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MORAN v. KIDDER PEABODY & CO.

May 9, 1985

JOSEPH MORAN, Plaintiff, against KIDDER PEABODY & CO., a corporation, and BRUCE BARBERS, an individual, Defendants


The opinion of the court was delivered by: SWEET

SWEET, D.J.

Plaintiff Joseph Moran ("Moran") commenced this action against defendants Kidder, Peabody & Co. ("Kidder Peabody") and Bruce Barbers ("Barbers") alleging violations of the federal securities laws and common law fraud. Kidder Peabody now moves this court to dismiss the complaint pursuant to Fed.R.Civ.P. 12(b)(6) or in the alternative for partial summary judgment on the grounds that certain claims are barred by the applicable statute of limitations, and for an order compelling arbitration of any remaining claims. For the reasons discussed below, the motions to dismiss the federal claims and to compel arbitration are granted.

 Facts

 Moran is an individual investor who was a customer of Kidder Peabody, a large investment concern located in New York, between June and December of 1983. Barbers was an employee of Kidder Peabody who acted as Moran's representative and account manager at Kidder Peabody. Between June and December 10 1983, Kidder Peabody acted as broker for the execution of purchase and sale orders of stocks and stock options on behalf of Moran's account. Upon transferring his account to Kidder Peabody, Moran signed a form agreeing to arbitrate any claims against the firm.

 In his complaint, Moran alleges that Barbers engaged in a course of fraudulent and deceitful activities with regard to Moran's account that resulted in the liquidation of the account and the loss of $90,000.00. In his first cause of action for fraud, Moran claims that "on various and diverse occasions," between June 24, 1983 and September 29, 1983 Barbers falsely reported that certain items were purchased or that certain purchases were a mistake, reprinted inaccurate price quotes, purchased items without Moran's authorization and made false representations to Moran in an effort to induce him to purchase certain stocks and stock options. In his second cause of action, Moran alleges that Barbers' activities violated Sections 10(b), 7 and 18 of the Securities Exchange Act of 1934, and Sections 12 and 17(a) of the Securities Act of 1933. He claims that Kidder Peabody credited his account with $55,000.00 without his knowledge and subsequently traded the account as if that sum were deposited therein, that Kidder Peabody unlawfully extended him credit and that Barbers made false representations to induce Moran to make additional cash payments. As further evidence of a general scheme of securities fraud, he states that a copy of a Kidder Peabody form, Form 412 (Members Authority of Transfer and Receive Account), signed by Moran, was materially altered as to the type and amount of the account. In count three of the complaint, Moran contends that Kidder Peabody exercised control over his account and that his account was traded excessively for the sole purpose of generating commission. In his final count, Moran charges Barbers and Kidder Peabody with breach of professional responsibility and negligence. On the basis of these claims, Moran claims damages in the amount of $90,000.00 and punitive damages in the amount of $500,000.00.

 Jurisdiction in this action asserted pursuant to both the federal securities laws and 28 U.S.C. § 1332.

 Discussion

 In its motion, Kidder Peabody moves for dismissal of the federal claims for failure to state a cause of action. In the alternative, it moves for partial summary judgment dismissing the securities claim brought under § 12 of the Securities Act as time barred. It also moves for an order compelling arbitration of its claims pursuant to the written agreements between the parties.

 Federal Securities Claims

 In determining the sufficiency of a complaint pursuant to a motion under Fed.R.Civ.P. 12(b)(6), a court must accept the plaintiff's allegations in the complaint as true and resolve every doubt in favor of the plaintiff. Conley v. Gibson, 355 U.S. 41, 78 S. Ct. 99, 2 L. Ed. 2d 80 (1957); Jenkins v. McKeithen, 395 U.S. 411, 23 L. Ed. 2d 404, 89 S. Ct. 1843 (1969). A complaint should not be dismissed for failure to state a claim "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, supra, 355 U.S. at 45-56.

 In his complaint, Moran repeatedly asserts that Barbers and Kidder Peabody defrauded him in violation of the federal securities laws. he supports this claim with general allegations that the defendants engaged in fraudulent and deceitful activity such as reporting price quotes inaccurately and making unauthorized purchases.

 Whether or not these allegations are sufficient to state a cause of action under the federal securities laws, they fail to meet the requirements of Fed.R.Civ.P. 9(b) as to pleading fraud with particularity. Fed.R.Civ.P. 9(b) requires that:

 
In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity.

 Under Rule 9(b), "mere conclusory allegations to the effect that defendant's conduct was fraudulent or in violation of Rule 10(b)-5 are insufficient." Shenitob v. Shearson, Hammill & Co., Inc., 448 F.2d 442, 444 (2d Cir. 1971). The requirement that fraud be pleaded with specificity serves several purposes. First, it inhibits the filing of a complaint as a pretext for the discovery of unknown wrongs. Gross v. Diversified Mortg. Investors, 431 F. Supp. 1080, 1087 (S.D.N.Y. 1977), aff'd, 636 F.2d 1201 (2d Cir. 1980). Second, it serves to place defendants on notice of the exact misconduct with which they are charged and enables them to prepare a defense. Rich v. Touche Ross & Co., 68 F.R.D. 243, 245 (S.D.N.Y. 1975). Finally, the requirement protects defendants from the harm that comes to their ...


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