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United States District Court, District of New Jersey

August 26, 1999


The opinion of the court was delivered by: Mary L. Cooper, United States District Judge.


This matter comes before the Court on the motion by the class action plaintiffs for leave to file a Third Amended Complaint including claims against former defendants Allan Boren ("Boren") and Eric Cano ("Cano"). Boren and Cano (hereinafter "moving defendants") oppose the motion. For the reasons stated, the motion is denied.


Because the Court is aware that the parties to this litigation are familiar with the surrounding facts and circumstances of this case, we need not repeat them herein. Instead, the Court refers the parties to our prior Memoranda and Orders entered in this case for a full recitation of the facts pertinent to the underlying dispute. We will, however, provide a brief procedural history to put the instant motion in proper context.

This Court issued a Memorandum and Order dated January 8, 1998 which dismissed claims against the moving defendants based upon (1) §§ 10(b) and 20 of the Exchange Act and Rule 10b-5, and (2) §§ 11 and 15 of the Securities Act. We also granted plaintiffs leave to file a Second Amended Complaint, identifying in the Memorandum which counts could be amended and in what manner.*fn1 However, we did not specify in the Order portion which counts of the Complaint could be amended. Our Order also stated that the moving defendants' motion to dismiss was granted, but did not specify whether the enumerated claims were dismissed against them with or without prejudice.

Plaintiffs filed a Second Amended Complaint which included,
inter alia, five counts against the moving defendants based upon
alleged violations of:  (1) § 15 of the Securities Act (Count I);
(2) § 10(b) and Rule 10b-5 of the Exchange Act (Counts II and
IV); (3) § 20 of the Exchange Act (Count II); (4) § 20A of the
Exchange Act (Count V); and (5) Section 12(2) of the Securities
Act (Count III).*fn2  The moving defendants filed a motion to
strike each of those counts from the Second Amended Complaint as
well as a motion to dismiss those counts pursuant to Federal
Rules of Civil Procedure 12(b)(6) and 9(b). This Court granted
the moving defendants' motion to strike, finding that this
Court's prior Memorandum and Order had not granted plaintiffs
leave to file a Second Amended Complaint which contained new and
improved allegations against the moving defendants. (Order dated
5-14-99 at 3.)  We also stated that if plaintiffs intended to
plead additional allegations and claims against the moving
defendants, it would be necessary for plaintiffs to file a formal
motion seeking leave to amend their Complaint in that manner.
(Id. at 4.)  In addition, we denied the motions to dismiss as
moot. (Id. at 6.)

Plaintiffs have now filed a formal motion seeking leave to file a Third Amended Complaint which includes the claims against the moving defendants which were the subject of defendants' motion to strike.*fn3 The moving defendants have opposed the motion, arguing that the request is untimely. They also claim that we should deny the motion because plaintiffs had not provided them with a copy of the proposed Third Amended Complaint. Finally, the moving defendants argue that if the Court determines that the motion to amend should be granted, they wish to renew their motion to dismiss which we previously dismissed as moot.

Plaintiffs counter that the motion to amend is timely, in that
plaintiffs' counsel filed it as soon as counsel became aware of
the effect of this Court's ruling on the original motions to
dismiss. In other words, plaintiffs' counsel claims that he
understood our dismissal of the counts asserted against the
moving defendants to have been without prejudice to plaintiffs'
right to file an amended complaint curing the pleading
inadequacies we identified therein. Moreover, plaintiffs point
out that defense counsels' assertion that the motion should be
denied because they do not have a copy of the proposed amended
pleading is without merit, as they have had notice of the new
claims asserted against their clients in the Third Amended
Complaint because the claims against the moving defendants which
are at issue in the instant motion are the same ones asserted
initially in the Second Amended Complaint dated April 8, 1998.
(Pls.' Reply Br. at 5 & n. 6.)  With respect to the moving
defendants' request to renew the motion to dismiss, plaintiffs
state that they do not oppose that procedural request, provided
that the Court consider their additional letter submitted by
their counsel after briefing on that motion had been completed.
(Id. & n. 7.)


