Fezzani v. Bear, Stearns & Co., Inc.

Citation384 F.Supp.2d 618
Decision Date06 April 2004
Docket NumberNo. 99 Civ.0793 RCC.,99 Civ.0793 RCC.
PartiesMohammed FEZZANI, Cirenaca Foundation, Dr. Victoria Blank, Lester Blank, James and Jane Bailey, Baydel Ltd., Margaret and Patrick Burgess, Bootlesville Trust and Adam Cung, Plaintiffs, v. BEAR, STEARNS & COMPANY, INC., Bear Stearns Securities Corp., Richard Harriton, Andrew Bressman, Arthur Bressman, Richard Acosta, Glenn O'Hare, Joseph Scanni, Brett Hirsch, Garvey Fox, Matthew Hirsch, Richard Simone, Charles Plaia, John Mcandris, Jack Wolynez, Robert Gilbert, First Hanover Securities, Inc., Banque Audi Suisse Geneve, Fozie Farkash, Rawairaes, Basil Shablaq, Ken Stokes, Issac R. Dweck, Individually and as custodian for Nathan Dweck, Barbara Dweck, Morris I. Dweck, Ralph I. Dweck, Millo Dweck, Beatrice Dweck, Richard Dweck, Jack Dweck, Issac B. Dweck, Hank Dweck, Morris Wolfson, Arielle Wolfson, Aaron Wolfson, Abraham Wolfson, Tovie Wolfson, Anderer Associates, Boston Partners, Wolfson Equities, Turner Scharer, Chana Sasha Foundation, United Congregation Mesarah, Fahnestock & Co., Inc., Donald & Co., Barry Gesser, Michael Ryder and Apollo Equities, Defendants.
CourtU.S. District Court — Southern District of New York

Max Folkenflik, Folkenflik & McGertity, New York City, for Plaintiffs.

Richard Acosta, Raybrook, NY, Pro se.

David L. Wales, Howard Wilson, Rosenman & Colin, L.L.P., John Edward Tardera, Winston & Strawn LLP, Stuart L. Melnick, Stuart L. Melnick, LLC, John Edward Tardera, Winston & Strawn LLP, Marc J. Ross, Sichenzia, Ross & Friedman & Ference, L.L.P., New York City, for Defendants.

Memorandum Opinion & Order

CASEY, District Judge.

This action was brought on February 2, 1999 by eleven investors (collectively, "Plaintiffs") against more than fifty individual and corporate defendants (collectively, "Defendants") arising out of the activities of A.R. Baron & Co. ("Baron"), a New York securities broker-dealer. The complaint alleges claims for federal securities fraud, violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), aiding and abetting breach of state-law fiduciary duties, and common-law fraud. Now before the Court are seven motions to dismiss the complaint. As detailed below, the motions are GRANTED IN PART AND DENIED IN PART.

I. BACKGROUND
A. Baron's History

Baron was a broker-dealer which operated from 1992 until 1996.1 (Compl.¶ 1.) During that period, Baron and its employees engaged in a widespread fraudulent scheme to manipulate the price of certain securities. The majority of Baron's business consisted of underwriting securities for initial public offerings. (Id. ¶ 5.) Baron brokers used cold calling to sell as much stock as possible in the companies. Because there was no true public market for the stocks, they were able to control both purchases and sales. (Id. ¶ 7.)

Baron first sought to increase sales by disseminating favorable information about the stocks while suppressing adverse information, as well as inventing favorable information. (Id. ¶ 8.) In addition, Baron made unauthorized purchases on behalf of customers. (Id.) When customers complained about the purchases, Baron transferred the securities to an "error account," effectively making Baron the purchaser of those securities and depleting its capital. (Id. ¶ 18.) Alternatively, Baron would rebill the unauthorized trade to a different customer's account. (Id. ¶ 21.) Baron also engaged in "parking" stock. (Id.) "Parking" is defined in the complaint as executing trades to a buyer, actually a coconspirator, by which the stock would be placed in the coconspirator's account while Baron maintained the risk of loss. The transactions would be reported to create a false appearance of trading in certain securities, thereby increasing the securities' price and inducing customers to execute transactions. (Id. ¶¶ 120-23.)

These acts of manipulation were intended to inflate the market price of the securities that Baron was selling and convince customers to purchase those stocks. Baron and its coconspirators then sold the shares they held before the stock price crashed. (Id. ¶¶ 10-11.) As stated above, however, Baron's practices caused its capital to decrease, placing it in constant danger of dipping below the minimum capital level required by regulations. (Id. ¶ 23.) The National Association of Securities Dealers ("NASD") and the Securities and Exchange Commission ("SEC") investigated Baron on a number of occasions, imposing large fines and temporarily suspending some of its brokers. (Id. ¶ 94.) By the end of 1995, Baron had a net capital deficiency of $1,110,675; customer complaints amounted to $80 million. (Id. ¶ 247.) Baron temporarily went out of business in October 1995, as it had previously done in 1993. (Id.) The company finally filed for bankruptcy in July 1996. (Id.)

