In re Catanella and EF Hutton and Co.

Citation583 F. Supp. 1388
Decision Date09 April 1984
Docket NumberM.D.L. No. 546.
PartiesIn re CATANELLA AND E.F. HUTTON and COMPANY, INC. SECURITIES LITIGATION.
CourtU.S. District Court — Eastern District of Pennsylvania

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Steven M. Kramer, Robert J. Vedatsky, Philadelphia, Pa., for Edward Gaugler.

Richard D. Greenfield, Robert P. Frutkin, David B. Zlotnick, Greenfield & Chimicles, P.C., Bala Cynwyd, Pa., George M. Conway, III, Haddonfield, N.J., for David Taraborelli and Ronald Singer.

Michael J. Rutenberg, Rutenberg, Rutenberg, Rutenberg & Rutenberg, Philadelphia, Pa., for Saul and Teresa Shulik.

Richard D. Greenfield, Robert B. Frutkin, David B. Zlotnick, Greenfield & Chimicles, P.C., Bala Cynwyd, Pa., James M. Richardson, Wynnewood, Pa., George M. Conway, III, Haddonfield, N.J., for the Rastelli plaintiffs.

Leonard Barrack, Gerald J. Rodos, Daniel E. Bacine, John G. Narkin, Barrack, Rodos & Bacine, Philadelphia, Pa., Philip Stephen Fuoco, Haddonfield, N.J., for Kenneth Catanella and E.F. Hutton & Co., Inc.

Walter B. Udell, Edelson, Udell, Kimmelman & Farrell, Philadelphia, Pa., M. Randall Vanet, Kansas City, Mo., for Joseph Granville.

MEMORANDUM AND ORDER

GILES, District Judge.

                                        TABLE OF CONTENTS
                SUBJECT                                              PAGE
                I.   INTRODUCTION                                      1392
                II.  THE COMPLAINTS                                    1393
                III. DISCUSSION                                        1397
                     A. Pleading Deficiencies                          1397
                        1. Specificity and Rule 9(b)                   1397
                        2. Immaterial, Impertinent or Scandalous
                           Matter                                      1400
                        3. Simplicity and Rule 8                       1401
                     B. Federal Securities Laws                        1402
                        1. Section 10(b)                               1402
                           (a) Scope of Prohibited Conduct             1403
                           (b) Churning                                1405
                           (c) In Connection With                      1407
                           (d) Causation                               1413
                        2. Section 12(2)                               1417
                        3. Investment Advisers Act of 1940             1418
                        4. Section 17(a)                               1417
                        5. Vicarious Liability                         1419
                     C. The Rico Claims                                1422
                        1. The Statute                                 1422
                        2. Securities Related Issues                   1424
                        3. Organized Crime                             1426
                        4. Injury                                      1430
                           (a) Competitive Injury                      1431
                           (b) Racketeer Enterprise Injury             1434
                     D. State Law Claims                               1437
                        1. Pendent Jurisdiction                        1437
                        2. Causation                                   1438
                        3. State Securities Statutes                   1438
                        4. New Jersey Consumer Fraud Act               1441
                
I. INTRODUCTION

Before the court are motions to dismiss in five securities fraud cases, consolidated for purposes of pretrial proceedings by the Judicial Panel on Multidistrict Litigation.1 Although the allegations contained in the complaints vary slightly, each involve the conduct of Kenneth G. Catanella ("Catanella"), a securities broker employed by defendant E.F. Hutton and Company, Inc. ("Hutton"). Catanella is accused of a continuing course of fraud in connection with his handling of plaintiffs' portfolios. The allegations run the gamut from churning to the purchase of unsuitable securities and the failure to disclose the risks inherent in certain transactions. In addition to misrepresentations and omissions directly impinging upon trading decisions, it is also averred that Catanella failed to disclose his role in a prior securities fraud action. Defendants Hutton and Granville are sued for failing to supervise Catanella adequately and under the related doctrine of respondeat superior. They are also characterized as "controlling persons" and aiders and abettors. Plaintiffs invoke sections 12(2), 15 and 17(a) of the Securities Act of 1933, 15 U.S.C. §§ 77l(2), 77o, 77q(a) (1976), sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78t(a) (1976) and the Investment Advisers Act of 1940, 15 U.S.C. §§ 80b-1—80b-17 (1976). Claims are also made pursuant to the Racketeer Influenced and Corrupt Organizations Act of 1970, ("RICO"), 18 U.S.C. §§ 1961-1968 (1976). Various counts based upon state law have been appended to the federal claims. In their motions to dismiss, defendants have assailed the legal sufficiency of virtually every cause of action. For the reasons which follow, the motions shall be granted in part and denied in part.

