Heit v. Weitzen
| Decision Date | 03 October 1968 |
| Docket Number | 31157.,163,Docket 30410,No. 162,162 |
| Citation | 402 F.2d 909 |
| Parties | Charles HEIT, Plaintiff-Appellant, v. Edward H. WEITZEN, Walter V. Tyminski, Stanley R. Grant, Marvin J. Levy, Jack J. Fischer and Belock Instrument Corporation, Defendants-Appellees, and Jack Silverstein, Defendant. Betty VOLK, Plaintiff-Appellant, v. Edward H. WEITZEN, Walter V. Tyminski, Stanley R. Grant, Marvin J. Levy, Jack J. Fischer and Belock Instrument Corporation, Defendants-Appellees, and Jack Silverstein, Defendant. Helen HOWARD, Plaintiff-Appellant, v. Stanley R. GRANT, Walter V. Tyminski, Lybrand, Ross Bros. & Montgomery, a partnership, Carl M. Loeb, Rhoades & Co., a partnership, and Belock Instrument Corporation, Defendants-Appellees, and Lawrence J. Levine, Jack Silverstein, Edward H. Weitzen, John F. Donato, Jack J. Fischer, Charles Welthy & Harry Ahrens, as Executors of the Estate of Helen Neuschafer, deceased, Defendants. |
| Court | U.S. Court of Appeals — Second Circuit |
COPYRIGHT MATERIAL OMITTED
William E. Haudek, New York City (Pomerantz, Levy, Haudek & Block, Arthur W. Lichtenstein, New York City, for plaintiffs-appellants Charles Heit and Betty Volk; and Lawrence Milberg, New York City, for plaintiff-appellant Helen Howard, on the brief), for plaintiffs-appellants.
David R. Hyde, New York City (Cahill, Gordon, Sonnett, Reindel & Ohl, New York City, for defendants-appellees Stanley R. Grant and Carl M. Loeb, Rhoades & Co.; Carter, Ledyard & Milburn, New York City, for defendants-appellees Edward H. Weitzen and Jack J. Fischer; and Mendes & Mount, New York City, for defendant-appellee Lybrand, Ross Bros. & Montgomery, on the brief), for defendants-appellees Stanley R. Grant, Carl M. Loeb, Rhoades & Co., Edward H. Weitzen, Jack J. Fischer, and Lybrand, Ross Bros. & Montgomery.
Boris Kostelanetz, New York City (Kostelanetz & Ritholz, New York City on the brief), for defendant-appellee Belock Instrument Corp.
Joel M. Walker, New York City (Battle, Fowler, Stokes & Kheel, New York City, on the brief), for defendant-appellee Walter V. Tyminski.
Hyman Bravin, New York City, for defendant-appellee Marvin J. Levy.
Philip A. Loomis, Jr., Gen. Counsel, David Ferber, Sol., Donald M. Feuerstein, Sp. Counsel, and Janet G. Gamer, Atty., Securities and Exchange Commission, Washington, D. C., for Securities and Exchange Commission, amicus curiae.
Before MEDINA, MOORE and HAYS, Circuit Judges.
On this appeal from two judgments dismissing plaintiffs' complaints, we are presented with significant questions involving civil liability under Sections 10 (b) and 18(a) of the Securities Exchange Act of 1934. Because the principal questions involved on these appeals have been under consideration by the active judges of this Court sitting in banc we have deferred decision until after the filing of the opinions in SEC v. Texas Gulf Sulphur Co., Docket No. 30882, 401 F.2d 833, on August 13, 1968.
There are three separate actions before us now, Heit v. Weitzen, et al., and Volk v. Weitzen, et al., originally consolidated by the District Court, and Howard v. Grant, et al., consolidated on appeal by this Court with Heit and Volk. The various complaints involve essentially the same operative facts as they all are based on the fact that Belock Instrument Corporation allegedly failed to disclose that a substantial amount of its income for the fiscal year 1964 was derived from various overcharges on government contracts. Thus, the consolidated amended complaint in Heit and Volk alleges that Heit on June 18, 1965 purchased $5,000 principal face amount of Belock's 6% convertible subordinated debentures at a price of 90% of face amount in reliance on various "materially false, misleading and untrue statements of Belock's net assets and past and prospective income," contained in Belock's Annual Report, and press releases, as well as documents filed by the individual defendants with the SEC and the American Stock Exchange. Volk allegedly purchased 100 shares of Belock common stock on April 22, 1965 and another 100 shares on April 27, 1965 in reliance on these same false statements. Heit and Volk seek to represent both themselves and the entire class of persons who purchased either common stock or debentures between April 30, 1964 and June 21, 1965, and who have either sold or continue to hold these investments at a loss. It is further alleged that the dissemination by defendants of these false statements had the effect of artificially inflating the market price of Belock's common stock and debentures and that defendants had knowledge or notice of the falsity of the statements. In addition to Belock Corporation, the individual defendants served in Heit and Volk include Weitzen, Tyminski, Fischer, and Grant, all directors of Belock Corporation, and Levy who was a vice president of the corporation.
