Clegg v. Conk

• Decision Date: 05 December 1974
• Citation: 507 F.2d 1351
• Parties: Fed. Sec. L. Rep. P 94,897 Will L. CLEGG et al., Plaintiffs-Appellees, v. Leo H. CONK, Defendant-Appellant. No 74-1059
• Court: U.S. Court of Appeals — Tenth Circuit

Page 1351

507 F.2d 1351

Fed. Sec. L. Rep. P 94,897

Will L. CLEGG et al., Plaintiffs-Appellees, v. Leo H. CONK, Defendant-Appellant.

No 74-1059

United States Court of Appeals, Tenth Circuit.

Argued Sept. 11, 1974.

Decided Dec. 5, 1974.

Byron L. Stubbs, Salt Lake City, Utah, for defendant-appellant.

Lowell N. Hawkes, Salt Lake City, Utah (Harold G. Christensen of Worsley, Snow & Christensen, Salt Lake City, Utah, with him on the brief), for plaintiffs-appellees.

Before LEWIS, Chief Judge, HOLLOWAY, Circuit Judge, and CHRISTENSEN, Senior District Judge. ^*

CHRISTENSEN, Senior District Judge.

This appeal from judgment on the verdict in a securities case raises questions concerning the applicable statute of limitations and the elements of scienter and reliance in so-called 10b-5 actions.

Plaintiffs' complaint was 'based upon violation of laws of the United States and the State of Utah including the proscriptions of Section 17(a) of the Securities Act of 1933 (15 U.S.C. Sec. 77q), Section 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. Sec. 78j), Rule 10b-5 promulgated pursuant thereto by the United States Securities and Exchange Commission (17 C.F.R. Sec. 240 10b-5) . . . and the Utah Uniform Securities Act (Utah Code Ann. 61-1-1 et seq. (1953)).'

There is little point in reciting the other allegations set out in plaintiffs' pleadings since they were generally denied by the appellant Conk and the partial transcript of the evidence before us is insufficient to determine with precision any particular allegations that were supported by substantial evidence on the whole record. But from the partial transcript of the testimony of one of the plaintiffs, the exhibits before us, and record statements of counsel during the trial indicating agreement as to certain circumstances, at least these structural facts emerge in view of inferences that may be drawn favorably to the verdict: ¹

Defendant-appellant Conk in August, 1968, was granted a distributorship for car wash units by Hanna Enterprises, a nonincorporated out-of-state business. ² In the late fall of that year Conk contacted john E. Olson, one of the plaintiff-appellees, and later there was a meeting, or meetings among appellant and appellees as part of a larger group of prospective investors, when an investment proposal was explained by Conk and his associate, Stewart, now deceased. Conk made untrue statements or omitted to state facts necessary to render what he said not misleading, and these statements and omissions were material to the investment judgment of the appellees who relied upon them in making investments in the car washing business being thereby promoted by appellant, to their several damages in the amounts found by the jury. ³

Appellant Conk's answer did not plead the statute of limitations nor any other affirmative defense. It was agreed, however, at the final pre-trial conference, that limitations would be one of the issues to be tried. For some reason the pre-trial order included in the record does not so provide, but the transcript of discussions before the trial judge assumes such an agreement and understanding, as do we. The pre-trial order as filed recites that 'there are no contested issues of law' and that 'there are no uncontroverted facts in addition to those established by the pleadings and discovery.'

Far from this being so as to the law however, substantial trial time was consumed by arguments between the parties, which have to a degree been projected here, whether the issue of the statute of limitations had been waived, whether a motion to dismiss on the ground that the claims were barred was timely, whether the statute in the absence of pleading could be considered at all, whether the defendant had been guilty of sharp practice by delaying the pressing of that defense until the opening of the trial, whether on the assumption that a two-year state statute was applicable plaintiffs could successfully claim that they did not discover the alleged fraud until within two years of the commencement of their action in view of allegations in their complaints that they had discovered the fraud one month earlier, and whether the discovery of some elements of fraud that early was effective to start the running of the statute if the greater part of its circumstances and seriousness was not discovered until afterwards.

