The opinion of the court was delivered by: NEALON
Now before the Court is defendant Bache & Co., Inc.'s
(hereafter Bache) motion for judgment on the pleadings, or, in the alternative, for summary judgment in the above matter pursuant to Rules 12(c) and 56 of the Federal Rules of Civil Procedure. The named plaintiffs have brought this action on behalf of themselves and all others similarly situated who were customers of J. Samuel Sicherman and Co. (hereafter Sicherman), to recover damages allegedly sustained by them as the result of a fraudulent scheme involving Sicherman's dealings in the commodities futures market.
Plaintiffs allege that defendant Sicherman accomplished his fraudulent scheme by making false representations to plaintiffs that purchases and sales of commodity futures contracts were being made with their money, when in fact they were never made, and by sending to plaintiffs false confirmation slips of these nonexistent purchases and sales.
The alleged liability of Bache is essentially that Bache is a controlling person within the meaning of § 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78t(a)
and, as such, is jointly and severally liable with Sicherman for any violation of § 10(b) of the Exchange Act, 15 U.S.C. § 78j, S.E.C. Rule 10b-5, 17 C.F.R. § 240.10b-5, §§ 4b and 4d of the Commodity Exchange Act of 1936, 7 U.S.C. §§ 6b, 6d and the Rules and Regulations of the National Stock and Commodities Exchanges and the Board of Trade of the City of Chicago. Plaintiffs allege that defendant Bache aided and abetted Sicherman in his illegal operation by furnishing Sicherman with various facilities customary in commodities brokerage offices and by referring to Sicherman commodities business originating in Bache's Scranton office. Plaintiffs maintain that this activity, coupled with the sharing of brokerage fees and commissions on trades placed, created a public impression of endorsement both as to the skill and integrity of Sicherman and that the operation was backed by Bache. This endorsement, plaintiffs contend, plus the failure of Bache to properly supervise the activities of Sicherman or to correct the public impression that Sicherman was in some manner connected with Bache, allowed Sicherman to obtain customers by trading on the use of Bache's established reputation, when they knew or should have known that he was engaged in illegal and fraudulent activities.
In its motion, defendant contends that the court lacks subject matter jurisdiction under the Securities Act of 1933 and the Securities Exchange Act of 1934 because the discretionary trading accounts in commodities futures which plaintiffs maintained with Sicherman were not "securities" as that term is defined in the Securities Acts.
See Milnarik v. M-S Commodities, Inc., 457 F.2d 274 (7th Cir. 1972); cert. denied 409 U.S. 887, 93 S. Ct. 113, 34 L. Ed. 2d 144 (1972); Wasnowic v. Chicago Board of Trade, 352 F. Supp. 1066 (M.D.Pa.1972). Defendant further contends that as a matter of law, plaintiffs' complaint fails to state a claim upon which relief can be granted under the Commodity Exchange Act. 7 U.S.C. § 1 et seq.
Bache's contention that the Court lacks jurisdiction under the federal securities laws is based primarily on this Court's prior decision in Wasnowic v. Chicago Board of Trade, 352 F. Supp. 1066 (M.D.Pa.1972). Wasnowic was a related case arising out of the same fraudulent scheme alleged herein brought by two individuals who are members of the class represented by plaintiffs, seeking to recover damages from the Chicago Board of Trade and the Chicago Mercantile Exchange for aiding and abetting Sicherman in his alleged violations of the Securities Act of 1933 and the Securities Exchange Act of 1934. Relying on the recent Seventh Circuit decision in Milnarik v. M-S Commodities, Inc., 457 F.2d 274, cert. denied 409 U.S. 887, 93 S. Ct. 113, 34 L. Ed. 2d 144 (1972), this Court granted defendants' motion to dismiss the complaint for lack of subject matter jurisdiction under the federal securities laws on the ground that the discretionary trading accounts in commodities futures which plaintiffs maintained with Sicherman were not "securities" within the statutory definition. This finding was based upon this Court's determination that the agreements between Sicherman and plaintiffs in that case lacked the element of a common enterprise among investors, an element which the Court felt was essential to the definition of a security. See S.E.C. v. W. J. Howey Co., 328 U.S. 293, 66 S. Ct. 1100, 90 L. Ed. 1244 (1946) and Tcherepnin v. Knight, 389 U.S. 332, 88 S. Ct. 548, 19 L. Ed. 2d 564 (1967).
The Court held that although Sicherman has opened numerous accounts with different customers acting as a common agent for each, nothing in the complaint alleged that Sicherman's various customers were joint participants in the same investment enterprise.
Bache urges that the Wasnowic holding compels the same result in this case. Plaintiffs, on the other hand, assert in opposition that the element of "commonality" is present here in that Sicherman had maintained numerous joint accounts with various investors, with some accounts having as many as five joint owners.
It is plaintiffs' contention that each multi-owned account maintained by Sicherman constituted a "security" within the statutory definition. In support of this contention, plaintiffs have submitted an affidavit which reveals that J. S. Sicherman & Co. had maintained 228 separate accounts during the time in question from December 31, 1968 to March 31, 1969. Of these 228 accounts, 105 were single accounts; 91 were held in the names of two individuals; 10 were held in the names of one or more individuals indicating a custodial relationship with one or more individuals; and 22 were held in various other ways. Apparently conceding that the single accounts did not constitute "securities", plaintiffs nevertheless seek to establish that the joint ownership accounts are "securities."
Essentially, this same argument had been raised and rejected by the Seventh Circuit in Milnarik and by this Court in Wasnowic. In Milnarik, plaintiffs
had opened a discretionary account with the defendant Nelson on the understanding that he could use the money deposited with him at his discretion for plaintiffs' benefit. Plaintiffs contended that their agreement with defendant, and his similar agreements with other customers constituted a security. In rejecting this argument, the Court of Appeals affirmed the District Court's dismissal of the complaint,
"We find the element of commonality absent here. Although the complaint does allege that Nelson entered into similar discretionary arrangements with other customers, the success or failure of those other contracts had no direct impact on the profitability of plaintiffs' contract. Nelson's various customers were represented by a common agent, but they were not joint participants in the same investment enterprise."
Milnarik v. M-S Commodities, Inc., 457 F.2d at 276, 277, supra.
The Milnarik opinion pointed out that the "security" is the "investment contract" between the plaintiffs and the broker creating the discretionary trading account. Consequently, in the case before us, the "investment contract" is between plaintiffs and Sicherman and not the arrangement existing among the investors in a joint account. As in Milnarik, the agreement here between plaintiffs and Sicherman created ". . . an agency-for-hire rather than constituting the sale of a unit of a larger enterprise".
"Each contract creating this relationship is unitary in nature and each will be a success or failure without regard to the others. Some may show a profit, some a loss, but they are independent of each other. No matter how many discretionary trading accounts Nelson may have had with other principals, the 'security' 'issued' to the ...