made, I will dismiss the controlling person liability claims against Medco.
B. Aiding and Abetting
Finally, plaintiffs fail to allege sufficiently that Medco aided and abetted Diagnostek's alleged fraud. Aiding and abetting a securities violation requires three elements: 1) securities law violations by a primary actor, 2) knowledge of the fraudulent conduct on the part of the person charged with aiding and abetting, and 3) substantial participation in the perpetration of the fraud charged. See Walck v. American Stock Exch., Inc,, 687 F.2d 778, 791 (3d Cir. 1982), cert. denied, 461 U.S. 942, 103 S. Ct. 2118, 77 L. Ed. 2d 1300 (1983) (citing Landy v. FDIC, 486 F.2d 139, 162 (3d Cir. 1973), cert. denied, 416 U.S. 960, 94 S. Ct. 1979, 40 L. Ed. 2d 312 (1974)); see also Meridian, 772 F. Supp. at 228. Particularly where the defendant has no duty to act or disclose, as is the case with Medco, the "scienter requirement scales upward," Kahn v. Chase Manhattan Bank, N.A., 760 F. Supp. 369, 374 (S.D.N.Y. 1991), quoting Armstrong v. McAlpin, 699 F.2d 79, 91 (2d Cir. 1983), and plaintiffs must allege knowing and substantial assistance on the part of the defendant.
Plaintiffs allege the first and second elements: primary wrongdoing by Diagnostek and Medco's knowledge of it. They fail again, however, to allege Medco's substantial assistance or participation in Diagnostek's acts.
Substantial participation in fraud must be pleaded with particularity pursuant to Federal Rule of Civil Procedure 9(b).
I recognize that this rule has been interpreted leniently in the context of securities fraud, see Seville Indus. Machinery Corp. v. Southmost Machinery Corp., 742 F.2d 786 (3d Cir. 1984), cert. denied, 469 U.S. 1211, 105 S. Ct. 1179, 84 L. Ed. 2d 327 (1985), but it still requires allegations of fraud to reflect "precision and some measure of substantiation." Meridian, 772 F. Supp. at 229. Plaintiffs' allegations against Medco reflect neither. All plaintiffs do is impute Diagnostek's knowledge of its actual earnings and its failure to correct those earnings reports to Medco. They describe no actual guidance of or even acquiescence in
Diagnostek's fraud by Medco. Plaintiffs merely charge Medco with knowledge of Diagnostek's fraud and a prior plan to acquire Diagnostek. Mere recitation of a defendant's status as an intended acquirer fails to state a claim for aiding and abetting.
Plaintiffs fail to state a claim for Medco's primary liability under section 10(b). Medco had no independent duty to disclose information to Diagnostek's shareholders, and plaintiffs do not point to any actual misrepresentations by Medco in the information it chose to reveal.
Further, plaintiffs fail to state a claim for Medco's secondary liability for Diagnostek's behavior. The amended complaint fails to describe either Medco's control over Diagnostek or its culpable participation in Diagnostek's fraud. Both are required for controlling person liability under section 20(a), and the second, pleaded with particularity, is required to allege aiding and abetting.
I will therefore grant Medco's motion to be dismissed from this suit. I will further grant the Diagnostek defendants' unopposed motion to transfer the case to the District Court for the District of New Mexico.
An order follows.
EDITOR'S NOTE: The following court-provided text does not appear at this cite in 812 F. Supp. 57.
AND NOW, this 21st day of January, 1993, it is hereby ordered that:
1. The motion of defendant, Medco Containment Services, Inc., to dismiss plaintiffs' claims against it, is GRANTED.
2. The unopposed motion of defendants, Diagnostek, Inc., Nunzio P. DeSantis, Arthur C. Solomon, Julius Golden, and Miles M. Stuchin, to transfer this case to the District Court for the District of New Mexico pursuant to 28 U.S.C. § 1404(a), is GRANTED.
3. The clerk shall forward case file No. 92-6509, including the open stipulations received December 31, 1992, and January 19, 1993, to the District Court for the District of New Mexico.
BY THE COURT:
J. William Ditter, Jr. J.