Plaintiffs do not dispute this in their Opposition, stating by implication that they are not bringing their claims "under" those sections. Pl. Opp. at 16.
Therefore, defendants' motion to dismiss that part of plaintiff's state securities fraud claim which asserts violations of sections 25216 and 25218 is GRANTED.
Section 25400. Corporations Code § 25400 imposes liability on a broker-dealer for the making of a false or misleading statement or omission, which he knew or had reasonable ground to believe was false or misleading, "for the purpose of inducing the purchase or sale of [a] security."
Plaintiffs have alleged that defendants falsely represented that they would abide by the Trustee's investment guidelines and instructions in their management of the Plans' funds. BEHR and Rowell did not have absolute discretion in investment decisions, and because the decision to open a discretionary account with a particular broker has been treated as a "purchase or sale" for purposes of the analogous section of the federal securities law, plaintiffs may be characterized as buyers, and defendants' alleged conduct can be characterized as "for the purpose of inducing the purchase or sale of a security."
Therefore, defendants' motion to dismiss plaintiffs' state securities fraud claim under section 25400 is DENIED.
Section 25401. California Corporations Code § 25401 prohibits the purchase or sale, or offer of purchase or sale, of a security by means of any written or oral communication which includes an untrue statement or material omission.
Defendants' seek dismissal of plaintiffs' claim under this section on the ground that no securities were bought or sold "by means of" any false communication.
Plaintiffs have asserted that defendants engaged in unauthorized transactions after representing that defendants would adhere to the Trustee's investment instructions. As above, treating plaintiffs' decision to open the discretionary investment account with defendants as tantamount to a purchase or sale, the facts alleged are sufficient to support a claim under section 25401.
Therefore, defendants' motion to dismiss plaintiffs' claim under section 25401 is DENIED.
III. PUNITIVE DAMAGES
Defendants' have moved to strike plaintiffs' prayer for punitive damages under ERISA, arguing that punitive damages are not available in ERISA actions.
The language of the Act does not preclude the awarding of punitive damages in an ERISA action. The Supreme Court has not yet ruled on the general availability of punitive damages under ERISA. Although the Court has held that a beneficiary is not entitled to recover extracontractual damages under section 409(a), it did not reach the issues (1) whether punitive damages may be recovered when the plan itself is the plaintiff and (2) whether punitives may be recovered under other sections of the statute. Massachusetts Mutual Life Ins. Co. v. Russell, 473 U.S. 134, 138, 144 n. 12, 87 L. Ed. 2d 96, 105 S. Ct. 3085 (1985).
The circuit courts have split on these issues. The Fifth Circuit, after considering the reasoning of Russell, held that Congress did not intend plans to recover punitive damages under either Section 409(a) or Section 502(a)(3) and found that the reference to available "equitable relief" in Section 502(a)(3) does not encompass punitive damages. Sommers Drug Stores Co. Employee Profit Sharing Trust v. Corrigan Enterprises, 793 F.2d 1456, 1464-65 (5th Cir. 1986), reh'g denied, 797 F.2d 977, cert. denied, 479 U.S. 1089, 94 L. Ed. 2d 154, 107 S. Ct. 1298 (1987).
However, the Ninth Circuit has held that punitives may be available under Sections 1132(c) (providing for "such other relief as [the court] deems proper") and 1109(a) (providing for "such . . . equitable or remedial relief as the court may deem appropriate. . . ."). Kuntz v. Reese, 760 F.2d 926 (9th Cir. 1985) (reversing district court's striking of plaintiff's prayer for punitives), withdrawn and vacated on other grounds, 785 F.2d 1410 (1986); see also Winterrowd v. David Freedman & Co., 724 F.2d 823, 826-27 (9th Cir. 1984) (punitive awards under ERISA available in "very limited circumstances"). The court in Kuntz reaffirmed its holding in Winterrowd that "Congress intended to permit punitive damages in appropriate cases, and that the punitive damages award is appropriate when a fiduciary has breached its duties." Kuntz, 760 F.2d at 938.
In support of their motion to strike, defendants cite Sokol v. Bernstein, in which the Ninth Circuit held that a beneficiary is not entitled to recover extracontractual damages under Section 502(a)(3). 803 F.2d 532 (9th Cir. 1986). However, Sokol is not controlling here, since the court did not reach the case of a plan suing under Section 409(a) for breach of fiduciary duty, and there are strong policy arguments for distinguishing the two kinds of cases.
The intent of Congress in creating ERISA was to safeguard the integrity of benefit plans, and only derivatively to benefit individual beneficiaries. See, e.g., Sokol, 803 F.2d at 537. "Allowing the recovery of punitive damages by individual beneficiaries would be antithetical to this purpose as it would allow generous individual recoveries at the expense of the plan as a whole. However, no such conflict exists in cases such as this where the plan itself is the plaintiff and would benefit from any award of punitive damages." California Digital Defined Benefit Pension Fund v. Union Bank, 705 F. Supp. 489, 491 (C.D. Cal. 1989) (denying bank's motion to strike prayer for punitive damages under ERISA Section 409(a)).
Following Ninth Circuit precedent recognizing the possibility of punitive damages in an appropriate ERISA action, the court DENIES defendants' motion to strike plaintiffs' prayer for punitive damages under the first claim for relief. However, this denial is without prejudice; if, during the course of discovery, it becomes clear that defendants' conduct will not justify the imposition of punitives damages, defendants may renew their motion to strike.
For the foregoing reasons, the court:
(1) GRANTS without prejudice defendants' motion to dismiss plaintiffs' fifth, sixth, seventh, eighth and ninth claims for relief under state common law as preempted by ERISA;
(2) GRANTS defendants' motion to dismiss plaintiffs' third claim for relief for violation of section 12(2) of the Securities Act;
(3) DENIES defendants' motion to dismiss plaintiffs' second claim for relief for violation of section 10(b) of the Securities Act;
(4) GRANTS defendants' motion to dismiss plaintiffs' claims under sections 25216 and 25218 of the California Corporations Code;
(5) DENIES defendants' motion to dismiss plaintiffs' claims under sections 25400 and 25401 of the California Corporations Code;
(6) and DENIES without prejudice defendant's motion to strike plaintiffs' prayer for punitive damages under ERISA.
Finally, (7) defendants BEHR and Rowell shall have twenty (20) days from the date of filing of this order to answer plaintiffs' remaining claims for relief.
IT IS SO ORDERED.
Dated: October 25, 1990