The opinion of the court was delivered by: LECHNER, JR.
ALFRED J. LECHNER, JR., UNITED STATES DISTRICT JUDGE:
Succinctly stated, in this action plaintiff has alleged the defendants committed fraud by charging plaintiff excessive mark-ups in the sale of two types of securities: collateralized mortgage obligations ("CMOs") and principal only trust certificates ("PO Trusts"). Plaintiff claims the aggregate amount of the excessive mark-ups exceeds $ 5 million. In addition, it is charged defendants have attempted to conceal the excessive mark-ups. While a significant number of the legal issues presented in this matter can be adequately addressed against the backdrop of this terse summary of plaintiff's first amended complaint (the "Current Complaint"), certain of the legal claims involve consideration of additional facts. These additional facts, although not voluminous or complicated, are set forth together with a discussion of the individual legal theories which make them relevant.
Defendants filed a motion to dismiss, on various grounds, several counts contained in the Current Complaint. Simultaneously, plaintiff has made a motion to file a second amended complaint (the "Amended Complaint") which (1) drops certain of the claims defendants seek to have dismissed in their motion, (2) seeks to include claims for relief based on additional legal theories, and (3) seeks to add certain detail, the absence of which defendants claim justifies dismissal of various counts in the Current Complaint.
More specifically, (and setting aside for the moment the assertions sought to be added in the Amended Complaint, because of defendants' motion to dismiss
and further review by plaintiff
of the issues involved) plaintiff's remaining claims which with the exception of one transaction continue to be the subject of defendants' motion to dismiss can be listed as follows:
(1) claims based on Section 10(b) of the Exchange Act and Rule 10(b)-5 for all CMO and PO Trust transactions;
(2) claims based on Section 12(2) of the Securities Act for CMO transactions only;
(3) control person liability claims pursuant to Section 15 of the Securities Act, 15 U.S.C. § 77 o for claims based on the CMO transactions only; and
(4) control person liability claims pursuant to Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a) for all CMO and PO Trust transactions.
As discussed below, defendants' opposition to plaintiff's motion to amend will, in large part, be treated as a motion to dismiss the new claims sought to be asserted which include claims under RICO, the New Jersey counterpart and of aiding and abetting. For the reasons that follow, defendants' motion to dismiss is denied in all respects; plaintiff's motion to file the Amended Complaint is granted.
Virtually all aspects of this matter will be treated under the standards applicable to Rule 12(b)(6) motions. In that connection, the Supreme Court stated in Conley v. Gibson, 355 U.S. 41, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957):
In appraising the sufficiency of the complaint we follow, of course, the accepted rule that 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.
Id. at 45-46. Accord, Cruz v. Beto, 405 U.S. 319, 321, 31 L. Ed. 2d 263, 92 S. Ct. 1079 (1972); Angelastro v. Prudential-Bache Securities, 764 F.2d 939 (3d Cir. 1985), cert. denied, 474 U.S. 935, 106 S. Ct. 267, 88 L. Ed. 2d 274 (1986). Indeed, the Supreme Court has stated that a Rule 12 motion should not succeed unless the complaint is found to be "wholly frivolous." Radovich v. National Football League, 352 U.S. 445, 453, 1 L. Ed. 2d 456, 77 S. Ct. 390 (1957). As articulated in this Circuit, the standard to be applied in a motion under Fed. R. Civ. P. 12(b)(6) is whether, after construing the pleading in the light most favorable to the plaintiff and resolving every doubt in favor of the plaintiff, the pleading states any valid claim for relief. Mortensen v. First Federal Savings and Loan Ass'n, 549 F.2d 884, 891 (3rd Cir. First Federal 1977).
With respect to at least two aspects of this matter -- the allegations concerning plaintiff's knowledge of the excessive markups and the related issue of statute of limitations accrual -- submissions in addition to the pleadings have been presented. To this limited extent defendants' Rule 12(b)(6) motion will be treated as a motion for summary judgment under Rule 56.
To prevail on a motion for summary judgment, the moving party must establish "there is no genuine issue as to any material fact and that [it] is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c). The district court's task is to determine whether disputed issues of fact exist, but the court cannot resolve factual disputes in a motion for summary judgment. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249-50, 91 L. Ed. 2d 202, 106 S. Ct. 2505 (1986). All evidence submitted must be viewed in a light most favorable to the party opposing the motion. See Matsushita Elec. Industrial Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587, 89 L. Ed. 2d 538, 106 S. Ct. 1348 (1986).
