The opinion of the court was delivered by: MANSFIELD
MANSFIELD, District Judge.
Defendants' motion pursuant to Rule 12(b), F.R.Civ.P., to dismiss the complaint on the grounds that the Court lacks jurisdiction over the subject matter and the complaint fails to state a cause of action is granted, with leave to file an amended complaint.
The complaint contains two claims for relief, invoking federal question jurisdiction, 28 U.S.C. §§ 1331, 1337, based on § 22 of the Securities Act of 1933, § 27 of the Securities Exchange Act of 1934, and claiming implied rights under § 17(a) of the 1933 Act, 15 U.S.C. § 77q(a), § 10(b) of the 1934 Act, 15 U.S.C. § 78j(b), and SEC Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5. See Fischman v. Raytheon Mfg. Co., 188 F.2d 783 (2d Cir. 1951). Pendent jurisdiction is asserted as the basis of state common law claims. For purposes of defendants' motion the complaint's factual allegations must be accepted as true and the complaint may be dismissed only if it discloses lack of jurisdiction or insufficiency on its face. Arfons v. E.I. Du Pont De Nemours & Co., 261 F.2d 434 (2d Cir. 1958); 2 Moore, Federal Practice para. 12.08, pp. 2244-45 (2d ed. 1964). The pertinent allegations are as follows:
Plaintiff, Commerce Reporting Co., Inc. ("Commerce") is a New York corporation having its principal place of business here. Plaintiff Edward Grant ("Grant"), a New York citizen, is its principal stockholder and chief executive officer. Defendant Puretec is a "fictitious name for and is composed of" defendant Ronald Purer, Inc. ("Purer"), a California corporation doing business in New York, of which the principal stockholder and alter ego is defendant Philip Purer ("Philip"). Defendants Ronald Purer ("Ronald") and David Jordan ("Jordan") are California citizens, and defendant VTR, Inc. is a New York corporation, of which defendant Frederic H. Gould ("Gould") is principal executive officer.
The complaint alleges that after Philip and Ronald in December 1967 decided to sell all of the stock or assets of Purer, including its Puretec "business," Purer, Ronald and Philip, on January 22, 1968, entered into an agreement with plaintiffs or their assigns to sell all of Purer's capital stock and the business of Puretec for $1.58 million or equivalent in stock and appointed plaintiffs as their agent to effectuate the sale to an assignee. On January 24, 1968, plaintiffs, acting as principal and agent, agreed to assign the aforementioned purchase right to Granite Equipment Leasing Co. ("Granite") in exchange for 5,000 shares of Granite's stock. On the same date Purer, Philip and Ronald agreed to accept the Granite common stock in consideration of its acquisition of the stock of Purer, which was confirmed by the said defendants who also agreed with Granite that the acquisition would be publicly announced on February 20, 1968 at a meeting of the New York Society of Security Analysts.
It is next alleged that sometime between January 1, 1968 and March 19, 1968 the defendants Purer and Philip entered into secret negotiations with VTR, Inc. and Gould who were introduced to the said defendants by defendant Jordan, with all parties having full knowledge of plaintiffs' rights and of the aforementioned agreements, resulting in the announcement on March 19, 1968 that VTR, Inc. and Gould had agreed to acquire the capital stock of Purer and "business' of Puretec from Philip and Ronald for 250,000 shares of VTR, Inc.
By reference to allegations found in the Second Claim for Relief, it may reasonably be inferred, although it is not expressly alleged in the First Claim, that in entering into the agreement of January 22, 1968 with plaintiffs, the defendants Purer, Philip and Ronald were acting pursuant to a fraudulent scheme between them designed to promote the highest possible price for sale of the stock of Purer and business of Puretec by inducing plaintiffs to enter into the agreement without any intent on defendants' part of consummating it if they could find other purchasers, such as VTR and Gould, who would pay more for the stock than that agreed to under the contract with plaintiffs.
