Kramer v. Scientific Control Corp.

• Citation: 365 F. Supp. 780
• Decision Date: 27 November 1973
• Docket Number: Civ. A. No. 71-1954.
• Parties: Mitchell A. KRAMER and David C. Harrison v. SCIENTIFIC CONTROL CORP. et al.
• Court: United States District Courts. 3th Circuit. United States District Court (Eastern District of Pennsylvania)

365 F. Supp. 780

Mitchell A. KRAMER and David C. Harrison v. SCIENTIFIC CONTROL CORP. et al.

Civ. A. No. 71-1954.

United States District Court, E. D. Pennsylvania.

September 27, 1973.

As Amended November 27, 1973.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Robert M. Britton, Philadelphia, for plaintiffs.

Albert Momjian, Donald A. Scott, William H. Lowery, Philadelphia, for defendants.

OPINION AND ORDER

BECHTLE, District Judge.

Plaintiffs, two Philadelphia lawyers, allege in their complaint that on January 6, 1969, they purchased, as joint tenants, 50 shares of stock of Scientific Control Corp. ("Scientific"),¹ in the Eastern District of Pennsylvania, in reliance on a prospectus considered acceptable for filing and use by the Securities Exchange Commission ("SEC"), as well as upon financial reports and other data of Scientific regarding the corporation's financial condition, which deceived them of the true worth of the stock. They sold the stock one month later for a loss of approximately $400. Eighteen months and three days later, claiming to represent a class of more than 3,000 holders of Scientific stock purchased during the thirteen-month period between October 31, 1968 (the effective date of registration and original offering of the stock), and November 21, 1969, the day it filed a petition for an arrangement under Chapter XI, of the Bankruptcy Act,² they filed their complaint on August 9, 1971, for damages pursuant to certain sections of the Securities Act of 1933³ and the Securities Exchange Act of 1934,⁴ the rules and regulations thereunder,⁵ and commonlaw fraud principles against fourteen defendants.

Three months later, plaintiffs filed an amended complaint dropping nine defendants and adding fifteen others, making a total of twenty. The defendants are Scientific; H. L. Federman & Co.; Kleiner, Bell & Co., Inc., the principal underwriters of the issuance of 400,000 shares of Scientific common stock;⁶ Arthur Andersen & Co., the accountant for Scientific; and, sixteen individuals who acted as officers and/or directors of Scientific during the relevant time period specified in the complaint.

Fourteen of the defendants have filed motions to dismiss the complaint on various grounds or to quash service of process.

I. JURISDICTION OVER THE SUBJECT MATTER

Plaintiffs bring this action to enforce a liability created by the Federal securities anti-fraud acts,⁷ SEC Rule 10b-5 and common-law fraud principles. Their claim is a substantial one. This Court has jurisdiction over the subject matter of this action. See, e. g., Rosen v. Albern Color Research, Inc., 218 F. Supp. 473, 474-475 (E.D.Pa.1963). It also has pendent jurisdiction over the state common-law claim. United Mine Workers of America v. Gibbs, 383 U.S. 715, 725, 86 S.Ct. 1130, 16 L.Ed.2d 218 (1966); Puma v. Marriott, 294 F.Supp. 1116 (D.Del.1969); Emerson v. Falcon Manufacturing, Inc., 333 F.Supp. 888 (S.D.Texas, 1971); 8 A.L.R. Fed. 533-538.

II. VENUE

Regarding venue, § 22(a) of the 1933 Act provides: "Any such suit or action may be brought in the district wherein 1 the defendant is found or 2 is an inhabitant or 3 transacts business, or 4 in the district where the offer or sale took place, if the defendant participated therein." Section 27 of the 1934 Act states: ". . . Any suit or action to enforce any liability or duty created by this chapter or rules and regulations thereunder . . . may be brought . . . (1) in the district wherein any act or transaction constituting the violation occurred or 2 in the district wherein the defendant is found or 3 is an inhabitant or 4 transacts business, and process . . . may be served in any other district of which the defendant is an inhabitant . . ."

Defendants William C. Weatherford and Van Calvin Ellis contend they did not participate in the offer to sell or the sale itself for two reasons: (1) They were "outside" directors of Scientific and their only participation in the events was the signing of the Registration Statement and the prospectus; and, (2) plaintiffs purchased their stock in the "aftermarket" and not in the original offering. The meaning of the words "if the defendant participated therein" in § 22(a) of the 1933 Act should not be confused with defenses which a particular defendant may raise and prove at trial. For purposes of this section, a director who signs the Registration Statement participated in the offer or sale of the securities involved, even though the sale occurred after the original offering. See, Rosenberg v. Globe Aircraft Corporation, 80 F.Supp. 123, 125 (E.D.Pa.1948); Lester v. Preco Industries, Inc., 282 F.Supp. 459 (S.D.N. Y.1965).

