Opinion
96 Civ. 3231 (RPP)
April 19, 2001
Counsel for Silva Run Worldwide Limited; Pierre F.V. Merle, P.C.
Counsel for Gaming Lottery Corporation and Jack Banks; Law Offices of Sheldon Eisenberger
Counsel for Courts Co. AG; White Case LLP
Counsel for Peter G. Embiricos; Cadwalader, Wickersham Taft
Counsel for Diversinet Corp. (f/k/a The Instant Publisher Inc.) Kaye, Scholer, Fierman, Hays Handler, LLP
Counsel for Ronald F. Seale, Park Wilshire Group, Inc. and Mariner Reserve Fund
OPINION AND ORDER
Defendants move pursuant to Federal Rules of Civil Procedure (" Fed.R.Civ.P.") 9(b), 12(b)(1) and 12(b)(6) and the Private Securities Litigation Reform Act of 1995, 15 U.S.C. § 78u-4(b)(2), to dismiss various counts of the Third Amended Complaint ("TAC") filed by plaintiff Silva Run Worldwide Limited ("Plaintiff'). The motions are granted and denied for the reasons set forth this Opinion and Order.
In Plaintiffs memorandum in opposition, it does not disavow the allegations of its earlier complaint, but reaffirms those allegations, stating that they are necessarily omitted in the TAC to comply with the Court's instruction to file a more concise complaint. (Plaintiffs Memorandum, dated July 20, 2000 ("P1. Mem."), at 1.) The Court may rely in this opinion on documents attached to those complaints but will not rely on allegations in the earlier complaints or strike allegations as inconsistent with those prior complaints.
DISCUSSION
I. Standard
"Every defense, in law or fact, to a claim for relief in any pleading . . . shall be asserted in the responsive pleading thereto if one is required, except that the following defenses may at the option of the pleader be made by motion: (1) lack of jurisdiction over the subject matter . . . (6) failure to state a claim upon which relief can be granted." Fed.R.Civ.P. 12(b). A defendant's motion to dismiss for failure to state a claim shall not be granted unless it appears beyond doubt that the plaintiff can prove no set of facts in support of its claim that would entitle it to relief. Conley v. Gibson, 355 U.S. 41, 45-46 (1957);Branham v. Meachum, 77 F.3d 626, 628 (2d Cir. 1996). When passing on a motion to dismiss, the allegations in the complaint are accepted as true and construed in favor of the plaintiff. Scheuer v. Rhodes, 416 U.S. 232, 236 (1974), abrogated on other grounds by Harlow v. Fitzgerald, 457 U.S. 800 (1982); Cruz v. Beto, 405 U.S. 319, 322 (1972). However, the court will not credit conclusory statements unsupported by fact allegations or legal conclusions and characterizations presented as factual allegations. Papasan v. Allain, 478 U.S. 265, 286 (1986); J.S. Serv. Ctr. Corp. v. General Elec. Tech. Servs. Co., 937 F. Supp. 216, 219 (S.D.N.Y. 1996). Nor should a court accept allegations that are contradicted or undermined by other more specific allegations in the complaint or by written materials properly before the court. MaDonna v. United States, 878 F.2d 62, 65-66 (2d Cir. 1989); Alusit Ltd. v. Aluglas of Pa., No. 89 Civ. 3849 (CSH), 1990 WL 209422 at *11 and n. 1 (S.D.N.Y. Dec. 4, 1990).
"In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." Fed.R.Civ.P. 9(b). Furthermore, "Rule 9(b) applies with equal force to all claims of fraud — whether they arise under state law" or federal law. Kolbeck v. LIT Am., Inc., 923 F. Supp. 557, 568 (S.D.N.Y. 1996). Allegations of fraud may only be based on information and belief as to matters that are peculiarly within the knowledge of the defendant and must be accompanied by a statement of facts upon which the belief is founded. Stern v. Leucadia Nat'l Corp., 844 F.2d 997. 1003 (2d Cir. 1988).
Under the Private Securities Litigation Reform Act of 1995 (the "PSLRA") a complaint alleging securities fraud must "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2). In addition, under the PSLRA, such pleadings of fraud must "state with particularity all facts on which that belief is formed." Id. § 78u-4(b)(1).
