The opinion of the court was delivered by: SWEET
Defendant Kidder, Peabody & Co., Inc. ("Kidder, Peabody") moves for an order of dismissal under Rule 12(b), Fed.R.Civ.P., or in the alternative, arbitration of the claims of plaintiff Intre Sport, Ltd. ("Intre Sport") which arise out of two sets of allegedly fraudulent transactions in securities. Kidder Peabody seeks the following relief: 1) dismissal of all claims alleged under section 12(2) of the Securities Act of 1933; 2) dismissal of the claim arising under the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1961 et seq (hereinafter "RICO"); 3) compelled arbitration of all other claims, including any remaining RICO claims and implied causes of action under the federal securities laws; and 4) dismissal of the federal securities laws claims if they are not referred to arbitration. For the reasons set forth below, the motion to dismiss the claims under RICO and Section 12(2) of the Securities Act of 1933 is granted, and the remaining federal securities law and common law fraud claims are referred to arbitration.
Intre Sport filed this action on March 13, 1985, alleging claims arising under section 12(2) of the Securities Act of 1933, 15 U.S.C. § 771(2), section 10(b) and 15(c) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78o(c) and various common law breaches of contract, breaches of fiduciary duty, and fraud.
Kidder, Peabody filed a motion seeking dismissal and arbitration of the initial complaint on May 3, 1985, and on August 13, 1985, Intre Sport filed both an opposing brief and an amended complaint, adding a claim under section 1964(d) of RICO. Kidder, Peabody withdrew its original motion, and on September 6, 1985 made a motion to dismiss the amended complaint, or alternatively, to submit all of Inter Sport's claims, except for those arising under section 12(2) of the Securities Act, to arbitration. For the convenience of the court, Kidder, Peabody consolidated all of its arguments in its September 1985 brief, superseding the earlier May 3, 1985 brief. Matters outside the pleadings and the memoranda of law have not been considered in deciding this motion, and it remains a motion to dismiss on the pleadings pursuant to Federal Rules of Civil Procedure 12(b)(6) and 12(c).
Intre Sport, formerly known as International Trends, Inc. ("International Trends") is a corporation duly incorporated in the State of New York, with its principle place of business at 350 Fifth Avenue, New York, New York.
Kidder, Peabody is a corporation with its principle place of business at 10 Hanover Square, New York, New York, and is a registered broker-dealer under section 15 of the Securities Exchange Act and is a member of the National Association of Securities Dealers, Inc. ("NASD"), the New York and American Stock Exchanges and most major securities, options and commodities exchanges.
For the purposes of this motion, the facts as alleged in the complaint are accepted as true. In April, 1982, Robert J. Turner ("Turner"), President and Chief Executive Officer of International Trends (now Inter Sport), met Peter N. Brant ("Brant"), a Vice President of Kidder, Peabody employed at its 101 Park Avenue, New York City branch office, who introduced himself to Turner as a highly successful broker with Kidder, Peabody who insisted on complete discretion over his customer's accounts. Turner reported to Brant that his company maintained securities brokerage accounts at other investment firms and had substantial investments in the stock market. Brant told Turner that he never followed Kidder, Peabody's recommendations but instead "specialized in identifying small companies with significant growth potential" and that he was able to develop close confidential relationships with the management of these companies which enabled him to "obtain valuable information in advance of the public."
In April, 1982, Intre Sport opened a margin account with Kidder, Peabody and executed a standard Customers Agreement which provided in relevant part as follows:
Any controversy arising out of or relating to accounts of or transactions with or for the undersigned or to this agreement or the breach thereof shall be settled by arbitration in accordance with the rules of either the American Arbitration Association or the New York stock Exchange as the undersigned may elect. If the undersigned does not make such election by registered mail addressed to you at your main office in New York City within five days after demand by you that such election be made, then you may make such election. Judgment upon any award rendered by the arbitrators may be entered in any court having jurisdiction thereof.
