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August 15, 2005.


The opinion of the court was delivered by: DICKINSON DEBEVOISE, Senior District Judge


Presently before the court is the motion of Defendants Richard J. Dunn, Kevin R. Dunn, and Crosswalk Holdings, Inc. (collectively "Defendants") to dismiss the complaint for failure to state a claim. For the reasons set forth below, the motion will be denied with respect to Plaintiffs' common law fraud claims and granted with respect to Plaintiffs' federal securities fraud claims.


  On February 23, 2004, Plaintiffs William Kozin and his son Kurt Kozin (collectively "Plaintiffs") filed the Complaint alleging various violations of federal and state securities laws, common law fraud, and breach of contract. Plaintiffs' claims are based on an allegedly unpaid and overdue $150,000.00 loan made to Crosswalk Holdings by William Kozin, Defendants' purported promise to Kurt Kozin of a 5% equity stake in Crosswalk, and Defendants' purported obligation to pay Kurt Kozin under an Employment Agreement.

  Plaintiffs are residents of Pennsylvania. Defendant Crosswalk is a corporation organized under Delaware law, with its principal place of business at 9 Law Drive, Third Floor, Fairfield, New Jersey. Defendant Richard Dunn is a resident of New York who was the president of Crosswalk at all relevant times. Defendant Kevin Dunn is a resident of New Jersey who was the secretary of Crosswalk at all relevant times.

  Crosswalk was a company that was set up to acquire revenue-generating, profitable third-party administrators ("TPAs") that provide technology-based services, risk-taking financial services, administrative services and products to managed care organizations, health insurers, corporations, Taft-Hartley welfare funds, health care providers and provider groups and financial and insurance brokers and associations. In the fall of 2000, Crosswalk, by and through Richard J. Dunn and Kevin R. Dunn (collectively, the "Individual Defendants"), approached Kurt Kozin regarding:
a. playing a major role in Crosswalk's senior management;
b. loaning $150,000 to Crosswalk and being paid 9% with a balloon period at the end of 36 months;
c. granting the right to convert warrants to equity equal to $150,000; and
d. buying a 5% equity ownership in Crosswalk.
(Compl. ¶ 16.) Kurt Kozin advised Defendants that his father, William Kozin, would be the individual investing $150,000.
  Defendants, by and through the Individual Defendants, represented the following information to Plaintiffs:
a. Crosswalk intended to purchase or take a large investment in a TPA located in Fairfield, New Jersey that was currently generating $100,000 per month with an EBITDA of over $20,000 a month;
b. This TPA could be purchased for $100,000 down and an additional $150,000 staggered over 30 payments;
c. $75,000 was needed for additional working capital;
d. Crosswalk had lined up another firm to purchase, and this firm was generating $900,000 in revenue and over $100,000 in EBITDA and could be purchased for very little cash or that the Company would be then left with $2,100,000 in revenue with almost $350,000 in EBITDA;
e. Crosswalk would bring in several other accounts which would generate another $500,000 in revenue by mid-second quarter 2000; f. Crosswalk currently had commitments for $100,000 in equity;
g. Crosswalk had the ability to do equipment financing for an additional $150,000; and
h. Funding was available from Rockwell Capital of New York City which currently had $2,500,000 in a public shell that could be turned into $10 million in debt financing for Crosswalk to complete these initial TPA acquisitions.
(Compl. ¶ 18.) These statements were communicated through e-mails, including that of December 2, 2002 (Ex. A), by letters, including that of December 10, 2002 (Ex. B), as well as numerous other interstate telephone calls and communications. Plaintiffs allege that these statements were untrue or omitted material facts.
  In reliance on these statements, Plaintiffs undertook the following actions:
a. Kurt Kozin entered into a Letter of Intent with Crosswalk on December 23, 2002.
b. William Kozin lent Crosswalk $150,000 on January 1, 2003, as evidenced by a Promissory Note (Ex. D).
c. Kurt Kozin entered into an Employment Agreement with Crosswalk which provided an annual base salary of $150,000 for five years (Ex. E).
Crosswalk defaulted under the terms of the Promissory Note. William Kozin, by letter dated December 15, 2003 and drafted on his behalf by counsel (Ex. F), notified Crosswalk of its default and exercised his acceleration rights pursuant to the Promissory Note.

