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July 28, 1988

JOHNSTON, LEMON & CO. et al., Defendants

Royce C. Lamberth, United States District Judge.

The opinion of the court was delivered by: LAMBERTH


 Plaintiff Nicholas T. Filloramo brings this action against defendants Johnston, Lemon & Co. Inc., a stock brokerage firm, and Robert H. Boorman, Jr., a Johnston Lemon employee who acted as Filloramo's stockbroker from August, 1982 until sometime in early 1986. Filloramo claims violations of section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, and brings common law counts of fraud and deceit, negligent misrepresentation, and breach of fiduciary duty. He also claims violations under "RICO", the Racketeer Influenced And Corrupt Organizations Act. Defendants have moved for summary judgment.

 This action centers around a sequence of transactions from December 1982 until late in 1985, involving three stocks in plaintiff Filloramo's portfolio: Manor Care, Johnson Electronics and Megadata. In essence, Filloramo alleges that defendant Boorman first fraudulently induced him to sell his substantial holdings - over $ 200,000 - in Manor Care, and then fraudulently induced him to invest the proceeds in Johnson Electronics and Megadata. The scheme was motivated, under Filloramo's theory, by Johnston Lemon's twin desire to recoup $ 10,000 it gave Filloramo in settlement of an earlier, unrelated dispute, and also to push Johnson Electronics and Megadata stocks on its customers in the hope it would influence the two companies to hire Johnston Lemon as, their investment banker.

 When Filloramo eventually sold his holdings in Johnson Electronics and Megadata, he suffered losses of over $ 60,000; in the meantime, Manor Care had more than doubled in value to over $ 600,000.

 In the motion papers and discovery filed with the Court, the factual disputes are well defined (although somewhat hazily remembered by the principals). Filloramo contends that in late 1982, Boorman called to advise him that he should liquidate his substantial holdings in Manor Care, a company engaged in nursing care and related businesses. Boorman gave as a reason that the government had announced it would no longer reimburse nursing homes under its Medicaid program. Filloramo Deposition at 186-187. However, Manor Care had never significantly relied on Medicaid patients, and there was no reason to believe it would be adversely affected by a government cutback of such payments. Further, Boorman was aware of this, or should have been, since this information was contained in Johnston Lemon reports in existence at the time.

 Defendants for their part contend that Filloramo was also in possession and aware of the same information, since the same reports were sent to him on a regular basis. Further, although Boorman does not recall whether he advised Filloramo to sell his Manor Care holdings, Boorman Deposition at 54, he explicitly denies advising him to do so because of cutbacks in Medicaid reimbursements. Id. at 58.

 Filloramo next alleges that sometime in 1983, he is not sure when but possibly in March, see Filloramo Deposition at 125, Boorman began to extol the prospects for Johnson Electronics. The tenor of his comments was that the company had a "pending" contract which would transform it into a $ 100 million company, and that this was "imminent." As a result, Filloramo made an initial purchase of the stock in March, 1983. The contract never materialized.

 Nevertheless, Filloramo continued to purchase Johnson Electronics, making purchases in September, 1983, and again some two years later in August, 1985. Joint Pretrial Statement, Stipulated Facts at 2. Before each purchase, Boorman allegedly repeated the same story about the pending $ 100 million contract, telling Filloramo he was now in contact with the president of the company, that it would be signed within two or three months, and explaining away the obvious fact it had not yet been signed as earlier promised because of a design change or other delay. Filloramo Deposition at 130-137. Filloramo invested a total of about $ 80,000 in Johnson Electronics, and claims losses of about $ 22,000 when he liquidated his holdings in the stock in 1986.

 At his deposition, Boorman acknowledged recommending the stock to Filloramo, Boorman Deposition at 30, but he did not recall whether he made the representations alleged by Filloramo. Id. at 38. Defendants have produced no evidence that, if Boorman did make such representations, he had any basis for doing so.

 The parties' respective stories about Megadata continue in this vein. Filloramo alleges that Boorman told him of illusory large contracts Megadata was about to obtain with companies throughout the airline industry, based on a super smart computer the company was developing for use in reservations programs. Boorman allegedly led Filloramo to believe that such contracts were a certainty. Filloramo Deposition at 173. Based on this, Filloramo began purchasing Megadata in January, 1983. And as with Johnson Electronics, he continued to purchase the stock, buying in June and October, 1983, in February, June, and July, 1984, and in February, 1985, Joint Pretrial Statement, Stipulated Facts at 2-3, always pursuant to the same representations by Boorman about contracts with airline companies in the very near future. Filloramo Deposition at 166-173. And as with Johnson Electronics, before each purchase of Megadata, Filloramo adamantly trusted Boorman's representations that although the upcoming contracts had been delayed temporarily, they were now about to happen. Over the two year period, Filloramo alleges he invested approximately $ 100,000 in Megadata, and when he sold out in 1986 he took a loss of about $ 41,000.

