Opinion

In Re Catanella and EF Hutton and Co.

583 F. Supp. 1388
1984 U.S. Dist. LEXIS 17796

Court: District Court, E.D. Pennsylvania
Filed: Apr 9, 1984
Status: Published
Author: Giles
On the bench: Giles
Cited by: 120 cases
Authority: More cited than 97.1%

finding nearly identical language of a complaint “susceptible to the interpretation” that a broker offered and sold securities “to plaintiffs, rather than just purchasing stock on the open market for their accounts”

How later courts described this case

finding nearly identical language of a complaint “susceptible to the interpretation” that a broker offered and sold securities “to plaintiffs, rather than just purchasing stock on the open market for their accounts”
finding plaintiff sufficiently pled a claim based on New Jersey common law fraud where “various misrepresentations and omissions are described [in exacting detail], accompanied by the substance of the statements, the identity of the speaker and why they are alleged to be fraudulent.”
holding plaintiff failed to plead an enterprise because “[n]o conceivable reading of the statutory definition would support a conclusion that securities accounts qualify as ‘enterprises’ ”
stating that “Rule 9(b)’s particularity requirements prohibits reliance upon unsubstantiated conclusory allegations.”

Written by the judges who cited it.

The opinion

MEMORANDUM AND ORDER

GILES, District Judge.

TABLE OP CONTENTS

SUBJECT PAGE

I. INTRODUCTION 1392

II. THE COMPLAINTS 1393

III. DISCUSSION 1397

A. Pleading Deficiencies 1397

1. Specificity and Rule 9(b) 1397

2. Immaterial, Impertinent or Scandalous Matter 1400

3. Simplicity and Rule 8 1401

B. Federal Securities Laws 1402

1. Section 10(b) 1402

(a) Scope of Prohibited Conduct 1403

(b) Churning 1405

(d) Causation 1413

2. Section 12(2) 1417

3. Investment Advisers Act of 1940 1418

4. Section 17(a) 1417

5. Vicarious Liability 4449

C. The Rico Claims 1422

1. The Statute 1422

2. Securities Related Issues 1424

3. Organized Crime 1426

4. Injury 1430

(a) Competitive Injury 1431

(b) Racketeer Enterprise Injury 1434

D. State Law Claims 1437

1. Pendent Jurisdiction 1437

2. Causation 1438

3. State Securities Statutes 1438

4. New Jersey Consumer Fraud Act 1441

I. INTRODUCTION

Before the court are motions to' dismiss in five securities fraud cases, consolidated for purposes of pretrial proceedings by the Judicial Panel on Multidistrict Litigation.

Although the allegations contained in the complaints vary slightly, each involve the conduct of Kenneth G. Catanella (“Catanella”), a securities broker employed by defendant E.F. Hutton and Company, Inc. (“Hutton”). Catanella is accused of a continuing course of fraud in connection with his handling of plaintiffs’ portfolios. The allegations run the gamut from churning to the purchase of unsuitable securities and the failure to disclose the risks inherent in certain transactions. In addition to misrepresentations and omissions directly impinging upon trading decisions, it is also averred that Catanella failed to disclose his role in a prior securities fraud action. Defendants Hutton and Granville are sued for failing to supervise Catanella adequately and under the related doctrine of

respondeat superior.

They are also characterized as “controlling persons” and aiders and abettors. Plaintiffs invoke sections 12(2), 15 and 17(a) of the Securities Act of 1933, 15 U.S.C. §§

(2), 77o, 77q(a) (1976), sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78t(a) (1976) and the Investment Advisers Act of 1940, 15 U.S.C. §§ 80b-l — 80b-17

*1393

(1976) . Claims are also made pursuant to the Racketeer Influenced and Corrupt Organizations Act of 1970, (“RICO”), 18 U.S.C. §§ 1961-1968 (1976). Various counts based upon state law have been appended to the federal claims. In their motions to dismiss, defendants have assailed the legal sufficiency of virtually every cause of action. For the reasons which follow, the motions shall be granted in part and denied in part.

II. THE COMPLAINTS

When deciding a motion to dismiss, the court must take as true all well pled allegations and resolve all reasonable inferences drawn therefrom in the light most favorable to the nonmoving party.

See e.g., Miree v. DeKalb County,

433 U.S. 25 , 27 n. 2, 97 S.Ct. 2490 , 2492 n. 2, 53 L.Ed.2d 557 (1977) ;

Rogin v. Bensalem Township,

616 F.2d 680 , 685 (3d Cir.1980);

Bogosian v. Gulf Oil Corp.,

561 F.2d 434, 444 (3d Cir. 1977).

Mindful of this standard, I shall summarize the rather complex allegations contained in the complaints. In the interest of brevity, I shall address issues jointly where possible.

Each complaint begins by tracing the progress of Catanella’s brokerage career. After spending eight months as a trainee, he embarked on that career at Paine, Webber, Jackson & Curtis, Inc. (“Paine, Webber”) in 1969. Then, from December, 1972 until November, 1973, he was a registered representative and sales manager for Shearson, Hayden, Stone, Inc. (“Shear-son”). Taraborelli Complaint at ¶ 16; Shulik Complaint at ¶ 8.

In April of 1974, Catanella’s former customers from Paine, Webber and Shearson instituted suit against him and his former employers, claiming violations of a variety of federal and state securities laws.

After a bench trial, Catanella was found to have violated sections 10(b) and 15(c) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78o (c) (1976), various regulations and stock exchange rules. The trial court determined that Catanella had intentionally mishandled those plaintiffs’ accounts, making unauthorized and unsuitable purchases, failing to disclose the risks inherent in short term trading and recommending securities without justification or investigation. Catanella also churned the accounts, disregarded specific instructions and breached a variety of fiduciary duties. Taraborelli Complaint at ¶ 19. Paine, Webber and Shearson were held liable for,

inter alia,

failing to supervise Catanella.

Id.

Judgment was entered against the defendants for eight hundred and thirteen thousand dollars ($813,000.00) and the case was later settled for an amount very close to that figure.

Id.

at 1120.

The instant complaints also allege that Catanella had been terminated by Paine, Webber and Shearson, had been the subject of customer complaints and disciplinary proceedings, and had been previously fined for unauthorized trading. Catanella’s commission record had been quite high, a potential indicia of churning.

Id.

at 1121. Despite this dubious employment history, Hutton hired Catanella as a registered representative. It is averred that Hutton either knew all of these facts before hiring him or was reckless in its failure to so learn. Not only was Catanella hired, but he was also named Portfolio Manager, made a member of Hutton’s Director’s Advisory Council and elected Vice-President. These titles added to Catanella’s credibility, but were allegedly undeserved and misrepresented the level of his expertise.

Id.

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11¶ 23-24. In an attempt to launch Catanella’s career at Hutton, a series of widely publicized seminars and lectures were sponsored by the firm. Famous market prognosticator, Joseph Granville was spotlighted at these lectures and Catanella was presented as a follower of the Granville method of investing. Gaugler Amended Complaint at H 8. These seminars were directly or indirectly responsible for bringing plaintiffs and Catanella together.

The Gaugler Complaint

Edward Gaugler, a sixty two year old retired scientist, attended a Hutton seminar in Atlantic City. Both Granville and Catanella were in attendance, and the latter was dubbed the “Granville Oriented Broker in the Tri-State Area.”

Id.

at H 9. During the seminar, Gaugler was given an informational card, which he filled out, entitling him to a free Granville Newsletter. This card also provided Catanella with the ability to contact and solicit him as a potential customer, which he did. Gaugler explained that his investments to date had been conservative,

id.

at II11, and that he desired only a “businessman’s risk.”

Id.

at 22. It is alleged that Gaugler was unsophisticated in investments and this fact should have been clear to Catanella.

Id.

at 11¶ 3, 11. Catanella attempted to convince Gaugler to follow the Granville market approach, making it appear that he was in constant contact with Granville and that Granville approved of his trading decisions. He also represented that Hutton’s research facilities were utilized in reaching all trading decisions.

Id.

at HH 11-14.

The complaint avers numerous wrongdoings by Catanella and Hutton, including their failure to disclose the cash position in Gaugler's account thereby enabling Hutton to use the idle cash for its own benefit,

id.

at ¶ 17; failure to disclose that certain transactions were contrary to Granville’s advice,

id.

at ¶ 18; failure to disclose that Gaugler had not “gotten in” at the beginning of Granville’s strategy for a certain period,

at ¶ 23, and failure to disclose that Hutton’s research resources were rarely utilized in making trading decisions,

id.

at H 24. Defendants made unauthorized trades, purchasing securities that were far riskier than those desired by Gaugler. Catanella induced Gaugler to purchase options, representing himself to be experienced in that area. Gaugler was never apprised of the significant risks involved and after losing almost all of the capital invested, was told that Catanella had never before traded in options.

Id.

at MI 21-22. Contrary to their representations, when warranted by the situation, defendants did not place firm stop orders on behalf of Gaugler’s account.

Id.

at H 25. Gaugler claims that Catanella engaged in churning, yielding a turnover ratio in excess of seven to one,

id.

at ¶ 16, and failed to disclose that he was a defendant in the

Brown

suit. Hutton and Granville were aware of Catanella’s complicity or were reckless in their failure to so learn.

Id.

at MI 25F, 25H. Finally, Granville is accused of reassuring Gaugler that all was going well while the other defendants were raping his portfolio.

Id.

at H 19.

Gaugler sues under sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78t(a) (1976); section 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a) (1976); section 206 of the Investment Advisers Act, 15 U.S.C. § 80b-6 (1976) and RICO. The complaint also contains state claims for breach of contract, breach of fiduciary duty, conversion, fraud, negligence, violation of the New Jersey Consumer Fraud Act, N.J.Stat. Ann. tit. 56 § 8-1 — 8-20 (West Supp.1983-1984), and the New Jersey Uniform Securities Law, N.J.Stat.Ann. tit. 49 § 3-47 — 3-76 (West Supp.1983-1984). The liability of Granville and Hutton is premised upon the “controlling persons” provision,

id.

at 117;

respondeat superior, id.

at II 28; failure to adequately supervise Catanella,

id.

at H 20 and aiding and abetting.

Id.

at 27.

Catanella and Hutton seek dismissal, assailing the complaint for not pleading fraud with sufficient specificity to satisfy Rule 9(b) of the Federal Rules of Civil Procedure. Alternatively, they seek a more definite statement under Rule 12(e). Defend

*1395

ants contend that Gaugler has failed to state a claim under section 10(b), arguing that the complaint is devoid of any allegations of material misrepresentations or omissions in connection with the purchase or sale of securities. Further, they insist that the complaint fails to state a cause of action under RICO and both New Jersey statutes. Defendants assert that count eleven, which contains details of the

Brown

action, including excerpts from the court’s findings, should be striken as “immaterial, impertinent or scandalous matter,” under Rules 11 and 12(f). Defendants also claim that certain portions of the complaint are violative of Rule 8. Finally, if the federal causes of action fail, Catanella and Hutton argue for dismissal of the pendent state claims.

