Trussell v. United Underwriters, Ltd.

Citation228 F. Supp. 757
Decision Date21 April 1964
Docket NumberCiv. A. No. 8170.
PartiesHarry H. TRUSSELL et al., Plaintiffs, v. UNITED UNDERWRITERS, LTD., a Colorado corporation, et al., Defendants.
CourtU.S. District Court — District of Colorado

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Dawson, Nagel, Sherman & Howard, Raymond J. Turner, and Frank P. King, Denver, Colo., for plaintiffs.

Lohf, Moran, Murphy & Barnhill, Ernest W. Lohf, Denver, Colo., for United Underwriters, Ltd.

Edison & Berman, Denver, Colo., for Clinton D. Buchner.

Rexford L. Mitchell, Rocky Ford, Colo., for Albert C. Pantle and Ross Belew.

Hindry, Erickson & Meyer, Denver, Colo., for Milo Steele.

Ben W. Fann, Colorado Springs, Colo., and Lawrence E. Addy, Security, Colo., for C. Douglas Andrews.

Jorge E. Castillo, Denver, Colo., for William Joss.

Lesher, Schmidt & Van Cise, Denver, Colo., for Pete Franzman.

DOYLE, District Judge.

The plaintiffs in this case are numerous individual purchasers of the stock of United Underwriters, Ltd. The separate defendants are United Underwriters, Ltd. and several individuals who, allege the plaintiffs, are associated with and control United Underwriters, Ltd. In their complaint the plaintiffs have stated five separate claims for relief which we will examine in turn.

THE CLAIMS

First:

The first claim is said to arise under § 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated pursuant thereto. As will later be seen this claim is insufficient in that it contains no allegation that the misleading statements and half-truths allegedly promulgated by the defendants were promulgated knowingly or intentionally.

The affirmative misrepresentations alleged in paragraph four of the first claim for relief are as follows:

a. That the stock sold by the defendants to the plaintiffs was worth eight dollars per share.
b. That the price of the stock would go up in value in the near future.
c. That the price of the stock would double in two years d. That the price of the stock would go up to twelve dollars per share in six months.
e. That the sellers would be able to resell in the event the purchaser wanted to trade.
f. That a market for the stock existed.
g. That the stock would be listed on a national securities exchange.
h. That the company was a sure thing.
i. That no one except one woman had ever asked for their money back, but if a person wanted it back, he could get it back without expense.

In paragraph four, then, the plaintiffs itemize the affirmative misstatements and half-truths allegedly promulgated by the defendants. In paragraph five the plaintiffs shift ground. There they allege neither affirmative misstatement nor intentional concealment; nor do they allege that sort of partial disclosure which would amount to the promulgation of half-truths. They allege, rather, substantially total non-disclosure. There was, allege the plaintiffs:

a. A failure to disclose the respective provisions of the common and preferred stock; specifically, to disclose provisions relating to payment of dividends, voting rights, and liquidation, dissolution or winding up.
b. No disclosure concerning underwriting expenses, commissions payable and other expenses of the offering.
c. No disclosure concerning the use of proceeds or the purposes for which proceeds were to be used.
d. A failure to disclose financial statements.
e. No disclosure concerning the then current earnings or loss per share on the stock.
f. No disclosure concerning the persons who controlled the corporation, or the basis upon which they controlled it.
g. No disclosure of the details of acquisition of related companies.
h. No disclosure concerning competitive conditions in the various areas in which the company and its affiliates operated.
i. No disclosure concerning remuneration of officers and directors of the company.

The significance of this itemization concerning which no statements were made lies in the fact that all material statements made by the defendants are alleged to have been misleading — even if they were true — because of the defendants' failure to make any disclosure with respect to the matters enumerated in paragraph five.

Second:

The second claim incorporates both the substantive allegations made in the first claim and the statement that the claim arises under § 10(b) and Rule 10b-5, but adds an allegation that the misleading statements and half-truths promulgated by the defendants were promulgated with full knowledge of their falsity, with full knowledge that they would be relied upon by the plaintiffs, and that plaintiffs did rely thereon to their detriment. The second claim, as we shall see, does state a claim arising under Rule 10b-5(2).

