Bailey v. Piper, Jaffray & Hopwood, Inc., 4-74 Civ. 173.

• Decision Date: 03 June 1976
• Docket Number: No. 4-74 Civ. 173.,4-74 Civ. 173.
• Citation: 414 F. Supp. 475
• Parties: Charles D. BAILEY and Dayton N. Barker, on Behalf of themselves and all others similarly situated, Plaintiffs, and Wesley C. Jensen et al., Plaintiff-Intervenors, v. PIPER, JAFFRAY & HOPWOOD, INC., Defendant.
• Court: U.S. District Court — District of Minnesota

414 F. Supp. 475

Charles D. BAILEY and Dayton N. Barker, on Behalf of themselves and all others similarly situated, Plaintiffs, and Wesley C. Jensen et al., Plaintiff-Intervenors, v. PIPER, JAFFRAY & HOPWOOD, INC., Defendant.

No. 4-74 Civ. 173.

United States District Court, D. Minnesota, Fourth Division.

June 3, 1976.

COPYRIGHT MATERIAL OMITTED

Terence M. Fruth and Timothy M. Heaney, Fredrikson, Byron, Colborn, Bisbee, Hansen & Perlman, Minneapolis, Minn., for plaintiffs Bailey and Barker.

Gordon B. Conn, Jr., and Timothy D. Kelly, Faegre & Benson, Minneapolis, Minn., for defendant.

MEMORANDUM AND ORDER

ALSOP, District Judge.

This action for violation of the Securities Exchange Act of 1934 is now before the court upon motion of the defendant for summary judgment or partial summary judgment on the grounds that plaintiffs' claims are barred by the applicable statute of limitations.

Plaintiffs, who are all individuals, allege that the defendant Piper, Jaffray & Hopwood, Inc. (hereinafter PJH), while acting in its capacity as a broker-dealer, made various misrepresentations and omissions and engaged in a scheme to defraud in connection with its sale to plaintiffs of stock in North American Resources Corporation. Plaintiffs' action is founded upon § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) and Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder. Since the 1934 Act and Rule 10b-5 contain no statute of limitations governing 10b-5 claims, federal district courts apply the appropriate limitations period of the forum state, United Automobile Workers v. Hoosier Cardinal Corp., 383 U.S. 696, 704-05, 86 S.Ct. 1107, 16 L.Ed.2d 192 (1966); Vanderboom v. Sexton, 422 F.2d 1233, 1239 (8th Cir.) cert. denied, 400 U.S. 852, 91 S.Ct. 47, 27 L.Ed.2d 90 (1970).

The late Judge Philip Neville of this court held in Klapmeier v. Peat, Marwick, Mitchell & Co., 363 F.Supp. 1212 (D.Minn. 1973), that the appropriate statute of limitations for 10b-5 actions arising in Minnesota was Minn.Stat. § 541.05(6) which is a six-year limitation provision for actions based on fraud.¹

Under normal circumstances, the principle of stare decisis would weigh heavily in favor of simply following the Klapmeier decision. However, since that case was decided, significant changes have occurred in the area of securities law which compel a reexamination of the choice of an appropriate limitations provision.

Klapmeier applied the controlling law of the Eighth Circuit, Vanderboom v. Sexton, supra, in choosing the fraud statute of limitations. Vanderboom set forth the standard for determining which of several local limitation provisions should be applied stating:

The basic standard for determining which of the various local periods of limitation to utilize is that it should be `one which best effectuates the federal policy at issue.' Charney v. Thomas, 372 F.2d 97, 100 (6th Cir. 1967).

422 F.2d at 1237.

In determining which limitations provision best effectuated the federal policy involved, the court in Vanderboom stated that it was appropriate to examine the local statute which bears the closest resemblance to Rule 10b-5. Id. at 1237-1238. After making that examination, the court adopted the statute of limitations which applied to the private remedy provision under the forum state's (Arkansas) blue-sky law and rejected the limitations provision for common law fraud. Id. at 1240. In reaching its conclusion the court looked to the commonality of purpose and similarity of defenses available under both 10b-5 and the state blue-sky law. Id. at 1238-1240.

The significant issue involving the similarity of defenses was the element of "scienter." The Eighth Circuit stated that actions under both Rule 10b-5 and the state blue-sky law would arise no matter if the misrepresentations were intentional or negligent. Id. at 1238 (citing Myzel v. Fields, 386 F.2d 718, 734-735 (8th Cir. 1967), cert. denied, 396 U.S. 951, 88 S.Ct. 1043, 19 L.Ed.2d 1143 (1968), for the proposition that Rule 10b-5 applies to negligent as well as intentional misrepresentations). However, under Arkansas law (the state law considered by the court), an action for common law fraud would lie only if scienter or intentional misrepresentation was proved. 422 F.2d at 1239. Therefore the court chose the limitations provisions which applied to the state cause of action which did not require scienter — the blue-sky law — and rejected the limitations provision for common law fraud. Id. at 1240.

