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POLERA v. ALTORFER

November 14, 1980

JOSEPH F. POLERA, PLAINTIFF,
v.
ALTORFER, PODESTA, WOOLARD AND COMPANY, ALTORFER, PODESTA, WOOLARD AND COMPANY AS SUCCESSOR TO JOHN J. ALTORFER & CO.; MICHAEL J. MIKITA; DANIEL R. HAJDUK; AND MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., DEFENDANTS.



The opinion of the court was delivered by: Bua, District Judge.

ORDER

The matter at bar is an action brought for violations of Section 10(b) of the Securities Exchange Act of 1934, as amended, 15 U.S.C. § 78j(b) [the Exchange Act]; Rule 10b-5 of the Securities and Exchange Commission, 17 C.F.R. § 240.10b-5; Sections 206 and 215 of the Investment Advisers Act of 1940, 15 U.S.C. § 80b-6, 80b-15 [the Advisers Act]; the Illinois Securities Law of 1953, as amended, Ill.Rev.Stat. ch. 121 1/2, § 137.1, et seq.; and the common law of the State of Illinois. Subject matter jurisdiction over the cause is conferred under Section 27 of the Exchange Act, 15 U.S.C. § 78aa; Section 214 of the Advisers Act, 15 U.S.C. § 80b-14; 28 U.S.C. § 1331; and by principles of pendent jurisdiction.

In his five count complaint, the plaintiff herein, Joseph F. Polera, contends essentially that the defendants are guilty of "churning" and of selecting and purchasing for his account securities which were unsuitable to his expressed investment objectives. Presently before the court is the defendants' motion, brought pursuant to Rules 9(b) and 12(b)(1) and (6) of the Federal Rules of Civil Procedure, for an order dismissing the plaintiff's complaint for failure to plead fraud with the requisite specificity.

Viewing the plaintiff's pleadings in light of the particularity requirements of Rule 9(b), Fed.R.Civ.P., it appears that the allegations of fraud which form the basis for this cause have not been well-pleaded. That being so, the defendants' motion to dismiss will, for the reasons stated below, be granted, and the plaintiff's cause will be dismissed, without prejudice, in its entirety.

I.

In Count I of his complaint, the plaintiff alleges that the defendants violated Rule 10b-5 of the Exchange Act by "churning"*fn1 his options account through a series of unsuitable transactions. To adequately plead Rule 10b-5 fraud, a plaintiff must satisfy the particularity requirements of Rule 9(b), Fed.R.Civ.P., Tomera v. Galt, 511 F.2d 504 (7th Cir. 1975); Schaefer v. First Nat'l Bank of Lincolnwood, 509 F.2d 1287, 1297 (7th Cir. 1975); Lincoln Nat'l Bank v. Lampe, 414 F. Supp. 1270, 1278 (N.D.Ill. 1976); such requirements having been imposed to insure that the defendants in question will be given notice of the fraud claimed which is sufficient in nature to permit them to frame adequate responsive pleadings, Felton v. Walston, 508 F.2d 577, 581 (2d Cir. 1974); Todd v. Oppenheimer, 78 F.R.D. 415, 419 (S.D.N.Y. 1978). Accordingly, because a properly pleaded churning claim is cognizable as fraud under federal securities law, Newberger, Loeb & Co., Inc. v. Gross, 563 F.2d 1057, 1070 (2d Cir. 1977); Darrell v. Goodson, CCH Fed.Sec.L.Rep. ¶ 97,349, 97,326 (S.D.N.Y. 1980), conclusory allegations cannot, without more, be considered sufficient to support such a claim, Vetter v. Shearson Hayden Stone, Inc., 481 F. Supp. 64, 66 (S.D.N.Y. 1979); Salwen Paper Co., Inc. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 79 F.R.D. 130, 135 (S.D.N.Y. 1978).

