Allen Loyd Conkling:
1998 U.S. Dist. ; Fed. Sec. L. Rep. (CCH) P90,271
SECURITIES AND EXCHANGE COMMISSION, Plaintiff, -v- THOMAS EDWARD CAVANAGH, et al., Defendants, KAREN CAVANAGH, et al., Relief Defendants.
UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK
1998 U.S. Dist. ; Fed. Sec. L. Rep. (CCH) P90,271
July 27, 1998, Decided
July 27, 1998, Filed
DISPOSITION: [*1] SEC's motion to amend the complaint granted. Motion to add claims under Section 5 and Sections 17(a) and 10(b) against Maier Lehmann, and to add a claim under Sections 17(a) and 10(b) against William Levy, granted.
OPINIONBY: DENISE COTE
OPINION: OPINION
DENISE COTE, District Judge:
In this action, filed on March 13, 1998, the SEC alleges that the defendants reaped millions of dollars in profits at the expense of the American investor by engaging in deceitful practices with respect to the stock of a company called Electro-Optical Systems Corporation ("EOSC"). To wit, the SEC alleges that the defendants offered and sold shares of EOSC in violation of the registration and antifraud provisions of the Securities Act of 1933, codified at 15 U.S.C. § § 77e ("Section 5") and 77q(a) ("Section 17(a)"), and the antifraud provisions of the Exchange Act of 1934, codified at 15 U.S.C. § ("Section 10(b)"). The SEC seeks a permanent injunction against future violations of the securities laws for certain of the defendants in addition to civil penalties. The SEC also seeks disgorgement of all proceeds related to the scheme, plus pre-judgment interest, from all of the defendants and relief defendants.
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A few days later, Maier Lehmann, acting on behalf of EOSC, offered Conkling the job of "investor relations representative" for EOSC. Conkling, using the name Allen Lloyd, created an entity called "Azure Investor Relations" to handle all communications between EOSC and the general public, investment community and media. Lloyd remained in constant contact with Maier Lehmann who was pressing EOSC to release press releases on virtually a daily basis, even though EOSC's Chief Operating Officer warned him and others in a January 12, 1998, memorandum that there was "not a product that we can show today." Moreover, during January, 1998, Maier Lehmann also urged Cosimo Tacopino, the trader at Donald & Co., to move up his bid price for EOSC shares. On January 30, 1998, EOSC issued a press release, which it placed on its internet web page, announcing its "Entry Into Health Care Documents Field." The release, copies of which were included in investor kits sent out by Allen Lloyd, stated in part that EOSC:
announced today that it received a Purchase Order from ADL Data Systems, [*17] Inc., a leading system integrator and software provider to the nursing home and health care industry, for an initial order of 1,000 Fingerprint Verification Units for an undisclosed price.
EOSC received no such Purchase Order and no order for Fingerprint Units.
The complaint also states that the January 30 press release was sent "for comment, prior to its publication" to Lehmann, among other people.
The Court finds that the foregoing allegations, combined with the allegations set forth elsewhere in the complaint regarding the financial benefits reaped by Lehmann as a result of the scheme, are sufficient to meet Rule 9(b)'s pleading requirements. "In order to satisfy the requirements of Rule 9(b), plaintiffs must allege in what respects the statements at issue were false and also allege facts that give rise to a strong inference of fraudulent intent." San Leandro Emergency Med. Plan v. Philip Morris, 75 F.3d 801, 812 (2d Cir. 1996). The complaint must also "state when and where the statements were made, and identify those responsible for the statements." Cosmas v. Hassett, 886 F.2d 8, 11 (2d Cir. 1989).
The above-quoted passage from the complaint makes clear [*18] that the fraudulent statement on which the SEC focuses for purposes of the fraud claim against Lehmann is the statement, contained in the January 30 press release, that EOSC had received an order for 1,000 fingerprint units. The passage also makes clear that the press release was false in two respects: (1) EOSC had not received such an order; and (2) EOSC's product was not ready for mass production. Finally, the allegations make clear that Lehmann, among others, was responsible for the statement, which occurred on January 30, 1998. n4
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