Schnitzer v. Oppenheimer & Co., Inc.

• Decision Date: 31 July 1985
• Docket Number: No. Civ. 84-1053-PA.,Civ. 84-1053-PA.
• Parties: Manuel SCHNITZER, Gilbert Schnitzer, Morton Goodman, Edith Goodman, Kathleen Lewis, and Kenneth Lewis, Plaintiffs, v. OPPENHEIMER & CO., INC., Richard Matoff and Robert Gordon, Defendants.
• Court: U.S. District Court — District of Oregon

633 F. Supp. 92

Manuel SCHNITZER, Gilbert Schnitzer, Morton Goodman, Edith Goodman, Kathleen Lewis, and Kenneth Lewis, Plaintiffs, v. OPPENHEIMER & CO., INC., Richard Matoff and Robert Gordon, Defendants.

No. Civ. 84-1053-PA.

United States District Court, D. Oregon.

July 31, 1985.

COPYRIGHT MATERIAL OMITTED

Kenneth M. Novack, Christopher W. Angius, Ball, Janik & Novack, Portland, Or., for plaintiffs.

Jeffrey A. Babener, Michael McArthur-Phillips, McMenamin, Joseph, Babener & Carpenter, Portland, Or., Robert H. Logan, David M. Grey, Keesal, Young & Logan, P.C., Long Beach, Cal., for defendants.

OPINION

PANNER, Chief Judge.

Plaintiffs are investors who bring this action against defendants Oppenheimer & Co., Inc. (Oppenheimer), Oppenheimer broker Richard Matoff, and Oppenheimer tax arbitrage specialist Robert Gordon. The action arises from an investment scheme in which plaintiffs actively traded large amounts of closed-end investment company shares. Plaintiffs allege common law fraud and negligence, numerous federal and state securities laws violations, and violations of federal and Oregon Racketeering Influenced and Corrupt Organizations Acts (RICO).

Defendants Oppenheimer and Matoff move to dismiss the federal and state RICO claims pursuant to Federal Rules of Civil Procedure 9(b) and 12(b)(6), to compel arbitration of certain claims, and to stay trial of other claims pending arbitration. I grant the motion to dismiss. Dismissal of counts nine and twelve is with prejudice. Dismissal of counts ten, eleven, thirteen, and fourteen is without prejudice. Plaintiffs have twenty days to file an amended complaint. I deny the motions to compel arbitration and to stay trial.

BACKGROUND

Plaintiffs allege the following facts in their complaint. During 1982 and 1983 Oppenheimer, Matoff, Gordon, and other Oppenheimer employees promoted the Oppenheimer Tax Arbitrage Program (Program). This consisted of a program of purchases and sales in shares of publicly traded closed-end investment companies. Investors executed margin agreements, allowing Oppenheimer to purchase large numbers of the shares and hold them for thirty-two days. The Program description provided that the shares would be sold on the thirty-second day after purchase. Participation in the Program also required plaintiffs to incur large amounts of debt.

Oppenheimer told plaintiffs that by participating in the Program, they could convert short term capital gains into long term capital gains in thirty-two days, and take advantage of other attractive tax benefits. Matoff and Gordon would select the shares that would maximize these benefits.

In 1983, Oppenheimer bought for plaintiffs about 70,000 shares of U.S. & Foreign Securities Corp. (UFO), a publicly traded investment company. Plaintiffs were unable to sell their UFO shares on the thirty-second day after purchase because of heavy selling of UFO shares by other Program investors and other UFO shareholders. Plaintiffs disposed of their shares afterwards, but at a price below what defendants had led them to expect. Plaintiffs also had to pay interest on the debt incurred to purchase the shares after the thirty-two day holding period. Plaintiffs' actual damages total about $307,500.

Defendants made several omissions and misstatements regarding the Program. For example, defendants failed to inform plaintiffs that the volume of UFO shares that plaintiffs and other Program investors would be required to sell in one day would be substantially greater than the average monthly trading volume in the shares, that this would greatly depress the shares' market price, and that plaintiffs would incur substantial losses as a result. Defendants also said that plaintiffs would be able to sell their shares on the thirty-second day of the holding period and that the sales would not exceed the capital gains distributions received on sales during the holding period.

The federal RICO claims are plead in counts nine to eleven. Counts nine and ten are plead in the alternative, in that count nine names Oppenheimer as a RICO defendant while count ten does not. In count eleven, plaintiffs allege that Oppenheimer should be vicariously liable for the RICO violations of its employees. The state RICO claims, which are plead in counts twelve to fourteen, replicate the federal claims.

STANDARDS

Rule 12(b)(6).

A motion to dismiss should not be granted unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief. Conley v. Gibson, 355 U.S. 41, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957). Thus the complaint should be construed in the light most favorable to plaintiff.

