|
|
Stanford
University Law School - Securities Class Action Clearinghouse
|
UNITED STATES DISTRICT COURT
MIDDLE DISTRICT OF FLORIDA
TAMPA DIVISION
HAROLD BRIMACOMBE,
Plaintiff,
JURY TRIAL DEMANDED
CASE NO.
96-593-CIV-T-25E
v.
•DEAN WITTER DISCOVER AND COMPANY,
a foreign corporation;
•DEAN WITTER VENTURE, INC.,
a foreign corporation;
•DEAN WITTER INTERCAPTIAL, INC.,
a foreign corporation;
•DEAN WITTER U.S. GOVERNMENT SECURITIES TRUST,
an open-end diversified management
investment company;
•DEAN WITTER SERVICES COMPANY, INC.,
a foreign corporation;
•DEAN WITTER DISTRIBUTORS, INC.,
a foreign corporation;
•NATIONSBANK CORPORATION, a
foreign corporation and bank
holding company;
•NATIONSBANK OF FLORIDA, N.A.,
a national banking association;
•NATIONSBANK OF NORTH CAROLINA, N.A.,
a national banking association;
•NATIONSSECURITIES, a general partnership;
•NATIONSBANC ENTERPRISE, INC.,
a foreign corporation;
•NATIONSBANC SECURITIES, INC., n/k/a
•NATIONSBANC DISCOUNT BROKERAGE, INC.,
a foreign corporation;
Defendants.
_____________________________________________/
CLASS ACTION COMPLAINT
Plaintiff, HAROLD BRIMACOMBE, sues defendants, DEAN WITTER
DISCOVER AND COMPANY, a foreign corporation; DEAN WITTER VENTURE,
INC., a foreign corporation; DEAN WITTER INTERCAPTIAL, INC., a
foreign corporation; DEAN WITTER U.S. GOVERNMENT SECURITIES TRUST,
an open-end diversified management investment company; DEAN WITTER
SERVICES COMPANY, INC., a foreign corporation; DEAN WITTER
$120.00 fee paid, receipt #37265
DISTRIBUTORS, INC., a foreign corporation; NATIONSBANK CORPORATION,
a foreign, corporation and bank holding company; NATIONSBANK OF
FLORIDA, N.A., a national banking association; NATIONSBANK OF NORTH
CAROLINA, N.A., a national banking association; NATIONSSECURITIES,
a general partnership; NATIONSBANC ENTERPRISE, INC., a foreign
corporation; and NATIONSBANC SECURITIES, INC., n/k/a NATIONSBANC
DISCOUNT BROKERAGE, INC., a foreign corporation, in this class
action complaint, demands trial by jury of all issues so triable,
and alleges:
Introduction and Summary of Claims
This lawsuit is brought by investors (primarily NationsBank
customers) who, during the period March 26, 1993, to November 15,
1994, were tricked and misled by commission and quota-driven
bankers and brokers into purchasing shares of the Dean Witter U.S.
Government Securities Trust. A recent financial magazine best
describes Dean Witters' ill-conceived and ill-fated products:
New York-based Dean Witter InterCapital, a unit of Dean
Witter, proves that mediocrity still sells . . . . The
fund products peddled by this wire house share attributes
only a spendthrift could enjoy: lackluster performance,
stiff loads, and high expenses. Despite the poor
numbers, though, Dean Witter has more than tripled its
equity assets under management in the past five years,
excluding investment gains . . . . No wonder it was the
last major wire house to discontinue the practice of
paying its brokers higher commissions on in-house brands.
And no wonder this was the only mutual fund family that
refused our requests for interviews and information.
Investors might consider taking their money elsewhere --
at least until Dean Witter demonstrates that it is as
serious about performance as it is about sales.1
____________________
1 Worth Magazine, March 1996, at 75.
2
After a substantial loss in his original investment, Plaintiff,
HAROLD BRIMACOMBE, did just that -- took his money elsewhere. Much
later, it was revealed that he was sold securities by bankers and
brokers prompted by hidden scripts, quotas and incentives. These
sales people pushed Dean Witter products in the bank branches of
NationsBank Corporation as part of a now-dissolved alliance between
NationsBank and Dean Witter. In so doing, NationsBank pushed Dean
Witter's proprietary products as its own. The representative
Plaintiff purchased the Dean Witter Trust from a NationsBank bank
branch in the state of Florida. His story is typical of those
class members who purchased in Florida and elsewhere. The
Plaintiff seeks to act as representative of the class pursuant to
Rule 23 of the Federal Rules of Civil Procedure.
This class action complaint is brought on behalf of a class of
investors who purchased shares of the Dean Witter U.S. Government
Securities Trust ("the Trust") during the period March 26, 1993 to
November 15, 1994, inclusive, from NationsSecurities or NationsBanc
Securities, Inc. All such purchasers were misled and lost money.
The Defendants are the NationsBank-controlled entities,
including the two broker-dealers who sold securities during the
class period (NationsBanc Securities, Inc., and NationsSecurities);
and the Dean Witter-controlled entities, including the Trust and
its investment advisors. The counts of liability are as follows:
COUNT I - Violations of Section 10(b) of the 1934 Act and
Rule 10b-5
COUNT II - Violations of the Florida Securities and Investor
Protection Act (§ 517.301, Florida Statutes)
3
COUNT III - Controlling Person Liability -- Dean Witter
Discover and Company
COUNT IV - Controlling Person Liability -- Dean Witter
Venture, Inc.
COUNT V - Controlling Person Liability -- NationsBank
Corporation
COUNT VI - Controlling Person Liability -- NationsBank of
North Carolina, N.A.
COUNT VII - Controlling Person Liability -- NationsBanc
Enterprise, Inc.
II. JURISDICTION AND VENUE
1. This Court has federal question jurisdiction of this case
or controversy pursuant to 28 U.S.C. § 1331, by virtue of Section
27 of the Securities and Exchange Act of 1934 (the "1934 Act"),
15 U.S.C. § 78aa.
2. This Court has supplemental jurisdiction over the state
law claims raised herein pursuant to 28 U.S.C. § 1367 because the
state law claims are so related to the original jurisdiction
federal claims raised herein that they form a part of the same case
or controversy under Article III of the United States Constitution.
Further, there exist no reasons for this Court to decline to
exercise supplemental jurisdiction under subsection (c) of 28
U.S.C. § 1367.
3. Venue lies in the Middle District of Florida pursuant to
each or all of the following federal statutes:
(a) (Special venue provision): Section 27 of the 1934
Act, 15 U.S.C. § 78aa, as one or more of the acts or transactions
constituting violations of the 1934 Act occurred, each or all of
4
the Defendants may be found, each or all of the Defendants is an
inhabitant, or each or all of the Defendants transacts business
within this district; or
(b) (General venue provision): 28 U.S.C. § 1391(a), as
a substantial part of the acts or omissions giving rise to the
claims alleged herein occurred within this judicial district, and
the Defendants are subject to personal jurisdiction in this
district.
4. The case or controversy is appropriately heard in the
Tampa Division of the Middle District of Florida pursuant to Middle
District Local Rule 1.02(c), as the Tampa Division encompasses the
counties having the greatest nexus with the causes of action and
claims of the representative plaintiff alleged herein. Plaintiff,
Harold Brimacombe, is a resident of and purchased shares of the
Trust in Pinellas County, Florida, which is within the Tampa
Division.
III. DEFENDANTS
5. Dean Witter Discover and Company is a foreign corporation
with its principal place of business in California.
6. NationsSecurities is a registered broker/dealer under the
1934 Act and is a member of the NASD. NationsSecurities, at all
times material, conducted a retail securities business on the
premises of bank branches operated by NationsBank of North
Carolina, N.A., and NationsBank of Florida, N.A., and the other
banking subsidiaries of NationsBank Corporation known by various
5
names2 in various states throughout the southern United States,
including Florida, and in the District of Columbia, at their
direction and control.
7. Until on or about November 15, 1994, NationsSecurities
was a general partnership or joint venture formed by NationsBanc
Enterprise, Inc., and Dean Witter Venture, Inc., with those two
entities being the general partners of NationsSecurities and being
responsible, jointly and severally, for the acts and omissions of
NationsSecurities.
