Smith v. Oppenheimer and Co., Inc.

• Decision Date: 20 September 1985
• Docket Number: No. G83-948 CA7.,G83-948 CA7.
• Citation: 635 F. Supp. 936
• Parties: Thomas E. SMITH, Plaintiff, v. OPPENHEIMER AND CO., INC., Charles W. Wright, Robert L. Hunziker, Warren K. Hayes, and Thomas O'Donnell, Defendant.
• Court: U.S. District Court — Western District of Michigan

635 F. Supp. 936

Thomas E. SMITH, Plaintiff, v. OPPENHEIMER AND CO., INC., Charles W. Wright, Robert L. Hunziker, Warren K. Hayes, and Thomas O'Donnell, Defendant.

No. G83-948 CA7.

United States District Court, W.D. Michigan, S.D.

September 20, 1985.

Donald F. Tucker, Southfield, Mich., for plaintiff.

Thomas G. Parachini, Kalamazoo, Mich., James E. Beckley, Chicago, Ill., Dirk J. Holkeboer, Kalamazoo, Mich., for defendant.

OPINION ON MOTION TO DISMISS

MILES, Chief Judge.

Now before this Court is the motion of defendants Oppenheimer and Co. ("Oppenheimer"), Wright, Hunziker, Hayes, and O'Donnell to strike and dismiss certain sections of the complaint filed by plaintiff Smith. The complaint in this action originally alleged seven counts, which included claims against the defendants based upon violations of federal securities laws; the federal Racketeering Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. §§ 1961-1968; Michigan securities laws; the Michigan Consumer Protection Act; common-law fraud; negligence; and breach of contract. By order of November 15, 1984 this Court agreed to the severance of all counts except those based upon the federal securities laws and upon RICO and the submission of the counts severed to arbitration, which was to be stayed until the disposition of the remaining counts (I & II) in this Court. The Court therefore is now faced with the objections of defendants to the counts still properly before it.

The facts underlying the complaint, as alleged by plaintiff, are as follows: plaintiff opened a cash account with defendant Oppenheimer in January of 1981. At the advice and urging of defendant Wright, an employee of Oppenheimer, plaintiff allowed his account to be used for numerous options transactions, even though plaintiff had some qualms about these transactions, because plaintiff was lead by Wright to rely upon defendants' ability to care for his investment properly. In August of 1981 plaintiff was urged by defendants Wright and Hunziker to give defendants discretionary authority over his account, and to entrust them with a cashier's check for $100,000. Plaintiff agreed to do so, again in reliance on defendants' representations that they would exercise due diligence in the management of his account, would make frequent review of the status of his account in order to curtail losses, and would conduct all transactions affecting his account with consideration for his best interests. In fact, plaintiff claims that from August 1981 onward defendants failed to provide plaintiff with information regarding his account, failed to communicate with plaintiff on the matter, disregarded plaintiff's suggestions and concerns about possible losses, acted in disregard of plaintiff's best interests, and engaged in excessive trading or "churning" of plaintiff's account in order to generate commissions. See complaint ¶¶ 9-40. Plaintiff claims that the situation was not improved following plaintiff's conversations with defendants Wright, Hunziker, O'Donnell or Hayes. He asserts that the conduct of defendants constituted manipulation, deception and fraud in violation of section 17(a) of the Securities Act of 1933, sections 15(c) and 10(b) of the Securities Exchange Act of 1934, and Securities Exchange Commission/Rules 10b-1, 10b-3 and 10b-5 and that this misconduct caused him injury in the amount of $100,000. See complaint ¶¶ 41-42. Further, plaintiff claims that the conduct of defendants constituted a "pattern of racketeering" that was engaged in in furtherance of an enterprise and that caused him injury so as to provide him with a civil cause of action under RICO, 18 U.S.C. § 1964(c). See complaint ¶¶ 44-49.

Defendants object to the complaint on the following grounds. They claim that the complaint is "prolix" and fails to comply with the requirements of Fed.R.Civ.P. 8(a)(2) and 8(e)(1), justifying their motion to strike under Rule 12(f); that the plaintiff has asserted claims under stock exchange and association rules and under sections of the federal securities laws for which there is no private cause of action available; that plaintiff has failed to state a claim upon which relief may be granted with respect to certain of his securities act claims and his RICO claim; that plaintiff's failure to allege "market manipulation" under section 9(a) of the 1934 Act is fatal to his claim of a violation of Rule 10b-1; that plaintiff's claims under section 15(c) of the 1934 Act are time barred; and that plaintiff's allegations of "insider trading" are not actionable under the doctrine of in pari delicto. Defendants also object to plaintiff's request for punitive damages and for attorneys' fees. The Court will deal with these objections severally.

