MEMORANDUM OPINION AND ORDER
Civil Action No. 92-K-1040 is the lead case in a series of actions arising out of the demise and alleged mismanagement of Stab-Tech Corporation (“Stat-Teeh”) by its officers and directors. These actions — Nos. 92-K-1040, 92-K-747, 92-K-1994, 92-K-2368, 92-K-2441, 92-K-2442, and 93-K-308 — were reassigned to me by Chief Judge Matsch in February 1995. 1 Due to the number and flux of the actions and motions, stays of proceedings, the withdrawal and substitution of parties and counsel, and the withdrawal of an earlier reference to Magistrate Judge Prin-gle, the litigation experienced gridlock. Numerous motions to dismiss and/or for partial summary judgment remain unresolved. Pretrial proceedings, including the issuance of a scheduling order to govern discovery, have been stayed pending resolution of the various motions to dismiss.
I called a status conference in March to familiarize myself with the issues and to expedite case management. At the conference’s conclusion, I ordered all existing complaints stricken and amended complaints filed. By May 1995, three of the seven original Stat-Teeh actions had either settled (Nos. 92-K-2442, professional negligence and aiding and abetting action against securities brokerage firm and individual broker, and 93-K-308, professional negligence action against former Stab-Tech legal counsel) or were not refíled (No. 92-K-747, shareholder class action against the company). Of the four remaining actions, motions to dismiss and/or for partial summary judgment remain pending only in three. 2
I. BACKGROUND
Stat-Teeh wás formed as part of a blind pool merger in November 1988 by Raynard Fenster. Stat-Tech’s principal business was the manufacture of electrostatic dissipation devices. Between 1988 and 1991, it is alleged that Fenster, together with his wife and Stat-Teeh director Therese Lamb and director Hayden Thompson, engaged in several schemes to defraud Stat-Teeh. These alleged schemes included (1) issuing false and misleading 10-Ks, 10-Qs 3 and press releases; (2) issuing warrants to each other with little or no consideration and illegally sharing restricted stock; and (3) causing Stat-Teeh to issue stock as compensation for their services.
In September 1991, Proactive Partners, L.P. (“Proactive”) purchased $1.5 million of Stat-Teeh stock in a private placement. The offering document upon which the transaction was based allegedly contained false and misleading information. Rodger Thornton, a securities broker with Schneider Securities, allegedly assisted in bringing Proactive and Stat-Teeh together for the deal and received a finder’s fee from Fenster. In October 1991, Proactive purchased $1 million of allegedly restricted stock from Stat-Teeh outside director Thompson. This transaction was brokered by Fenster and Thornton.
Also in October 1991, Thornton sold $560,-000 of Thompson’s Stat-Teeh stock to Tom Waymire, general manager of VBW Partners, Ltd. (VBW) and TRW Family Partnership, Ltd. (TRW). Waymire, too, alleges the information documents on which he based his decision to purchase Thompson’s stock were false and misleading. See generally, Status Report, No. 92-K-1040 (filed March 8, 1995). In December 1991, Stat-Tech’s accountant came forward with alleged irregularities indicating the company’s previous financial statements had not been audited and were grossly overstated. Fenster was removed from the board of directors and Proactive was given a seat on the board. Stat-Teeh formed an investigative committee, which allegedly discovered further problems at the company Id. at 3.
By June 1992, the company’s fortunes had declined seriously enough that it filed for bankruptcy protection. It emerged from Chapter 11 reorganization as the Stat-Teeh Liquidating Trust (“Trust”), authorized by Bankruptcy Judge Brooks to continue Stat-Tech’s pursuit, jointly with Proactive, of claims against Fenster, Lamb, Thompson, and others. Id.
II. THE MOTIONS TO DISMISS AND/OR FOR PARTIAL SUMMARY JUDGMENT
A. No. 92-K-1040, Trust v. Fenster, Lamb & Thompson
In its 60-page Fourth Amended Complaint in 92-K-1040, plaintiff Trust asserts claims against Fenster, Lamb and Thompson individually and as former officers/directors of Stat-Teeh, and against Fenster and Lamb nominally as trustees of a trust created for the benefit of their daughter Jessica Fenster and other unidentified children. Included are claims for violations of federal and state securities laws, common law fraud, breach of fiduciary duty, and negligent misrepresentation. The Trust alleges Fenster, Lamb and Thompson pursued a common scheme to violate federal and state securities laws by misrepresenting ■ Stat-Tech’s value and then cashing in on inflated stock prices for their personal financial gain.
