Berman v. Bache, Halsey, Stuart, Shields

• Decision Date: 02 February 1979
• Docket Number: No. C-2-77-723.,C-2-77-723.
• Citation: 467 F. Supp. 311
• Parties: Lawrence BERMAN, Plaintiff, v. BACHE, HALSEY, STUART, SHIELDS, INC., Defendant.
• Court: U.S. District Court — Southern District of Ohio

467 F. Supp. 311

Lawrence BERMAN, Plaintiff, v. BACHE, HALSEY, STUART, SHIELDS, INC., Defendant.

No. C-2-77-723.

United States District Court, S. D. Ohio, E. D.

February 2, 1979.

William B. Logan, Jr., Zacks, Luper & Wolinetz, Robert C. Perrin, Columbus, Ohio, for plaintiff.

Richard C. Graham, Sol Morton Isaac, Isaac, Graham & Nester, Columbus, Ohio, for defendant.

OPINION AND ORDER

KINNEARY, District Judge.

This matter is before the Court on the motion of the defendant to dismiss and the motion of the defendant to stay the action pending arbitration.

I

On September 16, 1977, the plaintiff, Lawrence Berman, filed a complaint against the defendant, Bache, Halsey, Stuart, Shields, Inc., alleging causes of action based upon the Securities Act of 1933, 15 U.S.C. § 77a et seq., the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq., the Commodity Exchange Act of 1936, 7 U.S.C. § 1 et seq., and the common law of the State of Ohio. The complaint alleged that the plaintiff executed a customer margin and lending agreement with the defendant in 1960. The plaintiff's account was largely unused until he approached the defendant in late 1972 and then began trading in stocks, commodities and metals through the defendant's since deceased employee, one Ned Grandstaff. The transactions which comprise the subject matter of this complaint took place between January 8, 1973 and August 8, 1974.

The defendant subsequently moved this Court to dismiss all nine counts of the original complaint or to stay the action pending arbitration which was provided for in the margin agreement between the parties. The plaintiff not only filed memoranda in opposition to these motions, but also sought leave to file a second amended complaint purporting to set out in greater factual detail the basis of the allegations of fraud originally pleaded. Leave to file the second amended complaint was granted by this Court in an order dated February 8, 1978.

In addition to the pleadings, both parties have filed affidavits with respect to the motion to dismiss. The defendant has offered the statement of two surviving account representatives who either worked on the plaintiff's account or observed the relationship between the plaintiff and Mr. Grandstaff. Both affidavits indicate that the plaintiff made numerous and daily visits to the offices of the defendant and approved or was informed of all of the investments made on his behalf; in the opinion of both affiants, the plaintiff was a "sophisticated" investor. The plaintiff's affidavit denies any investment expertise on his part, and states that, although his visits to the defendant's office were frequent, Mr. Grandstaff had actual discretion and in-fact control over the plaintiff's investment decisions.

The plaintiff's affidavit further describes his late 1972 meeting with Mr. Grandstaff at which time he orally communicated his "investment objectives," which were

(a) to earn enough to pay the large capital gains;

(b) to take no undue risk which would dissipate my capital;

(c) to take no large loss in any single transaction;

(d) not to invest in any commodities, because there would be less chance of erosion of my capital with stocks;

(e) to have someone to advise me who was an expert and who was familiar with my stated objectives and to do whatever that expert told me to do.

The plaintiff's affidavit also contains the following statement:

7. Sometime during 1973, and I believe it was April or May, Mr. Grandstaff strongly suggested that I invest in commodities futures contracts. I informed him that I had no interest in that type of investment, because of the high risk of loss of principle sic.

8. After much discussion, I reluctantly agreed to enter that market. Mr. Grandstaff had told me that he was accustomed to guiding investors in that market and that he would take care of me.

II

In considering the complaint as originally filed and the various memoranda and affidavits, it is apparent that the crux of the plaintiff's complaint against the defendant is the trading in commodities futures contracts in corn, wheat, soybeans, soybean meal and palladium. In light of the defendant's argument that such commodities futures contracts are not "securities" within the meaning of the Securities Act of 1933 or the Securities Exchange Act of 1934, the plaintiff's second amended complaint lists, under "The Facts and Circumstances" a number of transactions in stocks which, it is stated, are also "complained of."

