Merrill Lynch, Pierce, Fenner & Smith v. Del Valle

• Decision Date: 15 October 1981
• Docket Number: No. 80-3142-CIV-EPS.,80-3142-CIV-EPS.
• Citation: 528 F. Supp. 147
• Court: U.S. District Court — Southern District of Florida
• Parties: MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., Plaintiff/Counter-Defendant, and Alberto Suarez, Counter-Defendant, v. Reinaldo L. DEL VALLE, Defendant/Counter-Plaintiff.

528 F. Supp. 147

MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., Plaintiff/Counter-Defendant and Alberto Suarez, Counter-Defendant, v. Reinaldo L. DEL VALLE, Defendant/Counter-Plaintiff.

No. 80-3142-CIV-EPS.

United States District Court, S. D. Florida, Miami Division.

October 15, 1981.

Bennett Falk, Miami, Fla., for plaintiff/counter-defendant.

Brian F. Spector, Miami, Fla., for defendant/counter-plaintiff.

MEMORANDUM OPINION AND ORDER GRANTING IN PART AND DENYING IN PART THE COUNTER-DEFENDANTS' MOTION TO DISMISS THE COUNTERCLAIM

SPELLMAN, District Judge.

The complaint in the case at bar seeks to recover a $55,474.57 debit that the Defendant, Reinald L. Del Valle (hereinafter "Del Valle"), incurred by trading in various call options. It is alleged that Del Valle issued two checks, payable to the Plaintiff, Merrill Lynch, Pierce, Fenner & Smith, Inc., (hereinafter "Merrill Lynch"), to pay for the options traded. Both checks were returned to Merrill Lynch, unpaid, because the payor bank had received "stop payment" orders on the checks. Thereafter, the Defendant liquidated his entire account, leaving a debit balance of $55,474.57, for which payment has been demanded and refused.

The Defendant has filed a six count counterclaim against Merrill Lynch and Alberto Suarez, (hereinafter "Suarez"), an account executive employed by Merrill Lynch. Del Valle claims that the counter-Defendants have violated Sections 7(c) and 10(b) of the Securities Exchange Act of 1934, as amended, 15 U.S.C. §§ 78(g)(c), 78j(b), Regulation T and Rule 10b-5, promulgated thereunder, 12 C.F.R. § 220.1 et seq., and 12 C.F.R. § 240.10b-5, Section 517.301 of the Florida Statutes and he has also made a claim based on Florida common law fraud.

The counterclaim alleges, inter alia, that:

1. Prior to July 1979, Del Valle had not traded securities and had no experience in margin accounts or the options market;

2. In July of 1979, Del Valle opened an account with Merrill Lynch and, in spite of Del Valle's lack of investment sophistication, Merrill Lynch and Suarez recommended that he become involved in trading options;

3. In order to induce Del Valle to become involved in trading options, Merrill Lynch and Suarez made the following material misstatements and/or omissions:

a. that Merrill Lynch and Suarez were experts in trading options, upon whose advise Del Valle could substantially rely;

b. that Suarez would follow any instructions given by Del Valle regarding the purchase and sale of options; and

c. that Del Valle could pay for the purchase and sale of options and other securities by "settling up" at various intervals by paying the difference between the cost of purchases and the proceeds generated from sales during that interval; and

d. that Merrill Lynch and Suarez represented to Del Valle that Boeing was a suitable investment in October of 1980 while, at the same time, Merrill Lynch was advising other customers to sell their investments in Boeing;

4. By prearrangement, Merrill Lynch and Suarez made numerous recommendations regarding transactions for Del Valle in order to induce him to engage in excessive options trading, or churning, which could not be justified at any time as being suitable for or in the best interest of Del Valle; and

5. By allowing Del Valle to pay for the purchase and sale of options and other securities by "settling up" at various intervals, the Counter-Defendants violated Regulation T and Section 7 of the Exchange Act and the resulting liquidation of Del Valle's option positions directly and proximately caused damage to Del Valle.

Merrill Lynch and Suarez have jointly and independently moved to dismiss the counterclaim on several grounds. The first argument, which is advanced by Suarez individually, is that Federal Rule of Civil Procedure 13(a) does not permit him to be named as a counter-Defendant because he was not a party to the original complaint. Rule 13(h) provides, however, that "persons other than those made parties to the original action may be made parties to a counterclaim or crossclaim in accordance with the provisions of Rules 19 and 20." The Court is of the opinion that Suarez was properly joined as a counter-Defendant pursuant to Rule 20 and, therefore, his motion to dismiss is DENIED.

