Opinion
97 Civ. 2637 (TPG)
June 1, 2001
OPINION
This action is a shareholders' derivative suit arising from the alleged fraud perpetrated by the defendant principals of Sweepstakes News, Inc. (Sweepstakes) on plaintiff investors in that company. Plaintiffs claim that defendants made various misrepresentations regarding the condition of Sweepstakes resulting in an improperly executed merger agreement with another company and the subsequent loss of business opportunities and assets of Sweepstakes. Plaintiffs sue for compensatory and punitive damages, to be awarded to Sweepstakes, as well as attorneys fees and costs.
Defendants move to dismiss the Amended Complaint. Plaintiffs crossmove to amend the Amended Complaint. The motion to dismiss the Amended Complaint is granted and the motion to amend is denied.
The analysis that follows is based entirely on plaintiffs' failure to sufficiently plead their averments of fraud, although defendants have suggested several additional grounds for dismissal.
The Amended Complaint
The following is a summary of the Amended Complaint.
A publicly-traded Florida corporation, Sweepstakes News, Inc. ("Sweepstakes") was incorporated on August 3, 1994 to engage in publishing and distributing a monthly newspaper supplement reporting on sweepstakes throughout the United States. Income would come from advertising. Sweepstakes had a public offering of 300,000 shares of its common stock on December 21, 1994.
Plaintiffs Robert Spira, Edward Harris, and William Long, purchased and apparently continue to hold shares of common stock in Sweepstakes. These plaintiffs resided in New York and Nevada. Plaintiffs allege that the suit is derivative, brought on behalf of themselves and all other shareholders in Sweepstakes. Defendant Enternet Entertainment Group, Inc. ("Enternet") was a Florida Corporation doing business in Florida. Individual defendants Harvey Judkowitz and Robert Newman were Florida residents. Judkowitz was the Chief Financial Officer, Acting Chief Executive Officer, Treasurer and Secretary of Sweepstakes. Newman was President of Enternet. Facts about the position, if any, of defendant Lawrence Curtin are not laid out in the Amended Complaint.
Federal jurisdiction is predicated on claims made under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et seq., and is also claimed to arise under the federal mail fraud and wire fraud statutes, 18 U.S.C. § 1341, 1343, and the doctrine of pendant or supplemental jurisdiction. Venue in the Southern District of New York is alleged to be appropriate because the claims arose in this district and because defendant Sweepstakes maintained an office in New York.
The Amended Complaint alleges that Curtin sent the following fraudulent communications to certain plaintiffs via the mails or wires:
(1) October 10, 1994 memorandum stating that A Fact of Life, Inc. was to be dissolved;
A Fact of Life, Inc. is a Florida corporation, controlled by Curtin, whose only asset was the transcript of a screenplay entitled "A Fact of Life." It is unclear how this corporation or the communication regarding it is related to the other allegations in the Amended Complaint.
(2) October 17, 1994 memorandum stating that Sweepstakes would be "blue-skyed" in New York tomorrow;
(3) November 11, 1994 memorandum stating that Sweepstakes had $750,000, and would have $1 million by February;
(4) January 23, 1995 memorandum stating that a joint venture with a large Hispanic newspaper was being concluded;
(5) March 27, 1995 memorandum describing operations of Sweepstakes and stating that Sweepstakes would show a $25,000 profit in the current year;
(6) December 1, 1995 memorandum stating that an agreement had been reached with the Hearst organization to syndicate Sweepstakes editorials in 1,800 newspapers;
(7) May 15, 1996 memorandum stating that Sweepstakes would acquire Enternet, that Sweepstakes had $250,000 in cash and assets as well as a line of credit, and that Enternet would soon be using Sweepstakes contracts and assets.
These statements were allegedly made knowingly and with intent to hide the fact that Curtin had misappropriated and converted Sweepstakes' funds to his own use.
