Onesti v. Thomson McKinnon Securities, Inc.

• Decision Date: 07 October 1985
• Docket Number: No. 85 C 4375.,85 C 4375.
• Citation: 619 F. Supp. 1262
• Court: U.S. District Court — Northern District of Illinois
• Parties: Joseph ONESTI, Anna Onesti, and J. Onesti & Sons, Inc., an Illinois corporation, Plaintiffs, v. THOMSON McKINNON SECURITIES, INC., Richard M. Harris and Touche Ross & Co., Defendants.

619 F. Supp. 1262

Joseph ONESTI, Anna Onesti, and J. Onesti & Sons, Inc., an Illinois corporation, Plaintiffs, v. THOMSON McKINNON SECURITIES, INC., Richard M. Harris and Touche Ross & Co., Defendants.

No. 85 C 4375.

United States District Court, N.D. Illinois, E.D.

October 7, 1985.

Edward A. Berman, Jerome J. Roberts, Kathleen C. White, Berman, Roberts & Kelly, Chicago, Ill., for plaintiffs.

James E. Beckley, Richard S. Schultz, James E. Beckley & Associates, Chicago, Ill., for defendants Thomson McKinnon and Richard M. Harris.

Francis J. Higgins, John W. Rotunno, Thomas L. Fink, Bell, Boyd & Lloyd, Chicago, Ill., for defendant Touche Ross.

MEMORANDUM ORDER

BUA, District Judge.

Before the Court is defendants' motion to dismiss plaintiffs' complaint for compensatory damages. Plaintiffs allege numerous theories of recovery, including violations of the Racketeer Influenced and Corrupt Organization Act ("RICO"), 18 U.S.C. § 1962(c); the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (the 1934 Act); the Securities Act of 1933 (the 1933 Act), 15 U.S.C. § 77q(a); and the Illinois Consumer Fraud and Deceptive Practices Act, 121½ Ill.Rev.Stat. § 262 (1985). Plaintiffs also allege common law fraud and breach of fiduciary duty.

This Court's jurisdiction is based on 28 U.S.C. § 1331, 18 U.S.C. § 1964, 15 U.S.C. § 77v, 15 U.S.C. § 78aa, and on principles of pendent jurisdiction. For the reasons stated herein, the Court denies defendants' motion to dismiss in part. The Court, however, grants defendant Touche Ross' motion to dismiss Count VI, grants TMS' motion to dismiss TMS from Count I, and grants defendants TMS and Harris' motion to dismiss Count IV.

FACTS

The following facts are alleged in plaintiffs' complaint. For purposes of this order they are considered to be true.

Plaintiffs desired to invest in low-risk investments. On July 13, 1982, plaintiffs entered into an investment contract with defendant Thomson McKinnon Securities, Inc. ("TMS"), allowing TMS to invest plaintiffs' money pursuant to TMS' recommendations. TMS and co-defendant Harris, a TMS employee, recommended that plaintiffs invest substantial sums in stocks and a limited partnership. Plaintiffs acquiesced in defendants' investment recommendations and allowed defendants to purchase stock and to make other investments for plaintiffs' account beginning in July 1982.

During the course of managing plaintiffs' accounts, TMS and Harris charged excessive commission fees. In addition, they materially misrepresented stock investments as suitable to plaintiffs' investive goals and objectives when they were not. TMS and Harris also recommended investments without adequately investigating the tax consequences to plaintiffs. Along these lines, defendant Touche Ross wrongfully conveyed tax information that induced plaintiffs to accept TMS and Harris' investment recommendations. Plaintiffs apparently sustained losses and this litigation ensued.

Count I of the complaint alleges a § 1962(c) RICO violation. Counts II and III set forth securities fraud violations of § 10(b) of the 1934 Act and § 17(a) of the 1933 Act. Count IV alleges common law fraud, while Counts V and VI allege breach of fiduciary duty. Count VII pleads an action under the Illinois Consumer Fraud and Deceptive Business Practices Act.

DISCUSSION

I. Touche Ross' Motion to Dismiss for Lack of Subject Matter Jurisdiction

Touche Ross is named only in the breach of fiduciary duty allegations in Count VI. Since Count VI lacks an independent basis for original federal jurisdiction, Touche Ross is joined as a pendent party defendant. Touche Ross therefore moves to dismiss plaintiffs' complaint for lack of subject matter jurisdiction.

A pendent party defendant is not a party to a jurisdictionally sufficient main claim, but is only a party to a related state law claim. The Supreme Court has never expressly acknowledged the legitimacy of pendent party jurisdiction. Knudsen v. D.C.B., Inc., 592 F.Supp. 1232, 1235 (N.D. Ill.1984). In the Seventh Circuit, such jurisdiction has been generally met with disfavor. Thomas v. Shelton, 740 F.2d 478, 487 (7th Cir.1984). However, pendent party jurisdiction is not dead. A few opinions have approved pendent party jurisdiction, see Moore v. The Marketplace Restaurant, Inc., 754 F.2d 1336, 1353 (7th Cir.1985) (separate opinion by Posner, J.), suggesting that the exercise of such jurisdiction is within the trial court's sound discretion. Musikiwamba v. ESSI, Inc., 760 F.2d 740, 754 (7th Cir.1985).

