Plaintiff also alleges that Marsala prepared and submitted a "Form 211" application on behalf of Westminster, which resulted in approval of Westminster as a "market maker" allowing NYRR shares to be listed for trading on the Over-the-Counter Bulletin Board ("OTCBB")*fn3 (see id. at ¶¶ 103-13). According to plaintiff, this market for NYRR securities was "fueled" by the false and misleading information supplied by Marsala in the 10-K filings and other public documents, as well by "material omissions" in the Form 211 application process--such as Marsala's failure to disclose not only the existence of the Bar Order, but also his involvement in the "sham" acquisition of the OSK Capital I Corp. (whose primary shareholders were the principals of Westminster and their family members) which plaintiff claims was carried out to merely to inflate the assets on NYRR's balance sheet (see id. at ¶¶ 95-102). Finally, plaintiff alleges that in August 2004, plaintiff was present at Westminster's offices in New York City and met with Westminster's President, John O'Shea, who supported and endorsed Marsala and encouraged plaintiff to continue with the acquisition of NYRR stock. (id. at ¶ 185).*fn4
Based on these allegations, plaintiff sets forth four causes of action for securities fraud under the 1934 Act, and two causes of action for common law fraud. Specifically, in its First Cause of Action against all defendants, plaintiff alleges that the statements in the public filings made or caused to be made by defendants, upon which plaintiff relied in purchasing the NYRR securities, were known by defendants to be materially false and misleading, resulting in violations of Section 18 of the 1934 Act (id. at ¶¶ 261-71).
In its Second Cause of Action, plaintiff alleges that the individual defendants and Westminster violated Section 10(b) of the 1934 Act, and corresponding Rule 10b-5 promulgated by the Securities and Exchange Commission ("SEC"), by employing schemes to defraud, making false statements or omissions of material facts, and engaging in fraudulent business practices in connection with plaintiff's purchases of NYRR securities (id. at ¶¶ 272-82).
In its Third Cause of Action, plaintiff alleges that defendants Marsala, Marcus, Bridges, Caplan, and Todd Sage were "controlling persons" of NYRR within the meaning of Section 20(a) of the 1934 Act, and are therefore jointly and severally liable for the damages which plaintiff suffered in connection with its purchases of NYRR securities (id. at ¶¶ 283-87).
In its Fourth Cause of Action, plaintiff alleges that FS and Sherb, the auditors, violated Section 10(b) and Rule 10b-5 by employing schemes to defraud, making false statements or omissions of material facts, and engaging in fraudulent business practices in connection with plaintiff's purchases of NYRR securities (id. at ¶¶ 288-94).
In its Fifth Cause of Action, plaintiff alleges that Westminster was a controlling person with respect to defendant Marsala within the meaning of Section 20(a), and is therefore jointly and severally liable for the damages which plaintiff suffered in connection with its purchases of NYRR securities (id. at ¶¶ 295-301).
In its Sixth Cause of Action, plaintiff alleges that Marsala deliberately and fraudulently misrepresented the status, condition, and viability of the business of NYRR, and that plaintiff relied upon those misrepresentations to its detriment (id. at ¶¶ 302-08).
In its Seventh Cause of Action, plaintiff alleges that all of the defendants "conspired, aided, abetted, and assisted one another to carry out the fraudulent scheme and cause injury to plaintiff" (id. at ¶¶ 309-17).
Plaintiff seeks compensatory damages of $3,000,000.00, and $6,000,000.00 in punitive damages, based on these seven causes of action.
As mentioned above, defendants Marsala and Westminster have moved to dismiss the fraud claims made against them. Following a discussion of the legal standards to be considered in ruling on the matters raised in the briefs and at oral argument, the court will address each motion in turn.
As with any complaint, when deciding a motion to dismiss a securities fraud claim, the court must accept the plaintiff's factual allegations as true and must draw all inferences in the plaintiff's favor. Ganino v. Citizens Utilities Co., 228 F.3d 154, 161 (2d Cir. 2000); see also Scheuer v. Rhodes, 416 U.S. 232, 236 (1974). Dismissal is proper only if the complaint fails to set forth "enough facts to state a claim to relief that is plausible on its face." Bell Atlantic Corp. v. Twombly, ___U.S.___, 127 S.Ct. 1955, 1974 (2007); see also Iqbal v. Hasty, ___F.3d___, 2007 WL 1717803, at *9-11 (2d Cir. June 14, 2007) (discussing Bell Atlantic's "explicit disavowal" of the oft-quoted statement in Conley v. Gibson, 355 U.S. 41, 45-46 (1957), "that a complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.").
The purpose of a motion to dismiss is "to assess the legal feasibility of the complaint, not to assay the weight of the evidence which might be offered in support thereof." Geisler v. Petrocelli, 616 F.2d 636, 639 (2d Cir. 1980). The court's inquiry "is not whether the plaintiff will prevail, but whether the plaintiff is entitled to offer evidence to support his claims." United States v. Yale New Haven Hosp., 727 F. Supp. 784, 786 (D.Conn. 1990), quoted in In re Xerox Corp. Erisa Litigation, ___F. Supp. 2d___, 2007 WL 1137373, at *2 (D.Conn. April 17, 2007).
In making this inquiry, the court may consider the facts stated on the face of the complaint, as well as in documents appended to the complaint or incorporated in the complaint by reference, and matters of which judicial notice may be taken. See Leonard F. v. Israel Discount Bank of N.Y., 199 F.3d 99, 107 (2d Cir. 1999). This includes, in securities fraud actions, "public disclosure documents required by law to be filed, and actually filed, with the SEC . . . ." Kramer v. Time Warner, Inc., 937 F.2d 767, 774 (2d Cir. 1991); Rushing v. Nexpress Solutions, Inc., 2006 WL 2640645, at *3 (W.D.N.Y. September 14, 2006).
While the rules of pleading in federal court generally require only "a short and plain statement" of the plaintiff's claim for relief, Fed. R. Civ. P. 8, allegations of fraud must be "stated with particularity." Fed. R. Civ. P. 9(b). In the context of a civil action for securities fraud, this particularity requirement has been expanded by the Private Securities Litigation Reform Act of 1995 ("PSLRA"), 15 U.S.C. § 78u-4, which provides in relevant part:
In any private action arising under this chapter in which the plaintiff alleges that the defendant--
(A) made an untrue statement of a material fact; or (B) omitted to state a material fact necessary in order to make the statements made, in the light of the circumstances in which they were made, not misleading; the complaint shall specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on ...