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March 23, 1976

Direction Associates, Inc., et al.
Programming And Systems, Inc., et al.

Weinfeld, District Judge (Orally).

The opinion of the court was delivered by: WEINFELD

WEINFELD, District Judge (Orally):

What was commenced as, and should have remained, a simple action for breach of contract, by the time of trial burgeoned to one that included as many securities act claims as the ingenuity of counsel could develop. With one exception -- the charge of sale of unregistered stock -- these additional claims were advanced for the first time on the eve of the expiration of the statute of limitations, almost six years after the occurrence of events.

 The litigation centers about an agreement dated as of August 28, 1969 among these five plaintiffs and seven other shareholders of Interstate Appraisal Company and its subsidiary, Appraisal Surveys, Inc., collectively referred to herein as "Interstate," who transferred all their shares to the defendant Programming and Systems, Inc. (hereafter "PSI"). In return, plaintiffs and the others received 25,806 shares of PSI stock, and, contingent upon Interstate's after-tax earnings in the three fiscal years ended February 29, 1972, they were to receive additional or, as the parties term it, earn-out shares to be delivered on May 15, 1972.

 Now, at the conclusion of a seven-day trial, revolving in the main upon the securities acts claims, the case, stripped to its essentials, still remains what it was at its inception: one for breach of contract for failure to deliver the additional shares of stock claimed to be due pursuant to the formula set forth in the agreement -- in short, the Court finds that the plaintiffs have failed to sustain their burden of proof on their various claims charging material misrepresentations or omissions with respect to the transaction in alleged violation of the anti-fraud provisions of the Securities Exchange Act of 1934.

 As to the claim under the 1933 Securities Act for the sale of unregistered securities, the defendants have established that the transaction was a private offering and exempt under the criteria of Securities & Exchange Commission v. Ralston Purina Co., 346 U.S. 119, 97 L. Ed. 1494, 73 S. Ct. 981 (1953), and succeeding applicable authorities. The availability of the exemption is a question of fact dependent in each instance upon all the attendant circumstances.

 In the instant case, the plaintiffs and non-suing shareholders were twelve in number. The defendants have demonstrated the factors of sophistication, access to information and investment intent on the part of the offerees and their designated representatives. Plaintiffs' attempt to denigrate their own knowledgeability and experience, as well as those of their fellow shareholders, flies in the face of the facts. It was abundantly established that they were able to fend for themselves and were not in need of the protection of the registration provision of the Act. Apart from their own qualifications, they were represented by an attorney throughout the negotiation and consummation of the agreement. Their attorney and Daniel Cassanto, their designated representative, were afforded every opportunity to examine PSI records and to verify any statements made by its representatives. Additionally, they had and availed themselves of the services of their regular certified public accountant.

 This was not a one-way transaction. It was a stock-for-stock exchange for investment purposes. The transaction was negotiated at arm's length over an extended period. Plaintiffs' representatives, knowledgeable and experienced, during the course of the negotiations had access to any information they might have required or requested -- access to the same kind of information required under Schedule A of the 1933 Act; they had every opportunity to verify information, to obtain additional information and to ask questions of the defendants as to matters which they now assert were misrepresented or omitted, but failed to do so. Cf. Klapmeier v. Telecheck Int'l, Inc., 482 F.2d 247, 254 (8th Cir. 1973); Bowers v. Columbia Gen. Corp., 336 F. Supp. 609 (D.C. Del. 1971).

 Apart from the foregoing, I further find that the claim of an alleged sale of unregistered securities is barred under the applicable statute of limitations, 15 U.S.C., section 77m, the outer limits of which require that any action be brought within three years. The sale of the securities occurred as of August 28, 1969, the date of the contract; the plaintiffs received their respective PSI shares on October 23, 1969. The action was not commenced until November 1973, more than four years thereafter.

 Plaintiffs contend, however, that their claims did not accrue until the earn-out shares were due, on May 15, 1972, or that they have not yet accrued because of non-delivery of the earn-out shares. This contention, based upon those contingent shares, must fail. The earn-out shares must be deemed to have been acquired when the transaction was consummated, in August 1969, and in any event no later than October 1969, when the original shares were physically delivered to and received by plaintiffs. See Securities Exchange Commission Regulation 230.144(d)(4)(C). Cf. Pennsylvania Life Company, 1972 CCH SECURITIES LAW REPORTS, P 79,119; Flagg Industries, Inc., 1973 CCH SECURITIES LAW REPORTS, P 79,243.

 Plaintiffs' reliance upon Diskin v. Lomasney & Co., 452 F.2d 871 (2d Cir. 1971), to support their position that the limitation period did not commence until May 15, 1972, when defendants were required but failed to deliver the earn-out shares, or even later, is misplaced. That case simply held that the one-year provision in section 77m does not commence to run on an illegal offer until the plaintiff acquires the shares; otherwise, the statute of limitations could run before the claims had even arisen. Here, the cause of action accrued no later than the receipt by plaintiffs of the initial shares of PSI, and the sale or exchange was complete as of August 28, 1969.

 As to the merits of the remaining claims, the Court has had, in addition to documentary evidence, the benefit of demeanor testimony of witnesses called by one side or the other. However, Daniel Cassanto, who was the expressly authorized agent for the five plaintiff shareholders, as well as the six others, was not called as a witness. Cassanto was not only their representative but the president, director and largest shareholder of Interstate, and he negotiated and executed the agreement on behalf of all the Interstate shareholders. He had full knowledge of what transpired at all meetings, whether with his various shareholders at which the proposal was discussed and approved, or with the defendant PSI or its representatives. During the course of the negotiations he and other representatives of the shareholders received PSI's annual report for the year ended February 28, 1969 and the 1968 preliminary prospectus of a recent rights offering by PSI.

 The failure of plaintiffs to offer Cassanto's testimony takes on added significance, since they stated in the pretrial order that he would be called as their witness. Further, it appears that he was under subpoena by plaintiffs and, in response thereto, was present several days in court. In the circumstances, the failure to call him to the witness stand permits the inference that his testimony would have been adverse to plaintiffs. Cf. United States v. Dixon, 536 F.2d 1388, (2d Cir. 1976). But even without such an inference, the Court finds that the plaintiffs have failed to carry their burden of proof as to the securities acts claims.

 What remains for determination is whether plaintiffs have sustained their burden of proof that PSI breached the agreement of August 28, 1969 by failure to deliver the additional shares based upon the net earnings over a three-year period ending February 29, 1972, and which, if earned, were to be delivered on May 15, 1972. The Court finds that the additional shares had been earned under the formula based on net income of the acquired companies -- that is, Interstate Appraisal and Appraisal Surveys, Inc. -- in the three years ending February 29, 1972, and that PSI was obligated to deliver them to the shareholders severally in the same proportion as they received their shares upon the closing of the transaction in 1969. The fact that the parties' agreement was contained in a single document does not foreclose the right of the individuals to assert separate and individual claims to recover the respective amounts due them. See, e.g., Abel v. Brayton Flying Serv., Inc., 248 F.2d 713, 716 (5th Cir. 1957); Rush & Halloran, Inc. v. Delaware Valley Finan. Corp., 180 F. Supp. 63, 65-66 (E.D. Pa. 1960).

 Defendant PSI, both upon its internal records and in its annual report dated July 7, 1972, recognized its obligation and thereafter repeatedly in writing and in annual reports reiterated its ...

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