The opinion of the court was delivered by: LEONARD B. SAND
Plaintiffs bring various federal securities claims and state common law claims against their former stockbroker. Defendants have moved to dismiss this case for failure to plead fraud with particularity, pursuant to Federal Rule of Civil Procedure 9(b), and for failure to state a claim, pursuant to Rule 12(b)(6). In the alternative, defendants move for partial summary judgment. For the reasons set forth below, defendants' motions are granted in part and denied in part.
Plaintiff Hannah Komanoff is an eighty-year old resident of New York state who describes herself as having had "an extraordinarily active career in local politics." Amended Complaint P 14. Charles Komanoff, her son, manages a consulting practice and is also a New York resident. Plaintiffs are the wife and son, respectively, of the late Isadore Komanoff, a stock broker who managed their investments until his death in 1986.
Defendant Mabon, Nugent & Co. ("Mabon") was during the relevant period a limited partnership created under the laws of the State of New York, with its principal place of business in New York. Mabon was a registered securities broker and dealer with the State of New York and the Securities and Exchange Commission, as well as a member of the New York Stock Exchange and the National Association of Securities Dealers.
Defendant Mabon Securities Corp. ("Mabon Securities") is a New York corporation that purchased certain assets from Mabon in April of 1991. Mabon Securities, according to plaintiffs, assumed all of the liabilities of Mabon at the time of the purchase. Amended Complaint P 7. Defendants deny that Mabon Securities assumed any liabilities related to this action. Transcript of Proceedings Dated Feb. 9, 1995 ("Tr.") at 4-5.
Frederica Miceli, during the relevant time period, was a registered stock broker in the employ of defendant Mabon. Ms. Miceli, who is also the daughter of plaintiff Hannah Komanoff and the sister of plaintiff Charles Komanoff, is not a party to this action.
Bernard Weiner, during the relevant time period, was apparently both the personal accountant for plaintiff Hannah Komanoff and, unbeknownst to plaintiffs, a partner at the firm that served as Mabon's accountant. Plaintiffs allege, and defendants deny, that Mr. Weiner acted as Mabon's agent and representative in dealing with and giving advice to plaintiffs. Amended Complaint P 8.
Plaintiffs' central allegations are as follows. In 1986, sometime around the death of Isadore Komanoff, plaintiffs formed a relationship with Mabon whereby the latter was to act as plaintiffs' stockbroker for investments in securities. Plaintiffs each opened discretionary securities accounts with Mabon. Plaintiffs allege that they "were totally unsophisticated concerning stock market investments in general and the intricacies and risks of short-term trading techniques in particular." Amended Complaint P 13. They assert that Mabon consequently had "complete control" over the accounts, and plaintiffs "neither participated in, nor approved any securities transactions." Id. P 12.
Plaintiffs allege that several times in 1986 and 1987 they informed Mabon, through Ms. Miceli and Mr. Weiner, that their investment needs and objectives "called for long-term investments, primarily in income-producing securities, and protection and conservation of principal." Id. PP 15-19. Instead, according to plaintiffs, Mabon willfully and recklessly proceeded to adopt for plaintiffs "trading methods which were inconsistent with said investment needs and objectives." Id. P 21. These trading methods "had a very high probability of producing substantial losses to Plaintiffs" and did in fact produce such losses. Id.
Plaintiffs also allege a pattern of churning on the part of Mabon lasting from 1986 through the closing of plaintiffs' accounts.
They contend that in a "continuous course of action and concerted plan" intended to convert to the benefit of Mabon the funds in plaintiffs' accounts, Mabon "effected thousands of trades in the Accounts for the purpose of generating commissions and profits" for Mabon. Id. P 23. These trades "were of a high overall frequency . . . and included a high frequency of same day trading and in and out trading." Id. P 24.
Plaintiffs allege that overall commissions during this period totalled between $ 754,353 and $ 851,000 as to Charles Komanoff (approximately 56.3% of the average equity balance in his account) and between $ 2,819,000 and $ 3,836,000 as to Hannah Komanoff (approximately 38.3% of the average equity balance in her account). They contend that the turnover ratios in plaintiffs' accounts were as high as 31.2 times per year for Charles Komanoff and 25.7 times per year for Hannah Komanoff.
