Garner v. Pearson
| Citation | 374 F. Supp. 591 |
| Decision Date | 05 April 1974 |
| Docket Number | No. 72-416 Civ. T-K.,72-416 Civ. T-K. |
| Parties | Graham C. GARNER et al., Plaintiffs, v. Tazwell W. PEARSON et al., Defendants. |
| Court | U.S. District Court — Middle District of Florida |
COPYRIGHT MATERIAL OMITTED
The jurisdictional posture of this case is convoluted at best. Various motions to dismiss the second amended complaint came on for hearing on May 25, 1973. At that hearing, defendants questioned the complete diversity of parties in this action by contending that defendant Robert Bussey was in fact a stateless citizen of the United States. See Memorandum Opinion and Order of June 14, 1973. An evidentiary hearing on defendant Bussey's citizenship was held on September 6, 1973. After said hearing, at which plaintiffs presented evidence on Bussey's citizenship, a further hearing was scheduled for October 23, 1973, to allow further evidence.
On October 23, 1973, however, plaintiffs filed a motion for leave to amend their complaint by adding three additional counts against some of the defendants, including Robert Bussey. These proposed counts alleged violations of federal securities acts, specifically 15 U.S.C. § 78j(b), 17 C.F.R. § 240.10b-5 (hereinafter 10b-5). As the existence of these federal claims would render moot the citizenship of Robert Bussey under the prior diversity claims, the Court continued the hearing set for October 23, and directed the parties to submit memoranda on the legal sufficiency of the additional counts. Defendants filed memoranda contending that the proposed 10b-5 counts were legally insufficient and did not give the Court independent federal jurisdiction. Hearing was scheduled for December 20, 1973, at which time the Court heard oral argument on the 10b-5 counts.
The Court has considered the jurisdictional matters presented to it, and has concluded that the proposed counts do state a claim for relief under 10b-5, sufficient to withstand motions to dismiss, and that plaintiffs' motion for leave to amend should be granted. The Court has further concluded that the viable 10b-5 claims against some of the defendants give this Court jurisdiction over all of the claims presented in plaintiffs' complaint, and that the pending motions to dismiss should be denied.
This Court has in two prior extensive orders related the allegations of plaintiffs' complaint in some detail. It is not necessary to reiterate those allegations. It is necessary, however, to emphasize the fact that these matters are before the Court on motions to dismiss, and that the allegations must therefore be taken as true. Furthermore, the test which this Court must apply to the allegations is whether plaintiffs will be able to demonstrate any set of facts in support of their claim, entitling them to relief. Conley v. Gibson, 355 U.S. 41, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957).
Plaintiffs' proposed additional counts relate to defendants Bussey, Pearson, Baker, Cruz and Valdes, all former officers, directors, and principal shareholders in B-A Bank and its subsidiaries. In Count VIII, plaintiffs allege violations of 10b-5 by defendants Pearson, Bussey, and Baker. Plaintiffs, as liquidators, are suing on behalf of B-A Bank and its depositors and creditors. In support of their 10-B-5 claim plaintiffs allege: 1) That B-A Bank was an investment bank in which persons deposited sums of money under time deposit agreements or savings account agreements which provided fixed rates of interest to the depositors and in which more than 50% of the depositors are citizens of the United States; 2) That the defendants entered into fraudulent schemes with the purpose of appropriating the assets of B-A Bank to their own use and benefit; 3) That this was done by virtue of their control over B-A Bank and its subsidiaries; 4) That they caused the bank to enter into transactions with this fraudulent scheme in mind, and appropriated most of the assets of the bank to their own use, to the detriment of the depositors and creditors; and, 5) That the assets which they so appropriated were bank deposits, a shopping center located in Florida, and the ownership of the controlling stock in two Florida banks owned by a subsidiary of a subsidiary of B-A Bank.
