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IN RE CATANELLA & E. F. HUTTON & CO.

UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA


April 9, 1984

IN RE: CATANELLA AND E. F. HUTTON AND COMPANY, INC. SECURITIES LITIGATION

The opinion of the court was delivered by: GILES

MEMORANDUM AND ORDER

 GILES, J.

 I. INTRODUCTION

 Before the court are motions to dismiss in five securities fraud cases, consolidated for purposes of pretrial proceedings by the Judicial Panel on Multidistrict Litigation. *fn1" Although the allegations contained in the complaints vary slightly, each involve the conduct of Kenneth G. Catanella ("Catanella"), a securities broker employed by defendant E.F. Hutton and Company, Inc. ("Hutton"). Catanella is accused of a continuing course of fraud in connection with his handling of plaintiffs' portfolios. The allegations run the gamut from churning to the purchase of unsuitable securities and the failure to disclose the risks inherent in certain transactions. In addition to misrepresentations and omissions directly impinging upon trading decisions, it is also averred that Catanella failed to disclose his role in a prior securities fraud action. Defendants Hutton and Granville are sued for failing to supervise Catanella adequately and under the related doctrine of respondeat superior. They are also characterized as "controlling persons" and aiders and abettors. Plaintiffs invoke sections 12(2), 15 and 17(a) of the Securities Act of 1933, 15 U.S.C. §§ 77 l (2), 77o, 77q(a) (1976), sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78t(a) (1976) and the Investment Advisers Act of 1940, 15 U.S.C. §§ 80b-1 -- 80b-17 (1976). Claims are also made pursuant to the Racketeer Influenced and Corrupt Organizations Act of 1970, ("RICO"), 18 U.S.C. §§ 1961-1968 (1976). Various counts based upon state law have been appended to the federal claims. In their motions to dismiss, defendants have assailed the legal sufficiency of virtually every cause of action. For the reasons which follow, the motions shall be granted in part and denied in part.

 II. THE COMPLAINTS

 When deciding a motion to dismiss, the court must take as true all well pled allegations and resolve all reasonable inferences drawn therefrom in the light most favorable to the nonmoving party. See e.g., Miree v. DeKalb County, 433 U.S. 25, 27, 53 L. Ed. 2d 557, 97 S. Ct. 2490 n.2 (1977); Rogin v. Bensalem Township, 616 F.2d 680, 685 (3d Cir. 1980); Bogosian v. Gulf Oil Corp., 561 F.2d 434, 444 (3d Cir. 1977). *fn2" Mindful of this standard, I shall summarize the rather complex allegations contained in the complaints. In the interest of brevity, I shall address issues jointly where possible.

 Each complaint begins by tracing the progress of Catanella's brokerage career. After spending eight months as a trainee, he embarked on that career at Paine, Webber, Jackson & Curtis, Inc. ("Paine, Webber") in 1969. Then, from December, 1972 until November, 1973, he was a registered representative and sales manager for Shearson, Hayden, Stone, Inc. ("Shearson"). Taraborelli Complaint at para. 16; Shulik Complaint at para. 8. *fn3" In April of 1974, Catanella's former customers from Paine, Webber and Shearson instituted suit against him and his former employers, claiming violations of a variety of federal and state securities laws. *fn4" After a bench trial, Catanella was found to have violated sections 10(b) and 15(c) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78o(c) (1976), various regulations and stock exchange rules. The trial court determined that Catanella had intentionally mishandled those plaintiffs' accounts, making unauthorized and unsuitable purchases, failing to disclose the risks inherent in short term trading and recommending securities without justification or investigation. Catanella also churned the accounts, disregarded specific instructions and breached a variety of fiduciary duties. Taraborelli Complaint at para. 19. Paine, Webber and Shearson were held liable for, inter alia, failing to supervise Catanella. Id. Judgment was entered against the defendants for eight hundred and thirteen thousand dollars ($813,000.00) and the case was later settled for an amount very close to that figure. Id. at P 20.

 The instant complaints also allege that Catanella had been terminated by Paine, Webber and Shearson, had been the subject of customer complaints and disciplinary proceedings, and had been previously fined for unauthorized trading. Catanella's commission record had been quite high, a potential indicia of churning. Id. at P 21. Despite this dubious employment history, Hutton hired Catanella as a registered representative. It is averred that Hutton either knew all of these facts before hiring him or was reckless in its failure to so learn. Not only was Catanella hired, but he was also named Portfolio Manager, made a member of Hutton's Director's Advisory Council and elected Vice-President. These titles added to Catanella's credibility, but were allegedly undeserved and misrepresented the level of his expertise. Id. at PP 23-24. In an attempt to launch Catanella's career at Hutton, a series of widely publicized seminars and lectures were sponsored by the firm. Famous market prognosticator, Joseph Granville was spotlighted at these lectures and Catanella was presented as a follower of the Granville method of investing. Gaugler Amended Complaint at para. 8. These seminars were directly or indirectly responsible for bringing plaintiffs and Catanella together.

 A. The Gaugler Complaint

 Edward Gaugler, a sixty two year old retired scientist, attended a Hutton seminar in Atlantic City. Both Granville and Catanella were in attendance, and the latter was dubbed the "Granville Oriented Broker in the Tri-State Area." Id. at P 9. During the seminar, Gaugler was given an informational card, which he filled out, entitling him to a free Granville Newsletter. This card also provided Catanella with the ability to contact and solicit him as a potential customer, which he did. Gaugler explained that his investments to date had been conservative, id. at P 11, and that he desired only a "businessman's risk." Id. at 22. It is alleged that Gaugler was unsophisticated in investments and this fact should have been clear to Catanella. Id. at PP 3, 11. Catanella attempted to convince Gaugler to follow the Granville market approach, making it appear that he was in constant contact with Granville and that Granville approved of his trading decisions. He also represented that Hutton's research facilities were utilized in reaching all trading decisions. Id. at PP 11-14.

 The complaint avers numerous wrongdoings by Catanella and Hutton, including their failure to disclose the cash position in Gaugler's account thereby enabling Hutton to use the idle cash for its own benefit, id. at P 17; failure to disclose that certain transactions were contrary to Granville's advice, id. at P 18; failure to disclose that Gaugler had not "gotten in" at the beginning of Granville's strategy for a certain period, id. at P 23, and failure to disclose that Hutton's research resources were rarely utilized in making trading decisions, id. at P 24. Defendants made unauthorized trades, purchasing securities that were far riskier than those desired by Gaugler. Catanella induced Gaugler to purchase options, representing himself to be experienced in that area. Gaugler was never apprised of the significant risks involved and after losing almost all of the capital invested, was told that Catanella had never before traded in options. Id. at PP 21-22. Contrary to their representations, when warranted by the situation, defendants did not place firm stop orders on behalf of Gaugler's account. Id. at P 25. Gaugler claims that Catanella engaged in churning, yielding a turnover ratio in excess of seven to one, id. at P 16, and failed to disclose that he was a defendant in the Brown suit. Hutton and Granville were aware of Catanella's complicity or were reckless in their failure to so learn. Id. at PP 25F, 25H. Finally, Granville is accused of reassuring Gaugler that all was going well while the other defendants were raping his portfolio. Id. at P 19.

 Gaugler sues under sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78t(a) (1976); section 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a) (1976); section 206 of the Investment Advisers Act, 15 U.S.C. § 80b-6 (1976) and RICO. The complaint also contains state claims for breach of contract, breach of fiduciary duty, conversion, fraud, negligence, violation of the New Jersey Consumer Fraud Act, N.J. Stat. Ann. tit. 56 § 8-1 -- 8-20 (West Supp. 1983-1984), and the New Jersey Uniform Securities Law, N.J. Stat. Ann. tit. 49 § 3-47 -- 3-76 (West Supp. 1983-1984). The liability of Granville and Hutton is premised upon the "controlling persons" provision, id. at P 7; respondeat superior, id. at P 28; failure to adequately supervise Catanella, id. at P 20 and aiding and abetting. Id. at 27.

 Catanella and Hutton seek dismissal, assailing the complaint for not pleading fraud with sufficient specificity to satisfy Rule 9(b) of the Federal Rules of Civil Procedure. Alternatively, they seek a more definite statement under Rule 12(e). Defendants contend that Gaugler has failed to state a claim under section 10(b), arguing that the complaint is devoid of any allegations of material misrepresentations or omissions in connection with the purchase or sale of securities. Further, they insist that the complaint fails to state a cause of action under RICO and both New Jersey statutes. Defendants assert that count eleven, which contains details of the Brown action, including excerpts from the court's findings, should be striken as "immaterial, impertinent or scandalous matter," under Rules 11 and 12(f). Defendants also claim that certain portions of the complaint are violative of Rule 8. Finally, if the federal causes of action fail, Catanella and Hutton argue for dismissal of the pendent state claims.

 In a separate motion, Granville moves to dismiss or for a more definite statement under Fed. R. Civ. P. 12(e). In addition to expressly joining the motion of Catanella and Hutton, Granville argues that the complaint does not support liability against him either as a controlling person or an aider and abettor.

 B. The Taraborelli Complaint

 David Taraborelli brings suit on behalf of himself and all other persons who purchased from or sold securities to, Catanella from April 1, 1979 to the present. Taraborelli Complaint at para. 9 *fn5" Like the Gaugler complaint, it traces Catanella's employment history and involvement in Brown. Again, Catanella is charged with churning, failing to disclose the risks of option and margin trading and engaging in unauthorized transactions, unsuited to the customer's needs or desires. It is generally averred that he disseminated material false or misleading information to his customers. Id. at PP 25, 26. Catanella and Hutton *fn6" are sued under sections 10(b) and 20(a) of the Securities Exchange Act of 1934, RICO, common law fraud, misrepresentation, negligence and both the Pennsylvania and New Jersey securities statutes. In their motion to dismiss, defendants raise arguments similar to those made in Gaugler. With respect to section 10(b), defendants argue that the requisite material misrepresentations or omissions are absent, that their actions did not cause plaintiffs' losses, and were not "in connection with" the purchase or sale of a security. It is asserted that the fraud allegations were not pled with sufficient specificity and that the complaint fails to state a cause of action under RICO. Portions of the complaint are labeled scandalous and impertinent and defendants maintain that the failure of the section 10(b) claim would prove fatal to the section 20(a) claim. Finally, defendants contend that the complaint fails to state a cause of action under either the Pennsylvania or New Jersey statute, that causation is lacking and that all pendent claims should be dismissed if the federal claims are found wanting.

 C. The Shulik Complaint

 Saul and Teresa Shulik met Catanella at one of the Hutton-Granville seminars. They were also unsophisticated investors and specifically advised him of their interest in safe and conservative investments. Shulik complaint at para. 18. Although Catanella agreed to abide by their wishes, he indicated that as amateurs, they ought to rely upon him to handle their portfolio. Initially, Catanella did purchase blue chip quality stocks as requested. Id. at P 22. However, a variety of circumstances led to the sale of most, if not all, of this high quality stock. First, Catanella convinced the Shuliks to open a margin account to allow them greater purchasing power. In response to plaintiffs' inquiries about the high interest, risks involved and frequent transactions, Catanella assured the Shuliks that he was proceeding along the appropriate course. Id. at P 25. However, a large portion of the blue chip stock in the Shuliks' portfolio was sold in order to effectuate Granville's advice to "go short," id. at P 27, a decision which resulted in substantial losses. In an attempt to recoup some of these losses, Catanella began to purchase a large volume of shares in a company called Texas International. All blue chip securities, except holdings in Exxon and Smith, Kline were sold to purchase blocks of Texas International stock. Id. at P 30. When the price began to decline, the Shuliks requested that Catanella sell while they could still profit, but once again Catanella reminded them that they had no experience in the field and should "leave everything to him." Id. at P 32. Ultimately, the price dropped so low that virtually the entire portfolio was sold to satisfy margin calls. Id. at 33-35. In addition to losing their initial investment of seventy-two thousand dollars ($72,000), they paid eleven thousand dollars ($11,000) in brokerage commissions and over thirteen thousand dollars ($13,000) in interest on their margin account. Id. at P 36.

 The Shuliks accuse defendants of churning, manipulating their margin account to generate interest, failing to disclose the risks involved in margin trading and purchasing securities without reasonable investigation or justification, considering their stated investment goals. The Shuliks point out that they relied upon Hutton's reputation and Catanella's representations about his experience. Given their lack of sophistication, they followed Catanella's advice according him de facto control over their account. Id. at P 45. In deciding to trust and rely upon Catanella, plaintiffs did not know of his role in Brown. The complaint alleges violations of sections 10(b) and 20(a), RICO, the Investment Advisers Act and the Pennsylvania and New Jersey securities statutes. Claims are also included for fraud, conversion, negligence and breach of contract. The motion to dismiss in this case raises virtually identical arguments, contending that the complaint fails to state a claim under section 10(b), RICO, the Investment Advisers Act and the Pennsylvania and New Jersey securities statutes.

 D. The Singer Complaint

 Although Ronald Singer did not attend a Hutton-Granville lecture, he responded by telephone to a promotional advertisement and was subsequently contacted by Catanella. Singer Complaint at paras. 16-17. He explicitly informed Catanella of his interest in only safe investments. Catanella promised to invest ninety percent (90%) of his money in conservative high quality securities, using only ten percent (10%) for more speculative ventures. Id. at P 20. Catanella made a variety of representations about his experience and informational links, inducing Singer to open an account with him. Singer stated that he was investing the bulk of his assets, was unsophisticated, and was therefore relying on Catanella. He accorded the broker broad discretionary powers. Id. at P 21. Contrary to the investor's expectations, Catanella engaged in highly speculative maneuvering, selling short, on margin and purchasing options. He misrepresented the risks, failing to disclose, inter alia, that by trading on margin, Singer was actually gambling with more money on the table. He failed to explain how interest was computed, the extent to which Hutton benefitted from the margin account and the eventuality of margin calls. He also indicated that trading on margin was suitable for someone with Singer's investment objectives. Id. at P 26. However, the margin account was allegedly opened primarily to generate interest income for Hutton. Id. at P 27. Defendants also are accused of churning. Id. at P 37. When the value of Singer's portfolio began to decline, Catanella reassured him that he would handle everything and would "turn things around." Id. at P 30. To recoup, Catanella began purchasing only Texas International, an allegedly undervalued stock. The suitability of this volatile stock was misrepresented and, as mentioned above, its market price began to plummet. Margin calls led Singer to owe Hutton approximately twelve thousand dollars ($12,000). Id. at 35. Allegations with respect to Brown also find themselves in this complaint. Singer invokes sections 10(b), 12(2), 15 and 20(a); RICO and the Pennsylvania and New Jersey securities statutes. The full panoply of state common law claims are also included.

 Once again, the motions to dismiss attack the legal sufficiency of the securities and RICO claims. Defendants also contend that the churning allegations lack the specificity required under Fed. R. Civ. P. 9(b). Finally, defendants incorporate all arguments raised in the Taraborelli motion.

 E. The Rastelli Complaint

 The Rastelli complaint is a virtual carbon copy of Singer. Consequently, the motion to dismiss asserts the same arguments raised in the Singer motion.

 III. DISCUSSION

 A. Pleading Deficiencies

 In addition to more substantive attacks, defendants argue that all of the complaints suffer from fatal pleading flaws. The allegations are assailed under Rules 8 and 9(b) of the Federal Rules of Civil Procedure. Moreover, portions of the complaints are characterized as "immaterial, impertinent or scandalous," worthy of being stricken under Rules 11 and 12(f). I shall address these contentions seriatim.

 1. Specificity and Rule 9(b)

 Rule 9(b) of the Federal Rules of Civil Procedure requires allegations of fraud to be pled with particularity. *fn7" Defendants argue that plaintiffs' averments are conclusory, lacking the factual specificity necessary to formulate an intelligent response. They cite plaintiffs' failure to furnish the details typically required of newspaper reporters -- the who, what, where, when and how of the misrepresentations and omissions. The allegations of scienter are condemned as faulty as are the charges of churning. Defendants contend that the RICO counts are predicated upon vacuous and deficient allegations of securities fraud. As an alternative to dismissal, defendants seek a more definite statement under Fed. R. Civ. P. 12(e).

 Rule 9(b)'s particularity requirements prohibits reliance upon "unsubstantiated conclusory allegations." Juster v. Rothschild, Unterberg, Towbin, 554 F. Supp. 331, 332 (S.D.N.Y. 1983) (quoting Vetter v. Shearson Hayden Stone, Inc., 481 F. Supp. 64, 65 (S.D.N.Y. 1979). Accord Decker v. Massey-Ferguson, Ltd, 681 F.2d 111, 115 (2d Cir. 1982); Segal v. Gordon, 467 F.2d 602, 607 (2d Cir. 1972); Mauriber v. Shearson/American Express, Inc., 567 F. Supp. 1231, 1236 (S.D.N.Y. 1983); Kimmel v. Peterson, 565 F. Supp. 476, 481, (E.D. Pa. 1983); Merrill Lynch, Pierce, Fenner & Smith v. DelValle, 528 F. Supp. 147, 149 (S.D. Fla. 1981); Goodman v. Moyer, 523 F. Supp. 33, 35 (E.D. Pa. 1981). As the Second Circuit stated in Segal, "10b-5 violations will not pass scrutiny if they do not allege with some specificity the statements allegedly constituting fraud." 467 F.2d at 607. The purpose for this rule is two-fold. It protects parties from frivolous allegations of fraud. As Wright and Miller noted; "It is a serious matter to charge a person with fraud and hence no one is permitted to do so unless he is willing to put himself on record as to what the alleged fraud consists of specifically." 5 C. Wright & A. Miller, Federal Practice & Procedure, § 1298 at 413 (1969) (footnotes omitted). It also serves a notice function. To comply with the rule, a complaint must contain sufficient detail to apprise the defendants of the claims against them and allow them to formulate a meaningful response. See e.g., Gottreich v. San Francisco Investment Corp., 552 F.2d 866 (9th Cir. 1977); Kimmel, 565 F. Supp. at 481; Kaufman v. Magid, 539 F. Supp. 1088, 1092-93 (D. Mass. 1982); Baselski v. Paine, Webber, Jackson & Curtis, Inc., 514 F. Supp. 535, 540 (N.D. Ill. 1981); Zaretsky v. E.F. Hutton & Co., Inc., 509 F. Supp. 68, 74 n.27 (S.D.N.Y. 1981); Posner v. Coopers & Lybrand, 92 F.R.D. 765, 768 (S.D.N.Y. 1981), aff'd mem., 697 F.2d 296 (2d Cir. 1982). Although it is difficult to describe abstractly the quantum of specificity required, the rule is generally deemed satisfied where the complaint details the time, place, substance of the alleged misrepresentations, as well as the identity of the individual perpetrating the fraud. See e.g., Bennett v. Berg, 685 F.2d 1053, 1062 (8th Cir. 1982), aff'd en banc, 710 F.2d 1361 (8th Cir. 1983), cert. denied, 464 U.S. 1008, 104 S. Ct. 527, 78 L. Ed. 2d 710, 52 U.S.L.W. 3440 (1983); Kaufman, 539 F. Supp. at 1093; Baselski, 514 F. Supp. at 540; Troyer v. Karcagi, 476 F. Supp. 1142, 1149 (S.D.N.Y. 1979). However, as the Baselski court noted; "the sufficiency of a pleading under this rule also varies with the complexity of the transaction. When the transactions are numerous and take place over an extended period of time, less specificity is required." 514 F. Supp. at 540 (citations omitted). Furthermore, Rule 9(b) must be read in conjunction with Rule 8(a) which requires only a short and plain statement of the cause of action. *fn8" Therefore, the rule should not be applied with such draconian strictness as to undermine the liberal spirit of the Federal Rules of Civil Procedure.

