Haynes v. Anderson & Strudwick, Inc.

• Decision Date: 03 February 1981
• Docket Number: Civ. A. No. 80-0732-R.
• Citation: 508 F. Supp. 1303
• Court: U.S. District Court — Eastern District of Virginia
• Parties: Stuart E. HAYNES, Jr. et al. v. ANDERSON & STRUDWICK, INC. et al.

508 F. Supp. 1303

Stuart E. HAYNES, Jr. et al. v. ANDERSON & STRUDWICK, INC. et al.

Civ. A. No. 80-0732-R.

United States District Court, E. D. Virginia, Richmond Division.

February 3, 1981.

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COPYRIGHT MATERIAL OMITTED

D. J. Esposito, and H. Jack Armstrong, Richmond, Va., for plaintiffs.

Thomas E. Spahn, McGuire, Woods & Battle, James F. Morano, Jr., Richmond, Va., for defendants.

MEMORANDUM AND ORDER

WARRINER, District Judge.

This consolidated action involves alleged federal securities laws violations. Specifically, plaintiffs Stuart E. Haynes, Jr. (Haynes, Jr.) and Stuart E. Haynes, Sr. (Haynes, Sr.) claim that defendants Anderson & Strudwick, Inc. (Anderson & Strudwick), a Virginia broker-dealer, and Thomas V. Blanton, Jr. (Blanton), a former employee of Anderson & Strudwick, violated the Securities Act of 1933, § 17(a), 15 U.S.C. § 77q(a), (the 1933 Act), the Securities Exchange Act of 1934, § 10(b), 15 U.S.C. § 78j(b), (the 1934 Act), and Rules 10b-5 and 10b-16, 17 C.F.R. §§ 240.10b-5, — 16, promulgated under the 1934 Act by the United States Securities and Exchange Commission. Haynes, Sr., also asserts two pendent claims against defendants, one for conversion and the other for breach of contract.¹ Jurisdiction is obtained under § 22 of the 1933 Act, 15 U.S.C. § 77v, and § 27 of the 1934 Act, 15 U.S.C. § 78aa.

The parties are presently before the Court with respect to defendants' separate motions to dismiss plaintiffs' Complaint for lack of standing, Fed.R.Civ.P. 12(b)(1), and for failure to state a claim upon which relief can be granted, Fed.R.Civ.P. 12(b)(6), and with respect to Haynes, Jr.'s, motion to dismiss Blanton's counterclaim, apparently, for failure to state a claim upon which relief can be granted. The parties have briefed the issues and the motions are ripe for disposition.

I.

Briefly stated, plaintiffs, in their Complaint, make the following allegations which will be accepted as true for present purposes. In September, 1978, plaintiffs consulted Blanton concerning the purchase of stock in Shoney's, Inc., (Shoney's) and they placed orders with Blanton to purchase specified amounts of Shoney's stock. Upon receipt of their transaction statements in October, 1978, plaintiffs learned that Blanton had purchased Shoney's stock in excess of the orders and, in addition, had purchased shares in C.H.B. Foods, Inc., (C.H.B.) for plaintiffs, along with shares in Sierracin Corporation for Haynes, Sr. Apparently plaintiffs contend that Blanton purchased this stock by placing plaintiffs on margin accounts without authority and extended credit to them in connection with these security transactions without disclosing the terms of the credit agreements in violation of Rule 10b-16.

Upon plaintiffs learning of this transaction, Blanton persuaded them to retain the C.H.B. stock, informing them on the basis of what plaintiffs alleged to be inside information that the price was certain to go up as a result of the imminent takeover of C.H.B. by General Foods Corporation (General Foods). In reliance upon Blanton's advice and representations, plaintiffs retained the C.H.B. stock and requested Blanton to purchase additional shares of C.H.B.

In November, 1978, Blanton solicited plaintiffs to purchase additional shares of C.H.B. Again, in reliance upon Blanton's information, plaintiffs directed Blanton to do so. Haynes, Jr., also claims that in January, 1979, Blanton began making unauthorized purchases of C.H.B. stock on behalf of Haynes, Jr. Haynes, Jr., instructed Blanton not to purchase additional shares of C.H.B. stock because he would not pay for them. Haynes, Jr., was assured by Blanton that it would not be necessary for Haynes, Jr., to pay for the purchases.

When the General Foods acquisition of C.H.B. had not materialized by January, 1979, plaintiffs determined to sell their shares of C.H.B. and instructed Blanton accordingly. Blanton again represented to plaintiffs that the acquisition was going to take place and that an increase in the value of the C.H.B. stock was certain. In addition, Blanton disclosed to Haynes, Jr., that he owned several thousand shares of C.H.B. stock himself, so that there was no need for Haynes, Jr., to be concerned. Plaintiffs claim that ultimately Blanton refused to sell their shares of C.H.B. stock.

The takeover of C.H.B. by General Foods did not materialize and in February, 1979, the Securities and Exchange Commission suspended trading in C.H.B. stock. As a result, the price of C.H.B. stock diminished substantially, causing plaintiffs to suffer damages. Plaintiffs claim that throughout the various discussions with and solicitations by Blanton, they were unaware that Blanton's representations concerning C.H.B. were untrue.

II.