In a separate motion, Granville moves to dismiss or for a more definite statement under Fed.R.Civ.P. 12(e). In addition to expressly joining the motion of Catanella and Hutton, Granville argues that the complaint does not support liability against him either as a controlling person or an aider and abettor.

The Taraborelli Complaint

David Taraborelli brings suit on behalf of himself and all other persons who purchased from or sold securities to, Catanella from April 1, 1979 to the present. Taraborelli Complaint at ¶ 9.

Like the Gaugler complaint, it traces Catanella’s employment history and involvement in

Brown.

Again, Catanella is charged with churning, failing to disclose the risks of option and margin trading and engaging in unauthorized transactions, unsuited to the customer’s needs or desires. It is generally averred that he disseminated material false or misleading information to his customers.

Id.

at 1111 25, 26. Catanella and Hutton

are sued under sections 10(b) and 20(a) of the Securities Exchange Act of 1934, RICO, common law fraud, misrepresentation, negligence and both the Pennsylvania and New Jersey securities statutes. In their motion to dismiss, defendants raise arguments similar to those made in Gaugler. With respect to section 10(b), defendants argue that the requisite material misrepresentations or omissions are absent, that their actions did not cause plaintiffs’ losses, and were not “in connection with” the purchase or sale of a security. It is asserted that the fraud allegations were not pled with sufficient specificity and that the complaint fails to state a cause of action under RICO. Portions of the complaint are labeled scandalous and impertinent and defendants maintain that the failure of the section 10(b) claim would prove fatal to the section 20(a) claim. Finally, defendants contend that the complaint fails to state a cause of action under either the Pennsylvania or New Jersey statute, that causation is lacking and that all pendent claims should be dismissed if the federal claims are found wanting.

The Shulik Complaint

Saul and Teresa Shulik met Catanella at one of the Hutton-Granville seminars. They were also unsophisticated investors and specifically advised him of their interest in safe and conservative investments. Shulik complaint at ¶ 18. Although Catanella agreed to abide by their wishes, he indicated that as amateurs, they ought to rely upon him to handle their portfolio. Initially, Catanella did purchase blue chip quality stocks as requested.

Id.

at 1122. However, a variety of circumstances led to the sale of most, if not all, of this high quality stock. First, Catanella convinced the Shuliks to open a margin account to allow them greater purchasing power. In response to plaintiffs’ inquiries about the high interest, risks involved and frequent transactions, Catanella assured the Shuliks that he was proceeding along the appropriate course.

Id.

at 1125. However, a large portion of the blue chip stock in the Shu

*1396

liks’ portfolio was sold in order to effectuate Granville’s advice to “go short,”

id.

at ¶ 27, a decision which resulted in substantial losses. In an attempt to recoup some of these losses, Catanella began to purchase a large volume of shares in a company called Texas International. All blue chip securities, except holdings in Exxon and Smith, Kline were sold to purchase blocks of Texas International stock.

Id.

at H 30. When the price began to decline, the Shuliks requested that Catanella sell while they could still profit, but once again Catanella reminded them that they had no experience in the field and should “leave everything to him.”

Id.

at ¶ 32. Ultimately, the price dropped so low that virtually the entire portfolio was sold to satisfy margin calls.

Id.

at 33-35. In addition to losing their initial investment of seventy-two thousand dollars ($72,000), they paid eleven thousand dollars ($11,000) in brokerage commissions and over thirteen thousand dollars ($13,000) in interest on their margin account.

Id.

at ¶ 36.

The Shuliks accuse defendants of churning, manipulating their margin account to generate interest, failing to disclose the risks involved in margin trading and purchasing securities without reasonable investigation or justification, considering their stated investment goals. The Shuliks point out that they relied upon Hutton’s reputation and Catanella’s representations about his experience. Given their lack of sophistication, they followed Catanella’s advice according him

de facto

control over their account.

Id.

at ¶ 45. In deciding to trust and rely upon Catanella, plaintiffs did not know of his role in

Brown.

The complaint alleges violations of sections 10(b) and 20(a), RICO, the Investment Advisers Act and the Pennsylvania and New Jersey securities statutes. Claims are also included for fraud, conversion, negligence and breach of contract. The motion to dismiss in this case raises virtually identical arguments, contending that the complaint fails to state a claim under section 10(b), RICO, the Investment Advisers Act and the Pennsylvania and New Jersey securities statutes.

The Singer Complaint

Although Ronald Singer did not attend a Hutton-Granville lecture, he responded by telephone to a promotional advertisement and was subsequently contacted by Catanella. Singer Complaint at MI 16-17. He explicitly informed Catanella of his interest in only safe investments. Catanella promised to invest ninety percent (90%) of his money in conservative high quality securities, using only ten percent (10%) for more speculative ventures.

Id.

at ¶ 20. Catanella made a variety of representations about his experience and informational links, inducing Singer to open an account with him. Singer stated that he was investing the bulk of his assets, was unsophisticated, and was therefore relying on Catanella. He accorded the broker broad discretionary powers.

Id.

at ¶ 21. Contrary to the investor’s expectations, Catanella engaged in highly speculative maneuvering, selling short, on margin and purchasing options. He misrepresented the risks, failing to disclose,

inter alia,

that by trading on margin, Singer was actually gambling with more money on the table. He failed to explain how interest was computed, the extent to which Hutton benefitted from the margin account and the eventuality of margin calls. He also indicated that trading on margin was suitable for someone with Singer’s investment objectives.

Id.

at ¶ 26. However, the margin account was allegedly opened primarily to generate interest income for Hutton.

Id.

at H 27. Defendants also are accused of churning.

Id.

at II37. When the value of Singer’s portfolio began to decline, Catanella reassured him that he would handle everything and would “turn things around.”

Id.

at II30. To recoup, Catanella began purchasing only Texas International, an allegedly undervalued stock. The suitability of this volatile stock was misrepresented and, as mentioned above, its market price began to plummet. Margin calls led Singer to owe Hutton approximately twelve thousand dollars ($12,-000).

Id.

at 35. Allegations with respect to

Brown

also find themselves in this complaint. Singer invokes sections 10(b), 12(2),

*1397

15 and 20(a); RICO and the Pennsylvania and New Jersey securities statutes. The full panoply of state common law claims are also included.

Once again, the motions to dismiss attack the legal sufficiency of the securities and RICO claims. Defendants also contend that the churning allegations lack the specificity required under Fed.R.Civ.P. 9(b). Finally, defendants incorporate all arguments raised in the Taraborelli motion.

The Rastelli Complaint

The Rastelli complaint is a virtual carbon copy of Singer. Consequently, the motion to dismiss asserts the same arguments raised in the Singer motion.

III. DISCUSSION

Pleading Deficiencies

In addition to more substantive attacks, defendants argue that all of the complaints suffer from fatal pleading flaws. The allegations are assailed under Rules 8 and 9(b) of the Federal Rules of Civil Procedure. Moreover, portions of the complaints are characterized as “immaterial, impertinent or scandalous,” worthy of being stricken under Rules 11 and 12(f). I shall address these contentions

seriatim.

Specificity and Rule 9(b)

Rule 9(b) of the Federal Rules of Civil Procedure requires allegations of fraud to be pled with particularity.

Defendants argue that plaintiffs’ averments are conclusory, lacking the factual specificity necessary to formulate an intelligent response. They cite plaintiffs’ failure to furnish the details typically required of newspaper reporters — the who, what, where, when and how of the misrepresentations and omissions. The allegations of scienter are condemned as faulty as are the charges of churning. Defendants contend that the RICO counts are predicated upon vacuous and deficient allegations of securities fraud. As an alternative to dismissal, defendants seek a more definite statement under Fed.R.Civ.P. 12(e).

Rule 9(b)’s particularity requirements prohibits reliance upon “unsubstantiated conclusory allegations.”

Juster v. Rothschild, Unterberg, Towbin,

554 F.Supp. 331, 332 (S.D.N.Y.1983) (quoting

Vetter v. Shearson Hayden Stone, Inc.,

481 F.Supp. 64, 65 (S.D.N.Y.1979).

Accord Decker v. Massey-Ferguson, Ltd,

681 F.2d 111, 115 (2d Cir.1982);

Segal v. Gordon,

467 F.2d 602, 607 (2d Cir.1972);

Mauriber v. Shearson/American Express, Inc.,

567 F.Supp. 1231, 1236 (S.D.N.Y.1983);

Kimmel v. Peterson,

565 F.Supp. 476, 481 , (E.D.Pa.1983);

Merrill Lynch, Pierce, Fenner & Smith v. DelValle,

528 F.Supp. 147, 149 (S.D.Fla.1981);

Goodman v. Moyer,

523 F.Supp. 33, 35 (E.D.Pa.1981). As the Second Circuit stated in

Segal ,

“10b-5 violations will not pass scrutiny if they do not allege with some specificity the statements allegedly constituting fraud.” 467 F.2d at 607 . The purpose for this rule is two-fold. It protects parties from frivolous allegations of fraud. As Wright and Miller noted; “[I]t is a serious matter to charge a person with fraud and hence no one is permitted to do so unless he is willing to put himself on record as to what the alleged fraud consists of specifically.” 5 C. Wright & A. Miller,

Federal Practice & Procedure,

§ 1298 at 413 (1969) (footnotes omitted). It also serves a notice function. To comply with the rule, a complaint must contain sufficient detail to apprise the defendants of the claims against them and allow them to formulate a meaningful response.

See e.g., Gottreich v. San Francisco Investment Corp.,

552 F.2d 866 (9th Cir.1977);

Kimmel,

565 F.Supp. at 481 ;

Kaufman v. Magid,

539 F.Supp. 1088, 1092-93 (D.Mass.1982);

Baselski v. Paine, Webber, Jackson & Curtis, Inc.,

514 F.Supp. 535, 540 (N.D.Ill.1981);

Zaretsky v. E.F. Hutton & Co., Inc.,

509 F.Supp. 68 , 74 n. 27 (S.D.N.Y.1981);

Posner v. Coopers & Lybrand,

92 F.R.D. 765, 768 (S.D.N.Y. 1981) ,

aff'd mem.,

697 F.2d 296 (2d Cir. 1982) . Although it is difficult to describe

*1398

abstractly the quantum of specificity required, the rule is generally deemed satisfied where the complaint details the time, place, substance of the alleged misrepresentations, as well as the identity of the individual perpetrating the fraud.

See e.g., Bennett v. Berg,

685 F.2d 1053, 1062 (8th Cir.1982),

aff'd en banc,

710 F.2d 1361 (8th Cir.1983),

cert. denied,

— U.S. -, 104 S.Ct. 527 , 78 L.Ed.2d 710 (1983);

Kaufman,

539 F.Supp. at 1093 ;

Baselski,

514 F.Supp. at 540 ;

Troyer v. Karcagi,

476 F.Supp. 1142, 1149 (S.D.N.Y.1979). However, as the

Baselski

court noted; “[t]he sufficiency of a pleading under this rule also varies with the complexity of the transaction. When the transactions are numerous and take place over an extended period of time, less specificity is required.” 514 F.Supp. at 540 (citations omitted). Furthermore, Rule 9(b) must be read in conjunction with Rule 8(a) which requires only a short and plain statement of the cause of action.

