The opinion of the court was delivered by: WARD
Plaintiffs in this action seek damages for defendants' alleged violation of both the federal securities laws and common-law principles of fraud and fiduciary duty. Defendants are E.F. Hutton & Co., Inc. ("Hutton"), and five individuals who were employees of Hutton during the period when the events described in plaintiffs' amended complaint allegedly occurred. They move for an order dismissing the amended complaint, pursuant to either (1) Rule 9(b), Fed.R.Civ.P., for failure to allege fraud with the requisite particularity, or (2) Rule 12(b)(6), Fed.R.Civ.P., for failure to state a claim upon which relief can be granted. Alternatively, defendants move for an order, pursuant to Rule 12(f), Fed.R.Civ.P., striking those allegations in the amended complaint by which plaintiffs claim punitive damages and attorneys' fees. For the reasons hereinafter stated, defendants' motions are denied in all respects.
The individual plaintiffs in this action are Joseph Savino, Jr. ("Savino Jr."), and his parents, Ann Savino and Joseph Savino, Sr. ("Savino Sr."). The corporate plaintiffs are International Preferred Risks, Inc. ("IPR"), a New York corporation, and Trans-Atlantic Insurance Company ("TAI"), a Bahamian corporation, both of which were owned and operated by Savino Jr. during the period of time relevant to this action. Plaintiffs filed their amended complaint in this action on August 11, 1980.
The amended complaint sets forth three causes of action, one based on the federal securities laws, the other two based on principles of common law and maintained before this Court under the doctrine of pendent jurisdiction. In the federal securities law cause of action, plaintiffs claim that defendants violated section 10(b) of the Securities Exchange Act of 1934 ("the 1934 Act"), 15 U.S.C. § 78j(b), Rule 10b-5 promulgated thereunder by the Securities and Exchange Commission, 17 C.F.R. § 240.10b-5 (1980), and section 17(a) of the Securities Act of 1933 ("the 1933 Act"), 15 U.S.C. § 77q(a). Plaintiffs' first pendent cause of action claims that defendants' conduct constituted a common-law fraud, and their second pendent claim is based on defendants' alleged breach of fiduciary duty.
The events described in the amended complaint occurred between January 1, 1977 and June 30, 1978. During this period, defendant Jerome Miller was Hutton's Vice President in charge of East Coast operations, defendants Ted Adair and Alan Goldstein managed Hutton's White Plains office, and defendants Nicholas Tinios and Alan Grimaglia were employees of Hutton at its White Plains office.
The allegations of the amended complaint must be set forth in some detail. Plaintiffs' dispute with defendants concerns six accounts ("the Savino accounts") maintained by plaintiffs with defendant Hutton at its White Plains office. Each of the five plaintiffs held an account in his, her, or its name, while Savino Sr. and Ann Savino also held a joint account. The Savino accounts were opened on the following dates:
Name of Date Account
Account Holder Opened
(1) Savino Sr. May 1970
(2) Savino Jr. May 1970
(3) Savino Sr. & Ann Savino October 1974
(4) IPR October 1974
(5) Ann Savino October 1977
(6) TAI November 1977
Prior to 1977, the Savino accounts were managed by a Hutton employee named Michael Sposato. Sposato left Hutton in January 1977 to join the stock brokerage firm of Shearson Hayden Stone, Inc. ("Shearson"), at which time defendants Adair, Goldstein, Miller, and Grimaglia learned that Savino Jr., who throughout the period in question acted on behalf of all the holders of the Savino accounts, was considering transferring the funds invested in the four Savino accounts then in existence from Hutton to Shearson. The basic allegation of the amended complaint is that, commencing in January 1977 and continuing through June 1978, defendants misrepresented and omitted to state a number of material facts to Savino Jr. concerning the Savino accounts, with the goal of inducing plaintiffs to continue the Savino accounts at Hutton. Plaintiffs contend that they relied on these misrepresentations and omissions by continuing the Savino accounts at Hutton, and that by the time they finally liquidated the Savino accounts on June 20, 1978, they had suffered a loss in the Savino accounts of $ 375,000. They seek to recover this amount, plus interest, from defendants, and in addition ask that approximately $ 150,000 paid to defendants Hutton, Tinios, and Grimaglia during this period as brokerage commissions be returned. Plaintiffs also claim, in connection with their pendent common-law claims, compensatory damages in the amount of $ 200,000 and punitive damages in the amount of $ 1,000,000. Finally, plaintiffs ask that they be awarded their attorneys' fees.
The amended complaint describes the following sequence of events: In January 1977, when Sposato left Hutton to join Shearson, the Savino accounts were assigned to defendant Grimaglia. Grimaglia was an account executive at Hutton whose activities were supervised by defendants Adair, Goldstein, and Miller. These defendants were all aware that Savino Jr. was considering closing the Savino accounts and transferring the funds invested therein to Shearson. Grimaglia telephoned Savino Jr. and asked that the funds invested in the Savino accounts not be transferred to Shearson until he and Savino Jr. could meet to discuss the matter. A luncheon meeting at the Railroad Club, in New York City, was arranged.
