First Fed. Sav. & Loan v. Oppenheim, Appel, Dixon & Co.

• Decision Date: 03 June 1986
• Docket Number: No. 85 Civ. 4163(MEL).,85 Civ. 4163(MEL).
• Citation: 634 F. Supp. 1341
• Parties: FIRST FEDERAL SAVINGS & LOAN ASSOCIATION OF PITTSBURGH, Wichita Federal Savings & Loan Association; City of Farmington, New Mexico; and Federal Savings and Loan Insurance Corporation, Plaintiffs, v. OPPENHEIM, APPEL, DIXON & CO., a partnership, Defendant. OPPENHEIM, APPEL, DIXON & CO., a partnership, Third-Party Plaintiff, v. E. Keith OWENS; Robert Bell; S. Muir Atherton; Daniel Harkens; Richard Tisdale; John J. Giovannone; and Memel, Jacobs, Pierno, Gersh & Ellsworth, a partnership, Third-Party Defendants.
• Court: U.S. District Court — Southern District of New York

634 F. Supp. 1341

FIRST FEDERAL SAVINGS & LOAN ASSOCIATION OF PITTSBURGH, Wichita Federal Savings & Loan Association; City of Farmington, New Mexico; and Federal Savings and Loan Insurance Corporation, Plaintiffs, v. OPPENHEIM, APPEL, DIXON & CO., a partnership, Defendant.

OPPENHEIM, APPEL, DIXON & CO., a partnership, Third-Party Plaintiff, v. E. Keith OWENS; Robert Bell; S. Muir Atherton; Daniel Harkens; Richard Tisdale; John J. Giovannone; and Memel, Jacobs, Pierno, Gersh & Ellsworth, a partnership, Third-Party Defendants.

No. 85 Civ. 4163(MEL).

United States District Court, S.D. New York.

May 8, 1986.

As Amended June 3, 1986.

COPYRIGHT MATERIAL OMITTED

Patterson, Belknap, Webb & Tyler, New York City, Rosenfeld, Parnell & Shames, Inc., Los Angeles, Cal., for Oppenheim, Appel, Dixon & Co.

Obermaier, Morvillo & Abramowitz, P.C., New York City (Robert G. Morvillo, Robert J. Anello, of counsel), Georgene Vairo, Associate Professor of Law, Fordham Law School, for third-party defendants John J. Giovannone, and Memel, Jacobs, Pierno, Gersh & Ellsworth.

LASKER, District Judge.

Memel, Jacobs, Pierno, Gersh & Ellsworth ("Memel Jacobs") and John J. Giovannone move pursuant to Federal Rules of Civil Procedure 12(b)(2), 12(b)(3), 12(b)(6), and 9(b) to dismiss the supplemental third-party complaint filed against them by Oppenheim, Appel, Dixon & Co. ("OAD") for lack of personal jurisdiction, improper venue, failure to state a claim upon which relief may be granted, and failure to plead fraud with particularity. The motion is granted in part and denied in part.

I. Background

The third-party action as to which this motion has been made arises from the loss in June 1982 by several savings and loan associations and a municipality of $17 million in government securities as the result, inter alia, of the fraudulent conduct of a government securities dealer named Comark. In an earlier, related litigation, Wichita Federal Savings and Loan Association v. Comark, No. 82-4703(MEL) (S.D.N.Y.), a jury returned a verdict for fraud and the court directed a verdict for conversion against Comark. Marine Midland Bank, N.A. ("Marine"), Comark's clearing bank and a co-defendant, settled the claims against it in mid-trial.

In the present action, all but one of the Wichita plaintiffs or their successors in interest are suing OAD, Comark's accountants, on a variety of legal theories—including aiding and abetting violations of the federal securities laws by Comark—for the losses they sustained. OAD, in turn, has impleaded as third-party defendants¹ Comark's attorneys—the Memel Jacobs law firm and Giovannone, a partner in the firm—for recovery by way of contribution² in the event that the plaintiffs recover damages from OAD in this action.³

OAD's supplemental third-party complaint alleges that Giovannone, individually, as a "controlling person" of Comark under the federal securities laws, see 15 U.S.C. §§ 77o and 78t (1982), aided and abetted Comark in its violations of various provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934 by:

(a) Knowingly representing to plaintiffs that the securities owned by plaintiffs in the possession of Comark would be and were being held in safekeeping by Comark;

(b) Depositing or causing to be deposited securities owned by and the property of plaintiffs in an unsegregated account at Comark's bank to be commingled with securities of Comark;

(c) Enabling and permitting Comark to use plaintiffs' said securities as collateral for loans made to Comark by Comark's bank, Marine Midland Bank, N.A. ("Marine");

(d) Failing to disclose to and warn plaintiffs of Comark's wrongful commingling and use of plaintiffs' securities; and

(e) Enabling and permitting Marine to seize and sell plaintiffs' securities notwithstanding that said ... defendant ... well knew that the said securities were the property of plaintiffs, were not the property of Comark, were not true collateral for the loans of Marine to Comark, and were not lawfully subject to seizure and sale by Marine to satisfy an indebtedness of Comark to Marine.

