Appeal from a judgment of the United States District Court for the Southern District of New York, Charles L. Brieant, Jr., Judge. Plaintiffs appeal from a judgment dismissing with prejudice all of their claims against the individual defendants and ten of fourteen claims against the New York Stock Exchange for damages arising out of alleged violations of 15 U.S.C. Sections 78f, 78j and 78t and 17 C.F.R. Section 240.10b-5, as well as common law fraud and breach of fiduciary duty. Affirmed. Opinion below
Medina, Oakes and Gurfein, Circuit Judges.
Plaintiffs, two private investors, appeal from an order of the United States District Court for the Southern District of New York granting summary judgment for defendants and dismissing plaintiffs' complaint in full against three former officers of a now defunct brokerage firm and in part against the New York Stock Exchange. Determining that there was no just reason for delay, the District Court directed entry of final judgment against the investors, pursuant to Fed.R.Civ.P. 54(b). The opinion below is reported, 414 F. Supp. 334 (S.D.N.Y. 1976). To decide this appeal, we must consider the application of New York's "borrowing statute," N.Y.C.P.L.R. Section 202, in the context of an alleged securities fraud, as well as the scope of protection afforded by Section 6 of the Securities Exchange Act of 1934, 15 U.S.C. Section 78f.
This action was commenced on April 11, 1975, almost six years after the transactions in suit. The complaint alleged in fourteen separate "counts" numerous violations of the Securities Exchange Act of 1934, especially Sections 6 and 10(b), as well as common law fraud. Because of their critical role in resolving the numerous issues raised by the parties, the facts must be set forth in detail greater than usual.
Plaintiff James Arneil is an attorney. Plaintiff Vernon A. Stockwell is the general manager and half owner (with Arneil) of two apple orchards in Washington state. Both are longtime residents of Washington. In 1969 each had a net worth in excess of $1,000,000 and had regularly bought and sold securities. The two men had maintained brokerage accounts, including one jointly, with a number of firms, and, in 1969, they were plaintiffs in actions in the Southern District of New York against the brokerage house of Reynolds & Co. for damages arising from stock transactions in 1963.*fn1
Defendant Blair & Co. was a stockbroker and member organization of defendant New York Stock Exchange until September 25, 1970, when Blair ceased operations and a liquidator was appointed. On September 29, 1970, an involuntary petition in bankruptcy was filed against Blair, and, as a result, the portion of this action against Blair was stayed. Defendants Ramsey and Lendman are former presidents of Blair, and defendant Vanderbilt is a former chairman of Blair's board.
On February 28, 1969, Blair had acquired the brokerage firm of Schwabacher & Co., a California partnership, which had been a member of the New York Stock Exchange since 1930. Schwabacher had been in violation of certain Exchange rules between April 1966 and March 1967, and the Exchange had imposed various operating restrictions on Schwabacher in February 1968. In March of 1968 the Exchange learned from independent auditors of difficulties in completing the audit of Schwabacher, and further deficiencies in Schwabacher's position were soon discovered. Near the end of 1968, the Exchange determined that Schwabacher would have to merge with another broker or cut back its operations.
On December 13, 1968, it was publicly announced that Schwabacher would merge with Blair. The merger became effective on February 28 or March 1, 1969, after it was approved by the Exchange. At that time, Blair itself was under investigation by the Exchange for possible violations of the net capital rule as of May 31, 1968.
Plaintiffs allege that in early 1969 Blair solicited them to buy its securities and invest in the firm. They did, and, in the transaction giving rise to this suit, each purchased $15,000 worth of Blair stock, executed Secured Demand Notes ("SDNs"), and deposited $150,000 worth of securities as collateral therefor in a subordinated account with Blair. By means of the SDNs, plaintiffs made loans to Blair which it could use in computing its net capital. In return, they were to receive interest on the loan from Blair, as well as the normal dividends and gains on the collateral. Because stock in brokerage houses could not at that time be publicly traded*fn2 and Arneil and Stockwell were becoming lenders to a member of the Exchange, the two men had to complete special New York Stock Exchange "Allied Member or Non-Member Applications," pursuant to Exchange rules. The transaction required Stock Exchange approval, which was obtained on July 3, 1969.*fn3
Conversations concerning the transaction were held over the telephone between Blair in New York and plaintiffs in the State of Washington, and all written communications were mailed to or by plaintiffs in Washington. On April 16, 1969, each man mailed his check for $15,000 - drawn on a Washington bank - for the purchase of the Blair stock, along with most of the stock certificates to be deposited as collateral in the subordinated accounts. The stock and the SDN accounts were maintained by Blair in New York. Plaintiffs contend that the purchase documents they sent to Blair were signed by them in blank and were to be completed and accepted by Blair in New York, and that the checks they sent could not be negotiated until the transactions were approved by Blair and by the Stock Exchange.
Four months later, on August 28, 1969, the SEC issued a public release announcing violations of its financial, bookkeeping and reporting regulations by Schwabacher, now a division of Blair, and setting forth the disciplinary measures imposed by it and the Exchange. This release was carried in the Wall Street Journal on August 29th.
