Taylor v. Bear Stearns & Co.

• Decision Date: 30 September 1983
• Docket Number: Civ. A. No. C82-2059A.
• Citation: 572 F. Supp. 667
• Parties: Russell C. TAYLOR, Plaintiff, v. BEAR STEARNS & COMPANY, et al., Defendants.
• Court: U.S. District Court — Northern District of Georgia

572 F. Supp. 667

Russell C. TAYLOR, Plaintiff, v. BEAR STEARNS & COMPANY, et al., Defendants.

Civ. A. No. C82-2059A.

United States District Court, N.D. Georgia, Atlanta Division.

September 30, 1983.

COPYRIGHT MATERIAL OMITTED

J. Boyd Page, Cofer, Beauchamp, Hawes & Brown, Atlanta, Ga., for plaintiff.

Robert Thornton, King & Spalding, Gary W. Hatch, Hansell Post, Brandon & Dorsey, Richard Kirby, Atlanta, Ga., for defendants.

ORDER

FORRESTER, District Judge.

This action, brought under the Securities Exchange Act of 1934 (SEA), the Commodity Exchange Act (CEA), the Racketeer Influenced and Corrupt Organizations Act (RICO), and which has several state theories, is before the court on defendants' motions to dismiss pursuant to Fed.R.Civ.P. 12(b)(2) and 12(b)(6). This court has jurisdiction over this action pursuant to Section 27 of the SEA, 15 U.S.C. § 78aa; Sections 1331 and 1332 of the Judicial Code, 28 U.S.C. §§ 1331, 1332; and pursuant to the doctrines of pendent and ancillary jurisdiction.

Plaintiff alleges that while defendant Bowman was employed by Paine, Webber, Jackson & Curtis, Inc. (Paine Webber), plaintiff opened several accounts for which Mr. Ishmael Bowman (Bowman) acted as broker. Plaintiff alleges that these accounts were opened approximately from July 12, 1978, to August 10, 1979. Plaintiff alleges that in approximately August of 1979, defendant Bowman changed employers and began working for Bear Stearns & Co. (Bear Stearns). On or about August 10, 1979, plaintiff alleges that he opened his account with Bear Stearns, with defendant Bowman acting as broker. Plaintiff allegedly closed his Paine Webber account on or about August 10, 1979, and thereafter had no further dealings with Paine Webber. Plaintiff closed his accounts at Bear Stearns on or about October 15, 1980, and thereafter had no further dealings with Bear Stearns. In general terms, plaintiff alleges that he lost money in his accounts both at Paine Webber and Bear Stearns as a result of a series of unauthorized trades undertaken by the defendants for the purpose of generating commissions.

In their motions to dismiss, defendants seek to dismiss plaintiff's claims under Section 10(b) of the SEA, Section 10 of the Fair Business Practices Act of 1975, Sections 4b and 4c of the CEA, and RICO. In addition, defendant Giarletta moves pursuant to Fed.R.Civ.P. 12(b)(2) to dismiss all counts and claims as against him individually on the ground that he is not subject to the personal jurisdiction of this court.

For the reasons set forth below, defendants' motions shall be GRANTED IN PART and DENIED IN PART.

I.

A. The central task in determining whether Counts I and II are to be dismissed is to find a "security" that was the object of the activities in question. Woodward v. Metro Bank, 522 F.2d 84, 91 (5th Cir.1975). Section 10(b) of the Securities Exchange Act of 1934, which provides the basis for Counts I and II, provides, in pertinent part, as follows:

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 — to use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.

15 U.S.C. § 78j(b). Rule 10b-5 of the Securities and Exchange Commission provides, in pertinent part, as follows:

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, ...

(1) to employ any device, scheme, or artifice to defraud,

(2) to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statement made, in 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.

