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PITS, LTD. v. AMERICAN EXPRESS BANK INT'L & AMERIC

January 16, 1996

THE PITS, LTD., Plaintiff, against AMERICAN EXPRESS BANK INTERNATIONAL and AMERICAN EXPRESS BANK LIMITED, Defendants.


The opinion of the court was delivered by: SWEET

 Sweet, D.J.

 In this action predicated upon claims for federal securities fraud, common law fraud, negligent misrepresentation, breach of fiduciary duty, and breach of contract, defendant American Express Bank Limited ("Limited") has moved pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure for an order dismissing all of the claims against it made by Plaintiff, The Pits, Ltd. ("The Pits"), on the grounds that the Complaint fails to state a claim upon which relief can be granted. Defendant American Express Bank International ("International") has moved for an order (1) dismissing the claims against it for violations of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78aa (the "Exchange Act"), and common law fraud (a) pursuant to Rule 9(b), Fed. R. Civ. P., on the grounds that The Pits has failed to plead fraud with particularity or, (b) in the alternative, pursuant to Rule 12(b)(6), Fed. R. Civ. P., for failure to state a claim; (2) dismissing the claims against it for breach of contract pursuant to Rule 12(b)(6), Fed. R. Civ. P., for failure to state a claim; and (3) (a) dismissing the claim against it for negligent misrepresentation, pursuant to Rule 12(b)(6), for failure to state a claim or, (b) in the alternative, requiring a more definite statement with respect to that claim, pursuant to Rule 12(e), Fed. R. Civ. P.

 For the reasons set forth below, Limited's motion will be granted in part and denied in part. International's motion to dismiss the claims against it for violations of the Exchange Act and for common law fraud for failure to plead fraud with particularity will be granted in part and denied in part. International's motion to dismiss the claims against it for violations of the Exchange Act and for common law fraud for failure to state a claim will be denied. International's motion to dismiss the breach of contract claim will be denied. International's motion to dismiss the negligent misrepresentation claim will be denied. International's motion for a more definite statement will be denied.

 The Parties

 The Pits is an off-shore corporation based in the Cayman Islands. Juris Vitols ("Vitols"), not a party to this action, was at all times relevant to this action the president, a shareholder, and a director of The Pits.

 Limited is a banking entity. International is a wholly-owned subsidiary of and is controlled entirely by Limited. Both Limited and International have offices in New York. Rene Dominguez ("Dominguez"), not a party to this action, is an International employee with the title of "relationship manager."

 Prior Proceedings

 The Pits filed its Complaint on April 27, 1995, alleging (1) violations of Section 10(b) of the Exchange Act and of Rule 10b(5) promulgated thereunder, including claims based upon allegations of (a) misrepresentations and omissions, (b) unsuitability, and (c) churning; (2) breach of fiduciary duty; (3) common law fraud; (4) negligent misrepresentation; and (5) breach of contract. Defendants filed their notice of motion on July 17, 1995. Defendants had not then, nor have they yet, entered an answer to the Complaint. Oral argument was heard and the matter was deemed fully submitted on October 25, 1995.

 The Factual Allegations

 On a Rule 12(b)(6) motion to dismiss, the factual allegations of the complaint are presumed to be true and all factual inferences must be drawn in the plaintiff's favor and against the defendants. See Scheuer v. Rhodes, 416 U.S. 232, 236, 40 L. Ed. 2d 90, 94 S. Ct. 1683 (1974); Cosmas v. Hassett, 886 F.2d 8, 11 (2d Cir. 1989). Accordingly, the factual allegations set forth and considered herein are taken from the Complaint and do not constitute findings of fact by the Court. They are presumed to be true only for the purpose of deciding the present motion to dismiss.

 In July of 1992, Vitols, on behalf of The Pits, opened a discretionary trading account, the "U.S. Equity Account" (the "Account"), with International. Vitols placed over $ 970,000 into that account for the express purpose of establishing a fund of low-risk, conservative investments for his retirement and as a legacy for his children. Vitols had only limited experience with stock market investments and no understanding whatsoever of the nature of option trading or trading on the stock market index.

