The opinion of the court was delivered by: Leisure, District Judge.
This is a securities fraud action arising out of defendants'
allegedly improper trading in plaintiff's account. Plaintiff
alleges that as a result of defendants' improper activities,
particularly during the stock market crash of October 1987,
she lost her entire investment and accumulated substantial
trading deficits. Defendant Financial Clearing and Services
Corporation has come to the Court on behalf of itself, and any
of the listed John Doe defendants affiliated with that
company, urging dismissal of the first cause of action in the
complaint against them, pursuant to Fed.R.Civ.P. 12(b)(6).
Plaintiff has cross-moved for an order staying the arbitration
proceeding with defendant Financial Clearing & Services
Plaintiff Gertrude Stander ("Stander") is an elderly widow,
allegedly naive in the ways of securities investing. In early
1987, Stander opened an investment account with defendant
Domestic Arbitrage Group, Inc. ("Domestic"), through defendant
Jerry Czin ("Czin"), a vice-president of Domestic. Stander
allegedly told Czin that she was only interested in
conservative investments that would provide some on-going
income. In March 1987, Stander transferred $80,000 into an
account set up by Czin for investment purposes. A month later,
Domestic advised Stander that all of the trades in her
accounts would be maintained by defendant Financial Clearing
and Services Corporation ("FiCS"). In May 1987, Stander signed
a customer agreement, margin account agreement, and an option
account agreement with FiCS, to allow FiCS to maintain records
on her account and process any trades in that account. FiCS
required Domestic to provide executed copies of these
documents before FiCS would service any account managed by
Stander alleges that over the next five months, FiCS, at the
direction of Czin and Domestic, executed hundreds of risky
options trades in her account. During this period, due to
losses in the option trading ordered by Czin and Domestic,
FiCS made four demands on Stander for additional cash input
into her account to cover margin deficiencies. Stander alleges
that she did not understand those demands when she received
them, and was told by Czin to ignore them when she asked for
information regarding those demands. Stander never made the
cash inputs demanded by FiCS. Nonetheless, FiCS continued to
process trades in Stander's account authorized by Czin.
Losses accumulated in the account almost from the moment
Czin began trading activity. However, the losses were severely
exacerbated by the swift and dramatic downturn in the stock
market in the second week of October 1987. On October 19,
1987, the day the Dow Jones Industrial Index dropped over 500
points, FiCS informed Stander that her account was some
$211,000 in deficit. A week later, FiCS informed Stander that
it had liquidated her account, but that, even after
liquidation, her account showed a deficit of some $274,166.93.
Plaintiff commenced this action on February 3, 1988. On May
24, 1988 the parties agreed to arbitrate all claims except
those arising under the federal securities laws, though FiCS
continued to assert that plaintiff's securities laws claims
were also arbitrable. On August 10, 1989, this Court issued an
opinion and order refusing to compel arbitration of the
securities laws claims, but finding that plaintiff's complaint
failed to allege sufficiently fraud by FiCS, and thus
dismissed the claims against FiCS pursuant to Fed.R.Civ.P.
9(b). Stander v. Financial Clearing & Services Corp.,
718 F. Supp. 1204 (S.D.N.Y. 1989).
A) Defendant FiCS' Motion to Dismiss
A motion to dismiss under Fed.R.Civ.P. 12 must be denied
"unless it appears beyond a doubt that the plaintiff can prove
no set of facts in support of his claim which would entitle
him to relief." Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct.
1683, 1686, 40 L.Ed.2d 90 (1974), citing Conley v. Gibson,
355 U.S. 41, 45-46, 78 S.Ct. 99, 101-102, 2 L.Ed.2d 80 (1957);
Morales v. New York State Dep't of Corrections, 842 F.2d 27, 30
(2d Cir. 1988). The Court must accept plaintiff's allegations
of facts as true together with such reasonable inferences as
may be drawn in her favor. Murray v. City of Milford,
Connecticut, 380 F.2d 468, 470 (2d Cir. 1967). See also
Scheuer, supra, 416 U.S. at 236, 94 S.Ct. at 1686, Fed.R.Civ.P.
