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RIGGS v. SCHAPPELL

August 26, 1996

ROBERT RIGGS and HELEN RIGGS, Plaintiffs,
v.
BRUCE G. SCHAPPELL, executor for the estate of Steven Schappell, MERCER SECURITIES, LTD., WILLIAM B. BOYD, III, THOMAS H. TARANTINO, WILLIAM D. COLEMAN, CORRESPONDENT SERVICES CORP., PAINE WEBBER INC., LAWRENCE STEVENS, Defendants. WALTER BECK and VIVIAN BECK, Plaintiffs, v. BRUCE G. SCHAPPELL, executor for the estate of Steven Schappell, MERCER SECURITIES, LTD., WILLIAM B. BOYD, III, THOMAS H. TARANTINO, WILLIAM D. COLEMAN, CORRESPONDENT SERVICES CORP., PAINE WEBBER INC., LAWRENCE STEVENS, Defendants.



The opinion of the court was delivered by: SIMANDLE

 SIMANDLE, District Judge:

 Plaintiffs, Robert and Helen Riggs and Walter and Vivian Beck, bring these two substantially similar lawsuits against numerous individual and entity defendants under federal and state securities laws as well as under state common law alleging that they were defrauded of sizable sums of money through the defendants' investment of their retirement accounts in speculative stocks and securities. Presently before this court are the motions to dismiss, pursuant to Fed. R. Civ. P. 12(b)(6), of defendants Correspondent Services Corporation (hereinafter "CSC") and Paine Webber, Inc. (hereinafter "Paine Webber"). Because the separate Complaints filed by the Riggs and the Becks are substantially similar, as well as that the separate motions to dismiss filed by CSC and Paine Webber are identical, both motions will be considered in the instant Opinion.

 This case presents interesting questions of the duties of clearing brokers (entities performing backroom functions in the securities industry, such as the transfer of ownership of shares and rendering bookkeeping statements of transactions) to the customers of the primary broker under the securities laws and the common law.

 Background

 Plaintiffs filed the identical forty-count Complaints commencing the instant actions on October 23, 1995, naming Mercer Securities and its general partners, Schappell, through the executor of his estate, Bruce Schappell, William Ballantine Boyd, III, Thomas Tarantino, William Coleman, and Lawrence Stevens as defendants, as well as Paine Webber and its wholly-owned subsidiary CSC. Plaintiffs seek recovery from CSC and Paine Webber in counts twenty-three through twenty-seven of the Complaint, premising liability on theories of respondent superior and apparent authority, asserting that CSC and Paine Webber are secondarily and vicariously liable for the conduct of Mercer and its principals under section 10(b) of Securities Exchange Act of 1934, as amended 15 U.S.C. § 78(j)(b) (hereinafter the "1934 Act"), and Rule 10b-5 promulgated thereunder, as well as pursuant to N.J.S.A. § 49:3-71(a)(2). Plaintiffs also assert claims of common law negligence against CSC and Paine Webber in counts twenty-one and twenty-two, asserting that CSC and Paine Webber failed to conduct a proper investigation before accepting Mercer as a customer, failed to monitor the activities of Mercer during the time that CSC acted as a clearing house, failed to supervise the content of materials prepared by Mercer and sent to its clients, materials which included representations that defendants backed Mercer accounts, failed to monitor the type of transactions cleared for Mercer, and failed to satisfy the loss to plaintiffs' accounts in accordance with representations made to plaintiffs.

 Jurisdiction in this matter is grounded in federal question, 28 U.S.C. § 1331, and plaintiffs' state law claims are appropriately before the court pursuant to 28 U.S.C. § 1367.