 Considering the complaints in light of the standards articulated above, I conclude that dismissal is not warranted. The Gaugler complaint sets out the churning allegations in exacting detail, including the names of the securities allegedly churned, the commissions generated, the frequency of trades and the turnover ratio. *fn9" Gaugler Amended Complaint at para. 16i-x. In addition, various misrepresentations and omissions are described, accompanied by the substance of the statements, the identity of the speaker and why they are alleged to be fraudulent. The only thing missing is the exact date on which each incident occurred. However, there is more than sufficient information to apprise defendants of the claims against them and aid in formulating a response. The Gaugler complaint does not offend Rule 9(b) and neither dismissal nor a more definite statement is warranted.

 The Shulik, Rastelli and Singer complaints, while not as detailed as the amended complaint in Gaugler, still pass muster under Rule 9(b). They contain much more than the conclusory allegations of fraud that defendants portray. A course of fraudulent activity is chronicled, including a variety of misrepresentations and omissions, the substance of which is described in the complaints. The relative knowledge of the parties is outlined and the perpetrator of the fraud identified. The breadth of the allegations convinces me that the fraud aspects of these complaints are not "vexatious," brought only to tarnish the defendants' reputations. Although not paragons of specificity, I conclude that the allegations stated are sufficient to place defendants on notice and allow them to respond. As the court in Mauriber noted; "I find no greater merit in defendant's remaining scattershot contentions that the complaint omits various details. . . . The complaint is not deficient for failing to state every detail that might be a proper subject for interrogatories." 567 F. Supp. at 1236. I recognize, as did the court in Mauriber, that the actual shaping of issues in complex cases takes place during the discovery process. See also Christidis v. First Pennsylvania Mortgage Trust, 717 F.2d 96, 99-100 (3d Cir. 1983).

  However, I do note that the churning charges in these complaints are somewhat conclusory. The Shulik complaint states the amount of commissions paid to defendants. The Rastelli and Singer complaints assert only that plaintiffs' portfolios were churned to generate commissions and in direct contradiction to plaintiffs' investment instructions. Defendants argue that these allegations are insufficient under Rule 9(b) principally because they fail to identify those transactions alleged to be improper. Notwithstanding that some courts might, in their discretion, require more specificity to maintain a churning claim than is present here, see Russo v. Bache Halsey Stuart Shields, Inc., 554 F. Supp. 613, 617-18 (N.D. Ill. 1982); Vetter v. Shearson Hayden Stone, Inc., 481 F. Supp. 64, 66 (S.D.N.Y. 1979); Fein v. Shearson Hayden, Stone, Inc., 461 F. Supp. 137, 142-43 (S.D.N.Y. 1978), I will not dismiss these portions of the complaints. See e.g., Kaufman v. Magid, 539 F. Supp. 1088, 1095 (D. Mass. 1982) (general allegations of churning, tracking definition held sufficient). As the Baselski court noted, where the transactions are numerous and stretch over an extended period of time, less specificity is required. 514 F. Supp. at 540. Given the time frame involved in these complaints and the potentially large number of transactions involved, a requirement that plaintiff list each allegedly fraudulent purchase and sale would be unduly burdensome and undermine the liberal notice pleading embodied in the Federal Rules of Civil Procedure. *fn10" Accord Baselski, 514 F. Supp. at 541 n.2. Moreover, unless they have been diligent record keepers, plaintiffs may lack, pre-discovery, detailed information necessary to list all transactions or calculate turnover ratios. The records containing that information are most likely in the possession of defendants. Although I do not sanction conclusory pleading and would prefer more detail, I decline to impose requirements that may bar otherwise deserving plaintiffs from vindicating their claims. Even assuming that plaintiffs do possess the necessary information, dismissal or requiring a more definite statement would serve little practical utility. Defendants have been accused of churning and have sufficient facts to admit or deny that allegation. Amendments to the complaints would only delay what already appears to be a protracted suit. As this court noted; "only through discovery will both sides gain the information required to assert their respective claims and defenses." Kimmel, 565 F. Supp. at 482.

 The Taraborelli complaint is the least specific of the five. Although the pleading sets forth in great detail Catanella's involvement in Brown and the findings in that case, the other allegations of fraud are somewhat conclusory. The factual background is provided, including Hutton's role in launching Catanella's career with the aid of the Granville seminars. However, the ultimate allegations of fraud are sparse. *fn11" Plaintiffs' response concedes that the requisite particularity is lacking, but argues that his claim of fraud is predicated only upon Catanella's failure to disclose his role in Brown. See Plaintiff's Memorandum of Law in Opposition to Defendant's Motion to Dismiss the Complaint at 18. The other allegations of fraud, including churning and option and margin trading without disclosing the inherent risks, are said to support the claim of fraud, rather than constitute it. Id. Frankly, I am perplexed how an allegation of churning relates to the failure to disclose the existence of a previous action. It seems apparent that these are separate and distinct instances of fraudulent conduct. However, I shall accept plaintiffs' representation that the fraudulent behavior is limited to Brown. The averments surrounding Brown are pled with sufficient particularity under Rule 9(b). Given plaintiffs' position, I need not reach the specificity of the other allegations of fraud and shall deny the motion to dismiss. However, this issue may arise again if I am called upon to decide a class certification motion. Should plaintiff desire at that time to include other instances of fraud, he will be required to furnish additional factual allegations. *fn12" Defendants' motions to dismiss on specificity grounds are therefore denied. *fn13"

 2. Immaterial, Impertinent or Scandalous Matter

 Defendants move to strike portions of the complaints as "immaterial, impertinent or scandalous" under Fed. R. Civ. P. 12(f). The challenge focuses upon the RICO counts, which set out at length the details of the Brown action. *fn14" In particular, defendants attack the quotation of large excerpts from the court's findings in Brown. It is argued that Brown has nothing to do with this action, is not material and is extremely prejudicial. In addition, defendants characterize the averments as an attempt to prove that Catanella acted in conformity with his prior conduct, an impermissible inference under Rule 404(b) of the Federal Rules of Evidence.

 The standard for striking under Rule 12(f) is strict. One court has stated that "only allegations that are 'so unrelated to plaintiffs' claims as to be unworthy of any consideration as a defense' should be striken." EEOC v. Ford Motor Co., 529 F. Supp. 643, 644 (D. Col. 1982) (quoting C. Wright & A. Miller, Federal Practice and Procedure § 1380 at 784 (1969)). Similarly, immateriality under this rule has been defined as "any matter having no value in developing the issues of a case." Oaks v. City of Fairhope, Ala., 515 F. Supp. 1004, 1032 (S.D. Ala. 1981).

 Defendants' arguments overlook the fact that the Brown litigation is highly relevant in two major respects. Catanella's previous involvement in securities fraud may help establish the "pattern of racketeering" prong of RICO. *fn15" More importantly, the failure to disclose Catanella's role in Brown is one of the alleged acts of fraud. The details surrounding the suit become crucial. For example, the more outrageous the fraud in Brown, arguably the more material becomes the failure to disclose. The actual resolution of the suit may also be highly probative with respect to Hutton's level of knowledge. I do not interpret these allegations as an attempt to prove Catanella's present liability because of the marked similarity between the activities. Quoting ad nauseum from the court's findings might not have been necessary, however, the content of those findings is not "so unrelated to plaintiffs' claims" as to warrant striking them under Rule 12(f). By so holding, I do not rule on the legal sufficiency of a section 10(b) claim premised upon the failure to disclose Brown, an issue which shall be analyzed infra. I decide only that, as a matter of pleading, dismissal is not appropriate.

 3. Simplicity and Rule 8

 Defendants attack the RICO counts for their verbosity, arguing that Fed. R. Civ. P. 8 is thereby offended. Rule 8(a)(2) requires that a pleading contain "a short and plain statement of the claim showing that the pleader is entitled to relief. . . ." This rule sets the liberal tone of the federal pleading requirements, in sharp contrast to the earlier formalistic code and writ pleading. Indeed, Rule 8(e)(1) states that "each averment of a pleading shall be simple, concise, and direct. No technical forms of pleading or motions are required." Fed. R. Civ. P. 8(e)(1) (emphasis added). However, the Rule must be applied with some logic and common sense. The length of a pleading will depend upon a number of factors, not the least of which is the complexity of the case. Accord Kaufman, 539 F. Supp. at 1092.

 The RICO counts, detailing the findings in Brown, are indeed prolix. However, as determined above, these allegations may be relevant, although very lengthy and redundant in spots. I shall not go through each count and determine which averments ought to remain and which are potentially extraneous. I agree with the sentiments expressed in Kaufman:

 

The plaintiffs in this action are alleging the violation of numerous provisions in the federal securities laws, which are complex in their application. This makes "concise" pleading difficult.

 

. . . .

 

What verbosity and repetition appears in the complaint does not, standing alone, justify dismissal under Rule 8.

 Kaufman, 539 F. Supp. at 1092 (emphasis added). Accordingly, the RICO counts shall not be dismissed pursuant to Fed. R. Civ. P. 8.

 In Gaugler and Shulik defendants also argue that the state law claims lack sufficient factual allegations to pass muster under Rule 8(a)(2). For example, the contract claim in Gaugler is faulted for failing to set forth when the contract was formed and the substance of its terms. Similarly, on the breach of fiduciary duty issue, plaintiffs allegedly fail to spell out the nature of the claimed duty. This argument misperceives the purpose of Rule 8. Striking complaints that fall short of perfection is the very practice which the Federal Rules sought to end. All that is required is a sufficient factual basis to place defendants on notice and allow them to frame a response. This has been satisfied here. The complaints detail the genesis and evolution of the parties' relationship. It does not require extraordinary perception to recognize that both the contract and fiduciary duty claimed arose from the brokerage-customer relationship. The remaining state law claims are also predicated upon sufficient factual bases and shall not be dismissed.

  B. Federal Securities Laws

 1. Section 10(b)

 Section 10(b) *fn16" of the Securities Exchange Act of 1934 and its implementing rule, 10b-5 *fn17" broadly prohibit fraud in connection with the purchase and sale of securities. The fundamental purpose of the 1934 Act was "to substitute a philosophy of full disclosure for the philosophy of caveat emptor. . . ." Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 92 S. Ct. 1456, 31 L. Ed. 2d 741 (1972) (quoting SEC v. Capital Gains Research Bureau, 375 U.S. 180, 186, 11 L. Ed. 2d 237, 84 S. Ct. 275 (1963)). The Act is to be applied "not technically and restrictively, but flexibly to effectuate its remedial purposes." Affiliated Ute, 406 U.S. at 151 (quoting SEC v. Capital Gains Research Bureau, 375 U.S. 180, 195, 11 L. Ed. 2d 237, 84 S. Ct. 275 (1963)). See also Superintendent of Insurance v. Bankers Life & Casualty Co., 404 U.S. 6, 12, 30 L. Ed. 2d 128, 92 S. Ct. 165 (1971). Although drafted as an SEC enforcement provision, a private right of action "has been consistently recognized for more than 35 years. The existence of this implied remedy is beyond peradventure." *fn18" Herman & Maclean v. Huddleston, 459 U.S. 375, 103 S. Ct. 683, 687, 74 L. Ed. 2d 548 (1983).

 Judicial limitations which have been placed upon a section 10(b) claim also serve to define the elements of the cause of action. For example, in order to have standing to sue, a plaintiff must have either purchased or sold securities. See Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 749, 44 L. Ed. 2d 539, 95 S. Ct. 1917 (1975). The fraudulent conduct alleged must take the form of a misstatement, omission, manipulation or deception. The mere breach of a fiduciary duty is not actionable. See Santa Fe Ind., Inc. v. Green, 430 U.S. 462, 477, 479-80, 97 S. Ct. 1292, 51 L. Ed. 2d 480 (1977). As the statutory language indicates, the fraud must be "in connection with" the purchase or sale. In misstatement and omission cases, the controverted fact must also be "material." The definition of materiality in section 10(b) cases has been borrowed from the section 14(a) context. Quoting from TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449, 48 L. Ed. 2d 757, 96 S. Ct. 2126 (1976), the Third Circuit describes materiality as "a substantial likelihood that, under all circumstances, the omitted fact would have assumed actual significance in the deliberations of the reasonable shareholder." *fn19" Healey v. Catalyst Recovery of Pennsylvania, Inc., 616 F.2d 641, 647 (3d Cir. 1980).

 A plaintiff must also prove that the fraudulent conduct was accompanied by "scienter." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193, 47 L. Ed. 2d 668, 96 S. Ct. 1375 (1976). Although the Ernst court left the question open, this Circuit and others have held that reckless behavior is sufficient. *fn20" See e.g., Sirota v. Solitron Devices, Inc., 673 F.2d 566, 575 (2d Cir.), cert. denied, 459 U.S. 838, 103 S. Ct. 86, 74 L. Ed. 2d 80 (1982); McLean v. Alexander, 599 F.2d 1190, 1197-98 (3d Cir. 1979); Nelson v. Serwold, 576 F.2d 1332, 1337 (9th Cir.), cert. denied, 439 U.S. 970, 58 L. Ed. 2d 431, 99 S. Ct. 464 (1978); Rolf v. Blyth, Eastman Dillon & Co., Inc., 570 F.2d 38, 44-47 (2d Cir.), cert. denied, 439 U.S. 1039, 58 L. Ed. 2d 698, 99 S. Ct. 642 (1978); Coleco Industries, Inc. v. Berman, 567 F.2d 569, 574 (3d Cir. 1977), cert. denied, 439 U.S. 830, 58 L. Ed. 2d 124, 99 S. Ct. 106 (1978); First Virginia Bankshares v. Benson, 559 F.2d 1307, 1314 (5th Cir. 1977), cert. denied, sub nom., Heller & Co. v. First Virginia Bankshares, 435 U.S. 952, 55 L. Ed. 2d 802, 98 S. Ct. 1580 (1978); Sundstrand Corp. v. Sun Chemical Corp., 553 F.2d 1033, 1044-45 (7th Cir.), cert. denied, 434 U.S. 875, 98 S. Ct. 224, 54 L. Ed. 2d 155 (1977).

 The final two elements of a section 10b cause of action are reliance and causation. These related concepts have generated a good deal of uncertainty, see e.g., Sharp v. Coopers & Lybrand, 649 F.2d 175, 186-89 (3d Cir. 1981), cert. denied, 455 U.S. 938, 71 L. Ed. 2d 648, 102 S. Ct. 1427 (1982) (reliance); Huddleston v. Herman & MacLean, 640 F.2d 534, 547-50 (5th Cir. 1981), aff'd in part, rev'd in part, 459 U.S. 375, 103 S. Ct. 683, 74 L. Ed. 2d 548 (1983) (reliance and causation). In analyzing these concepts, I shall endeavor not to add to the existing confusion.

 Defendants' section 10(b) arguments can be broken down into four major categories. First, defendants make a general Santa Fe v. Green argument, portraying the allegations as little more than breaches of fiduciary duties, devoid of the requisite material misstatements or omissions. The churning claims are also attacked as insufficient to state a cause of action. However, the more interesting and problematic issues presented focus upon the causation and "in connection with" elements.

 (a) The Scope of Prohibited Conduct

 When minority shareholders challenged the Delaware statutory short form merger as a "device, scheme, or artifice to defraud," the Supreme Court decided that it was time to put a halt to the seemingly endless expansion of the scope of section 10(b). Therefore, in Santa Fe v. Green, 430 U.S. 462, 51 L. Ed. 2d 480, 97 S. Ct. 1292 (1977), the Court held that in the absence of some form of deception, misrepresentation or non-disclosure, a breach of a fiduciary duty is not actionable under section 10(b). Santa Fe, 430 U.S. at 475-77. No longer can the catch-all anti-fraud provision be used to redress claims of corporate mismanagement. Id. at 477. Defendants endeavor to characterize the complaints as Santa Fe pleadings which allege little more than breach of a fiduciary duty or the failure to disclose such a breach. *fn21" Indeed, plaintiffs are portrayed as poor losers -- investors who are now crying over bad advice. After reviewing the complaints, I cannot agree.

 Putting aside the churning allegations, I find allegations of material misrepresentations and omissions which elevate plaintiffs' complaints beyond the reach of Santa Fe. The complaints allege, explicitly or inferentially, knowledge or recklessness on the part of defendants -- thus fulfilling the scienter requirement. *fn22" See e.g., Gaugler Amended Complaint, paras. 25F, 25H, 29; Taraborelli Complaint, paras. 25, 26, 28; Shulik Complaint para. 40, 50; Singer Complaint, para. 39; Rastelli Complaint, para. 35.

 The failure to disclose Catanella's role in the Brown litigation is an omission which, if material, would fall within the scope of section 10(b). In Sutton v. Shearson Hayden Stone, Inc., 490 F. Supp. 98, (S.D.N.Y. 1980), a broker's failure to disclose that he had been the subject of previous customer complaints survived a motion to dismiss. Although the court seemed concerned about proof of materiality, there was no suggestion that this was simply a breach of fiduciary duty barred by Santa Fe. Id. at 101. Shearson Hayden paid $34,500 to satisfy irate and potentially litigious customers. Sutton, in turn, signed a promissory note for that amount. In contrast, the Brown litigation resulted in an $813,000 verdict. The court in Sutton found that disclosure of the customer complaints would serve the purpose of protecting investors -- the goal of section 10(b). Id. at 101-03. I agree. Moreover, the allegations here indicate that plaintiffs were not sophisticated and relied heavily upon Catanella. Thus, his track record of self-dealing, churning and mishandling of other portfolios would be highly material. *fn23" Catanella's affirmative misrepresentation of his expertise in option trading, which induced Gaugler to purchase options, presents a similar situation. After losing all of the funds so invested, Catanella admitted that he had never before traded in options. Misrepresentation of expertise has been held actionable under section 10(b). See Marbury Management, Inc. v. Kohn, 629 F.2d 705, 707-08 (2d Cir. 1980), cert. denied, sub. nom., Wood Walker & Co. v. Marbury Management, Inc., 449 U.S. 1011, 66 L. Ed. 2d 469, 101 S. Ct. 566 (1980) (trainee represented himself as "licensed registered representative" and "portfolio management specialist").

 Nor are the material omissions and misrepresentations limited to the Brown litigation. The Singer and Rastelli complaints contain detailed descriptions of all of the undisclosed risks and costs associated with margin trading. The mechanics of a margin account were not explained -- plaintiffs were not told that they were actually placing more money at risk. They were not informed about margin calls or the interest computation and were led to believe that margin trading was "prudent and cautious." Singer Complaint, para. 26; Rastelli Complaint, para. 26. The Shulik Complaint also contains averments of misrepresentations with respect to the risks of margin trading. Shulik Complaint, paras. 23, 25, 26. Misrepresentations or omissions with respect to the risks inherent in margin trading are within the scope of section 10(b). See e.g., Arrington v. Merrill Lynch, Pierce, Fenner & Smith, 651 F.2d 615, 619 (9th Cir. 1981); Yancoski v. E.F. Hutton & Co., Inc., 581 F. Supp. 88, slip op. at 7 (E.D. Pa. 1983). Catanella incorrectly advised Rastelli that the high volume of trading was appropriate, when in fact his account was being churned. This allegation also states a claim under section 10(b). Accord Yancoski, slip op. at 7. In all complaints, Catanella is accused of intentionally ignoring plaintiffs' conservative investment goals, plunging money into speculative, high risk securities. This is a material misrepresentation, rather than merely a breach of fiduciary duty. See Miley v. Oppenheimer & Co., Inc., 637 F.2d 318, 326 (5th Cir. 1981); Yancoski, slip op. at 7. See also Clark v. John Lamula Inv. Inc., 583 F.2d 594, 599-601 (2d Cir. 1978) (recommending unsuitable debentures violates section 10(b)). Finally, the complaints are replete with allegations of self-dealing and the general mishandling of plaintiffs' accounts. Defendants' goals were not to serve their customers, but rather to generate commissions and interest for themselves. Faced with a similar situation, the court in Troyer found material misrepresentations and omissions in defendant's failure to disclose his self-dealing and mishandling of plaintiffs' portfolio. 476 F. Supp. at 1146-47. I agree with the approach taken in Troyer. The various allegations, taken together, form a course of fraudulent and deceptive conduct, transcending Santa Fe v. Green and adequately stating a claim under section 10(b). *fn24"

 (b) Churning

 Churning is a term of art which is actually a "synonym for 'overtrading.'" Armstrong v. McAlpin, 699 F.2d 79, 90 (2d Cir. 1983) (citing Hazard & Christie, The Investment Business 68 (1964)). It occurs when a broker engages in excessive trading for the purpose of generating commissions, without regard to the customer's investment objectives. See e.g., Costello v. Oppenheimer & Co., Inc., 711 F.2d 1361, 1367 (7th Cir. 1983); Thompson v. Smith Barney, Harris Upham & Co., Inc., 709 F.2d 1413, 1416 (11th Cir. 1983); Armstrong, 699 F.2d at 90; Petrites v. J.C. Bradford, 646 F.2d 1033, 1035 (5th Cir. 1981); Miley v. Oppenheimer & Co., Inc., 637 F.2d 318, 324 (5th Cir. 1981); Mihara v. Dean Witter & Co., Inc., 619 F.2d 814, 820 (9th Cir. 1980); Williamsport Firemen Pension Boards I and II v. E.F. Hutton & Co., Inc., 567 F. Supp. 140, 144 (M.D. Pa. 1983). Invoking the talismanic Santa Fe decision, the Gaugler defendants argue that the churning claim represents simply another chapter in state fiduciary duty law. Similarly, they argue that churning itself is insufficient to state a section 10(b) claim. Rather, churning allegations must be accompanied by averments of specific misrepresentations, omissions or acts of deception. Defendants also attack all complaints for the lack of detail with respect to the allegedly improper transactions. For the most part, these arguments were raised and rejected in the section discussing specificity.

