Morris v. Wachovia Securities, Inc.
| Decision Date | 12 August 2003 |
| Docket Number | No. CIV. 3:02CV797.,CIV. 3:02CV797. |
| Citation | 277 F.Supp.2d 622 |
| Court | U.S. District Court — Eastern District of Virginia |
| Parties | Patrick V. MORRIS, Individually and on Behalf of All Others Similarly Situated, Plaintiff, v. WACHOVIA SECURITIES, INC., Defendant. |
Mark J. Krudy, Esquire, The Ironfronts, Richmond, Steven G. Schulman, Esquire, Peter Safirstein, Esquire, Daniel R. Altman, Esquire, Milberg Weiss Bershad Hynes & Lerach LLP, New York, NY, for Plaintiff.
James A. Murphy, Esquire, Harris L. Kay, Esquire, Cameron S. Matheson, LeClair Ryan, Richmond, for Defendant.
In this civil action, the Plaintiff, Patrick V. Morris, seeks to recover compensatory and/or rescissionary damages, prejudgment interest, disgorgement of profits, and costs and attorneys' fees from the Defendant, Wachovia Securities, Inc. ("Wachovia") for alleged violations of § 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. § 78j(b)) (the "1934 Act") and § 206 of the Investment Advisers Act of 1940 (15 U.S.C. § 80b-6) (the "IAA") in connection with Wachovia's Masters Program, a portfolio management service to which Morris subscribed. Morris also purports to represent a class of all similarly situated individuals and seeks similar recovery for this class.
Since initiating this action on November 1, 2002, Morris has twice amended the Complaint, once as a matter of right under Fed.R.Civ.P. 15(a), and once after the Court granted Wachovia's motion to dismiss. However, dismissal upon Wachovia's motion was without prejudice because it was determined that Morris had alleged facts that plausibly could support a claim under the federal securities laws. Thus, Morris was afforded a second opportunity to amend his Complaint, albeit with the strict admonition that leave for any further amendment would not be forthcoming. Morris then filed the Second Amended Complaint ("SAC"), and Wachovia now has moved to dismiss it under Fed.R.Civ.P. 12(b)(6), and Fed.R.Civ.P. 9(b) and the Private Securities Litigation Reform Act of 1995, 15 U.S.C. § 78u-4 ("PSLRA"). For the reasons that follow, Wachovia's motion is granted in part and denied in part.
The SAC is eighty-five pages long and is articulated in considerable detail. As is appropriate, the facts are stated as asserted in the SAC (including its twenty-six exhibits), affording Morris all reasonable inferences.
In December 2001, Morris enrolled in a portfolio management program offered by Wachovia known as the "Masters Program." As advertised, the Masters Program offers investors with assets of $100,000 or more the ability to receive the services of Portfolio Managers who usually only work with accounts of $1 million or more. (SAC Ex. 3). For a single annual fee, Wachovia takes custody of the investors' assets, while the Portfolio Managers make the decisions respecting the securities to be purchased for the investor's account. Wachovia's marketing literature describes the Masters Program as involving a three-step process.
Under Step 1, a Wachovia representative analyzes the individual investor's investment needs and then determines how the investor's assets should be allocated. Based on this analysis, Wachovia's representative assists the investor to develop an investment policy statement used by Wachovia in monitoring the investor's account. (Id.)
Under Step 2, Wachovia recommends a Portfolio Manager or Managers "whose style, philosophy, and performance record best suit [the investor's] investment strategy." (Id.) The literature then explains the criteria that Wachovia considers in deciding whether to recommend a Portfolio Manager:
Our rigorous due-diligence process, carefully screens candidates. This screening process includes
• reviewing credentials
• determining their investment style
• examining each manager's performance record
• tracking the consistency of the returns in varying market conditions
• evaluating and monitoring the level or risk taken by the manager, measured against the value of the returns generated
(Id.) The literature goes on to explain that the Portfolio Manager or Managers chosen by the investor actually select the individual securities to be bought and sold in the investor's account.
In Step 3 of the process Wachovia monitors the activity and performance of the investor's portfolio. Wachovia represents that its representatives will "closely track" the progress of the portfolios, and that the customers will receive comprehensive quarterly reports. (Id.) In other words, the marketing literature creates the impression that Wachovia monitors the performance of the Portfolio Managers to ensure quality and to assure investments that conform with each individual investor's needs.
