Metzner v. DH Blair & Co., Inc.

• Decision Date: 24 June 1987
• Docket Number: No. 87 Civ. 1560 (EW).,87 Civ. 1560 (EW).
• Parties: Sidney S. METZNER, Jack E. Metzner, George W. Sellers III, Mark W. Sellers, and Emanuel H. Horn as trustees of the Conservit, Inc., Employee Stock Ownership Plan, and Sidney S. Metzner and George W. Sellers III as trustees of the Conservit, Inc., Pension Plan and Trust, Plaintiffs, v. D.H. BLAIR & CO., INC., Peter Rosen, Theodore Rosen, Lena Berger, J. Morton Davis, Defendants.
• Court: U.S. District Court — Southern District of New York

663 F. Supp. 716

Sidney S. METZNER, Jack E. Metzner, George W. Sellers III, Mark W. Sellers, and Emanuel H. Horn as trustees of the Conservit, Inc., Employee Stock Ownership Plan, and Sidney S. Metzner and George W. Sellers III as trustees of the Conservit, Inc., Pension Plan and Trust, Plaintiffs, v. D.H. BLAIR & CO., INC., Peter Rosen, Theodore Rosen, Lena Berger, J. Morton Davis, Defendants.

No. 87 Civ. 1560 (EW).

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

June 24, 1987.

COPYRIGHT MATERIAL OMITTED

Danzinger, Bangser, Klipstein, Goldsmith, Greenwald & Weiss, New York City, for plaintiffs; Evan L. Gordon, of counsel.

Bachner, Tally, Polevoy, Misher & Brinberg, New York City, for defendants D.H. Blair & Co., Inc. and J. Morton Davis; H. Richard Penn, of counsel.

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

Spengler, Carlson, Gubar, Brodsky & Frischling, New York City, for defendant Theodore Rosen; Susan Allison, of counsel.

Marchi, Jaffe, Cohen, Crystal, Rosner & Katz, New York City, for defendant Lena Berger; Patrick A. Reilly, of counsel.

EDWARD WEINFELD, District Judge.

Plaintiffs brought this action against D.H. Blair & Co., Inc., a brokerage firm, J. Morton Davis, its president and principal executive and operating officer, Theodore Rosen and Peter Rosen, two D.H. Blair registered representatives, and Lena Berger, a former D.H. Blair registered representative, alleging breach of a fiduciary duty in violation of Section 404(a)(1) of the Employment Retirement Income Security Act of 1974 (ERISA);¹ securities fraud in violation of Section 10(b) of the Securities Exchange Act of 1934;² unlawful extensions of credit in violation of Section 7(c) or 7(d) of the Securities Exchange Act of 1934;³ civil RICO violations;⁴ and pendant state law claims for common law fraud and breach of fiduciary duty. Defendants move to dismiss the plaintiffs' complaint for failure to state a cause of action under Rule 12(b)(6) of the Federal Rules of Civil Procedure, and for failure to plead fraud with particularity as required by Rule 9(b) of the Federal Rules of Civil Procedure. Defendants also seek sanctions under Rule 11 of the Federal Rules of Civil Procedure.

The complaint, the allegations of which are deemed true for purposes of this motion to dismiss,⁵ alleges that plaintiffs, as trustees of two employee benefit plans qualified under ERISA, opened, at the solicitation of Lena Berger, two securities trading accounts with D.H. Blair & Co., Inc., on behalf of a qualified employee retirement plan (the Conservit, Inc., Employee Stock Ownership Plan or "ESOP") and a qualified benefit pension plan (the Conservit, Inc., Pension Plan and Trust or "PPT"). The complaint further alleges that in March 1985, Sidney Metzner forwarded funds of ESOP and PPT to D.H. Blair & Co.; authorized certain securities trading activities by Berger on behalf of the ESOP and PPT accounts; and received Berger's acknowledgment that she would invest the funds in ways appropriate to accounts containing assets of employee benefit plans.

In April 1985, Metzner asked Berger to liquidate the accounts, which had decreased in value. Berger ignored this instruction to liquidate the accounts and continued to invest in unsuitable, highly speculative securities which were inappropriate for employee benefit accounts. In May 1985, Berger left D.H. Blair & Co., and was replaced as account representative for the ESOP and PPT accounts by Peter Rosen. Rosen convinced Metzner to maintain the accounts, and to invest more ESOP and PPT assets in an effort to recoup the original investment.

Thereafter, the complaint alleges that Peter Rosen and Theodore Rosen opened margin accounts without authorization from the plans' trustees, and engaged in trading unsuitable for the ESOP and PPT accounts. On July 15, 1986, after further declines in the values of the accounts, Metzner ordered Peter Rosen to liquidate the accounts. Liquidation did not occur until November 1986, when plaintiffs' attorney contacted D.H. Blair & Co. The complaint alleges that during the time the accounts were open, the registered representatives of D.H. Blair & Co., who are among the defendants in this action, sold and purchased new issues, stocks in which D.H. Blair & Co. made a market, options, and securities which Peter Rosen was explicitly instructed by Metzner not to purchase. The complaint further alleges that this series of events was part of a scheme by the defendants to support the prices of their new issues and stocks in which they maintained a market.

