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LESTER v. PRECO INDUS.

July 19, 1965

Lester, et al., Plaintiffs,
v.
Preco Industries, Inc., et al.,Defendants


Palmieri, District Judge.


The opinion of the court was delivered by: PALMIERI

PALMIERI, District Judge.

This is an action brought pursuant to the Securities Act of 1933 and the Securities Exchange Act of 1934.

 The individual defendants Bellis, Davis and Zeidman have moved for an order pursuant to Fed. R. Civ. P. 12(b) dismissing the action against them on the grounds that this Court lacks jurisdiction over them, that venue does not properly lie in this Court, and that plaintiffs have failed to state a claim upon which relief can be granted. In the alternative, these defendants move for an order pursuant to Section 11(e) of the Securities Act of 1933, 15 U.S.C. § 77k(e) requiring plaintiffs to file an undertaking for the costs of these defendants. The corporate defendant Preco Industries, Inc. (Preco) and individual defendant Stern have moved only for an undertaking pursuant to Section 11(e) in the sum of $10,000 for payment of the costs of this suit, including reasonable attorneys' fees.

 The facts alleged in the complaint are as follows. The defendant Preco is a corporation engaged in the business of selling custom built swimming pools. In late 1961, a public offering of Preco shares was held and the plaintiffs made purchases. (The prospectus indicated that the individual defendants were all directors of Preco.) The registration statement filed with the Securities and Exchange Commission purportedly contained untrue statements of material facts and omitted to state material facts required to be stated therein. The particular allegations in which the statement is said to be deficient are set forth below at pp. 8-10.

 The complaint herein sets forth six counts, five of which purportedly state causes of action. Count I is based on Section 11 of the Securities Act of 1933, 15 U.S.C. § 77k. Count II is based on Section 12 of that Act, 15 U.S.C. § 77 l. Count III is based on both Sections 11 and 12. Count IV is based on Section 10 of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) and Rule X-10(b)-5, 17 CFR 240, 10b-5, promulgated thereunder. Count V is based on Section 17 of the Securities Act of 1933, 15 U.S.C.§ 77q. Count VI merely states that the action is brought on behalf of all other persons similarly situated to the plaintiffs.

 First, the jurisdiction and venue of this Court will be considered. Jurisdiction of this Court is proper - both subject matter and personal. 15 U.S.C. §§ 77 v (a), 78aa. The venue provisions under the two Acts differ. The 1933 Act provides as follows:

 
Any such suit or action may be brought in the district wherein the defendant is found or is an inhabitant or transacts business, or in the district where the offer or sale took place, if the defendant participated therein, . . . .

 Since in this case the defendants Bellis, Davis and Zeidman concededly are not found in this district, nor are they inhabitants of or transacting business in this district, venue is properly laid here only if: (1) This is the district where the offer or sale took place, and (2) the defendant participated therein.

 The 1934 Act provides:

 
Any suit or action to enforce any liability or duty created by this chapter or rules and regulations thereunder, or to enjoin any violation of such chapter or rules and regulations, may be brought in any such district or in the district wherein the defendant is found or is an inhabitant or transacts business, . . . .

 Thus, only one requirement is necessary and possible here: (1) That the act or transaction constituting the violation took place here.

 With respect to the Counts under the 1933 Act, the defendants have urged that venue is improper in that both of the necessary prerequisites are lacking. As to the first - that the offer or sale took place in this district - the plaintiffs Lester and Abco Industries, Inc. have submitted affidavits which sufficiently establish that they purchased shares here. Cf. Rosenberg v. Globe Aircraft Corp., 80 F. Supp. 123, 125 (E.D. Pa. 1948); Moore v. Gorman, 75 F. Supp. 453 (S.D.N.Y. 1948).

 As to the second - that the defendants participated in the sale - a more difficult question is presented. The plaintiffs argue that the defendants Bellis, Davis and Zeidman may be found to have participated in the sales by virtue of their alleged control of Preco at the relevant times. It is clear that when a company participates in a sale, any person who is equally liable under Section 15 of the 1933 Act, 15 U.S.C. § 77 o,1 is likewise a participant for venue purposes. Brown v. Cornelis de Vroedt, Inc., CCH Fed. Sec. L. Reps. P90,866 (S.D.N.Y. 1958); 3 Loss, Securities Regulation 2008 (2d ed. 1961). The plaintiff alleges that the defendants constituted a controlling group by virtue of their status as directors or large stockholders. What constitutes control is one of the most difficult questions in securities law. It is a question, furthermore, which is central to establishing substantive liability of these defendants under certain of the counts (e.g., Count II which is based on Section 12 of the 1933 Act.) It is axiomatic that a court cannot pre-try a substantive issue on a preliminary motion such as this. Cf. Smithers v. Smith, 204 U.S. 632 (1907); Wright, Federal Courts 93-4 (1963). Thus, since the facts alleged about defendants Bellis, Davis, and Zeidman could put them in a position of control, the allegations are sufficient to satisfy the venue requirements of the 1933 Act. See Rosenberg v. Globe Aircraft Corp., supra; Miller v. Hano, 8 F.R.D. 67 (E.D. Pa. 1947), 2 Loss, supra at 781-2.

 As for venue under the 1934 Act, that too is proper. Actual sales to plaintiffs took place in this district. See Thiele v. Shields, 131 F. Supp. 416, 420 (S.D.N.Y. 1955). Also see Coburn v. Warner, 110 F. Supp. 850 (S.D.N.Y. 1953), indicating that compliance with the venue ...


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