Sowell v. Butcher & Singer, Inc.

• Decision Date: 21 February 1991
• Docket Number: No. 90-1414,90-1414
• Citation: 926 F.2d 289
• Court: U.S. Court of Appeals — Third Circuit
• Parties: Fed. Sec. L. Rep. P 96,100, 19 Fed.R.Serv.3d 381, RICO Bus.Disp.Guide 7709 SOWELL, John B. v. BUTCHER & SINGER, INC. Grey, Thomas A., Bennett, Samuel J. and I.G.E., Inc. Appeal of John B. SOWELL, individually and on behalf of all others similarly situated.

Page 289

926 F.2d 289

Fed. Sec. L. Rep. P 96,100, 19 Fed.R.Serv.3d 381,

RICO Bus.Disp.Guide 7709

SOWELL, John B. v. BUTCHER & SINGER, INC. Grey, Thomas A., Bennett, Samuel J and I.G.E., Inc Appeal of John B. SOWELL, individually and on behalf of all others similarly situated.

No. 90-1414.

United States Court of Appeals Third Circuit.

Argued Dec. 13, 1990.

Decided Feb. 21, 1991.

Niels Korup (argued), Spector, Gadon & Rosen, P.C., Philadelphia, Pa. and Robert Stull, Stull, Stull & Brody, New York City, for appellant.

Edward C. Mengel, Jr. (argued), Ellen K. Burrows, and Yvette M. Kostelac, White & Williams, Philadelphia, Pa., for appellees, Butcher & Singer, Inc. and Thomas A. Grey.

John A. Luchsinger (argued), Luchsinger & Noel, P.C., Media, Pa., for appellee Samuel J. Bennett.

Before SLOVITER, Chief Judge, ^* and MANSMANN, Circuit Judge, and SAROKIN, District Judge. ^**

OPINION OF THE COURT

MANSMANN, Circuit Judge.

This appeal requires that we determine whether the district court erred in directing a verdict for the defendants in an action alleging fraud and misrepresentation in connection with the purchase and sale of securities. The plaintiff, John B. Sowell, represents a certified class of plaintiffs who purchased shares of stock in I.G.E., Inc. during the period between August of 1977 and June of 1981. The plaintiff named as defendants Butcher & Singer, a securities broker/dealer having its principal place of business in Philadelphia, Thomas A. Grey, a Butcher & Singer trader and first vice president, and Samuel J. Bennett, a former Butcher & Singer assistant vice president, vice president, and registered representative. The complaint alleged that these defendants committed violations of state and federal securities laws, engaged in conduct in violation of the Racketeer Influenced and Corrupt Organizations Act, and committed acts of fraud, deceit and negligence under Pennsylvania state law.

Several claims were dismissed upon the defendants' motion for summary judgment and, at trial, the only claims remaining were those based on RICO, 18 U.S.C. Sec. 1961-1968, common law fraud, and those section 10(b), 15 U.S.C. Sec. 78j(b), claims involving stock purchases between February 13, 1981 and June, 1981. At the close of the plaintiff's case, the trial court directed a verdict on all claims in favor of the defendants.

The plaintiff now challenges the district court's entry of a directed verdict. The plaintiff also claims that the district court erred in excluding certain evidence at trial and in dismissing a number of claims as time-barred.

While our examination of the issues has been complicated by the district court's failure to articulate the bases for the majority of its rulings, our detailed analysis of the record convinces us that the directed verdict and the evidentiary rulings underlying that verdict can be sustained. We will, therefore, affirm the order of the district court.

I.

While the parties do not agree on every factual detail, we are able to distill from the record those essential historical facts as to which there appears to be consensus. The allegations of wrongdoing in this case center on transactions in the stock of I.G.E., Inc., (IGE), a Massachusetts corporation formed in 1971 as the successor to the business of International Geophysical Explorations, Inc. During the period extending from 1971 through August, 1977, IGE had no revenue and was, in essence, a shell corporation whose principal asset was a 1/64 royalty interest in an off-shore oil and gas concession near Honduras.

In 1977, Samuel J. Bennett, then a registered representative with Butcher & Singer's Cherry Hill, New Jersey office, was approached by Craig O. Moon. When Moon expressed interest in acquiring control of a dormant corporation, Bennett suggested IGE as a "clean shell" and introduced Moon to IGE management.

After a period of negotiation, Moon became president of IGE with the intent to involve the corporation in varied business ventures. ¹ Under the terms of the agreement between Moon and the members of the board of IGE, Moon was required to enlist the services of a listed stock brokerage house for the purpose of "creating and maintaining a strong healthy market for IGE stock." Moon again approached Bennett, who agreed to serve as a consultant to IGE and to enlist the services of Butcher & Singer "to make a market" in IGE stock. ² In return for these services and to compensate him for having brought Moon and the IGE board together, Bennett, or members of his immediate family, were issued 400,000 shares of IGE capital stock. These shares were to be used to create and maintain a "good market situation" in that stock.

