Cohen v. Prudential-Bache Securities, Inc.

• Decision Date: 16 May 1989
• Docket Number: No. 88 CIV. 3448 (SWK).,88 CIV. 3448 (SWK).
• Parties: Mildred COHEN, Plaintiff, v. PRUDENTIAL-BACHE SECURITIES, INC., and Diane James, Defendants.
• Court: U.S. District Court — Southern District of New York

713 F. Supp. 653

Mildred COHEN, Plaintiff, v. PRUDENTIAL-BACHE SECURITIES, INC., and Diane James, Defendants.

No. 88 CIV. 3448 (SWK).

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

May 16, 1989.

COPYRIGHT MATERIAL OMITTED

Moser & Henkin by Norman E. Henkin, Alice P. Henkin, New York City, for plaintiff.

Hertzog, Calamari & Gleason by Loretta A. Preska, New York City, for defendants.

MEMORANDUM OPINION AND ORDER

KRAM, District Judge.

This action is brought to recover damages for alleged violations of the federal securities laws and various related state laws, including common law fraud, breach of contract and breach of fiduciary duty. More specifically, plaintiff sues for (1) violations of section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j and the associated Rule 10b-5 promulgated by the S.E.C., (2) violations of section 12(2) of the Securities Act of 1933, 15 U.S.C. § 77l, (3) violations of section 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q, (4) breach of oral contract, (5) common law fraud, (6) breach of fiduciary duty, and (7) violations of section 352-c of the New York General Business Law (the "Martin Act"). Defendants have moved to dismiss the complaint (1) for failure to state a claim under section 10(b) and Rule 10b-5, (2) for failure to comply with the one-year statute of limitations under section 12(2), (3) for failure to state a claim under section 17(a) and, assuming success on the above, (4) for lack of pendent jurisdiction as to the state law claims.

BACKGROUND

In her amended complaint,¹ plaintiff alleges that defendant James defrauded her by making material misrepresentations and omissions, as well as by engaging in other deceptive or manipulative activity. Plaintiff, who has no financial training and who retired in 1979, lives on a fixed income of approximately $30,000 a year. At some point in the 1970's plaintiff was introduced by telephone to Diane Capaccio, who later changed her name to Diane James, and who served as financial advisor and securities broker to plaintiff. At this time, plaintiff advised James that her primary investment objective was to make safe investments and to maximize annual yield without jeopardizing her capital. James was working for the Shearson Company at the time plaintiff first met her, but even after James moved to a position with E.F. Hutton, she continued to act as plaintiff's advisor and broker, regularly speaking with her by telephone, encouraging plaintiff to rely on her investment advice, and recommending investments in securities. James acted as broker on the transactions she recommended. James continued to advise plaintiff and act as her broker after James relocated to California and began working for defendant Prudential-Bache Securities, Inc. ("Prudential"). Plaintiff continued to rely on James at all times.

In February, 1986, James urged plaintiff to liquidate certain securities held in plaintiff's Prudential portfolio and in that month James did so. In April of that year, James "repeatedly and very strongly urged" plaintiff to invest in a Texas limited partnership known as the CSH-1 Hotel Limited Partnership ("CSH-1"). Plaintiff alleges on information and belief, based on promotional materials obtained, that Prudential acted as the "special limited partner" and promotor of CSH-1. James informed plaintiff verbally when?? that investment in CSH-1 was appropriate in light of plaintiff's investment objectives. James told plaintiff that she could expect a very strong cash flow without risk, but that she needed to act quickly so as not lose the opportunity. Plaintiff received an undated memorandum from defendants that stated in part: "TIMELY AND URGENT —PLEASE REVIEW NOW!!! UNITS ARE ONLY A FEW LEFT!" The memorandum also promised a tax-free return of 13.4% and stated that investors placed only $7,744.50 at risk before "write-offs", while noting "NO $ AT RISK at any time with write off + cash returned before sale".

In a telephone conversation with plaintiff in April, 1986, James told plaintiff that the monies already in her Prudential account would be sufficient for the entire CSH-1 investment and that the total investment by plaintiff would not be greater than $8500. No mention was made of the need to make any future payments. James, working through Prudential, forwarded a number of documents to plaintiff for her signature. Without understanding the nature of the documents and on the advice of James, plaintiff signed these papers and returned them to Prudential at some point prior to April 25, 1986. She did not make copies and Prudential did not send her any. James later informed plaintiff that payment for the CSH-1 investment was made from her Prudential portfolio. In November of 1986 and May of 1987, plaintiff made payments of $2,984.25 and $3,087.75, respectively, concerning CSH-1 after such payments were demanded. In October, 1987, the Note Collection Department of Manufacturers Hanover Trust Company demanded payment of $8500 respecting CSH-1, but plaintiff did not understand nor pay. On October 23, 1987, plaintiff began receiving notices from the Fireman's Insurance Company of North America demanding payment, advising her that she had signed a promissory note guaranteed by Fireman's Insurance and that she was in default. The note she allegedly signed obligates plaintiff to pay $54,000 plus 11.2% on unpaid principal, for a total of $84,752.50 through 1991.