Likewise in Klapmeier, supra, the district court placed important reliance on the issue of scienter in choosing the common law fraud statute of limitations to govern 10b-5 litigation arising in Minnesota. In examining the similarity of elements under Minnesota common law fraud and Rule 10b-5, the court stated:

However, the most important similarity between Minnesota common law fraud and a 10b-5 action in the Eighth Circuit is that neither action requires a showing of scienter. Myzel v. Fields, supra other citations omitted

363 F.Supp. at 1218.

The court went on to conclude that there were no great dissimilarities between Minnesota fraud law and Eighth Circuit 10b-5 law and thus the Minnesota fraud statute of limitations was appropriate. Id. at 1219.

Very recently the Eighth Circuit reaffirmed the Vanderboom analysis in In Re Alodex Corporation Securities Litigation, 533 F.2d 372 (8th Cir. filed March 24, 1976), while holding that the two-year statute of limitations of the Iowa Blue Sky law governed 10b-5 litigation arising in Iowa. The court stated:

Vanderboom v. Sexton, supra, viewed two factors to be significant in determining which particular state statute of limitations should be applied in a Rule 10b-5 case: (1) does the state statute share a common purpose with Rule 10b-5, and (2) does the state statute permit the assertion of substantially the same defenses that are available in a Rule 10b-5 case?

Id. at 373.

The court went on to say:

As to the second prong of the Vanderboom case, it is necessary to examine what defenses are allowed in the state cause of action relied upon by the various parties as establishing the appropriate statute of limitations. If there is a manifest minimization of assertible defenses available in a particular state cause of action which is analogous to Rule 10b-5, the statute of limitations for that cause of action should be applied since it would more closely approximate the federal policy and proof requirements of Rule 10b-5. Vanderboom v. Sexton, supra, at 1238-40. This inquiry and conclusion are compelled because this court has held that scienter need not be proved in a Rule 10b-5 case to establish liability. Myzel v. Fields, supra emphasis added

Id. at 373.

Six days later the Supreme Court held in Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d 668, 44 U.S.L.W. 4451 (1976), that a private cause of action for damages under § 10(b) and Rule 10b-5 will not lie in the absence of any allegation of scienter.² In so holding, the Court specifically overruled Myzel v. Fields, supra, the acknowledged authority in the Eighth Circuit for the proposition that scienter was not required in 10b-5 cases. 425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d 668, 44 U.S.L.W. at 4454, n. 12.

Myzel was the cornerstone of the second factor analyzed in Vanderboom, i. e., lack of defenses, and also had a significant effect in Klapmeier. This court now concludes that Klapmeier's result of choosing the fraud statute of limitations, with its important reliance on the lack of scienter in comparing Rule 10b-5 and common law fraud can no longer be followed. In addition, the importance of the second factor of the Vanderboom analysis is itself diminished. The inquiry into the area of defenses was compelled because of the now-overruled Eighth Circuit's position of not requiring scienter. In Re Alodex, supra, at 374. Nonetheless, elements of Vanderboom remain for determining the appropriate statute of limitations.

The basic standard of Vanderboom for choosing the appropriate limitations provision — that which best "`effectuates the federal policy at issue'" — still stands after Hochfelder. Also remaining is the exhortation of Vanderboom to ". . . look to the local statute which bears the closest resemblance to the federal statute involved." 422 F.2d at 1237.

Rule 10b-5 provides:

It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,

(a) To employ any device, scheme, or artifice to defraud.

(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or

(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,

in connection with the purchase or sale of any security.

17 C.F.R. § 240.10b-5.

The various limitation provisions which conceivably could be applicable to the state remedy which bears the closest resemblance to Rule 10b-5 are Minn.Stat. § 80A.23, Subd. 7; § 80.26; § 541.07(5); and § 541.05(6). Each statute will be examined individually.

§ 80A.23, Subd. 7.

On May 21, 1973, the Minnesota Legislature enacted a comprehensive version of the Uniform Securities Act, Minn.Stat. § 80A.01, et seq., Laws 1973, ch. 451 (hereinafter "Uniform Securities Act") which became effective on August 1, 1973 and thereby repealed the Minnesota Blue Sky Law, Minn.Stat. § 80.01 et seq. (hereinafter "Minnesota Blue Sky Law"). § 80A.01 is almost identical to Rule 10b-5³ and § 80A.23, Subd. 2 expressly provides that a violation of .01 shall create a civil action. § 80A.23, Subd. 7 establishes a uniform three-year period of limitation for civil actions including an action based on a violation of § 80A.01.

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