Supplemental Third-Party Complaint at ¶ 8. The supplemental third-party complaint goes on to allege that the Memel Jacobs law firm aided and abetted Comark in its violation of the federal securities laws:

(1) By advising and counseling Comark and its representatives that Comark could continue in its wrongful activities as more fully alleged in the complaint and that it was not necessary for Comark to make disclosure of the Comark commingling problem to any third persons (including plaintiffs);

(2) By stating and representing to OAD that OAD could and should continue to act as accountants for, and to render accounting services to, Comark; that the aforesaid acts and conduct of Comark did not constitute violations of the federal securities laws (including Section 10(b) of the 34 Act and Rule 10b-5 promulgated thereunder); and that OAD and Comark were not obligated to make disclosure of Comark's acts and conduct to any third persons (including plaintiffs); and

(3) By stating and representing to OAD that ... the acts and conduct of Comark did not constitute "a 10(b)(5) violation which would give the customers of Comark the right of rescission."

....

In doing the acts alleged above, the Memel, Jacobs Law Firm: (i) owed a duty to OAD to fully and fairly disclose the existence and effect of Comark's violations of the 33 Act and the 34 Act; (ii) falsely represented that Comark's activities did not constitute violations of the 33 Act and the 34 Act; (iii) was aware that any advice from it to OAD which was other or different from that which is alleged ... above would cause OAD to discontinue rendering services to Comark, an event which the Memel, Jacobs Law Firm knew would have a material adverse effect on Comark; (iv) intended to prevent OAD's discontinuance of services to Comark by rendering the aforesaid advice to OAD; and (v) in order to prevent OAD's discontinuance of services to Comark, rendered its aforesaid advice to Comark and OAD knowing that it was wrong or in reckless disregard for the incorrect nature of its advice to Comark.

Supplemental Third-Party Complaint at ¶ 10(E), (G).

II. Discussion

In moving to dismiss the claims asserted against them in OAD's supplemental third-party complaint, Memel Jacobs and Giovannone (collectively "Memel Jacobs")⁴ proceed on the assumption that personal jurisdiction over them is founded upon Section 27 of the Securities Exchange Act of 1934, 15 U.S.C. § 78aa (1982),⁵ since the complaint alleges no independent basis for personal jurisdiction and asserts that Memel Jacobs is liable only for aiding and abetting Comark's violations of the federal securities laws. (OAD does not dispute this assumption and indeed argues that Section 27 provides in personam jurisdiction over Memel Jacobs while also contending—should Section 27 be found not to apply—that New York's long-arm statute provides jurisdiction over Memel Jacobs.)

Memel Jacobs therefore first contends that Section 27 cannot confer personal jurisdiction over Memel Jacobs because under the facts of this case, such an assertion of jurisdiction violates Memel Jacobs' constitutional due process rights. Second, Memel Jacobs argues that venue, and therefore jurisdiction, in the Southern District of New York is improper as to it under Section 27. Third, Memel Jacobs asserts that OAD has failed to state a claim against it for aiding and abetting Comark's violations of the federal securities laws—an assertion which if correct would not only require dismissal of the aiding and abetting claim but would remove the Section 27 basis for personal jurisdiction over Memel Jacobs.

A. Personal Jurisdiction

Section 27 of the Securities Exchange Act has for some years been interpreted as providing nationwide personal jurisdiction over individuals alleged to have violated the Act. See Mariash v. Morrill, 496 F.2d 1138, 1142-43 (2d Cir.1974) ("It is simply too late in the day to argue that Section 27 does not authorize nationwide service of process...."). Although the Court of Appeals for the Second Circuit recognized in Mariash that the due process clause of the fifth amendment requires that the service authorized by Section 27 must provide a defendant with reasonable notice of the proceedings against him, id. at 1143, the court rejected the contention that due process requires that such a defendant have "minimum contacts" with the state in which the court exercising jurisdiction under the statute is located. Then Chief Judge Kaufman wrote in this regard:

Mere statement of this contention reveals its fatal flaw: It is not the State of New York but the United States "which would exercise its jurisdiction over them the defendants." And plainly, where, as here, the defendants reside within the territorial boundaries of the United States, the "minimal contacts," required to justify the federal government's exercise of power over them, are present. Indeed, the "minimal contacts" principle does not, in our view, seem particularly relevant in evaluating the constitutionality of in personam jurisdiction based on nationwide, but not extraterritorial, service of process. It is only the latter, quite simply, which even raises a question of the forum's power to assert control over the defendant.

Id. (footnotes omitted); accord Securities Investor Protection Corp. v. Vigman, 764 F.2d 1309, 1313-16 (9th Cir.1985); Johnson Creative Arts, Inc. v. Wool Masters, Inc., 743 F.2d 947, 950 & n. 3 (1st Cir.1984); FTC v. Jim Walter Corp., 651 F.2d 251, 256-57 (5th Cir.1981); Fitzsimmons v. Barton, 589 F.2d 330, 333-34 (7th Cir. 1979).

In the face of this authority, Memel Jacobs contends that the idea that "minimum contacts" with the United States as a whole is sufficient in all cases to support jurisdiction is too simplistic and would jeopardize the constitutionality of Section 27. In support of its position, Memel Jacobs...