Defendant did not expressly state, until March 1981, that the original cost was not necessarily the current market value. It would have been well advised to do so, if for no other purpose than the avoidance of this and other lawsuits. Plaintiffs try to tease from that, however, a fraudulent scheme, and that they cannot do. The information provided always indicated that "value" was carried at the cost price, without any attempt to estimate or establish the current market price. That scenario is not the stuff of a fraudulent scheme, or even, in the circumstances here alleged, of a negligent misrepresentation.
Plaintiffs argue that although the "#" appeared next to the price amount, there was no such symbol next to the value or net worth amounts, and it was not reasonable for them to have known that those pieces of information were related. We disagree. It is apparent from even a cursory review of the client statements that the "value" column relates to the "price" column. On the same line of the statement the "quantity" of the direct investment is recorded, then the "price" (with the "#" next to the amount), followed by the "value." The quantity multiplied by the price equals value.
And the sum of the figures in the value column equals the "net worth." We must assume that plaintiffs are persons of at least ordinary intelligence and that they realized that Prudential's disclosure as to the price of the direct investments was related to the value of those investments.
Plaintiffs can neither disavow the disclosures in the statements nor can they ask this court to ignore the remaining pieces of information available to them. Teamsters Local 282 Pension Trust Fund v. Angelos, 762 F.2d 522, 530 (7th Cir. 1985). There were no misrepresentations reasonably calculated to deceive persons of ordinary prudence and comprehension about the value of plaintiffs' direct investments.
In addition, plaintiffs allege that the client statements were misleading because the statements omitted the true value of the limited partnerships and other direct investments. An omission of a material fact can constitute fraud under RICO if either there exists a duty to disclose the information or the defendant makes statements of half-truths or affirmative misrepresentations. See Reynolds v. East Dyer Development Co., 882 F.2d 1249, 1252 (7th Cir. 1989); United States v. Keplinger, 776 F.2d 678, 697-98 (7th Cir. 1985), cert. denied, 476 U.S. 1183, 91 L. Ed. 2d 548, 106 S. Ct. 2919 (1986). Here plaintiffs have not alleged any basis for Prudential's duty to disclose the "true value" of the direct investments. See e.g., Reynolds, 882 F.2d at 1252; Federal Paper Board Co., Inc. v. Amata, 693 F. Supp. 1376, 1391 (D.Conn. 1988); Compania Sud-Americana de Vapores, S.A. v. IBJ Schroder Bank & Trust Co., 785 F. Supp. 411, 422 (S.D.N.Y. 1992). Furthermore, defendant has not made any affirmative misrepresentations or half-truths. As discussed above, those investments were not misrepresented on the statements.
In addition, the alleged omissions of which plaintiffs complain do not amount to a scheme to defraud. The alleged omissions were not reasonably calculated to deceive an ordinary prudent person. A reasonable investor could not have relied on the alleged omissions to conclude that the current value of the direct investments equaled the purchase price. Plaintiffs' allegations that the omissions amounted to a scheme to defraud are particularly unreasonable in light of the disclosures on the statements, and given that the "price" remained constant over the years and equalled the purchase price of the investments. Omissions do not amount to a scheme to defraud where the items allegedly omitted could have been discovered through the exercise of ordinary intelligence. See e.g., Compania, 785 F. Supp. et 425; Blount Financial Services, Inc. v. Walter E. Heller & Co., 819 F.2d 151, 153 (6th Cir. 1987). This is clearly not the type of situation that RICO was intended to remedy.
Plaintiffs do not and cannot allege that the claimed misrepresentations and omissions were reasonably calculated to deceive persons of ordinary prudence and comprehension. There is no "scheme to defraud" under RICO and defendant's motion to dismiss is granted as to count I.
2. State Law Claims
Plaintiffs have alleged state law claims for breach of fiduciary duty, fraud, negligent misrepresentation, and violation of various consumer fraud statutes under the laws of several states.
For purposes of this motion this court will apply Illinois law to the Caraluzzis' common law claims. The parties do not dispute the application of Illinois law in this motion. Checkers, Simon & Rosner v. Lurie Corp., 864 F.2d 1338, 1345 (7th Cir. 1988) (stating that the court must apply the substantive law of the forum state unless the parties to a diversity case argue that the forum state's conflict-of-law rules require the application of another state's laws); Stavriotis v. Litwin, 710 F. Supp. 216, 217 (N.D. Ill. 1988) (stating that a federal court must apply the law of the state in which it sits (including that state's choice-of-law rules) in a diversity case).
a. Breach of Fiduciary Duty Claim
Defendant contends that plaintiffs have failed to state a breach of fiduciary duty claim. Prudential argues that it is not enough for the Caraluzzis to merely allege that defendant was their broker and financial advisor, in whom plaintiffs placed trust and confidence. Defendant maintains that in a case such as this, where a fiduciary relationship does not exist as a matter of law, facts from which a fiduciary relationship arises must be plead and proved by clear and convincing evidence. We disagree. Plaintiffs are entitled to follow the federal rules of notice pleading and therefore need only plead the existence of a fiduciary relationship and some facts to substantiate the claims made. Ambrosino v. Rodman & Renshaw, Inc., 635 F. Supp. 968, 973 (N.D. Ill. 1986). Here plaintiffs have alleged a broker-customer relationship and that Prudential acted as their investment advisor. While this court agrees that the mere existence of a broker-customer (or investment advisor-customer) relationship is not proof of fiduciary character, the allegation of such relationships in a claim for breach of fiduciary duty is sufficient to withstand a motion to dismiss. Russo v. Bache Halsey Stuart Shields, Inc., 554 F. Supp. 613, 621 (N.D.Ill. 1982); Sostrin v. Altschul, 492 F. Supp. 486, 489 (N.D. Ill. 1980).
