Rush v. Oppenheimer & Co., Inc.

• Decision Date: 23 August 1984
• Docket Number: No. 84 Civ. 3219 (RWS).,84 Civ. 3219 (RWS).
• Citation: 592 F. Supp. 1108
• Parties: R. Stockton RUSH III, Plaintiff, v. OPPENHEIMER & CO., INC. and Scott Seskis, Defendants.
• Court: U.S. District Court — Southern District of New York

592 F. Supp. 1108

R. Stockton RUSH III, Plaintiff, v. OPPENHEIMER & CO., INC. and Scott Seskis, Defendants.

No. 84 Civ. 3219 (RWS).

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

August 23, 1984.

Lovell & Stewart, New York City, for plaintiff.

Joan Caridi, New York City, for defendants.

OPINION

SWEET, District Judge.

R. Stockton Rush III ("Rush") commenced this action against Oppenheimer and Co. and Scott Seskis ("defendants") in order to seek the recovery of damages for alleged violations of the federal securities laws (Count One), violations of common law principles of fraud and fiduciary duty (Count Two), and the Federal Organized Crime Control Act of 1970 (Count Three). Defendants moved for an order dismissing the complaint pursuant to (1) Rule 9(b), Fed.R.Civ.P., for failure to allege fraud with the requisite particularity, and (2) Rule 12(b)(6), Fed.R.Civ.P., for failure to state a claim upon which relief can be granted. Rush has consented to file an amended complaint that will satisfy the pleading requirements of Fed.R.Civ.P. 9(b). Defendants' remaining 12(b)(6) motion is denied with respect to Count One, granted with respect to Count Two to the extent of dismissing Rush's request for punitive damages, and granted with respect to Count Three.

Background

Rush filed this action on May 8, 1984, alleging three causes of action against defendants. The first count alleges that defendants violated section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder by the Securities and Exchange Commission, 17 C.F.R. § 240.10b-5 (1983). Rush alleges 10b-5 violations by defendants including excessive trading ("churning") and unsuitable recommendations as to purchases of stocks.

The second count asserts in a pendent state claim that defendants violated a fiduciary duty to Rush arising under the laws of New York. The final count alleges that defendants' actions constitute on-going "racketeering activity" within the meaning of section 901(g) of the Organized Crime Control Act of 1970, 18 U.S.C. Section 1961(1)(D).

Rush alleges that from November, 1981 until December, 1983 defendant Scott Seskis ("Seskis") worked as a registered representative and an account executive of, and under the control and supervision of, defendant Oppenheimer and Co. ("Oppenheimer"), a Delaware corporation engaged in the business of securities brokerage. Rush claims to have been, at the inception of his dealings with defendants, a financially inexperienced and unsophisticated eighteen-year old with no prior contacts with investment houses or the "devices of Wall Street." Rush asserts that beginning in November, 1981, Seskis persistently solicited Rush's business and in December, 1981, Rush opened an investment account with Oppenheimer, with Seskis acting as Rush's "customer man." Rush alleges that from the earliest moments of his relationship with Seskis he made it clear that he was a novice at investing, that his principal concern was an inheritance of 20,000 fully-paid shares of Natomas Company common stock held in trust for him, and that for tax reasons he could not sell his Natomas stock. Rush contends that despite Seskis' persistent efforts in November and December of 1981 to convince him to transfer his Natomas shares from his trust account into his Oppenheimer account, where they could be used as collateral for margin purchases, Rush refused to consent to a transfer. Rather, Rush alleges that he clearly conveyed to Seskis his unwillingness to make investments on margin, a process which he did not understand and which he considered "dangerous."

Rush asserts that from January until March 1982 defendants made numerous untrue statements in an effort to convince him to abandon his conservative investment strategy. Such alleged assertions included:

(a) that defendants were among the few brokers in the country who had the skill to invest in and "write" call options on equity securities in a conservative, risk-free system;

(b) that defendant Seskis had developed and refined a system of writing call options which was guaranteed to produce income as regularly as "dividends on blue chip stock";

(c) that defendant Seskis had numerous large accounts trusting him to invest for them in securities and, particularly, options thereon pursuant to his system;

(d) that defendant Seskis was financially well-off, recommended profitable options and other investments on a consistent basis, and that "see, every day that goes by that you don't get your Natomas stock in here, you lose money we would have made for you writing options on it";

(e) that defendants had "excellent" skill, operations and integrity on which plaintiff could rely and in which he could place his trust and confidence, for investment advice in the nature of a fiduciary relationship as existed over his trust account; and

(f) that defendants intended to avoid the "margin" investments which plaintiff had stated he wanted to avoid, and intended to undertake a prudent Natomas options writing program against his Natomas stock, and that he should, therefore, transfer the Natomas shares out of his trust account where he would make more money.

