by defendants, that the first specifically alleged use of the mails did not occur until after plaintiff had purchased shares in the Fund does not compel a different conclusion. It is not necessary, as ruled by Judge Muir in Pray, that the communication sent by mail contain the actual fraudulent misrepresentation which has given rise to the § 10(b) action but only that there be some connection between the mailed communication and the alleged fraud. Accord, Harrison v. Equitable Life Assurance Society of the United States, 435 F. Supp. 281, 284, 285 (W.D.Mich. 1977). Or, as stated by another court in this circuit, "the fraud itself need not be transmitted through the jurisdictional means -- it is enough if the jurisdictional means play a material role in the transaction." Levin v. Marder, 343 F. Supp. 1050, 1056 (W.D.Pa. 1972). The mailings alleged in the instant action, all of which related to the National Federal Securities Trust Fund ("Fund") in which plaintiff invested, display at least a connection between the use of the mails and the fraud which plaintiff claims was perpetrated upon her, i.e., the inducement by defendants through various misrepresentations and omissions to purchase shares in the Fund.
2. Materiality of Misrepresentations and Omissions
"Under Rule 10b-5, misinformation by misrepresentation or omission is not by itself sufficient; the information in question must be material." Healey v. Catalyst Recovery of Pa., Inc., 616 F.2d 641, 647 (3d Cir. 1980). A fact is material if there is "a substantial likelihood that, under all the circumstances, the omitted fact would have assumed actual significance in the deliberations of the reasonable shareholder." TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449, 48 L. Ed. 2d 757, 96 S. Ct. 2126 (1976).
In support of the Rule 10b-5 cause of action asserted in Count I of the complaint under consideration, plaintiff alleges that Henrie promised her a return of 12.9 percent on her investment but that the 12.9 percent yield never materialized. Plaintiff also alleges that Henrie failed to tell plaintiff that the personal property which plaintiff transferred to defendants would be used to purchase shares of a mutual fund. Nor did Henrie discuss with plaintiff at the time she made her investment the risk that plaintiff's investment might not yield the 12.9 percent interest which Henrie allegedly promised. Finally, plaintiff claims that Henrie did not explain the fact that a commission would be subtracted from the stocks and cash plaintiff transferred to defendants. As defendants note, plaintiff does not use the word "material" to describe the alleged misrepresentations and omissions which form the basis of her § 10(b) claim. The court disagrees that the failure to allege materiality specifically warrants dismissal of the § 10(b) claim.
As noted earlier in this memorandum, the court is obligated to draw reasonable factual inferences to aid the pleader when disposing of a motion to dismiss for failure to state a claim. Under the definition of materiality in the TCS case, the materiality of defendant Henrie's alleged misrepresentations and omissions can reasonably be inferred. In the opinion of the court such factors as the potential rate of return on an investment, the type of investment in which an investor is becoming involved, and a sales commission the investor is required to pay would all be significant in the deliberations of a reasonable investor. Thus, plaintiff's allegations are sufficient to withstand the challenge of the instant motion with respect to the materiality element of plaintiff's Rule 10b-5 claim.
Proof of the element of reliance in a § 10(b) action varies, depending on whether the action is founded on allegations of omissions or allegations of misrepresentations. In a Rule 10b-5 case involving primarily a failure to disclose, the Supreme Court ruled that "positive proof of reliance is not a prerequisite to recovery. All that is necessary is that the facts withheld be material in the sense that a reasonable investor might have considered them important in the making of this decision." Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 153-154, 92 S. Ct. 1456, 31 L. Ed. 2d 741 (1972). Following the Affiliated Ute decision, the Third Circuit Court of Appeals confronted a case similar to the one at bar in that there were allegations of both misrepresentations and omissions. Sharp v. Coopers & Lybrand, 649 F.2d 175 (3d Cir. 1981), cert. denied, 455 U.S. 938, 71 L. Ed. 2d 648, 102 S. Ct. 1427 (1982). The court declined to adopt a set rule with respect to the proof of reliance in such cases but adopted instead the following flexible approach: "we conclude that the proper approach to the problem of reliance is to analyze the plaintiff's allegations, in light of the likely proof at trial, and determine the most reasonable placement of the burden of proof of reliance." Sharp, 649 F.2d at 188. The court proceeded to hold that under the circumstances in that case the defendant was properly made to shoulder the burden of refuting a presumption of the plaintiff's reliance. Id. at 189.