After explaining the three-step process, the Masters Program literature, under the heading "Value Added Service," provides a summary of the services that investors can expect to receive:
In [Wachovia's] Masters Program, you work with a carefully assembled team of experts. These professionals add value through their systematic investment discipline, financial expertise, and personal attention to your objectives. Your annual fee covers the comprehensive services vital to successfully managing a significant investment portfolio:
• Identification and analysis of your investment objectives
• Access to a select roster of leading investment managers, evaluated on the following:
• quality, stability, and depth of management
• effective, disciplined, and consistent investment process
• consistent long-term investment returns
• solid performance relative to their peer group
• Investment-manager search and recommendation
• Ongoing portfolio management and consultation with your [Wachovia representative]
• Investment manager's fees
• All securities transaction costs
• Custody of securities
• Automatic sweep of cash balances into money-market funds
• Monthly activity statements
• Quarterly portfolio evaluation and market overview
• Annual review of your objectives
(Id. (emphasis added).)
Based in part on the representations made in Wachovia's marketing literature, Morris agreed to enroll in the Masters Program in December 2001. Within several months, Morris saw his initial investment of approximately $ 1.4 million depreciate by $300,000. (SAC ¶ 19). Morris alleges that Wachovia committed securities fraud by misrepresenting and/or failing to disclose certain material facts about the Masters Program, which affected his ability to make an informed decision respecting whether he should participate in the program. These omissions and/or misrepresentations included:
i. That its selection of [Portfolio Managers]1 was not based on factors such as whether the [Portfolio Manager] generated sufficient commissions for Wachovia;
ii. That it failed to adequately monitor the [Portfolio Manager] chosen for the Master [sic] Program;
iii. The misrepresentation of the deleterious effects of "aggregation" upon Plaintiff's account iv. The misrepresentation of its intention to charge Plaintiff's account an "SEC Fee";
v. The overcharging of Plaintiff by inflating the SEC Fee;
vi. The misrepresentation of the price of securities to Plaintiff; and
vii. The failure to provide Plaintiff with a periodic report, not less than quarterly, containing such basic information as the correct transaction price of Plaintiff's securities trades, that Plaintiff's transactions were aggregated with other transactions, that his price was an average price or that average price information was available to Plaintiff.
(SAC ¶ 3). According to Morris, these misrepresentations and omissions give rise to three separate claims: (1) a claim for violations of § 10(b) of the 1934 Act (15 U.S.C. § 78j(b)) and Rule 10b-5 (17 C.F.R. § 240.10b-5) promulgated thereunder; (2) a claim for violations of § 10(b) of the 1934 Act and Rule 10b-10 (17 C.F.R. § 240.10b-10) promulgated thereunder; and (3) a claim pursuant to § 215 of the IAA (15 U.S.C. § 80b-15) for violations of § 206 of the IAA.
The SAC devotes approximately seventy pages to outlining and then providing particulars respecting Wachovia's alleged misrepresentations and omissions. Brevity and clarity of understanding Morris's claims both will be served by referring to several headings in the section of the SAC captioned "SUBSTANTIVE ALLEGATIONS." There, it is alleged that:
• Wachovia never disclosed the material fact that [Portfolio Managers] selected to participate in the Masters Program by Wachovia were selected based on criteria which included whether or not the [Portfolio Manager's] inclusion would be financially beneficial to Wachovia (SAC at 10)
• Contrary to its disclosures, Wachovia Failed to perform due diligence about its [Portfolio Managers] (SAC at 11)
• The deleterious and undisclosed effect of aggregating customers' purchases or sales of securities in the Masters Program (SAC at 13)
• Wachovia failed to properly disclose that it was charging an SEC transaction fee to its Masters Program customers (SAC at 53)
• Wachovia deliberately miscalculated the SEC fee thereby creating a profit center (SAC at 55)
• Wachovia did not send plaintiff a periodic report containing the information stated on plaintiff's trade confirmations (SAC at 73)
The particulars of each of these topic headings are set forth in the paragraphs that follow the headings.
The SAC then proceeds to articulate three claims. The First Claim is under § 10(b) of the 1934 and SEC Rule 10b-5. It charges that Wachovia violated Rule 10b-5 by:
engag[ing] in a deceptive contrivance, scheme, practice, and course of conduct in connection with the purchase and sale of securities, pursuant to which it knowingly or recklessly engaged in acts, transactions, practices and courses of business which operated as a fraud upon Plaintiff and other members of the...
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