Rush alleges that in reliance on these assertions by defendants, on or about March 31, 1982, he entrusted his Natomas shares with defendants and authorized defendants to undertake a strictly limited program of writing Natomas options against such stock. Rush asserts that in the 18 months following the transfer of control over the Natomas shares to defendants, the defendants purchased unauthorized, unsuitable securities for Rush's account; charged Rush $92,000 in brokerage commissions and $47,000 in margin interest on an average equity balance of $275,000; caused him in excess of $300,000 in "investment" losses; made 325 separate transactions in his account; transformed such account into defendant Seskis' largest single and principal source of income; and "turned over" such $275,000 average account balance in excess of ten times. Throughout this period, and without Rush's permission, defendants allegedly traded in unauthorized stocks and financed these purchases with "margin" loans on Rush's account secured by Rush's Natomas stock. Rush alleges that defendants would only obtain his consent to these transactions subsequent to the transaction itself, and that such consent was obtained obliquely at best and by further untruthful assertions regarding the nature of the stocks purchased and the justification for such purchases.

Rush further alleges that in June, 1982, he informed defendants that he would be out of touch for the summer. He alleges that he expressly prohibited them from partaking in any transactions other than liquidating existing non-Natomas positions or writing options against his Natomas stock and that he received assurances of such limitations. Nonetheless, Rush claims that in the period between June 14 and August 11 defendants' escalated the prohibited activities, initiating numerous purchases and sales of securities financed by margin loans on Rush's account.

Upon his return in August, Rush alleges to have discovered and protested vigorously these continued violations of his understanding with Seskis. Rush claims that defendants', in order to maintain Rush's acquiescence in transactions violative of the pre-summer agreement and in order to maintain Rush as a client, then began to deceive Rush about both the nature of the securities defendants were purchasing and the underlying profitability of Rush's account, knowingly transforming large losses into apparent profits. Relying upon these false reports, Rush claims to have acquiesced to defendants' continued control over his account from August 1982 until September 1983, during which time defendants continued to purchase unauthorized stocks and highly risky options through margin financing. Simultaneously, defendants continued throughout this period to assert that Rush's accounts were profitable.

Finally, in September 1983, upon being informed of the nature of the defendants' transactions over the prior period, Rush allegedly demanded a written profit and loss accounting. Rush maintains that defendants refused to produce such a document, falsely claiming several times to have sent such an accounting to Rush.

Finally, Rush alleges that defendants, in September 1983, convinced him to purchase 11,000 shares of "Computer Devices" by falsely and knowingly asserting that a French financing would bolster that company's prospects. On or about October 31, 1983, Computer Devices filed for protection under Chapter 11 of the Bankruptcy Code, and Rush alleges that the financing of which defendants informed Rush was never a reality.

Soon after October 31, 1983 Rush claims to have ordered the liquidation of all his securities at Oppenheimer.

Count One — The § 10b-5 Claim

For Count One to survive defendants' motion to dismiss pursuant to Rule 12(b)(6), Fed.R.Civ.P., it must assert that (1) defendants misrepresented or omitted to state material facts in connection with the purchase or sale of a security, (2) Rush relied to his detriment upon defendants' misrepresentations or omissions; and (3) defendants made their misrepresentations or omissions with "scienter," that is, an intent to deceive, manipulate, or defraud Rush. See Savino v. E.F. Hutton & Co., Inc., 507 F.Supp. 1225, 1231 (S.D.N.Y.1981); Lloyd v. Industrial Bio-Test Laboratories, Inc., 454 F.Supp. 807, 810 (S.D.N.Y.1978).

Numerous misrepresentations are alleged by Rush, including (1) the misrepresentation of defendants' intent to manage the account for the best interest of Rush and within the strict investing guidelines defined by Rush; (2) the misrepresentation of defendant Seskis' individual experience and skill with respect to various investment devices; (3) the misrepresentations with respect to the profitability of Rush's account; (4) the misrepresentation with respect to defendants'...