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July 31, 1969

Moerman, Plaintiff
Zipco, Inc., et al., Defendants

Judd, District Judge.

The opinion of the court was delivered by: JUDD


JUDD, District Judge:

 This action, tried without a jury, is a claim by a shareholder for alleged violations of the federal securities laws and the Connecticut Blue Sky Law. Findings of fact and conclusions of law are made herein pursuant to F.R. Civ. P. Rule 52(a).

 The defendants Sam Nasser, Joseph Nasser, Joseph Snyder, Morris Bibi, and Isidore Dayan were directors of Zipco, Inc. from its inception. The two Nassers and Snyder were also officers. The action has been discontinued against another director, Donald S. Brodeur. Arthur M. Lewis, Zipco's trustee in bankruptcy, has not answered the complaint, but there are no assets for distribution to creditors.

 The Zipco Venture

 In 1960, defendant Sam Nasser obtained a license to produce and sell monofilament nylon zippers in the United States. The patent was owned by Lysta A/s, a Danish corporation. The license was assigned to a newly formed Connecticut corporation, Zipper Corporation of America, Inc., which, in March, 1961, was succeeded by Zipco, Inc., a Delaware corporation. The stockholders of the Connecticut corporation exchanged their stock for shares in Zipco. There were some twenty-seven shareholders.

 The plaintiff, Samuel Moerman, is an attorney specializing in matters before the Interstate Commerce Commission and the Maritime Administration. Since 1955, he has been President and Chairman of the Board of the American Hawaiian Steamship Company. He was first informed of Zipco in late July, 1961 through William Blum, also an attorney, who was counsel to Baruch & Company, underwriters of a Zipco stock offering intended to be registered with the Securities and Exchange Commission. Blum had been associated with the plaintiff's law firm from 1943 to 1946 and they had various business and social contacts since then. In fact, both had invested in the stock of other corporations prior to public offerings.

 Moerman testified that he had "good reason" for not relying on Blum's recommendation and insisted on obtaining information from Zipco's President, Sam Nasser, prior to making a purchase. The telephone conversations between Moerman and representatives of Zipco occurred in late July or early August, 1961. The content of these conversations, essential to the plaintiff's causes of action under the federal securities acts, was disputed. Without repeating all the conflicting testimony here, the relevant standards for determining the credibility of witnesses lead the court to determine the following facts.

 Moerman's first call to Zipco was received by Joseph Snyder, Zipco's Vice President and a Director. Snyder was told that the plaintiff wished to buy 12,500 shares at $2.00 a share. The stock was recommended by Blum, but Moerman wanted to get further details from Sam Nasser. The conversation was brief, ending with Snyder's saying that he would put Nasser in touch with Moerman.

 When the message was delivered to Sam Nasser, he expressed surprise that such a large purchase might be made by a stranger. He telephone Blum, stating that he would rather not sell such a large block of stock. Blum informed him that Moerman's position in the American Hawaiian Steamship Company would add "an air or * * * prestige to the company."

 While Sam Nasser, when he called Moerman, may have urged him to accept less than 12,500 shares, he was certainly glad to have wealthy subscribers to Zipco stock. This willingness is demonstrated in Nasser's subsequent efforts to have Moerman obtain or contribute additional capital to prevent the eventual bankruptcy of Zipco. Nasser's testimony that he informed both Blum and Moerman that the stock issue was then oversubscribed is rejected. Further testimony by Nasser on direct examination revealed that only about 100 out of the 227 ultimate subscribers to the "pre-public offering" had signed subscription agreements before Moerman.

 Blum was selling stock for Zipco in the Washington area. He had told Moerman that there would be just a few stockholders. Moerman repeated this statement to Sam Nasser, and Nasser did not disabuse him of the idea. Nasser did not tell Moerman that there were twenty-seven shareholders at the inception of Zipco, nor that at least seventy more persons had already signed subscription agreements. Moreover, he was never informed that there would be 227 subscribers to the 175,000 share issue.

 A few days later, Moerman received a blank subscription agreement in the mail. He signed the form on August 9, 1961 and returned it to Zipco with partial payment in the amount of $15,000, which was deposited on August 11th. About August 26th, Sam Nasser telephoned to request the $10,000 balance, which Moerman promptly forwarded. The agreement was accepted by Zipco on August 29th and given certificate number 134. A copy was returned to Moerman.

