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BRANTLEY v. E.F. HUTTON & CO.

March 30, 1989

SIDNEY BRANTLEY and DONNA BRANTLEY
v.
E.F. HUTTON & CO., INC.



The opinion of the court was delivered by: POLLAK

 Defendant E.F. Hutton & Company, Inc. ("Hutton") moves to dismiss all of the counts of the plaintiffs' amended complaint for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6). On count two of the amended complaint, defendant moves in the alternative for summary judgment pursuant to Federal Rule of Civil Procedure 56. Defendant also requests sanctions pursuant to Federal Rule of Civil Procedure 11, arguing that the amended complaint contains information unrelated to plaintiffs' claim.

 This case is the third of three cases -- the first two were Alfaro v. E.F. Hutton, Inc., 606 F. Supp. 1100 (E.D. Pa. 1985), and Cecil v. E.F. Hutton, Inc., 1987 U.S. Dist. LEXIS 2876, Civ. No. 86-1010 (E.D. Pa. 1987) -- arising from the failure of a limited partnership, Energy Resources 1981A-Ltd. ("Energy Resources"). *fn1" Defendant sold interests in Energy Resources in 1981, and the limited partnership called its letters of credit in 1984. Plaintiffs Sidney and Donna Brantley are two of a group of investors who bought interests in the partnership based on allegedly fraudulent misrepresentations made by defendant and Energy Resources management. They contend that defendant, acting as Energy Resources' agent, deliberately concealed the gravity of the partnership's financial problems and the magnitude of the Brantleys' risk, causing the Brantleys and other investors to suffer substantial financial loss.

 The Brantleys' original complaint alleged violations of section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), section 12(2) of the Securities Act of 1933, 15 U.S.C. § 77l(2), and section 4 of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1964. The complaint also alleged common law claims of fraud, breach of fiduciary duty, and negligence.

 Defendant moved for dismissal of the original complaint. In a telephone conference, the Brantleys' counsel agreed to amend the complaint and, at the court's suggestion, to use as a model the revisions made in the second amended complaint filed in the parallel action of Cecil v. E.F. Hutton, Inc., 1987 U.S. Dist. LEXIS 2876, Civ. No. 86-1010 (E.D. Pa. 1987) (Second Amended Complaint, Document #20). The first amended complaint in Cecil had been couched in language almost verbatim with that of the original Brantley complaint and had been met with a virtually identical motion to dismiss. *fn2" The second amended Cecil complaint added substantial additional information about the facts of each plaintiff's transaction with Hutton. *fn3"

 The Brantleys thereafter filed their amended complaint (hereinafter, the "complaint"). Defendant renewed its motion to dismiss, arguing that the complaint failed to correct the initial complaint's deficiencies. The Brantleys rested on their previous responses to defendant's motion to dismiss.

 I. The 10(b) claim

 Defendant first argues that count one -- plaintiffs' 10(b) claim -- should be dismissed because it fails to plead fraud with particularity as required by Federal Rule of Civil Procedure 9(b). That rule provides: "In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other conditions of mind of a person may be averred generally." Fed. R. Civ. Proc. 9(b). In order to support their 10(b) securities claim, plaintiffs must allege with particularity some material misrepresentation or non-disclosure of fact leading to manipulation or deception, Santa Fe Industries, Inc. v. Green, 430 U.S. 462, 474, 51 L. Ed. 2d 480, 97 S. Ct. 1292 (1977), and scienter, that is, defendant's intention to deceive, manipulate or defraud, Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193, 47 L. Ed. 2d 668, 96 S. Ct. 1375 (1976). Defendant claims that plaintiffs fail to provide the following particular facts about its alleged deception: the persons responsible for the allegedly fraudulent sale and their roles, the source of the alleged misrepresentations, and the time, place, and circumstances of the alleged misrepresentations.

 Rule 9(b) is not to be applied so mechanically and narrowly that the liberal pleading standard of the Federal Rules of Civil Procedure is rendered meaningless. See Seville Industrial Machinery Corp. v. Southmost Machinery Corp., 742 F.2d 786 (3d Cir. 1984), cert. denied, 469 U.S. 1211, 84 L. Ed. 2d 327, 105 S. Ct. 1179 (1985); Thomas v. Tramiel, 105 F.R.D. 568, 572-73 (E.D. Pa. 1985) (fraudulent omissions). However, although the allegations of the complaint need not necessarily detail the "date, place, or time," of each allegedly fraudulent act, the complaint must provide at least a sufficient "alternative means of injecting precision and some measure of substantiation into [plaintiffs'] allegations of fraud." Seville, 742 F.2d at 791. On the whole, complaints must be sufficient "to place the defendants on notice of the precise misconduct with which they are charged, and to safeguard defendants against spurious charges of immoral and fraudulent behavior." Id.

