Halperin v. Ebanker Usa.com

Halperin v. Ebanker Usa.com

Opinion

 [*354]  CARDAMONE, Circuit Judge:

 [**2]  This appeal involves investors who by purchasing securities took a risk for the purpose of securing an economic advantage but, failing to exercise prudence, instead suffered a loss. Plaintiffs claim defendants, sellers of the securities, defrauded them; when in fact what plaintiffs had done was to make a bad investment. Plaintiffs Michael Halperin, M.D., and Donald Kern, D.D.S., appeal from a judgment of the United States District  [*355]  Court for the Southern District of New York (Martin, J.), entered March 26, 2001 granting defendants' motion to dismiss their complaint for failure to state a claim upon which relief could be granted.

Although the district court dismissed the 12-count securities fraud complaint in its entirety, plaintiffs appeal the dismissal of only eight of their claims. In a separate summary order filed today, we affirm the dismissal of seven of these eight counts. We write to address an issue in the remaining eighth count that warrants more detailed analysis: whether plaintiffs stated a claim that defendants fraudulently misrepresented the future registration of certain securities with the Securities and Exchange Commission (SEC).

BACKGROUND

This is a class action [**3]  suit against three corporations and several individuals who served as officers and/or directors of those corporations. Plaintiffs, representing four subclasses of purchasers of stock from defendants, filed their 12-count complaint alleging fraud and other wrongful conduct under both state and federal law.

The relationship between the three defendant companies is as follows: eVision USA.COM, Inc. (eVision) is a public holding company; American Fronteer Financial Corporation (American Fronteer), a wholly-owned subsidiary of eVision, is a private corporation engaged in stock brokerage activities; and eBanker USA.COM, Inc. (eBanker), is a private corporation run by American Fronteer under a management agreement. Since April 1999 eVision has owned enough preferred stock in eBanker to cast 73 percent of the votes in the election of eBanker's directors, giving eVision effective control over eBanker.

Plaintiffs' claim of fraudulent misrepresentation stems from the issuance by defendants of two offering memoranda for the sale of eBanker securities. On May 26, 1998 Fronteer Development (now eBanker) issued a Confidential Private Offering Memorandum (1998 Offering Memorandum) advertising the [**4]  sale of debentures, common stock, and warrants exercisable for the purchase of common stock in the future. The 1998 Offering Memorandum acknowledged on the first page and elsewhere that the offered units had not been registered with the SEC under the Securities Act of 1933 or with any state securities commission under state securities laws. Without such registration, the memo noted, transfer of the shares were subject to restrictions. Thus, the memo stated that "there is no public or other market for the units . . . [and so] investors must expect to retain ownership of the units and bear the economic risks of their investment for an indefinite period." Similar warnings appeared throughout the memo.

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