Noland v. Gurley

• Decision Date: 15 June 1983
• Docket Number: Civ. A. No. 83-K-247.
• Citation: 566 F. Supp. 210
• Parties: Eloise D. NOLAND, Plaintiff, v. Zenas N. GURLEY, Merrill Lynch Pierce Fenner & Smith, Inc., a Delaware corporation and E.F. Hutton & Company, a Delaware corporation, Defendants.
• Court: U.S. District Court — District of Colorado

566 F. Supp. 210

Eloise D. NOLAND, Plaintiff, v. Zenas N. GURLEY, Merrill Lynch Pierce Fenner & Smith, Inc., a Delaware corporation and E.F. Hutton & Company, a Delaware corporation, Defendants.

Civ. A. No. 83-K-247.

United States District Court, D. Colorado.

June 15, 1983.

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Richard P. Slivka and David L. Dain, Bosworth & Slivka, P.C., Denver, Colo., for plaintiff.

Kevin Michael Shea, Roath & Brega, P.C., Denver, Colo., for Gurley.

Barry Permut, Weinshienk, Miller, Borus & Permut, Denver, Colo., for Merrill Lynch.

Stephen M. Duncan and Thomas D. Birge, Hopper, Kanouff, Smith, Peryam, Terry & Duncan, Denver, Colo., for E.F. Hutton.

MEMORANDUM OPINION AND ORDER

KANE, District Judge.

In this action filed under the Securities Exchange Act of 1934, the Securities Act of 1933, the Racketeer Influenced and Corrupt Organizations Act, the Colorado Securities Act and the common law, defendants have moved to strike or dismiss all or certain claims in the complaint. Jurisdiction of this thirteen-claim complaint is alleged under Section 27 of the Exchange Act, 15 U.S.C. § 78aa, Section 22(a) of the Securities Act, 15 U.S.C. § 77v(a); 18 U.S.C. § 1962 and 28 U.S.C. § 1331.

Plaintiff is a resident of the State of Colorado. Defendant Gurley is a resident of the State of Colorado and defendants Merrill Lynch Pierce Fenner & Smith and E.F. Hutton are corporations qualified to do business in the State of Colorado. Plaintiff's complaint alleges that she had no prior knowledge, experience or understanding regarding trading in options when she opened an account with the Colorado Springs office of Merrill Lynch in January, 1975. Defendant Gurley has been a registered broker and was employed by Merrill Lynch from 1975 until March 16, 1976 when he moved to and has remained with defendant Hutton. From March 16, 1976 to August, 1977, Skip Mooney was a registered broker employed by Merrill Lynch. The complaint alleges that at the time of her initial meeting with Gurley plaintiff described her investment needs and objectives as conservative, low risk and income producing. Plaintiff maintains that she explicitly instructed that the General Motors Corporation stock which she then owned could not be threatened or sold and that she wished to preserve the principal. The complaint continues that, by inducing plaintiff to rely on his expertise, Gurley intentionally initiated a scheme and plan to defraud plaintiff. The General Motors stock was delivered to Merrill Lynch and plaintiff was convinced to participate in a series of transactions of purchasing and selling options which Gurley knew to be speculative and high risk. Plaintiff maintains that no explanation of the trading program was provided her and that representations made to her were false and misleading. Plaintiff asserts that the account at all times was controlled by Gurley except for the brief time after Gurley left Merrill Lynch and before plaintiff's account was moved to Hutton. Although not named as a defendant, plaintiff charges that Mooney took over the account at Merrill Lynch after Gurley left and traded in the account without proper knowledgeable permission of plaintiff, made misrepresentations and omissions to plaintiff and continued the practice of making excessive trades in plaintiff's account. Plaintiff's account eventually followed Gurley in his move from Merrill Lynch to Hutton where the unsuitable and excessively active program and generation of commissions continued. Plaintiff alleges that she received no outside independent investment advice during this time.

The claims for relief allege charges of churning, trading in unsuitable programs, violation of exchange rules, misrepresentations and omissions, controlling person liability and liability of Merrill Lynch and Hutton as aiders and abettors and for failure to supervise Gurley and Mooney, all in violation of federal securities laws. Plaintiff's additional claims for relief are brought for fraudulent acts and omissions in violation of common law, violation of the Colorado Securities Act, breach of fiduciary duty under the common law and the Colorado Fiduciaries Standard for Investments Act, negligence in handling plaintiff's account, a racketeering claim under the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1961 et seq., and a claim for liability under both federal and state securities actions based on the doctrine of respondeat superior.

All motions to strike or dismiss are brought under Rules 12(b)(1), 12(b)(6) and 9(b) of the Federal Rules of Civil Procedure. Because the arguments in support of these motions are similar, they will be treated together whenever possible.

