Sennett v. Oppenheimer & Co., Inc.

• Decision Date: 15 October 1980
• Docket Number: No. 78 C 1418.,78 C 1418.
• Citation: 502 F. Supp. 939
• Parties: Morton W. SENNETT, Plaintiff, v. OPPENHEIMER & CO., INC., Ronald L. Brownlow, and Daniel J. Piet, Defendants.
• Court: U.S. District Court — Northern District of Illinois

502 F. Supp. 939

Morton W. SENNETT, Plaintiff, v. OPPENHEIMER & CO., INC., Ronald L. Brownlow, and Daniel J. Piet, Defendants.

No. 78 C 1418.

United States District Court, N. D. Illinois, E. D.

October 15, 1980.

Michael B. Roche, Michael P. Mullen, Hubachek, Kelly, Rauch & Kirby, Chicago, Ill., for plaintiff.

George E. Weaver, Chicago, Ill., for defendants.

MEMORANDUM OPINION AND ORDER

ASPEN, District Judge:

Plaintiff Morton W. Sennett ("Sennett") filed this action in April, 1978, yet nearly 30 months later he is still attempting to frame a complaint that contains a clear and concise statement of his cause of action in compliance with the Federal Rules of Civil Procedure. In January, 1979, Judge Bua dismissed the complaint without prejudice on the grounds that it commingled various legal theories in the same count, implicating few common facts and creating unnecessary confusion, and that the continuous incorporation by reference of all the facts in Count I throughout the remaining counts was excessively repetitive and confusing. Sennett v. Oppenheimer & Co., No. 78 C 1418 (N.D. Ill. Jan. 11, 1979). By pleading each cause of action in a separate count, Sennett's first amended complaint filed in February, 1979, corrected the first problem Judge Bua noted. This Court, nevertheless, dismissed the first amended complaint because Sennett continued the confusing and repetitive practice of incorporating by reference each and every fact alleged in Count I throughout the other counts of the complaint.¹ Sennett v. Oppenheimer & Co., No. 78 C 1418 (N.D.Ill., April 9, 1980).

On May 2, 1980, Sennett filed his second amended complaint containing seven counts. As in his previous complaints, Sennett alleges that the defendants, a commercial stock brokerage firm and two of its employees,² violated the anti-fraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. Sennett claims that by means of certain misrepresentations, omissions to state necessary facts and untrue statements, defendants fraudulently induced him to open a discretionary account with Oppenheimer & Co. and then continued to act fraudulently in purchasing, selling, and managing the securities and other funds in his account, all in violation of sections 12(2) and 17(a) of the Securities Act of 1933, 15 U.S.C. §§ 77l(2) and 77q(a), and sections 10(b), 11(d), and 15(c)(1) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78k(d), (f), 78o (c)(1). Sennett maintains that the opening of the discretionary account itself constituted the purchase and sale of a "security" within the meaning of the securities laws, 15 U.S.C. §§ 77b(1), 78c(a)(10), thereby invoking the anti-fraud provisions cited above. He also alleges that whether or not this Court finds the discretionary account to be a "security," the defendants engaged in a continuing scheme or plan of misrepresentation and fraud in connection with the purchase or sale of securities beginning with the allegedly fraudulent inducement to open the discretionary account and continuing through the alleged fraud in trading the account.

Defendants have moved to dismiss the second amended complaint for failure to comply with the prior orders of Judge Bua and this Court and specifically Rules 8 and 9 of the Federal Rules of Civil Procedure. Defendants also move for dismissal of the complaint pursuant to Rule 12(b)(6) of the Federal Rules for failure to state a claim upon which relief may be granted. Except for the contention that the discretionary account itself constitutes a security within the meaning of the 1933 and 1934 Acts, a proposition addressed and rejected later in this opinion, this Court finds that Counts I through V adequately state causes of action under the securities laws at this stage of the proceedings. This Court further holds that Count VI, asserting a private right of action under section 11(d), 15 U.S.C. § 78k(d), is dismissed for lack of subject matter jurisdiction. Count VII, asserting a cause of action under the Illinois Securities Law of 1953, Ill.Rev.Stat., ch. 121½, § 137.1 et seq., is also dismissed for the reasons set forth in this Court's prior opinion severing those allegations from the first amended complaint. Sennett v. Oppenheimer & Co., No. 78 C 1418, Mem.Op. at 2-7 (N.D.Ill., April 9, 1980).

