The opinion of the court was delivered by: SWEET
Plaintiff R. Stockton Rush III ("Rush") commenced this action against co-defendants Oppenheimer and Co., Inc. and Scott Seskis (collectively "defendants") seeking to recover for damages caused by the defendants' alleged violations of the federal securities laws, violations of New York State common law principles of fraud and breaches of fiduciary duty, and violations of Section 901(g) of the Organized Crime Control Act of 1980. On July 19, 1985, Rush moved pursuant to Rule 15(a) of the Fed.R.Civ.P. to reinstate his RICO cause of action which was dismissed by this court on August 23, 1984 for failure to state a claim upon which relief could be granted. Rush v. Oppenheimer & Co., Inc., 592 F. Supp. 1108 (S.D.N.Y. 1984). For the reasons set forth below, the motion to reinstate the civil RICO claim is denied.
On May 8, 1984, Rush filed this complaint claiming that the defendants (1) violated section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated under that section. 17 C.F.R. § 240.10b-5 (1983); (2) violated a fiduciary duty to Rush arising under the laws of New York; (3) engaged in an on-going "racketeering activity" prohibited by section 901(g) of the Organized Crime Control Act of 1980, entitled Racketeer Influenced and Corrupt Organizations Act 18 U.S.C. § 1961 et seq. (hereinafter "RICO").
On June 25, 1984, the defendants moved for an order dismissing the complaint pursuant to Rule 9(b) Fed.R.Civ.P. for failure to allege fraud with sufficient particularity, and pursuant to Rule 12(b)(6) Fed.R.Civ.P. for failure to state a claim upon which relief could be granted. At oral argument on this motion, Rush consented to file an amended complaint to satisfy the particularity requirements of Rule 9(b) and filed this amended complaint on August 23, 1984. By opinion of August 23, 1984, this court granted the defendants 12(b)(6) motion with respect to the punitive damages claimed under the cause of action for common law fraud, and with respect to the civil RICO claim. The claim based on the alleged 10b-5 violations withstood the challenge of the 12(b)(6) dismissal motion.
On August 31, 1984, Rush filed a motion for reargument on the portion of the August 23, 1984 opinion which dismissed his claim for punitive damages under common-law fraud principles. This motion to reinstate the punitive damages claim was granted on November 9, 1985, Rush v. Oppenheimer & Co., Inc., 596 F. Supp. 1529 (S.D.N.Y. 1985). The defendants' subsequent motion to sever the pendent common law claims and compel arbitration of those claims was denied. Rush v. Oppenheimer & Co., Inc., 606 F. Supp. 300 (S.D.N.Y. 1985), however, such denial of the motion to sever the common law claims was reversed on appeal. Rush v. Oppenheimer, 779 F.2d 885 (2d Cir. 1985).
The facts set out in this court's prior opinions must be reiterated here in order to evaluate whether Rush has properly pled his RICO claim. This action arises out of a two-year stock broker-customer relationship between Rush and the defendant Scott Seskis ("Seskis") who was employed by defendant Oppenheimer & Co., Inc. ("Oppenheimer"), as a registered representative. Rush alleges that Seskis, under the control and supervision of Oppenheimer, a Delaware corporation engaging in the business of securities brokerage, excessively traded the stocks in Rush's account ("churning"), and knowingly made unsuitable recommendations to Rush as to the purchases of stocks.
According to Rush, Seskis began to solicit Rush's business in November, 1981 and requested that Rush open an account with him at Oppenheimer. Rush alleges that he made it clear to Seskis from the start that he was a novice at investing, and that he was a financially unsophisticated eighteen-year old with no prior dealings with investment houses and no prior experience with the "devices of Wall Street." Rush also claims that during the first two months of this business relationship, he informed Seskis that his primary concern was an inheritance of 20,000 fully-paid shares of Natomas Company common stock which was being held for him in trust, and which he could not sell for tax reasons.
Seskis allegedly made persistent efforts from November through December, 1981 to convince Rush to transfer his Natoma as shares into his Oppenheimer account, where they could be used as collateral for purchases made on margin. Rush states that he refused such transfer requests, and claims that he clearly conveyed to Seskis his unwillingness to make investments on margin, a process which he did not understand and which he considered "dangerous." Despite these expressed wishes of his customer, Seskis allegedly made the following untrue statements in an attempt to convince Rush to transfer his Natomas stock to Oppenheimer and permit Seskis to use these shares as collateral for risky stock transactions:
(a) that defendants were among the few brokers in the country who had the skull to invest in and "write" call options on equity securities in a conservative, risk-free system; (b) that defendant Seskis had developed and refined a system of writing call options which was guaranteed to produce income as regularly as "dividends on blue chip stock"; (c) that defendant Seskis had numerous large accounts trusting him to invest for them in securities and, particularly, options thereon pursuant to his system; (d) that defendant Seskis was financially well-off, recommended profitable options and other investments on a consistent basis, and that "see, every day that goes by that you don't get your Natomas stock in here, you lose money we would have made for you writing options on it"; (e) that defendants had "excellent" skill, operations and integrity on which plaintiff could rely and in which he could place his trust and confidence, for investment advice in the nature of a fiduciary relationship as existed over his trust account; and (f) that defendants intended to avoid the "margin" investments which plaintiff had stated he wanted to avoid, and intended to undertake a prudent Natomas options writing program against his Natomas stock, and that he should, therefore, transfer the Natomas shares out of his trust account where he would make more money.
