Kronfeld v. Advest, Inc.

• Decision Date: 23 December 1987
• Docket Number: No. 85 Civ. 4673 (LFM),86 Civ. 4644 (LFM).,85 Civ. 4673 (LFM)
• Citation: 675 F. Supp. 1449
• Parties: Arthur I. KRONFELD et al., Plaintiffs, v. ADVEST, INC. et al., Defendants. Stanley I. KIRWIN et al., Plaintiffs, v. ADVEST, INC. et al., Defendants.
• Court: U.S. District Court — Southern District of New York

675 F. Supp. 1449

Arthur I. KRONFELD et al., Plaintiffs, v. ADVEST, INC. et al., Defendants.

Stanley I. KIRWIN et al., Plaintiffs, v. ADVEST, INC. et al., Defendants.

Nos. 85 Civ. 4673 (LFM), 86 Civ. 4644 (LFM).

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

December 23, 1987.

COPYRIGHT MATERIAL OMITTED

Cohen, Milstein & Hausfeld, Washington, D.C. by Herbert E. Milstein, Michael D. Hausfeld and Lisa M. Mezzetti, Murray, Hollander, Sullivan & Bass, New York City by Daniel J. Sullivan, for plaintiffs.

Harvis & Zeichner, New York City by Stuart A. Krause, for defendant McLaughlin, Piven, Vogel Inc.

Rogers & Wells, New York City by Richard A. Cirillo, Joseph A. Post and Donald P. Alexander, for defendants Merrill Lynch, Pierce, Fenner & Smith Inc., Dean Witter Reynolds, Inc., Bear, Stearns & Co. and Bacon Whipple & Co.

Finley, Kumble, Wagner, Heine, Underberg, Manley, Myerson & Casey, New York City by Harvey D. Myerson, Lloyd S. Clareman and Mark E. Segall, for defendants Shearson Lehman Bros. Inc., Foster & Marshall, Inc. and The Robinson-Humphrey Co., Inc.

Weil, Gotshal & Manges, New York City by Joseph S. Allerhand, Jenner & Block, Chicago, Ill. by Jerold S. Solovy, Keith F. Bode and Howard S. Suskin, for defendant Clayton Brown & Associates, Inc.

Pickard and Djinis, Washington, D.C. by Anthony W. Djinis, Zuckerbrod & Taubenfeld, Cedarhurst, N.Y., by Martin Zuckerbrod, for defendant David Lerner Associates, Inc.

OPINION

MacMAHON, District Judge.

Defendants move:

(1) to compel certain plaintiffs to arbitrate their claims against the defendants, pursuant to the Federal Arbitration Act, 9 U.S.C. § 3 (1970); (2) to dismiss the amended complaints, pursuant to Fed.R.Civ.P. 9(b), for failure to plead fraud with sufficient particularity;

(3) to dismiss the amended complaints, pursuant to Fed.R.Civ.P. 12(b)(6), for failure to state a claim for relief;

(4) for summary judgment, pursuant to Fed.R.Civ.P. 56(b), on the ground that the claims are barred by the applicable statutes of limitations;

(5) for entry of final judgments on certain counts of the amended complaints, pursuant to Fed.R.Civ.P. 54(b); and

(6) for an award of attorneys' fees and costs, pursuant to Fed.R.Civ.P. 11.

BACKGROUND

Plaintiffs, purchasers of Washington Public Power Supply System ("WPPSS") bonds, issued to fund development of WPPSS Nuclear Power Plants 4 and 5 ("Project 4 & 5"), instituted this action against the underwriters and sellers of the bonds. Counts I and II of the amended complaints are brought against certain underwriting defendants who were members of the group directly marketing the WPPSS Project 4 & 5 bonds to the investing public. These counts allege violations of Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 24.10-5, and violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1961 et seq. Counts III, IV, V, and VI, brought against all defendants, allege, respectively, violations of Section 10(b) of the Exchange Act and Rule 10b-5, negligent misrepresentation, fraud and deceit, and breach of fiduciary duties and obligations.

In essence, plaintiffs allege that defendants misrepresented or failed to disclose three categories of material facts concerning the Project 4 & 5 bonds: first, the existence of management and planning problems; second, the absence of government or agency guarantees; and third, the unenforceability of agreements with certain utilities and municipalities respecting the purchase of power and partial guarantee of the bonds ("Participants' Agreements").

The Kronfeld plaintiffs' original complaint was dismissed with leave to file an amended complaint. Their amended complaint and the identical complaint filed in Kirwin were dismissed as insufficient. On reargument, the dismissals were affirmed, again with leave to amend the Exchange Act and RICO claims (Counts I, II, and III). The pendent state law claims (Counts IV, V, and VI) were dismissed without prejudice to repleading them in state court. Plaintiffs now replead the same six counts with the single substantive addition of an exhibit to Count III detailing representations made to certain individual plaintiffs at or about the time the Project 4 & 5 bonds were purchased ("Exhibit 6").

