Butterworth v. Integrated Resources Equity Corp.

• Decision Date: 02 March 1988
• Docket Number: Civ. A. No. 87-0426.
• Citation: 680 F. Supp. 784
• Parties: Thomas R. BUTTERWORTH, Jr., et al. Plaintiffs, v. INTEGRATED RESOURCES EQUITY CORP., et al. Defendants.
• Court: U.S. District Court — Eastern District of Virginia

680 F. Supp. 784

Thomas R. BUTTERWORTH, Jr., et al. Plaintiffs, v. INTEGRATED RESOURCES EQUITY CORP., et al. Defendants.

Civ. A. No. 87-0426.

United States District Court, E.D. Virginia, Richmond Division.

March 2, 1988.

Channing J. Martin, James J. Burns, Sarah Hopkins Finley, Williams, Mullen, Christian & Dobbins, Richmond, Va., for plaintiffs.

Andrew J. Ellis, Jr., Robert D. Seabolt, Mays & Valentine, Richmond, Va., Lionel E. Pashkoff, Lawrence Barcella, Laxalt, Washington, Perito and Dubuc, Washington, D.C., Thomas F. Eubank, Spinella, Owings & Shaia, P.C., Richmond, Va., for defendants.

MEMORANDUM OPINION

RICHARD L. WILLIAMS, District Judge.

This matter is before the Court on Integrated's motion for summary judgment pursuant to Rule 56(b), Fed.R.Civ.P. Integrated argues that the plaintiffs lack standing to pursue a cause of action under § 10(b) of the Securities Exchange Act of 1934 on four grounds: (1) the "in connection with" language of § 10(b) requires the actual purchase or sale of securities; (2) there was no contract to buy securities because the plaintiffs did not know they were contracting to buy securities; (3) even if they did know, the contracts lacked specificity; (4) and even if the plaintiffs did have valid contracts, Baxter's misrepresentations did not go to the nature and characteristics of the securities themselves, as required by the statute.

Separate and apart from these arguments, Integrated asserts that the West End Orthopedic Clinic Pension and Profit Sharing Plan (WEOC), represented here by trustees Butterworth and Mauck, must be dismissed as a plaintiff because Baxter was acting as its agent at the time of the alleged conversion of funds.

"In connection with" under § 10(b)

Integrated argues that the plaintiffs lack standing to sue under § 10(b) and Rule 10(b)-5 because no securities were actually purchased. It characterizes the plaintiffs' claims as sounding in conversion, not securities fraud. This argument relies heavily on a narrow interpretation of the language of § 10(b). The section provides in part:

It shall be unlawful for any person ... to use or employ, in connection with the purchase or sale of any security ... any manipulative or deceptive devise or contrivance in contravention of such rules and regulations as the Commission may prescribe.

15 U.S.C. § 78j(b) (emphasis added). "Purchase" is defined to "include any contract to buy, purchase or otherwise acquire." 15 U.S.C. § 78c(13). This provision suggests that one who contracts to buy securities is treated as a "purchaser" of securities, and is therefore entitled to the protection afforded by § 10(b). See also, Commerce Reporting Co. v. Puretec, Inc., 290 F.Supp. 715, 718 (S.D.N.Y.1968) ("The use of the words `in connection with' indicates that Congress intended to protect against fraud in agreements to buy or sell, as well as with respect to completed sales, provided damages could be shown.") Those who enter into a contract to buy securities are entitled to the same protection as those who actually buy securities.

The district court in Smith v. Chicago Corp., 566 F.Supp. 66 (N.D.Ill.1983) held, however, that § 10(b) should not be expansively read, and its remedies were available only to actual purchasers and sellers. The court dismissed the plaintiff's claims based upon facts nearly identical to the ones in the present case. In Smith, the defendant withdrew funds from the plaintiff's investment account and instead of investing the funds as directed, he converted them to his own use. The court based its holding on the Supreme Court's decisions in Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975) and Santa Fe Industries, Inc. v. Green, 430 U.S. 462, 97 S.Ct. 1292, 51 L.Ed.2d 480 (1977).

In Blue Chip Stamps, the Supreme Court denied relief under the Securities Exchange Act to three classes of potential plaintiffs: those who did not purchase securities because of an unduly gloomy representations; those who did not sell because of an unduly rosy representations; and those who suffered loss in their investment because of insiders' activities or corporate actions in violation of § 10(b). The Smith court inexplicably characterized the victims of a broker's conversion as investors in the first group—those who chose not to invest because of unduly gloomy representations. In making such a characterization, the Smith court misses a critical distinction between the three class of investors in Blue Chip Stamps and the plaintiffs in actions such as this. The three Blue Chip Stamps classes were passive actors. They took no actions which would serve to manifest their intention to purchase securities absent misrepresentations by the seller. Conversely, the plaintiffs here made affirmative acts. They wrote checks to Baxter, a clear manifestation of their intent to invest in securities.

