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REEDER v. MASTERCRAFT ELECS. CORP.

February 3, 1969

Thomas J. REEDER et al., Plaintiffs,
v.
MASTERCRAFT ELECTRONICS CORPORATION, Al Dayon, James S. Farnell, and H. John Gluskin, Defendants



The opinion of the court was delivered by: HERLANDS

HERLANDS, District Judge:

 This motion poses a question of practical importance in the expanding field of private litigation arising out of claimed violations of the federal securities acts.

 The motion is made by defendants who seek to vacate the order of attachment issued December 16, 1968 on plaintiffs' behest by the judge then handling ex parte applications. The ground of the motion is that plaintiff's claim predicated on violations of the federal securities laws is not an action "* * * to recover damages * * * for fraud or deceit" within the meaning of New York Civil Practice Law and Rules (N.Y. CPLR) § 6201(7), a statute which authorizes the issuance of an order of attachment and which is made applicable to this case by Fed.R.Civ.P. 64. Alternatively, defendants contend that the affidavits accompanying the order of attachment are insufficient because they do not meet the requirements of N.Y. CPLR Rule 6212(a) as judicially interpreted.

 I.

 N.Y. CPLR § 6201(7) permits the issuance of an order of attachment when "there is a cause of action to recover damages * * * for fraud or deceit." *fn1" This provision was adopted in 1963, when the CPLR was enacted. Although there is no relevant legislative history, it is generally accepted that the provision authorizes attachment in all common law tort actions for fraud and deceit. See McLaughlin, Supplementary Practice Commentary, 7B N.Y.C.P.L.R. § 6201 (McKinney ed. 1968 Supp.); 7A Weinstein, Korn & Miller, N.Y. Civil Practice § 6201.16 (1968).

 Defendants argue that, because a cause of action brought under the federal securities laws is a statutory, as distinguished from common law, action for fraud, attachment, under this provision, was unavailable. There is an absence of judicial authorities and commentaries on this precise point.

 In this Court's opinion, CPLR § 6201(7) is applicable to any claim based upon operative facts that would sustain an action for common law fraud, regardless of the legal theory actually asserted by plaintiff. The public policy permitting attachment for security in cases involving fraud -- that defendant's prior conduct makes it likely that he would disregard any judgment rendered against him and frustrate plaintiff's efforts to collect the judgment -- is no less valid where fraudulent acts are sought to be redressed under the federal securities laws rather than under the common law. This is not to say, however, that a plaintiff is entitled to an order of attachment, of right, in an action brought for violation of the antifraud provisions contained in the federal securities acts. Section 6201 places the matter wholly within the court's discretion. Before issuing an order of attachment, the court must be convinced that the order is necessary for the security of plaintiffs. 7A Weinstein, Korn & Miller, supra § 6201.03. In this case, however, there has been no claim by defendants that, if attachment is available and the motion papers are sufficient, there was an abuse of discretion because the attachment was unnecessary for plaintiffs' security.

 Hence, the pertinent inquiry is: Have plaintiffs, in their complaint, stated a cause of action for fraud and misrepresentation under New York law?

 The complaint is structured in two counts: (1) it is alleged that defendants distributed over 25,000 shares of Mastercraft Electronics Corp. common stock without having a registration statement in effect and that plaintiffs were purchasers of this unregistered stock; and (2) it is alleged that defendants conspired to manipulate the price of Mastercraft common stock; that they accomplished this objective by filing a false and misleading financial statement and annual report with the S.E.C.; and that plaintiffs, in reliance thereon, purchased Mastercraft common stock to their detriment.

 The first count, based on violations of sections 5 and 12(1) of the Securities Act of 1933, 15 U.S.C. §§ 77e, 77 l (1) (1964), does not allege any facts giving rise to a claim founded on fraud. Liability, if any, arises from the mere distribution of unregistered stock.

 The Court, therefore, turns to the second count, charging manipulation and misrepresentation in violation of § 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78j(b) (1964), and S.E.C. Rule 10b-5 thereunder. The complaint specifically charges that defendants made certain representations which were false and that they were made by defendants for the purpose of defrauding the public. If these allegations are proven, plaintiffs will have demonstrated inferentially that defendants had knowledge of the falsity of the representations. Plaintiffs also assert that they relied on the representations and purchased stock. Consequently, the complaint would appear to contain all of the "essential constituents" of an action for fraud, which "are tersely and adequately stated as representation, falsity, scienter, deception, and injury." Ochs v. Woods, 221 N.Y. 335, 338, 117 N.E. 305, 306 (1917); Accord Sager v. Friedman, 270 N.Y. 472, 479, 1 N.E.2d 971, 973 (1936).

 In Reno v. Bull, 226 N.Y. 546, 124 N.E. 144 (1919), the court applied this formula in an action similar to the instant one. Plaintiff had purchased stock in reliance on a prospectus which included a letter sent by the president of the issuing company to the investment bankers, who were the underwriters. This letter contained various factual statements as to the company's operations, probable earnings and dividends. The court held that an action for fraud and deceit would be made out if the defendant directors, who had approved the prospectus, made false representations with knowledge of their falsity for the purpose of deceiving the public, and plaintiff, believing the representations true, purchased the stock and was thereby damaged.

 While this is the first reported case where the issue was litigated, it is not the first case where an order of attachment has issued in an action alleging violations of § 10(b) and Rule 10b-5.

 The district court issued an order of attachment in A. T. Brod & Co. v. Perlow, 66 Civ. 3366 (S.D.N.Y.), the merits of which, however, were not contested. When the Court of Appeals reversed the dismissal of the action, it directed, without discussion, the reinstatement ...


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