 It appears undisputed that churning does state a cause of action under section 10(b). See e.g., Costello v. Oppenheimer & Co., Inc., 711 F.2d 1361, 1368 (7th Cir. 1983); Thompson v. Smith Barney, Harris Upham & Co., Inc., 709 F.2d 1413, 1416-17 (11th Cir. 1983); Follansbee v. Davis, Skaggs & Co., Inc., 681 F.2d 673, 676 (9th Cir. 1982); Miley v. Oppenheimer, 637 F.2d 318, 324 (5th Cir. 1981); Mihara v. Dean Witter & Co., Inc., 619 F.2d 814, 820 (9th Cir. 1980); Carras v. Burns, 516 F.2d 251, 258 (4th Cir. 1975); Landry v. Hemphill, Noyes & Co., 473 F.2d 365, 368 n.1 (1st Cir.), cert. denied, 414 U.S. 1002, 38 L. Ed. 2d 237, 94 S. Ct. 356 (1973); Hecht v. Harris Upham & Co., 430 F.2d 1202, 1206-1207 (9th Cir. 1970); Mauriber v. Shearson/American Express, Inc., 567 F. Supp. 1231, 1237-38 (S.D.N.Y. 1983); Kaufman v. Magid, 539 F. Supp. 1088, 1095 (D. Mass. 1982); Kaufman v. Merrill Lynch, Pierce, Fenner & Smith, 464 F. Supp. 528, 534 (D. Md. 1978); Dandorph v. Fahnestock & Co., 462 F. Supp. 961, 963 (D. Conn. 1979); Kravitz v. Pressman, Frohlich & Frost, Inc., 447 F. Supp. 203, 211 (D. Mass. 1978); Powers v. Francis I. DuPont & Co., 344 F. Supp. 429, 431-32 (E.D. Pa. 1972); Lorenz v. Watson, 258 F. Supp. 724, 730 (E.D. Pa. 1966). As the court stated in Follansbee:

 

It is settled that when a broker, unfaithful to the trust of his customer, churns an account in the brokers control for the purpose of enhancing the broker's commission income and in disregard of the client's interest, there is a violation of section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C.A. § 78a et seq., and Securities and Exchange Commission Rule 10b-5.

 681 F.2d at 676. In order to prove a churning claim, plaintiff must show that the broker exercised control over the account and that the trading was excessive. *fn25" See e.g., Costello, 711 F.2d at 1368; Thompson, 709 F.2d at 1416-17; Miley, 637 F.2d at 324; Mihara, 619 F.2d at 821; Kaufman, 539 F. Supp. at 1095; Zaretsky v. E.F. Hutton & Co., Inc., 509 F. Supp. 68, 74 (S.D.N.Y. 1981). Although courts seem to be in agreement with respect to these two elements, some have added the requirement that the broker act "with the intent to defraud or with willful and reckless disregard for the investor's interest." Thompson, 709 F.2d at 1417; Miley, 637 F.2d at 324; Mihara, 619 F.2d at 821. *fn26" However, this prong only appears to formalize the general scienter requirement necessary for all section 10(b) actions.

 Although the prohibition on churning can probably be traced to the fiduciary responsibility a broker owes to its customers, as the above cited cases demonstrate, churning does rise to the level of a section 10(b) violation. The act of churning itself is a deception. As the Costello court noted; "as a scheme, the essence of which is deception of a relying customer, churning, as a matter of law, is considered a violation of section 10(b) and Rule 10b-5." Costello, 711 F.2d at 1368 (citations omitted) (emphasis added). Similarly, the Ninth Circuit stated "the churning of a client's account is, in itself, a scheme or artifice to defraud within the meaning of Rule 10b-5." Mihara, 619 F.2d at 821. Accord Yancoski, slip op. at 5-6. In Armstrong v. McAlpin, 699 F.2d 79 (2d Cir. 1983), the district court had dismissed the churning claim for failing to allege an accompanying misrepresentation or omission. In reversing that decision, the court stated that "churning, in and of itself, may be a deceptive and manipulative device under section 10(b), the scienter required by section 10(b) being implicit in the nature of the conduct. The district court's reliance upon Santa Fe Industries v. Green, supra, 430 U.S. 462, was misplaced." Armstrong, 699 F.2d at 91 (citations omitted). I agree that the utilization of a customer's account to generate omissions, without regard to the customer's investment objectives, is "deceptive" within the meaning of section 10(b). To require a plaintiff to prove something in addition to the elements of control and excessiveness would be redundant and would contravene the overriding purpose behind the Securities and Exchange Act of 1934 -- the protection of the investing public.

 Defendants' other arguments with respect to churning are made in the guise of pleading deficiencies under Rule 9(b) of the Federal Rules of Civil Procedure. I have already rejected the suggestion that a plaintiff must list all allegedly tainted transactions and calculate the turnover ratio. Although not as detailed as defendants might wish, the complaints do contain allegations of broad discretionary control and excessive trading in light of conservative investment objectives. See e.g., Shulik Complaint, paras. 19, 39, 44, 45; Singer Complaint, paras. 21, 24; Rastelli Complaint, paras. 21, 24. Moreover, paragraph 16 of the Gaugler Complaint sets forth in unassailable detail the names of the securities churned, the frequency of trading, the commissions paid and the estimated turnover ratio. Therefore, I conclude that churning claims are sufficient to survive a motion to dismiss.

 (c) In Connection With

 Section 10(b) and Rule 10b-5 proscribe fraud "in connection with the purchase or sale of any security." 15 U.S.C. § 78j (1976); 17 C.F.R. § 240.10b-5 (1983). Defendants contend that many of plaintiffs' allegations do not arise "in connection with" an actual purchase or sale. Although the failure to disclose Brown is the focal point of this argument, defendants cite the failure to disclose the risks of margin trading, churning, unsuitable purchases and other averments falling into the general category of mishandling plaintiffs' accounts. *fn27" Defendants reason that these allegations reflect upon the choice of, or confidence in a broker, rather than the decision to buy or sell a particular stock. According to defendants, the latter satisfies the "connection" element, while the former does not. I do not agree.

 Despite voluminous caselaw in the section 10(b) area, the "in connection with" element has received little judicial attention. The concept does not lend itself to definition and its application has generated more than its share of confusion. The only Supreme Court precedent, Superintendent of Insurance of New York v. Bankers Life & Cas. Co., 404 U.S. 6, 30 L. Ed. 2d 128, 92 S. Ct. 165 (1971), provides little practical guidance. In Bankers Life, defendants essentially used the assets of a corporation, Manhattan Casualty Company, to acquire total ownership. Defendants purchased all of the stock of Manhattan using a check drawn at a financial institution. At the time the check was written, defendants had no funds on deposit there. After taking over Manhattan and installing a president, defendants induced the Board to sell some of its United States Treasury Bonds. The proceeds of the sale were used to cover the check with which the stock had been purchased. 404 U.S. at 7-8. Noting that "section 10(b) must be read flexibly, not technically and restrictively," id. at 12, the Court stated that "there was a 'sale' of a security and since fraud was used 'in connection with' it, there is a redress under § 10(b). . . ." Id. Although the Court did not explicitly define the "in connection with" element, it did explain that "Manhattan suffered an injury as a result of deceptive practices touching its sale of securities. . . ." Id. at 12-13. (emphasis added). Because of this phrase, Bankers Life is universally cited for the proposition that the connection requirement will be satisfied if the alleged fraud "touches" the purchase or sale. See e.g., Arrington v. Merrill Lynch, Pierce, Fenner & Smith, 651 F.2d 615, 619 (9th Cir. 1981); McGrath v. Zenith Radio Corp., 651 F.2d 458, 467 (7th Cir.), cert. denied, 454 U.S. 835, 70 L. Ed. 2d 114, 102 S. Ct. 136 (1981); Alley v. Miramon, 614 F.2d 1372, 1378 n.11 (5th Cir. 1980); Ketchum v. Green, 557 F.2d 1022, 1026 (3d Cir.) cert. denied, 434 U.S. 940, 54 L. Ed. 2d 300, 98 S. Ct. 431 (1977); Yancoski v. E.F. Hutton & Co., Inc., 581 F. Supp. 88, slip op. at 7 (E.D. Pa. 1983); Williamsport Firemen Pension Boards I and II v. E.F. Hutton & Co., Inc., 567 F. Supp. 140, 143 (M.D. Pa. 1983); Chemical Bank v. Arthur Andersen & Co., 552 F. Supp. 439, 451 (S.D.N.Y. 1982); Somogyi v. Butler, 518 F. Supp. 970, 985-86 (D.N.J. 1981).

 Bankers Life raises the question what constitutes "touching" a securities transaction. Although many courts have taken a broad view of this element, there exists a paucity of viable standards. The Fifth Circuit has noted that "the plaintiff . . . need not establish a direct or close relationship between the fraudulent transaction and the purchase or sale. . . ." Alley v. Miramon, 614 F.2d 1372, 1378 n.11 (5th Cir. 1980). Accord Brown v. Ivie, 661 F.2d 62, 65 (5th Cir. 1981), cert. denied, 455 U.S. 990, 71 L. Ed. 2d 850, 102 S. Ct. 1614 (1982). The Alley court went on to state that the requirement is "satisfied when the proscribed conduct and the sale are part of the same fraudulent scheme." 614 F.2d at 1378 n.11. In Chemical Bank v. Arthur Anderson & Co., the court explained that Bankers Life and its progeny "require a nexus, albeit not a direct or close relationship, between the allegedly fraudulent conduct and the sale of securities." 552 F. Supp. at 451. This Circuit has "attempted to etch more finely the contours of the 'in connection with' clause," noting that other courts "almost without exception . . . have found compliance . . . even where fraudulent conduct is implicated only tangentially in a securities transaction." See Ketchum v. Green, 557 F.2d 1022, 1026-27 (3d Cir.), cert. denied, 434 U.S. 940, 54 L. Ed. 2d 300, 98 S. Ct. 431 (1977). However, rather than offering a standard, the Ketchum court observed that the ultimate determination is a factual one, best approached on a case by case basis. Id. at 1027.

 Ketchum involved a corporate power struggle. The plaintiffs were the Chairman of the Board and President of Babb, Inc., holding between them approximately forty-five percent of the stock of the company. Babb was a closely held corporation and stock could only be owned by employees. Defendants, other members of the Board, induced plaintiffs to support their slate of candidates without disclosing their plan to oust plaintiffs. After the incumbent directors were unanimously re-elected, the Board jointly proposed and elected their own candidates for the positions of chairman and president, removing plaintiffs as officers. Plaintiffs' employment was then terminated and they were asked to surrender their stock pursuant to the corporation's stock retirement plan. 557 F.2d at 1023-24. The court found that the fraud was not "in connection with" the forced sale of plaintiffs' securities. Characterizing the dispute as a corporate foray, the court noted that the actual securities transaction was tangential to the relief requested. Plaintiffs apparently were more concerned with recovering their seats and invalidating the elections. *fn28" Id. at 1027. There, the court found the proximity between the fraud and the securities transaction to be more attenuated than in Bankers Life. As the court stated; "instead of being merely one step away from a securities deal, the supposed deception here is somewhat removed from the ultimate transaction. Indeed, there are a substantial number of intermediate steps between the fraud and the accomplishment of the forced sale of plaintiffs' shares. . . ." Id. at 1028. *fn29" The court also expressed concern over the potential federalization of state law under section 10(b). *fn30" Id. at 1029. There is another distinction between Ketchum and Bankers Life, which was implicit in the court's opinion. In Bankers Life, the securities transaction was an integral part of the fraudulent scheme. Yet in Ketchum, the fraud was aimed at removing plaintiffs from the corporation. The forced sale was merely an incidental result of that scheme.

 One year after deciding Ketchum, this Circuit once again addressed the "in connection" issue in Cramer v. General Tele. & Electronics Corp., 582 F.2d 259 (3d Cir. 1978), cert. denied, 439 U.S. 1129, 59 L. Ed. 2d 90, 99 S. Ct. 1048 (1979). The plaintiffs challenged allegedly fraudulent commission payments made to a group of foreign investors. The arrangement arose out of GTE's sale of its controlling interest in a foreign company. The buyers did not have sufficient funds with which to purchase that interest, so GTE financed part of the price by paying the purchasers a commission on future equipment sales. Concluding that the payment of commissions was "in connection with" the sale of GTE's ownership interest, the court stated that: "GTE's promise to pay commissions on equipment sales was not a separate agreement. Rather, that promise was an essential part of GTE's original agreement to sell its interest in the foreign company." 582 F.2d at 271. Without further analysis or citation to Ketchum, the court concluded: "since the commission payments were inextricably linked to GTE's sale of its ownership interest . . ., we think the district court erred in concluding that the alleged fraud was not alleged to be in connection with the sale of a security." *fn31" Id. The fraud was not, as in the typical situation, the inducement for the securities transaction. Rather, the securities transaction was the inducement for the fraud. The financing problems surrounding the sale of ownership led GTE to arrange the allegedly fraudulent commission plan.

 Analyzing the allegations in light of the scant principles articulated above, I conclude that the connection requirement has been satisfied. Defendants' failure to disclose Brown "touches" all of the allegedly fraudulent securities transactions. Plaintiffs here were all unsophisticated investors. They were introduced to Catanella through E.F. Hutton, a well-known and well respected brokerage house. They were told about his qualifications and expertise and subsequently opened accounts. They trusted Catanella and routinely followed his advice. In some cases, discretionary accounts were opened. Therefore, Catanella was in a position to choose the securities purchased and sold for plaintiffs' portfolios. He had de facto, if not formal control, over the accounts. It was this control which allowed him to defraud plaintiffs by churning, buying unsuitable securities, failing to disclose risks and the like. If the plaintiffs knew that Catanella had previously defrauded investors, and the extent of that fraud, it defies logic to conclude that he would have been granted the kind of control which allowed him to perpetrate the fraud. Plaintiffs may have chosen not to deal with Catanella at all. Therefore, I find a nexus between that initial failure to disclose Brown and all subsequent fraudulent transactions performed by Catanella.

 I do not accept defendants' contention that the failure to disclose Brown is too remote from the transactions. In Bankers Life, the sale of the bonds was an integral part of a complex scheme of fraud. Here, the initial fraud in failing to disclose Brown played an integral role in an ongoing scheme of fraudulent securities transactions. As the Fifth Circuit stated, the connection element is satisfied where "the proscribed conduct and the sale are part of the same fraudulent scheme." Alley, 614 F.2d at 1378 n.11. The failure to disclose Brown was not only part of "the same fraudulent scheme," but enabled defendants to package and sell Catanella as expert and untarnished in his brokerage experience.

 The failure to disclose the risks of margin trading has been deemed fraud "in connection with" the purchase and sale of securities. See Arrington v. Merrill Lynch, Pierce, Fenner & Smith, 651 F.2d 615, 619 (9th Cir. 1981); Yancoski v. E.F. Hutton & Co., Inc., 581 F. Supp. 88, slip op. at 7-8 (E.D. Pa. September 23, 1983). This omission induced plaintiffs to open margin accounts and there is a nexus between that fraud and the securities purchased on margin. Defendants were informed that plaintiffs were desirous of safe investments. Although the failure to disclose did not necessarily result in the purchase of a specific security, it did cause plaintiffs to purchase more securities than they otherwise would have. Thus, plaintiffs unwittingly exposed themselves to more potential liability because of the increased trading a margin account permits. The failure to disclose certainly "touches" the securities so purchased.

 In Savino v. E.F. Hutton & Co., Inc, 507 F. Supp. 1225 (S.D.N.Y. 1981), the court faced a similar question. Defendants there allegedly misrepresented the risks of option trading. In holding the connection element satisfied, the court explained:

 

This alleged misrepresentation pertained directly to the underlying securities bought and sold for the Savino accounts. The Court is well aware of the recent admonition by the Court of Appeals for this Circuit that "not every 'risky' investment rises to the level of fraud because the risk is insufficiently disclosed."

 

* * *

 

On the other hand, a claim is stated where, as here, the defendants, knowing that the risk involved in an investment is unacceptable to plaintiffs, allegedly deliberately misrepresented or omitted to state their opinion of the level of risk involved.

 507 F. Supp. at 1241 (citations omitted). The observation applies with equal force to the allegations surrounding the purchase of unsuitable securities. When defendants knowingly ignore plaintiffs' investment objectives and purchase speculative securities without apprising plaintiffs of the risk, a section 10(b) claim is stated. The fraud perpetrated "touches" and is "in connection with" the purchase of those unsuitable securities. Similarly, I find that churning is a fraudulent device which "touches" securities transaction. Many cases are cited in the previous section for the proposition that churning states a section 10(b) claim. While none of these cases discuss the connection element, none suggest potential problems with this requirement. The reason for this silence is fairly obvious. Churning denotes excessive trading. Thus, by definition, churning is fraud "in connection with" the purchase or sale of a security. *fn32"

 Defendants contend that none of the activities discussed above are "in connection with" a securities transaction. They attempt a distinction between fraud which impacts upon the choice of a broker and that which influences the decision to buy or sell a particular security. They argue that the latter satisfies the connection requirement, the former does not. Defendants' contention traces its roots to Troyer v. Karcagi, 476 F. Supp. 1142 (S.D.N.Y. 1979), a case upon which they rely heavily. *fn33" Although Troyer does contain some restrictive language, its application does not appear faithful to the narrow view of section 10(b) that it purports to articulate. Plainly put, the court says one thing and does another. Moreover, to the extent that Troyer does stand for the dichotomy advanced by defendants, I am unable to agree with its reasoning or result.

 The facts of Troyer are fairly typical. The broker, Karcagi, made various representations to the Troyers, who were unsophisticated investors. These representations induced the Troyers to open discretionary accounts with Karcagi. Through an alleged course of mishandling and self-dealing, the Troyers lost approximately seventy-five percent (75%) of their rather substantial investment. 476 F. Supp. at 1146. The court determined that the complaint survived a motion to dismiss "because it contain[ed] allegations of a material misrepresentation or omission by Karcagi in connection with the purchase or sale of a security." Id. The fraud revolved around the failure to disclose self-dealing and the misrepresentation of Karcagi's intent to manage the account for his own, rather than Troyer's benefit. Id. Applying the standard established in SEC v. W.J. Howey Co., 328 U.S. 293 (1946), the court determined that the discretionary accounts were "investment contracts" and therefore "securities." Id. at 1147-48. Thus, the misrepresentations which induced the Troyers to open the accounts were made "in connection" with the purchase of those accounts, which were "securities." Id. at 1148-49. In addition, the court took a very expansive view of what constitutes "purchasing" a discretionary account. There was a "purchase" each time a new account was opened, and also each time new funds were deposited into already existing accounts. Troyer, 476 F. Supp. at 1148. Therefore, any misrepresentations or omissions which induced the Troyers to invest new funds constituted fraud "in connection with" the "purchase" of a "security."

