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September 23, 1983

E.F. HUTTON & COMPANY, INC. and Herbert Krakovitz

The opinion of the court was delivered by: HANNUM

 HANNUM, District Judge.

 This is an action brought by Plaintiff Yancoski to recover damages based on allegations of fraud relating to transactions in securities. The Complaint sets forth ten counts. The Court will rule on the Motion Of Defendants To Dismiss The Complaint *fn1" in which defendants seek dismissal, on various grounds, of all counts.

 Summary Of Allegations

 The allegations of the Complaint must be accepted as being true. *fn2" Accordingly, a distillation of the allegations is presented below.

 Lorraine Yancoski received a large sum of money in July of 1979 by means of the satisfaction of a judgment in her favor based on her husband's death. Yancoski sought prudent and safe investments for her funds in order to provide income and capital growth potential.

 At her request, plaintiff's attorney introduced her to some stockbrokers, including defendant Krakovitz. Krakovitz worked for the brokerage house of E.F. Hutton & Company, Inc., [hereinafter referred to as "E.F. Hutton"]. Plaintiff was told by Krakovitz that he could invest her money in a manner that was both safe and would lead to income and capital growth. Krakovitz emphasized that the vast research and informational resources of E.F. Hutton would be used to guide her investments.

 Based on Krakovitz's statements, plaintiff opened a discretionary account at E.F. Hutton with Krakovitz as the broker in charge of the account. Yancoski placed $100,000.00, the vast majority of her assets, in the account. Before opening her account with E.F. Hutton, plaintiff had not traded in securities and informed Krakovitz of her lack of knowledge of the stock market.

 Although plaintiff's objective of safe and prudent investments was known to him, Krakovitz immediately began purchasing stocks for the account which were highly speculative. Krakovitz represented to plaintiff that the stocks purchased for the account were cautious and safe investments. During late 1979 and early 1980, Krakovitz engaged the account in a large amount of trading. In December, 1979 and January, 1980, trading totals were close to the entire value of the account.

 In February of 1980, Krakovitz persuaded Yancoski to convert to a margin account by misrepresenting the risks of margin accounts and the suitability of a margin account to plaintiff's investment objectives. Krakovitz is alleged to have induced the conversion to a margin account and subsequently to have used the account solely for the purpose of generating commissions and not to serve Yancoski's interest. The Complaint sets forth a sequence of heavy trading through which the bulk of the account's value was lost while payments for commissions and interest on indebtedness to E.F. Hutton grew.

 Plaintiff eventually closed her account with E.F. Hutton and sought relief in this Court based on the heavy trading and misrepresentation by Krakovitz and a failure to supervise the account by E.F. Hutton.

 Count I: The Securities Exchange Act Section 10(b) and Rule 10b-5

 Plaintiff's first count alleges violations of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), *fn3" and the Securities and Exchange Commission's Rule 10b-5, 17 C.F.R. § 240.10b-5 (1982). *fn4" In effect, Count I of the Complaint sets forth two challenged theories of liability: *fn5" (1) Krakovitz violated Rule 10b-5 by engaging the account in excessive trading for the purpose of generating commissions or, in other words, that Krakovitz "churned" the account; and (2) Krakovitz violated Rule 10b-5 by making material misrepresentations concerning and omitting to state material facts regarding the securities transactions.

 Defendants properly recognize that Count I complains of "churning" *fn6" the account. Defendants contend, however, that churning is not a cognizable violation of either the Act or Rule 10b-5. Instead, maintain Krakovitz and E.F. Hutton, the churning of the account represents a mere breach of a fiduciary relationship and not a manipulative or deceptive act proscribed by federal law.

 If churning constitutes only a breach of fiduciary relations, then federal securities law does not cover the activity. See Santa Fe Industries, Inc. v. Green, 430 U.S. 462, 476, 97 S. Ct. 1292, 1302, 51 L. Ed. 2d 480 (1977). Churning is, however, more than defendants claim. The cases recognize churning as a deceptive practice which constitutes a violation of Section 10(b) of the Act and Rule 10b-5. E.g., Carras v. Burns, 516 F.2d 251, 258 (4th Cir.1975) (collecting cases); McNeal v. Paine, Webber, Jackson & Curtis, Inc., 598 F.2d 888, 890 n. 1 (5th Cir.1979) (collecting cases). Cf. 17 C.F.R. § 240.15c1-7 (1982) (expressly defining churning as a violation of Section 15(c) of the Act).

 Contrary to defendants' contentions, under the circumstances of this case, plaintiff is not required to allege misrepresentations in addition to the excessive trading in order to state a claim under Rule 10b-5. *fn7" Therefore, this Court finds that the Complaint does state a claim based on churning.

 Defendants also challenge Count I on the ground that it fails to state a claim based solely on misrepresentations by Krakovitz. It is asserted by defendants that plaintiff fails to allege any misrepresentations and, even if misrepresentations are alleged, that there were no misrepresentations made in connection with the purchase or sale of a ...

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