In March 1970 Blair mailed a letter to its stockholders, including Arneil and Stockwell, advising them that it had adopted a plan to obtain "a substantial amount of badly needed senior capital on a long-term basis" and noting the "absence of any book value" for Blair's stock. A month later over $11,000,000 of subordinated accounts belonging to so-called Blair "insiders" were liquidated to provide working capital. It does not appear from the record that plaintiffs were aware of this fact at that time.
During July of 1970, plaintiffs learned that the affairs of Blair had deteriorated to a point where their investment was about to be liquidated. On July 23rd, Stockwell, on behalf of Arneil and himself, wrote to Blair that they had been advised by their broker, a Mr. McNell of Blair, that some or all of the "outside" SDN accounts were about to be liquidated. They protested that they did not want their accounts liquidated. They also stated that "the extremely critical nature of Blair's problems were [sic] not known by us until this time," and that "proper disclosure of impending developments of the affairs of Blair & Company, Inc., having a material bearing on our willingness to participate in a 'Secured Demand Notes and Stock Purchase Agreement' has not been made to us by Blair & Company, Inc." Stating that they "regard this transaction as being an uncompleted transaction and as being invalid," they further demanded that the stocks and cash then in their accounts be returned to them forthwith. The next day they sent a copy of the letter by registered mail to defendant Ramsey, then Blair's president. In a handwritten note covering the letter, they reiterated their demand for the immediate return of their accounts and advised that they "will take immediate action against Blair & Co. & against any individual representing Blair & Co. who disposes of the stock in any way except by returning the stock to us."
Two weeks later, on August 5th, Blair sent letters to Arneil and Stockwell demanding payment of their secured notes. This letter stated that Blair "expected that a working capital deficiency will develop within the next few days," referred to the April liquidation of insiders' accounts, advised that Blair was not in compliance with the Exchange net capital rules, stated that operating restrictions had been imposed, and informed plaintiffs that unless their notes were paid their subordinated accounts would be liquidated in the next few days in connection with the Exchange-ordered sale or closing of Blair's branch offices. On the same day Blair sent telegrams to plaintiffs demanding payment of the SDNs and advising them that absent payment their accounts were scheduled to be liquidated on August 7th.
On August 13th, the Exchange publicly announced that Blair had terminated its public business "because of capital problems." This report was published in the Wall Street Journal on August 14th.
On about August 15th, plaintiffs received a telegram from one James P. Foley, Jr., a fellow Blair investor, advising them of an "emergency meeting of subordinated security holders of Blair & Co." to be held in New York on August 21st, "independent of Blair management, to compare notes and examine our mutual interests in the light of Blair's condition and conduct[.]" At the request of plaintiffs their lawyers in New York appeared at the meeting on their behalf.
Blair's subordinated lenders were sent a letter by defendant Ramsey on September 25, 1970, informing them that the Exchange had appointed a liquidator for Blair that day and inviting them to attend a meeting to discuss the effect of the appointment on the firm. On September 29th, an involuntary petition in bankruptcy was filed against Blair.
Apparently the next action taken by Arneil and Stockwell with regard to the transactions in issue was the filing of this suit on April 11, 1975. In it they alleged that the three individual defendants had devised a fraudulent scheme to obtain badly needed capital without disclosure of the true financial condition of Blair and that this conduct constituted common law fraud and violations of Sections 10(b) and 20(a) of the 1934 Securities Exchange Act. They also claimed that the New York Stock Exchange knowingly participated in part of the scheme and, while knowing that both Blair and Schwabacher were in violation of numerous securities laws and regulations and were of unsound financial condition, yet approved their merger and failed to enforce their compliance with those laws and regulations, thereby violating Sections 10(b), 20(a) and 6 of the Exchange Act and committing a common law fraud.*fn4
The District Court, Judge Charles L. Brieant, Jr., gave summary judgment for the individual defendants on all claims or counts against them, and for the Exchange on ten of the counts against it, including the Section 10(b) and Section 20(a) counts, as well as the common law fraud count. Summary judgment was denied the Exchange on four counts alleging damages sustained because of its violations of Section 6(a)(1) and (b) of the Exchange Act.
The District Court held that with respect to all defendants, those counts alleging violations of Sections 10(b) and 20(a) of the Exchange Act (Counts 1 through 4) were governed by the three-year statute of limitations of plaintiffs' home state, Washington, and not by the six-year statute of New York as plaintiffs had contended, and so were time barred. Summary judgment was also granted for the Exchange on plaintiffs' Count 12, which claimed a violation by the Exchange of its alleged Section 6(a) duty to enact rules for the protection of private investors, the court holding that no such duty exists. As there were other counts not resolved, the District Court certified that there was no just reason for delay and directed entry of final judgment, Fed.R.Civ.P. 54(b), for the three individual defendants on all counts and for the Exchange on the ten counts on which summary judgment was granted. Rule 54(b) certification was made on June 1, 1976, directing entry of final judgment dismissing the complaint in its entirety as against the individual defendants and dismissing Counts I, II, III, IV, VI, IX, X, XII, ...