II. Application
A. Counts One and Nine
Count One of the TAC charges the sale of unregistered securities under § 12(1) of the Securities Act of 1933 (the "Securities Act"), 15 U.S.C. § 771, against Gaming Lottery Corporation ("GLC"), Coutts Co. AG ("Coutts"), Peter G. Embiricos ("Embiricos"), and Ronald F. Seale ("Seale"). Count Nine of the TAC charges the sale of unregistered securities under § 12(1) of the Securities Act against Diversinet Corp. ("Diversinet") (formerly known as The Instant Publisher Inc. ("IPI")) (referred to herein as "IPI/Diversinet"), Seale, Coutts, Embiricos and Park Wilshire Group, Inc. ("PWG"). Defendants GLC, Coutts, Embiricos, Seale, IPI/Diversinet and PWG move to dismiss the claims of Plaintiff under Section 12(1) of the Securities Act.
15 U.S.C. § 771 (1) provides in pertinent part:
Any person who . . . offers or sells a security in violation of section 77e of this title shall be liable, subject to subsection (b) of this section, to the person purchasing such security from him, who may sue either at law or in equity in any court of competent jurisdiction, to recover the consideration paid for such security with interest thereon, less the amount of any income received thereon, upon the tender of such security, or for damages if he no longer owns the security.
Defendants move to dismiss pursuant to Fed.R.Civ.P. 12(b)(1), and, relying on Europe and Overseas Commodity Traders S.A. v. Banque Paribas London 147 F.3d 118, 126 (2d Cir. 1998) ("Banque Paribas"), argue that Plaintiff has failed to establish that the Court has subject matter jurisdiction over its Section 12 claims. In Banque Paribas, the Second Circuit held that the nearly de minimis United States interest in the transactions in that case precluded finding jurisdiction under the limited conduct and effect standard under the Securities Act. Id. In Banque Paribas, the conduct in the United States was that an offer to sell foreign securities was made over the telephone and by facsimile to a party in Florida and orders to purchase securities were placed from Florida. Id. at 120. The Second Circuit held that that conduct "was not such as to have the effect of creating a market for those securities in the United States." Id. at 126.
Unlike the facts of Banque Paribas, Plaintiff alleges more than de minimis United States interest in the transactions at hand. Specifically, the TAC alleges that GLC and IPI/Diversinet each entered into a written agreement with defendant PWG, a Bahamian corporation with its principal place of business in Florida (TAC ¶ 11), which was wholly-owned by defendant Seale, a Florida citizen and resident (id. ¶ 10), to distribute $22 million and $16 million of unregistered GLC and IPI/Diversinet stock, respectively, to purchasers residing outside of the United States, and made PWG its agent, with a right to appoint sub-agents, for such sales (id. ¶¶ 33-41, 150-51). The TAC further alleges on information and belief that PWG appointed Coutts as its subagent for each such distribution (id. ¶¶ 36, 152) and shared its commissions on the distribution of shares with Coutts (id. ¶¶ 16, 22); that Seale and Embiricos, a Vice President of Coutts in its New York office, had meetings in Florida with Plaintiffs principals, soliciting the purchase of the GLC and IPI/Diversinet (then IPI) shares in Florida (id. ¶¶ 29, 147, 159); that GLC and IPI/Diversinet arranged the purchase on margin of each of such shares by Plaintiff with Coutts' New York office (id. ¶¶ 45, 159); that Plaintiff agreed to each such financing of the purchase of shares by Coutts collateralized by a substantial number of shares of GLC and IPI/Diversinet owned by defendant Jack Banks ("Banks"), GLC's and IPI/Diversinet's Chief Executive Officer and President, and his wife (id. ¶ 56, 156); that, on information and belief, all the shares were held as collateral by Coutts' New York office (id. ¶¶ 29, 45, 156. 169); and that the closings for both Subscription Agreements for the purchase of shares of GLC and of WI /Diversinet took place in Coutts's New York office (id. ¶¶ 15, 21).
Additionally, as noted in the district court's opinion in Banque Paribas, the shares at issue in that case were neither registered nor listed on a U.S. securities exchange. See Europe and Overseas Commodity Traders v. Banque Paribas London, 940 F. Supp. 528, 533 (S.D.N.Y. 1996). Here, shares of both GLC and IPI/Diversinet were listed and traded on the NASDAQ, a U.S. securities exchange. GLC was also conducting business in the United States through its wholly-owned subsidiary in the State of Washington. The conduct in the United States in connection with the distribution of shares by GLC and IPI/Diversinet, the fact that both GLC and IPI/Diversinet were traded on U.S. exchanges, and that GLC was conducting business in the U.S., have the effect of creating substantially greater United States interest in the transactions at hand than in Banque Paribas, where the Second Circuit found a lack of jurisdiction over plaintiffs' Section 12(1) claims. See Banque Paribas 147 F.3d at 126-27; see also In re Gaming Lottery Sec. Litig., 58 F. Supp.2d 62. 73-75 (S.D.N.Y. 1999). Accordingly, defendants' motion to dismiss for lack of subject matter jurisdiction over Plaintiffs Section 12(1) claims is denied.