 In the alternative, the court explored whether the fraud was "in connection with" the purchase or sale of the underlying securities contained in the discretionary accounts. It is the resolution of this issue upon which defendants rely. At first the court suggested a negative answer, articulating the distinction drawn by defendants. The court explained:

 

The alleged misrepresentations concerning Karcagi's investment performance and his intentions affected the investors' confidence in a person selected by them to be their fiduciary rather than influencing their decision to purchase or sell particular securities. The purpose of Rule 10b-5, i.e., to promote "the maintenance of free and open securities markets nurtured in a climate of fair dealing" is not therefore sufficiently served.

 476 F. Supp. at 1149 (citations omitted). The court then inexplicably and in contradiction to the above-quoted language concluded:

 

Hence, under the Troyers' alternative theory of fraud in connection with purchases or sales of the underlying securities traded by Karcagi in the discretionary accounts, a Rule 10b-5 cause of action is adequately alleged as to instances of the purchase or sale of securities under circumstances where Karcagi failed to disclose self-interest, but not as to other purchases or sales where Karcagi induced the Troyers to grant him the discretion to make the purchases or sales by generalized representations.

 Id. (emphasis added). If I read the second passage correctly, the Troyer court essentially held that a claim was stated with respect to the purchase or sale of the underlying securities where Karcagi failed to disclose his self-dealing. Yet, Karcagi's failure to disclose self-dealing did not impact upon the Troyer's decision to buy or sell a particular stock, but rather, their trust and confidence in their broker. Thus, the court stated, but apparently declined to apply, the distinction between choosing a security and a broker. Moreover, as to purchases or sales resulting from Karcagi's control over the account, induced by "generalized representations," many of these would be actionable under the theory that the account itself is a security. Misrepresentations or omissions which induced plaintiffs to "purchase" a discretionary account would be covered by the first prong of Troyer. Given the broad definition of "purchase," the Troyers were fairly well protected. The motion to dismiss was ultimately denied.

 It is anomalous that the Troyer court suggested the distinction in light of its ultimate determination that the failure to disclose self-interest may be "in connection with" a securities transaction. *fn34" The instant case does not involve the mere retention of securities, although it does, to an extent, involve the retention of Catanella as broker. The fraud alleged here includes activities such as churning, margin trading without disclosing the risks and the purchase of unsuitable securities. All of these involve the purchase or sale of stocks. There is actually a supreme irony in defendants' reliance upon Troyer. In those cases where plaintiffs opened or "purchased" discretionary accounts, Troyer ensures coverage to the allegation of most concern to defendants. The failure to disclose the Brown litigation induced plaintiffs to "purchase" their discretionary accounts and is clearly fraud "in connection with" the purchase of a security. Moreover, it is entirely possible that Troyer's two step analysis affords more, rather than less protection under section 10(b).

 The distinction suggested by Troyer and championed by defendants is also at odds with precedent and the purpose behind the 1934 Act. As a practical matter, the distinction between choosing a broker and choosing securities may well be meaningless. Where a broker is given control of the client's portfolio, the choice of a broker is tantamount to the choice of securities. Defendants' argument would push deceptive practices, such as churning, beyond the reach of the statute, simply because they might not impact upon the decision to purchase or sell a particular stock. *fn35" This conflicts with controlling caselaw and common sense. Similarly, the failure to disclose risks or a prior litigation would be out of reach, despite the fact that a requirement of full disclosure is the very heart of section 10(b). *fn36" Finally, this distinction ignores the admonition of the Supreme Court in Bankers Life that section 10(b) "must be read flexibly, not technically and restrictively." 404 U.S. at 12. Although it is less exacting, I prefer the formulation of Bankers Life and progeny. Since I have concluded that the allegations "touch" and "are part of the same fraudulent scheme" as the purchase and sale of securities, the motion to dismiss on this issue shall be denied.

 (d) Causation

 Defendants' final section 10(b) argument focuses upon the Brown litigation and the thorny issue of causation. Plaintiffs, especially the purported class representatives in Taraborelli, *fn37" endeavor to link all their losses to defendants' failure to disclose Brown. They reason that had they known about Catanella's involvement, they would not have dealt with him or given him broad discretion over their accounts. Catanella would not, therefore, have had the opportunity to churn, buy unsuitable securities or engage in the panoply of fraudulent conduct alleged. Defendants contend that this initial failure to disclose Brown did not technically "cause" plaintiff's injuries. Rather, the losses were the result of independent intervening causes, such as fluctuations in the market, wholly unrelated to Catanella. If market forces drive the price of a stock downward, everyone who purchased would be injured. Plaintiffs would have sustained the same losses had they purchased that particular security through a different broker. Plaintiffs retort that they would not have purchased that security but for their affiliation with Catanella. These arguments underscore the complexity of, and provide focus to, the issue -- the meaning of "proximate causation" in a section 10(b) case.

 Causation actually has three facets. To analyze the arguments presented here, a clear understanding of the distinctions between them is necessary. The first is the "in connection with" requirement highlighted in the previous section. Although not typically analyzed in terms of "cause and effect," this element requires some form of relationship between the alleged fraud and the purchase or sale of a security. The second type, referred to as "transaction causation," asks whether "the violations in question caused the appellant to engage in the transaction in question." Schlick v. Penn-Dixie Cement Corp., 507 F.2d 374, 380 (2d Cir. 1974), cert. denied, 421 U.S. 976, 44 L. Ed. 2d 467, 95 S. Ct. 1976 (1975). See also Valente v. Pepsico, Inc., 454 F. Supp. 1228, 1246 (D. Del. 1978). The final kind is "loss causation," which requires a showing "that the misrepresentations or omissions caused the economic harm." Schlick, 507 F.2d at 380. See also Marbury Management, Inc. v. Kohn, 629 F.2d 705, 720 & n.6 (2d Cir.) (Meskill, J., dissenting), cert. denied sub nom. Wood Walker & Co. v. Marbury Management, Inc., 449 U.S. 1011, 66 L. Ed. 2d 469, 101 S. Ct. 566 (1980). Transaction causation focuses upon whether the misrepresentation induced the plaintiff to buy the security, while loss causation looks at whether the misrepresentation was responsible for plaintiff's pecuniary injury.

  Transaction causation is the "but for" requirement -- "but for" the misrepresentation or omission, plaintiff would not have acted. *fn38" Stripped of fancy nomenclature, transaction causation is the reliance element in a section 10(b) case. See e.g., Wilson v. Comtech Telecommunications Corp., 648 F.2d 88, 92 n.6 (2d Cir. 1981); Huddleston v. Herman & MacLean, 640 F.2d 534, 549 & n.24 (5th Cir. 1981), aff'd in part, rev'd in part on other grounds, 459 U. S. 375, 103 S. Ct. 683, 74 L. Ed. 2d 548 (1983); Schlick, 507 F.2d at 380 and n.11. An example will illustrate this relationship. A plaintiff contends that but for a misrepresentation in an offering circular, she would not have purchased certain securities. Not only does this satisfy the transaction causation prong, but it also inferentially shows that plaintiff read and relied upon the misrepresentation. Unfortunately, courts often use the phrases "reliance" and "causation" interchangeably, without specifying which type of causation they mean. *fn39" See generally Wilson, 648 F.2d at 92 n.6. As this Circuit has noted; "reliance is therefore one aspect of the ubiquitous requirement that losses be causally related to the defendants' wrongful acts." Sharp v. Coopers & Lybrand, 649 F.2d 175, 186 (3d Cir. 1981), cert. denied, 455 U.S. 938, 71 L. Ed. 2d 648, 102 S. Ct. 1427 (1982). See also T.J. Raney & Sons, Inc. v. Fort Cobb, Okl. Irr. Fuel Auth., 717 F.2d 1330, 1332 (10th Cir. 1983) (reliance as causal nexus between plaintiff's injury and defendant's conduct); In re Ramada Inns Securities Litigation, 550 F. Supp. 1127, 1130 (D. Del. 1982) (same).

  In an omission case, a plaintiff is required to prove a negative in order to show transaction causation or reliance. That is, something material not said caused the action or inaction. Put another way, if the plaintiff had known, he would not have acted. Such a plaintiff would be unable to point to a misrepresentation in an offering circular and contend that it was read, relied and acted upon. To obviate this problem, courts have substituted materiality for reliance. In Affiliated Ute Citizens v. United States, 406 U.S. 128, 31 L. Ed. 2d 741, 92 S. Ct. 1456 (1972), the Supreme Court held that proof of materiality coupled with a duty to disclose would establish reliance, or as the Court phrased it, "causation in fact." 406 U.S. at 153-54. Therefore, in an omission case, transaction causation, which is actually reliance, can be inferred from materiality. See generally Madison Consultants v. Federal Deposit Ins. Corp., 710 F.2d 57, 65 n.6 (2d Cir. 1983); Sharp, 649 F.2d at 187-88; Shores v. Sklar, 647 F.2d 462, 468 (5th Cir. 1981) (en banc); Continental Grain, Etc. v. Pacific Oilseeds, Inc., 592 F.2d 409, 412 n.1 (8th Cir. 1979). See also Healey v. Catalyst Recovery of Pennsylvania, Inc., 616 F.2d 641, 649 (3d Cir. 1980) (causation problems disposed of by applying materiality test). *fn40" Given the definition of materiality, something that there is "a substantial likelihood that a reasonable [investor] would consider important . . .," see TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449, 48 L. Ed. 2d 757, 96 S. Ct. 2126 (1976), this rebuttable presumption of reliance makes good legal sense.

  Typically, it is the transaction causation prong that is a stumbling block for plaintiffs in section 10(b) cases. See Wilson, 648 F.2d at 92 n.7. Consider for example, the plaintiff who challenges a misrepresentation in an offering circular, but admits never having read it. See e.g., Shores v. Sklar, 647 F.2d 462 (5th Cir. 1981) (en banc). However, the failure to disclose a previous lawsuit is factually unique and the implications for causation are similarly unique. Defendants do not, and probably could not reasonably, attack the transaction causation of the failure to disclose Brown. But for the omission, plaintiffs would not have employed Catanella as their broker in the first place. Nor would Catanella have been accorded the unbridled discretion over their accounts which permitted him to engage in the allegedly fraudulent activities. Plaintiffs relied upon Catanella's expertise and E.F. Hutton's good name and reputation. Treating this is an omission case, reliance or transaction causation is inferred from materiality. As I indicated above, there is a substantial likelihood that plaintiffs would have considered Catanella's role in Brown to be important in deciding whether to give him carte blanche over their accounts. Thus, the transaction causation requirement has been satisfied, at least for purposes of surviving a motion to dismiss.

  However, defendants' primary argument focuses upon loss causation -- the nexus between the failure to disclose Brown and the actual monetary injury sustained. Often referred to as "proximate cause," this concept has received far less discussion in the cases than transaction causation. In Huddleston, the Fifth Circuit explained:

  

The plaintiff must prove not only that, had he known the truth, he would not have acted, but in addition that the untruth was in some reasonably direct, or proximate, way responsible for his loss. The causation requirement is satisfied in a Rule 10b-5 case only if the misrepresentation touches upon the reasons for the investment's decline in value. If the investment decision is induced by misstatements or omissions that are material and that were relied on by the claimant, but are not the proximate reason for his pecuniary loss, recovery under the Rule is not permitted.

  640 F.2d at 549. (citations omitted) (emphasis added). *fn41" The court gave the following example of a material misrepresentation which was not the proximate cause of the injury:

  

An investor might purchase stock in a shipping venture involving a single vessel in reliance on a misrepresentation that the vessel had a certain capacity when in fact it had less capacity than was represented in the prospectus. However, the prospectus does disclose truthfully that the vessel will not be insured. One week after the investment the vessel sinks as a result of a casualty and the stock becomes worthless. In such circumstances, a fact-finder might conclude that the misrepresentation was material and relied upon by the investor but that it did not cause the loss.

  Id. at 549 n.25. It was the sinking of the vessel that caused the value of the stock to plummet, not the misrepresentation of its capacity. Similarly, with respect to the unauthorized and unsuitable securities purchased by Catanella, it was the intervention of market forces that caused plaintiffs' losses. The failure to disclose Brown, like the misrepresentation of the ship's capacity, may well have induced the purchase of the stock, but the acts of fraud were remote and wholly unrelated to the securities' decline in value. Under the reasoning of Huddleston, therefore, an independent intervening cause, such as a fluctuation in the stock market, will break the chain of causation. Accord Fryling v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 593 F.2d 736, 743-44 (6th Cir. 1979) (no causation where market conditions, rather than fraud, responsible for losses).

  However, there are two cases which lend support to plaintiff's position. In Sutton v. Shearson Hayden Stone, Inc., 490 F. Supp. 98 (S.D.N.Y. 1980), a brokerage firm was sued for failing to disclose that one of its brokers had been the subject of numerous customer complaints. Shearson investigated these complaints and entered into monetary settlements to placate the angry investors. Id. at 100. The customer complaints involved allegations of misconduct almost identical to those charged in the Sutton lawsuit. The court concluded without explanation that "Shearson's failure to disclose these . . . customer complaints proximately caused the damage sustained in . . . [plaintiff's] portfolio." Id. at 101. However, the absence of any "loss causation" analysis makes Sutton less than persuasive authority.

  In the second case, Marbury Management, Inc. v. Kohn, 629 F.2d 705 (2d Cir.), cert. denied sub nom., Wood Walker & Co. v. Marbury Management, Inc., 449 U.S. 1011, 66 L. Ed. 2d 469, 101 S. Ct. 566 (1980), a trainee at a brokerage house misrepresented himself as a licensed, registered representative and a "portfolio management specialist." Securities were purchased based upon the predictions of this trainee. Recognizing that the misrepresentations as to his qualifications did not cause the securities purchased to decline in value, the court nevertheless held that causation was established. Id. at 708. The basis for the court's decision is not clear, but it apparently rested, in part, upon somewhat antiquated principles of common law "proximate causation." See id. at 709-10. However, the court did not resolve the loss causation issue it raised, explaining in a footnote:

  

Differentiating transaction causation from loss causation can be a helpful analytical procedure only so long as it does not become a new rule effectively limiting recovery for fraudulently induced securities transactions to instances of fraudulent representations about the value characteristics of the securities dealt in. So concise a theory of liability for fraud would be too accommodative of many common types of fraud, such as the misrepresentation of a collateral fact that induces a transaction.

  Id. at 710 n.3. In avoiding the loss causation problem, the court opted for what it considered to be the "just" result. However, I am constrained to agree with the vehement dissent that the majority decision was "more righteous than right . . . ." 629 F.2d at 717 (Meskill, J., dissenting), and that "in straining to reach a sympathetic result, the majority overlook[ed] a fundamental principle of causation . . . ." Id. at 716-17. In an approach strikingly similar to the one subsequently employed in Huddleston, Judge Meskill noted that "Kohn's exaggeration of his expertise played no role in the economic collapse of the various stocks he touted." Id. at 717. He explained further that:

  

As applied to the sale of stock precipitated by misstatements, these principles of causation are satisfied only where the misrepresentation touches upon the reasons for the investment's decline in value. Thus, where one is induced to purchase securities in reliance upon a claim which, however deceitful, is immaterial to the operative reason for the pecuniary loss, recovery under a theory of fraud is precluded by the inability to prove the requisite causation.

  Id. at 718 (citations omitted). I find the view articulated by Judge Meskill and the Huddleston court to be logical and consistent with the definition of loss causation. A contrary view would render meaningless the distinction between transaction and loss causation, thereby writing the proximate cause requirement out of a section 10(b) cause of action. To find causation despite an intervening causative factor would transform the perpetrator of the fraud into "an insurer of the investment, responsible for an indefinite period of time for any and all manner of unforeseen difficulties which may eventually beset the stock." Marbury, 629 F.2d at 718 (Meskill, J., dissenting). Therefore, I conclude that defendants' failure to disclose Brown was not the proximate cause of plaintiffs' losses where the ebbs and flows of the stock market intervened. *fn42"

  A slightly different question is presented by the other claims, such as churning and the failure to disclose the risks of margin trading. There, the injuries sustained are not determined by the external forces of the market. Nor do the losses hinge upon the decline in the value of a given security. Rather, the damages are measured by the extent of excessive commissions generated by the churning or the interest accrued on the margin accounts. To be sure, failure to disclose Brown was a substantial factor in the control Catanella gained over plaintiffs' accounts, giving him the opportunity to churn or engage in the other alleged acts of fraud. However, that merely satisfies the cause-in-fact or transaction causation requirement. These injuries did not flow directly from the failure to disclose the prior lawsuit. The acts of churning and failing to disclose the risks of margin trading, like the fluctuation in the market or the sinking of the vessel, were the intervening factors which caused plaintiffs' harm. Therefore, as a matter of law, the failure to disclose Brown could not have been the proximate cause of the injuries suffered by plaintiffs. *fn43"

  By so holding, defendants' activities are not condoned, but the limits of section 10(b) are merely recognized. Plaintiffs are not bereft of a remedy. All, save the Taraborelli plaintiffs, have asserted claims based upon the more immediate acts of fraud -- the churning, the failure to disclose the risks of margin trading, the unsuitable purchases and the like. *fn44" Moreover, the factual allegations pertaining to Brown shall not be stricken from the complaint. Although they did not state an independent section 10(b) claim, they may be relevant to issues such as scienter, Hutton's vicarious liability or state based common law theories of liability.

  2. Section 12(2)

  Plaintiffs in the Singer and Rastelli complaints also invoke section 12(2) of the Securities Act of 1933, 15 U.S.C. § 77 l (2). *fn45" Defendants seek dismissal of these claims, arguing that the complaints fail to establish the privity required by the statute. In their role as "broker," defendants contend that they purchased and sold securities on behalf of plaintiffs, rather than selling securities that they owned to plaintiffs. Plaintiffs do not dispute that privity is an element of a section 12(2) cause of action, *fn46" but insist that the requisite buyer-seller relationship is alleged in the complaint. Indeed, each complaint avers that "in connection with the offer and sale of securities to plaintiff, Catanella made numerous untrue statements of material facts . . . ." Singer Complaint at para. 44; Rastelli Complaint at para. 40 (emphasis added). Although this allegation may simply parrot the statutory language, on a motion to dismiss, I must draw all inferences in favor of the non-moving party. Plaintiffs argue, and I must agree, that the phrase is susceptible to the interpretation that Catanella offered and sold Hutton's securities to plaintiffs, rather than just purchasing stock on the open market for their accounts. I am, therefore, unable to conclude "beyond doubt that the plaintiff can prove no set of facts . . . which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957). Thus, the motion to dismiss must be denied. However, plaintiffs' section 12(2) action shall be limited to those transactions where privity can be established.

  3. The Investment Advisers Act of 1940

  The Gaugler and Shulik complaints also purport to state causes of action under the Investment Adviser's Act of 1940, 15 U.S.C. § 80b-1 -- 80b-17 (1976). Defendants argue that these claims must be dismissed. I agree.

