The opinion of the court was delivered by: GAGLIARDI
Plaintiffs Marbury Management, Inc., Harry Bader and Harvey Jaffe commenced this action against the brokerage firm of Wood, Walker & Co. ("Wood Walker") and its employee, Alfred Kohn, alleging violations of Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78j(b), Section 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q, and common law fraud.
Jurisdiction is predicated upon 15 U.S.C. §§ 78aa, 77v and principles of pendent jurisdiction. This action was tried to the court and, at the conclusion of the evidence, the court granted Wood Walker's motion to dismiss the complaint on the ground that plaintiffs failed to prove a prima facie case against it (Tr. 188-90). The court reserved decision as to defendant Kohn's motion to dismiss the complaint against him.
Plaintiffs are former customers of defendant Wood Walker, a stock brokerage firm.
The complaint alleges that, beginning during the summer of 1967, Alfred Kohn falsely held himself out to be a licensed registered representative employed by Wood Walker. Plaintiffs claim that they placed buy and sell orders with Wood Walker through Kohn
in reliance upon his training and expertise. (Complaint, at PP 10, 37, 64). The complaint further alleges that Kohn offered advice to the plaintiffs regarding the investment potential of certain securities; that he represented that his opinion was "based upon personal conversations and meetings with officers and other persons who had unique information as to the transactions of the corporation and their effect on the market price"; and that Kohn knew that his representations were false when he made them but offered them in order to induce the plaintiffs to purchase certain stocks. (Id. PP 18-20, 42-45, 70-73). Wood Walker, it is alleged, permitted Kohn to hold himself out as a registered representative when it either knew or should have known that he was not so licensed. (Id. at PP 12-13, 39-40, 66-67). Based upon the aforesaid actions of the defendants, the complaint alleges three causes of action on behalf of each of the plaintiffs: violations of Section 10(b) of the Exchange Act (and Rule 10(b)(5) thereunder), Section 17(a) of the Securities Act of 1933, and fraud under the law of New York. The following constitutes this court's findings of fact and conclusions of law in accordance with Rule 52(a), Fed.R.Civ.P. Plaintiffs Marbury Management and Bader have proved their claims under § 10(b) and therefore are entitled to recover damages from Kohn. Plaintiff, Jaffe, however, has not proved all of the requisite elements of a § 10(b) cause of action and therefore is not entitled to relief. Plaintiff's motion for reconsideration of the court's dismissal of the complaint against Wood Walker pursuant to Rule 60(b), Fed.R.Civ.P. is also denied.
1. 10(b) Claims Against Defendant Kohn
It is well established that an implied cause of action under § 10(b) will lie only if the plaintiffs can prove that the defendant willfully misstated or omitted a material fact which caused the plaintiff injury in connection with his purchase or sale of a security. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 197, 96 S. Ct. 1375, 47 L. Ed. 2d 668 (1976) (knowing or intentional conduct required); TSC Industries Inc. v. Northway, Inc., 426 U.S. 438, 449, 96 S. Ct. 2126, 48 L. Ed. 2d 757 (1976) (misstatement or omission must be material); Affiliated Ute Citizens v. United States, 406 U.S. 128, 153-54, 92 S. Ct. 1456, 31 L. Ed. 2d 741 (1972); Titan Group Inc. v. Faggen, 513 F.2d 234, 237 (2d Cir. 1975) (causation still a necessary element in some private 10(b) actions); Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 730-31, 95 S. Ct. 1917, 44 L. Ed. 2d 539 (1975) (plaintiff must be a purchaser or seller of securities).
The complaint in this case alleges that Kohn made two types of misstatements giving rise to a private cause of action under § 10(b): (1) numerous predictions concerning the future earning capacities and proposed acquisitions of various companies, and (2) representations that he was a "portfolio management specialist." As to the first set of alleged misstatements, plaintiffs claim that Kohn stated that "he had a relative on the board of directors . . . of (DWG) corporation" and that the stock "should go up in price" (Gold Tr. 30) (Jaffe Tr. 90); that investors in Commuter Airlines Co. were likely to earn a "big return" (Bader Tr. 61) (Jaffe Tr. 100); that Capital Holding and Stanrock Uranium were "good stocks" which should return a profit (Bader Tr. 63-64); and that a favorable newspaper article regarding the Responsive Environment Co. would soon be published (Gold Tr. 33) (Bader Tr. 62). Although the plaintiffs claim that Kohn knew that these representations were false when he made them (Complaint PP 20, 47, 74), nothing in the record supports this conclusion. On the contrary, Robert Gold, President of plaintiff Marbury Management, testified that he did not believe that Kohn was making fraudulent statements (Tr. 31, 41), and plaintiff Jaffe conceded that certain information and investment advice that Kohn gave to him may have been true (Tr. 116). Nor does the mere fact that the defendant's predictions did not materialize indicate that the statements were untrue at the time of issuance. See A. Jacobs, What is Misleading Statement or Omission under Rule 10b-5, 42 Fordham L.Rev. 243, 284 (1973) Citing inter alia Dolgow v. Anderson, 53 F.R.D. 664, 670, 676-79 (E.D.N.Y.1971) (intervening cause); Milberg v. Western Pac. R.R., 51 F.R.D. 280, 282 (S.D.N.Y.1970) (cannot reasonably expect projections to be infallible in all situations). A false prediction, however, may be actionable if the plaintiff establishes that the statements, whether characterized as either fact or opinion,
were not prepared in a reasonable manner or with a firm basis. SEC v. Okin, 137 F.2d 862, 864 (2d Cir. 1943); REA Express v. Interway Corp., 410 F. Supp. 192, 197 (S.D.N.Y.1976) Citing Marx v. Computer Sciences Corp., 507 F.2d 485, 490 (9th Cir. 1974); Schuller v. Slick Corp., (1974-1975 Binder) Fed.Sec.Law Rep. (CCH) P 95,065 at p. 97,739; In re Alexander Reid & Co., Inc., (1962-63 Binder) Fed.Sec.Law Rep. (CCH) P 76,823 at p. 81,073; In re Mac Robbins & Co., 40 S.E.C. 497, 502 (1961) Remanded sub nom. Kahn v. SEC, 297 F.2d 112 (2d Cir. 1961) and Berko v. SEC, 316 F.2d 137 (2d Cir. 1963); Jacobs, supra, at 285; A. Bromberg, 2 Securities Law § 7.2(1) (1977); E. Weiss, Registration & Regulation of Brokers and Dealers, at 185 (1965).