Fenster and Lamb both filed motions seeking the dismissal of the Trust’s claims. Thompson filed a motion seeking dismissal, or, in the alternative, entry of partial summary judgment against the Trust.
1. Defendant Fenster’s Motion to Dismiss
Fenster, who is proceeding
pro se,
contends the Complaint should be dismissed with prejudice because (1) the Trust lacks “authority, capacity and legal existence” to sue; (2) counsel for the Trust has “demonstrated an unacceptable standard of egregious conduct as it relates to Defendant Fen-ster”; (3) plaintiffs “use” of Fenster’s former legal counsel violated Fenster’s constitutional rights; (4) the allegations against Fenster are erroneous; (5) the Complaint fails to state a claim upon which relief can be grant
Fenster fails to allege any facts in support of his motion by affidavit or otherwise. He also fails entirely to provide legal authority for the positions taken. Fenster’s second and third arguments regarding egregious conduct and the deprivation of his constitutional rights are premised on Fenster’s assertion that the law firm of Arnold & Porter should be disqualified from representing the Trust because it represented Stat-Tech when Fenster was an officer. Judge Matseh has rejected Fenster’s assertion twice before: once in denying Fenster’s Motion to Disqualify Arnold & Porter and again in denying Fenster’s Motion for Reconsideration. See Courtroom Minutes (dated October 8, 1993); Order (denying motion for reconsideration, filed October 22, 1993). A -pro se litigant must recognize that repeatedly raising assertions which already have been rejected serves only to diminish his ability to persuade on other issues.
With respect to Fenster’s assertion that plaintiff has failed to join indispensable parties, Fenster makes no attempt either to identify the individuals he claims should have been joined or to aver how their absence impedes his ability to protect his interests or subjects him to multiple or inconsistent liabilities. Fenster therefore fails to meet his burden under Fed.R.Civ.P. 12(b)(7) and 19 of showing joinder is necessary.
See First Nat’l Bank of Strasburg v. Platte Valley State Bank,
Fenster’s remaining arguments regarding the statute of limitations, standing and the sufficiency of the Trust’s scienter, damages, and securities fraud allegations will be addressed in my consideration of Lamb’s motion to dismiss, in which Fenster purports to join. See Fenster’s Reply Supp. Mot. Dismiss (filed June 13, 1995).
2. Defendant Lamb’s Motion To Dismiss
Defendant Lamb asserts the Fourth Amended Complaint should be dismissed for the following reasons: (1) the fraud-based claims are not pleaded with particularity as required by Fed.R.Civ.P. 9(b); (2) the alleged misconduct of defendant officers must be imputed to the company itself, thereby barring any claim for fraud under
Cenco, Inc. v. Seidman & Seidman,
a. Fed.R.Civ.P. 9(b)
The primary purpose of Rule 9(b) is “to afford defendant fair notice of the plaintiffs claim and the factual ground upon which it is based.”
Ambraziunas v. Bank of Boulder,
To plead a securities fraud claim with particularity, plaintiff must connect each defendant with a specific misrepresentation.
See In re Storage Technology Corp. Securities Litigation,
b. The Cenco-analysis
According to Lamb, the misconduct attributed to her benefitted, rather than harmed, Stat-Tech. Under these circumstances, Lamb argues, her conduct should have been imputed to the company as that of an agent and should preclude any later claim of fraud. See Lamb’s Mot. Dismiss at 9.
Generally, the acts and knowledge of an agent are imputed to the principal. Because a corporation can act only through its agents, the rule is that the actions of corporate officers and directors are attributable to the corporate entity. However most courts, including the Supreme Court of Colorado, recognize an exception to the rule when an agent acts adversely to his principal.
McFerson v. Bristol,
Under the facts alleged in the Fourth Amended Complaint, Lamb, Fenster and Thompson acted adversely to the interest of Stat-Tech. Applying the adverse interest exception under Colorado law, these defendants’ misconduct should not be imputed to the company.
Lamb relies heavily on
Cenco v. Seidman & Seidman,
As an initial matter,
Cenco
applies Illinois, rather than Colorado, law. Moreover, the Seventh Circuit later made clear its
Cenco
decision should apply only where “ ‘the managers are not stealing from the company ... but instead are turning the company into an engine of theft against outsiders.’ ”
Schacht v. Brown,
The argument urged by Lamb in this case, i.e., that Stat>-Tech “benefitted” from the alleged fraud because its value was artificially inflated and its existence artificially prolonged by it, was squarely rejected by the Seventh Circuit:
If defendants’ position were accepted, the possession of such ‘friends’ as [the plaintiff company] had would certainly obviate the need for enemies. We do not believe that such a Pyrrhic ‘benefit’ to [the company] is sufficient to even trigger the Cenco analysis which seeks to determine the propriety of imputing to the corporation the directors’ knowledge of fraud.
c. Standing — Securities Fraud
The Trust claims Lamb violated Rule 10b-5, 17 C.F.R. § 240.10b-5 (1995), as well as Rule 10b-5’s Colorado analog, codified at Colo.Rev.Stat. § 11-51-604(5)(c).