The Railroad Club meeting was held in January 1977. Savino Jr. and defendants Grimaglia, Adair, and Miller attended the meeting. These defendants made certain misrepresentations during the meeting. Specifically, they falsely represented that they intended (1) to discount commissions by thirty-five percent if the funds invested in the Savino accounts remained with Hutton; (2) to employ six to seven persons to handle the Savino accounts; (3) to employ tactics to stop losses; (4) to apply Hutton's research for the benefit of the Savino accounts; (5) to avoid unnecessary risk previously engaged in by Sposato; (5) to arrange for defendant Grimaglia to watch the accounts at all times; (6) to utilize automatic sell orders to avoid losses in excess of ten percent of the value of the portfolio; and (7) to limit plaintiffs' losses to a maximum of $ 50,000. In reliance upon these misrepresentations, Savino Jr. agreed to permit the funds invested in the Savino accounts to remain under Grimaglia's management at Hutton, with the exception of $ 100,000 to be transferred to Shearson.
During the Spring of 1977, Savino Jr. had a number of conversations with Grimaglia, Adair, and Goldstein, during which Savino Jr. expressed his concern over the losses plaintiffs were suffering. The losses were approaching ten percent of the total invested in the Savino accounts. Savino Jr. reminded these defendants that he was prepared to transfer the funds invested in the Savino accounts to Shearson. In an attempt to keep Savino Jr. from closing the Savino accounts, Grimaglia introduced him to defendant Tinios. Tinios, like Grimaglia, was an account executive at Hutton whose work was supervised by defendants Adair, Goldstein, and Miller.
The amended complaint describes two meetings between Savino Jr. and defendants Tinios and Grimaglia, both of which occurred in May 1977. Tinios and Grimaglia advised Savino Jr. that the funds in the Savino accounts should be reinvested in stock options, assuring him that options trading was no gamble and promising to watch plaintiffs' portfolio carefully every day. Based on this representation, Savino Jr. agreed not to close the Savino accounts, and to allow the funds therein to be reinvested in stock options. To insure that Tinios and Grimaglia would watch the Savino accounts properly, Savino Jr. agreed to pay them a bonus equal to ten percent of the profits on the Savino accounts.
Tinios promised to provide Savino Jr. with monthly written reports on the Savino accounts beginning in June 1977. In the reports for June, July, and August 1977, Tinios and Grimaglia falsely overstated the value of certain of the Savino accounts. Plaintiffs were unaware that the reports contained incorrect information, and relied on the false information by continuing to permit Tinios and Grimaglia to manage the Savino accounts. Plaintiffs also relied on these false statements by opening a fifth Savino account, in the name of Ann Savino, in September 1977, and by transferring funds invested with Shearson over to Hutton for distribution among the five Savino accounts in October 1977. The monthly reports continued to overstate the value of certain of the Savino accounts during September and October of 1977, which overstatement induced plaintiffs to open a sixth Savino account, in the name of TAI, during November 1977.
Tinios and Grimaglia made a number of false statements concerning the profits shown by the Savino accounts as of the end of 1977. On or about December 31, 1977, Tinios and Grimaglia informed plaintiffs that the Savino accounts had shown a profit of $ 111,000. In February 1978, they revised this figure downward to $ 63,487, at which point Savino Jr. paid Tinios and Grimaglia $ 6,500, representing the previously agreed upon ten percent bonus. The profit figure was subsequently recalculated in March 1978 to be $ 13,000, and in April 1978 to be $ 2,000. Shortly after the April recalculation, Tinios and Grimaglia returned the $ 6,500 bonus to Savino Jr. The Savino accounts actually showed a loss of $ 48,000 during the period in question. Tinios and Grimaglia were aware that the Savino accounts had shown such a loss when they stated to plaintiffs that a profit had been earned; plaintiffs relied upon the misrepresentations of Tinios and Grimaglia by permitting the Savino accounts to remain at Hutton.
The Savino accounts continued to suffer heavy losses during the first part of 1978. Tinios and Grimaglia concealed these losses from plaintiffs until April 18, 1978, on which date Tinios informed Savino Jr. that the losses in the Savino accounts amounted to $ 250,000. At that time, Tinios stated that the losses did not exceed $ 250,000, that steps would be taken to prevent further losses, and that Hutton intended to reimburse plaintiffs for their losses if the Savino accounts had actually shown a $ 48,000 loss rather than a $ 2,000 gain for the period ending December 31, 1977. These representations were false, and plaintiff relied on them by not immediately closing the Savino accounts. Not until May 1978, when Tinios met with Savino Jr. and told him that the losses in the Savino accounts would not exceed $ 330,000, did plaintiffs proceed to close the Savino accounts. The losses on the Savino accounts totaled $ 375,000.
Defendants have moved to dismiss the amended complaint. They argue that plaintiffs' federal securities law cause of action is insufficient in law and should accordingly be dismissed; the two state law causes of action should also be dismissed, they contend, because dismissal of the federal cause of action makes an exercise of pendent jurisdiction over the state claims inappropriate. In the alternative to their motions to dismiss the amended complaint, defendants move to strike those allegations in the amended complaint by which plaintiffs assert claims for punitive damages and attorneys' fees. The case is now before the Court on these motions.
DEFENDANTS' MOTIONS TO DISMISS
Defendants urge alternative grounds in support of their instant motions to dismiss plaintiffs' federal securities law cause of action. First, they argue that the allegations of the amended complaint set out above fail to plead fraud with the requisite particularity, making the amended complaint insufficient under Rule 9(b), Fed.R.Civ.P. Second, defendants contend that those allegations are insufficient to state a claim upon which relief can be granted, so ...