 Defendants make much of the certificate number. While conceding that the number 134 does not necessarily represent that there are at least 134 shareholders, they insist that since Moerman was, in his words, "vitally concerned" that there be only a small group of investors, he had a duty to inquire. Moerman's testimony was that he did not notice this number and if he had, it would not have been meaningful to him. In any event, he had already purchased the shares, basing his decision on what Nasser had told him or omitted to tell him. The subsequent discovery of the true facts is material only to the statute of limitations, discussed below.

 Moerman began receiving "Zipco reports," describing the progress of the company. While these reports contained statements such as "The letters and comment from so many of you" and "Several stockholders have inquired," such statements show only that Moerman may then have been on notice that there was more than a handful of stockholders, not that he was wrong in his testimony about the original representations. A report dated April 11, 1962 stated that the underwriter was having difficulty with the Securities and Exchange Commission, that the underwriting agreement with Zipco had been terminated, and that the company was looking for another underwriter of its public offering.

 In July, 1962, a draft registration statement was received by Moerman. The proposed public offering was 300,000 shares of $.10 par value common stock to be offered at $5.00 per share. Under the title "Offer of Rescission," the draft statement provided:

"In the first 10 days of August 1961, the Company sold 175,000 shares of its common stock at a price of $2 per share to approximately 227 individuals, of whom 27 were the original promoters of the Company. The Company received the proceeds of the sale, but has not yet issued any shares of stock to the purchasers. The proceeds of the sale were applied to the purchase of the license, manufacturing and other equipment from LYSTA necessary to engage in manufacturing operations. The Company has been informed by counsel that these sales may have violated the Securities Act of 1933 and the Securities Act of the State of Connecticut, and created a contingent liability on the part of the Company upon tender of the shares for rescission to return the consideration received by the Company plus interest thereon from the date of the sale."

 I find that this was the first unequivocal knowledge Moerman had that there were more than a few shareholders of Zipco stock. Moerman was invited to become part of a group to buy the stock of any shareholders who elected to rescind, but he refused to do so. He had indicated in a letter to Nasser on September 4th that he wished to "tender back my stock at the first opportunity," citing "changes in my personal situation." When the offer of rescission was presented on December 7, 1962, Moerman promptly accepted.

 Statutes and Defenses

 On these facts, plaintiff seeks recovery from all defendants under Sections 12(1) and 12(2) of the Securities Act of 1933; Section 10(b) of the Securities and Exchange Act of 1934 and Rule 10b-5 promulgated thereunder (17 C.F.R. § 240.10b-5); and Sections 36-267 and 36-312a of the General Statutes of Connecticut.*

 Defendants assert the statute of limitations as a defense to each cause of action.

 Other occurrences, which give rise to a claim by defendants that Moerman waived his rights, are discussed below. Still other facts, subsequent to Moerman's election to rescind, are relevant to plaintiff's claim that defendant Sam Nasser is estopped to plead the statute of limitations; these are discussed in a later portion of this opinion.

 Section 12

 Section 12(1) (15 U.S.C. § 77 l) permits the purchaser of securities sold in violation of Section 5 (15 U.S.C. § 77e) to recover the consideration paid. Section 5 makes it unlawful to use any means of communication in interstate commerce to offer to sell securities unless a registration statement has been filed. Section 12(2) allows recovery based upon misrepresentations or omissions of material fact in connection with the sale of securities.

 Although defendants described the offering to Moerman as part of a "pre-public sale," they do not now contend that the offering of August, 1961 was exempt from Section 5 as a non-public offering under Section 4 (15 U.S.C. § 77d). S.E.C. v. Ralston Purina Co., 346 U.S. 119, 97 L. Ed. 1494, 73 S. Ct. 981 (1953); Repass v. Rees, 174 F. Supp. 898 (D. Colo. 1959). Rather, the defendants have relied on the statute of limitations. On this basis, the court granted a motion to dismiss the Section 12 causes of action against all defendants except Sam Nasser. As to him, sufficient evidence was presented to raise the possibility of estoppel, and the complaint was deemed amended to so plead.

 An action under Section 12(1) must be brought within one year after the occurrence on which it was based. The statute of limitations applicable to Section 12(2) is one year after the discovery of the untrue statement or omission, or after discovery should have been made by the exercise of reasonable care. In no event may the action be brought more than three years after the sale. 15 U.S.C. § 77m. (Section 13).

 The violation occurred on August 29, 1961, when Zipco accepted plaintiff's subscription. The misrepresentations and omissions were discovered in July, 1962, when the draft registration statement was received. Reasonable diligence was exercised by the plaintiff in discovering the facts. This action was commenced on August 9, 1963. ...

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