However, the Caraluzzis' claim for breach of fiduciary duty is barred by the statute of limitations. The Illinois borrowing statute causes the forum court to apply the statute of limitations of the state where the cause of action arose, if that statute of limitations would preclude recovery. Sabena Belgian World Airways v. United Airways, Inc., 1991 U.S. Dist. Lexis 6041 (N.D. Ill. May 6, 1991). The Illinois borrowing statute, Ill. Rev. Stat. ch. 110, P 13-210, applies when (1) neither party to an action resides in Illinois and (2) the cause of action arose outside of Illinois. Le Blanc v. G.D. Searle & Co., 178 Ill. App. 3d 236, 127 Ill. Dec. 423, 424, 533 N.E.2d 41 (Ill. App. 1988). The Caraluzzis are residents of Connecticut and, for purposes of the Illinois borrowing statute, Prudential "resides" in Delaware (the state where it was incorporated). Id. at 425 (stating that a corporation resides where it is incorporated for purposes of the Illinois borrowing statute). Furthermore, the cause of action arose in Connecticut since not only were the monthly statements mailed to the Caraluzzis' Connecticut address, but, according to the statements, the Prudential financial advisor and the office serving the Caraluzzis' account were located in Connecticut. (Plf. cplt. exh. A; Mellusi aff. exh. 1). Therefore, we give effect to the applicable Connecticut statute of limitations.
Under Connecticut law claims for breach of fiduciary duty, which sound in tort, must be brought within three years from the date of the complained-of act or omission. D'Addario v. Bergman, 1992 Conn. Super. Lexis 114 (Conn. Jan. 16, 1992); Meredith v. Rippeto, 1991 U.S. Dist. Lexis 14793 (D. Conn. Aug. 27, 1991). Actionable harm for purposes of commencing the running of Connecticut statute of limitations occurs when the plaintiff discovers, or in the exercise of reasonable care should have discovered, the essential elements of his cause of action. Sandstrom v. Chemlawn Corp., 759 F. Supp. 84, 86 n.1 (D. Conn. 1991).
Plaintiffs argue that the applicable statute of limitations is a fact question when, as in this case, it is premised on whether a plaintiff knew or should have known of his cause of action. However, as plaintiffs further point out, the court can decide the question as a matter of law where only a single conclusion is compelled by undisputed facts. Such is the case here where the Caraluzzis, through the exercise of ordinary diligence, could have discovered the alleged breach of fiduciary duty (the alleged misrepresentations and omissions) and injuries more than three years before they filed this action. The Caraluzzis began receiving monthly client statements in October 1986. They could have discovered at that time (and in every statement from then on) that their direct investments were not reported at current value merely by reading the applicable disclosures on the statements. Furthermore, plaintiffs could have made additional inquiry if they did not understand the disclosures. Plaintiffs filed this action in February 1992 -- over five years after they began receiving monthly client statements.
Count II is barred by the statute of limitations.
b. Fraud Claim
In order to state a claim for fraud in Illinois a plaintiff must allege (1) a false statement of material fact; (2) that the person who made the statement knew it was false; (3) intent to induce the other party to act; (4) action by the other party in justifiable reliance on the truth of the statement; and (5) damage resulting from such reliance. Craig v. First American Capital Resources, Inc., 740 F. Supp. 530, 539 (N.D.Ill. 1990). In accordance with our position in the RICO section above, plaintiffs have failed to allege any misrepresentations or omissions of material fact on which any reasonable investor justifiably could have relied. For that same reason, the Caraluzzis' fraud claim is dismissed. See Associates in Adolescent Psychiatry, 751 F. Supp. at 729-30 (noting that both mail fraud and common law fraud require proof of the same universal elements of fraud); Compania Sud-Americana, 785 F. Supp. at 424 (stating that where the "fraudulent scheme is premised upon an inadequate fraud claim, allegations of mail and wire fraud must generally also fail").
c. Negligent Misrepresentation
The elements for negligent misrepresentation are essentially the same as for fraudulent misrepresentation, except that the defendant's mental state is different. The defendant need not know the statement is false. Board of Education v. A,C, and S, Inc., 131 Ill. 2d 428, 137 Ill. Dec. 635, 646, 546 N.E.2d 580 (Ill. 1989). As discussed in the RICO and fraud sections above, plaintiffs fail to allege any material misrepresentation or omission on which they justifiably could have relied. Plaintiffs' negligent misrepresentation claim is therefore also dismissed.
d. Connecticut Unfair Trade Practices Act
The Caraluzzis, as residents of Connecticut, allege that Prudential was in violation of the Connecticut Unfair Trade Practices Act (CUTPA), Conn. Gen. Stat. § 42-110 et seq. The Connecticut Supreme Court has held that CUTPA does not apply to deceptive practices in connection with the purchase or sale of securities. Russell v. Dean Witter Reynolds, Inc., 200 Conn. 172, 510 A.2d 972, 977 (Conn. 1986). In Russell, the court held that CUTPA is not applicable to securities transactions because such transactions are governed by a different statutory remedy and because they are not among the type of transactions which the Federal Trade Commission Act (the FTC Act) has been applied.
Id. The question of whether CUTPA applies is one of law. Connelly v. Housing Authority of the City of New Haven, 213 Conn. 354, 567 A.2d 1212, 1217 (Conn. 1990) And this court agrees with defendant in that CUTPA does not apply in this case. Count VIII is dismissed.
JAMES B. MORAN,
Chief Judge, U.S. District Court
May 26, 1993