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COWEN & CO. v. MERRIAM

August 29, 1990

COWEN & COMPANY, PLAINTIFF,
v.
DORI MERRIAM, JEROME E. ROSEN, JOSEPH D. RADCLIFFE AND JAMES A. MERRIAM, DEFENDANTS. COWEN & COMPANY, PLAINTIFF V. CIRCLE LAND & CATTLE CO., A COLORADO CORPORATION, JEROME E. ROSEN, JOSEPH D. RADCLIFFE AND JAMES A. MERRIAM, DEFENDANTS.



The opinion of the court was delivered by: Robert P. Patterson, Jr., District Judge.

OPINION AND ORDER

This is an action brought by plaintiff, a registered securities broker-dealer, for damages arising out of stock transactions which occurred in October 1987. Plaintiff alleges that defendants have violated Sections 12(2) and 17 of the Securities Act of 1933, 15 U.S.C. § 77l and 77q, Sections 9(a) and 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78i(a) and j(b), and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5 promulgated thereunder, as well as committed common law fraud and breach of contract. Defendant James Merriam now moves to dismiss counts seven through nine and counts fifteen through seventeen of the Consolidated and Second Amended Complaint for failure to state claims upon which relief can be granted pursuant to Fed.R.Civ.P. 12(b)(6) and for failure to plead fraud with particularity pursuant to Fed.R.Civ.P. 9(b).*fn1 Defendant Dori Merriam joins in the motion to dismiss count nine of the complaint and defendant Circle Land & Cattle Co. (hereinafter "Circle Land") joins in the motion to dismiss count seventeen of the complaint, both pursuant to Rule 12(b)(6). For the reasons set forth below, defendants Dori Merriam's and Circle Land's motions are granted while defendant James Merriam's motion is denied on counts seven, eight, fifteen and sixteen but granted on counts nine and seventeen.

BACKGROUND

For purposes of the motions to dismiss, the Court accepts the factual allegations contained in the complaint as true. Conley v. Gibson, 355 U.S. 41, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957); Dwyer v. Regan, 777 F.2d 825, 829 (2d Cir. 1985), modified on other grounds, 793 F.2d 457 (2d Cir. 1986). The facts are easily summarized as follows. Plaintiff, doing business as a registered securities broker-dealer, maintains accounts on its books for persons who desire to transact in securities. Prestige Investors, Inc. (hereinafter "Prestige"), a Colorado corporation, executed a clearing agreement with plaintiff dated June 3, 1986, whereby plaintiff was to act as a clearing broker for securities transactions by customers of Prestige. Defendants Dori Merriam and Circle Land were at all relevant times customers of Prestige and, by way of the clearing agreement, never had "front line" dealings with plaintiff. Instead, plaintiff dealt directly with defendant Jerome Rosen as the Prestige representative in charge of the two accounts. Defendant Joseph Radcliffe, as an officer, director and the majority stockholder of Prestige, allegedly supervised Rosen's handling of the two accounts.

Prestige was a market-maker in the shares of Vintage Group, Inc. (hereinafter "VGI"), an over-the-counter security, reporting bid and ask quotations in order to establish a market for such security. Defendant James Merriam is chairman, president and chief executive officer of VGI and defendant Dori Merriam, James' wife, owns more than 25% of the company's outstanding shares.

The complaint alleges that prior to September 1987, defendant James Merriam arranged for firms in addition to Prestige to act as market makers in VGI stock and pre-arranged transactions in VGI stock between different brokerage firms in order to bolster the price of VGI stock. Third Amended Complaint ¶ 54-55. Defendant James Merriam would then allegedly seek to sell off VGI shares owned by his wife Dori at the highest possible price. Id.

At the first sign of market-wide softening of stock prices in September 1987, a trend culminating in the October 1987 crash, defendant James Merriam allegedly devised a scheme to further manipulate the market price of VGI stock by creating a false appearance of demand for the stock. Merriam allegedly sought to preserve the stock's apparent trading volume by placing purchase orders for purchases of VGI stock with plaintiff through Prestige for the accounts of Circle Land & Cattle Company and Dori Merriam.

Between September 24 and October 7, 1987, James Merriam directed Prestige to place purchase orders with plaintiff for 453,000 shares of VGI common stock for defendant Circle Land's account at a total cost of $377,338.50. In reliance on Prestige's order and instructions, plaintiff credited and paid over to the Prestige account and debited the Circle Land account the same $377,338.50 in anticipation of full payment from Circle Land. Defendant Circle Land subsequently failed to pay plaintiff for the purchases.

Plaintiff thereafter sold the 453,00 shares of VGI stock on the open market, liquidated Circle Land's remaining positions in other VGI shares and applied the cash balance in Circle Land's account toward the cost of the purchases in issue. Plaintiff now claims that Circle Land owes a net sum of $231,326.31 as a result of the VGI stock purchases.

Similarly, between October 8 and 13, 1987, James Merriam directed Prestige to order purchases totalling 354,000 shares of VGI common stock for defendant Dori Merriam's account at a total cost of $265,520.19. Plaintiff credited that amount to the Prestige account and charged Dori Merriam's account in anticipation of full payment from Dori Merriam, which was not forthcoming. Dori Merriam denies that she authorized any of the purchases. Answer of Dori Merriam ¶ 8.*fn2

Plaintiff subsequently sold the 354,000 shares of Vintage Group stock in the market, receiving $62,373.50 in total proceeds, which plaintiff credited to Dori Merriam's account. Plaintiff now sues for the net balance of $203,149.69 owed on the account.

Finally, defendant James Merriam allegedly further promoted his scheme by meeting with Prestige sales representatives in mid-October 1987 to induce sales of VGI stock to other investors and by offering them special cash incentives for sales of VGI stock. Id. ¶ 123. His alleged purpose in doing so was to unload long positions in VGI stock in the Circle Land and Dori Merriam accounts while the price remained at an artificially high level. Id.

Plaintiff initiated the present action to recover the unsecured debit balances in the brokerage accounts of defendants Dori Merriam and Circle Land & Cattle Co. maintained with plaintiff through Prestige. Plaintiff filed the original complaint in this action on June 22, 1988, naming Dori Merriam, Jerome Rosen, Joseph Radcliffe and Prestige Investors as defendants. Plaintiff amended its complaint on July 14, 1988, to omit Prestige Investors as a defendant upon learning that the brokerage firm had filed for bankruptcy. Circle Land & Cattle Co. was a defendant in ...


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