Furthermore, "[i]t long has been quite clear that when a broker acting as agent of one of the principals to the transaction successfully solicits a purchase, he is a person from whom the buyer purchases within the meaning of § 12 and is therefore liable as a statutory seller."Pinter v. Dahl, 486 U.S. 622, 646 (1988). "[L]iability extends only to the person who successfully solicits the purchase, motivated at least in part by a desire to serve his own financial interests or those of the securities owner." Id. at 647. Here, the alleged activities of defendants PWG, as the agent of GLC and IPI/Diversinet, of Coutts, as subagent, and of Seale, as principal of PWG, as alleged in the TAC (¶¶ 1-50; 143-176), each of whom are alleged to have derived a personal financial benefit from the sales to Plaintiff, are sufficient to permit each of those defendants to be deemed a statutory seller under Section 12 of the Securities Act within the principal agent context. Accordingly, the motions of defendants GLC, IPI/Diversinet, Coutts, PWG, and Seale, to dismiss Counts One and Nine are denied on the grounds that they meet the criteria for liability as statutory sellers under Section 12 of the Securities Act.
However, the TAG does not allege facts sufficient to show that defendant Embiricos derived a personal financial benefit from these sales such that he was a statutory seller within the meaning of Section 12 of the Securities Act. Accordingly, the motion of Embiricos to dismiss Counts One and Nine of the TAG are granted.
B. Counts Two and Ten
Count Two charges control person liability for Section 12(1) claims under Section 15 of the Securities Act, 15 U.S.C. § 77o, against defendants Coutts, Banks, and GLC. Count Ten charges control person liability under Section 15 of the Securities Act against IPI/Diversinet, Banks and Coutts. Defendants Coutts, Banks, GLC, and IPI/Diversinet move to dismiss Counts Two and Ten arguing that control person liability has not been adequately pleaded.
Section 15 of the Securities Act imposes liability on any "controlling person" of another found liable under Section 12 of the Securities Act. 15 U.S.C. § 77o. To establish liability under Section 15 of the Securities Act, Plaintiff must allege facts sufficient to show that the controlling person was in "the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise." 17 C.F.R. § 230.405.
Plaintiff bases its allegations of control person liability in Counts Two and Ten against Banks on the actions of GLC and IPI/Diversinet alleged in Counts One and Nine. In view of the foregoing and the allegations that Banks was Chief Executive Officer, President of the Board of Directors, and, together with his wife, controlling stockholder of Gaming Lottery and IPI/Diversinet (TAC ¶ 56), the motion of Banks to dismiss Plaintiffs claims in Counts Two and Ten charging him with control person liability under Section 15 of the Securities Act is denied.
Plaintiff does not, however, allege sufficient facts to show control person liability under Section 15 of the Securities Act by Coutts of GLC, IPI/Diversinet, PWG, or Seale. The facts alleged in the TAG do not show that Coutts had possession, direct or indirect, of the power to direct or cause the direction of the management and policies of GLC, IPI/Diversinet, PWG, or Seale during the period covered by these allegations in Counts One and Nine. Accordingly, the motions of Coutts to dismiss Counts Two and Ten are granted as to Plaintiffs claims under Section 15 that Coutts is liable as a control person of GLC, IPI/Diversinet, PWG, and Seale. For the same reason, the motions of GLC and IPI/Diversinet to dismiss Plaintiffs claims under Section 15 that GLC and IPI/Diversinet are liable as control persons of Embiricos and Seale are granted.
However, the motions of GLC and IPI/Diversinet to dismiss Plaintiffs allegations of liability as control persons of Coutts is denied, since Coutts is alleged, on information and belief, to have been "subagent" for the sale of the shares of both GLC and IPI/Diversinet and to have shared in PWG's commissions from those defendants. (TAC ¶ 36.)
C. Counts Three and Four
Count Three charges securities fraud in violation of Section 10(b) of the Securities and Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 of the regulations promulgated thereunder against GLC, Banks, Seale, Coutts and Embiricos. Count Four charges control person liability pursuant to Section 20(a) of the Exchange Act against GLC, Banks and Coutts. Defendants GLC, Banks, Seale, Coutts and Embiricos move to dismiss.
