Barthe v. Rizzo, 73 Civ. 1014. (WCC)

Citation384 F. Supp. 1063
Decision Date26 July 1974
Docket NumberNo. 73 Civ. 1014. (WCC),73 Civ. 1014. (WCC)
PartiesRay BARTHE, Plaintiff, v. Alfred C. RIZZO et al., Defendants.
CourtUnited States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York

COPYRIGHT MATERIAL OMITTED

Julien & Schlesinger, P. C., New York City, for plaintiff; Jesse Alan Epstein, New York City, of counsel.

H. Elliot Wales, New York City, for defendant Rizzo.

Wohl, Lipton, Loewe, Stettner, Becker & Krim, New York City, for defendant Kern Securities Corporation; Leonard H. Krim, New York City, of counsel.

OPINION AND ORDER

CONNER, District Judge:

Plaintiff commenced this action pursuant to Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, to recover a $100,000 investment. This action was tried without a jury and accordingly this opinion constitutes findings of facts and conclusions of law pursuant to Rule 52, F.R.Civ.P.

I.

The testimony adduced at trial established that plaintiff, a man of modest means, first became seriously involved in the stock market in the late 1950's or early 1960's when he invested about $20,000 in an account at the brokerage firm of Spencer, Trask, & Co. This account was maintained until 1967 when it was transferred to the firm of Tessel, Paturick & Ostrau, Inc. ("TPO"). The change was occasioned by the meeting of plaintiff and defendant Alfred C. Rizzo ("Rizzo"), in the latter part of 1966 at the local Y.M.C.A. Rizzo was at that time a registered representative for TPO, and was interested in taking over Barthe's account which was then valued at about $150,000. When Rizzo finally did take over the account he was given full discretion in its management. During the latter part of 1967 Rizzo left TPO to join Scheinman, Hochstin & Trotta, Inc., and transferred plaintiff's account to that firm. In August 1968, Rizzo again changed employment, taking plaintiff's account, this time to defendant Kern Securities Corporation ("Kern"). Rizzo successfully managed plaintiff's account and within a short time it was valued at approximately $900,000.

The proof at trial disclosed that Barthe's overriding interest was in capital appreciation, and that he was not especially concerned with how it should be achieved, although he actively monitored the status of the account. Barthe and Rizzo met frequently and often discussed the fortunes which had been made by investing in companies prior to their "going public." Barthe was advised that such a "venture capital" deal afforded an opportunity to get rich quickly. Barthe became interested and, sometime before the events in issue, invested, at Rizzo's suggestion, in a venture capital deal which aborted, with Barthe's money eventually being returned to him.

In June, 1968 Barthe moved to Florida, but remained in close contact with Rizzo. At about this time, Rizzo first mentioned a venture capital deal involving a Chicago company named Institute of Management Training ("IMT"). Early in 1969 Rizzo went to see Barthe in Florida to discuss the IMT deal. Although Rizzo denied having told Barthe that he would have any influence on the company's eventual success, it is clear that Rizzo was very enthusiastic about the company's possibilities. He felt that his contacts and friends "on the street" were good assurance that the company would succeed in the contemplated public offering. Rizzo asked Barthe to invest $100,000 in return for a note for $93,000 (which would probably be paid within 6 months) bearing 7% interest, plus 10,000 shares in IMT which he expected would open at $5.00 per share.

Rizzo had brought two documents with him which he showed to Barthe: an agreement to assign to Barthe a note given by IMT to Rizzo for $93,000, and an agreement to transfer 10,000 shares of stock in IMT to Barthe in consideration of $7,000. Barthe testified that he really didn't understand the documents but gave his consent, and when he received his monthly statement from Kern, it reflected a $100,000 withdrawal. Near the end of March, 1969, the docuents were sent back to Barthe with the cancelled check to IMT for $100,000 attached. Rizzo also sent him the cover page of IMT's offering circular, but no further financial information.

In May 1969 Barthe was in New York and met with Rizzo who told him that things were going smoothly with IMT. However, by September, Barthe's inquiries were rebuffed by Rizzo.

Barthe then decided to write to IMT. He eventually learned, through communicating with Melvin Newman, the attorney for IMT, that Rizzo held almost half of the total shares of IMT, because Rizzo had invested $100,000 which constituted virtually the entire current assets of the company.

II.

The gravamen of plaintiff's original complaint was that Rizzo induced him to lend $93,000 to IMT and to purchase 10,000 shares in IMT for $7,000 by means of false and fraudulent representations and omissions of material fact. He alleged that Rizzo assured him that the investment was "riskless" when in fact it was highly speculative; and that Rizzo proferred Barthe's money as his own.