Third:

The third claim for relief contains a patent internal contradiction in that it is alleged to arise both under § 10(b) and under certain sections of the Kansas Blue Sky Law. If the incorporated allegation that this claim arises under § 10(b) be regarded as inadvertent surplusage it is possible to read the third claim as one which states a cause of action which arises under the Kansas Blue Sky Law. In the exercise of pendent jurisdiction this Court may be able to grant relief thereunder, but that question we do not now decide. Without dismissing the claim we reserve judgment on the question whether this claim will ultimately be seen to state a claim upon which relief can be granted.

Fourth:

The fourth claim incorporates both the substantive allegations made in the first claim and the statement that the claim arises under § 10(b), but adds an allegation that the misleading statements and half-truths promulgated by the defendants were promulgated with full knowledge of their falsity and with full knowledge that they would be relied upon by the plaintiffs. This claim, however, is duplicative of the second claim. The fourth claim differs from the second claim only in that it adds the further allegation that the defendants owed a legal duty to the plaintiffs to disclose full, complete and accurate information, that defendants negligently failed to perform that duty, and that as a proximate result of this alleged breach of duty plaintiffs have been injured. As will later be seen, an allegation of mere negligence does not, in our view, state a claim arising under § 10(b) on which relief can be granted. Apart from that, however, it must be questioned whether the complaint sufficiently alleges the existence of a duty to disclose full, complete and accurate information.

A distinction must be drawn in this context, between active, intentional concealment on the one hand, and non-disclosure in the buyer-seller relationship on the other, as is recognized in §§ 550 and 551 of the Restatement of Torts (1938). Loss has summarized the applicability of this distinction to cases of alleged non-disclosure in the sale of securities in these words:

"* * * It is now quite clear that a half-truth is as bad as an outright lie * * *. In 1941, for example, the Supreme Court of the United States, applying Iowa law in a deceit case involving an allegedly misleading prospectus, approved the view of the American Law Institute to the effect (in the Court's paraphrase) that `a statement of a half truth is as much a misrepresentation as if the facts stated were untrue.' * * * Equitable Life Insurance Co. of Iowa v. Halsey, Stuart & Co., 312 U.S. 410, 424-26, 61 S.Ct. 623, 85 L.Ed. 920 (1941)
"At the same time, there is still no common law liability in deceit for complete non-disclosure, as distinguished from a half-truth unless the one party to a business transaction `by concealment or other action intentionally prevents the other from acquiring material information,' Restatement of Torts, § 550, or the one party is under a duty to the other to exercise reasonable care to disclose the matter in question `because of a fiduciary or other similar relation of trust and confidence between them.'" Restatement of Torts § 551(2) (a). 3 Loss, Securities Regulation 1433-34 (2nd ed. 1961)

This distinction is not unique to common-law deceit. Section 17(a) (2) of the Securities Act of 1933, as well as Rule 10b-5(2), are specifically aimed at half-truths, as distinct from complete omissions. It is Section 11 of the 1933 Act which creates civil liability for nondisclosure as such, in connection with registration statements which Section 5 of the 1933 Act requires be filed. Neither Section 17(a) (2) nor Rule 10b-5(2), however, requires a seller "to state every fact about stock offered that a prospective purchaser might like to know or that might, if known, tend to influence his decision." Otis & Co. v. S. E. C., 106 F. 2d 579, 582 (6th Cir. 1939). Plaintiffs do allege that defendants "owed a legal duty to the plaintiffs to disclose full, complete and accurate information," but the basis of the alleged legal duty is not set forth, and is not apparent to us. No violation of Section 5 of the 1933 Act is alleged; and within the contemplation of Section 551 of the Restatement of Torts it is not apparent from the complaint that there was any existing relationship between the various plaintiffs and the defendants other than that of buyer to seller — from which no fiduciary duty of full disclosure arises.

Fifth:

The fifth claim incorporates both the substantive allegations made in the first claim and the statement that the claim arises under § 10(b) and Rule 10b-5, but adds an allegation that "the acts of the plaintiffs sic complained of constituted a device, scheme or artifice to defraud plaintiffs and further operated as a fraud or deceit upon the plaintiffs in connection with purchase of the securities in question." With the addition of this allegation the fifth claim does state a claim arising under Rule 10b-5(1) and (3).

THE QUESTION

The separate defendants have moved to dismiss or strike the various claims for relief, or alternatively, for an order requiring more definite statement. The allegations with which we seriously have to deal...

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