Opinion
CIVIL NO. 99-2276(JBS).
June 30, 2000.
William A. Harvey, Esq., Susan M. Dean, Esq., Klehr Harrison Harvey Branzburg Ellers LLP, Philadelphia, PA., Attorneys for Plaintiffs.
Francis X. Manning, Esq., Stradley, Ronon, Stevens Young, Cherry Hill, N.J., and Burton W. Wiand, Esq., Peter B. King, Esq., Fowler, White, Gillen, Villareal and Banker, PA Tampa, FL., Attorneys for Defendants Robert P. Gordon and Teleservices International Group, Inc.
J. Scott Kramer, Esq., Dana Ash, Esq., Duane Morris Heckscher, LLP, Philadelphia, PA., Attorney for Defendants Rhett Kirchhoff, Kelly Kirchhoff and the Kirchhoff Organization.
Laurent Meltzer, Esq., Haddonfield, N.J., Attorney for Defendants Silvio J. DiMedio and DiMedio, Kirchhoff Co., Inc.
O P I N I O N
In this securities fraud case, elderly investors Miles and Rosalie C. Lerman allege that they were bilked out of over $2 million as the result of a fraudulent arrangement between their stock broker, Rhett Kirchhoff, Kirchhoff's business partners Van Kirchhoff and Silvio DiMedio, and Robert P. Gordon, Chairman/CEO/CFO of Teleservices International Group, Inc. (TSIG), a Florida Corporation involved in the Internet industry. The Lermans claim that the defendants acted in concert to misappropriate their investment funds, used the money to open margin accounts, and with these accounts purchased excessive amounts of high risk stock in companies such as TSIG and related companies without the Lermans' consent or knowledge.
Recently, this Court took notice of defendant Rhett Kirchhoff's petition for bankruptcy filed May 15, 2000, and temporarily stayed this action against Rhett Kirchhoff pursuant to § 362 of the Bankruptcy Code, without prejudice to the case going forward against other named defendants. (Order Staying Claims against Rhett H. Kirchhoff dated June 6, 2000 (Docket Entry No. 73).)
Plaintiffs filed suit in this Court in May 1999, alleging that defendants' unauthorized transactions in the margin accounts, in combination with excessive purchases of high risk penny stocks, resulted in massive financial losses to the Lermans and violated state and federal securities laws. (Second Amended Complaint ¶ 24.)
Plaintiffs' present complaint alleges, in relevant part, violations of § 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and SEC Rule 10b-5 (Counts I, III, and IV), § 20 of the Exchange Act (Count II), violations of the New Jersey Uniform Securities Act (Count VI), violations of § 17 of the Exchange Act (Count VII), fraudulent inducement (Count VIII), for conversion (Count IX), negligence (Count X), conspiracy (Count XI), and common law fraud (Count XII). In addition to demanding monetary damages, plaintiffs seek the liquidation of corporate defendants DiMedio Kirchhoff and Company (DK Co.), The Kirchhoff Organization (TKO) and TSIG, and/or an Order that these defendants to cease and desist from conducting further business in the sale/purchase of securities. Plaintiffs also request the appointment of a receiver to protect their interests in defendants' assets in the event a judgment cannot otherwise be satisfied. (Count XIII.)
Presently before the Court is the motion of TSIG and Gordon to dismiss plaintiffs' Second Amended Complaint as against them for failure to state a claim upon which relief may be granted pursuant to Rule 12(b)(6), Fed.R.Civ.P. This Court heard oral argument on this motion on March 22, 2000, at which time moving defendants voiced concerns regarding plaintiffs' insufficiently particular fraud claims. The Court granted plaintiffs leave to file and serve a Second Amended Complaint, and required plaintiffs to plead their fraud claims with greater particularity. The Court also invited supplemental briefing on any newly clarified allegations contained in the Second Amended Complaint. Because both parties had at that point attempted to introduce evidence beyond the pleadings concerning this Court in personam jurisdiction over the moving defendants, the Court made clear that the motion would be considered as a motion to dismiss under Rule 12(b)(6) rather than one for summary judgment pursuant to Fed.R.Civ.P. 56, such that no evidence would be considered beyond the allegations contained in the complaint. The parties now have completed their briefing concerning the Second Amended Complaint, and the Court decides the present motion on the basis of the Second Amended Complaint and the briefs received, both original and those specifically addressing the Second Amended Complaint.
At oral argument plaintiffs also conceded that their claims arising under § 15 of the 1934 Exchange Act for non-disclosure apply only to broker-dealers, and since has withdrawn all claims under § 15 as against defendants TSIG and Gordon. (Second Amended Complaint Count V, ¶¶ 108-112.)
Moving defendants originally challenged this Court's in personam jurisdiction over defendants TSIG and Gordon, but have since withdrawn this motion. (Stipulation to Withdraw Motion to Dismiss on Issue of Jurisdiction filed January 21, 2000 (Docket Entry No. 62).)
