Bochicchio v. Smith Barney, Harris Upham & Co.

• Decision Date: 17 November 1986
• Docket Number: No. 85 CIV. 6544 (PKL).,85 CIV. 6544 (PKL).
• Citation: 647 F. Supp. 1426
• Parties: Anthony BOCHICCHIO, Adeline Bochicchio and J & D Oil Co., Plaintiffs, v. SMITH BARNEY, HARRIS UPHAM & CO., INC. and Charles D'Angelo, Defendants.
• Court: U.S. District Court — Southern District of New York

647 F. Supp. 1426

Anthony BOCHICCHIO, Adeline Bochicchio and J & D Oil Co., Plaintiffs, v. SMITH BARNEY, HARRIS UPHAM & CO., INC. and Charles D'Angelo, Defendants.

No. 85 CIV. 6544 (PKL).

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

November 17, 1986.

Demov, Morris & Hammerling, New York City, for plaintiff; Stephen M. Rathkopf, Marshall H. Fishman, of counsel.

Janvey & Berglas, New York City, for defendant Smith Barney.

OPINION & ORDER

LEISURE, District Judge:

This case involves a claim by Anthony Bochicchio, his wife, Adeline Bochicchio and J & D Oil, a sole proprietorship of Mrs. Bochicchio (hereinafter referred to collectively as "plaintiffs"), against Charles D'Angelo ("D'Angelo"), and D'Angelo's former employer, Smith Barney, Harris Upham & Co., Inc. ("Smith Barney"). D'Angelo was employed by Smith Barney as an account representative and as the branch manager of its Waterbury, Connecticut office. This action arises under (1) §§ 10 and 20 of the Securities and Exchange Act of 1934, as amended ("Exchange Act"), 15 U.S.C. §§ 78j and 78t; (2) the Rules and Regulations of the Securities and Exchange Commission promulgated under the aforementioned provisions; and (3) §§ 1961(1)(D), (3)(5), 1962 and 1964 of the Racketeer Influenced and Corrupt Organization Act ("RICO"), 18 U.S.C. § 1961 et seq. Jurisdiction is conferred upon the Court by § 27 of the Exchange Act, 15 U.S.C. § 78aa; and § 1964 of RICO, 18 U.S.C. § 1964. No pendent state claims are asserted; diversity of citizenship is not alleged.

The case is now before the Court on defendant Smith Barney's motion¹ to dismiss pursuant to Fed.R.Civ.P. 12(b)(6).² The allegations in the complaint, described below, are accepted as true for the purposes of deciding this motion to dismiss. Miree v. DeKalb, 433 U.S. 25, 97 S.Ct. 2490, 53 L.Ed.2d 557 (1977). In considering Smith Barney's motion to dismiss, this Court is bound by the general rule that it "should not dismiss the complaint pursuant to Rule 12(b)(6) 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." Goldman v. Belden, 754 F.2d 1059, 1065 (2d Cir.1985), quoting Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-02, 2 L.Ed.2d 80 (1957). For the reasons set forth below, (1) Smith Barney's motion is granted with respect to plaintiffs' federal securities claims; and (2) plaintiffs are ordered, if they still choose to pursue the litigation in this Court, after due consideration of the disposition herein³, to amend their complaint with respect to their RICO claims.

FACTUAL BACKROUND

Briefly stated the facts are as follows: This action was commenced on August 20, 1985. Plaintiffs are residents of Naugatuck, Connecticut. Smith Barney is a Delaware corporation with its principal place of business in the State and City of New York; it is an investment firm, registered as a broker and dealer in securities with the Securities and Exchange Commission, and a member of all principal securities exchanges and securities self-regulatory organizations. Smith Barney previously maintained a branch office in Waterbury, Connecticut.

Defendant Charles D'Angelo is the former manager of Smith Barney's former Waterbury office. By consent order, he has been barred from the securities industry by the SEC, has pleaded guilty to criminal charges arising out of his activites, and is currently serving a prison sentence. No criminal, civil or administrative charges have been brought against Smith Barney by any federal, state or industry regulatory organization arising out of D'Angelos's actions.

According to plaintiffs' complaint, beginning in or around 1979, D'Angelo, acting as an agent of Smith Barney, represented to plaintiffs that: (1) plaintiffs could place their trust in him because he was a highly skilled expert in the securities investment field; (2) with D'Angelo's guidance, plaintiffs' funds would remain secure and would be professionally managed; (3) plaintiffs need not concern themselves with nor question D'Angelo's investment decisions because D'Angelo was "paid" to have control over the accounts; (4) if plaintiffs regularly deposited monies into the accounts, D'Angelo would make purchases and insure a regular flow of income to plaintiffs; and (5) D'Angelo would at all times be guided by plaintiffs' paramount objective — safety of principal. Complaint ¶¶ 12(b), (d-f).

Relying on these representations, plaintiffs opened securities trading accounts with Smith Barney: one in Mr. Bochicchio's name; another as a joint account for Mr. Bochicchio and his wife; and, also an account in the name of Mrs. Bochicchio's company, J. & D. Oil. The Court infers that unspecified sums of money were deposited into these accounts for investment purposes.⁴ D'Angelo was given complete control over the accounts. From 1979 through 1984 plaintiffs deposited monies in these accounts.

