The opinion of the court was delivered by: Bua, District Judge.
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.
The plaintiffs, Thomas and Antoinette Baselski, bring this
action against defendant Paine, Webber, Jackson & Curtis, Inc.
("Paine Webber"), and its agent, defendant Jack Moses. Counts
I through IV of the
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 ...