scheme of the SEA suggests that private causes of action were not to be implied. Several provisions in the SEA explicitly provide for private causes of action, raising the inference that those not containing such provisions were not intended to contain them. Also, the statutory scheme contemplates self-regulation and enforcement of the rules by exchanges and associations, suggesting that Congress intended such self-regulation to be the only means of enforcement. See Juster v. Rothschild, Unterberg, Towbin, 554 F. Supp. 331, 333 (S.D.N.Y.1983); Colman v. D.H. Blair & Co., 521 F. Supp. 646, 654 (S.D.N.Y.1981). Therefore, given that legislative intent clearly requires that no private cause of action be implied, any claims for relief based on the rules are dismissed.
B. Insufficiency of Pleading
The defendants have advanced four separate arguments seeking to dismiss various elements of the complaint for insufficient pleading. First, the defendants argue that the entire complaint fails to satisfy Federal Rule of Civil Procedure 8(a) which requires, inter alia, "a short and plain statement of the claim showing the pleader is entitled to relief." The Court finds that the plaintiff adequately has demonstrated some entitlement to relief if the facts alleged are proven true, and therefore the Court denies the motion to dismiss for failure to plead a cause of action.
The other three contentions require more discussion. The defendants argue that all allegations of fraud in the complaint are insufficiently pled under the stricter pleading standards of Federal Rule of Civil Procedure 9(b). The defendants further suggest that the plaintiffs have only pled dissatisfaction with their broker's performance, which fails to establish a cause of action under the federal securities antifraud provisions. Lastly, the defendants contend that the plaintiffs have failed to allege sufficient facts to support a claim for churning.
Although the plaintiffs' counsel have been very general in drafting their pleadings, the Court still finds the pleadings sufficient to withstand the motion to dismiss.
Federal Rule of Civil Procedure 9(b) sets the standard for pleading fraud. Rule 9(b) provides that "in all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." This rule applies not only to common law fraud, but also to fraud claims under the federal securities laws. See, e.g., Ross v. A.H. Robins Co., 607 F.2d 545, 557-59 (2d Cir.1979), cert. denied, 446 U.S. 946, 100 S. Ct. 2175, 64 L. Ed. 2d 802 (1980). In the context of the federal securities laws, that rule has been interpreted to mean that "[a] plaintiff alleging fraud in a securities transaction must specifically allege the acts or omissions upon which the claim rests." Id.
That rule does, however, have to be read in conjunction with the liberal general pleading standard of Rule 8 of the Federal Rules of Civil Procedure. Those two rules, read together, lead to the conclusion that "the obligation to plead circumstance in Rule 9 should not be treated as requiring allegations of facts in the pleadings." Securities & Exchange Commission v. Tiffany Industries, Inc., 535 F. Supp. 1160, 1166 (E.D.Mo.1982), citing 5 WRIGHT & MILLER, Federal Practice and Procedure, § 1298, p. 409.
The Court finds the plaintiffs' allegations of fraud sufficient to meet this pleading standard. The plaintiffs allege three instances of intentional misrepresentation which induced them to place and keep their account with defendant Dow, and therefore with defendant Smith Barney. The plaintiffs allege that they initially were induced to invest in securities and options by the representations of defendant Dow that the investment would be safe and extremely profitable. Dow was aware, according to the plaintiffs, that the plaintiffs knew little or nothing about investing in securities or options. Once the plaintiffs observed the precipitous decline in the value of their holdings, they sought twice, unsuccessfully, to restrict Dow's discretion, first by asking him to consult his immediate superior before trading in their account, and second, by going directly to his superior and asking him to investigate Dow's handling of their account. On both occasions, plaintiffs allege that they were assured that appropriate action would be taken, but that action was not taken.
These allegations sufficiently satisfy the standard for pleading fraud set forth in Rule 9(b). In Todd v. Oppenheimer & Co., 78 F.R.D. 415, 420-21 (S.D.N.Y.1978), the court required that the time, place, manner, content, and speaker of particular statements be pleaded, in addition to stating how they misled the plaintiff and what the defendants obtained as a consequence of the fraud. The plaintiffs have provided that information in this case. The statements in question are three distinct representations made to the plaintiffs, two by Dow, and one by Dow's unnamed superior, which lulled the plaintiffs into placing their money in Dow's hands and allowing it to remain there, to the benefit of both Dow and Dow's employer, Smith Barney. The plaintiffs need not plead scienter specifically; under Rule 9(b), scienter may be alleged generally in the complaint.
The cases cited by the defendant to support dismissal of the allegations of fraud are distinguishable from the situation at hand. See, e.g., Segal v. Gordon, 467 F.2d 602, 608 (2d Cir.1972) (holding a complaint insufficient which merely tracked the language of the statute without alleging any facts); Shemtob v. Shearson, Hammill & Co., 448 F.2d 442 (2d Cir.1971) (dismissing a complaint which alleged only a breach of contract from which no inference of scienter could be drawn); Vetter v. Shearson, Hayden, Stone, Inc., 481 F. Supp. 64 (S.D.N.Y. 1979) (complaint described actions as unauthorized or perilous without alleging how those transactions were fraudulent).