Both Turner and Intre Sport's Executive Vice President Peter J. MacLeod ("MacLeod") were listed as having authority over the corporation's account.
Two sets of transactions are involved: Intre Sport's purchase of the stock of American Surgery Centers, and Brant's alleged failure to sell certain securities in January, 1984.
American Surgery Centers Stock
In March, 1983, Brant purchased 25,000 shares of American Surgery common stock for Intre Sport's account, at a price of $6.4780 per share for a total investment of $161,950.00. Brant told Turner and MacLeod that he had extensive knowledge about American Surgery and that he was personal friends with and regularly contacted employees of the company, including Greg Michael, its Executive Vice President. By May of 1983, American Surgery's price per share had doubled to $12.875.
During this period of rapid increase in the value of the stock, Brant telephoned Turner and MacLeod with what he described as "a deal which will change your lifestyle." He explained that American Surgery was issuing an unregistered secondary offering of common stock. While the offering was already oversubscribed, Brant told Turner and MacLeod that since he had been instrumental in assisting the company in arranging for the sale, he would be able to obtain 25,000 shares at $4.00 for the Inter Sport account. Brant also told them he had discussed the issue with Kidder, Peabody but was being paid for his efforts by American Surgery, either through cash commissions or American Surgery common stock.
Familiar with both the risks and nature of a restricted offering, Turner expressed concern about investing $100,000 in a restricted stock. Allegedly, Brant reassured him that there was no reason for concern since he had an arrangement with the management whereby American Surgery would register the first 25% of the private placement issue within three months of the offering; 50% by year end, and would register the balance of the offering "soon thereafter." Turner and MacLeod visited Brant at his office on or about May 12, 1983 and expressed concern about the restricted nature of the stock. Brant repeated his earlier representation that the company had agreed to register the securities in a very short period of time. He also predicted that the value of American Surgery shares would continue to rise to the point where they would be worth $16.00 per share by the time the restricted shares were freed for trading.
During the same meeting, Brant told Turner and MacLeod that they should not hesitate to invest in American Surgery stock because he had personally invested approximately $800,000 in the restricted offering and produced a check to this effect. Again, Brant repeated to Turner and MacLeod that he was close to the top management of American Surgery, and that they "were going to make a lot of money on the deal."
Brant gave Turner and MacLeod further assurances that "if there was ever any reason for concern about the company they would, in any event, be the first to know since he would receive such information in advance of the general public." In reliance on these representations, Turner and MacLeod agreed to purchase approximately $100,000 of the restricted stock.
The factual accounts of the parties diverge somewhat over the events surrounding the "Limited Offering Memorandum." Intre Sport contends that Brant filled out the name of the purchaser and the distribution date, and tore off the back pages of the document which contained financial information relative to the purchasers and to the subscription agreement. Brant then asked Turner and MacLeod to sign the subscription agreement as "a formality." Kidder, Peabody's memorandum of law is silent on this incident, other than to state that Turner and MacLeod signed the agreement.
The American Surgery restricted shares were never registered in 1983 as Brant promised, and are currently not saleable in the secondary (public) securities market. The price of the common stock plummeted from $14.25 per share in June, 1983 to $3.125 in February, 1984. From May, 1983 through February, 1984, Turner and MacLeod had numerous conversations about the declining value of the shares and the company's failure to live up to the registration commitments. Brant continued to assure them that American Surgery was financially sound, and that the drop in stock price had prompted the company to postpone registering the private placement. Brant also insisted that the company intended to register the stock as soon as the secondary market price improved, and Intre Sport continued to hold, as of February, 1984, the original 25,000 shares of publicly traded stock and the 25,000 shares of private placement stock.
In April, 1984, Turner and MacLeod read a series of newspaper articles in The Wall Street Journal indicating that the Securities and Exchange Commission was investigating Brant's activities. The following month, the two officers learned that an action was filed against Kidder, Peabody in this court entitled Huang v. Kidder, Peabody, No. 84 Civ. 1798 (S.D.N.Y. 1984), alleging securities fraud in connection with ...