4
Rule 10b-5 proscribes “fraud in connection with the purchase or sale” of securities. Thus, to have standing to pursue a claim under the rule one must be either a “purchaser” or “seller” of securities.
See Blue Chip Stamps v. Manor Drug Stores,
Because the Trust alleges only that its predecessor-in-interest “issued” securities as a result of defendants’ alleged fraud, Lamb contends the Trust lacks standing to pursue securities claims against them under Blue Chip Stamps. The Trust takes issue with Lamb’s narrow, reading of Blue Chip Stamps, and maintains an “issuer” of securities victimized by fraud has standing to sue under Rule 10b-5.
This issue was addressed thoroughly in the October 8, 1992 Recommendation of Magistrate Judge Pringle. The Magistrate Judge found the allegations in the Trust’s First Amended Complaint sufficient to confer standing on Stat-Tech as a “seller” of its own stock.
5
See
Recommendation at 5-7. The eminent Magistrate Judge reasoned that while a corporation may not bring suit under § 10(b) of the Act merely because it is an issuer of securities,
see Liberty Nat’l Ins. Holding Co. v. Charter Co.,
I agree with the Magistrate Judge that there is nothing in
Blue Chip Stamps
to suggest the issuance of corporate shares cannot constitute a sale for the purposes of standing to sue under the securities laws. Moreover,
Ruckle
and
Hooper
continue to be cited with approval for the proposition that a corporation that is defrauded into issuing its own stock may sue under § 10(b) and Rule 10b-5.
See, e.g., Frankel v. Slotkin,
‘There is deception of the corporation (in effect, of its minority shareholders) -when the corporation is influenced by its controlling shareholder^] to engage in a transaction adverse to the corporation’s interests (in effect, the minority shareholders’ interests) [based upon] nondisclosure or misleading disclosures [sic] as to the material facts of the transaction.’
Frankel
at 1333 (quoting
Goldberg,
d. Statute of Limitations— Securities Fraud
The Trust’s securities claims are subject to the one-year statute of limitations and three-year statute of repose set forth in § 13 of the Act, 15 U.S.C. § 77m.
Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson,
Stat-Tech’s original complaint in this action was filed May 22, 1992. Lamb contends plaintiffs allegations show Stat-Tech had notice, or was on “inquiry notice,” 7 of the alleged fraud more than one year earlier and that therefore its securities claims are time-barred. Mot. Dismiss at 16-17. The Trust denies it had notice of defendants’ fraud in May 1991 or that it was dilatory in discovering it.
The Fourth Amended Complaint avers sufficient facts from which the timeliness of plaintiffs securities fraud claims can be inferred. Nothing more is required,
e. Supplemental Jurisdiction
Five of the Trust’s six claims for relief against Lamb and Fenster are state law claims. Lamb contends I should decline to exercise supplemental jurisdiction over these claims under 28 U.S.C. § 1367 because they are substantially broader than, and predominate over, the federal securities fraud claims.
According to Lamb, the Trust is attempting to expand the limited remedies available to it on its Rule 10b-5 claim by “piggy-backing” onto it various state law fraud and breach of fiduciary duty claims for which broader remedies exist. Lamb’s Reply Mem. Supp. Mot. Dismiss at 4. As “evidence,” Lamb points to the nature of the relief requested: Salaries; bonuses; loss of good will; decline in the value of the company; liabilities incurred to third parties; fees and costs in connection with the bankruptcy; costs of investigating the alleged fraud; investor lawsuit defense costs; loss of going concern value; and an accounting. Not only are these items unrecoverable in a Rule 10b-5 action, Lamb maintains, but they also are the subject of proceedings presently pending before the Colorado state courts. 8 Lamb’s Br. Supp. Mot. Dismiss at 18. Lamb’s position is that this is a state law corporate mismanagement action characterized, for jurisdictional purposes, as one for securities fraud. Because the state law claims predominate, Lamb argues I should decline to exercise supplemental jurisdiction over them.