2. Federal Securities Law Antifraud Provisions
The plaintiffs' allegations of fraud also are sufficient to state a cause of action under the federal securities law antifraud provisions. The defendants maintain that the plaintiffs' claims are essentially a reflection of dissatisfaction with the performance of their broker, which is not actionable under the federal securities laws. The Court finds that the plaintiffs' allegations go beyond mere dissatisfaction, or the other allegations found insufficient in the cases cited by defendants, such as breach of contract, Bowman v. Hartig, 334 F. Supp. 1323, 1328 (S.D.N.Y.1971); poor business judgment by the broker, Carroll v. Bear, Stearns & Co., 416 F. Supp. 998 (S.D.N.Y.1976); or a "recommendation that [went] awry," Van Alen v. Dominick & Dominick, Inc., 441 F. Supp. 389, 400 (S.D.N.Y. 1976), aff'd, 560 F.2d 547 (2d Cir.1977). Therefore, the Court denies the defendants' motion to dismiss for failure to allege facts to support a claim under the antifraud provisions of the federal securities laws.
The defendants' last argument for dismissal based on the insufficiency of the plaintiffs' pleadings is a contention that the plaintiffs failed to allege sufficient facts to maintain a claim for churning of their account. The Court finds that the plaintiffs have alleged sufficient facts to maintain a churning claim, and denies that portion of the defendants' motion.
Under Newburger, Loeb & Co. v. Gross, 563 F.2d 1057 (2d Cir.1977), cert. denied, 434 U.S. 1035, 98 S. Ct. 769, 54 L. Ed. 2d 782 (1978), a plaintiff must show that "the dealer effectively exercised control over trading in the account and manipulated the account to his benefit." Id. at 1069. The Court concludes that the plaintiffs have adequately alleged that Dow had control over the account. The plaintiffs clearly took no active role in the choice of investments, and when they did try to limit Dow's discretion, unsuccessfully, they recommended that Dow consult his superiors, not them.
The Court also finds that the plaintiffs have alleged sufficient facts to show that Dow "manipulated the account to his benefit." In order to show such manipulation, the plaintiff must allege facts sufficient to show either the turnover ratio of the account or the percentage of the account paid in commissions. Baselski v. Paine, Webber, Jackson & Curtis, Inc., 514 F. Supp. 535, 541 (N.D.Ill.1981). The plaintiffs allege that in the space of 26 months, from August 1981 to November 1983, Dow generated from the plaintiffs' account $39,965 in commissions. This surely is sufficient information to suggest that a high percentage of the plaintiffs' account was eroded by commissions. This clear inference of churning differentiates the plaintiffs' case from situations in which a churning claim has been dismissed on the pleadings. See, e.g., Vetter, 481 F. Supp. at 66 (dismissing a churning count because it was based on conclusory allegations of churning); Carroll, 416 F. Supp. at 1001 (dismissing a conclusory allegation of churning where the commissions generated equaled 1% of the portfolio value).
C. Arbitrable Claims
In addition to taking the positions discussed above, the defendants also move to dismiss all pendent common law claims, or in the alternative, to stay those claims and refer them to arbitration. The pendent claims cannot be dismissed because the Court has declined to dismiss the underlying federal claims. However, the Court finds that the common law claims properly are severed and referred to arbitration.
When the plaintiffs opened their account at Smith Barney, they executed a "Customer's Agreement" which contained the following clause:
Any controversy arising out of or relating to my account . . . shall be settled by arbitration in accordance with the rules, regulations and procedures then in effect of the New York Stock Exchange, Inc., the AMEX or National Association of Securities Dealers, Inc., as I may elect.
The federal securities law claims involved in this case are clearly exempt from arbitration. The Federal Arbitration Act, 9 U.S.C. § 1 et seq. (1976), provides for the exclusive jurisdiction of federal courts over federal securities claims. See, e.g., Wilko v. Swan, 346 U.S. 427, 428, 74 S. Ct. 182, 183, 98 L. Ed. 168 (1953); Liskey v. Oppenheimer & Co., 717 F.2d 314, 315 (6th Cir.1983). Given the presence of nonarbitrable claims, the continuing effect of the arbitration agreement becomes an issue. The Court finds the arbitration agreement to be still effective, and orders the common law claims severed and referred to arbitration. Trial of the federal securities law issues will be stayed pending the outcome of the arbitration.
The plaintiffs advance three arguments for the proposition that the pendent common law claims should not be submitted to arbitration. Initially, the plaintiffs argue that they cannot properly be compelled to arbitrate the claims against defendant Dow because Dow could not be compelled to arbitrate disputes between himself and plaintiffs. That lack of reciprocity, they allege, relieves them of the duty to arbitrate their claims against Dow.
