In re Laser Arms Corp. Securities Litigation
| Decision Date | 03 November 1989 |
| Docket Number | No. 86 Civ. 3591 (JMC).,86 Civ. 3591 (JMC). |
| Citation | 794 F. Supp. 475 |
| Parties | In re LASER ARMS CORPORATION SECURITIES LITIGATION. |
| Court | U.S. District Court — Southern District of New York |
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Wolf Haldenstein Adler Freeman & Herz, Pomerantz Levy Haudek Block & Grossman, New York City, Charles Piven, Baltimore, Md., Berman DeValerio & Pease, Boston, Mass., Lowey, Dannenberg, Bemporad Brachtl & Selinger, P.C., Sirota & Sirota, Stull Stull & Brody, New York City, Morris & Rosenthal, P.A., Wilmington, Del., Law Office of Joseph Weiss, New York City, for plaintiffs.
Karp and Sommers, New York City, for Edward A. Viner & Co., Inc.
Bear Marks & Upham, New York City, for Greentree Securities Corp.
Oppenheimer Wolff & Donnelly, New York City, for Dillon Securities, Inc.
Scheffler, Karlinsky & Stein, New York City, for Teichberg Loeb Waxman & Rabinowitz.
Schreiber & McBride, New York City, for Hill Thompson, Magid & Co.
Law Offices of J. Jerome Olitt, New York City, for Philips, Appel & Walden, Inc.
Rein Mound & Cotton, New York City, for Mikal & Co., Inc.
Gusrae, Kaplan & Bruno, Law Offices of Ronald Kahn, New York City, Law Offices of Bucholtz, Bull & Ewing, P.C., Denver, Colo., for S.W. Devanney Co.
Ormsten & Evangelist, New York City, for Investors Center.
Robinson, Wayne, Levin, Riccio & Lasala, Newark, N.J., Tolins & Lownfels, New York City, for First Jersey Securities, Inc.
Defendants' motions to dismiss the Consolidated Class Action Complaint "Complaint" are granted in part and denied in part. Fed.R.Civ.P. 9(b), 12(b)(6). Defendant Wien Securities' motion for summary judgment is moot. Plaintiffs' motion for class and subclass certification is granted in part and denied in part. Fed.R.Civ.P. 23. All motions to withdraw as counsel of record are granted. Local Rules S.D.N.Y., General Rule 3(c).
This action stems from the Court's Order dated August 11, 1986, consolidating all similar actions pending in the Southern District of New York involving the fraudulent scheme to distribute unregistered shares of the Laser Arms Corporation "Laser Arms".1
Plaintiffs name three distinct groups of defendants who participated in the fraudulent scheme to distribute unregistered securities of Laser Arms — the "Laser Arms defendants," the "Broker-Dealer defendants," and the "Market Maker defendants." The Laser Arms defendants refers to Marshall Zolop, Philip Bernick, John Judge, and others who generally assisted Zolop, the alleged mastermind of the scheme. Complaint, at ¶ 11. The Broker-Dealer defendants refers to all other defendants, who broadly constitute the various broker-dealers that purchased Laser Arms stock from the Laser Arms defendants. Id. at ¶ 12. The Market Maker defendants, a sub-set of the seventeen Broker-Dealer defendants, listed themselves on the National Quotations Bureau "NQB" pink sheets as market makers for Laser Arms stock. Id.
The Complaint alleges that Zolop and the other Laser Arms defendants "formed a conspiracy, plan and scheme to distribute into the marketplace unregistered and fraudulent stock certificates of a fictitious company, Laser Arms Corporation." Id. at ¶ 5. The scheme was implemented in December 1985, when the Laser Arms defendants submitted a fraudulent application to the NQB for the initial publication of quotations for Laser Arms common stock in the NQB pink sheets. Id. at ¶ 21. The NQB application contained allegedly fictitious documents which were intended to constitute the "Due Diligence Memorandum." Id. These documents falsely represented the date of Laser Arms' incorporation; its merger with Diversified Medical Corporation; its issuance of additional stock following incorporation of the merger bringing the total outstanding shares to over 18.2 million; the description of its business; the identity of its officers and directors; and its balance sheets as of September 30, 1985 and December 15, 1985, which were accompanied by a favorable opinion letter from John Ritter, who was represented to be a Certified Public Accountant. Id. at ¶¶ 21-23.
To facilitate the listing of quotes for Laser Arms stock in the NQB pink sheets, the NQB application was signed on behalf of Broker-Dealer defendant S.W. DeVanney & Co. "DeVanney" by Bernick, who was allegedly a registered representative and employee of DeVanney acting within the scope of his employment. Id. at ¶ 40. Bernick personally profited from the fraud through a nominee account designed to hide his beneficial interest in the profits of the fraud. Id.
