Fezzani v. Bear, Stearns & Company Inc.
| Decision Date | 23 September 2008 |
| Docket Number | No. 99 Civ. 0793(PAC).,99 Civ. 0793(PAC). |
| Citation | 592 F.Supp.2d 410 |
| Parties | Mohamed FEZZANI, et al., Plaintiffs, v. BEAR, STEARNS & COMPANY INC., et al., Defendants. |
| Court | U.S. District Court — Southern District of New York |
Max Folkenflik, Folkenflik & McGerity, New York, NY, for Plaintiffs.
Jonathan Nicholas Francis, Michael David Schissel, Arnold & Porter, LLP, David Lloyd Wales, Rosenman & Colin, L.L.P., Howard Wilson, Proskauer Rose LLP, Max Folkenflik, Folkenflik & McGerity, Donald Albert Corbett, Ira Lee Sorkin, Dickstein Shapiro LLP, John Edward Tardera, Winston & Strawn LLP, Stuart L. Melnick, Stuart L. Melnick, LLC, Donald N. Cohen, Timothy Edward DiDomenico, William D. Briendel, Greenberg Traurig, LLP, Thomas John Quigley, Winston & Strawn LLP, Marc J. Ross, Sichenzia, Ross & Friedman, & Ference, L.L.P., New York, NY, for Defendants.
Richard Acosta, Raybrook, NY, pro se.
This action arises out of massive and persistent fraud by a now defunct broker dealer, A.R. Baron & Co. ("Baron"), which bilked its customers out of millions of dollars during the four-year period from May 1992, when it opened for business, until it went bankrupt in 1996, now twelve years ago. Baron is without assets and its former officers, directors, and key employees have been found guilty of various crimes. Plaintiffs, customers of Baron who allegedly lost more than $7.25 million through Baron's criminal activities, seek recovery from multiple Defendants which did business with Baron and allegedly propped the company up during its brief but felonious life, thereby permitting Baron to continue its criminal conduct. Plaintiffs seek recovery on six causes of action: (1) federal securities fraud based on the defendants' misrepresentations and omissions; (2) federal securities fraud based on market manipulation; (3) violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"); (4) common law fraud; (5) civil conspiracy to defraud; (6) and aiding and abetting fraud. Defendants move to dismiss the complaint. For the reasons that follow, the motions are GRANTED as to all defendants, expect the Apollo Defendants' motion is DENIED.
During its operation from 1992 to 1996, Baron was the prototypical "boiler room" securities broker.1 Baron's general scheme was to manipulate the price of specific securities by taking small, unknown companies with negligible profits and little overhead and then raising funds through an initial public offering ("IPO"). At the IPO stage, Baron would sell shares of the offering company to a small group of trusted investors. Baron would create a market for these shares through cold-calls to potential customers and high-pressure sales tactics. Baron brokers would suppress negative information about the stocks, while inflating any positive information. There was relatively little public information available to buyers because the companies that Baron brokers promoted were so small. Baron brokers were therefore able to control the information to customers and create a market for the stocks where none actually existed. Thus, Baron brokers could artificially inflate prices of the stocks.
The Baron scheme was reliant on presenting an impression that the stocks it sold were part of an active and vibrant market. When Baron brokers were unable to create sufficient demand for their stocks, Baron brokers executed unauthorized transactions on behalf of clients or used fictitious purchases to create an appearance of an active market. One such manipulation was "parking" a stock, which meant executing a trade to a buyer who was actually an insider. The stock would be parked in the insider's account to create the appearance of active trading, but Baron retained the risk of loss in the stock price. The point of the various stock manipulations was to drive the price up so that Baron and its co-conspirators could cash out their holdings before the stock crashed.
Baron eventually became a victim of its scheme. The company was under pressure to bring in enormous amounts of capital to prop up the IPOs that it had backed and to cover the repeated unauthorized purchases of stock that it made to create an appearance of an active trading market. By the end of 1995, Baron had a net capital deficiency of more than $1 million, and customer complaints amounted to approximately $80 million. Baron had gone out of business temporarily in both 1993 and in October 1995, and in July 1996 Baron filed for bankruptcy.