 Plaintiffs' complaint fails to meet even Seville's liberal interpretation of Federal Rule 9(b)'s particularity requirement. Unlike the complaint in Seville, which referred to a unique piece of machinery as part of the challenged transaction, the present complaint contains no reference point that can help to establish (a) defendant's alleged misstatements or omissions of material facts or (b) the details of the purchase that underlies this entire action. In contrast to the level of detail provided by the second amended complaint in Cecil (the pleading this court identified to the Brantleys as a model for amending their complaint) the Brantleys' sole identification of themselves remains: "Plaintiffs are purchasers of limited partnership interests in Energy resources [sic] and purchased their interest through Hutton." Complaint para. 5. *fn4"

 Paragraph 12 of the complaint contains the first claim of "misrepresentations to plaintiffs" by defendant's personnel -- misrepresentations allegedly made not only to plaintiffs, but to investors nationwide. See complaint, para. 11. These misrepresentations related to the risk of investment in Energy Resources. However, the complaint does not connect any of these apparently oral statements to the Brantleys by specifying the following: who -- or even which of defendant's alleged 245 nationwide offices -- made these statements to plaintiffs; when the statements were made; and in what context and form. The complaint's two references in paragraphs 11 and 15 to "David Van Dyck [sic]," identified as "plaintiffs'" Hutton broker, do not allege that he made any misrepresentations to plaintiffs. *fn5"

 Plaintiffs also claim that "the Private Offering Memorandum blatantly misrepresented that the offering, in compliance with Rule 146 of the SEC, would be limited to no more than 35 purchasers." Complaint at para. 13. However, plaintiffs do not allege whether, when, how, or from whom they received a copy of this Memorandum. The complaint does not recite the specific language of the alleged misrepresentation; nor is a copy of the Memorandum appended to the complaint -- a device suggested in Alfaro. Alfaro v. E.F. Hutton, Inc., 606 F. Supp. 1100, 1109 (E.D. Pa. 1985). As a consequence, it is at best speculative what deception is being alleged and whether it is material.

 Nor does the allegation, as pled, present a prima facie transgression of Rule 146 -- a rule which was rescinded as of June 30, 1982. The fact that an offering may not have been limited to 35 purchasers would not, without more, have violated Rule 146; the crucial question would be whether the offeror had "reasonable grounds to believe" that the number of purchasers would be so limited. Rule 146(g)(1), Reg. 230.146 (rescinded effective June 30, 1982). *fn6" However plaintiffs do not address defendant's scienter; to the contrary, their primary comment on the Memorandum is that "in order to compel potential investors to secure their information from Hutton brokers, that memorandum was deliberately general, and did not provide potential investors with much of the more detailed information needed . . . ." Complaint para. 9.

 The allegations of the sale and alleged subsequent concealment of the financial condition of Energy Resources similarly fail to identify with any precision the alleged acts of wrongdoing. Plaintiffs only state that they "submitted a subscription agreement and check to one of E.F. Hutton's offices in mid-1981." Complaint, para. 14. The allegations in paragraphs 17 through 22 suggest details of activity -- Hutton's conversations with other investors, mailings to 263 persons, letters from Energy Resources -- but only paragraphs 19 and 20 facially connect the defendant's acts with the Brantleys. Neither of these two paragraphs identifies what was misleading or who communicated it.

 "There is no reason that the defendants or the Court should be forced to edit or 'cut and paste' the plaintiff's complaint to be able to determine what misconduct is being alleged." Wildman v. Wills, 81 F.R.D. 588, 590 (E.D. Pa. 1978). In this case, even an exhaustive analysis fails to yield sufficient information to meet the pleading requirements of Federal Rule 9(b) that are applicable to this 10(b) claim. See Summers v. Lukash, 562 F. Supp. 737, 739-40 (E.D. Pa. 1983); cf. Seville, 742 F.2d at 791.

 Plaintiffs' amended complaint is similar to, and presents the same basic allegations as, the complaint of the purported class in Alfaro, the first suit filed. In Alfaro, I found that some of the complaint's allegations of fraud were sufficient, but noted:

 
These conclusions regarding the sufficiency of the fraud allegations assume that this action will continue as a class action. Should this action not be certified to proceed in that manner, but only as an action on behalf of the two named plaintiffs, plaintiffs will be ...

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