Roberts v. Smith Barney, Harris Upham & Co., Inc.

• Decision Date: 11 December 1986
• Docket Number: Civ. A. No. 86-1344-S.
• Citation: 653 F. Supp. 406
• Court: U.S. District Court — District of Massachusetts
• Parties: Jay C. ROBERTS and Maureen M. Roberts, Plaintiffs, v. SMITH BARNEY, HARRIS UPHAM & CO., INC., Defendant.

653 F. Supp. 406

Jay C. ROBERTS and Maureen M. Roberts, Plaintiffs, v. SMITH BARNEY, HARRIS UPHAM & CO., INC., Defendant.

Civ. A. No. 86-1344-S.

United States District Court, D. Massachusetts.

December 11, 1986.

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COPYRIGHT MATERIAL OMITTED

David F. Cavers, Jr., Robert W. Holmes, Jr., Powers & Hall, P.C., Boston, Mass., for plaintiffs.

Gerald F. Rath, James P. Delphey, Bingham, Dana & Gould, Boston, Mass., for defendant.

MEMORANDUM AND ORDER ON PLAINTIFFS' MOTION FOR LEAVE TO FILE FIRST AMENDED COMPLAINT AND DEFENDANT'S MOTION TO DISMISS OR TO COMPEL ARBITRATION

SKINNER, District Judge.

Plaintiffs Jay C. Roberts and Maureen M. Roberts (the "Roberts") reside in Vermont where they own and operate a sheep breeding business. Defendant Smith Barney, Harris Upham & Co., Inc. ("Smith Barney") is a New York based investment and brokerage house with offices throughout the country. The Roberts bring this action against Smith Barney to recover damages allegedly caused by Smith Barney's mishandling of the Roberts' securities trading accounts.

Plaintiffs allege the following: In April, 1983, Edward L. Diener, a Smith Barney employee working out of the company's office in Boca Raton, Florida, telephoned the Roberts at their home. He told the Roberts that he could increase their investment income if they opened trading accounts with him. In mid-July, the Roberts signed a number of agreements, including a Smith Barney, Harris Upham & Co., Inc. Securities Account Agreement (the "Securities Account Agreement"), and a Smith Barney, Harris Upham & Co., Inc. Commodity Customers Agreement (the "Commodity Customers Agreement"), and by September they had transferred to Smith Barney money and securities worth approximately $310,500. Diener opened three trading accounts in the Roberts' names over which he exercised complete control. The Roberts allege that between July, 1983 and May, 1985, Diener traded excessively in the accounts, incurring large loan and transaction fees on "in and out" trades, failed to inform the Roberts of his activities, failed to obtain the Roberts' permission for many trades, made misleading statements about the trades and the state of the Roberts' accounts, and made trades inconsistent with the Roberts' expressed investment objectives. In May, 1985, Diener sold all the securities in the Roberts' accounts causing them to lose substantial amounts of money.

Plaintiffs have brought this suit to recover damages allegedly caused by Smith Barney's mishandling of their trading accounts. Smith Barney moves to dismiss all counts of the Complaint. In the alternative, Smith Barney seeks an order compelling arbitration of the claims. Plaintiffs request permission to submit an Amended Complaint and oppose defendant's motions to dismiss and to compel arbitration.

Plaintiffs' Motion to File an Amended Complaint

Plaintiffs may file their Amended Complaint. The Amended Complaint contains copies of account statements for some of the transactions upon which plaintiffs base their claims. It also revises Count IV dealing with alleged RICO violations to reflect the First Circuit's recent decision in Schofield v. First Commodity Corp. of Boston, 793 F.2d 28 (1st Cir.1986). The Schofield case, which clarifies the requirements for civil RICO violations, was decided after plaintiffs filed their original Complaint. Plaintiffs have made this motion to amend early in the proceedings, and Smith Barney will not suffer any prejudice from the amendment. Therefore, plaintiffs' motion to file an Amended Complaint (the "Complaint") is ALLOWED.

Defendant's Motion to Dismiss

The Complaint contains seven counts alleging violations under:

(I) Section 10(b) of the Securities Exchange Act of 1934 (the "Act"), 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder (II) Section 15(c)(1) of the Act, 15 U.S.C. § 78o(c)(1), and Rules 15cl-2, 17 C.F.R. § 240.15cl-2, and 15cl-7, 17 C.F.R. § 240.15cl-7, promulgated thereunder;

(III) Section 20 of the Act, 15 U.S.C. § 78t;

(IV) the Racketeer Influenced and Corrupt Organization Act ("RICO"), 18 U.S.C. §§ 1961-1968;

(V) The Commodity Exchange Act (the "CEA"), 7 U.S.C. §§ 1-26;

(VI) common law negligence, and

(VII) common law fraud and misrepresentation.

Smith Barney moves to dismiss Count IV (RICO) and Count II (Section 15(c)(1)) of the Complaint on the grounds that they fail to state a claim upon which relief can be granted. See Fed.R.Civ.P. 12(b)(6). In addition, Smith Barney moves to dismiss all of plaintiffs' claims for failure to plead with particularity the circumstances of the alleged fraud. See Fed.R.Civ.P. 9(b).

