acting as a personal stockbroker for Rozsa (Compl. ¶¶ 5, 23), and as
such, SG Cowen had no fiduciary duty to Rozsa. In contrast, Rozsa
contends that SG Cowen had a fiduciary duty to him because it was a
stockbroker with whom he deposited funds (Compl. ¶ 11).
A fiduciary relationship exists under New York law "`when one [person]
is under a duty to act for or to give advice for the benefit of another
upon matters within the scope of the relation.'" Mandelblatt v. Devon
Stores, Inc., 132 A.D.2d 162, 168, 521 N.Y.S.2d 672, 676 (1987) (citation
omitted). Under ordinary circumstances, a broker owes no fiduciary duties
to a purchaser of securities, see Perl v. Smith Barney Inc.,
230 A.D.2d 664, 666, 646 N.Y.S.2d 678, 680 (N.Y.App. Div. 1996), except
those duties necessarily attendant to the "narrow task of consummating
the transaction requested." Press v. Chemical Inv. Servs. Corp.,
166 F.3d 529, 536 (2d Cir. 1999) (citations omitted).
The complaint alleges that May Davis had direct contact with Rozsa and
coordinated the opening and use of the account at SG Cowen. (Compl.
¶¶ 12, 13, 15, 16.) Assuming these facts to be true, May Davis was
functioning as an "introducing broker," which but needed the assistance
of a third party, or "clearing broker," to settle and complete the
investor's transactions. See In re Adler Coleman Clearing Corp.,
198 B.R. 70, 73 (S.D.N.Y. 1996); Katz v. Financial Clearing & Services
Corp., 794 F. Supp. 88, 90 (S.D.N.Y. 1992). As Rozsa's agent, May Davis
may well have assumed a fiduciary relationship with Rozsa in connection
with the agreed upon transaction. See Press v. Chemical Investment
Services Corp., 166 F.3d 529, 536 (2d Cir. 1999) (discussing split among
New York courts about existence and scope of fiduciary duty ordinary
broker owes to investor).
In contrast, the complaint specifically alleges that SG Cowen was the
"clearing broker" for May Davis. (Compl. ¶¶ 5, 23.) Clearing
brokers, unlike "introducing brokers," generally have agreements with
other broker-dealers, rather than individual 10 investors, governing the
mechanics of order entry, confirmation and the completion of trades. See
id. Due to this contracting scheme, New York courts have held that
clearing brokers generally have no fiduciary duty to individual
investors. See Edwards & Hanly v. Wells Fargo Securities, Inc.,
602 F.2d 478, 484 (2d Cir. 1979) ("a clearing agent, is generally under
no fiduciary duty to the owners of securities that pass through its
hands") (citation omitted), cert. denied, 444 U.S. 1045 (1980); Connolly
v. Havens, 763 F. Supp. 6, 10 (S.D.N.Y. 1991) (same); Dillon v.
Militano, 731 F. Supp. 634, 636 (S.D.N.Y. 1990) (same); Stander v.
Financial Clearing & Services Corp., 730 F. Supp. 1282, 1286 (S.D.N Y
1990)(same).*fn2 This holds true even where, as here, the clearing
broker holds an investor's funds for trading. Flickinger v. Harold C.
Brown & Co., Inc., 947 F.2d 595, 597, 599 (2d Cir. 1991) (finding that
clearing broker that kept custody of investor's funds and securities had
no fiduciary duty to him).
Clearing brokers may have a fiduciary duty to investors in certain
extenuating circumstances. See, e.g., Goldman v. McMahan, Brafman, Morgan
& Co., No. 85 Civ. 2236 (PKL), 1987 WL 12820, *22 (S.D.N.Y. June 18,
1987) (finding that complaint adequately made out a claim for clearing
agent's breach of fiduciary duty
due to claim that agent "actively
engaged . . . in creating fraudulent trading losses" rather than acting
as "a mere conduit."). However, the complaint in this action does not
allege any facts, such as, for example, the existence and violation of a
customer agreement between Rozsa and SG Cowen, upon which such a finding
could be based. Cf. Conway v. Icahn & Co., 16 F.3d 504, 509 (2d Cir.
1994). Rather, the complaint alleges only that the other defendants
"induced SG Cowen . . . to transfer Rozsa's funds. . . ." (Compl. ¶
In short, the complaint fails to allege facts on which the Court could
find that SG Cowen acted as anything other than a generic clearing agent
that acted only through May Davis. As a result, SG Cowen had no fiduciary
duty to Rozsa.*fn3 SG Cowen's motion to dismiss the breach of fiduciary
duty claim is granted for failure to plead facts upon which a claim for
relief may be granted.
III. Breach of Contract
SG Cowen next moved to dismiss the breach of contract claim against it
on the grounds that the complaint fails to allege that Rozsa and SG Cowen
ever entered into a written contract. In opposition, Rozsa contends that
his contract claim in fact relies on a theory that when SG Cowen accepted
his funds, it created either a bailment contract or a "mutuum."
First, the facts alleged do not support a finding that there was a
"mutuum." A "mutuum" is a vestige of Roman law defining a loan of money
or property that may be used by the transferee, who must then return
either the actual money transferred, or its equivalent, to the
transferor. See DeSimon v. Ogden Associates, 88 A.D.2d 472,
454 N.Y.S.2d 721, 726 (N.Y.App. Div. 198 2). The complaint alleges only
that SG Cowen accepted a transfer of funds with a note that the funds
were "for the benefit of Mr. Thoedore Rozsa" (Compl. ¶ 14), not that
SG Cowen was authorized to "use" the funds.
A bailment of money is created under New York law when a special or
specific bank account is created, title to the funds remains with the
account holder, and the funds are separated from other deposits. See
Peoples Westchester Savings Bank v. Federal Deposit Ins. Corp.,
961 F.2d 327, 330 (2d Cir. 1992). "Whether an account is general or
specific depends upon the mutual intent of the parties." Swan Brewery Co.
v. United States Trust Co., 832 F. Supp. 714, 718 (S.D.N.Y. 1993). Absent
evidence of intent, New York law presumes that deposits are general
rather than specific. Id. at 718-19. As the court recognized in Hossain
v. Rauscher Pierce Refsnes, Inc., 46 F. Supp.2d 1164 (D.Kan. 1999), an
investor does not seek to have the exact same funds returned after
depositing them with a clearing broker:
When plaintiff [investor] deposited his money with the
defendant [clearing agent], he did not intend for the
defendant to return the identical money back to him. To
the contrary, plaintiff deposited the money with hopes of
the amount of his deposit. Because the
deposit cannot be classified as a special deposit, no
bailment relationship existed between plaintiff and
46 F. Supp.2d at 1171 (construing Kansas law, which is analogous
to New York law of bailments).