Tomera v. Galt

• Citation: 511 F.2d 504
• Decision Date: 05 February 1975
• Docket Number: No. 73--2037,73--2037
• Parties: Fed. Sec. L. Rep. P 94,975 Michelle K. TOMERA, on behalf of herself and all others similarly situated, Plaintiff-Appellant, v. Arthur T. GALT, Jr., et al., Defendants-Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

Page 504

511 F.2d 504

Fed. Sec. L. Rep. P 94,975

Michelle K. TOMERA, on behalf of herself and all others

similarly situated, Plaintiff-Appellant, v. Arthur T. GALT, Jr., et al., Defendants-Appellees.

No. 73--2037.

United States Court of Appeals, Seventh Circuit.

Argued Sept. 20, 1974.

Decided Feb. 5, 1975.

William M. Ward, Chicago, Ill., for plaintiff-appellant.

Wayland B. Cedarquist Mitchell Edelson, Jr., Gary M. Elden and William D. Maddux, Edward J. DeGrange, Chicago, Ill., for defendants-appellees.

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

SPRECHER, Circuit Judge.

The plaintiff, Michelle K. Tomera, appeals the dismissal of her complaint brought pursuant to section 10(b) of the Securities Exchange Act of 1934 ¹ and Securities Exchange Commission Rule 10b--5 ² against the defendants, Arthur T. Galt, J., Alfred Rodriquez, D. Wendell Fentress, Joseph Wahrer, Justin Weinshenk, Walter Glass, Newton Turcot, Margaret M. Horsting, Eleanor W. Horsting, William Horsting, Astir Mexicana, S.A., La Nueva Candemena, S.A., and Astir Mexicana, Inc. The defendants carry on silver mining operations in Ocampo, Chihuahua, Mexico. Tomera, an investor in the enterprise, commenced this suit on January 26, 1973, as an independent class action for securities fraud. Her case, however, was immediately consolidated with two other pending actions brought by Clarence Mohr, Max Ries and Harold Cohn, suing individually and as a class, against the same defendants for similar violations. The defendants moved for summary disposition of all three actions and the district court, concluding that the actions were time barred, entered summary judgment in their favor. Tomera alone appeals. We reverse.

I

In September 1967, Arthur T. Galt, Alfred Rodriquez, D. Wendell Fentress, Joseph Wahrer, Justin Weinshenk, Walter Glass, Newton Turcot, and Margaret and Eleanor Horsting agreed to promote a Mexican mining business. As a first step, the group leased silver mine claims in Ocampo, Chihuahua. These leases were held under the name of La Nueva Candemena, S.A. (Candemena), a Mexican corporation the promoters organized for this purpose. The defendants also formed another Mexican corporation, Astir Mexicana, S.A. (Astir, S.A.) and an Illinois corporation, Astir Mexicana, Inc. (Astir, Inc.) to construct a mill, road and other mine facilities. These three corporations were staffed by the following appointments: Alfred Rodriquez as president of Astir, S.A. and Astir, Inc. and as technical director of Candemena, D. Wendell Fentress as vice president and chairman of the board of Astir, S.A., William Horsting as secretary of Astir, S.A. and Astir, Inc., and Arthur Galt as treasurer of Astir, S.A. Rodriquez, Fentress and Horsting constituted the board of directors of Astir, S.A.

The defendants estimated the initial cost for their mining enterprise at slightly more than one million dollars. Since they were only able to raise $70,000 from among themselves, they obtained a $400,000 loan from the Southern Arizona Bank, and approached several prospective investors for the rest. Among these were James B. Dooley, Dr. Wayne Slaughter, William Nott, Arnold Liebling, Clarence Mohr, Max Ries, Harold Cohn and the appellant Michelle Tomera.

Clarence Mohr was the largest investor contributing $160,000 during 1969. In return, he received 201 shares of Candemena and Astir, S.A. stock and interest bearing notes totalling approximately $70,000. He was also appointed secretary-treasurer and a board member of Astir, S.A. On August 13, 1968, Max Ries and Harold Cohn contributed $55,000 for which they received 98 shares of Astir, S.A. stock and $45,000 worth of interest bearing notes. On September 26, 1969, Michelle Tomera contributed $57,000 for which she received 80 shares of Astir, S.A. and Candemena stock and notes totalling $47,000. None of the securities which the defendants offered the new investors was registered.

In October 1969, Clarence Mohr, then acting secretary-treasurer of Astir, S.A. grew concerned with the health of the Mexican corporations. The validity of the Candemena leases was in doubt, the mine and mill permits were not forth-coming, and the Southern Arizona Bank sought payment of its loan. On a number of occasions Mohr pressed Rodriquez and Fentress for Spanish and English copies of Astir, S.A. and Candemena's charters, leases, contracts and the minutes of their directors' and shareholders' meetings. He also earnestly asked for the record of their financial dealings. Rodriquez and Fentress repeatedly refused his requests.

