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VILLAGE OF ARLINGTON HTS. v. PODER

May 3, 1989

VILLAGE OF ARLINGTON HEIGHTS, as subrogee of Village of Arlington Heights Fire Pension Fund and Village of Arlington Heights Police Pension Fund, VILLAGE OF ARLINGTON HEIGHTS FIRE PENSION FUND, and VILLAGE OF ARLINGTON HEIGHTS POLICE PENSION FUND, as principal and as subrogee of Village of Arlington Heights Fire Pension Fund, Plaintiffs,
v.
LEE L. PODER and DREXEL BURNHAM LAMBERT GOVERNMENT SECURITIES, INC., a Delaware Corporation, Defendants


Ilana Diamond Rovner, United States District Judge.


The opinion of the court was delivered by: ROVNER

ILANA DIAMOND ROVNER, UNITED STATES DISTRICT JUDGE

 I. INTRODUCTION

 Three separate complaints *fn1" were filed in this case by the Village of Arlington Heights ("Village"), the Village of Arlington Heights Fire Pension Fund ("Fire Fund"), and the Village of Arlington Heights Police Pension Fund ("Police Fund") *fn2" against Lee L. Poder ("Poder"), the Village's former treasurer, and Drexel Burnham Lambert Government Securities, Inc. ("Drexel") for alleged violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The plaintiffs also assert various Illinois state law claims based on a theory of pendent jurisdiction. Plaintiffs claim that during his tenure as Village treasurer, Poder used the Funds' assets to complete a series of unauthorized and highly speculative trades in government securities. Drexel acted as a broker in executing some of these trades.

 Drexel moved to dismiss the federal securities claims pursuant to Fed. R. Civ. P. 12(b)(6) and 9(b). Drexel also moved for dismissal of the state law claims for lack of pendent jurisdiction, or alternatively, for failure to state a claim upon which relief can be granted. Because the complaints in this case are substantially similar, the Court shall dispose of defendant's motions in a single opinion. For the reasons set forth below, the motions are denied in part and granted in part.

 II. FACTS

 Poder was Treasurer of the Village from approximately May, 1983, to May, 1987. By statute, the Village Treasurer was the custodian of the Funds' assets. The authority to control and manage the assets of the Funds, however, is vested exclusively in their respective boards of trustees. In 1986, Poder opened accounts at Drexel in the name of the Funds. Poder allegedly had no authority to open these accounts and concealed the existence of the accounts from the Village officials and from the Funds' boards of trustees.

 Plaintiffs contend that Poder directed Drexel to execute trades in government securities and repurchase agreements. Drexel allegedly executed trades despite its knowledge that Poder was engaging in "highly speculative" trading, as opposed to "investment" trading more suitable for pension fund assets. As a result of the trading, plaintiffs sustained losses in the amount of commissions paid to Drexel, the reduction of its assets, and other consequential damages.

 Plaintiffs contend that Drexel either knew or acted in reckless disregard of the fact that Poder lacked authority to open the accounts. Plaintiffs allege that Drexel made no effort to determine whether Poder had any authority to open the accounts, nor did Drexel obtain a resolution or other documents from the boards of trustees authorizing the opening of the accounts. Plaintiffs also argue that Drexel owed them a fiduciary duty and that Drexel breached that duty by failing to inquire in a timely manner as to Poder's authority to engage in the transactions.

 III. DISCUSSION

 In ruling on a motion to dismiss, the allegations of "the complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 46, 78 S. Ct. 99, 2 L. Ed. 2d 80 (1957). When considering a defendant's motion to dismiss, the allegations must be viewed in the light most favorable to the plaintiffs. Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S. Ct. 1683, 1686, 40 L. Ed. 2d 90 (1974). Thus, the well-pleaded facts in the complaint must be accepted as true. Ed Miniat, Inc. v. Globe Life Ins. Group, Inc., 805 F.2d 732, 733 (7th Cir. 1986), cert. denied, 482 U.S. 915, 107 S. Ct. 3188, 96 L. Ed. 2d 676 (1987). See also Doe v. St. Joseph's Hospital, 788 F.2d 411, 414 (7th Cir. 1986) (allegations of the complaint, along with the reasonable inferences to be drawn therefrom must be accepted as true).

 A. Section 10(b) of the Federal Securities Laws

 Drexel's first argument is that plaintiffs fail to state a claim under Section 10(b) *fn3" and Rule 10b-5 *fn4" of the federal securities laws. Specifically, Drexel claims that plaintiffs do not allege: (1) material misrepresentations or omissions; (2) fraud "in connection with" the purchase or sale of securities; or (3) "loss causation." Drexel also argues that absent specific allegations of a special duty of trust or confidence, Drexel's only duty to its customers is to faithfully execute trades. Drexel further contends that the complaints fail to state a cause of action for aiding and abetting Poder's violations of the federal securities laws.

 1. Material Misrepresentations or Omissions


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