The opinion of the court was delivered by: GOETTEL
GOETTEL, District Judge: In June, 1975, plaintiff DeWitt purchased 134,700 shares of defendant, Alrac Corporation ("Alrac"), an amount representing, at that time, approximately 13% of the outstanding shares. Although the single certificate bore no restrictive legend, Alrac's stock transfer agent, defendant, American Stock Transfer Co. ("A.S.T."), refused to transfer the shares. Its purported reluctance stemmed from the possibility that the transfer might violate the Securities Act of 1933 since the shares were admittedly not registered and the size of the transferred interest raised doubts as to the availability of an exemption from the Act's registration requirements. Plaintiff seeks to impose liability upon both defendants for wrongful refusal to transfer the shares and for failure to note the restrictions on transfer on the face of the certificate.
Defendant AST has answered. Both defendants join in a motion to dismiss the complaint under F.R.C.P. 12(b) or for summary judgment on grounds which will be detailed hereafter.
Plaintiff is described in his brief submitted in opposition to the instant motion as a retired small businessman living in Florida, whose principal source of income derives from investments. He claims that this was his first private stock purchase and that his prior familiarity was with transactions executed on either a national exchange or in the over-the-counter market.
Plaintiff maintains that he first heard of Alrac from a fishing partner, Barkley, who recommended the purchase as a good, although speculative, investment. The risk stemmed from the fact that Alrac had filed a voluntary petition under Chapter XI of the Bankruptcy Act and the cornerstone of the plan approved by the bankruptcy judge was that Standard Oil of California would invest millions of dollars for the right to develop valuable patents which were the primary assets of Alrac.
Barkley, an executive in the parent corporation of Athena Communications Corp. ("Athena"), present owner of the stock, had an officer of Athena contact plaintiff. Plaintiff claims that in a telephone conversation with this officer, he was given assurances that the certificate for the 134,700 shares representing Athena's total interest was not legended nor was the sale of the stock restricted in any way. Additionally, plaintiff was not requested to make any representation that he would hold the stock for investment. The agreed upon sales price was $26,940 of which one-half was contributed by Conn Central Corp., apparently a corporation controlled by a personal friend of DeWitt.
Armed with the certificate, a corporate resolution of Athena authorizing the sale, and a check for the transfer fees, plaintiff presented himself at the New York office of Alrac's stock transfer agent, A.S.T., on July 11, 1975. According to plaintiff, he was told that the corporate resolution was inadequat eand, instead, the transfer required a resolution of Athena's Board. Having obtained this second resolution, plaintiff returned, on August 8, 1975, to A.S.T., endorsed the Athena certificate, and was given a receipt for the stock. DeWitt contends that he was promised that the transfer would be effected in about one week. Not having heard from A.S.T. within the following week, plaintiff called A.S.T. and was allegedly told that a stop-transfer notation appeared on the books for Alrac's former transfer agent, Morgan Guaranty Co., with regard to these shares. Upon confirmation by Morgan Guaranty that no such order had been entered, plaintiff again requested the transfer only to be told that no transfer would be made because it might violate the securities laws.
The undisputed facts relating to the prior ownership of these shares bear out the possibility of a securities law violation. Under the Securities Act of 1933, registration of each sale of a security is required unless the circumstances are such that they fall into one of the statutory exemptions from registration. Section 4(1) of the Act, 15 U.S.C. § 77d(1) exempts "transactions by any person other than an issuer, underwriter, or dealer." Although the sale by Athena to plaintiff, a member of the public and thus precisely the type of individual intended to be protected by the Act, might superficially appear to fall within this exemption, an "underwriter" is so broadly defined that plaintiff might be a "statutory" underwriter. This follows because Section 2(11), 15 U.S.C. § 77b(11) includes within the meaning of an underwriter "any person who has purchased from an issuer with a view to... the distribution of any security.... As used in this paragraph the term 'issuer' shall include, in addition to an issuer, any person directly or indirectly controlling... the issuer." (emphasis added). Under this definition, if Athena was in a position to control
the issuer, plaintiff's purchase from it would render him an underwriter with the result that the exemption under Section 4(1) of the Act would not be available.
The corporation from which Athena acquired the stock, New Jersey Zinc, had, in fact, the right to designate two members of Alrac's Board of Directors. The parties dispute, however, whether Athena succeeded to this right upon acquiring the shares. In any case, while Athena held the certificate, it filed a Schedule 13D in 1972 with the SEC and Alrac as required by a Williams Act provision, 15 U.S.C. §§ 78m(d) for all persons acquiring more than five percent of the outstanding shares of corporation. This filing indicates that the shares were being held for investment, which in turn suggests that the shares were restricted in Athena's hands, since this is the type of representation commonly made when shares are acquired in a private offering. See SEC Rule 146.