Magistrate Pringle, in his October 8, 1992 Recommendation, agreed. He determined that with the exception of the claim based on Colorado’s Rule 10b-5 analog, the Trust’s state law claims predominated over the federal claim. Recommendation at 18 (noting the fraud, negligence and breach of fiduciary duty claims concern transactions in which Stab-Tech did not occupy the position of a buyer or seller of securities, and finding the sale of unregistered securities and conversion claims required consideration of matters beyond the scope of a 10b-5 claim). However, given my analysis of the Judicial Improvements Act of 1990 in
LaSorella v. Penrose St. Francis Healthcare Sys.,
While state law may predominate in terms of the comprehensiveness of remedies sought on the remaining state law claims, all of the Trust’s claims stem from the same alleged misconduct of defendants. The fact that three years have passed since this case was filed also militates against refusing to exercise jurisdiction over the state law claims now. I therefore accept jurisdiction over these claims and will consider them on their merits.
3. Defendant Thompson’s Motion to Dismiss Portions of the Fourth Amended Complaint or, in the Alternative, for Partial Summary Judgment
Defendant Thompson was an outside director of Stat-Tech from January 1988 to May 1991. According to the Trust, Thompson owned more than 10% of Stat-Tech’s outstanding common stock during the time period relevant to its claims, signed Stab-Teeh’s 1989 10-K, and knowingly, or with reckless disregard for the truth, participated in Fenster and Lamb’s scheme to defraud Stat-Tech. Thompson moves to dismiss, or, in the alternative, for summary judgment on four of the Trust’s six claims for relief against him. 11
Thompson premises his motion to dismiss or for partial summary judgment on two contentions. First, he maintains that he— like other outside directors and “everyone else” — was deceived by Stat-Tech’s management and learned of the fraud only after it became public. Thompson Br. Supp. Mot. Dismiss/Mot. Partial Summ. J. at 2. In support of his assertions, Thompson submits his own affidavit attesting to the passive nature both of his involvement in Stat-Teeh’s operations and the sale of his Stab-Tech stock. Id., Ex. A. Thompson contends he had no knowledge of the fraud at the time it was perpetrated, and asserts the Fourth Amended Complaint alleges no facts from which such knowledge, or even reckless disregard of it, can be inferred. Absent specific facts supporting such an inference, Thompson contends the Trust’s securities fraud and related claims should be dismissed.
Second, Thompson contends he is entitled to judgment with respect to the recoverability of two categories of damages: (a) liabilities to third-parties incurred as a result of defendants’ alleged misconduct; and (b) lost “going concern value” of Stat-Tech. Thompson argues the first category is unrecoverable both because the Trust lacks standing to sue under § 10(b) of the Act, and because recovery is barred under Colorado’s Uniform Contribution Among Tortfeasors Act. Thompson Mot. Dismiss at 26. Thompson contends the second category is unrecoverable because, under the Trust’s own theory of the case, Stab-Tech’s “value” was created by the alleged fraud itself. According to Thompson, the Trust should be precluded from claiming as damages the loss of a “value” that never existed,
a. Scienter — ‘Awareness of Wrongdoing” 12
The Trust asserts that under applicable Tenth Circuit and Colorado state court law, Thompson’s knowledge or reckless disregard of Fenster’s fraud may be averred generally and established by circumstantial evidence. Pl.’s Resp. Thompson Mot. Dismiss at 6-9 relying on
Anixter II,
I agree. While the facts alleged to support a nexus between the alleged fraud and Thompson’s state of mind are sparse, they are sufficient to state claims under the federal and state securities laws. They permit an inference that Thompson knew Stat-Teeh’s financial condition and stock value were inflated, and that he used that knowledge for his own gain. Moreover, given that discovery has been stayed pending resolution of the motions to dismiss, the Trust has had no opportunity to discover facts related to Thompson’s knowledge necessary to oppose a motion for summary judgment. Under these circumstances, neither an order of dismissal nor the entry of . summary judgment would be appropriate.
b. Recoverability of liabilities owed third-parties and lost “going concern value.”
I have addressed already the standing issue raised by Thompson when I concluded in section 11(A)(2)(c), supra, that the Trust has alleged sufficient facts from which Stat-Tech’s status as a defrauded issuer/seller of securities can be inferred, and thus may pursue its securities fraud claims against the defendants. Consideration is therefore limited to Thompson’s assertion that the Trust may not recover for claims it owes third-parties because those claims have not yet been, and may never be, paid.