Defendants assert that plaintiffs' claims for fraud and breach of fiduciary duty have not been alleged with sufficient particularity to satisfy Rule 9(b) of the Federal Rules of Civil Procedure. Defendants seek dismissal of the cause of action under Section 7(c) or 7(d) of the Securities and Exchange Act of 1934, because that section provides no private right of action. The defendants further argue that plaintiffs' civil RICO claims should be dismissed for failure to allege the predicate acts of fraud with sufficient particularity. Defendants also state that one of plaintiffs' civil RICO claims alleging a violation of 18 U.S.C. § 1962(c) improperly casts D.H. Blair & Co. as a "person" and the "enterprise" under 18 U.S.C. § 1962(c).

Defendants motion to dismiss is denied with respect to plaintiffs' ERISA claim but granted, with leave to plaintiffs to amend, with respect to the other causes of action.

Discussion

On a motion to dismiss, the complaint must be read generously and every reasonable inference drawn in favor of the plaintiffs.⁶ The complaint should only be dismissed if it "appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief."⁷

1. The ERISA Claim

Plaintiffs' complaint alleges that the defendants breached their fiduciary duty arising under Section 404(a)(1) of ERISA⁸ by failing to use due care in the management of the accounts opened on behalf of ESOP and PPT and with fund assets. ERISA holds fiduciaries to a prudent man standard of care in the management of qualified plans. To the extent that breach of fiduciary duty is premised on actions allegedly taken by defendants to manage the plans' assets imprudently, the cause of action is sufficient to state a claim for relief because the complaint alleges particular conduct in violation of the prudent man standard.⁹ In this instance, the complaint does more than merely assert that there was a lower return "than could have been obtained by the exercise of prudence."¹⁰ The allegations, also, are not limited to fraud. The complaint states that the defendants used the accounts to purchase and sell new issues underwritten by D.H. Blair & Co., stocks in which D.H. Blair & Co. made a market, and options on those stocks. It further alleges that D.H. Blair & Co. was acting in the capacity of a principal in purchases and sales to the accounts, and that these sales, allegedly designed to support the market for D.H. Blair & Co.'s stocks, led to losses in value to the accounts due to failure to liquidate those accounts, despite plaintiffs' demands for liquidation, for fear of depressing the price of the stock. Such allegations raise the claim that defendants failed to act appropriately in connection with the ESOP and PPT accounts.¹¹

The complaint, read liberally, does allege a failure to use prudence and care in investing the assets of employee benefits plans but this is only actionable under ERISA if the defendants were fiduciaries of the plans. Fiduciary is defined in Section 3(21)(A) of ERISA¹² to include anyone exercising authority or control over the management or disposition of assets of a plan. The defendants Berger, Peter Rosen, and Theodore Rosen allegedly controlled the management of some of the assets of the "ESOP" and "PPT" plans by trading on the accounts without authorization and contrary to the instructions given the defendants by the plaintiffs. Inferences may be drawn from the complaints allegations that the defendants collectively were engaged in a scheme to promote their own interests by improper trading on the ESOP and PPT accounts to posit control of the accounts with the other defendants, as well. These allegations of actual control of the management of the accounts containing assets of the employee benefit plans satisfy the statute's definition of fiduciary.¹³ A claim for relief, thus, has been properly set forth under ERISA.

2. The Securities Fraud Claims

Plaintiffs' complaint also alleges that defendants violated Section 10(b) of the Securities Exchange Act of 1934. These claims are dismissed for failure to plead with sufficient particularity the charge that defendants Lena Berger and Peter Rosen, with the knowledge of defendants Theodore Rosen and J. Morton Davis, made untrue statements in violation of Section 10(b) of the Securities Act of 1934, and Rule 10(b)(5), promulgated thereunder.¹⁴ The general allegations against Theodore Rosen and Davis fail the Rule 9(b) special pleading requirements.¹⁵ According to the complaint, statements by Lena Berger, a former registered representative of D.H. Blair & Co., Inc., and Peter Rosen, a current registered representative, "guaranteed" that the two accounts would regain their lost value. The complaint states that "in or about April 1985," defendant Berger "guaranteed" that the stocks in the two accounts would recover any lost value. Likewise, following the end of Berger's employment "in or about May 1985," Peter Rosen assured plaintiffs that the losses would be corrected if plaintiffs added $12,000. to the "ESOP" account and $37,000. to the "PPT" account. These allegations state the specific facts and sources that support the alleged fact,¹⁶ but do not particularly plead facts necessary to show that the allegedly fraudulent activity involved the actual purchase or sale of securities, as required to state a cause of action under Section...