Unlike Baron's short-lived business, this case has enjoyed a long lifespan. Plaintiffs filed their first complaint in February 1999,2 alleging six claims against multiple parties which did business with Baron. Plaintiffs' claims included: (1) violations of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and its implementing regulation, Rule 10b-5, 17 C.F.R. § 240.10b-5, through fraudulent misrepresentations and omissions in the sale of securities; (2) violations of Section 9 of the Securities Exchange Act, 15 U.S.C. § 78i, through knowing or reckless manipulation of the securities traded on the national securities exchanges; (3) violations of Section 10(b) and Rule 10b-5 based on market manipulation; (4) claims under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1962; (5) a claim of aiding and abetting a violation of fiduciary duties under New York State law; and (6) a claim of common-law fraud under New York State law.
The original complaint named eleven individuals or organizations that allege they were defrauded into purchasing stock by Baron's manipulation and now claim that Defendants are liable for their losses.3 The Defendants in the original complaint included a hodgepodge of companies and individuals who are alleged to have assisted and profited from Baron's fraud: a group of Baron executives and employees ("Baron Defendants");4 Bear, Stearns & Co., Bear Stearns Securities Corp., and Richard Harriton ("Bear Stearns Defendants");5 Donald & Co., First Hanover Securities, and Fahnestock & Co. ("Broker Defendants");6 a group of individual defendants who were alleged to have provided financing to Baron and were thus part of the fraudulent scheme ("Individual Defendants");7 and Apollo Equities, Barry Gesser, and Michael Ryder ("Apollo Defendants").8
Defendants moved to dismiss all of Plaintiffs' claims in August 1999 and Judge Casey granted the motions in part and denied them in part. See Fezzani v. Bear, Stearns & Co., 384 F.Supp.2d 618, 624 (S.D.N.Y.2004) ("Fezzani I"). Specifically, he found that all securities claims based on activities prior to February 2, 1996, three years before the complaint was filed, were time-barred. Id. at 637. Accordingly, the claims set forth in the first three causes of action by Plaintiffs Fezzani, Cirenaca, Jane Bailey, the Blanks, Baydel, Bootlesville, and Cung were dismissed as time barred, leaving only the unbarred claims of the remaining plaintiffs — James Bailey and the Burgesses ("Remaining Plaintiffs"). Id.
As to the Remaining Plaintiffs' first three causes of action (the securities-law claims), Judge Casey dismissed the three causes of action against the Bear Stearns defendants for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6). Id. at 640-42. He dismissed the Remaining Plaintiffs' second cause of action alleging violation of Section 9 of the Securities Exchange Act as to all defendants for failure to state a claim. Id. at 641. On the Remaining Plaintiffs' first cause of action (a violation of Section 10(b) and Rule 10b-5 of the Securities Exchange Act for misrepresentations and omissions) against the Individual and Broker Defendants, Judge Casey dismissed that cause for failure to state a claim. Id. at 643.
The Remaining Plaintiffs' third claim (Section 10(b) and 10b-5 market manipulation violations) against the Broker Defendants was dismissed for failure to plead with particularity under Federal Rule of Civil Procedure 9(b), with leave to replead. Id. The Remaining Plaintiffs' third claim against Individual Defendants was dismissed for failure to state a claim (James Bailey) and dismissed for failure to plead with particularity, with leave to replead (Burgesses). Id.
Judge Casey also dismissed the Remaining Plaintiffs' first cause of action against the Apollo Defendants for failure to state a claim. Id. at 645. He also dismissed the fifth claim (aiding and abetting breach of fiduciary duty) against all defendants for failure to state a claim, except for James Bailey's claims against Apollo Defendants. Id. at 647.
Plaintiffs' original pleading was left with the following viable claims:
(1) RICO claims against the Baron Defendants;
(2) The federal securities claim against Arthur Bressman;
(3) James Bailey's third cause of action based on market manipulation against the Apollo Defendants; and
(4) Bailey's aiding and abetting breach of fiduciary duty claim against the Apollo Defendants. Id. at 649.
Additionally, Judge Casey granted the Remaining Plaintiffs leave to replead their third cause of action against the Broker Defendants and gave the Burgesses leave to replead their third cause of action against the Individual Defendants. Id.
Plaintiffs moved for reconsideration of Judge Casey's decision on two issues. First, they argued that the Court should have applied a six-year statute of limitations to their state-law claim for aiding and abetting breach of fiduciary duty. See Fezzani v. Bear, Stearns & Co., No. 99 Civ. 0793(RCC), 2004 WL 1781148, at *1 (S.D.N.Y. Aug. 10, 2004) ("Fezzani II"). Judge Casey rejected that argument,...
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