First Union Brokerage v. Milos

• Decision Date: 12 May 1989
• Docket Number: No. 87-6981-CIV-EPS.,87-6981-CIV-EPS.
• Citation: 717 F. Supp. 1519
• Parties: FIRST UNION BROKERAGE, Plaintiff, v. Nick P. MILOS and Catherine P. Milos, Defendants.
• Court: U.S. District Court — Southern District of Florida

717 F. Supp. 1519

FIRST UNION BROKERAGE, Plaintiff, v. Nick P. MILOS and Catherine P. Milos, Defendants.

No. 87-6981-CIV-EPS.

United States District Court, S.D. Florida.

May 12, 1989.

Birgitta K. Siegel, Ruden, Barnett, McClosky, Smith, Schuster & Russell, P.C., Miami, Fla., for plaintiff.

Allan Lerner, Fort Lauderdale, Fla., for defendants.

MEMORANDUM OPINION

SPELLMAN, District Judge.

ORDER ON PLAINTIFF'S MOTION TO DISMISS DEFENDANTS' COUNTERCLAIM

THIS CAUSE comes before the Court upon Plaintiff's, FIRST UNION BROKERAGE, Motion to Dismiss, and the Magistrate's Recommendation therein. For the reasons set forth below, it is the opinion of this Court that the Plaintiff's Motion to Dismiss should be denied in part and granted in part.

PROCEDURAL HISTORY

Plaintiff, FIRST UNION BROKERAGE SERVICES, INC., instituted this action against the Defendants, NICK and CATHERINE MILOS, on December 16, 1987, to collect a debt balance in Defendants' brokerage account totaling $265,500.49. In response thereto, the Defendants asserted a seven (7) Count Counterclaim against the Plaintiff, and therein raised claims for federal and state securities violations, common law claims for fraud, negligence, breach of fiduciary duty and breach of contract.

Subsequent thereto, the Plaintiff filed a Motion to Dismiss the Defendants' Counterclaim. This Court referred the above-styled cause to Magistrate Turnoff for his consideration. Upon review of this matter, Magistrate Turnoff issued a Report and Recommendation, wherein he recommended the following:

1. Motion to Dismiss Counterclaim for Failure to Plead Fraud with Particularity — DENIED;

2. Motion to Dismiss Counterclaim for Failure to State a Cause of Action under Section 12(2) — GRANTED as to Count I of the Counterclaim;

3. Motion to Dismiss Counterclaim for Failure to State a Claim under Fla.Stat. Section 517.301 — DENIED;

4. Motion to Dismiss Counterclaim for Failure to Allege Justifiable Reliance — DENIED;

5. Motion to Dismiss Counter Claim for Failure to State a Claim for Fraud as to Future Acts — DENIED;

6. Motion to Dismiss Counterclaim for Failure to Allege Breach of Fiduciary Duty — DENIED;

7. Motion to Dismiss Counterclaim for Failure to State a Cause of Action for Breach of Contract — DENIED;

8. Motion for More Definite Statement as to Count VII — GRANTED.

After a de novo review of this matter, this Court makes the following determinations regarding the Plaintiff's Motion to Dismiss the Defendants' Counterclaim.¹

FACTS

The Defendants, NICK AND CATHERINE MILOS, maintained a securities account with the Plaintiff, FIRST UNION BROKERAGE SERVICES, INC.² In the course of purchasing and/or carrying of common stocks and options in Defendants' margin account, the Plaintiff made loans of monies into this account. This is known as "margin debt," which produces a "margin obligation" upon the Defendants. Due to unfavorable trading conditions in the market, the Defendants' account fell below regulated levels; accordingly, the Defendants were required to deposit marginable securities and/or funds into the account as collateral for the margin debt and to satisfy the margin requirement.

The relationship between the changing value of the Defendants' securities account and Defendants' margin requirement was central to the Defendants' investment decisions. The Defendants maintain that as a result of the shifting status of the margin requirement, the Plaintiff, First Union Brokerage Services, agreed to provide information on a daily basis with respect to those elements of the account which would impact upon decision-making. Defendants also aver that the production of this information on a timely basis was vital due to the volume and the velocity of their securities transactions.

In September 1987, Plaintiff switched to a new clearing broker, Pershing & Co. Inc., and as a result thereof, the Defendants became concerned over Plaintiff's ability to furnish daily trading information with regularity and accuracy. It is alleged that upon expressing this concern to Barry Parillo, First Union's Fort Lauderdale Branch Manager, the Defendants were told that in the event that any margin deficits did arise, Defendants would not be required to satisfy them until November 15, 1987.

Defendants allege that in reliance upon Mr. Parillo's representation, they continued to maintain their account at First Union Brokerage. On October 20, 1987, notwithstanding Mr. Parillo's alleged representation, the Defendants were notified that their account must promptly meet the existing margin requirement or said account would be liquidated. The Defendants failed to meet the margin requirement, and as a result thereof, the account was liquidated. By October 22, 1987, liquidation was complete and the account was left with a negative net worth.

