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SEILER v. E.F. HUTTON & CO.

January 11, 1984

ERSEL G. SEILER, JR., on behalf of himself and all others similarly situated, Plaintiff,
v.
E.F. HUTTON & COMPANY, INC., Defendant



The opinion of the court was delivered by: BROTMAN

 This action is brought by a purchaser of securities against E.F. Hutton & Co., Inc., a securities broker, alleging violations by the defendant of § 10(b) of the 1934 Securities Exchange Act, Rule 10b-5 of the Securities Exchange Commission, and common law principles of fraud and misrepresentation. Presently before the court is defendant's motion pursuant to Fed. R. Civ. P. 12(b)(6) to dismiss the complaint. Although this action is brought as a class action, plaintiff is withholding his motion for class certification pending the disposition of this motion to dismiss. This court's jurisdiction is based on 15 U.S.C. § 78aa.

 Plaintiff makes the following relevant allegations, which must be taken as true for purposes of this motion to dismiss:

 
The plaintiff is an individual who made successive purchases of the securities of Texas International Company ("TEI") in 1981 and 1982. The defendant, E.F. Hutton & Co., Inc. ("Hutton" or "defendant") is a broker and dealer in securities. TEI is a Delaware corporation principally engaged in the acquisition of, exploration for and production of crude oil and natural gas in the United States and Canada and the purchasing, exchanging, and processing of oil, condensate and refined petroleum products.
 
Between July 28, 1981, and January 19, 1982, plaintiff purchased $43,582.86 in TEI securities, consisting of 1000 shares of TEI common stock and 1400 call options. Plaintiff made these purchases in reliance on a series of materially misleading reports issued by Hutton and authored by Hutton's former securities analyst Dan Rice ("Rice").
 
Hutton's reports about TEI were materially misleading, in part because they enthusiastically reported about the prospects of oil production in one of TEI's properties, the Eloi Bay/Half Moon Field, known commonly as "Eloi Bay." Eloi Bay had produced 20 million barrels of oil since its discovery in 1953. In about 1980, TEI began exploring the possibility of extending its oil exploration to a part of Eloi Bay known as the "Tuscaloosa formation." TEI had substantial difficulty finding a joint venture partner for its proposed further exploration of Eloi Bay. TEI tested the Eloi Bay structure in October 1980 at an expense of $23 million, and found the exploration laborious because of extreme environmental conditions and a collapse of its well. TEI unsuccessfully tried to obtain financing of its exploration project. Potential lenders apparently refused TEI's loan requests because the project was too speculative. TEI could not fund further development on its own; its overall production had declined in 1982 and its overall production and revenues were expected to decline in the future.
 
Beginning at some point prior to July 1, 1981, defendant E.F. Hutton began manipulating the market for TEI securities and artificially inflating the price of those securities. Hutton solicited orders from its clients and issued at least 24 reports about TEI between September 9, 1981 and February 17, 1982. These reports consciously or recklessly misrepresented facts and omitted other facts necessary to make the facts stated not misleading. These reports were made (1) to distort the truth and otherwise mislead its customers in order to support and maintain the market prices of TEI securities, and (2) to generate for itself substantial commissions and margin interest rates as a result of the transactions. Hutton's actions were part of an "unlawful combination, conspiracy or course of conduct" (Complaint para. 21) with its former securities analyst Dan Rice and with TEI, as well as with other persons whose identities are "presently unknown to the plaintiff." Id.

 In summary, then, plaintiff is alleging that TEI needed money badly, and that Hutton -- acting in concert with its analyst and with TEI -- began generating an apparent market for TEI securities by issuing a series of fraudulent statements about TEI. Hutton's representations were made "knowing them to be false when made or in reckless disregard of the facts with respect thereto." Complaint para. 23. Plaintiff lists eleven specific items in Paragraph 23 which it alleges were conscious or reckless misrepresentations or omissions. Complaint para. 23(a)-(k).

 DISCUSSION

 Plaintiff's complaint consists of two counts. First, plaintiff alleges that Hutton's conduct violated § 10(b) of the 1934 Securities Exchange Act and Rule 10b-5 promulgated thereunder by the Securities Exchange Commission. Second, plaintiff alleges that Hutton's fraudulent statements and omissions violated the common law of fraud and misrepresentation.

 For purposes of this motion to dismiss, the complaint must be construed in the light most favorable to the plaintiff and its allegations must all be taken as true. Leone v. Aetna Casualty & Surety Co., 599 F.2d 566 (3rd Cir. 1979). A complaint may not be dismissed under Federal Rule of Civil Procedure 12(b)(6) "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).

 VIOLATIONS OF THE FEDERAL SECURITIES LAWS

 Section 10(b) of the 1934 Securities Exchange Act provides:

 
"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 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 ...

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