Taylor v. First Jersey Securities, Inc.

• Decision Date: 10 November 1988
• Docket Number: Nos. 88-CA-0388,88-CA-0861,s. 88-CA-0388
• Citation: 533 So.2d 1383
• Parties: William Buck TAYLOR, III, M.D. v. FIRST JERSEY SECURITIES, INC., Cris Blackman, and Leonard Alsfeld. 533 So.2d 1383, Blue Sky L. Rep. P 72,956
• Court: Court of Appeal of Louisiana — District of US

Page 1383

533 So.2d 1383

William Buck TAYLOR, III, M.D. v. FIRST JERSEY SECURITIES, INC., Cris Blackman, and Leonard Alsfeld.

Nos. 88-CA-0388, 88-CA-0861.

533 So.2d 1383, Blue Sky L. Rep. P 72,956

Court of Appeal of Louisiana Fourth Circuit.

Nov. 10, 1988.

Rehearing Denied Dec. 14, 1988.

Jacques F. Bezou, P.L.C., Trial Atty., DeRussy, Bezou and Matthews, New Orleans, for plaintiff/appellant.

Thomas K. Potter, III, Robert B. Bieck, Jr., Denise R. Krouse, Jones, Walker, Waechter, Poitevent, Carrere & Denegre, New Orleans, for defendants/appellees.

Before BYRNES, WILLIAMS and PLOTKIN, JJ.

PLOTKIN, Judge.

Appellant William Buck Taylor III, M.D. appeals the trial court's granting of an exception of no cause of action in favor of appellees, First Jersey Securities, Inc. and Leonard Alsfeld. We reverse in part and remand.

Dr. Taylor brought suit against First Jersey, Alsfeld and Cris Blackman, a former First Jersey registered representative, alleging violations of the Louisiana "Blue Sky" Securities Law (Blue Sky Law), the Louisiana Unfair Trade Practices and Consumer Protection Act (UTPA) and Louisiana Civil Code articles 1930, 2315-2317, 2320 and 2324, in connection with Dr. Taylor's stock purchases. He alleged that Blackman used "high pressure" sales techniques and fraudulent misrepresentations to induce him to make a number of purchases of extremely speculative stock, despite his express statements that he wished to purchase only "high quality bonds." Specifically, appellant claimed that Blackman told him that First Jersey had a "fantastic research department" and that the network of First Jersey dealers could manipulate the stock they purchased for their clients and thus keep it from dropping. Dr. Taylor also alleged that he discovered the fraud after Blackman left his position at First Jersey and moved to Nashville, Tennessee, when Blackman started making frequent telephone calls telling Dr. Taylor that First Jersey "practices illegal tactics in buying and selling stocks." Dr. Taylor alleged that, at all pertinent times, Alsfeld was Blackman's supervisor at First Jersey.

The petition concludes by alleging that Blackman's improper conduct "consisted of high pressure tactics, the sale of inappropriate stock, churning, numerous breaches of his fiduciary duty to the petitioner and fraud." Alsfeld should be liable, the petition stated, because he "knew and in fact encouraged the conduct of defendant Blackman, failed to supervise his activities, [and] failed to enforce any compliance on the part of defendant Blackman." Dr. Taylor sought recovery of his investments, plus treble damages and punitive damages.

First Jersey and Blackman filed an exception of no cause of action, alternatively motion for summary judgment, contending that Taylor had no cause of action under Louisiana's Blue Sky Law or the UTPA, that he had no cause of action for churning under any law and that he had no cause of action against defendant Alsfeld. The trial court granted the exception without written reasons. Dr. Taylor appealed, claiming the petition stated a cause of action for violations of the state Blue Sky Laws and the UTPA and that the petition stated a cause of action for damages caused by negligence and fraud.

Standard of Review

The purpose of an exception of no cause of action is to allow the court to determine the legal sufficiency of the plaintiff's petition. Darville v. Texaco, Inc., 447 So.2d 473, 474 (La.1984) (per curiam), reh'g denied, 448 So.2d 1302 (La.1984). The exception must be tried on the face of the pleadings and all well-pleaded facts must be accepted as true. Ermert v. Hartford Ins. Co., 480 So.2d 999 (La.App.4th Cir.1985), writs denied, 484 So.2d 672 (La.1986); La. C.C.P. art. 927. The exception must be overruled unless the allegations of the petition exclude every reasonable hypothesis other than the premise upon which the defense is based. Darville, supra. If it is possible for the plaintiff to adduce some admissible evidence which would entitle him to relief, the exception should not be granted. Id.