Although the summary judgment hurdle is a difficult one to overcome, it is by no means insurmountable. As the Supreme Court has stated, once the party seeking summary judgment has pointed out to the court the absence of a fact issue,
its opponent must do more than simply show that there is some metaphysical doubt as to the material facts. . . . In the language of the Rule, the non-moving party must come forward with 'specific facts showing that there is a genuine issue for trial.' . . . Where the record taken as a whole could not lead a rational trier of fact to find for the non-moving party, there is no 'genuine issue for trial.'
Matsushita, 475 U.S. at 586-87 (emphasis in original, citations and footnotes omitted).
The Court elaborated on the standard in Anderson v. Liberty Lobby, Inc., 477 U.S. at 249-50 (citations omitted): "If the evidence [submitted by a party opposing summary judgment] is merely colorable . . . or is not significantly probative . . . summary judgment may be granted." The Supreme Court went on to note in Celotex Corp. v. Catrett, 477 U.S. 317, 323-24, 91 L. Ed. 2d 265, 106 S. Ct. 2548 (1986) (footnote omitted): "One of the principal purposes of the summary judgment rule is to isolate and dispose of factually unsupported claims or defenses, and we think it should be interpreted in a way that allows it to accomplish this purpose." Thus, once a case has been made in support of summary judgment, the party opposing the motion has the affirmative burden of coming forward with specific facts evidencing a need for trial. See Fed. R. Civ. P. 56(e).
II. Statute of Limitations under Section 10(b) of the Exchange Act and Rule 10(b)-5 thereunder
Plaintiff purchased PO Trusts from defendants in May, June and August, 1987, and purchased the CMOs from defendants in a number of transactions during 1986. See footnote 8, infra. Plaintiff argues that, because the excessive mark-ups were not disclosed by defendants, it did not know it was being charged excessive mark-ups at the time of the transactions. In September, 1987, plaintiff, with the intervention of the Federal Home Loan Bank Board ("FHLBB"), retained Rochester Consulting Associates ("Rochester Consulting") in order to assist in the operations and management of the business. According to the deposition testimony of Peter Gensicke ("Gensicke"), former Chief Financial Officer of plaintiff, William Vail ("Vail") of Rochester Consulting asked Gensicke to prepare computer printouts of certain PO Trust and CMO transactions so that Vail could "check out" the prices for those securities.
Less than one year later, in August, 1988, Elysian filed its suit asserting claims under, among other things, Section 10(b) of the Exchange Act. Section 10 provides 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 -
(b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, 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. Subsequent to passage of the Exchange Act, the SEC promulgated Rule 10b-5, providing 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. To prevail in an action brought under Rule 10b-5, a plaintiff must establish six elements: (1) a false representation of (2) a material (3) fact; (4) defendant's knowledge of its falsity and his intention that plaintiff rely on it; (5) the plaintiff's reasonable reliance thereon; and (6) his resultant loss. See Peil v. Speiser, 806 F.2d 1154, 1160 (3d Cir. 1986); 3 Loss, Securities Regulation 1431 (1961). Defendants have not attacked the viability of the Rule 10b-5 claims on the basis that any of the foregoing requirements were not met. Instead, defendants claim the Rule 10b-5 claims have been asserted too late.
Statute of Limitations Period
The Third Circuit recently held in In re Data Access Systems Securities Litigation, 843 F.2d 1537 (3d Cir. 1988) (en banc), cert. denied sub nom., Vitiello v. I. Kahlowsky & Co., 488 U.S. 849, 102 L. Ed. 2d 103, 109 S. Ct. 131 (1988), that the applicable statute of limitations for Section 10(b) and Rule 10b-5 claims is one year after discovery of the violation and in no event more than three years after the violation. Defendants argue that all but one of plaintiff's claims are time-barred because plaintiff has failed to bring suit within one year after the violation and plaintiff has failed to plead any facts showing when it discovered the violation.
Before addressing whether the Rule 10b-5 claims were timely under the holding of Data Access because the original complaint was filed within one year of plaintiff's discovery of the excessive mark-ups (and also within three years of the date of the transactions), it is interesting to consider a novel argument advanced by plaintiff in this case. According to plaintiff, the statute of limitations rule recently articulated in Data Access (within one year of discovery, but in no event more than three years after an alleged violation) should be deemed to be modified as a result of the enactment of the Insider Trading and Securities Fraud Enforcement Act of 1988 ("Insider Trading Act"), P.L. 100-704, 102 Stat. 4677 (1988).
