The opinion of the court was delivered by: Caldwell, District Judge.
Defendant, Legg Mason Wood Walker, Inc. (Legg Mason), has
filed a motion to dismiss the amended complaint pursuant to
Fed.R.Civ.P. 12(b)(6). The plaintiffs, James R. Denison and
his wife, Theresa M. Denison, filed this lawsuit against Legg
Mason, a stock brokerage, and the other defendant, Steven D.
Kelly, a former broker for Legg Mason, alleging that the
defendants had churned their account and had purchased
investments inappropriate to the plaintiffs' stated desire for
long term growth and appreciation. In considering defendant's
motion, we must accept as true all the well pleaded
allegations of the amended complaint and construe them
favorably to the plaintiffs. The motion cannot be granted
unless the plaintiffs can prove no set of facts in support of
their claims which would entitle them to relief. Labov v.
Lalley, 809 F.2d 220 (3d Cir. 1987).
The amended complaint sets forth the following causes of
action: (1) Count I — a claim pursuant to section 10(b) of the
Securities and Exchange Act of 1934, 15 U.S.C. § 78j(b), and
its corresponding rule, 17 C.F.R. § 240.10(b)-5; (2) Counts II
and III — claims pursuant to section 501 of the Pennsylvania
Securities Act of 1972 (the Securities Act) for purported
violations of sections 401 and 403 of that Act, 70 P.S. §§
1-501, 1-401 and 1-403 (Purdon Supp. 1990-91); (3) Counts IV
through X — pendent state law claims, respectively, for breach
of contract, breach of fiduciary duty, negligence, common law
conversion (Counts VII and VIII), fraud, and civil conspiracy;
(4) Count XI — a claim for a violation of the Pennsylvania
Unfair Trade Practices and Consumer Protection Law (hereinafter
"the CPL"), 73 P.S. § 201-1 (Purdon Supp. 1990-91); and (5)
Count XII — a claim under the Racketeer Influenced And Corrupt
Organizations Act (RICO). 18 U.S.C. § 1961 et seq.
A. The RICO Claim (Count XII).
Plaintiffs' RICO claim is based upon 18 U.S.C. § 1962(a)
which provides, in pertinent part, as follows:
It shall be unlawful for any person who has
received any income derived, directly or
indirectly from a pattern of racketeering
activity . . . in which such person has
participated as a principal within the meaning of
section 2, title 18, United
States Code, to use or invest, directly or
indirectly, any part of such income, or the
proceeds of such income, in acquisition of any
interest in, or the establishment or operation
of, any enterprise which is engaged in, or the
activities of which affect, interstate or foreign
commerce. . . .
Legg Mason attacks the sufficiency of this claim on three
grounds, contending that the plaintiffs have failed to plead
that it has participated as a principal in a pattern of
racketeering activity, citing First National Bank v. Lustig,
727 F. Supp. 276 (E.D.La. 1989) on this issue, that the pattern
of racketeering activity that has been pled is not sufficient,
see Banks v. Wolk, 918 F.2d 418 (3d Cir. 1990), and that the
plaintiffs have failed to plead injury from the investment or
use of income derived from a pattern of racketeering activity
in an enterprise engaged in or affecting interstate commerce.
See Kehr Packages, Inc. v. Fidelcor, Inc., 926 F.2d 1406 (3d
Cir. 1991); Rose v. Bartle, 871 F.2d 331 (3d Cir. 1989).
Defendant contends each of these deficiencies is an independent
ground for dismissal of the RICO claim.
Plaintiffs admit that they have not alleged that Legg Mason
participated as a principal in the racketeering activity or
that it aided and abetted Kelly, and that this is a necessary
part of the particular theory under which they have chosen to
pursue Legg Mason on their RICO claim. They assert, however,
that, given the "size" of Legg Mason, "fairness" requires that
they be permitted to engage in some discovery to determine the
extent of Legg Mason's involvement with Kelly's wrongful
handling of their account. (plaintiffs' opposition brief at p.
33). They also cite United States v. Buttram, 432 F. Supp. 1269
(W.D. Pa. 1977) for the proposition that Legg Mason can be
found liable as a principal under 18 U.S.C. § 2 when its agent
Kelly has been "irresponsible." (plaintiffs' opposition brief
at p. 33).
