The opinion of the court was delivered by: SWEET
Now pending in this securities case are motions on behalf of the individual defendants Michael Brown ("Brown") pro se, Frank Caveretta ("Caveretta"), Jackie Johnston ("Johnston"), and the two securities firm defendants, Smith Barney, Harris Upham & Co., Inc. ("Smith Barney") and Merrill Lynch, Pierce, Fenner & Smith, Inc. ("Merrill Lynch"), to dismiss the amended complaint of plaintiff Marie Crummere ("Crummere") for lack of federal subject matter jurisdiction, failure to state a claim upon which relief can be granted, and for failure to plead fraud with particularity, Federal Rules of Civil Procedure, Rules 12(b)(1), 12(b)(6) and 9(b) respectively. The motion is granted for the reasons set forth below.
Crummere's initial complaint, filed on February 20, 1985, contained only one claim against defendants Smith Barney, Brown and Johnston which is identical to the first claim of the amended complaint discussed below. On May 24, 1985, Crummere amended her complaint pursuant to leave of this court, adding a second claim against Merrill Lynch and Caveretta and a third claim against Chemical Bank which was dismissed for lack of federal jurisdiction over the defendant. In response to this amended complaint, all defendants filed this motion to dismiss the complaint of July 14, 1985, and one month later Crummere filed a motion for partial summary judgment against defendant Brown on the state law claim. In addition, Crummere has sought to leave to amend her amended complaint to add a claim under 18 U.S.C. §§ 1961 et seq. (RICO).
In determining the validity of a motion to dismiss, the court assumes and sets forth below the facts contained in Crummere's amended complaint. SEC v. Drysdale Securities Corp., 606 F. Supp. 295 (S.D.N.Y. 1985); Miree v. DeKalb, 433 U.S. 25, 53 L. Ed. 2d 557, 97 S. Ct. 2490 (1977).
The complaint charges that the defendants Brown, Johnston, and Caveretta, with the aid of the corporate defendants Smith Barney and Merrill Lynch, defrauded her in violation of the federal securities laws and state laws under the following alleged facts.
In August of 1983, Crummere was approached by Brown who persuaded her to give him $61,000 in cash over the next four months to invest on her behalf with Smith Barney, the brokerage firm which was employing Brown as a registered representative. Five thousand dollars of this initial sum came from the cashing of Long Island Lighting Company ("LILCO") bonds owned by the plaintiff. Instead of investing this money for Crummere in her Smith Barney account, Brown diverted it to an-account maintained at Merrill Lynch in the name of his sister, Jackie Johnston, an account managed by Caveretta as registered representative employed by Merrill Lynch. This Johnston account was controlled by Brown who had discretionary authority over the account. Crummere never received any documentation regarding the investments Brown was purportedly making on her behalf, despite here efforts to verify the safety of her savings.
The misappropriation of funds continued throughout the fall of 1984, when Brown persuaded Crummere to cash $154,000 worth of bonds which she had entrusted to him in her account. She received two checks (totaling $154,000) from Smith Barney as proceeds of these bonds and deposited them in her personal checking account at Chemical Bank. One day later, Crummere turned these proceeds over to Brown for investment in her Smith Barney account by drawing personal checks from her Chemical Bank account. When Crummere received the cancelled checks, she discovered that they never had been deposited in her account, that Smith Barney as payee had been replaced with the word "cash," and that they were deposited instead in Brown's personal checking account at Chemical Bank. These funds eventually were transferred to Johnston's account at Merrill Lynch. When Crummere confronted Brown with these cancelled checks in October of 1985, Brown gave her four promissory notes totaling $220,500. Apparently not comforted by the tender of these notes, Crummere telephoned Brown's branch manager at Smith Barney to complain of Brown's alleged fraud. The supervisor never returned her call, and Crummere later contacted another Smith Barney representative to complain that Brown had defrauded her.
The plaintiff bases three claims on these circuitous diversions of her funds. The first claim is that Brown, Johnston and Smith Barney conspired to misappropriate funds and to divert them into the Merrill Lynch account under Johnston's name, violating section 10(b) of the Securities Exchange Act of 1934 (the "1934 Act"), 15 U.S.C. section 78j(b), and sections 12 or 17 of the Securities Act of 1933 (the "Securities Act"), 15 U.S.C. §§ 771 and 77g.
Crummere also alleges two pendent state claims related to this first claim, one based on Brown's tender of the four promissory notes, and the other based on Smith Barney's allegedly negligent hiring and supervision of Brown.
Crummere's second cause of action centers around the activities of Brown and Caveretta in the administration of Johnston's brokerage account with Merrill Lynch. Crummere contends that Brown, Caveretta and Merrill Lynch conspired to defraud her by diverting money from her Smith Barney account, placing the money in the Merrill Lynch account under Brown's actual control, and "engaging in speculative, inappropriate churning" of the securities. The claim further alleges that Merrill Lynch knew or should have known that such activities were improper and unlawful and that Merrill Lynch negligently supervised the activities of Caveretta with regard to the account.
The final claim charged that Chemical Bank improperly honored the two checks altered by Brown in violation of the Uniform Commercial Code and applicable duties under common law of negligence and warranty. Chemical Bank was, however, dismissed as a ...