Rivera v. Clark Melvin Securities Corp., Civ. 98-2122(JP).
| Decision Date | 14 May 1999 |
| Docket Number | No. Civ. 98-2122(JP).,Civ. 98-2122(JP). |
| Citation | 59 F.Supp.2d 280 |
| Parties | Francisco Luis RIVERA, et al., Plaintiffs, v. CLARK MELVIN SECURITIES CORP., et. al., Defendants. |
| Court | U.S. District Court — District of Puerto Rico |
Maria S. Kortright-Soler, San Juan, P.R., for plaintiff.
Guillermo J. Bobonis, San Juan, P.R., Rachel Brill, Hato Rey, P.R., Jeffrey M. Williams, Hato Rey, P.R., for defendant.
The Court has before it Defendants' Joint Defense Motion to Dismiss Due to Plaintiffs' Failure to Plead With Particularity (docket No. 38) and Plaintiffs' Opposition to "Joint Defense Motion to Dismiss" (docket No. 42). Plaintiffs Francisco Luis Rivera, Gloria Alcocer de Rivera and their conjugal partnership ("Plaintiffs") filed their Complaint on October 7, 1998, alleging violations of Section 10(b) of the Securities and Exchange Act of 1934. Defendants are Clark Melvin Securities Corporation ("Clark Melvin"), Pershing Division of Donaldson Lufkin & Jenrette Securities Corporation ("Pershing"), and Samuel Ramirez & Company Inc. ("Samuel Ramirez"). On February 5, 1999, Plaintiffs moved to amend their Complaint to account for the voluntary dismissal of Defendant Securities Investors Protection Corporation ("SIPC"), as well as to "set forth a specific and particular pleading as to the fraudulent conduct of Clark Melvin." (Pls.' Mot. For Leave of Ct. to Amend Compl. as Tendered at ¶ 3). The Court granted Plaintiffs' Motion to Amend their Complaint on February 9, 1999.
Plaintiffs allege that they were defrauded by Clark Melvin, through its employees Hernan Pérez and Richard Prann, out of $145,196.00 of their $188,115.00 investment portfolio. Plaintiffs also allege that Defendant Pershing had a duty to detect the forgeries through which Pérez misappropriated their funds, and further, that Defendant Samuel Ramirez is a successor in interest of Clark Melvin and its "alter ego" for the purposes of liability.
The Court met with the parties for an Initial Scheduling Conference on March 17, 1999, and at this Conference, Defendants indicated that they believed Plaintiffs have failed to plead with sufficient particularity to sustain a claim under the Private Securities Litigation Reform Act ("PLSRA"). Defendants also stated that they would pursue a motion to dismiss Plaintiffs' Complaint on this basis, and that under the PLSRA, any discovery would necessarily be stayed. The Court, nevertheless, went forward with the ISC and scheduled all discovery to be conducted in the instant case, which was subsequently entered in the ISC Order (docket No. 34).
On April 5, 1999, Defendants moved to dismiss Plaintiffs' Amended Complaint for a failure to plead with sufficient particularity pursuant to Rule 9(b) of the Federal Rules of Civil Procedure and the PLSRA. Defendants also sought a stay off all discovery until the Court ruled on their Motion to Dismiss, and Codefendant Samuel Ramirez subsequently filed an Urgent Motion to stay discovery or for temporary relief of the discovery scheduled in the ISC Order (docket No. 40). After receiving Plaintiffs' motions opposing the motion to dismiss and stay of discovery, on April 16, 1999, the Court orally informed the parties that discovery would be stayed until May 7, 1999, in order to give the Court an opportunity to examine Defendants' Motion to Dismiss.
Section 10(b) of the Securities Exchange Act of 1934 prohibits any person, in connection with the purchase or sale of a security, to use or employ any manipulative or deceptive device in contravention of the rules and regulations proscribed by the Securities and Exchange Commission. 15 U.S.C. § 78j(b); See O'Connor v. R.F. Lafferty & Co., Inc., 965 F.2d 893, 897 (10th Cir.1992). Rule 10b-5, promulgated as a result of Section 10(b), provides:
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails, or of any facility of any national securities exchange,
(1) To employ any device, scheme or artifice to defraud;
(2) To make any untrue statement of material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or
(3) To engage in any act, practice or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.