But in his testimony plaintiff admitted that he was aware that no investment is riskless and, both at the trial and in his post-trial memoranda, he has taken the new line that: 1) Barthe believed Rizzo was acting as his broker and not as one who stood to gain enormously from the financing of IMT; 2) Barthe was virtually the sole source of IMT's cash funds; 3) despite the fact that Barthe stood to lose $100,000, he was getting only 7,000 shares and a note for $93,000, while Rizzo was getting 110,000 shares or 47% of the total stock, for the principal reason that he had persuaded Barthe to put up $100,000, which Rizzo proferred to IMT as his own money; and 4) Barthe was furnished no financial data about the company.

Accordingly, the proof at trial and the post-trial memoranda will be treated as an amendment of the Complaint.

While Rizzo claims that he was made a director of IMT and given 47% of its stock at least in part because of his anticipated assistance in securing an underwriter for the stock issue, he does not deny that a substantial factor in his receipt of these benefits was the fact that he brought in Barthe's $100,000 or that this was the only cash put up by anyone. Rizzo also admits that he did not inform Barthe of these facts or of any other details of IMT's financing, but merely sent him the cover page of the offering circular. However, Rizzo defends these actions by proclaiming that "Barthe was not interested in full disclosure — he was not even interested in minimum disclosure." Brief for Rizzo at 18. That argument ignores the purpose of the securities laws. In Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 151, 92 S.Ct. 1456, 1471, 31 L.Ed.2d 741 (1972), the Supreme Court, citing Securities and Exchange Commission v. Capital Gains Research Bureau, 375 U.S. 180, 186, 84 S. Ct. 275, 11 L.Ed.2d 237 (1963), ruled that the 1934 Securities Act and its companion legislative enactments embrace a "fundamental purpose . . . to substitute a philosophy of full disclosure for the philosophy of caveat emptor and thus to achieve a high standard of business ethics in the securities industry."

Rizzo's contention that the IMT deal was a purely private deal, and therefore not one within the contemplation of the securities laws is also unfounded. In Superintendent of Insurance v. Bankers Life & Casualty Co., 404 U.S. 6, 12, 92 S.Ct. 165, 169, 30 L.Ed.2d 128 (1971), the Supreme Court held that the Congressional purpose behind § 10(b) was to "bar deceptive devices and contrivances in the purchase or sale of securities whether conducted in the organized market or face to face." This basic purpose is no less pertinent in purely private transactions. Reube v. Pharmacodynamics, Inc., 348 F.Supp. 900, 915 (E.D.Pa.1972).

Rizzo further contends that IMT had eminently qualified principals and that there was a bona fide attempt to complete a successful financing. In this regard, he emphasizes the part he played in attempting to launch the enterprise.

In the first instance, there is no claim by Barthe that Rizzo did not use his best efforts to obtain a public offering. Moreover, the question is not whether the deal was potentially a good one, but whether disclosure of Rizzo's interest might have influenced Barthe's decison to buy the stock and make the loan. See Affiliated Ute Citizens of Utah v. United States, supra, 406 U.S., at 153-154, 92 S.Ct. 1456, at 1472; Chasins v. Smith, Barney & Co., 438 F.2d 1167, 1171 (2d Cir. 1970). It is clear that Barthe was entitled to know that Rizzo was in a position to gain financially from the deal. See Affiliated Ute Citizens of Utah v. United States, supra, 406 U.S., at 153, 92 S.Ct. 1456, at 1472.

Rizzo presses the theory that Barthe is not as naive and uninformed in the ways of finance as he pretends. In support of his theory, Rizzo recounted instances when he went to the library with Barthe and Barthe read financial journals. He further claims that Barthe inquired daily as to the progress of his investments, and that therefore he did not rely to any great extent on Rizzo's judgment. Rizzo apparently contradicts himself by also insisting that he had full discretion with Barthe's account and that "Barthe accepted Rizzo's investment decisions without question." Brief for Defendant Rizzo at 18.

Rizzo's attempt thus to straddle the pit of liability is unavailing, since neither side affords him firm footing. The fact that the client is sophisticated should not excuse the failure to provide full and accurate disclosure because "sophisticated investors, like all others, are entitled to the truth." Stier v. Smith, 473 F.2d 1205, 1207 (5th Cir. 1973). On the other hand, the fact that the client gave the broker full discretion and "did not ask any questions" (Brief for Defendant Rizzo at 18), would not relieve the broker from his obligation to disclose the facts relevant to any possible...

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