The opinion of the court was delivered by: SWEET
Plaintiffs Noah A. Troyer and Clara A. Troyer (the "Troyers") have filed their second amended complaint in this securities fraud action against Joseph Karcagi, Edward D. Jones & Co. ("Jones"), and Prescott, Ball & Turben ("Prescott") under the Securities Act of 1933 (the "Securities Act") and the Securities Exchange Act of 1934 (the "Exchange Act"). The suit against a fourth defendant, First Columbus Corporation ("First Columbus"), has been settled. The defendants have moved to dismiss certain counts of the second amended complaint under Rule 41(b), Fed.R.Civ.P., for failure to comply with this court's opinion of July 11, 1979 and orders of September 7, 1979 and November 13, 1979. Prescott has moved under Rule 37 to impose sanctions on the Troyers for failure to provide discovery. Karcagi has moved to dismiss under Rules 12(b)(2) and 12(b)(3), Fed.R.Civ.P., alleging that venue is improperly placed in this district. Prescott has moved pursuant to 28 U.S.C. §§ 1404 and 1406 to transfer the action to the Northern District of Ohio. Jones and Karcagi join in this motion. The Rule 41(b) motion is granted in part and denied in part. The Rule 37 motion is denied. The motion to transfer under 28 U.S.C. §§ 1404 and 1406 is granted.
Sufficiency of Second Amended Complaint
The background of this action is set forth in an opinion of this court dated July 11, 1979. See D.C., 476 F. Supp. 1142. The original complaint was filed on April 28, 1978. In response to a motion to dismiss, plaintiffs served an amended complaint on September 6, 1978. In the July 11, 1979 opinion this court dismissed certain claims in the amended complaint, some with prejudice, others with leave to replead. On September 7, 1979, the Troyers moved for leave to serve a second amended complaint; the motion was granted upon condition that the causes contained therein be separately stated and numbered as to each defendant and that the basis of the alleged frauds be particularized as required by Rule 9(b), Fed.R.Civ.P. These conditions, including the requirement of compliance with Rule 9(b), were set forth in an order dated November 13, 1979. The Troyers then filed a second amended complaint, which differs from that authorized in September. Defendants claim that the second amended complaint is defective since it contains new causes of action not permitted by the September 7 motion to amend, and since its allegations do not comport with the conditions designated in the July 11 opinion and subsequent orders.
The defendants first contend that the reference in paragraphs 7 and 17 to a "plan or scheme" is an attempt to restate the conspiracy theory which is barred by the July 11 opinion. However, these paragraphs do not describe the alleged plan or scheme by Karcagi as a conspiracy; instead the defendant brokers are charged as aiders and abettors of a scheme by Karcagi. See IIT v. Cornfeld, 619 F.2d 909 at 922 (2d Cir.1980). The validity of the aiding and abetting claim was expressly sanctioned by the July 11 opinion, see D.C., 476 F. Supp. at 1151-1152, and accordingly these paragraphs are not improper.
Defendants raise various objections to Count One, including the lumping together of allegations concerning all defendants, the failure of certain allegations to meet the particularity standards of Rule 9(b) as required by the November 13 order, and the attempt to restate claims which have previously been barred. Although the allegations in Count One are far from a paradigm of clarity, they adequately allege a cause of action against Karcagi for making a series of false representations to the Troyers in Millersburg, Ohio which induced them to open cash and margin accounts with First Columbus. These accounts have been held to be "securities" for purposes of Rule 10b-5. See D.C., 476 F. Supp. at 1147-1148. The claim that Karcagi made additional misrepresentations to induce the Troyers to continue depositing funds in these discretionary accounts and to move the accounts from First Columbus to Jones and later from Jones to Prescott is legally sufficient, as are the claims against Karcagi, Jones and Prescott for self-dealing. The first count also avers that Prescott and Jones are liable as "controlling persons" of Karcagi and for aiding and abetting Karcagi's violations of the securities laws; these allegations have previously been held to state valid causes of action. See D.C., 476 F. Supp. 1142.
However, certain averments in Count One must be stricken from the complaint, since they fail to comply with this court's directives. Paragraph 15, which alleges misrepresentations "of a continuing nature," fails to meet the specificity requirement of Rule 9(b). See Denny v. Barber, 576 F.2d 465, 469 (2d Cir. 1978). So much of paragraph 17(w) as alleges that the defendant brokers "realized other profits unknown to plaintiffs" is excessively vague to provide fair notice of the alleged misconduct and is stricken. See Morgan v. Prudential Group, Inc., 81 F.R.D. 418, 423 (S.D.N.Y.1978); Todd v. Oppenheimer & Co., 78 F.R.D. 415, 419 (S.D.N.Y.1978). The averment in paragraph 21 that Karcagi, "on information and belief, realized secret profits on the trading of plaintiffs' accounts," is unsupported by any facts and therefore falls short of the requirements of Rule 9(b). Weinberger v. Kendrick, 451 F. Supp. 79, 84 (S.D.N.Y.1978).
