months after it was made. This has no merit, and in any case the Chengs have not alleged when the promises were made.
Grace also contends that the Chengs' pleading of fraud is not sufficiently particular. Under local law, a fraud claim must allege such facts as will reveal the existence of all requisite elements of fraud, which include: a false representation, in reference to a material fact, made by defendant with knowledge of its falsity and with intent to deceive plaintiff, who subsequently takes action in reliance upon the misrepresentation. Bennett, supra at 59. Clearly the Chengs have made such allegations.
Further, Grace's contention that the Chengs' allegations with respect to his intent are purely conclusory, and thus do not meet the particularity requirement, is also without merit. Grace's intent when he made the promises to the Chengs is a matter that is likely within his exclusive knowledge, and will have to be evaluated using extrinsic circumstantial evidence gathered through the discovery process. The Chengs should not be required to know, much less plead such facts at this stage of litigation. Further, even if discovery were complete, determination of a defendant's state of mind is ordinarily inappropriate to resolve on summary judgment, since it involves drawing inferences from facts upon which reasonable people can differ, and should therefore go to a jury. 10A C. Wright, A. Miller & M. Kane, Federal Practice and Procedure § 2730 (2d ed. 1983). A fortiori, it is inappropriate to resolve on a motion to dismiss.
Count IV: Violation of Federal Securities Laws
Inexplicably, the Chengs base this count not on the alleged unauthorized transactions by Grace which formed the basis for their fraud claim, but rather on their allegation that he recommended purchases which led the Chengs on a financially imprudent and unsuitable course. They further allege in Count IV, for the first time and in a quite conclusory fashion, that Grace was guilty of material omissions in the recommendations he made to the Chengs, which misled them, resulting in a violation of section 12 (2) of the Securities Act of 1933, 15 U.S.C. § 77 1(2) (1982), and of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (1982) and Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5 (1987).
1. Section 12(2)
Section 12(2) creates a federal cause of action against "Any person who offers or sells a security. . . ." in interstate commerce by means of a fraudulent pretext.
Grace contends that the one year statute of limitation applicable to section 12(2), contained in section 13 of the Act, 15 U.S.C. § 77 m, has expired, barring the Chengs' claim against Grace since the acts complained of occurred between April, 1985 and May, 1986, while the amended third-party complaint was not filed until July, 1987. However, the original complaint by Merrill Lynch was filed in September, 1986, and Chengs' original third-party complaint in October, 1986. Under the circumstances of this case, the amended third-party complaint relates back to the original filing in October 1986. Further, an action under section 12(2) must be brought within one year from discovery of the untrue statement or omission, or after discovery should have been made by exercise of reasonable diligence, so long as the action is ultimately brought within three years of the date of sale. Thus, dismissal on this ground is premature given the absence of facts on this issue.
However, the Court must nonetheless dismiss the Chengs' claim under section 12(2), since the statute does not apply to Grace by its terms. It restricts conduct by "Any person who offers or sells a security. . . ." Grace did not offer or sell securities to the Chengs; rather, he acted as their broker, or purported to act as broker on their behalf in purchasing securities. Although it has been held that a "seller" under section 12(2) is not necessarily just a person who conveys title and no one else, there is no reading of the statute that would broaden its application to a broker/defendant who buys on behalf of a customer/plaintiff. Admiralty Fund v. Jones, 677 F.2d 1289 (9th Cir. 1982), cited by the Chengs, applied section 12(2) to the attorney of a corporation whose stock plaintiff purchased, where the attorney misrepresented to plaintiff that the stock was unrestricted and freely transferable. Id. at 1294. The court held that the attorney might be liable under section 12(2), depending on the degree to which he participated in the fraud surrounding the negotiations leading up to sale.
Interestingly, the court was explicitly doubtful that even such a mildly expansive reading of section 12(2) would hold up in light of recent Supreme Court decisions applying principles of strict statutory construction to federal securities acts. Id. at 1294, n.4. There is very little doubt at all that including broker Grace in the sweep of section 12(2) would not find approval in a higher court. See e.g., Touche Ross & Co. v. Redington, 442 U.S. 560, 578, 61 L. Ed. 2d 82, 99 S. Ct. 2479 (1979) (invocation of the "remedial purposes" of the 1934 Act is unavailing to justify reading one of its provisions more broadly then its language and the statutory scheme reasonably permit).
2. Section 10(b) and Rule 10b-5
It is here that Grace's assertion that the Chengs have failed to plead with sufficient particularity must prevail. The Chengs have chosen to base this count solely on alleged omissions by Grace when he recommended purchases to the Chengs; it does not refer to the alleged unauthorized transaction by Grace of May 5, or to allowing options transactions to exceed the Chengs' balance in their Joint Standard Option Account. The Chengs give no indication of what the material omissions by Grace were, either in their amended third-party complaint, in their opposition to Grace's motion, or in their responses to discovery.
Under Federal Rule of Civil Procedure 9(b), a complaint alleging violation of Section 10(b) and Rule 10b-5 must be pleaded with particularity. See Devaney v. Chester, 813 F.2d 566, 568 (2d Cir. 1987). Under the facts pled here, the Chengs did not sufficiently set forth the alleged omissions which form the basis for their 10(b) claim.
Accordingly, it is hereby
ORDERED, that the third-party defendant's motion for summary judgement is denied, and it is further
ORDERED, that the third-party defendant's motion to dismiss is granted as to count IV of the third-party complaint, violation of federal securities laws, and denied as to all other counts. SO ORDERED.
© 1992-2004 VersusLaw Inc.