UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK
July 13, 1949
OSBORNE et al.
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
. 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)
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
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.
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 allegation of the complaint to show when the plaintiffs discovered the fraud, nor any exculpatory allegations explaining their failure to discover the fraud sooner than they did.
As to the second causes of action the defendants are entitled to a more definite statement setting forth the dates when the fraud was discovered and why it could not have been discovered sooner by the exercise of reasonable diligence. It will not be necessary to retype this voluminous complaint. The further requisite allegations to comply with this direction may be separately added at an appropriate place, as an amendment to the complaint.
Item (2) of the notice of motion asks that the third cause of action of each plaintiff be dismissed upon the ground that it fails to state a claim upon which relief can be granted (Rule 12(b), F.R.C.P.), 'in that no civil liability can be based upon the facts alleged therein'.
The third cause of action charges that the defendants violated Sec. 17 of the Securities Act of 1933, T. 15 U.S.C.A. § 77q
and Secs. 10(b) and 15(c) of the Securities Exchange Act of 1934, T. 15 U.S.C.A. §§ 78j(b)
and Rules X-10B-5
of the Rules and Regulations issued by the Securities and Exchange Commission under the 1934 Act. The third cause of action incorporates, by reference, the charges of fraud set forth in the second cause of action, and also alleges:
'133rd. That in violation of the said provisions of the Securities Act of 1933, section 17 and following, as amended, and the Securities and Exchange Act of 1934, sections 10-b and following, and sections 150c and following, and Rule X-10B-5 and Rule X-15C1-2, the defendants by the use of means and instruments of transportation and communication in interstate commerce, and by the use of the mails employed manipulative, deceptive and fraudulent devices, schemes and artifices to defraud and obtain money and property from the plaintiff by means of untrue statements of material facts and omissions 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 which statements or omissions said defendants made with the knowledge or reasonable grounds to believe that they were untrue or misleading, and engaged in transactions, practices and course of business which operated as a fraud and deceit on plaintiff as purchaser of Bost, Incorporated common capital stock from defendants.'
'134th. That the aforesaid manipulative, deceptive and fraudulent devices, schemes and artifices employed by defendants, and the aforesaid untrue statements of material facts and the omissions to state material facts and the aforesaid transactions, practices and course of business which operated as a fraud on plaintiff consisted of the acts, statements, omissions and concealments set forth in paragraph '88th' of this complaint which said allegations are repeated, reiterated and re-alleged in this paragraph with the same force and effect as if at full length set forth herein; that the value and reasonable market value of said Bost, Incorporated common capital stock at the time of the sale to plaintiff and at all the times mentioned in this complaint were nil; and that said stock was at all the times mentioned in the complaint worthless and had no reasonable market value whatsoever.'
Defendants' contention in respect to Sec. 17 of the 1933 Act and Secs. 10(b) and 15(c) of the 1934 Act is that there is no specific section of either Act creating a liability or providing a right of action for a violation of said sections, such as we have in respect to other violations specified in those Acts. I do not believe that any such additional section is necessary in relation to Sec. 17 of the 1933 Act or Sec. 10(b) of the 1934 Act.
The practices described in Sec. 17 of the 1933 Act and Sec. 10(b) of the 1934 Act are declared 'unlawful'. The practices specified in Sec. 15(c) of the 1934 Act and in the Rules and Regulations issued thereunder are prohibited as the word 'shall' indicates. Actions for the violations of Sec. 15(c) of the Securities and Exchange Act of 1934 are specifically provided for in Sec. 29(b) of that Act. T. 15 U.S.C.A . § 78cc(b).
Kardon v. National Gypsum Co., D.C., 69 F.Supp. 512.
The language of Sec. 17 of the 1933 Act and of Secs. 10(b) and 15(c) of the 1934 Act describes many acts that would constitute common law frauds; but the statute is more limited than that. For jurisdiction of a Federal court over actions based on said sections the additional features of interstate transportation or communications or the use of the mails are required.
