In re Sterling Foster & Co., Inc., Securities Lit.
| Decision Date | 27 June 2002 |
| Docket Number | Nos. 97 CV 189(ADS)(MLO), 97 CV 610(ADS)(MLO), 97 CV 1689(ADS)(MLO), 97 CV 3253(ADS)(MLO), 97 CV 3775(ADS)(MLO). MDL No. 1208 (ADS)(MLO).,s. 97 CV 189(ADS)(MLO), 97 CV 610(ADS)(MLO), 97 CV 1689(ADS)(MLO), 97 CV 3253(ADS)(MLO), 97 CV 3775(ADS)(MLO). MDL No. 1208 (ADS)(MLO). |
| Citation | 222 F.Supp.2d 216 |
| Parties | In re STERLING FOSTER & CO., INC., SECURITIES LITIGATION. This Document Relates To: Thomas Rogers, et al., Plaintiffs, v. Sterling Foster & Co., Inc., et al., Defendants. Leo W. Smith, et al., Plaintiffs, v. Sterling Foster & Co., Inc., et al., Defendants. William V. Wright, et al., Plaintiffs, v. Sterling Foster & Co., Inc., et al., Defendants. Michael Reynoso, et al., Plaintiffs, v. Sterling Foster & Co., Inc., et al., Defendants. Andrew Petit, et al., Plaintiffs, v. Sterling Foster & Co., Inc., et al., Defendants. |
| Court | U.S. District Court — Eastern District of New York |
Milberg Weiss Bershad Hynes & Lerach, LLP, Robert A. Wallner, Esq., Kim Levy, Esq., Of Counsel, Goodkind Labaton Rudoff & Sucharow, LLP, Ira A. Schochet, Esq., Jonathan M. Plasse, Esq., James M. Strauss, Esq., Of Counsel, New York, NY, Co-Lead Counsel for the Plaintiffs.
Rathman & Francis, LLC, Steven J. Stolze, Esq., Of Counsel, St. Louis, MO, Co-Lead Counsel for Claims Against Advanced Voice Technologies, Inc., Com/Tech Communications Technologies, Inc. & Embryo Development Corporation.
Kirby McInerney & Squire, LLP, Peter S. Linden, Esq., Lewis S. Sandler, Esq., Of Counsel, New York, NY, Co-Lead Counsel for Claims Against Lasergate Systems, Inc. & ML Direct, Inc.
Law Offices of Joseph D'Elia, Joseph D'Elia, Esq., Of Counsel, Huntington, NY, Ungaretti & Harris, Miriam G. Bahcall, Esq., Rawn Howard Reinhard, Esq., Of Counsel, Chicago, IL, Counsel for Defendants Sterling Foster & Company, Inc., Adam Lieberman, Matthew Hawley and Robert J. Paulson.
Morvillo, Abramowitz, Grand, Iason & Silberberg, P.C., Edward M. Spiro, Esq., Of Counsel, New York, NY, Counsel for Defendant Randolph Pace.
Alan M. Novich, Montgomery, PA, Defendant Pro Se.
Choate, Hall & Stewart, Jeremiah T. O'Sullivan, Esq., John R. Baraniak, Jr., Esq., Of Counsel, Boston, MA, Zuckerman, Spaeder, Goldstein, Taylor & Kolker, LLP, Lisa A. Cahill, Esq., Of Counsel, New York, NY, Counsel for Defendants Com/Tech Communication Technologies, Inc., ML Direct, Inc., and Nancy G. Shalek.
Bondy & Schloss, LLP, Joel M. Wolosky, Esq., Of Counsel, New York, NY, Counsel for Defendant Lasergate Systems, Inc.
Arnold & Porter, Peter L. Zimroth, Esq., David A. Weintraub, Esq., Of Counsel, New York, NY, Stephen M. Sacks, Esq., Scott B. Schreiber, Esq., James L. Cooper, Esq., Of Counsel, Washington, DC, Counsel for Defendants Bear, Stearns & Co., Inc., and Bear, Stearns Securities Corp.
Katten Muchin Zavis Rosenman, Howard Wilson, Esq., Joseph Zuckerman Esq., Of Counsel, New York, NY, Counsel for Defendant Richard Harriton.
Carey & Associates, Michael Q. Carey, Esq., Miriam A. Widmann, Esq., Of Counsel, New York, NY, Counsel for Defendants Roger Buoy, Tony Swash, Terence McAuley, and Armando Araujo.
Stillman & Friedman, P.C., Charles A. Stillman, Esq., Of Counsel, New York, NY, Counsel for Defendant Michael Krasnoff.
