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October 2, 1990


The opinion of the court was delivered by: William C. Conner, District Judge.


Defendants move this Court to (1) dismiss the complaint for failure to state a claim upon which relief may be granted, Fed.R.Civ.P. 12(b)(6); (2) dismiss several claims for failure to plead fraud with particularity, Fed.R.Civ.P. 9(b); and (3) dismiss the pendent state claims for lack of subject matter jurisdiction, Fed.R.Civ.P. 12(b)(1).


The parties' relationship began in 1983, when, recently widowed, plaintiff received the proceeds of an insurance policy on her late husband's life. She contacted defendants, seeking financial planning and investment advice and services to preserve the principal and generate approximately $50,000 per year in income from her $750,000 investment. Lacking any knowledge or experience with financial matters and hoping to provide for her two minor children, plaintiff told Goldberg that she was looking for a trustworthy financial advisor upon whom she could rely.

After several months of discussions and Goldberg's alleged promises to design a safe yet profitable five-year investment program suited to her needs, plaintiff placed approximately $750,000 into a non-discretionary account for which defendants would recommend investments.*fn1 For each limited partnership they recommended to plaintiff, defendants prepared their own written outline and sent it to plaintiff along with the offering memoranda and subscription agreements, suggesting that she did not have to "wade through" the companies' materials. Plaintiff asserts that the outlines were delivered through the use of interstate commerce. Plaintiff further claims that each of the outlines was materially false and misleading in that, among other omissions, it did not reflect the high-risk and low-return nature of the subject investment. Acting upon defendants' recommendations, plaintiff authorized the placement of $56,000 in limited partnerships, and other investments resulting in a portfolio of which 80% constituted securities more volatile in nature than plaintiff had indicated she intended to purchase. Plaintiff alleges that these investments, suitable only for investors amenable to high risk and seeking tax savings, were urged solely to generate substantial commissions and other benefits for defendants. Complaint ¶ 21(b).

Plaintiff states that from 1983 to 1989, defendants repeatedly represented to plaintiff by mail and telephone and in meetings that her investment plan was working well, and that her insurance proceeds, earning 12%, were secure. Plaintiff claims that defendants knew at the time but did not inform plaintiff that: (i) her investments were locked in high-risk, non-liquid limited partnerships that had materially declined in value and continued to lose money; (ii) several of the partnerships had failed or were close to failing; (iii) plaintiff had been receiving distributions which she believed were income but which were, in part, return of capital; and (iv) in at least one case, plaintiff's money had been invested for an 18-year period.

Toward the end of five years, when plaintiff contacted defendants, defendants did not explain to her that the life insurance proceeds that were invested in limited partnerships had diminished in value to less than $200,000. Plaintiff then had her investment portfolio independently analyzed in December, 1988, and learned that her investments were extremely risky, she had lost more than 60%, of her insurance proceeds, and there was no market in which to sell the investments without further losses. Plaintiff claims that as late as January 1989, defendants challenged that analysis and still continued to represent to plaintiff that her investments were performing as planned.


I. Failure to State a Claim

A motion to dismiss for failure to state a claim tests only the sufficiency of a complaint, see Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40 L.Ed.2d 90 (1974), and should not be granted "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." Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-02, 2 L.Ed.2d 80 (1957); Anderson v. Coughlin, 700 F.2d 37, 40 (2d Cir. 1983). A court must accept as true the allegations of the complaint and draw all reasonable inferences in favor of the plaintiff. See Scheuer, 416 U.S. at 236, 94 S.Ct. at 1686.

a. The Securities Claims

Defendants first argue that the complaint fails to state a cognizable claim under Section 10(b) of the Securities Exchange Act and Rule 10b-5 promulgated thereunder. The necessary elements of a Section 10(b) claim are: (1) damage to the plaintiff, (2) caused by reliance on the defendant's misrepresentations or omissions of material facts, or a scheme by the defendant to defraud, (3) made with an intent to deceive, manipulate or defraud, (4) in connection with the purchase or sale of securities, and (5) furthered by the defendant's use of the mails or any facility of a national securities exchange. See Packer v. Yampol, 630 F. Supp. 1237, 1240 (S.D.N.Y. 1986); Lloyd v. Industrial Bio-Test Laboratories, Inc., 454 F. Supp. 807, 810 (S.D.N.Y. 1978). Defendants contend that the complaint is insufficient because it does not allege the elements of (a) misrepresentations of material fact, (b) intent to defraud "in connection with" the purchase of a security, (c) causation, or (d) reasonable reliance.

In order for misrepresentations to give rise to a Section 10(b) claim, they must be made "in connection with" the purchase or sale of a security. Misrepresentations which are unrelated to the securities themselves do not fall within the ambit of the federal securities laws.

  The purpose of § 10(b) and Rule 10b-5 is to protect
  persons who are deceived in securities transactions
  — to make sure that buyers of securities get what
  they think they are getting and that sellers of
  securities are not tricked into parting with
  something for a price known to the buyer to be
  inadequate or for a consideration known to the
  buyer not to be what it purports to be. Chemical
  Bank v. Arthur Andersen & Co., 726 F.2d 930, 943
  (2d Cir.), (Friendly, J.) cert. denied,
  469 U.S. 884, 105 S.Ct. 253, 83 L.Ed.2d 190 (1984).

The Second Circuit Court in Chemical Bank held that misrepresentations or omissions "involved in a securities transactions but not pertaining to the securities themselves" could not form the basis of a § 10(b) violation. Id. Following the teachings of Chemical Bank, the district court in Siegel v. Tucker, Anthony & R.L. Day, Inc., 658 F. Supp. 550 (S.D.N Y 1987), dismissed a Section 10(b) complaint because the alleged misrepresentations were not made "in connection with" the purchase of any particular security but were made in connection with inducing plaintiff to open a securities account with defendants. See, Wilson v. First Houston Inv. Corp., 566 F.2d 1235 (5th Cir. 1978).

In the instant case, the complaint alleges that Goldberg induced plaintiff to do business with Goldberg & Co. by stating that he would personally handle her account; that he would implement a safe and conservative investment program tailored to her needs which would provide complete safety of principal and a reasonable rate of return; that defendants' clients always enjoyed complete safety and a high return; and that defendants were highly experienced financial planners. Complaint ¶¶ 11, 16, 19. Defendants correctly maintain that such representations of conservative management and general investment advisory services manifestly did not pertain to the value or quality of any specific securities purchased by plaintiff but were related to defendants' attempt to gain plaintiff's business. As such, the Court finds these alleged misrepresentations, identical to those in Siegel, to be insufficient to state a Section 10(b) claim.

While defendants' self-praising business solicitation, taken alone, would not support plaintiff's securities claim, plaintiff's allegations of misrepresentations continue:

    [T]he defendants for each and every limited
  partnership investment prepared and gave
  plaintiff a one or two page outline ("Outline")
  in lieu of her having to "wade through" the
  offering memoranda.
    Each of these Outlines were materially false
  and misleading in at least the following respects
  and intentionally omitted any mention that some
  or all of the limited partnerships were: a)
  highly speculative; b) high risk; c) highly
  leveraged; d) illiquid and that there was no
  resale market for the investment; e) based on
  highly favorable assumptions of future viability
  of the investment in question when in many cases
  the property had no business history and was a
  start-up operation; . . . and h) were subject to
  payments of undisclosed excessive commissions and
  other payments which would not be put to use in
  the ...

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