Numerous purchasers of Stat-Tech stock have filed claims against Stat-Tech in the underlying bankruptcy proceedings. Under the Joint Plan of Liquidation, the Trust is obligated to pay these claims out of the proceeds of this litigation, if any, after non-shareholder creditors have been paid. Thompson characterizes the Trust’s efforts to recover for these obligations as a request for contribution from a joint tortfeasor. Thompson Mot. Dismiss at 28. Under Colorado’s version of the Uniform Contribution Among Tortfeasors Act, a request for contribution may be asserted only after one tort-feasor has paid more than his pro rata share of an already determined common liability. See C.R.S. § 13-50.5-102(2). Thompson cites no case in which the Act was invoked to bar the remedy sought by the Trust here, and such a bar would defy logic. Obviously the underlying bankruptcy claims have yet to be paid — that is the nature of bankruptcy proceedings and the liquidation of those claims is the “liquidating Trust’s” raison d’etre. I find Thompson’s argument unpersuasive and reject the “joint tortfeasor” analogy out of hand.
Next Thompson asks me to strike the Trust’s claim for loss of “going concern value” because such value was illusory and the product of fraud. According to Thompson, Stat-Tech can not have been damaged by the loss of value that never existed. While this argument has a rather logical panache, presumably Stat-Tech had value independent of that created by the alleged fraud which, one can infer, was lost when Stat-Tech went out of business. It therefore would be premature to strike this request for relief at this stage of the proceedings.
Accordingly, Thompson’s Motion to Dismiss, or, in the Alternative, Motion for Summary Judgment is denied.
B. No. 92-K-1994, VBW Partners et al. v. Fenster et al.
This action arises out of the November 1991 purchase by VBW and TRW of 4,000,-000 shares of Thompson’s Stat-Tech stock. Alleging they were induced to buy Thompson’s stock at a fraudulently inflated price, VBW/TRW asserts claims for securities fraud and other statutory and common law claims against Fenster, Lamb, Thompson, Schneider Securities, and former Schneider broker Rodger Thornton. Before me for consideration in this action are motions to dismiss filed by Fenster, Lamb, Thompson and Schneider.
1. Fenster, Lamb and Thompson
With respect to the motions of Fenster and Thompson, which are identical in
2. Schneider Securities’ Motion to Dismiss 14
Plaintiffs in their Second Amended Complaint purport to state direct liability claims against Schneider for federal and state securities fraud (First and Second Claims for Relief); common law fraud (Third and Fourth Claims for Relief); breaches of duties imposed by the Rules of Fair Practice promulgated by the National Association of Securities Dealers (the “NASD Rules”) (Fifth and Sixth Claims for Relief); and vicarious liability for the fraudulent acts and omissions of broker Roger Thornton (Seventh Claim for Relief). Alternatively, VBW and TRW assert Schneider is secondarily liable as a “controlling person” under Colo.Rev.Stat. § 11-51-604(5)(b) and for providing “substantial assistance” to “the other defendants” pursuant to § 11-51-604(5)(c). Pls.’ Resp. at 9.
a. Securities claims
Schneider contends there is no basis for finding Schneider primarily liable for violations of either state or federal securities laws. Specifically, Schneider maintains direct liability is precluded as a matter of law because (1) Schneider was neither a buyer nor seller of the securities in question; (2) plaintiffs’ claims are inadequate under Fed.R.Civ.P. 9(b); and (3) plaintiffs have failed to plead compliance with the applicable one-year/three-year statute of limitations. Nor is there a basis, Schneider argues, for finding it secondarily liable to plaintiffs either as a controlling person or as an aider and abettor under Colorado securities laws. According to Schneider, any assertion that it is liable because it employed an individual (Thornton) who allegedly participated in the fraudulent sale of stock by another (Thompson) states a “a novel, double derivative liability theory” for which there is no legal authority. Further, Schneider argues, the theory duplicates plaintiffs’ respondeat superior claim and should be dismissed for that reason as well.
(1) Primary liability
A primary violation of § 10(b) or Rule 10b-5 may not be' maintained in the absence of allegations of fraud with intent to deceive, manipulate or defraud on the part of the defendant.
See Farlow v. Peat, Marwick, Mitchell & Co.,
Plaintiffs contend paragraphs 23-26,45-52, 54 — 56, 58, 60-61, 63, and 65 of their Second Amended Complaint “state in detail the basis for Schneider’s liability to the Plaintiffs directly and through the actions of Thornton.” Pis.’ Resp. Schneider Mot. Dismiss at 3. Fifteen of the twenty paragraphs fail even to mention Schneider. Of the five that do (¶¶ 23, 45, 49, 54, and 55), the only one that references representations purportedly made by Schneider is ¶55, which states:
Based upon the representations of Schneider Securities, Thornton and Fen-ster, through Pittock, represented to the Plaintiffs that Stab-Tech would be listed on NASDAQ by the end of 1991, that Plaintiffs would experience a significant short-term increase in the market value of the shares, and that Plaintiffs therefore wouldbe able to realize a substantial profit by selling Stab-Tech shares into the market.