Section 10 of the Exchange Act provides that "[i]It shall be unlawful for any person [t]o use or employ, in connection with the purchase or sale of any security . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors." 15 U.S.C. § 78j(b).
Rule 10b-5 of the regulations promulgated by the Securities and Exchange Commission pursuant to Section 10(b) provide that:
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange, (a) To employ any device, scheme, or artifice to defraud, (b)To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or (c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.17 C.F.R. § 240.10b-5.
The Second Circuit has held that, "to state a cause of action under Rule 10b-5, a plaintiff must plead 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 plaintiffs reliance on defendant's action caused [plaintiffs] injury.'" In re Time Warner Inc. Sec. Litig., 9 F.3d 259, 264 (2d Cir. 1993) (quoting Bloor v. Carro. Spanbock, Londin, Rodman Fass, 754 F.2d 57, 61 (2d Cir. 1985)).
Count Three alleges that GLC and Banks concealed an illegal operating agreement of April 1995 to illegally and fraudulently operate Specialty Manufacturing without a license in violation of the laws of Washington, while consolidating the earnings of Special Manufacturing on GLC's financial statements so that GLC's earnings were materially overstated in its press release of June 8, 1995. (TAC ¶¶ 76-77.) In view of these allegations, the motions of GLC and Banks to dismiss Count Three, charging violation of Section 10(b) of the Exchange Act and Rule 10b-5, are denied.
With regard to Seale, Coutts and Embiricos, Plaintiff signed a Subscription Agreement for the July 10. 1995, GLC transaction and accepted the benefits of that transaction without protest. The agreement contained a specific disclaimer, plainly evidenced in the agreement, of any reliance on non-public representations. The disclaimer states:
You acknowledge and agree that you have not received an offering memorandum or similar document and that your decision to enter into this agreement and to purchase the Common Shares has not been made upon any verbal or written representation as to fact or otherwise made by the Corporation or any other person and that your decision is based entirely upon publicly available information concerning the Corporation and your own investigation and due diligence concerning the Corporation.
Affidavit of Philip H. Schaeffer dated June 15, 2000 ("Schaeffer Aff."), Ex. H. See also Silva Run WorldWide Ltd. v. Gaming Lottery Corp., No. 96 Civ. 3231 (RPP), 1998 WL 167330 at *23-24 (S.D.N.Y. Apr. 8, 1998). Plaintiffs sole owner was a sophisticated investor in foreign currency transactions, and is alleged to have also engaged in earlier Regulation S transactions in 1994 and 1995 with Lehman Brothers, Smith Barney, and Coutts. (TAC ¶ 186 (iii).) Plaintiff had been formed as an investment vehicle for Plaintiffs owner to continue to engage in Regulation S investments. Plaintiff has offered and, under these circumstances, can offer no reason why it should not be held to its disclaimers. In addition, the June 26, 1995, Interest Bearing Demand Note signed by Plaintiff in connection with the GLC transaction states, "The undersigned expressly acknowledges that the Bank has not made and the undersigned is not relying on any oral representations, agreements or commitments of the Bank or any officer, employee, agent or representative thereof." (Affidavit of J. Christopher Shore dated Aug. 7, 2000 ("Shore Aff."), Ex. A.) Under these circumstances, Plaintiff cannot now, when faced with investments gone bad, claim under Section 10(b) or Rule 10b-5 that it relied upon oral misrepresentations of Seale, Embiricos, and Coutts concerning GLC. The other misrepresentations not concerning GLC may be grounds for relief under other counts of the TAC, however, they are not grounds for relief in a Section 10(b) or Rule 10b-5 claim. See Chem. Bank v. Arthur Anderson Co., 726 F.2d 930, 943 (2d Cir. 1984) (holding that misrepresentations or omissions involved in securities transactions but not pertaining to the securities themselves cannot form the basis of a Section 10(b) or Rule 10b-5 claim).