Therefore, the rule should not be applied with such draconian strictness as to undermine the liberal spirit of the Federal Rules of Civil Procedure.

Considering the complaints in light of the standards articulated above, I conclude that dismissal is not warranted. The Gaugler complaint sets out the churning allegations in exacting detail, including the names of the securities allegedly churned, the commissions generated, the frequency of trades and the turnover ratio.

Gaugler Amended Complaint at ¶ 16i-x. In addition, various misrepresentations and omissions are described, accompanied by the substance of the statements, the identity of the speaker and why they are alleged to be fraudulent. The only thing missing is the exact date on which each incident occurred. However, there is more than sufficient information to apprise defendants of the claims against them and aid in formulating a response. The Gaugler complaint does not offend Rule 9(b) and neither dismissal nor a more definite statement is warranted.

The Shulik, Rastelli and Singer complaints, while not as detailed as the amended complaint in Gaugler, still pass muster under Rule 9(b). They contain much more than the conclusory allegations of fraud that defendants portray. A course of fraudulent activity is chronicled, including a variety of misrepresentations and omissions, the substance of which is described in the complaints. The relative knowledge of the parties is outlined and the perpetrator of the fraud identified. The breadth of the allegations convinces me that the fraud aspects of these complaints are not “vexatious,” brought only to tarnish the defendants’ reputations. Although not paragons of specificity, I conclude that the allegations stated are sufficient to place defendants on notice and allow them to respond. As the court in

Mauriber

noted; “I find no greater merit in defendant’s remaining scattershot contentions that the complaint omits various details ____ The complaint is not deficient for failing to state every detail that might be a proper subject for interrogatories.” 567 F.Supp. at 1236 . I recognize, as did the court in

Mauriber ,

that the actual shaping of issues in complex cases takes place during the discovery process.

See also Christidis v. First Pennsylvania Mortgage Trust,

717 F.2d 96, 99-100 (3d Cir.1983).

*1399

However, I do note that the churning charges in these complaints are somewhat conclusory. The Shulik complaint states the amount of commissions paid to defendants. The Rastelli and Singer complaints assert only that plaintiffs’ portfolios were churned to generate commissions and in direct contradiction to plaintiffs’ investment instructions. Defendants argue that these allegations are insufficient under Rule 9(b) principally because they fail to identify those transactions alleged to be improper. Notwithstanding that some courts might, in their discretion, require more specificity to maintain a churning claim than is present here,

see Russo v. Bache Halsey Stuart Shields, Inc.,

554 F.Supp. 613, 617-18 (N.D.Ill.1982);

Vetter v. Shearson Hayden Stone, Inc.,

481 F.Supp. 64, 66 (S.D.N.Y.1979);

Fein v. Shearson Hayden, Stone, Inc.,

461 F.Supp. 137, 142-43 (S.D.N.Y.1978), I will not dismiss these portions of the complaints.

See e.g., Kaufman v. Magid,

539 F.Supp. 1088, 1095 (D.Mass.1982) (general allegations of churning, tracking definition held sufficient). As the

Baselski

court noted, where the transactions are numerous and stretch over an extended period of time, less specificity is required. 514 F.Supp. at 540 . Given the time frame involved in these complaints and the potentially large number of transactions involved, a requirement that plaintiff list each allegedly fraudulent purchase and sale would be unduly burdensome and undermine the liberal notice pleading embodied in the Federal Rules of Civil Procedure.

Accord Baselski,

514 F.Supp. at 541 n. 2. Moreover, unless they have been diligent record keepers, plaintiffs may lack, pre-discovery, detailed information necessary to list all transactions or calculate turnover ratios. The records containing that information are most likely in the possession of defendants. Although I do not sanction conclusory pleading and would prefer more detail, I decline to impose requirements that may bar otherwise deserving plaintiffs from vindicating their claims. Even assuming that plaintiffs do possess the necessary information, dismissal or requiring a more definite statement would serve little practical utility. Defendants have been accused of churning and have sufficient facts to admit or deny that allegation. Amendments to the complaints would only delay what already appears to be a protracted suit. As this court noted; “[o]nly through discovery will both sides gain the information required to assert their respective claims and defenses.”

Kimmel,

565 F.Supp. at 482 .

The Taraborelli complaint is the least specific of the five. Although the pleading sets forth in great detail Catanella’s involvement in

Brown

and the findings in that case, the other allegations of fraud are somewhat conclusory. The factual background is provided, including Hutton’s role in launching Catanella’s career with the aid of the Granville seminars. However, the ultimate allegations of fraud are sparse.

Plaintiffs’ response concedes that the requisite particularity is lacking, but argues that his claim of fraud is predicated only upon Catanella’s failure to disclose his role in

Brown. See

Plaintiff’s Memorandum of Law in Opposition to Defendant’s Motion to Dismiss the Complaint at 18. The other allegations of fraud, including churning and option and margin trading without dis

*1400

closing the inherent risks, are said to support the claim of fraud, rather than constitute it.

Id.

Frankly, I am perplexed how an allegation of churning relates to the failure to disclose the existence of a previous action. It seems apparent that these are separate and distinct instances of fraudulent conduct. However, I shall accept plaintiffs’ representation that the fraudulent behavior is limited to

Brown.

The averments surrounding

Brown

are pled with sufficient particularity under Rule 9(b). Given plaintiffs’ position, I need not reach the specificity of the other allegations of fraud and shall deny the motion to dismiss. However, this issue may arise again if I am called upon to decide a class certification motion. Should plaintiff desire at that time to include other instances of fraud, he will be required to furnish additional factual allegations.

Defendants’ motions to dismiss on specificity grounds are therefore denied.

Immaterial, Impertinent or Scandalous Matter

Defendants move to strike portions of the complaints as “immaterial, impertinent or scandalous” under Fed.R.Civ.P. 12(f). The challenge focuses upon the RICO counts, which set out at length the details of the

Brown

action.

In particular, defendants attack the quotation of large excerpts from the court’s findings in

Brown.

It is argued that

Brown

has nothing to do with this action, is not material and is extremely prejudicial. In addition, defendants characterize the averments as an attempt to prove that Catanella acted in conformity with his prior conduct, an impermissible inference under Rule 404(b) of the Federal Rules of Evidence.

The standard for striking under Rule 12(f) is strict. One court has stated that “only allegations that are ‘so unrelated to plaintiffs’ claims as to be unworthy of any consideration as a defense’ should be striken.”

EEOC v. Ford Motor Co.,

529 F.Supp. 643, 644 (D.Col.1982) (quoting C. Wright & A. Miller,

Federal Practice and Procedure

§ 1380 at 784 (1969)). Similarly, immateriality under this rule has been defined as “any matter having no value in developing the issues of a case.”

Oaks v. City of Fairhope, Ala.,

515 F.Supp. 1004, 1032 (S.D.Ala.1981).

Defendants’ arguments overlook the fact that the

Brown

litigation is highly relevant in two major respects. Catanella’s previous involvement in securities fraud may help establish the “pattern of racket

*1401

eering” prong of RICO.

More importantly, the failure to disclose Catanella’s role in

Brown

is one of the alleged acts of fraud. The details surrounding the suit become crucial. For example, the more outrageous the fraud in

Brown,

arguably the more material becomes the failure to disclose. The actual resolution of the suit may also be highly probative with respect to Hutton’s level of knowledge. I do not interpret these allegations as an attempt to prove Catanella’s present liability because of the marked similarity between the activities. Quoting

ad nauseum

from the court’s findings might not have been necessary, however, the content of those findings is not “so unrelated to plaintiffs’ claims” as to warrant striking them under Rule 12(f). By so holding, I do not rule on the legal sufficiency of a section 10(b) claim premised upon the failure to disclose

Brown,

an issue which shall be analyzed

infra.

I decide only that, as a matter of pleading, dismissal is not appropriate.

Simplicity and Rule 8

Defendants attack the RICO counts for their verbosity, arguing that Fed.R. Civ.P. 8 is thereby offended. Rule 8(a)(2) requires that a pleading contain “a short and plain statement of the claim showing that the pleader is entitled to relief____” This rule sets the liberal tone of the federal pleading requirements, in sharp contrast to the earlier formalistic code and writ pleading. Indeed, Rule 8(e)(1) states that “[e]ach averment of a pleading shall be simple, concise, and direct.

No technical forms of pleading or motions are required.”

Fed.R.Civ.P. 8(e)(1) (emphasis added). However, the Rule must be applied with some logic and common sense. The length of a pleading will depend upon a number of factors, not the least of which is the complexity of the case.

Accord Kaufman,

539 F.Supp. at 1092 .

The RICO counts, detailing the findings in

Brown,

are indeed prolix. However, as determined above, these allegations may be relevant, although very lengthy and redundant in spots. I shall not go through each count and determine which averments ought to remain and which are potentially extraneous. I agree with the sentiments expressed in

Kaufman :

The plaintiffs in this action are alleging the violation of numerous provisions in the federal securities laws, which are complex in their application. This makes “concise” pleading difficult.

What verbosity and repetition appears in the complaint does not, standing alone, justify dismissal under Rule 8.

Kaufman,

539 F.Supp. at 1092 (emphasis added). Accordingly, the RICO counts shall not be dismissed pursuant to Fed.R. Civ.P. 8.

In Gaugler and Shulik defendants also argue that the state law claims lack sufficient factual allegations to pass muster under Rule 8(a)(2). For example, the contract claim in Gaugler is faulted for failing to set forth when the contract was formed and the substance of its terms. Similarly, on the breach of fiduciary duty issue, plaintiffs allegedly fail to spell out the nature of the claimed duty. This argument misperceives the purpose of Rule 8. Striking complaints that fall short of perfection is the very practice which the Federal Rules sought to end. All that is required is a sufficient

factual

basis to place defendants on notice and allow them to frame a response. This has been satisfied here. The complaints detail the genesis and evolution of the parties’ relationship. It does not require extraordinary perception to recognize that both the contract and fiduciary duty claimed arose from the brokerage-customer relationship. The remaining state law claims are also predicated upon sufficient factual bases and shall not be dismissed.

*1402

Federal Securities Laws

Section 10(b)

of the Securities Exchange Act of 1934 and its implementing rule, 10b-5

broadly prohibit fraud in connection with the purchase and sale of securities. The fundamental purpose of the 1934 Act was “to substitute a philosophy of full disclosure for the philosophy of

caveat

emptor____”

Affiliated Ute Citizens of Utah v. United States,

406 U.S. 128, 151 , 92 S.Ct. 1456, 1471 , 31 L.Ed.2d 741 (1972) (quoting

SEC v. Capital Gains Research Bureau,

375 U.S. 180, 186 , 84 S.Ct. 275, 280 , 11 L.Ed.2d 237 (1963)). The Act is to be applied “not technically and restrictively, but flexibly to effectuate its remedial purposes.”

