Mulder v. Donaldson, Lufkin & Jenrette

• Decision Date: 16 May 1994
• Citation: 161 Misc.2d 698,611 N.Y.S.2d 1019
• Parties: , 62 USLW 2800 Joseph M. MULDER, Plaintiff, v. DONALDSON, LUFKIN & JENRETTE and Robert Albano, Defendants.
• Court: New York Supreme Court

Page 1019

611 N.Y.S.2d 1019

161 Misc.2d 698, 62 USLW 2800

Joseph M. MULDER, Plaintiff, v. DONALDSON, LUFKIN & JENRETTE and Robert Albano, Defendants.

Supreme Court, New York County,

IAS Commercial Part 14.

May 16, 1994.

Davis Polk & Wardwell, New York City (D. Scott Wise, Stephen D. Hibbard and Deborah Torrisi, of counsel), for defendants.

Pantaleoni, Govens, Trager & Weiss, New York City (Leslie Trager, of counsel), for plaintiff.

WALTER M. SCHACKMAN, Justice:

Defendants Donaldson, Lufkin & Jenrette ("DLJ") and Robert Albano move for an order pursuant to CPLR 3211(a)(7) dismissing the complaint for failure to state a cause of action. This case presents an important question: whether an employee of a securities firm whose job responsibilities include auditing the corporation, can be discharged for attempting to report violations of securities laws and DLJ's own trading regulations.

From April, 1978 until his discharge in June, 1991, plaintiff Joseph Mulder was employed by DLJ. During part of that period, he was a vice-president and senior operations auditor. Plaintiff alleges that the real reason for his discharge was to conceal DLJ's participation in money laundering operations of DLJ's customers and to conceal violations of securities laws that should have been reported to the appropriate governmental authorities. According to plaintiff, he presented a draft report to his immediate superior regarding the operation of the Miami office of DLJ. This draft report showed, inter alia, as follows:

(a) A corporate account was apparently controlled by three lawyers, who were listed as officers of this corporation. One of these persons was linked with a money laundering scheme in the Pablo Escobar indictment proceeding in April, 1990. Shortly after the public release of the Pablo Escobar information, the salesman in charge of the account ... [agreed] that this account ... would leave DLJ and come back repackaged as an offshore trust. Subsequently, this account came back with the same [government-backed $10 million] securities, not as a trust but as an offshore corporation. However, the papers at DLJ did not disclose (in violation of SEC and New York Stock Exchange rules) any of the persons in control of the corporation because the officers listed for this corporation were not individuals, but three other offshore corporations.

(b) Money was being taken in from third parties and sent out to other third parties who had no apparent relationship to the accounts. Many of these accounts in which this occurred had no security transactions. The wiring of funds to third parties and the receipt of third party checks violated DLJ's rules.

... (c) Trades were done in apparently unrelated accounts, in a manner indicating that the salesman involved was using discretion without written authorization as required by DLJ rules.

... (e) Money was wired overseas to third parties, in large amounts, to accounts in countries generally regarded as secrecy countries. In three instances, funds were wired in such a manner as to conceal the true name of the DLJ customer wiring the funds.

(f) Many accounts did not contain proper documentation for trading authorizations or disclose the individuals who actually controlled these accounts, in violation of DLJ and New York Stock Exchange rules ... [Complaint, pages 2-3].

After his discharge, plaintiff maintained that he had been dismissed because of his reporting of the alleged violations of rules and regulations to, among others, the defendant Robert Albano, DLJ's compliance director. Thereafter, plaintiff brought an arbitration proceeding before the New York Stock Exchange. In the arbitration proceeding, plaintiff filed a Statement of Claim indicating DLJ's alleged motivation for his discharge. DLJ filed a Response to Statement of Claim which vigorously denied plaintiff's allegations of violations of rules and regulations related to money laundering and maintained that plaintiff had been discharged because of poor job performance. In May, 1993, the New York Stock Exchange issued an arbitration award in favor of Mulder in the amount of $114,668, and costs of $1,000. The decision did not specify the basis of the award. However, the award recited the following case summary:

Ex-employee, Internal Auditor vs. Member Firm and Officers alleging that when he uncovered and brought to senior management's attention, by way of an audit report, a drug money laundering scheme within the firm, he was wrongfully terminated and his professional reputation was damaged. Claimant also alleges false reporting to the NYSE and seeks back pay and benefits, payment for his consulting services, future earnings and exemplary damages.