Louisiana Blue Sky Law

The Louisiana Blue Sky Law, LSA-R.S. 51:701 et seq., provides, in pertinent part, as follows:

Sec. 712. Unlawful practices

A. It shall be unlawful for any person: ...

(2) To offer to sell or to sell a security by means of any oral or written untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading, the buyer not knowing of the untruth or omission, if such person shall not sustain the burden of proof that he did not know, and in the exercise of reasonable care could not have known, of the untruth or omission.

Sec. 714. Civil liability from sales of securities

A. Any person who violates R.S. 51:712(A) shall be liable to the person buying such security, and such buyer may sue in any court to recover....

The above provisions have not been interpreted by Louisiana courts. In brief, the parties agree that parts of the Louisiana Blue Sky Law are analogous to provisions of the federal Securities Act of 1933 and that LSA-R.S. 51:712(A)(2) is analogous to Section 12(2) of the 1933 Act. Courts may therefore look to the federal law and jurisprudence interpreting the securities law for guidance in interpreting the Louisiana provisions. Gour v. Daray Motor Co., Inc., 373 So.2d 571, 578 (La.App.3d Cir.1979), writ granted 376 So.2d 1270 (La.1979), writs dismissed, 377 So.2d 1033 (La.1979).

The parties also agree that the plaintiff must prove the following elements to prevail in an action under Section 12(2) of the Securities Act of 1933: (1) the defendant made a false or misleading statement of a material fact or failed to state a material fact necessary in order to make the statement not misleading; (2) the plaintiff did not know of the untruth or omission; (3) the defendant knew, or in the exercise of reasonable diligence, could have known, of the untruth or omission. Junker v. Crory, 650 F.2d 1349, 1359 (5th Cir.1981); Hill York Corp. v. American Int'l Franchises, Inc., 448 F.2d 680, 695 (5th Cir.1971).

Based on the above elements and assuming that all the allegations in Dr. Taylor's petition are true, we find that appellant's petition states a cause of action against Blackman under the Louisiana analogue to Section 12(2), LSA-R.S. 51:712(A)(2). Dr. Taylor made specific allegations (1) that defendant Blackman made false statements of material fact, (2) that he [Dr. Taylor] was unaware of the untruth of the statements and (3) that Blackman was aware of the untruth of the statements. Those allegations are sufficient to state a cause of action. The trial court's granting of the exception of no cause of action was in error because it is possible for the plaintiff to adduce some admissible evidence which would entitle him to relief under Louisiana's Blue Sky Law. See Darville, supra.

Defendants argue strenuously in brief that the exception of no cause of action was properly maintained because no federal or state courts have ever recognized a cause of action for "suitability" or "churning" under Section 12(2) of the Securities Act of 1933. "Suitability" claims are based on allegations that the broker recommended and sold to the plaintiff securities which were inconsistent with the plaintiff's financial situation, experience and investment objectives, while "churning" occurs when a broker acts in his own interest to generate commissions and against his customer's interest by inducing transactions which are excessive in size and frequency in light of the character and investment objectives of the customer. Appellees cite a number of cases in which suitability and churning causes of action were allowed under Section 10(b) of the Securities Act of 1934, then argue that Section 10(b) is the only appropriate section under which to bring such actions. We refuse to adopt this argument and hold that the language of LSA-R.S. 51:712(A)(2) is broad enough to encompass allegations of suitability and churning. The cases cited by appellees do not limit those actions to Section 10(b), but instead only state that the actions are appropriate under that section. Additionally, the petition made sufficient allegations to establish a cause of action for both suitability and churning. Therefore, we hold that the trial judge erred in dismissing plaintiff's claims under the Louisiana Blue Sky Laws. The appellant does have a cause of action for both suitability and churning under that law.

In addition to the above arguments, appellees argue that plaintiff failed to state a cause of action for churning because he did not allege that any securities were sold or traded from his account with First Jersey. We agree that Dr. Taylor's allegations that Blackman churned his account are based solely on the fact that Blackman allegedly made excessive purchases on Dr. Taylor's account, but find that this fact does not make the petition deficient. The elements of a cause of action for churning, set out by the appellees, are (1) excessive trading in his account, (2) the broker's exercise of control over that account and (3) the broker's scienter. Miley v. Oppenheimer & Co., 637 F.2d 318, 324 (5th Cir.1981); reh'g denied, 642 F.2d 1210 (5th Cir.1981). We find that Dr. Taylor's petition makes all the required allegations. Although appellees correctly cite a number of federal cases which evaluate "excessive trading" by considering the "turnover ratio" in the account, those cases do not stand for the proposition that an excessive turnover ratio is the only evidence of excessive trading. Buying stocks is also trading and appellant properly alleged that Blackman undertook to buy more stocks than he intended to buy. Therefore, the exception of no cause of action concerning Dr. Taylor's churning claims was improperly granted. Liability of Alsfeld

LSA-R.S. 51:714(B) provides for liability...