Abelson v. Strong

• Decision Date: 05 June 1986
• Docket Number: MDL No. 584.,Civ. A. No. 85-0592-S
• Citation: 644 F. Supp. 524
• Parties: Arthur ABELSON and Irving Malis, individually and on behalf of all others similarly situated, Plaintiffs, v. Maurice STRONG, et al., Defendants.
• Court: U.S. District Court — District of Massachusetts

644 F. Supp. 524

Arthur ABELSON and Irving Malis, individually and on behalf of all others similarly situated, Plaintiffs, v. Maurice STRONG, et al., Defendants.

Civ. A. No. 85-0592-S, MDL No. 584.

United States District Court, D. Massachusetts.

June 5, 1986.

COPYRIGHT MATERIAL OMITTED

Laurence G. Cetrulo, Burns & Levinson, Boston, Mass., for plaintiffs.

John A.D. Gilmore, Hill & Barlow, Boston, Mass., for defendants.

MEMORANDUM AND ORDER ON DEFENDANTS' MOTIONS TO DISMISS

SKINNER, District Judge.

Plaintiffs bring this class action to challenge actions by the defendants which allegedly inflated the value of defendant AZL Resources, Inc.'s ("AZL") stock in violation of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq., and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, Section 1962 of the Racketeer Influenced and Corrupt Organization Act ("RICO"), 18 U.S.C. § 1961 et seq., M.G.L. c. 231, § 85J, and common law fiduciary duty. Plaintiffs purchased shares of AZL stock during the period in question. The individual defendants are officers, directors and shareholders of AZL. The corporate defendants other than AZL are two Swiss investment companies, Societe Generale Pour L'Energie et les Resources ("Sogener") and Credit Immobilier S.A. ("CI").¹

Plaintiffs' claims arise from an alleged scheme to artificially inflate the price of AZL common stock. Briefly, it is alleged that during the period from April 1981 to March 1982, AZL desired additional capital to finance exploration and development of oil and gas properties in which it held an interest. To obtain this capital, defendants sought to increase the market interest in AZL stock and to raise its price. Throughout the period in question defendants Strong and AZL made misrepresentations to an investment advisor, Atlantic Financial Management ("Atlantic"), the principals of a broker-dealer, Tuton, DiIanni & Draizin, Inc. ("TD & D"), and other investors and advisors concerning potential acquisitions or mergers and, subsequently, a purchase of a substantial block of AZL stock. During October and November of 1981, Sogener, an entity controlled by Strong, and the individual defendants other than Strong sold AZL shares while in possession of material nonpublic information.

As a result of the manipulation, the price of AZL stock rose to a high of $32 per share on December 23, 1981 and then fell sharply, reaching a low of $4.62 per share on July 7, 1982. Plaintiffs acknowledge that they were not privy to misrepresentations made by AZL and Strong. Instead, they allege they purchased shares of AZL stock on the open market "during the period of the market manipulation".

Defendants Maurice Strong, Mel P. Melsheimer, Herman W. Van Loo and Tom F. Marsh now move to dismiss plaintiffs' amended complaint. Defendants AZL and Scott M. Spangler join in this motion and make additional arguments pertinent to their respective situations. Defendants argue that plaintiffs have failed to plead fraud with sufficient particularity, failed to state a claim, failed to bring suit within the period allowed by the statute of limitations and, with respect to defendant Spangler, failed to make timely service of process.

For the reasons given below, I conclude that the amended complaint must be dismissed with respect to all the defendants except Strong. Plaintiffs have failed to state a claim under § 10(b) or RICO gainst AZL, Melsheimer, Van Loo, Marsh or Spangler. Although plaintiffs have successfully pleaded § 10(b) and RICO claims against Strong, the § 10(b) claim is barred by the statute of limitations. As a result of these rulings, I lack jurisdiction over the pendant state law claims against the defendants other than Strong. Plaintiffs' claim against Strong under M.G.L. c. 231, § 85J also must be dismissed for failure to state a claim.²

Compliance with Fed.R.Civ.P. 9(b).

The individual defendants argue that all counts of the amended complaint must be dismissed because plaintiffs have not stated the circumstances constituting fraud with particularity, as required by Fed.R.Civ.P. 9(b). Specifically, defendants point out that plaintiffs have not pleaded the dates and circumstances of their purchases of AZL stock. Plaintiffs allege only that they purchased in excess of 1,600 shares during the period of market manipulation. Amended Complaint ("A.C.") ¶ 41. This allegation is sufficient to withstand challenge under Rule 9(b). The dates and circumstances of plaintiffs' purchases, while perhaps necessary to their insider trading claims, are not related to the fraudulent scheme alleged in the amended complaint. It is the fraud, and not plaintiffs' purchases, which must be stated with particularity.