In the case at bar, plaintiff maintained discretionary securities and commodities futures investment accounts with defendants Paine Webber and Bear Stearns. In addition, plaintiff invested in a commodities futures trading program directed by defendant Bowman while he was employed at both Paine Webber and Bear Stearns. Amended Complaint, ¶¶ 19, 20. In his brief, plaintiff asserts that the transactions at issue involved Treasury Bills, Treasury Bonds, GNMAs, and commercial paper, and contends therefore that this action involves "securities" within the meaning of Section 3(a)(10), 15 U.S.C. § 78c(a)(10). Defendants contend, on the other hand, that plaintiff's claims under Section 10(b) and Rule 10b-5 must be dismissed because the commodities futures accounts upon which plaintiff bases his claims do not constitute securities and that accordingly the securities claims are inapplicable to this action.¹

The issue presented on this motion to dismiss for failure to state a claim under the federal securities law is whether the allegations in the complaint permit a finding that a defendant sold to this plaintiff "securities" within the meaning of the Securities Exchange Acts of 1934. For the plaintiff to prevail on federal securities claims, it must be determined that what were fraudulently sold to plaintiff by defendants were "securities." Plaintiff avers that he communicated with Paine Webber, Hudson, and Bowman regarding an interest rate futures trading program, Amended Complaint, ¶ 25, which entailed an "unusual type of trading called spread trading," id., ¶ 27, and that as a result of the communications, he entered into a contract with Paine Webber and opened a discretionary securities and commodities account. Id., ¶ 29. While it is not clear whether plaintiff is alleging fraud in the sale of any particular investment instrument, it is clear that plaintiff is alleging fraud in the sale of a program by his opening of a discretionary account. Id., ¶ 33. See also ¶ 43A. Similarly, as to defendant Bear Stearns, it appears that the alleged fraud occurred in the sale of "the overall accounts and trading program." Id., ¶ 56. See also, id., ¶ 60.

The term "security" includes "any ... investment contract." 15 U.S.C. §§ 77b(1); 78c(a)(10). In determining whether a particular financial relationship constitutes an investment contract, this court must evaluate whether (1) the scheme involves an investment of money (2) in a common enterprise (3) with profits to come solely from the efforts of others. SEC v. W.J. Howey Co., 328 U.S. 293, 301, 66 S.Ct. 1100, 1104, 90 L.Ed. 1244 (1946). See Moody v. Bache & Co., Inc., 570 F.2d 523, 526 (5th Cir.1978) (discretionary accounts in commodities futures contracts may be investment contracts for purposes of the Securities Act).

A review of the complaint read in light of the Howey test reveals that plaintiff "invested" in accounts at Paine Webber and Bear Stearns. Plaintiff avers that he parted with money in the hope of receiving profits through the efforts of another individual with expertise in the management of his money. The complaint can be read to allege that plaintiff's placement of money into the discretionary securities and commodities futures investment accounts and in a commodities futures trading program subjected him to a risk over which he had no control. The complaint can further be read to allege that since plaintiff was not knowledgeable about investments, plaintiff had expectations that defendants would make all decisions prudently as to the management of the accounts.

As to the second consideration of the Howey test, the averments suggest a "common enterprise." A common enterprise is said to exist where "the fortunes of the investor were interwoven with and dependent upon the efforts and success of those seeking the investment ...." SEC v. Glenn W. Turner Enterprises, Inc., 474 F.2d 476, 482 n. 7 (9th Cir.), cert. denied, 414 U.S. 821, 94 S.Ct. 117, 38 L.Ed.2d 53 (1973). Defendants at all relevant times were engaged in the securities and commodities futures contracts brokerage and financial services business and rendered services to clients including the investigation of investment alternatives and opportunities, the managing of securities and commodities futures contract accounts for clients, and the directing of securities and commodities futures contract transactions and trading programs for clients. See Amended Complaint, ¶ 14. As such, an investor could inexorably rely upon their guidance for the success of his or her investment. Here, allegations of defendants' dominance of the financial relationship exists. Such a dominance provides commonality. See SEC v. Continental Commodities Corp., 497 F.2d at 522-23 (5th Cir.1974). Given plaintiff's expectation that defendants were his investment managers, there exists a one-to-one relationship or a "vertical commonality." Surino v. E.F. Hutton & Co., Inc., 507 F.Supp. 1225, 1237 (S.D.N.Y.1981); Alvord v. Shearson Hayden Stone, Inc., 485 F.Supp. 848, 853 (D.Conn.1980).

As to the final consideration of the Howey test, the averments suggest that plaintiff invested in an enterprise according to which the hoped-for profits were to come solely from the efforts of others. Plaintiff avers that all investment decisions were to be made by defendants; as such, any profits were to be caused by defendants' efforts.

Therefore, under the Howey test, plaintiff may have purchased "securities" when he opened his discretionary accounts to be managed by defendants. Thus, defendants' argument that Rule 10b-5 has no application in this action because the instruments upon which plaintiff bases his claims were commodities...