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DICKENS v. CHEMICAL BANK

November 16, 1983

BRIAN DICKENS, et al, Plaintiffs, against CHEMICAL BANK, a corporation, Defendant.


The opinion of the court was delivered by: HAIGHT

MEMORANDUM OPINION AND ORDER

HAIGHT, District Judge:

 Plaintiffs Brian and Andrea Dickens bring this action on behalf of themselves and other persons similarly situated to redress alleged violations by defendant Chemical Bank ("Chemical") of the antifraud provisions of the Securities Exchange Act of 1934, the Securities Act of 1933, the Commodity Exchange Act, and various pendent state laws. More specifically, Chemical is charged with aiding and abetting the fraudulent activities of Ashton and St. John's, Inc. ("Ashton"), a commodity pool operator registered with the Commodity Futures Trading Commission ("CFTC"). The case is presently before the Court on defendant's motion to dismiss the complaint pursuant to Fed.R.Civ.P. 12(b)(1) and (6) and Fed.R.Civ.P. 9(b). For the reasons stated, the motion is granted.

 I.

 This suit is best understood as a by-product of a prior action, Commodities Futures Trading Commission v. Ashton and St. John's, Inc., No. 80-3707 (S.D.N.Y. June 30, 1980), brought by the CFTC against Ashton and its president, Wilbert A. Wilson. In that action, the CFTC sought to permanently enjoin Ashton from soliciting investments in a commodity futures pool, an operation described in the CFTC's complaint as "a Ponzi or pyramiding scheme." (Def. Ex. 3, P11). On March 9, 1981, Judge Leval granted a permanent injunction against Ashton and Wilson and appointed a receiver to settle claims asserted against the corporation. (Def. Rep. Mem., App. A). Chemical Bank was not involved in the CFTC litigation.

 The complaint in the instant action, while not naming Ashton or Wilson as defendants, tracks in large measure the complaint filed in the CFTC suit. Compare Complaint PP14-21 and CFTC Complaint PP6-14. Chemical's alleged role as aider and abettor in Ashton's fraudulent activities is premised on the fact that Ashton Maintained a checking account at Chemical Bank "to which prospective investors were urged to wire investment funds directly." (Comp. P24(C)). As set forth in the complaint, Chemical's purported liability under the securities lasw is based on (1) Ashton's dissemination of promotional literature designating Chemical as the firm's bank and naming Ms. I. Williams, a Chemical employee, as the "Officer in Charge of Our Account" (Comp. P24(A)); (2) Ms. Williams' "favorable statements" in response to telephone inquiries from prospective investors and her failure to disclose that the Bank "had made no reasonable investigation of Ashton" (Comp. P24(B)); and (3) defendant's "reckless conduct" in failing to "recognize and inhibit in its inception" the fraudulent activities of Ashton (Comp. P25). These various commissions and omissions form the core conduct from which plaintiffs allege--without further elucidation as to how Chemical's actions transgress particular securities provisions--some ten different statutory violations. In short, while Ashton's scheme to defraud investors is set forth fully in the complaint, Chemical's purported liability is premised solely on its otherwise unremarkable status as Ashton's bank and the services attendant on that banking relationship.

 II.

 Defendant's Motion to Dismiss

 In Counts One and Two of the complaint, plaintiffs allege violations of sections 10 and 20 of the Securities and Exchange Act of 1934, 15 U.S.C. 78j and 78t, and Rule 10b-5, 17 C.F.R. 240.10b-5, promulgated thereunder; and sections 5, 12, 15, and 17 of the Securities Act of 1933, 15 U.S.C. §§ 77e, 77l, 77o, and 77q. Defendant moves to dismiss these counts on alternative grounds, arguing first that a claim for damages resulting from commodities transactions cannot be asserted under the aegis of the securities laws due to the exclusive grant of administrative jurisdiction conferred on the CFTC by the Commodity Exchange Act. Alternatively, defendant argues that Counts One, Two and Three, wherein plaintiff alleges violations of sections 6n(3)(4), 6n(4), and 60(1) of the Commodity Exchange Act, must be dismissed for failure to plead fraud with particularity as required by Fed.R.Civ.P. 9(b). Because I find that all three of these claims suffer from the same Rule 9(b) infirmity and must be dismissed on that ground, I need not address plaintiffs' contention that the fraud alleged was in the inducement of "investment contracts" and thus within the scope of the Securities Acts.