AZL contends plaintiffs have failed to meet their obligation to allege with particularity the fraud perpetuated by each defendant. Margaret Hall Foundation v. Atlantic Financial Management, 572 F.Supp. 1475, 1481 (D.Mass.1983). Upon review of the amended complaint, I conclude that the acts constituting the alleged fraud and the potential bases for AZL's responsibility for these acts are pleaded with sufficient particularity.

However, the affirmative misrepresentations allegedly made by the individual defendants other than Strong have not been well pleaded. The amended complaint states that "in connection with their sale of AZL stock on specified dates", these defendants "willfully made materially false and/or misleading statements". A.C. ¶ 66. This allegation does not comply with Fed.R. Civ.P. 9(b), which "requires specification of the time, place and content of an alleged false representation". Hayduk v. Lanna, 775 F.2d 441, 444 (1st Cir.1985) (quoting McGinty v. Beranger Volkswagen, Inc., 633 F.2d 226, 228 (1st Cir.1980) (emphasis added)). Accordingly, any claim based on these alleged misrepresentations must be dismissed.

Count I: Claims under § 10(b) and Rule 10b-5.

A. Sufficiency of the Complaint.

Defendants Marsh, Van Loo, Melsheimer and Spangler contend that plaintiffs' § 10(b) claims should be dismissed for failure to state a claim because plaintiffs fail to allege contemporaneous trading. These defendants and others are alleged to have sold shares of AZL stock while in possession of material, nonpublic information. The amended complaint clearly fails to state a claim for insider trading because plaintiffs do not allege that their purchases were contemporaneous with the alleged sales. Wilson v. Comtech Telecommunications Corp., 648 F.2d 88, 94-95 (2d Cir. 1981); Backman v. Polaroid Corp., 540 F.Supp. 667, 669-70 (D.Mass.1982).

However, plaintiffs do not rely on their unsuccessfully pleaded claim of insider trading. In their memorandum, they assert that defendants' sales were part of the scheme to inflate the price of AZL stock. The individual defendants initially argue that the amended complaint does not apprise the defendants of a "fraud on the market" claim. I disagree. See A.C. ¶ 67 ("defendants created a false market into which plaintiffs ... entered"); ¶ 41 (plaintiffs purchased shares "during the period of market manipulation"); ¶ 50 (as a result of the misrepresentations "the price of AZL stock was artificially inflated"). Indeed, defendant AZL so understood the amended complaint. See AZL's Memorandum in Support of Motion to Dismiss at 12. As plaintiffs have alleged both that they purchased securities during the period of market manipulation and that defendants made material misrepresentations which resulted in artificial inflation of the market price of AZL stock, they have sufficiently described such a claim. See T.J. Raney & Sons v. Fort Cobb, Oklahoma Irrigation Fuel Authority, 717 F.2d 1330, 1332 (10th Cir.1983), cert. denied sub nom. Linde, Thomson, Fairchild, Langworthy, Kohn & Van Dyke v. T.J. Raney & Sons, Inc., 465 U.S. 1026, 104 S.Ct. 1285, 79 L.Ed.2d 687 (1984).

The amended complaint candidly acknowledges that plaintiffs were not privy to the misrepresentations allegedly made by AZL and Strong. Defendants accordingly urge that the action be dismissed for failure to plead reliance, usually a necessary condition for recovery under § 10(b) for misrepresentations. Janigan v. Taylor, 344 F.2d 781, 785-86 (1st Cir.1965). Plaintiffs first assert they need not prove reliance because their claim is based on nondisclosures, in which case proof of materiality and an obligation to disclose is sufficient to state a cause of action. Affiliated Ute Citizens v. United States, 406 U.S. 128, 153-54, 92 S.Ct. 1456, 1472, 31 L.Ed.2d 741 (1972); see Holmes v. Bateson, 583 F.2d 542, 558 (1st Cir.1978). The omissions alleged here are of information "that AZL's prospects for obtaining substantial infusions of capital in order to exploit its oil and gas rights were poor". A.C. ¶ 64. This information was needed to correct the impression created by the series of misstatements alleged. The "presumption" of causation of Affiliated Ute does not apply where such positive statements exist because reliance may then be proven. Wilson, 648 F.2d at 93-94. As the gravamen of plaintiffs' claim is misrepresentation, reliance must be shown. See Vervaecke v. Chiles, Heider & Co., Inc., 578 F.2d 713, 716-18 (8th Cir.1978); Grossman v. Waste Management, Inc., 589 F.Supp. 395, 409-10 (N.D.Ill.1984).

However, the "fraud on the market" theory is specifically aimed at protecting open market purchasers like plaintiffs who did not directly rely on any representations regarding the stock. The rationale behind the theory has been described as follows:

A purchaser on the stock exchanges may be either unaware of a specific false representation, or may not directly rely on it; he may purchase because of a favorable price trend, price earnings ratio, or some other factor. Nevertheless, he relies generally on the supposition that the market price is validly set and that no unsuspected manipulation has artificially inflated the price, and thus indirectly on the truth of the

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