Stockwell v. Reynolds & Co.

• Court: United States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
• Citation: 252 F. Supp. 215
• Parties: Vernon A. STOCKWELL, Plaintiff, v. REYNOLDS & CO. and Ralph E. Carpenter, Defendants. James ARNEIL, Plaintiff, v. REYNOLDS & CO. and Ralph E. Carpenter, Defendants.
• Decision Date: 22 September 1965

252 F. Supp. 215

Vernon A. STOCKWELL, Plaintiff,
v.
REYNOLDS & CO. and Ralph E. Carpenter, Defendants.
James ARNEIL, Plaintiff,
v.
REYNOLDS & CO. and Ralph E. Carpenter, Defendants.

United States District Court S. D. New York.

September 22, 1965.

252 F. Supp. 216

COPYRIGHT MATERIAL OMITTED

252 F. Supp. 217

Webster, Sheffield, Fleischmann, Hitchcock & Chrystie, New York City, for plaintiffs; Donald J. Cohn, Henry B. Cortesi, New York City, of counsel

Townsend & Lewis, New York City, for defendants; Richard J. Cutler, Michael A. Berch, New York City, of counsel.

BONSAL, District Judge.

Defendants in the above actions have moved, pursuant to Rule 12(b) (1) of the Federal Rules of Civil Procedure, for orders dismissing the complaints for lack of subject matter jurisdiction and have moved for other relief. Since both motions involve the same questions, they are treated together.

The plaintiffs in each action are citizens of the State of Washington. The defendants in each action are, Reynolds & Co., a New York partnership engaged in the stock brokerage business, and Ralph E. Carpenter, a citizen of the State of New York and a partner of the defendant Reynolds & Co., and during all times relevant to the action a director of Alside, Inc. (Alside), the stock of which is listed on the New York Stock Exchange.

Both plaintiffs maintained securities brokerage accounts with defendant Reynolds & Co. from January 1963 to August 1964. Plaintiffs' actions are based on alleged misrepresentation of material facts and failure to disclose material facts on the part of the defendants, as a consequence of which the plaintiffs were induced to retain their shares in Alside when they desired to sell them, and in the case of the plaintiff Arneil, that he was induced to purchase additional shares of Alside.

The two complaints are similar, each containing five counts — three against both defendants and two against the defendant Carpenter alone. The first count charges defendants with violating Section 10(b) of the Securities Exchange Act of 1934 (15 U.S.C § 78j) and Rule 10b-5 promulgated thereunder. The second count charges common law fraud, and the third count common law negligence. The fourth count repeats the charge of violation of Section 10(b) and Rule 10b-5 by defendant Carpenter alone, and the fifth count charges Carpenter with breach of his fiduciary duty as a director of Alside.

The defendants in both actions have moved, pursuant to Rule 12(b) (1) of the Federal Rules of Civil Procedure, to dismiss Counts I and IV of the Stockwell complaint and so much of Counts I and IV of the Arneil complaint as are based on the retention of the plaintiffs' Alside shares, for lack of subject matter jurisdiction. Defendants further move, pursuant to Rule 12(b) (6), for an order dismissing both complaints for failure to state a claim upon which relief can be granted. Defendants further move for an order directing that the matters alleged in Counts II, III and V be submitted to arbitration pursuant to the arbitration clause in the Customer's Agreements executed by defendant Reynolds & Co. with each of the plaintiffs. Finally, as an alternative prayer for relief, the defendants move, pursuant to Rule 12(e) and 12(f) for an order to strike certain allegations of each complaint and to make the complaint more definite and certain.

252 F. Supp. 218

For the purposes of these motions, the factual allegations of the complaints are to be taken as true, and the complaints may not be dismissed unless it is clear from the complaints that the plaintiffs are not entitled to any relief. Arfons v. E. I. DuPont De Nemours & Co., 261 F.2d 434 (2d Cir. 1958); Dioguardi v. Durning, 139 F.2d 774 (2d Cir. 1944); Cochran v. Channing Corp., 211 F.Supp. 239 (E.D.N.Y.1962); 2 Moore, Federal Practice ¶ 12.08, pp. 2244-45 (2d ed. 1964).

The complaints allege that each plaintiff opened a securities brokerage account with defendant Reynolds & Co. in or about January 1963, and that each plaintiff was informed at the time that defendant Carpenter was a director of Alside and that they would be kept fully informed of any circumstances which would affect the price of Alside stock. By August of 1963 Reynolds & Co. held 3,900 shares of Alside for plaintiff Stockwell's account, and by September 1963, 600 shares for plaintiff Arneil's account. Plaintiffs' Alside shares were purchased through defendant Reynolds & Co., with the exception of 1,400 shares held by plaintiff Stockwell (only plaintiff Stockwell alleges that he purchased his Alside shares on the basis of representations made by defendant Reynolds & Co.).

It is alleged that in September 1963 each plaintiff told the defendants that he wished to sell his Alside shares, and that defendants advised the plaintiffs not to sell their shares but, indeed, to purchase more shares, this advice being based on the fact that defendant Carpenter was a director of Alside and was thus in a position to know the financial condition of the company. Defendants are charged with representing to the plaintiffs: (a) that the decline in the price of Alside shares was caused by specialized selling and was not due to any financial or business problems of the company; (b) that it was time to buy Alside shares; (c) that defendant Reynolds & Co. would issue in the near future an institutional report concerning Alside; (d) that the financial condition and business situation of Alside assured the rise in price of Alside shares; and (e) that Alside, through its divisions and subsidiaries, was entering into the business of "producing houses and financing the sales thereof," and that, as a result of this new venture, Alside's earnings would be materially increased and the price of the shares would rise. Plaintiffs allege that the defendants knew, or should have known, that each of the foregoing representations was false or, alternatively (Count III), that they were made negligently. Each complaint also alleges that the defendant Carpenter failed to disclose the true facts concerning Alside, namely, that Alside and its home division or...