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RUSSO v. BACHE HALSEY STUART SHIELDS

November 18, 1982

SARA RUSSO, DAVID RUSSO, MARY ANN PARKER, PLAINTIFFS,
v.
BACHE HALSEY STUART SHIELDS, INC., DEFENDANT.



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

  MEMORANDUM OPINION AND ORDER

Plaintiffs Sara Russo, David Russo and Mary Ann Parker have sued defendant Bache Halsey Stuart Shields, Inc. ("Bache") for securities fraud under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b),*fn1 Rule 10(b)5, 17 C.F.R. § 240.10b-5,*fn2 several rules of the Chicago Board of Options Exchange,*fn3 Section 5(b) of the Securities Act of 1933, 15 U.S.C. § 77e(b)(2),*fn4 Regulation T of the Federal Reserve Board, 12 C.F.R. § 220.4(e)(2),*fn5 as well as various state law claims. Jurisdiction is asserted pursuant to 28 U.S.C. § 1332 and 28 U.S.C. § 1331. Presently before the Court is Bache's motion to dismiss plaintiffs' complaint pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure for failure to state a claim upon which relief can be granted. For reasons stated below, Bache's motion is granted in part and denied in part.

Plaintiffs have alleged that they each opened stock option accounts at Bache through an account executive, Phillip Reznick, in January 1981. According to plaintiffs, Bache subsequently engaged in a variety of acts and omissions, such as, inter alia, failing to deliver a prospectus, churning plaintiffs' accounts and making false representations, in violation of the aforementioned statutes, regulations and rules. In its motion to dismiss, Bache asserts that plaintiffs' complaint: (1) improperly joins several parties, in violation of Rule 20 of the Federal Rules of Civil Procedure; (2) fails to comply with Rules 8(a) and 9(b) of the Federal Rules of Civil Procedure; (3) fails to state a cause of action, in that the Chicago Board of Options Exchange Rules and Regulation T of the Federal Reserve Board, 12 C.F.R. § 220.4(e)(2), do not give rise to private rights of action; (4) insofar as it alleges violations of §§ 5 and 12 of the Securities Act of 1933, 15 U.S.C. § 77e and § 771 is barred by the statute of limitations set forth in § 13 of that Act, 15 U.S.C. § 77m, and in § 29 of the Securities Exchange Act of 1934, 15 U.S.C. § 78cc; and (5) fails to allege claims of common law fraud, breach of fiduciary duty, and breach of promise. When considering a motion to dismiss, the allegations of the complaint must be viewed in the light most favorable to the plaintiff. Conley v. Gibson, 355 U.S. 41, 45, 78 S.Ct. 99, 102, 2 L.Ed.2d 80 (1957); Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686,40 L.Ed.2d 90 (1974). With these standards in mind, each of Bache's arguments will be considered in turn.

Improper Joinder

Bache argues that the facts and circumstances concerning the three plaintiffs are substantially different, for their level of investment sophistication, financial positions, trades and losses varied, and the allegations made by the plaintiffs differ. Thus, according to Bache, plaintiffs are improperly joined in violation of Rule 20 of the Federal Rules of Civil Procedure, and they should therefore be severed pursuant to Rule 21. Rule 20 provides that:

  All persons may join in one action as plaintiffs
  if they assert any right to relief jointly,
  severally, or in the alternative in respect of or
  arising out of the same transaction, occurrence,
  or series of transactions or occurrences and if
  any question of law or fact common to all these
  persons will arise in the action.

Under the Federal Rules of Civil Procedure, "joinder of claims, parties and remedies is strongly encouraged." United Mine Workers of America v. Gibbs, 383 U.S. 715, 724, 86 S.Ct. 1130, 1138, 16 L.Ed.2d 218 (1966). For joinder of parties to be proper, there must be both common questions of law or fact and the rights asserted must arise out of the same transaction or series of transactions. Magnavox Co. v. APF Electronics, Inc., 496 F. Supp. 29, 34 (N.D.Ill. 1980). It is clear from the complaint herein that Sara Russo, David Russo and Mary Ann Parker dealt with the same account executive, Phillip Reznick, at Bache. The complaint further alleges transactions involving Mr. Reznick, Sara Russo and David Russo, as well as Mr. Reznick, Sara Russo and Mary Ann Parker.*fn6 The causes of action thus arise out of a series of transactions among plaintiffs and the agents of Bache. Moreover, plaintiffs present common questions of fact and law under the statutes, regulations and rules they have evoked. For these reasons, plaintiffs are properly joined in this action.

