Collins v. Rukin
| Decision Date | 24 May 1972 |
| Docket Number | Civ. A. No. 71-1903-J. |
| Citation | 342 F. Supp. 1282 |
| Parties | Francis R. COLLINS, Plaintiff, v. Michael B. RUKIN and Analytical Systems Corporation, Defendants. |
| Court | U.S. District Court — District of Massachusetts |
Barry Ravech, Boston, Mass., for plaintiff.
George J. Basbanes, Lowell, Mass., Peter J. Barack, Boston, Mass., for defendants.
This case is before the Court on defendants' motion to dismiss the complaint. Plaintiff, Francis R. Collins, invokes the jurisdiction of this Court under Section 22 of the Securities Act of 1933, 15 U.S.C. § 77v, and Section 27 of the Securities Exchange Act of 1934, 15 U.S.C. § 78aa. In addition to alleged violations of the federal securities laws, the complaint consists of four state law counts sounding in tort and contract, for which plaintiff invokes the discretionary pendent jurisdiction of this Court.1 The plaintiff's version of the facts, which must presently be accepted as true, is as follows:
Plaintiff, an electrical engineer, is a former employee and current stockholder of defendant Analytical Systems Corporation (hereinafter ASC), a domestic corporation with its principal place of business in Burlington, Massachusetts. ASC is engaged in the business of technical consultation and prepares studies for various governmental agencies and private business concerns. Through its subsidiary, Pedagogics, Inc., ASC develops, manufactures, and sells or franchises a product line useful in teaching various aspects of computer science. Defendant Michael B. Rukin is, and has been since incorporation, president, a director, and majority shareholder of ASC.
In 1969 plaintiff was employed by Magnavox Corporation in California. In August and September of that year, defendant Rukin, by mail and telephone, invited plaintiff to leave California and to join ASC in Massachusetts. Rukin offered plaintiff, in addition to a salary, certain so-called fringe benefits, one of which was an opportunity to purchase shares of stock of ASC.
In order to make the stock option attractive and to induce plaintiff to enter the employ of ASC, Rukin allegedly made certain false statements, failed to disclose certain material facts, and employed a scheme to defraud plaintiff in violation of Section 17 of the Securities Act of 1933, 15 U.S.C. § 77q, Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), Rule 10b-5 of the General Rules and Regulations of the Securities Exchange Commission, 17 C.F.R. § 240.10b-5, and the common law. The false statements, material non-disclosures, and scheme to defraud consisted of "representations which were calculated to make the plaintiff reasonably believe that Rukin and ASC had immediate and unimpeded access, in addition to the paid-in capital of ASC of approximately $100,000, to no less than $150,000 which money would be available `for the asking' and would be used to develop and market a product line for ASC." Complaint, ¶ VI. Plaintiff also alleges that Rukin represented as a fact that ASC was about to "go public"; that the imminent event rendered the value of the stock available under the option agreement, and the agreement itself, substantially greater than its then represented fair market value; and that many brokerage houses were ready to carry the public offering forward.
As a further inducement to join ASC, Rukin allegedly promised plaintiff that, if his performance were satisfactory, Rukin would offer plaintiff, in addition to the stock rights guaranteed by the stock option agreement, a significant increase in his equity position in ASC. Rukin subsequently tendered 25,000 shares of ASC which plaintiff accepted in satisfaction of Rukin's promise to enlarge plaintiff's stock ownership.
As a direct result of these and other misrepresentations by Rukin, plaintiff accepted the offer of employment with ASC, terminated his relationship with Magnavox Corporation in California, and moved to his present residence in Massachusetts on or about December 1, 1969.
The complaint further alleges that, shortly after plaintiff joined ASC, Rukin "prevailed upon the plaintiff to use his position of trust and friendship with his former colleague, Joseph W. Willhide, to convince Willhide to convey the assets of Pedagogics, Inc. to ASC." Complaint, ¶ X. Still believing in the truth of Rukin's representations, plaintiff urged Willhide to join with, and cause Pedagogics to become a part of, ASC. According to plaintiff, Rukin also represented to Willhide that ASC was solidly capitalized, that access was available to more than sufficient funds with which to properly develop and market a product line, and that the company's purported public offering was imminent. The acquisition was consummated, but, due to insufficient public and private funding, "the development of Willhide's product was severely inhibited and the marketing of it was almost totally interdicted." Ibid. Willhide, upon learning of the falsity of Rukin's representations, departed ASC.