Under Federal Rule of Civil Procedure 15, leave to amend shall be freely given in the absence of bad faith, dilatory motive, undue prejudice to the opposing party, or futility of amendment. See, e.g., Jablonski v. Pan American World Airways, Inc., 863 F.2d 289, 292 (3d Cir. 1988). Amendment of a complaint is futile if, as amended, it would not withstand a future motion to dismiss. Massarsky v. General Motors Corp., 706 F.2d 111, 125 (3d Cir. 1983), cert. denied, 464 U.S. 937 (1983).

In view of the fact that the Court's January Memorandum and Order admittedly did not specify whether the dismissal of the counts against Boren and Cano was with or without prejudice to plaintiffs' right to file an amended pleading relating to those claims, we find no merit to defendants' argument that the instant motion is untimely. It is clear that once our decision on the motion to strike was filed in this case, plaintiffs reacted in a timely manner. Moreover, there is no evidence of bad faith or dilatory motive on plaintiffs' part in waiting to this point to file the instant motion. Similarly, there does not appear to be undue prejudice to the opposing defendants, as they have been aware since plaintiffs filed the Second Amended Complaint in April 1998 that plaintiffs not only sought to provide additional factual information with respect to those claims dismissed by our Memorandum and Order dated January 8, 1998, but also intended to include new counts against defendant Boren.

The Court notes, however, that as to the last inquiry, that of the futility of amendment, we must determine whether plaintiffs' proposed amended pleading is sufficient to withstand a motion to dismiss pursuant to Rule 12(b)(6). In this connection, we are compelled to analyze the merits of defendants' motion which we dismissed as moot. We will turn our attention to that analysis next.*fn4 The Court will analyze each proposed claim asserted against the moving defendants and test the allegations pertaining to those counts against the standard of dismissal under Rule 12(b)(6) and 9(b).*fn5

 I.  Count II:  Liability of Boren and Cano under § 10(b) of the
                   Exchange Act and Rule 10b-5

The moving defendants argue that they cannot be exposed to
primary liability under § 10(b) and Rule 10b-5 because the
gravamen of plaintiffs' allegations against these defendants in
this connection is that they were directly involved in the
process of creating and reviewing the financial statements of
MB's subsidiary, I&J, which contained false and misleading
information concerning I&J's 1995 year-end figures. (Pls.' Br.
in Opp'n at 6.)  Defendants argue specifically that in order to
state a claim for primary liability under § 10(b) and Rule 10b-5
of the Exchange Act, plaintiffs must plead facts which show (1)
that each defendant made a false or misleading statement, and (2)
that the misstatements which are the subject of the action were
publicly attributed to that particular defendant at the time of
their dissemination. (Defs.' Br. in Supp. at 5-8; Defs.' Reply
Br. at 3-4 (citing Wright v. Ernst & Young, 152 F.3d 169 (2d Cir.
1998).)  Defendants also characterize plaintiffs' claim against
Boren and Cano to state nothing more than a "corporate
mismanagement" claim not actionable under § 10(b) and Rule 10b-5.

Plaintiffs counter that in order for liability as a primary
violator of § 10(b) and Rule 10b-5 to attach, they need not
allege that each defendant made a misrepresentation or false
statement which was publicly attributed to the defendant at the
time of its dissemination. (Pls.' Br. in Opp'n at 4.)  Instead,
plaintiffs rely upon a statement in the Second Circuit's opinion
in First Jersey Securities v. SEC, 101 F.3d 1450, 1471 (2d Cir.
1996), which states that "primary liability may be imposed `not
only on persons who made fraudulent representations but also on
those who had knowledge of the fraud and assisted in its
preparation.'" Id. (citing Azrielli v. Choen Law Offices,
21 F.3d 512, 517 (2d Cir. 1994)). They also rely upon In re Kidder
Peabody Sec. Litig., 10 F. Supp.2d 398 (S.D.N.Y. 1998) and Carley
Capital Group v. Deloitte & Touche, 27 F. Supp.2d 1324, 1334
(N.D.Ga. 1998), opinions decided after our initial dismissal of
the § 10(b) and Rule 10b-5 claims, arguing that the cases are
factually analogous and instructive as to what level of
participation in the making of the misstatements is necessary to
establish primary liability under § 10(b) and Rule 10b-5
without offending the Supreme Court's decision in Central Bank v.
First Interstate Bank of Denver,

