Soderberg v. Gens

• Decision Date: 28 January 1987
• Docket Number: No. 84 C 10120.,84 C 10120.
• Citation: 652 F. Supp. 560
• Court: U.S. District Court — Northern District of Illinois
• Parties: Georgina SODERBERG, Plaintiff, v. Timothy H. GENS, Acquitech Corporation, an Illinois corporation, Madison Professional Group, Ltd., an Illinois corporation, Winburn & Gray, Ltd., a professional corporation, and John Does One Through Ten, Defendants.

652 F. Supp. 560

Georgina SODERBERG, Plaintiff, v. Timothy H. GENS, Acquitech Corporation, an Illinois corporation, Madison Professional Group, Ltd., an Illinois corporation, Winburn & Gray, Ltd., a professional corporation, and John Does One Through Ten, Defendants.

No. 84 C 10120.

United States District Court, N.D. Illinois, E.D.

January 28, 1987.

Loren J. Mallon, Audrey Holzer Rubin, Gottlieb & Schwartz, Chicago, Ill., for Soderberg.

Daniel C. Meenan, Jr., David A. Axelrod, Feiwell, Galper, Lasky & Berger, Ltd., Chicago, Ill., for Gens, Acquitech and Madison.

John F. Horvath, Dennis J. Powers, Conklin & Adler, Ltd., Chicago, Ill., for Winburn & Gray.

MEMORANDUM AND ORDER

MORAN, District Judge.

Plaintiff, the current holder of securities purchased by an insurance company founded by her late husband, brings this action for securities fraud against the corporations who issued the securities, the lawyer who was instrumental in recommending their purchase and the patent law firm which formerly employed that lawyer. She seeks rescission and return of the insurance company's investment. Defendants have moved for summary judgment contending that she lacks standing to sue under the federal securities laws. The law firm additionally contends that it cannot be liable since the lawyer was not acting within the scope of his employment when he gave investment advice. Because plaintiff stood at too great a distance from the purchase, and because the right to sue for rescission of a securities transaction is almost certainly not assignable and in any case was not effectively assigned here, defendants' motions are granted.

FACTS

John Soderberg was the controlling shareholder of Copco Corp., which in turn owned 100% of Constitutional Casualty Co. ("Constitutional"), an Illinois insurance company. When he died in August, 1982, his shares passed to a trust. His widow, Georgina Soderberg, plaintiff here, and his daughters, Janet Soderberg Ventre and Christine Soderberg Solomon, are both the beneficiaries and the co-trustees of that trust. Janet, who had just graduated from law school two months before her father died, also became executive vice president of both Copco and Constitutional following her father's death.

Constitutional began experiencing legal and financial difficulties shortly thereafter. Minority shareholders sued the corporation, the estate and the Soderbergs individually. The company ceased showing a profit. In April or May 1983, Janet met defendant Timothy Gens while playing volleyball at the Latin School on Monday nights, and rapidly became romantically involved with him. Gens, a patent lawyer then with defendant Winburn & Gray, claimed to have experience with Illinois law governing insurance companies from work for a previous employer. He also claimed investment knowledge. By July 1983, on Janet's recommendation, Constitutional had hired Gens as a management consultant at $2,000 per month, apparently without his employer's knowledge. Gens retained that function even after the romantic aspect of his relationship with Janet ended in late 1983 and Janet married someone else.

According to Janet's deposition, Gens developed an investment strategy for Constitutional intended to improve Constitutional's income from investments. Following Gens' advice, the company acquired six new assets, including the securities in question here. Defendant Acquitech Corporation and defendant Madison Professional Group appear to have been set up expressly for Constitutional, which paid for their incorporation. Gens allegedly assured Janet that the investment strategy would not place Constitutional in any jeopardy regarding state regulation of insurance company investments. Constitutional purchased the Acquitech stock in December, 1983 and the Madison stock in March, 1984. However, in April 1984 the Illinois Department of Insurance found the investments "inadmissible". Constitutional's capital was deemed impaired and it had to raise an additional $300,000. Despite this surprise, Constitutional continued to accept and cash dividend checks from Acquitech and Madison through October, 1984.

The Acquitech and Madison stock came into Georgina's hands when the Soderbergs and the minority shareholders sold Copco and Constitutional on June 13th, 1984. The buyer did not want the six assets which Constitutional had purchased on Gens' recommendation. He agreed to purchase the company only if the Copco shareholders would in turn buy those assets back from the company. By the terms of the sale agreement, the minority shareholders received all of the cash which actually changed hands at that time. Some $365,000 of the proceeds from the sale of the Copco stock, including the Soderbergs' entire share of the purchase price, went immediately back to Constitutional to pay for the six assets which the buyer did not want. At the same time, Constitutional executed a formal assignment of "all claims, causes of action, and rights arising out of the negotiation, purchase, acquisition or retention" of five of these assets to Georgina Soderberg, the securities which are the subject matter of this suit among them. The securities were registered in Georgina's name. According to Janet's deposition testimony, the disputes over three of those assets have been settled for approximately $195,000. However, there was no agreement about Acquitech and Madison.

