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RICHARDSON v. SHEARSON/AMERICAN EXPRESS CO.

March 29, 1983

Richardson, et al.
v.
Shearson/American Express Company, Inc., et al.



The opinion of the court was delivered by: WERKER

WERKER, District Judge:

This is an action in which plaintiffs seek to recover the losses in which they sustained on the purchase of stock of Nucorp Energy, Inc. ("Nucorp"). The complaint contains thirteen counts and contains causes of action arising under various provisions of the federal securities laws and the regulations promulgated thereunder, the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1961-1968, section 352-c of the New York General Business Law, N.Y. Gen. Bus. Law § 352-c (McKinney 1968 & Supp. 1982-1983) and the common law. The matter presently is before the court on defendant's motion for an order dismissing the complaint pursuant to Fed. R. Civ. P. 12(b)(6).

 FACTS

 The allegations of the complaint are as follows. Defendant Peter Von Nessi, Jr. ("Von Nessi") is a vice president of defendant Shearson/American Express Company, Inc. He previously had been employed by defendant Drexel Burnham Lambert, Inc. ("Drexel"), but that relationship waas terminated sometime in July 1981. Plaintiffs claim that, through a series of misrepresentations and omissions of material facts, Von Nessi induced them to purchase and, with respect to some palintiffs, not to sell Nucorp stock. The gist of their complaint is that the Nucorp securities were highly speculative and subjected plaintiffs to a substantial risk of loss and that Von Nessi either misrepresented or failed to disclose these facts.

 DISCUSSION

 When considering a motion to dismiss pursuant to Fed. R. Civ. P. 12(b)(6), the court must view the complaint in the light most favorable to the plaintiff, and its allegations must be accepted as true. C. Wright & A. Miller, Federal Practice & Procedure § 1357 at 594 (1969) (footnote omitted). Thus, the complaint cannot be dismissed "unless it appears beyond doubt that the plaintiff[s] can prove no set of facts . . . which would entitle [them] to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957) (footnote omitted).

 Defendatns raise several arguments to support their motion. The court first will address Drexel's contention that all of the claims asserted against it must be dismissed because (1) there is no allegation that plaintiffs suffered any damage while their accounts were at Drexel and because plaintiffs have failed to plead with particularity any wrong-doing by Von Nessi and any knowledge thereof on the part of Drexel while plaintiffs' accounts were at Drexel. As mentioned earlier, Von Nessi left Drexel sometime in July 1981. Since plaintiff Frederick L. W. Richardson did not become a customer of Von Nessi until October 1981, he clearly has no claim against Drexel. With respect to the remaining plaintiffs, the allegations of the complaint indicate that, while their accounts were at Drexel, the price of Nucorp stock rose. Complaint PP27 & 51. Thus, the remaining plaintiffs did not sustain any damages until after Von Nessi had left Drexel and no liability could exist as between these plaintiffs and Drexel. The complaint therefore must be dismissed in its entirety as against Drexel. In view of this disposition, the court need not resolve the other points raised by Drexel.

 The remaining defendants argue that all of the claims asserted in the complaint must be dismissed on the basis of the in pari delicto doctrine. According to defendants, the information that Von Nessi allegedly gave plaintiffs, which plaintiffs claim induced them to buy or not to sell the Nucorp stock was "inside information," which could not be used by plaintiffs because it had not been disclosed to the public. Defendants thus argue that, since plaintiffs also were guilty of wrong-doing, they are in pari delicto and cannot recover.

 In pari delicto means "of equal fault" and has been applied by the courts to deny recovery to a plaintiff whose losses were caused by his own fault that is at least equal to or substantially equal to that of the defendant. See, e.g., Mallis v. Bankers Trust Co., 615 F.2d 68, 76 & 76 n. 6 (2d Cir. 1980), cert. denied, 449 U.S. 1123, 67 L. Ed. 2d 109, 101 S. Ct. 938 (1981); Lemmelin v. Haven Indus., Inc., 462 F. Supp. 172, 178 (S.D.N.Y. 1978); Furman v. Furman, 178 Misc. 582, 34 N.Y.S.2d 699 (Sup. Ct. New York County), aff'd, 262 App. Div. 512, 30 N.Y.S.2d 516 (1st Dep't 1941), aff's per curiam, 287 N.Y. 772, 40 N.E.2d 643 (1942). In the present posture of this case, it is impossible to measure the relative fault of the parties. The complaint therefore cannot be dismissed on the basis of the in pari delicto doctrine.