511 U.S. 119 (1994).*fn6

It is clear that plaintiffs' theory of liability under § 10(b) against Boren and Cano is predicated upon their participation in preparing I&J's 1995 year-end financial information, which was then provided to MB and subsequently incorporated into MB's publicly disseminated documents which provided MB's overall financial statistics.*fn7 (See Pls.' Br. in Opp'n to Mot. to Dismiss at 4 (heading under § 10(b) argument is "Boren and Cano Made False and Misleading Statements;" argument presented is that the Second Amended Complaint contains allegations which show that Boren and Cano were "responsible" for falsifying I&J and the Company's financial statements, and that the reported financial statements were "statements" within the meaning of the federal securities laws."); Pls.' Supp. Ltr. Br. dated 1-13-99 (noting that court's opinion in Carley Capital recognized that liability may attach to even those upon whom material misrepresentations have not been attributed). Moreover, it is also clear that the alleged actionable misstatements (I&J's financials) were included in the Company's public documents only by incorporation; there were no statements which were attributed to either Boren or Cano directly. With the issue framed as such, we will turn to our analysis of plaintiffs' theory of liability. The Second Circuit in Shapiro held that a claim under § 10(b) based upon alleged material misstatements or omissions must allege that the named defendant made a material misstatement or omission indicating an intent to deceive or defraud in connection with the purchase or sale of a security. Shapiro, 123 F.3d at 720-21. The court made that ruling in the context of a § 10(b) claim asserted against an accounting firm, but that holding does not appear limited to its facts. In addition, the court in Wright reaffirmed the holding in Shapiro, and went one step further by ruling that in order to hold a secondary actor liable under § 10(b) for alleged misrepresentations, the misrepresentations must be attributed to that specific actor at the time of public dissemination. Wright, 152 F.3d at 175.

In contrast to the Second Circuit's rule, plaintiffs argue that this Court should adopt the rule set forth in Carley Capital, where the district court held that primary liability under § 10(b) will attach against an individual if that person, acting alone or with others, "creates a misrepresentation even if the misrepresentation is not publicly attributed to it." 27 F. Supp.2d at 1333. The court reached its conclusion based upon the fact that under the Second Circuit's formulation, a "secondary actor who is the actual creator and author of a material misstatement could avoid liability simply due to the concealment of his identity." Id.

In the same vein, plaintiffs argue that the district court's opinion in Kidder Peabody supports their position. There the court concluded that a plaintiff may pursue a § 10(b) claim against a defendant if the plaintiff can show that the defendants were "the original and knowing source of a misrepresentation and that defendants knew or should have known that that misrepresentation would be communicated to investors."*fn8 Kidder, 10 F. Supp.2d at 407. Relying upon the rationale in Picard Chem. Inc. v. Perrigo Co., the court reasoned that GE was the "conduit" through which Kidder's fraudulent misstatements concerning the company's financial status were conveyed. Id. at 407-08.

