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BASELSKI v. PAINE

May 20, 1981

THOMAS BASELSKI AND ANTOINETTE BASELSKI, PLAINTIFFS,
v.
PAINE, WEBBER, JACKSON & CURTIS, INC., A DELAWARE CORPORATION, AND JACK MOSES, DEFENDANTS.



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

  ORDER

The motion at bar involves purported violations of the Securities Act of 1933, 15 U.S.C. § 77 et seq., and the Securities Exchange Act of 1934, 15 U.S.C. § 78 et seq. In addition, the plaintiffs allege various breaches of the defendants' common law duties. Subject matter jurisdiction of the federal claims is founded upon Section 22(a) of the Securities Act of 1933, 15 U.S.C. § 77v(a), and Section 27 of the Securities Exchange Act of 1934, 15 U.S.C. § 78aa. Jurisdiction of the state claims is founded upon the doctrine of pendent jurisdiction.

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 objectives.

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 Concepts, Inc., an over the counter stock in which defendant had a pecuniary interest.

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 $250,000.

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 ...


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