Plaintiffs allege that D'Angelo's representations were false. They allege that, D'Angelo made unauthorized sales of plaintiffs' securities, forged plaintiffs' endorsements on the proceed checks, converted the proceeds and made unauthorized withdrawals from plaintiffs' accounts. Complaint ¶¶ 12(f), (h). D'Angelo's unlawful actions purportedly caused plaintiffs to lose, out-of-pocket, in excess of $340,000 — consisting of deposits and excess margin payments made to Smith Barney. Plaintiffs were also defrauded into paying Smith Barney commissions for the unauthorized trades made by D'Angelo.

D'Angelo allegedly evaded detection by misrepresenting the status of plaintiffs' accounts through temporarily crediting their accounts with his own monies. D'Angelo's improper deposits enabled the margin maintenance requirements of the accounts to be met. D'Angelo then purportedly mailed to plaintiffs false statements of their accounts. Complaint ¶ 12(h)(3).

LEGAL DISCUSSION

A. The Federal Securities Claims

Smith Barney moves to dismiss plaintiffs' federal securities claims because it claims that "under the facts alleged, plaintiffs at best are able to assert only a state common law claim for conversion." Smith Barney Memorandum, 25. The operative provisions that form the basis of plaintiffs federal securities claims are § 10(b) of the Exchange Act, 15 U.S.C. § 78j(b) and SEC Rule 10b-5 promulgated thereunder, 17 CFR 240.10b-5.⁵

The essential elements of a claim for damages under these provisions are (1) damage to plaintiff, (2) caused by reliance on defendant's misrepresentations or omissions of material facts, or on a scheme by defendant to defraud, (3) made with an intent to deceive, manipulate or defraud (scienter), (4) in connection with the purchase or sale of securities and (5) furthered by defendant's use of the mails or any facility of a national securities exchange. Lloyd v. Industrial Bio-Test Laboratories, Inc., 454 F.Supp. 807, 810 (S.D.N.Y.1978). Smith Barney argues that plaintiffs' complaint fails to allege the requisite facts to satisfy the "in connection with the purchase or sale of any security" element.

In Chemical Bank v. Arthur Anderson & Co., 726 F.2d 930, 943 (2d Cir.), cert. denied, 469 U.S. 884, 105 S.Ct. 253, 83 L.Ed.2d 190 (1984), the Second Circuit noted that:

In Rubin v. United States, 449 U.S. 424 (1981) at 429 n. 6 101 S.Ct. 698, 701 n. 6, 66 L.Ed.2d 633, ..., the Supreme Court stated that it "need not decide whether misrepresentations or omissions involved in a securities transaction but not pertaining to the securities themselves can form the basis of a violation of § 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a) ." We are here compelled to decide that question, with respect to § 10(b) and Rule 10b-5 as well as § 17(a); our answer is in the negative.

Under the law of this Circuit, in order to be actionable under § 10(b) and Rule 10b-5, material misrepresentations or omissions must pertain to the securities themselves. S.E.C. v. Drysdale Securities Corp., 785 F.2d 38 (2d Cir.); cert. denied, ___ U.S. ___, 106 S.Ct. 2894, 90 L.Ed.2d 981 (1986).

In Chemical Bank, supra, 726 F.2d at 298, Judge Friendly explained:

The purpose of § 10(b) and Rule 10b-5 is to protect persons who are deceived in securities transactions—to make sure that buyers of securities get what they think they are getting and that sellers of securities are not tricked into parting with something for a price known to the buyer to be inadequate or for a consideration known to the buyer not to be what it purports to be.

In applying these laws, the courts have recognized that the "fundamental purpose" behind the enactment of the federal securities laws was to require "full and fair disclosure to participants in securities transactions of the information that would be useful to them in deciding whether to buy or sell securities." O'Brien v. Continental Illinois National Bank and Trust, 593 F.2d 54, 60 (1979).

"The Court is convinced that the `in connection with the purchase or sale of securities' requirement of the securities laws has not here been satisfied." Miller v. Smith Barney, Harris Upham & Co., Inc., Shearson/American Express, Inc., and Burdick, No. 84—4307, slip op. (S.D. N.Y. Feb. 24, 1986) (Keenan, J.) Available on WESTLAW, DCTU database. "The complaint here alleges no more than a conversion of property that happened to involve securities. The Court is unwilling to extend the reach of the securities laws to every conversion or theft of security." Pross v. Katz, 784 F.2d 455, 459 (2d Cir. 1986). In this case "the only connection with federal securities laws is that the funds were converted from a securities investment account." Smith v. Chicago Corp., 566 F.Supp. 66, 70 (N.D.Ill.1983).

Plaintiffs fail to allege that D'Angelo made any misrepresentation or omission regarding the character or nature of the securities involved. No particular security is even mentioned or alluded to in the Complaint. Plaintiffs also do not allege that they made any investment...