This Court previously dismissed plaintiffs' § 10(b) claims
against Boren and Cano, ruling that there were no allegations in
the pleading that either defendant made a misrepresentation which
was the subject of this lawsuit. (Mem. & Order at 35.)  While we
did not explicitly rely upon the Second Circuit's ruling in
Shapiro, it is clear that we took the position that in order to
be held liable under § 10(b) and Rule 10b-5 for making a material
misstatement (or omission), there must be allegations which
demonstrate that the particular defendant named in the complaint
in fact made a misstatement (or omission). See Shapiro, 123 F.3d
at 720 ("A claim under § 10(b) must allege a defendant has made a
material misstatement or omission indicating an intent to deceive
or defraud in connection with the purchase or sale of a
security."); Axiter v. Home-Stake Prods. Co., 77 F.3d 1215,
1226-27 (10th Cir. 1996); see also Mem. & Order at 35-36. The
allegations in the proposed pleading fail to meet this standard
because plaintiffs' theory is that Boren and Cano participated in
the process of "cooking the books" at I&J and generating the
allegedly fraudulent I&J financial data, which in turn was
included in MB's public documents. However, Boren and Cano's
participation in this process cannot be considered the equivalent
of making the false statements themselves. See Mishkin v.
Ageloff, No. 97-2690, 1998 WL 651065, at *16 (S.D.N.Y. 1998)
(noting that Shapiro suggests that "orchestration" of
misstatements and omissions is not enough to sustain primary
liability, and therefore a plaintiff must allege that each
defendant has made a material misstatement or omission in order
to be liable under Rule 10(b)). Moreover, we note that the
Second Circuit's opinion in Wright has added a new consideration,
namely that in order to hold an individual liable for material
misstatements, the misrepresentations must have been attributable
to that specific actor at the time of public dissemination.*fn9

It is clear that under Shapiro and Wright, plaintiffs' allegations concerning Boren and Cano's role in formulating, preparing and/or compiling I&J's false financial data are insufficient to hold those individuals liable under the theory that they themselves made a material misstatement actionable under § 10(b). Boren and Cano's conduct in that connection does not amount to actually making a false misrepresentation which can be attributed to them. Indeed, the allegedly false statements concerning I&J earnings, if attributable at all to an entity other than (or in addition to) MB, would be attributable to I&J. Viewing plaintiffs' allegations concerning defendants' role in generating the I&J financial statements at issue under the lens of Shapiro and Wright, it is clear that plaintiffs have not stated a claim for primary liability under § 10(b) or Rule 10b-5 as to either Boren or Cano.

We will briefly address an additional consideration raised by plaintiffs. We are aware of case law which states that "a third-party defendant may be held liable as a primary violator for materially misleading statements made by others where the third-party defendant controlled the content of the statement." Liability is imposed under these circumstances based upon agency principles. "When a defendant controls the content of another actor's statement, the actor is essentially operating as the agent of the defendant, unlike the situation wherein a defendant provides `substantial assistance' in aiding the actor's individual course of conduct." Picard Chemical Inc. v. Perrigo Co., 940 F. Supp. 1101, 1119 (W.D.Mich. 1996). In such circumstances, it is the defendant's original statement which misled investors — the person who communicated the statement to investors served as a mere conduit for defendant's statement. However, even under these circumstances, "the key to determining primary liability is that plaintiff must allege that defendant was the original and knowing source of the misrepresentation." Id.

Plaintiffs' protestations notwithstanding, this theory of agency/conduit liability cannot be applied to Boren and Cano in this case, as Manhattan Bagel's public documents cannot be characterized as "conduits" for alleged misstatements attributable to Boren and Cano. At best, MB's public documents served as conduits for material misstatements attributable to I&J, but not Boren and Cano. As alleged participants in a strategy which generated I&J's false financial information, Boren and Cano are one step removed from being the actual speakers of the misrepresentations. Thus, the rationale employed in Picard does not support plaintiffs' argument. Cf. Picard, 940 F. Supp. at 1120 (where the underwriter defendants argued that there were no material misstatements attributable to them, court denied motion to dismiss, finding that their statements as to the company's growth made in reports to the public demonstrate that they were the "original source" of the fraudulent predictions).

