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BOSIO v. NORBAY SECS.

January 8, 1985

RICHARD J. BOSIO, Plaintiff,
v.
NORBAY SECURITIES, INC. and BENJAMIN TAORMINA, Defendants



The opinion of the court was delivered by: GLASSER

MEMORANDUM AND ORDER

I. LEO GLASSER, United States District Judge:

 Plaintiff brings this action seeking compensatory and punitive damages under the Securities and Exchange Act of 1934, 15 U.S.C. § 78a et seq. (the "1934 Act"), and state law. Defendants have moved to dismiss the complaint or parts thereof for a variety of reasons. Plaintiff has also moved to amend the complaint. For the reasons set forth below, defendants' motion to dismiss the first, second, third and fourth causes of action, as well as the demand for punitive damages, is granted. As to the fifth and sixth causes of action, defendants' motion is denied. Plaintiff may amend his complaint in a manner consistent with this opinion.

 Background

 At all the time relevant to the complaint, plaintiff Bosio, a California resident, maintained an account with defendant Norbay Securities, Inc. ("Norbay"), a securities brokerage firm incorporated in New York and a member of the Boston Stock Exchange ("BSE") and National Association of Securities Dealers ("NASD"). Defendant Taormina is a broker-dealer employed by Norbay who acted as plaintiff's broker during the period in question.

 In July 1982, in connection with a problem between plaintiff and Norbay which is not at issue here, plaintiff informed defendant Taormina and a Ms. Spinella, another broker, that neither they nor any other brokers at Norbay should enter into any transactions for his securities account without his express authorization. Later in 1982, plaintiff instructed Ms. Spinella, who was then with another firm, to sell 49,000 of his 223,000 shares of Western Consortium stock, send him the proceeds of that sale, and reissue to him a certificate for the remaining 174,000 shares. Because Spinella's firm could not handle the transaction, plaintiff was referred back to Norbay.

 At plaintiff's instruction, Taormina executed the sale of the Western Consortium stock. This dispute arises, however, from plaintiff's allegation that the $43,947 in proceeds resulting from that sale were never turned over to him. Rather, the complaint alleges, these proceeds were put into "an account held with Norbay of a third party." Plaintiff alleges that although Taormina initially represented that the proceeds would be transferred to plaintiff, Taormina has never done so despite numerous demands by plaintiff. Neither the identity of this third party nor the circumstances surrounding this alleged improper transaction have been revealed by either party to this Court.

 In his complaint, plaintiff has alleged six causes of action as follows: (1) defendants violated § 10(b) and § 15(c)(1) of the 1934 Act and the rules promulgated thereunder; (2) Norbay is liable under § 20 of the 1934 Act for any damages caused to plaintiff by Taormina by violations of the Act; (3) defendants violated NASD and BSE rules requiring fair dealings with customers; (4) defendants committed common law fraud by intentionally making material misrepresentations or omissions on which plaintiff relied and thereby suffered injury; (5) defendants breached a fiduciary duty to plaintiff by failing to carry out plaintiff's instructions to forward the proceeds to him and instead transferred them to a different account; and (6) defendants converted plaintiff's proceeds.

 For relief, plaintiff seeks compensatory damages in the amount of the proceeds, pre- and post-judgment interest, and an estimated $15,000 in attorneys' fees. On the fiduciary duty claim plaintiff seeks punitive treble damages under California law, and on the fraud claim, plaintiff seeks the same damages based on common law.

 Discussion

 Because defendants have moved to dismiss the complaint or parts thereof for a variety of reasons, I will address defendants' motion as it pertains to each cause of action.

 Causes of Action Under the 1934 Act

 In his first cause of action, plaintiff alleges that in connection with their sale of the Western Consortium stock, defendants

 
willfully and fraudulently through the means and instrumentalities of interstate commerce (1) employed a device, scheme or artifice to defraud Bosio; and/or (2) made misrepresentations and/or omissions of material fact to Bosio; and/or engaged in acts, practices, or a course of business which operated to defraud all [sic] and/or deceive Bosio

 in violation of § 10(b) of the 1934 Act, 15 U.S.C. § 78j(b), and § 15(c)(1) of the Act, 15 U.S.C § 780(c)(1).

 Section 10(b) of the 1934 Act makes it unlawful for anyone to use a device "in connection with the purchase or sale of any security." Section 15(c)(1) prohibits a broker or dealer from using the mails or other means of interstate commerce "to effect any transaction in, or to induce or attempt to induce the purchase or sale of, any security. . . ." Although not specified in the complaint, plaintiff's motion papers aver that the alleged securities violations stem from Taormina's representation that he would complete the Western Consortium transaction in accordance with plaintiff's instructions, and that Taormina thus induced plaintiff to allow defendants to handle the transaction. Plaintiff alleges that defendants' fraudulent act was the "improper distribution of proceeds in connection with the sale of Western Consortium, Inc. stock." Plaintiff's Memorandum at 10, 13.

