The defendant's citation of Tarasi v. Pittsburgh National
Bank, 555 F.2d 1152 (3d Cir. 1977) is apposite. That case
discusses whether the defense of in pari delicto is
appropriately raised in the context of a suit for the
enforcement of a regulatory statute. It concludes that such a
defense is available in limited circumstances in a securities
fraud case. After an analysis of the Supreme Court's decision
in Perma Life Mufflers, Inc. v. International Parts Corp.,
392 U.S. 134, 88 S.Ct. 1981, 20 L.Ed.2d 982 (1968), the Third
Circuit concluded that "a plaintiff may be deprived of a
recovery only if his fault is substantially equal to that of
defendant." 555 F.2d at 1161. In the context of liability based
on section 20 of the Act, we think that the fault must be equal
to that of the controlled rather than the controlling person
and even if we are wrong in this conclusion, it would be hard
to imagine that the plaintiffs were at fault at all unless the
defendant could show that they had something approaching actual
notice of the rules upon which defendants rely. We think this
narrow application of the common law defense of in pari delicto
in this regulatory setting is consistent with the Supreme
Court's decision in Perma Life and the Third Circuit's careful
analysis in Tarasi. Moreover, we think that the Seventh
Circuit's decision in Sundstrand Corp. v. Sun Chemical Corp.,
553 F.2d 1033 at 1050-51 (7th Cir. 1977), supports our
conclusion. In that case the court stated that the defense that
a plaintiff failed to exercise due care or diligence was not
available in an intentional fraud case under the Securities
Exchange Act of 1934. The court then went on to deal with the
issue of the causal connection between the fraud of the
defendant and the injury to the plaintiff.*fn2 In this respect
the Seventh Circuit's opinion in Sunstrand sheds light on the
proper application of the doctrine of in pari delicto as a
defense to a securities fraud action. The proper analysis would
seem to require consideration of the extent to which the
allegedly illegal act of the plaintiff in entering into the
transaction contributed to the loss suffered by plaintiff.
Obviously this depends on the plaintiffs' knowledge of the
broker's violation of the rules relied on by Investors, and
this question cannot be resolved on the pleadings.
As to the remainder of defendant's argument in regard to the
deficiencies of plaintiffs' federal claims, we simply note
that common law fraud standards are not applied in determining
whether a statement is violative of Rule 10b-5. Defendant's
argument with regard to plaintiffs' "unsuitability" claim in
Count III is rejected as it relates to pleading deficiencies.
Finally, we address defendant's motion to dismiss Counts V,
VI and VII of the second amended complaint. These counts seek
damages for breach of fiduciary duty, negligence, and wilful
and wanton conduct respectively and are based on Illinois law.
We think that as to Count V the plaintiffs have adequately
pleaded a claim for breach of fiduciary duty since the entire
complaint deals with a presumptively fiduciary relationship,
i.e., the relationship of principal and agent. In re Jarmuth's
Estate, 329 Ill. App. 619, 70 N.E.2d 336 (1947). Even if we do
not treat the broker-client relationship as presumptively
fiduciary in nature, under Illinois law, see e.g., Fey v.
Walston & Co., Inc., 493 F.2d 1036 at 1049 (7th Cir. 1974), we
note that plaintiffs' allegations are sufficient to withstand a
motion to dismiss for failure to state a claim upon which
relief can be granted. Conley v. Gibson, 355 U.S. 41, 78 S.Ct.
99, 2 L.Ed.2d 80 (1957). See also Roberts v. Sears, Roebuck &
Co., 573 F.2d 976 at 983 (7th Cir. 1978). Moreover, whether or
not Altschul was acting within the scope of his employment may
be disputed but it is adequately pleaded.
As to Counts VI and VII, we think that plaintiff has
adequately pleaded facts constituting negligent and wilful and
wanton conduct in the handling of plaintiffs' account. The
doctrine of respondeat superior
is available under these tort theories to hold Altschul's
employer liable for its employee's negligent or reckless
conduct within the scope of his employment.
Therefore, defendant Investors Associates, Inc.'s motion to
dismiss is denied.