instituted this action on November 13, 1986, claiming
violations of Sections 10(b) and 20 of the Securities Exchange
Act of 1934 (the "Exchange Act") 15 U.S.C. § 78j(b), and 78t,
the Racketeering Influenced and Corrupt Organization Act
("RICO"), 18 U.S.C. § 1962(c), and also asserting state law
claims for common law fraud, breach of fiduciary duty, and
negligent mismanagement. Defendants have moved for partial
summary judgment to dismiss plaintiffs' Exchange Act claims
arising from transactions prior to November 13, 1984 as being
barred by the statute of limitations, to dismiss the remaining
Exchange Act claims and RICO claims for failure to plead a
cause of action pursuant to Fed.R.Civ.P. 12(b)(6) and failure
to plead fraud with particularity pursuant to Fed.R.Civ.P.
9(b), and finally to compel arbitration as to any remaining
A. Statute of Limitations
A party moving for partial summary judgment must establish
that there is no genuine issue of material fact and that it is
entitled to judgment as a matter of law as to the claims that
the party wishes to dismiss. Fed.R.Civ.P. 56(c). The moving
party has the initial burden of establishing the absence of a
genuine issue of material fact. Adickes v. S.H. Kress & Co.,
398 U.S. 144, 157, 90 S.Ct. 1598, 1608, 26 L.Ed.2d 142 (1970).
The non-moving party then has the burden of showing with
specific facts that there is a genuine issue for trial.
Fed.R.Civ.P. 56(e). In meeting this burden, the non-moving
party may not rely on speculation and conjecture. Knight v.
U.S. Fire Ins. Co., 804 F.2d 9, 12 (2d Cir. 1986), cert.
denied, 480 U.S. 932, 107 S.Ct. 1570, 94 L.Ed.2d 762 (1987).
Until recently, this Court looked to state law to determine
the applicable statute of limitations for implied causes of
action under the federal securities laws. However, in Ceres
Partners v. Gel Assoc., 918 F.2d 349 (2d Cir. 1990), the Court
of Appeals adopted a uniform statute of limitations of one year
from discovery and no more than three years after the conduct
alleged to constitute a violation for claims brought under
Sections 10(b) and 14 of the Exchange Act. Id. at 364. The
Court of Appeals left "for the future all questions concerning
retroactive application" of the court's decision to apply a
uniform statute of limitations to such claims. Id.
The parties' briefs submitted before the Court of Appeals
decision in Ceres Partners v. Gel Assoc. did not contest that
the two year statute of limitations provided for under the law
of Puerto Rico was applicable to the Exchange Act claims in
this action. Given that the parties have not chosen to raise
the issue of whether Ceres Partners v. Gel Assoc. should apply
retroactively to plaintiffs' Section 10(b) claims in this
action, this Court will apply the two year statute of
limitations provided for under the law of Puerto Rico to both
plaintiffs' Section 10(b) and Section 20 claims.
Although the parties do not contest the application of Puerto
Rico's statute of limitations, the parties do contest when the
two year limitations period began to run. The issue of when the
statute of limitations begins to run is a matter of federal
common law. Arniel v. Ramsey, 550 F.2d 774, 780 (2d Cir. 1977);
Salgado v. Piedmont Capital Corp., 534 F. Supp. 938, 947 (D.P.R.
1981). Under federal law, the statute of limitations begins to
run "when the plaintiff has actual knowledge of the alleged
fraud or knowledge which in the exercise of reasonable
diligence should have led to actual knowledge." Stull v.
Bayard, 561 F.2d 429, 432 (2d Cir. 1977), cert. denied,
434 U.S. 1035, 98 S.Ct. 769, 54 L.Ed.2d 783 (1978). Nonetheless,
when a claim for relief is stated against a defendant who has
concealed the wrong alleged, the applicable statute of
limitations will be suspended for the duration of the period of
concealment. Moviecolor Ltd. v. Eastman Kodak Co., 288 F.2d 80,
82-83 (2d Cir.), cert. denied, 368 U.S. 821, 82 S.Ct. 39, 7
L.Ed.2d 26 (1961).