Moving defendants argue that plaintiffs' allegations against them should be dismissed for (1) failure to plead fraud with particularity (Counts I-IV, VI-VIII and XI-XII), (2) failure to state a claim for violation of § 10(b) of the Securities Exchange Act (Counts I, III, IV and VI), failure to state a claim for conversion and negligence (Counts IX-X), failure to state a claim for control person liability under § 20(a) of the Exchange Act (Count II), for failure to comply with relevant statutes of limitation (Counts I, III, IV, and VI), for failure to state a cause of action for conspiracy to violate § 10(b) and Rule 10b-5 (Count XI), for failure to state an actionable private cause of action for violations of § 17(a) of the Securities Act (Count VII) and for failure to state valid claims for attorneys' fees and injunctive relief.
For reasons now discussed, the greater part of TSIG's motion will be denied because plaintiffs have alleged actionable fraud claims which are pleaded with adequate particularly, and which may prove meritorious after further discovery. However, the Court will dismiss Count VII (§ 17 violations), and plaintiffs' demand for attorneys' fees. Accordingly, the present motion will be granted in part and denied in part.
BACKGROUND
The alleged facts are as follows. Plaintiffs Miles and Rosalie Lerman are elderly investors who had investment accounts with CIBC Oppenheimer Corp. Defendant Rhett Kirchhoff and his brother Van Kirchhoff were the principles of defendant The Kirchhoff Organization (TKO), formerly known as DiMedio Kirchhoff Co (DK Co.), of which Silvio DiMedio was a partner. In 1993, plaintiffs entered into a fiduciary relationship with Rhett Kirchhoff for the purpose of making conservative investments of plaintiffs Oppenheimer funds. This relationship was extended to include defendants Van Kirchhoff and Silvio DiMedio when they established DK Co. in 1995 and then to TKO when it was created in 1998. (Second Amended Complaint ¶¶ 8, 16, 19.)
The important consideration in deciding a 12(b)(6) motion is whether the plaintiff has alleged facts which would constitute a legal claim, and not whether the alleged facts are true. The Court must accept as true all of the matters pleaded in the complaint, as well as reasonable inferences from those matters. Markowitz v. Northeast Land Co . , 906 F.2d 100, 103 (3d Cir. 1990). The facts here are therefore taken from plaintiff's Second Amended Complaint.
At the root of plaintiffs' complaint is their allegation that they have been harmed as a result of a conspiracy between defendant Gordon and the other defendants. Plaintiffs allege that, sometime prior to 1993, Gordon embarked on a course of conduct designed to create a market of buyers of his TSIG shares at artificially inflated prices. Plaintiffs contend that, as part of Gordon's plan, in or around January 1997 a conspiracy began involving defendants Gordon, Rhett and Van Kirchhoff and DiMedio during the course of which Gordon, acting as Chairman and CEO of TSIG, compensated Rhett and Van Kirchhoff and DiMedio for artificially inflating, or "pumping" the price of TSIG stock. Plaintiffs allege that the scheme was complex, and involved Gordon selling his shares in TSIG through either Rhett and Van Kirchhoff and DiMedio and other as yet unknown brokers, at prices as high as $3.25 per share.
Despite the price the brokers paid for the TSIG stock, plaintiffs allege that the stock was essentially worthless. It is alleged that TSIG's total revenue for 1996 was only $257,000.00, with Gordon's pay being set at $360,000.00 per year. Gordon also has received 5 million shares of restricted TSIG common stock as additional compensation. (Id. ¶¶ 25, 43. 45.) Plaintiffs maintain that TSIG is a financially unstable company and its stock has never been followed or recommended by any securities analyst. (Id. ¶ 53.) TSIG's net losses are calculated at $18,042,742 for fiscal 1997 and $11,822,251 for fiscal 1998. (Id. ¶ 41.) Plaintiffs contend that, despite TSIG's long and well-documented history of financial loss and instability, defendants Rhett and Van Kirchhoff and DiMedio beginning in January 1997 and through April 1998 purchased hundreds of thousands of dollars worth of TSIG stock with funds taken from the Lermans' investment accounts. (Id. at ¶¶ 19-22.)
The Lermans allege that they unwittingly became victims of the defendants' fraud scheme when Rhett Kirchhoff, without the Lermans' consent or knowledge, borrowed money from margin accounts that he had illicitly opened in the Lermans' names. (Id. ¶¶ 24, 30.) Plaintiffs aver that, starting on April 30, 1997 through July 24, 1997 defendants, through Rhett Kirchhoff, used these margin accounts to purchase of 248,798 shares of TSIG stock on plaintiffs' behalf. Furthermore, plaintiffs allege that in November 1997 Kirchhoff used the accounts to make combined unauthorized purchases of 115,000 shares of stock in PSIC, a company from which TSIG was "spun off". (Id. ¶ 8.) PSIC then went bankrupt in December 1999. (Id. ¶ 38.) Plaintiffs also allege that beginning on January 10, 1997 through January 31, 1997, defendants, acting through Rhett Kirchhoff, purchased 63,800 shares of stock in VSIG, a TSIG subsidiary, and that VSIG then went bankrupt in March 5, 1999.