The complaint alleges that Baron's activities cost investors in excess of $80 million and inflated the market value of the securities that Baron manipulated by billions of dollars. (Id. ¶ 24.) Baron's activities generated litigation, both civil and criminal, in more than one federal district court, the bankruptcy courts, New York state supreme court, and before arbitral tribunals. In 1994, a federal civil suit was filed against Baron; the NASD initiated another investigation; and an arbitration proceeding was commenced seeking over $1 million in damages. (Id. ¶ 116.) By the end of 1994, the numerous litigation actions sought over $10 million in damages. (Id.) In 1995, an investor brought another suit in federal court against Baron and some of its brokers seeking $1 million in compensatory and $5 million in punitive damages. (Id. ¶ 212.) On December 19, 1995, the State of Alabama procured an order to show cause why Baron's broker license should not be suspended for failure to report claims and proceedings against it. (Id. ¶ 231.)

Baron's woes did not end with its 1996 bankruptcy. In March 1997, the NASD filed a complaint against eighteen Baron representatives. (Id. ¶ 269.) Then, on May 13, 1997, Baron and its employees were indicted by a grand jury in New York Supreme Court, New York County. (Id. ¶ 270.) All of the defendants in that criminal case either pled guilty or were convicted of charges of, among other things, enterprise corruption, the state-law analogue to RICO. (Id. ¶¶ 271-72.)

B. The Manipulated Securities

The claims here arise out of public offerings of stock in the following companies: Cryomedical Sciences, Inc. ("CMSI"), Health Professionals, Inc. ("HPI"), Cypros, Innovir, Voxel, Cardiac Sciences, Inc. ("Cardiac"), PaperClip, Mammo, Symbollon, Aqua, Laser Video, and Jockey Club. Both CMSI and HPI were cofounded by Jeffery Weissman, who, along with Andrew Bressman, founded Baron. (Id. ¶ 64.) The complaint alleges that Weissman engaged in manipulation of CMSI and HPI stock prices before he and Bressman established Baron. (Id. ¶¶ 68-69.) After Baron's conception, its brokers began using the boiler room tactics described above to inflate the price of CMSI and HPI. (Id. ¶ 90.)

In mid-1992, Baron acted as underwriter for Cypros, a bio-pharmaceutical company without any marketable products. (Id. ¶ 91.) Baron placed 20% of the initial public offering with itself and its coconspirators, in violation of NASD regulations. (Id. ¶ 92.) Baron also executed a large amount of purchase orders for customers who never agreed to buy Cypros shares. (Id. ¶ 93.) The NASD later sanctioned Baron for the unauthorized trading in Cypros, and suspended Baron's top executives for sixty days. (Id. ¶ 155.)

Baron allegedly profited from the manipulation of CMSI, HPI, and Cypros stock prices. However, Baron ran into some difficulty when HPI lost its allure as an attractive investment. The SEC began an investigation of HPI in 1993, and newspaper articles appeared that accused HPI of fraud. (Id. ¶ 100.) Baron had misrepresented to customers that Hoffman-LaRoche was offering to purchase HPI, and that HPI rejected the offer because of the company's high value. (Id. ¶ 99.) Baron's involvement with HPI was publicized in Barron's Magazine, a widely read Wall Street publication. (Id. ¶¶ 101, 152.) The article caused HPI stock to drop in value, causing Baron to attempt to resuscitate the price through purchasing approximately 780,000 shares, then transferring the shares to unknowing customers or parking the shares with coconspirators. (Id. ¶ 104.) The manipulation financially strained Baron, causing its net capital to fall below the level required by the NASD and resulting in a short suspension from full trading activities. (Id. ¶ 107.)

Baron returned to its fraudulent activities with the initial public offering of Innovir, a biomedical company with no revenue and high debts. (Id. ¶ 109.) Baron instituted the same manipulation techniques it had used with the other securities. In 1994, a new group of brokers joined Baron and began manipulating certain securities: Mammo, Symbollon, Aqua, and Laser Video. (Id. ¶ 113.) These brokers made misrepresentations to Baron customers such as telling one of the plaintiffs here that Mammo's technologies and equipment were being installed and tested at Sloan Kettering Institute. (Id. ¶ 115.) The price of Innovir rose from $2½ per share to $4 15/16 per share; soon after Baron's bankruptcy, the price returned to $2 per share and is now virtually nothing. (Id. ¶ 245.)

Voxel was another company whose initial offering Baron underwrote. (Id. ¶ 118.) Baron hid or deceptively explained Voxel's lack of revenue, high debts, and short-term cash needs. (Id. ¶ 119.) Baron's brokers used high-pressure sales tactics and unauthorized purchases to inflate the price of Voxel shares as well. Shares of Voxel common stock went from $1 7/8 per share to $8 3/16 per share, until Baron's bankruptcy when the price collapsed. (Id. ¶ 244.)

The complaint describes the sale...

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