Secondly, the Private Securities Litigation Reform Act of 1995 ("PSLRA") requires that a complaint alleging securities fraud must "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2). Plaintiff has raised such an inference of scienter with respect to GLC's and Banks's issuing earnings statements which included material earnings from Specialty Manufacturing while it was being operated without a license required under the law of the state in which it was operating. (TAC ¶¶ 69-71, 74-86.) However, no such inference of fraudulent intent can be drawn from the facts alleged about Coutts. Coutts paid the entire purchase price of $22 million for Plaintiffs purchase of GLC stock in July 1995. (id. ¶ 45.) Since the shares were purchased on margin, Plaintiff made no outlay. It was no more in Courts's interest than in Plaintiffs to permit the $22 million to be used by GLC for purposes other than the acquisition of Trade Products or to not regain the purchase price if regulatory approval could not be timely obtained. (TAG ¶¶ 72, 74, 89, 97, 99.) Plaintiffs allegations that Coutts acted as a subagent of PWG in distributing the securities (TAC ¶ 36) must be disregarded as evidence of fraud because the TAG does not allege any facts upon which that information and belief allegation is based as required by the PSLRA. 15 U.S.C. § 78u-4(b)(1). Nor can Plaintiff establish a strong inference of intent from the financing fee received or the interest to be received by Coutts from the transaction. (TAC ¶¶ 18, 20, 24, 25.) Under these circumstances, Plaintiffs remaining allegations would have to be extremely strong to "give rise to a strong inference" of scienter as required by the PSLRA. 15 U.S.C. § 78u-4(b)(2). The allegations are not strong enough. Accordingly, Coutts' motion to dismiss Count Three pursuant to Rule 12(b)(6) is granted.
Plaintiff also alleges that: (1) Embiricos, Courts and Seale told Plaintiff that Courts had conducted due diligence of the transaction with GLC prior to Silva Run's purchase of that stock (TAC ¶¶ 89, 92); (2) Embiricos, Courts and Seale told Plaintiff that the transaction complied with Regulation S(id. ¶¶ 68, 94); (3) Embiricos, Coutts and Seale failed to disclose to Plaintiff material information that it knew or should have known regarding GLC's accounting practices and regulatory compliance (id. ¶ 92.). However, Plaintiff does not allege facts indicating that these statements were known by the defendants to be false. Specifically, Plaintiff does not allege facts showing: (a) that no due diligence was done; (b) that in fact Embiricos and Coutts knew that the transaction did not comply with Regulation S;(c) why Embiricos or Coutts should have known that the accounting practices and regulatory compliance by GLC were not in compliance with the standards or regulations; or (d) what accounting practices and regulatory compliance were not in compliance with the standards or regulations. Accordingly, Plaintiff has failed to state the circumstances constituting fraud with any particularity, as required by Fed.R.Civ.P. 9(b). See also IUE AFL-CIO Pension Fund v. Herrmann, 9 F.3d 1049, 1057 (2d Cir. 1993).
Furthermore, Plaintiffs allegation that Courts, Embiricos and Seale fraudulently failed to disclose to Plaintiff that the Subscription Agreement for Plaintiffs purchase of unregistered GLC shares contained a representation that Plaintiff had more than twenty shareholders "when Courts and Embiricos knew that Salazar was the sole shareholder of plaintiff' (TAC ¶ 100) is not only incredible, but also conclusory. Plaintiff does not show in what manner Courts, Embiricos or Seale committed fraud since that representation was stated in the Subscription Agreement that Plaintiff admits it signed. (TAC ¶ 109.) Thus, here too Plaintiff has failed to state the circumstances constituting fraud with any particularity, as required by Rule 9(b). Fed.R.Civ.P. 9(b);see also IUE AFL-CIO Pension Fund, 9 F.3d at 1057. Accordingly, the motions of defendants Courts, Embiricos, and Seale to dismiss Count Three are granted.
Count Four charges control person liability pursuant to Section 20(a) of the Exchange Act against GLC, Banks and Courts. Section 20(a) provides that:
Every person who, directly or indirectly, controls any person liable under any provision of this chapter or of any rule or regulation thereunder shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable, unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action.15 U.S.C. § 78t(a). The Second Circuit has interpreted Section 20(a) as follows:
[T]o establish a prima facie case of controlling-person liability, a plaintiff must show a primary violation by the controlled person and control of the primary violator by the targeted defendant and show that the controlling person was "in some meaningful sense [a] culpable participant in the fraud perpetrated by [the] controlled person." Control over a primary violator may be established by showing that the defendant possessed "the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise."S.E.C. v. First Jersey Sec., Inc., 101 F.3d 1450, 1472-73 (2d Cir. 1996) (internal citations omitted). As noted above, Banks was Chief Executive Officer, President of the Board of Directors, and, together with his wife, controlling stockholder of GLC and IPI/Diversinet (TAC ¶ 56). Consequently, the motion of Banks to dismiss Plaintiffs claims in Count Four charging him with control person liability is denied. The motion of defendant Courts to dismiss the claims of control person liability in Count Four is granted because there are no allegations showing that Courts had possession, direct or indirect, of the power to direct or cause the direction of the management and policies of GLC or Banks and therefore was a control person of GLC or Banks. See 17 C.F.R. § 240.12b-2. Insofar as GLC is alleged to be a control person of Courts (TAC ¶ 36), Plaintiffs claim pursuant to Section 10(b) and Rule 10b-5 was dismissed against Coutts, the primary violator. Accordingly, the motion of defendant GLC is granted because Plaintiff has not alleged facts showing that GLC was a control person of a primary violator liable for securities fraud and because Plaintiff has not alleged facts showing that GLC was a control person of Courts.