TABLE OF CONTENTS
I. Background ..............................................................225
A. The Procedural Nature of the Case ....................................225
B. The Second Amended and Consolidated Class Action Complaint ...........227
1. The Overall Scheme ................................................227
2. The Allegations of the Six Putative Subclass ......................230
a. The Allegations of the Advanced Voice Subclass .................230
b. The Allegations of the Com/Tech Subclass .......................233
c. The Allegations of the Embryo Subclass .........................235
d. The Allegations of the Applewoods Subclass .....................237
e. The Allegations of the Lasergate Subclass ......................239
f. The Allegations of the ML Direct Subclass ......................241
3. Claim Thirty-One ..................................................242
II. Discussion..............................................................242
A. The Motions to Dismiss the Second Amended Complaint .................243
1. Standing .........................................................243
2. The Statute of Limitations .......................................248
a. The Sterling Foster Defendants and the Shalek Defendants ......249
b. Bear Stearns and BSSC .........................................250
c. Randolph Pace .................................................254
d. Applewoods ....................................................257
e. The Individual Applewoods Defendants ..........................259
3. The Claims Brought Pursuant to Section 11 of the Securities Act ..262
a. The Alleged Omissions are Not Immaterial ......................262
b. Reliance ......................................................266
c. Oral Misrepresentations .......................................267
d. The Section 11 Claims are Pled With Sufficient Particularity ..267
4. The Claims Brought Pursuant to Section 10(b) of the Exchange Act
and Rule 10b-5 Promulgated Thereunder ..........................268
a. Scienter ......................................................270
b. Loss Causation and Reliance ...................................274
5. Pleading Fraud With Particularity ................................278
6. Control Person Liability .........................................282
7. Supplemental Jurisdiction ........................................283
8. Negligent Misrepresentation ......................................283
9. The Section 349 Claims ...........................................285
B. The Motions for a Temporary Stay of the Action Pending Resolution of
Parallel Criminal Proceedings ......................................287
C. The Motion to Lift the Automatic Stay of Discovery ...................288
III. Conclusion ..............................................................288
On February 17, 1999, the plaintiffs filed the Second Amended and Consolidated Class Action Complaint ("Second Amended Complaint"), which alleges that the defendants violated Sections 11 and 12(a)(2) of the Securities Act of 1933 (the "Securities Act"), 15 U.S.C. §§ 77k, 77l(a)(2), as well as Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5. In addition, the Second Amended Complaint raises claims under New York State law for negligent misrepresentation, common law fraud, and violations of Section 349 of the New York General Business Law ("N.Y.Gen.Bus.L."). The present decision addresses nine motions to dismiss the Second Amended Complaint, four motions to stay the action, and one motion to lift the automatic stay of discovery.
Before describing the allegations contained in the Second Amended Complaint, it is important to review the procedural nature of this complex action. The present case is a consolidation of five separate actions: Rogers, et al. v. Sterling Foster & Co., Inc., et al., 97 CV 189; Smith, et al. v. Sterling Foster & Co., Inc., et al., 97 CV 610; Wright v. Sterling Foster & Co., Inc., et. al., 97 CV 1689; Reynoso v. Sterling Foster, Inc., 97 CV 3253; and Petit v. Sterling Foster & Co., Inc., et al., 97 CV 3775. When these separate actions were commenced in 1997, they were assigned to the Hon. Dennis R. Hurley in the Eastern District of New York. In an order dated October 27, 1997, Judge Hurley consolidated the cases under Civil Action No. 97-189 and appointed lead plaintiffs and counsel.
Two days later, on October 29, 1997, Judge Hurley issued an order (1) enjoining all arbitrations pending against Sterling Foster through December 15, 1997; (2) directing the plaintiffs to file a Consolidated Class Action Complaint by November 27, 1997; and (3) directing Sterling Foster & Co., Inc. ("Sterling Foster") to serve a notice and a copy of the amended complaint on all arbitration claimants, advising the claimants that in order to proceed with their arbitration claims against Sterling Foster, they must file a request to be excluded from the putative class action within 45 days, and that if they failed to file a timely request for an exclusion, their arbitrations would be stayed.
On December 1, 1997, the plaintiffs filed an Amended and Consolidated Class Action Complaint. Thereafter, in an order dated December 8, 1997, Judge Hurley approved the notice to be sent to the arbitration claimants, informing them of the pendency of the consolidated class action proceedings and their right to request early exclusion and to pursue arbitration. Judge Hurley specifically directed that once a party requests early exclusion from the consolidated class action proceedings, the Court's October 29, 1997 order enjoining arbitration will no longer apply to the excluded party's case, and that individual may proceed with arbitration immediately. Conversely, if a party did not request early exclusion, the party would be enjoined from proceeding with arbitration.
In an order dated February 18, 1998, the Judicial Panel on Multidistrict Litigation ("J.P.M.L.") granted a motion by Sterling Foster to centralize the following actions pursuant to 28 U.S.C. § 1407 for coordinated or consolidated pretrial proceedings in the Eastern District of New York: Rogers, et al. v. Sterling Foster & Co., Inc., 97 CV 189 ...
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