8. NationsBanc Enterprise, Inc., is a foreign corporation
with its principal place of business in North Carolina. It is a
wholly-owned subsidiary of NationsBank of North Carolina.
9. Dean Witter Venture, Inc., is a foreign corporation with
its principal place of business in California.
10. Until on or about November 15, 1994, NationsBanc
Enterprise, Inc., and Dean Witter Venture, Inc., each owned 50% of
NationsSecurities.
11. On or after November 15, 1994, Dean Witter Venture, Inc.,
transferred or sold its interest in NationsSecurities to
NationsBank of North Carolina, N.A., or to a wholly owned and
controlled subsidiary thereof, with the result that NationsBank of
____________________
2 As a result of Congressional passage of interstate branching
legislation, NationsBank Corporation is in the process of combining
its banking-operations in various states. The North Carolina and
South Carolina banks have been combined and since renamed. The
Georgia and Florida banks are in the process of being combined and
renamed.
6
North Carolina owned or controlled 100% interest in
NationsSecurities as of November 15, 1994.
12. Even prior to November 15, 1994, NationsBank of North
Carolina at all times material had veto power over all major
decisions of NationsSecurities.
13. NationsBank of North Carolina, at all times material, was
a national banking association with its principal place of business
in North Carolina and is directly or indirectly a wholly-owned
subsidiary of NationsBank Corporation.
14. NationsBank Corporation is a foreign corporation and bank
holding company whose principal place of business is in North
Carolina. It controlled the activities of its banking and other
subsidiaries at all times material to the complaint.
15. NationsBank of Florida, at all times material, was a
national banking association with its principal place of business
in Florida and is a directly or indirectly wholly-owned subsidiary
of NationsBank Corporation.
16. NationsBank of Florida owns, operates and controls bank
branches within the state of Florida at the direction of
NationsBank Corporation.
17. Prior to the inception of NationsSecurities, NationsBanc
Securities, Inc., was the primary in-house brokerage firm
affiliated with NationsBank Corporation. It is a wholly-owned
subsidiary of either NationsBank Corporation or NationsBank of
North Carolina. It is now known as NationsBanc Discount Brokerage,
7
Inc. It was, at all times material, a registered broker/dealer
under the 1934 Act and a member of the NASD, and conducted a retail
securities business on the premises of bank branches operated by
the banking subsidiaries of NationsBank Corporation in various
states throughout the southern United States, including Florida,
and in the District of Columbia, at their direction and control.
18. NationsBanc Securities, Inc., effectively was merged into
NationsSecurities in some locations or offices.
19. At some time during 1993, the role played by NationsBanc
Securities, Inc., effectively was supplanted by NationsSecurities.
20. Dean Witter U.S. Government Securities Trust (the
"Trust") is an open-end diversified management investment company
(mutual fund) whose principal place of business is in New York.
The fund is organized as what is commonly known as a Massachusetts
Business Trust.
21. Dean Witter InterCapital, Inc., at all times material,
was the investment manager of the Trust. Its principal place of
business is in New York. Prior to December 31, 1993, Dean Witter
InterCapital, Inc., was a wholly-owned subsidiary of Dean Witter
Reynolds, Inc.; afterward, it became a direct wholly-owned
subsidiary of Dean Witter Discover and Company.
22. Dean Witter Services Company, Inc., is a wholly-owned
subsidiary of one or more of the Dean Witter-affiliated defendants.
After December 31, 1993, Dean Witter Services Company, Inc., took
over some of the administrative activities previously performed by
Dean Witter InterCapital, Inc. Together, Dean Witter InterCapital,
8
Inc., and Dean Witter Services Company, Inc., handled the
investment management, advisory, management and administrative
functions for the Trust and have done so together at least as of
December 31, 1993.
23. Dean Witter Distributors, Inc., as of December 31, 1993,
was a wholly-owned subsidiary of Dean Witter Discover and Company
with its principal place of business in New York. The distributor,
at all times material, received fees from the Trust, including
contingent deferred sales charges imposed on investors who sold
their shares within six (6) years after purchasing them. Prior to
December 31, 1993, Dean Witter Distributors, Inc., was a wholly-
owned subsidiary of Dean Witter Reynolds, Inc.; afterward, it
became a direct wholly-owned subsidiary of Dean Witter Discover and
Company.
24. Until on or about November 15, 1994, the following
parties were "controlling persons" of NationsSecurities within the
meaning of § 20 of the 1934 Act:
(a) NationsBank Corporation;
(b) NationsBank of North Carolina, N.A.;
(c) NationsBank of Florida, N.A.;
(d) NationsBanc Enterprise, Inc.;
(e) Dean Witter Venture, Inc.;
(f) Dean Witter Discover and Company.
9
25. At all times material, Dean Witter Discover and Company
was a "controlling person" of the following entities within the
meaning of § 20 of the 1934 Act:
(a) Dean Witter Venture, Inc.;
(b) Dean Witter InterCapital, Inc.;
(c) Dean Witter U.S. Government Securities Trust;
(d) Dean Witter Reynolds, Inc.;
(e) Dean Witter Services Company, Inc.;
(f) Dean Witter Distributors, Inc.
IV. THE SCHEME TO DEFRAUD
26. The Plaintiff, at all times material, was an individual
resident of Pinellas County, Florida. At the time he was solicited
to buy shares of the Trust, he was 67 years old.
27. The Plaintiff was not aware of the corporate structure of
NationsBank Corporation and its subsidiaries. He simply dealt with
the banking entity he knew as "NationsBank."
28. Likewise, the Plaintiff was not aware of the corporate
structure of Dean Witter Discover and Company and its various
subsidiaries. He did not even realize that Dean Witter was in any
way involved with Nationsbank at the time he was solicited to buy
shares of the Trust.
29. Because of his faith and trust in NationsBank as an
institution providing FDIC-insured products, and based on his
reasonable belief that the Trust was guaranteed by the U.S.
Government and had no risk to principal, the Plaintiff invested
10
money in shares of the Trust offered to him by the Defendants named
herein and suffered losses he would not have suffered if the
investments had possessed safety of principal, as the Plaintiff had
been led to believe.
30. The Plaintiff's belief and reliance was reasonable based
on the conduct and practices of the Defendants described herein.
31. The Plaintiff was solicited to purchase securities
through a referral by a bank employee.
32. Brokers employed by NationsSecurities, usually called
"investment officers" (like "loan officer" and "trust officer"),
typically would receive customers' names, sensitive bank account
and personal information, and telephone numbers from a NationsBank
bank employee through various "introductions."
33. Typically, the NationsBank bank employees making
referrals were receiving transaction based compensation, such as
cash, "points," and prizes, for their "referral" activities.
34. Effectively, the "referral" activities of the NationsBank
bank employees amounted to active solicitations by bank employees
for the sale of securities; yet, none of the bank employees were
appropriately registered as associated persons or registered
representatives with state regulatory authorities or the NASD.
35. Typically, brokers employed by NationsBanc Securities or
NationsSecurities would call and identify themselves as the
"investment officer at NationsBank," or other misleading
identifiers.
11
36. Typically, the brokers employed by NationsBanc Securities
and NationsSecurities would set up appointments with bank customers
at various bank branches, sometimes called "banking centers."
37. Typically, brokers employed by NationsBanc Securities or
NationsSecurities would tell customers that they worked with bank
customers, or that their jobs were to work with bank customers.
38. The Plaintiff never met a broker anywhere other than the
bank branch.
39. Brokers employed by NationsBanc Securities and
NationsSecurities were trained in how to overcome customer
objections. For example, brokers responded to customer concerns
about risk of loss and FDIC insurance by touting the "safety" of
the Trust and proclaiming that (underlying) investments contained
in the Trust were backed or guaranteed by the full faith and credit
of the U.S. Government, or words to like effect. These responses
were part of scripted presentations and training sessions given to
the brokers.
40. Typically, there was no meaningful disclosure under the
circumstances of interest rate risk, market risk, and other types
of risk (as opposed to simple credit risk).
41. Typically, brokers were trained to evade or avoid
answering questions such as the brokers' exact relationship with
NationsBank or whether the Trust was FDIC insured.
