plaintiffs' thirty-seven page complaint allege violations of
Sections 10(b), 15(c)(1) and 15(c)(2) of the Securities
Exchange Act of 1934, 15 U.S.C. § 78j and 78o, and Section
17(a) of the Securities Act of 1933, 15 U.S.C. § 77q. Counts V
and VI are founded upon alleged violations of Rules 405 and
342(a) of the New York Stock Exchange, these rules promulgated
pursuant to the authority granted in Sections 6 and 19 of the
Securities Exchange Act of 1934, 15 U.S.C. § 78f and 78s. In
addition, Counts VII through IX allege various breaches of the
defendants' common law fiduciary duties and charge defendants
with the tort of misrepresentation.
Defendants have moved to dismiss the plaintiffs' amended
complaint on various grounds. Defendants contend that many of
the transactions complained of are barred by the applicable
period of limitations and that plaintiffs have failed to
allege facts sufficient to invoke the equitable tolling
doctrine. In addition, defendants move for dismissal of Counts
I through IV for failure to plead fraud with the particularity
required by Rule 9(b), Fed.R.Civ.P., dismissal of Counts V and
VI for failure to state a claim upon which relief may be
granted, and defendants request that the state claims be
severed and referred to arbitration pursuant to the investment
agreement between the parties.
The plaintiffs have alleged in Count I of their complaint
that they began trading with the defendants in 1972, and that
these activities were conducted in accordance with an oral
agreement. At this time, the plaintiffs informed the
defendants that their investment objectives were conservative
and that they wished to avoid speculative transactions. The
plaintiffs continued to trade under this arrangement through
early 1974. In February, 1974, in reliance upon the advice and
recommendation of defendant Jack Moses, the plaintiffs
executed an "Option Trading Agreement" and "Customer
Agreement" with defendant Paine Webber. At this time
plaintiffs again reiterated their conservative investment
In connection with the opening of and subsequent trading in
this account, the plaintiffs allege that defendant Jack Moses
falsely informed them that defendants would: deal fairly with
them; utilize expert investment counseling in the management
of their account; implement the plaintiffs' stated investment
objectives, and further advised that margin trading was
suitable for this objective. The plaintiffs also allege that
the defendants falsely stated that the turnover ratio in their
account was normal, and that the amount of the defendants'
commissions was also normal.
In addition, the plaintiffs have alleged that the defendants
failed to disclose that margin trading exposed them to greater
risks, additional capital investment, and that the defendants
would liquidate stable income producing securities to meet
margin calls. The plaintiffs further allege that the
defendants failed to disclose that they would purchase and
sell securities in excess of the amount authorized, that the
defendants were managing their account more for their benefit
than for the plaintiffs, and that the defendants would make
substantial profit as a result of excessive trading.
Plaintiffs also allege that defendants, with intent to
defraud, failed to follow the plaintiffs' stated investment
instructions by recommending highly speculative securities,
placing plaintiffs in option positions which were inconsistent
with their investment objectives, and by recommending
transactions without the benefit of adequate research or
consideration of the plaintiffs' investment objectives.
The plaintiffs specifically allege that in August, 1978,
defendant Jack Moses induced them to purchase stock in U V
Industries, Inc. and that shortly thereafter defendant
converted this stock into warrants of the same company. These
securities were purchased in an amount in excess of that
authorized by the plaintiffs, and the defendants failed to
follow their express authorization to sell these securities.
In addition, the plaintiffs contend that defendant Jack Moses
fraudulently induced them to purchase debentures of Marketing
Inc., an over the counter stock in which defendant had a
At all times relevant to their complaint (1974 through
1978), the plaintiffs contend that they were naive and
unsophisticated investors who placed complete trust and
confidence in the defendants' investment expertise and that
defendants, were aware of their unsophistication and reliance.
As a result of the foregoing acts, omissions, or
misrepresentations, the plaintiffs claim $250,000 in damages.
