Wyman v. Prime Discount Securities

• Decision Date: 07 April 1993
• Docket Number: Civ. No. 92-228-P-C.
• Citation: 819 F. Supp. 79
• Parties: Ernest WYMAN, et al., Plaintiffs, v. PRIME DISCOUNT SECURITIES and Robert Rice, Defendants.
• Court: U.S. District Court — District of Maine

819 F. Supp. 79

Ernest WYMAN, et al., Plaintiffs, v. PRIME DISCOUNT SECURITIES and Robert Rice, Defendants.

Civ. No. 92-228-P-C.

United States District Court, D. Maine.

April 7, 1993.

William D. Robitzek, Tyler N. Kolle, Berman & Simmons, Lewiston, ME, for plaintiffs.

Harold J. Friedman, Laurence H. Leavitt, Friedman & Babcock, Portland, ME, for defendants.

MEMORANDUM OF DECISION AND ORDER

GENE CARTER, Chief Judge.

In this case, Plaintiffs Ernest Wyman and Wilma Wyman allege securities fraud and seek monetary reparations for their economic injuries. The six-count action involves the following federal and pendent state law claims: Count I (violation of section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5); Count II (negligence); Count III (breach of fiduciary duty); Count IV (fraud and deceit); Count V (violation of 32 M.R.S.A. § 10201); and Count VI (violation of Maine's Unfair Trade Practices Act, 5 M.R.S.A. § 205-A et seq.).

Defendants have filed a Motion for Partial Summary Judgment and Motion to Dismiss (Docket No. 32) supported by a Memorandum (Docket No. 33) and Statement of Material Facts Not in Dispute (Docket No. 34). Plaintiffs have filed an Opposition to Defendants' Motion for Partial Summary Judgment and Motion to Dismiss (Docket No. 42) supported by a Statement of Undisputed Material Facts (Docket No. 43). In addition, Plaintiffs have filed a Motion for Attachment/Trustee Process (Docket No. 26) with supporting Memorandum (Docket No. 27) and affidavits (Docket Nos. 28-30) to which Defendants have submitted their opposition (Docket No. 48) with supporting Memorandum (Docket No. 49) and affidavit (Docket No. 50).

This Court will first address Defendants' Motion for Partial Summary Judgment and Motion to Dismiss. The analysis of Plaintiffs' Motion for Attachment will follow.

FACTS¹

Plaintiffs have maintained securities investment accounts with Defendant Prime Discount Securities, Inc. ("Prime Discount") since 1985. Defendant Robert Rice acted as broker for Plaintiffs in all of their Prime Discount transactions.² Plaintiffs allege that, in 1988, Robert Rice began calling Plaintiffs and suggesting various high-risk stock purchases to them. Plaintiffs allegedly followed all of Defendants' suggestions, buying highly speculative stock, often in new companies, from 1989 to 1991.

Allegedly, many of the companies in which Plaintiffs bought stock did not succeed. Thus, Plaintiffs suffered financial loss. Ernest Wyman's portfolio went from a high of $117,665.61 in April 1989 to $11,254 in February 1993, while Wilma Wyman's portfolio shrunk from a high of $246,063.14 in November 1988 to $41,196 in February 1993. Plaintiffs seek to recover for their economic loss, alleging that Defendants recommended high-risk investments to them, despite their allegedly communicated conservative investment goals.

The parties seriously dispute various genuine issues of material fact, including, inter alia: 1) whether Plaintiffs made Defendants aware that they were only interested in conservative investment opportunities (See Ernest Wyman's Affidavit (Docket No. 46), ¶ 3; Ernest Wyman's Deposition at 21-22; Wilma Wyman's Affidavit (Docket No. 45), ¶ 4; Robert Rice's Affidavit (Docket No. 50), ¶ 4); 2) Ernest Wyman's knowledge regarding the workings and risks of stock trading (See Ernest Wyman's Deposition at 16-19, 22-23, and 27-28; Robert Rice's Affidavit (Docket No. 50), ¶ 2); and 3) the extent to which, if any, Ernest Wyman advised Ms. Wyman regarding her trading (See also Ernest Wyman's Deposition at 14-16; Wilma Wyman's Deposition at 13, 16-17; Wilma Wyman's Affidavit (Docket No. 45), ¶ 16; Robert Rice's Affidavit (Docket No. 50), ¶ 3).

ANALYSIS

I. MOTION TO DISMISS

PLEADING WITH SPECIFICITY UNDER FED.R.CIV.P. 9(b)

In their Motion for Partial Summary Judgment and Motion to Dismiss, Defendants argue that Plaintiffs' Amended Complaint fails to allege fraud with sufficient particularity to satisfy Federal Rule of Civil Procedure 9(b). Thus, Defendants assert, Counts I, IV, V, and VI should be dismissed, without which the remaining pendent statelaw claims would lack the necessary subject matter jurisdiction to remain in federal court. In deciding this motion, the Court must accept the factual allegations set forth in the Amended Complaint as true and must draw all reasonable inferences in favor of Plaintiffs. Correa-Martinez v. Arrillaga-Belendez, 903 F.2d 49, 51 (1st Cir.1990); Dartmouth Review v. Dartmouth College, 889 F.2d 13, 16 (1st Cir.1989). Further, the Complaint should not be dismissed unless it appears beyond doubt that Plaintiffs can prove no set of facts which would entitled them to relief. Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-02, 2 L.Ed.2d 80 (1957); Dartmouth Review, 889 F.2d at 16. In light of this standard, the Court examines the fraud claims against Defendants.

