The opinion of the court was delivered by: CONNER
Plaintiffs Saul and Marion Levine ("the Levines") brought this action against Merrill Lynch, Pierce, Fenner & Smith, Incorporated ("Merrill Lynch"), a securities brokerage house, and Jesse Scott ("Scott"), a Merrill Lynch account representative, alleging that defendants fraudulently induced them to trade in options and churned their account, resulting in a net loss of approximately $147,000. Plaintiffs allege that defendants thereby: (1) violated sections 10(b) and 20(a) of the Securities Exchange Act of 1934 ("the '34 Act"), 15 U.S.C. §§ 78j(b), 78t(a) (1982), and Securities and Exchange Commission rule 10b-5, 17 C.F.R. § 240.10b-5 (1985), promulgated under section 10(b); (2) violated the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1961-1968 (1982); and (3) committed common law fraud and breached their fiduciary duties to plaintiffs. Subject matter jurisdiction is predicated upon section 27 of the '34 Act, 15 U.S.C. § 78aa (1982), section 1964 of RICO, 18 U.S.C. § 1964 (1982), and the doctrine of pendent jurisdiction.
This matter is now before the Court on defendants' motion to dismiss the complaint for failure to state a claim upon which relief can be granted or, in the alternative, to stay this action and compel arbitration. For the reasons set forth below, defendants' motion is granted in part and denied in part as indicated below.
On a motion to dismiss, the Court must accept as true the facts alleged in the complaint. See Cruz v. Beto, 405 U.S. 319, 322, 31 L. Ed. 2d 263, 92 S. Ct. 1079 (1972) (per curiam); Joyce v Joyce Beverages, Inc., 571 F.2d 703, 706 (2d Cir.), cert. denied, 437 U.S. 905, 57 L. Ed. 2d 1135, 98 S. Ct. 3092 (1978). Accordingly, for the purposes of this motion, the relevant facts are as follows:
In 1982, plaintiff Saul Levine was a 70-year-old retired professor of art history, and plaintiff Marion Levine, his wife, was a 64-year-old associate professor of English at Nassau Community College. Saul Levine received $460 per month as a pension; his wife earned $31,000 per year teaching.
On March 12, 1982, the Levines opened a so-called discretionary account at Merrill Lynch, over which Scott, their broker, exercised complete control. Scott was aware of the Levines' age, employment, and income situation. He also knew that they were unsophisticated and inexperienced in financial matters, and sought to invest only in stable, income-producing securities.
In October 1982, Scott allegedly induced the Levines to enter into an agreement authorizing Scott to trade in options on their behalf. According to the Levines, Scott told them "that options are a safe form of investment which are suitable for generating conservative growth and income consistent with [their] needs." The Levines did not understand the nature of options or the risks that options trading entailed, and had not previously invested in options. Scott also allegedly represented that he was an expert in the securities investment field and, more specifically, in the field of options, and that the Levines should rely on his expertise and knowledge and should give him complete control over the handling of their account, which they did.
In the approximately 260 trading days between October 5, 1982 and October 25, 1983, Scott initiated some 98 transactions for the Levines' account. Scott generated $20,228 in commissions and $4,790 in margin charges. An additional option purchase on January 27, 1984 resulted in another $596 in commissions. These transactions resulted in a net loss of $147,849 and wiped out most of the Levines' life savings.
The Levines allege that Scott knew that they were unable to bear the risks of heavy trading on margin in high-risk options but disregarded their investment needs and objectives, and initiated excessive trades for, or "churned," their account by purchasing and selling speculative options in order to generate commissions. The Levines assert that the transactions were excessive in size and frequency in light of their financial objectives and resources.
Plaintiffs' complaint asserts three claims against defendants. Plaintiffs' first claim charges defendants with violations of section 10(b) and rule 10b-5. Plaintiffs' second claim charges defendants with violating RICO, and alleges as predicate acts violations of the mail fraud statute, the wire fraud statute, and the federal securities laws. Finally, plaintiffs' third claim charges defendants with common law fraud and breach of fiduciary duty. As noted above, defendants have moved to dismiss the complaint against them for failure to state a claim. In the alternative, defendants argue that plaintiffs' claims must be stayed pending arbitration.
A. The Securities Fraud ...