Goodman v. H. Hentz & Co.

Decision Date13 March 1967
Docket NumberNo. 65 C 2079.,65 C 2079.
Citation265 F. Supp. 440
PartiesLionel GOODMAN, Daniel Klein, Bernard Kleppel, Fred Donnenberg, Barry L. Kroll, Harry Kroll, Thelma Cohen, Jack Solinger and David G. Hirsch, on behalf of themselves and all others similarly situated, Plaintiffs, v. H. HENTZ & CO., a partnership, Robert Pollack, William Silverstein, Richard F. Uhlmann, Frederich Uhlmann, John Benjamin and Richard Rubloff, Defendants.
CourtU.S. District Court — Northern District of Illinois

COPYRIGHT MATERIAL OMITTED

Robert J. Downing, William M. Ward, Manuel E. Cowen, Chicago, Ill., for plaintiffs.

Harold W. Keele, Halbert O. Crews, William R. Fishman, Chicago, Ill., for defendants.

OPINION AND ORDER

NAPOLI, District Judge.

I FACTS

For purposes of deciding the motion of defendants to dismiss for failure to state a claim upon which relief can be granted, the allegations of the complaint must be accepted as fact. Plaintiffs allege that they were customers of defendant Hentz & Co., a partnership, which is a registered broker-dealer and commission merchant with the Securities and Exchange Commission and the Commodity Exchange Authority, and a member firm of the principal securities exchanges and commodity contract markets. Also named as defendants are five resident partners of Hentz & Co., and Richard Rubloff, a registered representative and agent of Hentz & Co., referred to as a "customers man." Plaintiffs allege that they bought and sold securities and commodities through Hentz, dealing with its representative and agent Rubloff. The jurisdictional allegations that the transactions occurred in this district, and that the United States mails and other instruments of transportation and communication in interstate commerce were used, also appear. Plaintiffs then allege that while acting as defendants' agent and registered representative, Rubloff engaged in a scheme and artifice by which he defrauded Hentz's customers (including plaintiffs) in the purchase and sale of securities and commodities in certain enumerated ways, made certain enumerated false and fraudulent statements to plaintiffs and omitted to state material facts to plaintiffs in the course of the fraud. The alleged transactions occurred during a period from October, 1962 to January, 1965.

Plaintiffs bring this action as a class action on behalf of all defrauded customers of Hentz & Co., seeking recovery of actual and punitive damages. It should be noted that a clerk's default has been entered against the defendant Rubloff on July 7, 1966 for failure to plead or otherwise defend the action. A motion to vacate the default was denied on September 29, 1966.

The other defendants, Hentz & Co., and its resident partners, move this court to strike certain allegations of the complaint for failure to state a cause of action, to dismiss the complaint as a class action, or in the alternative to sever plaintiffs' claims. Also pending is a motion by plaintiffs for an order upon defendants to answer an initial set of discovery interrogatories.

II FORM OF ACTION

The Court will rule against maintenance of this action as a class action under Rule 23 of the Federal Rules. First of all, there has been no satisfactory showing that the class is so numerous that joinder of all members is impracticable. Secondly, and more important, this court has no jurisdiction over some members of the class. Where jurisdiction is based upon a federal question, as in the case at bar, and a party who presents no substantial federal question joins the other plaintiffs, the court must dismiss the party presenting no substantial federal question. Pearce v. Pennsylvania Railroad Co., 3 Cir., 162 F.2d 524 (1947). Plaintiff Solinger in the case at bar is clearly a member of the proposed class, yet this Court has no jurisdiction over his claim because he presents no substantial federal question, his transactions with Hentz & Co., being only in non-regulated copper futures contracts. Copper is not a "commodity" as that term is defined in the Commodity Exchange Act, 7 U.S.C. § 2. Thus this plaintiff has alleged no facts which could bring the matters complained of within the scope of the act, even if it be assumed that a civil remedy is available in the federal courts under the Commodity Exchange Act. Weinfeld v. Paine, Webber, Jackson and Curtis, D.C., 191 F.Supp. 750 (1961). The class may contain others like Solinger, but even if he is the only member over whom this Court lacks jurisdiction, a class action would not be proper. Any judgment for or against the class would not be binding upon him, since this Court has no jurisdiction over him. Solinger and others like him would be entitled to their day in the state courts. Thus a class action here will not prevent multiple litigation, nor will it remove the risk of inconsistent or varying adjudication with respect to individual members of the class. Only the state courts have jurisdiction broad enough to define in a single class action the rights and liabilities arising from litigous situation created by the misrepresentations made by Rubloff while in the course of his employment with Hentz & Co.

Although limited by the boundaries of federal jurisdiction, the Federal Rules of Civil Procedure are flexible enough to allow plaintiffs other than Solinger substantial procedural advantages, in the interests of judicial economy, similar to the class action device. As an alternative to the class action, plaintiffs request leave for permissive joinder under Rule 20.

The complaint alleges that defendant Rubloff, while in the employment of the other defendants, pursued a consistent course of fraudulent misrepresentations to the plaintiffs concerning their securities and commodities transactions. As the record stands, with all allegations of the complaint deemed admitted, it is not clear that the issues to be tried are so unrelated that severance should be granted on the ground that plaintiffs' right to relief did not arise out of the same transaction, occurrence, or series of transactions or occurrences, as required by Rule 20, Permissive Joinder of Parties. This rule should be given the liberal interpretation needed to implement its apparent purpose: the avoidance of multiple trials involving many similar or identical issues. Consistent failure of the other defendants to maintain adequate standards of supervision over Rubloff, if proved by plaintiffs, would be a continuing act of negligence by defendants, causing the injury to plaintiffs, for which defendants would be liable to plaintiffs.

