Mladen v. Gunty

• Decision Date: 13 March 1987
• Docket Number: Civ. No. 86-0357 P.
• Citation: 655 F. Supp. 455
• Court: U.S. District Court — District of Maine
• Parties: Dusan MLADEN, on his own behalf, and on behalf of all persons similarly situated, Plaintiff, v. Howard GUNTY, Charles Cipolla, Irving Federman, Mitchell Gunty, James L. Pierce, David S. Webb, Nicholas Taube, Rebecca Cerny, Samuel M. Koren, North East Insurance Company, Bradford Associates, Inc., and Bernard D. Gershuny, Defendants.

655 F. Supp. 455

Dusan MLADEN, on his own behalf, and on behalf of all persons similarly situated, Plaintiff, v. Howard GUNTY, Charles Cipolla, Irving Federman, Mitchell Gunty, James L. Pierce, David S. Webb, Nicholas Taube, Rebecca Cerny, Samuel M. Koren, North East Insurance Company, Bradford Associates, Inc., and Bernard D. Gershuny, Defendants.

Civ. No. 86-0357 P.

United States District Court, D. Maine.

March 13, 1987.

Frank A. Weg, New York City, Michael X. Savasuk, Portland, Me., for plaintiff.

Kevin G. Libby, Portland, Me., Raymond G. McGuire, New York City, for defendants Cipolla, Federman, Mitchell Gunty, Pierce, Webb, Taube, Cerny & Koren.

Thomas H. Allen, Bruce W. Smith, Portland, Me., for defendant Northeast Ins. Co.

Peter DeTroy, Portland, Me., for defendants Howard Gunty & Bradford Associates.

MEMORANDUM OF DECISION AND ORDER

GENE CARTER, District Judge.

This matter comes before the Court on the motion of all Defendants except Bernard Gershuny (Gershuny) to deny class certification, and on the motion of Defendant Gershuny to dismiss the Amended Complaint as to him pursuant to Federal Rules of Civil Procedure 12 and 9(b).¹ For the reasons set forth below, we deny the motion to deny class certification and grant Gershuny's motion to dismiss.

I. BACKGROUND

Plaintiff originally brought a class and derivative action against the named Defendants by filing suit in the United States District Court for the Southern District of New York. Prior to the expiration of Defendants' time to respond as extended, Plaintiff served and filed an Amended Complaint. Subsequently, Defendants other than Gershuny moved to dismiss or, in the alternative, to transfer the action. An Order transferring the action to this Court was entered on October 14, 1986.

The Amended Complaint seeks damages and injunctive relief on six counts: violation of section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (1982), and Rule 10b-5, 17 C.F.R. 240.10b-5 (1986) (Count One); breach of fiduciary obligations (Count Two); common-law fraud (Count Three); and violation of the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. §§ 1961-68 (1982 & Supp. III 1986) (Counts Four through Six). Specific allegations relevant to the disposition of the motions now before the Court will be discussed below in the context of each motion; a brief summary is set out here.

Briefly stated, Plaintiff brings this action seeking relief for alleged fraudulent activities of Defendants relating to the sale of stock in the North East Insurance Company (North East). Plaintiff asserts that Defendants are engaged in a fraudulent scheme that includes material misrepresentations made by Defendants other than Gershuny to Plaintiff and the class he seeks to represent (Amended Complaint, ¶¶ 25, 27, 30),² and bad faith by all Defendants, including Gershuny, relating to a contract for the sale of a controlling interest in North East to Plaintiff. (Id., ¶¶ 16, 34-37). With respect to the sale of North East shares, the Amended Complaint alleges that Defendants other than Gershuny, while still under contract with Plaintiff, agreed to sell a controlling interest to Gershuny. The Amended Complaint further alleges that, at that time, Gershuny was acting as a "front" for Defendants Howard Gunty (H. Gunty) and Mitchell Gunty (M. Gunty), and for one Nicolas Neu (Neu). (Id.). Plaintiff alleges that the front is necessary because Neu's inability to gain the approval of regulatory authorities would preclude his being presented as the disclosed purchaser. (Id., ¶ 39).

II. MOTION TO DISMISS

Defendant Gershuny moves under the Federal Rules of Civil Procedure to dismiss on three grounds: lack of personal jurisdiction (Rule 12(b)(2)), failure to state a claim upon which relief may be granted (Rule 12(b)(6)), and failure to allege the claim of fraud with sufficient particularity (Rule 9(b)). Because the Court finds the 12(b)(6) issue dispositive, it will move directly to that discussion.

"The purpose of a motion under Rule 12(b)(6) is to test the formal sufficiency of the statement of the claim for relief. Thus, the provision must be read in conjunction with the liberal pleading requirements of Rule 8(a)." 5 C. Wright & A. Miller, Federal Practice and Procedure § 1356, at 590 (1969) (footnote omitted). "For purposes of the motion to dismiss, the complaint is construed in the light most favorable to the plaintiff and its allegations are taken as true." Id., § 1357 at 594; see also Miree v. DeKalb County, 433 U.S. 25, 97 S.Ct. 2490, 53 L.Ed.2d 557 (1977); O'Brien v. DiGrazia, 544 F.2d 543, 545 (1st Cir.1976). "A complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957). Applying these principles to the present case, the Court determines that all claims against Gershuny should be dismissed.