Merrill Lynch and Suarez jointly contend that the Section 10b and Rule 10b-5 claims against them should be dismissed because the circumstances of fraud have not been plead with sufficient particularity to meet the requirements of Federal Rule of Civil Procedure 9(b). The leading case setting forth the pleading requirements for a complaint alleging fraud under the federal securities laws is Segal v. Gordon, 467 F.2d 602 (2d Cir. 1972). The Court in Segal explained that:

It is a serious matter to charge a person with fraud and hence no one is permitted to do so unless he is in a position and is willing to put himself on record as to what the alleged fraud consists of specifically. 1A W. Barron & A. Holtzoff, Federal Practice & Procedure § 302, at 215-16 (Wright, rev. 1960).

467 F.2d at 607. The Segal court found that:

rule 9(b)'s specificity requirement stems not only from the desire to minimize the number of strike suits but also more particularly from the desire to protect defendants from the harm that comes to their reputations or to their goodwill when they are charged with serious wrongdoing.

Id. See also Shemtob v. Shearson Hammill & Co., 448 F.2d 442 (2d Cir. 1971); Felton v. Walston and Co., 508 F.2d 577 (2d Cir. 1974); Denny v. Barber, 576 F.2d 465 (2d Cir. 1978). Thus, "mere conclusory allegations of fraud, couched in the bare statutory language of the Securities Act will not satisfy Rule 9(b). Rather, the allegations must be accompanied by some delineation of the underlying acts and transactions which are asserted to constitute fraud." duPont v. Wyly, 61 F.R.D. 615, 630 (D.Del. 1973) (citations omitted).

A review of paragraphs 1 through 21 of the counterclaim shows that Del Valle has listed seven alleged material misstatements and eight alleged omissions. In addition, he has indicated the specific acts of the counter-Defendants which he claims were fraudulent, as well as the approximate dates on which they took place. These allegations are specific enough to give the counter-Defendants the notice they are entitled to and they assure the Court that Del Valle has "investigated ... the alleged fraud and reasonably believes that a wrong has occurred." Id. Accordingly, the motion to dismiss for failure to plead fraud with sufficient particularity is DENIED.

Merrill Lynch and Suarez have moved to dismiss Count III of the counterclaim, Count III purports to state a claim for violations of Section 7(c) of the Securities Exchange Act of 1934, 15 U.S.C. § 78g(c) and Regulation T, promulgated thereunder, 12 C.F.R. § 220.1 et seq. Del Valle contends that Count III is a valid cause of action because the Fifth Circuit has recognized the existence of an implied right of action for Section 7 and Regulation T violations. See McCormick v. Esposito, 500 F.2d 620 (5th Cir. 1974), cert. denied 420 U.S. 912, 95 S.Ct. 834, 42 L.Ed.2d 842 (1975). Merrill Lynch and Suarez argue that this Court should follow the trend in the circuit courts and find that no private right of action exists for such violations. Stern v. Merrill Lynch, Pierce, Fenner & Smith, 603 F.2d 1073 (4th Cir. 1979); Utah State University v. Bear, Stearns & Co., 549 F.2d 164 (10th Cir. 1977); Gutter v. Merrill Lynch, Pierce, Fenner & Smith, 644 F.2d 1194, 1198 (6th Cir. 1981).

It is the view of this Court that events subsequent to McCormick have undermined the bases for that decision and that the ruling in that case is no longer viable. The first of these events occurred in 1970 when Congress amended the Securities Exchange Act with the addition of Section 7(f).¹ This new section of the statute renders the investor equally responsible with the broker for compliance with the margin requirements.

After this section was enacted, it could no longer be fairly inferred that an investor could qualify as a statutory beneficiary of Section 7, entitled to invoke the statute as a basis for a private action in damages in his favor. Neither reason nor precedent can be marshalled in support of a conclusion that Congress, whose intent must be our polestar in this determination of implication vel non, ever intended that a statute, which regulated the action of the investor under threat of criminal sanctions, was to be used as a basis for inferring an action in favor of the investor. This follows inescapably from the language of the Court in Piper v. Chris-Craft Industries, Inc., (1977), 430 U.S. 1 at 37, 97 S.Ct. 926, 947, 51 L.Ed.2d 124. There the Supreme Court said that one whose conduct is regulated by a statute `can scarcely lay claim to the status of beneficiary whom Congress considered in need of protection,' an essential basis for inferring a private action in his favor under any statute.

Stern v. Merrill Lynch, supra at 1081.

The event that dealt the fatal blow to the McCormick decision was the Supreme Court's ruling in Cort v. Ash, 422 U.S. 66, 95 S.Ct. 2080, 45 L.Ed.2d 26 (1975). In Cort, the Supreme Court laid down specific requirements for implying a private right of action under a federal statute.

In determining whether a private remedy is implicit in a statute not expressly providing one, several factors are relevant. First, is the plaintiff `one of the class for whose especial benefit the statute was enacted' — that is, does the statute create a federal right in favor of the plaintiff? Second, is there any indication of legislative intent, explicit or implicit, either to create such a remedy or to deny one? Third, is it consistent with the underlying purposes of the legislative scheme to imply such a remedy for the plaintiff?

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