Rush's amended complaint also enumerates the omissions of material facts necessary to make Seskis' representations misleading (P 16a-g). According to Rush, he entrusted his Natomas shares to the defendants on or about March 31, 1982 in reliance on these misrepresentations, with the understanding that Seskis would undertake only a strictly limited program of writing Natomas options against the Natomas stock. Rush asserts that in the 18 months following the transfer of control over the Natomas shares to defendants, the defendants purchases unauthorized, unsuitable securities for Rush's account; charged Rush $92,000 in brokerage commissions and $47,000 in margin interest on an average equity balance of $275,000; caused him to excess of $300,000 in "investment" losses; made 325 separate transactions in his account; transformed such account into defendant Seskis' largest single and principal source of income; and "turned over" the $275,000 average account balance in excess of ten times. Throughout this period, and without Rush's permission, defendants allegedly traded in unauthorized stocks and financed these purchases with "margin" loans on Rush's account secured by Rush's Natomas stock. Rush alleges that defendants would only obtain his consent was obtained obliquely at best and by further untruthful assertions regarding the nature of the stocks purchased and the justification or such purchases.
Rush further alleges that in June, 1982, he informed Seskis that he would be out of touch for the summer and instructed him to limit activity in the account to the liquidation of existing non-Natomas positions or the writing of options against his Natomas stock. According to Rush, however, defendants escalated the prohibited activities in the period between June 14 and August 11, initiating numerous purchases and sales of securities financed by margin loans on Rush's account. When Rush returned in August, he discovered and vigorously protested these continued violations of his understanding with Seskis. Rush claims that Seskis, in order to maintain Rush's acquiescence in transactions violative of the pre-summer agreement and in order to maintain Rush as a client, began to deceive Rush about both the nature of the securities defendants were purchasing and the underlying profitability of Rush's account, knowingly transforming large losses into apparent profits. Relying upon these false reports, Rush consented to defendants' continued control over his account until September, 1983, during which time Seskis purchases unauthorized stocks and highly risky options through margin financing. Finally, in September, 1983, upon being informed of the nature of the defendants' transactions over the prior period, Rush allegedly demanded a written profit and loss accounting. Rush maintains that defendants refused to produce such a document, falsely claiming several times to have sent him such an accounting.
Rush's final allegation states that in September, 1983, the defendants convinced him to purchase 11,000 shares of "Computer Devices" by falsely and knowingly asserting that a French financing would bolster that company's prospects. On or about October 31, 1983, Computer Devices filed for protection under Chapter 11 of the Bankruptcy Code, and Rush alleges that the financing of which defendants informed Rush was never a reality.
Soon after October 31, 1983, Rush claims to have ordered the liquidation of all his securities at Oppenheimer.
Rush seeks to reinstate his civil RICO claim based upon a recent Supreme Court decision overturning the Second Circuit's construction of the Racketeer Influenced and Corrupt Organizations Act in Sedima, S.P.R.L. v. Imrex Co., Inc., 741 F.2d 482 (2d Cir.), rev'd, 473 U.S. 479, 105 S. Ct. 3275, 87 L. Ed. 2d 346 (1985). In Sedima, the Second Circuit held that the plaintiff's complaint was insufficient to constitute a claim under civil RICO for two reasons. First, the Court held that the plaintiff failed to allege an injury stemming from an activity that RICO was designed to deter as distinguished from direct injury as a result of the predicate act violations. Second, Sedima's claim failed to allege that the defendant had been criminally convicted of the predicate acts of mail fraud and wire fraud, a requirement which it inferred from the reference in the civil cause of action section to a "violation" of § 1962, the section providing a list of prohibited criminal activities under the statute. Id. at 495-503.
Relying on the Second Circuit's construction of the civil RICO prerequisites in Sedima, this court dismissed Rush's civil RICO claim on the following grounds:
Rush fails to allege the necessary requisites of a civil RICO case as recently redefined by this Circuit in Sedima, S.P.R.L.v. Imrex Co., Inc., 83-7965, slip op. (2d Cir. July 25, 1984). The prior criminal convictions of defendant that must be alleged as the predicate offenses are clearly not set forth. Nor is the special "racketeering injury," as defined in Sedima, supra, at 5561, alleged by Rush. Count three is consequently dismissed.
On July 1, 1985, the Supreme Court reversed the Second Circuit's Sedima decision, holding that a plaintiff need not establish a "racketeering injury" as distinct from a violation of two or more predicate acts under the statute, and that civil RICO actions do not require that plaintiff demonstrate that defendant was previously convicted of a predicate act or a RICO violation. In view of the fact that Rush's claim did not meet the Second Circuit's requirements for the pleading of a civil RICO action, this ...