  The allegations in Gaugler are directed at defendant Granville under section 206 of the Act, 15 U.S.C. § 80b-6 (1976). Gaugler Complaint at paras. 53-55. However, in Transamerica Mortgage Advisors, Inc. v. Lewis, 444 U.S. 11, 62 L. Ed. 2d 146, 100 S. Ct. 242 (1979), the Supreme Court refused to imply a private right of action under section 206. 444 U.S. at 21-24. The Shulik Complaint does not specify the section of the Act relied upon. Shulik Complaint at paras. 57-59. To the extent that they endeavor to invoke section 206, Transamerica will bar their cause of action as well. Moreover, although Transamerica did hold that there is a right of action under section 215, 15 U.S.C. § 80b-15, this is a limited right, allowing a plaintiff to seek recission and restitution or an injunction to prevent the continued operation of the contract. 444 U.S. at 19. If section 215 were applicable to plaintiffs' claims, it would be of little aid to them in their quest for monetary damages. Furthermore, the allegations in Shulik are directed at Catanella and Hutton. As defendants correctly point out, they are not "investment advisors" under the Act. Section 202(11) defines an investment adviser as:

  

any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities; but does not include . . .

  

(C) any broker or dealer whose performance of such services is solely incidental to the conduct of his business as a broker or dealer and who receives no special compensation therefor;

  15 U.S.C. § 80b-2(11) (1976). There is no allegation that Catanella's advice was anything other than incidental to his brokerage functions or that he received special compensation for that advice. See generally Kaufman v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 464 F. Supp. 528, 537-38 (D. Md. 1978). The same is true for Hutton. Thus, plaintiffs have failed to state a cause of action for monetary damages and have failed to sue appropriate defendants under the Investment Advisers Act. The counts under the Act shall be dismissed.

  4. Section 17(a) of the Securities Act of 1933

  The Gaugler complaint contains a count brought pursuant to section 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a) (1976). Defendants have not moved to dismiss this claim. However, in light of my decision in Kimmel v. Peterson, 565 F. Supp. 476 (E.D. Pa. 1983), I raise the issue sua sponte. In Kimmel, I held that there is no implied private right of action under section 17(a). See Kimmel, 565 F. Supp. at 482-88. In this, the court does not stand alone. See e.g., Alloy v. Miller, No. 83-4780 slip op. at 14 (E.D. Pa. February 8, 1984); Hudson v. Capital Management Intern., Inc., 565 F. Supp. 615, 625-27 (N.D. Cal. 1983); Massaro v. Vernitron Corp., 559 F. Supp. 1068, 1078 (D. Mass. 1983); Basile v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 551 F. Supp. 580, 585-87 (S.D. Ohio 1982); Keys v. Wolfe, 540 F. Supp. 1054, 1060 (N.D. Tex. 1982), aff'd in relevant part, rev'd on other grounds, 709 F.2d 413 (5th Cir. 1983); Kaufman v. Magid, 539 F. Supp. 1088, 1097-98 (D. Mass. 1982). See also Kimmel, 565 F. Supp. at 482-83 and n.6.

  5. Vicarious Liability

  Catanella and Hutton seek to dismiss claims asserted against them under the "controlling persons" provisions -- section 15 of the Securities Act of 1933, 15 U.S.C. § 77 o (1976) and section 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78t(a) (1976). Defendants contend that since plaintiffs have failed to state a cause of action under section 10(b), secondary or vicarious liability cannot attach. *fn47" However, the assumption upon which this argument is premised is faulty, as I have determined that there are section 10(b) claims sufficient to survive a motion to dismiss in all cases except Taraborelli. Since a claim for primary liability has been adequately stated, the assertion of derivative liability cannot be dismissed on this basis. *fn48"

  In a separate motion, defendant Granville moves to dismiss the claims against him, all of which are based upon theories of vicarious liability. Specifically, the Gaugler complaint labels him a "controlling person" under section 20(a) and an aider and abettor. Liability against Granville is also asserted under the doctrine of respondeat superior.

  In essence, the complaint accuses Granville of bolstering Catanella's reputation and then reassuring Gaugler of the wisdom of Catanella's investments. His behaviour is characterized as "hand-holding." It is claimed that Granville knew or was reckless in failing to learn about the fraud being perpetrated. Gaugler Complaint at paras. 19, 29. The following specific activities are alleged in the complaint. Granville was present at the Hutton seminar attended by Gaugler in Atlantic City. He joined Catanella in representing the latter as the "Granville Oriented Broker in the Tri State Area." He stated that Hutton "fully endorsed the Granville Market Theory." Id. at P 9. During the course of their association, Catanella frequently telephoned Granville in Gaugler's presence. Granville spoke directly to Gaugler, allaying any fears he might entertain. Id. at 12. In addition, Granville called during Catanella's radio show to endorse Catanella publicly and lead the listeners to believe that he approved Catanella's trading decisions. Id. at P 13. A tape recorded conversation between Granville and former Treasury Secretary William Simon was played to impress Gaugler and other investors. This discussion focused upon Simon's interest in the Granville strategy. Id. at P 15. *fn49" There is also a general allegation that Granville and Hutton failed to supervise Catanella adequately "contrary to their duties as controlling persons." Id. at P 20. Finally, it is averred that Granville knew or was reckless in failing to learn about the facts surrounding the Brown litigation. Id. at P 25H. Granville argues that those allegations do not state a claim. *fn50"

  Respondeat superior is not applicable to this case, factually or legally. This Circuit has held that, as a matter of law, the doctrine should not be used to impose vicarious liability under the securities laws. Rochez Brothers, Inc. v. Rhoades, 527 F.2d 880, 885-86 (3d Cir. 1975) (Rochez II). See also Sharp v. Coopers & Lybrand, 649 F.2d 175, 183 (3d Cir. 1981). The Rochez court reasoned that applying respondeat superior would circumvent the good faith defense contained in section 20(a). As the court explained, "imposing secondary liability would not advance the legislative purpose of the 1934 Act and in fact would also undermine the Congressional intent by emasculating section 20(a)." Rochez II, 527 F.2d at 885. The court envisioned exceptions to this rule, such as in the case of broker-dealers, where "a stringent duty to supervise employees does exist." Id. at 886. Thus, Hutton could be held liable for Catanella's acts under respondeat superior. However, Granville was not Catanella's employer and no "stringent duty to supervise" existed. Thus, the broker-dealer exception is inapposite. This also underscores the factual problem with applying respondeat superior even in the absence of Rochez. The doctrine is based upon the agency concept that the principal or master will be responsible for the acts of the agent or servant. Granville was neither a principal nor agent vis-a-vis Catanella or Hutton. At best, he was an independent participant. He appeared at the Hutton seminars only to gain followers and subscriptions to his market newsletter. Even assuming that an exception from Rochez could be carved out to cover this situation, common law principles of respondeat superior simply do not apply in this factual setting. Therefore, the claim shall be dismissed.

  Section 20(a) of the Securities Exchange Act of 1934 is the vehicle through which secondary liability can be imposed upon those who "control" a primary violator. That section provides:

  

Every person who, directly or indirectly, controls any person liable under any provision of this chapter or of any rule or regulation thereunder shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable, unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action.

  15 U.S.C. § 78t(a) (1976) (emphasis added). A definition of "control" is conspicuously absent from the statute. In Rochez, the court opined that "Congress deliberately did not define 'control' thus indicating its desire to have the courts construe the applicable provisions of the statute along with the evidence adduced at trial." 527 F.2d at 890. The court recognized that the SEC defines control as "the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a person . . . ." Id. (quoting 17 C.F.R. § 240.12(b)-2(f)).

  While the Gaugler complaint states that Granville was a controlling person vis-a-vis Catanella and Hutton, see Gaugler Complaint at para. 7, it does not contain any factual averments which would support that assertion. The factual allegations in the complaint demonstrate indisputably that Granville could not be a controlling person as a matter of law. With respect to Hutton, he was not a high ranking employee or officer with the power to direct its policies or management. Indeed, Granville was not an officer, director or employee of Hutton in any respect. His appearances at the seminars were his only connections with Hutton and those were motivated by his own self-interest -- the profit gained from increased newsletter subscriptions. There is no basis in the complaint from which it can be adduced that Granville controlled Hutton.

  Nor do the facts in the complaint give rise to the inference that Granville "controlled" Catanella. No relationship existed, employment or otherwise, that would allow Granville to exert influence over Catanella. The only link between the two was Catanella's purported adherence to the Granville market method. The complaint plainly states that Catanella did not always follow Granville's advice, despite representations to the contrary to Gaugler. Gaugler Complaint at para. 8. Thus, the plaintiff concedes that Catanella exercised independent judgment. *fn51" The claims against Granville based upon section 20(a) shall be dismissed.

  The final issue, Granville's liability as an aider and abettor, warrants a different result. Liability as an aider-abettor is not dependent upon the individual's status or relationship with the primary violator. This theory imposes liability upon one who knowingly participates or aids in a securities violation. See generally Rochez II, 527 F.2d at 886. Three elements must be present before liability can attach. There must be an underlying securities violation, the aider-abettor must have knowledge of the violation and must substantially assist or participate in the wrongdoing. See Monsen v. Consolidated Dress Beef Co., Inc., 579 F.2d 793, 799 (3d Cir. 1978), cert. denied, 439 U.S. 930, 99 S. Ct. 318, 58 L. Ed. 2d 323 (1979); Gould v. American-Hawaiian Steamship Co., 535 F.2d 761, 779 (3d Cir. 1976); Rochez, 527 F.2d at 886; Landy v. FDIC, 486 F.2d 139, 162-63 (3d Cir. 1973), cert. denied, 416 U.S. 960, 94 S. Ct. 1979, 40 L. Ed. 2d 312 (1974). Accord Armstrong v. McAlpin, 699 F.2d 79, 91 (2d Cir. 1983); SEC v. Seaboard Corp., 677 F.2d 1289, 1296 (9th Cir. 1982); Herm v. Stafford, 663 F.2d 669, 684 (6th Cir. 1981); ITT, An International Investment Trust v. Cornfeld, 619 F.2d 909, 922 (2d Cir. 1980); Rolf v. Blyth, Eastman Dillon & Co., Inc., 570 F.2d 38, 47-48 (2d Cir. 1978).

  For purposes of this motion, I shall assume that an underlying securities violation has been established. With respect to the second element, the complaint alleges that Granville acted intentionally or recklessly. Gaugler Complaint at para. 29. Although recklessness will satisfy the general scienter requirement under section 10(b), it is unlikely that it is sufficient in the aiding and abetting context. In Monsen, the Third Circuit stated that "knowledge of the underlying violation is a critical element in proof of aiding-abetting liability, for without this requirement financial institutions, brokerage houses, and other such organizations would be virtual insurers of their customers against security law violations." 579 F.2d at 799. Cf: Armstrong v. McAlpin, 699 F.2d 79, 91 (2d Cir. 1983) (recklessness enough only if aider-abettor owes fiduciary duty to plaintiff; otherwise knowledge needed). However, since the complaint also pled knowledge, by way of intentional conduct, I must assume, for purposes of a motion to dismiss, that the second prong has also been satisfied. The issue remaining is whether Granville "substantially assisted" or "participated" in the fraudulent conduct. The complaint does not allege that Granville actually aided in the churning or the various omissions and misrepresentations. However, construing all reasonable inferences in favor of plaintiff, the complaint is susceptible to an interpretation of substantial assistance on the part of Granville. Knowing about Catanella's escapades, Granville nevertheless continued to placate and reassure Gaugler, thus allaying potential fears or suspicions. This allowed Catanella to continue, undisturbed, in his course of fraudulent conduct. It is not clear at this early stage whether plaintiff can prove this scenario or a similar one -- more factual development is needed. I am, however, unable to conclude, as a matter of law, that the complaint fails to state a claim against Granville on a theory of aiding and abetting.

  C. The RICO Claims

  Defendants advocate dismissal of the claims brought pursuant to the civil remedy provision of the Racketeer Influenced and Corrupt Organizations Act of 1970, 18 U.S.C. §§ 1961-1968 (1976) ("RICO"). Four arguments are advanced -- two of which actually depend upon how I resolved the underlying securities issues. Defendants contend that since the federal securities claims are legally deficient, no "pattern" of "racketeering activity" has been alleged. It is also asserted that the lack of "loss causation" in the securities sense precludes a finding that the injuries occurred "by reason of" a RICO violation. The other two arguments have become rather standard civil RICO defenses: the missing link to organized crime and the failure to allege an injury "by reason of" a violation of section 1962.

  1. The Statute

  Title IX of the Organized Crime Control Act of October 15, 1970, Pub. L. No. 91-452, 84 Stat. 941, better known as RICO, was enacted in an effort to quell the potence and persistence of organized crime. *fn52" As illustrated by its findings, Congress was particularly concerned with organized crime's steady infiltration into legitimate business:

  

The Congress finds that (1) organized crime in the United States is a highly sophisticated, diversified, and widespread activity that annually drains billions of dollars from America's economy by unlawful conduct and the illegal use of force, fraud, and corruption; (2) organized crime derives a major portion of its power through money obtained from such illegal endeavors as syndicated gambling, loan sharking, the theft and fencing of property, the importation and distribution of narcotics and other dangerous drugs, and other forms of social exploitation; (3) this money and power are increasingly used to infiltrate and corrupt legitimate business and labor unions and to subvert and corrupt our democratic processes; (4) organized crime activities in the United States weaken the stability of the Nation's economic system, harm innocent investors and competing organizations, interfere with free competition, seriously burden interstate and foreign commerce, threaten the domestic security, and undermine the general welfare of the Nation and its citizens; and (5) organized crime continues to grow because of defects in the evidence-gathering process of the law inhibiting the development of the legally admissible evidence necessary to bring criminal and other sanctions or remedies to bear on the unlawful activities of those engaged in organized crime and because the sanctions and remedies available to the Government are unnecessarily limited in scope and impact.

  

It is the purpose of this Act to seek the eradication of organized crime in the United States by strengthening the legal tools in the evidence-gathering process, by establishing new penal prohibitions, and by providing enhanced sanctions and new remedies to deal with the unlawful activities of those engaged in organized crime.

  Pub. L. No. 91-452, 84 Stat. 922, title IX § 1 (1970). True to its word, Congress formulated a broad statute, giving law enforcement officials new tools with which to continue the battle. RICO created an entirely new category of offenses. The statute makes collective, ongoing activity, of the sort commonly engaged in by "organized crime," an offense separate from the underlying violation. For example, it is illegal to participate in the affairs of an "enterprise" through a "pattern" of "racketeering activity." See 18 U.S.C. § 1962(c). "Racketeering activity" is the actual criminal offense, for which the violator may be separately punished. Its definition includes a variety of state law offenses punishable by imprisonment for more than one year, as well as a long list of federal statutes. See 18 U.S.C. § 1961(1). *fn53" A "pattern of racketeering activity" is defined as the commission of at least two acts of racketeering within ten years. 18 U.S.C. § 1961(5). The statutory definition of "enterprise" includes any individual, group or entity. 18 U.S.C. § 1961(4). *fn54" However, the statute does not simply prohibit engaging in a "pattern of racketeering activity." Rather, it prohibits an individual from using income derived from a pattern of racketeering to acquire an interest in, or establish the operation of, an enterprise. 18 U.S.C. § 1962(a). It proscribes acquiring or maintaining an interest in, or control of, an enterprise through a pattern of racketeering. 18 U.S.C. § 1962(b). It also prohibits an individual employed or associated with an enterprise from conducting or participating in its affairs through a pattern of racketeering. 18 U.S.C. § 1962(c). Finally, it is unlawful to conspire to do any of the above. 18 U.S.C. § 1962(d).

  In addition to criminal sanctions, RICO provides a civil remedy for "any person injured in his business or property by reason of a violation of section 1962 . . . ." 18 U.S.C. § 1964(c). The statute provides for treble damages and attorney's fees. Id. Largely ignored for nearly a decade, this civil remedy provision has now been "found." Its recent leap from obscurity to notoriety has generated a tremendous volume of litigation. Although the statute is facially clear and unambiguous, its sheer breadth seems to have created problems in the civil context. Courts are reluctant to turn every multiple statutory violation into an action for treble damages and loath to label each multiple violator a "racketeer." This is especially true in the securities fraud area, where federal statutory remedies already exist. See e.g., Divco Const. & Realty Corp., Inc. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 575 F. Supp. 712, 714-15 (S.D. Fla. 1983); Hokama v. E.F. Hutton & Co., Inc., 566 F. Supp. 636, 643-44 (C.D. Cal. 1983); Noland v. Gurley, 566 F. Supp. 210, 218 (D. Col. 1983); Harper v. New Japan Securities Intern., Inc., 545 F. Supp. 1002, 1007-08 (C.D. Cal. 1982). *fn55" Therefore, despite the Congressional admonition that the statute be "liberally construed to effectuate its remedial purposes," Pub. L. No. 91-452, 84 Stat. 922, title IX § 904(a)(1970), some courts have endeavored to narrow the concededly expansive scope of the statute by judicial fiat.

  2. Securities Related Issues

  Defendants argue that the legal deficiency of the underlying securities claims prevents the complaints from alleging the required "pattern" of "racketeering activity." This challenge is analogous to the one made with respect to vicarious liability -- if there is no valid claim for a primary violation, derivative liability cannot attach. In the RICO context, defendants argue that if the allegations are insufficient to state a section 10(b) claim, there could be no "fraud in the sale of securities" sufficient to qualify as a predicate act under section 1961(1)(D). Defendants rely upon their earlier assertion that the misrepresentations and omissions were not made "in connection with" the purchase or sale of securities. Since I have decided otherwise, this argument must be rejected. The complaints allege various instances of fraud "in connection with" the purchase or sale of securities, sufficient to state a section 10(b) claim and establish a "pattern" of "racketeering activity." *fn56"

  Reaching back to the securities issues once again, defendants reassert that there is no "loss causation" between the alleged fraud and injury. Defendants reason that without loss causation, plaintiff's injuries cannot be "by reason of" a violation of section 1962. However, defendants do not explain or elaborate upon this theory. They may be intimating that "loss causation" in a securities sense is also a requirement under section 1964(c). However, I shall not decide this issue, especially considering defendant's non-existent analysis. But see Seawell v. Miller Brewing Co., 576 F. Supp. 424, 430 (M.D. N. Car. 1983) (independent, intervening act will break chain of causation required by section 1964(c)). If defendants are making the derivative liability argument discussed above, they may have a valid challenge. Causation is an element of a section 10(b) cause of action. If there is no loss causation, plaintiffs will not have stated a securities fraud claim. Without a valid securities fraud cause of action, that claim cannot serve as a predicate offense under RICO. See Moss v. Morgan Stanley, Inc., 719 F.2d 5, 18-19 (2d Cir. 1983). See also Tenaglia v. Cohen, No. 83-1814 slip op. at 15-16 (E.D. Pa. March 8, 1984) (failure to state securities claim will defeat RICO claim based upon "fraud in the sale of securities"); Somerville v. Major Exploration, Inc., 576 F. Supp. 902, 913-14 (S.D.N.Y. 1983) (same); Mauriber v. Shearson/American Express, Inc., 546 F. Supp. 391, 397 (S.D.N.Y. 1982) (same). I have concluded that defendant's failure to disclose Brown did not cause plaintiff's injuries in the loss causation sense. Thus, with respect to that claim only, recovery would be barred under section 10(b) and under RICO. *fn57"

   The RICO counts in Gaugler, Singer, Rastelli and Shulik embrace all the alleged acts of fraud. As I have concluded earlier, there are allegations of omissions and misrepresentations other than Brown, which state valid claims under section 10(b). Therefore, the RICO counts can stand without Brown. As noted earlier, the purported class representatives in Taraborelli rely exclusively upon the failure to disclose Brown. Since that does not satisfy the dictates of section 10(b), there is a failure to state a claim under RICO as well.