Plaintiffs also allege that Mabon deliberately made misrepresentations to plaintiffs and concealed facts from them in order to persuade them to establish and maintain their accounts with Mabon. Prior to the opening of plaintiffs' accounts, for example, defendants allegedly concealed from plaintiffs the fact that Mr. Weiner was not only Hannah Komanoff's accountant, but also Mabon's accountant, thus posing a conflict of interest. Later, in response to questioning by plaintiffs as to the status of their accounts, Ms. Miceli and Mr. Weiner purportedly misinformed plaintiffs that their monthly account statements did not accurately reflect account balances. In addition, plaintiffs allege that Ms. Miceli by letter dated August 15, 1989, misrepresented to plaintiffs that, when "pooling" the trades of its customers, it would allocate such trades at the end of each day. In fact, contend plaintiffs, losses were allocated after the fact and disproportionately to plaintiffs' accounts.
Defendants have offered as exhibits two letters, sent by Mabon to Hannah Komanoff in May and December of 1988, which advised plaintiffs of "realized and unrealized losses" in their accounts, warned them that their "trading strategy" involved "a high degree of leverage and risk," urged them to consider taking "a more conservative trading approach," and requested that Hannah Komanoff confirm her "understanding and appreciation of the concerns" expressed in the letters. Exhibits 3 & 4 to Affidavit of Annette Nazareth Dated Jan. 5, 1994 ("Nazareth Aff."). The December letter specifically requested Hannah Komanoff to "release and discharge" Mabon and its employees from responsibility for the losses described in the letter. Ex. 4 to Nazareth Aff. Plaintiffs concede that Hannah Komanoff signed both of these letters. Amended Complaint P 46. However, they allege that she did so as a result of misrepresentations on the part of Ms. Miceli and Mr. Weiner that she was "doing all right," that "everything is all right with your account," and that she "should not worry about anything." Id. PP 44-45.
According to plaintiffs, the losses in their accounts due to defendants' wrongful actions amounted to approximately $ 1,064,278.00 for Charles Komanoff and $ 7,922,100.00 for Hannah Komanoff. This constituted a total loss of $ 8,986,378.00 out of plaintiffs' combined investment of $ 14,768,312.00.
Plaintiffs allege that defendants have violated § 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, promulgated thereunder by the Securities and Exchange Commission, 17 C.F.R. § 240.10b-5. Amended Complaint P 1. Defendants respond that any claims under these provisions are time barred. Alternatively they argue that we should dismiss these claims pursuant to Fed. R. Civ. P. 9(b) for failure to plead fraud with particularity.
1. Statute of Limitations
The parties agree that the applicable statute of limitations for Rule 10b-5 claims is the one-and-three-year rule set forth by the Supreme Court in Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350, 361, 115 L. Ed. 2d 321, 111 S. Ct. 2773 (1991) (applying the period specified in §§ 9 and 18 of the 1934 Act). See also Walsche v. First Investors Corp. 981 F.2d 649, 653 (2d Cir. 1992). Under this rule, a Rule 10b-5 claim must be brought within one year after discovery of the facts constituting the violation and within three years of such violation. Lampf, 501 U.S. at 359-60.
Although the Amended Complaint does not specify when Charles Komanoff's account with Mabon was closed, defendants have provided evidence that this account was closed in May or June of 1988 and that the parties conducted no further transactions after this date. Nazareth Reply Aff. P 4 and Ex. 1 (Charles Komanoff's final account statement). Plaintiffs brought this lawsuit in April 1993, more than three years after the date that defendants claim Mr. Komanoff closed his account. Since plaintiffs have not provided any evidence that Mr. Komanoff closed his account later than June 1988 or that he traded with Mabon after this date, we conclude for purposes of defendants' summary judgment motion that Mr. Komanoff's Rule 10b-5 claim is barred by the statute of limitations.
To avoid the three-year bar, Mr. Komanoff urges that the running of that limitation period should be tolled due to fraudulent concealment on the part of defendants that prevented plaintiffs from discovering defendants' wrongdoing. Mr. Komanoff offers no relevant caselaw in support of this proposition, and we reject it in light of the Lampf decision.
In Lampf, the Supreme Court held that the three year cutoff for Section 10(b) claims is absolute, reasoning that "the equitable tolling doctrine is fundamentally inconsistent with the 1-and-3-year structure." Lampf, 501 U.S. at 363 (explaining that "the 3-year limit is a period of repose inconsistent with tolling" and "can have no significance . . . other than to impose an outside limit.") (citations omitted). Despite plaintiffs' protestations to the contrary, we believe that this reasoning holds even when the plaintiff's failure to bring suit within three years is due to fraudulent ...