Elysian Fed. Sav. v. First Interregional Equity

• Decision Date: 11 May 1989
• Docket Number: Civ. A. No. 88-3528.
• Citation: 713 F. Supp. 737
• Parties: ELYSIAN FEDERAL SAVINGS BANK, Plaintiff, v. FIRST INTERREGIONAL EQUITY CORPORATION, First Interregional Gvm't Securities, Inc. and Charles Belina, Defendants.
• Court: U.S. District Court — District of New Jersey

713 F. Supp. 737

ELYSIAN FEDERAL SAVINGS BANK, Plaintiff, v. FIRST INTERREGIONAL EQUITY CORPORATION, First Interregional Gvm't Securities, Inc. and Charles Belina, Defendants.

Civ. A. No. 88-3528.

United States District Court, D. New Jersey.

May 11, 1989.

Seth T. Taube, McCarter & English, Newark, N.J., for plaintiff.

Nicholas W. McClear, Wilentz, Goldman & Spitzer, Woodbridge, N.J., for defendants.

OPINION AND ORDER

LECHNER, District Judge.

Succinctly stated, in this action plaintiff has alleged the defendants committed fraud by charging plaintiff excessive mark-ups in the sale of two types of securities: collateralized mortgage obligations ("CMOs") and principal only trust certificates ("PO Trusts"). Plaintiff claims the aggregate amount of the excessive mark-ups exceeds $5 million. In addition, it is charged defendants have attempted to conceal the excessive mark-ups. While a significant number of the legal issues presented in this matter can be adequately addressed against the backdrop of this terse summary of plaintiff's first amended complaint (the "Current Complaint"), certain of the legal claims involve consideration of additional facts. These additional facts, although not voluminous or complicated, are set forth together with a discussion of the individual legal theories which make them relevant.

Defendants filed a motion to dismiss, on various grounds, several counts contained in the Current Complaint. Simultaneously, plaintiff has made a motion to file a second amended complaint (the "Amended Complaint") which (1) drops certain of the claims defendants seek to have dismissed in their motion, (2) seeks to include claims for relief based on additional legal theories, and (3) seeks to add certain detail, the absence of which defendants claim justifies dismissal of various counts in the Current Complaint.

As to the counts in the Current Complaint which have not been voluntarily dismissed, plaintiff has strongly opposed defendants' motion to dismiss. As to plaintiff's motion to further amend the Current Complaint, defendants have strenuously argued, among other things, the new counts sought to be included fail to state a claim as a matter of law. While there are a variety of issues raised by the present motions, each of which will be addressed below, this opinion primarily addresses the viability of various legal theories for recovery on the relatively straightforward facts of this case.

More specifically, (and setting aside for the moment the assertions sought to be added in the Amended Complaint, because of defendants' motion to dismiss¹ and further review by plaintiff² of the issues involved) plaintiff's remaining claims which with the exception of one transaction continue to be the subject of defendants' motion to dismiss can be listed as follows:

(1) claims based on Section 10(b) of the Exchange Act and Rule 10(b)-5 for all CMO and PO Trust transactions;

(2) claims based on Section 12(2) of the Securities Act for CMO transactions only;

(3) control person liability claims pursuant to Section 15 of the Securities Act, 15 U.S.C. § 77o for claims based on the CMO transactions only; and

(4) control person liability claims pursuant to Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a) for all CMO and PO Trust transactions.

As discussed below, defendants' opposition to plaintiff's motion to amend will, in large part, be treated as a motion to dismiss the new claims sought to be asserted which include claims under RICO, the New Jersey counterpart and of aiding and abetting. For the reasons that follow, defendants' motion to dismiss is denied in all respects; plaintiff's motion to file the Amended Complaint is granted.

Discussion

I. Dismissal Standard

Virtually all aspects of this matter will be treated under the standards applicable to Rule 12(b)(6) motions. In that connection, the Supreme Court stated in Conley v. Gibson, 355 U.S. 41, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957):

In appraising the sufficiency of the complaint we follow, of course, the accepted rule that a complaint should not be dismissed for failure to state a claim 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.

