Opinion
Case No. 03 C 5157.
March 30, 2005
ORDER
This is a diversity action under Wisconsin securities and common law brought by the two daughters of Marion K. Baird (Mrs. Baird), who died in 2001, against RBC Dain Rauscher, Inc. ("Dain"), a registered securities broker-dealer. Defendant has moved to dismiss those allegations in plaintiffs' complaint which set forth plaintiffs' "selective rescission" theory of damages, the theory that plaintiffs can set aside unprofitable transactions while not netting them against profitable ones.
Plaintiffs allege that during her lifetime, Mrs. Baird opened two securities accounts at Dain, one in the name of each of two family trusts, and filed forms with Dain authorizing discretionary trading in the accounts by William Baird, a cousin of Mrs. Baird's deceased husband. Dain thereafter accepted orders from William Baird to purchase and sell securities in the accounts, and, pursuant to authorization from Mrs. Baird, debited the accounts to pay William Baird substantial management fees. It is alleged that William Baird was acting as an investment advisor under Wisconsin law but, contrary to Wisconsin law, was unlicensed. Plaintiffs allege that William Baird bought and sold highly speculative and unsuitable securities, causing the trusts to sustain the loss of great sums of money. Plaintiffs seek to hold Dain liable as an aider of William Baird's violation of the law.
Dain has asked the court to dismiss those allegations of the complaint which set forth plaintiffs' theory that they are entitled to "selective recission" of the unlawful trades. Specifically, paragraph 17 states: "The plaintiffs elect to rescind all Bill Baird's purchases in the Family Trust account which have resulted in financial losses. . . ." The Demand for Judgment seeks $519,000 in rescissionary damages which the parties appear to agree represents a damage calculation based on the theory of selective rescission.
The parties agree that the issue of whether, under Wisconsin law, plaintiffs are entitled to recover on only those transactions on which the accounts suffered losses, or are rather required to net out all the gains and losses on the accounts traded by William Baird, is a question no court has previously addressed. Plaintiffs argue that the permissibility of "selective recission" is made clear by the applicable Wisconsin statute, Wisc. Stat. § 551.59 (1)(a) which repeatedly refers to " a security" and " the security," such as in the provision defining the measure of damages for securities violations: the measure of damages is "the consideration paid . . . less the amount of any income received on the security" and less the proceeds received upon resale." Plaintiff maintains that "[t]he use of this noun in its singular context confirms that the right of rescission afforded under the Act is exercisable on a security by security basis." But this statutory argument fails. As defendant points out, Wisconsin law provides explicitly that in construing Wisconsin statutes, "[t]he singular includes the plural, and the plural includes the singular." Wisc. Stat. § 990.001(1). Thus, the fact that the statute dictates measuring damages by the gain and loss on the security does not resolve the issue in this case. Nor is the court aware, based on the parties' briefing, whether in the various cases plaintiff cites where selective rescission was allowed based on similar statutory language, the jurisdictions involved had a comparable rule of construction or whether, if they did, such a rule was brought to the attention of the courts involved. But as weak as plaintiffs' argument is, defendant's argument that substituting the plural for the singular in the statutory language means that all transactions, even winning ones, must be undone is no stronger. The question of which transactions must be considered in calculating the remedy is simply not answered by the statute.
Plaintiff relies on cases such as Kane v. Shearson Lehman Hutton, Inc., 916 F.2d 643 (11th Cir. 1990), where the court refused to require the plaintiff to net gains against losses. Kane was a case based on violations of Florida securities laws which was resolved by arbitration. The case in federal court raised the issue of the propriety of the measure of damages ordered by the arbitrators, a remedy which required netting those transactions in which plaintiffs had gains against those in which they suffered losses. The Eleventh Circuit held, affirming the district court, that the language of the Florida statute, which permitted rescission for any fraudulent security transaction, allows a purchaser who has been fraudulently induced to purchase a security to rescind that purchase; "[t]here is no indication," the court stated, "that other transactions are relevant to this calculation at all." Id. at 646. This conclusion is unexceptional. If plaintiff in this case could establish that certain transactions were induced by defendants by fraud, it would be those transactions that plaintiffs would be entitled to rescind, without regard to transactions which were not induced by fraud. Plaintiffs would not be compelled to undo all transactions ever conducted with defendant, whether or not induced by fraud.