Congress has basically amended the Exchange Act to expressly provide a private right of action for contemporaneous buyers and sellers asserting claims of fraud committed through insider trading. Because Congress selected a five-year statute of limitations period for insider trading cases and because insider trading is a specific type of activity prohibited under Section 10(b) and Rule 10b-5, plaintiff argues that, under the court's reasoning in Data Access, the five-year period should govern all claims under Section 10(b).
In Data Access the court was attempting to establish a single statute of limitations period for all claims under Section 10(b) and Rule 10b-5.
Plaintiff notes that at the time of the decision in Data Access, Congress had not established a limitations period for Section 10(b) claims and the court had to decide which was the " one most appropriate" statute of limitations. It is now argued that "since the decision in Data Access, Congress has now spoken and selected a five-year statute of limitations to govern at least one type of claim brought under § 10(b)." Plaintiff's Brief, p. 7.
While it is not necessary to rule on this novel argument made by plaintiff (because it appears able to survive defendants' motion to dismiss under the shorter statute of limitations previously articulated in Data Access), certain observations are made. First, although it appears the argument has never been squarely presented, it is noted the statute of limitations rule enunciated in Data Access, even after the Insider Trading Act was enacted, has not been modified. Bloch v. Prudential-Bache Securities, 707 F. Supp. 189 (W.D. Pa. 1989); Ferreri v. Mainardi, (E.D. Pa. Feb. 1989); T.R. Whitelyn Holstein Breeder Associates v. Whitelyn Farms, Inc., (E.D. Pa. Dec. 16, 1988).
Second, and more importantly, it appears plaintiff seeks a ruling on this issue which would be one based upon form rather than substance. It is arguable the Third Circuit's central goal in Data Access was to establish a uniform statute of limitations to govern all claims under Section 10(b). It does not necessarily follow, however, that it is appropriate to articulate a uniform statute of limitations period based merely upon Congress' enactment of a statute of limitations period for a particular violation of the securities laws which happens to be a species of a Section 10(b) claim.
Both section 10(b) and its companion provisions -- § 9(e) (manipulation of security prices); § 16(b) (profits from purchase and sale of securities within six months); § 18(c) (liability for misleading statements in any application, report, or filed document); and § 29(b) (validity of contract provisions in violation of Act or regulations thereunder) -- are aimed at the same objectives. All of these companion provisions, except section 16(b), have a uniform federal limitations period. All reflect, in common with section 10(b), the purpose of the original Securities Act of 1933:
to "provide full and fair disclosure of the character of securities sold in interstate and foreign commerce and through the mails, and to prevent frauds in the sale thereof, and for other purposes."
Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 728, 95 S. Ct. 1917, 1921, 44 L. Ed. 2d 539 (1975) (quoting 1933 Act); see Basic Inc. v. Levinson,  U.S. , 108 S. Ct. 978, 99 L. Ed. 2d 194 (1988). All aim to compensate the same type of injury. All are designed to fill a void in the common law and to create remedies that would be uniform throughout our nation's commercial universe, instead of being subjected to the vagaries of independent and diverse state statutory regulations.
Data Access, 843 F.2d at 1548.
It appears from the foregoing the Third Circuit was most interested in considering the precise nature of the claim asserted under section 10(b). It is doubtful the Circuit would have automatically endorsed, without a reasoned analysis, a five year statute of limitations period for all claims arising under section 10(b)
merely because Congress established such a limitations period for a specific type of conduct proscribed by Section 10(b).
Turning to the nature of the Section 10(b) claims asserted in this case, it appears they are more similar to claims under the "companion provisions" referred to above than to a claim under the Insider Trading Act. This case involves the alleged failure by the defendants "to provide full and fair disclosure," Data Access, 843 F.2d at 1548, concerning the amount of the markups for the PO Trust and CMO transactions.
The objectives of the Insider Trading Act are well summarized in defendants' brief. A primary purpose of the legislation was to restore public confidence in the fairness and integrity of the securities markets. House Report No. 100-910, 100th Cong., 2d Sess at 7 ("House Report"). Although an express private cause of action for contemporaneous traders was created, the thrust of the legislation was to protect the public at large, and not just individual investors. Id. Professor James Cox of Duke University School of Law testified at the House ...