Count II of their complaint, incorporates by reference the
foregoing and alleges that the defendants assumed de facto
discretionary control over their account. In addition, the
plaintiffs allege that the defendants fraudulently and
intentionally bought and sold securities at an excessive rate,
engaged in multiple trading in identical securities, and
recommended that plaintiffs purchase and sell securities for
the purpose of generating commissions. As a result of these
transactions, defendants received commissions in excess of
$81,000 and the plaintiffs suffered losses in excess of
Count III of the complaint incorporates by reference the
allegations of Count II and alleges that the defendants
fraudulently induced the plaintiffs to purchase and sell over
the counter securities, specifically Marketing Concepts, Inc.
debentures in violation of Sections 15(c)(1) and 15(c)(2) of
the Securities Exchange Act.
Count IV incorporates by reference the allegations of Count
II and alleges that the defendants have violated Sections
17(a)(1), (2) and (3) of the Securities Act of 1933, and
further alleges that the defendant Paine Webber was a
"controlling person" within the meaning of Section 15 of the
Securities Act of 1933.
Counts V and VI of the plaintiffs' complaint incorporate by
reference all of the allegations of Count II. In addition,
Count V alleges that defendant Jack Moses failed "to use
diligence" in the supervision of the plaintiffs' account in
contravention of New York Stock Exchange Rule 405. Count VI
alleges that defendant Paine Webber failed to "reasonably
supervise and control" the activities of defendant Jack Moses
in violation of New York Stock Exchange Rule 342(a).
Counts VII through IX, as previously set forth, charge
defendants with violations of their fiduciary duties and the
tort of misrepresentation. Because these claims will be
severed and referred to arbitration, the pleadings contained
therein will not be summarized.
Motion to Strike and Dismiss Counts I through IV as
Barred by the Statute of Limitations
This action commenced with the filing of the plaintiffs'
original complaint on June 19, 1980. The transactions in
controversy allegedly span the period from February 1974
through some undisclosed point in time in 1978. The parties
agree that the applicable period of limitations is three years
from the date of the allegedly fraudulent transaction. See
Parrent v. Midwest Rug Mills, Inc., 455 F.2d 123 (7th Cir.
1972). The parties further agree that accrual of the claim is
subject to tolling by the "discovery rule." See Hupp v. Gray,
500 F.2d 993 (7th Cir. 1974). Defendants contend, however, that
plaintiffs have failed to plead facts sufficient to invoke this
In Parrent, supra, the Seventh Circuit Court of Appeals
recognized that the statute of limitations in a 10(b) action
may be tolled by the equitable doctrine of fraudulent
concealment, however, the plaintiff's ignorance of the fraud
must not be a result of a lack of diligence on his part.
Equally well established is the requirement that, in the event
that the applicable period of time has elapsed, the plaintiff
has the burden of showing that he exercised "reasonable care
and diligence in seeking to learn facts which would disclose
the fraud." Hupp v. Gray, 500 F.2d 993, 996 (7th Cir. 1974).
Relevant to this inquiry is the relationship of the parties,
the nature of the fraud alleged, the opportunity to discover
the fraud and the subsequent actions of the defendant. Morgan
v. Koch, 419 F.2d 993, 997 (7th Cir. 1969). When the plaintiff
possession of those facts which would place a reasonable
person on notice of the fraud, the cause of action accrues and
the period of limitations begins to run.
As previously noted, the transactions in controversy
allegedly span the period from February, 1974 through 1978.
Those transactions which occurred prior to June 19, 1977,
three years prior to commencement of this action, are
therefore barred on the face of the complaint in the absence
of allegations asserting either active concealment, or the
inability to discover the fraud despite diligence, and the
date upon which the plaintiff became aware of the fraud.
Timmreck v. Munn, 433 F. Supp. 396, 404 (N.D.Ill. 1977).
In the present case, the plaintiffs have alleged their
investment naivete, complete trust and repose placed in the
defendants, and the defendants' active concealment of their
fraud in response to their inquiries.*fn1 Given the nature of
the fraudulent activity claimed, churning, and the alleged
unsophistication of the plaintiffs, the court believes that
the plaintiffs have plead facts sufficient to invoke the
doctrine of equitable tolling. Hupp v. Gray, 500 F.2d 993 (7th
Cir. 1974). This is especially true where, as in the present
case, the defendants have an affirmative duty of disclosure.