Plaintiffs maintain that all defendants were aware that purchasing stock in TSIG and its related companies was highly speculative, and only bought TSIG stock in an effort to manipulate the company's stock prices. Moreover, plaintiffs allege that moving defendants had an agreement with the Kirchhoffs and DiMedio that they would not disclose to investors, such as plaintiffs, the true arrangement between the defendants, i.e., that the Chair of TSIG was selling millions of shares of worthless TSIG stock as soon as they became available to sell, and that the other defendants then purchased these same shares with the funds of investors' like the Lermans, thereby artificially inflating the price of TSIG stock. (Id. ¶ 22.) In return for Kirchhoff's cooperation, plaintiffs allege that Gordon gave Kirchhoff money, shares of stock, and the grant of a mortgage in the amount of $100,000 for Kirchhoff and his wife. (Id. ¶ 55.)
As further evidence of the conspiracy, plaintiffs aver that once they began litigation against Rhett Kirchhoff, plaintiffs' counsel was contacted by the Denver law firm of Futro and Trauernicht, LLC, which is listed as TSIG's counsel in TSIG's Securities Registration Statement. (Id. ¶ 65; Compl. Ex. B at 56.) The Futro firm advised counsel that it would be representing Kirchhoff as well as TSIG. Plaintiffs assert that the fact that TSIG's counsel would be retained to defend Kirchhoff is further evidence of the complex relationship between Gordon, TSIG and Rhett Kirchhoff. (Id.)
The Lermans allege that they first became aware of the margin balances and investment portfolio losses in November 1998 and immediately confronted Rhett Kirchhoff. (Id. ¶ 16.) Kirchhoff signed a statement admitting that he had, without the Lermans' permission, borrowed money on margin from the Lermans' accounts to make so-called "arbitrage" investments placed in accounts held in the names of defendants DK Co. and TKO. (Compl. Ex. A.) The Lermans filed the present suit approximately seven months later.
DISCUSSION
A. Standard of Review
A motion to dismiss under Rule 12(b)(6) for failure to state a claim upon which relief can be granted does not attack the merits of the case, but merely tests the legal sufficiency of the Complaint. See Nami v. Fauver, 82 F.3d 63, 65 (3d Cir. 1996). When considering a Rule 12(b)(6) motion, the reviewing court must accept as true all well-pleaded allegations in the Complaint and view them in the light most favorable to the plaintiff. See Scheuer v. Rhodes, 416 U.S. 232, 236 (1974); Jordan v. Fox, Rothschild, O'Brien Frankel, 20 F.3d 1250, 1261 (3d Cir. 1994); Hakimoglu v. Trump Taj Mahal Assoc., 876 F. Supp. 625, 628-29 (D.N.J. 1994), aff'd, 70 F.3d 291 (3d Cir. 1995). In considering the motion, a district court must also accept as true any and all reasonable inferences derived from those facts. See Oshiver v. Levin, Fishbein, Sedran Berman, 38 F.3d 1380, 1384 (3d Cir. 1994); Schrob v. Catterson, 948 F.2d 1402, 1405 (3d Cir. 1991); Glenside West Corp. v. Exxon Co., U.S.A., 761 F. Supp. 1100, 1107 (D.N.J. 1991). A court may not dismiss the Complaint "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." Conley v. Gibson, 355 U.S. 41, 45-46 (1957).
The question before the court is not whether the plaintiffs will ultimately prevail; rather, it is whether they can prove any set of facts in support of their claims that would entitle them to relief. See Hishon v. King Spalding, 467 U.S. 69, 73 (1984). However, while the rules do not dictate that a "claimant set forth an intricately detailed description of the asserted basis for relief, they do require that the pleadings give the defendant fair notice of what the plaintiff's claim is and the grounds upon which it rests." Baldwin County Welcome Center v. Brown, 466 U.S. 147, 149-50 n. 3 (1984) (quoting Conley, 355 U.S. at 47).
B. Plaintiffs' Fraud Claims — Pleading Requirements (Counts I-IV, VI-VIII, and XI-XII)
The moving defendants first challenge the Second Amended Complaint on the ground that plaintiffs have insufficiently detailed their allegations of fraud, and thus have failed to plead the fraud with particularity as required by Rule 9(b), Fed.R.Civ.P.
To plead fraud with particularity, plaintiffs should include the time, place, and substance of the alleged conduct. See United States ex rel Lacorte v. SmithKline Beecham Clinical Laboratories, Inc., 149 F.3d 227, 234 (3d Cir. 1998). However, a complaint centering on fraudulent activity occurring over a period of time, will be read less stringently. See General Accident Insurance Co. v. Fidelity and Deposit Co. of Maryland, 598 F. Supp. 1223, 1232 (E.D.Pa. 1984). Where, as here, the complaint arises from conduct occurring over the course of many months, it is simply necessary that plaintiffs provide some measure of factual information to corroborate and animate their claims so that defendants know what claims they must meet. Id.
