Therefore, this Court must deny defendants' motion for summary judgment on plaintiffs' churning claim.
CLKA and Weir contend that plaintiffs' causes of action alleging securities fraud, breach of fiduciary duty and common law fraud should be dismissed because the plaintiffs purportedly ratified defendants' conduct and failed to object to the trades at issue until the plaintiffs' evaluated the results of such trades.
Plaintiffs claim that they were unsophisticated investors who were unaware that they could cancel trades after receiving confirmation slips regarding same. Van Syckle Aff. at P 70.
They also claim that Weir informed them that certain stock purchases into which Weir had entered could not be canceled. Id. at P 59.
Ratification of unauthorized trading occurs only when it is clear from all the circumstances that the customer intends to adopt the trade as his own. Knowledge of the pertinent facts and the clear intent to approve the unauthorized action is a precondition to ratification. See, e.g., Meyers v. Brooks Weinger, 1992 U.S. Dist. LEXIS 7031, *8-9 (S.D.N.Y. May 26, 1992).
In the present case, this Court cannot find, as a matter of law, that the plaintiffs clearly intended to adopt the disputed trades as their own. Mrs. Van Syckle claims to have called Weir in September 1987, at which time she informed Weir to refrain from entering into any further trades concerning plaintiffs' account without the express approval of the plaintiffs. Van Syckle Aff. at PP 54-60. However, she was allegedly told that certain stock purchases into which Weir had entered could not be canceled. Id. at P 59. Additionally, it is unclear whether the plaintiffs were aware that they could, in fact, cancel the stock purchases at issue. See, e.g., Van Syckle Aff. at P 70. Thus, their inaction may have been the result of ignorance of their rights under the investment agreement, rather than a clear intent to approve the allegedly unauthorized actions of the defendants. In light of these factual issues, this Court must deny defendants' motion for summary judgment on this aspect of plaintiffs' complaint.
(D) Plaintiffs' claim under the Investment Advisors Act.
The second count in plaintiffs' amended complaint alleges that the plaintiffs were damaged by the "deceptive acts and omissions and fraudulent conduct and activity of Defendant Weir," and that such conduct violated the IAA.
The defendants have moved for summary judgment on this aspect of plaintiffs' complaint on the basis that any such claim is barred by the applicable statute of limitations. Plaintiffs claim that their claim, which was brought approximately 22 months after the plaintiffs terminated their relationship with the defendants.
In Kahn v. Kohlberg, Kravis, Roberts & Co., 970 F.2d 1030 (2d Cir. 1992), cert. denied, U.S. , 113 S. Ct. 494, 121 L. Ed. 2d 432 (1992), the Second Circuit recently articulated the statute of limitations that is applicable to claims brought under the Investment Advisors Act. The Kahn court noted that claims under this Act must be brought "either one year from the commission of the wrong or one year [from the discovery of the wrong but no later than] three years from [the commission of] the wrong." Id. at 1039. Discovery of wrongful conduct under the IAA occurs when a plaintiff obtains actual knowledge of the facts giving rise to the action, or notice of the facts, which, in the exercise of reasonable diligence, would have led to actual knowledge. Id., 970 F.2d at 1042 (citing Ingenito v. Bermec Corp., 441 F. Supp. 525, 554 (S.D.N.Y. 1977)). In the present case, the plaintiffs discovered the allegedly wrongful conduct of the defendants no later than November 5, 1987, the date on which the plaintiffs wrote Weir and requested that plaintiffs' account with CLKA be liquidated.
The plaintiffs filed the present action on August 14, 1989 -- more than one year after the wrong of which the plaintiffs complain,
and more than one year after the discovery of such wrong. Therefore, under either applicable statute of limitations, plaintiffs' second cause of action is time-barred and must be dismissed. See Kahn v. Kohlberg, Kravis, Roberts & Co., 970 F.2d at 1042.
(E) Breach of Contract.
Plaintiffs' third cause of action alleges that the parties entered into an agreement with CLKA in July 1985 wherein it was agreed that CLKA would invest plaintiffs' money in such a manner so as to avoid risk to the principal and invest no more than $ 50,000 in stocks in such account. Amended Complaint, PP 93-96. They further contend that this agreement was supplemented or modified by the August 1987 agreement described supra.
The defendants argue that plaintiffs' breach of contract claim is barred by the Statute of Frauds. They note that section 8-319(a) of the Uniform Commercial Code ("U.C.C."), as adopted by New York, requires that any contract for the sale of securities be reduced to writing.