42. Typically, brokers were trained to recommend the Trust by
comparing favorably the then-current yield of the fund with the
12
interest rate earned on a bank certificate of deposit, an
inapposite, incorrect and misleading comparison.
43. Defendants were aware that the Trust was not federally
insured or guaranteed in any way by NationsBank Corporation or its
subsidiary banks, by any of the Dean Witter entities, or by the
U.S. Government, and in fact, that the Trust had managed to lose
money nearly every year of its existence, had steadily declined in
net asset value, and had unusually high expenses and loads.
Nevertheless, Defendants failed to meaningfully convey those facts
to the Plaintiff under the circumstances of the solicitations and
sales described herein.
44. For those customers who did receive a prospectus and
sales literature in a timely manner, they continued to be misled by
what they saw.
45. For example, the glossy brochure which wrapped the
prospectus touted the Trust as: "For High Current Income,
Consistent With Safety of Principal."
46. The glossy brochure presented the following misleading
picture of the Trust to class members:
(a) "Dean Witter U.S. Government Securities Trust -- For
High Current Income, Consistent With Safety of Principal."
(Featured on the color cover of the brochure, and twice on page 1).
(b) "The Trust seeks its objective by investing in a
portfolio of U.S. Government Securities, such as U.S. Treasuries and
Government National Mortgage Association certificates. These
securities are backed by the full faith and credit of the U.S.
13
Government as to the timely payment of interest and principal. In
fact, the U.S. Government has never failed to meet its obligations
--- making these securities among the safest in the world."
(Glossy brochure, page 1) (emphasis added).
(c) "(E]ach [GNMA] certificate is backed by the full
faith and credit of the U.S. Government, which means investors are
guaranteed complete and timely payment of monthly interest and
principal. Investing a portion of its assets in Ginnie Mae
certificates enables the Trust to achieve a higher level of current
income without sacrificing safety of principal." (Glossy brochure,
page 3) (emphasis added).
(d) "Since the government has never failed to pay
principal or interest payments on its securities, no other
investment offers the same degree of quality, safety, and liquidity
as U.S. Treasury securities. This standard of safety is brought to
you through the U.S. Treasury securities included in the portfolio
of Dean Witter U.S. Government Securities Trust." (Glossy
brochure, page 3) (emphasis added).
(e) "Dean Witter U.S. Government Securities Trust
invests its assets in a professional managed, diversified portfolio
of obligations issued or guaranteed by the U.S. Government and its
instrumentalities. All such obligations are backed by the full
faith and credit of the United States and are considered to be of
the highest quality." (Glossy brochure, page 4) (emphasis added).
14
(f) Words such as "safety" and "safely" appear in the
"prospectus wrapper" no less than nine (9) times on the cover and
the first four pages.
(g) The glossy brochure uses phrases such as "guaranteed
by the U.S. Government," no less than three (3) times in the first
four pages.
&nbs laiming: "No
Front-End Sales Charge" but fails to describe the amount of any
back-end sales charge. Instead, it blandly refers the reader to
the prospectus.
50. For those customers who actually received and read the
prospectus, if they received one at any time before or after the
sale, they were greeted with more of the same.
15
51. For example, in bold red type on the first page of the
prospectus, readers are told that the Trust's investment objective
"is high current income consistent with safety of principal," and
that the Trust is a "professionally managed diversified portfolio
of obligations issued or guaranteed by the U.S. Government or its
instrumentalities. All such obligations are backed by the full
faith and credit of the United States." All other information is
in block type.
52. At the Prospectus Summary, the "Investment Objective"
heading states: "The investment objective of the Fund is high
current income consistent with safety of principal." (emphasis
added).
53. At the very bottom of the same page under "Risks," the
block indented paragraph leads off with the following misleading
statement: "The Fund invests only in obligations issued or
guaranteed by the U.S. Government which are subject to minimal risk
of loss of income and principal." Again, these statements misled
the customer into thinking that the fund itself is subject to
minimal risk of loss of principal -- not true.
54. The stated fundamental investment objective of the Trust
is: "High Current Income Consistent with Safety of Principal."
This objective may not be changed without the approval of the
fund's shareholders. (Prospectus, page 5).
55. Yet, this is exactly what the Trust has done since
changing investment management strategies in 1992 and 1993.
16
56. Published research reports cite, in pertinent part, the
Trust's "higher risk" and the fact that its "yield has fallen and
its risk has risen." More specifically:
The fund used to have low risk scores relative to the
government-general group, but they have risen steadily
since manager Raj Gupta came aboard in early 1992.
That's because Gupta eliminated the fund's old high-
coupon strategy in favor of a more aggressive total-
return-oriented approach. . . . Gupta's more aggressive
strategy truly paid off this year. . . . Gupta achieved
greater interest-rate sensitivity by shifting more assets
into discount-coupon mortgages . . . . The fund's
duration is still a bit aggressive, though, as Gupta
remains generally optimistic that continued low inflation
will allow interest rates to stay flat or fall further.
. . .
Morningstar, Oct. 27, 1995, at 449 (emphasis added).
57. The proclamations of "safety" and "guaranteed U.S.
Government obligations" found in the glossy brochure and the
prospectus are substantially at odds with the actual state of
affairs as reported by Morningstar -- i.e. the Trust "used to have
low risk scores," but became "aggressive," "risky," and possessed
"greater interest rate sensitivity."
58. Thus, the investment objective of the Trust was changed
without approval of the Trust's shareholders.
59. NationsSecurities and NationsBanc Securities brokers were
even given a "cheat sheet" touting the primary features of the
Trust as higher income than a CD, triple-A rating, and safety.
60. Nowhere in the glossy sales brochure or prospectus does
it say, "you may lose your money," or "this investment is
aggressive and risky" or "this investment will decrease rapidly in
value if interest rates increase, and interest rates are at all
17
time lows," or plain-English words to like effect, which easily
could have been used.
61. The Trust was a Dean Witter product rolled out in 1984
under another name. The Trust, from the outset, touted itself as
an investment "for high current income, consistent with safety of
principal."
62. However, the net asset value of the Trust, and therefore,
the price at which shares could be bought or sold on the open
market, slid steadily from approximately $10.53 per share in 1985,
the year after roll-out, to approximately $8.41 per share in 1994,
after millions of dollars' worth had been sold to unsuspecting bank
customers and other conservative investors.
63. Clearly, an investor such as Plaintiff who paid $9.37 per
share in November 1993, and sold at $8.80 per share in April 1994,
less than 6 months later did not have "safety of principal."
64. Likewise, total return on the fund in 1994 was a negative
3.51 percent. Returns were further hurt by excessive fees and
expenses.
65. The Plaintiff would not have purchased shares in the
"aggressive," "risky," and "interest rate sensitive" Trust had the
true facts been disclosed.
66. The Defendants' failure to disclose the true facts
subjected the Plaintiff to extraordinary risk, including interest
rate risk and market risk. But for the Defendants' fraud, the
Plaintiff would not have been exposed to such risks as a
18
certificate of deposit customer of NationsBank or otherwise
conservative investor.
67. As described below, NationsBank Corporation embarked upon
a scheme to mine its depositor base for brokerage business. The
Dean Witter-affiliated entities were its willing partners.
68. Before NationsBank Corporation could put its own
proprietary products into the bank lobbies, it needed something to
sell its customers that would make them feel comfortable and
effectively conceal the fact that the risk of loss was being
transferred from NationsBank Corporation to the customer.
69. The Trust fit the bill. Its name featured words designed
to put investors at ease, such as "U.S. Government" and "Trust."
70. Further, the Trust touted "high current income,
consistent with safety of principal," "guaranteed U.S. Government
obligations," and all of the lulling and misleading assurances
discussed above.
71. The Defendants' scheme developed as described below.
72. Until recent judicial and administrative decisions
liberalized the restrictions of the Glass-Steagall Act, 12 U.S.C.
§ 377, banks were prohibited from underwriting or dealing in
securities, and from affiliating with companies engaged primarily
in the issuance, sale, or distribution of securities.
73. The relaxation of the restraints of Glass-Steagall
resulted in attempts by many banks and bank affiliates to offer
19
products and services traditionally offered only by broker/dealers
and other non-bank securities firms.