State courts which have addressed the question of suits against the individual agents of brokerage firms have allowed the individual defendant to be made a party to the arbitration proceedings despite the fact that he was not a party to the agreement. See, e.g., Vic Potamkin Chevrolet, Inc. v. Bloom, 386 So.2d 286 (Fla.Dist.Ct.App. 1980) (where arbitration clause applied to "any controversy or claim arising out of, or relating to this agreement," the scope of that clause was broad enough to include within it individuals within the respondeat superior doctrine even though they were not signatories to the agreement); Paine, Webber, Jackson & Curtis, Inc. v. McNeal, 143 Ga.App. 579, 239 S.E.2d 401, 404 (1977) (defendant account representative was entitled to share with defendant firm the benefit of the arbitration agreement); Starr v. O'Rourke, 5 Misc.2d 646, 159 N.Y.S.2d 60, 61 (1957) (individual employee is joint tortfeasor with the firm, so despite jurisdictional technicalities, a suit against both should be entertained in the forum to which one has a right to resort).
Secondly, the plaintiffs contend that the arbitration agreement should not be enforced because arbitrators cannot award punitive damages, and they allege that they did not knowingly waive their right to punitive damages. The Court finds that the signing by the plaintiffs of the Customer's Agreement, which was governed by New York law and included an arbitration clause, was a contractual waiver of the right to punitive damages. Baselski, 514 F. Supp. at 543.
Finally, the plaintiffs argue that no part of the complaint should be submitted to arbitration in order to preserve the exclusive jurisdiction of the federal courts over federal securities law claims. This Court finds protection of exclusive jurisdiction to be an insufficient reason to override the agreement of the parties to arbitrate claims. See, Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 105 S. Ct. 1238, 1241, 84 L. Ed. 2d 158 (1985). See also, Liskey, 717 F.2d at 320; Dickinson v. Heinold Securities, Inc., 661 F.2d 638, 646 (7th Cir.1981). The federal policy favoring arbitration is very strong. See, Federal Arbitration Act, 9 U.S.C. § 1 et seq. (1976).
Therefore, these common law claims are subject to arbitration, and trial on the federal securities law issues will be stayed pending the resolution of the arbitration. The Supreme Court has stated that:
Courts may directly and effectively protect federal interests by determining the preclusive effect to be given to an arbitration proceeding. Since preclusion doctrine comfortably plays this role, it follows that neither a stay of the arbitration proceedings, nor a refusal to compel arbitration of state claims, is required in order to assure that a precedent arbitration does not impede a subsequent federal-court action.
Dean Witter, 105 S. Ct. at 1243.
D. Punitive Damages
The defendants argue that the plaintiffs' claim for punitive damages should be stricken because the plaintiffs have not stated a cause of action which would support the award of punitive damages. The Court finds that plaintiffs are not entitled to punitive damages, and therefore strikes the claim for such damages.
The plaintiffs clearly cannot recover punitive damages under any federal securities law claim. Punitive damages are not available for such claims under either the Securities Act of 1933, Globus v. Law Research Service, Inc., 418 F.2d 1276, 1283-87 (2d Cir.1969), cert. denied, 397 U.S. 913, 90 S. Ct. 913, 25 L. Ed. 2d 93 (1970); or the Securities Exchange Act of 1934, Carras v. Burns, 516 F.2d 251, 259-60 (4th Cir.1975).
Furthermore, the plaintiffs waived their rights to punitive damages under any of the remaining common law claims. As decided above, all such claims are subject to arbitration. By the plaintiffs' own admission, "both Smith-Barney's Customer's Agreement . . . and the Customer's Option Account Form and Agreement . . . executed by the Plaintiffs specifically provide that the agreements and transactions shall be governed by the laws of the State of New York." Memorandum of Points and Authorities in Opposition to Defendants' Motion To Dismiss, To Compel Arbitration And To Strike Claim for Punitive Damages, p. 13 fn. Under the laws of New York, an arbitrator has no power to award punitive damages. Garrity v. Lyle Stuart, Inc., 40 N.Y.2d 354, 386 N.Y.S.2d 831, 832, 353 N.E.2d 793, 794 (1976). When the plaintiffs executed the Customer's Agreement, they contractually waived their right to punitive damages by agreeing to be governed by arbitration and New York law. Baselski, 514 F. Supp. at 543. Therefore, the plaintiffs are not entitled to punitive damages on any claim.
For the foregoing reasons, it hereby is
ORDERED, that the defendants' motion to dismiss all claims under the constitution and/or rules of the New York Stock Exchange or the National Association of Securities Dealers is granted. It hereby further is
ORDERED, that the defendants' motion to dismiss all claims for failure to plead a cause of action is denied. It hereby further is
ORDERED, that the defendants' motion to dismiss any claims for fraud is denied. It hereby further is
ORDERED, that the defendants' motion to dismiss all claims under the antifraud provisions of the federal securities laws is denied. It hereby further is
ORDERED, that the defendants' motion to dismiss any pendent common law claims is denied. The defendants' motion to sever all pendent common law claims, and have them subject to arbitration, is granted. It hereby is
ORDERED, that the defendants' motion to strike the plaintiffs' claim for punitive damages is granted.