Alas, we must transfer to our sister court in New York.
This case involves a dispute between investors, an investment
manager, and a brokerage house. During the 1980s, the Plaintiffs,
primarily physicians, office profit sharing plans, and pension
trusts, invested in two partnerships, which in turn invested in
Delta Capital Management, a limited partnership. Plaintiffs
allege that although Delta held itself out as fundamentally
conservative, it, unbeknownst to its investors, shifted from a
conservative investment strategy to a high risk strategy. The
focus of this strategy shift was massive investment in First
Executive, a company which eventually collapsed. Plaintiffs claim
that Delta conspired with its broker, Morgan Stanley, and
unspecified others to make First Executive seem to be something
it was not: a desirable takeover target. This was done, claim the
Plaintiffs, by stock churning and other deceptive practices.
As to the parties, Plaintiffs were partners of Springfield
Associates or Springfield Retirement Associates. These two
partnerships were limited partners in Delta. Delta was a Delaware
limited partnership with offices in New York. Morgan Stanley is a
Delaware Corporation with its principal place of business in New
York, New York. John LeFrere is either a Florida or New York
resident and a general partner of Delta Capital Management, L.P.
(Delta), The Estate of William H. Gregory III succeeds William H.
Gregory III, a former general partner of Delta.
Morgan Stanley moves for transfer of venue and asserts that no
substantial acts or omissions giving rise to the claims against
it occurred in this district. Plaintiffs, to successfully oppose
Morgan Stanley's motion, must prove that venue is proper in this
Plaintiffs' lengthy complaint contains very few factual
allegations regarding Morgan Stanley's*fn1 conduct. The section
of the complaint entitled "Course of Wrongful Conduct" describes
Morgan Stanley's alleged role in the scheme to defraud.
According to the Complaint, Morgan Stanley was engaged in the
business of trading securities for LeFrere and his associates.
Morgan Stanley "and/or its agents" made recommendations to
LeFrere and his associates regarding trading in accounts alleged
to be the Plaintiffs'. Morgan Stanley had actual or constructive
knowledge of Plaintiffs' desire to invest conservatively in a
diversified portfolio. Morgan Stanley knew that LeFrere, Gregory,
and Delta were unlicensed to act as either investment advisors,
an investment company, or an introducing broker-dealer. Morgan
Stanley prepared account statements that indicated numerous
trades in First Executive securities over repeated one-month
intervals. Morgan Stanley did not disclose to Plaintiffs various
pieces of information regarding Delta, LeFrere and First
Morgan Stanley submitted an affidavit with its motion to
transfer. This affidavit states that Morgan Stanley acted as a
prime broker for Delta. Prime brokers provide a variety of
services for large investors who deal with several
broker-dealers. Morgan Stanley served Delta through its New York,
New York, office.
II. VENUE AND TRANSFER
Courts decide questions of venue largely on the basis of the
pleadings. Because venue and personal jurisdiction are similar,
it is appropriate to apply the same evidentiary standard to both
issues. Reed, 727 F. Supp. at 377 n. 1. "The allegations in
[Plaintiffs'] complaint are to be taken as true unless
controverted by the defendant's affidavits; and any conflicts in
the affidavits are to be resolved in [Plaintiffs'] favor."
Turnock v. Cope, 816 F.2d 332, 333 (7th Cir. 1987). The Court
is not obliged, however, to treat all allegations as true, no
matter how speculative, conclusory, or lacking of necessary
supporting factual allegations. Matter v. Williams, 832 F. Supp. 244,
246 (C.D.Ill. 1993). Instead, the Court's function in
deciding factual questions related to venue is similar to its
function when reviewing a motion to dismiss. To survive a motion
to dismiss, a complaint must allege a factual basis for its legal
claims. Cushing v. City of Chicago, 3 F.3d 1156, 1161 n. 5 (7th
Cir. 1993) ("`[C]onclusory allegations unsupported by any factual
assertions will not withstand a motion to dismiss.' Briscoe v.
LaHue, 663 F.2d 713, 723 (7th Cir. 1981), aff'd 460 U.S. 325,
[103 S.Ct. 1108, 75 L.Ed.2d 96] (1983)."). Therefore, to defeat a
motion for transfer, a plaintiff must allege or establish facts
to support venue in its chosen district.
Plaintiffs have alleged only one act by Morgan Stanley outside
of New York: the appearance of a representative of Morgan Stanley
at one of Delta's annual meetings in Springfield, Illinois.
Plaintiffs make no allegation as to what Morgan Stanley's
representative said or did at that meeting. The substance of
Plaintiffs' complaint is that a series of fraudulent
misrepresentations and improper securities transactions caused
A single appearance by a representative of Morgan Stanley, at
which Plaintiffs do not allege the representative took any
significant action, cannot possibly constitute "a substantial
part of the events or omissions giving rise" to the claim against
Morgan Stanley. Plaintiffs, therefore, must demonstrate how
various actors' conduct within this district can be imputed to
Morgan Stanley, whose only substantial acts occurred in New York.