For the first three or four months after the sale, Constitutional apparently forwarded the dividend payments from Acquitech and Madison to Georgina. Georgina announced her intent to rescind the Acquitech and Madison transactions on September 26th, 1984. Since then, dividend checks have been refused. This suit, alleging fraud in the sale of the two remaining securities, was filed in November, 1984. The nine-count complaint seeks rescission of the purchase transaction from Gens, Acquitech and Madison under § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b); § 12(2) of the Securities Act of 1933, 15 U.S.C. § 77l(2); § 206 of the Investment Advisers Act of 1940, 15 U.S.C. § 80b-6; 15 U.S.C. §§ 77q and 78t; two Illinois statutes, and common law fraud. A count also seeks rescissionary damages from Winburn & Gray. Plaintiff has neither tendered, nor offered to tender, the amount of the dividends paid before she demanded rescission.

DISCUSSION

Since all of the parties to this action are citizens of Illinois, this Court only has jurisdiction if plaintiff's complaint presents a federal question. Defendants point out that to have standing under each of the federal statutes in question, one must be the purchaser (or, in some cases, seller) in the allegedly fraudulent securities transaction, see Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 731, 734, 95 S.Ct. 1917, 1923, 1924, 44 L.Ed.2d 539 (1975), with the exception of § 206, which is limited to a client of an allegedly dishonest investment adviser. Reserve Management Corp. v. Anchor Daily Income Fund, Inc., 459 F.Supp. 597, 608 (S.D.N.Y. 1978). The purchaser or client here, they contend, is Constitutional, which is not a party to this suit.

At the time the alleged fraud occurred, Georgina was merely a beneficiary of a testamentary trust which held stock in Copco, which in turn held the stock of Constitutional. If her trustees had purchased the Acquitech or Madison stock directly for the trust on her behalf, we might well be able to look through the apparent barrier presented by the trust and grant Georgina standing as one who experienced the direct impact of the transaction. See Norris v. Wirtz, 719 F.2d 256, 259 (7th Cir.1983), cert. denied, 466 U.S. 929, 104 S.Ct. 1713, 80 L.Ed.2d 185 (1984); Kirshner v. United States, 603 F.2d 234, 240 (2d Cir.1978), cert. denied, 442 U.S. 909, 99 S.Ct. 2821, 61 L.Ed.2d 274 (1979); Heyman v. Heyman, 356 F.Supp. 958, 965 (S.D.N.Y. 1973). However, it is settled law that status as a shareholder in a corporation victimized by securities fraud does not of itself give an individual standing to sue under federal securities laws. Any impairment of value of shares of stock by a corporation's investment transactions is at bottom a question of corporate mismanagement as far as shareholders are concerned, and "Congress ... did not seek to regulate transactions which constitute no more than internal corporate mismanagement." Superintendent of Insurance v. Bankers Life & Casualty Co., 404 U.S. 6, 12, 92 S.Ct. 165, 169, 30 L.Ed.2d 128 (1971). See Simmons v. Wolfson, 428 F.2d 455 (6th Cir.1970), cert. denied, 400 U.S. 999, 91 S.Ct. 459, 27 L.Ed.2d 450 (1971); Vanderboom v. Sexton, 422 F.2d 1233 (8th Cir.), cert. denied, 400 U.S. 852, 91 S.Ct. 47, 27 L.Ed.2d 90 (1970); Ross v. Longchamps, Inc., 336 F.Supp. 434 (E.D.Mo.1971). The corporation, as the actual purchaser, has the securities fraud claim, although in appropriate circumstances a shareholder can bring a derivative suit on the corporation's behalf. Ohashi v. Verit Industries, 536 F.2d 849 (9th Cir.1976), cert. denied, 429 U.S. 1004, 97 S.Ct. 538, 50 L.Ed.2d 616 (1976); Surowitz v. Hilton Hotels Corp., 342 F.2d 596 (7th Cir.1965), rev'd on other grounds, 383 U.S. 363, 86 S.Ct. 845, 15 L.Ed.2d 807 (1966); Guttman v. Brinkmann, 410 F.Supp. 46 (W.D.Pa.1976). Georgina, however, no longer has an interest in the insurance company and does not pursue a derivative action. The question for purposes of this suit, then, is whether her additional statuses, either as current holder of the securities or as assignee of any right of action Constitutional had, take her sufficiently outside the general rule to give her the standing she otherwise lacks.

Holder status does not. Recent case law interpreting § 10(b) is virtually unanimous in concluding that the federal cause of action does not attach automatically to the security itself and pass to the next purchaser. In re Nucorp Energy Securities Litigation, 772 F.2d 1486, 1490 (9th Cir.1985); In re Saxon Securities...