Per Curiam: The order is affirmed on the opinion below, 99 F. Supp. 701, and the subsequent decision in Birnbaum v. Newport Steel Corp., 2 Cir., 193 F.2d 461 wherein we concluded "that Rule X-10B-5 extended protection only to the defrauded purchaser or seller," p. 464.
FRANK, C.J., dissenting:*fn1 1. The pertinent sections of the complaint may be summarized thus: The defendants, directors of the Farnsworth Company, published false statements of material facts concerning the financial condition of the company. This the defendants did to induce purchases of shares of stock in that company owned by them. Soon after they had sold all their shares of stock, the plaintiffs, misled by the false statements, purchased some Farnsworth shares on the stock exchange where Farnsworth stock was listed. When, later, the true facts about the company's financial condition were disclosed, the price of the stock fell. Plaintiffs sold at the lower price, with resultant damage*fn2 On motion by the defendants, the trial judge dismissed the complaint. His basic reason was the absence of any "semblance of privity" between plaintiffs and defendants.
2. His decision has been excellently discussed and criticized in a Comment in 4 Stanford Law Review (1952) 308, from which I quote as follows:
"Rule X-10B-5 of the Securities and Exchange Commission, passed pursuant to § 78j(b) of the Securities and Exchange Act,*fn1a provides: It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails, or of any facility of any national securities exchange, (a) to employ any device, scheme, or artifice to defraud. (b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or (c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security*fn2a
"The Farnsworth case raises the question of what class of persons may recover in an action for fraud under the Statute and the Rule. The court held that the plaintiffs were outside the class of persons entitled to recover.The reason given by the court, lack of 'privity,' is not satisfactory.
"One purpose of the Act is to extend common-law liability or fraud in security transactions*fn3 Even at common law, there was no requirement of privity of contract in an action for fraud*fn4 If privity of contract was not required at common law, a fortiori, privity of contract is not required under the statute and the rule*fn5
"The common law, however, did require that the person relying upon a misrepresentation be within the ambit of persons whom the defendant actually intended to defraud. In Peek v. Gurney*fn6 the defendant directors issued a prospectus containing misrepresentations and nondisclosures of material facts to induce persons to buy stock directly from the defendant company. The plaintiff, relying on the prospectus, bought stock, not from the defendant, but from another on the market. The House of Lords denied recovery for fraud since defendants did not intend to induce the plaintiff to enter the particular transaction which occasioned plaintiff's loss. The Restatement of Torts has adopted this limitation: * * * the maker of a fraudulent misrepresentation is subject to liability * * * only to those persons to whom it is made with the intent to cause them to act in reliance upon it and to such persons only for the pecuniary harm suffered by them by relying upon it in the transaction or type of transaction in which the maker intended to influence their conduct*fn7
"This rule would support the result in the principal case, and may well have been what the court meant by 'some semblance of privity.'
"But the modern tendency is to depart from the limitation of Peek v. Gurney*fn8 Liability has been imposed where plaintiffs have relied on intentional misrepresentations though the defendant had no intent to influence the particular person or class of persons. This relaxation of the Peek v. Gurney limitation has occurred primarily in cases where false statements were embodied in negotiable instruments*fn9 It has not, as yet, been extended to stock transactions such as those in the principal case*fn10 The extension of liability is predicated upon reasonable anticipation by the defendant that one in the plaintiff's position would rely. In the principal case, there were intentional misrepresentations and nondisclosures calculated to portray the financial stability of the Corporation. It does not tax credulity to say that the defendants might have foreseen and anticipated reliance by such persons as the plaintiffs.
"In spite of the recent trend to the contrary, Peek v. Gurney may still be the weight of authority*fn11 The crucial question then is, should this commonlaw limitation be applied under the Statute and the Rule? Or does the Statute command a broader interpretation concurrent with the modern tendency away from the Peck v. Gurney limitation?
"The language of Rule X-10B-5 is broad. It speaks of '* * * any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security*fn12 Furthermore, House and Senate Reports of the Securities and Exchange Act support the conclusion that the class of persons entitled to actionably rely on false statements is not the narrow or restricted class of Peek v. Gurney*fn13
"The language and legislative history of the Statute and Rule, and the decline of the Peek v. Gurney limitation at common law, impels a conclusion that the ...