 Defendants next claim that Counts I, II and III of the complaint must be dismissed insofar as they allege violations of the Investment Advisors Act of 1940 ("IAA"), 15 U.S.C. §§ 80b-1-80b-21, and the Count VII must be dismissed insofar as it alleges violations of the rules of the New York Stock Exchange ("NYSE") because neither the IAA nor the NYSE rules provides a private right of action. Defendants are correct in their contention, which plaintiffs do not dispute, that there is no private right of action under the IAA.Transamerica Mortgage Advisors, Inc. v. Lewis, 444 U.S. 11, 62 L. Ed. 2d 146, 100 S. Ct. 242 (1979). Moreover, although the Supreme Court has not yet addressed the issue, the present state of the law clearly indicates that no private right of action exists under rule 405 of the NYSE, which if the focal point of Count VII. Leist v. Simplot, 638 F.2d 283, 296 n. 11 (2d Cir. 1980), aff'd on other grounds sub nom. Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Curran, 456 U.S. 353, 102 S. Ct. 1825, 72 L. Ed. 2d 182 (1982); Picard v. Wall Street Discount Corp., 526 F. Supp. 1248, 1251 (S.D.N.Y. 1981) (and cases cited therein).

 Plaintiffs, however, argue that they do not premise any of their asserted rights of recovery on either the IAA or the rules of the NYSE. Rather, plaintiffs contend that they rely on the IAA and NYSE rules to support their common-law claims that defendants breached their duties to plaintiffs and did not comply with relevant standards of care. A reading of the complaint, however, reveals the contrary. Count VI specifically alleges breaches of Von Nessi's duties to plaintiffs as a stockbroker and investment advisor, and Count VII alleges violations of Von Nessi's common-law duties. Both Counts contain separate requests for damages. To permit Counts I, II, III and VII to stand in support of plaintiffs' breach of duty claims, which Counts also contain separate damage requests, would be to allow plaintiffs a possible double recovery, which, of course is prohibited.Thus, the claims asserted in Counts I, II and III under the IAA must be dismissed as must be Count VII.

 Defendants next seek dismissal of Count IV, which alleges violations of section 9 of the Securities Exchange Act of 1934, 15 U.S.C. § 78i. Count VI in essence charges Von Nessi with inducing plaintiffs not to sell their Nucorp stock by making misrepresentations and omissions of material facts for the purpose of "stabilizing, fixing, and/or raising the price of Nucorp shares." Complaint P77. Defendants claim that Count IV fails to state a cause of action under section 9 because Count IV does not allege that Von Nessi's conduct actually created a false market in Nucorp stock or that plaintiffs purchased or sold Nucorp shares at an inflated or depressed price or that plaintiffs were damaged by Von Nessi's activity.

 Section 9(e) provides that a person who violates section 9 "shall be liable to any person who shall purchase or sell any security at a price which was affected by [the violation]." 15 U.S.C. § 78i(e). The courts have held that, to state a cause of action, a section 9 complaint must contain an allegation to that effect. Jewelcor Inc. v. Pearlman, 397 F. Supp 221, 244 (S.D.N.Y. 1975) (citing Rosenberg v. Hano, 121 F.2d 818 (3d Cir. 1941) & duPont v. Wyly, 61 F.R.D. 615 (D. Del. 1973)). In this case, plaintiffs do not claim that they purchased or sold Nucorp stock at a price that was affected by Von Nessi's alleged violation of section 9.Rather, they assert that Von Nessi's conduct induced them not to sell the stock. For this reason alone, Count IV must be dismissed.

 Counts VI and VIII of the complaint seek punitive damages for Von Nessi's alleged breach of his common-law fiduciary duties to plaintiffs. Defendants assert that the complaint does not contain the requisite allegations to sustain an award of punitive damages, and that therefore Counts VI and VIII must be dismissed to the extent they seek to recover such damages. Punitive damages are recoverable only "in cases where the wrong complained of is morally culpable, or is actuated by evil and reprehensible motives." Walker v. Sheldon, 10 N.Y.2d 401, 404, 179 N.E.2d 497, 498, 223 N.Y.S.2d 488, 490, (1961); see Borkowski v. Borkowski, 39 N.Y.2d 982, 355 N.E.2d 287, 387 N.Y.S.2d 233 (1976) (per curiam). Although Counts VI and VIII include words such as "wilful" or "wanton," they do not allege conduct that rises to the level of that ...


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