Here, plaintiffs have met the particularity requirements so as to avoid dismissal of their fraud-based Counts, especially in light of the fact that the alleged fraud took place over an almost two-year period. Plaintiffs have given ample notice of the basis for their claims against Gordon and TSIG, and the period during which their claims arose. Plaintiffs have alleged that all defendants sought to manipulate the price of TSIG stock in violation of state and federal securities laws, that Gordon stood to benefit from this manipulation, and that the conspiracy to carry the plan out began approximately in January 1997. The manner and means of the alleged fraudulent acts are sufficiently spelled out in the Second Amended Complaint, as summarized above, to place the defendants on due notice. These allegations are sufficiently specific to place Gordon and TSIG on notice of the specific nature of the Lermans' claims against them. Plaintiffs in opposing a motion to dismiss are not required to allege each and every date and time of every fraudulent act of defendants. Such details will be developed with further discovery. Because plaintiffs have stated their fraud claims with sufficient particularity, defendants' motion to dismiss for failure to plead with particularity will be denied.
C. Plaintiff's Securities Laws Claims
The Court next examines moving defendants' arguments that plaintiffs have failed to state actionable violations of relevant provisions of the Securities Exchange Act of 1934.
1. Direct and Conspiratorial Violations of § 10 of the Securities Exchange Act and SEC Rule 10b-5 (Counts I, III, IV, VI and XI)
a. Primary Violator Liability
Counts I, III, IV and VI of the Second Amended Complaint allege that Gordon and TSIG violated of § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) , and SEC Rule 10b-5 by directly participating in a scheme to separate plaintiffs from their money, and to artificially raise the price of TSIG stock. Specifically, plaintiffs allege that moving defendants orchestrated the plan during the course of which the other defendants used plaintiffs' investment funds to conduct unauthorized trades of high risk stock. Plaintiffs also maintain that defendants mischaracterized and concealed reports concerning such transactions.
That section provides, in relevant part, that:
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange —* * *
(b) To use or employ, in connection with the purchase or sale of any security . . . any manipulative or deceptive device or contrivance. . . .15 U.S.C. § 78j.
The Security Exchange Commission (SEC), which is empowered by § 10(b) to define manipulative or deceptive conduct violative of the Exchange Act, has provided that:
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.17 C.F.R. § 240.10b-5.
Defendants argue that plaintiffs' claims premised on violations of the New Jersey Uniform Securities Act, N.J.S.A. 49:3-47, should be dismissed on the same grounds as the federal securities law claims.
Moving defendants challenge these direct participation Counts (I, III, IV and VI) on the ground they fail to state a valid § 10(b) violation. Specifically, moving defendants argue that plaintiffs have failed to state a claim for violations of § 10(b) and Rule 10b-5 because (1) they fail to allege that moving defendants misstated or omitted material facts concerning the purchase of securities; (2) they fail to establish that moving defendants' alleged omissions were made in connection with the purchase of TSIG shares, and (3) they fail to allege reasonable reliance on the alleged misrepresentations. (Moving Defs. 4/10/2000 Ltr. Br. ("Ltr. Br.") at 5.) For reasons now discussed, the Court finds defendants' arguments unpersuasive and will deny their motion to dismiss these Counts.
As set forth in the margin above, § 10(b) and Rule 10b-5 provide a remedy for injuries suffered as a result of deceptive practices touching the purchase or sale of securities. Superintendent of Ins. v. Bankers Life Cas. Co., 404 U.S. 6, 12 (1971). At the 12(b)(6) stage, all a plaintiff must do is allege "some causal connection between the alleged misrepresentation and the harm incurred when a security is purchased or sold." Angelastro v. Prudential-Bache Secs., Inc., 764 F.2d 939, 944 (3d Cir.), cert. denied, 474 U.S. 935 (1985).
A review of the Second Amended Complaint shows that plaintiffs have adequately pleaded a cause of action for primary violator liability of § 10(b). Plaintiffs claim that moving defendants were direct participants in the scheme to defraud the Lermans, and knowingly took part in a plan to withhold from the plaintiffs the fact that their investment funds were being placed in high risk margin accounts for the purpose of bolstering TSIG's flagging stock prices, and that as part of this scheme made material misrepresentations regarding the purchase of TSIG stock, which misrepresentations caused injury to plaintiffs. (Second Amended Complaint ¶¶ 13-14, 20-22, 25-28, 34-36, 39-40, 43-51, 54-58, 60-63, 69-70.) Because the Second Amended Complaint includes allegations that Gordon conceptualized and orchestrated the scheme involved in this case, and that they were direct participants in the misrepresentations concerning the purchase of securities, plaintiffs' allegations of primary actor violations of § 10(b) in Counts I, III, IV and VI, are sufficient at this point to survive a motion to dismiss.
b. Conspirator Liability for Violations of § 10(b) Count XI
Count XI of the Second Amended Complaint alleges that, in addition to direct violations of § 10(b), defendants harmed plaintiffs by "acting in concert" and conspiring to defraud plaintiffs in violation of § 10(b).