74. NationsBank Corporation made a corporate decision to
dramatically expand its securities business because it anticipated
that the income generated by securities activities would exceed
bank earnings on customer monies deposited into checking or savings
accounts or placed into Certificates of Deposit ("CD's"); or that
the bank would be able to gather assets under management from
outside the bank, thus increasing the customer's total relationship
with NationsBank Corporation and its subsidiaries, or both.
75. In order to carry out that decision, NationsBank
Corporation directed the organization and activities of all of the
NationsBank-affiliated Defendants, for the purpose of increasing
its profits, and of increasing the value and earnings of its
subsidiaries, by moving customer monies out of bank deposits and
into non-depository investment products, such as the Trust.
76. NationsBank Corporation made a conscious decision to
increase its retail sales of non-depository investment products by
exploiting bank customers' trust in NationsBank and its banking
subsidiaries as depository (banking) institutions providing
federally-insured products. In so doing, it deliberately targeted
the least sophisticated segment of the investing public.
77. NationsBank Corporation's market research indicated that
banks and other "depository institutions" enjoyed a much higher
20
level of public trust and confidence than traditional stock
brokerage firms.3
78. NationsBank Corporation was aware of this extraordinary
degree of trust and confidence it enjoyed from its banking
customers and made a conscious decision to exploit it. It took the
position, for example, that all of its employees should assist in
sales.
79. NationsBank Corporation's market research also showed
that many of the bank customers it targeted for securities sales,
including sales of the Trust, were "first-time investors"; it also
knew that its bank customers were unsophisticated investors, often
elderly.
80. NationsBank Corporation agreed to form a securities
broker/dealer with an affiliate of Dean Witter Discover and Company
in order to take advantage of Dean Witter's supposed expertise in
operating a nationwide retail securities business.
81. Dean Witter Discover and Company was motivated to enter
the joint venture with NationsBank Corporation at least in part by
a desire to gain access to the tremendous customer deposit base of
NationsBank Corporation's banking subsidiaries.
____________________
3 For example, in 1989, The Wall Street Journal had conducted
a poll in which respondents were asked the question, "Who would you
trust to give you good advice on investing a $10,000 windfall?"
Fifty-nine percent of respondents stated that they would trust
depository institutions, but only 11% stated that they would trust
stock brokerage firms.
21
82. As part of the scheme described herein Dean Witter
Discover and Company hoped to sell its proprietary mutual funds
(including the Trust) to bank customers of NationsBank
Corporation's banking subsidiaries.
83. In order to sell bank customers non-depository investment
products such as the Trust, Defendants conceived the scheme
described herein which was implemented and carried out through the
various Defendants named herein.
84. Defendants schemed to obscure the nature of the brokerage
products they were selling in the bank branches by blurring the
distinctions between NationsBank's banking and non-banking
subsidiaries, and between traditional federally insured bank
products such as CD's, and new uninsured non-depository products,
such as the Trust, in order to mislead customers into believing
that non-depository products such as the Trust were bank products
or were somehow endorsed, backed, or guaranteed by the bank or by
the U.S. Government.
85. NationsBank Corporation also schemed to conceal the fact
that by selling non-depository products to its customers, as
opposed to providing depository products, it was transferring the
risk of loss on these instruments from the bank to the customer.
86. The products which Defendants sold such as the Trust, of
course, were not federally insured or in any way guaranteed by the
U.S. Government against loss of principal, but the Plaintiff was
led to believe that they were.
22
87. The following are a few examples of the ways in which the
distinctions between NationsBank Corporation's banking
subsidiaries, and NationsBanc Securities/NationsSecurities, were
intentionally blurred, so as to confuse bank customers as to the
nature of the products being sold:
(a) Brokers were physically located on
the premises of the bank branches,
and were permitted virtually
unlimited access throughout the bank
branches, which were liberally
plastered with decals proclaiming
the protection of FDIC insurance;
(b) Brokers typically sat in NationsBank
bank lobbies at the same desks where
customers opened checking or savings
accounts and bought bank CD's;
(c) NationsBank Corporation and its
banking subsidiaries provided
brokers with bank customers'
confidential account information
through the United States Mail
and/or interstate wire/telephone
communications, including such
information as the dollar value and
maturity dates of customers' CD's,
the dates of deposits and
withdrawals, account balances, the
identities of joint account holders,
and personal information such as the
addresses, telephone numbers, ages
and incomes of the customers;
(d) A printed script prepared for
NationsBank employees entitled
"REFERRALS ARE KEY!" contained
"(t]he following lead-ins" for use
by bank employees to refer bank
customers to brokers:
* NationsBank offers a wide range of
investment services, If you'd like,
I can ask a NationsSecurities
representative to call and arrange
a meeting. . . .
23
* Many priority customers, like
yourself, work with our investment
representatives. May I introduce
you to him/her?. . . .
(e) Brokers were trained to make
telephone solicitations such as "I
am calling from the bank" or words
of similar effect, for the purpose
of soliciting securities sales;
(f) Brokers were taught to emphasize the
safety, stability, and credit
quality of shares of the Trust and
were trained to hedge or avoid
directly answering customer
questions or objections, such as,
"Is this FDIC insured?"
(g) Prior to the inception of
NationsSecurities, NationsBanc
Securities account applications
featured the "NationsBank" corporate
logo in large type and contained few
or no disclosures under the
circumstances indicating the risk
being taken by the customer when
investing in shares of the trust;
(h) Even after NationsSecurities'
inception, brokerage applications
concealed or disguised explanations
of risk under a boxed heading in the
margin misleadingly labeled
"Affiliate Disclosure."
(i) Employees of NationsBank
Corporation's, subsidiaries were
instructed to advise customers that
Dean Witter products (including the
Trust) were as safe as NationsBank,
or words to like effect;
(j) NationsBank Corporation's banking
subsidiary employees were actively
engaged in soliciting and
"referring" sales of securities,
including the Trust, and customers
typically were unable to discern
that the bank customer service
representative, manager, or
teller who normally handled their
24
depository accounts were now engaged
in security solicitations in
exchange for improper ongoing
transaction-based compensation.
(k) The various other misleading
activities and practices outlined
above.
88. NationsBank Corporation realized that it could earn
substantial commissions from sales of securities to its banking
customers, and the Dean Witter entities knew they could earn fees
such as contingent deferred sales charges and 12b-1 fees from the
Trust sold to former depositors and other bank customers.
89. In order to effect NationsBank Corporation's plan to
expand its retail securities business, on or about October 26,
1992, NationsBank of North Carolina, at the direction of
NationsBank Corporation, made a proposal to the Office of the
Comptroller of Currency ("OCC") to establish NationsSecurities, a
joint venture between a NationsBank of North Carolina, N.A.
subsidiary and a subsidiary of Dean Witter Financial Services
Group.
90. On or about April 9, 1993, the OCC issued Interpretive
Letter No. 622, approving the proposal subject to limitations set
forth in the letter. One of the limitations was that no
NationsBank employee would receive any compensation based upon
sales of securities products.
91. Following the OCC's approval, NationsBank Corporation and
NationsBank of North Carolina caused NationsBanc Enterprise, Inc.
to be formed as a direct or indirect wholly-owned subsidiary of
NationsBank of North Carolina.
25
92. Beginning in 1993, NationsSecurities began rapidly
expanding its sales force of brokers and began marketing,
soliciting, the sale and selling securities from both registered
and unregistered bank branches.
93. In order to exploit NationsBank banking customers' trust
and to blur the distinction between the banking and brokerage
businesses, NationsBanc Securities and NationsSecurities sold
securities from the NationsBank bank branch premises instead of
from the separate licensed regional "hub" offices where the
administrative, technical and supervisory personnel worked.
94. Typically, neither NationsBanc Securities nor
NationsSecurities registered or licensed the bank branches where
the brokers actually sold securities as branch offices as required
by applicable state laws. As a result, state inspection,
supervision, and audits were virtually non-existent.
95. Poorly-trained, inexperienced brokers were often placed
alone in bank branches where there were no experienced brokers,
compliance officers or supervisory personnel; typically, there was
no supervision or meaningful compliance in the bank branches where
the brokers worked.