Pleading under the Federal Rules of Civil Procedure requires only a "short and plain statement of the claim showing that the pleader is entitled to relief." Fed.R.Civ.P. 8(a)(2). Under Federal Rule of Civil Procedure 9(b), however, a complainant alleging fraud must allege the circumstances constituting the fraud with specificity.³ The purpose of Rule 9(b) is to: "1) place the defendants on notice and enable them to prepare meaningful responses; 2) to preclude the use of a groundless fraud claim as a pretext to discovering a wrong or as a `strike suit;' and (3) to safeguard defendants from frivolous charges which might damage their reputations." Bailey v. Linsco/Private Ledger Corp., 136 F.R.D. 11, 13 (D.Me.1991) (quoting New England Data Services, Inc. v. Becher, 829 F.2d 286, 289 (1st Cir.1987)).

The Court of Appeals for the First Circuit, as well as this Court, has insisted on strict compliance with Rule 9(b). See, e.g., Cutler v. F.D.I.C., 781 F.Supp. 816, 818 (D.Me.1992); Romani v. Shearson Lehman Hutton, 929 F.2d 875, 878 (1st Cir.1991); New England Data Services, Inc. v. Becher, 829 F.2d 286, 290 (1st Cir.1987); Bailey v. Linsco/Private Ledger Corp., 136 F.R.D. 11, 13 (D.Me.1991); In re One Bancorp Securities Litigation, 135 F.R.D. 9, 12 (D.Me.1991). Rule 9(b)'s particularity requirement also applies to private causes of action based on Section 10(b) and Rule 10b-5, such as this one, because "fraud lies at the core of the action." In re One Bancorp, 135 F.R.D. at 12 (quoting Hayduk v. Lanna, 775 F.2d 441, 443 (1st Cir.1985)).

To meet the specificity requirements demanded under Rule 9(b), a complainant alleging fraud must specify "the time, place and content of an alleged false representation, but not the circumstances or evidence from which fraudulent intent could be inferred." Wayne Investment, Inc. v. Gulf Oil Corp., 739 F.2d 11, 13 (1st Cir.1984) (quoting McGinty v. Beranger Volkswagen, Inc., 633 F.2d 226, 228 (1st Cir.1980)). As the Court of Appeals for the First Circuit explained:

The inquiry, however, does not end with the technical compliance of specifying the time, place and content of an alleged misrepresentation. The circumstances of the misrepresentation must be specified; the specific basis for the claim must be alleged.... (citations omitted). A complaint must do more than offer speculation, it must make some step toward showing that `fraud was actually committed.'

Haft v. Eastland Financial Corp., 755 F.Supp. 1123, 1127 (D.R.I.1991) (quoting Wayne Investment, 739 F.2d at 14).

The Amended Complaint at issue here alleges that:

9. Beginning at the end of 1988 and continuing through November 1991, Defendants made representations to Plaintiffs and solicited Plaintiffs to purchase and sell securities through Defendants. At the time Plaintiffs' securities accounts were opened, Defendants knew Plaintiffs lacked sufficient investment experience and financial acumen to enable Plaintiffs to make any informed judgments or decisions about the purchase and sale of the securities recommended by Defendants.⁴

10. At the time Plaintiffs' securities accounts were opened, Defendants knew that Plaintiffs were retired with limited incomes and assets. The Plaintiffs advised Defendants that they were interested in conservative investments that would yield dividend income to supplement their social security income and other limited income. The Defendants knew that Plaintiffs were relying on their expertise in selecting appropriate securities to accomplish their investment objectives.

The Amended Complaint further asserts that immediately prior to each of the purchases and sales made by Defendants on behalf of each Plaintiff, Robert Rice contacted each Plaintiff at home by telephone, from either his office or home, in order to advise them that the stock was appropriately suited to Plaintiffs' financial objectives. Amended Complaint, ¶¶ 12-14.

From the Amended Complaint, as written, the particulars of the fraud allegations are these:

time: from 1988 through 1991, immediately prior to any purchase or sale made by Defendants on behalf of Plaintiffs

place: while Plaintiffs were in their homes and Defendant Rice was at his home or office

content: Defendants knowingly made untrue statements of material facts to Plaintiffs regarding which securities were most appropriate for them (in light of the conservative investment objectives they communicated to him) with the purpose of inducing them to buy/sell certain securities⁵

Taking material allegations as true for the purposes of this motion, this Court finds that Plaintiffs have adequately specified in the Amended Complaint the time, place and content of the alleged fraud. Plaintiffs have alleged that Defendants repeatedly, from 1988-1991, knowingly encouraged Plaintiffs to buy securities that were very high risk, in direct contrast to the conservative investments Plaintiffs allegedly requested. Further, Plaintiffs have furnished Defendants with adequate notice of claims against them and the circumstances from which they arise. It is...