Turning to plaintiffs' final arguments, we do not believe that the courts' opinions in Kidder or Carley Capital require us to reconsider our understanding of the scope of primary liability for making material misstatements under § 10(b) or Rule 10b-5. We reach that conclusion because we disagree with the holdings and reasoning applied in those cases. First, the district court in Carley Capital discussed the Second Circuit's holdings in Shapiro and Wright but rejected that circuit's holdings in favor of the SEC's position. In the absence of Third Circuit precedent on this point, this Court has adopted the Second Circuit's position, as it is consistent with the Supreme Court's holding in Central Bank and faithful to the statutory language of § 10(b).

With respect to the district court's decision in Kidder, we agree with defendants that it is likely that the court's holding has been called into question by Wright. However, assuming arguendo that Wright does not affect the validity of the court's ruling in Kidder, we do not agree with the district court's holding and reasoning therein. Significantly, we question the outcome in the Kidder opinion because the court did not adequately explain its rationale for exposing not only Kidder (the subsidiary which allegedly misrepresented its financial information to its parent GE), but the individual defendants (employees of Kidder) to liability under § 10(b) for the misleading nature of Kidder's financial information eventually reported in GE's public documents. In our view, holding individual defendants liable under § 10(b) for the orchestration of a company's fraudulent financial reports runs afoul of the court's holdings in Shapiro and Anixter and the notion that only speakers may be held liable for their material misstatements under this aspect of Rule 10b-5 and § 10(b). See Shapiro, 123 F.3d at 720-21 ("A claim under § 10(b) must allege a defendant has made a material misstatement or omission indicating an intent to deceive or defraud in connection with the purchase or sale of securities;" court also noted that allegations of "assisting in," "participating in," "complicity in" and similar synonyms fall within the prohibitive bar of Central Bank); Anixter, 77 F.3d at 1226 n. 10 ("Some post-Central Bank cases have held that third party defendants can be liable for statements made by others, where the defendant substantially participated in preparing the statements. . . . To the extent that these cases allow liability to attach without requiring a representation to be made by defendant, and reformulate the substantial assistance element of aiding and abetting liability into primary liability, they do not comport with Central Bank."); Mishkin, 1998 WL 651065, at *16 ("Shapiro strongly suggests that "orchestration" of misstatements or omissions is not enough to sustain primary liability, and that a plaintiff must allege, as defendant argues herein, that a defendant made a material misstatement or omission in order to be liable under § 10(b)"). Yet, it appears that this is exactly the result which was reached in Kidder, although admittedly the court's opinion is ambiguous on this point.

What remains after an exhaustive analysis of the applicable
principles surrounding primary liability under § 10(b) for
material misstatements is our conclusion that plaintiff's
allegations concerning Boren and Cano's "participation in" the
creation and review of I&J's false financial statements fail to
state a claim upon which relief may be granted. (See Sec. Am.
Compl. ¶¶ 33 ("Boren participated in the creation and review of
I&J's false financial statements."); id. ("[Boren] continued to
meet and have discussions with Cano . . . and gave . . .
instructions concerning the accounting treatment for certain
items improperly reflected in [I&J's] year-ended financial
statements.").)  Accordingly, we will deny plaintiffs' motion to
amend the Complaint to add a claim under § 10(b) and Rule 10b-5
against defendants Boren and Cano based upon the alleged
misstatements enumerated in ¶¶ 37 to 42 of the Second Amended
Complaint as futile under the 12(b)(6) standard for dismissal.

 II.  Control Person Liability against Boren and Cano  (Counts I
                             and II)

Plaintiffs also seek to amend the Complaint so as to hold Boren and Cano liable as "control persons" of MB during the class period. In Count I, plaintiffs allege that Boren and Cano are liable under § 15 of the Securities Act for an allegedly false and misleading registration statement issued by MB in March 1996. In Count II, plaintiffs allege that Boren and Cano are liable under § 20 of the Exchange Act for all of the allegedly misleading statements issued by MB and its officers during the class period. We will discuss the viability of plaintiffs' §§ 15 and 20 claims together.

