Mauriber v. Shearson/American Exp., Inc.

• Decision Date: 27 August 1982
• Docket Number: No. 82 Civ. 1802 (KTD).,82 Civ. 1802 (KTD).
• Parties: Saul MAURIBER, Plaintiff, v. SHEARSON/AMERICAN EXPRESS, INC., and Judith LeWinter a/k/a Judith Cohen, Defendants.
• Court: U.S. District Court — Southern District of New York

546 F. Supp. 391

Saul MAURIBER, Plaintiff, v. SHEARSON/AMERICAN EXPRESS, INC., and Judith LeWinter a/k/a Judith Cohen, Defendants.

No. 82 Civ. 1802 (KTD).

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

August 27, 1982.

Dan Brecher, New York City, for plaintiff.

Peter T. Kujawski, Harry D. Frisch, Leslie A. Klein, Theodore A. Krebsbach, New York City, for defendant Shearson/American Exp., Inc.

MEMORANDUM & ORDER

KEVIN THOMAS DUFFY, District Judge:

From January, 1980 to October, 1981, Saul Mauriber placed a substantial portion of his life savings in a discretionary customer account at Shearson/American Express, Inc. ("Shearson"), a New York corporation engaged in the investment brokerage business. Allegedly, Shearson proceeded to lose up to $250,000 of Mauriber's money principally by selling off his portfolio of "blue chip securities" and purchasing "speculative" stock. This lawsuit ensued. It exemplifies a growing number of cases which improperly invoke the federal securities laws and, additionally, exploit the vague language of the civil provisions of the federal anti-racketeering statute in an attempt to recoup investment losses.

Shearson now moves to dismiss the complaint pursuant to Fed.R.Civ.P. 12(b)(6) for failure to state a claim upon which relief can be granted in that (1) the complaint fails to plead fraud with the particularity required by Fed.R.Civ.P. 9(b); (2) the complaint improperly assumes the existence of an implied cause of action under the Rules of the New York Stock Exchange ("NYSE"), the American Stock Exchange ("AMEX") and the National Association of Securities Dealers ("NASD"); and (3) the complaint fails to state sufficient facts to sustain a claim under the Racketeer Influenced and Corrupt Organization Statute ("RICO"), 18 U.S.C. §§ 1961-68 (1976 and Supp. II 1978). Shearson also moves pursuant to Fed.R.Civ.P. 12(f) to strike plaintiff's claim for punitive damages.

The complaint alleges two causes of action, one under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and another under Section 1962(c) of RICO, 18 U.S.C. § 1962(c). The same set of facts purport to support both causes of action. For purposes of this motion the facts alleged in the complaint are assumed to be true and all inferences are construed in plaintiff's favor. Prior to January, 1980, the plaintiff, who is at an "advanced age" and retired, owned an unspecified amount of "blue chip" securities which he had acquired over the past thirty years. The dividend and interest income from these securities provided plaintiff with a "substantial portion of his income." Sometime in January 1980, plaintiff opened a customer account at the Shearson brokerage firm and transferred his portfolio of securities there. The account executive at Shearson responsible for Mauriber's account was defendant Judith LeWinter. Mauriber contends that the defendants Shearson and LeWinter "made and caused to be made misstatements and omissions of material facts and engaged in fraudulent and deceptive conduct and courses of business," complaint ¶ 17, including the following:

1. "in an atmosphere of high pressure tactics, defendants induced plaintiff to sign a Limited Discretionary Authorization which granted defendants discretionary power to buy and sell securities in plaintiff's account, without offering plaintiff the opportunity to read, reflect or ask meaningful questions with respect to said document, and by telling plaintiff that said document was merely necessary to transfer plaintiff's existing portfolio of securities over to his account with defendant Shearson." Complaint ¶ 17(b).

2. "defendants filled out, completed, reviewed and maintained possession of a Discretionary Account Information Statement on plaintiff's behalf, without consulting plaintiff or obtaining the relevant information from plaintiff. Said document contained several material misstatements of facts concerning plaintiff and his financial condition and investment objectives." Id., ¶ 17(c).

3. "defendants failed to inform plaintiff that said Limited Discretionary Authorization granted defendants several powers, including, but not limited to, the power to act as plaintiff's agent ... for purpose of buying and selling securities in plaintiff's account, ... without first consulting plaintiff ...." Id., ¶ 17(d).

4. Between January, 1980 and October, 1981, "defendants sold plaintiff's blue chip securities and caused plaintiff to make several cash payments into his account. With the proceeds of said sales and said cash payments, defendants purchased and sold, for plaintiff's account, various non-income producing securities which were of a high risk and speculative nature. Said purchases and sales involved in excess of 160 transactions over a short period of time, constituting excessive trading, and were designed to, and, in fact, did earn defendants substantial commissions, but caused plaintiff losses, expenses, costs and damages." Id., ¶ 17(c).