D. Count Five
Count Five charges GLC and Banks with breach of the Subscription Agreement and makes a claim of indemnity against GLC and Banks. Both Banks and GLC move to dismiss Count Five. "To state a claim for breach of contract under New York law, a party must allege: (i) the existence of an agreement between the plaintiff and defendant; (ii) due performance of the contract by the party alleging the breach; (iii) a breach; and (iv) damages resulting from the breach." Reuben H. Donnelley Corp. v. Mark I Mktg. Corp., 893 F. Supp. 285, 290 (S.D.N.Y. 1995). Here, Plaintiff does not allege that defendant Banks executed the Subscription Agreement in his personal capacity. Rather, GLC executed the Agreement. (See TAC ¶¶ 117-120.) Therefore, Plaintiff has not alleged the existence of an agreement between Banks and Plaintiff, and Plaintiff has therefore failed to state a claim for breach of contract with regard to Banks. Accordingly, the motion of Banks to dismiss Plaintiffs claim of breach of contract against Banks contained in Count Five is granted.
The TAC alleges that GLC was operating Specialty Manufacturing without the license required by the State of Washington and was not in compliance with all material laws, rules and regulations in each jurisdiction in which its business was carried on, in violation of the warranties to that effect in the Subscription Agreement. (TAC ¶¶ 114, 118.) Accordingly, the motion of GLC to dismiss Count Five is denied.
E. Count Six
Count Six charges common law fraud with respect to the GLC transaction against GLC, Banks, Embiricos, Coutts and Seale. GLC, Banks, Embiricos, Courts and Seale move to dismiss Count Six. To plead common law fraud, a plaintiff must allege facts showing "(1) a material false representation or omission of an existing fact, (2) made with knowledge of its falsity, (3) with an intent to defraud, and (4) reasonable reliance, (5) that damages plaintiff." Diduck v. Kaszycki Sons Contractors. Inc., 974 F.2d 270, 276 (2d Cir. 1992).
The motions of defendants Banks and Courts to dismiss Count Six charging common law fraud are granted. Plaintiff in the Subscription Agreement waived any claim for non-public representations made by the defendants about the securities being purchased. See supra § C; see also Silva Run WorldWide Ltd. 1998 WL 167330 at *23-24 Neither Banks nor Courts are specifically alleged to have made any false statements to Plaintiff. Accordingly, their motions are granted.
However, GLC is alleged to have failed to make its public statements truthful by reporting earnings in June 1995 which incorporated Specialty Manufacturing's material earnings without disclosing that it was operating Specialty Manufacturing without the required license. Accordingly, GLC's motion to dismiss Count Six is denied.
The motions of defendants Seale and Embiricos to dismiss Count Six for failure to state a claim of common law fraud are denied. The allegations of oral misrepresentations and nondisclosures attributed to Seale and Embiricos, together with other allegations by which GLC, with Seale's and Embiricos's assistance, received $22 million, give rise to an inference of fraud. Seale, the owner of PWG, arranged with GLC for PWG to receive a commission for raising the funds for the GLC financing, arranged with Embiricos for Courts to fund the purchase of the GLC shares, arranged for the offshore corporations which he controlled, Mariner Reserve Fund ("Mariner") and Compania di Investimento Antilliano ("CIA"), to receive at no cost to either Mariner or CIA shares of common stock of GLC valued at over $7 million, which shares were paid for by loans from Courts to Plaintiff secured by non-recourse demand notes collateralized by the GLC shares purchased by Plaintiff and held in Plaintiffs account at Courts and also collateralized by shares of GLC pledged to Courts by defendant Banks and his wife. (TAC ¶¶ 14-25.) Together with the alleged oral misrepresentations of Seale and Embiricos, the structure of the transaction gives rise to an inference of fraud by Seale and Embiricos and, probably, others as yet unidentified. Accordingly, the motions of Seale and Embiricos to dismiss Count Six claiming common law fraud are denied.
