rejected in Bischoff and Alton, supra. Plaintiffs have not described in adequate detail why they consider the securities unsuitable.
B. Representations and Omissions Regarding the Stock's Risk of Loss
Plaintiffs' allegations concerning omissions and misrepresentations of the risk of loss fail for similar reasons. These allegations may be viewed as outgrowths of the unsuitability claim in that they are, in essence, the reasons why the stock was alleged to be unsuitable. However, evaluated independently, they too are deficient.
Plaintiffs allege no facts which give rise to an inference of scienter. Subsequent decline in value is no reflection on the risk associated with the investment when it was made. Plaintiffs allege no facts other than the later diminution in value. In addition, it is questionable whether plaintiffs can even justifiably rely on omissions regarding the risk of loss. See Bischoff, supra. Therefore, defendant's motion to dismiss the counts alleging unsuitability, failure to disclose the risk of loss, and misrepresentation regarding the stock's low risk of loss, is granted.
Under Rule 15(a) of the Federal Rules of Civil Procedure, leave to amend a complaint "shall be freely given when justice so requires." The Supreme Court has determined that this mandate should be heeded and leave to amend should be freely granted "in the absence of any apparent or declared reason--such as undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party . . ., [or] futlity of the amendment . . . ." Foman v. Davis, 371 U.S. 178, 182, 9 L. Ed. 2d 222, 83 S. Ct. 227 (1962). The Court perceives none of the above circumstances in the instant action. Accordingly, plaintiffs' request for leave to amend 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. 15(a).
C. Omissions Regarding the Value of the Stock
Plaintiffs allege that defendant knowingly failed to disclose that the market price of the stock had been "artificially inflated" by Blair and that the actual value of the stock was "substantially less than the then selling price." Amended Complaint, at P 12(i) and (ii).
Plaintiffs adequately allege time and place. The misrepresentations were alleged to have occurred on the 8th and 15th of July 1987 during the course of Dr. Keenan's conversation with Rubin. Though the allegation of content is somewhat inartful, the court believes that the allegation is sufficiently particular to give defendant notice so that it may prepare adequate responsive pleading. Scienter is averred generally, as permitted by Rule 9(b). Accordingly, defendant's motion to dismiss is denied as to the counts premised upon omissions regarding the value of the stock.
II. RULE 12(b)(6) MOTIONS
In deciding a motion to dismiss for failure to state a claim upon which relief can be granted, the court must accept as true all of plaintiff's factual allegations and must construe the complaint in the light most favorable to the plaintiff. See Scheuer v. Rhodes, 416 U.S. 232, 236, 40 L. Ed. 2d 90, 94 S. Ct. 1683 (1974). All permissible inferences from those facts must also be drawn in plaintiff's favor. See Murray v. City of Milford, 380 F.2d 468, 470 (2d Cir. 1967). A complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that no relief can be granted under any set of facts plaintiff could prove in support of his claim. See Hishon v. King & Spalding, 467 U.S. 69, 73, 81 L. Ed. 2d 59, 104 S. Ct. 2229 (1984); Dahlberg v. Becker, 748 F.2d 85, 88 (2d Cir. 1984), cert. denied, 470 U.S. 1084, 85 L. Ed. 2d 144, 105 S. Ct. 1845 (1985).
A. Breach of Fiduciary Duty
Plaintiffs allege that defendant Blair (1) was a registered broker-dealer who dispensed investment advice, (2) recommended the stock, (3) knew plaintiffs had no other knowledge concerning Total Health Systems save that which was imparted to them by defendant, and (4) Blair possessed information regarding Total Health and knew plaintiffs would be relying on its representations. Defendant moves to dismiss the breach of fiduciary duty count for failure to state a claim.
The precise contours of a fiduciary relationship are incapable of expression. Penato v. George, 52 A.D.2d 939, 942, 383 N.Y.S.2d 900, 904 (2d Dep't 1976). Such a relationship is rooted in the trust or confidence instilled by one person in the honesty or probity of another. Id. A breach of fiduciary duty occurs "when influence has been acquired and abused and when confidence has been reposed and retained." Richardson Greenshields Sec., Inc. v. Mui-Hin Lau, 693 F. Supp. 1445, 1456 (S.D.N.Y. 1988).
