The opinion of the court was delivered by: BRIEANT
Plaintiffs, Welch Foods Inc. ("Welch"), a New York corporation, C.R. Anthony Company ("Anthony"), an Oklahoma corporation, and Younker Brothers, Inc. ("Younkers"), a Delaware corporation with its principal place of business in Iowa, allege that in 1970, defendant Goldman, Sachs & Co. sold Penn Central Transportation Company promissory notes ("Penn Central") to them and in so doing violated § 12(2) and § 17(a) of the Securities Act of 1933 (15 U.S.C. §§ 77 l, 77q), § 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. § 78j). The complaint, filed November 4, 1970, also pleads a count based on allegations of common law fraud and a private claim said to arise under the Martin Act, in effect in New York State.
Goldman, Sachs, a partnership engaged in investment banking, underwriting and dealing in securities and commercial paper, is a registered broker-dealer, and a member of the New York Stock Exchange and the National Association of Securities Dealers. Its principal place of business is in New York City.
Trial of the issues was commenced before the Court and jury on September 9, 1974, and continues. On September 19, 1974, after plaintiffs had rested, defendant moved to dismiss generally, for failure of proof, and specifically moved to dismiss all claims asserted by Welch, and to dismiss those claims of the other plaintiffs arising under § 17(a) of the 1933 Act and § 10(b) of the 1934 Act, all for lack of subject matter jurisdiction.
Defendant contends that the Court lacks subject matter jurisdiction of Welch's claims under the 1933 Act because the notes were not offered or sold "by the use of any means or instruments of transportation or communication in interstate commerce or of the mails," as required by § 12(2) and § 17(a).
As to all plaintiffs, defendant contends that § 17(a) does not afford a private right of action, and further, that subject matter jurisdiction does not exist under the 1934 Act because the Penn Central notes are "commercial paper" and not within the definition of a "security" contained in § 3(a) (10) of the 1934 Act. Accordingly, it is claimed, the notes are not a "security" for purposes of § 10(b) or Rule 10b-5.
Defendant also asserts that if no federal subject matter jurisdiction exists as to Welch, this Court, as a matter of discretion, should not exercise pendent jurisdiction over Welch's state claim.
Claims of Welch under the 1933 Act.
In order for this Court to have jurisdiction over Welch's claims under § 12(2) and § 17(a) of the 1933 Act, the notes of Penn Central must have been offered or sold either (a) by use of the mails, or (b) "by the use of any means or instruments of . . . communication in interstate commerce." 15 U.S.C. § 77 l (2).
Welch did not enter into this particular transaction with Goldman, Sachs as a result of a solicitation by mail. Goldman, Sachs had published and distributed leaflets inviting clients such as Welch to invest in commercial paper, but it cannot be said with certainty that Welch received or acted upon any such mailing in making this particular purchase.
Purchase of these notes was effected by an intrastate telephone conversation between William H. Lomicka, a financial officer of Welch, and Mark Dembrow, a Goldman, Sachs commercial paper salesman. As a result of one or more intrastate phone calls, Welch made the purchase, and directed its bank in New York City, First National City Bank, to credit Goldman, Sachs for the purchase price against delivery of the notes to the Bank, all on the same day. This was the standard procedure followed in such sales.
Immediately after the transaction had been concluded on the phone, and, according to defendant's theory was therefore complete in all respects, Goldman, Sachs caused a "confirmation" to be completed and mailed to Welch, enclosed with so-called green, white and yellow sheets (PX162, 163 and 164), financial data prepared or reproduced by Goldman, Sachs concerning the issuer, Penn Central.
Defendant clearly employed the mails, but the confirmation and the green, white and yellow sheets were not mailed until after the purchase had been agreed upon, and were not received by Welch until a day or more after payment and delivery of the notes. At issue is whether this use of the mails is a sufficiently significant part of the transaction to be relied on for jurisdictional purposes.
I find that under the circumstances of this case, both parties contemplated that a confirmation would be mailed forthwith from Goldman, Sachs to Welch at Westfield, New York, as soon as possible after concluding the telephone call. Indeed, it would have been impossible to conduct or complete this sort of transaction if prompt receipt of this documentation at the home office of the purchaser was not contemplated. Otherwise, purchaser would be in a position of having had its New York City bank account debited for a substantial amount of money, with no documentation in the office of its treasurer at Westfield, New York to show where the money had gone. The confirmation, in effect, served as a voucher, and under principles of accounting generally followed in American business, it would be impossible for Welch to effect such a transaction solely by telephone. An alternative, of course, would have been the immediate mailing of a vault ticket or receipt for the notes to Welch by its bank, but such a mailing would not have satisfied the normal requirement of a voucher, since the bank had no first-hand basis, except for an undocumented telephone instruction, to set forth the purchase price thereon, in a way binding seller as to amount.
Where, as here, the confirmation of a sale of securities is an integral and essential part of the transaction, it is sufficient to support jurisdiction. The Court recognizes in this regard that there is a factual distinction between a confirmation which is used, as in this case, as a voucher record in the purchaser's accounting procedures, and a confirmation such as is used in the sale of equity securities, where payment or delivery or some similar act is required after receipt of the mailing, and by the settlement date. But this distinction is considered unimportant for jurisdictional purposes.
Use of the mails "to confirm purchases already induced by defendant's deceit" is adequate, and "the mailing need not be central to the fraudulent scheme as it would be in a mail fraud case." United States v. Cashin, 281 F.2d 669, 673-74 (2d Cir. 1960); see also Jaffee & Co. v. S.E.C., 446 F.2d 387, 392 (2d Cir. 1971). Decisions under the mail fraud statute are inapposite in the construction of the securities laws. Assuming they applied, a distinction exists which is applicable here. In United States v. Maze, 414 U.S. 395, 38 L. Ed. 2d 603, 94 S. Ct. 645 (1974) the Supreme Court reversed a conviction based on the mail fraud statute, holding that the mailings were too remote from, and not part of, the fraudulent scheme. However, the Court noted that where, as here, the mailings might have helped to prevent detection by lulling the victim into refraining from investigating and discovering the fraud, mailing after the consummation of the transaction might support conviction. The mailings in Maze actually assisted in discovering the fraud. Here, confirmation slips accompanied by sheets containing favorable financial information about Penn Central might induce the purchasers to believe they had sufficient relevant background information about the company and thus need not conduct a separate investigation which might have alerted the purchasers to the true state of affairs of Penn Central and "uncovered" the alleged fraud.
Use of the mails as a part of a sale, even though subsequent to it, appears to be sufficient to sustain jurisdiction.
We agree with defendant's contention, however, that use of the mails and interstate telephone calls involved in the purchase by Goldman, Sachs of the Penn Central notes sold to Welch cannot be used as a jurisdictional basis with respect to claims arising out of the sale to Welch. This is so, notwithstanding the fact that there is some evidence the notes or paper sold to Welch were "special order" with respect to maturity and terms, and, of necessity, would have required a specific telephone conversation between Goldman, Sachs' New York commercial paper buying office, and the Treasurer's office of Penn Central, at Philadelphia, Pa. This interstate aspect of the transaction is considered too remote to serve as a basis for jurisdiction.
With respect to the claims of Welch under § 12(2) of the 1933 Act, I am satisfied that subject matter jurisdiction does exist in that the commercial paper was offered or sold "by the use of any means or instruments of transportation or communication in interstate ...