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JOHNSON v. COMPUTER TECH. SERVS.

June 17, 1987

William P. Johnson, Jr., Plaintiff
v.
Computer Technology Services, Inc., et al., Defendants


Thomas F. Hogan, United States District Judge.


The opinion of the court was delivered by: HOGAN

THOMAS F. HOGAN, UNITED STATES DISTRICT JUDGE

 This action is the third in a series of three brought against defendants Computer Technology Services, Inc. ("CTS") and its president, Dr. Daisy G. Wallace. Plaintiff William P. Johnson, Jr. alleges several causes of action for breach of contract, securities fraud, common law fraud, and violation of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. §§ 1961-1968 (1982) ("RICO"), based upon the disintegration of his employment relationship with defendants, and upon alleged improprieties in defendants' solicitation and securing of financing. Defendants move to dismiss the securities count and the RICO count for failure to allege essential elements of the causes of action, and have moved to dismiss all fraud allegations pursuant to Fed. R. Civ. P. 9(b) for insufficient specificity. Finally, defendants move to dismiss the state law claims, on the ground that they are "pendent" to federal claims that cannot be maintained. Plaintiff has countered with a motion to bar defendant's motion under Rule 12(g), and has requested attorneys fees.

 BACKGROUND1

 Dr. Daisy Wallace, president of CTS, approached plaintiff in 1985 to help stave off CTS's imminent financial collapse. Wallace promised, among other things, to give plaintiff 25% of CTS's outstanding equity stock, to employ plaintiff as the "number two" manager for at least two years, to repay any loans plaintiff gave CTS, and to reimburse plaintiff for the cost of relocating from California to Maryland. Complaint para. 8. Plaintiff arranged for his sister, Dr. Frankie Brown, and his father, William P. Johnson, Sr., to loan CTS money. Complaint paras. 10-11, 14. Both loans were secured by written promissory notes, on which plaintiff gave his personal guarantee of repayment. Complaint paras. 11, 15, 17. Plaintiff also loaned CTS funds, but received no promissory note in return. Complaint paras. 18, 21. None of these notes or loans have been repaid. *fn2" Complaint paras. 13, 16, 24. Plaintiff states that defendants have also failed to pay his full salary, relocation costs, other costs and expenses, and that they have failed to repay the loans he made to CTS.

 Plaintiff moved to Maryland and began work at CTS, "sav[ing] Defendant CTS from financial collapse." Complaint para. 31. During his employment, he was required to sign as personal guarantor for a loan to CTS. Complaint, paras. 37-39. His tenure at CTS was brief: Dr. Wallace discharged him on June 2, 1986. Complaint para. 24. Plaintiff asserts that Dr. Wallace made many misrepresentations to him, concerning CTS's viability and his own tenure, all of which he relied upon in securing his relatives' loans, in relocating to Maryland, and in giving loans and personally guaranteeing others for CTS's benefit. Plaintiff suffered financial injury from all of these actions, and brought this action on December 19, 1986 claiming: Breach of Contract (Count 1); Federal and State Securities Fraud (Count 2); Common-Law Fraud in Obtaining Funds (Count 3); Common-Law Fraud in Obtaining Personal Loan Guarantee (Count 4); and violations of Civil RICO (Count 5). Plaintiff is a party in two earlier actions based on the promissory notes issued to his sister, Brown, et al. v. Computer Technology Services, Inc., Civil Action No. 86-2753, and to his father, William P. Johnson, Sr., et al. v. Computer Technology Services, Inc., Civil Action No. 86-3124. The present action reiterates the allegations as to Dr. Brown and Mr. Johnson, Sr., although neither is a party to this case. *fn3" Defendants move to dismiss Counts 2 through 5. For the reasons below, the Court denies the motion in part, and grants it in part.

 DISCUSSION

 The Court may dismiss a complaint under Fed. R. Civ. P. 12(b)(6) only when it appears beyond doubt that plaintiff can prove "no set of facts in support of his claims that would entitle him to relief in this court." Doe v. United States Department of Justice, 243 U.S. App. D.C. 354, 753 F.2d 1092, 1102 (D.C. Cir. 1985). In its review of the complaint, the Court must construe the complaint in the light most favorable to plaintiff, and accept as true all reasonable inferences drawn from well-pleaded factual allegations. Id. Plaintiff's complaint need contain only a "short and plain statement" of his claims that will put defendants on notice of his claims and the grounds upon which they rest. E.g., Sinclair v. Kleindienst, 229 U.S. App. D.C. 13, 711 F.2d 291, 293 (D.C. Cir. 1983).

 A. Count 2: Federal and State Securities Fraud

 In order to state a cause of action for fraud under federal and state securities law, plaintiff must allege that defendants made a material misrepresentation in connection with his purchase or sale of a security. Securities Exchange Act of 1934 ("Act"), 15 U.S.C. § 78j(b); Maryland Securities Act, Md. Corp. & Assoc. Code Ann. § 11-301; Cal. Corp. Code, §§ 25401, 25501. Defendants contend that plaintiff has failed to refer to any "purchase or sale of security." Plaintiff asserts that the loans he made directly to defendants for the payment of expenses are "notes" within the protective reach of the Act. The Act does include promissory notes within its definition of a "security." *fn4" 15 U.S.C. § 78c(a)(10). Plaintiff's claim has other deficiencies, however, which place his transactions with defendants, as alleged, beyond the Act's reach.

 In this jurisdiction, a note is a "security" under the Act only if it represents a "genuine investment," as determined by the criteria set forth by the Supreme Court. E.g., Baurer v. Planning Group, Inc., 215 U.S. App. D.C. 384, 669 F.2d 770, 777-78 (D.C. Cir. 1981). This analysis turns on "whether the scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others." SEC v. W.J. Howey Co., 328 U.S. 293, 301, 90 L. Ed. 1244, 66 S. Ct. 1100 (1946). The determinative element is "the presence of an investment in a common venture premised on a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others." United Housing Foundation v. Forman, 421 U.S. 837, 852, 44 L. Ed. 2d 621, 95 S. Ct. 2051 (1975). The Court thus must examine the investment characteristics of the transaction to determine whether it comes within the Act. The absence of any written instrument memorializing the transaction, while not fatal to plaintiff's security claim, requires the Court to review the complaint for the necessary investment indicia. Accord Canadian Imperial Bank of Commerce v. Fingland, 615 F.2d 465, 466-67 (7th Cir. 1980) (in absence of physical document, court examines complaint for investment attributes of transaction). Unless plaintiff has sufficiently described a "security," subject matter jurisdiction is lacking. Id. at 467.

 Plaintiff also refers to two promissory notes CTS issued to his father and sister in support of this cause of action. Assuming that these notes would be "securities" under the Act, plaintiff neither "purchased" nor "sold" them, and they cannot support his claim of fraud under securities laws. Thus, as plaintiff has failed to allege the existence of a "security" that he purchased or sold, he has stated ...


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