The opinion of the court was delivered by: SUGARMAN
Charles Heit (Heit) as plaintiff in 65 Civil 1942 and Betty Volk (Volk) as plaintiff in 65 Civil 2303 each commenced an action against defendants Weitzen, Tyminski, Silverstein, Grant, Levy, Fischer and Belock Instrument Corporation (Belock), seeking damages alleged to have been sustained by each plaintiff in purchasing securities of defendant Belock. In due course the actions were consolidated and a "consolidated amended complaint" (the complaint) was filed on November 19, 1965.
The complaint bases jurisdiction on § 22(a)
of the Securities Act of 1933 (the 1933 Act), § 27
of the Securities Exchange Act of 1934 (the 1934 Act) "and the principles of pendent jurisdiction", as an action arising under §§ 12(2)
of the 1933 Act and §§ 9(e),
of the 1934 Act, "the General Rules and Regulations promulgated under both statutes; and under common-law principles".
The facts alleged are that plaintiff Volk and plaintiff Heit is each "a security holder of defendant Belock", Volk having purchased 100 shares of Belock's common stock on April 22, 1965 and another 100 shares of Belock's common stock on April 27, 1965, all at $5 1/2 per share and Heit having purchased $5,000 face amount of Belock's 6% convertible subordinated debentures on June 18, 1965 at a price of 90% of the face amount.
Volk, although as aforesaid, she alleges that she acquired her stock on April 22 and April 27, 1965, sues on her own behalf and on behalf of all other persons who purchased Belock's common stock between April 30, 1964 and June 21, 1965 and "who have either sold or continue to hold such stock at a loss" (the stock class).
Heit, although as aforesaid, he alleges that he acquired his debentures on June 18, 1965, sues on his own behalf and on behalf of all other persons who purchased Belock's debentures between April 30, 1964 and June 21, 1965 and "who have either sold or continue to hold such debentures at a loss" (the debenture class).
It is further alleged that defendants Weitzen, Tyminski, Fischer, Grant and Silverstein constituted, during the times mentioned, all or a majority of Belock's board of directors and that at all such times defendant Tyminski was Belock's president, defendant Silverstein was Belock's vice president and controller and defendant Fischer was Belock's secretary, and that Tyminski's and Silverstein's tenure terminated on August 18, 1965 by their removal as officers of Belock at which time defendant Levy was also removed as a vice president of Belock to which office he had been elected in the summer or fall of 1964.
The complaint then avers that defendant Belock, which manufactures and sells precision and other instruments and components, is a New York corporation, with its principal office in Queens County, New York; that at all the times mentioned its common stock was and now is listed on the American Stock Exchange (ASE); that since February 11, 1963 its debentures (Series A) were and now are listed on said Exchange and from January 23, 1963 to June 21, 1965 its debentures (Series B) were traded on the over-the-counter market.
The complaint then charges that on or about February 4, 1965 defendant Belock, at the direction of the individual defendants, caused to be filed with the Securities and Exchange Commission (SEC) pursuant to the provisions of the 1934 Act and the General Rules and Regulations promulgated thereunder and with the ASE its annual report for the fiscal year ending October 31, 1964 and thereafter caused copies of said annual report to be sent to its security holders, the press, brokers and dealers, research organizations and financial institutions.
It is further charged by plaintiffs that the said annual report
"contained statements which were materially false and misleading and contained untrue statements of material facts in that they substantially overstated Belock's net assets and past and prospective income"
"such statements of assets and income were based in large part upon the inclusion therein of earnings, income and assets resulting from substantial overcharges to the United States Government in connection with contracts between Belock and the Government."
It is also alleged that similar materially false, misleading and untrue statements of Belock's net assets and past and prospective income were contained in reports and other documents filed by Belock at the direction of the individual defendants with the SEC and the ASE for the quarters ending April 30, July 31 and October 31, 1964, for the half year ending October 31, 1964 and for the quarter ending January 31, 1965 and that these were released to the press and to the stockholders.
The complaint further charges that the individual defendants "had knowledge or notice" that the said reports, statements and documents "were false, misleading and contained untrue statements of material facts" and that the dissemination thereof was "intended to, and did, have the effect of artificially inflating the market prices of Belock's" securities.
After alleging that the offending data were distributed in interstate commerce, etc., the complaint charges that
"As a result of the defendants' acts . . . Belock's common stock and debentures were sold to and bought by plaintiffs and the other members of the stock class and the debenture class at artificially inflated prices substantially in excess of their value, and such value has since been further reduced on account of such acts."
Claiming that they and the other members of the two classes purchased and retained Belock's securities in reliance on the truth of the statements and representations alleged, plaintiffs aver that they thereby "sustained substantial damages".
Asserting that plaintiffs and the other members of the two classes did not, and could not by the exercise of reasonable diligence, discover the facts alleged more than a few days prior to the institution of "these actions" and the reasons for the class actions, the plaintiffs then demand judgment for damages and the expenses of the litigation.
The sufficiency of the complaint is now challenged by four motions: - One, by defendant Tyminski, pursuant to F.R. Civ. P. 12(b) (6) to dismiss the complaint for failure to state a claim upon which relief can be granted and the remaining three by defendant Grant and defendant Belock separately and defendants Weitzen and Fischer jointly, seeking relief similar to that sought by Tyminski but in addition and alternatively, under F.R. Civ. P. 56, summary judgments in favor of said defendants upon the grounds that since plaintiffs purchased their securities at the prices stated, Belock's common stock and debentures have sold at prices in excess of that paid by each plaintiff and that plaintiffs have therefore suffered no damage.
In their memorandum in opposition to the four motions, plaintiffs make no mention of their allegations in their complaint that their suit is based on §§ 12(2) and 17(a) of the 1933 Act and § 9(e) of the 1934 Act, and, despite the arguments of defendants inter alia in their memoranda that those sections of the acts supply no basis for this suit, plaintiffs address themselves solely to their right to sue under §§ 10(b) and 18(a) of the 1934 Act. Since the compelling reasons stated by defendants in challenging plaintiffs' right to sue under §§ 12(2) and 17(a) of the 1933 Act and § 9(e) of the 1934 Act, are ignored by plaintiffs, it is assumed that plaintiffs have abandoned those claims.
It should be remembered that we are not dealing here with the enormity of the fraud alleged but simply with the question of whether plaintiffs' complaint states a claim for which redress may be had in a federal court under the federal statutes and rules relied upon.
The 1934 Act provides in § 10(b):
"REGULATION OF THE USE OF MANIPULATIVE AND DECEPTIVE DEVICES
Sec. 10. 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 ...