Second Am. Compl., ¶ 55 (emphasis added).
15
This allegation simply does not support a claim for primary liability against Schneider. The “representations” attributed to Schneider are not identified, although the reference apparently is to the 1989-90 10-Qs and 10-Ks signed in March 1991, a November 12, 1991 letter to potential shareholders and an October press release touting Stab-Tech’s success and future prosperity.
Id.,
¶¶ 25, 44, 48, 52. Plaintiffs’ only attempt to connect Schneider to the alleged misrepresentations contained in these documents is through its employment (through October 1991) of Thornton.
See id,.,
¶ 54 (alleging these documents were provided to plaintiffs by Pittock and Thornton, Fenster and Thompson “through Schneider”). Recently I observed that “prolixity is not an acceptable substitute for specificity” under Rule 9(b).
Schwartz v. Celestial Seasonings,
I find plaintiffs have failed to plead a claim against Schneider for primary liability under either § 10(b) of the 1934 Securities Exchange Act or its Colorado analog.
See Ambraziunas v. Bank of Boulder,
(2) Secondary liability
Colorado Revised Statute § 11-51-501 proscribes fraud “in connection with the offer, sale, or purchase of any security.” Section 11-51-604 provides for the civil remedies available to victims of such fraud. Subsections 11-51-604(3) and (4) states that one who “sells or buys” a security in violation of § 11-51-501 is liable to the person to whom the security was sold or from whom the security was bought for damages, or for such other legal or equitable relief as the court deems appropriate. Subsection 11-51-604(5) provides that those who “control” persons primarily liable under subsections (3) and (4) or who provide “substantial assistance” to conduct they know violates § 11-51-501 are liable “jointly and severally with and to the same extent” as the primary violator. Secondary liability under § 11—51—604(5)(b) is subject to the affirmative defense of good faith.
The Colorado “controlling person” statute is modeled after § 20(a) of the 1934 Act. In
First Interstate Bank of Denver,
N.A.
v. Pring,
the Tenth Circuit held that to establish a
prima facie
case of “controlling person” liability under § 20(a), plaintiff must establish both the existence of a primary violation of the securities laws and “control” by the alleged controlling person.
Plaintiffs claim Schneider, as Thornton’s employer, was a “controlling person” with respect to Thornton’s alleged primary violations of the securities laws and thus is liable for Thornton’s alleged fraud under § 11-51-604(5)(b). Plaintiffs also claim Schneider provided “substantial assistance”
In support of its motion to dismiss, Schneider asserts the only person who “sold or bought” a security within the meaning of § 11-51-604(3) and (4) was Thompson. Accordingly, Schneider argues, any claim for secondary liability based on the conduct of Thornton must be dismissed. I disagree. Primary liability under the Colorado Securities Act is available against “any person, [who], in connection with the offer, sale, or purchase of any security, directly or indirectly” engages in fraud. Colo.Rev.Stat. § 11-51-501(1). Given the remedial purpose of the securities laws generally and the “controlling person” provision specifically
(see Pring,
With respect to Thompson, however, I find plaintiffs have failed to state a claim for secondary liability against Schneider. The chain of control for the purposes of “controlling person” liability begins and ends with the individual or individuals over whom the defendant has some “means of discipline or influence.”
See Pring,
Accordingly, I grant in part and deny in part Schneider’s motion to dismiss plaintiffs’ second claim for relief for violation of Colo. Rev.Stat. § 11-51-604(5)(b) and (c). I hold plaintiffs may pursue a secondary liability claim against Schneider that is based on the alleged primary violation of the person controlled, here, Roger Thornton. However, plaintiffs may not pursue a secondary liability claim against Schneider that is based on Thornton’s alleged participation in the primary violation of Thompson.
b. Claims for violation of NASD rules
Plaintiffs’ fifth and sixth claims for relief allege that Thornton and Schneider negligently, and in breach of their fiduciary duties to plaintiffs, violated Article III, §§ 3 and 18 of the NASD Rules of Fair Practice. Schneider contends there is no private right of action under these rules, but argues that even if there were, plaintiffs were never customers of Schneider and the rules create no' duties with respect to non-customers. Mot. Dismiss at 10-11.