 Boorman on the other hand, while agreeing he did recommend that Filloramo purchase Megadata, Boorman Deposition at 42-43, denies he represented that contracts throughout the airline industry were a certainty, or even that there was a good chance they would occur. Id. at 143.

 Basic to Filloramo's version of events is that he reposed great and undaunted trust in Boorman, and continued to rely on the information he received from Boorman because of the pressures of running his own business. Filloramo Deposition at 136-137.


 1. Common Law And Securities Law Claims

 Defendants' motion for summary judgment on the securities fraud and common law fraud claims has little force. They argue in essence that Filloramo can not establish scienter, an essential element of a section 10(b) and Rule 10b-5 claim, where the underlying fraud is based on misrepresentations of future events. Further, defendants argue in any case that there has been no showing that Boorman knew his representations were false, or that he had the requisite intent to deceive Filloramo. Finally, they claim Filloramo could not reasonably have relied on such misrepresentations, since he was a sophisticated investor and had access to the same information available to Boorman.

 It is well established that an action may be brought under section 10(b), 15 U.S.C. § 78j(b) (1982), and Rule 10b-5, 17 C.F.R. § 240 10b-5 (1987) against a stockbroker who states an opinion without a genuine belief in its accuracy, or with a reckless disregard for its truth or falsity. Eisenberg v. Gagnon, 766 F.2d 770, 776 (3d Cir. 1985), cert. denied, 474 U.S. 946, 88 L. Ed. 2d 290, 106 S. Ct. 342 (1985). This principal applies to forecasts and predictions. Abrams v. Oppenheimer Government Securities, Inc., 589 F. Supp. 4, 9 (N.D. Ill. 1983), aff'd 737 F.2d 582 (7th Cir. 1984).

 In addition, the element of scienter under section 10(b) and Rule 10b-5 embraces reckless conduct, as well as conduct that is knowing or intentional. Dirks v. Securities and Exchange Commission, 220 U.S. App. D.C. 309, 681 F.2d 824, 844-845 (D.C. Cir. 1982), rev'd on other grounds, 463 U.S. 646, 77 L. Ed. 2d 911, 103 S. Ct. 3255 (1983). Further, plaintiff need not produce direct evidence of a defendant's state of mind; circumstantial evidence will suffice if it supports an inference of intentional, knowing, or reckless behavior. Wechsler v. Steinberg, 733 F.2d 1054, 1058-1059 (2d Cir. 1984) (the court noting that issues of intent and motive are usually inappropriate for disposition on summary judgment).

 Thus, Filloramo can bring a securities fraud claim against defendants based not only on Boorman's alleged misrepresentation of a present fact; that Manor Care depended on government Medicaid payments. He may also bring such a claim on the alleged misrepresentations by Boorman regarding future events; that a $ 100 million contract for Johnson Electronics was pending or imminent, and that airline industry-wide contracts for Megadata were also imminent. Further, if a jury believes Filloramo's testimony that Boorman made such representations (one of which, concerning the $ 100 million contract for Johnson Electronics, he does not deny making), the absence of reports or other evidence that would give him a basis for making such predictions could lead it to conclude he acted recklessly.

 Also, if Filloramo establishes at trial that defendants sought to recoup the $ 10,000 settlement Johnston Lemon awarded him prior to the disputed transactions, and if he establishes that defendants actively pushed Johnson Electronics and Megadata stocks on customers such as Filloramo in the hope that Johnston, Lemon would become the investment banker for those two companies, a jury could reasonably consider such factors as evidence that Boorman's misrepresentations were intentional.

 Filloramo has cited significant evidence material to Boorman's state of mind: it is undisputed that Filloramo did receive a $ 10,000 settlement from Johnston Lemon prior to the transactions in dispute here. In addition, defendants acknowledge that Johnston Lemon's reports at the time showed that Manor Care would not be adversely affected by government cutbacks in Medicaid spending, Defendant's Motion for Summary Judgment, Statement of Material Facts at 5, contrary to the alleged misrepresentations by Boorman. Also, if the jury believes Boorman made false representations concerning large lucrative contracts for Johnson Electronics and Megadata, then the Johnston Lemon reports on those companies may be relevant to show that such predictions had no basis in fact. Boorman Deposition, exhibits 8, 9, 11, 13. Further, Filloramo has discovered evidence that Johnston Lemon had expressed a desire to Megadata to manage an offering by that company, pointing out that one of Johnston Lemon's employees "has gotten ...

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