Submission of the NQB application permitted Laser Arms common stock to be traded in the over-the-counter market. From approximately January 7, 1986 through at least April 18, 1986, over 900,000 unregistered shares of Laser Arms common stock were distributed into the marketplace by the Laser Arms defendants through accounts established at various brokerage firms. Id. The illegal stock certificates were printed by the Laser Arms defendants and delivered to the brokerage firms for sale. Id. The Laser Arms stock subsequently was sold to other brokerage firms who acted as market makers for the stock. Id.
Upon approval of the NQB application, Laser Arms common stock was listed in the pink sheets, "thereby creating a public market for the stock." Id. at ¶ 24. Once the stock was publicly listed, the Laser Arms defendants embarked upon a fraudulent scheme to raise the price of Laser Arms stock and to generate investor confidence. Id. at ¶ 25. Pursuant to the fraudulent scheme, the Laser Arms defendants disseminated false press releases and advertisements about the financial condition of Laser Arms and the development of a new fictitious product. See id. at ¶¶ 25-35. As a result of this fraudulent scheme, the price of Laser Arms stock climbed in the pink sheets from a $.05 bid and $.15 ask price on January 1, 1986, to $3.50 a share in mid-April 1986. Id. at ¶ 35.
On April 21, 1986, the Securities and Exchange Commission suspended trading in Laser Arms securities and on April 30 secured an order freezing the assets of Laser Arms and Zolop. Id. at ¶ 52. In September 1986, a grand jury returned a five count indictment against Zolop and the other Laser Arms defendants charging them with criminal violations of the federal securities laws. Id. at 57.
Zolop sold Laser Arms securities through accounts established at Broker-Dealer defendants E.F. Hutton & Co. "Hutton" and Fitzgerald, Talmin, Inc. "Fitzgerald". Hutton solicited buyers for the Laser Arms stock on behalf of Zolop and sold 115,000 shares between February 25 and March 7, 1986. Id. at ¶ 42(b). Zolop sold additional Laser Arms securities through an account established at Fitzgerald under the direction of Laser Arms defendant Bernick, who was an employee of Fitzgerald. Id. at ¶ 43(c).
The Market Maker defendants moving to dismiss—Greentree Securities Corp. "Greentree", Wien Securities, Inc. "Wien", Mikal & Company "Mikal",2 First Jersey Securities, Inc. "First Jersey", Investors Center, Inc. "Investors Center", and Hill, Thompson, Magid & Co. "Hill Thompson" — held themselves out as market specialists for the buying and selling of Laser Arms stock. Id. at ¶ 46. Each Market Maker defendant purchased its Laser Arms stock from accounts the Laser Arms defendants established either at their own firms or with other Broker-Dealer defendants. Id. All sales to the public were allegedly made from the inventory of the Market Maker defendants. Id. at 47. However, the Complaint only alleges specific purchases by plaintiffs from Market Maker defendants Greentree, First Jersey, and Investors Center. See id. at ¶ 13(b), (e), (o), (p), (q), (r). Aside from these specific allegations, plaintiffs broadly allege that "all other named Broker-Dealers participated in the initial distribution of Laser Arms stock by purchasing stock as principals in their capacity as market makers from the foregoing accounts established by the Laser Arms defendants." Id. at 44. By virtue of these activities, plaintiffs allege that the Broker-Dealer defendants, including those who were market makers, acted as "underwriters" in the distribution of Laser Arms securities within the meaning of section 2(11) of the Securities Act of 1933. Id. at ¶ 45.
Counts I through III assert claims against all defendants under section 12(1) and 12(2) of the Securities Act of 1933. Counts IV and V assert claims against all defendants under section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Count VI asserts a claim against the Laser Arms defendants and various other defendants under section 1962 of the Racketeer Influenced and Corrupt Organizations Act. Count VII asserts a claim against all defendants for common law negligent misrepresentation. Lastly, Counts VIII and IX assert claims against the Laser Arms defendants for common law conversion and common law fraud, respectively.
Of the defendants who move to dismiss the instant action pursuant to Rule 9(b) and Rule 12(b)(6) of the Federal Rules of Civil Procedure, Greentree, Wien, Mikal, First Jersey, Investors Center, and Hill Thompson are Market Maker defendants, while Hutton and Fitzgerald are the only moving Broker-Dealer defendants.3 Alternatively, Wien moves for summary judgment. None of the Laser Arms defendants move to dismiss the instant action. In addition, plaintiffs move to certify a class and numerous subclasses pursuant to Rule 23 of the Federal Rules of Civil Procedure. Lastly, Baer, Marks & Upham moves to withdraw as counsel for Market Maker defendant Greentree, Ronald S. Kahn moves to withdraw as local counsel for Market Maker defendant DeVanney, and Lysaght, Lysaght & Kramer, P.C., moves to withdraw as counsel for Laser Arms defendant Judge.
Count I asserts a claim against the Laser Arms defe...
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