The allegations of the complaint spell out a course of conduct by the partner defendants which falls within the requirement of Rule 20, Permissive Joinder, allowing joinder of actions based upon the same "series of transactions or occurrences." The purpose of this rule was not to lay a subtle snare for the unwary pleader, but rather to avoid multiple lawsuits involving similar or identical issues, except where a showing of oppression, prejudice or delay is made. No such showing is made by the partner defendants in their brief supporting the motion to sever. After discovery and pre-trial, if a single trial appears prejudicial to the defendants, for example because a jury may be inclined to find in favor of all plaintiffs on the liability issue because of the stronger case made by only some of the plaintiffs, the court will in its discretion under Rule 20(b) and 21 order separate trials. But the court will not order a severance before the parties are at issue, absent a showing of prejudice, merely on the theory that rule 20 sets out technical requirements as a condition precedent to allowing joinder of parties.

III THE SECURITIES ACT CLAIMS

Defendants move to dismiss some or all of the claims involving alleged securities transactions, on the ground that the transactions as alleged do not indicate a consummated purchase or sale. Thus, in some cases Rubloff would represent to plaintiffs that purchases and sales of securities were being made, when in fact they were never made; in other cases Rubloff would "sell" to plaintiffs securities which were in fact non-existent. Defendants contend that the provisions of the Securities Exchange Act as amended, 15 U.S.C.A. § 78j1 and the Securities Exchange Commission Rule 10b-5 promulgated thereunder (17 C.F.R. § 240.10b-5),2 apply only when fraud is involved in a completed purchase or sale of securities.

Defendants' reading of the Statute and Regulations thereunder is untenable. If their position were sustained, the law would be that if a customers man at a brokerage house overstated the virtues of a certain stock, inducing his client to purchase the stock for a price 20% above its value, then he and the controlling partners would be liable to the customer under the Securities Act; but if the customers man took client's money for purchase of stock and returned nothing to the client, then this fraud is beyond the reach of the Securities Act. This interpretation of the Securities laws flies in the face of the plain language of Section 10(b), which proscribes fraud "in connection with the purchase or sale" of securities. The court finds no justification in the legislative history of the Act or in the cases for reading this phrase as if it read merely "in the purchase or sale" rather than "in connection with the purchase or sale."

Various cases cited by defendant, in which relief has been denied to parties complaining under Section 10(b), are not in point. In Keers and Company v. American Steel and Pump Corporation, D.C., 234 F.Supp. 201 (1964), Complainants were victims of the breach by an executor of a decedent's promise to sell controlling shares in a corporation only after offering plaintiffs first refusal. The court found a breach of contract, but no fraud whatsoever, in denying plaintiffs recovery under the Securities Act. The case is not in point. Nor is Birnbaum v. Newport Steel Corp., 2 Cir., 193 F.2d 461 (1951). In that case the...

To continue reading

Request your trial
59 cases
  • Leist v. Simplot, s. 402-404
    • United States
    • United States Courts of Appeals. United States Court of Appeals (2nd Circuit)
    • February 23, 1981
    ...... And they did not. The first reported case, frequently cited in later decisions, was Goodman v. H. Hentz & Co., 265 F.Supp. 440 (N.D.Ill.1967). 16 The unbroken line of decisions upholding a private right of action under pre-1974 law ......
  • Herpich v. Wallace, 27729.
    • United States
    • United States Courts of Appeals. United States Court of Appeals (5th Circuit)
    • July 14, 1970
    ...Opper v. Hancock Securities Corporation, 2 Cir., 1966, 367 F.2d 157, aff'g S.D.N.Y., 1966, 250 F. Supp. 668, and Goodman v. H. Hentz & Co., N.D.Ill., 1967, 265 F.Supp. 440.13 In Opper a customer sued a brokerage house for damages allegedly resulting from the latter's failure to carry out hi......
  • Mount Clemens Industries, Inc. v. Bell, 71-1318.
    • United States
    • United States Courts of Appeals. United States Court of Appeals (9th Circuit)
    • June 28, 1972
    ...367 F.2d 157 (2d Cir.), aff'g 250 F.Supp. 668 (S.D.N.Y.1966); Commerce Reporting Co. v. Puretec, Inc., supra; Goodman v. H. Hentz & Co., 265 F.Supp. 440 (N.D.Ill.1967); Stockwell v. Reynolds & Co., 252 F.Supp. 215 (S.D.N.Y. While the courts employed varying rationales to arrive at the concl......
  • Christensen Hatch Farms, Inc. v. Peavey Co., Civil 3-80-287.
    • United States
    • United States District Courts. 8th Circuit. United States District Court of Minnesota
    • January 13, 1981
    ...v. Kohlmeyer & Co., 340 F.Supp. 1338, 1343 (E.D.La.1972), aff'd per curiam, 477 F.2d 113 (5th Cir. 1973); Goodman v. H. Hentz & Co., 265 F.Supp. 440, 446-47 (N.D.Ill.1967). In 1974 Congress amended the Act by passing the Commodities Futures Trading Commission Act. The new Act created the Co......
  • Request a trial to view additional results

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT