509 F.2d 1287 (7th Cir. 1975), 73--2128, Schaefer v. First Nat. Bank of Lincolnwood

Docket Nº:73--2128.
Citation:509 F.2d 1287
Party Name:, 1975-1 Trade Cases 60,137 Robert SCHAEFER and Sandra Schaefer, Plaintiffs-Appellants, v. FIRST NATIONAL BANK OF LINCOLNWOOD et al., Defendants-Appellees.
Case Date:January 30, 1975
Court:United States Courts of Appeals, Court of Appeals for the Seventh Circuit

Page 1287

509 F.2d 1287 (7th Cir. 1975)

, 1975-1 Trade Cases 60,137

Robert SCHAEFER and Sandra Schaefer, Plaintiffs-Appellants,

v.

FIRST NATIONAL BANK OF LINCOLNWOOD et al., Defendants-Appellees.

No. 73--2128.

United States Court of Appeals, Seventh Circuit

January 30, 1975

Argued Sept. 20, 1974.

Rehearing and Rehearing En Banc

Denied April 4, 1975.

Page 1288

[Copyrighted Material Omitted]

Page 1289

S. John Templeton, Lawrence Walner, Harvey Walner, Chicago, Ill., for plaintiffs-appellants.

Jerald P. Esrick, W. Thomas Rosemond, Jr., Michael B. Roche, Stewart S. Dixon, Chicago, Ill., John J. Loflin, New York City, Narcisse A. Brown, Warren E. King, Constantine N. Kangles, Samuel Weisbard, James E. S. Baker, Brimson Grow, Chicago, Ill., Mandel E. Himelstein, Phoenix, Ariz., Gerald Walpin, Rosenman, Colin, Kaye, Petschek, Freund & Emil, New York City, Howard L. Kastel, Chicago, Ill., for defendants-appellees.

Before CASTLE, Senior Circuit Judge, and FAIRCHILD and SPRECHER, Circuit Judges.

SPRECHER, Circuit Judge.

Plaintiffs, private parties suing individually and as a class, appeal from unfavorable summary judgments and orders dismissing their complaint alleging common-law fraud, violations of the Securities Acts and violations of the Sherman and Clayton Antitrust Acts.

Page 1290

The plaintiffs purchased Hercules-Galion Products, Inc. stock during a period of market manipulation between 1965 and 1967. They have based their civil claims on events which were grounds earlier for criminal prosecutions in the Southern District of New York. United States v. Projansky et al., 67 CR 729, aff'd, 465 F.2d 123 (2d Cir. 1972). Named as defendants here were the criminal defendants and the non-indicted co-conspirators of the Projansky case 1 and a number of additional non-criminal parties, including several brokerage houses and their salesmen and others. The defendants who are appellees in this appeal include the brokerage house of Rodman & Renshaw; the American Stock Exchange (AMEX) and a group of its specialists, John Rissetto, Al Vernieri, Edward Crooks and Frank Alter; Charles F. Myers, the former president of Hercules-Galion Products, Inc.; Wilbur A. Gorman, chief operating officer of the brokerage house of Link, Gorman & Peck Co.; Arthur Dickholtz, an officer of the First National Bank of Lincolnwood; and Jerry and David Fogelson, partners in Investment Associates. These defendants successfully argued in the district court that the claims against them based on the Securities Acts were time barred and that the antitrust laws do not apply to securities market rigging schemes. Consequently, the district court dismissed the suit against them. These same contentions are at issue on appeal. We reverse in part and affirm in part.

I

The original complaint in this action alleged substantially the same events as were alleged in the criminal indictment returned in New York. The original complaint sought relief from common law fraud; violations of section 1 of the Sherman Act (15 U.S.C. § 1), sections 1, 4, 5, 12 and 16 of the Clayton Act (15 U.S.C. §§ 12, 15, 16, 22 and 26); sections 15, 16, 17(a), and 22 of the Securities Act of 1933; (15 U.S.C. §§ 77o, 77p, 77q and 77v) and sections 9(a) (2), 10, 27 and 28 of the Securities Act of 1934 (15 U.S.C. §§ 78i, 78j, 78aa and 78bb).

In addition, however, to the sixteen criminal defendants and the six non- indicted co-conspirators, the plaintiffs named the seven brokerage houses employing some of the criminal conspirators. Among these was Rodman & Renshaw, the house which employed Harris Nagorsky, a Chicago broker who from the first figured prominently in the scheme, and Edward Wetzel. Rodman & Renshaw was generally charged in the original complaint with conspiring to defraud the plaintiffs. It was specifically charged with failing to supervise Nagorsky and thereby aiding and abetting the alleged conspiracy, fraud and stock manipulation. The plaintiffs broadened these claims in subsequent pleadings.