The instant complaint contains three causes of action. The first cause of action refers to the arbitration decision and seeks the imposition of punitive damages by reason of DLJ's bad faith dismissal of plaintiff and DLJ's refusal to report to the proper governmental authorities the violations of law uncovered by plaintiff. According to the complaint, an award of punitive damages will discourage DLJ from firing those who uncover, as part of their jobs, violations of United States laws and violations of regulations of the New York Stock Exchange.

The second cause of action seeks recovery for libel. Specifically, it is alleged that in August, 1993, after the arbitration award was rendered against DLJ, defendant Robert Albano was quoted in the Wall Street Journal as stating that plaintiff was fired because of his poor work performance and that his dismissal had nothing to do with his report on the activities of the Miami office of DLJ. Originally, as one of its contentions in the arbitration proceeding, DLJ had maintained that plaintiff had been fired by reason of his failure to perform a sales practice audit; during the course of the proceeding, however, the parties entered into a stipulation that plaintiff had never been requested by DLJ to perform a sales practice audit. In the complaint, plaintiff alleges that Albano's statement regarding plaintiff's work performance was false, particularly in light of Albano's knowledge of the stipulation, which (according to plaintiff) effectively conceded that there was nothing wrong with plaintiff's work.

The third cause of action merely seeks the imposition of punitive damages for the aforesaid libel.

At the outset, defendant maintains that plaintiff cannot properly maintain separate causes of action for punitive damages. Defendant's statement of the general rule is correct (see eg., Staudacher v. City of Buffalo, 155 A.D.2d 956, 547 N.Y.S.2d 770 [4th Dept.]; APS Food Systems, Inc. v. Ward Foods, Inc., 70 A.D.2d 483, 421 N.Y.S.2d 223 [1st Dept.]. Thus, the third cause of action, which merely seeks punitive damages arising out of Albano's statement to the Wall Street Journal, is not properly asserted. The situation is different, however, as to the first cause of action. An arbitrator cannot award punitive damages (Garrity v. Lyle Stuart, Inc., 40 N.Y.2d 354, 386 N.Y.S.2d 831, 353 N.E.2d 793). Plaintiff was, of course, required to submit his underlying claim to arbitration under the rules of the New York Stock Exchange. His appropriate recourse was to wait for a favorable award from the arbitrators, and then bring a plenary action in this court for punitive damages (see Singer v. Salomon Brothers, 156 Misc.2d 465, 593 N.Y.S.2d 927, decided by this Court). Thus, the usual rule on punitive damages does not apply and plaintiff may maintain the first cause of action for punitive damages.

The basis for the arbitrator's award was not set forth in the decision. Apparently, the arbitrator determined that DLJ's discharge of plaintiff had been wrongful and thereupon awarded compensatory damages for breach of contract. DLJ maintains that the award was not res judicata as to the legality of the discharge. However, even assuming that the arbitration decision does not have a res judicata effect, this court would be inclined to sustain the cause of action.

In determining a motion to dismiss a pleading, the Court assumes the allegations of the pleading to be true (Krantz v. Garmise, 13 A.D.2d 426, 215 N.Y.S.2d 327 [1st Dept.]. The opposing party gets the benefit of any favorable inference which may reasonably be drawn, and even inadequately pleaded material can be supplemented by affidavits (Rovello v. Orofino Realty Co., 40 N.Y.2d 633, 389 N.Y.S.2d 314, 357 N.E.2d 970).

It is well settled that where...