Count One of the Amended Complaint alleges that all Defendants, including Gershuny, violated section 10(b) of the Securities Exchange Act, 15 U.S.C. § 78j(b) (1982), and Rule 10b-5, 17 C.F.R. § 240.10b-5 (1986).³ Even accepting the allegations of the Amended Complaint as true, however, Plaintiff has failed to state a claim against Gershuny.

In order to state a claim for relief under section 10(b) a plaintiff must allege that, in connection with the purchase or sale of securities, the defendant, acting with scienter, made a false material representation or omitted to disclose material information and that the plaintiff's reliance on defendant's actions caused him injury.

Bloor v. Carro, Spanbock, Londin, Rodman & Fass, 754 F.2d 57, 61 (2d Cir.1985), citing Chemetron Corp. v. Business Funds, Inc., 718 F.2d 725, 728 (5th Cir. 1983); Zobrist v. Coal-X, Inc., 708 F.2d 1511, 1516 (10th Cir.1983); Schlick v. Penn-Dixie Cement Corp., 507 F.2d 374, 381 (2d Cir.1974), cert. denied, 421 U.S. 976, 95 S.Ct. 1976, 44 L.Ed.2d 467 (1975).

A careful examination of Plaintiff's Amended Complaint indicates that Plaintiff cannot state a section 10(b)/Rule 10b-5 claim against Gershuny. Paragraphs 24 through 44 set forth allegations of fraudulent actions and schemes to defraud, yet those paragraphs relating to the material elements of a 10b-5 claim explicitly refer to Defendants "other than Gershuny." Plaintiff alleges that all Defendants except Gershuny and Cipolla knew of the questionable status of various re-insurers used by "these defendants" (not Gershuny) to project false information and manipulate the stock (Amended Complaint ¶ 27); that the misfeasance and malfeasance of Defendants other than Gershuny resulted in a decrease in North East's total equity or surplus from seven million dollars ($7,000,000) to an insignificant amount (id., ¶ 30); that all Defendants except Gershuny and Cipolla deliberately under-reserved North East over a substantial period of years (id., ¶ 31); that the purpose of these deliberately fraudulent and deceptive practices was to allow Defendants other than Gershuny and Cipolla to continue improper speculative day trading on the bond market in a negligent manner (id., ¶ 32); that the individual defendants other than Gershuny, as directors and officers of North East, falsely represented to Plaintiff an intention to sell stock to Plaintiff (id., ¶ 35); and that Defendants other than Gershuny, contrary to the best interests of North East, adopted an indemnification plan for officers and directors of North East without shareholder approval and entered into a contract with H. Gunty that would allow him to "abscond" with significant corporate assets in the event he loses control (id., ¶¶ 41-43). Accepting these allegations as true, Plaintiff himself has excluded Gershuny from the realm of a section 10(b)/Rule 10b-5 violation, because Plaintiff has failed to tie Gershuny to any false misrepresentations or omissions made knowingly in connection with the purchase or sale of securities that resulted in any injury to Plaintiff.

Plaintiff does allege that Gershuny knowingly acted as a "front" for Nicholas Neu as purchaser of a controlling interest in North East (id., ¶ 36-37); Plaintiff further alleges that Neu could not present himself as the disclosed purchaser because Neu would not be able to gain the approval of regulatory authorities (id., ¶ 39). While mindful that "the antifraud provisions of the federal securities laws provide an extremely broad canopy for the protection of securities traders," Dopp v. Franklin National Bank, 374 F.Supp. 904, 910 (S.D.N. Y.1974), the Court nevertheless concludes that Plaintiff's allegations relating to Gershuny's "fronting" are not sufficient to state a section 10(b)/Rule 10b-5 claim. Plaintiff has failed to allege that Gershuny, rather than the other Defendants, made any representations to Plaintiff or to other traders, or that Gershuny failed to make any disclosures which he had a duty to make, in connection with the purchase or sale of securities. Gershuny, as a would-be buyer of North East stock, did not stand in a fiduciary relationship to Plaintiff or other traders, and therefore had no duty under section 10(b)/Rule 10b-5 to reveal his status as a "front" for Neu. See, e.g., Strong v. France, 474 F.2d 747 (9th Cir.1973); Gold v. DCL, Inc., 399 F.Supp. 1123 (S.D. N.Y.1973); Branham v. Material Systems Corp., 354 F.Supp. 1048 (S.D.Fla.1973); Rothschild v. Teledyne, Inc., 328 F.Supp. 1054 (N.D.Ill.1971).

It may be that Plaintiff's real claim is an "aiding and abetting" allegation.⁴ Based on the Amended Complaint now before it, however, the Court is not willing to imply such an interpretation. Count One of the Amended Complaint is therefore dismissed as to Defendant Gershuny.

Counts Four through Six of the Amended Complaint allege that all Defendants violated the federal RICO statute, 18 U.S.C. §§ 1961-68;...