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