As in Sharp, the complaint in the instant case contains allegations of both misrepresentations and omissions. Contrary to defendants' argument, the court finds that the allegations of omissions are more prevalent than those of misrepresentations. See Defendants' Supporting Brief at 12. Thus, it is possible that in this case, as in the Affiliated Ute case, plaintiff will be entitled to a presumption of reliance and defendants will be put to the task of refuting that presumption. Such a possibility is ensured by the Third Circuit Court's opinion in Sharp, in which the determining factor was not considered to be which type of allegation was more prevalent but what was the most reasonable placement of the burden of proof. It is not necessary at this stage in the litigation of the case at bar to resolve which party should bear the burden with respect to proof of reliance. Nevertheless, the very existence of the possibility that plaintiff will not have the burden of proof renders premature the dismissal of plaintiff's Rule 10b-5 claim for her failure to allege specifically the element of reasonable reliance.
Further, the court finds that plaintiff has alleged reliance in her § 10(b) action and that that allegation is sufficient to withstand defendants' Federal Rule of Civil Procedure 12(b)(6) motion regardless of who will ultimately bear the burden of proving reliance. Plaintiff alleges simply in Count I that she "relied upon the factual statement made by the Defendant regarding the Defendant's ability to garner a 12.9 % compounded interest on all monies given to the Defendant by the Plaintiff." Complaint at para. 20. Again, the court must accept this allegation as true for purposes of defendants' motion to dismiss. The fact that plaintiff did not actually use the term "reasonable" to describe her reliance is not fatal to her § 10(b) claim -- the court will infer in the disposition of the instant motion that it was reasonable for plaintiff, an unsophisticated investor, to rely on the investment representations of an individual who is vice-president and sales manager of an investment firm.
4. Due Diligence
Defendants argue that due diligence is a separate element of a Rule 10b-5 cause of action which plaintiff must plead and establish in order to recover. In support of this proposition defendants cite opinions from the Fifth and Eleventh Circuit Courts of Appeal. However, the opinion of the Third Circuit Court in Peil, by which this court is bound, does not include due diligence as a separate element of a Rule 10b-5 claim. Neither does the one district court opinion from this circuit which defendants cite, McClean v. Alexander, 420 F. Supp. 1057 (D.Del. 1976), speak of due diligence as an element of a Rule 10b-5 cause of action. The court in McClean refers to the concept of due diligence as a defense to a Rule 10b-5 claim which may require a 10b-5 plaintiff to demonstrate that his reliance was well-founded. Id. at 1077. The court analogizes the due diligence defense to the defense of contributory negligence. Id. at 1078. Nowhere in the opinion does the McClean court refer to due diligence as an element of a 10b-5 claim that must be pleaded in order for a plaintiff to state a claim upon which relief can be granted.
Because the notion of due diligence is absent from the Peil list of the elements of a 10b-5 cause of action, and in light of the portrayal in McClean of the due diligence requirement as an affirmative defense, plaintiff's claim will not be dismissed for her failure to allege that she acted with due diligence in relying on defendant Henrie's representations.
The United States Arbitration Act provides as follows:
If any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration under an agreement in writing for such arbitration, the court in which such suit is pending, upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration under such an agreement, shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the agreement, providing the applicant is not in default in proceeding with such arbitration.
9 U.S.C. § 3.
"The first task of a court asked to compel arbitration of a dispute is to determine whether the parties agreed to arbitrate that dispute." Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 626, 87 L. Ed. 2d 444, 105 S. Ct. 3346 (1985). In making that determination the court is required to apply federal substantive law with respect to arbitrability, which has been set forth as follows by the Supreme Court:
Questions of arbitrability must be addressed with a healthy regard for the federal policy favoring arbitration . . . The Arbitration Act establishes that, as a matter of federal law, any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration, whether the problem at hand is the construction of the contract language itself or an allegation of waiver, delay, or a like defense to arbitrability.