8 requires only a "'short and plain statement of the claim'
that will give the defendant fair notice of what the
plaintiff's claim is and the ground upon which it rests."
Conley, supra, 355 U.S. at 47, 78 S.Ct. at 102 (cited in Hishon
v. King & Spaulding, 467 U.S. 69, 73, 104 S.Ct. 2229, 2232, 81
L.Ed.2d 59 (1984)). For the purposes of a Rule 12 motion, "The
pleading is deemed to include any document attached to it as an
exhibit, Fed.R. Civ.P. 10(c), or any document included in it by
reference." Goldman v. Belden, 754 F.2d 1059, 1065-66 (2d Cir.
1985) (citations omitted).
"The function of a motion to dismiss 'is merely to assess
the legal feasibility of the complaint, not to assay the
weight of the evidence which might be offered in support
thereof.'" Ryder Energy Distribution Corp. v. Merrill Lynch
Commodities, Inc., 748 F.2d 774, 779 (2d Cir. 1984) (citations
omitted). "Dismissal of a complaint for failure to state a
claim is a 'drastic step.'" Meyer v. Oppenheimer Management
Corp., 764 F.2d 76, 80 (2d Cir. 1985) (citations omitted).
FiCS is a clearing broker. Its duties are to provide
record-keeping functions for the accounts it handles, and, in
some cases, to accomplish the actual settlement of trades for
those accounts. Lester v. Basner, 676 F. Supp. 481, 482
(S.D.N.Y. 1987). The clearing broker normally has no direct
contact with the individual customer, except for mailing copies
of reports and records regarding the account to the customer on
a regular basis. Trades are ordered through or by the retail
broker, who has personal contact with the customer. Such was
the situation in the instant case. There is no allegation that
FiCS or its employees ever had direct contact with Stander.
Stander did sign a customer and other agreements with FiCS, but
this was done through the auspices of Domestic. FiCS' only
contact in the transactions at issue was with Domestic and
Czin, who ordered the allegedly improper trades.
Plaintiff alleges that FiCS aided and abetted Domestic's and
Czin's securities law violations. A number of courts have
addressed the issue of the liability of a clearing broker as
an aider and abetter of securities fraud in violation of
section 10(b) of the Securities Exchange Act of 1934,
15 U.S.C. § 78j. The Second Circuit has held that in order to make
out a claim for aiding and abetting a substantive securities
offense, a plaintiff must allege, "(1) the existence of a
securities law violation by the primary (as opposed to the
aiding and abetting) party; (2) 'knowledge' of this violation
on the part of the aider and abettor; and (3) 'substantial
assistance' by the aider and abettor in the achievement of the
primary violation." Bloor v. Carro, Spanbock, Londin, Rodman &
Fass, 754 F.2d 57, 62 (2d Cir. 1985), citing IIT v. Cornfeld,
619 F.2d 909, 922 (2d Cir. 1980). Viewing the pleadings in the
light most favorable to plaintiff, as the Court must for this
motion, the Court will accept the uncontested assertion that
sufficient facts have been alleged to meet the first
requirement for aiding and abetting liability.
The Court, then, must focus on whether plaintiff has
sufficiently alleged that FiCS had knowledge of Domestic's and
Czin's securities law violations, and that FiCS provided
substantial assistance to Domestic and Czin in their
achievement of the violation. It is clear that the simple
providing of normal clearing services to a primary broker who
is acting in violation of the law does not make out a case of
aiding and abetting against the clearing broker. Baum v.
Phillips, Appel & Walden, Inc., 648 F. Supp. 1518 (S.D.N Y
1986), aff'd, 867 F.2d 776 (2d Cir.), cert. denied, ___ U.S.
___, 110 S.Ct. 114, 107 L.Ed.2d 75 (1989). Plaintiff ...