PRIVATE RIGHT OF ACTION UNDER SECTION 17(a)

Defendants have moved to strike or dismiss all claims based on a private right of action under Section 17(a) of the Securities Act of 1933. Plaintiff's first, second and fourth claims seek relief, in part, under Section 17(a). Plaintiff argues that a private cause of action is properly implied under this section. I have addressed this issue previously in Sterling Recreation Organization Co. v. Segal, 537 F.Supp. 1024 (Col.1982) and Philbosian v. First Financial Securities Corp., 550 F.Supp. 61 (Col.1982) where I found that there is a split in the circuits on the issue and no controlling precedent. In both those cases, ruling on the private right of action question was deferred to permit further discovery to determine whether the conduct that damaged the plaintiff was violative of section 17(a) and not the regulations promulgated under section 10(b) of the 1934 Act, 15 U.S.C. § 78j(b).

The ruling is the same here. Although all parties have analyzed and applied the four-part test of Cort v. Ash, 422 U.S. 66, 78, 95 S.Ct. 2080, 2087, 45 L.Ed.2d 26 (1975), it is premature to consider the private right of action question until discovery has progressed. All motions to strike or dismiss the section 17(a) claims are denied at this time without prejudice to their being reasserted.

THE THIRD CLAIM FOR RELIEF

Plaintiff's third claim for relief alleges violations of the security exchange rules, particularly rules 405 and 408 of the New York Stock Exchange, Rules 9.7, 9.8 and 9.10 of the Chicago Board of Options Exchange, and Article III, Section 2 of the Rules of Fair Practice of the National Association of Securities Dealers, "and all such other rules and regulations of such bodies designed to prohibit unsuitable recommendations in trading activity and excessive trading in customers' accounts..." This claim is tied to the second claim in the complaint for fraud. Defendants contend that there is no specific cause of action provided in any federal or state statute for violation of these exchange rules and that the rules do not create an independent private cause of action. Plaintiff maintains that she has a right of action based on these rules.

While defendants have cited a myriad of cases that hold there is no private right of action under these rules, Jablon v. Dean Witter & Co., 614 F.2d 677 (9th Cir.1980); Gordon v. Dupont Glore Forgan, Inc., 487 F.2d 1260 (5th Cir.1973), cert. denied, 417 U.S. 946, 94 S.Ct. 3071, 41 L.Ed.2d 666 (1973); Colonial Realty Corp. v. Bache & Co., 358 F.2d 178 (2nd Cir.1966) cert. denied, 385 U.S. 817, 87 S.Ct. 40, 17 L.Ed.2d 56 (1966); Mauriber v. Shearson/American Express, Inc., 546 F.Supp. 391 (S.D.N.Y. 1982); Klitzman v. Bache Halsey Stuart Shields, Inc., 499 F.Supp. 255 (S.D.N.Y. 1980); Russo v. Bache Halsey Stuart Shields, Inc., CCH Fec.Sec.L.Rpt. ¶ 99,071 (N.D.Ill.1982), the Tenth Circuit, to which this court must defer, has determined in Utah State University v. Bear, Stearns, 549 F.2d 164 (10th Cir.1977), cert. denied, 434 U.S. 890, 98 S.Ct. 264, 54 L.Ed.2d 176 (1977) that in some circumstances, there may be a private right of action. The Tenth Circuit analyzed Colonial Realty, supra, and the decisions of the district courts of the Tenth Circuit,¹ recognized the split of authority, but, relying on Ocrant v. Dean Witter & Co., Inc., 502 F.2d 854 (10th Cir.1974) said:

"In an appropriate case a rule violation may give rise to a private cause of action. At the same time there is good reason to limit the scope of potential liability of brokers for rule violations. The advantages of self-regulation in the securities field may not be denied. Self-regulation obviates need for a more massive governmental bureaucracy and a detailed and rigid regulation of the entire securities field. For the system to work effectively, the self-regulatory bodies must be encouraged to take the initiative in exploring and formulating new rules to govern the conduct of their members. Such action is doubtful if the promulgation of every new rule has the potential of creating massive liability for the members."

549 F.2d at 168.

After acknowledging that no provision of the Securities Exchange Act creates an express civil remedy for violation of an exchange or association rule, the court indicated that to find a private right of action under these rules an "appropriate case" might allege more than mistake or negligence. Id. An "appropriate case" where there may be an implied cause of action for private redress for violation of association or exchange rules may be one where there are claims of overreaching, misrepresentation, manipulation or deception. The allegations of the instant action go beyond mistake and negligence and allege these other claims. Because the law in the Tenth Circuit and in this area generally is uncertain, the motion to dismiss these claims is denied at this time. Again, it is prudent to await discovery on this action to permit the allegations of fraud, misrepresentation and bad faith to be more fully developed. The motions to strike or dismiss are denied without prejudice.

THE STATE SECURITIES LAWS CLAIMS

Defendants next move to strike or dismiss plaintiff's eighth claim for relief, that...