Siegel v. Tucker, Anthony & RL Day, Inc.

• Decision Date: 02 April 1987
• Docket Number: No. 86 Civ. 5008 (SWK).,86 Civ. 5008 (SWK).
• Citation: 658 F. Supp. 550
• Parties: Dani SIEGEL, Plaintiff, v. TUCKER, ANTHONY & R.L. DAY, INC. and Lee Balter, Defendants.
• Court: U.S. District Court — Southern District of New York

658 F. Supp. 550

Dani SIEGEL, Plaintiff, v. TUCKER, ANTHONY & R.L. DAY, INC. and Lee Balter, Defendants.

No. 86 Civ. 5008 (SWK).

United States District Court, S.D. New York.

April 2, 1987.

Carro, Spanbock, Fass, Geller, Kaster & Cuiffo, New York City by Kenneth A. Lapatine Vincent Lipari, for plaintiff.

Shanley & Fisher, P.C., New York City by Matthew Farley, Brian McDonough, Robert G. Brehme, for defendants.

MEMORANDUM OPINION AND ORDER

KRAM, District Judge.

This action arises out of a brokerage account plaintiff Dani Siegel ("Siegel") opened in 1981 with defendant Tucker, Anthony & R.L. Day, Inc. ("Tucker Anthony"), a brokerage firm, and defendant Lee Balter ("Balter"), one of its registered account representatives. This action is brought under Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), as amended, 15 U.S.C. § 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5; Section 15(c)(1) of the Exchange Act, 15 U.S.C. § 78o(c)(1), and Rule 15c1-7(a) thereunder, 17 C.F.R. § 240.15cl-7(a); and the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et seq. The Court has jurisdiction under Section 27 of the Exchange Act, 15 U.S.C. § 78aa, and Section 1964 of RICO, 18 U.S.C. § 1964.

Plaintiff alleges fraudulent misrepresentations by defendants in inducing plaintiff to give defendants control of his account, churning of plaintiff's account, and a RICO claim. The case is presently before the Court on defendants' motion (1) to dismiss the complaint for failure to state a claim upon which relief can be granted pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, (2) to dismiss all claims alleging fraud for failure to plead fraud with the particularity required by Rule 9(b) of the Federal Rules of Civil Procedure, and (3) to stay this action and compel arbitration of all claims pursuant to the arbitration provisions of plaintiff's customer agreements. For the reasons outlined below, defendants' motion is granted

The Fraudulent Misrepresentation Claim

Plaintiff alleges that on or about August 5, 1981, during a telephone call between Siegel and Balter and, again, during lunch at a midtown restaurant, Siegel advised Balter — and, through him, Tucker Anthony — of his conservative investment goals. Balter then allegedly made fraudulent misrepresentations including that defendants would manage Siegel's account conservatively and would not speculate or take unnecessary risks and that defendants had made significant monies for their clients by allowing them to follow Balter's investment philosophy and would make significant monies for Siegel. Balter allegedly subsequently represented to Siegel in numerous telephone calls throughout the duration of the relationship that the securities purchased for his account were suitable and that the losses sustained were temporary and would soon be recouped. Such misrepresentations allegedly were made in the context of defendants' efforts to induce plaintiff to give defendants control of plaintiff's account so that they could generate excessive commissions and secret profits through trading made for defendants' and not plaintiff's profit. As a result, plaintiff allegedly was misled, detrimentally relied upon these representations and was induced to give defendants control of his account which defendants then proceeded to churn. Finally, in his memorandum of law but not in his complaint, plaintiff contends that these misrepresentations were made in connection with the purchase of a security because they induced plaintiff to open a discretionary account, which is an investment contract and thus a security, with defendants.

Defendants argue that plaintiff's claim fails to plead fraud with the particularity required by Rule 9(b) and that the claim otherwise fails to state a claim because the allegedly fraudulent statements did not induce specific investment decisions.

To state a claim under Section 10(b) or Rule 10b-5, the complaint must allege "(1) that defendants misrepresented or omitted to state material facts in connection with the purchase or sale of a security, (2) that plaintiff relied to his detriment upon defendants' misrepresentations or omissions, and (3) that defendants made their misrepresentations or omissions with `scienter,' that is, an intent to deceive, manipulate or defraud plaintiff." Levine v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 639 F.Supp. 1391, 1394 (S.D.N.Y.1986) (citations omitted).

Under Rule 9(b), a plaintiff must set forth "the time, place and content of the alleged misrepresentations." Gamble v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 1982-83 Transfer Binder Fed.Sec.L. Rep. (CCH) ¶ 99,046 (S.D.N.Y. Dec. 30, 1982). Plaintiff clearly has alleged this much, and his motion to dismiss for failure to plead fraud with the required specificity pursuant to Rule 9(b) must be rejected.

