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IN RE INVESTORS FUNDING CORP. OF NEW YORK SECS. LI

December 8, 1980

In re INVESTORS FUNDING CORPORATION of New York Securities Litigation. Robert MORSE and Claire Morse, Plaintiffs,
v.
PEAT, MARWICK, MITCHELL & CO., et al., Defendants



The opinion of the court was delivered by: CONNER

OPINION AND ORDER

Before the Court are motions by defendants Peat, Marwick, Mitchell & Co. ("PMM") and Ernst & Whinney, as successor to S. D. Leidesdorf & Co. ("Leidesdorf") for summary judgment, pursuant to Rule 56, F.R.Civ.P. In his Report Number 22 ("Report"), Magistrate Harold J. Raby recommends the granting of Leidesdorf's motion and the denial of PMM's motion. Plaintiffs and PMM have filed objections to the Report, and accordingly, this Court must make a de novo determination as to the motions, as required by 28 U.S.C. § 636(b) (1).

BACKGROUND

 This action, as do several others consolidated before me for pretrial purposes, arises from the financial collapse of Investors Funding Corporation of New York ("IFC"), which petitioned for reorganization under Chapter X of the Federal Bankruptcy Act on October 21, 1974. Plaintiffs seek to represent a "class consisting of all persons and entities who between July 28, 1972 and October 21, 1974, bought IFC 10% registered convertible subordinated debentures, Series Due December 31, 1978, 9% Registered Subordinated Debentures, Series Due December 31, 1978, 8% short-term subordinated notes and redeemable warrants to purchase shares of IFC Class A stock, all issued by IFC pursuant to" a Prospectus dated July 28, 1972 ("Prospectus"). The third amended complaint alleges that plaintiffs "purchased or exchanged" certain IFC debentures pursuant to the Prospectus on November 20, 1972 and December 3, 1973. However, the clarified record reveals that on October 19, 1972 plaintiffs exchanged two $ 5,000 9% registered subordinated debentures of IFC, series due December 31, 1977 ("1977 Debentures"), plus $ 1,502.10 (representing a portion of the principal previously paid to plaintiffs by IFC on plaintiffs' 1977 Debentures), for two $ 5,000 9% registered subordinated debentures of IFC, series due December 31, 1978 ("1978 Debentures"). *fn1" The only difference between the 1977 Debentures and the 1978 Debentures was the maturity date. Plaintiffs did not make any other acquisitions of IFC securities after this exchange.

 Defendants in this action include IFC and its officers, directors, accountants, lawyers, underwriters and banks. Count Three of the complaint is directed against Leidesdorf, Count Four against the banks, Counts Five and Six against the lawyers, and Counts One and Two against all other defendants, including PMM.

 The thrust of plaintiffs' complaint against PMM is that the Prospectus, which included IFC financial statements for the year 1971 ("1971 Financials"), was materially false and misleading. The 1971 Financials are alleged to have presented IFC's financial condition much more favorably than reality would allow; in fact the complaint alleges that IFC was actually insolvent when the Prospectus and the 1971 Financials were issued. Plaintiffs seek to press claims against PMM under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, ("Section 10(b)"), Section 11 of the Securities Act of 1933, 15 U.S.C. § 77k ("Section 11"), and common law fraud principles, with pendent jurisdiction being asserted for the common law claims.

 Leidesdorf's purported liability under Section 10(b) and the common law is predicated on its certification of IFC financial statements for the years 1972 and 1973.

 DISCUSSION *fn2"

 PMM has moved for summary judgment on the grounds that:

 (1) as to the federal claims, the October 19, 1972 exchange was not a "purchase" within the meaning of the federal securities laws;

 (2) as to the federal claims, assuming that the October 19, 1972 exchange was a "purchase," plaintiffs suffered no damages in connection therewith resulting from the allegedly misleading Prospectus; and

 (3) as to the nonfederal claims, the granting of summary judgment for PMM on the federal claims removes any basis for pendent jurisdiction.

 Leidesdorf has moved for summary judgment on these same grounds by joining in PMM's papers. Additionally, Leidesdorf has advanced a separate ground for its motion: i. e., that because all the alleged acts of Leidesdorf occurred after October 19, 1972, the date of plaintiffs' ...


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