Connolly v. Havens

• Decision Date: 23 April 1991
• Docket Number: No. 90 Civ. 6451 (PKL).,90 Civ. 6451 (PKL).
• Citation: 763 F. Supp. 6
• Parties: Elizabeth Freeman CONNOLLY and SMC Trading Co., Plaintiffs, v. Anthony HAVENS, Peter Aiello, Ernest Barbella, Joel S. Nadell, Richard Owen Bertoli, Joseph Lugo, Carl Caserta and Securities Settlement Corporation, Defendants.
• Court: U.S. District Court — Southern District of New York

763 F. Supp. 6

Elizabeth Freeman CONNOLLY and SMC Trading Co., Plaintiffs, v. Anthony HAVENS, Peter Aiello, Ernest Barbella, Joel S. Nadell, Richard Owen Bertoli, Joseph Lugo, Carl Caserta and Securities Settlement Corporation, Defendants.

No. 90 Civ. 6451 (PKL).

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

April 23, 1991.

COPYRIGHT MATERIAL OMITTED

Wolf, Popper, Ross, Wolf & Jones (Klari Neuwelt, of counsel), New York City, for plaintiffs.

Kirkland & Ellis (J. Andrew Langan, Thomas E. Dutton, of counsel), Chicago, Ill. (Richard F. Levy, James H. Gale, of counsel), New York City, for defendant Securities Settlement Corp.

Schoeman, Marsh & Updike (Michael E. Schoeman, Scott M. Riemer, of counsel), New York City, for defendant Joel S. Nadel.

ORDER AND OPINION

LEISURE, District Judge:

This is a class action for violations of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. §§ 1961 et seq. ("RICO"), and for violations of § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (the "1934 Act"), and Rule 10b-5 promulgated thereunder, and § 9(a) of the 1934 Act. Each defendant is named in each of the five claims in the complaint. Defendant Securities Settlement Corporation ("SSC") and defendant Joel S. Nadel¹ ("Nadel") (collectively referred to herein as "the Moving Defendants"), have separately moved on similar grounds, pursuant to Fed. R.Civ.P. 12(b)(6) and Fed.R.Civ.P. 9(b), for dismissal of the complaint in this action. For the reasons discussed below, the motions of the Moving Defendants are granted.

Background²

The plaintiffs in this action are Elizabeth Freeman Connolly ("Connolly") and SMC Trading Company, a partnership in which Connolly was a general partner. Complaint ¶¶ 12, 13. The complaint names seven individuals as defendants (the "Individual Defendants"), as well as SSC. Plaintiffs aver that they maintained securities trading accounts with Equities International Securities ("Equities"), and sue on behalf of a class consisting of similar customers of Equities who, like themselves, allegedly sustained losses in their accounts as the result of unauthorized trades and securities fraud. Complaint ¶¶ 5, 12, 13. More specifically, plaintiffs allege that during 1987 and 1988 the Individual Defendants conducted a scheme to defraud plaintiffs by using Equities

as a vehicle to manipulate the prices of various securities, to sell unregistered securities, to underwrite the initial public offerings of securities in which the individual defendants had or gained an interest, to engage in unauthorized purchases and sales from the accounts of customers of Equities, to park securities in the accounts of customers of Equities in order to give Equities the appearance of solvency and of a legitimate business enterprise, all to the benefit of the individual defendants herein. SSC aided and abetted these activities.

Complaint ¶ 23.

Defendant SSC is alleged to have acted as Equities's clearing house during the relevant time period, Complaint ¶ 24, and to have "indicated" that it was the broker of record with respect to two securities. Complaint ¶¶ 65, 75. It is alleged that because SSC acted as Equities's clearing house, it "knew, or in the exercise of reasonable diligence should have known," of the illegal activities of Equities and the other defendants. Complaint ¶¶ 24, 34, 40, 46, 51, 57, 65, 70, 75, 79. Defendant Nadel is alleged to have owned manipulated securities, Complaint ¶ 31, and to have owned or controlled "a number of" publications that give advice on securities to the public. Complaint ¶ 63. It is also alleged that Equities paid Nadel $6,000 to use his publications to tout the stock for which Equities was the underwriter, and that Nadel did so without disclosing that fact. Complaint ¶ 63. Finally, it is alleged that Nadel voluntarily agreed to leave the securities industry under pressure from the Securities and Exchange Commission, a fact not disclosed to the public or to plaintiffs. Complaint ¶ 35.

Discussion

"The court's function on a Rule 12(b)(6) motion is not to weigh the evidence that might be presented at a trial but merely to determine whether the complaint itself is legally sufficient." Festa v. Local 3 International Brotherhood of Electrical Workers, 905 F.2d 35, 37 (2d Cir.1990); see also Ryder Energy Distribution Corp. v. Merrill Lynch Commodities, Inc., 748 F.2d 774, 779 (2d Cir.1984) ("The function of a motion to dismiss `is merely to assess the legal feasibility of the complaint, not to assay the weight of the evidence which might be offered in support thereof.'" (quoting Geisler v. Petrocelli, 616 F.2d 636, 639 (2d Cir.1980))).

