Cooperativa de Ahorro y Credito Aguada v. KIDDER, ETC.

• Decision Date: 30 January 1991
• Docket Number: Civ. No. 89-1706 (JAF).
• Citation: 758 F. Supp. 64
• Parties: COOPERATIVA de AHORRO y CREDITO AGUADA, Plaintiff, v. KIDDER, PEABODY & CO.; Paine Webber Incorporated; Ramón M. Almonte, Jane Doe, and the property partnership existing between them, Defendants.
• Court: U.S. District Court — District of Puerto Rico

758 F. Supp. 64

COOPERATIVA de AHORRO y CREDITO AGUADA, Plaintiff, v. KIDDER, PEABODY & CO.; Paine Webber Incorporated; Ramón M. Almonte, Jane Doe, and the property partnership existing between them, Defendants.

Civ. No. 89-1706 (JAF).

United States District Court, D. Puerto Rico.

January 30, 1991.

COPYRIGHT MATERIAL OMITTED

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Roberto Boneta, Enrique Peral, Muñoz Boneta Arbona Benitez & Peral, San Juan, P.R., for Cooperativa de Ahorro y Credito Aguada.

Harry F. Woods, Woods & Woods, San Juan, P.R., for Ramón M. Almonte.

Néstor Méndez-Gómez, Richard Graffam, McConnell Valdes Kelley Sifre Griggs & Ruiz-Suria, San Juan, P.R., for Kidder, Peabody.

Guillermo J. Bobonis, Bobonis Bobonis & Rodriguez Poventud, Condado, P.R., for Paine Webber.

OPINION AND ORDER

FUSTE, District Judge.

I. Introduction

Plaintiff Cooperativa ("Coop") is a single-branch savings and loan institution incorporated and operating in Puerto Rico. Defendants Kidder, Peabody & Co. ("Kidder") and Paine Webber Incorporated ("Paine Webber") are financial services providers through whom plaintiff purchased various securities. Defendant Ramón Almonte ("Almonte")¹ was the securities representative, first as an employee of Kidder and later as an employee of Paine Webber, who recommended and carried out securities purchases for plaintiff. Plaintiff claims that at all times it has sought investments which are unspeculative and which would provide a safe, moderate rate of return. Plaintiff complains that Almonte, while working at Kidder in 1986, fraudulently induced the Coop to invest over three and a half million dollars in Drexel Burnham "junk bond" funds. Though both sides now agree that the funds consisted of high risk, high yield bonds, plaintiff claims that at the time of purchase Almonte fraudulently led the Coop to believe that the funds represented a low risk, conservative investment, appropriate for the needs of the Coop's depositors. Subsequently, particularly in 1989, the value of the bonds dropped precipitously, leading finally to a liquidation when they fell to less than 50% of their original principal value. Plaintiff alleges a cause of action under the federal securities laws, the RICO statute, and common law fraud. Plaintiff claims a loss of principal of $778,818.57, along with the loss of the interest which the Coop would have received from an "appropriate" investment.

In cause of action I, the Coop argues that the fraud violates the federal securities laws, specifically section 10(b) of the 1934 Securities Act, Rule 10b-5, section 15(c)(1)-(2) of the 1934 Act, section 17(a) of the 1933 Act, and section 20 of the 1934 Act. In cause of action II, the Coop claims the fraud is actionable under Puerto Rico law, and that pendent jurisdiction exists. In cause of action III, the Coop claims that the fraud was a part of a pattern of racketeering prohibited by the RICO statute.

As to the federal securities law claim, defendants argue in respective motions to dismiss for failure to state a claim that, inter alia: 1) the federal securities issues are time barred; 2) no private right of action exists under section 15(c)(1)-(2) of the 1934 Act or section 17(a) of the 1933 Securities Act, and 3) plaintiff has not alleged scienter as a required element of its claim. Paine Webber denies all potential liability under the securities acts on the theory that the only act alleged which could possibly trigger a violation was the original sale of the funds to the Coop in 1986, a time when Coop's account was still with Kidder.

The Supreme Court has recently agreed to review a split in the circuits as to which statute of limitations would apply to the federal securities laws at issue here. Since that case may render all the federal securities law claims here untimely, we reserve judgment on federal securities law question pending a ruling by the Supreme Court in Lampf Pleva Lipkind Prupis & Petigrow v. Gilbertson, ___ U.S. ___, 111 S.Ct. 242, 112 L.Ed.2d 201 (1990). See 22 B.N.A. Securities Regulation and Law Report at 1439. We dismiss the RICO claims against Kidder for failure to state a cause of action. We dismiss the RICO claims against Paine Webber for failure to state a cause of action. We order plaintiff to amend its RICO pleading with regard to the predicate fraudulent acts for purposes of Almonte's tenure at Paine Webber, 18 U.S.C. § 1962(c), since such pleading does not currently comply with the specificity requirement of Fed.R.Civ.P. 9(b). We also stay disposition of the common law fraud claims since no independent basis for jurisdiction is alleged, leaving the common law fraud claims subject to the fate of the federally-based causes.