The Second Claim for Relief alleges that beginning on December 1, 1967 and continuing up to and including the date of the complaint the defendants combined and conspired to defraud the plaintiffs in the following way:
Philip and Ronald agreed with Jordan to independently approach and interest a number of people who might possibly agree to buy the stock of Purer, including plaintiffs, in order to obtain offers which they did not intend to accept and which they would fraudulently use to induce higher or additional offers from others; that as part of the scheme the defendants fraudulently led each possible purchaser to believe that no other negotiation was or was to be conducted in good faith; and that defendants did not intend to fulfill, or be bound by, such agreements. It is further alleged that as part of the scheme the defendants agreed to make certain fraudulent representations to prospective purchasers with respect to the business and contracts of a company called Tokyo Electric Company, Ltd.
Plaintiffs seek compensatory damages under both claims, plus punitive damages under the second.
Defendants' motion is founded almost entirely on the contention that the complaint fails to meet the dual requirements of § 10(b) and SEC Rule 10b-5 of the Exchange Act that the alleged fraud be (1) "in connection with" (2) "the sale or purchase" of any security (for full texts of § 10(b) of the Exchange Act, SEC Rule 10b-5, and § 17(a) of the Securities Act, see Appendix), since the alleged fraudulent agreement was never consummated and therefore amounted to no more than an aborted agreement to sell stock of Purer, as distinguished from a "sale or purchase."
Although it has been suggested that an action under § 10(b) of the Exchange Act and SEC Rule 10b-5 may not be founded upon an aborted agreement to buy or sell securities, see Keers & Co. v. American Steel & Pump Corp., 234 F. Supp. 201 (S.D.N.Y.1964), the law in this Circuit and elsewhere now appears to be established that it is unnecessary to prove a consummated, or closed, purchase or sale as condition to the institution of such a suit. Opper v. Hancock Securities Corp., 367 F.2d 157 (2d Cir. 1966); Stockwell v. Reynolds & Co., 252 F. Supp. 215 (S.D.N.Y.1965); Goodman v. H. Hentz & Co., 265 F. Supp. 440 (N.D.Ill.1967); M.L. Lee & Co. v. American Cardboard and Packing Corp., 36 F.R.D. 27 (E.D.Pa.1964).
"The words 'in connection with the purchase or sale of any security' contained in Section 10(b) and in Rule 10b-5 do not require that the purchase or sale immediately follow the alleged fraud. The words have been construed more liberally in order to carry out the intent of the Act, which is designed to protect investors against fraud. Cooper v. North Jersey Trust Co., 226 F. Supp. 972 (S.D.N.Y.1964); New York Mining Co. v. Cranmer, 225 F. Supp. 261 (S.D.N.Y.1963); Pettit v. American Stock Exchange, 217 F. Supp. 21 (S.D.N.Y.1963)." Stockwell v. Reynolds & Co., 252 F. Supp. at 219.
Having in mind that since Congress' purpose in enacting § 10(b) of the Exchange Act was to protect the public by broadly prohibiting " all fraudulent schemes in connection with the purchase or sale of securities" the terms of the statute must be liberally construed, A.T. Brod & Co. v. Perlow, 375 F.2d 393 (2d Cir. 1967), see SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 195, 84 S. Ct. 275, 11 L. Ed. 2d 237 (1963), the construction urged by the defendants would not only fly in the face of that objective, but render unnecessary the words "in connection with". Its effect would be to artificially restrict the statute to proscription of fraud "in the purchase or sale" rather than "in connection with" the purchase and sale of a security. The use of the words "in connection with" indicates that Congress intended to protect against fraud in agreements to buy or sell, as well as with respect to completed sales, provided damages could be shown. Here, for instance, the plaintiffs allege in substance that but for the defendants' fraud, their purchase of the stock of Purer would have been consummated. Such is the very type of fraud intended to be outlawed by Congress. Although failure to consummate ...