The opinion of the court was delivered by: MOTLEY
Defendants moved for an order, Rule 12 (b), Fed. R. Civ. P., dismissing the original complaint for failure to state a claim upon which relief could be granted and for lack of jurisdiction over the subject matter. The original complaint, filed November 2, 1966, contained three causes of action. The first count was brought under Section 15(c) of the Securities Exchange Act of 1934, ("the Act"), 15 U.S.C. § 78 o. The second and third counts were predicated on the doctrine of pendent jurisdiction. United Mine Workers of America v. Gibbs, 383 U.S. 715, 16 L. Ed. 2d 218, 86 S. Ct. 1130 (1966); See generally, Lowenfels, Pendent Jurisdiction and the Federal Securities Acts, 67 Colum. L. Rev. 474 (1967).
Defendants motions were on the grounds that the first count, based on Section 15 (c) of the Act, was barred by the applicable statute of limitations, Section 29 (b) of the Act, 15 U.S.C. § 78cc (b), and that since plaintiff's only federal cause of action should be dismissed, his second and third claims, brought pursuant to state law, should be dismissed as there would be no federal cause of action upon which the doctrine of pendent jurisdiction could operate. Ruckle v. Roto American Corp., 339 F.2d 24, 27 (2d Cir. 1964).
Plaintiff, on December 23, 1966, no answer having been filed, Rule 15 (a), Fed. R. Civ. P., served an amended complaint to which the pending motion to dismiss is directed. The allegations of wrongdoing contained in the amended complaint are totally identical to those contained in the original complaint. However, the amended complaint contains six causes of action, two (the first and second) under Section 10 of the Act, 15 U.S.C. § 78j, two (the third and fourth) under Section 15 (c) (1) of the Act, 15 U.S.C. § 78 o (c) (1), and two (the fifth and sixth) pursuant to state law, jurisdiction being predicated on the doctrine of pendent jurisdiction.
It is alleged that defendant, J. R. Williston & Beane, Inc. (hereinafter "Williston"), a Delaware corporation registered with the Securities and Exchange Commission having its principal office and place of business in New York, was the successor to the business and assets, subject to its liabilities, of a partnership operating under the name of J. R. Williston & Beane (hereinafter "partnership"). At all times Williston or its predecessor partnership was engaged in the city, county, and State of New York as a "broker" and "dealer" in securities as said terms "broker" and "dealer" are defined in the Act, 15 U.S.C. § 77b (12), and was subject to the provisions of the Act and to the Rules and Regulations of the Securities and Exchange Commission promulgated thereunder.
The individual defendants were each voting stockholders of defendant Williston and were each directors and/or officers during the periods hereinafter mentioned. It is further alleged that each of the individual defendants was the beneficial owner of voting stock of defendant Williston, and all of them directly or indirectly controlled the corporation.
It is alleged that on or about June 15, 1963, defendants Williston, Beane and Kantor caused and procured the plaintiff to purchase and accept 900 shares of Class A Non-Voting Stock and 400 shares of Common Voting Stock of defendant Williston and to pay a total of $100,000.00 therefor.
Plaintiff claims that to induce him to purchase and accept defendant Williston's stock, defendants Beane and Kantor falsely and fraudulently represented to plaintiff that the stock was a safe and good investment on which he would get a good return; that Williston was sound financially, substantially as good as that of the predecessor partnership as shown on its balance sheet on March 30, 1963; that the corporation did little business with one "Tino" DeAngelis and his corporate affiliates in commodities and futures; that the corporation and its predecessor partnership operated at a profit; and that the corporation owned seats and memberships on various stock and commodities exchanges which represented an asset of the corporation of the current value of approximately $321,000.00. It is alleged that each representation by Beane and Kantor was false and fraudulent, was known by defendants to be false and fraudulent, was made to induce plaintiff to rely thereon and to agree to purchase and pay for and accept the Williston stock in reliance thereon; that plaintiff did not know that the representations were false and untrue, did rely thereon, and did purchase the stock to his damage. Furthermore, it is alleged that to induce plaintiff to purchase the stock, defendants Beane and Kantor fraudulently and intentionally concealed facts from plaintiff that Williston and its predecessor partnership had accumulated deficits from operations and sustained losses from operations; that Williston was engaging in business in violation of the net capital rule of the Securities and Exchange Commission; that the shares were risky investments; and that the stock when issued and paid for would have little or no value in comparison to the sum paid therefor. Plaintiff claims that if the true facts so concealed had been revealed, he would not have entered the transaction and purchased the shares, but since he did not know the true facts, he relied on defendants, and was defrauded and deceived by them and by their false representations and concealment of the true facts.
