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MORRIS v. GILBERT

December 23, 1986

ALAN E. MORRIS, Plaintiff,
v.
PAUL GILBERT and REICH & CO., INC., Defendants



The opinion of the court was delivered by: GLASSER

GLASSER, United States District Judge:

I. Background

 Defendants Paul Gilbert ("Gilbert") and Reich & Co., Inc. ("Reich") move on a variety of grounds against the amended complaint of plaintiff Alan E. Morris ("Morris"). *fn1" During the relevant time periods, Gilbert was an employee of Reich, a brokerage firm. Morris opened a brokerage account at the firm.

 Although his amended complaint sets forth thirty claims, Morris makes three essential allegations: (1) beginning in December 1982, Gilbert induced Morris to purchase and sell securities and enter other transactions on the representation that he -- Giloert -- was a registered representative of Reich; in fact, Morris alleges, Gilbert did not oecome a registered representative of Reich until August 1983, and Morris relied on the misrepresentation to his detriment; (2) in June 1983, Gilbert recommended that Morris purchase shares of Telesphere International Inc. ("Telesphere") and Biotech Research Labs Inc. ("Biotech") in anticipation of stock splits that Gilbert said he knew would take place in fact, Morris alleges, the stocks did not split, and he was damaged by his reliance on the erroneous recommendation; (3) although Morris's account with Reich was not a discretionary account, Gilbert made discretionary trades during the period from December 1982 to February 1985, notwithstanding Morris's instructions that no trades should be effected without his prior authority.

 II. Conversion to Summary Judgment

 Morris's three essential allegations metamorphosed into thirty claims -- some against both defendants, some against Gilbert alone, and some against Reich alone -- under several legal theories, including federal securities laws, RICO, a New York statute, and a series of common law causes of action. Although the defendants move to dismiss the complaint, they have also introduced matters outside the pleading. Thus, there are two affidavits from Gilbert saying that Morris was never defrauded, a power of attorney executed by Morris in favor of Gilbert, and copies of brokerage statements. Withal, the defendants maintain that the motion has not been converted to one for summary judgment, because the amended complaint is so infirm as to compel dismissal before the court even decides whether to consider material outside the pleading. Defendants' Reply Memorandum of Law at 3 & n.*.

 A motion to dismiss for failure to state a claim upon which relief can be granted, Fed. R. Civ. P. 12(b)(6), "shall be treated as one for summary judgment" if "matters outside the pleading are presented to and not excluded by the court," id. 12(b). Whether or not the motion to dismiss has been converted to a motion for summary judgment is not a topic for debate. The court, and not the parties, decides whether the motion to dismiss is converted to one for summary judgment. A decision to exclude matters outside the pleading is tantamount to a decision that the motion will not be converted; a decision not to exclude such extraneous matters triggers the procedures of rule 56 of the Federal Rules of Civil Procedure. *fn2" Once a court decides to rely on matters outside the pleadings, it may not "exclude from consideration other evidence that had been submitted or might properly of submitted under Rule 56." Goldman v. Belden, 754 F.2d 1059, 1066 (2d Cir. 1985); accord Baptiste v. Sennet & Krumholz, 788 F.2d 910, 911 (2d Cir. 1986) (before converting to motion for summary judgment, district court was obligated to give plaintiff notice of intention to convert and opportunity to respond with appropriate evidence).

 The decision whether or not by convert the motion is within the court's discretion. See ware v. Associated Milk Producers, Inc., 614 F.2d 413, 415 (5th Cir. 1980) (per curiam). "When tne extra-pleading material is comprenensive and will enable a rational determination of a summary judgment motion, the court is likely to accept it; when it is scanty, incomplete or inconclusive, the court probably will reject it." 5 C. Wright & A. Miller, Federal Practice and Procedure 1366, at 679 (1969). Given the complexity of Morris's amended complaint and the variety of legal attacks on it mounted by the defendants, the the issue for the court is whether or not each of the thirty claims is legally cognizable. Additionally, the extraneous material submitted by the defendants is insufficient to dispose of the entire complaint. The court believes that judicial economy would be served by an initial determination on the sufficiency of the complaint, with defendants free to move for summary judgment at a later date. As such, the court will not consider matters outside tne complaint, and the defendants' motion to dismiss will not be converted to one for summary judgment.

 III. Claims Predicated on Gilbert's Misrepresentation of His Status

 Morris's amended complaint alleges that Gilbert represented himself to be a registered representative of Reich, when, in fact, he did not become a registered representative until approximately August 1983. Morris claims that he relied on this misrepresentation to his detriment because he opened an account at Reich; permitted Gilbert to purchase, sell, and retain securities in tne account on a discretionary basis; assented to Gilbert's recommendations regarding the purchase, sale, and retention of securities: and authorized purchases and sales upon such recommendations. According to Morris, he did not learn of Gilbert's misrepresentation until about February 1985.

