Metzner v. DH Blair & Co., No. 87 Civ. 1560 (KC).

• Court: United States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
• Writing for the Court: Seth Agota, Spengler, Carlson, Gubar, Brodsky and Frischling, New York City, for Theodore Rosen
• Citation: 689 F. Supp. 262
• Decision Date: 22 June 1988
• Docket Number: No. 87 Civ. 1560 (KC).
• Parties: Sidney S. METZNER, et al., Plaintiffs, v. D.H. BLAIR & CO., et al., Defendants.

689 F. Supp. 262

Sidney S. METZNER, et al., Plaintiffs,
v.
D.H. BLAIR & CO., et al., Defendants.

No. 87 Civ. 1560 (KC).

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

June 22, 1988.

689 F. Supp. 263

Evan S. Gordon, Scott Jaffe, Danziger, Bangser, Klipstein, Goldsmith, Greenwald & Weiss, New York City, for plaintiffs.

Seth Agota, Spengler, Carlson, Gubar, Brodsky and Frischling, New York City, for Theodore Rosen.

H. Richard Penn, Richard Mermelstein, Bachner, Tally, Polevoy, Misher and Brinberg, New York City, for D.H. Blair and Co. and J. Morton Davis.

Guy L. Heinemann, New York City, for Peter Rosen.

Kaufman, Caffey, Gilden, Rosenblum and Schaeffer, New York City, for Lena Berger.

MEMORANDUM OPINION AND ORDER

CONBOY, District Judge:

This action is before the court a second time. The late Honorable Edward Weinfeld dismissed almost all the claims plaintiffs asserted in their original complaint, and simultaneously granted them leave to amend. See generally Metzner v. D.H. Blair & Co., 663 F.Supp. 716, 719-22 (S.D. N.Y.1987). Plaintiffs amended their complaint; all defendants except Lena Berger¹ move to dismiss the amended complaint for failure to allege fraud with particularity, Fed.R.Civ.P. 9(b), and for failure to state a claim on which relief may be based, Fed.R. Civ.P. 12(b)(6). As the facts of the case are discussed in the prior decision, see Metzner, 663 F.Supp. at 718-19, they will be discussed only where necessary.

LEGAL ANALYSIS

A. Securities Laws Claims²

The first count of the amended complaint defendants move to dismiss,

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count II, alleges that the defendants made untrue statements of material facts to the plaintiffs. The statements at issue are the following: Defendant Berger "guaranteed that the stocks purchased for the ESOP and PPT accounts that had decreased in value would recover," Amended Complaint para. 31 (emphasis in original); defendant Peter Rosen would "attempt to cure the damage caused by defendant Berger by `making customers whole,'" id. para. 35; and defendant Peter Rosen "assured" one plaintiff "that the losses which had been sustained as a result of Berger's incompetency and dishonesty ... would be recouped," id. para. 40 (emphasis in original)

The statements attributed to the named defendants are not actionable.³ Compare Zerman v. Ball, 735 F.2d 15, 20-21 (2d Cir.1984) (E.F. Hutton's advertising slogan "When E.F. Hutton Talks, People Listen," and characterization of bonds as "marvelous" not actionable because they "do not constitute representations of fact that could be actionable under the securities laws") and Newman v. L.F. Rothschild, Unterberg, Towbin, 651 F.Supp. 160, 163 (S.D.N.Y.1986) (statements by broker that he would make money for the clients, and that they would make good money on new issues not actionable because "the reasonable investor is presumed to understand that this is nothing more than `the common puff of a salesman,' not a material factual misstatement") (quoting Bowman v. Hartig, 334 F.Supp. 1323, 1328 (S.D.N.Y.1971)) and Rotstein v. Reynolds & Co., 359 F.Supp. 109, 113 (N.D.Ill.1973) (statements that stock was "red hot," that plaintiff "could not lose" by investing in it, and that plaintiff "would make a bundle of money" on another stock not actionable) with Newman v. L.F. Rothschild, Unterberg, Towbin, 662 F.Supp. 957, 959 (S.D.N.Y.1987) (broker's statement that he could earn the clients a return of a specific percentage on their investment actionable). Guarantees, and assurances of success generally, are merely "puffery," and therefore are not actionable under the securities laws. Count II of the Amended Complaint is dismissed.

Counts III and IV allege that certain acts undertaken by the defendants constitute both a scheme to defraud and a fraudulent course of business. These expressions are culled from Rule 10b-5, subsections (a) and (c) respectively. See 17 C.F.R. § 240.10b-5 (1987). These two subsections have the same pleading requirements. See Affiliated Ute Citizens v. United States, 406 U.S. 128, 153-54, 92 S.Ct. 1456, 1472, 31 L.Ed.2d 741 (1972). The plaintiffs must allege facts showing that the defendants possessed an affirmative duty to disclose facts that "reasonable investors might have considered ... important in the making of their decisions" to purchase or sell securities, and that the defendants failed to execute this duty. Id.

