The opinion of the court was delivered by: MOTLEY
This is a civil action for rescission and damages arising under the Securities Act of 1933 and the Securities Act of 1934, 15 U.S.C. §§ 77l(2), 77q(a) and 15 U.S.C. § 78i(b) and Rule 10b-5, 17 C.F.R. 240.10b-5. The complaint alleges that defendant Hsu (1) promised to invest over $1,000,000 in plaintiff's corporation in exchange for stock therein; (2) represented that he had negotiated and obtained a valuable contract from defendant T.E.A.C. Corporation which he would assign to plaintiff's corporation; (3) represented that he had a secret cache of securities and cash in Formosa available for investment in plaintiff's corporation. The complaint further alleges that Hsu's representations of his efforts to retrieve his "hidden Formosa monies" were used as inducements to get plaintiff to advance $96,000 in a series of loans to Hsu to help him finance his efforts, for which loans Hsu delivered promissory notes to plaintiff. The complaint then alleges that such representations were also used to induce plaintiff to advance $15,000 additional monies to defendants T.E.A.C. and Tramberg and the sum of $40,000 for extensive travel to and from Japan and Formosa for these defendants. Next, the complaint alleges that Hsu never intended to purchase stocks in plaintiff's corporation, did not have any valuable contract with T.E.A.C., and had no hidden assets. Finally, the complaint alleges that the scheme to defraud plaintiff included the offer and sale of notes to plaintiff by means of a prospectus and oral communications which were misleading; and that defendants have used means and instrumentalities of interstate commerce and of the mails to defraud plaintiff in violation of the Securities Acts and the laws of New York.
During the course of an examination before trial of defendant Hsu, plaintiff asked Hsu questions concerning Hsu's transactions with plaintiff in connection with the alleged fraud which Hsu refused to answer on Fifth Amendment grounds.
After Hsu testified to the payment of some money to him by plaintiff, represented by promissory notes to plaintiff, plaintiff claimed that Hsu waived any privilege by answering these questions.
This action was commenced on August 8, 1966. Defendant was examined on June 14, 1967. On August 8, 1967, plaintiff moved this court for an order compelling Hsu to answer the questions which he refused to answer on the ground of self incrimination. Pending such answers, plaintiff asks that defendant's examination of plaintiff be stayed. The motion is denied.
An indictment of Hsu for the alleged fraudulent activities complained of in plaintiff's complaint was returned on March 8, 1967. Hsu was convicted on January 12, 1968, of eleven of the twelve counts in the indictment.
In opposition to plaintiff's motion, Hsu first challenged the subject matter jurisdiction of this court. He also invokes his Fifth Amendment privilege against self incrimination and denies any waiver thereof during the course of his deposition.
Under the applicable federal statutes, "security" is defined as " . . . any note, stock, treasury stock, bond, debenture, evidence of indebtedness . . .". 15 U.S.C. § 77 b (1). That promissory notes are within the intendment of the securities laws cannot be seriously questioned. Llanos v. United States, 206 F.2d 852, 853-854 (9th Cir. 1953), cert. denied, 346 U.S. 923, 74 S. Ct. 310, 98 L. Ed. 417; United States v. Monjar, 147 F.2d 916, 920 (3rd Cir. 1945), cert. denied, 325 U.S. 859, 65 S. Ct. 1191, 89 L. Ed. 1979; S.E.C. v. Vanco, Inc., 166 F. Supp. 422, 423 (D.N.J. 1958). The Securities Act of 1933 creates civil liability for any person who "offers or sells" a security by means of an oral communication which includes an untrue statement of a material fact. 15 U.S.C. § 77l(2). Jurisdiction of claims under 15 U.S.C. § 77l(2) is in this court. 15 U.S.C. § 77v. The Securities Act of 1933, 15 U.S.C. § 77q, and the Securities Act of 1934, 15 U.S.C. § 78j(b) also outlaw fraudulent activities in interstate commerce in the purchase or sale of any securities. One who violates the statutory prohibitions against fraud in the purchase or sale of securities is also subject to civil liability. Fischman v. Raytheon Mfg. Co., 188 F.2d 783 (2d Cir. 1951), and Thiele v. Shields, 131 F. Supp. 416 (S.D.N.Y. 1955). Jurisdiction of claims arising under 15 U.S.C. § 77q(a) and 15 U.S.C. § 78j(b) is also in this court. 15 U.S.C. §§ 77v(a), 78aa. This court, consequently, has jurisdiction of this action.