  I am compelled to raise, sua sponte, a flaw in the Gaugler RICO count. Plaintiff alleges that the "enterprises" in which Catanella gained an interest were plaintiff's securities accounts. Gaugler Amended Complaint at para. 71. While it is true that the complaint does not state or reasonably infer that Catanella gained an interest in plaintiff's portfolio, this issue is immaterial. No conceivable reading of the statutory definition would support a conclusion that securities accounts qualify as "enterprises." See 18 U.S.C. § 1961(4). Thus, the RICO count shall be dismissed without prejudice for failure to allege the existence of a legally appropriate "enterprise" under the statute. Plaintiff shall have twenty days within which to amend the RICO count. Earlier, I declined to dismiss Count Eleven on technical pleading grounds, reasoning that the prolix allegations with respect to Brown might have relevance to the RICO claim. Given my rulings, the only possible relevance these allegations could have would be to show a "pattern" of prohibited activity. The remaining multiple allegations of fraud cast doubt upon the necessity of Brown for this purpose. Even assuming its probity on the issue of "pattern" over one hundred paragraphs detailing the facts and holdings of Brown ad nauseaum seems unwarranted. This is especially true since the pertinent allegations are summarized elsewhere in the complaint. See Amended Complaint at paras. 25A-25I. Therefore, should plaintiff choose to amend the RICO claim, he would be well advised to ponder the evils of redundancy and the virtues of brevity.

  3. Organized Crime

  Expressing concern over the broad sweep of RICO, defendants assert that it was "the clear intention of Congress . . . to eradicate organized crime, not to turn all civil disputes into RICO claims." See e.g., Defendants' Reply Memorandum in Support of the Motion to Dismiss in Gaugler at 23. Defendants then proceed to quote the court in Waterman Steamship Corp. v. Avondale Shipyards, Inc., 527 F. Supp. 256, 260 (E.D. La. 1981), holding that RICO applies only to the activities of "organized crime." Defendants appear to be suggesting that a link to organized crime is necessary to state a civil RICO claim. In Kimmel, I refused to impose such a requirement, see Kimmel v. Peterson, 565 F. Supp. at 490-93, and will not deviate from that holding. However, I feel compelled by the ever increasing caselaw, to update that prior discussion.

  Given defendants' argument, it is noteworthy that the so-called organized crime requirement has not found acceptance in the criminal RICO context. See e.g., United States v. Gottesman, 724 F.2d 1517, 1521 (11th Cir. 1984); United States v. Cauble, 706 F.2d 1322, 1330 (5th Cir. 1983); petition for cert. filed, 465 U.S. 1005, 104 S. Ct. 996, 79 L. Ed. 2d 229. 52 U.S.L.W. 3550 (1984); United States v. Martino, 648 F.2d 367, 380 (5th Cir. 1981), cert. denied, 456 U.S. 949, 72 L. Ed. 2d 474, 102 S. Ct. 2020 (1982), aff'd, reh'ng en banc, 681 F.2d 952 (5th Cir. 1982); aff'd sub. nom, Russello v. United States, 464 U.S. 16, 104 S. Ct. 296, 78 L. Ed. 2d 17 (1983); United States v. Uni Oil, Inc., 646 F.2d 946, 953 (5th Cir. 1981); cert. denied sub. nom., Corbott v. United States, 455 U.S. 908, 102 S. Ct. 1254, 71 L. Ed. 2d 446 (1982). United States v. Thordarson, 646 F.2d 1323, 1328-29 n.10 (9th Cir.), cert. denied, 454 U.S. 1055, 102 S. Ct. 601, 70 L. Ed. 2d 591 (1981); United States v. Aleman, 609 F.2d 298, 303 (7th Cir. 1979), cert. denied, 445 U.S. 946, 63 L. Ed. 2d 780, 100 S. Ct. 1345 (1980); United States v. Forsythe, 560 F.2d 1127, 1136 (3d Cir. 1977); United States v. Campanale, 518 F.2d 352, 363 (9th Cir. 1975), cert. denied sub nom., Grancich v. United States, 423 U.S. 1050, 96 S. Ct. 777, 46 L. Ed. 2d 638 (1976); United States v. Vignola, 464 F. Supp. 1091, 1095-96 (E.D. Pa.) aff'd mem. 605 F.2d 1199 (3d Cir. 1979), cert. denied, 444 U.S. 1072, 100 S. Ct. 1015, 62 L. Ed. 2d 753 (1980). In Forsythe, this Circuit remarked that "the legislative intent was to make RICO violations dependent upon behavior, not status." Forsythe, 560 F.2d at 1136 (emphasis added). Yet, on the civil side, where the stakes are presumably not as high, some courts have been willing to restrict a civil RICO claim by requiring a link or nexus with organized crime. See e.g., Gilbert v. Prudential-Bache Securities, Inc., Fed. Sec. L. Rep. (CCH) P 91,573, No. 83-1513, slip op. at 4 (E.D. Pa. January 10, 1984); Divco Const. & Realty Corp., Inc. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 575 F. Supp. 712, 714-15 (S.D. Fla. 1983); Hokama v. E.F. Hutton & Co., Inc., 566 F. Supp. 636, 643 (C.D. Cal. 1983); Wagner, et al. v. Bear, Stearns & Co., et al, [1982-1983 Transfer Binder]Fed. Sec. L. Rep. (CCH) P 99,032 at 94,913 (N.D. Ill. 1982); Noonan v. Granville-Smith, 537 F. Supp. 23, 29 (S.D.N.Y. 1981); Waterman Steamship Corp. v. Avondale Shipyards, Inc., 527 F. Supp. 256, 260 (E.D. La. 1981); Adair v. Hunt International Resources Corp., 526 F. Supp. 736, 747-48 (N.D. Ill. 1981); Kleiner v. First National Bank of Atlanta, 526 F. Supp. 1019, (N.D. Ga. 1981); Barr v. WUI/TAS, Inc., 66 F.R.D. 109, 112-13 (S.D.N.Y. 1975). *fn58" However, the continued vitality of Wagner, Noonan, Adair and Barr is dubious in light of the recent decisions in Moss v. Morgan Stanley, Inc., 719 F.2d 5 (2d Cir. 1983) and Schacht v. Brown, 711 F.2d 1343 (7th Cir. 1983), cert. denied, 464 U.S. 1002, 104 S. Ct. 508, 78 L. Ed. 2d 698, 52 U.S.L.W. 3423 (1983). Indeed, the overwhelming majority of cases have rejected the organized crime limitation. See e.g., Sutliff, Inc. v. Donovan Cos., Inc., 727 F.2d 648, slip op. at 7 (7th Cir. February 9, 1984); Moss v. Morgan Stanley, Inc., 719 F.2d 5, 21 (2d Cir. 1983); Bunker Ramo Corp. v. United Business Forms, Inc., 713 F.2d 1272, 1287-88 n.6 (7th Cir. 1983); Schacht v. Brown, 711 F.2d 1343, 1353 (7th Cir. 1983), cert. denied, 464 U.S. 1002, 104 S. Ct. 508, 78 L. Ed. 2d 698, 52 U.S.L.W. 3423 (1983); Cenco, Inc. v. Seidman & Seidman, 686 F.2d 449, 457 (7th Cir.), cert. denied, 459 U.S. 880, 103 S. Ct. 177, 74 L. Ed. 2d 145 (1982); Bennett v. Berg, 685 F.2d 1053, 1063 (8th Cir. 1982), aff'd en banc, 710 F.2d 1361, 1364 (8th Cir. 1983), cert. denied sub nom., Prudential Ins. Co. v. Bennett, 464 U.S. 1008, 52 U.S.L.W. 3440, 78 L. Ed. 2d 710, 104 S. Ct. 527 (1983); Jensen v. E.F. Hutton & Co., Inc., [Current]Fed. Sec. L. Rep. (CCH) P 99,674 at 97,713 (C.D. Cal. 1984); Willamette Savings & Loan v. Blake & Neal Finance Co., 577 F. Supp. 1415, 1425-26 (D.Ore. 1984); Furman v. Cirrito, 578 F. Supp. 1535, slip op. at 10-11 (S.D.N.Y. 1984); B.F. Hirsch, Inc. v. Enright Refining Co., 577 F. Supp. 339, 348 (D.N.J. 1983); Yancoski v. E.F. Hutton & Co., Inc., 581 F. Supp. 88, slip op. at 17 n.18 (E.D. Pa. 1983); Slattery v. Costello, 586 F. Supp. 162, slip op. at 405 (D.C.D.C. July 28, 1983); Mooney v. Fidelity Union Bank, et al., Nos. 82-3192, 82-3193 slip op. at 5 (D.N.J. March 22, 1983); In re Longhorn Securities Litigation, 573 F. Supp. 255, 269 (W.D. Okl. 1983); King v. Lasher, 572 F. Supp. 1377, 1382-83 (S.D.N.Y. 1983); Taylor v. Bear & Stearns & Co., 572 F. Supp. 667, 681-82 (N.D. Ga. 1983); In re Action Industries Tender Offer, 572 F. Supp. 846, 850-51 (E.D. Va. 1983); Guerrero v. Katzen, 571 F. Supp. 714, 719-20 (D.C.D.C. 1983); Durante Bros. and Sons, Inc. v. Flushing Nat'l Bank, 571 F. Supp. 489, 495 (E.D.N.Y. 1983); Austin v. Merrill Lynch, Pierce, Fenner & Smith, 570 F. Supp. 667, 669 (W.D. Mich. 1983); Ralston v. Capper, 569 F. Supp. 1575, 1578-79 (E.D. Mich. 1983); Mauriber v. Shearson/American Express, Inc., 567 F. Supp. 1231, 1239-40 (S.D.N.Y. 1983); Bankers Trust Co. v. Feldesman, 566 F. Supp. 1235, 1239-40 (S.D.N.Y. 1983); Eisenberg v. Gagnon, 564 F. Supp. 1347, 1351 (E.D. Pa. 1983); Windsor Assoc., Inc. v. Greenfeld, et al., 564 F. Supp. 273, 278-79 (D. Md. 1983); Hunt Int'l Resources Corp. v. Binstein, 559 F. Supp. 601, 602 (N.D. Tex. 1982); Lode v. Leonardo, 557 F. Supp. 675, 680 (N.D. Ill. 1982); Kaushal v. State Bank of India, 556 F. Supp. 576, 578 (N.D. Ill. 1983); Crocker Nat'l Bank v. Rockwell Int'l Corp., 555 F. Supp. 47, 49 (N.D. Cal. 1982); D'Iorio v. Adonizio, 554 F. Supp. 222, 230-31 (M.D. Pa. 1982); Meineke Discount Muffler Shops, Inc. v. Noto, 548 F. Supp. 352, 354 (E.D.N.Y. 1982); Hanna Mining Co. v. Norcen Energy Resources, Ltd., 574 F. Supp. 1172 [1982 Transfer Binder]Fed. Sec. L. Rep. (CCH) P 98,742 at 93,737 (N.D. Ohio 1982); Harper v. New Japan Securities, Int'l, Inc., 545 F. Supp. 1002, 1006 n.7 (C.D. Cal. 1982); Maryville Academy v. Loeb Rhoades & Co., Inc., 530 F. Supp. 1061, 1069 (N.D. Ill. 1981); Hellenic Lines, Ltd. v. O'Hearn, 523 F. Supp. 244, 247-48 (S.D.N.Y. 1981); Spencer Companies, Inc. v. Agency Rent-a-Car, Inc., 1981-82Fed. Sec. L. Rep. (CCH) P 98,361 at 92,214 (D. Mass. 1981); Engl v. Berg, 511 F. Supp. 1146, 1155 (E.D. Pa. 1981); Heinold Commodities, Inc. v. McCarty, 513 F. Supp. 311, 313 (N.D. Ill. 1979); Farmers Bank v. Bell Mortgage Corp., 452 F. Supp. 1278, 1280 (D. Del. 1978). Accord, Blakey, supra note 43 at 284-85; Note Application of the Racketeer Influenced and Corrupt Organizations Act (RICO) to Securities Violations, 8 J. Corp. L. 411, 429 (1983).

  Those courts requiring a link to organized crime appear to be searching for a way to restrict the seemingly endless scope of RICO in accordance with their perception of the statutory goals. However, "the short answer is that Congress did not write the statute that way." Russello, 104 S. Ct. at 300 (quoting United States v. Naftalin, 441 U.S. 768, 773, 99 S. Ct. 2077, 60 L. Ed. 2d 624 (1979)). A fundamental tenent of statutory construction teaches that "in determining the scope of a statute, we look first to its language. If the statutory language is unambiguous, in the absence of 'a clearly expressed legislative intent to the contrary, that language must ordinarily be regarded as conclusive.'" Russello, 104 S. Ct. at 299 (quoting United States v. Turkette, 452 U.S. 576, 580, 69 L. Ed. 2d 246, 101 S. Ct. 2524 (1981). By its terms, RICO does not require any connection with organized crime -- the statute neither mentions nor purports to define that concept. Each subsection of section 1962 begins, "it shall be unlawful for any person. . . ." 18 U.S.C. § 1962 (emphasis supplied), *fn59" indicating an intent not to restrict the class of possible defendants. The legislative history of the statute supports this reading of the plain language. Congress recognized the difficulties inherent in endeavoring to first define and then apply the concept of "organized crime." For example, an amendment was proposed that would have made membership in the "Mafia" or "La Cosa Nostra" an offense. See 116 Cong. Rec. 35, 343 (Oct. 7, 1970) (Rep. Biaggi). It was rejected as under-inclusive and potentially unconstitutional. Id. at 35, 344-346. Representative Poff remarked that "the concept of organized criminal activity is broader in scope than the concept of organized crime; it is meant to include any criminal activity collectively undertaken . . . ." Id. at 35,293. Put another way, RICO is not aimed at organized crime, but rather, at organized criminal behavior. As Senator McClellan observed:

  

the curious objection has been raised to S.30 as a whole, and to several of its provisions in particular, that they are not somehow limited to organized crime itself . . . as if organized crime were a precise and operative legal concept like murder, rape or robbery. Actually, of course, it is a functional concept like white collar crime, serving simply as a shorthand method of referring to a large and varying group of criminal offenses committed in diverse circumstances.

  116. Cong. Rec. 18,913 (June 9, 1970).

  In addition to the potential constitutional problems, the act of defining "organized crime" would, by necessity, limit RICO's application. *fn60" Rather than endeavoring to target the actors, Congress chose instead to focus upon the acts often committed. Therefore, RICO is not status oriented. See e.g., Forsythe, 560 F.2d at 1136; Guerrero, 571 F. Supp. at 719; Ralston, 569 F. Supp. at 1578-79. Senator McClellan explained that:

  

the Senate report does not claim, however, that the listed offenses are committed primarily by members of organized crime, only that those offenses are characteristic of organized crime. The listed offenses lend themselves to organized commercial exploration . . . and experience has shown they are commonly committed by participants in organized crime.

  

* * *

  

It is impossible to draw an effective statute which reaches most of the commercial activities of organized crime, yet does not include offenses commonly committed by persons outside organized crime as well.

  116 Cong. Rec. 18,940 (June 9, 1970). Thus, Congress was well aware that in order to reach "organized crime" effectively, the statute would, by necessity, ensnare those outside of that nebulous category. *fn61"

  In addition, as noted by Professor Blakey, various groups voiced their objections to the sweep of the bill during the House Hearings in 1970. See generally Blakey, supra note 43 at 272-79. For example, the New York City Bar Association specifically criticized the inclusion of securities fraud in the definition of "racketeering activity." See Relating to the Control of Organized Crime in the United States: Hearings on S.30 and Related Proposals Before Subcomm. No. 5 of the Comm. on the Judiciary, 91st Cong., 2d Sess. at 329 (1970). *fn62" However, "fraud in the sale of securities" was not omitted from section 1961(1). Indeed, as Professor Blakey commented:

  

Despite this testimony, Title IX was not only reported out, but the treble damage clause was added. Accordingly, those who seek to have the courts restrict the scope of the statute to curtail its application to fraud are refighting in the judicial forum a battle they lost in the legislative arena . . . .

  Blakey, supra, note 43 at 273 n.112.

  The fear of opening the floodgates notwithstanding, neither the language nor legislative history of RICO support an organized crime requirement. I agree with the eloquent conclusion reached by the Seventh Circuit:

  

Congress, by granting both plaintiff and defendant status to "any person" who possesses the rudimentary connection with the operation of an enterprise through predicate offenses or who suffers injury therefrom, may well have created a runaway treble damage bonanza for the already excessively litigious. The statute, however, does not speak ambiguously, and Congress, as RICO's legislative history indicates, was alerted to the far-reaching implications of its enactment. The legislature having spoken, it is not our role to reassess the costs and benefits associated with the creation of a dramatically expansive, and perhaps insufficiently discriminate, tool for combating organized crime.

  Schacht, 711 F.2d at 1361 (emphasis added).

  4. Injury "By Reason of" a Violation of Section 1962

  Defendants argue that the complaints do not allege injury "by reason of a violation of section 1962," pointing out that the damages sustained flow only from the commission of the predicate acts. It is not as if plaintiffs claim only two acts of securities fraud with ten years. Rather, it is alleged that Catanella participated in the affairs of an enterprise, Hutton, through a pattern of racketeering, multiple acts of securities fraud. It would appear that the statutory requirements have been met. Yet the only injuries suffered by plaintiffs were the losses incurred in the fraudulent securities transactions. Suggesting that some additional injury is required, defendants advocate the necessity of a "competitive" or "racketeer enterprise" injury.

  Although this issue is often characterized as one of "standing" or "causation," in essence, defendants question whether the complaints allege the appropriate kind of injury. See Kimmel, 565 F. Supp. at 493. What constitutes an appropriate RICO injury has become one of the most popular judicial tools for limiting the scope of the statute and has generated its share of imaginative approaches. See e.g., Dakis on Behalf of Dakis Pension Fund v. Chapman, 574 F. Supp. 757, 761 (N.D. Cal. 1983) (loss of control due to infiltration or competitive injury); Noland v. Gurley, 566 F. Supp. 210, 218 (D. Col. 1983) (infiltration or commercial injury); Van Schaick v. Church of Scientology of Cal., Inc., 535 F. Supp. 1125, 1136-37 (D. Mass. 1982) (commercial injury); Erlbaum v. Erlbaum, [1982 Transfer Binder]Fed. Sec. L. Rep. (CCH) P 98,772 at 93,923 (E.D. Pa. 1982) (infiltration) Landmark Savings & Loan v. Rhoades, 527 F. Supp. 206, 208-09 (E.D. Mich. 1981) (racketeer enterprise injury); Spencer Cos., Inc. v. Agency Rent-A-Car, Inc., 1981Fed. Sec. L. Rep. (CCH) P 98,361 at 92,216 (D. Mass. 1981) (infiltration) North Barrington Development, Inc. v. Fanslow, 547 F. Supp. 207, 211 (N.D. Ill. 1980) (competitive injury). All these approaches share a common thread -- the injury alleged must be something other than that arising out of the commission of the predicate offenses. *fn63" However, despite the various terms employed, none of these courts have been terribly clear on exactly what that "something else" is. This is especially true of the so-called "racketeering enterprise injury," a "catch-all" concept which appears to defy definition. Although bright line distinctions do not always exist, to the extent possible, I shall analyze separately the "competitive injury" and "racketeer enterprise injury" requirements.

