Dorfman v. First Boston Corporation

• Decision Date: 13 January 1972
• Docket Number: Civ. A. No. 70-1845,71-269.
• Citation: 336 F. Supp. 1089
• Parties: Minnie DORFMAN v. FIRST BOSTON CORPORATION et al. JUSTER, INC. v. FIRST BOSTON CORPORATION et al.
• Court: U.S. District Court — Eastern District of Pennsylvania

336 F. Supp. 1089

Minnie DORFMAN v. FIRST BOSTON CORPORATION et al.

JUSTER, INC. v. FIRST BOSTON CORPORATION et al.

Civ. A. Nos. 70-1845, 71-269.

United States District Court, E. D. Pennsylvania.

January 13, 1972.

Mitchell A. Kramer, Philadelphia, Pa., for plaintiff Minnie Dorfman.

Herbert I. Deutsch, New York City, for plaintiff Juster, Inc.

Michael A. Cooper, Sullivan & Cromwell, New York City, for defendant First Boston Corporation.

Raymond K. Denworth, Drinker, Biddle & Reath, Philadelphia, Pa., for defendants Otto N. Frenzel, Edward J. Hanley, Franklin J. Lunding, Thomas L. Perkins and Daniel E. Taylor.

Peter Gruenberger, Weil, Gotshal & Manges, New York City, for defendant Glore Staats Corporation.

Tom P. Monteverde, Pelino, Wasserstrom, Chucas & Monteverde, Philadelphia, Pa., for Pennsylvania Co. and W. W. Riley.

James M. Marx, Holtzmann, Wise & Shepard, New York City, for defendant Robert S. Odell.

OPINION

JOSEPH S. LORD, III, Chief Judge.

Plaintiffs Minnie Dorfman ("Dorfman") and Juster, Inc. ("Juster") have instituted this action to recover damages resulting from their purchase of Pennsylvania Company ("Pennco") bonds in reliance on an allegedly false and misleading offering circular issued by the defendants in connection with the sale. Plaintiffs bring this action on their own behalf and on behalf of all those similarly situated pursuant to F.R.Civ.P. 23. Plaintiffs assert claims under §§ 12(2), 15 and 17(a) of the Securities Act of 1933 ("Securities Act"); §§ 9(a) (4), 10(b) and 18 of the Securities and Exchange Act of 1934 ("Exchange Act"); and §§ 8, 20a and 20b of the Interstate Commerce Act.

The corporate and firm defendants are Penn Central Transportation Co. ("Transportation Co."), a corporation engaged in the business of railroads; Pennco, a wholly owned subsidiary of Transportation Co. which operates as an investment company and which issued the bonds involved in this action; First Boston Corporation ("First Boston") and Glore Staats Corporation ("Glore"),¹ corporations engaged in the sale and underwriting of investment securities which were the principal and managing underwriters of the Pennco bonds; and Peat, Marwick, Mitchell and Company ("PMM"), a partnership of public accountants who acted as auditors and public accountants for Transportation Co. and Pennco. At all times relevant to this action, the individual defendants were officers and/or directors of Pennco and/or Transportation Co.

A number of defendants² ("moving defendants") have moved to dismiss plaintiffs' complaint for failure to state a claim on which relief can be granted, F.R.Civ.P. 12(b) (6), insofar as it asserts claims under §§ 12(2), 15 and 17 (a) of the Securities Act, §§ 9(a) (4) and 18 of the Exchange Act and §§ 8, 20a and 20b of the Interstate Commerce Act. Defendants' motion is not directed at claims asserted under § 10(b) of the Exchange Act.

I. Securities Act

A. Sections 12(2) and 15

Defendants contend that the complaint fails to state a claim under § 12(2)³ of the Securities Act because § 12(2) creates civil liability only on the part of the seller of a security to the "person purchasing such security from him," and there is no allegation that either plaintiff purchased securities from any of the moving defendants. Defendants recognize that the privity requirement is relaxed when a defendant comes within one of the "control" relationships specified by § 15 of the Securities Act or when a defendant acts through an agent, but defendants assert that neither exception is alleged in plaintiffs' complaint. Jackson Tool & Die, Inc. v. Smith, 339 F.2d 88 (C.A.5, 1964); Winter v. D. J. & M. Investment and Construction Corp., 185 F.Supp. 943, 946 (S.D.Cal.1960); see also III L. Loss, Securities Regulation 1719-1720 (2d ed. 1961).

Plaintiffs argue that a number of cases have relaxed the privity requirement and the need to specify the seller of a security in the complaint particularly when a conspiracy is alleged as in the present complaint. Buchholtz v. Renard, 188 F.Supp. 888 (S.D.N.Y.1960); Bailey v. Huntington Securities Co., 35 F.R.D. 169 (S.D.N.Y.1963); Lennerth v. Mendenhall, 234 F.Supp. 59 (N.D.Ohio, 1964).⁴ Plaintiffs' reliance on these cases is misplaced.