The Tenth Circuit has stated that “in an appropriate case,” the securities exchange rules may give rise to a private cause of action.
Utah State Univ. Agric. & Applied Science v. Bear, Stearns & Co.,
By contrast, plaintiffs’ fifth claim for relief is premised on Thornton’s participation in the allegedly fraudulent scheme to induce plaintiffs to purchase Thompson’s overvalued Stab-Tech stock. With respect to Thornton, this claim survives a motion to dismiss under Bear Steams and Gurley. With respect to Schneider, however, survival of plaintiffs’ fifth claim is less clear.
As pleaded by plaintiffs, Schneider’s liability for violating the NASD rules is premised solely on its employment of Thornton. Plaintiffs allege that Schneider, “through Thornton,” participated in Fenster et al.’s fraudulent scheme and that Schneider, “as supervising broker for Thornton” breached fiduciary duties owed plaintiffs.
c. Plaintiffs’ vicarious liability claim
The doctrine of respondeat superior is an agency principle and concerns the scope of course of employment. Schneider claims it cannot be liable under the doctrine of respon-deat superior for the acts of Thornton because plaintiffs were never Schneider’s customers. Schneider argues that plaintiffs’ own allegations show Thornton was acting on his own account in his dealings with them, for his own benefit, and against the interest of Schneider. Schneider Mot. Dismiss at 10 (citing Second Am. Compl., ¶ 63).
Plaintiffs, however, allege they entered into a contract with. Thornton for the purchase or sale of securities while Thornton was employed by Schneider, and that under the general laws of agency, the fraud of an employee may be attributed to his employer where the employer “knows of and encourages the fraudulent behavior of his [employee.]” Pls.’ Resp. at 11 (citing
King v. Horizon Corp.,
C. No. 92-K-2441, Proactive et al. v. Fenster et al.
In this action, plaintiffs Proactive Partners, L.P. (“Proactive”) and Lagunitas Partners, L.P. (“Lagunitas”) assert state and federal securities fraud as well as common law fraud claims against Fenster, Lamb, Thompson, Thornton, and Schneider arising out of two securities transactions that took place in the fall of 1991. In September 1991, plaintiffs allege they were fraudulently induced to purchase 20,000,000 shares of Stab-Tech stock through a private placement for a total price of 1.5 million dollars. In October 1991, plaintiffs allege they were fraudulently induced to purchase 15,210,000 shares of Stat-Tech stock from Thompson at a price of $ 1,000,000. Plaintiffs continue to hold this stock.
The only motions to dismiss filed in No. 92-K-2441 are those of Fenster and Lamb. 17 Fenster’s pro se motion is identical to those filed in the related actions and is without merit for the reasons stated above. Lamb’s motion, which highlights effectively the weaknesses in plaintiffs’ case against her, nevertheless fails to persuade me that a dismissal at this stage of the proceedings is warranted.
Lamb’s assertion that she owed no duty to plaintiffs to disclose material information is irrelevant when, as an officer of Stab-Tech, she signed the 1989 10-K upon which plaintiffs, among other things, claim they relied.
See Alter v. DBLKM,
Lamb’s remaining arguments regarding the sufficiency of plaintiffs’ allegations have already been addressed. Incorporating my analysis and conclusions set forth above, Lamb’s motion to dismiss plaintiffs’ claims in No. 92-K-2441 is denied.
III. CONCLUSION
Upon consideration of the ten motions to dismiss pending in Civil Action Nos. 92-K-1040, 92-K-1994 and 92-K-2441, I rule as follows:
IT IS ORDERED that the motions to dismiss and/or for summary judgment filed by defendants Fenster, Lamb and Thompson in 92-K-1040 are DENIED.
FURTHER ORDERED that the motions to dismiss and/or for summary judgment filed by defendants Fenster, Lamb and Thompson in No. 92-K-1994 are DENIED.
FURTHER ORDERED that the motion to dismiss filed by Schneider Securities in No. 92-K-1994 is GRANTED in part and DENIED in part. Plaintiffs’ First and Second Claims for Relief against Schneider alleging primary violations of federal and state securities laws are dismissed for failure to plead the circumstances of fraud with particularity pursuant to Fed.R.Civ.P. 9(b). Plaintiffs’ Second Claim for Relief against Schneider for secondary liability under the federal and state securities laws, to the extent it is based on the alleged primary violation of Thompson, fails to state a claim upon which relief can be granted and is dismissed with prejudice. Plaintiffs’ Sixth Claim for Relief, alleging negligence under the NASD Rules, also fails to state a claim upon which relief can be granted and is dismissed with prejudice. In all other respects, Schneider’s motion to dismiss plaintiffs’ Second Amended Complaint is DENIED.