Anderson & Strudwick's initial ground for dismissal is that the Complaint's recitation of federal securities law violations fails to mention any involvement by Anderson & Strudwick.² Anderson & Strudwick asserts that the only specific conduct and statements plaintiffs allege as violating § 10(b) and Rule 10b-5 are the alleged conduct and statements of Blanton. It is Anderson & Strudwick's contention, then, that from the Complaint the only basis for its liability is under the common law doctrine of respondeat superior. Anderson & Strudwick argues, however, that the doctrine of respondeat superior was supplanted in the federal securities laws by Congress' enactment of "controlling person" provisions in both the 1933 Act³ and the 1934 Act.⁴ Since plaintiffs have failed to state a cause of action under the appropriate controlling person provision, § 20(a) of the 1934 Act, Anderson & Strudwick contends that plaintiffs' Complaint should be dismissed as to the broker-dealer. Plaintiffs, on the other hand, apparently contend that Anderson & Strudwick is subject to liability under both § 20(a), the controlling person provision, and the doctrine of respondeat superior.

A review of the law reveals that the circuits are split on the issue presented. In the Ninth Circuit the rule is firmly embedded that the controlling person provision found in § 20(a), and not the doctrine of respondeat superior, is the appropriate standard for determining liability of a broker-dealer for the acts of its employee in violation of the 1934 Act. Zweig v. Hearst Corp., 521 F.2d 1129, 1132 (9th Cir.), cert. denied, 423 U.S. 1025, 96 S.Ct. 469, 46 L.Ed.2d 399 (1975); Douglass v. Glen E. Hinton Investments, Inc., 440 F.2d 912, 914 (9th Cir. 1971); Hecht v. Harris, Upham & Co., 283 F.Supp. 417, 438-39 (N.D.Cal.1968), modified on other grounds, 430 F.2d 1202, 1210 (9th Cir. 1970); Kamen & Co. v. Paul H. Aschkar & Co., 382 F.2d 689, 697 (9th Cir.), cert. granted, 390 U.S. 942, 88 S.Ct. 1021, 19 L.Ed.2d 1129, cert. dismissed, 393 U.S. 801, 89 S.Ct. 40, 21 L.Ed.2d 85 (1967); Jackson v. Bache & Co., Inc., 381 F.Supp. 71, 93-5 (D.C.1974). The Third Circuit is in accord. Rochez Bros., Inc. v. Rhoades, 527 F.2d 880, 884-86 (3d Cir. 1975); Thomas v. Duralite Co., Inc., 524 F.2d 577, 586 (3d Cir. 1975). Cf. Sharp v. Coopers & Lybrand, 457 F.Supp. 879, 890-91 (D.C.Pa.1978) (holding that Rochez did not foreclose respondeat superior liability for broker-dealers for the fraudulent acts of their employees). The Eighth Circuit would seem to be in agreement with the Ninth and Third Circuits, though that circuit has not taken a definitive position. Myzel v. Fields, 386 F.2d 718, 737-38 (8th Cir. 1967), cert. denied, 390 U.S. 951, 88 S.Ct. 1043, 19 L.Ed.2d 1143 (1968) (the liability of controlling persons "is governed neither by principles of agency nor conspiracy." Id. at 738).

The Sixth and Seventh Circuits have taken the position that the controlling person statutes in the 1933 Act and the 1934 Act do not preclude respondeat superior liability under the federal securities laws. Holloway v. Howerdd, 536 F.2d 690, 694-95 (6th Cir. 1976); Armstrong, Jones & Co. v. Securities & Exchange Commission, 421 F.2d 389, 361-62 (6th Cir.), cert. denied, 398 U.S. 958, 90 S.Ct. 2172, 26 L.Ed.2d 543 (1970); Fey v. Walston & Co., Inc., 493 F.2d 1036, 1051-52 (7th Cir. 1974). United States Law Week has recently reported that the Fifth Circuit has taken a similar position in Paul F. Newton & Co. v. Texas, 630 F.2d 1111 (5th Cir. 1980). The First Circuit has not had an occasion to address the issue, however, a district court in that circuit has concluded that § 20(a) and the common law doctrine of respondeat superior are complementary rather than exclusive remedies. Kravitz v. Pressman, Frohlich & Frost, Inc., 447 F.Supp. 203, 214 (D.Mass.1978).

The Tenth Circuit has not expressly decided the controlling person-respondeat superior issue. See Kerbs v. Fall River Indus., Inc., 502 F.2d 731, 741 (10th Cir. 1974); Richardson v. MacArthur, 451 F.2d 35, 41-42 (10th Cir. 1971).

The position of the Second Circuit is difficult to discern. Apparently as a result of that circuit's decision to consider the issue on a case by case basis, it has authority seeming to support both positions. Compare SEC v. Geon Indus., Inc., 531 F.2d 39, 54-56 (2d Cir. 1976); SEC v. Management Dynamics, Inc., 515 F.2d 801, 811-13 (2d Cir. 1975); Rolf v. Blyth, Eastman, Dillon & Co., Inc., 424 F.Supp. 1021, 1043-44 (S.D.N. Y.1977), nonacq., 570 F.2d 38, 48 (2d Cir. 1978) with Lanza v. Drexell & Co., 479 F.2d 1277, 1299 (2d Cir. 1973); Barthe v. Rizzo, 384 F.Supp. 1063, 1068-70 (S.D.N.Y.1974); Gordon v. Burr, 366 F.Supp. 156, 167-68 (S.D.N.Y.1973), partially modified on other grounds, 506 F.2d 1080 (2d Cir. 1974); SEC v. Lums, Inc., 365 F.Supp. 1046, 1061-64 (S.D.N.Y.1973).

The position of the Fourth Circuit is ambiguous. In Johns Hopkins University v. Hutton, 297 F.Supp. 1165, 1210-13 (D.Md. 1968), aff'd in part, rev'd in part & remanded, 422 F.2d 1124 (4th Cir. 1970), Judge Kaufman, in the District Court, addressed the controlling person — respondeat superior issue in the context of the controlling person...