Buchholtz v. Renard, supra, held that when a seller (principal) sells through a broker who acts as his agent, both the agent and the principal can be held liable under § 12, see Cady v. Murphy, 113 F. 2d 988 (C.A.1, 1940), cert. denied 311 U.S. 705, 61 S.Ct. 175, 85 L.Ed. 458 (1940), and the plaintiff's complaint need not identify the particular seller from whom the plaintiff purchased his securities where the principal has affirmatively concealed his identity from the plaintiff. The plaintiffs here have not alleged that the immediate sellers were agents for any of the moving defendants and in fact the offering circular attached to the plaintiffs' complaint indicates that the securities were purchased from Pennco by the underwriters rather than sold by the underwriters as agents of Pennco. Appendix A, pp. 55-57 (referred to in paragraph 29 of Plaintiffs' Consolidated Complaint).

Bailey v. Huntington Securities Co., supra, held that specification of particular defendants from whom each plaintiff purchased securities was not required when the complaint alleged a conspiracy among persons in control of the direct seller who allegedly violated the Securities Act. Although the complaint in this action charges a conspiracy among the defendants, there is no allegation that any of the defendants controlled the direct seller from whom the plaintiffs purchased or that the direct seller violated the Securities Act.

Lennerth v. Mendenhall, supra, held that an agent who takes an active part in negotiating a sale for the direct seller but who does not actually sign the contract of sale can nevertheless be held liable with the direct seller under § 12. The complaint in the present case, however, fails to allege that any moving defendant played any role in bringing about plaintiffs' purchases much less the kind of active solicitation involved in Lennerth.

The privity requirement of § 12 (2) must be read in connection with § 15⁵ of the Securities Act which provides that if an individual controls a person who is liable under § 12, he can be held liable jointly with the controlled person. To establish a § 15 claim, plaintiff must establish that the direct seller is liable under § 12 and that a control relationship existed between the direct seller and the defendant. Winter v. D. J. & M. Investment and Construction Corp., supra, 185 F.Supp. at 946-947. The plaintiffs' complaint does not allege that the direct seller sold securities to the plaintiffs in violation of § 12(2) nor does the complaint allege that the named defendants controlled the direct seller. Even accepting plaintiffs' position that § 15 should be liberally construed, there is in the complaint no allegation of control for us to construe.

We therefore dismiss the plaintiffs' complaint insofar as it purports to assert claims under §§ 12(2) and 15 of the Securities Act.

B. Section 17(a)

Defendants argue that plaintiffs have failed to state a claim for relief under § 17(a)⁶ of the Securities Act because § 17(a) does not afford a private right of action. Although some courts have implied a private right of action from § 17 (a), Dack v. Shanman, 227 F.Supp. 26 (S.D.N.Y.1964); Pfeffer v. Cressaty, 223 F.Supp. 756 (S.D.N.Y.1963); Thiele v. Shields, 131 F.Supp. 416 (S.D.N.Y. 1955); Fischman v. Raytheon Mfg. Co., 188 F.2d 783, 787, n. 2 (dictum) (C.A.2, 1951), the Second Circuit has recently questioned this practice and considers the issue an open one. SEC v. Texas Gulf Sulphur, 401 F.2d 833, 864-869 (Friendly, J. concurring) (C.A.2, 1968); Donlon Industries, Inc. v. Forte, 402 F.2d 935, 936 n. 2 (C.A.2, 1968); Globus v. Law Research Service, Inc., 418 F.2d 1276 (C.A.2, 1969), cert. denied 397 U.S. 913, 90 S.Ct. 913, 25 L.Ed.2d 93 (1970); Pinto v. Maremont Corp., 326 F.Supp. 165 (S.D.N.Y.1971).

The major argument against the existence of a private right of action under § 17(a) is that such an action would circumvent the express limitations placed on civil remedies by the specific civil liability sections of the Securities Act (§§ 11 and 12, 15 U.S.C. §§ 77k and 77l).⁷ The specific requirements of § 12 include limitations on who may sue and be sued, the imposition on the defendants of the burden of proof that they reasonably believed their statements to have been true, the discretion in the court to require a bond of plaintiffs this provision is contained in § 11(e) but also applies to § 12, and the one year statute of limitations (§ 13, 15 U.S.C. § 77m). In addition, the legislative history of the Securities Act and statements of commentators and draftsmen indicate that § 17(a) was intended to be enforced only by injunctive or criminal action. H.R.Rep.No.85, 73rd Cong., 1st Sess. (1933), pp. 9-10; Landis, Liability Sections of the Securities Act, 18 Am.Accountant 330, 331 (1933); Douglas and Bates, The Federal Securities Act of 1933, 43 Yale L.J. 171, 181-182 (1933).

In 1942, the Securities and Exchange Commission (SEC) adopted the language of § 17(a) in drafting Rule 10b-5⁸ which was promulgated under the authority of § 10(b) of the 1934 Exchange Act, and the courts have consistently implied a private right of action under § 10(b) and Rule 10b-5. Superintendent of Insurance of State of New York v. Bankers Life & Casualty Co., 404 U.S. 6, 92 S.Ct. 165, 30 L.Ed. 128 (1971); Fischman v. Raytheon Mfg. Co., supra; McClure v. Borne Chemical Co., Inc., 292 F.2d 824 (C.A.3, 1961), cert. denied, 368 U.S. 939, 82 S.Ct. 382, 7 L.Ed.2d 339; see cases cited in VI Loss, Securities Regulation (2d Ed.Suppl.1969) pp. 3871-3872. However, the contrast between the provisions of the 1933 and the 1934 acts has been stressed by commentators as supporting the conclusion that a private right of action should not be...