These problems may be shortly disposed of for the purposes of this case by our rejecting, as did the trial court ultimately, appellant's basic contention that since plaintiffs had claimed under both the 1933 and the 1934 Acts, and also had asserted a claim in reliance upon the Utah Blue Sky Law, ⁴ one of the shorter limitation periods should apply, rather than the three-year period provided by state statutes for fraud cases which this court his repeatedly held applicable to implied rights of action under the Securities Exchange Act of 1934. ⁵

The only serious problem in this case arises from appellant's contention that the trial court erroneously eliminated from plaintiffs' 10b-5 action any requirements for scienter and reliance, and submitted the case to the jury on the basis of a restrictive view of the elements referred to in Stevens v. Vowell, 343 F.2d 374 (10th Cir. 1965). ⁶

The question of whether some species of scienter should have been recognized in the instructions as an element of appellant's 10b-5 action was squarely presented to the trial court in pre-submission conferences. ⁷ The trial court indicated that it might give a modified negligence instruction in this area, and indeed did so as to the other defendant Hanna which was claimed to have been involved through publications furnished to the appellant Conk. But as to the latter, apparently its reading of Stevens v. Vowell, 343 F.2d 374 (10th Cir. 1965), supra, led it to apply rather literally the language that in a 10b-5 action 'it is only necessary to prove one of the prohibited actions such as the material misstatement of fact or the omission to state a material fact', with the result that the subject of scienter was ignored ⁸ except as it might be gathered from the language of Rule 10b-5 itself. It is to be noted, however, that the element of 'reliance' was covered beyond the otherwise restrictive interpretation of the language of Stevens and in harmony with Affiliated Ute Citizens v. United States, 406 U.S. 128, 92 S.Ct. 1456, 31 L.Ed.2d 741 (1972).

Other courts have interpreted the language of Stevens as meaning that there is no requirement of scienter in this circuit more burdensome than a showing of negligence. ⁹ This court has rejected such an interpretation expressly, ¹⁰ which rejection undoubtedly survives any contrary inference that might be drawn from dicta in our latest opinion. ¹¹

The emphasis in Stevens v. Vowell of the necessity of a flexible interpretation of the security laws to cover all conduct, schemes and contrivances within its scope independently of the rigid requirements of common law fraud has been often quoted. We reaffirm that essential principle as it constitutes the hallmark, genius and strength of modern securities legislation. Yet the facts and setting of Stevens v. Vowell do not permit the extrapolation of the view for which it sometimes is cited. The case involved an attack by appellant upon the jurisdiction of the trial court 'for the reason that the evidence wholly fails to establish any of the elements required to make out a case under 15 U.S.C.A. 78j and Rule X-10B-5.' It is rather clear from the opinion that the defendant knowingly made untrue statements and omissions of material facts which by their very nature and context were misleading. ¹² There are two quotations which frequently have been applied out of context to indicate that this circuit in 10b-5 cases recognizes neither any species of scienter nor reliance as essential elements. We have already quoted one. The other is as follows:

'It will be observed that neither the statute nor the rule requires that the manipulative or deceptive device or contrivance be a part of or actually transmitted in the mails or instrumentality of interstate commerce. All that is required is that such a device or contrivance be used or employed in connection with the use of the instruments of interstate commerce or the mails.'

This court concluded 'that there is abundant evidence to establish each and every element required under the statute and rule. The trial court therefore had jurisdiction over the subject matter.'

The same year Judge Doyle, author of Trussell v. United Underwriters, Ltd., 228 F.Supp. 757 (D.Colo.1964), still the leading district court case on the subject, had before him again in Parker v. Baltimore Paint And Chemical Corp., 244 F.Supp. 267 (D.Colo.1965), the question of whether scienter and reliance were essential elements. It was stated:

'We concluded in Trussell that these elements are essential in a 10b-5 case. Our reasons are extensively articulated in that decision, and although the case at bar involves an allegedly defrauded seller rather than a purchaser, the rule applies nevertheless. Plaintiff argues that the decision of this Circuit in Stevens v. Vowell (10 Cir. 1965) 343 F.2d 374, dispenses with the mentioned requirements. However, Stevens does not specifically consider the question and the dicta which is the source of the plaintiff's contention does not in our opinion require adoption of a ruling which is contrary to that expressed in Trussell.'

In Gilbert v. Nixon, 429 F.2d 348 (10th Cir. 1970), supra, this court agreed with the district court that the fractional interests in suit were securities within the meanings of 15 U.S.C. 77b(1) of the 1933 Act, and 15 U.S.C. 78c(a) (10) of the 1934 Act, and K.S.A. 17-1252(j). The appellants in their brief had considered liability under Rule 10b-5 to be most appropriate but they also pursued remedies under, and the trial court appeared to have based its decision upon, claimed violations...