"Control person" liability is predicated upon the theory that certain corporate insiders have the power and obligation to supervise or "control" the day-to-day "policy and decision-making processes" of the persons beneath them who are alleged to have committed the primary wrong. Riggs v. Schappell, 939 F. Supp. 321, 327 (D.N.J. 1996). Thus, to plead control person liability, the complaint must allege facts which demonstrate that each defendant had the power or potential power to influence and control the activities of the controlled person or entity during the class period. See Brown v. Enstar Group, 84 F.3d 393, 397 (11th Cir. 1996) (for defendant to be liable as a control person, he must have had the power to control the company at the time the alleged fraudulent prospectus was issued); In re Gupta Sec. Litig., 900 F. Supp. 1217, 1243 (N.D.Cal. 1994). Furthermore, the Third Circuit requires plaintiffs to allege that the defendants "culpably participated" in the primary wrong. Rochez Bros. Inc. v. Rhoades, 527 F.2d 880, 883-86 (3d Cir. 1975), cert. denied, 425 U.S. 993 (1976); Riggs, 939 F. Supp. at 327.

Plaintiffs cannot state a claim for control person liability
against Boren and Cano because plaintiffs have failed to plead
facts demonstrating that they were controlling persons of the
Company within the meaning of sections 15(a) and 20(a). As the
moving defendants point out, our prior Memorandum and Order
rejected plaintiffs' allegations of control person status against
Boren and Cano as "insufficient as a matter of law." (Mem. &
Order at 39.)  It appears that plaintiffs' control person
liability allegations are, in several respects, identical to
those which we found deficient.

We reject plaintiffs' assertion of control person liability
against Boren and Cano based upon their involvement in the
operations of I&J. In essence, plaintiffs raise no new factual
allegations demonstrating that Boren and Cano, during the class
period, exerted sufficient control over MB's operations such that
control liability could be appropriate. (Compare Am. Compl. ¶ 38
with Sec. Am. Compl. ¶¶ 39, 48.)  We need not reiterate here what
we said before with respect to those factual averments, except to
note that plaintiffs' allegations could only at best show that
Boren and Cano controlled I&J rather than MB.

We pause briefly to consider one additional assertion in
support of control person liability which was not originally
addressed in our prior opinion. Plaintiffs allege that Boren
demanded that the other named defendants agree to the
registration and sale of Boren's stock in March 1996. The March
1996 Public Offering allowed Boren to sell all 870,000 shares of
his MB stock at an artificially inflated price. (Sec. Am. Compl.
¶ 39, 48(c)(v).)  Specifically, the proposed amended pleading
states that Boren threatened MB and its executives that unless
they agreed to the Public Offering in March 1996, Boren would
sell his stock at a lower price, causing the price of the stock
to drop. (Id. ¶ 39.)  Plaintiffs appear to argue that Boren's
threats demonstrate his control over the Company and its officers
during the stated time period.

We disagree. First, we note that this allegation pertains only to Boren and thus can have no potential effect on our conclusion regarding the sufficiency of the factual allegations of control liability with respect to Cano. Second, even as to Boren, we find this allegation insufficient to support a claim of control person liability under §§ 15 or 20. Plaintiffs cite no case law, and we are aware of none on point, which would permit this Court to impose control person liability upon Boren under these stated circumstances. Accordingly, we find that amendment of the Complaint to add claims against Boren and Cano based upon control person secondary liability under §§ 15 or 20 would be futile. We will deny the motion to amend with respect to this aspect of the proposed pleading.

     III.  Claim under § 12(2) of the Exchange Act — against
                         Defendant Boren

In Count III of the proposed pleading, plaintiffs contend that Boren is liable under Section 12(2) (now § 12(a)(2))*fn10 of the Exchange Act for alleged misstatements found in MB's March 1996 Prospectus and Registration Statement, apparently based upon the theory that Boren "solicited" the March 1996 offering. (See Sec. Am. Compl. ¶ 73 ("Defendant Boren solicited the sale of Manhattan Bagel common stock in the March 1996 Offering.").) Boren claims that the allegations pertaining to his status as a statutory "solicitor" under § 12(a)(2) are insufficient as a matter of law. We agree.