RICO

Count IV of the Complaint alleges that Smith Barney violated sections 1962(a) and 1962(c) of RICO and asks for civil damages under section 1964 of the statute. See 18 U.S.C. §§ 1962(a) and (c), 1964. Smith Barney contends that Count IV must be dismissed because plaintiffs' allegations of a single criminal scheme fail to allege a "pattern of racketeering activity." Plaintiffs respond that they have alleged numerous related criminal acts by Smith Barney and that the statute requires no more.

To prove a RICO violation, plaintiffs must show, among other things, that Smith Barney engaged in a "pattern of racketeering activity." 18 U.S.C. § 1962; Sedima, S.P.R.L. v. Imrex Company, Inc., 473 U.S. 479, 105 S.Ct. 3275, 3285, 87 L.Ed.2d 346 (1985). The RICO statute does not fully define the phrase "pattern of racketeering activity"; it states merely that "a pattern of racketeering activity requires at least two acts of racketeering activity." 18 U.S.C. § 1961(5). As the Supreme Court has noted, this definition provides only the necessary condition for finding a pattern of racketeering activity and does not imply that two acts of racketeering activity are always sufficient to form a pattern.

The definition of a "pattern of racketeering activity" differs from the other provisions in § 1961 in that it states that a pattern "requires at least two acts of racketeering activity," § 1961(5) (emphasis added) not that it "means" two such acts. The implication is that while two acts are necessary, they may not be sufficient.

Sedima, 105 S.Ct. at 3285 n. 14. The statute leaves to the courts the task of determining what constitutes a sufficient condition of a pattern of racketeering activity.

Before 1985, the lower courts had generally not vigorously enforced the pattern requirement. However, in 1985, the Supreme Court indicated that civil RICO had been extended beyond its appropriate scope, in part because the lower courts had failed to construe the pattern requirement as restrictively as Congress had intended.

We ... recognize that in its private civil version, RICO is evolving into something quite different from the original conception of its authors.... The "extraordinary" uses to which civil RICO has been put appear to be primarily the result of the breadth of the predicate offenses, in particular the inclusion of wire, mail, and securities fraud, and the failure of Congress and the courts to develop a meaningful concept of pattern.

Id. 473 U.S. at 500, 105 S.Ct. at 3287, 87 L.Ed.2d at 361. This dicta by the Supreme Court has provoked a range of responses from the lower courts.

A few courts have continued after Sedima to hold that any two related acts of racketeering activity constitute a pattern. See R.A.G.S. Couture, Inc. v. Hyatt, 774 F.2d 1350, 1355 (5th Cir.1985); Systems Research, Inc. v. Random, Inc., 614 F.Supp. 494, 497 (N.D.Ill.1985). I find this approach inadequate. The Supreme Court appeared to reject this concept of pattern in Sedima because it fails to take into account Congress' intent that RICO should reach only continuous criminal activity. See Sedima, 105 S.Ct. at 3285 n. 14, 3287. Congress made clear in the legislative history that "`the "pattern" element of the statute was designed to limit its application to planned, ongoing, continuous crime as opposed to sporadic, unrelated, isolated criminal episodes.'" Id. 473 U.S. at 527, 105 S.Ct. at 3289, 87 L.Ed.2d at 378 (Powell, J., dissenting) (quoting Ad Hoc Civil RICO Task Force of the ABA Section of Corporation, Banking and Business Law 72 (1985)). As the Senate Report stated:

The target of RICO is thus not sporadic activity. The infiltration of legitimate business normally requires more than one `racketeering activity' and the threat of continuing activity to be effective. It is this factor of continuity plus relationship which combines to produce a pattern.

S.Rep. 91-617, 91st Cong. 1st Sess. 158 (quoted in Sedima, 105 S.Ct. at 3285 n. 14). Holding that any two related acts constitute a "pattern" reads the continuity factor out of RICO and allows the statute to apply to sporadic, noncontinuous activity. Thus, this relaxed reading of the pattern requirement is inadequate.

At the other end of the spectrum are those courts which have held that the pattern requirement is met only where a defendant's criminal acts are committed in furtherance of two or more separate criminal schemes or episodes. See Superior Oil Co. v. Fulmer, 785 F.2d 252, 257 (8th Cir. 1986); Holmberg v. Morrisette, 800 F.2d 205, 210 (8th Cir.1986); B.J. Skin & Nail Care, Inc. v. International Cosmetic Exchange, Inc., 641 F.Supp. 563, 566-567 (D.Conn.1986); Zahra v. Charles, 639 F.Supp. 1405, 1408-1409 (E.D.Mich.1986); Clodfelter v. Thuston, 637 F.Supp. 1034, 1039-1040 (E.D.Mo.1986); Madden v. Gluck, 636 F.Supp. 463, 465 (E.D.Mo.1986); Papai v. Cremosnik, 635 F.Supp. 1402, 1412-1413 (N.D.Ill.1986); Agristor Leasing v. Meuli, 634 F.Supp. 1208, 1225-1226 (D.Kan.1986); Frankart Distributors v. RMR Advertising, Inc., 632 F.Supp. 1198, 1200-1201 (S.D.N.Y.1986); Phelps v. Wichita Eagle-Beacon, 632 F.Supp. 1164, 1171-1172 (D.Kan.1986); Grant v. Union Bank, 629 F.Supp. 570, 578 (D.Utah 1986); Fleet Management Systems, Inc. v. Archer-Daniels-Midland Co., Inc., 627 F.Supp. 550, 559-560 (C.D.Ill.1986); ...