Corbey v. Grace, Civ. No. 4-84-736.

• Court: U.S. District Court — District of Minnesota
• Writing for the Court: DIANA E. MURPHY
• Citation: Corbey v. Grace, 605 F.Supp. 247 (D. Minn. 1985)
• Decision Date: 29 March 1985
• Docket Number: Civ. No. 4-84-736.
• Parties: John CORBEY, Plaintiff, v. Brooks GRACE, and A.G. Becker Paribas, Inc., a New York corporation, Defendants.

605 F. Supp. 247

John CORBEY, Plaintiff, v. Brooks GRACE, and A.G. Becker Paribas, Inc., a New York corporation, Defendants.

Civ. No. 4-84-736.

United States District Court, D. Minnesota, Fourth Division.

March 29, 1985.

Dale Thornsjo, Minneapolis, Minn., for plaintiff.

J.D. Jackson, Tracy Van Steenburgh, Dorsey & Whitney, Minneapolis, Minn., for defendant A.G. Becker Paribas, Inc.

MEMORANDUM OPINION AND ORDER

DIANA E. MURPHY, District Judge.

Plaintiff John Corbey brought this action for damages against defendants Brooks Grace and A.G. Becker Paribas, Inc. (Becker), alleging violations of federal and state securities laws and common law violations. Jurisdiction is alleged under 28 U.S.C. § 1331, 15 U.S.C. § 78aa, and 28 U.S.C. § 1337. Jurisdiction of the state claims is founded upon pendent jurisdiction. This matter is now before the court upon the motion of Becker to dismiss.

Factual Background

The following facts are alleged by plaintiff in his complaint and are taken as true for the purposes of this motion to dismiss under Federal Rules of Civil Procedure 12(b)(6).

Becker is a national securities brokerdealer with an office in Hennepin County, Minnesota. At the time of this dispute Brooks Grace was employed by Becker as a securities salesman. Corbey alleges numerous securities violations by the defendants arising from Grace's successful efforts to have Corbey open a margin account and engage in trading on margin and from the subsequent unauthorized trading in the account by Grace.

Prior to the transactions at issue here, Corbey maintained a security account with Becker. Corbey alleges in the complaint that his investment needs and objectives were conservative because he had irreplaceable income and savings and was responsible for monthly nursing home expenses for his wife. Corbey further alleges that Grace knew this background information and that accordingly Corbey's account should have been limited to stable and income-producing securities, designed for a steady flow of income.

Nevertheless, Grace represented to Corbey that because the stock of Analyst International, Inc. was guaranteed to rise in value, he should purchase on margin. In fact, the stock was a volatile and speculative security but Corbey was never informed of this information. In addition, the defendants never fully explained the fundamental aspects of a margin account to Corbey. They simply offered to extend credit or arrange for a loan for Corbey, and ultimately they did extend credit by opening the margin account. Thus, Corbey was not informed that if the stock held on margin was to diminish in value, Becker would be required to send a "margin call", which would require Corbey to send additional sums of money to Becker in order to retain the stock in the margin account. Otherwise, Becker would by law be forced to sell such stock to keep the account within legal limits.

After these conversations with Grace, Corbey decided to sell warrants of Chrysler Corporation from his security account to pay for stock of Analysts International, Inc. This was subsequently purchased on margin on or about July 27, 1983. Corbey alleges that this transaction ultimately resulted in losses in excess of $30,000. Subsequently, Grace purchased an additional 800 shares of Analysts International, Inc. on or about October 11, 1983 for Corbey's account without Corbey's approval. When Corbey was notified of the purchase, he demanded immediate recission of the transaction. Even though the demand for recission came within 7 days of the original purchase order, the time period allowed for recission, Grace informed Corbey that the transaction could no longer be rescinded. Corbey alleges that this transaction ultimately resulted in losses in excess of $30,000. This action was filed by Corbey on July 18, 1984, and an amended complaint was filed on October 11, 1984.

Discussion

Becker is moving to dismiss with prejudice those parts of counts one and two which allege violations of section 15(c)(1) and rules 15c 1-2, 15c 2-5, and 10b-3, and count ten. It seeks to dismiss all remaining counts without prejudice.

Section 15 Claims

In counts one and two of the complaint Corbey asserts in part that the willfully fraudulent and deceptive conduct of defendants violates section 15(c)(1) of the Securities Exchange Act of 1934, 15 U.S.C. § 78o (c)(1) and rule 15c 2-5, 17 CFR § 240.15c 2-5, promulgated thereunder. Section 15(c)(1) provides that brokers and dealers are prohibited from making use of the mails or any means of interstate commerce "to effect any transaction in, or to induce the purchase or sale of, any security" in over-the-counter transactions and transactions on exchanges of which the broker-dealer is not a member by means of any "manipulative, deceptive, or other fraudulent device or contrivance." 15 U.S.C. § 78o (c)(1). It is a counterpart to section 10(b) and rule 10b-5, the general antifraud provisions applicable to "any security registered on a national securities exchange or any security not so registered". Securities Exchange Act of 1934, § 10(b), 15 U.S.C. § 78j(b). Becker argues that this claim should be dismissed because there is no private right of action under section 15(c)(1) or its rules. Corbey asserts that section 15(c)(1) contains within it a valid private right of action against broker-dealers.