96. The brokerage business was to be generated from the bank
branches, either through "referrals" from the bank employees or
through solicitations from customer lists provided by the bank,
through the United States Mail and/or interstate wire/telephone
communications.
26
97. As part of the scheme, Defendants set a goal of ensuring
that the overwhelming majority of their brokerage customers would
purchase proprietary products such as the Trust.
98. As part of the scheme Defendants intended to and did lure
bank customers' monies into the Trust.
99. NationsBanc Securities and NationsSecurities did not
adequately advise bank customers of the true relationship between
or among the various bank and brokerage entities.
100. In mid-1993, during the class period, NationsSecurities
imposed a new commission structure which paid brokers at a certain
production level 50% more commissions for sales of the Trust and
other proprietary products over outside products.
101. The effect of that commission structure was to coerce
NationsSecurities' brokers into selling still more proprietary
products, such as the Trust.
102. Further, Defendants imposed sales quotas on their brokers
for proprietary products, such as the Trust.
103. There was a "referral incentive program" pursuant to
which bank employees who referred bank customers to NationsBanc
Securities' or NationsSecurities' brokers were paid a percentage
(typically 5%) of gross commissions on sales of securities to the
referred customer. This was in fact an illegal and undisclosed
commission splitting arrangement.
27
104. Employees of NationsBank Corporation's banking
subsidiaries were encouraged to and did share confidential customer
financial information about the bank's customers with brokers
employed by NationsBanc Securities/NationsSecurities.
105. Such confidential information was disclosed without the
knowledge or permission of bank customers including the Plaintiff.
106. Bank customers, including Plaintiff, did not expect
anyone not closely affiliated with the bank to have or use such
personal bank information or to work in the depository areas of the
bank alongside bank personnel.
107. Confidential customer information was used by
NationsSecurities to solicit bank customers to purchase securities
from NationsSecurities through mailings (through the United States
Mail), interstate telephone calls and personal referrals, which
typically referred to the bank or the banking relationship.
108. In exchange for a share of the brokerage profits,
NationsBank Corporation and its banking subsidiaries performed
services integral to the scheme such as referring their banking
customers to NationsBanc Securities/NationsSecurities, and
providing detailed lists of banking customers to the securities
brokers, for use in soliciting bank customers.
109. NationsBank Corporation's banking subsidiaries had the
ability to replace a NationsBanc Securities/NationsSecurities
broker if the bank branch manager or bank employees did not get
&nbs self-interest.
113. Bank customers, including the Plaintiff, believed that
the bank referral indicated that the bank approved of or was
involved in the Trust, in the same or similar manner that the bank
was involved in traditional federally insured bank products.
114. NationsBank Corporation and its banking subsidiaries knew
that bank customers, including the Plaintiff, who were thus
solicited would automatically assume the broker to be an employee
of the subsidiary bank.
115. Bank customers, including the Plaintiff, were not told
that NationsBank Corporation's banking subsidiaries received a
portion of all sales commissions generated by the brokers' sales.
116. As a result of the above-described calculated and
deliberately misleading sales techniques, customers of NationsBank
Corporation's banking subsidiaries were induced to buy non-
29
depository investment products such as the Trust instead of
traditional federally insured bank products.
117. The Dean Witter-affiliated Defendants utilized many of
the materials and techniques described above to market the Trust.
118. NationsBank Corporation and its banking subsidiaries told
bank employees to watch for, and refer to brokers, bank
customers with large cash deposits in their checking or savings
accounts, or with large amounts invested in CD's; or who made
remarks about low interest rates, high taxes, or estate planning;
or who asked about bank IRA products.
119. NationsBank Corporation and its banking subsidiaries also
instructed bank employees and the brokers to target senior citizens
for referral to NationsSecurities.
120. NationsBank Corporation and its banking subsidiaries
advised those bank customers who were targeted for referral that
the Trust provided better "interest rates" than were otherwise
available on CD's and regular savings accounts.
121. NationsBank Corporation's banking subsidiaries urged bank
customers to speak with an "investment counselor" or "investment
officer" regarding such better interest rates.
122. NationsBank Corporation's banking subsidiaries typically
scheduled an appointment for the bank customer to meet with the
investment counselor at the bank branch.
123. NationsSecurities' brokers typically met bank customers
at the bank branches and then and there completed the solicitation
of the bank customer to purchase securities.
30
124. The NationsBank-affiliated Defendants failed to post
signs that meaningfully or adequately disclosed that the Trust was
significantly different than the federally insured products offered
by the bank.
125. Such signs as may have existed were inadequate in light
of the prominent, conspicuous, and overwhelming displays of FDIC
insurance protection, and the herein-described location and manner
of the solicitations of sales of the Trust.
126. Employees of NationsBank Corporation and its banking
subsidiaries were not registered with the appropriate departments
of the various States as sellers of securities including in
Florida, the Department of Banking and Finance as "associated
persons" of NationsBanc Securities or NationsSecurities even though
such employees typically were required to, and did, act for, refer
and solicit the sales of, securities.
127. Because neither NationsBanc Securities nor
NationsSecurities typically had separate office space within the
bank branches, brokers used a desk, office, or space in the lobby
normally used by a depository bank employee.
128. Broker employees of NationsBanc Securities distributed
business cards to potential customers, by, among other means, the
United States Mail, which prominently displayed the distinctive
"NationsBank" logo and characteristic color scheme, but did not
clearly distinguish themselves or the non-depository products and
services offered by NationsBanc Securities from the bankers at
31
whose desks they sat and the FDIC insured products and services
offered by NationsBank.
129. As a result of the scheme, bank customers, including the
Plaintiff, typically were unaware they were purchasing non-
depository investment products (the Trust) that carried substantial
risk to principal or that the Defendants were selling same.
130. Confirmation slips and account statements sent to
customers via the United States Mail and/or interstate
wire/telephone communications did not adequately disclose under the
circumstances that shares of the non-banking products were not
insured by the FDIC and not guaranteed or backed by the bank.
131. Defendants failed to supervise the sale of shares of the
Trust non-banking products to bank customers and failed to disclose
to the Plaintiff and class members that there was no effective
supervision.
132. Defendants failed to disclose to the Plaintiff and class
members that the brokers were trained how to overcome customer
sales objections but not appropriately trained in investment theory
and suitability.
133. Defendants omitted to disclose that Defendants forced the
brokers to participate in high-pressure internal sales contests for
the Trust.
134. Defendants failed to disclose that bank personnel were
evaluated, judged and compensated based, in part, on the number,
32
"quality," and dollar volume of the referrals which they made to
NationsBanc Securities and NationsSecurities.
135. Defendants failed to conduct an appropriate follow-up
contact program to verify that the Plaintiff and class members knew
that they were purchasing non-federally insured investments, as is
standard in the industry for sales of securities by banks and bank-
affiliated broker/dealers.
136. The Defendants' acts, practices and courses of business
alleged herein operated as a fraud on the Plaintiff and the class
members.
137. The Defendants acted with scienter, as evidenced by,
among other things, their extreme departure from the normal
business practices of banks and bank affiliates that engage in
selling securities or firms offering or selling securities to bank
customers and other conservative investors.
138. Although the Plaintiff and class members knew at some
point after their respective purchases of shares of the Trust that
they had lost money, they did not, and could not with the exercise
of reasonable diligence, have discovered the entire fraud
complained of and discovered herein prior to at least December
1995. Many investors have yet to learn the truth.
V. THE NAMED PLAINTIFF
MR. HAROLD BRIMACOMBE
139. At the time Mr. Brimacombe purchased shares of the Trust,
he was 67 years old.
33
140. Mr. Brimacombe was a resident of St. Petersburg, Pinellas
County, Florida, at the time he purchased shares of the Trust at a
NationsBank branch in St. Petersburg, Florida.
141. In November 1993, Mr. Brimacombe visited the NationsBank
branch at the corner of 4th Street and 38th Avenue North in St.
Petersburg, Florida to roll over a Certificate of Deposit that was
due to mature.
142. Mr. Brimacombe spoke with a customer service
representative at NationsBank, who told him that "we" have options
other than a CD available.