F. Count Seven
Count Seven charges breach of fiduciary duty by Seale, Embiricos, and Courts with respect to the GLC transaction. Seale, Embiricos, and Courts move to dismiss. "Generally, banking relationships are not viewed as special relationships giving rise to a heightened duty of care." Banque Arabe et Internationale D'Investissement v. Maryland Nat. Bank, 57 F.3d 146, 158 (2d Cir. 1995). "This same principle applies to loan participation agreements, in which there is deemed to be no fiduciary relationship unless expressly and unequivocally created by contract." Id. "Under New York law, an arms-length commercial transaction generally does not give rise to a fiduciary relationship, even if the defendants have relied on the plaintiffs' contractual obligation to use their `best efforts'. . . ." O'Hearn v. Bodyonics. Ltd., 22 F. Supp.2d 7, 12 (E.D.N.Y. 1998). Here, the allegations of fiduciary duty are conclusory and the facts alleged in the TAG are insufficient to show that a fiduciary duty existed between defendants Embiricos or Courts and Plaintiff. Accordingly, the motions of Embiricos and Courts to dismiss Count Seven charging breach of fiduciary duty to Plaintiff with respect to the GLC transaction are granted.
Seale did have a written agreement dated April 22, 1995, as set forth in the Amended Complaint, which was signed by Seale and Hector Gomez, a.k.a. Hector Gomez Lopez, who, along with Alejandro Salazar, controlled and managed the business activities of Plaintiff. (See Amended Complaint, dated Sept. 9, 1996, ¶¶ 32, 67 and Ex. A.) Seale and Plaintiff followed the terms of this agreement in distributing the shares purchased from GLC. However, the TAC contains no allegation that Lopez signed the agreement on Plaintiffs behalf or that the agreement was assigned to Plaintiff. Additionally, Plaintiff has failed to plead facts sufficient to show that Seale had broader authority as Plaintiffs agent than to execute the IPI/Diversinet Subscription Agreement. Accordingly, Plaintiff has failed to state facts sufficient to show a fiduciary relationship was owed by Seale to Plaintiff in connection with the purchase of the GLC shares. Accordingly, the motion of defendant Seale to dismiss Count Seven for breach of fiduciary duty is granted.
G. Count Eight
Count Eight charges negligent misrepresentations in connection with the sale of GLC shares against GLC, Banks, Courts, Embiricos, and Seale. GLC, Banks, Courts, Embiricos, and Seale move to dismiss. "Under New York law, a plaintiff may not recover for negligent misrepresentation in the absence of a special relationship of trust or confidence between the parties." Banque Arabe et Internationale D'Investissement, 57 F.3d at 158. See supra § F. Here, Plaintiff has not alleged facts sufficient to show a fiduciary relationship or other special relationship giving rise to a heightened duty of care between GLC, Banks, Courts, Embiricos or Seale and Plaintiff. See supra § F. Since Plaintiff has failed to establish a special relationship of trust or confidence between Plaintiff and those parties, Plaintiff has failed to state a claim for negligent misrepresentation. Accordingly, the motions of GLC, Banks, Courts, Embiricos and Seale to dismiss Count Eight are granted.
H. Counts Nine and Ten
Counts Nine and Ten have been dealt with previously. See supra §§ A, B.
I. Count Eleven
Count Eleven charges securities fraud in violation of Section 10(b) of the Exchange Act and SEC Rule 10b-5 against Courts, Embiricos and Seale for the IPI/Diversinet transaction. Courts, Embiricos and Seale move to dismiss. As noted above, misrepresentations or omissions involved in securities transactions but not pertaining to the securities themselves cannot form the basis of a Section 10(b) or Rule 10b-5 claim. Chem. Bank, 726 F.2d at 943 n. 21; see supra § C. Plaintiffs allegations in paragraphs 182 and 184-186 of the TAC do not constitute misrepresentations of fact about the financial condition of IPI/Diversinet or its securities. Rather, the TAC alleges statements either about Banks' plans and opinions with respect to IPI/Diversinet (TAC ¶ 182(i)), or relate to misrepresentations or omissions involved in the transaction, e.g., the splitting of an excessive commission (id. ¶ 184). These statements do not pertain to the value of the securities themselves and thus cannot form the basis of a Section 10(b) or Rule 10b-5 claim, nor do they plead fraud with particularity as required by Fed.R.Civ.P. 9(b). Plaintiffs allegations in ¶ 181 with regard to Regulation 5 constitute opinions of defendants and do not state facts from which a strong inference of scienter can be drawn as required by the PSLRA against any defendant. 15 U.S.C. § 78u-4(b)(2). Accordingly, the motions of defendants Courts, Embiricos and Seale are granted.
