Hudak v. Economic Research Analysts, Inc., 73-3742.

• Citation: 499 F.2d 996
• Decision Date: 26 August 1974
• Docket Number: No. 73-3742.,73-3742.
• Parties: Cyril M. HUDAK, Plaintiff-Appellee, v. ECONOMIC RESEARCH ANALYSTS, INC., and Richard W. McIntyre, Defendants-Appellants.
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

499 F.2d 996 (1974)

Cyril M. HUDAK, Plaintiff-Appellee, v. ECONOMIC RESEARCH ANALYSTS, INC., and Richard W. McIntyre, Defendants-Appellants.

No. 73-3742.

United States Court of Appeals, Fifth Circuit.

August 26, 1974.

COPYRIGHT MATERIAL OMITTED

Guy K. Stewart, Jr., Warren M. Salomon, Miami, Fla., for defendants-appellants.

Jeffrey A. Tew, Richard H. Critchlow, Miami, Fla., for plaintiff-appellee.

Before BELL, GOLDBERG and CLARK, Circuit Judges.

GOLDBERG, Circuit Judge:

Defendants Economic Research Analysts, Inc. ("ERA"), a registered broker/dealer, and Richard W. McIntyre, its president, bring this appeal from a judgment of the United States District Court for the Southern District of Florida holding them jointly and severally liable to plaintiff Hudak under sections 10(b) and 20(a) of the Securities Exchange Act of 1934¹ and the Florida common law of fraud for losses incurred by Hudak in the course of certain securities transactions.

The present litigation arises from the activities of one Richard F. Petersen who, from September 13, 1968 to July 11, 1969, was employed by ERA as a registered representative for the purpose of selling securities to the public. While ostensibly acting in that capacity, Petersen collected money from plaintiff on the basis of representations that he had made and assurances that he would continue to make prudent investments on Hudak's behalf. The district court found that virtually all of those statements were false, and that Petersen had solicited money for legitimate purchases, converted it to his own use, and then covered his defalcations by persuading Hudak to accept worthless securities, which he touted highly.

Defendants do not dispute either the accuracy of these findings or the fact that this pattern of deceptive practices is sufficient to make out a case against Petersen. They protest vigorously, however, that they are not accountable to plaintiff for the wrongs committed by their employee and that, even should such liability exist under either federal or state law, they are shielded from its impact by the applicable statutes of limitations. Finding defendants' attack partially successful, we reverse as to the individual defendant McIntyre, but affirm the judgment against ERA on the basis of the pendent state fraud claim.

THE FEDERAL CLAIM

Though defendants raise numerous objections to the imposition below of liability under federal securities law, we are met at the outset by the question of the proper limitations period to apply to any such federal claim. The analysis required of a court in determining the proper time measure for private actions brought under the federal securities provisions at issue here was recently sketched by Judge Clark in his opinion for this Court in Sargent v. Genesco, Inc., 5 Cir. 1974, 492 F.2d 750, 758.

The federal securities laws contain no limitation period that is expressly applicable to claims under section 10(b) and rule 10b-5, nor does federal law prescribe any general statute of limitations for civil actions. Consequently, the limitation period which the forum state applies to the state remedy which bears the closest substantive resemblance to rule 10b-5 and which best effectuates its purpose is to be applied. citations omitted.

Evidently relying on our observation in Azalea Meats, Inc. v. Muscat, 5 Cir. 1967, 386 F.2d 5, 8, that "the gravamen of an action brought under section 10(b) of the Securities Exchange Act of 1934 is fraud," the district court measured the timeliness of plaintiff's action against the three-year limitations period provided by § 95.11(5)(d) Florida Statutes for "an action for relief on the ground of fraud." Defendants contend, however, that § 517.301(1) of the Florida blue sky laws, which deals with fraudulent transactions in securities, more nearly embodies the policies behind section 10(b) and the related Rule 10b-5, and that the two-year limitations period applicable in suits brought to rescind sales conducted in violation of that statute² should therefore govern a 10b-5 action in Florida. We find this argument persuasive.

The anti-fraud provisions of the Florida securities statutes and Rule 10b-5, promulgated by the Securities and Exchange Commission as "necessary and appropriate" for the implementation of section 10(b) of the 1934 Act, address the problems of false and misleading communications involving the sale of securities with strikingly similar language. Indeed, as an examination of the texts set out in the margin indicates³, commentators have justifiably referred to § 517.301(1) of the Florida Statutes as "the mirror image of Rule 10b-5."⁴ This congruence between the state and federal schemes is not limited to a surface resemblance, but extends as well to judicial elaborations on the elements necessary to make out a case—requirements differing significantly from those applicable to the Florida common law of fraud.

