The opinion of the court was delivered by: WYATT
This is a motion by defendants C.M.P. Corporation (CMP), Flannery and Staley for orders granting the following relief:
(1) dismissing the first, second and third counts (styled in the complaint and in the motion as 'causes of action') for failure to state a claim upon which relief can be granted (Fed.R.Civ.P. 12(b)(6));
(2) dismissing the third, fourth and sixth counts for lack of jurisdiction over the subject matter (Fed.R.Civ.P. 12(b)(1)); and
(3) dismissing the third and fourth counts as 'redundant'.
The action is by purchasers on or about March 14, 1962 of capital stock of CMP. The action was commenced on April 24, 1964.
This avers that two of the defendants sold capital stock of CMP to plaintiffs, that all defendants (except Myron A. Lomasney & Co.) made specific untrue statements of material facts, that all defendants (except Myron A. Lomasney & Co.) omitted to state specific material facts, that plaintiffs relied on the untrue statements, and that all defendants (except Myron A. Lomasney & Co.) in such manner violated Section 17(a) of the Securities Act of 1933 (15 U.S.C. § 77q(a); the '1933 Act'). Section 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. § 78j(b); the '1934 Act') and Rule 10b-5 of the Rules and Regulations of the Securities and Exchange Commission (17 CFR 240.10b-5). It will be noted that there is no averment that defendants had any knowledge of the falsity of their statements. So far as the claim is concerned, defendants may have made innocently or negligently untrue statements. The claim is not based on fraud.
Section 11 and 12 of the 1933 Act (15 U.S.C. §§ 77k and 77l) specifically provide for civil liabilities for untrue statements or misleading omissions. These liabilities are subject to a one year statute of limitations (15 U.S.C. § 77m). Thus these sections could not have been invoked by plaintiffs at the time the case at bar was commenced.
May a civil suit be maintained by a buyer of securities as a private remedy under Section 17(a) of the 1933 Act and under Rule 10b-5 promulgated under the 1934 Act?
There are persuasive reasons for a negative answer. In the 1933 Act, Congress specifically provided for civil liability in Sections 11 and 12 (15 U.S.C. §§ 77k and 77l) and in so doing imposed certain specific rules: (a) the one year statute of limitations, (b) the discretion in the Court to require a bond of plaintiffs, and (c) the placing on defendants of the burden of proof that they reasonably believed their statements to have been true, etc. To imply a civil liability under Section 17(a) which would be free of these restrictions seems illogical. See Loss, Securities Regulation (2d ed.) 1784-1787. As for the 1934 Act and Rule 10b-5, the same reasoning is applicable because the two acts are closely related and there seems no reason why the buyer of securities given a private remedy, with restrictions, in Sections 11 and 12 of the 1933 Act should be given an additional remedy without restrictions under Rule 10b-5. This reasoning was early adopted in Rosenberg v. Globe Aircraft Corp., 80 F.Supp. 123 (E.D.Pa.1948) where the court said (at 124):
'It cannot be supposed that Congress intended to abolish these regulations and limitations when it enacted Sec. 10 of the Act of 1934. By any reasonable rule of statutory interpretation, it would require either an express repeal or an implication of repeal so strong as to be inescapable. The two Acts are unquestionably in pari materia and must be construed together to make a consistent whole. Looking at them as one statute it is simply not possible that Congress, having prescribed in elaborate detail procedural requirements which must be fulfilled in order to enforce civil liability attaching to a carefully defined type of violation, would have casually nullified them all in a later section.'
See also Montague v. Electronic Corp. of America, 76 F.Supp. 933 (S.D.N.Y.1948). Professor Loss agrees with this reasoning. Loss, above cited, at 1787.
But then came Fischman v. Raytheon Mfg. Co., 188 F.2d 783 (2d Cir. 1951). Our Court of Appeals there held that a civil liability to a buyer of securities could be implied under Rule 10b-5 if fraud (meaning, knowledge of the falsity of the alleged untrue statements) was alleged and proved. In other words, the liability was not the same as that under Sections 11 and 12 of the 1933 Act; it was different because the additional ingredient of fraud was required as a part of the case for a plaintiff. The court stated (188 F.2d at 786-787):
'A suit under 11 of the 1933 Act requires no proof of fraud or deceit, and such a suit may be maintained only by one who comes within a narrow class of persons i.e. those who purchase securities that are the direct subject of the prospectus and registration statement (here the purchasers of preferred stock). But proof of fraud is required in suits under § 10(b) of the 1934 Act and Rule X-10 B-5, which was validly promulgated by the S.E.C. pursuant to that section. Congress reasonably, and without inconsistency, allowed suits of that sort which (1) are free of the restrictions applicable to a suit under § 11 of the 1933 Act and (2) which are not confined to those persons who may properly sue under that section but which include all who are the victims of the fraud. We think that when, to conduct actionable under § 11 of the 1933 Act, there is ...