Lefkowitz v. Smith Barney, Harris Upham & Co., Inc.

• Citation: 804 F.2d 154
• Decision Date: 17 September 1986
• Docket Number: No. 86-1329,86-1329
• Parties: Blue Sky L. Rep. P 72,461, Fed. Sec. L. Rep. P 92,977 Bertram LEFKOWITZ, etc., Plaintiff, Appellant, v. SMITH BARNEY, HARRIS UPHAM & CO., INC., and Henry N. Fishburne, Defendants, Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (1st Circuit)

Page 154

804 F.2d 154

Blue Sky L. Rep. P 72,461, Fed. Sec. L. Rep. P 92,977

Bertram LEFKOWITZ, etc., Plaintiff, Appellant, v. SMITH BARNEY, HARRIS UPHAM & CO., INC., and Henry N.

Fishburne, Defendants, Appellees.

No. 86-1329.

United States Court of Appeals,

First Circuit.

Submitted Sept. 12, 1986.

Decided Sept. 17, 1986.

Michael C. Gilleran and Schultz & Bednarz, P.C., Boston, Mass., on brief, for plaintiff, appellant.

Gerald F. Rath, James P. Delphey, Bingham, Dana & Gould, Boston, Mass., Henry Lukas, David Levy and Smith Barney, Harris Upham & Co., Inc., New York City, on brief, for defendants, appellees.

Before CAMPBELL, Chief Judge, COFFIN and BREYER, Circuit Judges.

PER CURIAM.

Appellant Lefkowitz, personal representative of the estate of Julius Melnick, appeals an order of the district court dismissing the remaining three counts of his second amended complaint against appellees Smith Barney, Harris Upham & Co. ("Smith Barney") and Henry Fishburne pursuant to Fed.R.Civ.P. 12(b)(6) and 9(b). The complaint alleges that appellees failed to disclose the unsuitability of investments in Melnick's brokerage account, thereby violating section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78j(b), and Rule 10b-5, 17 C.F.R. Sec. 240.10(b)-5 (Count I); Mass.Gen.Laws Ann. ch. 110A, Sec. 410(a)(2) (Count III); and their common law fiduciary duty (Count IV). We affirm the dismissal on the basis of appellant's failure to state a claim upon which relief may be granted. Fed.R.Civ.P. 12(b)(6).

1. The district court properly dismissed the breach of fiduciary duty claim in Count IV because a simple stockbroker-customer relationship does not constitute a fiduciary relationship in Massachusetts. Brine v. Paine, Webber, Jackson & Curtis, Inc., 745 F.2d 100, 103 (1st Cir.1984); Plumer v. Luce, 310 Mass. 789, 795-96, 39 N.E.2d 961, 964-65 (1942). Appellant claims that the relationship between Melnick and Fishburne, his account executive, cannot be properly characterized as a "simple stockbroker-customer relationship" because the parties enjoyed a longstanding personal friendship and because Melnick, who allegedly lacked business acumen, always followed Fishburne's guidance in complicated matters. Appellant cites Broomfield v. Kosow, 349 Mass. 749, 755-56, 212 N.E.2d 556, 560 (1965), to support his contention that these facts compel a finding of fiduciary duty.

We are persuaded, however, that this case is controlled by Vogelaar v. H.L. Robbins & Co., 348 Mass. 787, 204 N.E.2d 461 (1965) (rescript opinion), a case not cited by appellant. In Vogelaar, the Massachusetts Supreme Judicial Court held that allegations of a decedent's minimal knowledge of investments and blind reliance upon his broker are not sufficient for a proper pleading of fiduciary duty. Id. at 788, 204 N.E.2d at 462. The facts of the case before us are surprisingly similar to the facts of Vogelaar. Both cases involved actions brought by the representative of an estate seeking to establish a breach of fiduciary duty by a stockbroker. Furthermore, there were allegations of a conservative investment objective in each case. Although the facts of Vogelaar appear to be even more compelling because of the broker's awareness that the deceased had been under intermittent psychiatric care, the court sustained the demurrer for failure to establish a fiduciary relationship in the pleadings. We find nothing in appellant's complaint to distinguish this case from the situation in Vogelaar and therefore hold that the relationship between Melnick and Fishburne was not fiduciary in nature.

2. The district court also properly dismissed Count I of the complaint because appellant's Rule 10b-5 claim insufficiently pleads the elements of an unsuitability claim. To prevail in a Rule 10b-5 action, a plaintiff must first show that the defendant is responsible for some misrepresentation or material omission. Holmes v. Bateson, 583 F.2d 542, 551 (1st Cir.1978). Appellant claims that appellees' failure to disclose the unsuitability of the investments in Melnick's account constitutes a material omission. See Troyer v. Karcagi, 476 F.Supp. 1142, 1152 (S.D.N.Y.1979). Appellant must demonstrate, therefore, that the quality of the securities purchased for Melnick's account was inappropriate in light of Melnick's investment objectives. Tiernan v. Blyth, Eastman, Dillon & Co., 719 F.2d 1, 5 (1st Cir.1983). Based upon three clusters of factual allegations and upon "information and belief," appellant has averred that Melnick's investment objective was to purchase strictly "low risk" securities. These allegations, however, whether considered individually or collectively, are insufficient to support appellant's unsuitability claim.

First, appellant alleges that it is common practice in the brokerage industry to require that new customers complete an investor intake form listing the type of investments the customer prefers. Because Smith Barney has been unable to produce such a form for Melnick, appellant argues that it is reasonable for us to conclude that appellees were not concerned with Melnick's objectives or that appellees failed to produce the completed form because it indicated Melnick's "low risk" objective. We disagree. The only inference we can reasonably draw from the pleadings and appellees' failure to locate an intake form is that such a form was never completed, or alternatively, that the completed form was lost, misplaced, or destroyed. We cannot reasonably infer anything about the contents of an investor intake form from the appellees' inability to produce one.

Second, appellant alleges that Melnick drew up five different wills during the waning years of his life, each providing for different beneficiaries. Appellant argues from this fact that Melnick must have wanted only "low risk" investments to preserve the estate for his heirs. Again, we cannot reasonably infer this conclusion from the alleged facts. Melnick's repeated redrafting of his will merely reflects frequent changes of heart regarding how to...