Investors Equity Group v. ROSENKRANTZ LYON & ROSS
| Citation | 822 F. Supp. 429 |
| Decision Date | 22 April 1993 |
| Docket Number | No. 5:90-CV-43.,5:90-CV-43. |
| Parties | INVESTORS EQUITY GROUP, a Michigan corporation, Plaintiff, v. ROSENKRANTZ LYON & ROSS, INC., a foreign corporation, Kamal Hughes, Universal Symetrics Corporation, a foreign corporation, Juris Mednis and Leslie Wicks, jointly and severally, Defendants. |
| Court | United States District Courts. 6th Circuit. United States District Court (Western District Michigan) |
Michael H. Perry, Iris K. Socolofsky, Fraser, Trebilcock, Davis & Foster, PC, Lansing, MI, for plaintiff.
Phillip J. Neuman, Jacob & Weingarten, PC, Troy, MI, Scott K. Nigro, Feinberg, Felzen & Nigro, New York City, Jerome F. Rock, Grosse Pointe, MI, for defendants.
Plaintiff Investors Equity Group filed this diversity action against defendants Rosenkrantz, Lyon & Ross, Inc. and Kamal Hughes. Plaintiff alleges that the defendants sold securities to him in violation of the Michigan Blue Sky Laws which require either registration or exemption from registration.1 Plaintiff seeks rescission of the sale and recovery of the purchase price, together with interest and attorneys' fees. This Court held a bench trial on February 9 and 10, 1993. The following opinion contains the findings of fact and conclusions of law required by Federal Rule of Civil Procedure 52(a).
Plaintiff Investors Equity Group, Inc. (IEG) is a Michigan corporation involved in the commercial real estate business. Roger Thornburg is the president and sole shareholder of IEG. Defendant Rosenkrantz, Lyon & Ross, Inc. (RLRI) is a licensed stock brokerage firm. Defendant Kamal Hughes (Hughes) is an account executive employed by RLRI at its branch office in Chicago.2 This action arises out of the plaintiff's purchase of certain investments in Universal Symetrics Corporation and Chronodynamics, Ltd.
On September 12, 1989, the defendants sold IEG 2,600 shares of Chronodynamics stock at the price of $3.125 per share, amounting to a total investment of $8,127. On September 19, 1989, IEG purchased another 12,500 shares of Chronodynamics stock from the defendants at $3.00 per share, for a total investment of $16,500.
During a telephone conversation Mr. Thornburg, the president of IEG, discussed additional investment opportunities with Mr. Hughes, an account executive with RLRI. Mr. Hughes suggested that IEG invest in Universal Symetrics Corporation (Universal). He explained that the Universal situation was similar to the Chronodynamics investment. Mr. Thornburg had never heard of Universal prior to this telephone conversation. Mr. Thornburg testified on direct examination that this telephone conversation with Mr. Hughes took place a week or two before he invested in Universal.
On September 21, 1989, IEG executed a Subscription Agreement to invest $250,000 in Universal and tendered a check in that amount to Universal's escrow agent. The Agreement read in part:
The undersigned understands that Universal Symetrics Corporation (the "Company") is a New Jersey corporation, has sustained operating losses to date and may incur additional losses in the future. The Company cannot give any assurance that its operations will ultimately be profitable. An investment in the Company's securities involves a high degree of risk, including the possibility of losing an entire investment.
Prior to accepting the Subscription Agreement, Mr. Dan Purjes, the president of RLRI, had two telephone conversations with Mr. Thornburg. The first call took place on September 25, 1989. According to Mr. Purjes, Mr. Thornburg told Mr. Purjes that he (Mr. Thornburg) was interested in highly speculative investments and that five million dollars was a reasonable estimate of his net worth. He also stated that he was the sole shareholder of IEG. He explained that IEG was a company involved in real estate offerings which required disclosure documents similar to the ones required by the Universal transaction. Mr. Thornburg acknowledged that he had not read the Confidential Private Offering Memorandum dated July 21, 1989, (CPOM) which described the offering. Mr. Purjes testified that he asked Mr. Thornburg to read the memorandum and call him back if he still wanted to invest. The topic of registration or exemption was never discussed.
On September 27, 1989, Mr. Thornburg called Mr. Purjes and confirmed his desire to invest in Universal. In return for his investment plaintiff received a subordinated secured note, in the face amount of $250,000 bearing interest at the rate of twelve (12%) percent and 17,500 shares of Universal's common stock. The obligation was guaranteed by the personal guarantees of Universal's principals, Juris Mednis and Leslie Wicks.