At approximately the same time that he was given the 400,000 shares, Bennett is alleged to have misappropriated blank IGE stock certificates on which he forged or caused to have forged necessary signatures, certificate amounts, and dates of issuance. ³ None of the stock which Bennett received, either by grant or alleged misappropriation, was registered.

In 1977, Bennett requested that Butcher & Singer make a market in IGE stock. Bennett contacted Thomas A. Grey, an over-the-counter securities trader at Butcher & Singer's Philadelphia office and informed him that he, Bennett, had a "good amount" or an "interest" in IGE stock which he wished to sell. On August 22, 1977, Grey, as the trader designated and authorized to handle stocks such as IGE, began market-making efforts on behalf of Butcher & Singer. Grey did not ask Bennett to disclose the number of IGE shares which he owned, did not inquire into the circumstances surrounding Bennett's acquisition of the certificates, and did not place in the Butcher & Singer file the information required by Section 15 of the 1934 Act.

Between August 23, 1977 and October 31, 1977, Bennett sold 50,560 shares of IGE stock through Butcher & Singer with both Grey and Butcher & Singer earning commissions on the sales. The plaintiff alleges that, at the time of these sales, Bennett was aware that virtually all of IGE's capital stock was outstanding and that, in an effort to raise revenue, IGE was preparing to effect a 1 for 10 reverse split on the stock issued. The impending reverse split, which did, in fact, occur on November 1, 1977, was not disclosed to the purchasers of IGE stock. ⁴

The remaining allegations of misconduct on the part of the defendants focus primarily on circumstances surrounding transactions in IGE stock during April, May and June 1979. Prior to that time, the price of IGE stock fluctuated in a narrow range between $1 and $2 per share. In the spring of 1979, however, the price rose dramatically to more than $8 per share. Transactions in the stock increased during this period, with Bennett transferring more than 40,000 shares for over $200,000 in proceeds. During the same period, Grey and other Butcher & Singer officers and employees also traded IGE stock, at a profit, in their own accounts.

The parties agree that this increase in the price of and activity in IGE stock resulted from rumors concerning IGE's acquisition of property on which to develop and operate a casino in Atlantic City, New Jersey. Sowell alleges that, by virtue of Bennett's position as a consultant to IGE and his involvement in IGE's casino-related efforts, Bennett knew that the realistic prospects for IGE's acquiring casino property were minimal. Despite this knowledge, Bennett continued to sell IGE stock on the basis of inflated or false rumors.

Sowell also alleges misconduct on the part of Butcher & Singer stemming from the Spring, 1979 events. Prior to April, 1979, no one at Butcher & Singer made any effort to determine the source or extent of Bennett's IGE stock holdings. In April, 1979, however, Louis Iannucci, an assistant to Francis Doyle, Butcher & Singer's compliance director, brought the IGE activity in Bennett's account to Doyle's attention. ⁵ Iannucci had determined that the IGE stock was being sold primarily to other market makers for IGE although some shares had also been sold, on an unsolicited basis, to local customers. Iannucci spoke with Bennett but did not ask him any questions regarding his IGE holdings other than their source. Bennett claimed to have acquired the shares as penny stock during his time as a penny stock trader with another brokerage house during the late 1960's and early 1970's. Doyle asked that the unsolicited nature of IGE sales be confirmed but did not make inquiry or direct that inquiry be made concerning the amount of stock owned by Bennett, previous sales by Bennett, or Bennett's relationship to IGE. No inquiry was made into the registration of IGE stock. Bennett continued to market IGE stock through Butcher & Singer.

In early June, 1979, IGE made a public announcement which stated that its casino project was contingent upon receipt of necessary financing. It then became clear that rumors to the effect that IGE was about to build an Atlantic City casino were unfounded. The price of IGE stock dropped to between $2 and $4 per share by the end of 1979. Thereafter, the price remained steady at between $1 to $2 per share through June, 1981.

During the period extending from August 23, 1977 through June 23, 1981, Bennett sold some 270,550 shares of IGE stock through Butcher & Singer for proceeds totalling some $546,768.41. Butcher & Singer and Grey received commissions on each of these sales.

In 1981, the Securities Exchange Commission, Division of Enforcement, initiated an investigation into trading in IGE stock. At the conclusion of that investigation, a public administrative proceeding was instituted by the Commission's Order for Public Proceedings dated January 13, 1984. Pursuant to this order, a nine-day evidentiary hearing was conducted during April and May, 1984. The administrative law judge found that Butcher & Singer, Bennett, and Grey had willfully violated and willfully aided and abetted violations of Sections 5(a) an...