Counts I Through V

Counts I through V allege facts that, if true, constitute a continuous scheme or plan by which the defendants intended to and did defraud Sennett.³ Sennett charges that he was induced to open an account with defendants on the basis of their representations that, among other things, they used a proven secret and unique method of generating profits through stock investments and trading in securities; that Sennett would earn a return of at least 20 percent on his investment; that they would preserve Sennett's principal investment; and that he would receive discounts on commissions charged to his account. Sennett further alleges that he relied on these representations and that defendants failed to disclose certain other material facts: that defendants traded in volatile and highly speculative securities without his consent and against his stated investment objectives; that they placed plaintiff in unsound options or short positions in certain securities; and that they committed other acts, many alleged to be fraudulent and intentional, that caused Sennett damages in excess of $100,000 between May and August of 1977. The defendants apparently do not contest the fact that if the allegations in the amended complaint were true, the alleged misrepresentations and assorted fraudulent acts would have occurred "in connection with the sale or purchase of securities" as that phrase has been interpreted by the Supreme Court. Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975); Superintendent of Insurance v. Bankers Life and Casualty Co., 404 U.S. 6, 92 S.Ct. 165, 30 L.Ed.2d 128 (1971).

On this third effort, Sennett has barely managed to arrange these allegations into a coherent complaint that complies with the Federal Rules of Civil Procedure. Although the paragraphs identifying the parties, venue, and the general factual overview of the plan of fraud and misrepresentation that Sennett alleges in this case are incorporated by reference throughout the seven counts of the complaint, Sennett has been somewhat more selective here than in his previous efforts by incorporating, for the most part, only those specific elements necessary to each cause of action asserted in the separate counts. Furthermore, the complaint contains a sufficiently plain statement of the grounds upon which relief is sought and the averments of fraud are stated with sufficient particularity to satisfy Rules 8 and 9(b) of the Federal Rules of Civil Procedure. "Pleading is no longer a procedural game of skill at which counsel must be adept in order to insure the decision of his case on the merits." Sundstrand Corp. v. Standard Kollsman Industries, Inc., 488 F.2d 807, 811 (7th Cir. 1973). Although this is Sennett's third draft of his complaint, it still must be construed, whenever possible, in his favor.

Count I asserts a cause of action for violation of section 10(b) of the Securities Exchange Act. It adequately alleges the parameters of such a violation through intentional and material misrepresentations, omissions, and untrue statements of fact upon which Sennett allegedly relied in connection with the defendants' purchases and sales of securities on his behalf. Count II asserts a separate cause of action for churning under both section 10(b) and section 15(c)(1) of the Exchange Act. Courts have held that the same allegations may establish a violation of both sections for churning and thus the incorporation of much of Count I into Count II is necessary to state a cause of action. Landry v. Hemphill, Noyes & Co., 473 F.2d 365 (1st Cir.), cert. denied, 414 U.S. 1002, 94 S.Ct. 356, 38 L.Ed.2d 237 (1973). Count III asserts a separate cause of action for violation of section 15(c)(1) and (2) of the Exchange Act which also necessarily includes a fair amount of incorporation of the allegations in Count I. To the extent possible, however, Sennett incorporated only those allegations that are relevant to the causes of action asserted in Counts II and III.

Count IV, which asserts a private right of action under section 17(a) of the Securities Act of 1933, necessarily incorporates and realleges many of the allegations contained in Count I since the United States Court of Appeals for the Seventh Circuit has held that the elements of a private cause of action under section 17(a) of the Securities Act of 1933 are substantially the same as those necessary to make out a claim under section 10(b) and Rule 10b-5. See Lincoln National Bank v. Herber, 604 F.2d 1038, 1040 n.2 (7th Cir. 1979); Daniel v. International Brotherhood of Teamsters, 561 F.2d 1223, 1245-46 (7th Cir. 1977), rev'd on other grounds, 439 U.S. 551, 99 S.Ct. 790, 58 L.Ed.2d 808 (1979). See also SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 867-68 (2d Cir. 1968) (Friendly, J. concurring), cert. denied sub nom. Coates v. SEC, 394 U.S. 976, 89 S.Ct. 1454, 22 L.Ed.2d 756 (1969); Felts v. National Account Systems Ass'n, Inc., 469 F.Supp. 54, 64 (N.D.Miss.1978).

Count V asserts a cause of action under section 12(2) of the Securities Act to which defendants take particular umbrage in their memorandum in support of their motion to dismiss because the complaint switches back and forth between the paragraphs freshly stated in Count V and those incorporated by reference to Count I. It is obvious, however, that Sennett has framed Count V of his complaint in such a way as to pare out those allegations in the section 10(b) claim asserted in Count I that are unnecessary to a claim under section 12(2). For example, Sennett has not incorporated or realleged those paragraphs of Count I that deal with...