Motion to Strike

The defendants' first objection to the complaint rests on the assertion that because the complaint arguably is "prolix" and "amorphous," it fails to meet the standards of pleading set forth in Fed.R.Civ.P. 8(a)(2) and 8(e)(1), which require in essence that claims for relief should be short, plain and concise. It is true that pleadings in flagrant violation of this directive may justify a motion to strike. See, e.g., Brainerd v. Potratz, 421 F.Supp. 836, 839 (N.D.Ill. 1976); Prichard v. Conley, 48 F.R.D. 138 (E.D.Tenn.1969). However, while the Court agrees that the complaint in this case is not a model of concise pleading, it does not believe that the complaint is sufficiently flawed to justify dismissal.

The essence of defendants' objection seems to be that plaintiff has combined several statutory violations in one count (Count I), and that plaintiff has incorporated seemingly unnecessary factual allegations from the earlier count into the later one. It is true that in Count I plaintiff alleges violations of and claims relief under three distinct sections of the federal securities laws: sections 10(b) and 15(c) of the 1934 Act, and section 17(a) of the 1933 Act. See complaint ¶ 41. However, plaintiff claims that each of these sections was violated by actions of the defendants that constituted a single "course of conduct" that plaintiff claims was manipulative, deceptive and fraudulent. Matters of fraud, manipulation and deception are the gravamen of each of the sections of the securities acts that plaintiff bases his action upon. See 15 U.S.C. §§ 77q(a), 78j(b), 78o (c)(1) (1982). The fact that plaintiff failed to segregate his claims into three separate counts and to restate the underlying facts in each count should not be fatal to the complaint insofar as plaintiff has provided defendants with adequate notice of what the claims against them are. See Ritchie v. United Mine Workers of America, 410 F.2d 827, 832 (6th Cir.1969) (stating that the designation of counts in a complaint should not control the interpretation of the complaint); see also Conley v. Gibson, 355 U.S. 41, 47, 78 S.Ct. 99, 10304, 2 L.Ed.2d 80 (1957) (stating that the purpose of pleading requirements under the Federal Rules are to provide parties with notice of claims against them).

The Court also finds that the complaint in this case is not terminally repetitive or verbose due to the incorporation of the facts alleged in Count I in the text of Count II. The second count of the complaint sets forth plaintiff's RICO claims; it is established that in order to state a claim under RICO a plaintiff must allege a substantive wrong of the type proscribed by that statute. See 18 U.S.C. § 1962(c); Moss v. Morgan Stanley, Inc., 719 F.2d 5, 17 (2d Cir.1983). By setting forth in Count II the allegations of securities fraud detailed in Count I, plaintiff is setting forth the claim of a predicate act required to support his RICO count. The fact that the facts setting up those allegations may be lengthy does not make them unnecessary. The Court therefore finds that the complaint passes muster under Rule 8, and it denies defendants' motion to strike.

Claims Under the Federal Securities Law

1. Claims under Stock Exchange and Association Rules.

Defendants have expended considerable energy in arguing that the plaintiff has not stated a cause of action under stock exchange or association rules because those rules do not provide litigants a private cause of action. Plaintiff counters with the statement that the complaint does not contain a request for relief under any exchange rule, but rather refers to specific rules merely as illustrations of the ways in which defendants' conduct was wrongful and, therefore, violative of federal statutes and SEC rules. It is true that the complaint contains many references to various exchange and association rules. See, e.g., complaint ¶¶ 3, 30, 39. However, the Court finds it significant that the one paragraph of Count I in which plaintiff explicitly states that defendants' conduct was wrongful and actionable contains no reference to any stock exchange rule. See complaint ¶ 41. The references to the exchange rules may be taken merely to be evidentiary allegations, which are not fatal to a complaint if they do not obfuscate the substance of the causes of action. See Kamen Soap Products Co. v. Struthers Wells Corp., 159 F.Supp. 706, 713 (S.D.N.Y.1958). Although exchange rules may not provide persons with a private cause of action, violations of those rules may be probative of conduct alleged to violate the antifraud provisions of the securities laws. Kirkland v. E.F. Hutton & Co., 564 F.Supp. 427, 554 (E.D.Mich.1983). Therefore, insofar as the Court finds that plaintiff's complaint is not based upon prayers for relief under stock exchange or association rules, the Court finds defendants' motion to dismiss and/or to strike on this ground not to be meritorious.

2. Standing under § 17(a) of the 1933 Act and under § 15(c) of the 1934 Act

The defendants raise a more serious issue for this Court's consideration when they assert that plaintiff has failed to state a claim under section 17(a) of the 1933 Act because that section does not give rise...