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NORNIELLA v. KIDDER PEABODY & CO.

December 17, 1990

JESUS NORNIELLA AND RUTH NORNIELLA, PLAINTIFFS,
v.
KIDDER PEABODY & CO., INC. AND RAMON A. ALMONTE, DEFENDANTS.



The opinion of the court was delivered by: Edelstein, District Judge:

  OPINION & ORDER

Defendants have moved for partial summary judgment, to dismiss for failure to plead a cause of action 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), and to compel arbitration as to any remaining claims. For the following reasons: (1) defendants' motion for partial summary judgment is granted; (2) defendants' motion to dismiss plaintiffs' claims for failure to plead fraud with particularity pursuant to Fed.R.Civ.P. 9(b) is granted; and (3) defendants' motion to compel arbitration as to plaintiffs' remaining claims is granted.

I. BACKGROUND

At the heart of this dispute is plaintiffs Jesus Norniella and Ruth Norniella's claim that defendants Kidder, Peabody & Co., Inc., ("Kidder") and Ramon A. Almonte "churned" plaintiffs' accounts. In January 1983, plaintiffs claim that defendant Almonte, a broker with defendant Kidder, gained their friendship and subsequently induced them to open three trading accounts with Kidder. Plaintiffs claim that Almonte fraudulently induced them to make a number of investments through the accounts and that Almonte consistently overestimated the value of the accounts. Although plaintiffs inquired as to the status of their accounts, plaintiffs claim that Almonte told them that the accounts were doing well.

Plaintiffs claims that they instructed Almonte to invest in safe, long-term investments because the money from the accounts was to be used for their retirement. According to plaintiffs, however, defendants used plaintiffs accounts to engage in short term bond trading, including the practice of day trading in bonds from Kidder's own inventory, and speculative stock trading. Plaintiffs admit having received confirmation slips for the transactions that took place and monthly account statements, but claim that the statements did not list the excessive commissions taken by defendants and were constructed so that plaintiffs could not figure out how much money was being lost.

II. DISCUSSION

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).

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 ...


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