Moving defendants argue that plaintiffs' claim of conspiracy to violate § 10(b) must be dismissed because such a claim is barred by the Supreme Court's Opinion in Central Bank of Denver v. First Interstate Bank of Denver, 511 U.S. 164 (1994), which held that there is no cause of action for aiding and abetting a violation of § 10(b). As a preliminary matter, however, while Central Bank does bar claims premised on allegations of aiding and abetting a § 10(b) violation, that case still allows for imposition of liability on secondary actors who conspire to commit violations § 10(b) so long as the secondary actor also independently satisfies the requirements for primary violator liability.
The Supreme Court in Central Bank, in rejecting aiding and abetting liability, made clear that it did not intend to insulate all "secondary actors in the securities markets" from liability. Central Bank, 511 U.S. at 191. Indeed, as the Court found and the Second Circuit recently has reiterated, such actors remain liable under § 10(b) if the requirements for primary liability are met. Id.; see also Dinsmore v. Squadron, Ellenoff, Plesent, Sheinfeld Sorkin, 135 F.3d 837, 842-43 (2d Cir. 1998) ("secondary actors who conspire to commit such violations will still be subject to liability so long as they independently satisfy the requirements for primary liability").
To establish a secondary actor's primary liability under § 10(b), a plaintiff must prove that in connection with the purchase or sale of a security, the defendant, acting with scienter, made a material misrepresentation, and that the plaintiff relied on that misrepresentation to his or her detriment. San Leandro Emergency Med. Group Profit Sharing Plan v. Philip Morris Cos., 75 F.3d 801, 808 (2d Cir. 1996). Thus, if plaintiffs can show that defendants were the original and knowing source of a misrepresentation and that defendants knew or should have known that misrepresentation would be communicated to investors, primary liability should attach. See In re Kidder Peabody Securities Litigation, 10 F. Supp.2d 398 (S.D.N.Y. 1998).
Under the principles discussed above, plaintiffs in this case may still establish a cause of action for conspiracy to violate § 10(b) so long as they also establish that the moving defendants independently satisfy the requirements for primary liability. See Dinsmore, 135 F.3d at 843. By the terms of plaintiffs' Second Amended Complaint, it is apparent that, rather than alleging that the moving defendants aided or abetted the fraudulent scheme described in the Second Amended Complaint, plaintiffs are alleging that Gordon and TSIG were directly involved in the scheme and even orchestrated the transactions leading to the Lermans' alleged losses. Plaintiffs' theory is not that Gordon and TSIG are liable because of the acts of other conspirators, but rather is that they are primary violators of the Act. (Second Amended Complaint ¶¶ 13-14, 20-22, 25-28, 34-36, 39-40, 43-51, 54-58, 60-63, 69-70.) Thus, although Gordon and TSIG are alleged to be secondary actors, in the sense that they are not alleged to have directly contacted the Lermans, it is sufficiently alleged that Gordon substantially contributed to plaintiffs' losses in a knowing and direct manner giving rise to primary liability.
At this stage, the Court may dismiss an aspect of the complaint only where it appears beyond doubt that plaintiffs can prove no set of facts in support of their claim which would entitle them to relief. Conley v. Gibson, 355 U.S. 41, 45-46 (1957). The Court finds that under the principles of secondary actor conspirator liability left open underCentral Bank and Dinsmore, the plaintiffs have stated actionable claims of conspiracy to violate § 10(b). It will be plaintiffs' burden at trial to establish that the moving defendants were both members of the conspiracy and primary violators of § 10(b). Because the Second Amended Complaint states a cognizable cause of action for conspiracy to violate § 10(b), such claims will not be dismissed.
The Court recognizes that, because plaintiffs must show that moving defendants independently satisfy the requirements for primary liability for violations of § 10(b), the requirements for establishing Count XI will be substantively similar to those required for plaintiffs' allegations of direct violation of § 10(b) in Counts I, III, IV, VI and XI. The difference may prove to be in the damages available to plaintiffs. If plaintiffs succeed in establishing that moving defendants were members of a conspiracy, the conduct of which violated § 10(b), then it is well-established that Gordon and TSIG may be liable for the acts of their co-conspirators "if the acts are done in the furtherance of the joint venture as all understood it". Taxin v. Fair Food Stores, Inc . 287 F.2d 448, 451 (3d Cir.), cert. denied , 366 U.S. 930 (1961) (quoting Momand v. Universal Film Exchange , 72 F. Supp. 469, 475 (D.Mass. 1947) (Wyzanski, J.), affirmed 172 F.2d 37 (1st Cir. 1948), cert. denied , 336 U.S. 967 (1949).)
