The opinion of the court was delivered by: SWEET
R. Stockton Rush III ("Rush") commenced this action against Oppenheimer and Co. and Scott Seskis ("defendants") in order to seek the recovery of damages for alleged violations of the federal securities laws (Count One), violations of common law principles of fraud and fiduciary duty (Count Two), and the Federal Organized Crime Control act of 1970 (Count Three). Defendants moved for an order dismissing the complaint pursuant to (1) Rule 9(b), Fed.R.Civ.P., for failure to allege fraud with the requisite particularity, and (2) Rule 12(b)(6), Fed.R.Civ.P., for failure to state a claim upon which relief can be granted. Rush has consented to file an amended complaint that will satisfy the pleading requirements of Fed.R.Civ.P. 9(b). Defendants' remaining 12(b)(6) motion is denied with respect to Count One, granted with respect to Count Two to the extent of dismissing Rush's request for punitive damages, and granted with respect to Count Three.
Rush filed this action on May 8, 1984, alleging three causes of action against defendants. The first count alleges that defendants violated section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder by the Securities and Exchange Commission, 17 C.F.R. § 240.10b-5 (1983). Rush alleges 10b-5 violations by defendants including excessive trading ("churning") and unsuitable recommendations as to purchases of stocks.
The second count asserts in a pendent state claim that defendants violated a fiduciary duty to Rush arising under the laws of New York. The final count alleges that defendant's actions constitute on-going "racketeering activity" within the meaning of section 901(g) of the Organized Crime Control Act of 1970, 18 U.S.C. Section 1961(1)(D).
Rush alleges that from November, 1981 until December, 1983 defendant Scott Seskis ("Seskis") worked as a registered representative and an account executive of, and under the control and supervision of, defendant Oppenheimer and Co. ("Oppenheimer"), a Delaware corporation engaged in the business of securities brokerage. Rush claims to have been, at the inception of his dealings with defendants, a financially inexperienced and unsophisticated eighteen-year old with no prior contacts with investment houses or the "devices of Wall Street." Rush asserts that beginning in November, 1981, Seskis persistently solicited Rush's business and in December, 1981, Rush opened an investment account with Oppenheimer, with Seskis acting as Rush's "customer man." Rush alleges that from the earliest moments of his relationship with Seskis he made it clear that he was a novice at investing, that his principal concern was an inheritence of 20,000 fully-paid shares of Natomas Company common stock held in trust for him, and that for tax reasons he could not sell his Natomas stock. Rush contends that despite Seskis' persistent efforts in November and December of 1981 to convince him to transfer his Natomas shares from his trust account into his Oppenheimer account, where they could be used as collateral for margin purchases, Rush refused to consent to a transfer. Rather, Rush alleges that he clearly conveyed to Seskis his unwillingness to make investments on margin, a process which he did not understand and which he considered "dangerous."
Rush asserts that from January until March 1982 defendants made numerous untrue statements in an effort to convince him to abandon his conservative investment strategy. Such alleged assertions included:
(a) that defendants were among the few brokers in the country who had to skill to invest in and "write" call options on equity securities in a conservative, risk-free system;
(b) that defendant Seskis had developed and refined a system of writing call options which was guaranteed to produce income as regularly as "dividends on blue chip stock";
(c) that defendant Seskis had numerous large accounts trusting him to invest for them in securities and, particularly, options thereon pursuant to his system;
(d) that defendant Seskis was financially well-off, recommended profitable options and other investments on a consistent basis, and that "see, every day that goes by that you don't get your Natomas stock in here, you lose money we would have made for you writing options on it";
(e) that defendants had "excellent" skill, operations and integrity on which plaintiff could rely and in which he could place his trust and confidence, for investment advice in the nature of a fiduciary relationship as existed over his trust account; and
(f) that defendants intended to avoid the "margin" investments which plaintiff had stated he wanted to avoid, and intended to undertake a prudent Natomas options writing program against his Natomas stock, and that he should, therefore, transfer the Natomas shares out of his trust account where he would make more money.
Rush alleges that in reliance on these assertions by defendants, on or about March 31, 1982, he entrusted his Natomas shares with defendants and authorized defendants to undertake a strictly limited program of writing Natomas options against such stock. Rush asserts that in the 18 months following the transfer of control over the Natomas shares to defendants, the defendants purchased unauthorized, unsuitable securities for Rush's acount; charged Rush $92,000 in brokerage commissions and $47,000 in margin interest on an average equity balance of $275,000; caused him in excess of $300,000 in "investment" losses; made 325 separate transactions in his acount; transformed such account into defendant Seskis' largest single and principal source of income; and "turned over" such $275,000 average account balance in excess of ten times. Throughout this period, and without Rush's permission, defendants allegedly traded in unauthorized stocks and financed these purchases with "margin" loans on Rush's account secured by Rush's Natomas stock. Rush alleges that ...