Affiliated Ute,

406 U.S. at 151 , 92 S.Ct. at 1471 (quoting

SEC v. Capital Gains Research Bureau,

375 U.S. 180, 195 , 84 S.Ct. 275, 284 , 11 L.Ed.2d 237 (1963)).

See also Superintendent of Insurance v. Bankers Life & Casualty Co.,

404 U.S. 6, 12 , 92 S.Ct. 165, 169 , 30 L.Ed.2d 128 (1971). Although drafted as an SEC enforcement provision, a private right of action “has been consistently recognized for more than 35 years. The existence of this implied remedy is beyond peradventure.”

Herman & Maclean v. Huddleston,

459 U.S.

375, 103 S.Ct. 683, 687 , 74 L.Ed.2d 548 (1983).

Judicial limitations which have been placed upon a section 10(b) claim also serve to define the elements of the cause of action. For example, in order to have standing to sue, a plaintiff must have either purchased or sold securities.

See Blue Chip Stamps v. Manor Drug Stores,

421 U.S. 723, 749 , 95 S.Ct. 1917, 1931 , 44 L.Ed.2d 539 (1975). The fraudulent conduct alleged must take the form of a misstatement, omission, manipulation or deception. The mere breach of a fiduciary duty is not actionable.

See Santa Fe Ind., Inc. v. Green,

430 U.S. 462, 477, 479-80 , 97 S.Ct. 1292, 1303-1304 , 51 L.Ed.2d 480 (1977). As the statutory language indicates, the fraud must be “in connection with” the purchase or sale. In misstatement and omission cases, the controverted fact must also be “material.” The definition of materiality in section 10(b) cases has been borrowed from the section 14(a) context. Quoting from

TSC Industries, Inc. v. Northway, Inc.,

426 U.S. 438, 449 , 96 S.Ct. 2126, 2132 , 48 L.Ed.2d 757 (1976), the Third Circuit describes materiality as “a substantial likelihood that, under all circumstances, the omitted fact would have assumed actual significance in the deliberations of the reasonable shareholder.”

*1403

Healey v. Catalyst Recovery of Pennsylvania, Inc.,

616 F.2d 641, 647 (3d Cir.1980).

A plaintiff must also prove that the fraudulent conduct was accompanied by “scienter.”

Ernst & Ernst v. Hochfelder,

425 U.S. 185, 193 , 96 S.Ct. 1375, 1380 , 47 L.Ed.2d 668 (1976). Although the

Ernst

court left the question open, this Circuit and others have held that reckless behavior is sufficient.

See e.g., Sirota v. Solitron Devices, Inc.,

673 F.2d 566, 575 (2d Cir.),

cert. denied,

459 U.S. 838 , 103 S.Ct. 86 , 74 L.Ed.2d 80 (1982);

McLean v. Alexander,

599 F.2d 1190, 1197-98 (3d Cir.1979);

Nelson v. Serwold,

576 F.2d 1332, 1337 (9th Cir.),

cert. denied,

439 U.S. 970 , 99 S.Ct. 464 , 58 L.Ed.2d 431 (1978);

Rolf v. Blyth, Eastman Dillon & Co., Inc.,

570 F.2d 38, 44-47 (2d Cir.),

cert. denied,

439 U.S. 1039 , 99 S.Ct. 642 , 58 L.Ed.2d 698 (1978);

Coleco Industries, Inc. v. Berman,

567 F.2d 569, 574 (3d Cir.1977),

cert. denied,

439 U.S. 830 , 99 S.Ct. 106 , 58 L.Ed.2d 124 (1978);

First Virginia Bankshares v. Benson,

559 F.2d 1307, 1314 (5th Cir.1977),

cert. denied, sub nom., Heller & Co. v. First Virginia Bankshares,

435 U.S. 952 , 98 S.Ct. 1580 , 55 L.Ed.2d 802 (1978);

Sunstrand Corp. v. Sun Chemical Corp.,

553 F.2d 1033, 1044-45 (7th Cir.),

cert. denied,

434 U.S. 875 , 98 S.Ct. 224 , 54 L.Ed.2d 155 (1977).

The final two elements of a section 10b cause of action are reliance and causation. These related concepts have generated a good deal of uncertainty,

see e.g., Sharp v. Coopers & Lybrand,

649 F.2d 175, 186-89 (3d Cir. 1981),

cert. denied,

455 U.S. 938 , 102 S.Ct. 1427 , 71 L.Ed.2d 648 (1982) (reliance);

Huddleston v. Herman & Mac-Lean,

640 F.2d 534, 547-50 (5th Cir.1981),

aff'd in part, rev’d in part,

459 U.S. 375 , 103 S.Ct. 683 , 74 L.Ed.2d 548 (1983) (reliance and causation). In analyzing these concepts, I shall endeavor not to add to the existing confusion.

Defendants’ section 10(b) arguments can be broken down into four major categories. First, defendants make a general

Santa Fe v. Green

argument, portraying the allegations as little more than breaches of fiduciary duties, devoid of the requisite material misstatements or omissions. The churning claims are also attacked as insufficient to state a cause of action. However, the more interesting and problematic issues presented focus upon the causation and “in connection with” elements.

(a)

The Scope of Prohibited Conduct

When minority shareholders challenged the Delaware statutory short form merger as a “device, scheme, or artifice to defraud,” the Supreme Court decided that it was time to put a halt to the seemingly endless expansion of the scope of section 10(b). Therefore, in

Santa Fe v. Green,

430 U.S. 462 , 97 S.Ct. 1292 , 51 L.Ed.2d 480 (1977), the Court held that in the absence of some form of deception, misrepresentation or non-disclosure, a breach of a fiduciary duty is not actionable under section 10(b).

Santa Fe,

430 U.S. at 475-77 , 97 S.Ct. at 1301-02 . No longer can the catch-all anti-fraud provision be used to redress claims of corporate mismanagement.

Id.

at 477 , 97 S.Ct. at 1302. Defendants endeavor to characterize the complaints as

Santa Fe

pleadings which allege little more than breach of a fiduciary duty or the failure to disclose such a breach.

Indeed, plaintiffs

*1404

are portrayed as poor losers — investors who are now crying over bad advice. After reviewing the complaints, I cannot agree.

Putting aside the churning allegations, I find allegations of material misrepresentations and omissions which elevate plaintiffs’ complaints beyond the reach of

Santa Fe .

The complaints allege, explicitly or inferentially, knowledge or recklessness on the part of defendants — thus fulfilling the scienter requirement.

See e.g.,

Gaugler Amended Complaint, ¶¶ 25F, 25H, 29; Taraborelli Complaint, If If

25, 26, 28;

Shulik Complaint 1140, 50; Singer Complaint, ¶ 39; Rastelli Complaint, 1135.

The failure to disclose Catanella’s role in the

Brown

litigation is an omission which, if material, would fall within the scope of section 10(b). In

Sutton v. Shearson Hayden Stone, Inc.,

490 F.Supp. 98 (S.D.N.Y. 1980), a broker’s failure to disclose that he had been the subject of previous customer complaints survived a motion to dismiss. Although the court seemed concerned about proof of materiality, there was no suggestion that this was simply a breach of fiduciary duty barred by

Santa Fe. Id.

at 101. Shearson Hayden paid $34,500 to satisfy irate and potentially litigious customers. Sutton, in turn, signed a promissory note for that amount. In contrast, the

Brown

litigation resulted in an $813,000 verdict. The court in

Sutton

found that disclosure of the customer complaints would serve the purpose of protecting investors — the goal of section 10(b).

Id.

at 101-03 . I agree. Moreover, the allegations here indicate that plaintiffs were not sophisticated and relied heavily upon Catanella. Thus, his track record of self-dealing, churning and mishandling of other portfolios would be highly material.

Catanella’s affirmative misrepresentation of his expertise in option trading, which induced Gaugler to purchase options, presents a similar situation. After losing all of the funds so invested, Catanella admitted that he had never before traded in options. Misrepresentation of expertise has been held actionable under section 10(b).

See Marbury Management, Inc. v. Kohn,

629 F.2d 705, 707-08 (2d Cir.1980),

cert. denied, sub. nom., Wood Walker & Co. v. Marbury Management, Inc.,

449 U.S. 1011 , 101 S.Ct. 566 , 66 L.Ed.2d 469 (1980) (trainee represented himself as “licensed registered representative” and “portfolio management specialist”).

Nor are the material omissions and misrepresentations limited to the

Brown

litigation. The Singer and Rastelli complaints contain detailed descriptions of all of the undisclosed risks and costs associated with margin trading. The mechanics of a margin account were not explained — plaintiffs were not told that they were actually plac

*1405

ing more money at risk. They were not informed about margin calls or the interest computation and were led to believe that margin trading was “prudent and cautious.” Singer Complaint, 1126; Rastelli Complaint, ¶ 26. The Shulik Complaint also contains averments of misrepresentations with respect to the risks of margin trading. Shulik Complaint, HU 23, 25, 26. Misrepresentations or omissions with respect to the risks inherent in margin trading are within the scope of section 10(b).

See e.g., Arrington v. Merrill Lynch, Pierce, Fenner & Smith,

651 F.2d 615 , 619 (9th Cir.1981);

Yancoski v. E.F. Hutton & Co., Inc.,

581 F.Supp. 88 at 92 (E.D.Pa. 1983). Catanella incorrectly advised Rastelli that the high volume of trading was appropriate, when in fact his account was being churned. This allegation also states a claim under section 10(b).

Accord Yancoski,

at 92. In all complaints, Catanella is accused of intentionally ignoring plaintiffs’ conservative investment goals, plunging money into speculative, high risk securities. This is a material misrepresentation, rather than merely a breach of fiduciary duty.

See Miley v. Oppenheimer & Co., Inc.,

637 F.2d 318, 326 (5th Cir.1981);

Yancoski ,

at 92.

See also Clark v. John Lamula Inv. Inc.,

583 F.2d 594, 599-601 (2d Cir.1978) (recommending unsuitable debentures violates section 10(b)). Finally, the complaints are replete with allegations of self-dealing and the general mishandling of plaintiffs’ accounts. Defendants’ goals were not to serve their customers, but rather to generate commissions and interest for themselves. Faced with a similar situation, the court in

Troyer

found material misrepresentations and omissions in defendant’s failure to disclose his self-dealing and mishandling of plaintiffs’ portfolio. 476 F.Supp. at 1146-47 . I agree with the approach taken in

Troyer .

The various allegations, taken together, form a course of fraudulent and deceptive conduct, transcending

Santa Fe v. Green

and adequately stating a claim under section 10(b).