The common law remedy imposes upon the plaintiff the burden of demonstrating, inter alia, "(1) a false statement of fact; (2) known by the defendant to be false at the time it was made; (3) made for the purpose of inducing the plaintiff to act in reliance thereon . . . ." Poliakoff v. National Emblem Insurance Company, 249 So.2d 477, 478 (Fla.App., 3rd Dist. 1971). In contrast, both this Circuit and, as the parties agree, the Florida state courts have relaxed such traditional notions of scienter and evil purpose in actions brought under their respective securities regulation provisions. See Smallwood v. Pearl Brewing Company, 5 Cir. 1974, 489 F.2d 579, 606; State v. Houghtaling, 181 So.2d 636 (Fla.Sup.Ct.1965). Though it would appear that Florida has not entirely abandoned the requirement of a showing of culpability, Sparks v. State, 256 So.2d 537 (Fla.App., 4th Dist.), nor yet embraced a pure negligence standard, the present hesitant growth of the Florida blue sky law accurately tracks the development of federal securities regulation in this Circuit. In our most recent statement on the scienter requirement in 10b-5 litigation, we observed that the law is presently in a state of considerable flux, and held it sufficient for the moment to note that "some culpability, beyond mere negligence, is required." Smallwood v. Pearl Brewing Company, supra, 489 F.2d at 606.

We concur in the reasoned judgments of the Seventh and Eighth Circuits which, when faced with the present choice between a forum state's fraud and blue sky limitations periods for use in federal securities litigation, found the similarity between the blue sky and 10b-5 scienter requirements crucial to their determination. Parrent v. Midwest Rug Mills, Inc., 7 Cir. 1972, 455 F.2d 123; Vanderboom v. Sexton, 8 Cir. 1970, 422 F.2d 1233. Given the similarity of § 517.301(1) and Rule 10b-5, in both language and interpretation, and the congruence between the specific remedy sought here—return of the purchase money—and the remedy of recission for which Florida securities law provides a two-year statute⁵, we hold that the district court erred in applying the three-year fraud period. The present action was filed on April 11, 1973. Since the district court found and plaintiff agrees that the discovery of the fraud dates from May of 1970, the federal cause of action is barred by the two-year limitations rule we announce today.⁶

THE STATE CLAIM

All the parties to this suit are residents of Florida. Hence the district court was empowered to hear a claim based on violation of the state common law of fraud only in the discretionary exercise of pendent jurisdiction. In light of its plausible, though erroneous, conclusion that the federal cause of action was not barred by the applicable statute of limitations, the court below was unquestionably justified in considering the issue of liability for fraud under Florida law. Plaintiff's complaint presented a federal question of "substance sufficient to confer subject matter jurisdiction on the court," and the "state and federal claims ... derived from a common nucleus of operative fact." United Mine Workers v. Gibbs, 1966, 383 U.S. 715, 725, 86 S.Ct. 1130, 1138, 16 L.Ed.2d 218. Article III requires no more; and, given the significant overlap of the evidence necessary to prove the respective contentions, all "considerations of judicial economy, convenience and fairness to litigants" argued in favor of the assumption of federal jurisdiction over the entire case. Id. at 726, 86 S.Ct. at 1139.

The question now occurs, however, as to whether, having determined that the federal claim ought to have been dismissed at the outset, we should proceed to review the holding on the pendent state claim or remand that count to the district court with directions to dismiss for want of jurisdiction. Confronting the identical question in Parrent v. Midwest Rug Mills, Inc., supra, the Seventh Circuit considered these alternatives and determined to review the pendent cause on its merits, noting that,

certainly judicial economy directs that we dispose of the issues here instead of sending the case back to the district court with directions to dismiss the state law counts and virtually sending the plaintiffs to the state court where it is likely that the case would go through the trial and appellate courts. The parties would be greatly inconvenienced by having to retry the issues. It also would be unfair to the parties, who have litigated the issues in a ... trial in the district court and filed briefs and argued here, to have us refrain from disposing of the state law counts after passing on the judgment with respect to the other counts, especially in view of the "federal judicial resources" already committed.

455 F.2d at 129. We find this reasoning persuasive; for, as the Parrent Court observed, the very factors which Gibbs lists as militating in favor of the exercise of pendent jurisdiction at the trial level—judicial economy, convenience, and fairness—support review of the entire case here.

Though...