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KEENAN v. D.H. BLAIR & CO.

August 12, 1993

THOMAS P. KEENAN, M.D., THOMAS P. KEENAN, M.C., P.C., and DOMINION TRUST COMPANY, in its capacity as Trustee of the Drs. Reuling & Keenan Profit Sharing Plan (formerly Thomas P. Keenan, M.D., P.C. Profit Sharing Plan), Plaintiffs,
v.
D.H. BLAIR & CO., INC., a New York Corporation, Defendant.


CANNELLA


The opinion of the court was delivered by: JOHN M. CANNELLA

CANNELLA, D.J.:

 Defendant's motion to dismiss counts one, two, and five is denied. Fed. R. Civ. P. 12(b)(6). Defendant's motion to dismiss counts three and four is denied as to claims alleging failure to disclose the value of the stock. Defendant's motion to dismiss counts three and four is granted as to claims of unsuitability, failure to disclose the stock's high risk of loss, and misrepresentation that the stock posed a low risk of loss. Fed. R. Civ. P. 9(b). Plaintiffs' request for leave to amend the complaint as to these claims is granted. Fed. R. Civ. P. 15(a).

 BACKGROUND

 Plaintiffs are Thomas P. Keenan, M.D., a resident of Virginia, and Thomas P. Keenan, M.D., P.C., and Dominion Trust Co., corporations organized under Virginia law. Dominion Trust Co. is the trustee of the "Drs. Reuling & Keenan Profit Sharing Plan," formerly the "Thomas P. Keenan, M.D., P.C. Profit Sharing Plan." Thomas P. Keenan, M.D., was the sole participant in the profit sharing plans and Thomas P. Keenan, M.D., P.C., was the sponsoring employer in both plans. The plaintiffs filed an amended complaint *fn1" on May 30, 1991. The amended complaint sets forth causes of action based upon breach of contract, common law fraud, securities fraud, and breach of fiduciary duty. The alleged violations arise out of two stock transactions which occurred on July 8, 1987, and July 15, 1987. On July 8, 1987, pursuant to a telephone conversation with Howard Rubin, plaintiff Keenan instructed Dominion Trust Co. to purchase through defendant D.H. Blair 5000 shares of stock in Total Health Systems, Inc., at a cost of $ 88,125. On July 15, 1987, following another telephone conversation with Rubin, plaintiff Keenan, on behalf of the profit sharing plan, purchased an additional 1000 shares in Total Health Systems for $ 17,250. Plaintiffs allege that Howard Rubin, a registered broker-dealer and Vice-President of Investments, recommended the above stock as "suitable for a pension and profit sharing plan" and represented that there was "a low risk of loss of principal in connection with the stock." Plaintiffs contend that the stock was purchased in reliance upon Rubin's advice, and later sold on October 21, 1987 for $ 16,515, a total loss of $ 88,860 having been incurred.

 Plaintiffs allege that defendant's warranty of the stock's suitability and its representation concerning its low risk of loss constitute a breach of contract (counts one and two). Plaintiffs include an additional count of breach of contract predicated upon defendant's failure to notify plaintiffs of any fall in the stock's price as was allegedly warranted and represented by Rubin (count six). Plaintiffs also allege that the warranties regarding the suitability and risk of loss of the stock were false and fraudulent, and made for the purpose of inducing plaintiffs' purchase (count three). In addition, plaintiffs contend that defendant D.H. Blair "knowingly and intentionally and with intent to deceive" failed to disclose pertinent facts in connection with the stock purchase. Such omissions are detailed in the complaint as the failure to disclose that (1) the market price of the stock was "artificially inflated" due to Blair's manipulation; (2) the actual value of the stock was considerably less than the selling price; and (3) there was a "high degree of risk of loss of principal" involved. Amended Complaint, at P 12 (i)-(iii). Plaintiffs also assert that the above warranties and omissions constitute securities fraud in contravention of Rule 10b-5 (count four). Plaintiffs' final claim is premised upon a breach of fiduciary duty (count five). Plaintiffs maintain that defendant D.H. Blair acted in a fiduciary capacity in its dealings with plaintiffs, and consequently, had a duty to disclose "all risks and other material matters known, or which should have been reasonably known . . . regarding such stock." Amended Complaint, at P 15.

 Defendant now moves to dismiss the breach of contract counts and the breach of fiduciary duty count for failure to state a cause of action. Fed. R. Civ. P. 12 (b)(6). Defendant also moves to dismiss the common law fraud count and the securities fraud count for failure to state fraud with particularity. Fed. R. Civ. P. 9(b).

 DISCUSSION

 I. RULE 9(b) MOTIONS

 Plaintiffs' fraud claims are premised upon section 10(b) of the 1934 Act and Rule 10b-5 promulgated thereunder and upon common law fraud principles. A section 10(b) claim consists of the following elements: (1) defendant's misrepresentation or omission of a material fact in connection with the purchase or sale of a security; (2) plaintiff's detrimental reliance upon the defendant's misrepresentation or omission; (3) scienter, defined as the intent to deceive, manipulate, or defraud; and (4) employment of the mails, an instrumentality or interstate commerce, or a national securities exchange in furtherance of the fraud. Bischoff v. G.K. Scott & Co., Inc., 687 F. Supp. 746, 748 (E.D.N.Y. 1986); Savino v. E.F. Hutton & Co., Inc., 507 F. Supp. 1225, 1231 (S.D.N.Y. 1981). In order to state the common law cause of action for fraud, the plaintiff must allege: (1) a false representation of a material fact; (2) scienter, or knowledge or belief in its falsity; (3) belief in its truth by the person to whom the statement is directed; (4) the intent to induce reliance; and (5) detrimental reliance by the person claiming to be defrauded. Virgilio Flores, S.A. v. Jerome Radelman, Inc., 567 F. Supp. 577, 579 (E.D.N.Y. 1982); 5 Charles A. Wright & Arthur R. Miller, Federal Practice and Procedure ยง 1297 (2d ed. 1990).

 Defendant moves to dismiss Counts three and four of the Amended Complaint for failure to state fraud with particularity as required by Rule 9(b) of the Federal Rules of Civil Procedure. Rule 9(b) provides:

 
Fraud, Mistake, Condition of Mind
 
In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other conditions of mind of a person may be averred generally.

 Fed. R. Civ. P. 9(b).

 In deciding a Rule 9(b) motion, the court "must assume the truth of the plaintiff's allegations." O'Brien v. National Property Analysts Partners, 936 F.2d 674, 676 (2d Cir. 1991). Rule 9(b) is to be construed in light of Rule 8, which requires "a short and plain statement of the claim." Onesti v. Thomson McKinnon Sec., Inc., 619 F. Supp. 1262, 1265 (N.D. Ill. 1985); Todd v. Oppenheimer & Co., Inc., 78 F.R.D. 415, 419 (S.D.N.Y. 1978). As the Second Circuit has noted, "the requirement of particularity does not abrogate Rule 8, and it should be harmonized with the general directives . . . of Rule 8." Ross v. A.H. Robins Co., Inc., 607 ...


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