The Defendants maintain that their investment decisions during September and early October 1987 were made in reliance upon Mr. Parillo's statement. But for that statement, Defendants contend that they would have diminished the activity in their account, or, upon the receipt of fully accurate information, would have pulled the account altogether.

DISCUSSION

Failure to Plead Fraud with Particularity

Plaintiff, First Union Brokerage, filed a Motion to Dismiss Count I (Federal Securities Fraud), Count II (State Securities Fraud), Count III (Common Law Fraud), and Count V (Negligence) of the Defendants' Counterclaim for failure to plead fraud with sufficient particularity as required by Fed.R.Civ.P. 9(b). Federal Rule of Civil Procedure 9(b) requires that "in all averments of fraud or mistake, the circumstances constituting the fraud or mistake shall be stated with particularity."³ It is well established that claims for securities fraud must meet the requirements of Rule 9(b); accordingly, all averments therein must be pled with sufficient particularity. Rule 9(b), however, must not be read to abrogate the notice pleading policy of Fed.R.Civ.P. 8.⁴

Mere conclusory allegations of fraud, couched in statutory language, will not satisfy Rule 9(b). The allegations "must be accompanied by some delineation of the underlying acts and transactions which are asserted to constitute fraud." Merrill Lynch, Pierce, Fenner & Smith v. Del Valle, 528 F.Supp. 147, 149 (S.D.Fla.1981) (Spellman, J.).⁵

Upon review of the Defendants' Counterclaim, it is the opinion of this Court that the Defendants have pled their claims for securities fraud with sufficient particularity in accordance with Rule 9(b). In their Counterclaim, the Defendants have identified the alleged misstatement, the approximate date of the alleged misstatement, and the particular party who made the alleged misstatement.⁶ Accordingly, it is the view of this Court that the Defendants have complied with the pleading requirements of Rule 9(b), and thus, Plaintiff's Motion to Dismiss is DENIED.

Failure to State a Cause of Action under Section 12(2)

Plaintiff has filed a Motion to Dismiss Count I of the Defendants' Counterclaim for failure to state a claim under Section 12(2) of the 1933 Act. Liability imposed pursuant to Section 12(2) of the Securities Act of 1933 is restricted to a "person who ... offers or sells a security ... by means of a prospectus or oral communication." The phrase "prospectus or oral communication" refers to a prospectus, registration statement, or other communication related to a batch offering of securities, not to subsequent trading. SSH Co., Ltd., v. Shearson Lehman Bros., Inc., 678 F.Supp. 1055, 1059 (S.D.N.Y.1987). The statute does not, therefore, provide relief for acts or omissions in connection with trading in the secondary market.⁷

The Defendants herein have failed to allege that they purchased securities in connection with a new offering, prospectus or registration. Precedent has established that an investor's claim in connection with securities traded on the secondary market, i.e., post-distribution trading, is not within the purview of Section 12(2) of the Securities Act. Accordingly, Plaintiff's Motion to Dismiss Count I of Defendants' Counterclaim is GRANTED on this basis.

Failure to State a Claim under Florida Statute Section 517.301

Section 517.302(1)(a) of the Florida Securities Act, patterned after Rule 10b-5 of the federal securities laws, makes it unlawful for anyone

(1) To employ any device, scheme, or artifice to defraud;

* * * * * *

(3) To engage in any transaction, practice or course of business which operates or would operate as a fraud or deceit upon a person.⁸

To state a cause of action under Section 517.301, a party must allege and prove: (1) a misrepresentation or omission of a material fact; (2) that the investor justifiably relied on said misrepresentation or omission; (3) that the misrepresentation or omission was made in connection with a purchase or sale of securities; (4) with scienter or reckless disregard as to the truth of the communication; and (5) that the untruth was the direct proximate cause of the investor's actual loss. Currie v. Cayman Resources Corporation, et al., 835 F.2d 780, 785 (11th Cir.1988); Gochnauer v. A.G. Edwards & Sons, Inc., 810 F.2d 1042, 1046 (11th Cir.1987) (stating that the elements of a cause of action under Fla.Stat. Section 517.301 are identical to those required by Section 10(b), except that the scienter requirement is relaxed in the former instance).

The Plaintiff has filed a Motion to Dismiss Count II of Defendants' Counterclaim for failure to state claim under Section 517.301. First, Plaintiff maintains that the Defendants have failed to state a claim under Section 517.301 as they have failed to plead a requisite element of the claim, loss causation, i.e., that the misrepresentation caused the economic harm.⁹

The Florida Supreme Court has recently held that proof of "loss causation" is not required in a securities proceeding instituted under Section 517.301 and Section 517.211. E.F. Hutton & Company v. Rousseff, 537 So.2d 978 (...