protection the statute affords. It is equally clear, however, under the facts presented here, that wherever that line is eventually drawn, this case does not fall on its actionable side. To hold otherwise would mean that § 10(b) protection would extend to any investor who is given, without more, false credentials of someone claiming to be a broker and subsequently loses money. While a state fraud action may here be warranted, I do not believe there was ever any intention or expectation that this situation would rise to the federal level of actionability.
The federal securities laws are not intended "to provide a broad federal remedy for all fraud." Chemical Bank v. Arthur Andersen & Co., 726 F.2d 930, 938 (2d Cir. 1984). The Act was enacted to promote "fair dealing and efficiency in the securities markets", Central Bank of Denver, N.A. v. First Interstate Bank of Denver, 511 U.S. 164, 188, 128 L. Ed. 2d 119, 114 S. Ct. 1439 (1994), and its purpose "is to protect persons who are deceived in securities transactions--to make sure that buyers of securities get what they think they are getting . . . ". Chemical Bank, 726 F.2d at 943. As such, the Second Circuit has consistently required that an alleged fraud under § 10(b) pertain to the securities at issue. See Bissell v. Merrill Lynch & Co., Inc., 937 F. Supp. 237, 242 (1996). Marbury and Drysdale are in accord since the defendants' misrepresentations spoke directly to the quality of the specific security or purchase at issue.
Drysdale, on close examination, is a situation where the buy-back capability of the seller was an essential element of the security "package". In finding liability under § 10(b), the Court noted that the defendant's misrepresentations regarding the entity's solvency impacted directly on the quality of the plaintiff's investment because the investment's return was predicated upon the expectation of the entity's ability to repurchase the securities. Drysdale Securities Corp., 801 F.2d at 21. Thus, when the Drysdale court analogized Marbury, it emphasized that the misrepresentations in both cases went to the investment quality of the specific stocks at issue because the misrepresentations induced a purchase in the face of investor misgivings regarding that particular stock. See id. at 21-22.
Laub has not made any allegation that Faessel's misrepresentation caused the loss incurred under any specific stock in Laub's portfolio. He merely alleges that, due to Faessel's deceit, he paid Faessel for fraudulent services from which he may have been induced to purchase as he did. The complaint makes no claim, however, that the asserted losses flow directly and foreseeably from Faessel's misrepresentations, but rather, it appears, from the market forces to which all investors are subject.
Laub invested approximately $ 600 million in well-established technology stocks such as Hewlett Packard, Intel, IBM, Microsoft, Sun Microsystems and Texas Instruments. For the period from July 1, 1995 through December 7, 1995, the account under which these trades were affected was a non-discretionary one. The plaintiff, himself an experienced and high-stakes investor, controlled what trades were made and when.
Thus, nothing suggests that Faessel's alleged fraud led to the risks incurred or losses suffered; the risks appear to have been chosen by Laub and the losses appear to be due to market factors divorced from Faessel's deception.
As for the balance of the complaint, Count II alleges a violation of § 10(b) due to Faessel's lack of a reasonable basis for the stock recommendations he made to Laub. Faessel contends that the fraud is not alleged with sufficient particularity as required by Fed. R. Civ. P. Rule 9(b). Allegations of fraud should specify "the time, place, speaker, and content of the alleged misrepresentations." DiVittorio v. Equidyne Extractive Industries, 822 F.2d 1242, 1247 (2d Cir. 1987). Laub does, however, state the years in which the misrepresentations were allegedly made and he quotes some of the alleged misrepresentations. While concluding that the complaint's allegations meet the particularity threshold required under Rule 9(b), Count II must, however, be dismissed for the same reasons as Count I. In the context made, Faessel's misrepresentations as to his background may very well have induced Laub's choice to purchase, but there is nothing alleged indicating those misrepresentations caused the loss actually incurred.
Count III is brought under § 20 of the Exchange Act on the theory that WorldCo should be liable for Faessel's fraud because it controlled him. Faessel argues that if Counts I and II fall then Count III must necessarily fall with them. I agree. Further, all that is alleged by Laub is the conclusory assertion that Worldco was aware of Faessel's misrepresentations and that it exercised actual control over Faessel. There are no facts alleged to support the claim. Count III is dismissed.
Counts IV - VI allege state law claims for fraud, negligent misrepresentation and breach of fiduciary duty. The plaintiff's federal claims having been dismissed, I decline to exercise supplemental jurisdiction over the remaining state claims pursuant to 28 U.S.C. 1367(c)((3).
The complaint is dismissed in its entirety.
Dated: New York, New York
November 19, 1997
United States District Judge