May 7, 2013
MOHAMMED FEZZANI, CIRENACA FOUNDATION, DR. VICTORIA BLANK, LESTER BLANK, JAMES BAILEY, JANE BAILEY, BAYDEL LTD., MARGARET BURGESS, PATRICK BURGESS, BOOTLESVILLE TRUST, AND ADAM CUNG, PLAINTIFFS-APPELLANTS,
BEAR, STEARNS & CO. INC., BEAR STEARNS SECURITIES CORP. RICHARD HARRITON, MORRIS WOLFSON, ARIELLE WOLFSON, ABRAHAM WOLFSON, TOVIE WOLFSON, ANDERER ASSOCIATES, BOSTON PARTNERS, WOLFSON EQUITIES, TURNER SCHARER, CHAN SASHA FOUNDATION, UNITED CONGREGATION MESERAH, ISAAC DWECK, INDIVIDUALLY AND AS CUSTODIAN FOR NATHAN DWECK, BARBARA DWECK, MORRIS I. DWECK, RALPH I. DWECK, JACK DWECK, FAHNESTOCK & CO. INC., BARRY GESSER, MICHAEL REITER, AND APOLLO EQUITIES, DEFENDANTS-APPELLEES, ARTHUR BRESSMAN, ANDREW 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, RAWAI RAES, BASIL SHIBLAQ, IYAD SHIBLAQ, KEN STOKES, MILLO DWECK, BEATRICE DWECK, RICHARD DWECK, ISAAC B. DWECK, HANK DWECK, AND DONALD & CO., DEFENDANTS.*FN1
Appeal from a dismissal by the United States District Court for the Southern District of New York (Paul A. Crotty, Judge), of a complaint alleging securities manipulation in violation of Section 10(b). We affirm in part and vacate and remand in part by opinion with respect to one group of defendants. We affirm in part and vacate and remand in part by summary order with respect to remaining defendants.
The opinion of the court was delivered by: Winter, Circuit Judge:
Fezzani v. Bear, Stearns & Co.
Before: WINTER, CABRANES, and LOHIER, Circuit Judges.
Judge Lohier concurs in part and dissents in part in a separate opinion.
24 Several individual investors appeal from Judge Crotty's 25 dismissal of their complaint alleging securities fraud in 26 violation of Section 10(b). We dispose of this appeal by both 27 summary order and opinion. In the summary order issued 28 simultaneously with this opinion, we affirm in part and vacate 29 and remand in part with regard to most appellees. In this 30 opinion, we affirm the dismissal of the federal claim and vacate 31 and remand on the state law claim with regard to one group of 32 appellees, principally Isaac R. Dweck.*fn2
2 This litigation arises out of a fraudulent scheme engaged in 3 by a now-defunct broker-dealer, A.R. Baron ("Baron"). Over the 4 course of four years beginning in 1992, Baron defrauded customers 5 of millions of dollars. As a result, Baron's former officers, 6 directors, and key employees have been convicted of various 7 crimes.
8 As pertinent here, and based on the complaint, the 9 allegations of which we assume to be true, Baron's scheme used 10 high-pressure sales campaigns involving "cold calls" to potential 11 customers. The goal of the scheme was to induce the customers to 12 purchase securities in initial public offerings of small, unknown 13 companies with negligible profits. The salespeople would falsely 14 represent that the stocks were the subject of an active, rising 15 market, and the purchasers were led to believe that the prices 16 they paid were set by trading in that arms-length market. In 17 fact, the market was principally a series of artificial trades 18 orchestrated by Baron designed to create a false appearance of 19 volume and increasing price. Baron's scheme was a paradigmatic 20 "pump and dump" scheme.
21 The scheme was in part furthered by "parking" stock with 22 trusted Baron investors, including Dweck. "Parking" would 23 involve placing stock in the investor's account while Baron 24 retained the risk of loss by promising to buy back shares, if 25 necessary, at a price that afforded the insider a guaranteed 1 profit. Based on Baron's salespeople's false representations of 2 trading volume and increasing stock prices inducing customers to 3 buy, Baron and its co-conspirators would sell their holdings at a 4 profit before the stock crashed.
5 Appellants do not allege a liquid, efficient market in the 6 securities. Rather, they allege that the only market for them 7 was based on artificial trading by Baron and others. See Pls.' 8 First Am. Compl. at 9 ¶ 17 ("[T]here was no real market for [the 9 manipulated securities] outside of Baron, and its customers, and 10 other brokers with whom it conspired. Because of the limited 11 public information available . . . (few, if any, were followed by 12 other brokerage firm analysts)[,] Baron brokers were able to 13 'box' the stock.").*fn3 Appellants alleged that Baron and Bear 14 Stearns, see infra note 4, falsely represented the securities 1 were trading in "an active, liquid, bona fide market," see Pls.' 2 First Am. Compl. at 10 ¶ 21, 16 ¶¶ 40-41, and that appellants 3 believed the price at which the securities were offered was that 4 established by that public market rather than an artificial price 5 established by Baron. The deception on which appellants relied, 6 therefore, were statements by Baron's salespeople that the 7 customers were buying at a price set by public market activity.
8 The complaint alleged that Dweck was one of Baron's 9 principal investors, provided Baron with short-term cash 10 infusions and financing for specific deals, and allowed Baron to 11 park certain securities on particular occasions in his accounts 12 at other broker-dealers. Dweck was rewarded with ownership in 13 companies on a preferential basis and a guaranteed return on his 14 parking arrangements as well. These acts undoubtedly facilitated 15 Baron's frauds. The impact of Dweck's involvement is alleged to 16 have been twofold. Parking by Dweck and others "creat[ed] a 17 false impression in the minds of Baron customers of the value and 18 liquidity of the 'parked' securities and induced Baron customers 19 . . . to make investments based on Baron's illusion of trading 20 activity," id. at 44 ¶ 131, while Dweck's provision of funds to 21 Baron prolonged the firm's frauds. See id. at 18 ¶ 46 (noting 22 the importance of collective action for the fraud to succeed); 23 see also id. at 81 ¶ 251.
24 However, appellants' claims for damages do not contain 25 discrete claims related to the prices paid for the particular 1 securities parked by Dweck at times they were trading. Rather, 2 they seek to recover damages for all losses caused by Baron. 3 While the complaint contains voluminous records of trades 4 involving securities of various firms over extended periods of 5 ...
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