The importance of this distinction is apparent when one examines the Supreme Court's concerns underlying their holding in Blue Chip Stamps. The Supreme Court noted two potential problems in securities litigation if the three classes of plaintiffs identified above were allowed standing. First, the Court feared vexatious litigation. Almost any individual would be able to state a claim and force the corporation to pay a settlement, go forward with a costly trial or cause delay in corporate activities. Second, the Court was concerned with problems of proof. The plaintiff's sole proof of fraud would be oral testimony about what he was told and his reasons for not investing.

These concerns are not warranted in the instant case. There is a tangible ticket to admission to the class of plaintiffs: a canceled check to Baxter. Although the plaintiffs' case relies on their testimony of what was said, their intent to enter into a contract for the purchase of securities is manifested by their canceled checks.

The decision in Smith also relies on the Supreme Court's holding in Santa Fe Industries. The concerns underlying the Santa Fe Industries opinion are inapplicable here as well. In that case, the Supreme Court noted that a private right of action under § 10(b) should be implied only in those instances that further the Act's primary purpose of full and fair disclosure of the nature of the security. The Court was reluctant to expand the parameter of § 10(b) to areas traditionally relegated to state law. Santa Fe Industries, 430 U.S. at 478, 97 S.Ct. at 1303. By allowing the plaintiff's claim to go forward, the Supreme Court would have disrupted Delaware's short-form merger statute and provided greater remedies to minority shareholders than those afforded under the state statute. Here, however, Virginia has not made an effort to limit the remedies available to individuals such as the plaintiffs. Allowing a federal securities action in the context of the instant case will not disrupt any state law.

Therefore, to the extent that other cases cited by Integrated rely on Smith, those cases are distinguishable. See John v. Blackstock, 664 F.Supp. 1426 (M.D.Fla. 1987); Baker v. Wheat First Securities, 643 F.Supp. 1420 (S.D.W.Va.1986); Bochicchio v. Smith Barney, Harris Upham & Co., 647 F.Supp. 1426 (S.D.N.Y.1986); Crummere v. Smith Barney, Harris Upham & Co., Inc., 624 F.Supp. 751 (S.D.N.Y. 1985); Bosio v. Norbay Securities, Inc., 599 F.Supp. 1563 (E.D.N.Y.1985).

Plaintiffs' contracts to purchase securities

Integrated contends that even if § 10(b) grants standing to those who merely contract to purchase securities, the plaintiffs do not have standing here because they did not contract to buy securities. Integrated contends that they contracted with Baxter for investments, not securities. In support of these arguments, Integrated selectively quotes from the depositions of each of the plaintiffs to demonstrate that the plaintiffs did not know what they were buying through Baxter.

Since this matter is before the Court on a motion for summary judgment, the Court need only determine if the plaintiffs have presented sufficient evidence to allow the factual dispute to go to the jury. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252, 106 S.Ct. 2505, 2511, 91 L.Ed.2d 202, 213 (1986).

There is no evidence in the Act that the purchaser must know and understand that the investment he is buying is a "security." It is sufficient that an investment be considered a security as a legal matter for the plaintiff to come within the protection of the Act. "In searching for the meaning and scope of the word `security' in the Act, form should be disregarded for substance and the emphasis should be on economic reality." Tcherepnin v. Knight, 389 U.S. 332, 336, 88 S.Ct. 548, 553, 19 L.Ed.2d 564 (1967). "Security" embodies a "flexible rather than a static principle, one that is capable of adaption to meet the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits." S.E.C. v. W.J. Howey Co., 328 U.S. 293, 299, 66 S.Ct. 1100, 1103, 90 L.Ed. 1244 (1946).

To fall within the protection of the Act, therefore, each plaintiff must have contracted to purchase securities. The Act does not require that the contract identify the security by name, but only that the terms of the contract be sufficiently specific to evidence a meeting of the minds by the parties. Each plaintiff's statement presents enough evidence to allow the question of whether there was a contract for the purchase of securities to be submitted to a jury.

Butterworth and Mauck, trustees for WEOC, gave Baxter checks for $150,000 and $60,000 in March 1985 to invest in "safe" stock options. In September 1985, they gave him checks for $200,000 and $50,000 to invest in high quality stocks. (Butterworth Aff. at 1-2; Pl. Ex. 2)

Chester Russell gave Baxter $100,000 to invest in an Integrated Cable Television limited partnership. (Dep. at 28-31, 75-77; Pl. Ex. 3) At the time Russell surrendered his check he formed a contract...