Brennan v. Midwestern United Life Insurance Company, Civ. No. 1716.

• Decision Date: 23 September 1966
• Docket Number: Civ. No. 1716.
• Citation: 259 F. Supp. 673
• Parties: Tora C. BRENNAN, Plaintiff, v. MIDWESTERN UNITED LIFE INSURANCE COMPANY, Defendant.
• Court: U.S. District Court — Northern District of Indiana

259 F. Supp. 673

Tora C. BRENNAN, Plaintiff, v. MIDWESTERN UNITED LIFE INSURANCE COMPANY, Defendant.

Civ. No. 1716.

United States District Court N. D. Indiana, Fort Wayne Division.

September 23, 1966.

COPYRIGHT MATERIAL OMITTED

Charles B. Feibleman, Bamberger & Feibleman, Indianapolis, Ind., Robert L. Kaag, Congdon & Kaag, Fort Wayne, Ind., for plaintiff.

G. R. Redding and John L. Woolling, Baker & Daniels, Indianapolis, Ind., Gilmore S. Haynie, Livingston, Dildine, Haynie & Yoder, Fort Wayne, Ind., for defendant.

MEMORANDUM OF DECISION AND ORDER

ESCHBACH, District Judge.

The complaint in this case alleges a class action for damages against the defendant corporation for aiding, abetting, and assisting, by its failure to report improper activities of a brokerage firm, the alleged violation by the brokerage firm of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j (b), and of Rule 10b-5 of the Securities and Exchange Commission, 17 C.F.R. § 240.10b-5. The alleged principal violator, Dobich Securities Corporation, was engaged in selling shares of stock in the defendant corporation, which was acting as its own transfer agent. However, according to the complaint, Dobich failed to deliver stock of the defendant corporation having a value of two million nine hundred thousand dollars ($2,900,000) before Dobich became bankrupt, having used the stock purchase money as working capital for speculation and other improper purposes and having used fraudulent misrepresentations in explaining to purchasers the reason for delays in delivery of the purchased shares of stock. The complaint alleges that the defendant knew of Dobich's activities and permitted the activities to continue by failing to report Dobich either to the Indiana Securities Commission or to the Securities and Exchange Commission. By thus permitting Dobich's activities to continue, alleges the complaint, the defendant knowingly and purposely encouraged an artificial build-up in the market for its stock. As a result of this Dobich-stimulated market, the defendant was allegedly in a more favorable position for potential mergers it was then negotiating, and certain of the defendant's officers and directors realized substantial personal profits from the sale of stock in the defendant corporation.

On January 13, 1966, the defendant filed motions (1) to dismiss for failure to state a claim upon which relief can be granted, (2) to dismiss the claim in so far as it is a class action, (3) for a more definite statement, and (4) to strike certain parts of the complaint. Extensions of time were granted to both parties for the preparation of extensive and helpful briefs on the issues raised by the motions. A hearing was held on June 9, 1966, on the two motions to dismiss, and at the close of that hearing both parties were granted additional time to file further briefs. After full consideration, this court concludes that all four motions must be denied for the reasons and in the manner hereinafter stated.

I. Motion to Dismiss for Failure to State a Claim

The motion to dismiss for failure to state a claim upon which relief can be granted raises basic, and not yet clearly answered, questions regarding the extent and nature of civil liability under Section 10(b) and Rule 10b-5. The defendant's primary contentions in regard to this motion are (1) that an aider and abettor is not liable, as such, in a civil action for damages under Section 10(b) and Rule 10b-5, (2) that one cannot aid and abet the commission of a wrong unless he does so by some affirmative action or by breaching an affirmative duty to act, and (3) that the complaint does not sufficiently allege the plaintiff's reliance upon the defendant's conduct, or "some semblance of privity" between the plaintiff and the defendant, or some relationship between the plaintiff and the defendant which would show that the defendant's conduct was a proximate cause of the plaintiff's alleged damage.

For purposes of the motion to dismiss, the defendant concedes that the complaint sufficiently alleges a violation of Section 10(b) and Rule 10b-5 by Dobich Securities Corporation. Nor has the defendant challenged the proposition that civil liability for damages arises under the cited section and rule. Such civil liability has become well established in the twenty years since it first appeared in the landmark case of Kardon v. National Gypsum Co., 69 F.Supp. 512 (E.D.Pa.1946). The Kardon doctrine has been explicitly approved and adopted in holdings of courts of appeals in five circuits—Fischman v. Raytheon Mfg. Co., 188 F.2d 783 (2d Cir. 1951); Speed v. Transamerica Corp., 235 F.2d 369 (3d Cir. 1956); Hooper v. Mountain States Securities Corp., 282 F.2d 195 (5th Cir. 1960); Fratt v. Robinson, 203 F.2d 627, 37 A.L.R.2d 636 (9th Cir. 1953); Ellis v. Carter, 291 F.2d 270 (9th Cir. 1961); Crist v. United Underwriters, Ltd., 343 F.2d 902 (10th Cir. 1965); by dictum of the courts of appeals in two more circuits —Beury v. Beury, 222 F.2d 464, 465 (4th Cir. 1955); Brouk v. Managed Funds, Inc., 286 F.2d 901, 906-908, 913 (8th Cir. 1961); Boone v. Baugh, 308 F.2d 711, 713-714 (8th Cir. 1962); and applied in the district courts in still two more circuits—Northern Trust Co. v. Essaness Theatres Corp., 103 F.Supp. 954, 964 (N.D.Ill.1952); Texas Continental Life Ins. Co. v. Bankers Bond Co., 187 F.Supp. 14, 23 (W.D.Ky.1960)— including the Seventh Circuit where Judge La Buy, in the Northern Trust Co. case, stated,