In this action, it is undisputed that during the period that
defendants were allegedly churning, plaintiffs received
confirmation slips of every transaction and
monthly reports of all the activity in the accounts. When
plaintiffs questioned one of their accounts because the balance
was low, plaintiffs claim that Almonte misled them by stating
that the value of the account was understated. Further,
plaintiffs allege that defendants concealed their churning
because defendants' commissions were not listed on the
confirmation slips or monthly reports and therefore that
plaintiffs could not have known, and should not be deemed to
have known, of the fraud. Thus, plaintiffs argue that the
statute of limitations could not begin to run until after
January of 1985 or, in the alternative, that the question of
whether plaintiffs had actual knowledge of the fraud and
whether defendants concealed the fraud are questions of fact
which require this Court to deny defendants' motion for partial
The core component of a churning claim is excessive trading
activity. See Newburger, Loeb & Co., Inc. v. Gross,
563 F.2d 1057, 1069 (2d Cir. 1977), cert. denied, 434 U.S. 1035, 98
S.Ct. 769, 54 L.Ed.2d 782 (1978). Plaintiffs claim that they
opened the accounts in question to make safe long-term
investments and that 169 transactions took place during the two
years that plaintiffs had these accounts. Plaintiffs admit to
having received both confirmation slips of the trades and
monthly accounts which kept track of each trade that took
place. Plaintiffs therefore received 169 confirmation slips,
one for each transaction, and 24 monthly statements, in which
every one of the transactions was recorded. Plaintiffs claim
that they were unaware of the level of commissions being taken
by defendants. However, it seems very unlikely that the client
confirmation slips did not specifically state defendants'
commission. Moreover, the amount of commissions being taken by
defendants has nothing to do with the level of activity
reflected in the confirmation slips and monthly statements. If
significant trading was not consistent with plaintiffs'
investment objectives, plaintiffs certainly could have
determined from the confirmation slips and monthly statements
that there was excessive activity in their account before
November of 1984.
It is well settled that where the circumstances should
indicate "to a person of ordinary intelligence the probability
that he has been defrauded, a duty of inquiry arises, and if he
shuts his eyes to the facts which call for investigation,
knowledge of the fraud will be imputed to him." Armstrong v.
McAlpin, 699 F.2d 79, 88 (2d Cir. 1983). Thus, in Appel v.
Kidder, Peabody & Co., Inc., 628 F. Supp. 153 (S.D.N.Y. 1986),
plaintiffs who admitted receiving confirmation slips and
monthly reports were deemed to have had a duty of inquiry as to
their churning claims and thus such claims were deemed barred
by the statute of limitations. Id. at 158.
Here, plaintiffs' duty of inquiry was triggered by the
receipt of confirmation slips and monthly accounts detailing
every trade, which the plaintiffs themselves claim was contrary
to their investment objective. "Plaintiffs may not close their
eyes and say they do not see what is obvious." Appel, supra,
628 F. Supp. at 158. Thus, even if the allegedly excessive
commissions were not listed on the confirmation slips or
monthly statements, plaintiffs' receipt of the number of
confirmation slips alone and the number of transactions stated
on the monthly reports should have made plaintiffs aware that
the accounts were being handled inconsistently with plaintiffs'
wishes. Accordingly, defendants motion for partial summary
judgment is granted as to plaintiffs' Exchange Act claims
arising out of transactions prior to November 13, 1984.
B. Fed.R.Civ.P. 9(b)
In all averments of fraud or mistake, the
circumstances constituting fraud or mistake shall
be stated with particularity.
Rule 9(b) is a special pleading requirement contrary to the
simplified pleading requirements adopted by the federal rules.