17 C.F.R. § 240.10b-5.
A plaintiff can bring a claim under Section 10(b) and Rule 10b-5 against a broker or broker-dealer for engaging in trades that are unsuitable to the plaintiff's needs in either the quality and quantity of securities purchased, see O'Connor 965 F.2d at 897-98 (); Lefkowitz v. Smith Barney, Harris Upham & Co., 804 F.2d 154, 155 (1st Cir.1986) (); Xaphes v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 632 F.Supp. 471, 483 (D.Me.1986) (), or for unauthorized transactions if accompanied by deception, misrepresentation, or non-disclosure, see Sec. Investor Protection Corp., v. Vigman, 803 F.2d 1513, 1519-20 (9th Cir. 1986) (); Arioli v. Prudential-Bache Sec., Inc., 792 F.Supp. 1050, 1062 (E.D.Mi.1992) (); Pross v. Baird, Patrick & Co., Inc., 585 F.Supp. 1456, 1460-61 (S.D.N.Y. 1984) ().
Plaintiffs state claims pursuant to section 10(b) and Rule 10b-5, alleging unauthorized trades and inappropriate trading on their account by employees of Clark Melvin, as well as various misrepresentations related to their account and broker, Pérez. Defendants' Motion to Dismiss examines each paragraph of Plaintiffs' Complaint and asserts that Plaintiffs have failed to plead the requisite fraud and scienter under Federal Rule 9(b) and the PSLRA. The Court will examine Defendants' arguments in turn.
Under Rule 12(b)(6) of the Federal Rules of Civil Procedure, a defendant may, in response to an initial pleading, file a motion to dismiss the complaint for failure to state a claim upon which relief can be granted. It is well-settled, however, that "a complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957); see also Miranda v. Ponce Fed. Bank, 948 F.2d 41 (1st Cir. 1991). The Court must accept as true "all well-pleaded factual averments and indulg[e] all reasonable inferences in the plaintiff's favor." Aulson v. Blanchard, 83 F.3d 1, 3 (1st Cir.1996) (citations omitted). Nevertheless, a Complaint must set forth "factual allegations, either direct or inferential, regarding each material element necessary to sustain recovery under some actionable theory." Gooley v. Mobil Oil Corp., 851 F.2d 513, 514 (1st Cir.1988).
When assessing a 12(b)(6) Motion to Dismiss for a securities fraud claim, "two additional considerations bear upon the motion to dismiss: Federal Rule of Civil Procedure 9(b) and the PSLRA." Lirette v. Shiva Corp., 27 F.Supp.2d 268, 274 (D.Mass.1998). Rule 9(b) provides that for complaints alleging "fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." Fed.R.Civ.P. 9(b). The purposes behind Rule 9(b) are to provide a defendant with notice of a claim, to prevent damage to a defendant's reputation, and to protect defendants from a "strike suit." See Suna v. Bailey Corp., 107 F.3d 64, 68 (1st Cir. 1997) (citing Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1128 (2d Cir.1994); Lirette, 27 F.Supp.2d at 274.) A strike suit is a largely groundless claim brought by a plaintiff who later engages in extensive discovery to induce the defendant to settle rather than to discover relevant evidence of fraud. See id.; Romani v. Shearson Lehman Hutton, 929 F.2d 875, 878 (1st Cir.1991).
Under Rule 9(b), a plaintiff bringing a securities claim must "allege `specific facts that make it reasonable to believe that defendant[s] knew that a statement was materially false of misleading.'" Suna, 107 F.3d at 68 (quoting Serabian v. Amoskeag Bank Shares, Inc., 24 F.3d 357, 361 (1st Cir.1994)). "It is well settled that Rule 9(b) requires the plaintiff in a securities fraud case to specify the time, place and content of an alleged false representation." Romani, 929 F.2d at 878 (citing Wayne Investment v. Gulf Oil Corp., 739 F.2d 11, 13 (1st Cir.1984)); see also Suna, 107 F.3d at 68 (quoting Serabian, 24 F.3d at 361) ("the rule requires that the particular `times, dates, places or other details of [the] alleged fraudulent involvement of the actors be allege.'") Further, this heightened pleading applies even when information regarding the fraud is within the knowledge of the defendant. Id.
The PSLRA also imposes heightened pleading requirements on a plaintiff claiming a securities fraud violation. Like Rule 9(b), one of the main goals behind the PSLRA is to prevent "strike suits." See Lirette, 27 F.Supp.2d at 274 () (quoting 104...
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