Id. at 45-46, 78 S.Ct. at 101-102. Accord, Cruz v. Beto, 405 U.S. 319, 321, 92 S.Ct. 1079, 1081, 31 L.Ed.2d 263 (1972); Angelastro v. Prudential-Bache Securities, 764 F.2d 939 (3d Cir.1985), cert. denied, 474 U.S. 935, 106 S.Ct. 267, 88 L.Ed.2d 274 (1986). Indeed, the Supreme Court has stated that a Rule 12 motion should not succeed unless the complaint is found to be "wholly frivolous." Radovich v. National Football League, 352 U.S. 445, 453, 77 S.Ct. 390, 395, 1 L.Ed.2d 456 (1957). As articulated in this Circuit, the standard to be applied in a motion under Fed.R.Civ.P. 12(b)(6) is whether, after construing the pleading in the light most favorable to the plaintiff and resolving every doubt in favor of the plaintiff, the pleading states any valid claim for relief. Mortensen v. First Federal Savings and Loan Ass'n, 549 F.2d 884, 891 (3d Cir.1977).

With respect to at least two aspects of this matter—the allegations concerning plaintiff's knowledge of the excessive markups and the related issue of statute of limitations accrual—submissions in addition to the pleadings have been presented. To this limited extent defendants' Rule 12(b)(6) motion will be treated as a motion for summary judgment under Rule 56.³

To prevail on a motion for summary judgment, the moving party must establish "there is no genuine issue as to any material fact and that it is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). The district court's task is to determine whether disputed issues of fact exist, but the court cannot resolve factual disputes in a motion for summary judgment. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249-50, 106 S.Ct. 2505, 2510-11, 91 L.Ed.2d 202 (1986). All evidence submitted must be viewed in a light most favorable to the party opposing the motion. See Matsushita Elec. Industrial Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538 (1986).

Although the summary judgment hurdle is a difficult one to overcome, it is by no means insurmountable. As the Supreme Court has stated, once the party seeking summary judgment has pointed out to the court the absence of a fact issue,

its opponent must do more than simply show that there is some metaphysical doubt as to the material facts.... In the language of the Rule, the non-moving party must come forward with `specific facts showing that there is a genuine issue for trial.' ... Where the record taken as a whole could not lead a rational trier of fact to find for the non-moving party, there is no `genuine issue for trial.'

Matsushita, 475 U.S. at 586-87, 106 S.Ct. at 1356 (emphasis in original, citations and footnotes omitted).

The Court elaborated on the standard in Anderson v. Liberty Lobby, Inc., 477 U.S. at 249-50, 106 S.Ct. at 2510-11 (citations omitted): "If the evidence submitted by a party opposing summary judgment is merely colorable ... or is not significantly probative ... summary judgment may be granted." The Supreme Court went on to note in Celotex Corp. v. Catrett, 477 U.S. 317, 323-24, 106 S.Ct. 2548, 2553, 91 L.Ed. 2d 265 (1986) (footnote omitted): "One of the principal purposes of the summary judgment rule is to isolate and dispose of factually unsupported claims or defenses, and we think it should be interpreted in a way that allows it to accomplish this purpose." Thus, once a case has been made in support of summary judgment, the party opposing the motion has the affirmative burden of coming forward with specific facts evidencing a need for trial. See Fed. R.Civ.P. 56(e).

II. Statute of Limitations under Section 10(b) of the Exchange Act and Rule 10(b)-5 thereunder

Plaintiff purchased PO Trusts from defendants in May, June and August, 1987, and purchased the CMOs from defendants in a number of transactions during 1986. See footnote 8, infra. Plaintiff argues that, because the excessive mark-ups were not disclosed by defendants, it did not know it was being charged excessive markups at the time of the transactions. In September, 1987, plaintiff, with the intervention of the Federal Home Loan Bank Board ("FHLBB"), retained Rochester Consulting Associates ("Rochester Consulting") in order to assist in the operations and management of the business. According to the deposition testimony of Peter Gensicke ("Gensicke"), former Chief Financial Officer of plaintiff, William Vail ("Vail") of Rochester Consulting asked Gensicke to prepare computer printouts of certain PO Trust and CMO transactions so that Vail could "check out" the prices for those securities.

Less than one year later, in August, 1988, Elysian filed its suit asserting claims under, among other things, Section 10(b) of the Exchange Act. Section 10 provides 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 registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.

15 U.S.C. § 78j. Subsequent to passage of the Exchange Act, the SEC promulgated Rule 10(b)-5, providing 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

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