 Rule 9(b) of the Federal Rules of Civil Procedure requires that "[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." This refinement of the Federal Rules' otherwise simplified pleading approach is intended to protect defendants from the substantial harm that could result from vaguely pleaded or speculatively based claims of serious wrongdoing.It further ensures that a defendant accused of fraudulent conduct will be fully apprised of the grounds upon which that claim rests. Ross v. A.H. Robins Co., Inc., 607 F.2d 545, 557 (2d Cir. 1979), cert. denied, 446 U.S. 946, 64 L. Ed. 2d 802, 100 S. Ct. 2175 (1980), rehearing denied, 448 U.S. 911, 65 L. Ed. 2d 1140, 100 S. Ct. 3057 (1980); Denny v. Barber, 576 F.2d 465, 469 (2d Cir. 1978); Segal v. Gordon, 467 F.2d 602, 607 (2d Cir. 1972). In the context of securities litigation, Rule 9(b) further operates to diminish the possibility that a plaintiff with a largely groundless claim will be permitted to conduct extensive, costly, and time-consuming discovery, "with the right to do so representing an in terrorem increment of the settlement value, rather than a reasonably founded hope that the process will reveal relevant evidence...." Denny, supra, 576 F.2d at 470. See Decker v. Massey-Ferguson, Ltd., 681 F.2d 111, 115 (2d Cir. 1982) ("Because the 'in terrorem' effect of such unfettered discovery would, to say the least, be substantial, it is important that the wheat in plaintiff's pleading be separated from the chaff."). As stated by the Second Circuit: "To pass muster in this Circuit a complaint 'must allege with some specificity the acts constituting the fraud' [citation omitted]; conclusory allegations that defendant's conduct was fraudulent or deceptive are not enough." Decker, supra, 681 F.2d at 114.

 Certain of the allegations set forth in plaintiffs' complaint clearly do not satisfy Rule 9(b)'s specificity requirement, while others are more fundamentally defective in that they fail to state actionable claims. Although the complaint specifies in considerable detail the fraudulent activities of Ashton, Chemical's alleged involvement as aider and abettor of Ashton's various securities and commodities violations is difficult to ascertain. The parameters of such liability were recently reiterated by the Court of Appeals:

 "The general requirements for establishing aiding and abetting liability are well settled in this Circuit. Plaintiffs must prove (1) a securities law violation by a primary wrongdoer, (2) knowledge of the violation by the person sought to be charged, and (3) proof that the person sought to be charged substantially assisted in the primary wrongdoing." Armstrong v. McAlpin, 699 F.2d 79, 91 (2d Cir. 1983). See also IIT v. Cornfeld, 619 F.2d 909, 922 (2d Cir. 1980); S.E.C. v. Falstaff Brewing Corp., 203 U.S. App. D.C. 28, 629 F.2d 62, 72 (D.C.Cir. 1980).

 Chemical's alleged participation in Ashton's fraud may be reduced to three acts or omissions. First, with respect to Ashton's dissemination of promotional literature identifying Chemical as the bank where Ashton maintained a checking account, I fail to perceive how Chemical was remiss, even assuming its awareness of the literature, in failing to "dispel the mistaken impressions [thereby] created...." (Comp. P24(A)). The only impression created is an accurate one: Ashton did have a checking account at Chemical and, accordingly, Chemical was accurately denominated as Ashton's "Bank." A review of the page in question shows that Chemical is listed as Ashton's "Bank" together with the law firm acting as Ashton's "attorneys" and the individual serving as its "Accountant." Plaintiffs' conclusory assertion that these neutral facts induced investors to believe Ashton was "legitimately engaged in trading in commodities futures in conjunction with defendant Chemical Bank" falls for short of Rule 9(b)'s specificity requirement.

 Further, the above allegation, and indeed the entire complaint, unjustifiably presumes a duty of investigation and disclosure on the part of Chemical based on its status as "a large, major bank" with "substantial resources and numerous highly skilled employees." (Comp. P25). Yet aside from Chemical's arguable ability to ferret out the misdeeds of account holders such as Ashton, plaintiff has offered no support, and this Court knows of none, for the proposition that Chemical stands in some sort of fiduciary role with respect to the unknown clients of one of its customers. "At the very least, [Rule 9(b)] requires plaintiff to allege: (1) the nature of each individual defendant's participation in the fraud, including the facts constituting scienter and an explanation of the defendant's duty toward the plaintiff...." Natowitz v. Mehlman, 542 F. Supp. 674, 676 (S.D.N.Y. 1981). Plaintiffs appear to contend that an entity or individual engaged in fraudulent activity can, by the simple act of maintaining a checking account, subject its chosen bank to aider and abettor liability. Such a contention, if accepted, would make a virtual dragnet of the securities laws and would impose on institutions such as Chemical an unprecedented, and seemingly unachievable, degree of vigilance in monitoring the ongoing business operations of their customers. Where, as here, defendant cannot be said to owe a fiduciary duty to plaintiff, "the 'scienter' requirement [of aider and abettor ...


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