Count III of plaintiffs' Second Amended Complaint would not
survive a motion to dismiss under Rule 12(b)(6) because
plaintiffs have not pleaded sufficient allegations pertaining to
Boren's status as a statutory "solicitor" under Section 12(a)(2).
(See Sec. Am. Compl. ¶ 73.)  The Supreme Court in Pinter v.
Dahl, 486 U.S. 622 (1988), interpreted the scope of the terms
"offers or sells" to include one "who successfully solicits the
purchase." Id. at 644. The Court held that solicitation
liability focuses on "the relationship between the purchaser and
the participant." Id. at 651. "Solicitation" under Pinter is a
term of art, which the Court described variously as the act of
"urging" or "persuading" another to purchase securities. Id. at
646-47. The Court rejected the so-called "substantial factor"
test for solicitation liability, under which a defendant could be
liable if his or her "participation in the buy-sell transaction
[was] a substantial factor in causing the transaction to take
place." Id. at 649.

The allegations in the proposed pleading concerning Boren's status as a statutory solicitor attempt to hold him liable based upon a substantial participation theory squarely rejected in Pinter. Plaintiffs state that defendant Boren "was involved in the preparation of" I&J's accounting records, which records were subsequently reflected in the Company's March 1996 Prospectus:

  Defendant Boren solicited the sale of Manhattan Bagel common
  stock in the March 1996 Offering and was motivated by
  financial gain to sell shares of Manhattan Bagel common stock
  in such offering. As set forth above, the March 1996
  Registration Statement and Prospectus contained misstatements
  and omissions of material facts. Also, as set forth above,
  Boren was involved in the preparation of the false and
  misleading year-end December 31, 1995 financial statements of
  I&J (and thus Manhattan Bagel) which were included in the
  March 1996 Registration Statement and Prospectus and as the
  primary beneficiary of such offering, has sold 870,000 of the
  900,000 shares sold in such offering for proceeds of
  approximately $20 million. As such, Boren is liable to
  plaintiffs and the members of the class.

(Sec. Am. Compl. ¶ 73.)  Plaintiffs' proposed pleading is
deficient as a matter of law because it reveals on its face that
plaintiffs' theory of solicitation rests upon Boren's
participation in producing information about I&J which was
incorporated into the 1996 Registration Statement and Prospectus.
More importantly, there are no

allegations of any direct solicitation by Boren of any of the
named plaintiffs. Cf. In re Westinghouse Sec. Litig., 90 F.3d 696,
716 (3d Cir. 1996); In re Craftmatic Sec. Litig., 890 F.2d 628,
637 (3d Cir. 1990).*fn11 For these reasons, the Court will deny
the motion to amend with respect to this aspect of the proposed

 IV.  Insider Trading Claims pursuant to § 10(b) and Rule 10b-5
    and § 20A of the Exchange Act (Counts IV and V) — Against
                         Defendant Boren

Counts IV and V of plaintiffs' proposed pleading purport to assert two causes of action against defendant Boren for alleged "insider trading." To maintain a private cause of action for "insider trading" under § 20A, a plaintiff must establish that he or she traded "contemporaneously" with the defendant. See 15 U.S.C. § 781-1(a). Similarly, courts which have implied a private right of action under § 10 and Rule 10b-5 to recover damages for insider trading also require that a plaintiff have traded "contemporaneously" with the defendant. See, e.g., Neubrunner v. Milken, 6 F.3d 666, 669-70 (9th Cir. 1993) (agreeing with Second Circuit's approach and also stating that the contemporaneous requirement must be pled with particularity under Rule 9(b)).

