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STANDER v. FIN. CLEARING & SERV.

February 23, 1990

GERTRUDE STANDER, PLAINTIFF,
v.
FINANCIAL CLEARING & SERVICES CORPORATION, DOMESTIC ARBITRAGE GROUP, INC., RUSHMORE SECURITIES, JERRY W. CZIN AND JOHN DOES NOS. 1-10, DEFENDANTS.



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 Corporation.

BACKGROUND*fn1

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 Domestic.

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).

FiCS has now returned to the Court, after plaintiff's filing of an amended complaint, alleging that plaintiff has failed to state a claim against FiCS for which relief can be granted, and thus urging dismissal of the complaint pursuant Fed.R.Civ.P. 12(b)(6). Plaintiff has cross-moved to stay FiCS' pending arbitration proceeding on the non-securities law claims arising from this litigation.

DISCUSSION

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.


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