(b)

Churning

Churning is a term of art which is actually a “synonym for ‘overtrading.’ ”

Armstrong v. McAlpin,

699 F.2d 79, 90 (2d Cir.1983) (citing Hazard & Christie,

The Investment Business

68 (1964)). It occurs when a broker engages in excessive trading for the purpose of generating commissions, without regard to the customer’s investment objectives.

See e.g., Costello v. Oppenheimer & Co., Inc.,

711 F.2d 1361, 1367 (7th Cir.1983);

Thompson v. Smith Barney, Harris Upham & Co., Inc.,

709 F.2d 1413, 1416 (11th Cir.1983);

Armstrong,

699 F.2d at 90 ;

Petrites v. J.C. Bradford,

646 F.2d 1033 , 1035 (5th Cir. 1981);

Miley v. Oppenheimer & Co., Inc.,

637 F.2d 318, 324 (5th Cir.1981);

Mihara v. Dean Witter & Co., Inc.,

619 F.2d 814, 820 (9th Cir.1980);

Williamsport Fireman Pension Boards I and II v. E.F. Hutton & Co., Inc.,

567 F.Supp. 140, 144 (M.D.Pa. 1983). Invoking the talismanic

Santa Fe

decision, the Gaugler defendants argue that the churning claim represents simply another chapter in state fiduciary duty law. Similarly, they argue that churning itself is insufficient to state a section 10(b) claim. Rather, churning allegations must be accompanied by averments of specific misrepresentations, omissions or acts of deception. Defendants also attack all complaints for the lack of detail with respect to the allegedly improper transactions. For the most part, these arguments were raised and rejected in the section discussing specificity.

It appears undisputed that churning

does

state a cause of action under section 10(b).

See e.g., Costello v. Oppenheimer & Co., Inc.,

711 F.2d 1361, 1368 (7th Cir.1983);

Thompson v. Smith Barney, Harris Upham & Co., Inc.,

709 F.2d

*1406

1413, 1416-17 (11th Cir.1983);

Follansbee v. Davis, Skaggs & Co., Inc.,

681 F.2d 673, 676 (9th Cir.1982);

Miley v. Oppenheimer,

637 F.2d 318, 324 (5th Cir.1981);

Mihara v. Dean Witter & Co., Inc.,

619 F.2d 814, 820 (9th Cir.1980);

Carras v. Burns,

516 F.2d 251, 258 (4th Cir.1975);

Landry v. Hemp-hill, Noyes & Co.,

473 F.2d 365 , 368 n. 1 (1st Cir.),

cert. denied,

414 U.S. 1002 , 94 S.Ct. 356 , 38 L.Ed.2d 237 (1973);

Hecht v. Harris Upham & Co.,

430 F.2d 1202, 1206-1207 (9th Cir.1970);

Mauriber v. Shear-son/American Express, Inc.,

567 F.Supp. 1231, 1237-38 (S.D.N.Y.1983);

Kaufman v. Magid,

539 F.Supp. 1088, 1095 (D.Mass. 1982);

Kaufman v. Merrill Lynch, Pierce, Fenner & Smith,

464 F.Supp. 528, 534 (D.Md.1978);

Dandorph v. Fahne Stock & Co.,

462 F.Supp. 961, 963 (D.Conn.1979);

Kravite v. Pressman, Frohlich & Frost, Inc.,

447 F.Supp. 203, 211 (D.Mass.1978);

Powers v. Frances I. DuPont & Co.,

344 F.Supp. 429, 431-32 (E.D.Pa.1972);

Lorenz y. Watson,

258 F.Supp. 724, 730 (E.D.Pa. 1966). As the court stated in

Follansbee :

It is settled that when a broker, unfaithful to the trust of his customer, churns an account in the brokers control for the purpose of enhancing the broker’s commission income and in disregard of the client’s interest, there is a violation of section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C.A. § 78a

et seq.,

and Securities and Exchange Commission Rule 10b-5.

681 F.2d at 676. In order to prove a churning claim, plaintiff must show that the broker exercised control over the account and that the trading was excessive.

See e.g., Costello,

711 F.2d at 1368 ;

Thompson,

709 F.2d at 1416-17 ;

Miley,

637 F.2d at 324 ;

Mihara,

619 F.2d at 821 ;

Kaufman,

539 F.Supp. at 1095 ;

Zaretsky v. E.F. Hutton & Co., Inc.,

509 F.Supp. 68, 74 (S.D.N.Y. 1981). Although courts seem to be in agreement with respect to these two elements, some have added the requirement that the broker act “with the intent to defraud or with willful and reckless disregard for the investor’s interest.”

Thompson,

709 F.2d at 1417 ;

Miley,

637 F.2d at 324 ;

Mihara,

619 F.2d at 821 .

However, this prong only appears to formalize the general scienter requirement necessary for all section 10(b) actions.

Although the prohibition on churning can probably be traced to the fiduciary responsibility a broker owes to its customers, as the above cited eases demonstrate, churning does rise to the level of a section 10(b) violation. The act of churning itself is a deception. As the

Costello

court noted; “as a scheme,

the essence of which is deception of a relying customer,

churning, as a matter of law, is considered a violation of section 10(b) and Rule 10b-5.”

Costello,

711 F.2d at 1368 (citations omitted) (emphasis added). Similarly, the Ninth Circuit stated “[t]he churning of a client’s account is, in itself, a scheme or artifice to defraud within the meaning of Rule 10b-5.”

*1407

Mihara,

619 F.2d at 821 .

Accord Yancoski,

at 91. In

Armstrong v. McAlpin,

699 F.2d 79 (2d Cir.1983), the district court had dismissed the churning claim for failing to allege an accompanying misrepresentation or omission. In reversing that decision, the court stated that “churning, in and of itself, may be a deceptive and manipulative device under section 10(b), the scienter required by section 10(b) being implicit in the nature of the conduct. The district court’s reliance upon

Santa Fe Industries v. Green, supra,

430 U.S. 462 , 97 S.Ct. 1292 , 51 L.Ed.2d 480 , was misplaced.”

Armstrong,

699 F.2d at 91 (citations omitted). I agree that the utilization of a customer’s account to generate omissions, without regard to the customer’s investment objectives, is “deceptive” within the meaning of section 10(b). To require a plaintiff to prove something in addition to the elements of control and excessiveness would be redundant and would contravene the overriding purpose behind the Securities and Exchange Act of 1934 — the protection of the investing public.

Defendants’ other arguments with respect to churning are made in the guise of pleading deficiencies under Rule 9(b) of the Federal Rules of Civil Procedure. I have already rejected the suggestion that a plaintiff must list all allegedly tainted transactions and calculate the turnover ratio. Although not as detailed as defendants might wish, the complaints do contain allegations of broad discretionary control and excessive trading in light of conservative investment objectives.

See e.g.,

Shulik Complaint, ¶¶ 19, 39, 44, 45; Singer Complaint, ¶¶ 21, 24; Rastelli Complaint, ¶¶ 21, 24. Moreover, paragraph 16 of the Gaugler Complaint sets forth in unassailable detail the names of the securities churned, the frequency of trading, the commissions paid and the estimated turnover ratio. Therefore, I conclude that churning claims are sufficient to survive a motion to dismiss.

(c)

In Connection With

Section 10(b) and Rule 10b-5 proscribe fraud “in connection with the purchase or sale of any security.” 15 U.S.C. § 78j (1976); 17 C.F.R. § 240 .10b-5 (1983). Defendants contend that many of plaintiffs’ allegations do not arise “in connection with” an actual purchase or sale. Although the failure to disclose

Brown

is the focal point of this argument, defendants cite the failure to disclose the risks of margin trading, churning, unsuitable purchases and other averments falling into the general category of mishandling plaintiffs’ accounts.

Defendants reason that these allegations reflect upon the choice of, or confidence in a broker, rather than the decision to buy or sell a particular stock. According to defendants, the latter satisfies the “connection” element, while the former does not. I do not agree.

Despite voluminous caselaw in the section 10(b) area, the “in connection with” element has received little judicial attention. The concept does not lend itself to definition and its application has generated more than its share of confusion. The only Supreme Court precedent,

Superintendent of Insurance of New York v. Bankers Life & Cas. Co.,

404 U.S. 6 , 92 S.Ct. 165 , 30 L.Ed.2d 128 (1971), provides little practical guidance. In

Bankers Life,

defendants essentially used the assets of a corporation, Manhattan Casualty Company, to acquire total ownership. Defendants purchased all of the stock of Manhattan using a check drawn at a financial institution. At the time the check was written, defendants had no funds on deposit there. After taking over Manhattan and installing a president, defendants induced the Board to sell some of its United States Treasury Bonds. The proceeds of the sale were used to cover the check with which the stock had been purchased. 404 U.S. at 7-8 . Noting that “[sjection 10(b) must be read flexibly, not technically and restrictively,”

id.

at 12 , 92 S.Ct. at 169, the Court stated that “there was a ‘sale’ of a security and since fraud was used ‘in connection with’ it, there is a

*1408

redress under § 10(b)----”

Id.

Although the Court did not explicitly define the “in connection with” element, it did explain that “Manhattan suffered an injury as a result of deceptive practices

touching

its sale of securities ____”

Id.

at 12-13, 92 S.Ct. at 169. (emphasis added). Because of this phrase,

Bankers Life

is universally cited for the proposition that the connection requirement will be satisfied if the alleged fraud “touches” the purchase or sale.

See, e.g., Arrington v. Merrill Lynch, Pierce, Fenner & Smith,

651 F.2d 615 , 619 (9th Cir.1981);

McGrath v. Zenith Radio Corp.,

651 F.2d 458, 467 (7th Cir.),

cert. denied,

454 U.S. 835 , 102 S.Ct. 136 , 70 L.Ed.2d 114 (1981);

Alley v. Miramon,

614 F.2d 1372 , 1378 n. 11 (5th Cir.1980);

Ketchum v. Green,

557 F.2d 1022, 1026 (3d Cir.)

cert. denied,

434 U.S. 940 , 98 S.Ct. 431 , 54 L.Ed.2d 300 (1977);

Yancoski v. E.F. Hutton & Co., Inc.,

581 F.Supp. 88 at 92 (E.D. Pa.1983);

Williamsport Firemen Pension Boards I and II v. E.F. Hutton & Co., Inc.,

567 F.Supp. 140, 143 (M.D.Pa.1983);

Chemical Bank v. Arthur Anderson & Co.,

552 F.Supp. 439, 451 (S.D.N.Y.1982);

Somogyi v. Butler,

518 F.Supp. 970, 985-86 (D.N.J.1981).

Bankers Life

raises the question what constitutes “touching” a securities transaction. Although many courts have taken a broad view of this element, there exists a paucity of viable standards. The Fifth Circuit has noted that “[t]he plaintiff ... need not establish a direct or close relationship between the fraudulent transaction and the purchase or sale____”

Alley v. Miramon,

614 F.2d 1372 , 1378 n. 11 (5th Cir.1980).

Accord Brown v. Ivie,

661 F.2d 62, 65 (5th Cir.1981),

cert. denied,

455 U.S. 990 , 102 S.Ct. 1614 , 71 L.Ed.2d 850 (1982). The

Alley

court went on to state that the requirement is “satisfied when the proscribed conduct and the sale are part of the same fraudulent scheme.” 614 F.2d at 1378 n. 11. In

Chemical Bank v. Arthur Anderson & Co.,

the court explained that

Bankers Life

and its progeny “require a nexus, albeit not a direct or close relationship, between the allegedly fraudulent conduct and the sale of securities.” 552 F.Supp. at 451 . This Circuit has “attempted to etch more-finely the contours of the ‘in connection with’ clause,” noting that other courts “[ajlmost without exception ... have found compliance ... even where fraudulent conduct is implicated only tangentially in a securities transaction.”