The text of § 20A does not define the term "contemporaneous." The parties agree that the courts applying the "contemporaneous" requirement under § 10(b) and Rule 10b-5 and § 20A of the Exchange Act are split on the issue of the time period which would satisfy that element of the plaintiffs' prima facie case. Plaintiffs advocate a more flexible approach which would permit the Court to find the requirement satisfied if one of the plaintiffs traded within a few days of the named defendant's market activity. See, e.g., In re Verifone Sec. Litig., 784 F. Supp. 1471, 1488 (N.D.Cal. 1992). Alternatively, defendant argues that the Court should adopt the reasoning in those cases which have required that each plaintiff seeking recovery for alleged illegal insider trading to plead that he or she traded on the same day as the defendant in order to meet the contemporaneous requirement.

The parties do not cite, nor has our research revealed, any case law from our Court of Appeals which is instructive on this point. Cf. In re Advanta Corp. Sec. Litig., No. 97-4343, 1999 WL 395998 (3d Cir. June 17, 1999) (noting defendants' argument that plaintiffs had not met contemporaneous requirement but finding that dismissal was appropriate on alternative basis such that neither the district court nor the court of appeals addressed whether plaintiffs had provided sufficient allegations of contemporaneous trading under § 20A). After considering the issue of the appropriate interpretation of the contemporaneous requirement in this context, we find persuasive the reasoning applied in the cases cited by defendant. See, e.g., In re AST Research Sec. Litig., 887 F. Supp. 231, 233-34 (C.D.Cal. 1995); Buban v. O'Brien, No. 94-0331, 1994 WL 324993, at *3 (C.D.Cal. June 22, 1994); In re Aldus Sec. Litig., 1993 WL 121478 (W.D.Wash. 1993) (found in Defs.' App. in Supp. of Boren's Mot. to Dismiss, Ex. A); In re Stratus Comp. Sec. Litig., No. 89-2075, 1992 WL 735555, at *5 (D.Mass. Mar. 27, 1992) (attached to Defs.' App., Ex. C.); cf. In re Cendant Corp. Litig., No. 98-1664, 1999 WL 549015, at *23 (D.N.J. July 27, 1999) (court found contemporaneous requirement was satisfied where complaint alleged that certain class representative traded on one of the days that defendant traded, February 21, 1996, as well as the following two days, February 22 and 23, 1996); Backman v. Polaroid Corp., 540 F. Supp. 667, 670 (D.Mass. 1986) (court found lapse of 2 trading days between plaintiffs' trading and defendant's activities insufficient to meet contemporaneous requirement). Accordingly, we hold that in order to satisfy the "contemporaneous" requirement applied in insider trading claims under §§ 10(b) and 20A of the Exchange Act, a plaintiff must at this stage plead that he or she bought stock on the same dates on which the defendant's sales took place.

Applying that rule to the factual allegations in the proposed
pleading demonstrates that the contemporaneous requirement is not
satisfied here. The proposed pleading states that Boren sold
stock in the Company on Tuesday, March 19, 1996. (Sec. Am. Compl.
¶¶ 43.)  However, the pleading does not identify a single
plaintiff who purchased MB stock on that date. Although
plaintiffs assert that plaintiff McKillop traded
"contemporaneously" with Boren, the factual allegations indicate
otherwise because the pleading discloses that McKillop did not
purchase his stock in the Company until Thursday, March 21, 1996.
(Id. ¶¶ 6(b), 84.)  Thus there are no factual allegations which
demonstrate that any of the named plaintiffs traded in MB stock
on the same date as Boren. Under these circumstances,
plaintiffs' insider trading claims articulated in Counts IV and V
are not sufficient to withstand a defense motion to dismiss.
Accordingly, we will deny plaintiffs' motion to amend to the
extent that it seeks to add Counts IV and V in their present


We have determined that the claims asserted against the moving defendants identified in Counts I through V of the proposed pleading cannot withstand a motion to dismiss under Rule 12(b)(6). Accordingly, the Court must deny the motion as futile with respect to the remaining claims. See Massarsky, 706 F.2d at 125.

An appropriate Order accompanies this Memorandum Opinion.

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