Rule 8(a) and Rule 9(b)

Bache argues that the complaint fails to comply with pleading requirements set forth in the Federal Rules of Civil Procedure. Count I of the complaint alleges violations of Section 10(b) and Rule 10(b)5 of the federal securities laws; Fed.R.Civ.P. 9(b) governs the pleading of Section 10(b) and Rule 10(b)5 claims, Schaefer v. First National Bank of Lincolnwood, 509 F.2d 1287, 1297 (7th Cir. 1975), cert. denied, 425 U.S. 943, 96 S.Ct. 1682, 48 L.Ed.2d 186 (1975), and Rule 9(b) must be read together with Rule 8. Tomera v. Gait, 511 F.2d 504, 508 (7th Cir. 1975). Rule 8(a)(2) requires that a complaint contain "a short and plain statement of the claim showing that the pleader is entitled to relief. . . ." Rule 9(b), however, states that "circumstances constituting fraud or mistake shall be pleaded with particularity." Simply reciting conclusory allegations that defendant's conduct was fraudulent or in violation of Section 10 or Rule 10(b)5 does not satisfy Rule 9(b). Garner v. Enright, 71 F.R.D. 656, 658 (E.D. N Y 1976). A plaintiff alleging securities fraud must specifically allege the acts or omissions upon which his or her claim rests. Ross v. A.H. Robins Co., 607 F.2d 545, 557 (2d Cir. 1979), cert. denied, 446 U.S. 946, 100 S.Ct. 2175, 64 L.Ed.2d 802 (1980).

In the instant case, Count I of the complaint adequately sets forth the time periods and contents of the allegedly false representations, the alleged omissions of allegedly material facts, as well as the identity of the individuals who made them. Thus, the defendant has received the proper notice to which it is entitled. Darling & Co. v. Klouman, 87 F.R.D. 756, 758 (N.D.Ill. 1980). Plaintiffs have supplied, as they must, a brief sketch of the allegedly fraudulent transactions, where and when they occurred and the individuals involved. Tomera v. Galt, 511 F.2d 504, 509 (7th Cir. 1975); Alco Financial Services v. Treasure Island Motor Inn, 82 F.R.D. 735, 737 (N.D. Ill. 1979). We therefore decline to dismiss Count I of plaintiffs' complaint in its entirety.*fn7

However, insofar as Count I seeks damages for churning*fn8 of plaintiffs' options accounts, it is dismissed. Under federal securities law, churning is cognizable as fraud, Newburger, Loeb & Co. v. Gross, 563 F.2d 1057, 1070 (2d Cir. 1977), cert. denied, 434 U.S. 1035, 98 S.Ct. 769, 54 L.Ed.2d 782 (1978). Churning does not involve a single trade or transaction, but rather, a series of transactions which are excessive in light of market conditions, commission size and customer sophistication. Fey v. Walston & Co., 493 F.2d 1036, 1050 (7th Cir. 1974); Polera v. Altorfer, Podesta, Woolard & Co., 503 F. Supp. 116, 118 (N.D.Ill. 1980). While at least one court has held that a complaint for churning need not provide specific detail to support its allegations, Kaufman v. Magid, Fed.Sec.L.Rep. (CCH) ¶ 98713 (D.Mass. 1982), other courts have required considerably greater specificity, Vetter v. Shearson Hayden Stone Inc., 481 F. Supp. 64, 66 (S.D. N Y 1979); Zaretsky v. E.F. Hutton & Co., 509 F. Supp. 68, 74 (S.D.N.Y. 1981). In our view, the better rule is that specificity is required when pleading churning. See, e.g., Baselski v. Paine, Webber, Jackson & Curtis, Inc., 514 F. Supp. 535, 541 (N.D.Ill. 1981). A plaintiff in pleading a churning claim must identify the securities involved, the nature, amount and dates of transactions in issue, as well as sufficient facts to allow for a determination of the turnover ratio in the account and/or the percentage of the account value paid in commissions. Shelley v. Noffsinger, 511 F. Supp. 687, 692 (N.D.Ill. 1981). In the instant case, the complaint fails to plead churning with the requisite specificity, and, therefore, paragraph F of Count I must be dismissed.

     Implied Private Rights of Action Under Chicago Board of
                     Options Exchange Rules

In Count II, plaintiffs allege that the identical factual allegations which gave rise to the violations of Section 10(b) and Rule 10(b)5 alleged in Count I of the complaint also violated several rules of the Chicago Board of Options Exchange ("CBOE"). Bache, in its motion to dismiss, asserts that the federal securities laws do not create a private right of action for violations of CBOE rules.

In Buttrey v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 410 F.2d 135 (7th Cir.), cert. denied, 396 U.S. 838, 90 S.Ct. 98, 24 L.Ed.2d 88 (1969), the Court of Appeals for the Seventh Circuit held that a violation of the New York Stock Exchange ("NYSE") Rule 405, when accompanied by allegations of fraud, stated an implied private right of action. Id. at 142. In so holding, the court discussed Colonial Realty Corp. v. Bache & Co., 358 F.2d 178 (2d Cir.), cert. denied, 385 U.S. 817, 87 S.Ct. 40, 17 L.Ed.2d 56 (1966), which emphasized that stock exchange rules can play an integral part in SEC regulation. The Court in Buttrey added that Rule 405 was designed in part to protect the public, and that a private action for its violation was consistent with the purposes of the Securities Exchange Act of 1934, 15 U.S.C. § 78a-78kk. Id. at 181-82. Moreover, in Sanders v. John Nuveen & Co., 554 F.2d 790 (7th Cir. 1977), cert. denied, 450 U.S. 1005, ...


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