 Discussion

 A. Motion to Dismiss Standard

 A motion to dismiss under Rule 12(b)(6) for failure to state a claim upon which relief can be granted does not attack the merits of the case, but merely tests the legal sufficiency of the Complaint. See Nami v. Fauver, 82 F.3d 63, 65 (3d Cir. 1996). When considering a Rule 12(b)(6) motion, the reviewing court must accept as true all well-pleaded allegations in the Complaint and view them in the light most favorable to the plaintiff. See Scheuer v. Rhodes, 416 U.S. 232, 236, 40 L. Ed. 2d 90, 94 S. Ct. 1683 (1974); Jordan v. Fox, Rothschild, O'Brien & Frankel, 20 F.3d 1250, 1261 (3d Cir. 1994); Hakimoglu v. Trump Taj Mahal Assoc., 876 F. Supp. 625, 628-29 (D.N.J. 1994), aff'd, 70 F.3d 291 (3d Cir. 1995). In considering the motion, a district court must also accept as true any and all reasonable inferences derived from those facts. See Oshiver v. Levin, Fishbein, Sedran & Berman, 38 F.3d 1380, 1384 (3d Cir. 1994); Schrob v. Catterson, 948 F.2d 1402, 1405 (3d Cir. 1991); Glenside West Corp. v. Exxon Co., U.S.A., 761 F. Supp. 1100, 1107 (D.N.J. 1991). A court may not dismiss the Complaint "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 question before the court is not whether the plaintiffs will ultimately prevail; rather, it is whether they can prove any set of facts in support of their claims that would entitle them to relief. See Hishon v. King & Spalding, 467 U.S. 69, 73, 81 L. Ed. 2d 59, 104 S. Ct. 2229 (1984). However, while the rules do not dictate that a "claimant set forth an intricately detailed description of the asserted basis for relief, they do require that the pleadings give the defendant fair notice of what the plaintiff's claim is and the grounds upon which it rests." Baldwin County Welcome Center v. Brown, 466 U.S. 147, 149-50 n. 3, 80 L. Ed. 2d 196, 104 S. Ct. 1723 (1984) (quoting Conley, 355 U.S. at 47).

 B. The Merits of Defendants' Motion

 1. Defendants' Argument that Clearing Broker Cannot Be Held Vicariously Liable for the Actions of the Introducing Broker

 Counts twenty-three through twenty-seven seek to hold CSC and Paine Webber vicariously liable, through theories of respondent superior and apparent authority, for the wrongs allegedly committed by Mercer Securities under both section 10(b) of the 1934 Act and N.J.S.A. § 49:3-71(a)(2). *fn2" Plaintiffs seek to impose liability on these defendants on the basis that CSC held Mercer Securities out to plaintiffs as its authorized agent by sending account statements to plaintiffs and by allowing Mercer to present written materials to their customers containing representations that CSC and Paine Webber backed Mercer accounts. Defendants CSC and Paine Webber argue that because of the limited role they played in the relationship between plaintiffs and Mercer Securities, they cannot be held responsible for the actions of Mercer under any theory and must be dismissed from this action.

 Clearing brokers, such as CSC, generally perform numerous backroom and recordkeeping functions for the introducing broker. See Beauvais v. Allegiance Securities, Inc., 942 F.2d 838, 839 (2d Cir. 1991); Broadcort Capital Corp. v. Dutcher, 859 F. Supp. 1517, 1518 n.1 (S.D.N.Y. 1994) ("Clearing firms generally perform recordkeeping and other mechanical functions related to stock transactions for stock brokers."); Fine v. Bear, Stearns & Co., Inc., 765 F. Supp. 824, 826 n.2 (S.D.N.Y. 1991) ("These services include comparing and settling transactions, producing and distributing confirmations and statements of account, maintaining the customer's account, and processing dividends and proxy materials."); Lester v. Basner, 676 F. Supp. 481, 482 (S.D.N.Y. 1987) (clearing brokers undertake "mechanical, record-keeping functions related to the clearance and settlement of various transactions"). Introducing brokers, such as Mercer Securities, are generally responsible for maintaining contact with the individual investor, and often provide investment advice. See Stander v. Financial Clearing & Services Corp., 730 F. Supp. 1282, 1285 (S.D.N.Y. 1990) ("The clearing broker normally has no direct contact with individual customer, except for mailing copies of reports and records regarding the account to the customer on a regular basis. Trades are ordered through or by the retail broker, who has personal contact with the customer."). In this case, it is the conduct of the introducing broker, Mercer, through its partner Steven Schappell, which is alleged to have caused plaintiffs to suffer losses.

 Section 10(b) of the 1934 Act renders it:

 
unlawful for any person, directly or indirectly . . . to use or employ, in connection with the purchase or sale of any security . . . any . . . deceptive device in contravention of such rules and regulations as the [Securities and Exchange] Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.

 Rule 10b-5, promulgated by the SEC pursuant to its delegation of authority by Congress, provides that it shall be unlawful, in connection with ...


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