Plaintiffs' first attempt to justify venue in this district is
the "conspiracy theory of personal jurisdiction." Assuming
Plaintiffs mean the co-conspirator theory of venue, they quickly,
and wisely, abandon this theory. Except for some specialized
venue provisions, the co-conspiracy theory of venue is invalid.
Sportmart, Inc. v. Frisch, 537 F. Supp. 1254, 1259-60 (N.D.Ill.
1982) ("Most courts that have considered the so-called
co-conspirator theory of venue after the Supreme Court's dictum
in Bankers Life & Casualty Co. v. Holland, [346 U.S. 379, 74
S.Ct. 145, 98 L.Ed. 106 (1953)], have also declined to find venue
appropriate over a non-resident corporate defendant solely on the
basis of the alleged conduct of its co-conspirators in the forum
state.") (further citations omitted). The co-conspirator theory
is available under Section 27 of the Securities Exchange Act of
1934, 15 U.S.C. § 78aa (1994). See Securities Investor
Protection Corp. v. Vigman, 764 F.2d 1309, 1317 (9th Cir. 1985).
But Plaintiffs have asserted only 28 U.S.C. § 1391(a) as a basis
Because plaintiffs cannot justify venue on the grounds of an
alleged conspiracy, they must turn to a theory of venue based on
agency. Several vehicles exist by which Plaintiffs might hold
Morgan Stanley liable for the conduct, in this district, of Delta
and its general partners. "The three principal vehicles for
imposing such liability are: (1) statutorily created controlling
person liability, (2) for [sic] the brokerage firm's culpable
failure to supervise its employees, and (3) under common law
principles of vicarious liability. . . ." 1 THOMAS LEE HAZEN,
TREATISE ON THE LAW OF SECURITIES REGULATION 592 (2d ed. 1990).
"Controlling person" liability is imposed by statute,
15 U.S.C. § 77o, 78t (1994), and is "more restrictive than common law agency
theories. . . ." HAZEN at 593. First, to establish controlling
person liability, a plaintiff must, at a minimum, allege that the
defendant exercised some control or discipline over the alleged
wrongdoer. See Harrison v. Dean Witter Reynolds, Inc.,
974 F.2d 873, 876-82 (7th Cir. 1992), cert. denied ___ U.S. ___, 113
S.Ct. 2994, 125 L.Ed.2d 688 (1993); see also Martin v. Shearson
Lehman Hutton, Inc., 986 F.2d 242, 244 (8th Cir. 1993) (noting
that a controlling person can be liable for the acts of a person
over whom the controlling person exerts any discipline or
influence), cert. denied ___ U.S. ___, 114 S.Ct. 177, 126
L.Ed.2d 136 (1993). To trigger liability, the control exerted
must be "over the specific activity upon which the primary
violation is predicated." Schlifke v. Seafirst Corp.,
866 F.2d 935, 949-50 (7th cir. 1989). Because Plaintiffs have not alleged
facts that would allow the Court to conclude that Morgan Stanley
controlled Delta or its general partners, Plaintiffs cannot look
to controlling person liability to justify venue in this
The second type of vicarious liability comes from negligent
supervision or negligent failure to supervise. See, e.g.,
Henricksen v. Henricksen, 640 F.2d 880, 884 (7th Cir. 1981)
(describing negligent supervision), cert. denied sub nom Smith,
Barney, Harris, Upham & Co. v. Henricksen, 454 U.S. 1097, 102
S.Ct. 669, 70 L.Ed.2d 637 (1981). This type of liability makes a
defendant answer for conduct of persons the defendant could have
controlled. Liability for failure to protect a third party from
such an actor, however, arises only when a duty to protect
exists. Harrison, 974 F.2d at 885. In Harrison, two of a
broker's employees defrauded investors by inducing them to invest
in the employee's own accounts. The Seventh Circuit rejected the
investors' negligent hiring and retention claims because the
investors did not have a relationship to the broker that could
establish vicarious liability. Id. Plaintiffs repeatedly allege
that Morgan Stanley maintained "their" accounts. Morgan Stanley,
however, states that none of the Plaintiffs ever had an account
with Morgan Stanley. Additionally, the facts asserted in the
Complaint do not support the inference that
Plaintiffs had accounts with Morgan Stanley. Instead, it is clear
that the only entity with an account at Morgan Stanley was Delta.
Plaintiffs have not, therefore, alleged sufficient facts for the
Court to conclude that Morgan Stanley was under any duty to
supervise Delta in its dealings with Plaintiffs. Cf. Harrison,
974 F.2d at 885; Champion Parts, Inc., v. Oppenheimer & Co.,
878 F.2d 1003, 1008 (7th Cir. 1989) (holding that a claim of
negligent supervision under Illinois law could not stand because
plaintiff was not a customer of the brokerage firm). Plaintiffs
also assert that Morgan Stanley should be liable as a clearing
broker for the torts of Delta, an alleged introducing broker. The
allegations in the complaint, however, do not support the
conclusion that Delta was an introducing broker. Furthermore, a
clearing broker is not generally liable for fraudulent
misrepresentations made by the introducing broker to its
customers. Katz v. Financial Clearing & Services Corp.,
794 F. Supp. 88, 94 (S.D.N.Y. 1992) ("Neither primary nor aiding and
abetting liability attaches to a clearing broker who merely
clears trades for an introducing broker.")
