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OSBORNE v. MALLORY

July 13, 1949

OSBORNE et al.
v.
MALLORY et al.



The opinion of the court was delivered by: LEIBELL

In this action eleven plaintiffs who purchased common stock of Bost, Incorporated in late February and early March of 1946, have joined as parties of plaintiff, under Rule 20(a) Federal Rules Civil Procedure, 28 U.S.C.A., in asserting claims against the defendants or some of them, who are alleged to have sold the stock under conditions which violated certain sections of the Securities Act of 1933, 15 U.S.C.A. § 77a et seq., and the Securities Exchange Act of 1934, 15 U.S.C.A. § 78a et seq. Jurisdiction of this Court is based upon specific provisions of those statutes. Section 22(a) of Securities Act of 1933, T. 15 U.S.C.A. 1 77v(a), and Sec. 27 of the Securities Exchange Act of 1934, T. 15 U.S.C.A. § 78aa *fn1" . The complaint was filed in this Court on February 25, 1949. Ten of the plaintiffs, who still have their stock, seek to recover the purchase price of the stock. The eleventh seeks to recover the loss sustained on a sale of the stock. Some of the defendants have filed answers thereto and have asserted cross claims against another defendant. Other defendants have impleaded a third party defendant.

One of the defendants, Paul W. Havener, has made a motion now before the Court 'for an order:

'1. Dismissing the complaint in this action upon the ground that the complaint fails to state a claim upon which relief can be granted, in that it does not affirmatively appear on the face of the complaint when the alleged fraudulent acts were discovered and that the actions were commenced within the time limitations prescribed by the statutes which created these rights of action.

 '2. Dismissing each of the causes of action of the complaint designated 'Third Cause of Action' upon the ground that they fail to state a claim upon which relief can be granted, in that no civil liability can be based upon the facts alleged therein.

 '3. Requiring the plaintiffs to state in separate counts the claims alleged in each of the causes of action designated 'First Cause of Action', for the reason that Section 12 of the Securities Act of 1933 creates separate and distinct causes of action for which separate and distinct limitations of time are prescribed, and defendants cannot reasonably be required to frame a responsive pleading unless such claims are stated in separate counts. and for such other, further and different relief as may be just and proper in the premises.'

 The first cause of action of each plaintiff is based on Secs. 5(a) and 12(1) *fn2" of the Securities Act of 1933, T. 15 U.S.C.A. §§ 77e(a) and 77l(1), for which the statute of limitations is fixed in Sec. 13 *fn3" of the Act T. 15 U.S.C.A. § 77m.

 No action may be maintained to enforce the liability created by Sec. 12(1) of the Act for a violation of Sec. 5(a), unless brought within one year after the violation upon which it is based, and in no event more than three years after the security was bona fide offered to the public. Each first cause of action of the plaintiffs contains allegations that no registration statement under the Securities Act of 1933 was ever in effect with the Securities and Exchange Commission with respect to the securities of Bost, Incorporated and that the securities were not exempt from the registration requirements of the Act. There is also an allegation in the first cause of action that defendants falsely and fraudulently and with intent to deceive the plaintiffs omitted to state and concealed the fact that no registration under the Act was in effect. The latter statement adds nothing to the charged violation of Sec. 5(a) and is not an essential element of its violation. The dates on which the various plaintiffs made their purchases of stock as alleged in the complaint were as follows: Alex Osborne -500 shares Feb. 27/46 Sam I. Gweirtz -500 shares Feb. 27/46 Nicholas Clemente -500 shares Feb. 26/46 Anita Philipson -500 shares Feb. 26/46 Fannie Jacobs -300 shares Feb. 27/46 Gilbert Jacobs -300 shares Feb. 26/46 Ann Kahn -200 shares Feb. 26/46 Celia Seifter -100 shares Feb. 26/46 Elaine Seifter -100 shares Feb. 28/46 Hertha Osborne -300 shares Feb. 28/46 Sophie Cohen -300 shares March 4/46

 The complaint herein was filed with the Clerk of the Court February 25, 1949 and that is the date the action was commenced. Rule 3, Federal Rules Civil Procedure.

 There is no allegation in the first cause of action to show when these Bost, Incorporated securities were first offered to the public so it is not apparent from the face of the complaint that they were offered to the public more than three years before the complaint was filed. If the securities in question were bona fide offered to the public for the first time on February 26, 1946 then the first cause of action would meet one of the conditions set forth in Sec. 13 of the Securities Act of 1933, 15 U.S.C.A. § 77m. It is not likely that February 26, 1946, was the date.

 But there is another condition attached to the right to bring action based on Secs. 5(a) and 12(1) of the Act (the first cause of action). Under Sec. 13 of the Act it may not be maintained 'unless brought within one year after the violation upon which it is based'. In the case at bar the violation took place when interstate facilities were used by the defendants in connection with the sales made to the various plaintiffs, all of which were consummated about three years before this action was commenced. It follows that the first causes of action pleaded by the various plaintiffs should be dismissed because it affirmatively appears from the complaint that it was not begun, as required by Sec. 13 of the Securities Act of 1933, within one year after the violation of Sec. 5(a) of the Act. Adams v. Albany, D.C., 80 F.Supp. 876; M. J. Hall & Co. v. Johnson, Sup., 92 N.Y.S.2d 202. This disposes of item (1) of defendant Havener's notice of motion, in so far as it concerns the first cause of action.

 In view of this ruling that the first cause of action should be dismissed, it is unnecessary to rule on item (3) of defendant Havener's notice of motion. At this point is is proper to rule also that if the pleader intended the first causes of action to set forth a claim of fraudulent concealment in connection with the failure of defendants to file a registration statement in relation to the Bost, Incorporated stock, then in serving an amended complaint in respect to the Second Cause of Action he may add an appropriate subdivision to paragraph 88 of the complaint to include this alleged fraudulent concealment.

 The second cause of action of each plaintiff charges a violation of Sec. 12(2) of the Securities Act of 1933, T. 15 U.S.C.A. § 77l(2), in that defendants are alleged to have sold the securities to the plaintiffs by means of a prospectus and oral communications which included untrue statements of a material fact and the omission to state material facts necessary in order to make the statement not misleading, the plaintiff not knowing of the untruth or omission. The alleged untrue statements, and false and fraudulent misrepresentation of material facts, and the concealment of material facts, are set forth in subparagraphs (a) to (h) inclusive of paragraph 88 of the complaint. *fn4"

 The statute of limitations controlling the second cause of action is contained in Sec. 13 of the Act, 15 U.S.C.A. § 77m, which provides that no action shall be maintained to enforce any liability under Sec. 12(2) of the Act unless brought within one year after the discovery of the untrue statement or the omission, or after such discovery should have been made by the exercise of reasonable diligence, and that in no event shall any action be brought under Sec. 12(2) of the Act more than three years after the sale.

 The second causes of action, based on fraudulent acts, misrepresentations and concealments of the defendants in connection with the sales of the stock to the plaintiffs (Sec. 12(2) of the Act), satisfies one of the conditions of Sec. 13 in that it appears therefrom that the sales were made less than three years before this action was commenced. But under Sec. 13 of the Act there is another condition attached to the right to maintain an action based on Sec. 12(2) of the Act; it must be brought within one year after the discovery of the untrue statement or omission, or after such discovery should have been made by the exercise of reasonable diligence. There is no ...


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