Buder v. Merrill Lynch, Pierce, Fenner & Smith

• Decision Date: 01 February 1980
• Docket Number: No. 77-643C(B).,77-643C(B).
• Citation: 486 F. Supp. 56
• Court: U.S. District Court — Eastern District of Missouri
• Parties: G. A. BUDER, III, et al., Plaintiffs, v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., et al., Defendants.

486 F. Supp. 56

G. A. BUDER, III, et al., Plaintiffs, v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., et al., Defendants.

No. 77-643C(B).

United States District Court, E. D. Missouri, E. D.

February 1, 1980.

Charles E. Valier, St. Louis, Mo., for plaintiffs.

John J. Cole, Thomas E. Wack, St. Louis, Mo., for defendants.

MEMORANDUM AND ORDER

REGAN, District Judge.

Before us is defendants' motion for summary judgment on the ground plaintiffs' claims are barred by limitations.

This suit is based in large part upon alleged violations of Section 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. Section 78j) and Rule 10b-5 promulgated thereunder. Other grounds of action relied on are alleged violations of Sections 12(2) and 17(a) of the Securities Act of 1933, and Section 15(c)(1) and (2) of the Securities Exchange Act of 1934.

Insofar as concerns claims based on Section 12(2) of the Securities Act, the Act provides (Section 13) that actions to enforce Section 12(2) liabilities must be brought not later than three years after the sale or one year after discovery of the fraud, whichever is shorter. The last sale of a security occurred more than three years prior to the institution of this action, so that Section 12(2) claims are clearly barred by limitations. So, too, claims based on Section 15(c)(1) and (2) of the 1934 Act are barred by virtue of the unambiguous provisions of Section 29(b) of that Act. Such claims must be brought within one year after discovery of the alleged violation but not later than three years after the violation. The last of the alleged violations occurred in December, 1973, more than three years before suit was brought in June, 1977.

With respect to the Section 17(a) claims, we question whether a private right of action may be implied therefrom. The Circuits are in disagreement. See Shull v. Dain, Kalman & Quail, Inc., 561 F.2d 152, 155 (8 Cir. 1977); Daniel v. International Brotherhood of Teamsters, etc., 561 F.2d 1223 (7 Cir. 1977), and Kirshner v. United States, 603 F.2d 234, 241 (2 Cir. 1978). Certiorari was denied in Shull and granted in Daniel. However, inasmuch as Daniel was decided on another point by the Supreme Court, it "express(ed) no views on this issue." 439 U.S. 551, page 557 footnote 9, 99 S.Ct. 790, page 795 footnote 9, 58 L.Ed.2d 808. In Kirshner, the Second Circuit reasoned that "there was little practical point in denying the existence of an action under § 17 once it is established that an aggrieved buyer has a private action under § 10(b) of the 1934 Act." We do not definitively rule this issue, for the reason that the limitation period would be that applicable to Section 10(b) claims. Our ruling, infra, on those claims is dispositive of the Section 17(a) claim.

The primary thrust of this section are the claims based on Section 10(b) of the 1934 Act (15 U.S.C. § 78j) and Rule 10b-5 thereunder. Where, as in Section 10(b), no federal limitations period is provided to determine the timeliness of an action on a federally created claim, the courts look to the appropriate state statute which best serves to effectuate the federal policy at issue. In conformity with this principle, the Court of Appeals for the Eighth Circuit definitively ruled, in Morris v. Stifel, Nicolaus & Co., 600 F.2d 139 (8 Cir. 1979), that the two year period of limitation in Section 409.411(e) of the Missouri Blue Sky Law, rather than the five year period for common law fraud in Missouri, governs Section 10(b) claims. The trial of the instant case was postponed several times awaiting the decision in Morris.

Section 409.411(e), RSMo. provides in unambiguous language and without exception that "no person may sue under this section more than two years after the contract of sale." Unlike the Missouri statute providing a limitation of five years for common law fraud claims, there is no tolling provision applicable to claims under the Missouri Blue Sky Law. Nevertheless, the Court of Appeals in Morris, citing its earlier decision in Vanderboom v. Sexton, 422 F.2d 1233, 1240 (8th Cir. 1970, clearly indicated that the limitations period runs "only from the date of discovery of the fraud or from the date the fraud should have been discovered." We are, of course, bound to follow these rulings.

The question for resolution, then, is whether there is a genuine issue of fact respecting the latest date at which the alleged fraud was or "should have been discovered."

Plaintiff, G. A. Buder, III, on his own behalf and on behalf of his then minor children, maintained several securities accounts with defendant Merrill Lynch, Pierce, Fenner & Smith (Merrill Lynch), allegedly relying on advice and counsel from defendant Ray Dusek, Jr. (Dusek), an account executive for Merrill Lynch. The complaint alleges that Dusek, by fraudulent and misleading representations and material omissions, induced Buder to sell (or pledge) high quality stock in his personal and custodial accounts and invest the proceeds in real estate investment trusts (REITs) and thereafter to continue to invest in REITs.

Buder, a college graduate, business man, and oil company executive, was an experienced, sophisticated investor. His present wife was, prior to their marriage in 1965, an account executive with another brokerage firm in Wichita Falls, Texas. Buder was one of her clients. As such, he bought and sold securities without seeking or obtaining her advice.¹ From time to time, over the years, Buder has subscribed to various investment advisory services, such as Barrons and the Wall Street Journal. He had in the past made various investment judgments on his own, including some of a speculative nature.

Essentially, the complaint charges that commencing in late 1971 (while Buder resided in Wichita Falls, Texas),² Dusek fraudulently and falsely represented that the REITs were sound securities with high yields and high growth possibilities and with little attendant risk. In his answers to interrogatories Buder stated that the representations were made prior to each individual purchase of REITs, the last such purchase being in December 1973, so that insofar as concerns federal securities fraud in connection with a purchase of securities, the instant suit was filed some three and a half years thereafter (June 13, 1977).

We have carefully read the voluminous (3 volume) deposition of Buder as well as his answers to interrogatories and have taken note of various documents which had been furnished to Buder during the critical period antedating the two years prior to June 13, 1977, and have no doubt whatever that sufficient information was made known to Buder during and prior to this critical period to have put him on notice of the actual, speculative nature of the REITs and their poor quality as investments, and so, of the falsity of the alleged representations.

In our judgment, testimony by Buder that he does "not recall" reading some of the reports sent to him, or that Dusek, in effect, told him not to pay attention to them (even though no dividends were being paid and the book and market values were substantially down) does not operate to create a jury issue as to when the alleged fraud upon reasonable inquiry should have been discovered.³ Buder may not deliberately close his eyes to the information...