## Facts

- Mildred Cohen, a retired investor on a fixed income and without financial training, sought safe investments and relied on her long-time broker and adviser, Diane James, then employed by Prudential-Bache Securities, Inc.
- In April 1986, James urged Cohen to invest in interests in CSH-1 Hotel Limited Partnership, allegedly describing it as virtually risk-free and providing strong cash flow.
- Cohen alleged Prudential and James provided written assurances including a stated 13.4% tax-free return and that investors would pay $7,744.50 with “NO $ AT RISK at any time.”
- James allegedly represented Cohen’s total out-of-pocket exposure would not exceed roughly $8,500, and Cohen signed documents at James’s direction without understanding them.
- In October 1987, Cohen learned she had signed a promissory note approaching $85,000 and that nonpayment could result in sale of her partnership interest by a guarantor.
- Cohen alleged CSH-1 was actually a risky, leveraged tax shelter intended for high-income investors and unsuitable for her financial circumstances.
- Cohen also alleged James falsified an investor questionnaire to inflate Cohen’s income and net worth and forged Cohen’s signature on that and other forms to facilitate the transaction.

## Issues

1. Whether the complaint plausibly alleged material misrepresentations and omissions under § 10(b) and Rule 10b-5, as opposed to nonactionable sales talk.
2. Whether alleged forged and falsified investor-suitability documents could support a § 10(b) claim even if Cohen did not see or directly rely on those documents.
3. Whether the § 12(2) claim was barred by the one-year limitations period.
4. Whether § 17(a) of the Securities Act of 1933 supports an implied private right of action.

## Decision

- Denied the motion to dismiss the § 10(b) and Rule 10b-5 claim, holding the allegations stated a securities-fraud claim based on misstatements, omissions, and a fraudulent scheme connected to the purchase of the partnership interests.
- Granted the motion to dismiss the § 12(2) claim as time-barred because Cohen’s allegations showed discovery of the essential facts more than one year before suit.
- Granted the motion to dismiss the § 17(a) claim, declining to recognize a private right of action.
- Retained jurisdiction over the related state-law claims because the federal Rule 10b-5 claim survived and the claims arose from the same operative facts.

## Legal Principles

- Specific representations about investment risk, cost, and expected returns—especially when expressed in concrete numeric terms—can be materially misleading and are not necessarily treated as nonactionable sales talk at the pleading stage.
- Materiality is commonly a fact question and is generally not resolved against the plaintiff on a motion to dismiss when plausible allegations are pleaded.
- A § 10(b)/Rule 10b-5 claim may be based on a “device, scheme, or artifice to defraud” where falsified or forged suitability documents are alleged to have enabled an unsuitable securities transaction, even if the investor did not directly rely on the forged documents.
- A § 12(2) claim must be filed within one year of discovery (or when discovery should have occurred with reasonable diligence); allegations showing earlier discovery can warrant dismissal as untimely.
- Courts may decline to imply a private right of action under § 17(a) of the 1933 Act.

## Conclusion

The court allowed Cohen’s Rule 10b-5 claim to proceed because she plausibly alleged concrete misstatements and omissions about the investment’s risk and her true exposure, and that forged suitability paperwork was part of a deceptive scheme connected to the transaction; it dismissed the § 12(2) claim as untimely and rejected a private § 17(a) claim while keeping the related state claims.


Cohen v. Prudential-Bache Sec., Inc., 713 F. Supp. 653 (S.D.N.Y. 1989)