## Facts

- Steven A. Fishman was a registered representative of Equitable Securities of New York, Inc.
- William T. Cruse, an 82-year-old businessman, had previously traded only blue-chip stocks, relied on dividend income, and had never traded options.
- Fishman met Cruse at a social event and pitched an index-options strategy, allegedly assuring Cruse that: (i) the return could be substantial, (ii) any stock posted as collateral would never be liquidated, (iii) no trade would be made without consulting Cruse, (iv) Fishman would monitor trading to prevent losses, (v) the strategy was conservative, and (vi) Fishman would explain trade confirmations and monthly statements.
- Cruse alleged his Equitable account was non-discretionary and that no one other than Cruse was authorized to trade in it.
- On or about September 30, 1985, Cruse transferred collateral into the Equitable account worth about $160,000, consisting of 2,968 shares of Kerr-McGee Corporation and 1,200 shares of PepsiCo, Inc.
- Cruse alleged Fishman immediately sold call options on the collateral stock without Cruse’s authorization and continued to execute unauthorized and unsuitable options transactions over the next six months (approximately October 1985 through mid-March 1986).
- Cruse alleged Fishman knew Cruse did not understand the account statements, but Fishman did not tell Cruse the extent of the losses as they mounted.
- When Cruse received margin-maintenance notices, Fishman allegedly said the notices were sent in error; Fishman also allegedly told Cruse that prior losses had turned into profits and should be reinvested.
- Cruse alleged he received 17 trade confirmations reflecting unauthorized trades and later met with Equitable, where he was told the firm had been concerned about the account, but Fishman had represented internally that Cruse was very wealthy and was using the Equitable account as a risk portfolio.
- Cruse alleged total losses exceeded $260,000 and sued Fishman and Equitable under § 10(b) and Rule 10b-5, civil RICO, common-law fraud and breach of fiduciary duty, and New York’s Blue Sky law.

## Issues

1. Whether the complaint pleaded securities fraud based on unauthorized options trading and related misrepresentations/omissions with sufficient particularity under Fed. R. Civ. P. 9(b).
2. Whether the allegations, taken as true, stated a claim under § 10(b) and Rule 10b-5 sufficient to survive a Rule 12(b)(6) motion.
3. Whether the complaint’s fraud-based RICO and related state-law claims were adequately pleaded to withstand dismissal at the pleading stage.

## Decision

- The court denied defendants’ motion to dismiss under Rules 9(b) and 12(b)(6).
- The court held the complaint sufficiently identified the alleged misrepresentations and omissions, the speaker (Fishman), the account and collateral involved, the relevant time period, and the claimed losses to satisfy Rule 9(b).
- The court held the alleged course of unauthorized and unsuitable trading in a non-discretionary account, coupled with alleged deception about risk, margin notices, and losses, stated a claim under § 10(b) and Rule 10b-5 at the motion-to-dismiss stage.
- The court allowed the RICO and state-law claims to proceed because they were based on the same alleged fraudulent course of conduct and were pleaded with enough detail to avoid dismissal at this stage.

## Legal Principles

- Fraud allegations must satisfy Rule 9(b) by stating the circumstances of the fraud with enough detail to give defendants notice of the challenged conduct (including who made the statements, what was said or omitted, when it occurred, and how the plaintiff was harmed).
- A § 10(b) and Rule 10b-5 claim may be based on deceptive conduct in connection with securities transactions, including executing trades in a purportedly non-discretionary account without authorization and concealing or misrepresenting material information about risk and losses.
- Misstatements about the nature of an investment strategy (for example, describing it as conservative), about whether trades will be authorized in advance, and about whether collateral will be liquidated can be material when they relate to how and whether an investor would permit the trading program.
- Scienter may be pleaded through allegations supporting an inference that the broker knowingly engaged in unauthorized transactions and misled the customer about losses, margin calls, or the status of the account.
- At the pleading stage, a complaint asserting civil RICO and related fraud-based state claims can survive dismissal when it alleges a series of fraudulent acts connected to an enterprise and resulting injury to the plaintiff’s property, and pleads the fraud components with Rule 9(b) specificity.

## Conclusion

Cruse alleged that his broker induced him to enter an options strategy through specific assurances, then carried out unauthorized options transactions and concealed mounting losses in a non-discretionary account, causing more than $260,000 in losses. The Southern District of New York held that these allegations were pleaded with sufficient detail and, if true, stated claims under § 10(b)/Rule 10b-5 as well as related RICO and state-law theories, so dismissal under Rules 9(b) and 12(b)(6) was denied.


Cruse v. Equitable Securities of New York Inc., 678 F. Supp. 1023 (1987)