Other cases cited by plaintiffs are, however, more pertinent to this issue. The Kane court, as well as plaintiffs, relied on Merchant v. Oppenheimer Co., 568 F. Supp. 639 (E.D. Va. 1983), rev'd in part on other grounds, Dixon v. Oppenheimer Co., 739 F.2d 165 (4th Cir. 1984). In Dixon, brokerage services were performed for plaintiff by an unregistered employee of defendant brokerage house, in violation of Virginia law. In holding that the plaintiff was entitled to rescind selectively, the court relied on the fact that the statute involved referred to "a security sold in violation" and not to "all securities sold in violation." 739 F.2d at 167. "This would support an interpretation," the court held, "that each transaction is separate and they may not be aggregated over a purchaser's objection." Id. As stated above, however, it is not clear whether Virginia law has a provision comparable to Wisconsin's that singular and plural usage in a statute are interchangeable; without knowing whether Virginia law, as Wisconsin law, explicitly prohibits reliance on the statute's use of the singular form or if it does, whether the court was made aware of it, it cannot be determined whether Virginia law supports plaintiffs' position here. Another case allowing selective rescission is Piantes v. Hayden-Stone, 514 P.2d 529, 530 (Utah 1973). In Piantes, the court based its decision on an unidentified and unquoted Utah statute, so this court cannot determine how similar the relevant Utah statute is to the Wisconsin statute at issue here.
Rather than taking a position that selective rescission is or is not a valid theory in all cases, the court is more persuaded by the cases that hold that the measure of damages should be based on the facts of the case at hand. The Seventh Circuit has stated in the federal securities context that the district court has discretion "to fashion the remedy best suited to the harm." Rowe v. Maremont Corp., 850 F.2d 1226, 1241 (7th Cir. 1987) (quoting Nye v. Blyth Eastman Dillon Co., 588 F.2d 1189, 1198 (8th Cir. 1978). See also Smith v. Fahnestock Co., Inc., 2002 WL 334511, at *3 (S.D.N.Y. Mar. 1, 2002). Thus, the nature of the wrong proven must be considered in shaping the remedy. Normally, if there is a single wrong, the plaintiff may not recover for losses while ignoring his profits. See Abrahamson v. Fleschner, 568 F.2d 862, 878 (2d Cir. 1977). See generally Rolf v. Blyth Eastman Dillon Co., Inc., 570 F.2d 38, 49 (amended, 1978 WL 4098) (2d Cir. 1978); Minpeco v. Conticommodity Services, Inc., 676 F. Supp. 486, 489 (S.D.N.Y. 1987). While it sounds as if plaintiffs are complaining of a single wrong — that Dain permitted an unregistered person to act as an investment advisor and conduct a series of transactions — it is possible that Baird's conduct was illegal in only some circumstances or that Dain aided that conduct in only some circumstances. Even the cases cited by defendant indicate that only when the wrongful transactions are separated from the legitimate ones is it possible to determine which transactions should be netted and which should not be. Smith, 2002 WL 334511, at *3.
If a single wrong occurred in this case, plaintiffs' theory that they can rescind only the transactions in which they lost money and keep the profit from those that were profitable strikes the court as highly dubious. Such would amount to a ratification of William Baird's and Dain's allegedly unlawful conduct to the extent it benefitted plaintiffs. At least one Wisconsin court has ruled in a different context that when a party elects rescission, which amounts to disavowing a contract, it cannot simultaneously seek benefits under the contract because to do so would be asserting the contract as void and not void at the same time. Criticare Systems, Inc. v. Sentek, Inc., 465 N.W.2d 216, 220 (Wisc.App.Ct. 1990). By this theory, plaintiffs should not be permitted to take advantage of the very wrong of which they complain. But if wrongs were committed in only certain specific transactions, case law indicates that plaintiffs might not be compelled to choose between affirming or rescinding all the transactions.
To rule on the measure of damages at this point in the case, when the court knows virtually nothing about the nature of the wrong plaintiffs will be able to prove, if any, seems both unnecessary and imprudent. When the case has progressed to the point where the court can assess with more precision what if any wrongs plaintiffs will be able to prove, it will be time enough to determine the appropriate measure of damages.
The motion to dismiss is denied.