Moreover, promises of conservative stewardship in inducing plaintiff to invest monies with defendants, as plaintiff alleges here, are insufficient to state a claim for fraudulent misrepresentation under Section 10(b) or Rule 10b-5; the key factor is whether the allegedly fraudulent statements induced specific investment decisions, and here they did not. See, e.g., Luce v. Edelstein, 802 F.2d 49 (2d Cir. 1986); Bennett v. U.S. Trust Co., 770 F.2d 308 (2d Cir.1985), cert. denied, ___ U.S. ___, 106 S.Ct. 800, 88 L.Ed.2d 776 (1986); Chemical Bank v. Arthur Anderson & Co., 726 F.2d 930 (2d Cir.1984), cert. denied, 469 U.S. 884, 105 S.Ct. 253, 83 L.Ed.2d 190 (1984); Darrell v. Goodson, 1979-80 Transfer Binder Fed.Sec.L.Rep. (CCH) ¶ 97,349 (S.D.N.Y. Apr. 10, 1980) Available on WESTLAW, DCT database. Indeed, such "indefinite promises of conservative management seem to have been made in connection with defendant's efforts to attract plaintiff's brokerage business rather than with any subsequent trade in a particular security in plaintiff's investment portfolio." Darrell v. Goodson, Fed.Sec.L.Rep. ¶ 92,932 at 97,525.

Plaintiff's contention that defendants' misrepresentations were made in connection with the purchase of a security because the opening of a discretionary account, which plaintiff argues is an investment contract and therefore a form of security, is the purchase of a security is without merit as plaintiff can demonstrate neither horizontal nor vertical commonality, one of the requisites of an investment contract. See, e.g., Kaplan v. Shapiro, 655 F.Supp. 336, 339-41 (S.D.N.Y.1987); Leone v. Advest, 624 F.Supp. 297, 304 (S.D. N.Y.1985); Silverstein v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 618 F.Supp. 436, 439-40 (S.D.N.Y.1985); Mechigian v. Art Capital Corp., 612 F.Supp. 1421 (S.D. N.Y.1985); Savino v. E.F. Hutton & Co., Inc., 507 F.Supp. 1225, 1237-38 n. 11 (S.D. N.Y.1981).

Accordingly, defendants' motion to dismiss plaintiff's fraudulent misrepresentation claim pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure is GRANTED.

The Churning Claim

Plaintiff alleges that he communicated his conservative investment goals to defendants, that defendants' trading in his account was excessive in light of these goals and made simply to generate commissions or profits for defendants, and that defendants exercised exclusive control over his account. Plaintiff attaches to his complaint a schedule of 206 sales and 128 purchases on his accounts — representing all trading activity in the accounts for the relevant period — along with a description of the name and number of shares traded, the date acquired or sold and the time held in the account prior to each sale. Plaintiff also alleges that these transactions generated a turnover rate of 5.93 during the relevant 35 month period from August 1981 through June 1984.

Defendants claim that plaintiff has not specified the transactions which allegedly were churned or the facts necessary to calculate the annual turnover ratio. Defendants also argue that the claim as stated warrants dismissal pursuant to Rule 12(b)(6) in light of the principle that an annual turnover ratio of less than six will not normally be considered excessive.

Churning occurs where a securities dealer creates commissions by inducing transactions in a customer's account which are disproportionate to the size and character of that account. Moran v. Kidder Peabody & Co., 609 F.Supp. 661, 666 (S.D.N.Y. 1985), aff'd mem., 788 F.2d 3 (2d Cir.1986). In order to state a churning claim under the antifraud provisions of the federal securities laws, plaintiff must allege (1) that the trading in his account was excessive in light of his investment objectives; (2) that the broker exercised control over the account, and (3) that the broker acted with intent to defraud or with willful or reckless disregard for the interests of his client. Levine v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 639 F.Supp. 1391, 1394 (S.D.N. Y.1986); Moran, 609 F.Supp. at 666. The Court finds that plaintiff's complaint adequately alleges each of these three elements.

In addition, in order to properly plead the elements of a churning claim with the specificity required by Rule 9(b), the complaint also must set forth (1) the nature, amount and date of the securities in question, Vetter v. Shearson Hayden Stone, Inc., 481 F.Supp. 64, 66 (S.D.N.Y. 1979); Salwen v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 79 F.R.D. 130, 135 (S.D.N.Y.1978); and (2) facts sufficient to permit the calculation of the turnover rate of the account and/or the percentage of the account value paid in commissions, Moran, 609 F.Supp. at 666; Vetter, 481 F.Supp. at 66. Such facts are necessary in order to "allow the determination of whether or not trading was excessive." Moran, 609 F.Supp. at 666. Although there is no clear demarcation between excessive and non-excessive trading, excessive trading generally is thought to exist by courts and commentators when there is an annual turnover rate in an account in excess of six. Frota...