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KLINE v. HENRIE

February 22, 1988

Lorraine Kline, Plaintiff
v.
Charles Henrie and Josephthal and Company, Inc., Defendants



The opinion of the court was delivered by: RAMBO

 Sylvia H. Rambo, United States District Judge

 Before the court is defendants' motion to dismiss. The motion has been fully briefed and is ripe for disposition.

 Background

 Plaintiff asserts five causes of action in her complaint and, in support thereof, alleges the following facts. Defendant Henrie at all times relevant to this action was an officer of defendant Josephthal and Company. Plaintiff initially consulted Henrie for the purpose of obtaining from him the name of a competent broker. Because Henrie and plaintiff were friends and plaintiff was worried about how the friendship might affect advice from him, plaintiff told Henrie that she did not wish to receive advice other than Henrie's opinion on who would be a competent broker. Despite plaintiff's concern, Henrie advised plaintiff that he could invest her money and obtain for her a 12.9 percent rate of return. Henrie also represented to plaintiff that she could not get a better return anywhere else and compared the 12.9 percent figure to the 6.5 percent rate of interest that a bank would pay to plaintiff. Henrie did not explain to plaintiff the income tax implications of the investment and did not initially reveal to her the possibility that the rate of return on plaintiff's investment might be lower than 12.9 percent.

 Pursuant to Henrie's representations, plaintiff transferred to Josephthal and Company through Henrie over fifty-five thousand dollars in securities and checks. Although Henrie informed plaintiff that her money would be "placed with National Federal Securities Trust," Complaint at para. 10, Henrie did not furnish to plaintiff a financial report or a prospectus of the Trust until a year after plaintiff transferred her property to defendants. Nor did Henrie explain that the Trust was a fund in which shares would be purchased with plaintiff's money and that plaintiff would be required to pay a commission on the purchase of the shares. Plaintiff thought she had made an investment similar to purchasing a certificate of deposit. The investment did not yield the rate of return which Henrie initially quoted to plaintiff, and it was not until several months after plaintiff transferred her checks and securities to defendants that Henrie informed her the rate of return might be as low as 10 percent. Plaintiff claims to have suffered severe financial losses and emotional distress as a result of the circumstances surrounding her investment relationship with defendants.

 On the basis of these allegations plaintiff asserts five causes of action. In Count I plaintiff claims that defendants' misrepresentations and omissions violated section 10(b) of the 1934 Securities Exchange Act (15 U.S.C. § 78j(b)) and Rule 10b-5 (17 C.F.R. § 240.10b-5), promulgated pursuant to the Act. The second count contains a state law claim for breach of an alleged oral contract between plaintiff and defendants. In Count III plaintiff asserts a state law claim of misrepresentation and in Count IV a claim that defendants have violated the Pennsylvania Securities Act. It is unclear what cause of action is asserted in Count V, but it appears to be a variation of the state law, contract action contained in the second count.

 Defendants move to dismiss the complaint pursuant to Federal Rule of Civil Procedure 12(b)(6). Defendants argue in the first place that plaintiff has failed to make certain allegations which are necessary to support a Rule 10b-5 cause of action. Specifically, defendants contend that there are no allegations of the use by defendants of the mails or of an instrumentality of interstate commerce, no allegation that defendants' misrepresentations or omissions were material, and no allegation that plaintiff either reasonably relied on defendants' misrepresentations or that she acted with due diligence in dealing with defendants. With respect to plaintiff's state law claims, defendants claim that plaintiff has agreed to arbitrate such claims and argue that the court should both compel the arbitration of and dismiss those claims. Finally, defendants argue that the oral contract which defendants are alleged to have breached is unenforceable in that it does not comply with the applicable Pennsylvania statute of frauds.

 In disposing of defendants' motion the court finds it necessary to address only defendants' argument that plaintiff has failed to state a federal law securities claim upon which relief can be granted and that there is an agreement to arbitrate the state law claims which the court should honor by compelling arbitration.

 Discussion

 A. Rule 10b-5 Claim

 "[A] complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim 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). The court must accept the factual allegations of the complaint as true and draw reasonable factual inferences to aid the pleader. D. P. Enterprises v. Bucks County Community College, 725 F.2d 943, 944 (3d Cir. 1984). It is in light of these standards that the court must decide whether plaintiff has stated a Rule 10b-5 claim upon which relief can be granted.

 1. Use of Interstate Commerce or the Mails

 Section 10 of the 1934 Securities Exchange Act makes it unlawful

 
for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange . . .
 
(b) to use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.

 15 U.S.C. § 78j. One of the rules promulgated by the Securities and Exchange Commission pursuant to the 1934 Act is Rule 10b-5, which provides as follows:

 
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any ...

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