Thus, a motion to dismiss must be denied "unless it appears beyond a doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40 L.Ed.2d 90 (1974) (citing Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-02, 2 L.Ed.2d 80 (1957)); see also Morales v. New York State Dep't of Corrections, 842 F.2d 27, 30 (2d Cir.1988). In deciding a motion to dismiss, the Court must accept the plaintiff's allegations of fact as true, together with such reasonable inferences as may be drawn in his favor. Papasan v. Allain, 478 U.S. 265, 283, 106 S.Ct. 2932, 2934, 92 L.Ed.2d 209 (1986); Murray v. Milford, 380 F.2d 468, 470 (2d Cir.1967); Hill v. Sullivan, 125 F.R.D. 86, 90 (S.D.N.Y.1989) ("all allegations in plaintiffs' amended complaint must be accepted as true and liberally construed."); see also Scheuer, supra, 416 U.S. at 236, 94 S.Ct. at 1686. Federal Rule of Civil Procedure 8(a) requires only a "`short and plain statement of the claim' that will give the defendant fair notice of what plaintiff's claim is and the ground upon which it rests." Conley, supra, 355 U.S. at 47, 78 S.Ct. at 103 (quoting Fed.R. Civ.P. 8(a)).

Nevertheless, "the complaint must set forth enough information to suggest that relief would be based on some recognized legal theory." Fort Wayne Telsat v. Entertainment and Sports Programming Network, 753 F.Supp. 109, 111 (S.D.N.Y. 1990) (Leisure, J.). "The District Court has no obligation to create, unaided by plaintiff, new legal theories to support a complaint." District of Columbia v. Air Florida, Inc., 750 F.2d 1077, 1081-82 (D.C.Cir. 1984). "In practice `a complaint ... must contain either direct or inferential allegations respecting all the material elements necessary to sustain a recovery under some viable legal theory.'" Car Carriers, Inc. v. Ford Motor Co., 745 F.2d 1101, 1106 (7th Cir.1984) (quoting Sutliff, Inc. v. Donovan Cos., 727 F.2d 648, 654 (7th Cir.1984) (Posner, J.) (emphasis in original) (quoting French Quarter Apartments Ltd. v. Georgia-Pacific Corp., 655 F.2d 627, 641 (5th Cir.1981), cert. dism'd, 462 U.S. 1125, 103 S.Ct. 3100, 77 L.Ed.2d 1358 (1983))), cert. denied, 470 U.S. 1054, 105 S.Ct. 1758, 84 L.Ed.2d 821 (1985).

Having set forth the standards for evaluating motions under Rule 12(b)(6), the Court now addresses the sufficiency of plaintiffs' claims. Those claims will be discussed in logical, rather than numerical order.

I. Fourth Claim: Section 10(b) and Rule 10b-5

A) Primary Violations

To state a claim for primary liability under § 10(b) and Rule 10b-5, a plaintiff must allege 1) damage to plaintiff; 2) caused by reliance on the defendant's misrepresentations or omissions of material facts, or on a scheme by defendant to defraud; 3) made with scienter; 4) in connection with the purchase or sale of securities; 5) promulgated through the use of the mails, an instrument of interstate commerce, or a securities exchange facility. See Royal American Managers, Inc. v. IRC Holding Corp., 885 F.2d 1011, 1015 (2d Cir.1989); Goodridge v. Harvey Group Inc., 728 F.Supp. 275, 280 (S.D.N.Y.1990).

With respect to SSC, there is no specific allegation that it directly violated § 10(b) and Rule 10b-5; indeed, ¶ 23 of the complaint clearly states that the Individual Defendants engaged in the scheme to manipulate securities prices, and that SSC "aided and abetted these activities." Complaint ¶ 23. Moreover, even if plaintiffs have attempted to allege primary violations by SSC, such a claim must fail. It is well-established that a clearing firm, such as SSC, does not have a fiduciary relationship with the customers — such as plaintiffs herein — of the introducing broker with which it has contracted to perform clearing services. See Edwards & Hanly v. Wells Fargo Securities Clearance Corp., 602 F.2d 478, 484 (2d Cir.1979) ("a clearing agent ... is generally under no fiduciary duty to the owners of the securities that pass through its hands."), cert. denied, 444 U.S. 1045, 100 S.Ct. 734, 62 L.Ed.2d 731 (1980); Dillon v. Militano, 731 F.Supp. 634, 636 (S.D.N.Y.1990); Stander v. Financial Clearing & Services Corp., 730 F.Supp. 1282, 1286 (S.D.N.Y.1990) (Leisure, J.); Ross v. Bolton, 639 F.Supp. 323, 326-27 (S.D.N.Y.1986). The services that SSC allegedly performed for Equities were ordinary clearing house functions. The allegation, without more, that SSC was also allegedly "responsible for compliance with securities laws and regulations" by Equities, without any allegation or legal authority that SSC owed any such duty to the plaintiffs, cannot create a fiduciary duty where none existed.³

Plaintiffs have not alleged any false or misleading statements by SSC. Because plaintiffs have not adequately alleged a fiduciary relationship between SSC and themselves, SSC owed plaintiffs no duty of disclosure, see Chiarella v. United States, 445 U.S. 222, 232, 100 S.Ct. 1108, 1116-17, 63 L.Ed.2d 348 (1980), and "silence, absent a duty to disclose, is not misleading under Rule 10b-5." Basic Inc. v. Levinson, 485 U.S. 224, 239 n. 17, 108 S.Ct. 978, 987 n. 17, 99 L.Ed.2d 194 (1988). Accordingly, in similar cases courts have consistently held that clearing firms cannot be primarily liable under Rule 10b-5 for...