On May 15, 1996, plaintiffs Harris and Long executed a "corporate vote" approving the purchase by Sweepstakes of Enternet. On the same day, Curtin, Judkowitz, and Newman as president of Enternet caused to be executed a "Reverse Merger Acquisition Agreement," whereby Enternet purchased Sweepstakes. The Amended Complaint alleges that the Merger Agreement was executed improperly in that the Board of Directors of Sweepstakes did not approve it, notice was not given to the shareholders, shareholders were not given the opportunity to meet and vote on the action, and the Agreement contained provisions that would confer many of Sweepstakes' assets on Curtin personally. The Amended Complaint also states that the approvals of Harris and Long were fraudulently obtained. Curtin and Judkowitz kept the cash and other assets of Sweepstakes, and have refused to provide plaintiffs with an accounting of such assets.
The Amended Complaint alleges that Curtin made the fraudulent representations, listed above, and improperly executed the merger with the intent of maintaining sole control of Sweepstakes and of converting Sweepstakes' assets to his own use. Plaintiffs claim that they relied on Curtin's misrepresentations, and his silence as to the status of Sweepstakes, to the detriment of Sweepstakes. Such detriment is described as loss of business opportunities and loss of the assets that were converted by Curtin.
The Amended Complaint contains six Claims for Relief. The First Claim for Relief is against Curtin for breach of fiduciary duty. The Second Claim for Relief is against Judkowitz for breach of fiduciary duty. The Third Claim for Relief is against Curtin and Judkowitz for fraud. The Fourth Claim for Relief is against Curtin and Judkowitz under civil RICO. The Fifth Claim for Relief is against Curtin and Judkowitz for conversion. The Sixth Claim for Relief is against Newman and Enternet for conspiracy and conversion. Plaintiffs demand that monetary damages be awarded to Sweepstakes on each of the claims for relief. They also ask for an accounting of all "moneys derived from, and respective business activities related to, Sweepstakes." Finally, they request that defendants be permanently enjoined from engaging in business activities related to Sweepstakes and that a receiver be appointed to manage the interests of defendants in Sweepstakes.
Discussion
Jurisdiction
Plaintiffs claim that federal jurisdiction arises under RICO ( 18 U.S.C. § 1964(c)), under 18 U.S.C. § 1341, 1343, and under the doctrine of pendant or supplemental jurisdiction. 18 U.S.C. § 1964(c) contains an express grant of federal jurisdiction in cases arising under RICO, and the jurisdiction of this court is properly predicated thereon. 18 U.S.C. § 1341, on the other hand, does not in any way purport to confer jurisdiction on the federal district courts under any circumstances. 18 U.S.C. § 1343 confers jurisdiction on the district courts in cases to recover damages resulting from violations of civil rights. Plaintiffs claim of jurisdiction under these sections is wholly inappropriate. Therefore, the court's jurisdiction is properly invoked only under RICO and the doctrines of pendant and supplemental jurisdiction.
Pleading Fraud
This action was filed on April 14, 1997. On July 21, 1997, defendants moved to dismiss the complaint pursuant to Fed.R.Civ.P. 12(b)(6), 12(b)(1), 12(c), 9(b), and 23.1. On September 28, 1998, the court granted the motion to dismiss with leave to replead, stating that the complaint was not sufficiently specific to comply with Fed.R.Civ.P. 9(b), which requires that all averments of fraud "shall be stated with particularity."
The Amended Complaint was filed on November 30, 1998. The Amended Complaint is almost entirely identical to the Complaint, with the following substantive exceptions:
(1) George Jacobs, Richard Cohan, Harold Silver and Selwyn Malisoff, plaintiffs on the original Complaint, are not plaintiffs on the Amended Complaint (Complaint ¶¶ 6-9);
(2) The Amended Complaint contains an added paragraph alleging that Curtin made fraudulent misrepresentations and circumvented corporate formalities with the intent of retaining sole control of Sweepstakes and ultimately converting its assets to his own use (Amended Complaint ¶ 27);
(3) The Amended Complaint contains added paragraphs alleging that Harris, Long and other plaintiffs relied on Curtin's misrepresentations and silence as to the status of Sweepstakes to the detriment of Sweepstakes (Amended Complaint ¶¶ 28, 29);
(4) The Amended Comparnt adds reference to the dollar-amounts of investments made by Long in Sweepstakes;
(5) The number of predicate acts of fraud is reduced from 174 (Complaint ¶ 52) to 13 (Amended Complaint ¶ 50), and the estimated amount of actual loss is reduced from $1.3 million (Complaint ¶ 54) to $300,000 (Amended Complaint ¶ 52).
