McNeal v. Paine, Webber, Jackson & Curtis, Inc., 77-2033

Decision Date10 July 1979
Docket NumberNo. 77-2033,77-2033
Citation598 F.2d 888
PartiesBlue Sky L. Rep. P 71,497, Fed. Sec. L. Rep. P 96,928 William W. McNEAL, Plaintiff-Appellant, Cross-Appellee, v. PAINE, WEBBER, JACKSON & CURTIS, INC., Defendant-Appellee, Cross-Appellants.
CourtU.S. Court of Appeals — Fifth Circuit

Edward L. Savell, Atlanta, Ga., for William W. McNeal.

Theodore S. Bloch, Securities & Exchange Comm., Washington, D.C., for Securities & Exchange Comm., amicus curiae.

Gary W. Hatch, Dom H. Wyant, Atlanta, Ga., for Paine, Webber, Jackson & Curtis, Inc.

Appeal from the United States District Court for the Northern District of Georgia.

Before BROWN, Chief Judge, AINSWORTH, Circuit Judge, and CAMPBELL, * District Judge.

AINSWORTH, Circuit Judge:

Appellant William W. McNeal filed this suit on September 3, 1976, seeking damages under the federal securities laws from defendant Paine, Webber, Jackson & Curtis, Inc. He alleged that J. Brian Skone, an account executive for Paine, Webber, continuously engaged during 1971, 1972 and the first half of 1973 in a fraudulent scheme of buying and selling securities for McNeal's account for the purpose of generating commissions for himself in violation of section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b). 1 In addition, he alleged that Skone purposefully concealed from him the true status of his account and extended credit in connection with the purchase of securities in violation of the margin requirements of Regulation T, promulgated pursuant to section 7 of the 1934 Act, 15 U.S.C. § 78g. 2 McNeal further alleged that he first discovered on or about September 4, 1973 that the value of his account had shrunk from approximately $179,000 to approximately.$19,000 as a result of Skone's fraudulent conduct. He therefore sought recovery of $160,000 damages from Paine, Webber, as a controlling person under section 20(a) of the 1934 Act, 15 U.S.C. § 78t(a), on the basis of its employee Skone's violations of section 10(b) and section 7. 3

The district court concluded that both the section 10(b) and section 7 claims were barred by the applicable statute of limitations and therefore dismissed McNeal's complaint. We reverse, disagreeing with the district court as to the applicable period of limitations, and remand the case to the district court for further proceedings.

Basic Principles

Neither section 10(b) nor section 7 of the Securities Exchange Act expressly creates a private right of action for its enforcement. Hence, neither section fixes a specific period of limitations within which a private litigant must bring suit for damages. Nor is there any federal statute of limitations generally applicable to suits arising under provisions of federal statutory law which fail to specify a limitations period. As a result, the courts must fix, as a matter of federal common law, a period of limitations for suits based upon the various provisions of the federal securities laws which give rise to an implied private right of action.

The basic rule that has emerged is that a court should apply the period which the forum state applies to the state cause of action bearing the closest substantive resemblance to the implied cause of action arising under the federal securities laws. 4 By dint of repeated application in every circuit, with the evident approval of the Supreme Court 5 and without legislative reaction by Congress, that basic rule is at this point definitely established. We are therefore compelled to apply it rather than follow the logically appealing course of applying the period of limitations applicable to a similar cause of action expressly provided in the federal securities laws. 6 Although the latter approach would lead to desirable uniformity in securities litigation from state to state and would eliminate the need to engage in difficult and essentially esoteric comparisons of federal and state remedies, reform must await congressional action. 7 In the meantime, we must scrutinize the substantive law of the forum state (in this case, Georgia) 8 to determine which local causes of action most closely resemble those relied upon by the plaintiff under section 10(b) and section 7 and to apply the period of limitations to which that inquiry leads.

The Section 10(b) Claim

In regard to McNeal's claim under section 10(b) and Rule 10b-5, we must choose between applying the two-year statute of limitations applicable to actions brought under section 13 of the Georgia Securities Act of 1957 based upon fraudulent practices in violation of section 11 of that act, 9 or the four-year statute applicable to actions brought under Georgia's general fraud statute. 10 The district court concluded that the two-year statute was applicable and granted Paine, Webber's motion for summary judgment because McNeal filed his suit in 1976, more than two years after he first discovered the alleged churning. 11 We conclude, however, that the four-year statute is applicable and that summary judgment on the section 10(b) claim was therefore erroneous.

