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EICKHORST v. E.F. HUTTON GROUP

January 11, 1990

CHARMAINE S. EICKHORST, ET AL., PLAINTIFFS,
v.
THE E.F. HUTTON GROUP, INC. AND JOHN P. HOLMES, DEFENDANTS. EILEEN WINEGARD, ET AL., PLAINTIFFS, V. THE E.F. HUTTON GROUP, INC. AND JOHN P. HOLMES, DEFENDANTS.



The opinion of the court was delivered by: Robert J. Ward, District Judge.

  MEMORANDUM DECISION

Defendant, the E.F. Hutton Group, Inc. ("Hutton"), has moved to dismiss the amended complaints against it in the above-captioned cases pursuant to Rules 9(b) and 12(b)(6), Fed.R.Civ.P.*fn1 Plaintiffs in the Eickhorst action have moved to further amend the complaint to add an additional plaintiff. For the reasons that follow, the motion to dismiss the amended complaints is granted in part and denied in part, and the motion to amend the complaint in the Eickhorst action is granted.

BACKGROUND

Plaintiffs argue that Hutton formulated a scheme to distribute high risk securities to its conservative customers. As part of that overall scheme, they maintain that Hutton management directed the marketing and sale of the, ACP-1983-3 program as a low risk investment by supplying the account executives responsible for selling the partnership interests with material, including a sales memorandum called the "Blue Top," a brochure, and certain financial projections, which falsely portrayed ACP-1983-3 as a conservative investment. The misleading information was then passed along to plaintiffs through the recommendations of the account executives.

The original complaints in these actions named as defendants the American Completion and Development Corporation, ACP-1983-3 (collectively the "American Completion Defendants"), Howard W. Phillips ("Phillips"), John P. Holmes ("Holmes"), and Hutton. The complaints asserted claims against defendants under (1) Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78j(b) and Rule 10b-5 promulgated thereunder by the Securities and Exchange Commission, 17 C.F.R. § 240.10b-5; (2) Section 17(a) of the Securities Act of 1933 (the "1933 Act"), 15 U.S.C. § 77q(a); (3) common law fraud; and (4) the Racketeer Influenced and Corrupt Organizations Act ("R.I.C.O."), 18 U.S.C. § 1962(a), (c) and (d).

This Court, in an Opinion filed on February 1, 1989, dismissed the claims under Section 17(a) of the 1933 Act, holding that Section 17(a) does not provide a private right of action.*fn3 The remaining claims were dismissed for failure to plead fraud with particularity as required by Rule 9(b). Plaintiffs were granted leave to replead their fraud-based claims against defendants within the parameters set by Rules 9(b) and 11, Fed.R.Civ.P. Eickhorst I, 706 F. Supp. at 1102.

Subsequently, plaintiffs settled their claims with the American Completion Defendants and with Phillips. On March 31, 1989, plaintiffs filed amended complaints naming as defendants only Hutton and Holmes. Prior to the instant motions, plaintiffs settled their claims against Holmes. The amended complaints allege two Section 10b claims against Hutton, the first based upon the sale of unsuitable securities, the second based upon prospectus fraud.*fn4 Plaintiffs also assert state law claims against Hutton based upon common law fraud and breach of fiduciary duty.

DISCUSSION

Rule 9(b) provides that:

  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 may be
  averred generally.

As the Court explained in Eickhorst I, in a motion to dismiss a complaint for failure to plead fraud with particularity as required by Rule 9(b), plaintiffs' allegations must be taken as true. E.g., Luce v. Edelstein, 802 F.2d 49, 52 (2d Cir. 1986). The court must read the complaint generously, and draw all inferences in favor of plaintiffs. Cosmas v. Hassett, 886 F.2d 8, 11 (2d Cir. 1989). Furthermore, Rule 9(b) must be read in conjunction with Rule 8(a), Fed.R.Civ.P., which requires a plaintiff to plead only a short, plain statement of the grounds upon which he is entitled to relief. Ross v. A.H. Robins Co., 607 F.2d 545, 557 n. 20 (2d Cir. 1979), cert. denied, 446 U.S. 946, 100 S.Ct. 2175, 64 L.Ed.2d 802 (1980). The serious nature of a charge of fraud, however, renders mere conclusory allegations that defendants acted fraudulently insufficient to satisfy Rule 9(b). Segal v. Gordon, 467 F.2d 602, 607 (2d Cir. 1972); Center Savings & Loan Assoc. v. Prudential-Bache Securities, Inc., 679 F. Supp. 274, 276 (S.D.N.Y. 1988).

Rule 9(b) is designed to provide a defendant with fair notice of a plaintiff's claim in order to enable the defendant to prepare a defense, to protect his or her reputation or goodwill from harm flowing from baseless allegations of fraud, and to reduce the number of strike suits. Cosmas v. Hassett, supra, 886 F.2d at 11; DiVittorio v. Equidyne Extractive Industries, Inc., 822 F.2d 1242, 1247 (2d Cir. 1987). In order to satisfy Rule 9(b) "a complaint must adequately specify the statements it claims were false or misleading, give particulars as to the respect in which plaintiff contends the statements were fraudulent, state when and where the statements were made, and identify those responsible for the statements." Cosmas v. Hassett, supra, 886 F.2d at 11. See also Eickhorst I, 706 F. Supp. at 1091.

While Rule 9(b) allows "condition of mind" to be averred generally, plaintiffs must at least present those circumstances that provide a minimal factual basis for the allegations of scienter. E.g., Connecticut National Bank v. Fluor Corp., 808 F.2d 957, 962 (2d Cir. 1987). In other words, plaintiffs must "`specifically plead those events' which `give rise to a strong inference' that defendants had an intent to defraud, knowledge of the falsity, or a reckless disregard ...


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