The third avenue for vicarious liability in this case is
through the common law doctrines of agency. Generally, a
principal may be liable for the acts of its agents under three
theories: actual authority, apparent authority, or inherent
authority (respondeat superior). To establish actual authority,
it must be shown that a principal actually granted its agent
authority to do the act in question. Apparent authority holds a
principal liable for acts the agent reasonably appeared
authorized to take.*fn3 The third variety of agency liability
arises from agency inherent to an actor's position. See
generally In re Atlantic Financial Management, Inc., 784 F.2d 29
(1st Cir. 1986) (describing the theories of vicarious liability
in securities fraud cases), cert. denied sub nom AZL Resources,
Inc. v. Margaret Hall Foundation, Inc., 481 U.S. 1072, 107 S.Ct.
2469, 95 L.Ed.2d 877 (1987).
The Complaint repeatedly refers to "Morgan Stanley and its
agents," or describes LeFrere and the other Delta general
partners as agents of Morgan Stanley. These statements are legal
conclusions. Without allegations of fact to support these legal
conclusions, the Court cannot credit them. Cushing v. City of
Chicago, 3 F.3d at 1161 n. 5, Rand Bond of North America, Inc.
v. Saul Stone & Co., 726 F. Supp. 684 (N.D.Ill 1989) ("[A]gency
is a legal relationship whose existence flows from facts. . . .
it remains incumbent on the pleader to allege some factual
predicate . . . to create the inference. . . .") (emphasis in
original). In addition to their bald allegations of agency,
Plaintiffs argue that Morgan Stanley is liable for Delta's
conduct because Morgan Stanley knew that LeFrere, Gregory, and
Delta were either unlicensed investment advisors, an unlicensed
investment company, or an unlicensed introducing broker-dealer.
But Plaintiffs fail to assert facts that could lead the Court to
conclude that this knowledge triggered liability. See, e.g.,
Katz, 794 F. Supp. at 94 (stating that facts must be pled to
demonstrate an exception to the rule that a clearing broker is
not liable for an introducing broker's tortious conduct). The
Complaint does not allege any facts that might lead the Court to
believe that failure to register was improper, or that by failing
to do anything about that failure to register, Morgan Stanley
should be liable.
Furthermore, Plaintiffs do not allege the existence of
master-servant relationship between LeFrere, Gregory, and Delta
and Morgan Stanley, nor do Plaintiffs allege any other facts that
could lead the Court to conclude that Delta acted on either
actual, implied, or inherent authority of Morgan Stanley.
Finally, Plaintiffs' memoranda cite no cases holding that agency
arose under circumstances similar to those described in the
B. Improper Venue and Transfer
For the reasons stated above, the Court concludes that
significant acts or omission giving rise to the claim against
Morgan Stanley did not occur in this district and that the two
other options under 28 U.S.C. § 1391(b) do not apply. Therefore,
venue is not proper in this Court. The allegations in the
Complaint and the affidavits of Morgan Stanley lead to the
conclusion that the Southern District of New York is the
appropriate venue for this lawsuit. Morgan Stanley admits that
all of the conduct giving rise to Plaintiffs' claim against it
occurred in New York. Delta and its general partners are alleged
to have conspired with Morgan Stanley to churn stock and defraud
investors. Because both Morgan Stanley and Delta operated in New
York, the conduct giving rise to these charges apparently
occurred in New York. A substantial part of the conduct giving
rise to Plaintiffs' claims against Delta and its general partners
also occurred in this district. The language and history of
28 U.S.C. § 1391(a)(2), however, make clear that venue may be proper
in two or more districts. Cottman Transmission Systems, Inc. v.
Martino, 36 F.3d 291, 294 (3d Cir. 1994) (noting that the
pre-1990 version of § 1391 generally allowed venue in only one
district, but that the amended statute allows venue in several).
Thus, a substantial part of the events or omissions giving rise
to all of Plaintiffs' claims occurred in the Southern District of
The Court finds it in the interest of justice to transfer this
case to the Southern District of New York. The only alternative
available to the Court is to dismiss this case as to Morgan
Stanley. The Court also finds that justice would be served by
allowing this case to proceed on its merits. The Court further
finds that justice would be better served by keeping the claims
in this case together in the same forum, than by splitting them
and potentially requiring two trials on largely identical issues.
Because venue is not proper in this Court and because the Court
has decided to transfer this case, the Court declines to rule on
the pending motions to dismiss and for preliminary injunction.
Ergo, Defendant's Motion to Transfer (d/e 22) is ALLOWED.
This case is transferred to United States District Court for the
Southern District of New York, and all pending proceedings are
referred to that court. Because important motions are pending in
this matter, transfer is to take effect immediately.