Rutledge v. Boston Woven Hose & Rubber Co., 576 F.2d 248, 250
(9th Cir. 1978).
For these reasons, the defendants' motion to dismiss Counts
I through IV, as barred by the statute of limitations, is
Motion to Dismiss Counts I through IV for Failure to Plead
Fraud with Particularity
The defendants have also moved to dismiss Counts I through
IV of the plaintiffs' amended complaint for failure to plead
fraud with particularity as required by Rule 9(b),
Fed.R.Civ.P. The plaintiffs do not contest the applicability
of this rule. 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). They contend, however, that given the
number of transactions at issue, their complaint has met this
The specificity requirements of Rule 9(b), Fed.R.Civ.P.,
have been imposed to ensure that the defendant has been
apprised of the fraud claimed in a manner sufficient to permit
the framing of adequate responsive pleadings. Felton v.
Walston, 508 F.2d 557, 581 (2d Cir. 1974). This requirement
must be read in conjunction with Rule 8, Fed.R.Civ.P., which
requires a short and plain statement of the claim. Tomera v.
Galt, supra at 508. Generally, a complaint is considered
sufficient when it sets forth the time, place and substance of
the allegedly false representations, as well as the identity of
the individual making the representations, and what was
allegedly obtained thereby. Wright & Miller, Federal Practice
and Procedure: Civil § 1297. The sufficiency of a
pleading under this rule also varies with the complexity of the
transaction. When the transactions are numerous and take place
over an extended period of time, less specificity is required.
Fulk v. Bagley, 88 F.R.D. 153, Fed.Sec.L.Rep., (C.L.16), ¶
97,640 (M.D.N.C. 1980). For these reasons, the court believes
that a complaint, complies with Rule 9(b), Fed.R.Civ.P., when
the allegations provide the defendant with fair notice of the
fraud claimed and, at the same time, evidences a reasonable
belief on the part of the plaintiff that there is merit to the
claim, Fulk, supra, 88 F.R.D. 153, Fed.Sec.L.Rep. (C.L.16) at ¶
In the present case, Counts I, III and IV sufficiently
comport with the requirements of Rule 9(b), Fed.R.Civ.P. The
complaint sets forth the time, place and contents of the
allegedly false representations, as well as the identity of
the individual who made them, and what was obtained thereby.
These averments describe the
"bare bones" of the allegedly fraudulent scheme. Tomera v.
Galt, supra at 508.*fn2
For this reason, the defendants' motion to dismiss will be
denied as to Counts I, III, and IV.
In Count II of the amended complaint, the plaintiffs allege
that defendants violated the Securities and Exchange Act by
"churning" their options account through a series of
unsuitable transactions.*fn3 The essence of a churning claim
is not a particular transaction, it is the aggregation of
transactions, allegedly excessive in number, judged in
relation to the plaintiff's investment objectives and the
market conditions at that time. Fey v. Walston, 493 F.2d 1036
(7th Cir. 1974). For this reason, it serves no useful purpose
to require the plaintiffs to list with particularity every
transaction relevant to their claim. However, to satisfy the
specificity requirements of Rule 9(b), the complaint should, at
a minimum, set forth a statement of fact which would permit a
determination of either the turnover ratio of the account,*fn4
or the percentage of the account value paid in
commissions.*fn5 Vetter v. Shearson Hayden Stone, Inc.,
481 F. Supp. 64, 66 (S.D.N.Y. 1979); Salween Paper Co., Inc. v.
Merrill Lynch, Pierce, Fenner & Smith, Inc., 79 F.R.D. 130, 135
Measured against this requirement, Count II fails to plead
churning with the requisite specificity. The complaint fails
to allege the account value and therefore the information
provided is insufficient to calculate the defendants'
commissions as a percentage of the account equity. Nor does
the complaint allege facts from which the turnover ratio could
be ascertained. For these reasons, Count II of the complaint
Motion to Dismiss Counts V and VI for Failure to State a Claim
Upon Which Relief May Be Granted
Counts V and VI of the amended complaint charges violations
of Rules 405