The central inquiry to such a determination is whether Congress intended to create, either expressly or by implication a private cause of action. Touche Ross & Co. v. Redington, 442 U.S. 560, 575, 99 S.Ct. 2479, 2488, 61 L.Ed.2d 82 (1979). The language and focus of the statute, its legislative history, and its purpose are the factors traditionally relied upon in determining legislative intent. Id. at 575-76, 99 S.Ct. at 2488-89.

While there is no express grant of a private right of action in section 15(c)(1), the statute does proscribe fraudulent conduct in the sale of securities. Thus, it is possible to argue that an intent to confer a private right of action can be implied from the focus of the section. See Pierson v. Dean, Witter, Reynolds, Inc., 551 F.Supp. 497 (C.D.Ill.1982).

The remaining Touche Ross factors support a conclusion that no implied private right of action exists, however. Neither party cites to any legislative history which indicates that Congress intended to provide a private right of action for violation of this section. Corbey contends, however, that the express reference to the section in the limitations period of section 29 of the Securities Exchange Act of 1934, 15 U.S.C. § 78cc(b), evidences that a cause of action exists. This court is not persuaded by the interpretation given to the legislative history of section 29 in holding that a private right of action exists under section 15(c)(1). Maher v. J.R. Williston & Beane, Inc., 280 F.Supp. 133, 137 (S.D.N.Y.1967), relied on the legislative history of section 29 in finding a private right of action under section 15(c)(1). The court stated that the provision in section 29(b) establishes a limitation period for violation of section 15(c) and then cited a 1950 Yale law review article taking the view that the amendment of section 29 to include this limitations period gives rise to the implication that Congress had always assumed that private actions under section 15(c) were available.

The amendment to section 29 should not be read so broadly, however. The limitation period of section 29, by its express terms, applies only to actions brought under section 29 itself. Douglas v. Glenn E. Hinton Inv., Inc., 440 F.2d 912, 914 (9th Cir.1971). Certain securities contracts are voided by section 29(b) if they violate any provision of the Securities Exchange Act of 1934 or any rule or regulation thereunder. Section 29(b) further provides that no contract shall be deemed void by reason of the violation of any rule or regulation prescribed pursuant to section 15(c)(1) unless an action is brought within one year of discovery of the violation. Thus, section 29 creates substantive rights of its own, including a statute of limitations for those claims brought under it and based on a violation of section 15(c)(1). This does not provide any support for Corbey's claims under section 15(c)(1) because the source of his rights must be found, if at all, in section 15(c)(1), the substantive provision which he seeks to enforce. Touche Ross & Co., 442 U.S. at 577, 99 S.Ct. at 2489. The 1938 amendment to section 29 to include the limitations provision is evidence of Congressional intent on section 29 alone.

The purpose of the statute is the final traditional factor used to determine legislative intent. Courts addressing the purpose of the Act and section 15(c)(1) after the Touche Ross decision have found that because of the similarities between section 15(c)(1) and section 10(b), it would not further the purpose of the regulatory framework to allow an implied private right of action under section 15(c)(1). Pierson v. Dean, Witter, Reynolds, Inc., 551 F.Supp. at 502-03; see also Berk v. Oppenheimer & Co., Inc., Fed.Sec.L.Rep. ¶ 99,603 (N.D. Ill.1983); Chapman v. Merrill Lynch, Pierce, Fenner & Smith, Inc., Fed.Sec.L. Rep. ¶ 99,419 (D.Md.1983). Both provisions proscribe the use of any manipulative, deceptive, or other fraudulent device or continuance in the purchase or sale of any security. The protections provided by section 15(c)(1) are all subsumed within the provisions of section 10(b). The private right of action under section 10(b) and rule 10b-5 encompasses fraud by broker-dealers involving over-the-counter transactions or transactions on exchanges of which the broker-dealer is not a member. Pierson v. Dean, Witter, Reynolds, Inc., 551 F.Supp. at 503; see Superintendent of Ins. v. Bankers Life and Casualty Co., 404 U.S. 6, 10, 92 S.Ct. 165, 167, 30 L.Ed.2d 128 (1971); Hooper v. Mountain States Sec. Corp., 282 F.2d 195 (5th Cir.1960), cert. denied, 365 U.S. 814, 81 S.Ct. 695, 5 L.Ed.2d 693 (...