Briefly the facts are these. 2 Between July 1, 1965 and August 23, 1967, the sixteen criminal defendants conceived and executed a plan to manipulate the price of Hercules-Galion (Hercules) stock. By a furious promotion campaign, the group was able to raise the price of Hercules stock from $6 to over $14 per share. The heart of the scheme was for the defendants to regularly purchase from among themselves large blocks of Hercules stock on the AMEX at prearranged prices. The price was slowly raised by design, and as public interest and the price increased, the stock was sold and the profits taken.

Page 1291

After the criminal indictments were returned by a New York federal grand jury on August 23, 1967, the allegations were published immediately in many newspapers and news magazines. One and one-half years later, on February 19, 1969, the plaintiffs filed their original complaint. Of those now on appeal, only the defendant Rodman & Renshaw was named in the original complaint.

The first amended complaint was filed on July 25, 1969. Again, of the defendants here on appeal, only Rodman & Renshaw was named. Substantially the same allegations were repeated.

In the fall of 1969, both the plaintiffs and the defendants made the several pretrial motions. The plaintiffs moved for discovery and the defendants sought dismissal of the action. Discovery of the criminal defendants was stayed until their criminal trial was completed. The antitrust claims against the defendants were dismissed. The district court held that the securities acts allegations and the common law fraud allegations stated claims for relief. The court, applying the Illinois five year statute of limitations for fraud, also found the securities acts claims timely.

Subsequently, two events took place setting the stage for this appeal. The first was the end of the criminal trial wherein all of the indicted conspirators were convicted. Discovery resumed and proceeded on schedule, first with the taking of the depositions of the individual criminal defendants followed by that of the brokerage houses' representatives. On October 18, 1972, the plaintiffs filed their amendment to the first amended complaint adding as defendants the AMEX, the specialists, and Myers, Gorman, Dickholtz and the Fogelsons. The second event was this court's decision in Parrent v. Midwest Rug Mills, Inc., 455 F.2d 123 (7th Cir. 1972). In Parrent we held that Rule 10b--5 actions were subject to the three year limitations period contained in the Illinois Securities Act.

At this point, Rodman & Renshaw and all the defendants added in the newly amended complaint moved for summary judgment in the light of the shorter limitations period ammounced in Parrent. The district court then found the three year period applicable and ordered the dismissal of all three counts, including the securities and common law fraud claims and the antitrust claims which had been re-alleged. This order was made final under Rule 54(b), Fed.R.Civ.P., and is the subject of this appeal. The plaintiffs contend that their suit against Rodman & Renshaw as well as all the other non-criminal defendants is timely, and that the district court erred in dismissing all their claims against the defendants.

II

Plaintiffs contended that they have an implied right of action under section 10(b) of the 1934 Act and Rule 10b--5 and under section 17 of the 1933 Act. The defendants contended that plaintiffs' sole relief lies under section 9 of the 1934 Act. The original complaint stated a claim for relief averring market manipulation of the price of Hercules stock. The defendants argued that section 9(a)(2) specifically prohibits the conduct which the complaint alleges. Arguing that a claim may not be duplicated within the framework of a single act in derogation of its specific limitations, the defendants concluded that the claims based on Rule 10b--5 and section 17 may not be raised in this case.

A

Section 10(b) of the 1934 Act and Rule 10b--5 provide a private claim for relief from market manipulation. 3

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Section 10(b) 4 and Rule 10b--5 5 have been liberally construed by the Supreme Court and include private actions arising from manipulative stock transactions. In Affiliated Ute Citizens v. United States, 406 U.S. 128, 92 S.Ct. 1456, 31 L.Ed.2d 741 (1971), the Court recognized a private right of action where the claim for relief based on Rule 10b--5 arose from a stock rigging scheme. By fraudulently misstating the prevailing market price of Ute Distribution Corporation stock, the defendant bankers artificially depressed its purchase price. Once they bought the stock, the defendants then sold it at its higher, true market value. Finding this practice unlawful, the Court remarked on the scope of section 10(b) and Rule 10b--5:

These proscriptions, by statute and rule, are broad and, by repeated use of the word 'any,' are obviously meant to be inclusive. The Court has said that the 1934 Act and its companion legislative enactments embrace a 'fundamental purpose . . . to substitute a philosophy of full disclosure for the philosophy of caveat emptor and thus to achieve a high standard of business ethics in the securities industry.' SEC v. Capital Gains Research Bureau, 375 U.S. 180, 186 (84 S.Ct. 275, 11 L.Ed.2d 237) (1963). In the case just cited the Court noted that Congress intended securities legislation enacted for the purpose of avoiding frauds to be construed 'not technically and restrictively, but flexibly to effectuate its remedial purposes.' Id., at 195 (84 S.Ct. at 285.) This was recently said once again in Superintendent of Insurance v. Bankers Life & Casualty Co., 404 U.S. 6, 12 (92 S.Ct. 165, 169, 30 L.Ed.2d 128) (1971). 406 U.S. at 151, 92 S.Ct. at 1471.

Similarly this Circuit has recognized a private implied right under 10b--5 where the defendant's conduct only threatened to create artificial market conditions....

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