Abrash v. Fox

• Citation: 805 F. Supp. 206
• Decision Date: 02 November 1992
• Docket Number: No. 92 Civ. 3863(MEL).,92 Civ. 3863(MEL).
• Parties: Sandra ABRASH, Norma Veridiano, Sandy Airbrush, Inc. and Art & Sole, Ltd., Plaintiffs, v. Byron FOX, Galvin Fox & Palmer, John Galvin and Sheldon Palmer, individually and as partners of Galvin Fox & Palmer, and Galvin & Palmer, as Successor in Interest to Galvin Fox & Palmer, Defendants.
• Court: U.S. District Court — Southern District of New York

805 F. Supp. 206

Sandra ABRASH, Norma Veridiano, Sandy Airbrush, Inc. and Art & Sole, Ltd., Plaintiffs, v. Byron FOX, Galvin Fox & Palmer, John Galvin and Sheldon Palmer, individually and as partners of Galvin Fox & Palmer, and Galvin & Palmer, as Successor in Interest to Galvin Fox & Palmer, Defendants.

No. 92 Civ. 3863(MEL).

United States District Court, S.D. New York.

November 2, 1992.

John G. Rich, New York City, for plaintiffs.

Bressler, Amery & Ross, Florham Park, N.Y. and Bressler, Amery & Rothenberg (George R. Hirsch, on brief and of counsel, David J. Libowsky, on brief), New York City, for defendant Byron Fox.

LASKER, District Judge.

Sandra Abrash, Norma Veridiano, Sandy Airbrush, Inc. ("Airbrush, Inc.") and Art & Sole, Ltd. ("Art & Sole") sue Byron Fox, and his law firm, Galvin Fox & Palmer¹, alleging securities fraud, common law fraud, malpractice, and breach of contract. Plaintiffs contend that Fox induced Abrash and Veridiano to purchase securities in Airbrush, Inc. by making various misrepresentations in violation of Section 10(b) of the Securities Exchange Act of 1934 and S.E.C. Rule 10b-5.

Fox moves to dismiss the complaint for lack of subject matter jurisdiction on the grounds that Plaintiffs' claim for securities fraud, the sole predicate for federal jurisdiction², fails to state a claim upon which relief can be granted. Fed.R.Civ.P. 12(b)(1), 12(b)(6).

I.

Abrash formed Art & Sole in 1988 to produce hand painted pictures and designs on athletic footwear. Abrash sought a person with suitable expertise to evaluate and follow through on various unfolding business opportunities and was introduced to Fox through Veridiano in March 1989. According to the Complaint, Fox represented to Abrash and Veridiano:

(a) that Fox was duly competent and qualified to represent plaintiffs ... and duly licensed to practice law in ... New York;

(b) that Fox would do all the necessary work to establish the francise (sic) organization and arrange for the filing of the patent application by July 1 of 1989;

(c) that Fox would act as business and legal advisor and negotiator with regard to ... new business opportunities ...;

(d) and that $50,000 in capital, which included $15,000 to be paid immediately to Fox in legal fees, was sufficient to establish the franchise and initially capitalize the business.

Plaintiffs contend that these representations were materially false or misleading.

In June 1989, Airbrush, Inc. was formed on Fox's advice as a start-up vehicle for the franchise organization. Veridiano purchased 100 shares, representing 10% of the outstanding stock for $50,000, and Abrash purchased 900 shares in consideration for the transfer to Airbrush, Inc. of the right to use or license the Process developed by Art & Sole, Inc. Plaintiffs contend that they would never have entered into this transaction, but for Fox's misrepresentations.

II.

To sustain a claim under Section 10(b) and Rule 10b-5, a plaintiff must establish that the alleged material misstatement or omission took place "in connection with the purchase or sale of a security." Luce v. Edelstein, 802 F.2d 49, 55 (2d Cir. 1986) (citing Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976)). Fox contends that the alleged misrepresentations were not made "in connection with the purchase or sale of a security," but rather in relation to his legal representation of the Plaintiffs. Abrash and Veridiano do not contest the legal authorities cited by Fox, but deny that the relationship of the misrepresentations to the securities was too remote. They argue that:

simply because the misrepresentations were also made in connection with the legal retention as well as in connection with the securities transaction does not mean that they were not integral to the securities transaction.

* * * * * *

The representations were a direct inducement to proceed with the securities transaction. This case is no different in that respect than one in which a defendant induces persons to invest based on business plans that it has no intention of implementing.

Pl.'s Mem. in Opp. 5-6.

To establish misrepresentations "in connection with" a securities transaction, a plaintiff must demonstrate a causal connection between the alleged fraudulent conduct and the securities transaction at issue, In re Financial Corporation of America Shareholder Litigation, 796 F.2d 1126, 1130 (9th Cir.1986). The causal connection may not be established solely on the basis of "but-for" allegations, Bloor v. Carro, Spanbock, Londin, Rodman & Fass, 754 F.2d 57, 61 (2d Cir.1985). The proof must demonstrate something more than a "de minimis" relationship between the fraud and the purchase or sale of securities. Manufacturers Hanover Trust Company v. Smith Barney, Harris Upham & Company, Incorporated, 770 F.Supp. 176, 181 (S.D.N.Y.1991).

Moreover, even when there is a clear causal connection between the misrepresentations and the investment decision, there is no securities law violation unless the misrepresentations or omissions involved in a securities transaction pertain to the securities themselves. Chemical Bank v. Arthur Andersen & Co., 726 F.2d 930, 943 (2d Cir.1983). The "in connection with" requirement is not satisfied unless "the alleged fraud concerns the...