Ross v. A.H. Robbins Co., 607 F.2d 545, 557 (2d Cir. 1979),
cert. denied, 446 U.S. 946, 100 S.Ct. 2175, 64 L.Ed.2d 802
(1980), reh'g denied, 448 U.S. 911, 100 S.Ct. 3057, 65 L.Ed.2d
1140 (1980). The special pleading rule serves three purposes:
(1) it assures
defendants of notice of the precise conduct with which they are
charged and against which they must defend themselves; (2) it
protects defendants from harm to their reputations that might
occur as a result of being charged with serious wrongdoing; and
(3) it serves, in securities litigation particularly, to
diminish the possibility that plaintiffs will file suit as a
pretext for the discovery of unknown wrongs. Id. at 557.
It is not sufficient for a plaintiff to make sweeping
allegations and merely track the language of a federal statute.
Rather, plaintiffs must specify:
(1) precisely what statements were made in what
documents or oral misrepresentations or what
omissions were made, and (2) the time and place of
each such statement and the person responsible for
making (or, in the case of omissions, not making)
the same, (3) the content of such statements and
the manner in which they misled the plaintiff, and
(4) what the defendants obtained as a consequence
of the fraud.
Todd v. Oppenheimer & Co., 78 F.R.D. 415, 420-21 (S.D.N Y
1978) (citation omitted). See Moran v. Kidder Peabody & Co.,
609 F. Supp. 661, 665 (S.D.N.Y. 1985), aff'd, 788 F.2d 3 (2d
Cir. 1986). In the instant action, plaintiffs Exchange Act and
RICO claims are based on defendants' alleged churning of
plaintiffs' accounts. To establish a claim for churning, a
plaintiff must plead and prove: (1) that the trading in the
account was excessive in light of the investment objectives;
(2) that the broker exercised control over the account; and (3)
that the broker acted with intent to defraud or with willful or
reckless disregard for the plaintiffs interests. Moran, supra,
609 F. Supp. at 666.
Plaintiffs' churning claim fails to plead two elements of
such a claim with sufficient particularity. First, plaintiffs
fail to plead with particularity that excessive trading has
taken place. Plaintiffs rely on the number of transactions and
speculation rather than pleading a measure of trading frequency
as is customary when trying to establish that trading is
excessive. Id. The most common measure of trading frequency,
the turnover ratio, is not even alleged. Plaintiffs allegation
that the trades were excessive is based solely on the number of
transactions, speculation, and claims as to the approximate
commissions that were being charged. Second, plaintiffs fail to
plead that they abandoned control of the account to defendants.
In fact, plaintiffs' complaint indicates that they had control;
plaintiffs claim that they monitored their accounts and raised
questions about the accounts with Almonte.
Plaintiffs also fail to allege claimed misrepresentations
made by Almonte with sufficient particularity. In paragraph 25
of plaintiffs' complaint, plaintiffs list six alleged
misrepresentations made by defendants but do not allege when or
where they occurred, or the attendant circumstances or
deception. Without such a context, it is difficult to see how
or if plaintiffs were deceived or harmed. Therefore, plaintiffs
Exchange Act and RICO claims based on defendants' alleged
churning and misrepresentations have not been plead with
sufficient particularity to satisfy Rule 9(b). Accordingly,
defendants' motion to dismiss plaintiffs' Exchange Act and RICO
claims pursuant to Rule 9(b) is granted.
Plaintiffs signed agreements with defendant Kidder which
contained an arbitration clause requiring that any controversy
or claim arising out of or related to the accounts would be
settled by arbitration. It is uncontested that plaintiffs'
state law claims are subject to binding arbitration.
Accordingly, defendants motion to compel arbitration of
plaintiff's state law claims is granted.
Defendants' motion for partial summary judgment dismissing
plaintiffs' Exchange Act claims arising before November 13,
1984 is granted; defendant's motion to dismiss plaintiffs'
remaining Exchange Act and RICO claims pursuant to Rule 9(b)
for failure to plead fraud with sufficient particularity is
granted; the parties are directed
to proceed to arbitrate plaintiffs' state law claims.
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