See Ketchum v. Green,

557 F.2d 1022, 1026-27 (3d Cir.),

cert. denied,

434 U.S. 940 , 98 S.Ct. 431 , 54 L.Ed.2d 300 (1977). However, rather than offering a standard, the

Ketchum

court observed that the ultimate determination is a factual one, best approached on a case by case basis.

Id.

at 1027 .

*1312

Each plaintiff was completely unaware of the falsity or misleading nature of the statements or omissions as set forth above in Paragraph 18 and of the fact that each security was unregistered, until approximately 1982.

*1408

Ketchum

involved a corporate power struggle. The plaintiffs were the Chairman of the Board and President of Babb, Inc., holding between them approximately forty-five percent of the stock of the company. Babb was a closely held corporation and stock could only be owned by employees. Defendants, other members of the Board, induced plaintiffs to support their slate of candidates without disclosing their plan to oust plaintiffs. After the incumbent directors were unanimously re-elected, the Board jointly proposed and elected their own candidates for the positions of chairman and president, removing plaintiffs as officers. Plaintiffs’ employment was then terminated and they were asked to surrender their stock pursuant to the corporation’s stock retirement plan. 557 F.2d at 1023-24 . The court found that the fraud was not “in connection with” the forced sale of plaintiffs’ securities. Characterizing the dispute as a corporate foray, the court noted that the actual securities transaction was tangential to the relief requested. Plaintiffs apparently were more concerned with recovering their seats and invalidating the elections.

Id.

at 1027 .

*1409

There, the court found the proximity between the fraud and the securities transaction to be more attenuated than in

Bankers Life.

As the court stated; “[i]nstead of being merely one step away from a securities deal, the supposed deception here is somewhat removed from the ultimate transaction. Indeed, there are a substantial number of intermediate steps between the fraud and the accomplishment of the forced sale of plaintiffs’ shares____”

Id.

at 1028 .

The court also expressed concern over the potential federalization of state law under section 10(b).

Id.

at 1029 . There is another distinction between

Ketchum

and

Bankers Life,

which was implicit in the court’s opinion. In

Bankers Life,

the securities transaction was an integral part of the fraudulent scheme. Yet in

Ketchum ,

the fraud was aimed at removing plaintiffs from the corporation. The forced sale was merely an incidental result of that scheme.

One year after deciding

Ketchum ,

this Circuit once again addressed the “in connection” issue in

Cramer v. General Tele. & Electronics Corp.,

582 F.2d 259 (3d Cir. 1978),

cert. denied,

439 U.S. 1129 , 99 S.Ct. 1048 , 59 L.Ed.2d 90 (1979). The plaintiffs challenged allegedly fraudulent commission payments made to a group of foreign investors. The arrangement arose out of GTE’s sale of its controlling interest in a foreign company. The buyers did not have sufficient funds with which to purchase that interest, so GTE financed part of the price by paying the purchasers a commission on future equipment sales. Concluding that the payment of commissions was “in connection with” the sale of GTE’s ownership interest, the court stated that: “GTE’s promise to pay commissions on equipment sales was not a separate agreement. Rather, that promise was an essential part of GTE’s original agreement to sell its interest in the foreign company.” 582 F.2d at 271. Without further analysis or citation to

Ketehum,

the court concluded: “[sjince the commission payments were inextricably linked to GTE’s sale of its ownership interest ..., we think the district court erred in concluding that the alleged fraud was not alleged to be in connection with the sale of a security.”

Id.

The fraud was not, as in the typical situation, the inducement for the securities transaction. Rather, the securities transaction was the inducement for the fraud. The financing problems surrounding the sale of ownership led GTE to arrange the allegedly fraudulent commission plan.

Analyzing the allegations in light of the scant principles articulated above, I conclude that the connection requirement has been satisfied. Defendants’ failure to disclose

Brown

“touches” all of the allegedly fraudulent securities transactions. Plaintiffs here were all unsophisticated investors. They were introduced to Catanella through E.F. Hutton, a well-known and well respected brokerage house. They were told about his qualifications and expertise and subsequently opened accounts.

*1410

They trusted Catanella and routinely followed his advice. In some cases, discretionary accounts were opened. Therefore, Catanella was in a position to choose the securities purchased and sold for plaintiffs’ portfolios. He had

de facto,

if not formal control, over the accounts. It was this control which allowed him to defraud plaintiffs by churning, buying unsuitable securities, failing to disclose risks and the like. If the plaintiffs knew that Catanella had previously defrauded investors, and the extent of that fraud, it defies logic to conclude that he would have been granted the kind of control which allowed him to perpetrate the fraud. Plaintiffs may have chosen not to deal with Catanella at all. Therefore, I find a .nexus between that initial failure to disclose

Brown

and all subsequent fraudulent transactions performed by Catanella.

I do not accept defendants’ contention that the failure to disclose

Brown

is too remote from the transactions. In

Bankers Life,

the sale of the bonds was an integral part of a complex scheme of fraud. Here, the initial fraud in failing to disclose

Brown

played an integral role in an ongoing scheme of fraudulent securities transactions. As the Fifth Circuit stated, the connection element is satisfied where “the proscribed conduct and the sale are part of the same fraudulent scheme.”

Alley,

614 F.2d at 1378 n. 11. The failure to disclose

Brown

was not only part of “the same fraudulent scheme,” but enabled defendants to package and sell Catanella as expert and untarnished in his brokerage experience.

The failure to disclose the risks of margin trading has been deemed fraud “in connection with” the purchase and sale of securities.

See Arrington v. Merrill Lynch, Pierce, Fenner & Smith,

651 F.2d 615 , 619 (9th Cir.1981);

Yancoski v. E.F. Hutton & Co., Inc.,

581 F.Supp. 88 at 92 (E.D.Pa.1983). This omission induced plaintiffs to open margin accounts and there is a nexus between that fraud and the securities purchased on margin. Defendants were informed that plaintiffs were desirous of safe investments. Although the failure to disclose did not necessarily result in the purchase of a specific security, it did cause plaintiffs to purchase more securities than they otherwise would have. Thus, plaintiffs unwittingly exposed themselves to more potential liability because of the increased trading a margin account permits. The failure to disclose certainly “touches” the securities so purchased.

Savino v. E.F. Hutton & Co., Inc.,

507 F.Supp. 1225 (S.D.N.Y.1981), the court faced a similar question. Defendants there allegedly misrepresented the risks of option trading. In holding the connection element satisfied, the court explained:

This alleged misrepresentation pertained directly to the underlying securities bought and sold for the Savino accounts. The Court is well aware of the recent admonition by the Court of Appeals for this Circuit that “[n]ot every ‘risky’ investment rises to the level of fraud because the risk is insufficiently disclosed.” * * * * * *

On the other hand, a claim is stated where, as here, the defendants, knowing that the risk involved in an investment is unacceptable to plaintiffs, allegedly deliberately misrepresented or omitted to state their opinion of the level of risk involved.

507 F.Supp. at 1241 (citations omitted). The observation applies with equal force to the allegations surrounding the purchase of unsuitable securities. When defendants knowingly ignore plaintiffs’ investment objectives and purchase speculative securities without apprising plaintiffs of the risk, a section 10(b) claim is stated. The fraud perpetrated “touches” and is “in connection with” the purchase of those unsuitable securities. Similarly, I find that churning is a fraudulent device which “touches” securities transaction. Many cases are cited in the previous section for the proposition that churning states a section 10(b) claim. While none of these cases discuss the connection element, none suggest potential problems with this requirement. The reason for this silence is fairly obvious. Churning denotes excessive trading. Thus,

*1411

by definition, churning is fraud “in connection with” the purchase or sale of a security.

Defendants contend that none of the activities discussed above are “in connection with” a securities transaction. They attempt a distinction between fraud which impacts upon the choice of a broker and that which influences the decision to buy or sell a particular security. They argue that the latter satisfies the connection requirement, the former does not. Defendants’ contention traces its roots to

Troyer v. Karcagi,

476 F.Supp. 1142 (S.D.N.Y.1979), a case upon which they rely heavily.

Although

Troyer

does contain some restrictive language, its application does not appear faithful to the narrow view of section 10(b) that it purports to articulate. Plainly put, the court says one thing and does another. Moreover, to the extent that

Troyer

does stand for the dichotomy advanced by defendants, I am unable to agree with its reasoning or result.

The facts of

Troyer

are fairly typical. The broker, Karcagi, made various representations to the Troyers, who were unsophisticated investors. These representations induced the Troyers to open discretionary accounts with Karcagi. Through an alleged course of mishandling and self-dealing, the Troyers lost approximately seventy-five percent (75%) of their rather substantial investment. 476 F.Supp. at 1146 . The court determined that the complaint survived a motion to dismiss “because it contained] allegations of a material misrepresentation or omission by Karcagi in connection with the purchase or sale of a security.”

Id.

The fraud revolved around the failure to disclose self-dealing and the misrepresentation of Karcagi’s intent to manage the account for his own, rather than Troyer’s benefit.

Id.

Applying the standard established in

SEC v. W.J. Howey Co.,

328 U.S. 293 , 66 S.Ct. 1100 , 90 L.Ed. 1244 (1946), the court determined that the discretionary accounts were “investment contracts” and therefore “securities.”

Id.

at 1147-48. Thus, the misrepresentations which induced the Troyers to open the accounts were made “in connection” with the purchase of those accounts, which were “securities.”

Id.

at 1148-49. In addition, the court took a very expansive view of what constitutes “purchasing” a discretionary account. There was a “purchase” each time a new account was opened, and also each time new funds were deposited into already existing accounts.

*1412

Troyer,

476 F.Supp. at 1148 . Therefore, any misrepresentations or omissions which induced the Troyers to invest new funds constituted fraud “in connection with” the “purchase” of a “security.”

In the alternative, the court explored whether the fraud was “in connection with” the purchase or sale of the underlying securities contained in the discretionary accounts. It is the resolution of this issue upon which defendants rely. At first the court suggested a negative answer, articulating the distinction drawn by defendants. The court explained:

The alleged misrepresentations concerning Karcagi’s investment performance and his intentions affected the investors’ confidence in a person selected by them to be their fiduciary rather than influencing their decision to purchase or sell particular securities. The purpose of Rule 10b-5,

e., to promote “the maintenance of free and open securities markets nurtured in a climate of fair dealing” is not therefore sufficiently served.