Plaintiff claims that defendants never informed her that CSH-1 was a tax shelter designed for high income-bracket persons, inappropriate for investors with moderate fixed income, and that the investment was risky. Plaintiff's counsel became aware of these facts upon receipt of the CSH-1 Subscription Agreement in January, 1988. Plaintiff claims her investment is at risk, especially in light of threats by Fireman's Insurance to sell plaintiff's shares. Plaintiff also asserts that neither defendant ever asked her for a statement of her income, assets or net worth, and never discussed tax shelters with her.

Plaintiff further alleges, on information and belief, that on or about April 25, 1986, James filled out an investor questionnaire form for plaintiff showing plaintiff's gross income (actual or projected) in excess of $100,000 for each year from 1984 through 1989, indicating that thirty percent of her income came from salary, and showing a net worth of $1,180,000. Plaintiff bases this allegation on a copy of the investor questionnaire provided to her counsel by Fireman's Insurance, and plaintiff's conclusion that the handwriting on the form is not plaintiff's, but instead that of James. Plaintiff, after retiring in 1979, states she has earned no salary and receives only $30,000 per year, with a net worth between $90,000 and $150,000. Plaintiff alleges that, at these salary levels, she would not have been accepted for investment in CSH-1.

Plaintiff never authorized James to use these figures or to act as her amanuensis for such purpose. Plaintiff, whose signature purportedly appears at the bottom of the questionnaire, claims that she never signed this questionnaire. In addition, the signature page bearing plaintiff's purported signature was allegedly notarized on April 25, 1986 in California. Plaintiff claims to have been in New York at that time, did not authorize the notarization and was never in California at any relevant time. Moreover, plaintiff alleges, on information and belief, that her signature was also forged on an Investor Bond Indemnification and Pledge Agreement dated April 25, 1986. This agreement was allegedly required before a purchase in CSH-1 would be allowed. Plaintiff claims she never received any income from CSH-1.

DISCUSSION

I. Section 10(b) Claim

Defendants attack plaintiffs' first claim in a few ways. Defendants generally attack the pleadings, at certain points, for failing to plead fraud with the particularity required by Fed.R.Civ.P. 9(b). Defendants then proceed to attack plaintiff's complaint for failure to state a claim by critically analyzing each element of paragraph 45 of the complaint, at which plaintiff states:

Defendants intentionally or with gross recklessness misrepresented material facts and omitted to state material facts and used manipulative or deceptive devices or contrivances, such as:

a. failing to advise plaintiff of the riskiness of the investment or the extent to which she would be at risk by making the investment in CSH-1 at issue herein;

b. verbally misleading plaintiff as to the amount of money she would be investing in CSH-1;

c. transmitting to plaintiff numerous papers and advising and urging her to sign them although the papers in issue contained many blanks and gaps;

d. recklessly failing to make any inquiry as to plaintiff's assets and income or source of income;

e. filing in false and grossly exaggerated statements concerning plaintiff's assets and income on an "Investor Questionnaire";

f. forging plaintiff's signature on an "Investor Bond Indemnification and Pledge Agreement";

g. without plaintiff's authority, notarizing or causing to be notarized a signature purporting to plaintiff's signature in California at a time when plaintiff was in New York.

Defendants attack each of these subparagraphs as if each were a separately alleged cause of action. Plaintiff has not organized her complaint in this way and admits that each allegation above does not state a claim standing alone. The Court notes that plaintiff alleges only one claim for violation of section 10(b) and Rule 10b-5, and thus the Court will not dismiss this claim if any theory of liability is properly alleged. Dismissal in a Rule 12(b)(6) motion is not proper unless "it appears beyond doubt that the plaintiff can prove no set of facts in support of her claim which would entitle her to relief." Conley v. Gibson, 355 U.S. 41, 45-6, 78 S.Ct. 99, 101-02, 2 L.Ed.2d 80 (1957).

Plaintiff suggests in her Memorandum of Law that two types of...