The opinion of the court was delivered by: CONNER
Plaintiff commenced this action pursuant to Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, to recover a $100,000 investment. This action was tried without a jury and accordingly this opinion constitutes findings of facts and conclusions of law pursuant to Rule 52 F.R.Civ.P.
The testimony adduced at trial established that plaintiff, a man of modest means, first became seriously involved in the stock market in the late 1950's or early 1960's when he invested about $20,000 in an account at the brokerage firm of Spencer, Trask, & Co. This account was maintained until 1967 when it was transferred to the firm of Tessel, Paturick & Ostrau, Inc. ("TPO"). The change was occasioned by the meeting of plaintiff and defendant Alfred C. Rizzo ("Rizzo"), in the latter part of 1966 at the local Y.M.C.A. Rizzo was at that time a registered representative for TPO, and was interested in taking over Barthe's account which was then valued at about $150,000. When Rizzo finally did take over the account he was given full discretion in its management. During the latter part of 1967 Rizzo left TPO to join Scheinman, Hochstin & Trotta, Inc., and transferred plaintiff's account to that firm. In August 1968, Rizzo again changed employment, taking plaintiff's account, this time to defendant Kern Securities Corporation ("Kern"). Rizzo successfully managed plaintiff's account and within a short time it was valued at approximately $900,000.
The proof at trial disclosed that Barthe's overriding interest was in capital appreciation, and that he was not especially concerned with how it should be achieved, although he actively monitored the status of the account. Barthe and Rizzo met frequently and often discussed the fortunes which had been made by investing in companies prior to their "going public." Barthe was advised that such a "venture capital" deal afforded an opportunity to get rich quickly. Barthe became interested and, sometime before the events in issue, invested, at Rizzo's suggestion, in a venture capital deal which aborted, with Barthe's money eventually being returned to him.
In June, 1968 Barthe moved to Florida, but remained in close contact with Rizzo. At about this time, Rizzo first mentioned a venture capital deal involving a Chicago company named Institute of Management Training ("IMT"). Early in 1969 Rizzo went to see Barthe in Florida to discuss the IMT deal. Although Rizzo denied having told Barthe that he would have any influence on the company's eventual success, it is clear that Rizzo was very enthusiastic about the company's possibilities. He felt that his contacts and friends "on the street" were good assurance that the company would succeed in the contemplated public offering. Rizzo asked Barthe to invest $100,000 in return for a note for $93,000 (which would probably be paid within 6 months) bearing 7% interest, plus 10,000 shares in IMT which he expected would open at $5.00 per share.
Rizzo had brought two documents with him which he showed to Barthe: an agreement to assign to Barthe a note given by IMT to Rizzo for $93,000, and an agreement to transfer 10,000 shares of stock in IMT to Barthe in consideration of $7,000. Barthe testified that he really didn't understand the documents but gave his consent, and when he received his monthly statement from Kern, it reflected a $100,000 withdrawal. Near the end of March, 1969, the documents were sent back to Barthe with the cancelled check to IMT for $100,000 attached. Rizzo also sent him the cover page of IMT's offering circular, but no further financial information.
In May 1969 Barthe was in New York and met with Rizzo who told him that things were going smoothly with IMT. However, by September, Barthe's inquiries were rebuffed by Rizzo.
Barthe then decided to write to IMT. He eventually learned, through communicating with Melvin Newman, the attorney for IMT, that Rizzo held almost half of the total shares of IMT, because Rizzo had invested $100,000 which constituted virtually the entire current assets of the company.
The gravamen of plaintiff's original complaint was that Rizzo induced him to lend $93,000 to IMT and to purchase 10,000 shares in IMT for $7,000 by means of false and fraudulent representations and omissions of material fact. He alleged that Rizzo assured him that the investment was "riskless" when in fact it was highly speculative; and that Rizzo proffered Barthe's money as his own.
But in his testimony plaintiff admitted that he was aware that no investment is riskless and, both at the trial and in his post-trial memoranda, he has taken the new line that: 1) Barthe believed Rizzo was acting as his broker and not as one who stood to gain enormously from the financing of IMT; 2) Barthe was virtually the sole source of IMT's cash funds; 3) despite the fact that Barthe stood to lose $100,000, he was getting only 7,000 shares and a note for $93,000, while Rizzo was getting 110,000 shares or 47% of the total stock; and 4) Barthe was furnished no financial data about the company.
Accordingly, the proof at trial and the post-trial memoranda will be treated as an amendment of the Complaint.
See Gordon v. Burr, 366 F. Supp. 156, 167 (S.D.N.Y. 1973). Rizzo, on the other hand, admits that he did not tell Barthe that he was being made a director because he brought in the $100,000, nor that he was to own 47% of the stock. He further admits that he did not tell Barthe any details about IMT, and merely sent him the cover page of the offering circular. However, Rizzo defends these actions by proclaiming that "Barthe was not interested in full disclosure -- he was not even interested in minimum disclosure." Brief for Defendant Rizzo at 18. That argument ignores the purpose of the securities laws. In Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 151, 92 S. Ct. 1456, 31 L. Ed. 2d 741 (1972), the Supreme Court, citing Securities and Exchange Commission v. Capital Gains Research Bureau, 375 U.S. 180, 186, 11 L. Ed. 2d 237, 84 S. Ct. 275 (1963), ruled that the 1934 Securities Act and its ...