Plaintiffs have not offered even a scintilla of evidence to show that Kohn's representations were groundless and absent such proof, the requisite falsity is lacking to establish a misstatement within the purview of § 10(b).
Kohn's representations concerning his expertise in the securities field present a different problem. Unlike his investment advice, Kohn's repeated statements that he was a stockbroker (Gold Tr. 13) (Bader Tr. 60) (Jaffe Tr. 87-89) and his use of a business card stating that he was a "portfolio management specialist" (Exhibits 47, 48) were undeniably false. William Haneman, general partner of Wood Walker, testified that Kohn was employed by Wood Walker as a trainee, and as such, was permitted to accept buy or sell orders only under the supervision of a Wood Walker officer (Haneman Tr. 141).
Scienter and materiality, two principal elements of the private cause of action under 10(b), are also present with regard to Kohn's statements concerning his qualifications. Given defendant's deposition testimony that he was neither a "securities analyst" nor "portfolio management specialist" but knew that his business card listed him as such (Tr. 138-39), it is clear that Kohn acted with an " "intent to deceive, manipulate, or defraud' ". See Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S. Ct. 1375, 47 L. Ed. 2d 668 (1976). A willfully false statement is considered to be material if:
(there is) a substantial likelihood that, under all the circumstances, the omitted (or misrepresented) fact would have assumed actual significance in the deliberations of the reasonable shareholder. Put another way, there must be a substantial likelihood that the disclosures of the omitted (or misrepresented) fact would have been viewed by the reasonable investor as having significantly altered the "total mix" of information made available.
TSC Industries v. Northway, Inc., 426 U.S. 438, 449, 96 S. Ct. 2126, 2132, 48 L. Ed. 2d 757 (1976).
Analyzed against this standard, the court finds that Kohn's misstatements were material. The court reaches this conclusion for two reasons. First, the expertise that Kohn held himself out as having affected the type of services that he could lawfully perform for investors. For example, testimony at trial indicated that while trainees at a brokerage firm can accept buy or sell orders by phone under the supervision of a broker, they cannot recommend the purchase of a security outside of the office. (Haneman Tr. 148-49). Second, the qualifications and expertise of a securities salesman are particularly significant criteria in evaluating any information as inherently speculative as future earnings predictions. Thus, a reasonable investor would certainly consider the total mix of information "significantly altered" if he learned that certain investment advice was being furnished to him by "a trainee" in the securities field rather than a "specialist". It is therefore irrelevant that the plaintiffs may not have known the precise training required for an individual to be licensed as a broker (Tr. 52, 84, 108); what is important is that the terms "broker" and "specialist" themselves connote a level of competence to the reasonable investor. Defendant's reliance on Hayden v. Walston & Co., Inc., 528 F.2d 901 (9th Cir. 1975) is inappropriate. Although the Ninth Circuit held that a salesman's failure to reveal to his investors that he was not licensed to sell securities was not an omission of a material fact under Rule 10b-5, that decision predated the Supreme Court's ruling in Northway and relies heavily on the fact that the complaint contained no allegations that the salesman's omission rendered his other statements misleading. The complaint in this case, in contrast, alleges that the misstatements were materially misleading (Complaint PP 21, 48, 75). These allegations are amply supported by the trial testimony to warrant a different result from that reached by the Ninth Circuit in Hayden.
The final element of a 10(b) cause of action based on affirmative misrepresentations is proof of reliance.
In such a case, "reliance" would seem to embody,
two separate questions both of which are designed to determine whether the utterance by defendant caused the plaintiff to enter into the transaction and therefore his losses which allegedly flowed from the transaction. The two questions are did the plaintiff believe what the defendant said and was his belief the cause (or a cause) of plaintiff's action in entering into the transaction.
R. Jennings & H. Marsh, Securities Regulation 1063 (1977). Unlike the concept of materiality, which is couched in terms of "the reasonable investor", the concept of reliance requires a subjective inquiry to determine causation in fact. 3 A. Bromberg, supra § 8.6 at p. 209-11. See also Schlick v. Penn-Dixie Cement Corp., 507 F.2d 374, 380-81 (2d Cir. 1974); Shapiro v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 495 F.2d 228, 238-39 (2d Cir. 1974).
Based upon plaintiffs' testimony at trial, this court finds that Kohn's misrepresentations regarding his employment status caused plaintiffs Marbury Management and Bader to purchase securities from Kohn between the summer of 1967 and April 1969. Both of these plaintiffs testified repeatedly and without qualification that they would not have purchased the stocks had they known that Kohn was not a broker (Gold Tr. 24, 47-48, 51-53)
(Bader Tr. 66, 82). Plaintiff Jaffe, however, has not established to the court's satisfaction that he purchased the securities in question based upon Kohn's misstatement of his employment status. On the contrary, Jaffe's testimony indicates that he purchased in reliance upon his friendship with Kohn and Kohn's representations that Kohn had inside information regarding the companies whose stock was being recommended. (Jaffe Tr. 89, 90, ...