Parsons v. Hornblower & Weeks-Hemphill, Noyes
| Citation | 447 F. Supp. 482 |
| Decision Date | 10 February 1977 |
| Docket Number | No. C-74-366-G.,C-74-366-G. |
| Court | U.S. District Court — Middle District of North Carolina |
| Parties | Louise Price PARSONS, Plaintiff, v. HORNBLOWER & WEEKS-HEMPHILL, NOYES, a partnership, Howard E. Buhse, Charles L. Morse, Jr., Jansen Noyes, Jr., William J. Lawlor, Jr., William G. Maloney, George T. Flynn, Blancke Noyes, Walker W. Stevenson, Jr., Clifton P. Walker, James F. Gilbert, Robert R. Miller, Ralph L. Pope, Jr., Robert W. Sharer, George N. Morris, Henry Hornblower, II, Ralph Hornblower, Jr., Harold F. Carter, Joseph A. Gimma, Robert R. Spence, Hatfield Smith, Dudley H. Bradlee, II, Eugene M. Matalene, J. Malcolm De Sieyes, Edmund T. Anderson, Herman H. Kuver, Stephen C. Reynolds, Jr., Clifford Hemphill, Jr., Richard A. Miller, John F. Detmer, Thor W. Kolle, Jr., Pearce D. Smith, A. Paul Ogilvie, Jr., Jack P. Gould, Royal G. Whiting, C. Austin Barker, Joseph R. Carson, Milton J. Rusnak, Robert M. Wohlforth, James M. Clark, Elmer I. Paull, Henry F. Williams, Stephen J. Kozeletz, John P. Toolan, John T. Schriver, James F. Clardy, William G. Budinger, Salvatore Saladini, Donald O. Von Wedel, Stephen Litte, Alfred Lisi, Earl Rubin, William J. Pigott, Robert J. Florentino, G. Lloyd Isaacs, Richard W. Massey, Bernard N. Klein, Robert M. Biggar, Theodore M. Johnson, William J. Lawlor, III, Peter J. De Angelis, George R. Ross, Bernadotte P. Lester, Jr., Donald F. Grannis, Frank E. Dominach, Jr., Joseph J. Ignazio, Richard T. Le Doux, Hornblower & Weeks-Hemphill, Noyes, Inc., Avco Corporation, and Thomas Ward, Defendants. |
Lindsay R. Davis, Jr. and Edward L. Murrelle, of Jordan, Wright, Nichols, Caffrey & Hill, Greensboro, N. C., for plaintiff.
Charles F. Vance, Jr., of Womble, Carlyle, Sandridge & Rice, Winston-Salem, N. C., for defendant Avco Corp.
Beverly C. Moore and Larry B. Sitton, of Smith, Moore, Smith, Schell & Hunter, Greensboro, N. C., for all other defendants.
This action arises out of plaintiff's purchase of 50,000 shares of common stock of Cartridge Television, Inc., (Cartridge) on January 20, 1972, for a total purchase price of $1,983,125. Plaintiff alleges that, in connection with that purchase, numerous violations of the federal securities laws were committed by the defendants. Plaintiff prays for recovery of the purchase price and for punitive damages.
Defendants have moved for summary judgment on the ground that there is no genuine issue as to any material fact and that they are entitled to judgment as a matter of law.
Prior to July 1971 Cartridge was privately owned, with defendant Avco Corporation (Avco) owning a majority interest. With the financial and technical assistance of Avco, Cartridge had developed a color video tape cartridge system intended primarily for home use.
In July 1971 Cartridge offered for sale to the public 1,100,000 shares of its common stock. Defendant Hornblower & Weeks-Hemphill, Noyes (Hornblower)1 acted as principal underwriter of the public offering and therefore participated in the preparation of the preliminary and final prospectuses distributed in connection with the public offering. The final prospectus was dated July 13, 1971.
All of the Cartridge stock offered in the public offering was sold by the end of July 1971 and thus Hornblower did not act as an underwriter in connection with the sale of such stock after July 1971. Hornblower did act as a market maker in Cartridge stock during the period from July 1971 to January 20, 1972, and thereafter.
Plaintiff had maintained a cash account with Hornblower for a number of years prior to the transaction at issue. Buy and sell orders were executed in that account by defendant B. Thomas Ward (Ward), a registered representative in Hornblower's Greensboro, North Carolina, office.
Plaintiff had authorized her then husband, Young M. Smith, Jr., (Smith) to buy and sell securities for her account with Hornblower. Each of the transactions described below was effected by Smith in plaintiff's account with Hornblower.2
Smith first learned about Cartridge in June or July 1971 when Ward mentioned the company and stated that it was a "speculative, second-stage venture capital situation." After reviewing a copy of one of the preliminary prospectuses and discussing the matter with Ward, Smith decided to buy 3,000 shares for plaintiff's account in the July 1971 public offering at the offering price of $20 per share. This purchase was made in plaintiff's account on July 13, 1971, for the net amount of $60,000. In connection with the purchase, a copy of Cartridge's final prospectus dated July 13, 1971, was mailed to plaintiff and was delivered to Smith.