Various claims of damage to plaintiff, other shareholders, and the corporation are made, and various forms of legal and equitable relief are requested, none of which is pertinent to the issues raised by defendants' motion to dismiss the complaint. The motion is based upon three separate grounds, viz., that the Court lacks jurisdiction over the subject matter of the complaint, that the complaint fails to state a claim upon which relief can be granted,2 and that the complaint fails to state with sufficient particularity the circumstances constituting fraud, deception, or other affirmative misrepresentation by defendant Rukin, as required by Fed.R.Civ.P. 9(b). The second ground consists of four alternative contentions, specifically, that the claim is barred by the statute of limitations, laches, waiver, or estoppel. The proffered bases of defendants' motion to dismiss the complaint are considered by the Court seriatim.
Defendants urge that the complaint be dismissed on the ground that the Court lacks jurisdiction of the subject matter because, on its face, the complaint states no violation of Section 17 of the Securities Act of 1933, Section 10 (b) of the Securities Exchange Act of 1934, or Rule 10b-5. Jurisdiction, therefore, would not be conferred upon this Court by Section 22 of the 1933 Act or by Section 27 of the 1934 Act.
The operative provisions of Section 17 of the 1933 Act and of Rule 10b-5, which implements Section 10(b) of the 1934 Act, are, for purposes of determining the sufficiency of the complaint, substantially identical.3 The facts that must be alleged to state a valid claim under Rule 10b-5 are set forth in the Rule itself:
Defendants concede that the complaint successfully alleges use of the jurisdictional means,4 and that plaintiff charges the defendant Rukin with certain material misrepresentations.5 Defendants rather contend that the complaint must be dismissed for failing to allege that such material misrepresentations were made "in connection with the purchase or sale of any security."
First, defendants argue that the stock option agreement is not subsumed by the statutory definition of the term "security" set forth in Section 3(a) (10) of the Securities Exchange Act of 1934, 15 U.S.C. § 78c(a) (10). Defendants concede that, on its face, the definition appears to embrace stock options granted employees by including any "warrant or right to subscribe to or purchase" any "note, stock, treasury stock, bond, debenture, certificate of interest or participation in any profit-sharing agreement . . . or in general, any instrument commonly known as a `security.'"6 Defendants further acknowledge that stock options have been considered by other courts to fall within the statutory definition. See, e. g., Globus, Inc. v. Jaroff, 271 F.Supp. 378, 380 (S.D.N.Y. 1967); S. E. C. v. Texas Gulf Sulphur Co., 258 F.Supp. 262, 290 (S.D.N.Y. 1966), aff'd 401 F.2d 833 (2 Cir. 1968). The point underscored by defendants, however, is that the definitions in the 1933 and 1934 Acts are statutorily qualified by the phrase "unless the context otherwise requires." The stock option agreement here in issue is personal, non-transferable, and hence non-negotiable. With quotations culled from the leading commentary of Professor Loss,7 defendants urge a flexible taxonomic approach, one which recognizes that the context has, at times, otherwise required. As an example, defendants note that the S.E.C. has not required registration of non-transferable options or warrants, saying that "ordinarily non-transferable warrants are in the nature of private contracts and their registration is not required." Securities Act Release No. 3210 (April 9, 1947).8
Similarly, argue defendants, the fraud provisions of the securities laws should not apply to a non-transferable stock option which is ...
To continue reading
Request your trial
-
Salgado v. Piedmont Capital Corp.
...period and the newly-enacted Blue Sky limitation period were both two years, such a discussion was unnecessary. See Collins v. Rukin, 342 F.Supp. 1282, 1292 (D.Mass., 1972). In the only District Court decision in the First Circuit where the issue was considered and discussed, the United Sta......
-
Daniel v. International Broth. of Teamsters, Chauffeurs, Warehousemen and Helpers of America
...having certificates evidencing their interest or the power to transfer their interests in the trust. See Collins v. Rukin, 342 F.Supp. 1282, 1286 (D.Mass.1972). Presumably, an investor who purchases a minority block of stock from a close corporation whose shares have restraints on their ali......
-
Enron Corp. v. Ubs Painewebber, Inc.
...examples Yoder, 751 F.2d at 560 ; Rudinger v. Insurance Data Processing, Inc., 778 F.Supp. 1334 (E.D. Pa. 1991) ; and Collins v. Rukin, 342 F.Supp. 1282 (D. Mass. 1972).21 Or 1980 SEC LEXIS 2141 at *15.22 The phrase "for value" in § 2(1) of the Securities Act of 1933 has been construed to i......
-
In re Cendant Corp. Securities Litigation
...that grant of options to purchase 50,000 shares in executive's employment agreement was a purchase of securities); Collins v. Rukin, 342 F.Supp. 1282, 1289 (D.Mass.1972) (finding that stock options were a "quid pro quo offered to induce plaintiff to enter into the employ of [the issuer]"). ......