In concluding that the cause of action available under Georgia's general fraud statute, rather than that available under the Georgia Securities Act of 1957, most closely resembles the 10b-5 cause of action relied upon here, we find determinative the fact that McNeal seeks damages against a broker, on account of alleged churning of his account, and does not seek rescission from an actual purchaser or seller of securities. Although the language of section 11 of the Georgia Securities Act of 1957 mimics that of Rule 10b-5 in prohibiting employment of "any device, scheme or artifice to defraud," 12 the remedy made available by section 13 13 is expressly limited to an action for rescission by a purchaser against a seller. As such, the remedy is ineffective to a 10(b) plaintiff such as McNeal, who was allegedly injured by Paine, Webber's actions as an agent rather than as a principal. For that reason, McNeal could not frame his action as one for rescission. Although McNeal sought damages in an amount equal to the total decline in value of his account during the period in which the churning allegedly occurred, and thus sought restoration to the status quo ante, the normal effect of rescission, it is not clear that in a churning case damages of that sort are available. 14 Any similarity between the damages remedy available to McNeal under section 10(b) and the rescission remedy available under the Georgia Securities Act of 1957 is therefore, at best, uncertain. By contrast, there is no reason to doubt that Georgia's general fraud statute would support an action for money damages based on the churning of McNeal's account. Ga.Code Ann. § 105-301 et seq. (1968). 15 Hence, we conclude that the cause of action available under the general fraud statute more closely resembles McNeal's cause of action under section 10(b) than that available under the Georgia Securities Act of 1957. Therefore, the four-year statute of limitations applicable to actions under the fraud statute is applicable to the section 10(b) claim asserted here.

In so holding, we distinquish the prior decision of this court in Hudak v. Economic Research Analysts, Inc., 5 Cir., 1974, 499 F.2d 996. In that case, the plaintiff sought the return of the purchase price of worthless securities bought for him by a broker who converted the plaintiff's funds to his own use. The court concluded that the cause of action available under the Florida sale of securities law (identical, for practical purposes, to the Georgia Securities Act of 1957) more closely resembled the plaintiff's cause of action under section 10(b) than did the cause of action available under the Florida general fraud statute. 16 The court stressed, however, "the congruence between the specific remedy sought here return of the purchase money and the remedy of rescission for which Florida securities law provides a two-year statute." Id. at 1000. 17 In this case, there is no "congruence" between the damages remedy sought by McNeal and the rescission remedy available under the Georgia Securities Act of 1957. Hence, the rationale of Hudak suggests that it is appropriate in this case to look to Georgia's general fraud law, which does provide a remedy equivalent to that sought by McNeal, to determine the limitations period applicable to McNeal's section 10(b) claim. 18

The Section 7 Claim

In determining the limitations period applicable to McNeal's claim under section 7, we must choose again between the two-year limitation applicable to actions brought under the Georgia Securities Act of 1957 19 and the four-year period applicable to actions brought under Georgia's general fraud statute 20 and also to actions for breach of implied contract. 21 The district court concluded that the two-year statute was applicable. We disagree, concluding instead that a four-year period applies because McNeal's asserted cause of action under section 7 more closely resembles the cause of action available to him under Georgia's general fraud statute than that available under the Georgia Securities Act of 1957. 22

As with McNeal's section 10(b) claim, the critical determinant in electing to apply the four-year limitations period of the general fraud statute is the availability of a damages remedy against a party who is not a principal in a securities transaction. As discussed above, the Georgia Securities Act of 1957 provides no such remedy and hence the cause of action available thereunder does not resemble McNeal's cause of action under section 7 as closely as does that available under the general fraud statute. Hence, as Hudak requires, we apply the four-year period of limitations that the forum state (Georgia) would apply to the state cause of action bearing the closest resemblance to McNeal's implied cause of action under section 7. 23

Conclusion

In sum, we conclude that the four-year period of limitations applicable to actions under Georgia's general...

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