Paragraph 17(v) is legally insufficient since it fails to allege that the claimed misstatements in May 1977 were in connection with the purchase or sale of a security. See Troyer v. Karcagi, D.C., 476 F. Supp. at 1148.
Defendants contend that paragraph 14, in which Karcagi's scienter is alleged "on information and belief," is insufficient under Rule 9(b). Rule 9(b) permits state of mind to be averred generally. This is not a case such as Morgan v. Prudential Group, Inc., supra at 423-24, or Weinberger v. Kendrick, supra at 84, in which the entire complaint is alleged on information and belief with no elaboration of the factual basis for the averments. The general allegation of scienter in this case is sufficient to satisfy the requirements of Rule 9(b). See Armstrong v. McAlpin, 461 F. Supp. 622 (S.D.N.Y.1978).
Count Two of the complaint, against First Columbus and Karcagi, reiterates no new basis for liability and is dismissed for failure to comply with the court's order of November 13, 1979.
Count Three alleges a cause of action against First Columbus, Jones and Karcagi under Rule 10b-5 for the "sale" of the cash and margin accounts by First Columbus in December 1973 to Jones for $ 19,291.39. The Troyers claim that when Karcagi left the employ of First Columbus and became employed by Jones, he induced the Troyers to close their accounts with First Columbus and to open new accounts with Jones by omitting to make material statements necessary to clarify the nature of the transaction. Jones allegedly paid First Columbus $ 19,291.36 in connection with the transfer of accounts and debited the Troyers' accounts for that amount, although the nature of these payments is not alleged. The Troyers seek to characterize this switch from First Columbus to Jones as the sale of securities, namely the cash and margin accounts initially issued by First Columbus; they describe First Columbus and Jones as the "issuer" and "underwriter," respectively, of these securities.
This claim has never been raised in any prior complaint. In addition to the fact that the court did not authorize presentation of this claim when the Troyers sought leave to amend in September 1979, this new count fails to state a cause of action under Rule 10b-5.
The defendants do not contest the claim that the Troyers closed their discretionary securities accounts at First Columbus in December 1973 and simultaneously opened new accounts at Jones. Moreover, as stated above, this court previously ruled that the cash and securities accounts opened by the Troyers at First Columbus, Jones and Prescott constituted "securities" for purposes of the Securities Act and the Exchange Act. 476 F. Supp. at 1147-1148. However, the description of First Columbus as the "issuer" of cash and security accounts which were then "underwritten" by Jones is simply incorrect. An underwriter purchases securities, either directly or indirectly, from an issuer and then facilitates the marketing of the securities to the public. See SEC v. North American Research & Development Corp., 424 F.2d 63, 72 (2d Cir. 1970). To sustain their legal characterization of the facts in this case, the Troyers would be required to show that Jones served as an intermediary between First Columbus and the Troyers in the "distribution" of discretionary accounts.
There was no "sale" of the Troyers' discretionary accounts by First Columbus to Jones. See 15 U.S.C. § 78c(a)(14); International Brotherhood of Teamsters v. Daniel, 439 U.S. 551, 99 S. Ct. 790, 795, 58 L. Ed. 2d 808 (1979) (definition of sale requires "disposition " or contract to dispose of security). Rather, it would appear that First Columbus closed the Troyers' securities accounts and transferred the individual securities contained in the accounts to Jones. Jones did not become the owner of discretionary accounts issued by First Columbus, but instead opened its own new discretionary accounts for the Troyers. There is also no basis whatsoever for the claim that Jones "purchased" the securities contained in the accounts from First Columbus, since First Columbus was not the owner of these individual securities prior to transfer, and Jones did not become their owner after the transfer. This conclusion is not altered by the averment that commissions or fees were collected from the Troyers and paid to First Columbus in connection with the transfer of securities from the Troyers' accounts at First Columbus to their new accounts at Jones. Thus, Jones did not act as a middleman in a distribution of securities from First Columbus to the Troyers, but served as the issuer of new securities directly to the Troyers. See Ingenito v. Bermec, 441 F. Supp. 525 (S.D.N.Y.1977).
Although the Troyers did not seek leave to plead Count Three when making their motion to amend in September, the court would be inclined to permit the new cause of action to stand if it stated a valid claim. On the other hand, it would be futile to permit this amendment at this stage if the new claim would be subject to a motion to dismiss. Grogg v. General Motors Corp., 72 F.R.D. 523, 527 (S.D.N.Y.1976). The Troyers' characterization of the undisputed facts underlying Count Three is legally untenable, and is inconsistent with the allegations of Count Five ...