The essence of a churning claim is not a particular trade or group of trades, but rather is the overall amount of trading in the customer's account in light of such considerations as market conditions, size of commissions, and sophistication of the customer. Fey v. Walston & Co., 493 F.2d 1036, 1050 (7th Cir. 1974); Darrell v. Goodson, supra at 97,326. Because that is so, it would serve no useful purpose to require plaintiffs to list in their pleadings every transaction relevant to their claims. Darrell v. Goodson, supra at 97,326. To satisfy the requirements of Rule 9(b) in a claim for churning in violation of Rule 10b-5, the complaint instead should identify the securities involved and should contain a statement of facts which is sufficient to, at the very least, permit a rough ascertainment of either the turnover ratio or the percentage of the account value paid in commissions. Vetter v. Shearson Hayden Stone, Inc., supra 481 F. Supp. at 66; Salwen Paper Co., Inc. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., supra at 135.

In Count I of his complaint, the plaintiff's allegations clearly lack the specificity required by Rule 9(b). Without more, his statement therein regarding his initial investment, the number of transactions per year, and the aggregate commission charges per year during the period the defendants exercised control over his account (Complaint ¶ 15) does not provide the means of comparison necessary to determine whether his account had been excessively traded. Hecht v. Harris, Upham & Co., 430 F.2d 1202, 1209-10 (9th Cir. 1970); Carroll v. Bear, Stearns & Co., 416 F. Supp. 998, 1000-01 (S.D.N.Y. 1976). The information provided in the complaint also is insufficient to permit calculation of the defendants' commissions as a percentage of account equity, on either a monthly or year-to-date basis.*fn2

With regard to his claim of unsuitability, the plaintiff alleges only that the defendants traded without consideration of his investment needs or objectives (Complaint ¶ 14). To properly plead a claim of this nature, however, the plaintiff must specifically identify the securities transactions at issue, and indicate why they were unsuitable. Vetter v. Shearson Hayden Stone, Inc., supra at 66; Rotstein v. Reynolds & Co., 359 F. Supp. 109, 114 (N.D.Ill. 1973).

Accordingly, as plaintiff Polera has failed to plead the churning and unsuitability he alleges with the particularity required by Rule 9(b), Count I of his complaint will be dismissed.

II.

In Count II of his complaint, Polera charges that the defendants acted in a manner violative of Sections 206 and 215 of the Advisers Act.*fn3 As regards this count, the court will, for purposes of the present motion, assume that at all times relevant an agreement, cognizable under the Advisers Act, existed between plaintiff Polera and the defendants. Conley v. Gibson, 355 U.S. 41, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957). That fact aside, however, before his claim in Count II can be considered adequate, plaintiff Polera also must demonstrate that the defendants were "investment advisers" subject to the provisions of the Advisers Act. Cortlandt v. E.F. Hutton, Inc., 491 F. Supp. 1, CCH Fed.Sec.L.Rep. ¶ 97,173, 96,482 (S.D.N.Y. 1979).

To state a claim under the Advisers Act, a plaintiff first must overcome the threshold limitation imposed by the statutory definition of "investment adviser."*fn4 In most instances, this can be accomplished through an allegation that special compensation was paid to the defendants for services rendered which were not solely incidental to their brokerage business. Darrell v. Goodson, supra at 97,328; Cortlandt v. E.F. Hutton, Inc., supra 491 F. Supp. at 5, CCH Fed.Sec.L.Rep. at ¶ 96,482. The absence of such an allegation in the present cause, however, is alone sufficient to justify dismissal of Count II.

Count II, though, can also be dismissed for failing to satisfy the requirements of Rule 9(b). Because the basis for a violation of Section 206 of the Advisers Act is a fraudulent transaction, a claim founded upon that statute is one which necessarily must be pleaded with Rule 9 specificity. Jones v. Equitable Life Assurance Society, 409 F. Supp. 370, 375 (S.D.N.Y. 1975). Count II, having merely ...


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