Plaintiff alleges defendants knew or should have known the financial condition of Williston and that it failed to comply with the net capital rule. In addition, it is alleged defendants made use of the mails, telephone, instruments of transportation and communication, and other means and instrumentalities of and in interstate commerce to effect transactions in securities, and they did thereby effect transactions in the subject securities otherwise than on a national securities exchange. Plaintiff also alleges that defendants conspired to obtain plaintiff's money; and they intended to and did defraud plaintiff by wrongful and unlawful acts, representations, omissions and conduct in violation of the Act and the Rules and Regulations promulgated thereunder.
Plaintiff claims his stock is worthless and he has been damaged in the amount of $100,000.00.
The Third and Fourth Causes of Action
Plaintiff's third cause of action is based on Section 15 of the Act, 15 U.S.C. § 78 o, and the Rules and Regulations of the Securities and Exchange Commission promulgated and adopted pursuant to the Act, 17 C.F.R. § 240.15c 1-2.
The fourth cause of action repeats and realleges all the allegations in the third cause and tenders the return of the stock. Jurisdiction of this court is invoked under Section 27 of the Act, 15 U.S.C. § 78aa.
Section 15 (c) (1) of the Act, 15 U.S.C. § 78 o (c) (1), on which plaintiff particularly relies for his third and fourth causes of action, provides in relevant part:
"No broker or dealer shall make use of the mails or of any means or instrumentality of interstate commerce to effect any transaction in, or to induce the purchase or sale of, any security * * * otherwise than on a national securities exchange, by means of any manipulative, deceptive, or other fraudulent device or contrivance * * *."
Section 29 (b) of the Act, 15 U.S.C. § 78cc (b) provides for actions brought for violations of Section 15 (c) of the Act. Osborne v. Mallory, 86 F. Supp. 869, 878 (S.D.N.Y. 1949).
The section provides both for actions seeking rescission and companion causes of action for money damages. Geismar v. Bond & Goodwin, Inc., 40 F. Supp. 876, 878 (S.D.N.Y. 1941).
Section 29 (b) of the Act, 15 U.S.C. § 78cc (b) provides in part:
"(B) that no contract shall be deemed to be void by reason of this subsection in any action maintained in reliance upon this subsection, by any person to or for whom any broker or dealer sells, or from or for whom any broker or dealer purchases, a security in violation of any rule or regulation prescribed pursuant to paragraph (1) of subsection (c) of section 78 o of this title, unless such action is brought within one year after the discovery that such sale or purchase involves such violation and within three years after such violation."
In plain language, this section creates an absolute three year statute of limitations on the bringing of an action to void a contract based on violations of 15 U.S.C. § 78 o (c) (1) or rules or regulations promulgated pursuant to the statute. The section clearly bars suits commenced more than three years after the occurrence of any violations, regardless of the date of discovery of the violations.
Paragraph 9 of the amended complaint alleges that the stock sale in issue was consummated "on or about June 15, 1963." The original complaint was sworn to and filed in this court on November 2, 1966. The action was commenced by the filing of the complaint with the court, Rule 3, Fed. R. Civ. P. The amended complaint filed on December 23, 1966, relates back to the date of the original complaint since it "arose out of the conduct, transaction, or occurrence set forth or attempted to be set forth in the original pleading." Rule 15 (c), Fed. R. Civ. P.
It is evident, therefor, that plaintiff's third and fourth causes of action based on Section 15 (c) (1) of the Act were commenced more than three years after the date of the alleged violations. Are plaintiff's third and fourth causes of action time-barred?
Plaintiff contends that there are two possible theories of liability for violations of Section 15 (c) (1) of the Act, tort and contract. Plaintiff further argues that his third and fourth causes of action are based on a tort theory of fraud by a seller rather than on a contract theory. Plaintiff says that Section 29 (b) of the Act, which contains the statute of limitations provision, is limited to a contract theory of action on which he does not rely. Plaintiff then claims the limitation ...