There is a more liberal view, contra to that expressed in the Rosenberg case, supra, 80 F.Supp., at 125, that a defrauded buyer, in suing under § 10(b) of the 1934 Act and SEC Rule 10b-5, is free of the restrictions of the 1933 Act. See, e. g., Dauphin Corporation v. Redwall Corporation, 201 F.Supp. 466 (D.Del.1962). Under this view, the requirement of the venue provision of § 22(a) of the 1933 Act as to the district where the offer or sale took place, "if the defendant participated therein," need not be met. Inasmuch as the defendants objecting to venue are parties alleged to be, or who may be deemed, participants in the sale of stock, the more liberal view need not be followed here in deciding the venue question.

Paragraph 7 of the amended complaint alleges that, at all relevant times, defendant George Jaggers was a director of Scientific. In his brief, Jaggers states in support of his motion to dismiss that he is not a participant in the sale of stock because he did not become a director of Scientific until August 26, 1969, almost ten months after the date of the Registration Statement. The Court may not consider this item of information supplied by him in his brief, since it does not appear in affidavit form. Moreover, the complaint alleges a conspiracy among the defendants. This allegation is sufficient to meet the requirements of § 22(a) regarding Jaggers. A director need not be an active participant in the corporation's fraudulent practice in connection with the sale of securities. It is enough if he approved that practice. See, Sprayregen v. Livingston Oil Company, 295 F.Supp. 1376 (S.D.N.Y.1968).

With the exception of Jagger's motion, which will be denied at this time without prejudice, the motions to dismiss for lack of venue will be denied.

III. JURISDICTION OVER THE PERSON

Except for the firm of Arthur Andersen & Co., all of the defendants which could be located by a Deputy United States Marshal were "served" with process beyond the borders of Pennsylvania. A number of such individual defendants have moved to dismiss the complaint for lack of jurisdiction over the person. The bases for their motions include one or more of the following grounds: (1) He is not an inhabitant of this judicial district; (2) he has not purposefully availed himself of the privilege of conducting activities within Pennsylvania; (3) he has not been found in, nor has he submitted himself to, this district for purposes of service; (4) he has not had sufficient minimum contacts with this district and, consequently, the maintenance of the action against him here will offend traditional notions of fair play and substantial justice; (5) he was an "inactive" or "outside" director of Scientific and his only participation in the events was his signing the Registration Statement and prospectus; (6) he did not participate in the offer or sale of the stock complained of in this action; and, (7) the process is insufficient because the summons served upon him failed to conform to the requisites of Rule 4(b), Fed.R.Civ.P., in that it does not have the Seal of the Court impressed on it nor is it directed to him.

Both § 22(a) of the 1933 Act and § 27 of the 1934 Act provide that "process in such cases may be served in any other district of which the defendant is an inhabitant or wherever the defendant may be found."

Since none of the objecting defendants has asserted that he was neither an inhabitant nor found in the district in which he was eventually "served" with process, this Court does not lack jurisdiction over the person of any defendant on the basis of either grounds 1, 2, or 3.

As to ground 4, regarding the claim of insufficient minimum contacts with this district, it must be remembered that the United States is one jurisdictional area, even though it may be divided into 50 states and numerous judicial districts. Congress does not have to resort to the concept of a "long-arm" statute which brings into play considerations of "presence" or "minimum contacts" when the issue of eligibility to be served by state process is a question in a litigation. Rather, Congress has the power to provide for the reach of service of process to the outer limits of the reach of its legislative power which, of course, is anywhere in the United States or its territories. Mississippi Pub. Corp. v. Murphree, 326 U.S. 438, 442, 66 S.Ct. 242, 245, 90 L.Ed. 185 (1946). If suit under the Federal securities anti-fraud acts and rules thereunder is brought in a Federal court, the purchaser has the privilege of nationwide service of process. Wilko v. Swan, 346 U.S. 427, 431, 74 S.Ct. 182, 185, 98 L.Ed. 168 (1953). The issue here is not one of constitutional due process but one of compliance with the statute and the Federal Rules of Civil Procedure. Robinson, et al. v. Penn Central Co., et al, 484 F.2d 553 (3rd Cir. 1973); Gottlieb v. Sandia American Corporation, 452 F.2d 510, 513 (3rd Cir. 1971). The motions based on this ground will be denied.

Grounds 5 and 6 are a basis for objecting to venue and not service of process, and they have been disposed of under my ruling on the objections to venue.

Regarding ground 7, defendant Donald G. O'Neal, Scientific's vice-president of engineering, claims the process is...