 Defendants move to dismiss this cause of action for failure to allege fraud with particularity as required by Rule 9(b) and for failure to allege the essential elements of the statutory violations alleged. Because I find that plaintiff fails to state a claim under § 10(b) and § 15(c)(1), I need not address any other alleged bases for dismissal.

 Plaintiff relies on Opper v. Hancock Securities Corp., 250 F. Supp. 668 (S.D.N.Y.), aff'd, 367 F.2d 157 (2d Cir. 1966) to support his allegation that a failure to follow a customer's order is actionable under the Act. In that case, the plaintiff had requested that the defendant, a broker-dealer, sell 3,000 of plaintiff's shares of stock at the best price obtainable. The defendant assured plaintiff that it would sell the shares but did not do so, allegedly because it had not yet obtained a market for the shares. At the same time, however, defendant sold over 6,000 of its own shares of the same stock.

 The Opper trial court found that plaintiff had stated a cause of action under § 10(b) and ) 15(c)(1). The court held:

 
It has been settled for a long time that when Congress struck in this legislation at the particularized problems of "manipulative, deceptive, or otherwise fraudulent" practices in the securities markets, it meant to reach frauds that "may take on more subtle and involved forms than those in which dishonesty manifests itself in cruder and less specialized activities." . . . We are concerned in this case with a garden variety instance of deception, nondisclosure, and self-preferment by a broker purporting to act as a selling agent.

 250 F. Supp. at 673 (citations omitted). Affirming the district court, the Second Circuit itself differentiated Opper from the instant case. The court stated that a broker's failure to carry out a sale order while disposing of its similar stock constituted a breach of contract and securities law violation. 367 F.2d at 158 (citing Barnett v. United States, 319 F.2d 340, 344, 345 (8th Cir. 1963)). Opper therefore does not provide support for plaintiff's position.

 I find, however, that other authorities warrant the dismissal of plaintiff's claims under § 10(b) and § 15)c)(1). It is well established in this circuit that the "in connection with" the purchase/sale of securities requirement of 10(b) requires using a device "of a sort that would cause them to purchase or sell a corporation's securities." SEC v. Texas Gulf Sulfur, 401 F.2d 833, 860 (2d Cir. 1968) (en banc), cert. denied, 394 U.S. 976, 89 S. Ct. 1454, 22 L. Ed. 2d 756 (1969) (emphasis added). This principle has been reiterated in numerous district and circuit court cases in this circuit. The "fraud practiced must have been prior to or contemporaneous with the sale of securities," Freschi v. Grand Coal Venture, 551 F. Supp. 1220, 1227 (S.D.N.Y. 1982) (citing Kogan v. National Bank of North America, 402 F. Supp. 359, 361 (E.D.N.Y. 1975)) (emphasis added). As stated in plaintiff's motion papers and at oral argument, plaintiff alleges that defendants acted in violation of the 1934 Act because Taormina fraudulently promised to "follow plaintiff's instructions" regarding the sale of the Western Consortium stock and falsely represented that he would forward the proceeds of the sale to plaintiff. This sort of misrepresentation, if it was a misrepresentation at all, goes not to any inducement by the defendants regarding the investment purpose of the sale, but to the arrangements concerning the mechanics of the sale. As such, plaintiff's claims under § 10(b) and § 15(c)(1) must fail.

 Further support for this conclusion is found in Smith v. Chicago Corp., 566 F. Supp. 66 (N.D. Ill. 1983). Plaintiff's causes of action under § 10(b) and Illinois law were based on claims that defendant's employee failed to make certain purchases for plaintiff's accounts although instructed to do so, and also fraudulently withdrew funds from plaintiffs' accounts. Two issues [issues] were therefore before the court: whether plaintiffs had standing under § 10(b) and whether a plaintiff can state a claim under that section "when purchases he orders are not made and money is misappropriated from his securities account." Id. at 68. Although not precisely identical, the second issue is similar to that presented in the instant case.

 Relying on Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 44 L. Ed. 2d 539, 95 S. Ct. 1917 (1975) and Santa Fe Industries, Inc. v. Green, 430 U.S. 462, 51 L. Ed. 2d 480, 97 S. Ct. 1292 (1977), the Smith court found that plaintiffs lacked standing because although they requested that defendant's employee purchase stock on their behalves, they never actually became "purchasers" within the meaning of § 10(b). In dictum that is helpful to the instant analysis, however, the court went on to state the plaintiffs had also failed to state a claim under § 10(b). Quoting Sante Fe, the court reiterated the principle tht [that] "a cause of action under the antifraud provisions of the Securities Exchange Act should not be implied where it is 'unnecessary to ensure the fulfillment of Congress' ...


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