II. Facts for Purposes of Motion to Dismiss Under Rules 12(b) and 9(b)

Plaintiff Coop is a savings and loan cooperative organized and existing under the laws of Puerto Rico. Depositors have a share in the cooperative in proportion to their assets. The cooperative is operated by a Board of Directors and an Administrator. The Coop's investors are mainly salaried individuals of moderate means. The Coop seeks to provide investments of the assets under its control that provide secure, moderate return on investment. Traditionally, savings and loan cooperatives in Puerto Rico have invested their funds primarily in time deposit accounts of commercial banks and government securities.

In 1983 the Coop was approached by William Torres ("Torres"), a registered representative of Kidder. Torres advised on and executed several investments for the Coop. Torres gave presentations to the Coop and other cooperatives concerning the investment needs of savings and loan cooperatives.

In June of 1986, Torres passed the Coop's account to defendant Almonte, recommending Almonte highly. Shortly after the transfer, Almonte proposed to Luis Feliciano, Assistant Manager of the Coop, that the Coop invest in Drexel Burnham Lambert Unit Trusts. According to the complaint, Almonte told Feliciano that the Drexel funds were safe and unspeculative, since they were "sponsored" by Drexel Burnham, a reputable national brokerage, that the Coop could expect a steady stream of income for a long term as they were not redeemable for 7-10 years, and that the purchase of the funds was appropriate for the needs and objectives of the Coop. Although plaintiff is not clear about the exact date or dates of the alleged misrepresentation, the complaint, read broadly, implies that at least one phone call in June of 1986 contained such statements. Based on this recommendation, plaintiff purchased, on three occasions between June 23, 1986 and December 16, 1986, a total of $3,563,665.80 worth of Drexel Series 10 and Series 2 "High Income Trust Securities."

The complaint lists those aspects of the bond funds that Almonte failed to mention, from which we now excerpt:

1. That the bonds underlying the trust were either unrated or had very low ratings, between BB/Ba and C/C by Standard & Poors and Moody's;

2. The bonds which composed the fund ranged from primarily speculative with respect to capacity to pay interest and repay principal, to bonds with an extremely poor prospect of attaining any real investment standing;

3. That Drexel had no obligation to maintain a secondary market for the bonds.

The Coop's list of those facts which Almonte failed to disclose was culled directly a prospectus prepared by Drexel for prospective investors. That such a prospectus existed at all is not discussed in the pleadings. A copy of the prospectus is brought to the court's attention for the first time in the plaintiff's opposition to the current motion. Plaintiff claims it never received a copy of the prospectus. Since we choose today to rule on the pleadings, we give no weight to the prospectus provided by plaintiff, and consider it a factual matter outside the pleadings. In any event, there is no prejudice to the plaintiff, since the document would have no effect on any of the rulings we make today, even if we were to take cognizance of it. If it becomes relevant in the future, this court may convert this motion to one for summary judgment, giving all parties appropriate opportunity to file as they see fit. At present we think judicial economy militates towards confining our ruling to an attack on the pleadings.

A. Post-Purchase Activity

In June 1987, Almonte left Kidder to take a position with Paine Webber, taking the Coop's investment portfolio with him. The value of the funds remained relatively stable until late 1988, when a rapid drop began. During the period from the 1986 purchases until late 1988, defendants (first Kidder and Almonte, then Paine Webber and Almonte) supplied the Coop with periodic statements of account containing the market prices of the securities at issue. According to plaintiff, the defendants continued to make misrepresentations and to conceal the original fraud during this period in that they failed to alert the Coop to the possibility that these investments were not proper for the Coop.

On January 18, 1989, Almonte (then employed by Paine Webber) sent a letter to the Coop stating that "all funds are performing as expected since inception." The January 18 letter misstated per-share values, artificially inflating the market price of the funds. Almonte stated that the bidding price for Drexel unit series No. 10 was $887.37 and the bidding price for Drexel unit series No. 2 was $604.35. In fact, the bidding price for each was exactly $100 less per unit.²

At some time shortly after the January letter, Paine Webber stopped supplying statement accounts, stating that the information was "not available." In July 1989, the trusts were liquidated by the trustee, since they had fallen to below 50% of their original principal value. Such a liquidation, triggered by the 50% value threshold, was a required part of the trust purchase agreement.

In summation, a time line of events appears as follows:

-1983: The Coop begins an

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