In mid March of 1990, Mr. Thornburg was concerned that Universal was not doing well. He contacted the law firm of Fraser Trebilcock Davis & Foster and instructed them to investigate the Universal transaction. Their investigation revealed that RLRI had not filed the Confidential Report of Offering pertaining to the Universal transaction with the State of Michigan, Department of Commerce, Corporation and Securities Bureau. The evidence shows that by March 19, 1990, plaintiff knew that the Confidential Report of Offering had not been filed.3 IEG's attorneys drafted a letter to RLRI requesting rescission of the Universal transaction. However, IEG did not request that the transaction be rescinded until after Universal defaulted on the loan.
On March 29, 1990, Universal was required by the promissory note to make an interest payment to the plaintiff. Universal failed to make this payment and defaulted on the note.
On April 2, 1990, plaintiff's counsel sent a letter to Mr. Hughes demanding rescission of the plaintiff's Chronodynamics purchases and the Universal investment. Defendants refused to rescind the transactions, and IEG filed a complaint on May 18, 1990. The original complaint sought recovery only on the Universal transaction. The complaint was subsequently amended to include the plaintiff's purchase of Chronodynamics.
On May 21, 1990, RLRI filed a Confidential Report of Offering regarding Universal's securities with Michigan's Department of Commerce, Corporation and Securities Bureau. The report was dated May 15, 1990, and contained the following information: (1) that Universal was the issuer; (2) that RLRI was the broker-dealer; (3) that RLRI was registered in Michigan; (4) that RLRI was not affiliated with the issuer; (5) a description of the securities; (6) the statutory provision pursuant to which exemption from registration was claimed; (7) that a commission of $25,000 was paid on the sale of the securities; and (8) that Investors Equity Group, plaintiff, was the sole Michigan purchaser of the securities.
Michigans' Uniform Securities Act (the Act) provides that:
It is unlawful for any person to offer or sell any security in this state unless (1) it is registered under this act or (2) the security or transaction is exempted under section 402.
M.C.L. § 451.701; M.S.A. § 19.776(301).
The Act also provides an exemption from registration for certain securities which satisfy each of the following requirements:
(C) A commission is not paid or given directly or indirectly for soliciting any prospective purchaser in this state, except to a broker-dealer registered pursuant to this act who is not affiliated with the issuer or its affiliates. Those payments shall be reflected on the books and records of the broker-dealer, and shall be fully disclosed in writing to each prospective purchaser. The broker-dealer or issuer shall file with the administrator on such forms as the administrator prescribes, a confidential report of offering within 30 days after initiation of the offering in this state and every 90 days thereafter until the final report of completion of the offering.
M.C.L. § 451.802(b)(9); M.S.A. § 19.776(402)(b)(9)
M.C.L. § 451.810(a); M.S.A. § 19.776(410)(a) provides that any person who offers or sells a security in violation of section 301 is liable to the person buying the security for "the consideration paid for the security ... together with interest at 6% per year from the date of payment, costs and reasonable attorneys' fees." Id.
It is undisputed that the defendants violated the Act by failing to file the Confidential Report of Offering within thirty days of the initial offering of the securities as required by the provisions cited above. Plaintiff contends that this violation entitles it to rescind the sale and the return of its investment, together with interest and attorneys' fees. In its prior motion for judgment on the pleadings and/or summary judgment plaintiff argued that the defendants should be strictly liable for their failure to comply with the Act. Plaintiff argued: Investors Equity Group, Inc. v. Rosenkrantz, Lyon & Ross, Inc., No. 5:90-CV-43, 1992 WL 501775 at *3, 1992 U.S.Dist. LEXIS 8062 at *9 (W.D.Mich. April 8, 1992).
In an Opinion dated April 8, 1992, Judge Hillman rejected the plaintiff's strict liability approach. "Michigan courts do not hold that violation of the Act justifies granting the Act's remedies under all circumstances." Id. Judge Hillman specifically recognized two defenses which could prevent the plaintiff's recovery. He relied upon Williams Delight Corp. v. Harris, 87 Mich.App. 202, 273 N.W.2d 911 (1978) and Walton v. Semmler, 6 Mich.App. 596, 149 N.W.2d 885 (1967) and found that the Act does not require rescission if the defendant unwittingly violated the Act and the purchaser participated in some way in the wrongdoing.
In the present case, defendants have alleged sufficient facts to support a jury verdict in their favor under the holdings of Williams...
To continue reading
Request your trial
-
Investors Equity Group, Inc. v. Universal Symetrics Corp.
...though not entitled to the equitable defense of in pari delicto, were not liable for a de minimis violation of the Act. 822 F.Supp. 429, 434, 436 (W.D.Mich.), modified, 822 F.Supp. 436 Plaintiff seeks relief from two securities transactions with defendants because the defendants neither reg......
-
INVESTORS EQUITY v. ROSENKRANTZ LYON & ROSS
...410 creates liability for persons who offer or sell securities in violation of section 301 of the Act.1 In its Opinion of April 22, 1993, 822 F.Supp. 429, this Court found that at the time plaintiff purchased the securities they were exempt from registration pursuant to M.C.L. § 451.802(b)(......