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LEONE v. ADVEST

December 12, 1985

JOSEPHINE LEONE and JOSEPHINE LEONE as Executrix of the Estate of ANDREW LEONE, Plaintiffs, against ADVEST, INC., THOMSON-McKINNON SECURITIES, INC., PRUDENTIAL-BACHE SECURITIES, INC., and JEROME MESSANA, Defendants


The opinion of the court was delivered by: CARTER

CARTER, District Judge

The four defendants in this securities fraud action present an omnibus of motions to the court in light of the recent Supreme Court decision in Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 105 S. Ct. 1238, 84 L. Ed. 2d 158 (1985). In response, plaintiffs have moved to amend their complaint and seek sanctions pursuant to Rule 11, F.R.Civ.P.

 Facts

 The facts are taken from the amended complaint. *fn1" In 1982, Josephine Leone was a 58 year-old teletype operator living alone in Queens. She supported her elderly and infirm father, Andrew Leone, who lived in a senior citizens home. In May of that year, she went to Advest, Inc. ("Advest"), seeking to place their savings of $413,000 in secure, income-producing investments. At Advest, she was introduced to Jerome Messana, who promised her that she would become a millionaire within five years and would receive $30,000 per year, tax-free, from one investment alone. She signed a "Customer's Agreement" and opened two accounts at Advest, one in her name, and one jointly with her father. This "Customer's Agreement" contained a provision that "any controversy between [Advest and the Leones] arising out of or relating to this agreement or the breach thereof shall be submitted to arbitration in accordance with the rules then prevailing of the Arbitration Committee of the National Association of Securities Dealers, Inc., the American Arbitration Association, Board of Arbitration of the New York Stock Exchange or the Board of Arbitration of the American Stock Exchange, as I may elect." Over the next six months, Messana traded securities in these accounts, conducting $2 million worth of transactions. He also convinced Ms. Leone to invest funds in a commodities futures trading account and in three tax shelter programs. The Leones allege that by October, 1982, when Messana left Advest, his excessive and unsuitable trading had reduced their $400,000 investment to less than $240,000.

 In October or November of 1982, Messana began to work for Thomson-McKinnon Securities, Inc. ("Thomson"). Messana visited Ms. Leone at her home and convinced her to transfer the Leones' accounts to Thomson. Messana continued to conduct their trading. Ms. Leone signed an "Agreement for Option Trading" on November 15, 1982. That agreement contained a provision that any dispute "arising out of the purchase, sale, endorsement, execution or other handling of puts and/or calls for our account shall be settled by arbitration before the Arbitration Committee of the New York Stock Exchange, Inc., in accordance with the rules of that Committee." In February, 1983, both Leones signed an identical agreement for their joint account. Ms. Leone opened a third "Bond and Dividend" account and made further tax shelter investments, all on Messana's suggestion.

 In addition to these accounts, Messana accepted $27,000 from the Leones for purchase of 25,000 shares of Keystone Medical Corp. ("Keystone"). He gave them a "Convertible Promissory Note" pledging repayment of the $27,000 or 25,000 shares of Keystone. The Leones received neither.

 In November of 1983 the peripatetic Messana left Thomson and began to work for defendant Prudential-Bache Securities, Inc. ("Pru-Bache"). He again visited Ms. Leone and persuaded her to transfer the funds she had remaining at Thomson -- now amounting to about $120,000 -- to Pru-Bache. She did so. Both Leones signed a "Joint Account Agreement" that stated, in part: "Any controversy arising out of or relating to my account, to transactions with or for me or to this agreement or the breach thereof, shall be settled for arbitration in accordance with the American Arbitration Association or the Board of Governors of the New York Stock Exchange as I may elect."

 The Leones apparently closed their account with Pru-Bache in May, 1984. Under Messana's stewardship, their investment had dwindled to approximately $60,000.

 The Leones brought this suit in February of 1985. Their nine-count complaint alleges violations of § 12(2) of the Securities Act of 1933 ("the Securities Act"), 15 U.S.C. § 771(2), § 10(b) of the Securities Exchange Act of 1934 ("the Exchange Act"), 15 U.S.C. § 78j(b), and Securities and Exchange Commission Rule 10b-5 ("Rule 10b-5"), 28 C.F.R. § 240.10b-5 by Advest and Messana in Count One, by Thomson and Messana in Count Two, and by Pru-Bache and Messana in Count Four. Count Three seeks performance of the promissory note for Keystone stock. Count Five seeks rescission of the various agreements signed by the Leones. Count Six charges common-law fraud and breach of fiduciary and other duties by all defendants. Count Seven charges negligent mismanagement of the plaintiffs' accounts by all defendants. Count Eight charges violations of various provisions of New York law. *fn2" Finally, Count Nine charges Advest, Thomson and Pru-Bache with controlling person liability for Messana's actions under both federal securities and the common law.

 This lengthy complaint has been met with a barrage of motions. Defendant Advest seeks: (a) to sever the claims against it, pursuant to Rule 21, F.R.Civ.P; (b) to dismiss all securities claims pursuant to either Rule 12(b)(6) or Rule 9(b), F.R.Civ.P; or, alternatively (c) to compel arbitration of all claims; or (d) to dismiss Counts Five, Six and Eight pursuant to Rule 9(b), F.R.Civ.P; and (e) to receive costs and attorney's fees pursuant to Rule 11, F.R.Civ.P. Defendant Thomson asks the court to: (a) stay the action pending arbitration; (b) dismiss the complaint pursuant to either Rule 12(b)(6) or 9(b), F.R.Civ.P.; (c) grant summary judgment in Thomson's favor; (d) dismiss the state law claims pursuant to Rule 12(b)(1), F.R.Civ.P. Defendants Pru-Bache and Messana together urge us to compel arbitration, stay the non-arbitrable claims, and award them costs pursuant to Rule 11, F.R.Civ.P. and 28 U.S.C. § 1927. Finally, plaintiffs seek both to amend their complaint pursuant to Rule 15(a), F.R.Civ.P. and to receive costs and attorney's fees from all defendants.

 Discussion

 I. Arbitration

 A. Motions to Compel

 The Supreme Court's recent decision in Dean Witter Reynolds, Inc. v. Byrd, supra, leaves the court with precious little discretion in ruling on the motions to compel arbitration. The Court interprets the Arbitration Act of 1925 ("the Arbitration Act"), 9 U.S.C. §§ 1 et seq., as a "mandate[] that district courts shall direct the parties to proceed to arbitration on issues as to which an arbitration agreement has been signed . . . . absent a ground for revocation of the contractual agreement." Id. at , 105 S. Ct. at 1241 (emphasis in original). Two ...


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