We fail to see the relevance of Buttram to the instant case.
The court in Buttram decided that a criminal defendant could be
found guilty as the principal of an accomplice who was legally
insane at the time of the offenses. The adjudication of guilt
as a principal depended on the conduct of the defendant, not
the mental state of the accomplice. Buttram simply has no
bearing on this case.
As to the asserted need for discovery, we have generally
prohibited a plaintiff from trying to cure deficiencies in a
complaint by engaging in discovery. See Humphrey v. Court of
Common Pleas, 640 F. Supp. 1239 (M.D.Pa. 1986). This approach is
consistent with Fed.R.Civ.P. 11 which contemplates that a
party's attorney will sign the complaint only "after reasonable
inquiry" establishes that the complaint "is well grounded in
fact and is warranted by existing law. . . ." (emphasis added).
See also Kaylor v. Fields, 661 F.2d 1177, 1184 (8th Cir. 1981)
("Discovery should follow the filing of a well-pleaded
complaint. It is not a device to enable a plaintiff to make a
case when his complaint has failed to state a claim."); Avnet,
Inc. v. American Motorists Insurance Co., 115 F.R.D. 588
There may be circumstances in which we would permit
discovery to proceed even though a complaint has failed to
state an essential element of a plaintiff's chosen theory of
recovery. But we do not think that the mere size of the
defendant or a general plea for fairness justifies doing so.
Accordingly, we conclude that the complaint fails to state a
RICO claim because it does not allege that Legg Mason was a
principal in a pattern of racketeering activity or aided and
abetted that activity.
In any event, we agree with Legg Mason's third ground for
dismissal of the RICO claim. Plaintiffs have failed to allege
that they have been injured by the use or investment of income
derived from a pattern of racketeering activity, or the
proceeds thereof, in an enterprise in, or affecting,
interstate commerce. This is a required element of a cause of
action under section 1962(a). See Kehr Packages, supra; Rose,
supra; Zimmer v. Gruntal & Co., 732 F. Supp. 1330 (W.D.Pa.
For the foregoing reasons, the plaintiffs' RICO claim
against Legg Mason will be dismissed.*fn1
B. The Consumer Protection Act Claim (Count XI).
Legg Mason next contends that the plaintiffs cannot make a
claim under the CPL for alleged wrongdoing arising from
securities transactions. Legg Mason makes this claim despite
the very broad language of the CPL which seemingly covers the
conduct at issue.
The CPL declares unlawful "[u]nfair methods of competition
and unfair or deceptive acts or practices in the conduct of
any trade or commerce as defined in [section 201-2(4)(i)
through xvii]. . . ." (brackets added). 73 P.S. § 201-3. Trade
and commerce are defined, in part, as "the sale or distribution
of any services. . . ." Id. at § 201-2(3). Section 201-2, after
enumerating several specific unfair trade practices, contains a
catch-all provision, which the plaintiffs rely on, defining an
unfair method of competition as "any other fraudulent conduct
which creates a likelihood of confusion or of
misunderstanding." 73 P.S. § 201-2(4)(xii). Further, section
201-9.2, in pertinent part, authorizes individuals to sue for
violations of section 201-3, when they purchase "services
primarily for personal, family or household purposes. . . ."
Finally, the CPL contains a specific exemption only for radio,
television and newspapers acting in good faith. 73 P.S. §
201-3. It does not similarly exempt from its coverage the
business of securities.
Thus, plaintiffs appear to meet all the requirements of the
CPL. They allege that they purchased the defendant's brokerage
services for their personal portfolio and that they suffered
injury because the defendant engaged in fraudulent conduct in
connection with the handling of their account.