Mohr countered by filing two suits, one state and one federal. In January 1970, Mohr filed suit in the Circuit Court of Cook County against the defendants named in this suit. He alleged corporate mismanagement. On October 31, 1972, he filed in the district court for the Northern District of Illinois his complaint in two counts for securities fraud. The first count alleged violations of section 10(b) and rule 10b--5. The second alleged violation of section 13 of the Illinois Securities Law of 1953. ³ Several months later Max Ries and Harold Cohn intervened adopting Mohr's complaint. The defendants without answering moved to dismiss both Mohr's and the intervenors' complaints. On January 26, 1973, while these motions were pending, Michelle Tomera filed her complaint which restated substantially Mohr's averments. Her action was consolidated with the actions of Mohr, Cohn and Ries.

The district court dismissed both counts against all the defendants. The victory, however, was not complete for Rodriquez, Weinshenk and William Horsting. As to these defendants, the court allowed the plaintiffs to file an amended complaint realleging more specifically the first count. The court directed that the amended complaint set forth the dates the securities were purchased and the defendants' intent at the time of the sale. As instructed the plaintiffs filed an amended complaint setting forth the sale dates and amplifying their account of defendants' violations of rule 10b--5. Tomera stated that she purchased her stock on September 26, 1969, and received her stock certificates and notes on February 1, 1970. Additionally, she clarified the nature of the joint venture scheme and described the role each of the defendants played in it.

Upon defendants' renewed request for dismissal, the district court granted Fentress' summary judgment against Mohr and dismissed the claims of the other plaintiffs including Tomera. The reasons were twofold: (1) The plaintiffs' first amended complaint did not comply with Rule 9(b) Fed.R.Civ.P. since their fraud claims lacked particularity; and (2) plaintiffs Ries, Cohn, and Tomera's claims were time barred since they were filed more than three years after commission of the fraud. These grounds for dismissal are the issues of this appeal.

II

Tomera's first amended complaint states a sufficient claim for securities fraud. The defendants contend that Tomera did not plead facts of sufficient particularity to state a rule 10b--5 cause of action and so did not comply with rule 9(b), Fed.R.Civ.P. The district court, in full agreement, especially disapproved of plaintiff's failure to allege 'legally sufficient intent on the part of the plaintiff.' (Decision on Defendants' Motions, Nos. 72 C 2746 and 73 C 234, September 12, 1973).

Rule 9(b) governs the pleading of section 10(b) and rule 10b--5 claims. Schaefer v. First National Bank of Lincolnwood, No. 73--2128, 509 F.2d 1287 (7th Cir., 1975); Carroll v. First National Bank, 413 F.2d 353 (7th Cir. 1969); Jackson v. Alexander, 465 F.2d 1389 (10th Cir. 1972). It reads in full:

Fraud, Mistake, Condition of the Mind. In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other condition of mind of a person may be averred generally.

Rule 9 must be read together with rules 8(a)(2), 8(e)(1) and 8(f), Fed.R.Civ.P. Buckley v. Altheimer, 2 F.R.D. 285 (D.C.Ill.1942); C. Wright, Law of Federal Courts 282 (2d ed. 1970). Rule 8 requires that a plaintiff give through his pleadings notice to defendant of the nature of his claims. Cf. Appendix of Forms, Fed.R.Civ.P., Forms 6, 9 and 11. It urges the plaintiff to make known his claims simply and concisely in short, plain statements. With these principles in mind, the purpose of rule 9 becomes clear. Rule 9 lists the actions in which slightly more is needed for notice. In a fraud action, a plaintiff need also state 'with particularity' the circumstances constituting the fraud. Tomera has done so.

Among the fraudulent schemes constituting a violation of rule 10b--5 is selling securities either by omitting to disclose material facts or by making false statements. Tomera's first amended complaint relates with particularity such a scheme. She states that on September 26, 1969, Alfred Rodriquez, then president of Astir, S.A. and technical director of Candemena, sold her several notes and 80 shares of unregistered stock in the mining companies he promoted. She further alleges defendant informed her that these three companies held valid mine leases in Mexico, were carrying on silver mining operations and processing the ore, and planned to use the funds she invested to further develop the mine property and facilities. In fact none of this vital information was true. These averments describing the bare bones of the fraudulent scheme coupled with Tomera's allegations that defendants used the mails and other instruments of transportation in interstate commerce state a sufficient rule 10b--5 claim.

Tomera named besides Rodriquez, other individual defendants who allegedly were joint venturers with him, and three corporate defendants in whose name they all did business. A joint venture agreement which was signed by nearly all defendants and which contained their plan to organize Astir, S.A. and Candemena was attached...