 The complaint alleges claims against both Gilbert and Reich individually, as well as a conspiracy claim against both arising out of this misrepresentation. Thus, Giloert is alleged to have violated section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and rule 10b-5 thereunder, 17 C.F.R. § 240.10o-5 (claim 1); section 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a) (claim 5); New York General Business Law § 349 (claim 6); and to have committed a common law fraud (claim 7). Reich is also charged with violating General Business Law § 349 (claim 17). In addition, Morris charges Reich with aiding and abetting Gilbert's fraud (claim 12); with violating, as a "controlling person," section 15 of the 1933 Act, 15 U.S.C. § 77o, and section 20(a) of the 1934 Act, 15 U.S.C. § 78t(a) (claim 13); and with liability under principles of respondeat superior (claim 14) and principal and agent (claim 15). The defendants are charged jointly with a conspiracy to defraud Morris (claim 16).

 A. Pleading with Particularity

 The defendants contend that all the allegations dealing with a misrepresentation of Gilbert's status fail the particularity requirements of rule 9(b) of the Federal Rules of Civil Procedure. The rule provides:

 In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other condition of mind of a person may be averred generally.

 Specifically, the defendants argue that the complaint misses the mark in failing to identify (1) which securities were traded as a result of Gilbert's misrepresentation and (2) the agency reltionship between Reich and Gilbert.

 On the first point, Morris persuasively quotes the following language from an opinion of our court of appeals:

 There is therefore no reason to analyze Rolf's portfolio on a stock by stock basis to determine which purchases and sales constituted frauds upon Rolf, a more specific and particularized investigation which we might have to undertake if Yamada had merely manipulated two or three stocks without engaging in a more exhaustive and all-encompassing web of fraud.

 Rolf v. Blyth, Eastman Dillon & Co., 570 F.2d 38, 47 (2d Cir.), cert. denied, 439 U.S. 1039, 58 L. Ed. 2d 698, 99 S. Ct. 642 (1978). As in Rolf, Morris does not allege that any particular securities transaction, or even any series of transactions, constituted a fraud. Instead, he alleges that every transaction in his Reich account was the product of a fraud perpetrated by Gilbert and aided by Reich. In other words, Morris would not have opened an account with Reich, let alone act on Gilbert's recommendations, had he known tne truth about Gilbert's status. Without reaching the question of how damages may oe computer for the Gilbert misrepresentation, the court is satisfied that Morris is sufficiently specific in alleging that all his trades with Reich stemmed from Gilbert's false representation that he was a registered representative.

 With regard to the defendants' contention that Morris has failed to specify the agency relationship between Reich and Gilbert, the court finds sufficient the allegation that Gilbert was Reich's agent for the transactions complained of. The details of Gilbert's relationship with Reich surely are better known to the defendants than to Morris, who may learn more about the relationship in discovery. In any event, the allegation that Gilbert was Reich's agent is sufficient for purposes of describing "the circumstances constituting fraud" under rule 9(b). While Morris "would not satisfy the pleading requirement of rule 9(b) with "conclusory allegations that defendant's conduct was fraudulent or deceptive," Decker v. Massey-Ferguson, Ltd., 681 F.2d 111, 114 (2d Cir. 1982), with respect to the charge that Gilbert misrpresented his status "[t]here can be no doubt that the [complaint gives each defendant notice of precisely what ne is charged with," Goldman v. Belden, 754 F.2d 1059, 1070 (2d Cir. 1985).

 B. Stating a Claim

 Aside from the contention that the complaint fails to particularize fraud, the defendants argue that the allegations regarding a misrepresentation of Gilbert's status fail to state a claim upon which relief can oe granted, Fed. R. Civ. P. 12(o)(6). In this connection, Gilbert and Reich challenge Morris's reading of Marbury Management, Inc. v. Kohn, 629 F.2d 705 (2d Cir.), cert. denied, 449 U.S. 1011, 66 L. Ed. 2d 469, 101 S. Ct. 566 (1980), and place their reliance on Hayden v. Walston & Co., 528 F.2d 901 (9th Cir. 1975) (per curiam).

 In Marbury Manaqement, defendant Kohn was employed by the brokerage house of Wood, Walker & Co. as a trainee. Although Kohn was employed as a trainee, he misled plaintiffs with "repeated statements that he was a stock broker" and used "a business card stating that he was a ,portfolio management specialist.'" 629 F.2d at 707. The district court held Kohn liable under section 10(b), inferentially finding that his misstatements induced both the purchase and the retention of certain securities. Ic. The district court also dismissed plaintiffs' claims against Wood, Walker, finding that the brokerage house was guilty, at most, of negligently supervising Kohn. Io. The court of appeals affirmed the judgment against Konn and ordered a new trial as against Wood, Walxer. The Second Circuit held that plaintiffs' allegation of detrimental reliance on Kohn's misrepresentation of his status stated a claim under section 10(b) and rule 10b-5. Id. at 710. Moreover, the court distinguished the case upon which Gilbert and Reich now rely -- Hayden v. Walston & Co., 528 F.2d 901 (9th Cir. 1975) (per curiam): "there the plaintiffs had purchased securities through a salesman who was not a duly ...


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