143. The customer service representative sent him to a service
desk to make an appointment with Dan Schultz, a representative of
"NationsSecurities" who had actual and/or apparent authority to act
on behalf of NationsSecurities. Mr. Schultz was not there at the
time.
144. The bank customer service representative made the
arrangements for Mr. Brimacombe to meet with Mr. Schultz later at
the same NationsBank branch.
145. Mr. Brimacombe at all times thought that
"NationsSecurities" was part of NationsBank.
146. When he met with Mr. Schultz, Mr. Brimacombe indicated
that he did not want any risk to his money.
147. Mr. Schultz told Mr. Brimacombe that his money would be
safe and that he "could only lose money if the United States
Government failed."
34
148. Mr. Brimacombe was never told that he was purchasing an
investment product from Dean Witter.
149. Mr. Brimacombe had never personally invested in any
stocks, bonds, or mutual funds.
150. Mr. Brimacombe cashed in his CD, and, at the
recommendation of the broker, purchased 5,257 shares of the Trust
on November 12, 1993, at $9.37 per share, for a total investment of
$49,258.09. The broker did not recommend any investment to Mr.
Brimacombe other than the Trust.
151. Mr. Brimacombe ultimately sold his shares of the Trust at
$8.80 per share on April 15, 1994. The contingent deferred sales
charge was not assessed because Mr. Brimacombe was told that his
investment was in an IRA.
152. The Defendants utilized United States Mail and
interstate wire and telephone communications in furtherance of this
scheme to defraud described herein, including account statements,
and a confirmation. In addition, the transaction utilized
interstate wire and/or telephone communications for order entry and
clearing.
153. Defendants committed the acts and omissions described
herein in paragraphs 31 through 137, as described in those
paragraphs and in the individual counts against the Defendants
which follow.
35
CLASS ACTION ALLEGATIONS
154. This action is brought as a Class action under Rule 23 of
the Federal Rules of Civil Procedure on behalf of:
All persons who, during the period March 25, 1993, to November
15, 1994, inclusive, purchased shares in the Dean Witter U.S.
Government Securities Trust from NATIONSBANC SECURITIES, INC.,
and/or NATIONSSECURITIES;
excluding then or current officers, directors, and employees of any
of the Defendants.
155. The Class in this matter is composed of, at a minimum,
persons in numerous and various locations throughout the
southeastern United States of America where NationsBank Corporation
operates banking subsidiaries, and, at a maximum, persons in
numerous and various locations throughout the entire United States
of America.
156. The number of Class members is so large that the joinder
of all its members is impracticable.
157. Plaintiff's claims are typical of the claims of the
members of the Class.
158. Plaintiff is an adequate representatives of the Class.
159. Plaintiff will fairly and adequately protect the
interests of the Class.
160. Plaintiff has retained counsel competent and experienced
in class and securities litigation and intend to prosecute this
action vigorously.
36
161. The Plaintiff's interests are not antagonistic to or in
conflict with the interests Plaintiff seeks to represent as Class
representative.
162. A class action is superior to the other available methods
for the fair and efficient adjudication of this controversy because
among other things, joinder of all members of the Class is
impracticable. Furthermore, as the damages suffered by individual
members of the Class may be relatively small, and the expense and
burden of individual litigation make it impracticable for the
members of the Class individually to seek to redress the wrongs
done to them. Plaintiff knows of no difficulty that will be
encountered in the management of this litigation that would
preclude its maintenance as a class action.
163. There exist numerous common questions of law and fact in
this matter within the meaning of Rule 23(a)(2) of the Federal
Rules of Civil Procedure, and same predominate over any questions
affecting only individual members within the meaning of Rule
23(b)(3).
164. The common questions of law and fact include, without
limitation:
(a) Whether Defendants violated § 10(b)
of the 1934 Act and Rule 10b-5 by
employing devices, schemes, or
artifices to defraud; by omitting to
state material facts necessary to
make the statements made, in light
of the circumstances under which
they were made, not misleading;
and/or by engaging in transactions,
practices or courses of business
37
which operated as frauds or deceits,
in connection with the sale of
securities.
(b) Whether those Defendants who were
controlling persons are liable as
controlling persons for violations
of § 10(b) of the 1934 Act and Rule
10b-5.
(c) Whether Defendants violated §
517.301 of the Florida Statutes by
employing devices, schemes, or
artifices to defraud; by obtaining
money or property by means of
omissions to state material facts;
and/or by engaging in transactions,
practices or courses of business
which operated as frauds or deceits.
(d) Whether there existed among the
Defendants a common scheme to
defraud.
(e) Whether the Class members suffered damages.
COUNT I
VIOLATIONS OF SECTION 10(b)
OF THE 1934 ACT AND RULE 10b-5
165. The allegations of paragraphs 1 through 153 of this
Complaint are incorporated in this Count herein by reference.
166. All Defendants violated § 10(b) of the 1934 Act and Rule
10b-5 thereunder, 17 C.F.R. § 240.10(b)-5, by directly or
indirectly, by the use of various means of interstate commerce, or
of the mails, or of various facilities of national securities
exchanges,
(1) employing a scheme to defraud the Plaintiff and
class members into purchasing shares of the Trust, as described in
paragraphs 26-138 of this Complaint;
38
(2) making untrue statements of material facts and
omitting to state material facts necessary in order to make the
statements made, in the light of the circumstances under which they
were made, not misleading, as described earlier in this Complaint
and in further detail below in paragraph 167(a)-(j); and
(3) engaging in acts, practices and courses of business
which operated as frauds on the Plaintiff and class members in
connection with the sale of the above-described securities, all as
alleged in this Complaint at paragraphs 26-138.
Materially Misleading Statements and Omissions
167. The materially misleading statements and omissions made
by Defendants NationsBanc Securities, Inc. and NationsSecurities,
Dean Witter InterCapital, Inc., Dean Witter Services Company, and
Dean Witter Distributors, Inc. include, without limitation, the
following:
(a) Defendants failed meaningfully to disclose under the
circumstances of the solicitations and sales that the Trust's net
asset value (NAV) had been declining steadily from $10.53 per
share in 1985 (the year after inception) to as low as $8.41 per
share in 1994. Failure to disclose the declining NAV was
materially misleading because this information was necessary to
alert unsophisticated bank customers, like Plaintiff, to the fact
that they could lose their money despite the representations to the
contrary made by NationsSecurities brokers and made in the
prospectus and glossy brochure. Disclosure of this information was
39
necessary to make the representations by the NationsSecurities
brokers and in the glossy brochure and the prospectus not
misleading.
(b) Defendants failed meaningfully to disclose under the
circumstances of the solicitations and sales that during the ten
year period 1985 to 1994, when performance results were posted by
independent research analysts, the Trust performed in either the
lowest quartile (three years) or next to lowest quartile (five
years) of all funds with the same objective. Failure to disclose
this information was materially misleading because the information
was necessary to allow bank customers to make an informed decision,
particularly those customers, like Plaintiff, who thought they were
buying a product guaranteed by the U.S. Government and would have
seen no reason to research the Trust's performance. Disclosure of
this information was necessary to make the representations by the
NationsSecurities brokers and in the glossy brochure and the
prospectus not misleading.
(c) Defendants failed meaningfully to disclose under the
circumstances of the solicitations and sales that on or about the
period 1992 to 1993, the Trust intentionally changed its
fundamental investment policies by, among other things, adopting a
more aggressive investment approach, increasing the risk of the
Trust, and increasing the interest rate sensitivity of the Trust
in an environment where interest rates were at all-time lows. The
NationsSecurities brokers and sales brochures and prospectuses
continued to advertise the Trust as an investment with "high
40
current income, consistent with safety of principal." Failure to
disclose that the Trust had changed its investment strategy, which
increased risk and volatility, while at the same time touting the
Trust as "consistent with safety of principal," was misleading
because the Trust's principal was not "safe." Disclosure of this
information was necessary to make the representations by the
NationsSecurities brokers and in the glossy brochure and the
prospectus not misleading.
