Boone v. Baugh

Citation308 F.2d 711
Decision Date15 November 1962
Docket NumberNo. 16984.,16984.
PartiesJames L. BOONE et al., Appellants, v. S. R. BAUGH and W. P. Crawford, Appellees.
CourtUnited States Courts of Appeals. United States Court of Appeals (8th Circuit)

Leffel Gentry, Little Rock, Ark., for appellants.

E. W. Brockman, Jr., Pine Bluff, Ark., for appellees and filed brief with E. W. Brockman, Pine Bluff, Ark.

Before VOGEL and VAN OOSTERHOUT, Circuit Judges, and VAN PELT, District Judge.

VAN OOSTERHOUT, Circuit Judge.

The issue presented by this appeal is whether the trial court erred in dismissing the complaints in the three consolidated cases before us for lack of jurisdiction. The complaints in the three cases differ in no material respect to the extent that they relate to the jurisdictional issue. Jurisdiction is predicated on § 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C.A. § 78j(b), as implemented by Rule X-10B-5 of the Securities and Exchange Commission, 17 C.F.R. § 240.10B-5. It is conceded that no diversity of citizenship jurisdiction exists.

A statement of the facts involved in the cases before us is set out in the trial court's opinion. Since only the jurisdictional issue is presented, a detailed reiteration of the facts would serve no purpose. Briefly stated, it is the theory of the plaintiffs that the defendants employed manipulative and deceptive devices prohibited by the statute and the rule to induce plaintiffs to invest in a project involving the acquiring of franchises to sell certain burial vaults in Louisiana, Alabama and Georgia, and forming corporations in such states to carry out such purpose. The use of the mails and instrumentalities of interstate commerce in inducing the fraudulent sale is charged.

The trial court, being of the view that the question of jurisdiction presented a possible fact issue and that the question of jurisdiction and liability were closely related, heard the cases without a jury on the merits as well as on the issue of jurisdiction. After a full submission of the cases, the court dismissed the complaints for the reason that "plaintiffs have failed to establish jurisdiction from a factual standpoint." The court did not reach a determination of the cases upon the merits.

The court assumed, without so deciding, that the purchase or sale of a security and the use of a manipulative device was established. For the purpose of a review, we shall follow the same course.

The court determined that jurisdiction was lacking. The court correctly observes that the burden is on the plaintiffs to establish jurisdiction, and then states:

"Conceding, on the authority of Fratt v. Robinson, supra 9 Cir., 203 F.2d 627, 37 A.L.R.2d 636, that if there was sufficient connection between the use of the mails or of interstate commerce and the devices claimed to have been used by defendants, jurisdiction would not be defeated merely because the mail use or the use of interstate commerce may have been innocuous in and of itself, still plaintiffs could not discharge their burden merely by showing that the defendants made some use of the mails or some means or instrumentality of interstate commerce in their overall operation without a further showing that there was a substantial connection between such use and the deceptive or manipulative devices of which complaint is made. Assuming without deciding that the defendants practiced one or more deceptive devices, as defined by Rule X-10b-5, in procuring plaintiffs\' investments, and assuming further that those investments amounted to the purchase or sale of `securities,\' plaintiffs have not established any real or substantial connection between such device or devices and any use by the defendants of the mails or of any means or instrumentality of interstate commerce."

Plaintiffs, as a basis for reversal, rely upon Fratt v. Robinson, 9 Cir., 203 F.2d 627, 37 A.L.R.2d 636, and Errion v. Connell, 9 Cir., 236 F.2d 447, and particularly upon an excerpt from the Errion case reading:

"It was sufficient if it were shown that fraud was used or employed in connection with the use of instruments of interstate commerce or the mails. Therefore, all that is required is a showing that instruments of interstate commerce or the mails were used and in connection with that use a fraudulent act occurred * * *." 236 F.2d 455.

Section 10(b) provides:

"It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, * * * to use or employ * * * in connection with the purchase or sale, of any security * * *, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors."

Rule X-10B-5 goes no further than to carry out the statutory authority granted the Commission to designate more specifically the type of manipulative device that shall fall within the statutory prohibition.

Three separate acts are designated in § 10(b), to wit:

1. Use of mails or instrumentalities of interstate commerce.

2. Purchase or sale of a security.

3. Use of a manipulative or deceptive device.

There can be no violation of the statute unless all three acts are proven and a proper relationship among these acts...

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