The opinion of the court was delivered by: Laura Taylor Swain, District Judge
MEMORANDUM OPINION AND ORDER
In this civil action, Plaintiff Securities and Exchange Commission ("Plaintiff" or "SEC") accuses Defendants Andreas Badian ("Badian"), Jacob Spinner ("Spinner"), Mattes Drillman ("Drillman"), Jeffrey "Danny" Graham ("Graham"), Pond Securities Corporation ("Pond"), Ezra Birnbaum ("Birnbaum"), and Shay Hirsch ("Hirsch") of, inter alia, fraudulent and manipulative trading in the common stock of Sedona Corporation ("Sedona").
Defendants Spinner and Drillman move to dismiss the claims asserted against them in the Complaint (First through Fourth Claims for Relief), pursuant to Federal Rules of Civil Procedure 12(b)(6) and 9(b). Defendant Badian moves for judgment on the pleadings on Plaintiff's First and Second Claims for Relief, pursuant to Federal Rules of Civil Procedure 12(c) and 9(b). For the following reasons, Defendant Badian's motion is denied, and the motion of Defendants Spinner and Drillman is denied in part and granted in part.
The facts alleged in Complaint are taken as true for the purposes of this motion. See Blue Tree Hotels Inv. (Canada), Ltd. v. Starwood Hotels & Resorts Worldwide, Inc., 369 F.3d 212, 217 (2d Cir. 2004). Rhino Advisors, Inc. ("Rhino") is a New York-based unregistered investment advisor firm. (Comp. ¶ 22.) In Spring 2001, Badian worked for Rhino, which had helped its client Amro International S.A. ("Amro") enter into a Convertible Debentures and Warrants Purchase Agreement ("Agreement") with Sedona in November 2000. (Comp. ¶¶ 22, 24.) Under the terms of the Agreement, Amro provided Sedona with $2.5 million in financing and Sedona issued to Amro a $3 million, 5% Convertible Debenture ("Debenture"). (Comp. ¶ 24.) The Debenture obligated Sedona to pay Amro $3 million on March 22, 2001. (Id.) It also gave Amro the right to convert all or any portion of the Debenture into Sedona common stock on pre-established conversion dates at a discounted price based on the volume average weighted price of Sedona common stock during the five trading days before the conversion date. (Id.) To prevent Amro from manipulating Sedona's share price, the agreement specifically prohibited Amro from making any short sales of Sedona's stock as long as the Debenture remained issued and outstanding. (Id. ¶¶ 1, 25.) Copies of the Agreement were provided to defendants Badian, Spinner, Drillman, and Graham. (Id. ¶ 25.)
According to the Complaint, Badian engaged in a scheme of extensive short selling*fn1 of Sedona's stock in violation of the agreement and federal securities laws and defendants Spinner, Drillman, and Graham assisted Badian in carrying out this scheme. (Id. ¶ 27.) Spinner and Drillman were registered representatives associated with broker/dealers Refco Securities ("Refco") and Pond Securities Corporation ("Pond"). (Id. ¶¶ 9-10.) Spinner and Drillman were partners, sharing equally in the profits they generated, and sat within a few feet of each other at Refco's trading desk. (Id. ¶26.) Graham was a Refco employee who worked at their direction. (Id.) Spinner, Drillman, and Graham worked as a unit; each took orders from Badian and knew of his intention to manipulate Sedona's stock price downward. (Id.)
From March 1, 2001, through March 29, 2001, Badian and others directed Spinner, Drillman, and Graham to execute numerous short sales of Sedona stock through a proprietary account at Pond, which Spinner and Drillman controlled. (Id. ¶ 27.) The scheme was allegedy carried out as follows: Badian typically placed orders with Graham before the markets opened. Badian directed Graham to trade Sedona's stock to depress its price, to "clobber" the stock, to sell Sedona shares with "unbridled levels of aggression," and to be "merciless" in selling it. (Id.) Accordingly, Spinner, Drillman, and Graham each made sales of Sedona stock throughout the day in small amounts. (Id. ¶ 28.) These orders were routinely placed through various electronic communications networks (ECN's) linked to the Pond proprietary account. (Id.) Spinner, Drillman, and Graham executed Sedona trades through Pond. Just after the market closed, Spinner, Drillman, and Graham typically sold the Sedona shares from Amro's customer account at Refco to the Pond proprietary account. (Id.) These sales were priced slightly below the average price of Pond's daily sales of Sedona stock. (Id.) Spinner, Drillman, and Graham each falsely described these stock sales at Refco as long sales in order to disguise Amro's short sales. (Id.)