The purpose of the Fifth Amendment privilege is to preclude the use of official force to compel a witness to recite a sequence of events which could lead to his conviction. Malloy v. Hogan, 378 U.S. 1, 11-12, 12 L. Ed. 2d 653, 84 S. Ct. 1489 (1964); Curcio v. United States, 354 U.S. 118, 122, 1 L. Ed. 2d 1225, 77 S. Ct. 1145 (1957); Emspak v. United States, 349 U.S. 190, 198-199, 99 L. Ed. 997, 75 S. Ct. 687 (1955). In consonance with this aim, the courts have afforded the Amendment a liberal construction. Miranda v. Arizona, 384 U.S. 436, 461, 16 L. Ed. 2d 694, 86 S. Ct. 1602 (1966); Ullmann v. United States, 350 U.S. 422, 426, 100 L. Ed. 511, 76 S. Ct. 497 (1956); Quinn v. United States, 349 U.S. 155, 162, 75 S. Ct. 668, 99 L. Ed. 964 (1955); Hoffman v. United States, 341 U.S. 479, 486, 95 L. Ed. 1118, 71 S. Ct. 814 (1951); Counselman v. Hitchcock, 142 U.S. 547, 562, 35 L. Ed. 1110, 12 S. Ct. 195 (1892).
The fact that Hsu has sought to invoke the privilege in this civil proceeding as opposed to the criminal proceeding against him is no bar to the applicability of the privilege. McCarthy v. Arndstein, 266 U.S. 34, 40, 69 L. Ed. 158, 45 S. Ct. 16 (1924); Malloy v. Hogan, supra; Watkins v. United States, 354 U.S. 178, 1 L. Ed. 2d 1273, 77 S. Ct. 1173 (1957).
The indictment charges that Hsu " . . . unlawfully, wilfully and knowingly did devise and intend to devise a scheme and artifice to defraud, and for obtaining money and property of a value of $5,000 and more by means of false and fraudulent pretenses, representations and promises from . . . plaintiff . . . by inducing and attempting to induce . . . plaintiff . . . to be defrauded to part with his money and property . . ."
Under the circumstances, the court agrees that questions propounded to Hsu and set forth in footnote 1, supra, concerning the transactions described in the complaint and in the indictment are properly subject to Fifth Amendment reservations. Indeed, some of the questions inquired whether Hsu had promised to invest a million dollars in Video Medical Electronics Corporation (plaintiff's corporation) or if he had defrauded plaintiff out of approximately a hundred and fifty thousand dollars.
The remaining question before the court is whether Hsu waived the privilege by answering as he did some of the questions regarding the notes. Certainly, a defendant can waive his Fifth Amendment privilege. Upon a claim of waiver and denial of waiver, this court must inquire into the circumstances to see if a waiver has occurred. Hsu answered "yes" to making promissory notes to the order of plaintiff, although Hsu could not remember the amount of the notes. Hsu also testified that he did not owe plaintiff approximately one hundred thousand dollars. Counsel for plaintiff secured concessions from Hsu and his lawyer that certain promissory notes had been made by Hsu.
In response to whether he had paid plaintiff the amount of money which those notes represented, Hsu replied, "No", but still urged that he did not owe plaintiff any money. The witness refused to provide details on his contention that there was no debt owing to plaintiff, claiming his Fifth Amendment privilege. Plaintiff contends that ...