A complaint, to comply with Rule 9(b), "must adequately specify statements it claims were false or misleading, give particulars as to the respect in which plaintiffs contend the statements were fraudulent, state when and where the statements were made, and identify those responsible for the statements." McLaughlin v. Anderson, 962 F.2d 187, 191 (2d Cir. 1992). Where multiple defendants are involved, the complaint is required to describe specifically each defendant's alleged participation in the fraud. DiVittorio v. Equidyne Extractive Indus., Inc. 822 F.2d 1242, 1247 (2d Cir. 1987). Rule 9(b) applies not only to claims under RICO and common law fraud, but also to elements of other claims that are premised on fraud. See O'Brien v. National Property Analysts Partners, 936 F.2d 674, 676 (2d Cir. 1991). Plaintiffs' claims of breach of fiduciary duty, conversion and conspiracy rest on allegations of fraud, and are therefore subject to the pleading requirements of Rule 9(b). See Daly v. Castro Llanes, 30 F. Supp.2d 407, 414 (S.D.N.Y. 1998).
It is altogether unclear how the additional allegations in the Amended Complaint address the court's concerns, expressed in its September 28, 1998 opinion, that averments of fraud in the Complaint were not pleaded with sufficient particularity. The court stated:
[T]here are general allegations that various defendants misappropriated funds of Sweepstakes, but no sufficient pleading as to what such misappropriation involved and how it was related to the alleged fraudulent communications. Aside from the RICO claim, such a definition of the alleged misappropriation is necessary to properly plead even the state law claims.
The Amended Complaint adds nothing to the discussion of the alleged misappropriation "of cash and assets of Sweepstakes" contained in the original Complaint. The Amended Complaint also fails to give particulars as to the respect in which the allegedly fraudulent statements were fraudulent, or to identify the purpose of the statements within defendants' fraudulent scheme. All of the Claims for Relief are predicated on plaintiffs' allegations of fraud. Therefore, the Amended Complaint is dismissed pursuant to Fed.R.Civ.P. 9(b).
The Motion to Amend
Fed.R.Civ.P. 15(a) provides that leave to amend "shall be freely given when justice so requires." However, courts will deny a motion for leave to amend if there has been undue delay or bad faith, if the proposed amendment is futile, or if leave to amend will result in prejudice to the opposing party. State Teachers Retirement Board v. Fluor Corp., 654 F.2d 843, 855 (2d Cir. 1981).
The court denies plaintiffs' motion to amend. This case has been pending for nearly four years. In that time, there has been a dismissal of the Complaint, the submission of an Amended Complaint that is largely indistinguishable from the original Complaint, and now a dismissal of the Amended Complaint. Plaintiffs had adequate opportunity to construct a complaint that meets the well-known pleading requirements of the Federal Rules. The court's September 28, 1998 opinion made certain specific remarks concerning what was missing from the Complaint. Plaintiffs apparently ignored these remarks and submitted an Amended Complaint so similar to the original Complaint as to suggest bad faith. They should not be permitted to prolong this litigation with repeated attempts at amendment.
In any event, the Proposed Second Amended Complaint, in the form submitted to the court, is unfit for filing. The document is rife with clerical errors, misnumbered paragraphs and unreadable text.
Conclusion
The motion to dismiss the Amended Complaint is granted. The motion to amend is denied.
SO ORDERED.