Gaudette v. Panos

• Decision Date: 24 September 1986
• Docket Number: Civ. A. No. 86-0393-C.
• Citation: 644 F. Supp. 826
• Court: U.S. District Court — District of Massachusetts
• Parties: Roger P. GAUDETTE and Jeannine R. Gaudette, Plaintiffs, v. Peter PANOS and E.F. Hutton & Company, Inc., Defendants.

644 F. Supp. 826

Roger P. GAUDETTE and Jeannine R. Gaudette, Plaintiffs, v. Peter PANOS and E.F. Hutton & Company, Inc., Defendants.

Civ. A. No. 86-0393-C.

United States District Court, D. Massachusetts.

September 24, 1986.

COPYRIGHT MATERIAL OMITTED

Robert C. Barber, Bradley W. Snyder, Looney & Grossman, Boston, Mass., for plaintiff.

Gerald F. Rath, Bingham, Dana & Gould, John R. Snyder, Boston, Mass., for defendants.

MEMORANDUM

CAFFREY, Chief Judge.

This is a civil action brought by Roger P. Gaudette and Jeannine R. Gaudette against Peter Panos and E.F. Hutton & Company, Inc. ("Hutton"). The defendant Peter Panos was a broker and an employee at Hutton's Salem, Massachusetts office during the time period relevant to this action. The plaintiffs seek to recover monetary damages caused by the alleged fraudulent and negligent administration of various investment accounts by Panos and Hutton. Count I of the second amended complaint¹ alleges a violation of Section 10(b) of the 1934 Securities Exchange Act, 15 U.S.C. § 78j(b) and Rule 10-b-5, 17 C.F.R. 240, 10b-5. Count VI alleges a violation of Section 4o of the Commodity Exchange Act. 7 U.S.C. § 6o. Counts VII and VIII were brought pursuant to the Racketeer Influenced and Corrupt Organization Act ("RICO"), 18 U.S.C. § 1964(c), alleging violations of 18 U.S.C. § 1962(c) and (d). Finally, invoking the doctrine of pendent jurisdiction, the plaintiffs request this Court to exercise jurisdiction over their state law claims in Counts II, III, IV, V, IX, and X.²

The matter is now before the Court on the defendants' motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(6), 9(b), and 12(b)(1). In their motion and supporting memoranda, the defendants maintain that Count I, the Section 10(b) and Rule 10b-5 claim, Count VI, the Commodity Exchange Act claim, and Counts VII and VIII, the RICO claims, fail to state a claim upon which relief can be granted and fail to allege the circumstances of the purported fraud with the particularity required by Fed.R.Civ.P. 9(b). The defendants further maintain that if Counts I, VI, VII, and VIII are not barred on those grounds, those parts of Counts I, VI, VII, and VIII pertaining to pre-February 4, 1984 transactions are time-barred. The remaining counts, Counts II, III, IV, V, IX, and X also should be dismissed, the defendants argue, because the plaintiffs have filed a state court suit against the defendants in which they have made identical claims raising the same issues as are present here.

This case raises important and complex questions concerning three major pieces of federal legislation. After careful consideration of the arguments presented on behalf of both parties, I rule that plaintiffs' claims under the Securities Exchange Act, plaintiffs' claims under the Commodity Exchange Act, and plaintiffs claims under the so-called RICO statute against defendant Panos should not be dismissed. Review of the language and intent of RICO, as well as of recent decisions in this and other circuits, however, leads me to conclude that plaintiffs' RICO claims against defendant Hutton should be dismissed for failure to allege an enterprise separate and distinct from the person alleged to conduct the enterprise's affairs. Finally, the Court declines to exercise its discretionary pendent jurisdiction over plaintiffs' state law claims having in mind that plaintiffs are parties to a suit in state court which makes the same claims.

The second amended complaint alleges a pattern of fraudulent activity by the defendant Panos from approximately April of 1983 when the plaintiffs entrusted the management of their investment accounts to Panos through approximately November of 1984 when the plaintiffs began transferring their accounts out of Hutton. The second amended complaint alleges that as of April, 1983 the plaintiffs owned a portfolio of securities with a net value of approximately $507,322. The portfolio consisted primarily of stock in Computervision, Inc. acquired by the plaintiffs over a number of years through employee stock options and employee bonuses. The plaintiffs' primary investment objective prior to and through April, 1983, the second amended complaint alleges, was the maintenance of a growing, income producing portfolio invested in conservative and well managed growth companies.