The plaintiffs contend that the July 1985 agreement clearly satisfies the statute of frauds requirement, and that the August 1987 agreement only related to restrictions on the purchase of securities, not the sale of same, and therefore did not have to be reduced to a writing.
McKenna's letter to the plaintiffs of July 17, 1985 discussed a proposed investment portfolio for the plaintiffs. This proposal indicated that $ 50,000 of this account would be invested in stocks -- an amount consistent with plaintiffs' claimed investment objectives. On July 22, 1985, the parties entered into a written Investment Management Agreement. Under this agreement, the plaintiffs noted that safety of the principal of their account was "high" and that margining of securities on this account was unacceptable. See Van Syckle Aff., Exhibit E. These writings clearly satisfy the writing requirement of § 8-319(a) of the U.C.C.
Turning to the alleged August 1987 agreement, its terms were never reduced to any writing. Contrary to plaintiffs' assertions, the oral agreement which the parties allegedly entered into in August 1987 clearly related to the sale of securities. See Amended Complaint at P 54, discussed supra. Therefore, pursuant to U.C.C. § 8-319(a), any such agreement was required to be in writing in order to be enforceable. Additionally, this alleged oral agreement could not have modified or otherwise altered the terms of the July 1985 contract. As the Fourth Department noted in Ber v. Johnson, 163 A.D.2d 817, 558 N.Y.S.2d 350 (4th Dep't 1990):
Where an original agreement comes within the provision of the statute of frauds requiring certain agreements to be in writing, the statute of frauds renders invalid and ineffectual a subsequent oral agreement changing the terms of the written contract, no matter how slight the attempted variation or by whom it was made.
Id. at , 558 N.Y.S.2d at 351 (citations omitted).
Since no evidence has been proffered by the plaintiffs in response to the present motion which indicates that there is any writing that memorializes the alleged August 1987 agreement, defendants' motion for summary judgment relating to claims based upon same must be granted.
(F) Breach of Confidential Relationship.
In his order of November 17, 1989, Judge Munson dismissed plaintiffs' state law claim which alleged breach of confidential relationship. Since this ruling is clearly the law of this case, defendants' motion to dismiss the fifth cause of action in plaintiffs' amended complaint, which alleges that the defendants breached a confidential relationship that existed between the partes herein, must be granted.
Plaintiffs' seventh cause of action alleges that the defendants converted plaintiffs' account by (i) purchasing stock and selling bonds and treasury bills for the portfolio without authority from the plaintiffs and (ii) trading in plaintiffs' account after the plaintiffs had directed defendant Weir to halt all trading in this account.
Conversion of property is the unauthorized exercise of dominion and control over property by one who is not its owner which interferes with another person's superior possessory rights. Cauble v. Mabon Nugent & Co., 594 F. Supp. 985, 995 (S.D.N.Y. 1984). A party who wrongfully sells stock of another may be found guilty of conversion. See, e.g., Schultz v. Commodity Futures Trading Comm'n, 716 F.2d 136, 139-40 (2d Cir. 1983).
The defendants argue that they are entitled to summary judgment on this claim because plaintiffs' account was purportedly never converted. Defendants claim that they were in lawful possession of plaintiffs' account and that they returned the assets remaining in same upon plaintiffs' request to do so.
The plaintiffs concede that the defendants were initially in lawful possession of plaintiffs' property. However, they have submitted evidence which indicates that the defendants exceeded such authority when they transformed plaintiffs' bond portfolio into a stock portfolio and executed trades in plaintiffs' account after being informed to stop trading in same.
There are questions of fact concerning whether Weir exceeded her authority when she sold the bonds in plaintiffs' portfolio and purchased more than $ 50,000 worth of stocks for plaintiffs' account. Additionally, there are questions of fact as to whether Weir engaged in transactions with this account after the plaintiffs had informed Weir to cease any further trading in same. Since such conduct on the part of Weir, if proven, would establish a claim alleging conversion, see, e.g., Schultz v. Commodity Futures Trading Comm'n, 716 F.2d at 139-40, defendants' motion for summary judgment regarding plaintiffs' claim alleging conversion must be denied.
Defendants' motion for summary judgment is granted with respect to plaintiffs' second and fifth causes of action, which allege that the defendants violated the Investment Advisers Act and breached a confidential relationship that existed between the parties herein. Defendants' motion also is granted as to plaintiffs' third cause of action insofar as that claim alleges that the defendants breached the terms of the alleged August 1987 agreement. It is denied in all other respects.
IT IS SO ORDERED
May 24, 1993
Frederick J. Scullin, Jr.
U.S. District Judge