Lazzaro v. Manber
| Decision Date | 30 June 1988 |
| Docket Number | No. CV 87-2153(RR).,CV 87-2153(RR). |
| Citation | 701 F. Supp. 353 |
| Parties | Anthony LAZZARO, individually and as custodian for his children, Anthony R. Lazzaro, Denise Lazzaro, Christopher Lazzaro, Mark Lazzaro, James Lazzaro, and Marilyn Lazzaro; Marilyn A. Lazzaro; Let's Make a Deal Auto Inc.; Lazzaro Investing Corp.; Lazzaro Auto Sales, Inc.; Richard Keating, Nicholas Fiumano; Frank Spinelli; Michael Riegel; and Irene Riegel, on behalf of themselves and all persons similarly situated, Plaintiffs, v. Abraham MANBER; Solomon Manber; Douglas Bremen & Co., Inc.; Berine Enterprises, Ltd.; Sherman Fitzpatrick & Co., Inc.; Individual's Securities, Ltd.; Max Levine; Gary Purcell; Louis Cattaruzza; Ada DeFelippo; Gig Friedman; Walter Reed; Albert Lerner; and Steven F. Miller, Jr., Defendants. |
| Court | U.S. District Court — Eastern District of New York |
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Snitow & Pauley, New York City by William H. Pauley, III, Charles D. Cunningham, for plaintiffs.
Parker, Chapin, Flattau & Klimpl, New York City by Charles W. Stotter, for defendants Abraham Manber, Solomon Manber, Berine Enterprises, Ltd., Individual's Securities, Ltd., Max Levine, Gig Friedman, Walter Reed, Albert Lerner and Steven F. Miller, Jr.
Kenneth A. Elan, New York City, for defendant Sherman Fitzpatrick & Co., Inc.
Plaintiffs bring this class action1 on behalf of themselves and all other persons who purchased securities in four companies — Flo-Con Corporation ("Flo-Con"), Cabletech, Inc. ("Cabletech"), Primages, Inc. ("Primages") and Telebyte Technology, Inc. ("Telebyte") — between February 8, 1982 and June 12, 1986 from defendants Sherman Fitzpatrick & Co., Inc. ("Sherman Fitzpatrick") and/or Douglas Bremen & Co., Inc. ("Douglas Bremen"), as well as on behalf of all holders of Cabletech common stock who, from May 2, 1986 through June 2, 1986, received, in exchange, common stock of Primages. In their amended complaint, plaintiffs allege violations of federal securities law, racketeering and various state law torts.
Defendants, Abraham Manber, ("A. Manber") Solomon Manber, ("S. Manber") Berine Enterprises, Ltd., ("Berine") Individual's Securities, Ltd., ("Individual's Securities") Max Levine, ("Levine") Gig Friedman, ("Friedman") Walter Reed, ("Reed") Albert Lerner, ("Lerner") Steven Miller, Jr. ("Miller") and Sherman Fitzpatrick move to dismiss the amended complaint for failure to state a claim upon which relief can be granted, Fed.R.Civ.P. 12(b)(6), failure to plead fraud with particularity, Fed.R.Civ.P. 9(b), and failure to file suit within the statute of limitations, Fed.R.Civ.P. 12(b)(6).2 They further urge dismissal of pendent state claims.
For the reasons set forth below, the court dismisses plaintiffs' claims — with the exception of those of Michael and Irene Riegel — under Section 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78j(b) pertaining to the purchase of Flo-Con shares, all plaintiffs' claims under Section 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q, and all claims for conspiracies to commit racketeering, 18 U.S.C. § 1962(d). In all other respects the motion is denied.
The amended complaint, the allegations of which must be accepted as true on this motion to dismiss, alleges that in 1981, defendant A. Manber, a Florida businessman, joined with defendant Levine, a New York stock broker then employed by Sherman Fitzpatrick, a registered broker-dealer, to form Berine, an investment advisory service. Berine initially operated out of the Mineola, New York offices of Sherman Fitzpatrick.
Thereafter, in June 1981, A. Manber became plaintiff Anthony Lazzaro's financial advisor at Berine and Levine became Lazzaro's stockbroker at Sherman Fitzpatrick. In February 1982, plaintiffs Richard Keating, Nicholas Fiumano and Frank Spinelli opened brokerage accounts with Levine at Sherman Fitzpatrick. In December of that year, plaintiff Michael Riegel opened an account with defendant Purcell, another broker at Sherman Fitzpatrick. Lazzaro, Keating, Fiumano and Riegel had minimal experience in the stock market and A. Manber, Levine, Purcell and Berine assumed discretionary authority to purchase and sell securities for their accounts.
In November 1982, Douglas Bremen was incorporated in New York as a broker-dealer, its stock held by defendants Cattaruzza and DeFelippo, siblings both employed by Sherman Fitzpatrick, and Berine. Cattaruzza and DeFelippo held their stock as nominees of A. Manber, who would become a consultant at Douglas Bremen, and his brother, defendant S. Manber.