Rule 9(b).

Rule 9(b) provides:

In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other condition of mind may be averred generally.

In Walling v. Beverly Enterprises, 476 F.2d 393 (9th Cir.1973), the Ninth Circuit adopted a relaxed approach to Rule 9(b).

Rule 9(b) requires that the circumstances constituting fraud must be stated with particularity. But the rule does not require nor make legitimate the pleading of detailed evidentiary matter. ... Nor does the rule require any particularity in connection with an averment of intent, knowledge or condition of mind. It only requires the identification of the circumstances constituting fraud so that the defendant can prepare an adequate answer from the allegations.

476 F.2d at 397 (citations omitted). The Walling court held that a complaint alleging the time, place, and nature of the alleged fraud satisfied Rule 9(b). In Miscellaneous Service Workers v. Philco Ford Corp., 661 F.2d 776, 782 (9th Cir.1981), the Circuit interpreted the rule to require that the pleader also state the specific content of the false representations as well as the identities of the parties to the mispresentations.

DISCUSSION

I. Motion To Dismiss The RICO Claims.

Plaintiffs' federal RICO claims are stated in counts nine to eleven. Count nine is dismissed with prejudice. Counts ten and eleven are dismissed without prejudice.

A. Pattern of Racketeering.

Defendants' first argument is that there is no pattern of racketeering activity here. Each subsection of section 1962 requires a "pattern of racketeering activity." Such a "pattern" requires "at least two acts of racketeering activity." 18 U.S.C. § 1961(5). An act of "racketeering activity" is done by committing one of many state and federal offenses enumerated in section 1961(1). Plaintiffs assert that the predicate offenses here are the wire and mail fraud associated with promotion of the Program. Securities fraud could also be added to this list.

1. Prior Criminal Convictions.

Plaintiffs need not plead prior criminal convictions for the predicate offenses. Sedima S.P.R.L. v. Imrex Co., Inc., ___ U.S. ___, 105 S.Ct. 3275, 87 L.Ed.2d 346 (1985).

2. Probable Cause Pleading.

Defendants also argue that plaintiffs fail to plead a pattern of racketeering activity because they have not plead the predicate offenses with sufficient particularity to demonstrate probable cause that they occurred. Three district courts have imposed a probable cause requirement. Laterza v. American Broadcasting Co., Inc., 581 F.Supp. 408, 413 (S.D.N.Y.1984); Taylor v. Bear Stearns & Co., 572 F.Supp. 667, 682-83 (N.D.Ga.1983); Bache Halsey Stuart Shields v. Tracy Collins Bank, 558 F.Supp. 1042 (D.Utah 1983). While I sympathize with these courts' intentions, I agree with the Seventh Circuit that such a requirement would be unrealistic.

A determination of probable cause in the criminal context ordinarily involves some evaluation of the reliability of specific evidence. Even the most specific allegations do not establish probable cause unless they are reliable. We are, to say the least, perplexed as to how a court might undertake such evaluations of reliability in deciding the motion to dismiss under Rule 12.... Yet the approach of the District Court in Bache Halsey appears to require a plaintiff to establish a case before any discovery is permitted. The Bache Halsey court argued that such specificity was needed in order to evaluate the merits of a claim and to distinguish between well-founded and frivolous claims.... While the Court's motives are admirable, its approach seems to us to be impractical. We see no grounds for demanding that a civil RICO plaintiff essentially plead evidence and prove the case in the complaint.

Haroco, Inc. v. American National Bank & Trust Co. of Chicago, 747 F.2d 384, 404 (7th Cir.1984) (citation omitted), aff'd on other grounds, ___ U.S. ___, 105 S.Ct. 3291, 87 L.Ed.2d 437 (1985).

While I will not go so far as to require probable cause pleading, I agree that RICO plaintiff must meet a higher pleading standard than that imposed on an ordinary plaintiff. RICO's in terrorem effect is potent, in that a RICO defendant faces the unsavory label "racketeer" as well as the risk of triple damages. In many cases the RICO defendant may be guilty of no more than negligence, yet his reputation for honesty is at great risk. Because a RICO claim threatens the same kind of harm to a professional reputation as a fraud claim, a RICO plaintiff should plead the facts constituting the predicate offenses with the particularity required by Rule 9(b). This requirement is especially appropriate where, as here, the predicate offenses alleged in the complaint are acts of fraud.

Accordingly, allegations based on information and belief are not acceptable unless the complaint specifies the source of the information and the reasons upon which the belief is founded. Similarly, I will not automatically assume that Rule 11 has been honored. Triple damages offer too great a temptation. See Taylor, 572 F.Supp. at 682.

Plaintiffs' federal RICO counts alleging primary liability are not plead with the particularity required by Rule 9(b).

B. Enterprise...