 At the time Vitols opened the Account, Dominguez advised Vitols that The Pits' monies would be placed only into conservative, low-risk, equity investments and that the amount of the initial investment would be fully protected. Dominguez showed Vitols a document entitled "Discretionary Investment Management Guidelines" (the "Guidelines"), which stated that trading in the Account would consist entirely of purchases of stock in United States corporations with minimum capitalizations of three billion U.S. dollars. After Vitols had reviewed the Guidelines, Dominguez instructed him to initial the document. Although Vitols did not understand English well enough to understand the Agreement, he did so.

 On June 28, 1994, Dominguez informed Vitols that a new team of managers had taken over the Account, and Dominguez showed Vitols another document, entitled "New Signature Portfolio", concerning the trading conducted in the Account. This document represented that such trading was limited to "stocks of high quality companies generating superior growth characteristics in terms of profits, cash flows, and internal rates of return."

 In administering the Account, Defendants traded extensively in puts, calls, and options on the stock market index. These actions constituted operation of the Account as both an option and an index account, in contravention of The Pits' stated investment objective and of the parameters set forth in the Management Guidelines and the New Signature Portfolio. Numerous trades also involved the purchase of abnormally small units of options and stock. Plaintiffs invested The Pits' monies in numerous companies with capitalizations of less than three billion dollars.

 As a result of, inter alia, these option and small lot trades, The Pits incurred substantial losses and unreasonably high commission charges.

 Discussion

 I. Legal Standards

 A. Rule 12(b)(6)

 Rule 12(b)(6) imposes a substantial burden of proof upon the moving party. A court may not dismiss a complaint unless the movant demonstrates "beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." H.J. Inc. v. Northwestern Bell Tel. Co., 492 U.S. 229, 249-50, 106 L. Ed. 2d 195, 109 S. Ct. 2893 (1989); Hishon v. King & Spalding, 467 U.S. 69, 73, 81 L. Ed. 2d 59, 104 S. Ct. 2229 (1984);. Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957).

 B. Rule 9(b)

 Rule 9(b), Fed. R. Civ. P., requires that in all allegations of fraud, the circumstances constituting the fraud must be stated with particularity. See Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1127 (2d Cir. 1994); In re Time Warner Inc. Secs. Litig., 9 F.3d 259, 265 (2d Cir. 1993); Shemtob v. Shearson, Hammill & Co., 448 F.2d 442, 444-45 (2d Cir. 1971). The pleading must be sufficiently particular to serve the three goals of Rule 9(b) which are (1) to provide a defendant with fair notice of the claims against him; (2) to protect a defendant from harm to his reputation or goodwill by unfounded allegations of fraud; and (3) to reduce the number of strike suits. See DiVittorio v. Equidyne Extractive Indus., Inc., 822 F.2d 1242, 1247 (2d Cir. 1987); O'Brien v. Price Waterhouse, 740 F. Supp. 276, 279 (S.D.N.Y. 1990), aff'd, 936 F.2d 674 (2d Cir. 1991).

 Our Court of Appeals has required that allegations of fraud (1) adequately specify the statements made that were false or misleading, (2) give particulars as to the respect in which it is contended that the statements were fraudulent, and state the (3) time and place the statements were made and (4) the identity of the person who made them. See McLaughlin v. Anderson, 962 F.2d 187, 191 (2d Cir. 1992); Cosmas, 886 F.2d at 11. Finally, the Court of Appeals has held that a complaint charging fraud must assert that defendant possessed an intent to defraud or, at minimum, "allege facts that give rise to a strong inference of fraudulent intent." Shields v. Citytrust Bancorp., 25 F.3d at 1128 (citations omitted); see Beck v. Manufacturers Hanover Trust Co., ...


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