The opinion of the court was delivered by: COOPER
This is an action under the federal securities laws to recover damages arising out of plaintiffs' purchases of Montgomery County Industrial Development Agency First Mortgage Industrial Development Revenue Bonds ("Bonds") from defendant Bache Halsey Stuart Inc. ("Bache") in March 1972. Plaintiffs assert four causes of action in their complaint: In Counts I and III, they claim that Bache misrepresented or omitted to state material facts in connection with their purchase of the Bonds, in violation of the Securities Exchange Act of 1934, §§ 10(b) and 15(c)(1), 15 U.S.C. §§ 78j(b) and 78o(c)(1), and the rules promulgated thereunder. In the remaining counts, plaintiffs contend that the above misleading conduct on defendant's part violated section 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a) (Count II) and Rule 405 of the New York Stock Exchange Rules and Article III, Section 2 of the Rules of Fair Practice of the National Association of Securities Dealers, Inc. (Count IV).
After a four-day trial to the Court, the parties submitted extensive and helpful post-trial memoranda in addition to argument of various evidentiary points which arose at trial. We have carefully examined all pertinent papers, as well as the entire trial record. We conclude that plaintiffs have failed to sustain the burden of proof.
There is little dispute as to the facts. In March, 1972, Bache purchased approximately $4,800,000 in Montgomery County Bonds from the Montgomery County Industrial Development Agency ("Agency"), and offered them for resale to the public. [Pretrial Order, Appendix I, filed September 20, 1976, p.6 (hereinafter PTO App.)] The Bonds were industrial revenue bonds issued pursuant to Article 18-A of the General Municipal Law of the State of New York. [PTO App., p. 6] These tax-free Bonds were unrated, not backed by New York State, Montgomery County or any other taxing authority. [PTO App., p.7]
The Bonds were sold to raise money for the acquisition of certain real property, buildings, equipment and the construction of a warehousing and shipping plant. This facility was designed for and was to be occupied entirely by a privately owned corporation, Palatine Dyeing Co., Inc. ("Palatine"). In return for its use of the facility, Palatine was to pay rent to the Agency pursuant to a lease; the rental payments were the sole source of funds for the payment of principal and interest on the Bonds. [PTO App., p.7]
On or about March 28, 1972, plaintiffs Angelo Scarfarotti, a dentist, and his brother Joseph Scarfarotti, a lawyer, purchased the Bonds from Bache at par, in the face amounts of $100,000 and $50,000 respectively. The Bonds were purchased on margin, with the deposit of 30% of the purchase price to satisfy margin requirements. *fn1"
41, 325; PTO App., p.8]
In March, 1973, Angelo Scarfarotti sold, at a price of 103.75, $40,000 (face amount) of the Bonds, earning a profit of $1,500 on the sale. [PTO App., p.8] Later that month, Bache delivered to him the certificates for the balance of $60,000 (face amount) of Bonds. These certificates expressly stated that neither the State of New York nor the County of Montgomery was liable on the Bonds. *fn2"
; PTO App., p.8] Angelo Scarfarotti also received at that time a copy of the formal opinion letter from bond counsel to the Agency; it described the security for payment of the Bonds' obligations. The letter expressly stated that neither governmental unit was liable on the Bonds. [Deft. Ex. L]
On October 9, 1973, eighteen months after the Bonds were issued, Palatine filed a petition in bankruptcy [PTO App., pp. 7-8]; the Bonds consequently went into default, precipitating this litigation.
We find that plaintiffs have failed to establish by a preponderance of the credible evidence that any misrepresentations or omissions of material facts were made to either of them in connection with their purchase of Bonds from Bache. It is clear from the evidence that both plaintiffs were informed of the nature of the Bonds, and, more importantly, were not the innocent investors they sought at trial to portray. Indeed, even if there were certain omissions with respect to the economic condition of Palatine or the financial backing of the Bonds (we were not made certain), plaintiffs, knowledgeable investors, have not proved reliance upon defendant's alleged actions or inaction sufficient to warrant a finding of liability. We turn first to the issue of whether defendant made material misrepresentations on the character of the Bonds.
Plaintiffs claim that Bache, through one Anthony Carzo, a registered representative of defendant in its Utica (N.Y.) office, informed them that the Bonds were "muni" bonds (Tr. 53, 319), that they were backed by the State of New York and Montgomery County (Tr. 319-320), that they were the "safest investments possible" (Tr. 30-31, 321) and that the Bonds were highly rated (Tr. 30, 335). It is essentially these alleged misrepresentations upon which plaintiffs assert they relied in their purchase of the Bonds, and upon which liability must rest. However, the record simply does not support their position.
First, we find that both plaintiffs received adequate oral explanations of the security behind the Bonds prior to their purchase in March 1972. Anthony Carzo testified by way of deposition
that he informed both plaintiffs, prior to their acquisition of the Bonds, that the sole source of revenue for payment of the Bond obligations was rental payments from Palatine to the Agency. [Carzo dep. 59, 89, 99] According to Carzo, at no time did he affirmatively represent that the Bonds were backed by either New York State or Montgomery County. [Carzo dep. 63, 98]
Significantly, Carzo described the Bonds as the same type that plaintiffs had previously purchased from Bache: Between 1970 and 1972, Angelo Scarfarotti had purchased from Bache $140,000 in face amount of Town of Wallkill (N.Y.) Industrial Development Agency Industrial Development Revenue Bonds ("Wallkill Bonds") and $10,000 (face amount) of Fulton County Industrial Development Agency Industrial Development First Mortgage Revenue Bonds ("Fulton Bonds"). During the same period, Joseph Scarfarotti acquired $20,000 (face amount) of the Wallkill Bonds and $5,000 (face amount) of the Fulton Bonds.
The important fact here is that both the Wallkill and Fulton Bonds were issued pursuant to the same statute that authorized the issuance of the Montgomery Bonds; there too the Bonds were secured solely upon rental payments to be made by a corporate lessee of the industrial facility built by the County agency, and neither bond issue was a general obligation of the State of New York or any political subdivision. [Deft. Exs. M, N, Q] In these material respects, the Wallkill and Fulton Bonds were identical to the Montgomery Bonds at issue in the present case.
Thus, Carzo's description of the Montgomery Bonds as being the same type as the Wallkill and Fulton Bonds [Carzo dep. 57, 89], and so admitted by plaintiffs, [Tr. 28, 237-38] certainly placed them on notice that the security behind the Montgomery Bonds was the same as that behind the other Bonds, i.e., rental payments alone by the tenant of the issuing authority. [Carzo dep. 48-49; Tr. 560-61, 609] Based on the foregoing, we find that Bache did not misrepresent the Bonds as an obligation of New York State or Montgomery County; we reject plaintiffs' testimony to the contrary. [Carzo dep. 37-38, 45; Tr. 45, 53, 319-20]
In addition to Bache's representations above, we find that prior to and shortly after his purchase of the Bonds, Angelo Scarfarotti received documents from Bache describing the Bonds (as well as the Wallkill and Fulton Bonds). These documents plainly stated that the industrial revenue bonds were not obligations of the State or county.
The first such document which described the security behind the Bonds was a newswire memorandum [pltf. ex. 10] which Carzo stated he discussed with Angelo Scarfarotti at their initial meeting concerning the Bonds. [Carzo dep. 66-67] From that document, it is clear that the funds for payment of the obligations of the Bonds were to be derived solely from rental ...