  (a) Competitive Injury

  Borrowing from the field of antitrust, some courts have transplanted the "competitive injury" requirement to the civil RICO context. See e.g., Bankers Trust Co. v. Feldesman, 566 F. Supp. 1235, 1241 (S.D.N.Y. 1983); North Barrington v. Fanslow, 547 F. Supp. 207, 210-11 (N.D. Ill. 1980). Essentially a standing requirement, this concept would not grant a remedy "to those who have suffered directly through the operation of a business through a pattern of racketeering, but only to those injured as competitors." Schacht, 711 F.2d at 1357 (emphasis in original). One of the first cases that required a competitive injury, North Barrington, relied upon RICO's stated purpose to prevent the infiltration of legitimate business and the interference with free competition. 547 F. Supp. at 210-11. However, North Barrington has been discredited by the Seventh Circuit's decision to the contrary in Schacht, 711 F.2d at 1358. Moreover, the holdings in two of the cases universally cited as following North Barrington actually appear to rest on a different ground. In Harper v. New Japan Securities Intern., Inc., 545 F. Supp. 1002 (C.D. Cal 1982), while noting twice that an antitrust analogy provides the most logical construction of section 1964(c), id. at 1007, 1008, the court concluded that its requirement of a causal connection between the injury and the violation of section 1962 "avoid[s] the imposition of the antitrust requirement of a 'competitive injury,' [yet] recognizes the similarities between the RICO treble damages provision and § 4 of the Clayton Act." Id. at 1008. The Harper court endeavors to have it both ways -- claiming allegience to antitrust law, yet repudiating the competitive injury requirement. Harper 's "causal connection" actually sounds closer to the "racketeer enterprise injury," discussed infra. Van Schaick v. Church of Scientology of Cal., Inc., 535 F. Supp. 1125 (D. Mass. 1982) is also often cited in connection with the competitive injury requirement. However, a careful reading of that case shows that the court explicitly rejected the competitive injury in favor of a "commercial" "racketeer enterprise injury." Id. at 1134 n.11. *fn64" The court did not define that concept. There does not, therefore, appear to be a clear consensus on what constitutes a "competitive injury," even among those courts ostensibly requiring it. The majority of courts have either rejected the requirement, see e.g., Bunker Ramo Corp. v. United Business Forms, Inc., 713 F.2d at 1272, 1288 (7th Cir. 1983); Schacht, 711 F.2d at 1358; Bennett, 685 F.2d 1053, 1059 (8th Cir. 1982), aff'd en banc, 710 F.2d 1361 (8th Cir. 1983); Yancoski, slip op. at 16; Slattery v. Costello, 586 F. Supp. 162, at 165-66 (D.C.D.C. 1983); Municipality of Anchorage v. Hitachi Cable Ltd., No. 81-347 slip op. at 3-4 (March 18, 1983); In re Longhorn Securities Litigation, 573 F. Supp. 255, 270 (W.D. Ok. 1983); Ralston v. Capper, 569 F. Supp. 1575, 1580 (E.D. Mich. 1983); Wilkinson v. Paine, Webber, Jackson & Curtis, Inc., 585 F. Supp. 23 [1982-83 Transfer Binder],Fed. Sec. L. Rep. (CCH) P 99,198 at 95,797 (N.D. Ga. 1983); Mauriber v. Shearson/American Express, Inc., 567 F. Supp. 1231, 1240-41 (S.D.N.Y. 1983); Eisenberg v. Gagnon, 564 F. Supp. 1347, 1352-53 (E.D. Pa. 1983); Gitterman v. Vitoulis, 564 F. Supp. 46, 48 (S.D.N.Y. 1982); Crocker Nat'l Bank v. Rockwell Intern. Corp., 555 F. Supp. 47, 49 (N.D. Cal. 1982); D'Iorio v. Adonizio, 554 F. Supp. 222, 230 n.5 (M.D. Pa. 1982); Hanna Mining Co. v. Noreen Energy Resources, Ltd., 574 F. Supp. 1172 [1982 Transfer Binder]Fed. Sec. L. Rep. (CCH) P 98,742 at 93,737 (N.D. Ohio 1982); State Farm Fire and Cas. Co. v. Estate of Caton, 540 F. Supp. 673, 680 (D. Del. 1982); Hellenic Lines, Ltd. v. O'Hearn, 523 F. Supp. 244, 248 (S.D.N.Y. 1981), or abandoned it in favor of another approach. See e.g., In re Action Industries Tender Offer, 572 F. Supp. 846, 851-52 (E.D. Va. 1983) (racketeering injury); Guerrero v. Katzen, 571 F. Supp. 714, 720 n.6 (RICO injury); Barker v. Underwriters at Lloyd's, London, 564 F. Supp. 352, 358 (E.D. Mich. 1983) (racketeer enterprise injury); Landmark, 527 F. Supp. at 208-09 (racketeer enterprise injury). See also Blakey, supra note 43 at 253-54 and n.52; 326-28 (rejecting competitive injury requirement).

  I have previously cast my lot with those courts which have concluded that restrictive antitrust standing principles are not applicable to civil RICO, see Kimmel, 565 F. Supp. at 493-95, and continue to be of that view. To be sure, the Sherman and Clayton Acts served as models for section 1964(c). *fn65" The "by reason of" language appears in both section 1964(c) and section 4 of the Clayton Act, 15 U.S.C. § 15 (1976). Moreover, the Congressional findings expressed concern that organized crime "would weaken the stability of the nation's economic system" and "interfere with free competition." Pub. L. No. 91-452, 84 Stat. 922, title IX § 1(4) (1970). These similarities notwithstanding, there is abundant evidence that Congress did not intend to incorporate a competitive injury requirement into RICO.

  As Professor Blakey chronicles, earlier proposed bills, S.2048 and S.2049, suggested amending the Sherman Act to create a weapon against organized crime. See Blakey, supra, note 43, at 253-56. After studying the proposal, the Antitrust Division of the American Bar Association issued a report advocating separate legislation. The report stated, in pertinent part:

  

the use of antitrust laws themselves as a vehicle for combating organized crime could create inappropriate and unnecessary obstacles in the way of persons injured by organized crime who might seek treble damage recovery. Such a private litigant would have to contend with a body of precedent -- appropriate in a purely antitrust context -- setting strict requirements on questions such as "standing to sue" and "proximate cause."

  115 Cong. Rec. 6995 (March 20, 1969). See also 115 Cong. Rec. 9567 (April 18, 1969) (Sen. McClellan) (no intent to incorporate complexity of antitrust principles). The ABA recommendation was followed -- separate legislation was enacted. As the court in State Farm appropriately observed, section 1964(c) was "cast as a separate statute intentionally to avoid the restrictive precedent of antitrust jurisprudence." 540 F. Supp. at 680. Accord Schacht, 711 F.2d at 1358; Yancoski, slip op. at 15-16; Slattery, slip op. at 7. Similarly, Professor Blakey concluded "any suggestion that RICO actions be limited by antitrust type limitations -- "competitive," "commercial," or "direct/indirect" injuries -- flies in the face of the very consideration that led to the drafting of RICO as a separate statute from the antitrust statutes that are so limited." Blakey, supra note 43 at 255 n.52.

  Another factor militating against the application of the antitrust standing requirement is the differing goals behind the two statutes. As the Bennett court observed; "although RICO borrowed the tools of antitrust law to combat organized criminal activity . . . Congress did not see the objectives of RICO and the antitrust laws as coterminous." Bennett, 685 F.2d at 1059 (citing S.Rep. No. 617 at 81-82; 115 Cong. Rec. 6993 (Sen. Hruska); id. at 9567 (Sen. McClellan); 116 Cong. Rec. at 607 (Sen. Byrd); id. at 35, 193 (Sen. Poff)). On a very simplistic level, fostering free competition is the purpose of the antitrust laws, while only an ancillary purpose of RICO. RICO "was broadly aimed at 'striking . . . a mortal blow against the property interests of organized crime.'" Schacht, 711 F.2d at 1357-58 (quoting 116 Cong. Rec. 602 (1970) (Sen. Hruska)). Thus, the very reason for the antitrust standing requirement is inapposite in the RICO context. As the Bennett court recognized "to ruin an antitrust defendant, usually a legitimate businessman, would generally lessen competition and increase concentration in a particular industry." Bennett, 685 F.2d at 1059. Thus, the competitive injury requirement actually prevents frivolous suits from undermining the purpose behind the antitrust laws -- the promotion of competition. This safeguard is unnecessary in the RICO situation -- the economic ruin of an enterprise which operates through a pattern of racketeering is the purpose behind section 1964(a).

  More fundamentally, a competitive injury requirement would be under-inclusive when applied to RICO. Organized crime will not always affect competition. *fn66" Not all of the victims will be either "competitors" or harmed in their ability to compete. Consider as an example, threats made to induce a small grocer to pay a certain amount of money per month for "protection services." The grocer is not in competition with the vendors of this service, who, for purposes of this hypothetical, are members of "organized crime." No attempt is made to infiltrate or take over the grocer's business. Nor is the grocer hampered in his ability to compete. Imposition of the competitive injury requirement would prevent the grocer from suing under section 1964(c). This result would frustrate the purpose of RICO in two major respects. First, targeted behavior would go unpunished and the protection ring would not be divested of its "ill-gotten gains," Turkette, 452 U.S. at 555. See also Hellenic Lines, 523 F. Supp. at 248 (can sue to recover bribes or kickbacks). In addition, the Congressional findings preceding the statute express a desire to protect "innocent investors" as well as "competing organizations." Pub. L. No. 91-452, 84 Stat. 922, title IX § 1(4)(1970). The grocer in the example is a direct victim of racketeering activity. Preventing suit by those directly, as opposed to competitively injured, would circumvent one of Congress' stated objectives. In rejecting the need to show a competitive injury, the court in Hanna Mining observed:

  

To conclude otherwise and restrict the right of action under 18 U.S.C. § 1964(c) only to those who or which are indirect victims of racketeering activity would leave undisturbed racketeers whose activity does not infringe upon their competitor's markets. It is untenable to suggest that Congress intended such a result.

   Hanna Mining, 574 F. Supp. 1172 [1982 Transfer Binder]Fed. Sec. L. Rep. (CCH) P 98,742 at 93,737. Accord In re Longhorn Securities Litigation, 573 F. Supp. at 270; Hellenic Lines, 523 F. Supp. at 248. See also Note, Application of the Racketeer Influenced and Corrupt Organizations Act (RICO) to Securities Violations, 8 J. Corp. L. 411, 435-36 (1983).

  The legislative history of RICO evidences an intent to escape the restrictive antitrust standing principles. Section 1964(c) was added to battle organized criminal activity on a new front -- its pocketbook. Since a competitive injury requirement would interfere with that goal and create cracks through which targeted behavior will slip, it must be rejected.

  (b) Racketeer Enterprise Injury

  Some courts, perhaps recognizing the limitations of the antitrust analogy, but still desirous of narrowing the statute's sweep, have reached the same result by requiring a "racketeer enterprise injury." See Haroco, Inc. v. American National Bank and Trust Co. of Chicago, 577 F. Sup. 111, 114-15 (N.D. Ill. 1983); Furman v. Cirrito, 578 F. Supp. 1535 at 1540-1541 (S.D.N.Y. 1984); Willamette Savings & Loan v. Blake & Neal Finance Co., 577 F. Supp. 1415, 1429-30 (D. Ore. 1984); Hudson v. Larouche, 579 F. Supp. 623 at 630 (S.D.N.Y. 1983); Richardson v. Shearson/American Express Co., Inc., 573 F. Supp. 133, 137 (S.D.N.Y. 1983); King v. Lasher, 572 F. Supp. 1377, 1382 (S.D.N.Y. 1983); In re Action Industries Tender Offer, 572 F. Supp. 846, 851-52 (E.D. Va. 1983); Barker v. Underwriters at Lloyd's, London, 564 F. Supp. 352, 358 (E.D. Mich. 1983); Moss v. Morgan Stanley, Inc., 553 F. Supp. 1347, 1361 (S.D.N.Y.), rev'd on other grounds, 719 F.2d 5 (2d Cir. 1983); Johnsen v. Rogers, 551 F. Supp. 281, 285 (C.D. Cal. 1982); Van Schaick, 535 F. Supp. at 1137 & n.11; Landmark, 527 F. Supp. at 208-09. Underlying this requirement is the familiar judicial discomfort with the potential breadth of RICO's civil component. As the Johnsen court noted: "Congress . . . did not intend to provide an additional remedy for an already compensable injury." Johnsen, 551 F. Supp. at 285. See also In re Actions Industries, 572 F. Supp. at 852; Harper, 545 F. Supp. at 1007-008, discussed supra at note 55.

  It is far from clear what constitutes a "racketeering enterprise injury" and how it differs from a "competitive injury." Those courts requiring a racketeer enterprise injury purport to do so out of strict adherence to RICO's terms. Parrotting the statutory language, they simply state that the injury must result from a violation of section 1962. See e.g., Haroco, slip op. at 7-8; Richardson, 573 F. Supp. at 137; King, 572 F. Supp. at 1382; Moss, 553 F. Supp. at 1361. The Johnsen court described the appropriate damage as "a commercial injury, caused by the conducting of an 'enterprise's affairs through a pattern of racketeering activity.'" Johnsen, 551 F. Supp. at 285. At first blush, it appears that these courts may actually be applying RICO's internal standing requirement. RICO does not punish the commission of two or more predicate acts within ten years. Rather, the statute proscribes, inter alia, the operation of, or participation in, the affairs of an enterprise through a pattern of racketeering. See 18 U.S.C. § 1962 (c). Viewed in that light, the racketeering enterprise injury requirement becomes redundant. See Slattery, slip op. at 9-10. However, the courts' insistence that the resulting injury be something "more or different than injury from predicate acts," see Landmark, 527 F. Supp. at 208, belies this conclusion.

  Individuals may operate the affairs of an enterprise through a pattern of racketeering, yet a potential plaintiff may suffer injuries resulting only from the underlying predicate acts. Recall the small grocer discussed supra. The members of the protection ring operated the affairs of their criminal enterprise through repeated acts of extortion. The only injuries suffered by the grocer were those flowing from the predicate acts -- the money extracted via threats. Although the actions of the enterprise fall squarely under RICO's requirements, those courts requiring a racketeer enterprise injury would bar the grocer from recovery. To hold that the injuries must be something more or different from those flowing from the predicate acts, is to imply that the damages must be indirect. This direct versus indirect distinction harkens back to the antitrust analogy. There is much to suggest that this racketeer enterprise injury concept is similar or at least related to the competitive injury concept. The only court to venture a definition of a racketeer enterprise injury, did so by way of example. The court in Landmark opined that such an injury might be found where "a civil RICO defendant's ability to harm the plaintiff is enhanced by the infusion of money from a pattern of racketeering activity into the enterprise." Landmark, 527 F. Supp. at 209. Although noting that they are not identical, the court in Landmark also conceded the existence of an overlap between the competitive and racketeer enterprise injuries. Id. at 208-09. Further narrowing the gap between these two allegedly distinct concepts, the court noted:

  

The number of potential plaintiffs who are not the direct victims of predicate crimes but who have treble damage claims because they have suffered racketeering enterprise injury to their business or property are limited only by their imagination and the burden of proof. Does, for example, the State of Michigan have a treble damage action against an illegal gambling enterprise because of injury to its lottery business? Does a legitimate business which loses a public bid because of a series of bribes by a competitor have a treble damage action under RICO?

  Id. at 209 (emphasis added). *fn67" These examples appear to be competitive injuries, despite the court's explicit rejection of the antitrust standing requirement. See Landmark, id. at 208. Whatever else Landmark teaches, it appears to give the "indirect injury" concept a new name.

  Other cases also call into doubt the existence of a tangible distinction between the two concepts. In Harper, discussed, supra, the court seemed unable to choose between the racketeer enterprise and competitive injury requirements. See Harper, 545 F. Supp. 1007-08. In Barker v. Underwriters at Lloyd's, London, the court, after explicitly rejecting the need for a competitive injury, noted that "other cases, however, have used the same analogy to the antitrust laws to interpret section 1964(c) as requiring that plaintiff suffer 'racketeering enterprise injury.'" Barker, 564 F. Supp. at 358. (emphasis added). Similarly, the court in Schacht rejected the argument that RICO required a competitive or "indirect injury." The court treated the approaches utilized in North Barrington, Van Schaick and Landmark together, implicitly suggesting that they all represented facets of the same concept. See Schacht, 711 F.2d at 1356-58. *fn68" See also Hanna Mining, 574 F. Supp. 1172, 1982 Fed. Sec. L. Rep. (CCH) P 98,742 at 93,737. To the extent that a racketeer enterprise injury is identical or related to the antitrust competitive injury concept, it must be rejected for the reasons articulated in the previous section.

  However, it may be that a racketeer enterprise injury is not synonymous with a competitive injury. The former may actually be broader than the latter. All that can be gleaned from the cases is that the injury must be something more or different from that flowing from the predicate acts. Perhaps this amorphous requirement is a proxy for any form of indirect injury. In other words, a racketeer enterprise injury may be an umbrella concept, encompassing not only competitive and commercial injuries, but also damages flowing from infiltration or complete takeover of a plaintiff's business. *fn69" See Dakis, 574 F. Supp. at 761 (racketeer enterprise injury is either infiltration or competitive injury). Viewing this requirement as a "catch-all" does not redeem its basic flaw -- any limitation along the direct/indirect dichotomy is untenable in light of RICO's language and purpose. The Mauriber court suggested the following "infiltration" hypothetical:

  

A brokerage enterprise infiltrated by organized crime and engaged in defrauding its customers through acts like those alleged here might injure no one but the customers of the enterprise. There would be no injury above and beyond that caused by the predicate acts of fraud forming the "pattern of racketeering activity."

  Mauriber, 567 F. Supp. at 1240. The advocates of a racketeering enterprise injury would allow the infiltrated brokerage house to recover, assuming it could first oust the unwanted intruders. Surely a competing brokerage house somehow hampered in its ability to compete would have standing. However, the defrauded customer would have no redress. I must agree with the Mauriber court that "such conduct, however, would violate RICO and would lie near the center of Congress' concern." Id. The reasoning that compelled rejection of the competitive injury requirement applies with equal force here. RICO's purpose would be frustrated if targeted behavior went unpunished and innocent investors were not compensated. As the court in Crocker eloquently concluded:

  

The key purpose of RICO's civil remedy is to "divest the association of the fruits of its ill-gotten gains." This purpose would be severely undermined if persons who suffered direct harm from racketeering activity as defined by the statute could not recover in the absence of showing some "special" harm or some overall anti-competitive effect. Such a rule would leave money derived from actions prohibited by RICO precisely where Congress did not intend it to remain, in the hands of RICO violators.

   Crocker, 555 F. Supp. at 49-50. (citations omitted).

  It is possible that those courts requiring a racketeer enterprise injury have envisioned something other than the indirect injuries discussed above. However, they have not defined the parameters of this concept and it borders on impossible to apply that which defies definition. See Municipality of Anchorage v. Hitachi Cable, Ltd., No. 81-347 slip op. at 4 (D. Ala. March 18, 1983). Perhaps the most telling fact is that none of the courts requiring this special injury have found it to exist in the cases before them. *fn70" Ultimately, this requirement may be seen as nothing more than a convenient way to exclude from coverage actions which do not seem like they ought to fall within RICO's grasp -- especially where other remedies exist for the commission of the predicate acts. In order to give the statute its plain meaning and intended effect, I shall not engraft vague and artificial requirements to a civil cause of action. Curtailing RICO's breadth is a task reserved to Congress. Therefore, I follow the better reasoned path of those who have declined to require a "racketeer enterprise injury." See e.g., Jensen, [Current]Fed. Sec. L. Rep. (CCH) P 99,674 at 97,713; Yancoski, slip op. at 18-19; Slattery, slip op. at 9-13; Municipality of Anchorage, slip op. at 4; Kirschner v. Cable/Tel Corp., 576 F. Supp. 234, 244 (E.D. Pa. 1983). In re Longhorn Securities Litigation, 573 F. Supp. at 270; Ralston v. Capper, 569 F. Supp. 1575, 1580 (E.D. Mich. 1983); Seville Industrial Machinery Corp. v. Southmost Mach. Corp., 567 F. Supp. 1146, 1157 (D.N.J. 1983); Mauriber, 567 F. Supp. at 1240-41; Eisenberg v. Gagnon, 564 F. Supp. 1347, 1352-53 (E.D. Pa. 1983); Windsor Associates, Inc. v. Greenfeld, 564 F. Supp. 273, 278-79 (D. Md. 1983); Crocker, 555 F. Supp. at 49-50; Hanna Mining, 574 F.Supp. 1172 [1982 Transfer Binder]Fed. Sec. L. Rep. (CCH) P 98,742 at 93,737.

