EDWARD WEINFELD, District Judge.
Plaintiff, Rooney Pace, Inc. ("Rooney Pace"), a brokerage house, brings this action alleging that defendants, Thomas W. Reid ("Reid"), Armond Zaccaria ("Zaccaria"), and Jerry Phillips ("Phillips"), engaged in a conspiracy to manipulate the market for securities of Threshold Technology, Inc. ("Threshold") and First City Properties, Inc. ("FCP") in violation of RICO
Defendant Phillips moves to dismiss plaintiff's claims against him pursuant to Rule 12(b), Fed.R.Civ.P. With respect to the securities law claims, Phillips contends (1) that the sole conduct attributed to him in the complaint—the purchase of 3500 shares of Threshold stock on January 10,
Plaintiff disputes each of these contentions, arguing that it has stated viable claims under the RICO statute and the federal securities laws; that it has stated its securities claims with particularity; and that as a result of stating a federal claim, defendant's contentions with respect to the state law claims need not be reached.
At the outset, it is apparent that plaintiff's RICO claim against Phillips must be dismissed. As plaintiff concedes, it has not and cannot allege that Phillips has been convicted of any of the predicate acts alleged, a necessary element of a civil RICO claim under our Court of Appeals' decision in Sedima, S.P.R.L. v. Imrex Co.
The Court finds, however, that plaintiff has stated a claim against Phillips under the federal securities laws. That claim is based upon a single transaction: on January 10, 1984, Phillips, a Texas resident, is alleged to have placed a purchase order for 3500 shares of Threshold stock through an account opened that day at the New York offices of Rooney Pace, an order for which he subsequently refused to pay. Pointing to the fact that there is only a single transaction alleged, Phillips contends that plaintiff has stated nothing more than a breach of contract claim.
Defendant's argument ignores the fact that although Phillips is charged with a single transaction, that transaction is claimed to be fraudulent in itself and, furthermore, part of a fraudulent conspiracy to manipulate the market for Threshold stock.
An alleged scheme to manipulate the market for a stock states a claim under both sections 9 and 10(b) of the Securities Exchange Act.
The holding of our Court of Appeals in A.T. Brod & Co. applies equally here. While the allegations of the complaint respecting Phillips's involvement in the purported conspiracy are few, the issue upon a motion to dismiss is not whether plaintiff will ultimately prevail in proving Phillips's intent not to pay or his participation in the conspiracy, but whether plaintiff is entitled to offer evidence to support its allegations.
Phillips argues that even if plaintiff has stated a claim, it has not been plead with sufficient particularity to satisfy Rule
While Phillips contends that "no specific conduct" in furtherance of the claimed conspiracy has been alleged, particular acts have in fact been attributed to him in the complaint, i.e. that he opened an account on January 10, 1984 at the New York offices of Rooney Pace, ordered 3500 shares of Threshold stock through that account on that day, placed that order with the intent not to pay for the shares, and in fact failed to pay for the stock. These allegations "give ... defendant notice of precisely what he is charged with. No more is required by Rule 9(b)."
Similarly, Phillips's contention that scienter has not been plead with sufficient particularity is misplaced. Rule 9(b) expressly provides that intent may be plead generally,
Plaintiff's complaint states more than a simple conclusion that Phillips acted with scienter. Supporting plaintiff's claim that Phillips ordered the Threshold shares with the intent not to pay or only if the price rose are allegations that he sought to create an appearance of active trading or induce others to purchase or sell; that, in fact, Rooney Pace liquidated the account at a loss; and that Phillips refused to pay. In addition, the complaint alleges that Phillips ordered the stock in furtherance of a conspiracy to manipulate the market, and specifies the particular purchases forming a part of that conspiracy, made not only by Phillips, but also by Zaccaria on the same day, through the same New York brokerage house, and in each case with the same subsequent failure to pay and liquidation by Rooney Pace into the market at a loss.
Not "every failure by a customer to pay for securities ordered adds up to a violation of the securities laws. But whether there is actionable fraud or a mere breach of contract depends on the facts and circumstances developed at the trial or on motion for summary judgment."
Finally, Phillips argues that the federal securities law claims must be dismissed because plaintiff has failed to allege that Threshold was traded on a national securities exchange. While section 10(b) does not require that the stock at issue be traded in such a market, section 9 does.
Because the Court sustains the legal sufficiency of plaintiff's securities law claims against Phillips, it need not reach his contentions as to plaintiff's state law claims, all of which are premised on the assumption that the federal claims should be dismissed.
Accordingly, defendant Phillips's motion to dismiss, pursuant to Rule 12(b), is granted as to the RICO claims against him, and denied in all other respects.
Plaintiff has alleged the elements necessary for recovery under section 9: that Phillips with the other defendants engaged in a series of transactions creating a false or misleading appearance with respect to the market for the securities for the purpose of inducing the purchase and sale of securities by others; that the defendants' actions were done "willfully;" and that the market price at which Rooney Pace sold the stock was affected by defendants' conduct. See 15 U.S.C. § 78i (1982).