(d) Defendants failed meaningfully to disclose under the
circumstances of the solicitations and sales that the Trust was
"aggressive" and "risky." Failing to disclose that the Trust was
aggressive and risky was materially misleading because the
NationsSecurities brokers and the prospectus and glossy brochure
indicated otherwise, and many of the largely unsophisticated bank
customers who bought shares of the Trust, like Plaintiff, wanted no
risk at all. This information was necessary to make the
representations of the NationsSecurities brokers and in the
prospectus and glossy brochure not misleading.
(e) Defendants promoted the Trust in the common written
and scripted oral presentations as "consistent with safety of
principal," despite the fact that the Trust was aggressive and
risky. These statements were misleading because the Trust was not
"consistent with safety of principal."
(f) Defendants failed meaningfully to disclose under the
circumstances of the solicitations and sales that retail brokers
(usually called "investment officers") were being improperly driven
41
by heightened payouts, skewed commission grids, sales contests,
quotas, and prizes, to sell shares of the Trust to unsuspecting and
unsophisticated customers, like Plaintiff, seeking conservative
investments and safety of principal. Failure to disclose the above
information was materially misleading because this information
would have informed otherwise unknowledgable bank customers that
the brokers who they thought were salaried bank employees were
working for commission and did not have the customers' best
interests at heart. This information was necessary to make the
representations and advice of the NationsSecurities brokers who
profited and often earned other prizes for selling shares of the
Trust not misleading.
(g) Defendants failed meaningfully to disclose under the
circumstances of the solicitations and sales that unregistered
persons such as NationsBank employees were receiving ongoing
transaction-based fees for soliciting and "referring" Plaintiff and
class members to purchase shares in the Trust, in violation of
Article III, Section 25 of the NASD Rules of Fair Practice and
interpretations thereof from the NASD Office of General Counsel.
Failing to disclose the presence of referral fees was materially
misleading because bank customers, like Plaintiff, often trust bank
employees to give unbiased or disinterested financial advice.
Thus, when a bank employee encourages the customer to see an
"investment officer," the suggestion is clothed with legitimacy and
is likely to be heeded. On the other hand, if the customer knew
the bank employee was paid for this encouragement, the suggestion
42
would less likely be heeded. This information was necessary to
make the representations of the NationsBank bank employees who
referred bank customers to the brokers not misleading.
(h) Defendants failed meaningfully to disclose under the
circumstances of the solicitations and sales that NationsBank
affiliated Defendants were engaged in an illegal commission
splitting scheme in connection with sales of the Trust, among other
non-deposit investment products. Failure to disclose this
information was materially misleading because all customers have a
right to know whether their broker is complying with all laws,
rules, and regulations -- particularly bank customers, like
Plaintiff, who trust banks simply because they claim to be highly
regulated and safe.
(i) The statement on page 3 of the glossy brochure that
"This standard of safety is brought to you through the U.S.
Treasury securities included in the portfolio of Dean Witter U.S.
Government Securities Trust," misleads potential investors into
thinking that the Trust has a standard of safety equivalent to that
of a U.S. Treasury product. However, unlike a U.S. Treasury bond,
for example, which has a definite maturity date at which time the
bond investor is entitled to a return of the face amount of the
bond, a bond fund comprised of Treasury bonds has no maturity date
and a considerable amount of principal can be lost when interest
rates rise and the prices of the bonds that make up the bond fund
portfolio fall.
43
(j) The statement on page 3 of the glossy brochure that
"Investing a portion of its assets in Ginnie Mae certificates
enables the Trust to achieve a higher level of current income
without sacrificing safety of principal," misleads investors into
thinking that their principal is "safe." However, Ginnie Mae
certificates are sensitive to interest rates and fluctuate in value
as interest rates fluctuate, which causes the NAV of the fund (the
investors' principal) to fluctuate. Thus, in a period of rising
interest rates, safety of principal is sacrificed.
168. Defendants NationsBanc Securities, Inc. and
NationsSecurities made these misrepresentations and omissions
through its employee brokers who had actual and apparent authority
to act on their behalf and who disseminated the misleading
information in the prospectus and glossy brochure during sales
presentations. These defendants also failed even to provide a
prospectus at the time of the solicitation and sale, as with the
named Plaintiff.
169. Defendant Dean Witter InterCapital, Inc. made these
misrepresentations and omissions in its capacity as investment
adviser and by assisting or directing in the preparation and
distribution of the prospectus and glossy brochure.
170. Defendant Dean Witter Services Company made these
misrepresentations and omissions by assisting in or directing the
preparation and distribution of the prospectus and glossy brochure.
44
171. Defendant Dean Witter Distributors, Inc. made these
misrepresentations and omissions by distributing the prospectus
and glossy brochure.
172. Potential investors would have considered the omissions
described above important in making the decision to invest.
173. These material misrepresentations and omissions are in
addition to and form parts of the overall scheme to defraud the
Plaintiff and class tive and opportunity to conceal the
declining NAV and the poor ranking of the Trust.
177. Defendants had a motive to conceal the declining NAV and
the poor ranking because doing so ensured that more bank customers
would invest in the Trust, thereby increasing the amount of money
under management, which increases the Defendants' advisory fees,
45
distribution fees (12b-1 fees), administrative fees, and redemption
fees.
178. The opportunity to conceal the declining NAV and poor
ranking existed because many of NationsSecurities' customers, like
Plaintiff, were unsophisticated and, even if they knew they were
buying a mutual fund, would not know how to utilize the available
research materials that would reveal a declining value or poor
ranking.
179. The typical bank customer relies heavily upon and trusts
the bank and its employees for proper advice, particularly in
financial matters. Thus, by concealing the declining NAV and poor
rank, more bank customers would be likely to invest in the Trust.
180. Scienter with regard to the failure to disclose the
change in investment strategy and the fact that the Trust had
become riskier and more aggressive is illustrated by the following
circumstantial evidence.
181. A new Trust manager in 1992 changed from a low-risk
high-coupon strategy to a higher-risk longer duration zero-coupon
and mortgage strategy.
182. The longer the duration, the more sensitive a bond (or
bond fund) is to changes in the interest rates.
183. Although the Trust's risk and volatility increased,
Defendants nevertheless represented to customers through oral
representations and the prospectus and glossy brochure that their
principal was secure.
46
184. These statements were inconsistent with contemporaneous
data regarding the Trust's investment strategy, duration, and
portfolio.
185. Scienter with respect to the failure to disclose the
incentives to bank employees, the referral fees, and the commission
splitting is illustrated by the conscious misconduct of
deliberately refusing to adhere to the standard of care in the
industry as outlined in paragraphs 67-136 of this Complaint.
186. Scienter with respect to the statements on page 3 of the
glossy brochure discussed in paragraph 167(i)-(j) above is shown
because these statements reflect either a knowing or grossly
reckless disregard of the distinction between investing in a
Treasury or Treasury-backed obligation itself and investing in a
fund whose portfolio consists of Treasury-backed obligations.
187. The blurring of the distinctions between bank and
brokerage, between bank and broker, and between bank products and
securities, constitutes a departure from the standard of care in
the industry.
Justifiable Reliance
188. Each class member and the Plaintiff justifiably relied on
the Defendants' misrepresentations and omissions in connection with
the purchase or sale, or both, of securities from the Defendants.
189. Given the lack of sophistication and expertise of the
Plaintiff, the existence of a trusting relationship between
NationsBank and the Plaintiff, the initiation of the transaction by
47
the Defendants, and the Plaintiff's lack of access to relevant
information, the Plaintiff was justified in relying on Defendants'
misrepresentations as to the safety of the Trust.
Causation
190. As a proximate result of the Defendants' securities law
violations, Plaintiff and each class member suffered damages,
losses, or injuries to property.
191. Defendants induced Plaintiff and the class members into
purchasing this Trust by misrepresenting it as safe and consistent
with the preservation of capital, and Plaintiff and the class
members suffered losses as a result of the risky and aggressive
nature of the Trust.
192. Accordingly, Defendants are liable to Plaintiff and each
class member under section 10(b) of the Securities Exchange Act of
1934, 15 U.S.C. § 78j(b) and Rule 10b-5, 17 C.F.R. § 240.10b-5.
WHEREFORE, the Plaintiff and class members demand judgment for
damages against each Defendant, jointly and severally.