476 F.Supp. at 1149 (citations omitted). The court then inexplicably and in contradiction to the above-quoted language concluded:

Hence, under the Troyers’ alternative theory of fraud in connection with purchases or sales of the underlying securities traded by Karcagi in the discretionary accounts,

a Rule 10b-5 cause of action is adequately alleged as to instances of the purchase or sale of securities under circumstances where Karcagi failed to disclose self-interest,

but not as to other purchases or sales where Karcagi induced the Troyers to grant him the discretion to make the purchases or sales by generalized representations.

Id.

(emphasis added). If I read the second passage correctly, the

Troyer

court essentially held that a claim was stated with respect to the purchase or sale of the underlying securities where Karcagi failed to disclose his self-dealing. Yet, Karcagi’s failure to disclose self-dealing did not impact upon the Troyer’s decision to buy or sell a particular stock, but rather, their trust and confidence in their broker. Thus, the court stated, but apparently declined to apply, the distinction between choosing a security and a broker. Moreover, as to purchases or sales resulting from Karcagi’s control over the account, induced by “generalized representations,” many of these would be actionable under the theory that the account itself is a security. Misrepresentations or omissions which induced plaintiffs to “purchase” a discretionary account would be covered by the first prong of

Troyer .

Given the broad definition of “purchase,” the Troyers were fairly well protected. The motion to dismiss was ultimately denied.

It is anomalous that the

Troyer

court suggested the distinction in light of its ultimate determination that the failure to disclose self-interest may be “in connection with” a securities transaction.

The instant case does not involve the mere retention of securities, although it does, to an extent, involve the retention of Catanella as broker. The fraud alleged here includes activities such as churning, margin trading without disclosing the risks and the purchase of unsuitable securities. All of these involve the purchase or sale of stocks. There is actually a supreme irony in defendants’ reliance upon

Troyer .

In those cases where plaintiffs opened or “purchased” discretionary accounts,

Troyer

ensures coverage to the allegation of most concern to defendants. The failure to disclose the

Brown

litigation induced plaintiffs to “purchase” their discretionary accounts and is clearly fraud “in connection with” the purchase of a security. More-

*1413

over, it is entirely possible that Troyer’s two step analysis affords more, rather than less protection under section 10(b).

The distinction suggested by

Troyer

and championed by defendants is also at odds with precedent and the purpose behind the 1934 Act. As a practical matter, the distinction between choosing a broker and choosing securities may well be meaningless. Where a broker is given control of the client’s portfolio, the choice of a broker is tantamount to the choice of securities. Defendants’ argument would push deceptive practices, such as churning, beyond the reach of the statute, simply because they might not impact upon the decision to purchase or sell a particular stock.

This conflicts with controlling caselaw and common sense. Similarly, the failure to disclose risks or a prior litigation would be out of reach, despite the fact that a requirement of full disclosure is the very heart of section 10(b).

Finally, this distinction ignores the admonition of the Supreme Court in

Bankers Life

that section 10(b) “must be read flexibly, not technically and restrictively.” 404 U.S. at 12 , 92 S.Ct. at 169. Although it is less exacting, I prefer the formulation of

Bankers Life

and progeny. Since I have concluded that the allegations “touch” and “are part of the same fraudulent scheme” as the purchase and sale of securities, the motion to dismiss on this issue shall be denied.

(d)

Causation

Defendants’ final section 10(b) argument focuses upon the

Brown

litigation and the thorny issue of causation. Plaintiffs, especially the purported class representatives in Taraborelli,

endeavor to link all their losses to defendants’ failure to disclose

Brown.

They reason that had they known about Catanella’s involvement, they would not have dealt with him or given him broad discretion over their accounts. Catanella would not, therefore, have had the opportunity to churn, buy unsuitable securities or engage in the panoply of fraudulent conduct alleged. Defendants contend that this initial failure to disclose

Brown

did not technically “cause” plaintiff’s injuries. Rather, the losses were the result of independent intervening causes, such as fluctuations in the market, wholly unrelated to Catanella. If market forces drive the price of a stock downward,

everyone

who purchased would be injured. Plaintiffs would have sustained the same losses had they purchased that particular security through a different broker. Plaintiffs retort that they would not have purchased that security

but for

their affiliation with Catanella. These arguments underscore the complexity of, and provide

*1414

focus to, the issue — the meaning of “proximate causation” in a section 10(b) case.

Causation actually has three facets. To analyze the arguments presented here, a clear understanding of the distinctions between them is necessary. The first is the “in connection with” requirement highlighted in the previous section. Although not typically analyzed in terms of “cause and effect,” this element requires some form of relationship between the alleged fraud and the purchase or sale of a security. The second type, referred to as “transaction causation,” asks whether “the violations in question caused the appellant to engage in the transaction in question.”

Schlick v. Penn-Dixie Cement Corp.,

507 F.2d 374, 380 (2d Cir.1974),

cert. denied,

421 U.S. 976 , 95 S.Ct. 1976 , 44 L.Ed.2d 467 (1975).

See also

115 Cong.Rec. 9567 (April 18, 1969) (Sen. McClellan) (no intent to incorporate complexity of antitrust principles). The ABA recommendation was followed — separate legislation was enacted. As the court in

State Farm

appropriately observed, section 1964(c) was “cast as a separate statute intentionally to avoid the restrictive precedent of antitrust jurisprudence.” 540 F.Supp. at 680.

Accord Schacht,

711 F.2d at 1358 ;

Yancoski ,

at 95;

Slattery ,

at 165. Similarly, Professor Blakey concluded “any suggestion that RICO actions be limited by antitrust type limitations — “competitive,” “commercial,” or “direct/indirect” injuries — flies in the face of the very consideration that led to the drafting of RICO as a separate statute from the antitrust statutes that are so limited.”

Blakey, supra

note 43 at 255 n. 52.

Another factor militating against the application of the antitrust standing requirement is the differing goals behind the two statutes. As the

Bennett

court observed; “although RICO borrowed the tools of antitrust law to combat organized criminal activity ____Congress did not see the objectives of RICO and the antitrust laws as

*1433

coterminous.”

Bennett,

685 F.2d at 1059 (citing S.Rep. No. 617 at 81-82; 115 Cong. Rec. 6993 (Sen. Hruska);

id.

at 9567 (Sen. McClellan); 116 Cong.Rec. at 607 (Sen. Byrd);

id.

at 35, 193 (Sen. Poff)). On a very simplistic level, fostering free competition is

the

purpose of the antitrust laws, while only an ancillary purpose of RICO. RICO “was broadly aimed at ‘striking ... a mortal blow against the property interests of organized crime.’ ”

Schacht,

711 F.2d at 1357 -58 (quoting 116 Cong.Rec. 602 (1970) (Sen. Hruska)). Thus, the very reason for the antitrust standing requirement is inapposite in the RICO context. As the

Bennett

court recognized “to ruin an antitrust defendant, usually a legitimate businessman, would generally lessen competition and increase concentration in a particular industry.”

Bennett,

685 F.2d at 1059 . Thus, the competitive injury requirement actually prevents frivolous suits from undermining the purpose behind the antitrust laws — the promotion of competition. This safeguard is unnecessary in the RICO situation — the economic ruin of an enterprise which operates through a pattern of racketeering is

the

purpose behind section 1964(a).

More fundamentally, a competitive injury requirement would be underinclusive when applied to RICO. Organized crime will not always affect competition.

Not all of the victims will be either “competitors” or harmed in their ability to compete. Consider as an example, threats made to induce a small grocer to pay a certain amount of money per month for “protection services.” The grocer is not in competition with the vendors of this service, who, for purposes of this hypothetical, are members of “organized crime.” No attempt is made to infiltrate or take over the grocer’s business. Nor is the grocer hampered in his ability to compete. Imposition of the competitive injury requirement would prevent the grocer from suing under section 1964(c). This result would frustrate the purpose of RICO in two major respects. First, targeted behavior would go unpunished and the protection ring would not be divested of its “ill-gotten gains,”

Turkette,

452 U.S. at 585 , 101 S.Ct. at 2529 .

See also

Note,

Application of the Racketeer Influenced and Corrupt Organizations Act (RICO) to Securities Violations,

8 J.Corp.L. 411, 435-36 (1983).

The legislative history of RICO evidences an intent to escape the restrictive antitrust standing principles. Section 1964(c) was added to battle organized criminal activity on a new front — its pocketbook. Since a competitive injury requirement would interfere with that goal and create cracks through which targeted behavior will slip, it must be rejected.

(b)

Racketeer Enterprise Injury

Some courts, perhaps recognizing the limitations of the antitrust analogy, but still desirous of narrowing the statute’s sweep, have reached the same result by requiring a “racketeer enterprise injury.”

See Haroco, Inc. v. American National Bank and Trust Co. of Chicago,

577 F.Supp. 111, 114-15 (N.D.Ill.1983);

Fur-man v. Cirrito,

578 F.Supp. 1535 at 1540-1541 (S.D.N.Y.1984);

Willamette Savings & Loan v. Blake & Neal Finance Co.,

577 F.Supp. 1415, 1429-30 (D.Or.1984);

Hudson v. Larouche,

579 F.Supp. 623 at 630 (S.D.N.Y.1983);

Richardson v. Shear-son/American Express Co., Inc.,

573 F.Supp. 133, 137 (S.D.N.Y.1983);

King v. Lasher,

572 F.Supp. 1377, 1382 (S.D.N.Y. 1983);

In re Action Industries Tender Offer,

572 F.Supp. 846, 851-52 (E.D.Va.1983);

Barker v. Underwriters at Lloyd’s, London,

564 F.Supp. 352, 358 (E.D.Mich.1983);

Moss v. Morgan Stanley, Inc.,

553 F.Supp. 1347, 1361 (S.D.N.Y.),

rev’d on other grounds,

719 F.2d 5 (2d Cir.1983);

Johnsen v. Rogers,

551 F.Supp. 281, 285 (C.D.Cal. 1982);

Van Schaick,

535 F.Supp. at 1137 & n. 11;

Landmark,

527 F.Supp. at 208-09 . Underlying this requirement is the familiar judicial discomfort with the potential breadth of RICO’s civil component. As the

Johnsen

court noted: “Congress ... did not intend to provide an additional remedy for an already compensable injury.”

John-sen,

551 F.Supp. at 285.

See also

*1436

Hanna Mining,

574 F.Supp. 1172 , 1982 Fed.Sec.L.Rep. (CCH) 1198,742 at 93,737. To the extent that a racketeer enterprise injury is identical or related to the antitrust competitive injury concept, it must be rejected for the reasons articulated in the previous section.

