The opinion of the court was delivered by: GURFEIN
This is a set of two motions to dismiss the amended and supplemental complaint, both pursuant to Rule 12(b)(1) and (6) of the Federal Rules of Civil Procedure on the grounds that: (1) the Court lacks jurisdiction of the subject matter of the action by reason of the plaintiff's lack of standing; and (2) the complaint fails to state a claim upon which relief can be granted. The motions are made on behalf of two of the defendants, namely, Barad Shaff Securities Corp. ("Barad") and Equivest Corporation ("Equivest").
The amended and supplemental complaint (hereinafter the "complaint"), sets forth the following:
American Bank & Trust Company ("American") clears securities for certain of its stock broker customers. It receives stock bought by brokers and pays the persons delivering the stock. In effect, it thereby makes a loan to its customer. American then delivers the stock to its customer broker, or as the latter directs, against payment, out of which American reimburses its advance (Compl. para. 10). One such broker customer of American was Wanderon and Co., Inc. ("Wanderon") (Compl. para. 11). Wanderon had executed a loan and collateral agreement in favor of American (Compl. para. 12).
The stock involved in the action is that of At-Your-Service Leasing Corp. ("AYSL"). On or about April 8, 1970 the SEC issued an order, pursuant to Regulation A, promulgated under Section 3(b) of the Securities Act of 1933, authorizing exemption for the public offering of AYSL stock by TDA Securities, Inc. ("TDA") as underwriter (Compl. para. 13). However, TDA never made any bona fide offering of the stock to the public, as described in the offering circular; nor did TDA make any public distribution of the stock. The SEC has now permanently suspended the Regulation A exemption previously issued (Compl. para. 14).
Before August 19, 1970 TDA telephoned Wanderon and suggested that Wanderon enter a quotation for AYSL in the "pink sheets" maintained by the National Quotation Bureau, Inc. at prices in excess of the original $3 per share offering price, and Wanderon did so. In connection with this listing, TDA told Wanderon that it should advise TDA of all offers of AYSL to Wanderon so that TDA could consider repurchasing that stock from Wanderon (Compl. para. 15). On August 17, 1970 TDA sold 27,500 shares of AYSL at approximately $6 per share to various brokers including 8,500 shares to the moving defendant Barad and 8,000 shares to the moving defendant Equivest (Compl. para. 16). On the same day an employee of Barad, the defendant Garry Frederichs, called Wanderon and offered to sell Wanderon 5,000 shares of AYSL at 6 7/8. Wanderon called TDA and was told that TDA would repurchase this stock from Wanderon at $7 per share (Compl. para. 17). Thus, TDA was agreeing to repurchase the very shares it had just sold. But TDA was financially unable to go forward with the repurchase and Barad is alleged to have known that (Compl. para. 35). It is alleged that, with the connivance of Barad and Frederichs, similar round-robin transactions occurred through the three other interpositioned stock broker-defendants, Equivest, Friedman & Co., and Letters, Peremel and Rashbaum Inc. (Compl. para. 17) and that the nature of the transactions was not disclosed to American or Wanderon (Compl. para. 37). All the parties concerned confirmed the transactions as principals. Frederichs is alleged to have arranged all the transactions, and Barad and Frederichs were alleged to have obtained or been promised some emolument for their activities (Compl. para. 42).
On August 24 and 25, the four selling brokers delivered the AYSL stock, all in negotiable form, to American which received it and paid out $165,625, including $34,375 to Barad and $55,375 to Equivest (Compl. paras. 20-23). This sum was now owed by Wanderon. As security for the advance, American held the 24,000 shares of AYSL received from the various brokers. Pursuant to Wanderon's direction, American tendered the stock to TDA via a Hempstead bank against payment of the amounts which TDA had agreed to pay Wanderon as reflected in the confirmation issued to Wanderon by TDA. TDA failed to pay and American was left holding the stock (Compl. para. 24). Wanderon and TDA are both insolvent. Each has been enjoined from the further transaction of business by court orders made in actions commenced by the SEC (Compl. para. 25). The AYSL stock itself is alleged to have little or no value (Compl. para. 26). American has sought rescission which has been refused.
Based on the foregoing facts, the complaint purports to set forth five causes of action: (1) for rescission and damages under the Securities Act of 1933 arising from the sale of unregistered securities in violation of Section 5; this claim is asserted against all the defendants; (2) for damages for fraud under Sections 12 and 17 of the Securities Act and Section 10(b) of the Securities Exchange Act (and Rule 10b-5) against Barad and Frederichs; (3) for damages for similar fraud against Equivest and the other two delivering brokers; (4) for damages for violation of Section 15(c) of the Securities Exchange Act against all defendants except AYSL; (5) for common law fraud and violations of the New York State General Business Law against Barad, Frederichs and AYSL.
The first claim for relief, by which American seeks to recover the money it paid out to each of the moving defendants for the AYSL shares, is based on the registration requirements of the Securities Act of 1933. Section 5(a) of that Act (15 U.S.C. § 77e(a)) makes it unlawful to use the means of interstate commerce to sell or deliver any security unless a registration statement has been filed as to such security. It is alleged that the AYSL stock was sold and delivered without an effective registration statement.
Section 12(1) of the Act (15 U.S.C. § 77l(1)) makes a seller of a security in interstate commerce in violation of Section 5, the registration section, "liable to the person purchasing such security from him."
On this motion to dismiss we must treat the allegations of the complaint as true. On that basis we assume that the stock delivered to American by the moving defendants was stock sold without a proper registration statement and with no valid exemption under the 1933 Act. The defendants, however, contend that American has no standing to assert liability against them under Section 12 because American was not "a person purchasing a security from him," i.e., from the moving defendants. The defendants read the statute restrictively to support a claim only by a purchaser in direct privity with the seller. They contend that their purchaser was Wanderon and no other; that American, the bank, was a lender to Wanderon and not a participant in a purchase transaction with the selling defendants. We have been cited to no case under Section 12 of the 1933 Act which has passed on the question of whether a bank which acquires stock at the direction of its customer, for the customer's account, has "purchased" the stock from the seller.
American contends that it is a "purchaser" within the meaning of Section 12, because it actually received and paid for the stock, and, when Wanderon failed to repay American's advance, it became as much the purchaser of the stock as if it had acquired the stock directly from Barad and Equivest.
In essence, the proposition is that a bank which purchases stock for a customer who subsequently defaults, can sue the seller just as his customer would have been able to do, if the securities sold turn out to have been sold without registration.
The authorities, as affecting the precise point, are unclear. The Eighth Circuit in Greater Iowa Corporation v. McLendon, 378 F.2d 783, 790 (1967) said: "We do not believe that the statute [the 1933 Act] was designed for the protection of those who are not investors or do not have any semblance of legal privity with the party dealing in the unregistered or fraudulently sold security." Accordingly, the remedies of Section 12 were held unavailable in that case to plaintiffs who had not bought any securities themselves but who were complaining that securities sold to others, with whom the plaintiffs had no connection, were sold in violation of the registration provisions of the 1933 Act. That case did not establish that technical privity of contract is required under Section 12 of the 1933 Act; it merely excluded from the benefits of Section 12 those persons who had no relation to the transaction. The case left the precise meaning of "purchased from him" undecided.
One who buys for another may be a "purchaser" under § 10(b) of the 1934 Act, at least for purposes of suit against his own customers if they fail to reimburse him. A.T. Brod & Co. v. Perlow, 375 F.2d 393 (2 Cir. 1967). Granted that a broker or a bank, acting for a customer, may be a "purchaser" under the securities laws, the question still remains here whether ...