1994 WL 138672 at * 6. The term distribution refers to an
offering of securities, whether or not subject to registration
under the Securities Act, that is distinguished from ordinary
trading transactions by the magnitude of the offering and the
presence of special selling efforts and selling methods. Id.
The Court finds that the offering of the HFS notes was such a
distribution. A distribution commences at the point when the
incentive to engage in manipulative conduct is first present, and
is complete when the securities "come to rest in the hands of the
investing public." Id. at * 7. The offering of the notes was
completed when the last notes were sold to the investing public,
which, according to the defendants and undenied by the
plaintiffs, occurred in February 1996. The redemption of the HFS
notes was a right granted to Cendant by the terms of the notes.
Because this right survived the termination of the offering of
the notes does not mean that the offering remained open.
If the Court were to accept the plaintiff's reasoning, such
could lead to an unreasonable result. Under the plaintiffs'
argument, the offering of the HFS notes could have remained open
until the 2003 maturity date. If Cendant had never exercised its
right to redeem the HFS notes, the plaintiffs would have retained
the right to convert the notes into common stock at all times
until the 2003 maturity date. In that case, the 1996 Form S-3 and
its accompanying prospectus would have incorporated by reference
most, if not all, documents filed with the SEC by HFS or Cendant
until the year 2003. This would have been an unreasonable and
unnecessary result and not served any purpose of the Securities
Act. The Court finds that the offering of the HFS Notes was
completed on February 22, 1996 and that the Cendant 1997 Form
10-K was not incorporated by reference into the 1996 Form S-3 or
its accompanying prospectus.
To support their claim under § 12(2), the plaintiffs have only
alleged, by their incorporation by reference argument, that the
1996 Form S-3 or HFS Notes Prospectus contained materially false
statements or omissions of material fact. To perfect this claim,
they rely on allegedly false and misleading statements and
omissions in the Cendant 1997 Form 10-K, and the Cendant Proxy
Materials and press release related to the merger. The Court has
found that these materials were not incorporated by reference
into the 1996 Form S-3 or HFS Notes Prospectus. Hence, the Court
finds that the plaintiffs have not sufficiently plead a violation
of § 12(2). The defendants' motions to dismiss the plaintiffs §
12(2) claim are granted with prejudice.
3. Section 10(b) and Rule 10b-5
Section 10(b) of the Exchange Act prohibits the use of
fraudulent schemes or devices in connection with the purchase or
sale of securities. Under § 10(b), it is unlawful to "employ, in
connection with the purchase or sale of any security . . . any
manipulative or deceptive device or contrivance in contravention"
of any rule promulgated by the SEC designed to protect the
investing public. To implement the section, the SEC enacted Rule
10b-5, violation of which gives rise to a private cause of
action. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S.Ct.
1375, 47 L.Ed.2d 668 (1976); Blue Chip Stamps v. Manor Drug
Stores, 421 U.S. 723, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975). That
Rule makes it unlawful: (1) "[t]o employ any device, scheme, or
artifice to defraud," (2) "[t]o make any untrue statement of a
material fact" or to omit to state a material fact so that the
statements made "in light of the circumstances," are misleading,
and (3) "[t]o engage in any act, practice, or course of business
which operates or would operate as a fraud or deceit upon any
person." 17 C.F.R. § 240.10b-5. The Supreme Court has held that
standing to bring a private cause of action under Rule 10b-5 is
limited to actual purchasers or sellers of
securities. Blue Chip Stamps, 421 U.S. 723, 95 S.Ct. 1917.
This tort, although statutory in origin, sounds in the common
law of fraud and deceit and retains, in modified form, the common
law elements of duty, breach, causation, and damage. See
Huddleston v. Herman & MacLean, 640 F.2d 534, 547 (5th Cir.
1981) (10b-5 claim derived from common law action for deceit),
modified on other grounds, 459 U.S. 375, 103 S.Ct. 683, 74
L.Ed.2d 548 (1983). The plaintiff must prove knowledge by the
defendant, an intent to defraud, misrepresentation or failure to
disclose, materiality of the information and injurious reliance
by the plaintiff. Thomas v. Duralite Co., 524 F.2d 577 (3d Cir.
1975); Rochez Bros., Inc. v. Rhoades, 491 F.2d 402 (3d Cir.),
cert. denied, 425 U.S. 993, 96 S.Ct. 2205, 48 L.Ed.2d 817
(1976). More precisely, these elements form the following test:
to cast a 10b-5 claim, a plaintiff must allege that the defendant
made (1) a misstatement or an omission (2) of a material fact (3)
with scienter (knowledge) (4) in connection with the purchase or
sale of a security (5) upon which plaintiff reasonably relied,
and (6) that reliance proximately caused injury to the plaintiff.
Kline v. First Western Government Securities, Inc.,
24 F.3d 480, 487 (3d Cir.), cert. denied sub nom., Arvey, Hodes,
Costello & Burman v. Kline, 513 U.S. 1032, 115 S.Ct. 613, 130
L.Ed.2d 522 (1994); In re Phillips Petroleum Secs. Litig.,
881 F.2d 1236, 1244 (3d Cir. 1989) (citing Angelastro v.
Prudential-Bache Securities, Inc., 764 F.2d 939, 942-43 (3d
Cir.), cert. denied, 474 U.S. 935, 106 S.Ct. 267, 88 L.Ed.2d
The Private Securities Litigation Reform Act of 1995 (the
"PSLRA") strengthened the requirement that:
In any private action arising under this chapter in
which the plaintiff may recover money damages only on
proof that the defendant acted with a particular
state of mind the complaint shall with respect to
each act or omission alleged to violate this chapter,
state with particularity facts giving rise to a
strong inference that the defendant acted with the
required state of mind.
In addition, a complaint alleging fraud must satisfy the
requirements of Fed. R.Civ.P. 9(b), which instructs that "in all
averments of fraud or mistake, the circumstances constituting
fraud or mistake shall be stated with particularity. Malice,
intent, knowledge, and other condition of mind of a person may be
averred generally." Fed.R.Civ.P. 9(b).