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DENISON v. KELLY

March 20, 1991

JAMES R. DENISON, AND THERESA M. DENISON, PLAINTIFFS,
v.
STEVEN D. KELLY, AND LEGG MASON WOOD WALKER, INC., DEFENDANTS.



The opinion of the court was delivered by: Caldwell, District Judge.

MEMORANDUM

I. Introduction.

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.

II. Discussion.

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 (S.D.N.Y. 1987).

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. 1989).

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 ...


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