Courts allowing pendent party jurisdiction require the federal and state claims to arise from a common nucleus of operative facts such that a plaintiff would ordinarily be expected to try his claims in one judicial proceeding. Moore v. Marketplace Restaurant, Inc., 754 F.2d 1336, 1353 (7th Cir.1985). Moreover, the valid pendent claim must be based on the same facts as the main claim for the two claims to be considered part of a single case. Bernstein v. Lind-Waldock & Co., 738 F.2d 179, 187 (7th Cir.1984).

Plaintiffs' claims against TMS and Harris and claim against Touche Ross are related, but the claims do not arise from a common nucleus of operative fact and cannot be considered part of the same case. TMS and Harris had a contractual relationship with plaintiffs, whereas Touche Ross did not. In addition, TMS and Harris repeatedly misrepresented the liquidity and suitability of numerous investments to plaintiffs' known investment objectives. Touche Ross' misrepresentation was limited to tax advice regarding a single investment given without knowledge of plaintiffs' investment goals. Plaintiffs' pendent party claim against Touche Ross should not be joined with plaintiffs' other federal claims since pendent party jurisdiction is construed conservatively in recognition of the inroads it makes into the autonomy of state sovereignty. Accordingly, Touche Ross' motion to dismiss is granted.

II. Motion to Dismiss Counts I Through V and Count VII for Failure to Plead Fraud with Particularity

Defendants Harris and TMS move to dismiss Counts I through V and Count VII of plaintiffs' complaint for failure to plead fraud with particularity as required by Rule 9(b). Fed.R.Civ.P. 9(b). Rule 9(b) provides that "in all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." Generally, a complaint is considered sufficient when it sets forth the time, place, particular contents of the false representation, the identity of the party making the misrepresentation, and the consequences of the misrepresentation. Bennett v. Berg, 685 F.2d 1053, 1062 (8th Cir. 1982); Baselski v. Paine, Webber, Jackson & Curtis, 514 F.Supp. 535, 540 (N.D.Ill. 1981).

The specificity requirements of Rule 9(b) have been imposed to ensure that defendants have been apprised of the claimed fraud in a manner sufficient to permit adequate responsive pleadings. Felton v. Walston, 508 F.2d 577, 581 (2d Cir.1974). Nevertheless, Rule 9(b)'s more stringent requirements must be read in conjunction with Rule 8, which requires a short and plain statement of the claim. Tomera v. Galt, 511 F.2d 504, 508 (7th Cir.1975). The sufficiency of a pleading under these rules varies with the complexity of the transaction. When the transactions are numerous and take place over an extended period of time, less specificity is required. Baselski v. Paine, Webber, Jackson & Curtis, 514 F.Supp. 535, 540 (N.D.Ill.1981).

Defendants argue that the complaint is insufficient for a variety of reasons. First, they assert Counts I through III fail to allege the specific time and place where the representations were made. Second, they argue Counts II and III do not specify the content of the misrepresentation. Third, defendants maintain all counts fail to list the specific dollar amount of plaintiffs' investment. Finally, defendants allege Count V fails to include any facts establishing a fiduciary relationship.

Counts I through V and Count VII sufficiently comport with the requirements of Rule 9(b). Plaintiffs cannot be expected to specify the exact time and particular place of each factual omission and misrepresentation. The complaint adequately specifies the transactions and the approximate time frame, the contents of the alleged misrepresentations and the essence of omitted information, and the identities of those involved. In addition, there is little purpose in requiring plaintiffs to expand the complaint by including the specific dollar amount of plaintiffs' investments. Finally, a close review of paragraphs 5 through 23 of the complaint reveals that a fiduciary relationship is alleged since defendant Harris was plaintiffs' stock broker and TMS contracted with plaintiffs as their investment brokerage house.

The complaint sets forth the time, place, and contents of the alleged false representations, as well as the names of the individuals who made them, and the damage caused by the misrepresentations and omissions. The averments describe the essential aspects of defendants' allegedly fraudulent activity. For these reasons, defendants' motion to dismiss Counts I through V and Count VII for failure to plead with particularity is denied.

III. Motion to Dismiss Counts I Through VII for Failure to State a Claim

The guidelines used in considering a motion to dismiss a complaint for failure to stae a claim are well defined. On a motion to dismiss, a complaint must be construed in the light most favorable to the plaintiff, the allegations thereof being taken as true. Mathers Fund, Inc. v. Colwell, 564 F.2d 780, 783 (7th Cir.1977). A complaint should not be dismissed unless it appears beyond doubt that plaintiff can prove no set of facts in support of his claim that would entitle him to the requested relief. Cruz v. Beto, 405 U.S. 319, 322, 92 S.Ct. 1079, 1081, 31 L.Ed.2d 263 (1972); Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-02, 2 L.Ed.2d 80 (1957).

a. RICO

TMS and...