2. Whether a Private Cause of Action Exists for Violations of § 17(a) (Count VII)
Next, defendants argue that plaintiffs have failed to state a valid claim against Gordon and TSIG under § 17 of the Exchange Act. As set out in the margin, § 17 of the Exchange Act prohibits the use of modalities of interstate commerce in furtherance of violations of federal securities laws. Defendants argue that plaintiffs may not assert a claim based on § 17, because the courts have uniformly held that there is no private cause of action for such claims. The Court agrees.
That section provides that:
It shall be unlawful for any person in the offer or sale of any securities by the use of any means or instruments of transportation or communication in interstate commerce or by the use of the mails, directly or indirectly —(1) to employ any device, scheme, or artifice to defraud, or
(2) to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
(3) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser.15 U.S.C. § 77q.
In Riggs v. Schappell, 939 F. Supp. 321 (D.N.J. 1996), this Court held that § 17 of the 1934 Act does not contain an implied private right of action. Id. at 332. Plaintiffs have not produced any authority that would lead the Court to believe that its decision in Riggs is not still valid. Moreover, the Court notes that every court to have considered the issue has come to the conclusion that there is no private cause of action for violation of § 17. See, Maldonado v. Dominguez, 137 F.3d 1, 6-7 (1st Cir. 1998); Finkel v. Stratton Corp., 962 F.2d 169, 174-75 (2d Cir. 1992); Newcome v. Esrey, 862 F.2d 1099, 1101-07 (4th Cir. 1988);Stephenson v. Paine Webber Jackson Curtis, Inc., 839 F.2d 1095, 1100 (5th Cir. 1988); Schlifke v. Seafirst Corp., 866 F.2d 935, 942-43 (7th Cir. 1989); Deviries v. Prudential-Bache Securities, Inc., 805 F.2d 326, 328 (8th Cir. 1986); Puchall v. Houghton, Cluck, Coughlin Riley (In re Washington Public Power Supply System Securities Litigation), 823 F.2d 1349, 1350 (9th Cir. 1987); Stephenson v. Calpine Conifers II, Ltd., 652 F.2d 808, 815 (9th Cir. 1981); Zink v. Merrill Lynch Pierce Fenner Smith, Inc., 13 F.3d 330, 334 (10th Cir. 1993); Currie v. Cayman Resources Corp., 835 F.2d 780, 784-85 (11th Cir. 1988). Consistent with the reasoning of the courts that uniformly have held that there is no cause of action for allegations similar to those alleged in plaintiffs' Count VII, the Court will dismiss this Count as against all defendants.
3. Violation of § 20 (Count II)
Next, defendants argue that plaintiffs have failed to state a valid claim against Gordon and TSIG for control person liability under § 20 of the Exchange Act, 15 U.S.C. § 77t(a).
As set forth in the margin, this section provides for liability of persons who "control" persons liable for violations of the Exchange Act. Claims brought under § 20 are not subject to the heightened pleading requirements for fraud claims, but rather a simple pleading of control will suffice. Derensis v. Coopers Lybrand, 930 F. Supp. 1003, 1013 (D.N.J. 1996). A plaintiff "need only plead circumstances establishing control because: (1) the facts establishing culpable participation can only be expected to emerge after discovery; and (2) virtually all of the remaining evidence, should it exist, is usually within the defendants' control." Id.
(a) Joint and several liability; good faith defense
Every person who, directly or indirectly, controls any person liable under any provision of this chapter or of any rule or regulation thereunder shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable, unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action.15 U.S.C. § 78t.
Here, plaintiffs have adequately alleged that Gordon is a "control person" within the meaning of the Exchange Act by alleging that he is the Chairman, CEO and CFO of TSIG, and thus had the authority and power to cause TSIG to engage in the unlawful acts complained of in the Second Amended Complaint. Plaintiffs also have alleged that Gordon orchestrated the scheme during the course of which Rhett Kirchhoff would purchase TSIG's stock for the purpose of pumping the stock price in violation of § 10(b).
Defendants maintain that the only evidence of a controlling relationship between Gordon and Rhett Kirchhoff is the mortgage loan from Gordon, and that a simple loan is insufficient to establish control person liability. (Id.) This argument is premature, however, because at this point in the litigation, when merits discovery is still not yet completed, it is not plaintiffs' burden to establish the truth of their allegations via evidence. On the contrary, plaintiffs' control person theory could prove meritorious after further discovery. The loan from Gordon to Kirchhoff is merely one example of the evidence plaintiffs hope to produce in support of their control person theory. The Court finds that plaintiffs have adequately pleaded a § 20 violation, and that such a claim might provide relief if proven at trial. For these reasons, the moving defendants' motion to dismiss Count II will be denied.
4. Statute of Limitations Arguments (Counts I, III, IV and VI)
Moving defendants next argue that the Court should dismiss the securities law-based claims within the Second Amended Complaint for plaintiffs' failure to file suit within applicable state and federal statutes of limitation. Movants accurately point out that claims under § 10(b) must be brought within one year of discovery and within three years of such violation. (Defs. Br. at 23 (citing Lampf, Pleva, Lipkind, et al. v. Gilbertson, 501 U.S. 351 (1991).)
