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
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
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
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
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 incorporated the conclusory allegations of
fraud set forth in Count I, clearly lacks such specificity.
In Count V of his pleading, the plaintiff, after first
contending that the defendants' conduct was violative of the
rules of several self-regulatory organizations,*fn5
seeks to recover based upon an implied private right of action
for violation of those rules. In this regard, however, it is well
settled that a federal private right of action based upon alleged
violations of exchange rules can be implied only if the
plaintiff's allegations of fraudulent conduct are pleaded with
the requisite specificity. Sanders v. John Nuveen & Co., Inc.,
554 F.2d 790, 796-97 (7th Cir. 1977); SEC v. First Securities Co.
of Chicago, 463 F.2d 981, 988 (7th Cir.), cert. denied sub nom.
McKy v. Hochfelder, 409 U.S. 880, 93 S.Ct. 85, 34 L.Ed.2d 134
(1972). That being so, as it has already been established that
plaintiff Polera's conclusory allegations of fraud do not satisfy
the requirements of Rule 9(b), Count V also will be dismissed.
The claims raised by the plaintiff in Counts III and IV of his
complaint deal with the defendants' alleged breach of their
common law fiduciary duties to him [Count III], and with
purported violations of Illinois securities law [Count IV].
Federal jurisdiction over these state law claims, it is
contended, can be founded on principles of pendent jurisdiction,
based upon the relationship between said claims and the federal
securities law violations set out in Counts I, II, and V. Counts
I, II and V, though, having already been dismissed, no longer
provide a viable foundation for the continued exercise of
jurisdiction over Counts III and IV. Because that is the
situation, this court will, at least for the present, decline to
exercise its discretion to hear those matters raised in Counts
III and IV. United Mineworkers v. Gibbs, 383 U.S. 715, 86 S.Ct.
1130, 16 L.Ed.2d 218 (1966). Accordingly, these counts will be
dismissed, without prejudice, for lack of subject matter
In summary, the following is directed:
(1) The defendants' motion to dismiss Counts I, II and V of the
plaintiff's complaint for failure to comport with the
requirements of Rule 9(b), Fed.R.Civ.P., is GRANTED, and said
counts are ordered dismissed. This dismissal, however, is without
prejudice to the plaintiff's ability to amend these counts, by
December 19, 1980, to, if possible, remedy the defects noted.
(2) Counts III and IV of the plaintiff's complaint are ordered
dismissed, without prejudice, for lack of subject matter
jurisdiction. Rule 12(b)(1), Fed.R.Civ.P. If the claims presented
in Counts III and IV are refiled on or before December 19, 1980,
and such is done in conjunction with the filing of the
plaintiff's amended pleading concerning Counts I, II and V,
consideration will again be given to whether pendent jurisdiction
should be exercised with respect to them.
IT IS SO ORDERED.