In April of 1983 the plaintiffs, who already used one broker at Hutton, sought another broker who could also serve as a financial advisor to guide the growth and preservation of their portfolio. With this objective, the plaintiffs met with the defendant Panos and allegedly informed him of their investment objectives of growth and income, their desire to retain securities already in their portfolio, particularly the Computervision stock, their reluctance to trade on margin due to the risks involved, their desire to liquidate promptly any investment as soon as its upward trend appeared to be peaking, and their need for someone to monitor their account daily. At this April meeting, Panos allegedly represented to the plaintiffs that he was a qualified financial advisor with many years of education, experience, knowledge, and with the skill and tools to monitor accounts effectively and to enable him to make responsible decision in the best interest of his clients. According to the second amended complaint, Panos also represented to the plaintiffs that it was his practice to monitor personally his clients' accounts on a daily basis and that he and Hutton would monitor the plaintiffs' account on a daily basis if the plaintiffs decided to engage them. When the plaintiffs expressed concern about trading on margin, Panos allegedly represented that the plaintiffs' margin account balance would not exceed the 50% limitation set by the Federal Reserve Bank and that the interest charges on the plaintiffs' account for any one year would not exceed $10,000, the interest deduction limit under the federal tax laws. Finally, at the April meeting Panos allegedly represented to the plaintiffs that he and Hutton would closely monitor the plaintiffs' IRA accounts on a daily basis and would minimize losses to those accounts in a declining market by transferring funds from the growth IRA into Hutton's more stable investment IRA.

According to the second amended complaint, Panos intended all of the above representations to induce the plaintiffs to turn over their account to him and to transfer their other stock holdings to Hutton. On May 3, 1983 the plaintiffs allegedly arranged for the delivery to Hutton of 6,346 shares of Computervision stock. From May 2, 1983 through May 16, 1983 Panos allegedly spent $200,000 purchasing stocks and calls. Although Mr. Gaudette asked Panos on or about May 16, 1983 what funds were used to purchase these securities, Panos did not inform him that he had drawn heavily on the plaintiffs' margin account to purchase these securities.

At a meeting on or about May 24, 1983, Panos allegedly urged the plaintiffs to enter the futures market. Panos allegedly promised the plaintiffs that he would not allow them to lose more than one-half of whatever they committed to futures, that he would monitor the market's trends on a daily, or even hourly, basis, that upon the slightest reverse in the market he and Hutton would "bail out" and thereby minimize any losses. According to the second amended complaint, Panos allegedly failed to fully explain the risks of investing in the commodities market, which the plaintiffs allege would have enabled them to understand Panos's trading in futures and to appreciate that his trading was unsuitable in light of the plaintiffs' investment objectives. Allegedly as a result of these representations by Panos, the plaintiffs committed $25,000 from their margin account to a commodity account and gave Panos and Hutton full discretion in handling the account. Panos allegedly represented at that time that he would soon return this $25,000 to the margin account to minimize the accumulation of interest on the margin account. This promise notwithstanding, Panos allegedly never returned these funds; instead, he allegedly started on a course that resulted in the accumulation of excessive interest and, ultimately, in calls on the plaintiffs' margin account. On June 28, 1983, allegedly upon the recommendation of Panos, Mr. Gaudette drew $17,000 from the margin account to pay off a debt in that amount, thereby generating additional interest charges to that account. Shortly thereafter, Mr. Gaudette told Panos that he was concerned about the amount of interest being charged to his margin account. In response, Panos allegedly again represented that he would not allow the interest charged to the plaintiffs' margin account to exceed $10,000.

Prior to engaging the services of Mr. Panos, the plaintiffs owned shares of MCI stock with a market value of approximately $96,000. At the meeting between Panos and the plaintiffs in April of 1983, Panos allegedly represented that the MCI stock had peaked and should be sold as soon as sufficient time passed for long-term capital gains recognition. The plaintiffs later informed Panos that the one year holding period for capital gains recognition would be met as of July 8, 1983. The second amended complaint alleges that Panos failed to sell the MCI stock after July 8, 1983. When Mr. Gaudette received his August, 1983 statement, he saw that Panos had not sold the stock, which by that time had declined in value to under $60,000. Instead of selling the MCI stock at that time, Panos allegedly reassured Mr. Gaudette that the MCI stock would recoup some of its losses even though he allegedly had an insufficient basis for that belief. The MCI stock continued to decline in value, however, and was ultimately sold by Panos in 1984 for $40,272. According to the second amended complaint, during the first six month period of the margin account, Panos allowed $31,500 of interest charges which, of course, meant a profit for...