Fezzani v. Bear, Stearns & Co.
716 F.3d 18
2d Cir.2013Background
- Baron, a defunct broker-dealer, conducted a four-year securities fraud scheme starting in 1992.
- The scheme used high-pressure cold-calling campaigns to push investors into IPOs of small, unprofitable companies.
- Baron’s salesforce allegedly misrepresented that there was an active, rising market and that prices were set by the public market.
- Baron parked shares with insiders, including Isaac Dweck, promising to buy back at a guaranteed profit, to create a false market.
- Dweck was a principal investor who provided funding and facilitated parking, allegedly contributing to the fraud but the damages claims were not tied to specific trades involving his parked securities.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Dweck is liable under Section 10(b) for market manipulation as a primary violator | Dweck knowingly participated in and aided Baron’s manipulation | Dweck’s acts were facilitating, not direct misrepresentations to investors | Federal claim against Dweck dismissed; state-law claims remanded |
| Whether state-law claims against Dweck survive separate from federal claims | Dweck’s involvement supports state-law conspiracy and aiding-and-abetting | State claims should be dismissed if federal claims fail | State-law claims survive and are remanded |
| Whether the district court properly dismissed the federal claim under Rule 12(b)(6) | Complaint plausibly alleges direct manipulation by Dweck | Stoneridge/Janus foreclose direct manipulation liability absent direct misrepresentation | Affirmed as to federal claim; reversed on state-law remand not to bar entirely |
Key Cases Cited
- ATSI Communications, Inc. v. Shaar Fund, Ltd., 493 F.3d 87 (2d Cir. 2007) (elements of market manipulation; reliance on efficient market assumption)
- Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 147 (U.S. 2008) (private 10(b) claims require direct misrepresentation by defendant; reliance on others insufficient)
- Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296 (U.S. 2011) (insider-manager liability; statements attributed to management may be insulated)
- Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (U.S. 1994) (absence of aiding-and-abetting liability does not bar primary-liability claims)
- Stoneridge Investment Partners, LLC v. Scientific-Atlanta, 552 U.S. 148 (U.S. 2008) (distinguishes between misrepresentation and market manipulation claims)
- Basic Inc. v. Levinson, 485 U.S. 224 (U.S. 1988) (fraud-on-the-market theory; reliance presumed in open market)
- In re Salomon Analyst Metromedia, LLC, 544 F.3d 474 (2d Cir. 2008) (fraud-on-the-market doctrine applicability)