FURTHER ORDERED that the motions to dismiss filed by Fenster and Lamb in No. 92-K-2441 are DENIED. Finally,
IT IS ORDERED that these cases are set for a Scheduling Conference at 9:00 a.m., December 5,1995, in Courtroom C-401. The parties are to comply with the enclosed instructions and with D.C.Colo.LR 29.1.
Notes
. An eighth action, No. 95-K.-1367, was filed on May 30, 1995 and recently was transferred to me from Judge Nottingham upon the parties' joint motion. To date, two of the seven defendants in that Securities and Exchange Commission enforcement action have filed motions to dismiss. Briefing on those motions is not yet complete and they will not be considered here.
. I summarily denied pro se defendant Raynard Fenster’s motion to dismiss in 92-K-2368 on August 15, 1995.
. These are financial disclosure statements filed with the Securities Exchange Commission (SEC).
. In general, the Colorado Securities Act, Colo.Rev.Stat. § 11-51-201
et seg.,
parallels the federal Securities Act of 1933 and the Securities and Exchange Act of 1934.
Sauer v. Hays,
. Magistrate Pringle recommended defendants' motion to dismiss be denied as to plaintiff’s claims based on § 10(b) of the Act Colorado’s Rule 10b-5 analog, but granted as to plaintiff's claims based on § 20A of the Act (insider trading) and the federal RICO statute. Recommendation at 19-20: Magistrate Pringle also recommended the court decline to exercise supplemental jurisdiction over plaintiff's state law claims for fraud, breach of fiduciary duty, conversion, negligence and violation of C.R.S. § 11-51-301 (sale of unregistered securities). However, before Judge Matsch ruled on the Magistrate’s Recommendation,' the order of reference was withdrawn, the Trust was substituted for Stat-Tech, and a Second (then Third) Amended Complaint was filed.
.
Applied in Anixter v. Home-Stake Prod. Co.,
. Lamb attributes the ''inquiry notice” standard to
Anixter I,
. The accuracy of this assertion cannot be ascertained. Lamb neither identifies nor explains the nature of the purported state court proceedings, and the Trust does not address them at all. Because I accept supplemental jurisdiction over these claims regardless of whether parallel proceedings are ongoing in state court, the existence and status of these proceedings is irrelevant.
. In
LaSorella,
I concluded the JIA expanded supplemental jurisdiction and created a " 'strong presumption' ” in favor of its exercise.
.After the reference to Magistrate Pringle was withdrawn, the Trust amended its complaint. Among other things, the Trust withdrew its state law conversion and sale of unregistered securities claims.
. Thompson challenges the Trust’s Second Claim for Relief, alleging violations of the 1934 Securities and Exchange Act and Rule 10b-5; the Fourth Claim for Relief, alleging violations of C.R.S. § 11-51—604(5)(c); Fifth Claim for Relief, alleging common law fraud; and the Seventh and Eighth Claims for Relief, alleging breaches of fiduciary duty.
. The Tenth Circuit in
Decker v. Securities & Exch. Comm'n,
.Secondary liability as a “controlling person” trader § 20(a) of the 1934 Act or as one providing "substantial assistance” to a primary violator under the Colorado Act, however, remains subject to the affirmative defense of "good faith.”
First Interstate Bank of Denver v. Pring,
. On April 27, 1995, defendant Roger Thornton filed a pro se document in which he purported to "join" in Schneider’s motion to dismiss plaintiffs’ claims. That same day, however, Thornton filed an Answer to the Second Amended Complaint, which rendered his "joinder” moot.
. The remaining paragraphs either group Schneider together with the other defendants as having “known” or as having been "recklessly indifferent” to the fact that representations made to plaintiffs were false (¶ 49), or support claims of secondary, rather than primary, liability against Schneider by alleging that Schneider was in a position to influence Thornton (¶ 23) or provided documents and other information to plaintiffs "through Thornton” (¶¶ 53-54).
. Because I grant Schneider’s motion to dismiss plaintiffs' primary liability claims under Rule 9(b), I decline to reach Schneider’s standing or statute of limitations arguments.
. Defendants Thornton and Schneider were dismissed as party defendants in May 1995 after reaching settlement with plaintiffs. Defendant Thompson filed his Answer to plaintiffs' Amended Complaint on April 14, 1995.