The opinion of the court was delivered by: Tone, District Judge.
This action arises out of alleged commodities futures trading
by the corporate defendants with funds deposited by plaintiff and
other members of the purported class of some 90 individuals on
whose behalf he seeks to bring this action. The allegations of
the complaint are in substance as follows:
The corporate defendants were engaged in the business of
trading in commodities futures as registered commission merchants
or as floor brokers acting under the authority of the Commodity
Exchange Act (7 U.S.C. § 1ff). Defendant Ness was not a
registered broker or customer's man under that Act.
Plaintiff and those he seeks to represent were induced to
deposit large sums of money with one or more of the corporate
defendants by defendant Ness' representations "that profits would
result from Defendants' efforts." All alleged class members, who
were "unsophisticated investors," deposited funds "under the same
or similar factual conditions." The corporate defendants
established trading accounts for each of the customers and then
wrongfully commingled the deposits.
Plaintiff invokes the Commodity Exchange Act, 7 U.S.C. § 4 and
6(b); the Securities Act of 1933, 15 U.S.C. § 77q(a); and the
Securities Exchange Act of 1934, 15 U.S.C. § 78o(c)(1) and
78j(b), and Securities and Exchange Commission Rule 10(b)(5),
17 C.F.R. § 240.10b-5. Defendants have moved to dismiss the class
allegations and the allegations of federal securities law
violations.
Class actions are maintainable under Rule 23(b)(3),
F.R.Civ.P., upon which plaintiff relies, only when the
prerequisites of subdivision (a) of the rule are satisfied, and,
in addition, when "the court finds that the questions of law or
fact common to the members of the class predominate over any
questions affecting only individual members, and that a class
action is superior to other available methods for the fair and
efficient adjudication of the controversy." The complaint raises
certain questions of law and fact applicable to all members of
the prospective class. It is apparent, however, from plaintiff's
allegations, vague as they are, that there are numerous important
issues of fact that relate only to individual members. He does
not allege a representation or series of representations common
to all customers. It appears from the complaint that at least
some, if not all, customers had trading accounts with one and not
other corporate defendants. Although it is alleged that all
customers made deposits "under the same or similar factual
conditions," it is apparent that, the nature of the agreement
between each customer and the corporate defendant with which he
had an account would have to be the subject of separate evidence.
The same is true of the representations by defendant Ness to each
customer and that customer's reliance on the misrepresentations.
The trading transactions made on behalf of, or allocated to, one
customer would be different from those made on behalf of, or
allocated to, some, if not all, other customers.
Actions asserting fraud, securities laws violations, or other
similar wrongs are not likely to be suitable for class treatment
if they are founded on oral misrepresentations which are not
common to all members of the purported class. The Advisory
Committee on the Federal Rules of Civil Procedure observed in the
1966 Committee Note that "a fraud case may be unsuited for
treatment as a class action if there was material variation in
the representations made or in the kinds or degrees of reliance
by the persons to whom they were addressed." (3B Moore's Federal
Practice 23-29 (2d ed. 1969).) See also 6 Loss, Securities
Regulation 3947-3950 (2d ed. 1969 Supp.): "The propriety of a
class action when misstatements are oral is generally considered
to be doubtful;" and see Bromberg, Securities Laws, ¶ 11.6 at 258
n. 33.1 (1969).
In Moscarelli v. Stamm, 288 F. Supp. 453, 462 (E.D.N.Y. 1968)
allegations of fraudulent representations inducing trades and of
churning and violation of margin requirements by the defendant
securities brokers were held unsuited for class treatment. The
Court said:
See also Morris v. Burchard, 51 F.R.D. 530, 535 (S.D.N.Y. 1971);
Lah v. Shell Oil Co., 50 F.R.D. 198 (S.D.Ohio 1970). With respect
to the allegations of churning, which are also made in the case
at bar, the Court in Moscarelli said:
"A reading of the churning cases illustrates the
personal character of most of the contacts involved
in this tort." (288 F. Supp at 462.)
With respect to the alleged margin violations, the Court pointed
out that there would be individual issues with respect to the
participation of the customer, which would depend upon his
sophistication and the nature of his arrangements with the
broker.
In the case at bar there are "individualized" issues as to
misrepresentation, reliance, and agreement, all "susceptible of
material variations." In addition, the wrongs alleged to have
occurred after the trading agreements were entered into, i.e.,
commingling, unauthorized trading, allocations of profits and
loss, and churning of accounts, are also to a large extent
"individualized" and "susceptible of material variations," and,
like the alleged margin violations in Moscarelli, may be
actionable or not ...