Securities dealers "owe a special duty of fair dealing to their clients." Securities and Exchange Comm'n v. Hasho, 784 F. Supp. 1059, 1107 (S.D.N.Y. 1992). In Hanly v. Securities and Exchange Comm'n, 415 F.2d 589 (2d Cir. 1969), the Second Circuit articulated the duties which inhere in this "special relationship." Id. at 596. By virtue of his position, a dealer "implicitly represents he has an adequate basis for the opinions he renders." Id. Thus, a securities dealer must have an adequate and reasonable basis in order to recommend a security, and must disclose facts of which he has knowledge or that are easily ascertainable. Id. at 597. In addition, a dealer implies that his conclusions are the result of a reasonable investigation. Id. If essential information about a security is not available to the dealer, he must disclose this and identify the risks associated with the absence of this information. Id. The investigation undertaken by the dealer will vary with the type of security involved. Id. These duties have been described as implicit warranties of the soundness of the stock,
in terms of value, earning capacity, and the like. Kahn v. Securities and Exchange Comm'n, 297 F.2d 112, 115 (2d Cir. 1961) (Clark, J., concurring). Failure to disclose information in contravention of the warranty is tantamount to an omission of a material fact. Id. Dealers are under a special duty due to their expertise, as well as their advisory activities. Charles Hughes & Co., Inc. v. Securities and Exchange Comm'n, 139 F.2d 434, 437 (2d Cir. 1943), cert. denied 321 U.S. 786, 88 L. Ed. 1077, 64 S. Ct. 781 (1944).
The Court notes that the confirmation slips attached to the pleadings indicate that Blair was acting as a principal, that is, as a dealer. See Amended Complaint, at Exs. 1 and 2. Plaintiffs' allegations, though not models of clarity, allude to certain misrepresentations which, if proved, implicate the above mentioned duties of dealers to recommend a stock only upon a full investigation and only if an adequate and reasonable basis exists for the recommendation. Construing the complaint in the light most favorable to the plaintiff, as we are obliged to do on a motion pursuant to Rule 12(b)(6), the Court cannot say that count five fails to state a claim. Accordingly, defendant's motion to dismiss is denied.
B. Breach of Warranty
Plaintiffs allege Rubin warranted that the stock in Total Health Systems was appropriate for a pension and profit sharing plan and that there was a low risk of loss of principal. See Amended Complaint, at PP 1-9.
Affirmations made at the time of sale are warranties which are incorporated into the contract of sale. Williston on Contracts § 954 (3d ed. 1964). An express warranty arises when a seller directly affirms the quality or condition of the stock, provided that such affirmation tends to induce the buyer's purchase, and the buyer purchases relying upon it. Shippen v. Bowen, 122 U.S. 575, 581, 30 L. Ed. 1172, 7 S. Ct. 1283 (1887); Distillers Distrib. Corp. v. Sherwood Distilling Co., 180 F.2d 800, 802 (4th Cir. 1950); Williston, supra, § 954. Warranties are to be distinguished from statements of opinion, conjecture, or puffery, which do not result in the imposition of liability. Williston, supra, § 954. The test for determining whether a given statement amounts to a warranty has been articulated frequently: "did the seller assume to assert a fact of which the buyer is ignorant, or did he merely express a judgment about a thing as to which they each may be expected to have an opinion." Wedding v. Duncan, 310 Ky. 374, 220 S.W.2d 564 (1949) (quoting Mantle Lamp Co. v. Rucker, 202 Ky. 777, 261 S.W. 263, 264 (1924)); see Titus v. Poole, 145 N.Y. 414, 426, 40 N.E. 228, 231 (1895); General Supply & Equip. Co., Inc. v. Harry S. Phillips, 490 S.W.2d 913, 917 (Tex. Ct. App. 1972). An express warranty need not be in writing; nor are technical words such as "warrant" or "warranty" necessary to create one. Compton v. M. O'Neil Co., 101 Ohio App. 378, 381, 139 N.E.2d 635, 637 (Ohio Ct. App. 1955). If the facts or affirmation rely wholly or partly on parol, it is within the province of the trier of fact to determine whether a statement constitutes an opinion or a warranty. Royal Business Machs. v. Lorraine Corp., 633 F.2d 34, 43 (7th Cir. 1980); Distillers Distrib. Corp., 180 F.2d at 802; Titus, 145 N.Y. at 426, 40 N.E. at 232; General Supply & Equip., 490 S.W.2d at 917; Compton, 101 Ohio App. at 381-82, 139 N.E.2d at 638. If writings exist, but do not represent a complete expression of the parties' agreement, the parol evidence rule will not bar admission of the oral testimony. Distillers Distrib. Corp., 180 F.2d at 803.
Plaintiffs assert that warranties regarding the suitability of the stock and its low risk of loss were made during the course of Dr. Keenan's conversation with Rubin. Plaintiffs allege that they purchased stock as a result of the defendant's recommendation. Whether these alleged oral statements constitute a warranty, as opposed to an expression of opinion, is a question for the trier of fact. Therefore, defendant's motion to dismiss the breach of warranty count for failure to state a claim is denied.
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).
JOHN M. CANNELLA
United States District Judge
Dated: New York, New York
August 12, 1993