Second Amended Complaint ¶ 58 states plaintiffs' contention that the acts complained of, including supplying plaintiffs with fraudulent account statements, began sometime in 1997 and continued up to and including October 1998, and that as a result plaintiffs were unable to discover defendants' wrongdoing until November 1998. It is clear from the face of the Second Amended Complaint that plaintiffs allege that plaintiffs filed this lawsuit in May 1999, well within one-year of discovering the defendants alleged misconduct. Because the Second Amended Complaint settles the issue of whether plaintiffs have met the relevant statutes of limitation, the Court will deny the motion to dismiss on these grounds.
D. Plaintiffs' Common Law Claims
1. Common Law Conspiracy Claims (Count XI)
Next, moving defendants argue that plaintiffs' claims of common law conspiracy should be dismissed for failure to state such claims with sufficient particularity. (Defs. Br. at 30.)
In order to plead a common law claim of conspiracy, a plaintiff must allege (1) the existence of an agreement between the defendants and another to commit an unlawful act or a lawful act by unlawful means, (2) an overt act in furtherance of that agreement, and (3) resultant damage to the plaintiffs. Reiff v. Convergent Technologies, 957 F. Supp. 573, 583-584 (D.N.J. 1997). All these elements must be pleaded with sufficient specificity to give notice to defendants of the nature of the conspiracy alleged. Rule 9(b), Fed.R.Civ.P.; Kronfeld v. First New Jersey National Bank, 638 F. Supp. 1454, 1468 (D.N.J. 1986).
As discussed above in section II.B of this Opinion, plaintiffs have provided sufficient detail of the alleged fraudulent conspiracy between Gordon and the other named defendants. The plaintiffs have alleged that there was an arrangement between Gordon and Rhett Kirchhoff, that the aim of this conspiracy was to induce the Lermans into purchasing high risk stocks in violation of § 10(b) of the Exchange Act, and that the defendants sought to conceal the nature of their relationship. While it is true that plaintiffs have not yet adduced direct evidence of a conspiracy, such evidence rarely exists. Instead, conspiracy is often established through inference and circumstantial evidence. See Kronfeld, 638 F. Supp. at 1469. At any rate, evidence is not required in order to survive a motion to dismiss. Because plaintiffs have pleaded their conspiracy claims with sufficient detail, the Court will deny the motion to dismiss such claims.
2. Negligence and Conversion Claims (Counts IX-X)
Moving defendants have also moved to dismiss plaintiffs' negligence and conversion claims on the ground that plaintiffs have failed to allege that Gordon and TSIG owed the Lermans a duty.
This Court has previously noted that in the context of securities fraud litigation "before a party may be held liable for a breach of an obligation to another party, it must first be established that the party in fact owed a duty to act in a certain manner." Riggs v. Schappell, 939 F. Supp. at 329. Here, plaintiffs make clear that their negligence and conversion claims as against secondary actors such as Gordon and TSIG are premised on the Restatement (Second) or Torts § 876, which imposes liability based upon a concert-of-action theory. (Second Amended Complaint ¶¶ 134-135, 138-139.) New Jersey courts have routinely looked to the Restatements for guidance in substantive law. See e.g.DeSantis v. Employees Passaic County Welfare Ass'n, 237 N.J. Super. 550 (App.Div.), cert. denied, 122 N.J. 164 (1990) (adopting Restatement (Second) of Torts § 588). Although it has not explicitly adopted § 876, the New Jersey Supreme Court has favorably cited its provisions, and this Court anticipates that the court will adopt the standards of § 876 when given the proper opportunity to do so. See Shackil v. Lederle Laboratories, 116 N.J. 155, 193 (1989) (citing § 876).
Under § 876, a defendant is liable
For harm resulting to a third person from the tortious conduct of another, . . . if he
(a) does a tortious act in concert with the other or pursuant to a common design with him, or
(b) knows that the other's conduct constitutes a breach of duty and gives substantial assistance or encouragement to the other so to conduct himself, or
(c) gives substantial assistance to the other in accomplishing a tortious result and his own conduct separately considered, constitutes a breach of duty to the third person.Restatement (Second) of Torts § 876 (1985).
Defendants mistakenly argue that these claims should be dismissed because they fail to allege the requisite elements of aiding and abetting liability, which is distinct from plaintiffs § 876-based negligence claims. A claim of aiding and abetting does not require proof of an agreement, but requires that an actor knew of a wrong and assisted its furtherance. Landy v. Federal Deposit Ins. Corp., 486 F.2d 139, 162-63 (3d Cir. 1973). In contrast, a "concert of action" claim under § 876(a) requires proof of an agreement, proof that a tortious act was done in concert with the other actors or pursuant to a common design, and that a substantive wrong was committed as a result of the common scheme.