The TAC does not charge IPI/Diversinet in this Count.
J. Count Twelve
Count Twelve charges control person liability under Section 20 of the Exchange Act against IPI/Diversinet, Banks and Courts. See 15 U.S.C. § 78t(a). IPI/Diversinet, Banks and Courts move to dismiss. As noted above, the allegations of Count Eleven have been dismissed against Courts, Embiricos and Seale for failure to state a claim of securities fraud. See supra § I. Consequently, there is no basis for control person liability for control of Courts, Embiricos or Seale by IPI/Diversinet, Banks or Courts under Section 20 of the Exchange Act since no primary violation has been adequately alleged. In addition, Plaintiff has not sufficiently alleged facts to show "control," which is defined to mean "possession, direct or indirect, of the power to direct or cause the direction of the management and policies" by IPI/Diversinet or Banks of Courts, Embiricos or Seale in paragraphs 1-64 or 77-190 of the TAC. See 17 C.F.R. § 240.12b-2. Accordingly, the motions of defendants IPI/Diversinet, Banks and Courts to dismiss Plaintiffs claims in Count Twelve of control person liability under Section 20 of the Exchange Act for the acts of Courts, Embiricos and Seale set forth in Count Eleven are granted.
K. Count Thirteen
Count Thirteen charges common law fraud with respect to the IPI/Diversinet transaction against Embiricos, Courts, and Seale. Defendants Embiricos, Courts and Scale move to dismiss. As with Plaintiffs claim of fraud with respect to the GLC transaction, the alleged misrepresentations together with the structure of the transaction for the purchase of the IPI/Diversinet shares, give rise to an inference of fraud by Embiricos and Seale. Thus the motions of Embiricos and Seale to dismiss Count Thirteen are denied for the reasons stated in this Opinion and Order in Count Six. See supra § E.
With regard to Plaintiffs claim of fraud against Courts, Seale signed a Subscription Agreement as Plaintiffs agent disclaiming any reliance on non-public statements of any person about the condition of IPI/Diversinet. See supra § C. Plaintiff did not disavow either the Subscription Agreement or Seale's authority to sign the Subscription Agreement for it, but rather accepted delivery of the shares in question, and continued to deal with Courts until the GLC shares lost value. Plaintiff has not alleged sufficient facts necessary to overcome this waiver and infer reasonable reliance on any statements allegedly made by Courts. With respect to any other statement of Courts, in view of Courts's non-recourse loans totaling $14,302,855 to Plaintiff and Mariner Reserve for the purchase of the IPI/Diversinet shares, the allegations are insufficient to draw an inference of scienter as to Courts. (TAC ¶ 25.) Accordingly, the motion of Courts to dismiss Count Thirteen charging common law fraud with respect to the IPI/Diversinet transaction is granted.
L. Count Fourteen
Count Fourteen charges breach of a fiduciary duty by Seale, Embiricos, and Courts with respect to the IPI/Diversinet transaction. Defendants Seale, Embiricos and Courts move to dismiss. Plaintiff has failed to plead facts sufficient to show that Seale acted as agent for Plaintiff with broader authority than to sign the Subscription Agreement. Accordingly, the facts alleged do not show that a fiduciary duty was owed to Plaintiff by Seale. See supra §§ F, G. No facts are alleged sufficient to show that any fiduciary duty was owed to Plaintiff by Embiricos or Courts. Accordingly, the motions of defendants Seale, Embiricos and Courts to dismiss Count Fourteen are granted.
M. Count Fifteen
Count Fifteen charges negligent misrepresentations in connection with the sale of IPI/Diversinet shares against Embiricos, Courts and Seale. Defendants Embiricos, Courts and Seale move to dismiss. As noted above, however, under New York law, a plaintiff may not recover for negligent misrepresentation in the absence of a special relationship of trust or confidence between the parties. Banque Arabe et Internationale D'Investissement, 57 F.3d at 158. See supra § F, G. Here, Plaintiff has not alleged facts sufficient to show that Plaintiffs relationship with Embiricos or Courts or Seale was more than an ordinary relationship with a broker or lender. Accordingly, although Plaintiff has a common law fraud claim against Seale and Embiricos, its claim for negligent misrepresentation fails. Accordingly, the motions of defendants Embiricos, Courts and Seale to dismiss Count Fifteen are granted.
CONCLUSION
The motions of the defendants are granted and denied for the reasons set forth this Opinion and Order.
IT IS SO ORDERED.