In the Howard complaint it is alleged that plaintiff Helen Howard purchased a 6% convertible subordinated Belock Corporation debenture on June 16, 1965 at an artificially inflated price. The price inflation was allegedly caused by the circulation and dissemination by the defendants "through press statements to the investment community * * * of statements as to the purported earnings and income of Belock Instrument and forecasts with respect thereto which in fact were gross overstatements." Howard seeks to represent the entire class composed of persons who purchased Belock stock or debentures in the open market and who were either misled by the published false material or by the artificially inflated market price. The defendants in Howard who were served include, in addition to Belock Corporation, Tyminski and Grant, Carl M. Loeb, Rhoades & Co., who is Belock's controlling shareholder, and Lybrand, Ross Bros. & Montgomery, Belock's auditors.
In Howard, Judge Cooper granted defendants' motion to dismiss for failure to state a claim upon which relief could be granted, primarily because the alleged fraud did not occur "in connection with the purchase or sale of any security" as required by Rule 10b-5. Howard v. Levine, 262 F.Supp. 643 (S.D.N.Y.1965). Judge Sugarman, relying in part on Judge Cooper's opinion, similarly dismissed the Section 10(b) claims in Heit and Volk for failure to satisfy the "in connection with" clause. Heit v. Weitzen, 260 F.Supp. 598 (S.D.N.Y.1966). Judge Sugarman also found that plaintiffs had failed to state a claim for relief under Section 18 of the 1934 Act since none of the reports upon which the claims were predicated were "filed" with the SEC as required by that Section. The motions to dismiss were granted without leave to replead. We also note that defendants in all the actions moved for summary judgment based on the fact that plaintiffs have suffered no damage since after the institution of these actions the price of both Belock's common stock and debentures has risen above the prices originally paid by plaintiffs. Neither of the judges below reached this question, nor do we.
Rule 10b-5, 17 C.F.R. Section 240.10 b-5, provides:
Each of the judges below referred to the fact that the basic fraudulent scheme alleged in the complaints was primarily directed toward the government "notwithstanding its possible incidental market impact." Thus, it was held that the concealment of the overcharges when the financial statements were released was for "the purpose of further defrauding the Government by not disclosing the original malfeasance and not for the purpose of perpetrating a `misrepresentation or fraudulent practice usually associated with the sale or purchase of securities.'" Heit v. Weitzen, 260 F. Supp. 598, 602 (S.D.N.Y.1966). Furthermore, as stated by Judge Cooper, since neither the corporate nor the individual defendants in the instant action were engaged in purchasing or selling Belock securities, he could see no basis for a finding that the alleged fraud occurred "in connection with the purchase or sale of any security."
However, we must now reassess the holdings below in light of the principles enunciated in SEC v. Texas Gulf Sulphur Co., Docket No. 30882, 401 F.2d 833, at 839 (2d Circuit in banc 1968). Judge Waterman writing for the Court in Texas Gulf Sulphur construed the "in connection with" requirement broadly and held that the clause was satisfied whenever a device was employed "of a sort that would cause reasonable investors to rely thereon, and, in connection therewith, so relying, cause them to purchase or sell a corporation's securities," SEC v. Texas Gulf Sulphur Co., at 860. There is no necessity for contemporaneous trading in securities by insiders or by the corporation itelf. "Rule 10b-5 is violated whenever assertions are made * * * in a manner reasonably calculated to influence the investing public, e. g., by means of the financial media * * *, if such assertions are false or misleading or are so incomplete as to mislead irrespective of whether the issuance of the release was motivated by corporate officials for ulterior purposes." SEC v. Texas Gulf Sulphur Co., at 861.
Applying this rule, and accepting at face value plaintiffs' well pleaded allegations, as we must on a motion to dismiss for failure to state a claim, we conclude that plaintiffs have met the requirements of the "in connection...
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