Farley v. Baird, Patrick & Co., Inc.

• Decision Date: 19 November 1990
• Docket Number: No. 90 Civ. 2168 (MBM).,90 Civ. 2168 (MBM).
• Citation: 750 F. Supp. 1209
• Parties: Dick FARLEY, on behalf of himself and all others similarly situated, Plaintiff, v. BAIRD, PATRICK & CO., INC., Stuart Patrick, Ray Dirks and Paul Morris, Defendants.
• Court: U.S. District Court — Southern District of New York

750 F. Supp. 1209

Dick FARLEY, on behalf of himself and all others similarly situated, Plaintiff, v. BAIRD, PATRICK & CO., INC., Stuart Patrick, Ray Dirks and Paul Morris, Defendants.

No. 90 Civ. 2168 (MBM).

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

November 19, 1990.

COPYRIGHT MATERIAL OMITTED

Richard G. Sablosky, New York City, for plaintiff.

Martin I. Kaminsky, Pollack & Kaminsky, New York City, for defendants.

OPINION AND ORDER

MUKASEY, District Judge.

Plaintiff has sued defendants under Rule 10b-5, 17 C.F.R. § 240.10b-5, § 12(2) of the Securities Act of 1933, 15 U.S.C. § 77l, RICO, 18 U.S.C. § 1962, and state law based on alleged overcharges for commissions on his purchases of over-the-counter stock. Defendants have moved to dismiss, raising a host of issues including the statute of limitations, the reach of § 12(2), failure to plead fraud with particularity and failure otherwise to state a claim. As set forth below, the motion based on the statute of limitations is granted in part and denied in part. The remainder of defendants' motions are denied.

Plaintiff is a professional golfer, who lives half the year in Florida and the other half in Pennsylvania. During the period in contention in this lawsuit, plaintiff maintained individual, pension plan and profit sharing accounts with the securities brokerage firm Steinberg & Lyman, and when Steinberg & Lyman went out of business, defendant Baird, Patrick & Co., Inc. Plaintiff transferred his accounts to Baird, Patrick in order to follow his account executives, the two individual broker defendants, Ray Dirks and Paul Morris, from the defunct Steinberg & Lyman to Baird, Patrick. Plaintiff apparently maintains at least one other investment account, at Shearson Lehman Hutton in Stroudsburg, Pennsylvania. Individual defendant Stuart Patrick is the President of Baird, Patrick.

Both Steinberg & Lyman and Baird, Patrick were marketmakers in certain securities. Over the course of his relationship with these firms, plaintiff was solicited by the brokers Dirks and Morris to purchase penny stocks in which these firms made a market. This case arises from a series of purchases by plaintiff of two such stocks, Paperback Software International Corp. ("PSI") and Hybrilonics, from January 1986 to February 22, 1988.

As a market maker, defendant Baird, Patrick charges clients mark-ups rather than commissions on the purchase or sale of stocks in which defendant makes a market. Plaintiff testified at his deposition, the only discovery that has been conducted as yet, that he was aware that defendant was a market maker, but knew only vaguely what a market maker was. Plaintiff also testified that he never really understood what a mark-up was, and he refers to mark-ups and commissions interchangeably in the transcript of the deposition.

In February 1990, Farley fortuitously read a newspaper article reporting that Baird, Patrick had been sued for charging excessive mark-ups on penny stocks in which it made a market. One of the stocks mentioned was PSI. He then called Richard Sablosky, mentioned in the newspaper article as counsel for the plaintiffs, and asked him to investigate whether plaintiff Farley also had a claim. As a result of that investigation, plaintiff brought this suit, alleging that he was fraudulently charged an excessive mark-up in connection with his purchases of PSI and Hybrilonics stock from 1986 through 1988.

Plaintiff's theory is that, as a marketmaker, defendant Baird, Patrick and its employees were under a special duty not to take advantage of customers and had a duty to disclose an excessive mark-up. These are over-the-counter stocks whose prices are not listed other than through the NASD inter-dealer quotation system, often referred to as the "pink sheets." Plaintiff alleges that defendant Patrick would determine that certain pink sheet stocks should be aggressively marketed to retail clients, and then, knowing that clients cannot readily access current market prices, would determine a retail price without taking into consideration the actual current market price for each of these stocks as reflected in National Quotation Bureau's quotations or the prices paid in transactions between broker-dealers. Patrick allegedly would reward his account executives with above-average selling commissions for the selected stocks.

According to plaintiff, PSI and Hybrilonics were two such stocks. When Dirks and Morris recommended that plaintiff purchase these stocks, they quoted him the Baird, Patrick price without disclosing that it bore no reasonable relation to the true market price for the stock. Plaintiff argues that, having no reason to suspect that his brokers were not quoting him the lowest price obtainable, plaintiff reasonably but mistakenly believed that the price quoted him was fair, causing him to purchase the stocks at an unconscionable price.