During this three week time period of short selling the stock, Spinner, Drillman, and Graham were responsible for over 40% of the total reported trading volume in Sedona's shares. (Id. ¶ 29.) They sold short over 843,000 shares on behalf of Badian, which was double reported as over 1.6 million shares due to their trading method. (Id.) This short-selling scheme also depressed Sedona's stock price. (Id. ¶ 30.) The stock price dropped from an average price of $1.43 per share between January 26, 2001, and March 1, 2001, to $0.75 per share on March 23, 2001. (Id.)
On or around March 21, 2001, Badian called Graham to congratulate him for his efforts that had led to the collapse of Sedona's stock price. (Id. ¶ 31.) Two days later, Badian called Graham again and said, "On Sedona, keep on wailing away, this is very good." Spinner, Drillman, and Graham knew that their trading was causing Sedona's stock price to plummet. (Id. ¶¶ 31-32.) Drillman acknowledged that they had managed to "drive the stock SDNA down to three quarters." (Id. ¶ 32.) Graham remarked that "we ran it down for weeks" and that Badian had them "killing SDNA down to seventy-five cents." (Id.) Spinner told a colleague, "Want to short something illegally for twelve months? You got my number." (Id.) Spinner also asked Badian whether he was concerned that Sedona's stock price would begin to rise now that they had stopped their selling pressure on the stock; Badian remarked that he was not concerned because he had a particular market maker "in the way" to keep the price from rising. (Id. ¶ 33.) Spinner, Drillman, and Graham's actions increased the number of conversion shares that Amro received from Sedona under the terms of the Agreement. (Id. ¶ 34.) Between March 27, 2001, and April 16, 2001, Amro exercised its conversion rights on four occasions and received over 1.6 million shares of Sedona stock in repayment of $1.1 million due under the terms of the Agreement. (Id.) Rhino deposited the conversion shares that Amro received from Sedona into another account at a second U.S. broker-dealer designated to receive the conversion shares ("Conversion Shares Account"). (Id. ¶ 35.) In the majority of these conversions, Spinner, Drillman, and Graham used the shares to close the open and undelivered short positions they had created in Amro's account at Refco by purchasing the shares from Amro's Conversion Shares Account. (Id.) Instead of delivering the shares directly to broker-dealers that had handled the short sales, Spinner, Drillman, and Graham each executed wash sales and matched orders from the Conversion Shares Account to the accounts where they had engaged in short selling, giving the false impression that the short sales were being covered with open market purchases and other than conversation shares. (Id. ¶ 36.) On at least ten occasions during April 2001, Badian directed Spinner, Drillman, and Graham to process transactions which involved no change in beneficial ownership of shares of Sedona stock. (Id.)
The standard of review on a motion for judgment on the pleadings pursuant to Federal Rule of Civil Procedure 12(c) is the same as that on a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6). Shaw v. Rolex Watch U.S.A., Inc., 745 F. Supp. 982, 984 (S.D.N.Y. 1990).
To survive dismissal, the plaintiff must allege facts sufficient "to raise a right to relief above the speculative level." ATSI Commc'ns., Inc. v. The Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir. 2007) (quoting Bell Atl. Corp. v. Twombly, 127 S.Ct. 1955, 1965 (2007)). Rule 9(b) of the Federal Rules of Civil Procedure refers to fraud actions generally, providing that "[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." Fed. R. Civ. P. 9(b). Particularity requires the plaintiff to "(1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent." Stevelman v. Alias Research, Inc., 174 F.3d 79, 84 (2d Cir. 1999) (internal quotation marks and citation omitted); Anatian v. Coutts Bank (Switzerland) Ltd., 193 F.3d 85, 88 (2d Cir. 1999). Although the SEC is subject to the pleading standard codified in Federal Rule of Civil Procedure 9(b), the heightened pleading standards imposed by the Private Securities Litigation Reform Act ("PSLRA") do not apply to actions brought by the SEC. See 15 U.S.C. § 78u-4(b) ("The provisions of this subsection shall apply in each private action arising under this title that is brought as a plaintiff class action pursuant to the Federal Rules of Civil Procedure").
I. Claims One and Two: Violations of Sections 10(b) and Rule 10b-5 of the Exchange Act and 17(a)(1) of the Securities Act
Defendants Badian, Spinner, and Drillman move for dismissal of Claims One and Two of the Complaint, arguing that the two claims are not plead with sufficient particularity and fail to allege the requisite scienter. Defendants Spinner and Drillman further argue that Claims One and Two should be dismissed because they were not primary violators, and that Claim Two (Rule 17(a)(1)) should be dismissed because they were not statutory sellers. Additionally, defendant Badian argues that Claims One and Two should be dismissed as against him based on ...