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February 4, 1992



The opinion of the court was delivered by: JAMES F. HOLDERMAN


JAMES F. HOLDERMAN, District Judge:

 Plaintiff, Joseph Ruby Carl, brought this action against defendants Richard J. Galuska, Charles Davis, George Calvert, National Gas and Electric Corporation of America, National Gas Associates, Ltd. and Geoquest, Inc. Plaintiff asserts claims under the federal securities statutes, the Racketeer Influenced and Corrupt Organization ("RICO") statute, and pendent state law claims. Pro se defendant Galuska has moved, under Fed. R. Civ. P. 9(b), 12(b)(2) and 12(b)(6) to dismiss certain counts of the complaint.

 For the reasons stated in this memorandum opinion and order, defendant Galuska's motions to dismiss counts I, II, IV, V, VI, VIII, IX, X and XI are denied. His motion to dismiss count XII for lack of subject matter jurisdiction is granted.


 On a motion for dismissal pursuant to Federal Rule of Civil Procedure 12(b)(6), the facts alleged in the complaint, as well any reasonable inferences therefrom, are taken as true. See Bane v. Ferguson, 890 F.2d 11, 13 (7th Cir. 1989). The relevant facts as alleged in the complaint are as follows.

 On December 2, 1987 plaintiff Carl invested $ 100,000 ("the investment") in National Gas and Electric Corporation of America. ("National"). (Complaint, para. 16.) This investment was made on the advice and recommendation of defendant Galuska, who had been plaintiff Carl's accountant and financial adviser since 1980. Id. In exchange for the $ 100,000, Carl received from National a $ 200,000 promissory note. The note provided that it could be converted, at the option of National, into preferred shares of equivalent value in National. Id.

 Specifically, Galuska did not inform Carl that National was having trouble performing its obligations under contracts with the towns of Lancaster and Haverstraw, New York. (Paras. 20, 30(b).) Most pertinently, he did not disclose that National's creditors had filed a petition for involuntary bankruptcy on June 11, 1987, which was converted into a voluntary petition on July 15, 1987. (Paras. 24, 29.) The complaint alleges that Galuska failed to inform Carl of these facts "in a deliberate and reckless manner." (Para. 29.)

 Additionally, Galuska did not reveal that he was employed or retained as a financial advisor to National and to defendants Charles Davis and George Calvert, who were controlling stockholders and officers of National. (Para. 30(h).) Galuska did not disclose that he received a commission for each investor he brought into National. (Para. 30(g).) According to the complaint, Galuska's relationship with National, in addition to being a fact which he should have revealed, placed him in a position in which he knew or should have known about the omitted facts relating to the poor financial condition of the company. (Para. 29.)

 Subsequent to Carl's initial December 1987 investment, he wrote checks totaling $ 200,000 to National and defendants Geoquest, Inc. and National Gas Associates, Ltd., which are other entities controlled by Calvert and Davis that succeeded to the ownership of National's assets. (Paras. 17-19.) Carl alleges, upon information and belief, that defendants did not treat the $ 300,000 invested as a capital contribution to the various entities but rather "misappropriated" the money "to pay for personal investments." (Para. 27.) He claims that, as result of defendants' conduct, he has lost $ 300,000, all of the money invested. (Para. 57.)

 In count XII, the complaint alleges that Galuska, in addition to guaranteeing Carl's investments in National, also guaranteed other investments. (Paras. 80-84.) The recipients of these investments were International Fund Managers and Herbert Industries, Inc. Id. Galuska has allegedly not performed his obligations under the guarantee. (Para. 85.)


 I. COUNT I - RULE 10b-5

 In count I, plaintiff asserts a claim under Section 10b of the Securities Act of 1934, Rule 10b-5. 15 U.S.C. ยง 78j(b). 17 C.F.R. 240.10b5. Defendant Galuska has moved to dismiss the claim under Fed. R. Civ. P. 12(b)(6) and 9(b), arguing that plaintiff has not pleaded sufficient facts to support his cause of action and has not set out the circumstances of the alleged fraudulent conduct with sufficient particularity.

 Under Rule 10b-5, it is unlawful to misrepresent or fail to disclose material information in the purchase or sale of securities. See Michaels v. Michaels, 767 F.2d 1185, 1194 (7th Cir. 1985). An omission or misstatement is material if there is a substantial likelihood that the omitted or misstated fact would have assumed actual significance in the deliberations of a reasonable shareholder. Id. To prevail on a 10b-5 claim, a plaintiff must also establish the requisite scienter, a burden which is sustained by a showing that defendant knowingly or recklessly withheld or misstated material information. Id. at 1199, citing Sanders v. John Nuveen & Co., 554 F.2d 790, 792-93 (7th Cir. 1977).

 Measuring plaintiff's allegations in relation to these legal standards, the court concludes that Carl's complaint sufficiently states a cause of action under 10b-5. The fact that National was involved in a bankruptcy proceeding, which was allegedly known but not disclosed by defendant Galuska when he solicited plaintiff's investment, is quite possibly the type of information that a trier of fact would find material and the omission of which would support liability under Rule 10b-5. Further, scienter was sufficiently alleged as ...

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