  Kurt Kozin never received 5% equity ownership in Crosswalk or any warrants. Kurt Kozin was not paid under the Employment Agreement and left employment at Crosswalk in or about October 2003.

  The Complaint includes the following seven counts as the bases of Defendants' liability:
Count One — Because the Promissory Note, Crosswalk equity and warrants were securities that were not registered as required by § 5 of the Securities Act of 1933 (the "1933 Act"), 15 U.S.C. § 77a et seq., and were sold in violation thereof, Defendants are responsible to Plaintiffs for the loss caused by such sales pursuant to § 12 of the '33 Act.
Count Two — Defendants are liable for securities fraud under § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78a, et seq. (the "1934 Act"), and Rule 10b-5.
Count Three — Defendants are liable for common law fraud.
Count Four — Defendants are liable for negligent misrepresentation.
Count Five — Defendants breached the Promissory Note by failing to pay William Kozin the amounts due thereunder.
Count Six — Defendants breached the Employment Agreement by failing to pay Kurt Kozin $150,000 for at least four years.
Count Seven — Defendants violated the New Jersey Securities Act, N.J. STAT. ANN. § 49:3-71.
Defendants have moved to dismiss for failure to state a claim upon which relief can be granted. See FED. R. CIV. P. 12(b)(6). Defendants' motion concerns only the common law fraud and federal securities fraud claims — i.e., Counts Two and Three — because Defendants request dismissal on the grounds that the Complaint does not meet the heightened pleading standard under FED. R. CIV. P. 9(b) and does not allege scienter adequately.


  A motion to dismiss should not be granted 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." Conley v. Gibson, 355 U.S. 41, 45-46 (1957); Johnsrud v. Carter, 620 F.2d 29, 33 (3d Cir. 1980); Craftmatic Sec. Litig. v. Kraftsow, 890 F.2d 628, 634 (3d Cir. 1989). Allegations contained in the Complaint will be accepted as true, Cruz v. Beto, 405 U.S. 319, 322 (1972), and Plaintiffs shall be "given the benefit of every favorable inference that can be drawn from those allegations." Schrob v. Catterson, 948 F.2d 1402, 1405 (3d Cir. 1991). Although consideration of facts on a motion to dismiss is typically limited to those contained in the Complaint, courts may consider indisputably authentic documents that are "integral to or explicitly relied upon in the complaint." In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1426 (3d Cir. 1997) (citations omitted). Accordingly, in addition to the Complaint, the documents annexed to the Complaint — i.e., an e-mail dated December 2, 2002 from Kevin Dunn to Kurt Kozin (Ex. A), a letter dated December 10, 2002 from Kevin Dunn to Kurt Kozin (Ex. B), a Letter of Intent dated December 23, 2002 (Ex. C), the Promissory Note dated January 1, 2003 and check #124 of William Kozin dated January 2, 2003 and paid to the order of Crosswalk Holdings, Inc. in the amount of $150,000 (Ex. D), an unexecuted Employment Agreement (Ex. E), a letter dated December 15, 2003 on William Kozin's behalf accelerating his rights under the Promissory Note (Ex. F) — will be considered because they are integral to the Complaint and because Plaintiffs explicitly rely upon these documents to support their allegations.

  The targets of the pending motion to dismiss are the securities fraud and common law fraud claims, which are subject to heightened pleading requirements under both FED. R. CIV. P. 9(b) and the federal securities laws. Both Rule 9(b) and the Private Securities Litigation Reform Act (the "PSLRA"), 15 U.S.C. § 78u-4(b), require a plaintiff to plead "the who, what, when, where, and how: the first paragraph of any newspaper story." In re Advanta Corp. Sec. Litig., 180 F.3d 525, 534 (3d Cir. 1999) (citations omitted).

  Rule 9(b) requires 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). Although Rule 9(b) does not require every material detail of the fraud such as date, location, and time to be pleaded, a plaintiff must inject precision and some measure of substantiation into its allegation of fraud. California Pub. Employees' Retirement Sys. v. Chubb Corp., 394 F.3d 126, 144 (3d Cir. 2004) (citations omitted). The heightened pleading requirement is designed to give defendants notice of the claims against them, provide an increased measure of ...

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