Among the fraudulent transactions allegedly executed by the defendants for the purpose of appropriating assets were the following: 1) 100% ownership in B-A Bank was sold by Pearson, Bussey and Baker to Dr. Cruz, another defendant, through the fraudulent device of causing B-A Bank to loan Dr. Cruz the purchase price from the assets of the Bank in return for a promissory note and a pledge of worthless stock in a nonexistent airline. As a result of this transaction, defendants diverted $3.8 million in B-A Bank's assets to themselves. 2) Pearson, Bussey and Baker fraudulently attempted to divest B-A Bank of its ownership in Holdings, its principal subsidiary, and to appropriate its ownership to themselves or their assignees. 3) Pearson, Bussey and Baker caused B-A Bank to issue to Holdings a $3 million line of credit, knowing that Holdings was insolvent and unable to repay, thereby further diverting assets from B-A Bank to themselves. 4) Defendants sold to B-A Bank the common stock of Killarney Ltd. for $1.8 million. The sale was fraudulent because B-A Bank was the true owner of the stock and the $1.8 million purchase price was far in excess of the value of the stock. 5) Defendants caused Bancorp, the subsidiary of Holdings, to sell to themselves the stock in two Florida banks, American National and Citizens, which they then sold to defendants Bassett, Johnson, and Exchange, and converted the purchase money to themselves. By virtue of its ownership of Bancorp, B-A Bank was the true owner of the banks. This sale took place within the Middle District of Florida. 6) Within the Middle District defendants caused Holdings to sell its stock in Britton Plaza to B-A Bank for $2 million and appropriated these assets to themselves. 7) Defendants caused B-A Bank to make fraudulent loans, mortgages, and property transfers to themselves in their individual capacities, most of which transactions occurred in the Middle District.
Plaintiffs allege that the foregoing series of transactions constituted a "scheme to defraud" B-A Bank through the purchase and sale of securities in violation of Rule 10b-5, and took place partially within the Middle District and through the use of interstate commerce and the United States mails. Plaintiffs sue in Count VIII for over $10 million in damages.
Count IX is directed against defendant Frank Valdes, who allegedly prepared false and fraudulent financial statements concerning the financial condition of B-A Bank for the purpose of furthering the conspiracy to "plunder the assets of B-A Bank."
Count X is directed against defendant Dr. Frederico Cruz, who allegedly bought B-A Bank from the defendants Pearson, Bussey and Baker. Plaintiffs allege that after the license of B-A Bank had been suspended by the Bahamian government, Cruz continued to offer bank deposit agreements to the public, including a substantial number of depositors in the United States. Plaintiffs further allege that Cruz appropriated 2 million in these deposits for his own use, and that the conversion of the deposits constituted a violation of 10b-5. The offer and sale of bank deposits occured, among other places, within the Middle District. Plaintiffs seek damages, an accounting, and a constructive trust against Cruz.
The proposed additional counts allege violations of the federal securities laws, specifically, 10b-5. The statute provides.
Rule 10b-5, as a part of the overall plan of the securities laws of the United States, attempts to prevent inequitable and unfair practices on securities exchanges and over-the-counter markets, and insure fairness and honesty in securities transactions generally. S. E. C. v. Texas Gulf Sulpher Co., 401 F.2d 833, 847-848 (2 Cir. 1968). Congress wrote Section 10(b) "as a `catch-all' meant to reach practices employed in connection with the purchase or sale of securities which were contrary to the public interest or the interest of investors." Herpich v. Wallace, 430 F.2d 792, 801 (5 Cir. 1970). See Hearings on Stock Exchange Regulation Before the House Comm. on Interstate and Foreign Commerce, 73rd Cong., 2nd Sess. 115 (1934). The federal statute and regulation, therefore, are designed to encompass the infinite variety of devices that are alien to the "climate of fair dealing" that Congress sought to create and maintain. S. E. C. v. Capital Gains Research Bur., 375 U.S. 180, 201, 84 S.Ct. 275, 11...
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