II. THE COMPLAINTS

When deciding a motion to dismiss, the court must take as true all well pled allegations and resolve all reasonable inferences drawn therefrom in the light most favorable to the nonmoving party. See e.g., Miree v. DeKalb County, 433 U.S. 25, 27 n. 2, 97 S.Ct. 2490, 2492 n. 2, 53 L.Ed.2d 557 (1977); Rogin v. Bensalem Township, 616 F.2d 680, 685 (3d Cir.1980); Bogosian v. Gulf Oil Corp., 561 F.2d 434, 444 (3d Cir. 1977).2 Mindful of this standard, I shall summarize the rather complex allegations contained in the complaints. In the interest of brevity, I shall address issues jointly where possible.

Each complaint begins by tracing the progress of Catanella's brokerage career. After spending eight months as a trainee, he embarked on that career at Paine, Webber, Jackson & Curtis, Inc. ("Paine, Webber") in 1969. Then, from December, 1972 until November, 1973, he was a registered representative and sales manager for Shearson, Hayden, Stone, Inc. ("Shearson"). Taraborelli Complaint at ¶ 16; Shulik Complaint at ¶ 8.3 In April of 1974, Catanella's former customers from Paine, Webber and Shearson instituted suit against him and his former employers, claiming violations of a variety of federal and state securities laws.4 After a bench trial, Catanella was found to have violated sections 10(b) and 15(c) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78o (c) (1976), various regulations and stock exchange rules. The trial court determined that Catanella had intentionally mishandled those plaintiffs' accounts, making unauthorized and unsuitable purchases, failing to disclose the risks inherent in short term trading and recommending securities without justification or investigation. Catanella also churned the accounts, disregarded specific instructions and breached a variety of fiduciary duties. Taraborelli Complaint at ¶ 19. Paine, Webber and Shearson were held liable for, inter alia, failing to supervise Catanella. Id. Judgment was entered against the defendants for eight hundred and thirteen thousand dollars ($813,000.00) and the case was later settled for an amount very close to that figure. Id. at ¶ 20.

The instant complaints also allege that Catanella had been terminated by Paine, Webber and Shearson, had been the subject of customer complaints and disciplinary proceedings, and had been previously fined for unauthorized trading. Catanella's commission record had been quite high, a potential indicia of churning. Id. at ¶ 21. Despite this dubious employment history, Hutton hired Catanella as a registered representative. It is averred that Hutton either knew all of these facts before hiring him or was reckless in its failure to so learn. Not only was Catanella hired, but he was also named Portfolio Manager, made a member of Hutton's Director's Advisory Council and elected Vice-President. These titles added to Catanella's credibility, but were allegedly undeserved and misrepresented the level of his expertise. Id. at ¶¶ 23-24. In an attempt to launch Catanella's career at Hutton, a series of widely publicized seminars and lectures were sponsored by the firm. Famous market prognosticator, Joseph Granville was spotlighted at these lectures and Catanella was presented as a follower of the Granville method of investing. Gaugler Amended Complaint at ¶ 8. These seminars were directly or indirectly responsible for bringing plaintiffs and Catanella together.

A. The Gaugler Complaint

Edward Gaugler, a sixty two year old retired scientist, attended a Hutton seminar in Atlantic City. Both Granville and Catanella were in attendance, and the latter was dubbed the "Granville Oriented Broker in the Tri-State Area." Id. at ¶ 9. During the seminar, Gaugler was given an informational card, which he filled out, entitling him to a free Granville Newsletter. This card also provided Catanella with the ability to contact and solicit him as a potential customer, which he did. Gaugler explained that his investments to date had been conservative, id. at ¶ 11, and that he desired only a "businessman's risk." Id. at 22. It is alleged that Gaugler was unsophisticated in investments and this fact should have been clear to Catanella. Id. at ¶¶ 3, 11. Catanella attempted to convince Gaugler to follow the Granville market approach, making it appear that he was in constant contact with Granville and that Granville approved of his trading decisions. He also represented that Hutton's research facilities were utilized in reaching all trading decisions. Id. at ¶¶ 11-14.

The complaint avers numerous wrongdoings by Catanella and Hutton, including their failure to disclose the cash position in Gaugler's account thereby enabling Hutton to use the idle cash for its own benefit, id. at ¶ 17; failure to disclose that certain transactions were contrary to Granville's advice, id at ¶ 18; failure to disclose that Gaugler had not "gotten in" at the beginning of Granville's strategy for a certain period, id at ¶ 23, and failure to disclose that Hutton's research resources were rarely utilized in...

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