As discussed above, the Second Amended Complaint makes clear that it is plaintiffs' intent to establish that they were harmed by a conspiracy to fraudulently manipulate the price of TSIG stock, and that all defendants were acting in concert to carry out this scheme. Plaintiffs further allege that all participants in the scheme knew or should have known that their actions would harm investors such as the Lermans. The Court finds that such allegations are sufficient to create a duty on the part of those who participated in the scheme to those that would forseeably be harmed thereby. Whether the moving defendants knew the particular identities of those that would be defrauded as a result of the alleged scheme is of no consequence. In short, if plaintiff is able to establish (1) that the defendants acted in concert to defraud investors like the Lermans, (2) that acts were done in furtherance of the conspiracy, and (3) that the Lermans were harmed as a result, then the defendants will be deemed to have owed a duty to the plaintiffs. Accordingly, the plaintiffs have stated actionable claims of negligence and conversion, and the motion to dismiss such claims will be denied.
3. Claims for Injunctive Relief (Count XIV), and Attorneys' Fees (All Counts)
Finally, moving defendants argue that plaintiffs' claims for injunctive relief and attorneys' fees should be dismissed as baseless. The Court will address these arguments in turn.
The Court first discusses plaintiffs' claims for injunctive relief against moving defendants in Count XIV, wherein plaintiffs seek the appointment of a receiver in order to prevent defendants from further dissipating their assets during the pendency of this litigation. Plaintiffs allege that, if moving defendants and others are permitted to liberally dispose of their assets, any potential money judgment in plaintiffs' favor will likely go unsatisfied. (Second Amended Complaint ¶¶ 158-167.)
To obtain injunctive relief such as the appointment of a receiver, a plaintiff must assert not only a risk of irreparable harm, but "has the burden of proving a `clear showing of immediate, irreparable injury.'"Hoxworth v. Blinder, Robinson, Co., Inc., 903 F.2d 186, 205 (3d Cir. 1990) (Becker, J.) (citations omitted). Dismissing plaintiffs' claims for injunctive relief would be premature at this stage, as plaintiff has not yet been given the opportunity to develop record evidence showing the need for such relief. This Court must assume for the purposes of a 12(b)(6) motion that all of plaintiffs' allegations are true. See Hishon v. King Spalding, 467 U.S. 69, 73 (1984).
If it is later proven that defendants were actively disposing of their assets in an effort to become judgment proof, then the appointment of a receiver might well be appropriate in order to prevent dissipation of assets owed to plaintiffs. Accordingly, the Court will not dismiss plaintiffs' equitable relief claims at this early stage in the litigation.
Next, the Court finds that plaintiffs' claims for attorneys' fees must be stricken. Neither Federal nor New Jersey law provides for the imposition of attorneys' fees except where authorized by statute, or in traditionally recognized, limited exceptions such as for bad faith or vexatious conduct. See Straub v. Vaisman Co., Inc., 540 F.2d 591, 589-600 (3d Cir. 1976) (vacating award of attorneys' fees in § 10(b) case); Kolczycki v. City of East Orange, 317 N.J. Super. 505 (App.Div. 1999) (attorneys' fees only proper where authorized by statute or as a penalty for conduct during course of litigation).
Plaintiffs have not alleged that there is a basis for attorneys' fees, and the Court finds that no such basis exists. Moreover, plaintiffs have not responded to moving defendants' motion to strike the demands for attorney. Accordingly, the Court will strike all demands for attorneys' fees in the Second Amended Complaint.
CONCLUSION
For the reasons discussed above, the Court will dismiss plaintiffs' Count VII and will strike all demands for attorneys' fees from the Second Amended Complaint. The remainder of moving defendants' motion to dismiss will be denied. The accompanying Order is entered.
O R D E R
THIS MATTER having come before the Court on motion of defendants Robert P. Gordon and Teleservices International Group, Inc. to dismiss plaintiffs' Second Amended Complaint pursuant to Rule 12(b)(6), Fed.R.Civ.P., and the Court having heard oral argument in this matter on March 22, 2000, and having considered the parties' briefs concerning the motion to dismiss and their post-argument supplemental submissions,
IT IS this day of June, 2000 hereby ORDERED as follows:
1. Count V of the Second Amended Complaint is DISMISSED as to defendants Gordon and TSIG, the claim having been withdrawn; and
2. Moving defendants' motion to dismiss Count VII of plaintiffs' Second Amended Complaint (violations of § 17 of the Exchange Act) is GRANTED and Count VII is DISMISSED WITH PREJUDICE as to all defendants; and
3. Moving defendants' motion to strike plaintiffs' demand for attorneys' fees in all counts of the Second Amended Complaint is GRANTED and all demands for attorneys' fees are hereby STRICKEN; and
4. The remainder of moving defendants' motion to dismiss is DENIED; and
5. Moving defendants are directed to file an Answer to plaintiffs' Second Amended Complaint within ten (10) days of the date of this Order.