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.
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
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
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