Section 22(a) of the Securities Act of 1933, T. 15 U.S.C.A. § 77v, gives the Federal district courts jurisdiction over suits in equity and actions at law brought to enforce any liability or duty 'created by this subchapter', i.e., the subchapter relating to 'domestic securities', which includes Sec. 17.
Section 27 of the Securities Exchange Act of 1934, T. 15 U.S.C.A. § 78aa, gives a Federal district court jurisdiction over 'violations of this chapter', i.e. under the 1934 Act, and over violations of the Rules and Regulations issued by the Securities and Exchange Commission pursuant to the provisions of said Act. The word 'violation' is not limited to a criminal case; it includes also civil litigation. Grossman v. Young, D.C., 70 F.Supp. 970.
Even though there is no specific section of the 1933 Act creating liability under Sec. 17 other than the language of Sec. 17 itself, or in the 1934 Act in relation to Sec. 10(b) of that Act other than the language of Sec. 10(b) itself, nevertheless it has been held that a civil liability is implied and a remedy is available under the Acts for violations of their provisions, and that an action may be brought in the appropriate courts to enforce that liability. In suits for damages for violations of subchapter I of the Securities Act of 1933, the Federal and State courts have concurrent jurisdiction under Sec. 22; but where damages are claimed for a violation of the Securities and Exchange Act of 1934 the Federal courts have exclusive jurisdiction under Sec. 27.
That a violation of Sec. 10(b) of the Securities Exchange Act of 1934 implicitly creates a civil liability for which a remedy is available in the Federal courts, has been held in the following cases: Kardon v. National Gypsum Co., D.C., 69 F.Supp. 512 and Id., D.C., 73 F.Supp. 798; Acker v. Schulte, D.C., 74 F.Supp. 683; Slavin et al. v. Germantown Fire Ins. Co., 3 Cir., 1949, 174 F.2d 799. See also Matter of Barrett & Co., 9 S.E.C. 319. In the Slavin case the majority opinion stated that 'Logic and such authority as is available, seem to favor such action despite the absence of enabling legislation'. Cases and Law Review Articles are cited by Judge Kalodner to support that statement. Although Judge Biggs dissented as to the result, he agreed with the majority on that proposition and he cited authorities, including, Restatement, Torts, Sec. 286. He stated that 'the remedy supplied by Section 29(b), like the other remedies supplied by the Act, is federal in origin, and, in view of the foregoing authorities, must be construed broadly so that it may be availed of by an injured private person.' (174 F.2d 815). The reasoning of the Slavin case would apply also to the right of an investor to sue for a violation of Sec. 17 of the 1933 Act.
Concurrent remedies under several sections of both Acts may be available to the investor injured by the seller's fraudulent practices. Speed v. Transamerica Corp., D.C., 71 F.Supp. 457.
The applicable statute of limitations to actions under Sec. 17 of the 1933 Act and Sec. 10(b) of the 1934 Act would be that of the forum, since the two Federal Acts do not provide any period within which suits must be brought under those sections. Seaboard Terminal Corp. v. Standard Oil Co., D.C., 24 F.Supp. 1018; Dipson Theatres v. Buffalo Theatres, D.C., 8 F.R.D. 86; Cope v. Anderson, 331 U.S. 461, at page 464, 67 S. Ct. 1340, 91 L. Ed. 1602. The applicable statute of limitations of the State of New York is found in the New York Civil Practice Act, Sec. 48(2) and (5), a six year statute.
To sum up the foregoing rulings:
(a) The First Cause of Action of each plaintiff is dismissed, with leave however to add to the Second Cause of Action a subparagraph to paragraph 88 of the complaint, charging as fraudulent conduct on the part of the defendants an allegation that the defendants fraudulently concealed from the plaintiffs that no registration statement had been filed as required by Sec. 5(a) of the Securities Act of 1933, in relation to the common stock of Bost, Incorporated.
(b) The Second Cause of Action of each plaintiff shall be amended by adding thereto allegations showing when said plaintiff discovered the fraud in connection with the sale to him of the stock of Bost Incorporated, and why the fraud could not have been discovered sooner by the exercise of reasonable diligence.
(c) In all other respects the motion of the defendant Havener is denied.
Settle an order accordingly.