Cook v. Avien, Inc.

• Decision Date: 28 March 1978
• Docket Number: Nos. 77-1106 and 77-1107,s. 77-1106 and 77-1107
• Citation: 573 F.2d 685
• Parties: Fed. Sec. L. Rep. P 96,366 Benjamin A. COOK et al., Plaintiffs-Appellees, v. AVIEN, INC., et al., Defendants-Appellees, James F. Pritchard, Defendant-Appellant. Benjamin A. COOK et al., Plaintiffs-Appellants, v. AVIEN, INC., et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — First Circuit

Page 685

573 F.2d 685

Fed. Sec. L. Rep. P 96,366

Benjamin A. COOK et al., Plaintiffs-Appellees, v. AVIEN, INC., et al., Defendants-Appellees, James F. Pritchard, Defendant-Appellant.

Benjamin A. COOK et al., Plaintiffs-Appellants, v. AVIEN, INC., et al., Defendants-Appellees.

Nos. 77-1106 and 77-1107.

United States Court of Appeals,

First Circuit.

March 28, 1978.

Steven J. Brooks, Boston, Mass., with whom John C. Foskett and Glass & Brooks, Boston, Mass., were on brief, for James F. Pritchard.

Charles Donelan, Worcester, Mass., with whom George B. Sanders, Jr., Bowditch & Lane, and Samuel R. DeSimone, Worcester, Mass., were on briefs, for Benjamin A. Cook et al.

Leo A. Weiss, pro se.

Clinton T. Crolius, Boston, Mass., with whom Barry M. Portnoy, Victor Bass, John G. Short, and Sullivan & Worcester, Boston, Mass., were on brief, for Robert A. Weaver, Jr., et al.

Robert J. Pearl, Rochester, N. Y., with whom Martin, Dutcher, Mousaw, Vigdor & Reeves, Rochester, N. Y., was on brief, for Pierre A. Alsina.

Edwin J. Carr, Boston, Mass., with whom Rich, May, Bilodeau & Flaherty, Boston, Mass., was on brief, for Roy E. Marquardt et al.

Before COFFIN, Chief Judge, CAMPBELL and LAY, ^* Circuit Judges.

LAY, Circuit Judge.

These appeals arise from claims brought under the Securities Act of 1933, ¹ the Securities Exchange Act of 1934, ² and Securities Exchange Commission Rule 10b-5, ³ to recover the purchase price of certain securities. In September of 1968 Benjamin A. Cook, Rachel C. Lowe, Gerald J. Eydenberg, Donald A. Conte, Peter A. Consiglio, and Advance Coatings Company purchased Avien, Incorporated six percent convertible subordinated notes. Avien was declared a bankrupt in 1976.

The district court entered judgments for the individual plaintiffs under Rule 10b-5 against James F. Pritchard, a stock broker and intermediary on the note sales, based on alleged fraudulent, material omissions made in connection with the sale of the notes. Pritchard has appealed these judgments asserting various defenses including the statute of limitations. The purchasers of the notes have appealed the dismissal of their claims against Leo A. Weiss president, executive director and the chief operating officer of Avien Avien's Board of Directors Pierre A. Alsina, Roy E. Marquardt, Robert A. Weaver, Jr., Robert A. Wiener, and Leo A. Weiss and Robert Weaver, Jr. & Associates, Incorporated, a consulting firm. The plaintiffs assert that the district court erred in denying recovery against all of the defendants under §§ 12(1), ⁴ 12(2), ⁵ and 17, ⁶ of the 1933 Act and against Weiss and Avien's Board of Directors under § 10(b) of the 1934 Act. ⁷

We find that, although violations may have been made out against Weiss and Pritchard under §§ 12(1) and 12(2), the one year statute of limitations in § 13 of the 1933 Act ⁸ bars plaintiffs' claims against both defendants. We also affirm the trial court's finding that only Pritchard's actions constituted violations of § 10(b) and Rule 10b-5; we nonetheless vacate the judgment against Pritchard and remand for further proceedings on the sole question of whether the statute of limitations had run on the § 10(b) claims against Pritchard. ⁹

Facts.

Avien, a manufacturer of jet aircraft fuel consumption measuring devices, achieved spectacular growth during the late 1950s. The company, however, subsequently experienced financial difficulties and underwent reorganization pursuant to Chapter XI of the Bankruptcy Act in 1964. ¹⁰ In order to ensure stability Avien thereafter moved toward diversification by acquisition of, and merger with, other corporations. In March of 1968 Avien made its first acquisition when it purchased the Davis-Edwards Pharmacal Corporation.

To further its expansion effort Avien commissioned Robert Weaver, Jr. & Associates to prepare an elaborate brochure referred to as the Avien Fact Report. ¹¹ The report was to be used to acquaint other companies interested in merger or acquisition with Avien. The report presented an optimistic projection of both Avien's and Davis-Edwards' earnings and growth potentials.

