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SUMMERS v. LUKASH

April 19, 1983

Hugh D. SUMMERS
v.
Leslie I. LUKASH, et al.



The opinion of the court was delivered by: NEWCOMER

 NEWCOMER, District Judge.

 Plaintiff brings this action alleging violation of federal security laws and "applicable principals of common law." The defendants named in the complaint are the Hi-G Corporation, a manufacturer of electronic components; Alvin Lukash, Seth Lukash, Terrance Geoghegan, Leslie Lukash, Phil David Fine, Conrad Kronholm and Martin Berman, officers and directors of Hi-G; Drexel Burnham Lambert, a broker/dealer in securities; and Laventhol & Horwath, a firm of certified public accountants.

 Before the court are various motions to dismiss the complaint under F.R.C.P. 12(b)(6) for failure to plead fraud with sufficient particularity to meet the requirements of F.R.C.P. 9(b) and for failure to state a claim upon which relief can be granted. *fn1" Some of the defendants have also moved, in the alternative, for a more definite statement pursuant to F.R.C.P. 12(e).

 In Count I of the complaint the plaintiff alleges that the defendants *fn2" violated § 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, by failing to disclose certain information in press releases, Annual and Quarterly Reports released in 1980 and 1981 and a prospectus of Hi-G dated April 14, 1981. Plaintiff alleges that the failure to disclose was done by the defendants with the purpose of causing investors like the plaintiff to purchase securities and that the acts were performed with a reckless indifference to the truth. Plaintiff further alleges that he bought and sold shares of Hi-G and lost money in these transactions as a result of the defendants' activities. The plaintiff, in Count II of the complaint, asserts that these activities also violate "applicable principles of common law."

 The defendants argue that Count I and Count II of the complaint fail to meet the requirements of F.R.C.P. 9(b) *fn3" and that the complaint, therefore, should be dismissed. Because I find that the complaint is fatally deficient in some respects, I will grant the motion. The plaintiff, however, will be given leave to replead in order to correct these deficiencies.

 I.

 Initially, I must deal with the plaintiff's contention that F.R.C.P. 9(b) should not be rigorously applied to cases arising under § 10(b) in light of the Supreme Court's recent decision in Herman & MacLean v. Huddleston, 459 U.S. 375, 103 S. Ct. 683, 74 L. Ed. 2d 548 (1983). In Huddleston the Supreme Court held that the plaintiff's burden of proof in a case brought under § 10(b) is proof by a preponderance of the evidence and not proof by clear and convincing evidence. The court overruled the Court of Appeals for the Fifth Circuit which had held that proof by clear and convincing evidence should be required in a 10(b) action because common law actions and fraud were governed by the higher burden of proof.

 The plaintiff interprets Huddleston as implying that the common law requirement that fraud be pleaded with particularity (codified in Rule 9(b)) should be used to impose only a minimal burden on plaintiffs in pleading § 10(b) actions. I do not find the plaintiff's argument persuasive.

 In Huddleston the court determined that greater weight should not be given to a § 10(b) defendant's interests in avoiding "the opprobrium that may result from the finding of fraudulent conduct," U.S. at , 103 S. Ct. at 692, 74 L. Ed. 2d at 561, than the weight given to society's interest in protecting defrauded investors. As a result, the standard of proof that should apply to § 10(b) cases is that which allocates the risk of error in the most equal fashion, i.e., proof by a preponderance of the evidence.

 This reasoning does not fully apply to the standard of pleadings established by Rule 9(b), however. Requiring that actions under § 10(b) be pleaded with particularity not only serves to protect defendants in § 10(b) actions from the opprobrium that may result from accusations of fraudulent conduct, it also provides defendants charged with fraud with specific notice of the charges against them so that they have a reasonable opportunity to frame an answer and prepare a defense. *fn4" Furthermore, the requirements of Rule 9(b) serve as a barrier to prevent the bringing of suits which simply seek to recover an in terrorem settlement value. *fn5" These goals support the application of the particularity requirement to pleadings in § 10(b) actions regardless of the scope one might choose to give Huddleston.6

 The requirements of Rule 9(b), however, should be applied to the degree necessary to fairly serve the interests discussed above. It should not be used to create an insurmountable obstacle to the bringing of § 10(b) actions and it must be read in conjunction with the general principle of notice pleading adopted by the Federal Rules. See F.R.C.P. 8. Thus, the plaintiff should only be required to plead with sufficient particularity to give the defendants a fair opportunity to frame an answer and prepare a defense, and to insure that plaintiff has a sufficient factual basis for bringing the action.

 The defendants argue that the plaintiff's complaint is fatally deficient as to Count I in ...


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