Plaintiffs allege that numerous acts undertaken by the defendants create liability on these causes of action. The court need address only certain allegations. Plaintiffs contend, inter alia, that the defendants used the ESOP and PPT accounts to engage in numerous financially illogical transactions in order to create a false or misleading appearance with respect to the market for certain securities, for which D.H. Blair & Co. acted as principal or market maker, for the purpose of inducing the purchase and sale of securities by others. See Amended Complaint paras. 95, 97, 129(h), 131(h). The Rosens, as coaccount executives, unquestionably owed plaintiffs a duty to disclose market manipulation. See Affiliated Ute Citizens, 406 U.S. at 153, 92 S.Ct. at 1472. Further, market manipulation is a fact "reasonable investors might have considered ... important in the making of their decisions." See

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id. at 154, 92 S.Ct. at 1472. Unquestionably, then, "an alleged scheme to manipulate the market for ... stocks states a claim under ... section ... 10(b) of the Securities Exchange Act." Rooney, Pace, Inc. v. Reid, 605 F.Supp. 158, 161 (S.D.N.Y. 1985); see SEC v. Management Dynamics, Inc., 515 F.2d 801, 810 (2d Cir.1975) (manipulation of the stock market violates the antifraud provisions of the securities laws); Crane Co. v. Westinghouse Air Brake Co., 419 F.2d 787, 792-96 & n. 11 (2d Cir.1969) ("the violation of 10b-5 consists of nondisclosure of the manipulation"), cert. denied, 400 U.S. 822, 91 S.Ct. 41, 27 L.Ed.2d 50 (1970); SEC v. Resch-Cassin & Co., 362 F.Supp. 964, 975, 978 (S.D.N.Y.1973) (manipulation of stock's price within the meaning of 15 U.S.C. section 78i(a)(2) contravenes section 78j and Rule 10b-5)

These counts are pleaded with sufficient particularity to survive Fed.R.Civ.P. 9(b) scrutiny. Plaintiffs enumerate numerous transactions, thereby placing defendants on notice of the basis of plaintiffs' claims. See Metzner, 663 F.Supp. at 721 (dismissing counts alleging scheme to defraud, fraudulent course of business, and short sales because the original complaint failed to "give specifics as to actual purchases or sales of stock in the accounts"). Plaintiffs allege that these transactions raise an inference of market manipulation. See Amended Complaint at paras. 95, 97, 129(h), 131(h). At the pleading stage, the plaintiffs are entitled to the benefit of all reasonable inferences. See Budco, Inc. v. The Big Fights, Inc., 594 F.2d 900, 902 (2d Cir.1979) (per curiam); Morse/Diesel, Inc. v. Trinity Indus., Inc., 655 F.Supp. 346, 353 (S.D.N.Y.1987); Samuel M. Feinberg Testamentary Trust v. Carter, 652 F.Supp. 1066, 1069 (S.D.N.Y.1987); see also Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40 L.Ed.2d 90 (1974) (in passing on motion to dismiss, complaint's allegations "should be construed favorably to the pleader"). The inference of market manipulation reasonably may be drawn from the facts plaintiffs present.⁴ These counts, therefore, are pleaded sufficiently as against the Rosens, as alleged primary violators.

Whether plaintiffs state causes of action against D.H. Blair & Co. and J. Morton Davis is more problematic. There are three theories of secondary liability under the securities laws—aiding and abetting, acting as a controlling person, or respondeat superior. See Marbury Management, Inc. v. Kohn, 629 F.2d 705, 711-12, 716 (2d Cir.), cert. denied, 449 U.S. 1011, 101 S.Ct. 566, 66 L.Ed.2d 469 (1980). The amended complaint gives no indication as to what theory or theories plaintiffs assert against these defendants. Although plaintiffs are not required to elect one particular theory in their pleading, see Stern v. American Bankshares Corp., 429 F.Supp. 818, 822 (E.D.Wis.1977), the complaint must state a claim for relief under each theory plaintiffs advance. See id. at 822-23. To survive defendants' dismissal motions, the amended complaint must state a claim for relief on at least one theory against D.H. Blair and Davis.

Undoubtedly, plaintiffs have stated a cause of action against D.H. Blair & Co. on a theory of respondeat superior. See Affiliated Ute Citizens, 406 U.S. at 154, 92 S.Ct. at 1472; Kohn, 629 F.2d at 716.

As to Davis, the court presumes that plaintiffs assert that he is liable as a controlling person, as that concept is used in section 20(a) of the Securities Exchange Act, 15 U.S.C. 78t(a) (1982). There is disagreement among the courts as to what elements a plaintiff must plead to make out a prima facie case under section 20(a). One view is that the plaintiff must prove two elements: 1) the controlling person had the power to control or influence the controlled person, and 2) the controlling person was a culpable participant in the primary violation. See, e.g., Wool v. Tandem Computers, Inc., 818 F.2d 1433, 1440 (9th Cir.1987);

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Lanza v. Drexel & Co., 479 F.2d 1277, 1299 (2d Cir.1973) (en banc); O'Connor & Assocs. v. Dean Witter Reynolds, 529 F.Supp. 1179, 1195 (S.D.N.Y.1981). The other view is that "a prima facie Section 20(a) case requires only proof of control by status." Savino v. E.F. Hutton & Co., 507 F.Supp. 1225, 1243 (S.D.N.Y.1981); see Kohn, 629 F.2d at 716; Savino, 507 F.Supp. at 1243 & n. 21 (citing cases)

It is unnecessary to decide which view is correct, because plaintiffs have pleaded a claim against Davis under the stricter view reflected by Wool. In the context of liability of brokerage firms, a plaintiff alleges...