Despite the broad scope and remedial nature of the CPL,
defendant contends it provides the plaintiffs no relief,
citing in its support cases from other jurisdictions which
have held for a variety of reasons that consumer protection
laws with language comparable to Pennsylvania's do not extend
to securities transactions. See Spinner Corp. v. Princeville
Development Corp., 849 F.2d 388 (9th Cir. 1988) (Hawaii law);
Stephenson v. Paine, Webber, Jackson & Curtis, Inc.,
839 F.2d 1095 (5th Cir. 1988) (Louisiana law); Lindner v. Durham Hosiery
Mills, Inc., 761 F.2d 162 (4th Cir. 1985) (North Carolina law);
Skinner v. E.F. Hutton Co., Inc., 314 N.C. 267, 333 S.E.2d 236
(1985) (North Carolina law); Swenson v. Englestad,
626 F.2d 421 (5th Cir. 1980) (Texas law); Nichols v. Merrill Lynch
Pierce Fenner & Smith, 706 F. Supp. 1309 (M.D.Tenn. 1989); In re
Catanella, 583 F. Supp. 1388 (E.D.Pa. 1984) (New
Jersey law); Taylor v. Bear Sterns, 572 F. Supp. 667 (N.D.Ga.
1983) (Georgia law); Russell v. Dean Witter Reynolds, Inc.,
200 Conn. 172, 510 A.2d 972 (1986) (Connecticut law); Cabot Corp.
v. Baddour, 394 Mass. 720, 477 N.E.2d 399 (1985) (Massachusetts
law); State ex rel. McLeod v. Rhoades, 275 S.C. 104,
267 S.E.2d 539 (1980) (South Carolina law); State v. Piedmont Funding
Corp., 119 R.I. 695, 382 A.2d 819 (1978) (Rhode Island law).
We have carefully reviewed these cases and we must agree
with the plaintiffs that they cannot control the outcome here.
Initially, we note that Rhoades and Piedmont Funding are easily
distinguishable because the consumer protection laws at issue
in those cases contained specific exemptions for conduct
regulated or permitted by governmental agencies or statute. The
CPL contains no similar exemption.
The remaining cases share what appear to be the typical
reasons for refusing to allow a securities claim under state
consumer protection laws. Thus, it is noted that some of these
laws were patterned after the Federal Trade Commission Act
(FTC Act), 15 U.S.C. § 45(a)(1), and the latter statute has
never been construed as applying to securities transactions.
See Stephenson, Lindner, Skinner and Russell. Moreover,
previous state court reliance on the FTC Act for guidance in
construing these laws has also been viewed as an indication
that consumer protection laws should not be read to encompass
securities transactions. See Stephenson. The comprehensive
nature of state securities laws, which often provide private
remedies substantively different from the applicable consumer
protection laws, lead some courts to conclude they should not
interfere with legislative statutory schemes supposedly
providing coordinated coverage in different areas. See Spinner,
Lindner, Nichols, Cabot, In re Catanella, Skinner and Russell.
Other reasons include: (1) the availability of treble
damages under consumer protection laws, but not under state
securities laws, which makes it unlikely that state
legislatures intended the more liberal consumer remedy to be
available for securities violations, see Spinner, Stephenson,
Lindner and Skinner; (2) the potential for an undesirable
overlapping of authority between state officials in charge of
consumer protection and those in charge of securities
regulation, see Stephenson, Lindner and Skinner; (3) simply the
federal predominance in the area of securities transactions,
see Nichols; and that (4) securities transactions are just
qualitatively different from the usual run of consumer
transactions intended to be covered by consumer protection
laws. See In re Catanella.
These reasons all have some validity and the issue is
certainly arguable. But our review of Pennsylvania law leads
us to believe that the Pennsylvania Supreme Court would
approach the issue differently.
To begin with, we believe the supreme court would look first
to the language of the statute rather than engage in a
somewhat loose analysis, independent of the statutory
language, of what the Pennsylvania General Assembly intended
to be covered by the CPL. Of course, the "object of all
interpretation and construction of statutes is to ascertain
and effectuate the intention of the General Assembly," 1 Pa.
C.S. § 1921(a), but "[w]hen the words of a statute are clear
and free from all ambiguity," id. at § 1921(b) (brackets
added), that intent should be found in the statutory language
itself. See Coretsky v. Board of Commissioners, 520 Pa. 513,
555 A.2d 72 (1989); In re Estate of Fox, 494 Pa. 584,
431 A.2d 1008 (1981); Garcia v. Community Legal Services Corp.,
362 Pa. Super. 484, 524 A.2d 980 (1987). As noted above, and ...