Mark v. McDonnell & Co.

• Decision Date: 25 August 1971
• Docket Number: No. 18884.,18884.
• Parties: Gordon S. MARK, Plaintiff-Appellee, v. McDONNELL & CO., Inc., Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

447 F.2d 847 (1971)

Gordon S. MARK, Plaintiff-Appellee, v. McDONNELL & CO., Inc., Defendant-Appellant.

No. 18884.

United States Court of Appeals, Seventh Circuit.

August 25, 1971.

H. Templeton Brown, Lee N. Abrams, William A. Gordon, Chicago, Ill., for defendant-appellant; Mayer, Brown & Platt, Chicago, Ill., of counsel.

Ware Adams, Chicago, Ill., for appellee.

Before DUFFY, Senior Circuit Judge, and KILEY and STEVENS, Circuit Judges.

STEVENS, Circuit Judge.

On December 24, 1969, plaintiff filed a complaint alleging that on January 30 of that year he had purchased from defendant 500 shares of its nonvoting stock. He alleged that the consideration for the purchase was (a) his agreement to lend either $250,000 or 4300 shares of American Home Products Company stock to defendant, and (b) his payment to defendant of the book value of the stock. He actually loaned 4301 American Home shares and paid $38,005 at the rate of $76.01 per share to defendant. His complaint prayed for rescission of the entire transaction.

The complaint was in nine counts and alleged a number of violations of the Securities Exchange Act of 1934, the Securities Act of 1933, the Illinois Securities Law of 1953, and common law fraud. The defendants were the New York Stock Exchange and plaintiff's former employer, McDonnell & Co., Inc., from whom he had purchased the stock. McDonnell was a member of the Exchange and was registered as a dealer in securities with the Securities and Exchange Commission and with the Illinois Secretary of State.

On the day the complaint was filed, plaintiff also filed a motion for a preliminary injunction to restrain McDonnell from making any transfer of the 4301 shares of American Home stock. The motion was set for hearing on January 29, 1970, when various affidavits were filed and testimony was presented. At the outset of that hearing plaintiff filed a motion for summary judgment on Count II of the complaint. This appeal is from the order, entered some months later, granting summary judgment on that count.

At the injunction hearing plaintiff testified at length. The executive of McDonnell with whom he had negotiated the transaction was present in court but did not testify. At the conclusion of the hearing the district court found that the loan of American Home shares was part of the consideration for McDonnell's sale to plaintiff of 500 of its own shares; concluded that bona fide questions as to violations of the federal and state securities laws had been raised; and entered the injunction.

Thereafter McDonnell answered the complaint, filed various affidavits and interrogatory answers, and took plaintiff's deposition. On that record, after receiving the parties' briefs, the district court entered judgment for the plaintiff on Count II. If that judgment is affirmed, no further proceedings on the other counts will be necessary; if it is reversed, plaintiff still has eight arrows in his quiver.

Count II is predicated on the Illinois Securities Law. Ill.Rev.Stat. Ch. 121½, § 137 et seq. Section 13 provides that every sale of a security made in violation of the Act is "voidable at the election of the purchaser" who may recover from the seller "the full amount paid."

Section 5 of the Act requires that, except for certain exempt securities and exempt transactions, all securities "shall be registered prior to sale in this state." McDonnell admitted that the 500 shares sold to plaintiff were not registered. In the district court it contended that the sale was exempt because (a) plaintiff was a "sophisticated investor," and (b) it had made sales to less than 15 persons within a 12-month period and had given sufficient information to the Secretary of State to constitute "substantial compliance" with the reporting requirement of § 4, subd. G. It also contended that the loan of American Home shares was not part of "the full amount paid" for its stock within the meaning of § 13.

On this appeal the contentions rejected below are again urged. In addition, McDonnell contends that the district court erroneously admitted parol evidence and resolved genuine issues of material fact. Finally, it asks leave to supplement the record to show that it is "hopelessly insolvent" and should be allowed to vindicate the rights of its general creditors. Its principal creditor, the New York Stock Exchange, to which McDonnell has an indebtedness of over eight million dollars, was a party below; neither it nor McDonnell made the insolvency contention which is urged here.

On the basis of the record before it, the district court's order was plainly correct. We reject McDonnell's attempt to raise new issues after perfection of its appeal.