  D. State Law Claims

  Defendants challenge the legal sufficiency of the state law claims, arguing that a remedy is unavailable to plaintiffs under the Pennsylvania Securities Act of 1972, Pa. Stat. Ann. tit. 70 § 1-101 -- 1-704 (Purdon's Supp. 1983-1984) the New Jersey Uniform Securities Law, N.J. Stat. Ann. tit. 49 § 3-47 -- 3-76 (West 1970) or the New Jersey Consumer Fraud Act, N.J. Stat. Ann. tit. 56 § 8-1 -- 8-20 (West Supp. 1983-1984). With respect to the theories of common law fraud and negligence, defendants contend that the requisite causation is missing. As a threshold matter, however, defendants question this court's jurisdiction over all state created causes of action.

  1. Pendent Jurisdiction

  Defendants' jurisdictional attack is premised upon their earlier arguments that the complaints fail to state valid securities or RICO causes of action. Without a surviving federal claim, exercise of pendent jurisdiction would be clearly unjustified. See United Mine Workers of America v. Gibbs, 383 U.S. 715, 726-27, 16 L. Ed. 2d 218, 86 S. Ct. 1130 (1966). However, I have determined that the Gaugler, Shulik, Singer and Rastelli complaints do contain legally sufficient federal causes. Since the state and federal claims arise from the same "common nucleus of operative fact[s]," Gibbs, 383 U.S. at 725, an exercise of pendent jurisdiction is appropriate. Taraborelli presents a different question. In light of plaintiff's limitation of the issues, a section 10(b) claim has not been pled. Much like dominoes, the section 20(a) and RICO claims must also fall, leaving the complaint devoid of a federal cause of action. As such, I shall decline to exercise pendent jurisdiction, see Gibbs, 383 U.S. at 726-27, and the complaint shall be dismissed in its entirety.

  2. Causation

  In the section 10(b) context, defendants have contended that there is no causal link between the failure to disclose the Brown litigation and plaintiffs' subsequent losses, placing the blame instead on fluctuations in the stock market. Defendants maintain that this reasoning applies with equal force to the common law fraud and negligence counts. However, as a factual matter, it is not clear whether the Brown litigation is the subject of either of these state claims.

  The negligence counts, although incorporating by reference the previous factual allegations, focus upon how defendants handled plaintiffs' portfolios. More specifically, defendants are accused of negligently and recklessly handling the accounts, Shulik Complaint at para. 71, and breaching their duty of care by purchasing speculative securities, trading on margin and engaging in excessive trading. Singer Complaint at paras. 68-69; Rastelli Complaint at paras. 64-65. See also Gaugler Complaint at para. 50. *fn71" The failure to disclose Brown is not specifically mentioned, nor would it seem to be actionable in negligence. If anything, plaintiffs allege an intentional act of fraud on defendants' part. Negligence principles might be relevant if Hutton had not had actual knowledge of the Brown litigation. Then it could be argued that Hutton was negligent in failing to learn of Catanella's role in that suit. Alternately, Hutton may have been negligent if it knew and hired Catanella anyway. However, the failure to disclose Brown to plaintiffs sounds in fraud rather than negligence.

  The common law fraud counts aver that defendants churned the accounts, Shulik Complaint at paras. 61-62, misrepresented the nature of the securities purchased and generally breached the duty of care owed to plaintiffs. Rastelli Complaint at paras. 64-65; Singer Complaint at paras. 68-69. Once again, Brown is not explicitly mentioned, however, it may be incorporated by reference to the prior factual allegations. Assuming this to be so, I must agree with defendants that there is a break in the chain of causation. As I concluded earlier, independent intervening factors were the actual cause of plaintiffs' losses. See section 1(d) supra. It was not the failure to disclose Brown, but rather fluctuations in the market, Catanella's churning, purchase of unsuitable securities and failure to disclose the risks inherent in certain transactions which caused plaintiffs to lose money. Therefore, plaintiffs cannot predicate their common law fraud claim upon the failure to disclose Catanella's complicity in Brown.

  3. State Securities Statutes

  Two basic problems arise under both the Pennsylvania Securities Act of 1972 and the New Jersey Uniform Securities Law -- specifically, which sections apply and what are their requirements? Defendants contend that private civil actions under each statute are limited to those sections expressly providing for such a remedy. The plaintiff in Gaugler argues that this court should imply a private right of action under a statutory provision which happens to track the language of section 10(b). Defendants note that the express remedy sections of both statutes contain a privity requirement similar to that found in section 12(2). Therefore, they maintain that plaintiffs can only sue persons from whom they purchased or to whom they sold. Plaintiffs contend that they did purchase from defendants, thereby satisfying the privity requirement.

  Both statutes contain a general anti-fraud provision virtually identical to section 101 of the Uniform Securities Act, which was patterned after Rule 10b-5. See Pa. Stat. Ann. tit. 70 § 1-401 (Purdon's Supp. 1983-1984); N.J. Stat. Ann. tit. 49 § 3-52 (West 1970). *fn72" Like section 10(b), these provisions do not expressly grant a private remedy. Analogizing to section 10(b) jurisprudence, plaintiff insists that a private right of action should be implied under sections 3-52 and 1-401. Notwithstanding the similarity of language, implication of a private remedy under the state statutory provisions is clearly inappropriate. Unlike the federal statute, both the Pennsylvania and New Jersey blue sky laws have explicitly limited causes of action to those expressly provided in the statute. The New Jersey statute states; "this law does not create any cause of action not specified in this section or section 10, paragraph (e)." N.J. Stat. Ann. tit. 49 § 3-71(h) (emphasis added). The Pennsylvania limitation mandates that " except as explicitly provided in this act, no civil liability in favor of any private party shall arise against any person by implication from or as a result of the violation of any provision of this act or any rule or order hereunder." Pa. Stat. Ann. tit. 70 § 1-506. Therefore, plaintiff's suggestion that a private remedy be implied flies in the face of the plain language of both statutes and must be rejected. See also Biggans v. Bache Halsey Stuart Shields, Inc., 638 F.2d 605, 609 (3d Cir. 1980) (under Pennsylvania statute, section 1-501 is sole source of civil liability); Roberts v. Magnetic Metals Co., 611 F.2d 450, 453 (3d Cir. 1979) (section 3-71 of New Jersey Statute does not contemplate implication of additional remedies.

  Having decided that plaintiffs are limited to the express remedies granted in each statute, I turn now to the privity requirements of those provisions. The Pennsylvania statute is the more generous of the two, affording a cause of action to a defrauded buyer or seller. See Pa. Stat. Ann. tit. 70 § 1-501 (a), (b). The New Jersey statute only allows a defrauded buyer to sue. See N.J. Stat. Ann. tit. 49 § 3-71. However, both share the same express limitations on who may be sued. For example, section 3-71(a)(2) provides that one who fraudulently offers or sells a security "is liable to the person buying the security from him . . . ." *fn73" Similarly, the Pennsylvania statute states that a seller "shall be liable to the person purchasing the security from him," Pa. Stat. Ann. tit. 70 § 1-501(a), and a buyer "shall be liable to the person selling the security to him . . . ." Id. at § 1-501(b). *fn74" Thus, sections 3-71 and 1-501 contain privity requirements likened to that found in section 12(2). Plaintiffs can recover under these sections only if they purchased from, or, under the Pennsylvania statute, sold to, defendants. See e.g., Biggans, 638 F.2d at 610 (Pennsylvania statute); Ging v. Parker-Hunter, Inc., 544 F. Supp. 49, 52 (W.D. Pa. 1982) (Pennsylvania statute); Hoover v. E.F. Hutton & Co., 1980Fed. Sec. L. Rep. (CCH) P 97,654 at 98,486 (E.D. Pa. 1980) (Pennsylvania statute); Salb v. Lemoine Ave. Assoc., 178 N.J. Super. 36, 40-41, 427 A.2d 1129, 1132 (1981) (New Jersey statute).

  Claims for churning, failure to disclose risks, engaging in unsuitable transactions and generally mishandling plaintiffs' portfolios are not compensable under sections 3-71 or 1-501. Such claims necessarily involve the relationship between a customer and broker. Although arguably, defendants were acting for their own benefit, technically, they were plaintiff's agents. The broker would have purchased and sold securities for the customer's accounts, rather than to the customer. Put another way, there would not be the required buyer-seller relationship. *fn75"

  This precise issue was treated in the prior discussion of section 12(2), supra. I did not dismiss those claims because defendants may have actually sold securities to plaintiffs, thus satisfying the privity requirement. Plaintiffs again make that argument. *fn76" As in the section 12(2) area, if defendants did sell securities to plaintiffs, a cause of action would also lie under the state statutes. Since the Singer and Rastelli complaints explicitly allege that defendants sold securities to the plaintiffs in violation of the substantive provisions of both statutes, see Rastelli Complaint at paras. 73, 78; Singer Complaint at paras. 77, 82, the allegations of privity are sufficient to survive a motion to dismiss. On the other hand, the Shulik complaint does not allege that defendants sold securities to plaintiffs. It is merely averred that defendants gained exorbitant profits and commissions by defrauding plaintiffs. See Shulik Complaint at paras. 53-56. This is not compensable under the statutes. Similarly, the Gaugler complaint incorporates the previous allegations by reference and simply concludes that the New Jersey statute has been violated. After carefully examining both complaints, I find no allegation that even intimates that defendants sold securities to plaintiffs. *fn77" Therefore, these claims shall be dismissed for failing to allege privity which is essential under both the Pennsylvania and New Jersey securities statutes.

  4. New Jersey Consumer Fraud Act

  The Gaugler complaint includes a count under the New Jersey Consumer Fraud Act, N.J. Stat. Ann. tit. 56 § 8-1 -- 8-20 (West Supp. 1983-1984). Noting that it is unclear whether the statute applies to securities transactions at all, defendants nevertheless argue that the act would be inapplicable here, since they did not sell anything to Gaugler. Instead, they acted as his agent, buying and selling for his portfolio. Gaugler responds that the language of the Act is sufficiently broad to encompass securities transactions. He asserts that defendants' distinction between "selling to" and "buying for" his account is not relevant.

  The New Jersey Consumer Fraud Act is, as its name implies, designed to protect consumers from deceptive sales or advertising practices. Its broad language evidences "legislative concern over sharp practices and dealings in the marketing of merchandise and real estate whereby the consumer could be victimized by being lured into a purchase through fraudulent, deceptive or other similar kind of selling or advertising practice." Daaleman v. Elizabethtown Gas Co., 77 N.J. 267, 271, 390 A.2d 566, 568-69 (1978). Its general anti-fraud section provides in pertinent part:

  

The act, use or employment by any person of any unconscionable commercial practice, deception, fraud, false pretense, false promise, misrepresentation, or the knowing, concealment, suppression, or omission of any material fact with intent that others rely upon such concealment, suppression or omission, in connection with the sale or advertisement of any merchandise or real estate . . . is declared to be an unlawful practice . . . .

  N.J. Stat. Ann. tit. 56 § 8-2 (West Supp. 1983-1984). Merchandise is broadly defined as "any objects, wares, goods, commodities, services or anything offered, directly or indirectly to the public for sale;" N.J. Stat. Ann. tit. 56 § 8-1(c). A private remedy is available to anyone suffering "any ascertainable loss of moneys or property, real or personal," as a result of any of the practices prohibited by the Act. N.J. Stat. Ann. tit. 56 § 8-19. Section 8-19 also provides for treble damages, costs and attorneys fees.

  Defendants' position boils down to the contention that there was no privity because there was no sale of securities to plaintiff as opposed to buying or selling for plaintiff. This dichotomy was effective in the context of section 12(2) and the state securities acts, because these all require privity. However, the Consumer Fraud Act has no privity requirement. See Neveroski v. Blair, 141 N.J. Super. 365, 358 A.2d 473, 479 (1976). In Neveroski, plaintiffs purchased a house with the representation that it was free from termites. The house had suffered extensive termite damage and was so infested that plaintiffs were forced to vacate four months after moving in. Plaintiffs sued the real estate broker for concealing the presence of termites. The broker raised the lack of privity as a bar to liability. In rejecting the need to show privity, the court stated:

  

Section 19 clearly grants a remedy to "any person who suffers any ascertainable loss . . . as a result of the use" of any practice declared unlawful. There is no provision that the claimant thereunder must have direct contractual relationship with the seller of the product or service.

  Neveroski, 141 N.J. Super. at 376, 358 A.2d at 479. Although the broker was not the seller of the house, the court determined that the concealment of the termites arose "in connection with" the sale of real estate sufficient to invoke section 8-19. Id. While defendants here might not have sold their securities to Gaugler, a claim is stated under the Act so long as there was a sale of securities and fraud "in connection with" the sale. Securities were sold to Gaugler, probably by a large number of unknown investors. The complaint sufficiently alleges that defendants committed various acts of fraud "in connection with" these sales.

  Although conceding that the issue is not free from doubt, defendants have suggested that the Act does not cover securities transactions. Relying upon the definition of "merchandise," plaintiff responds that fraud in the sale of securities falls within the expansive sweep of the statute. There is no New Jersey Supreme Court caselaw on this issue. Moreover, there is virtually no legislative history accompanying the Act. Therefore, in predicting how the highest state court would rule, I look to the language of the statute and the decision in Neveroski.78

  At first blush, it would appear that the definition of merchandise found in section 8-1(c) is facially broad enough to cover securities. By including the phrase "anything offered, directly or indirectly to the public for sale," the reach of the Act might seem limitless. In Neveroski, the New Jersey Superior Court determined otherwise. It had to decide whether real estate brokerage services fall within the scope of the Act. In determining that they did not, the court distinguished between the kind of item sold, real estate, and the kind of services performed, brokerage services. Tracing the history of the statute, the court noted that the original definition of merchandise included "any objects, wares, goods, commodities or services." Neveroski, 141 N.J. Super. at 377, 358 A.2d at 479. An amendment was proposed which would have expanded the definition to "any objects, wares, goods, commodities, real estate, securities, services or anything offered directly or indirectly to the public for sale." Id. (quoting Assembly Bill 715, introduced March 13, 1967) (emphasis in original). When the amendment was enacted, the terms real estate and securities were deleted. See N.J. Stat. Ann. tit. 56 § 8-1(c). After the Neveroski suit was instituted, section 8-2 was amended to its present form, prohibiting fraud "in connection with the sale or advertisement of any merchandise or real estate." Id. at n.3. Securities, though proposed for inclusion, never found its way into the statute, either in the definition of merchandise or the prohibitions listed in section 8-2. The Neveroski court observed:

  

We would consider such a deletion as a meaningful act on the part of the Legislature eliminating these two areas of commercial activity from the purview of the statute.

  

We recognize a possible alternative construction to the effect that the deletion was made because of an assumption that the express words were unnecessary in view of the catch-all phrase "or anything offered, directly or indirectly, to the public for sale."

  Id. at 378, 358 A.2d at 480. Although the court did not explicitly claim allegiance to either interpretation, the "alternative construction" makes little sense in light of the addition of "real estate" to section 8-2. It is illogical to conclude that the express words were unnecessary when real estate was ultimately added and securities left out.

  The Neveroski court then shifted focus from what was being sold to what services were being rendered. The court opined that "the entire thrust of the Consumer Fraud Act is pointed to products and services sold to consumers in the popular sense." Id. at 378, 358 A.2d at 480. Distinguishing between consumerism and professional services, the court explained:

  

A real estate broker is in a far different category from the purveyors of products or services or other activities. He is in a semi-professional status subject to testing, licensing, regulations and penalties through other legislative provisions . . . Although not on the same plane as other professionals such as lawyers, physicians, dentists, accountants or engineers, the nature of his activity is recognized as something beyond the ordinary commercial seller of goods or services -- an activity beyond the pale of the act under consideration.

  

Certainly no one would argue that a member of any of the learned professions is subject to the provisions of the Consumer Fraud Act despite the fact that he renders "services" to the public. And although the literal language may be construed to include professional services, it would be ludicrous to construe the legislation with that broad a sweep in view of the fact that the nature of the services does not fall into the category of consumerism.

  Id. at 379, 358 A.2d at 480-81 (citations omitted). The court then concluded that the services of a real estate broker are outside the scope of the Consumer Fraud Act. Id. at 380, 358 A.2d at 381.

  The proposal to add securities to the definition of merchandise and its subsequent deletion suggests that the legislature affirmatively decided to exclude the sale of securities from the scope of the Act. The addition of real estate to section 8-2 belies the conclusion that the general catch-all phrase was sufficient breadth to encompass both real estate and securities. Moreover, when real estate was ultimately added, it was not placed in the definition of merchandise, as originally proposed. Rather, it was placed in section 8-2, which prohibits fraud "in connection with the sale . . . of any merchandise or real estate." N.J. Stat. Ann. tit. 56 § 8-2. This phraseology implies that real estate is different from "merchandise," despite the apparent breadth of the definition of the latter concept. Since both real estate and securities were deleted from the definition of merchandise, it appears that the legislature also perceived securities to be conceptually different from merchandise. Unlike real estate, the sale of securities was never added to any section of the Consumer Fraud Act. The logical inference to be drawn is that despite the statutory definition, securities are not merchandise and their sale does not fall within the statute.

  The second prong of Neveroski, differentiating between professional or semi-professional services and "consumer" services, is a separate ground for dismissing the Consumer Fraud Act claim. A securities broker is a professional, subject to registration, regulation and penalties under the New Jersey Uniform Securities Law. Moreover, the very existence of a carefully drawn state securities statute militates against the application of the Consumer Fraud Act to securities transactions. As was noted in the previous section, the New Jersey securities statute has a privity requirement. In addition, private causes of action are strictly limited to those expressly granted. Therefore, it is very clear that the legislature desired private damage actions to be restricted to those individuals in a privity relationship. The Consumer Fraud Act has no privity requirement. To allow a plaintiff to recover under the Consumer Fraud Act in the absence of privity would emasculate the internal restrictions embodied in the Uniform Securities Act.

  Finally, there is a distinction, though subtle, between the policies underlying the protection of consumers in general and the protection of investors in particular. As the allegations in this case amply illustrate, not all investors are savvy, sophisticated financial moguls. Nor are they the poor, uneducated, naive consumers that the Consumer Fraud Act was designed to protect. See e.g., Kugler v. Romain, 58 N.J. 522, 537-38, 279 A.2d 640, 648-49 (1971). Securities fraud is qualitatively different from the archetypal installment credit sale scam where the uneducated are duped into buying inferior consumer goods at exorbitant prices. The rationale behind the Consumer Fraud Act is inapposite in the securities fraud area.

  Therefore, given the history of the definition of "merchandise," the fact that securities never found its way into the statute, the requirements of the Uniform Securities Law and the policies underlying each statute, I predict that the New Jersey Supreme Court, if faced with the issue, would hold that securities fraud is not actionable under the Consumer Fraud Act.

  An appropriate order follows.

  ORDER

  AND NOW, this 9th day of April, 1984, for the reasons stated in the foregoing memorandum, it is hereby ORDERED that Defendants' Motions to Dismiss are GRANTED in part and DENIED in part. It is further ORDERED that:

  1. The Taraborelli complaint is DISMISSED without prejudice. Plaintiff shall have twenty (20) days from the date of this order in which to amend the complaint in accordance with this memorandum.

  2. Count Eleven of the Gaugler complaint is DISMISSED without prejudice. Plaintiff shall have twenty (20) days from the date of this order in which to amend the complaint in accordance with this memorandum.

  3. The counts in the Gaugler and Shulik complaints brought pursuant to the Investment Advisers Act of 1940 are DISMISSED with prejudice.

  4. Counts Three, Nine and Ten of the Gaugler complaint are DISMISSED with prejudice.

  5. The claims asserted by Gaugler against Granville based upon respondeat superior and section 20(a) of the Securities Exchange Act of 1934 are DISMISSED with prejudice.

  6. The count in the Shulik complaint brought pursuant to the New Jersey Uniform Securities Law and the Pennsylvania Securities Act of 1972 is DISMISSED with prejudice.

  7. A record conference shall be held in this case on May 17, 1984, at 9:00 a.m., in Courtroom 8B.


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