COUNT II
VIOLATIONS OF THE FLORIDA SECURITIES AND
INVESTOR PROTECTION ACT (§ 517.301, FLORIDA STATUTES)
193. The allegations of paragraphs 1 through 153 and 166
through 191 of this Complaint are incorporated in this Count herein
by reference.
194. In connection with the offers and sales of securities to
the Plaintiff and the class members, the Defendants violated Fla.
Stat. § 517.301 by directly or indirectly:
(1) employing devices, schemes or artifices to defraud;
48
(2) making untrue statements of material facts and
omitting to state material facts necessary in order to make the
statements made, in the light of the circumstances under which they
were made, not misleading; and
(3) engaging in acts, practices and courses of business
which operated as frauds on the Plaintiff and class members in
connection with the sale of the above-described securities, all as
alleged in paragraphs 165-191 of this Complaint.
195. In addition, Defendants violated the equivalent anti-
fraud provisions of the securities laws of each and every state
where shares of the Trust were sold from NationsBank branches by
means of the material omissions and misstatements outlined in
paragraph 167 of this Complaint.4
196. Accordingly, Plaintiff and each class member is entitled
to recover damages from those Defendants pursuant to section
517.211 of the Florida Statutes, including rescission plus
interest, for each class member who still holds any securities
purchased; or for damages, plus interest, for Plaintiff and each
class member who has sold the securities; plus a reasonable
attorneys' fee.
WHEREFORE, the Plaintiff and class members demand judgment for
damages against the Defendants, jointly and severally, pursuant to
____________________
4 The securities fraud statutes of every other state in which
the Defendants did business in the bank branches of NationsBank
Corporation are similar if not identical to Florida's. See D.C.
Code Ann. § 2-2602; Ga. Code Ann. § 10-5-12; Md. Corps. & Ass'ns
Code Ann. § 11-301; N.C. Gen. Stat. § 78A-8; S.C. Code Ann. § 35-1-
1210; Tenn. Code Ann. § 48-2-121(a); Tex. Rev. Civ. Stat. Ann. art.
581-33; Va. Code Ann. § 13.1-502.
49
section 517.211 of the Florida Statutes, including either damages
or rescission, as appropriate, plus a reasonable attorneys' fee and
costs of this action. The Plaintiff and class members further
request that the Court grant such other and further relief as it
deems appropriate.
COUNT III
CONTROLLING PERSON LIABILITY -- DEAN WITTER DISCOVER
AND COMPANY
197. Plaintiff realleges and incorporates by reference
paragraphs 1 through 153 and 165 through 192 of this complaint.
198. Defendant, Dean Witter Discover and Company, at the times
relevant to this action, was a "controlling person" of
NationsSecurities, through Defendant, Dean Witter Venture, Inc., as
well as each of the Dean Witter subsidiaries named in this
Complaint within the meaning of § 20 of the 1934 Act and,
therefore, is liable for NationsSecurities' and its Dean Witter
subsidiaries' § 10(b) violations.
199. Defendant Dean Witter Discover and Company is the parent
corporation of and was vested with control over Dean Witter
Venture, Inc., one of two general partners of NationsSecurities;
Dean Witter InterCapital, Inc., the investment adviser to the
Trust; and Dean Witter Distributors, Inc., the distributor of the
prospectus for the Trust.
200. Defendant Dean Witter Discover and Company participated
in and encouraged its subsidiaries to engage in the fraudulent
scheme and material misrepresentations with NationsBank Corporation
as outlined in this Complaint at paragraphs 75-136.
50
COUNT IV
CONTROLLING PERSON LIABILITY -- DEAN WITTER VENTURE, INC.
201. Plaintiff realleges and incorporates by reference
paragraphs 1 through 153 and 165 through 192 of this complaint.
202. Defendant, Dean Witter Venture, Inc., as a general
partner, was a "controlling person" of NationsSecurities within the
meaning of § 20 of the 1934 Act and, therefore, is liable for
NationsSecurities' § 10(b) violations.
203. Defendant Dean Witter Venture, Inc. was a general
partner with NationsBanc Enterprise, Inc. in NationsSecurities, and
exercised control over NationsSecurities at all times material.
204. Defendant Dean Witter Venture, Inc., as one of two
general partners of NationsSecurities, participated in and
encouraged NationsSecurities to engage in the fraudulent scheme and
material misrepresentations outlined in this Complaint at
paragraphs 75-136.
COUNT V
CONTROLLING PERSON LIABILITY -- NATIONSBANK CORPORATION
205. Plaintiff realleges and incorporates by reference
paragraphs 1 through 153 and 165 through 192 of this complaint.
206. Defendant NationsBank Corporation is a "controlling
person" of the NationsBank of Florida, N.A., NationsBank of North
Carolina, N.A., NationsBanc Enterprise, Inc., NationsBanc
Securities, Inc., and NationsSecurities, within the meaning of § 20
of the 1934 Act and, therefore, NationsBank Corporation is liable
for the Defendants' §10(B) violations.
51
207. NationsBank Corporation is a publicly owned bank holding
company which is a controlling shareholder of, and/or wholly owns
the above defendants, and necessarily has supervisory responsibility
over those defendants.
208. NationsBank Corporation participated in and encouraged
its subsidiaries to engage in the fraudulent scheme and material
misrepresentations outlined in this Complaint at paragraphs 75-136.
COUNT VI
CONTROLLING PERSON LIABILITY -- NATIONSBANK OF NORTH
CAROLINA, N.A.
209. Plaintiff realleges and incorporates by reference
paragraphs 1 through 153 and 165 through 192 of this complaint.
210. Defendant NationsBank of North Carolina, N.A., is a
"controlling person" of NationsSecurities within the meaning of §
20 of the 1934 Act and is liable for NationsSecurities' § 10(b)
violations.
211. As of November 15, 1994, NationsBank of North Carolina,
N.A., owned or controlled 100% interest in NationsSecurities.
212. Prior to November 15, 1994, NationsBank of North
Carolina, N.A., had veto power over all major decisions of
NationsSecurities, and owned and controlled NationsBanc Enterprise,
Inc., a general partner of NationsSecurities.
213. NationsBank of North Carolina, N.A., participated in and
encouraged NationsSecurities to engage in the fraudulent scheme and
material misrepresentations outlined in this Complaint at
paragraphs 75-136.
52
COUNT VII
CONTROLLING PERSON LIABILITY -- NATIONSBANC ENTERPRISE, INC.
214. Plaintiff realleges and incorporates by reference
paragraphs 1 through 153 and 165 through 192 of this complaint.
215. Defendant NationsBanc Enterprise, Inc., is a "controlling
person" of NationsSecurities within the meaning of § 20 of the 1934
Act and is liable for NationsSecurities' § 10(b) violations.
216. Defendant NationsBanc Enterprise, Inc. was a general
partner with Dean Witter Venture, Inc., in NationsSecurities, and
exercised control over NationsSecurities.
217. Defendant NationsBanc Enterprise, Inc., as one of two
general partners of NationsSecurities, participated in and
encouraged NationsSecurities to engage in the fraudulent scheme and
material misrepresentations outlined in this Complaint at
paragraphs 75-136.
PLAINTIFF'S CERTIFICATION
218. Plaintiff has executed a certification meeting the
requirements of section 21D(a)(2) of the Securities Exchange Act of
1934. A copy is attached hereto.
DEMAND FOR TRIAL BY JURY
Plaintiff demands a trial by jury on all issues so triable by
jury.
53
DEMAND FOR ATTORNEY'S FEES
Plaintiff hereby demands that attorney's fees be awarded to
class counsel if, as, and when a fund is created, in accordance
with the law and rules governing class actions under Rule 23 of the
Federal Rules of Civil Procedure and the relevant statutory
provisions cited in Count II herein.
Respectfully submitted this 26th day of March,
1996.
/s/
______________________________
JOHNATHAN L. ALPERT
Florida Bar No. 121970
PATRICK B. CALCUTT
Florida Bar No. 869971
Alpert, Barker & Calcutt, P.A.
Post Office Box 3270
Tampa, Florida 33601-3270
Telephone: (813) 223-4131
54
23 July 1997