In the Spring of 1983, Levine and Purcell resigned from Sherman Fitzpatrick to join Douglas Bremen and Berine began doing business out of Douglas Bremen's Roslyn, New York offices. At this time, and pursuant to solicitations by A. Manber, Levine and Purcell, plaintiffs transferred their accounts from Sherman Fitzpatrick to Douglas Bremen.
On August 15, 1981, A. Manber purchased 100,000 shares of Flo-Con common stock for $11,000, ($.11/share), and entered into a financial consulting agreement with the company, which in the previous fiscal year had incurred a net loss of $232,034.
On February 8, 1982, Flo-Con made a public offering of 1,000,000 shares of common stock for $1.00 per share, a price far in excess of any reasonable valuation. Sherman Fitzpatrick was the exclusive underwriter and Levine, then still in its employ, solicited purchases from Lazzaro, Keating, Fiumano and Spinelli. In so doing, Levine falsely represented that: (1) Flo-Con had developed a new heat-recycling technology; (2) a strong aftermarket for Flo-Con shares would exist; and (3) the offering price was based on fair market value. Sherman Fitzpatrick mailed Lazzaro, Keating, Fiumano and Spinelli a prospectus regarding the offering.
Relying on the representations made by Levine and in the prospectus, Lazzaro purchased 50,000 Flo-Con shares, Keating purchased 2,000, Fiumano purchased 4,000 and Spinelli purchased 10,000.
In December 1982, Purcell, acting at the direction of A. Manber, Levine, Berine and Sherman Fitzpatrick, solicited Riegel to purchase Flo-Con shares, falsely representing that: (1) Flo-Con had developed a new heat-recycling technology; (2) Flo-Con had numerous contracts to sell its technology; and (3) the price for a Flo-Con share would rise to $10. Relying on these representations, Riegel purchased a total of 20,000 shares for an average price of $1.75 per share.
In June 1983, with plaintiffs' accounts now transferred to Douglas Bremen, A. Manber, Levine and Berine advised Lazzaro, Keating, Fiumano and Spinelli that Flo-Con was on the verge of bankruptcy and persuaded them to sell their stock for $1.375 per share.
Simultaneously, Purcell advised Riegel to hold his Flo-Con shares, continuing to represent that the price would rise to $10 per share. At the same time, Cattaruzza urged other Douglas Bremen clients to purchase Flo-Con shares at $2.50 per share. To further this promotion, Douglas Bremen had an investment newsletter, the Cheap Investor, tout Flo-Con's alleged client list and products.
From June 1983 through November 1983, Douglas Bremen did not report the current price for Flo-Con shares in its account statements to plaintiffs. On February 16, 1984, Flo-Con declared bankruptcy.
Cabletech was incorporated in Florida in 1980 with A. Manber as director, vice-president and treasurer, S. Manber as director and consultant, defendant Friedman as director and president, defendant Reed as director and consultant, and defendant Lerner as director and consultant. The Manber brothers and Reed each held 150,000 shares of the company's stock purchased in a private placement at $.05 per share.
On September 2, 1982, Cabletech publicly offered 900,000 units for $2.00 each. A unit consisted of a share of common stock and a one-year warrant, exercisable with a second such warrant in the future to purchase a share of common stock for $2.50. The co-underwriters of this offering were Sherman Fitzpatrick and defendant Individual's Securities, a New York registered broker-dealer.
A. Manber and Levine solicited Lazzaro and Fiumano to purchase Cabletech units, falsely representing that: (1) this cable television company had rapid growth potential; and (2) the offering price was based on fair market value. Sherman Fitzpatrick mailed Lazzaro and Fiumano a prospectus concerning the offering.
The prospectus falsely represented that: (1) Cabletech would devote its primary efforts to selling advertising time on cable television; (2) over 50% of the proceeds of the offering would be used to construct an "uplink" and to rent "satellite transponder time and production facilities;" (3) defendant Friedman would devote his full time and A. Manber would devote 75% of his time to the company; and (4) Cabletech would purchase 20-40% of the equity of K.S.S. Technology Corporation ("K.S.S.") to further research and development.
Relying on these oral and written representations, Lazzaro purchased 50,000 Cabletech units and Fiumano purchased 4,000.
In fact, Cabletech never commenced active operations and never used the net proceeds of the public offering — $1,281,051 — for the represented purposes. Instead, the invested funds were used to finance the merger that created Telebyte, the successor to K.S.S.
From November 1983 through March 1984, defendants falsely reported a market price of $3.00 per Cabletech unit in Douglas Bremen's account statements to plaintiffs, whereas SEC filings reflected bid prices less than half that amount.
Primages was incorporated in 1981. Both Manber brothers participated in its management, held substantial equity interests in the company and licensed patents to it. In 1982, Primages recorded a net...
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