The opinion of the court was delivered by: DUFFY
Plaintiff has brought this action under § 10 and § 27 of the Securities Exchange Act of 1934 (the "Act"), 15 U.S.C. § 78j and Rule 10b-5 promulgated thereunder. The defendant now moves for summary judgment dismissing the complaint on the grounds that this Court lacks subject matter jurisdiction and that the action is barred by the doctrines of res judicata and collateral estoppel.
An action under Section 10(b) must allege as a jurisdictional predicate "the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange . . ." The defendant notes that the complaint is defective in this respect and that the absence of the allegation may be an indication that none exists. Plaintiff's attorney argues that the transaction in question must have been accomplished through instrumentalities of interstate commerce or the mails since defendant's agents, who conducted the negotiations, were in Florida and the plaintiff was in New York. In any event plaintiff moves to amend his complaint to include his proposed jurisdictional allegation. The motion is granted and the complaint is deemed amended.
The plaintiff, Dr. Hyman C. Hendler, together with Jack M. Marqusee, owned a parcel of land in Boca Raton, Florida. Through a trustee, the two entered into an option agreement with Hemisphere Hotels Corporation ("Hemisphere") on September 18, 1969. Defendant Charles Wohlstetter, Chairman of the Board and principal shareholder of Hemisphere, negotiated and executed the agreement on behalf of the corporation. The consideration for the proposed sale included promissory notes, mortgage notes and 10,000 shares of Hemisphere common stock. According to the complaint, the option was exercised and the property transferred "sometime in January, 1970."
Dr. Hendler's complaint alleges fraud and misrepresentation on the part of Charles Wohlstetter in describing the financial status and future plans of Hemisphere. The Plaintiff contends that because of these misrepresentations which bore upon the value of the stock, he was induced into transferring the realty.
Defendant's primary argument is that Dr. Hendler is precluded from bringing this action by reason of a judgment entered on May 29, 1974, in a class action suit before Judge Bonsal of this District against Hemisphere, Wohlstetter and others. Ostroff v. Hemisphere Hotels Corporation, 172 Civ. 1570 (S.D.N.Y. 1974). The stipulation of settlement as approved by the Court provided for payment of $400,000 and incorporated the conditional class determination made by the Court which included:
". . . all persons who purchased common stock, warrants and/or common stock and warrants of the defendant, HEMISPHERE HOTELS CORPORATION ("HEMISPHERE") pursuant to and/or following the Registration Statement and Prospectus of December 23, 1969 . . . ."
Plaintiff urges that he is not a member of this class because he acquired the stock in an exchange rather than a purchase, he did not rely on either the Registration Statement or Prospectus and, finally, the acquired stock was unregistered investment stock. I find that the plaintiff is a member of the class bound by the earlier judgment.
The term "purchased" used by the Court in determining the class is certainly broad enough to embrace a transfer of real property in exchange for stock and other good consideration. In fact, the Act under which the plaintiff brings this suit requires that a "sale" be alleged. See § 3(a)(14), Securities Exchange Act of 1934, 15 U.S.C. § 78c(14) defining sale to "include any contract to sell or otherwise dispose of" securities such as those involved in the case at bar. See also H. L. Green Company v. Childree, 185 F. Supp. 95 (S.D.N.Y. 1960) (exchange of stock held to be a sale.)
Plaintiff claims that his lack of reliance on the Registration Statement excludes him from the class. However, in the first action the Court defined the class to include all those who purchased the stock "pursuant to and/ or following the Registration Statement and Prospectus of December 23, 1969 . . . ." (emphasis added). The plaintiff's own complaint alleges that the transfer took place in January of 1970.
For similar reasons plaintiff's contention that his acquisition of unregistered stock held for investment purposes is not within the prior judgment must also fail. The order does not speak in terms of registered or unregistered stock. All purchasers of "common stock, warrants and/or common stock and warrants" of Hemisphere are within the scope of the class. The complaint itself alleges that the agreement with defendant contemplated the transfer of ten thousand shares of "fully paid and non-assessable common stock . . . ."
Plaintiff could have excluded himself from the effects of the class action judgment. On March 19, 1974, a notice of the proposed settlement was sent to all shareholders of record as of December 31, 1971. The option was given to each shareholder to exclude one's self from the settlement and judgment. Defendant alleges that notice was sent to the plaintiff and that he did not seek to exclude himself. Plaintiff's affidavit does not deny these facts. However, counsel's unsworn statement pursuant to Rule 9(g) of this District ...