"Without unduly lengthening this memorandum by consideration of the defendants' contentions, the court is of the opinion Section 10(b) authorizes the remedy here pursued."

The Kardon doctrine was impliedly approved by the United States Court of Appeals for the Seventh Circuit by its opinion in Kohler v. Kohler Co., 319 F.2d 634, 7 A.L.R.3d 486 (7th Cir. 1963). It appears that there have been no decisions rejecting that doctrine. 3 Loss, Securities Regulation 1763-1764 (2d ed. 1961).

Mindful of the fact that the issue of aider and abettor liability under the Securities Exchange Act of 1934 is here raised by a motion to dismiss and that the issue presents important questions in an expanding area of the law, and having due regard for the purposes and policies underlying the Act, it cannot be held necessarily to exclude persons who do no more than aid and abet a violation of Section 10(b) and Rule 10b-5.

In fact, the provisions of Section 10(b) and Rule 10b-5 were applied to aiders and abettors even before the first case recognizing civil liability under that statute and rule. The first case to deal with the applicability of Section 10(b) and Rule 10b-5 to aiders and abettors involved a suit by the SEC for an injunction against alleged principal violators and certain aiders and abettors. The complaint against the aiders and abettors was upheld on a motion to dismiss. The district court cited the criminal provisions making aiders and abettors responsible as principals and stated, "No good reason appears why this same rule should not apply in an injunctive proceeding to restrain a violation of the same statute." SEC v. Timetrust, Inc., 28 F.Supp. 34, 43 (N.D.Calif.1939). The court further observed that, "There is ample authority to support the validity of a suit to enjoin persons who are aiding and abetting the commission of unlawful acts."

The defendant inaccurately contends that the above-cited Timetrust case was reversed on its holding that aiders and abettors could be enjoined under Section 10(b). That decision was appealed, but the appeal was dismissed on stipulation. 118 F.2d 718 (9th Cir. 1941). The district court then heard evidence and enjoined all the defendants. The granting of the injunctions against the aiders and abettors was reversed because "there is no evidence that they participated in any way" in the unlawful activity. Timetrust v. SEC, 142 F.2d 744, 746 (9th Cir. 1944). The court of appeals gave no indication that the injunctions would not have been upheld had there been evidence of the alleged aiding and abetting.

In SEC v. Scott Taylor & Co., 183 F.Supp. 904 (S.D.N.Y.1959), another suit for an injunction, the court found that a defendant actively participated in a violation of an SEC rule promulgated under Section 10(b). However, the court added a footnote, by way of dictum, that "Wholly apart from Landau's participation in the illegal distribution, he aided and abetted the other defendants' violations * * * and is therefore liable as a principal."

In Fry v. Schumacker, 83 F.Supp. 476 (E.D.Pa.1947), the court upheld a complaint on a motion to dismiss when the complaint alleged a claim against brokers who had been employed by the principal violators to write a letter which was an essential part of a plan to defraud in violation of Section 10(b) and Rule 10b-5.

The case that is perhaps most nearly in point is Pettit v. American Stock Exchange, 217 F.Supp. 21 (S.D.N.Y.1963). This was an action for damages. The court denied motions to dismiss for failure to state a claim upon which relief could be granted and upheld that part of the complaint which, under Section 10(b) and Rule 10b-5, alleged that the defendant stock exchange and its officers aided, abetted, and assisted an illegal distribution of stock "by failing to take necessary disciplinary action" against some of its brokers who it knew or should have known were engaged in abusive conduct and practices. The complaint as upheld also included allegations that other defendants, including some banks, assisted, aided, and abetted by allowing the principal violators to open and maintain dummy accounts and by helping to conceal the true identity of traders in the plaintiff's stock. Judge Palmieri explicitly stated the basis for his holding:

"Since knowing assistance of or participation in a fraudulent scheme under Section 10(b) gives rise to liability equal to that of the perpetrators themselves, the facts alleged by the plaintiff trustees

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