However, it may be that a racketeer enterprise injury is not synonymous with a competitive injury. The former may actually be broader than the latter. All that can be gleaned from the cases is that the injury must be something more or different from that flowing from the predicate acts. Perhaps this amorphous requirement is a proxy for any form of indirect injury. In other words, a racketeer enterprise injury may be an umbrella concept, encompassing not only competitive and commercial injuries, but also damages flowing from infiltration or complete takeover of a plaintiffs business.

See Dakis,

574 F.Supp. at 761 (racketeer enterprise injury is

either

infiltration or competitive injury). Viewing this requirement as a “catch-all” does not redeem its basic flaw — any limitation along the direct/indirect dichotomy is untenable in light of RICO’s language and purpose. The

Mauriber

court suggested the following “infiltration” hypothetical:

A brokerage enterprise infiltrated by organized crime and engaged in defrauding its customers through acts like those alleged here might injure no one but the customers of the enterprise. There would be no injury above and beyond that caused by the predicate acts of fraud forming the “pattern of racketeering activity.”

Mauriber,

567 F.Supp. at 1240 . The advocates of a racketeering enterprise injury would allow the infiltrated brokerage house to recover, assuming it could first oust the unwanted intruders. Surely a competing brokerage house somehow hampered in its ability to compete would have standing. However, the defrauded customer would have no redress. I must agree with the

Mauriber

court that “[sjuch conduct, however, would violate RICO and would lie near the center of Congress’ concern.”

Id.

The reasoning that compelled rejection of the competitive injury requirement applies with equal force here. RICO’s purpose would be frustrated if targeted behavior went unpunished and innocent investors were not compensated. As the court in

Crocker

eloquently concluded:

The key purpose of RICO’s civil remedy is to “divest the association of the fruits of its ill-gotten gains.” This purpose would be severely undermined if persons who suffered direct harm from racketeering activity as defined by the statute could not recover in the absence of showing some “special” harm or some overall anti-competitive effect. Such a rule would leave money derived from actions prohibited by RICO precisely where Congress did not intend it to remain, in the hands of RICO violators.

*1437

Crocker,

555 F.Supp. at 49-50 . omitted). (citations

It is possible that those courts requiring a racketeer enterprise injury have envisioned something other than the indirect injuries discussed above. However, they have not defined the parameters of this concept and it borders on impossible to apply that which defies definition.

See Municipality of Anchorage v. Hitachi Cable Ltd..,

No. 81-347 slip op. at 4 (D.Alaska March 18, 1983). Perhaps the most telling fact is that none of the courts requiring this special injury have found it to exist in the cases before them.

70.

Ultimately, this requirement may be seen as nothing more than a convenient way to exclude from coverage actions which do not seem like they ought to fall within RICO’s grasp— especially where other remedies exist for the commission of the predicate acts. In order to give the statute its plain meaning and intended effect, I shall not engraft vague and artificial requirements to a civil cause of action. Curtailing RICO’s breadth is a task reserved to Congress. Therefore, I follow the better reasoned path of those who have declined to require a “racketeer enterprise injury.”

See e.g., Jensen,

[Current] Fed.Sec.L.Rep. (CCH) ¶ 99,674 at 97,-713;

Yancoski ,

at 96-97;

Slattery ,

at 166-67;

Municipality of Anchorage

slip op. at 4;

Kirschner v. Cable/Tel Corp,

576 F. Supp. 234, 244 (E.D.Pa.1983).

In re Longhorn Securities Litigation,

573 F.Supp. at 270;

Ralston v. Capper,

569 F.Supp. 1575, 1580 (E.D.Mich.1983);

Seville Industrial Machinery Corp. v. Southmost Mach. Corp.,

567 F.Supp. 1146, 1157 (D.N.J.1983);

Mauriber,

567 F.Supp. at 1240-41 ;

Eisenberg v. Gagnon,

564 F.Supp. 1347, 1352-53 (E.D.Pa.1983);

Windsor Associates, Inc. v. Greenfeld,

564 F.Supp. 273, 278-79 (D.Md. 1983);

Crocker,

555 F.Supp. at 49 — 50;

Hanna Mining ,

574 F.Supp. 1172 [1982 Transfer Binder] Fed.Sec.L.Rep. (CCH) ¶ 98,742 at 93,737.

State Law Claims

Defendants challenge the legal sufficiency of the state law claims, arguing .that a remedy is unavailable to plaintiffs under the Pennsylvania Securities Act of 1972, Pa.Stat.Ann. tit. 70 § 1-101 — 1-704 (Purdon’s Supp. 1983-1984) the New Jersey Uniform Securities Law, N.J.Stat.Ann. tit. 49 § 3-47 — 3-76 (West 1970) or the New Jersey Consumer Fraud Act, N.J.Stat.Ann. tit. 56 § 8-1 — 8-20 (West Supp.1983-1984). With respect to the theories of common law fraud and negligence, defendants contend that the requisite causation is missing. As a threshold matter, however, defendants question this court’s jurisdiction over all state created causes of action.

Pendent

Jurisdiction'

Defendants’ jurisdictional attack is premised upon their earlier arguments that the complaints fail to state valid securities or RICO causes of action. Without a surviving federal claim, exercise of pendent jurisdiction would be clearly unjustified.

See United Mine Workers of America v.

*1438

Gibbs,

383 U.S. 715, 726-27 , 86 S.Ct. 1130, 1139 , 16 L.Ed.2d 218 (1966). However, I have determined that the Gaugler, Shulik, Singer and Rastelli complaints do contain legally sufficient federal causes. Since the state and federal claims arise from the same “common nucleus of operative fact[s],”

Gibbs,

383 U.S. at 725 , 86 S.Ct. at 1138 , an exercise of pendent jurisdiction is appropriate. Taraborelli presents a different question. In light of plaintiffs limitation of the issues, a section 10(b) claim has not been pled. Much like dominoes, the section 20(a) and RICO claims must also fall, leaving the complaint devoid of a federal cause of action. As such, I shall decline to exercise pendent jurisdiction,

see Gibbs,

383 U.S. at 726-27 , 86 S.Ct. at 1139 , and the complaint shall be dismissed in its entirety.

Causation

In the section 10(b) context, defendants have contended that there is no causal link between the failure to disclose the

Brown

litigation and plaintiffs’ subsequent losses, placing the blame instead on fluctuations in the stock market. Defendants maintain that this reasoning applies with equal force to the common law fraud and negligence counts. However, as a factual matter, it is not clear whether the

Brown

litigation is the subject of either of these state claims.

The negligence counts, although incorporating by reference the previous factual allegations, focus upon how defendants handled plaintiffs’ portfolios. More specifically, defendants are accused of negligently and recklessly handling the accounts, Shulik Complaint at ¶ 71, and breaching their duty of care by purchasing speculative securities, trading on margin and engaging in excessive trading. Singer Complaint at Mi 68-69; Rastelli Complaint at MI 64-65.

See also

Gaugler Complaint at 11 50.

The failure to disclose

Brown

is not specifically mentioned, nor would it seem to be actionable in negligence. If anything, plaintiffs allege an

intentional

act of fraud on defendants’ part. Negligence principles might be relevant if Hutton had not had actual knowledge of the

Brown

litigation. Then it could be argued that Hutton was negligent in failing to learn of Catanella’s role in that suit. Alternately, Hutton may have been negligent if it knew and hired Catanella anyway. However, the failure to disclose

Brown

to plaintiffs sounds in fraud rather than negligence.

The common law fraud counts aver that defendants churned the accounts, Shulik Complaint at MI 61-62, misrepresented the nature of the securities purchased and generally breached the duty of care owed to plaintiffs. Rastelli Complaint at MI 64-65; Singer Complaint at MI 68-69. Once again,

Brown

is not explicitly mentioned, however, it may be incorporated by reference to the prior factual allegations. Assuming this to be so, I must agree with defendants that there is a break in the chain of causation. As I concluded earlier, independent intervening factors were the actual cause of plaintiffs’ losses.

See

section 1(d)

supra.

It was not the failure to disclose

Brown,

but rather fluctuations in the market, Catanella’s churning, purchase of unsuitable securities and failure to disclose the risks inherent in certain transactions which caused plaintiffs to lose money. Therefore, plaintiffs cannot predicate their common law fraud claim upon the failure to disclose Catanella’s complicity in

Brown.

State Securities Statutes

Two basic problems arise under both the Pennsylvania Securities Act of 1972 and the New Jersey Uniform Securities Law— specifically, which sections apply and what are their requirements? Defendants contend that private civil actions under each statute are limited to those sections expressly providing for such a remedy. The plaintiff in Gaugler argues that this court should imply a private right of action under a statutory provision which happens to track the language of section 10(b). Defendants note that the express remedy sections of both statutes contain a privity re

*1439

quirement similar to that found in section 12(2). Therefore, they maintain that plaintiffs can only sue persons from whom they purchased or to whom they sold. Plaintiffs contend that they did purchase from defendants, thereby satisfying the privity requirement.

Both statutes contain a general anti-fraud provision virtually identical to section 101 of the Uniform Securities Act, which was patterned after Rule 10b-5.

See

Pa.Stat.Ann. tit. 70 § 1-401 (Purdon’s Supp.1983-1984); N.J.Stat.Ann. tit. 49 § 3-52 (West 1970).

Like section 10(b), these provisions do not expressly grant a private remedy. Analogizing to section 10(b) jurisprudence, plaintiff insists that a private right of action should be implied under sections 3-52 and 1-401. Notwithstanding the similarity of language, implication of a private remedy under the state statutory provisions is clearly inappropriate. Unlike the federal statute, both the Pennsylvania and New Jersey blue sky laws have explicitly limited causes of action to those expressly provided in the statute. The New Jersey statute states; “this law

does not create any cause of action not specified in this section

or section 10, paragraph (e).” N.J.Stat.Ann. tit. 49 § 3-71(h) (emphasis added). The Pennsylvania limitation mandates that

“[e]xcept as explicitly provided in this act, no civil liability

in favor of any private party

shall arise against any person by implication

from or as a result of the violation of any provision of this act or any rule or order hereunder.” Pa.Stat.Ann. tit. 70 § 1-506. Therefore, plaintiff’s suggestion that a private remedy be implied flies in the face of the plain language of both statutes and must be rejected.

See also Biggans v. Bache Halsey Stuart Shields, Inc.,

638 F.2d 605, 609 (3d Cir.1980) (under Pennsylvania statute, section 1-501 is sole source of civil liability);

Roberts v. Magnetic Metals Co.,

611 F.2d 450, 453 (3d Cir.1979) (section 3-71 of New Jersey Statute does not contemplate implication of additional remedies.

Having decided that plaintiffs are limited to the express remedies granted in each statute, I turn now to the privity requirements of those provisions. The Pennsylvania statute is the more generous of the two, affording a cause of action to a defrauded buyer or seller.

See

Pa.Stat.Ann. tit. 70 § l-501(a), (b). The New Jersey statute only allows a defrauded buyer to sue.

See

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