5. "defendants knew that the high risk securities were unsuitable for plaintiff's financial needs and investment objectives." Id., ¶ 17(f). "Despite this knowledge, defendants represented to plaintiff that it would be consistent with his needs and objectives to sell the securities." Id., ¶ 17(g).

6. "defendants sold plaintiff's Anchor Growth Funds, and defendants told plaintiff that the sale price of said securities was approximately $11,000, when, in fact, the sale price was approximately $34,000." Id., ¶ 17(i). Furthermore, "defendants failed to inform plaintiff that approximately $23,000 from the sale of plaintiff's Anchor Growth Funds was deposited into plaintiff's account by defendants and utilized to purchase unsuitable securities." Id., ¶ 17(j).

7. Defendants failed to inform plaintiff that numerous purchases of securities for plaintiff's account were made on margin. Id. ¶ 17(k).

Plaintiff asserts that these actions constitute a Section 10(b) violation in that they involved misrepresentations and omissions, and furthermore, they constitute violations of NASD and NYSE "know your customer" and "suitability" of investments rules. Also, plaintiff alleges that these actions constitute violations of Section 1962(c) of RICO which proscribes inter alia any fraud in the sale of a security committed at least twice within a ten year period.

1. The Section 10(b) Claim

On its motion to dismiss, defendants' first objection to the complaint is that it fails to plead fraud with the particularity required by Fed.R.Civ.P. 9(b). Rule 9(b) states in part: "in all averments of fraud ... the circumstances constituting fraud ... shall be stated with particularity."

"To pass muster in this Circuit a complaint `must allege with some specificity the acts constituting the fraud;' conclusory allegations that defendant's conduct was fraudulent or deceptive are not enough." Decker v. Massey-Ferguson, Ltd., current, 681 F.2d 111 (2d Cir. 1982), quoting Rodman v. Grant Foundation, 608 F.2d 64, 73 (2d Cir. 1979). In defendants' view, nearly every paragraph of the complaint fails to meet this standard.

After reviewing the complaint, I find that plaintiff's fraud allegations fail to meet the requirements of Rule 9(b). The Section 10(b) portion of the complaint can be divided into three categories: (1) misrepresentations by defendants to Mauriber; (2) churning; and (3) violations of the "know your customer" and "suitability" rules of the NYSE and NASD. These categories will be scrutinized seriatim under the Rule 9(b) requirements.

The first category of fraud allegations takes several forms. Plaintiff asserts that he was induced through "high pressure tactics" to grant defendants discretionary power over his account. Defendants purportedly told the plaintiff that the document which he signed was merely necessary to set up the account at Shearson. The complaint fails to state, however, who made these "pressure" statements to the plaintiff and exactly when and where they were made.

The complaint further states that the defendants filled out and maintained a Discretionary Account Information Statement on plaintiff's behalf which contained misstatements of fact. But the complaint does not reveal these misrepresentations nor how plaintiff relied upon them to his detriment.

Next, the complaint alleges that defendants erroneously represented to the plaintiff that selling off his blue chip securities was consistent with his financial needs. Again, it is not clear who made these statements, when they were made and how they were made. Gross v. Diversified Mortgage Investors, 431 F.Supp. 1080 (S.D.N.Y.1977), aff'd without op., 636 F.2d 1201 (2d Cir. 1980). A similar deficiency exists in the allegation that defendants told plaintiff that the sale price of his shares in Anchor Growth Funds was $11,000 instead of $34,000. Plaintiff is under a Rule 9(b) obligation when dealing with more than one defendant to specify which defendant told which lie and under what circumstances. Plaintiff is also obligated to name the defendant or defendants who allegedly failed to inform the plaintiff that securities were purchased on margin in plaintiff's account. For the foregoing reasons, paragraphs 16 and 17(a), (b), (c), (g), (i) are stricken from the complaint. These vague allegations of fraud fail to appraise the defendants of information which would be necessary to raise an intelligent defense.

The second category of fraud in the complaint is churning. Complaint ¶ 17(e), (k). Churning occurs when a broker disregards the client's investment objectives and engages in excessive trading for the purpose of generating commissions. To prevail on a claim of churning under Section 10b, an investor must prove: (1) excessive trading in light of his known investment objectives, (2) by a broker with discretion over his account, (3) who acts with the intent to defraud. See Miley v. Oppenheimer & Co., Inc., 637 F.2d 318 (5th Cir. 1981). The complaint falls...