A.S.T. alleges in its answer that the circumstances relating to the prior ownership of the shares was supplied at its request by Alrac's Chairman of the Board and Chief Executive Officer, Wolfe. Alrac contends that it took no position with regard to whether or not the shares should be transferred into DeWitt's name, other than the concern, expressed by letter to DeWitt, that the transfer comply with the applicable law. Plaintiff characterizes Alrac as actively opposing the transfer. Its purported motive was to eliminate any potential alliance between DeWitt and Barnes, the founder, and a major stockholder of Alrac who was attempting to block approval of the bankruptcy plan favored by Alrac's management.
A.S.T.'s response to the situation was an offer either to issue a new certificate bearing a restrictive legend or to issue an unrestricted certificate if DeWitt would supply an attorney's letter vouching for the legality of the transfer. Plaintiff attempted, instead, to get Alrac's approval through Wolfe. This was withheld for the apparent reason that it was either unnecessary or improper if the transfer, in fact, required registration. It seems that plaintiff also tried to secure an opinion letter from an attorney, but was unable to do so. Moreover, by this time, A.S.T. was not only refusing to transfer the shares, but also refusing to return the Athena certificate to plaintiff.
Plaintiff's response was to commence a suit in New York Supreme Court on August 21, 1975 naming A.S.T. as the defendant and seeking a mandatory injunction compelling A.S.T. to issue an unrestricted certificate and $2,000 in punitive damages. This maneuver was followed by a petition before the bankruptcy judge on September 5, 1975 to compel the holding of the annual shareholders' meeting required by Alrac's by-laws. Apparently, no meeting was contemplated at that time since shareholders' meetings had been suspended since 1972. This petition was ultimately denied.
The situation apparently remained static until March 15th of the following year when plaintiff allegedly received an attractive offer from Skaneateles Distirbutors Inc. for the purchase of his interest in Alrac. The purported purchase price was to be $3 per share, a figure representing approximately fifteen times what plaintiff had paid less than a year earlier. Because the stock was selling in the over-the-counter market (according to the "pink sheets") at $2.75 bid and $3.25 asked, the offering price also exceeded the market price, but this may have been due to the large size of the block to be acquired. Plaintiff claims that the offer was withdrawn on April 1, 1975 due to his inability to transfer an unrestricted interest. The withdrawal coincided with a precipitous decline in the bid and ask prices quoted in the over-the-counter market.
Two final events have significance for this action. On April 23, 1976, the SEC suspended trading in Alrac due to its failure to file the required annual report, Form 10-K. Plaintiff claims that this had a foreseeably severe effect on the market, making it impossible for him to locate a purchaser and mitigate his damages. The second event was A.S.T.'s transfer of the long-desired unrestricted certificate in May, 1976, prior to any resolution of the then pending action in the New York Supreme Court. A.S.T. claims that the transfer was prompted solely by a statement from a member of the regional office of the SEC that the Commission had no interest in the transfer to plaintiff.
This suit was commenced on September 16, 1976. The complaint states three causes of action. Count I names A.S.T. and its individual partners as defendants and claims damages for the "wrongful failure to issue certificates" prior to the substantial decline in price discussed above. Plaintiff seeks $202,050 in damages, an amount representing his share of the price offered by Skaneateles for the shares plaintiff purchased. (The other half of the shares represented by the Athena certificate is beneficially owned by Conn Central Corp., which has not been made a plaintiff in this action.) Count II is directed against the issuer Alrac, plus the defendants named in the first count, and alleges that Alrac "aided and abetted" A.S.T. in wrongfully refusing to transfer the certificate into plaintiff's name following his purchase.
Subject matter jurisdiction for these two counts is premised upon diversity of citizenship. Plaintiff is a Florida resident, A.S.T. and its partners are located in New York and Alrac is a Delaware corporation having its principal place of business in Connecticut. Personal jurisdiction over Alrac is based upon New York's long-arm statute, N.Y.C.P.L.R. § 302 (McKinney 1972).
In the third count, plaintiff claims that Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78m(a), 78o(d) create an implied cause of action in favor of all shareholders whose interest diminishes in value as a result of a corporation's failure to file reports required by the Act. In this case, the failure had the foreseeable result of an SEC suspension of trading. Jurisdiction of this cause of action, which is directed solely against defendant Alrac, arises from Section 27 of the ...