I.

The record demonstrates that plaintiff is a well educated intelligent individual, with experience in analyzing securities. McDonnell suggests that since the statute was enacted to protect unwary and unsophisticated investors, its coverage should not encompass plaintiff. The scope of the statute's coverage is for the Illinois General Assembly, not for us, to determine. Cf., Stein v. Twilight Motel Inc., 29 Ill.App.2d 131, 172 N.E.2d 642 (1st Dist. 1961). McDonnell has not directed our attention to any statutory exemption for "sophisticated investors" such as plaintiff.¹

With similar force, McDonnell argues that plaintiff was not injured by its failure to file the notice required by § 4, subd. G to qualify the sale for exemption from registration. But the statutory right to rescind, as defined by the Illinois Legislature, is not dependent on the purchaser's ability to prove an actual injury or actual fraud. Moreover, in this case there can be no doubt that plaintiff was in fact injured as a result of McDonnell's failure to comply with the statute. In focusing on the absence of the notice as the source of plaintiff's injury, McDonnell ignores the statutory scheme. If it had registered the securities, presumably it would have made disclosures which would have warned a potential investor of the risks involved in buying its stock. The facts of record make it extremely doubtful that plaintiff would have made his purchase if the securities had been registered. McDonnell cannot escape responsibility for the consequences of its failure to register without meeting the statutory requirements for exemption.

II.

McDonnell contends that it did qualify for the exemption because substantially all of the information required by § 4, subd. G had been given to the Secretary of State in one form or another. There are two flaws in the argument: (1) all of the information had not been provided; and (2) nothing was provided in the form reasonably required by the Act.

The relevant portion of § 4, subd. G described the reporting condition as follows:

"The issuer * * * shall file with the Secretary of State a report of sale within 30 days after the sale, setting forth the name and address of the issuer * * *, the total amount of the securities sold under this subsection G, the price at which the securities were sold, the commission paid, and the names and addresses of the purchasers * * *."²

McDonnell had its Articles of Incorporation on file with the Secretary of State. According to McDonnell these Articles required any sale of its stock to be made at a price determined "on the basis of net book value." The Articles further required that value to be calculated in accordance with sound accounting principles, subject to adjustment to reflect the market value of various kinds of assets owned by the corporation.³ McDonnell argues that this requirement in its charter was substantially equivalent to a § 4, subd. G report stating the price at which 500 shares of its stock were sold to plaintiff on January 30, 1969. The argument is completely without merit. Even if the Secretary of State had McDonnell's accounting records at hand, and could compute a net book value as of that date, he would have no assurance that the sale to plaintiff had in fact been made at the price so computed. An essential element of the § 4, subd. G report — the price at which the securities were sold — was simply not provided to the Secretary of State.⁴

The information which was provided was contained, for the most part, in various reports and correspondence submitted in connection with McDonnell's maintenance of its status as a registered dealer. We do not believe the Illinois General Assembly intended to impose upon the Secretary of State the duty of compiling scattered fragments of information contained in a variety of files when it directed in § 4, subd. G that a seller claiming exemption shall file "a report of sale." The burden of demonstrating compliance with the qualification for a statutory exemption is upon the party claiming its benefit.⁵

The district court correctly concluded that McDonnell had not filed a report of sale in compliance with § 4, subd. G. The sale to plaintiff was not an exempt transaction; since the shares were not registered, he was entitled to avoid the sale and recover the full amount paid. See Young, "History, Source and Effect of the Illinois Securities Law of 1953 as Amended," appendix to Ch. 121½, § 137 et seq., appearing in Smith-Hurd Illinois Annotated Statutes at p. 563.

III.

If payment for securities sold in violation of the statute is made partly in the form of cash and partly in the form of a loan, the statutory recovery of "the full amount paid" would quite clearly encompass a return of both the cash and the loan. McDonnell does not disagree with this interpretation of the statute. It does argue, however, that the purchase of 500 shares of its stock and plaintiff's loan of 4301 American Home Products shares were separate transactions — in other words, that the loan was not part of the consideration for the sale.

The undisputed facts make it perfectly clear that the loan was a condition of the stock purchase. The negotiations, McDonnell's written offer,⁶ and the single closing for both parts of the...