DISCUSSION

Arbitration

Certain plaintiffs signed customer agreements with arbitration provisions, and defendants seek to compel arbitration of all their claims. We must determine at the outset (1) whether an arbitration agreement exists; (2) whether the claims are arbitrable; and (3) whether the right to arbitrate has been waived.¹

Plaintiffs do not dispute the existence of the agreements; nor do they raise any issues of unfairness or unconscionability. The arbitration agreements are therefore presumed valid.²

The Supreme Court's recent decision in Shearson/American Express, Inc. v. McMahon, ___ U.S. ___, 107 S.Ct. 2332, 96 L.Ed.2d 185 (1987), conclusively establishes the arbitrability of RICO and Exchange Act claims. Plaintiffs argue that McMahon is distinguishable because of the complexity of their conspiracy claims and the inefficiency of requiring them to litigate identical claims in two fora. The complexity point echoes the mistrust of arbitration expressly repudiated in McMahon.³ A similar efficiency contention was considered and rejected in Dean Witter Reynolds Inc. v. Byrd, 470 U.S. 213, 105 S.Ct. 1238, 84 L.Ed.2d 158 (1985). Byrd concluded that "the Arbitration Act requires district courts to compel arbitration of pendent arbitrable claims ... even where the result would be the possibly inefficient maintenance of separate proceedings in different forums."⁴ Thus, the prospect that different plaintiffs with like claims may have to litigate in two different fora is unpersuasive.

Finally, there is no dispute that defendants have not waived their right to compel arbitration. Defendants have asserted that plaintiffs' claims are arbitrable from the outset. No cognizable prejudice to plaintiffs will result.⁵

Defendants' motion to compel arbitration is therefore granted. The balance of this opinion will address only the claims of plaintiffs who have not signed arbitration agreements.

Rule 9(b)

Counts I and II

Counts I and II allege a conspiracy by the underwriter defendants to make the misrepresentations and omissions that induced plaintiffs to purchase the Project 4 & 5 bonds, in violation of the Exchange Act and RICO. The conclusory fact allegations that plaintiffs offer to support these counts have been dismissed twice as inadequate. A brief review of Second Circuit authority will demonstrate anew that plaintiffs fail to meet the pleading requirements of Fed.R. Civ.P. 9(b).

Rule 9(b) provides, in pertinent part: "In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." This circuit consistently has held that securities fraud claims must meet this heightened particularity requirement.⁶ Indeed, Rule 9(b) should be strictly construed in securities cases in order to minimize strike suits, to protect defendants from harm to their reputations from groundless claims, and to provide defendants with knowledge of the precise conduct at issue.⁷

To survive a Rule 9(b) motion in a securities fraud action, plaintiffs must plead factual allegations that set forth

1) precisely what statements were made, and 2) the time and place of each such statement and the person responsible for making (or, in the case of omissions, not making) the same, 3) the content of such statements and the manner in which they misled the plaintiff, and 4) what the defendants "obtained as a consequence of the fraud."

Posner v. Coopers & Lybrand, 92 F.R.D. 765, 769 (S.D.N.Y.1981) (citations omitted), aff'd, 697 F.2d 296 (2d Cir.1982). Accord Goldman v. Belden, 754 F.2d 1059, 1069-70 (2d Cir.1985); Whitbread (US) Holdings, Inc. v. Baron Philippe De Rothschild, 630 F.Supp. 972, 982 (S.D.N.Y.1986).

Plaintiffs contend that conspiracy allegations should be treated more leniently, invoking decisions that accord conspiracy allegations more "leeway."⁸ The cases relied on by plaintiffs are distinguishable: some involve conspiracy allegations other than fraud,⁹ to which, of course, the Rule 9(b) requirements do not apply; in others, the court found that the underlying fraud had been pleaded with sufficient particularity.¹⁰ Unlike the latter group of cases, plaintiffs' amended pleadings offer nothing in support of their conspiracy allegations other than broad and conclusory statements too vague to provide a basis for defendants to respond.¹¹

These deficiencies in Counts I and II mandate dismissal. In choosing to dismiss Counts I and II with prejudice, we follow those courts that conclude that failure to particularize pleadings despite notice of deficiencies and opportunity to correct them abuses the liberal pleading policies of the Federal Rules.¹²

Count III

Revised Count III sets forth plaintiffs' Exchange Act claims against individual brokers from whom they purchased the Project 4 & 5 bonds. Exhibit 6 consists of individualized fact sheets providing the following information from certain plaintiffs ("Exhibit 6 plaintiffs"): (1) the broker, (2) the account representative with whom they dealt, (3) the dates and locations of conversations with their account representatives, (4) the date that the misrepresentations were made and how they were communicated, and (5) the content and wording of the misrepresentations.

Applying Rule 9(b) criteria to these fact allegations, Exhibit 6 plaintiffs have satisfied the particularity requirement. The Count III claims of the other plaintiffs, however, remain deficient and are dismissed with prejudice.

Accordingly, we must consider defendants' other objections to the Count III claims of the Exhibit 6 plaintiffs.

Rule 12(b)(6)

Defendants next argue that the Count III...