The addition of these transactions in what are concededly securities evidently has a two-fold purpose. The first is to establish the jurisdiction of this Court directly under the 1933 and 1934 Acts with respect to the alleged fraud of the defendants in these transactions involving securities. The second is to establish the jurisdiction of this Court under the 1933 and 1934 Acts with respect to the allegedly fraudulent commodities futures transactions by alleging a general scheme to defraud the plaintiff through the trading of both securities and commodities. See Hecht v. Harris, Upham & Co., 430 F.2d 1202, 1210 (CA 9, 1970) affirming 283 F.Supp. 417 (N.D.Calif.1968). This second theory of jurisdiction under the securities laws will be treated further below. The Court will now consider each count of the second amended complaint seriatim.

Count One

Count 1 deals solely with the actions of the defendant "in connection with the sales and purchases by plaintiff of securities traded over national stock exchanges." Complaint, ¶ 9. This count, then, relates only to transactions in securities admittedly covered by the 1933 and 1934 Acts. The factual basis for the alleged fraud in these transactions is set out in paragraph 10(a). After stating that plaintiff had little investment expertise and that the defendant did have such expertise, the complaint alleges that

defendant, however, knew that its guidance did not fit within the parameters sic of Plaintiff's stated investment objectives, and Defendant was aware that Plaintiff was relying on the guidance supplied by Defendant. Defendant intentionally, or with such recklessness as to indicate an intention, guided Plaintiff to follow a course of action which was, in fact, inconsistent with that desired by Plaintiff.

Defendant objects to Count 1 on the basis that plaintiff has not alleged fraud with the specificity required by Rule 9(b), Federal Rules of Civil Procedure. This Court agrees.

Rule 9(b) provides that "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 of a person may be averred generally." Three reasons are usually assigned as the chief concerns underlying this rule. The first is to deter the filing of complaints in order to discover unknown wrongs; the second is to protect potential defendants from reputational damage due to the serious nature of a charge of fraud; the third is to provide the defendants with concrete notice of the particular conduct for which a defense must be prepared. Gross v. Diversified Mortgage Investors, 431 F.Supp. 1080, 1087 (S.D.N.Y., 1977). In Count 1 of this complaint the plaintiff does not provide sufficient particularity to alleviate any of these concerns.

Nowhere in Count 1 is it alleged that the defendant made any material misrepresentation, either affirmatively or by omission, which misled the plaintiff to his detriment. If these elements of securities fraud are intended to be gleaned from the allegation that the defendant did not follow the investment objectives of the plaintiff, the complaint does not state what those objectives were or in what way the defendant violated them. Nor does Count 1 specify which of the securities transactions which are generally said to be "complained of" earlier in the complaint did not comport with the plaintiff's investment objectives. Were the Court to read the affidavit submitted by the plaintiff with the memorandum contra the motion to dismiss as a part of the complaint, the plaintiff would not be benefitted. The investment objectives listed in the affidavit make it difficult to imagine how those objectives could have been violated by the transactions described in Count 1. The Court need not speculate as to what constituted this fraud, nor attempt to imagine a set of facts by which the plaintiff could prevail. The standard here is Rule 9(b), not Conley v. Gibson, 355 U.S. 41, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957).

In sum, this complaint falls far short of the specificity required in such cases as Segal v. Gordon, 467 F.2d 602, 608 (CA 2, 1972), Rich v. Touche Ross & Co., 68 F.R.D. 243 (S.D.N.Y., 1975), and Gross v. Diversified Mortgage Investors, supra, 431 F.Supp. at 1087. In a factually similar case, Judge Knapp of the Southern District of New York held that when "stripped of its conclusory allegations of fraud, the complaint alleges no more than that defendants negligently managed plaintiff's portfolio in connection with advising her on investment decisions," no cause of action can be stated under Rule 10b-5. Carroll v. Bear, Stearns & Co., 416 F.Supp. 998, 1000 (S.D.N.Y.1976). Although that Court's insistance that facts comprising scienter must be alleged after the Supreme Court decision in Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976), appears to conflict with the second sentence of Rule 9(b), F.R.C.P., the Court also assigned the failure to allege the circumstances of the fraud with particularity as an alternate basis for dismissal, 416 F.Supp. at 1000 n. 1.

Judge Knapp's opinion in the Carroll case also makes the following observation with respect to an allegation of "churning:"¹

Moreover, . . . a conclusory allegation of churning — without a factual support —cannot save this complaint. At most, the allegations in plaintiff's complaint demonstrate that defendants turned over the bulk of her account once in

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