In December 1971 Smith decided to purchase 10,000 additional shares of Cartridge because it appeared to him, from discussions with Ward and from the stock's prior price movement, that the price of the stock was depressed. The purchase was made in plaintiff's account on December 10, 1971, at a price of $24.25 per share; the total amount paid was $242,500.
By January 18, 1972, the price of Cartridge stock had increased substantially. Ward contacted Smith and suggested that, in view of the rapid increase in the price of the stock during the prior six weeks, Smith might want to consider selling the stock. Smith instructed Ward to sell the 13,000 shares of Cartridge in plaintiff's account, and the sale was executed on January 18, 1972, at a price of $35 per share. The sale yielded $454,480. Since the 13,000 shares had cost $302,500, a total profit of $151,980 was realized. For the 10,000 shares purchased in December 1971 this represented a 44% return on investment and a profit of $107,500.
Two days later, on January 20, 1972, Ward again contacted Smith and reported he had information which had not been available to him on January 18. Ward told Smith that Sears, Roebuck and Co. was about to announce the beginning of its marketing campaign for Cartridge's video tape cartridge system with a two-page advertisement in the Chicago Tribune.3 Although Smith had previously been aware of Sears' intention to market the Cartridge system, the January 1972 announcement was the first public indication that the marketing campaign was ready to begin. Smith concluded that the announcement might result in more widespread enthusiasm and awareness about Cartridge's prospects, which might in turn result in a rapid increase in the price of Cartridge stock.
As of January 20, 1972, plaintiff was experiencing serious cash flow problems in connection with certain real estate development ventures in which she and Smith were involved.4 A large amount of cash was needed to make a mortgage payment due in May 1972.
Based upon his belief that Sears' anticipated announcement might result in a substantial short term increase in the price of Cartridge stock and upon the hope that such a result would provide plaintiff with additional cash to help meet the mortgage payment due in May, Smith decided to purchase for plaintiff's account 50,000 shares of Cartridge stock. The decision to purchase the 50,000 shares of Cartridge stock was totally that of Smith, plaintiff's agent.5 The purchase was made in plaintiff's account with Hornblower on January 20, 1972, at a cost of $1,983,125.
Unfortunately Smith's hope was not realized; the gamble did not pay off. The price of Cartridge stock did not rise rapidly. During subsequent months the Cartridge system did not achieve widespread consumer acceptance. By mid-December 1972, Cartridge's inventory was such that it ordered a halt in the production of video tape decks. On June 30, 1973, Cartridge decided to file for bankruptcy under Chapter XI of the Federal Bankruptcy Act. The 50,000 shares of Cartridge stock purchased for plaintiff's account on January 20, 1972, are now worthless.
Plaintiff has alleged that (1) her purchase of 50,000 shares of common stock of Cartridge Television, Inc., on January 20, 1972, resulted from a concerted sales campaign directed by Hornblower and carried out by its agent Ward; (2) the campaign was based upon outright misrepresentation of certain facts and the failure to relate other known, relevant facts; (3) the purchase was not suitable for her account in view of the amount of money involved and the nature of the stock; (4) she was induced to hold the shares by a constant flow of favorable, untrue, and misleading information about Cartridge; and (5) the shares are now worthless.
Plaintiff asserts that she is entitled to relief under Sections 11, 12, and 17 of the Securities Act of 1933 (15 U.S.C. §§ 77k, 77l, and 77q); Sections 10 and 15 of the Securities Exchange Act of 1934 (15 U.S.C. §§ 78j and 78o) and rules promulgated thereunder, including Rule 10b-5 (17 C.F.R. § 240.10b-5); Section 206 of the Investment Advisers Act (15 U.S.C. § 80b-6); Regulation T of the Board of Governors of the Federal Reserve System (12 C.F.R. § 220); and the Rules of Fair Practice of the National Association of Securities Dealers (NASD).
In addition, plaintiff alleges that Avco conspired with Hornblower in committing the alleged violations summarized above and, further, that such alleged violations were committed willfully and in wanton disregard of plaintiff's rights so that plaintiff is entitled to recover punitive damages.
On September 9, 1975, Hornblower and Ward moved for summary judgment. Plaintiff secured two extensions of time to respond to the motion. Before responding, plaintiff engaged in extensive discovery. Thirteen depositions were taken (in Greensboro and Hickory, North Carolina, New York, Chicago, and Washington) consuming twenty-one days and resulting in almost 1900 pages of transcript and over 700 deposition exhibits, many with multiple pages. On August 6, 1976, Avco moved for summary judgment.
The Court fully realizes that summary judgment is not a device to dispose of factual disputes. However, if a ...
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