Cohen v. Prudential-Bache Securities, Inc.

Mildred Cohen (plaintiff) was retired and had a $30,000 annual fixed income. Diane James (defendant) was Cohen’s financial adviser and securities broker. In April 1986, while James was working for Prudential-Bache Securities, Inc. (Prudential) (defendant), James urged Cohen to invest in the CSH-1 Hotel Limited Partnership (CSH-1). James told Cohen that investing in CSH-1 would be a risk-free way to obtain a strong cash flow. Prudential and James sent Cohen a memorandum regarding CSH-1, promising a tax-free return of 13.4 percent and indicating that investors would pay $7,744.50, with “NO $ AT RISK at any time.” James told Cohen that Cohen’s entire CSH-1 investment would not exceed $8,500. James sent Cohen documents to sign regarding the CSH-1 investment, and Cohen signed upon James’s advice, even though Cohen did not understand the documents. In October 1987, Cohen learned that she had actually signed a promissory note that obligated her to pay nearly $85,000. The guarantor of the note threatened to sell Cohen’s CSH-1 shares if Cohen did not pay. Cohen’s attorney subsequently learned that CSH-1 was a tax shelter designed for high-income individuals, that the investment was risky, and that the investment was not appropriate for someone on a moderate fixed income. Cohen learned that James allegedly completed an investor questionnaire for Cohen that falsely stated that Cohen had a net worth of $1.18 million and a gross income of over $100,000 per year. Cohen claimed that James had forged Cohen’s signature on the investor questionnaire and other documents relating to the CSH-1 investment. Cohen sued James and Prudential, asserting violations of § 10(b) of the Securities Exchange Act of 1934 based on the allegedly material misrepresentations about the CSH-1 investment’s cost and risk level, the alleged failure to tell Cohen about CSH-1’s true nature, and the allegedly forged documents. James and Prudential moved to dismiss. James and Prudential asserted that the alleged misrepresentations and omissions about CSH-1 were not material because the statements about CSH-1 were mere puffery. James and Prudential also asserted that the forgeries could not form the basis for a § 10(b) claim because Cohen did not know about the forged documents and thus could not have relied on the documents in deciding whether to invest.