Defendant moves to dismiss this action pursuant to Fed.R.Civ.P. 12(b)(6) and 9(b) arguing that plaintiff's Rule 10b-5 claims are time-barred and insufficiently pleaded, that plaintiff's § 12(2) claim is also time-barred and legally insufficient, that plaintiff's RICO claims are insufficiently pleaded and otherwise legally insufficient, and that plaintiff's state law claims should be dismissed for lack of subject matter jurisdiction.

I.

Defendants seek summary judgment on plaintiff's Rule 10b-5 claim on two grounds: (1) that plaintiff's claim is barred by the applicable statute of limitations, and (2) that plaintiff's First Amended Complaint fails to state a claim upon which relief can be granted because it fails to plead fraud with particularity as required by Fed.R.Civ.P. 9(b).

1. Statute of Limitations

Ceres Partners v. GEL Associates, 918 F.2d 349 (2d Cir.1990), was decided after this motion became fully submitted. In Ceres Partners, the Second Circuit adopted a new federal statute of limitations for Rule 10b-5 actions. In accord with the Third and Seventh Circuits, the Second Circuit, seeking to create a uniform statute of limitations for Rule 10b-5 cases, chose to adopt for such cases the statute of limitations which expressly governs much of the rest of the 1934 Act: no action shall be maintained to enforce any liability created under § 10(b), unless brought within one year after the discovery of the facts constituting the violation and within three years after such violation. Id., at 364; see In re Data Access Systems Secur. Litigation, 843 F.2d 1537 (3d Cir.1988) (en banc); Short v. Belleville Shoe Manufacturing Co., 908 F.2d 1385 (7th Cir.1990) (Easterbrook, J.). Application of this new statute of limitations leads to the same result that would follow in this case if I were to apply New York state law, because under New York's borrowing statute I would be required to apply Data Access. Therefore, no rebriefing is necessary to deal with the Second Circuit's decision in Ceres Partners, New York law having been fully briefed by the parties.

The dates of plaintiff's purchases, as recorded in the trade confirmation slips, are listed below:

                     Stock            Sale Date
                 1. PSI              January 31, 1986
                 2. PSI              February 26, 1986
                 3. Hybrilonics      April 16, 1987
                 4. Hybrilonics      May 1, 1987
                 5. PSI              February 9, 1988
                 6. PSI              February 11, 1988
                 7. PSI              February 19, 1988
                 8. PSI              February 22, 1988
                

Plaintiff filed his original complaint on March 29, 1990. After defendants moved to dismiss the complaint, the court granted plaintiff leave to file an amended complaint. Plaintiff's First Amended Complaint was served on April 30 and May 1, 1990.

The Second Circuit has held that "the statute commences to run when the plaintiff has actual knowledge of the alleged fraud or knowledge of facts which in the exercise of reasonable diligence should have led to actual knowledge." Stull v. Bayard, 561 F.2d 429, 243 (2d Cir.1977), cert. denied, 434 U.S. 1035, 98 S.Ct. 769, 54 L.Ed.2d 783 (1978). This is an objective standard; the statute begins to run when a person of ordinary intelligence would have suspected that he or she was being defrauded. Goodman v. Shearson, Lehman Bros., Inc., 698 F.Supp 1078, 1082 (S.D.N. Y.1988). "`Where the circumstances are such as to suggest to a person of ordinary intelligence the probability that he has been defrauded, a duty of inquiry arises, and if he omits that inquiry when it would have developed the truth, and shuts his eyes to the facts which call for investigation, knowledge of the fraud will be imputed to him.'" Armstrong v. McAlpin, 699 F.2d 79, 88 (2d Cir.1983), citing Higgins v. Crouse, 147 N.Y. 411, 416, 42 N.E. 6 (1895). The parties agree that Data Access has been interpreted to require plaintiffs to satisfy the same standard: "The limitations period in Rule 10b-5 claims begins to run `from the date plaintiff discovered or in the exercise of reasonable diligence should have discovered the facts underlying their claims.'" Procacci v. Drexel Burnham Lambert, Inc., 1989 WL 121984, 1989 U.S. Dist. LEXIS 12208, at p. 6 (E.D.Pa.1989), quoting ITG, Inc. v. Price Waterhouse, 697 F.Supp. 867, 870 (E.D.Pa.1988); Bradford-White Corp. v. Ernst & Whinney, 699 F.Supp. 1085 (E.D.Pa.1988), rev'd on other grounds, 872 F.2d 1153 (3d Cir.), cert. denied Ernst & Whinney v. Bradford-White Corp., ___ U.S. ___, 110 S.Ct. 542, 107 L.Ed.2d 539 (1989); Elysian Federal Savings Bank v. First Interregional Equity Corp., 713 F.Supp. 737, 745 (D.N.J.1989).

Defendants argue that the price of the securities plaintiff purchased is readily available from other brokerage firms, including plaintiff's Pennsylvania brokerage firm with which plaintiff was in contact on various other matters, and from the National Quotation Bureau. According to defendants, a reasonable investor would have called the National Quotation Bureau or another broker after having been quoted a price for the stock by defendants. A reasonable investor,...