In June of 1968 M. Timothy Sullivan and Pritchard, both stockbrokers, approached Weaver. They told Weaver that they had a group of "discretionary account" customers who were looking for investment opportunities in private placements of securities. Knowing that Avien was short of working capital, Weaver told Weiss of the brokers' interest. Weiss thereafter negotiated with Pritchard and Sullivan the possibility of a sale of $500,000 of six percent convertible subordinate notes to the brokers' customers. Sullivan and Pritchard were to receive a five percent commission on the sale.

Weiss, through Weaver, furnished the brokers with several items concerning Avien including the company's quarterly and annual reports and a copy of the Fact Report. Sullivan and Pritchard were told that the Fact Report was confidential and for their use only. ¹²

On August 13, 1968, Weiss wrote a memorandum to Avien's Board of Directors which expressed a pessimistic view of the company's overall economic progress. The memorandum told of a declining price structure for Davis-Edwards products, discussed the company's immediate need for cash, disclosed management problems at Davis-Edwards, and revealed adverse Food and Drug Administration reports on Davis-Edwards' methods of operation.

Sullivan and Pritchard met with Weiss to discuss the note purchase on August 15, 1968. At that time Weiss took the brokers on a tour of some of the company's facilities, told them of at least one FDA concern with Davis-Edwards' method of operation, and analyzed the profit structure of Davis-Edwards utilizing varying product mix scenarios. He did not give his August 13 confidential report to the brokers, though he may have discussed some of its factual contents with them. Weiss' attitude toward the future success of Avien was optimistic during these discussions.

Avien's Board of Directors met on August 26, 1968, to discuss the sale of the notes. At the meeting Weiss told the other directors that he had furnished complete financial information to the brokers.

On September 11, 1968, Weiss wrote another memorandum to the Avien Board in which he discussed serious personnel problems at Davis-Edwards and noted the immediate need for the $500,000 proceeds from the notes to offset continued cash drains at Avien and Davis-Edwards. The notes were issued on September 13, 1968, and the proceeds paid to Avien by Sullivan and Pritchard less their commission. Included among the purchasers of Avien's notes were Cook, Lowe, Eydenberg, Consiglio, Conte and Advance Coatings Company.

Section 12(1).

The purchasers first urge that the district court erred in denying recovery against all of the sellers of the notes under § 12(1) of the 1933 Act. Under this section the seller of a security is liable to a purchaser if the sale violates the registration provisions of § 5 of the Act. ¹³ Sales may, however, be exempted from registration by § 4(2) ¹⁴ of the Act if a private offering is made in which the purchasers (1) are limited in number, (2) are sophisticated, and (3) have a relationship with the issuer enabling them to command access to information that would otherwise be contained in a registration statement. See, e. g., Doran v. Petroleum Management Corp., 545 F.2d 893, 899-900 (5th Cir. 1977); Hill York Corp. v. American International Franchises, Inc., 448 F.2d 680, 687-89 (5th Cir. 1971). If securities are sold without full disclosure or effective access to significant information, there is no exemption, the registration provisions of § 5 are violated, and the seller is liable under § 12(1). Although the district court found that the securities were not exempt from registration under § 4(2), the court determined that the § 12(1) claims were barred because the one year statute of limitations in § 13 of the Act had not been tolled by any fraudulent act of the defendants. ¹⁵ We agree but for reasons differing from those presented by the trial court.

We hold that, under the explicit language of § 13, the limitations period runs from the date of the violation irrespective of whether the plaintiff knew of the violation. See Gridley v. Cunningham, 550 F.2d 551, 552-53 (8th Cir. 1977); Mason v. Marshall, 412 F.Supp. 294, 299 (N.D.Tex.1974), aff'd, 531 F.2d 1274 (5th Cir. 1976); Ferland v. Orange Groves of Florida, Inc., 377 F.Supp. 690, 703 (M.D.Fla.1974); Shuman v. Sherman, 356 F.Supp. 911, 912-13 (D.Md.1973); Moerman v. Zipco, Inc., 302 F.Supp. 439, 445 (E.D.N.Y.1969), aff'd, 422 F.2d 871 (1970); 3 L. Loss, Securities Regulation ch. 11C(1)(f), at 1742 (2d ed. 1961). It is undisputed that at the time plaintiffs filed their complaints more than one year had elapsed since their purchase of the notes. Under the circumstances, plaintiffs cannot pursue their § 12(1) claims.

Section 10(b).

Section 10(b) of the 1934 Act and Rule 10b-5 prohibit the use of any manipulative or deceptive device or contrivance in the sale of securities. Under the Supreme Court's decision in Ernst & Ernst v. Hochfelder, 425 U.S. 185, 214, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976), more than negligent conduct is required to trigger a private cause of action under this section.

The district court found insufficient evidence to conclude that Weiss knowingly or recklessly withheld material information from the purchasers. The purchasers, however, assert on appeal that Weiss acted with reckless disregard of the truth when he failed to disclose information contained in the August 13, 1968, memorandum.

Assuming without deciding that reckless conduct can result in a § 10(b) liability, ¹⁶ we agree with the trial court that the evidence does not support a finding that Weiss' conduct was intentional within the requirements of the Act.

The Seventh Circuit has recently defined reckless conduct under § 10(b) as

a highly unreasonable omission, involving not merely simple, or even...