Kreis v. Mates Investment Fund, Inc.

• Decision Date: 10 December 1971
• Docket Number: No. 70 C 67(4).,70 C 67(4).
• Citation: 335 F. Supp. 1299
• Parties: Fred P. KREIS, Jr., Plaintiff, v. MATES INVESTMENT FUND, INC., a Corporation, and Frederick S. Mates, Defendants.
• Court: U.S. District Court — Eastern District of Missouri

335 F. Supp. 1299

Fred P. KREIS, Jr., Plaintiff, v. MATES INVESTMENT FUND, INC., a Corporation, and Frederick S. Mates, Defendants.

No. 70 C 67(4).

United States District Court, E. D. Missouri, E. D.

December 10, 1971.

Lashly, Caruthers, Rava, Hyndman & Rutherford, St. Louis, Mo., for plaintiff.

D. Jeff Lance, Cook, Murphy, Lance & Mayer, St. Louis, Mo., for defendants.

MEMORANDUM

WANGELIN, District Judge.

Plaintiff instituted this action to rescind the sale to him of shares of defendant Mates Investment Fund, Inc. (hereinafter referred to as "Fund") on the grounds that the Fund had not complied with the registration provision of the Missouri Uniform Securities Act, Chapter 409 RSMo 1969, (hereinafter referred to as the "Act"). The cause is submitted for a determination of the merits upon a Stipulation of Facts and briefs.

Plaintiff is a citizen of Missouri. The Fund is a Delaware corporation with its principal place of business in New York. Frederic S. Mates is the president, a director, and the controlling officer of the Fund, and the sole shareholder of Mates Management Company, Inc. This Court has jurisdiction under 28 U.S.C. § 1332 and venue under 28 U.S.C. § 1391.

The Fund is an "open end" investment company registered under the Investment Company Act of 1940, and engaged in the business of operating an investment fund and selling shares to the public. The Fund is duly registered in the Office of the Attorney General of the State of New York and the Fund, at all relevant times, was entitled under New York laws to accept offers for the purchase of its shares in New York.

The Fund filed a Uniform Consent to Service of Process dated June 10, 1968, with the Office of the Secretary of State of Missouri, and plaintiff has complied with the Missouri Securities Act with regard to service of process.

Shares of defendant Fund are not registered and have never been registered pursuant to the Missouri Securities Act.

The plaintiff first learned of the existence of the Fund from an article published in Barron's National Business and Financial Weekly, in the issue dated June 3, 1968.

Barron's National Business and Financial Weekly was, on June 3, 1968, published and printed entirely without the State of Missouri. On June 3, 1968, and for twelve (12) months prior thereto its circulation in Missouri was less than one-third ( 1/3 ) of its total circulation. (See, Section 409.415(e) RSMo 1969).

Armon Glenn, the writer of the article had no stock interest in the Fund or in any affiliate of defendant, Frederic S. Mates before, at the time of, or subsequent to the publication of said article. No fees, salaries, wages or commissions have ever been paid by either defendant or any affiliate of either defendant, to Armon Glenn. Armon Glenn was not an agent, of any type, for the Fund or defendant Frederic S. Mates at any time relevant herein.

Plaintiff's purchase of Fund shares was initiated as follows: plaintiff wrote a letter addressed to the Fund, which letter in substance referred to an enclosed personal check of plaintiff for Twenty Thousand Dollars ($20,000.00) and requested the Fund to sell to plaintiff the number of shares purchasable for Twenty Thousand Dollars ($20,000.00). Such letter was dated and deposited in the mail in the State of Missouri on or about June 4, 1968. Plaintiff obtained the address of the Fund from the article in Barron's.

The Fund received the offer of plaintiff to purchase Fund shares on June 5, 1968, in its office in New York, at 10:15 A.M. The defendants cashed plaintiff's check and after price adjustments retained Nineteen Thousand Five Hundred Forty One Dollars and Two Cents ($19,541.02) and issued two thousand one hundred seventy eight (2,178) shares.

On June 6, 1968, the Fund posted the sale to plaintiff on its books. On or after June 7, 1968, the Fund physically delivered plaintiff's check to the custodian, Bank of New York, and on or after June 7, 1968, deposited in the mail confirmation #10256, addressed to the plaintiff. Computation of the Fund's net asset value on June 6, 1968, included an entry reflecting the plaintiff's purchase of Fund shares.

Before mailing the letter to the Fund offering to purchase Fund shares, plaintiff did not in any manner communicate with any person representing the Fund, and did not receive any communication of any kind from anyone representing or employed by the Fund. Plaintiff did not receive a prospectus of the Fund prior to mailing the letter of June 4, 1968, to the Fund, but did receive a prospectus prior to the delivery of the 2,178 shares.

Plaintiff, prior to his letter to the Fund requesting rescission (described below) received no written communication from the Fund directed to him personally (as opposed to printed reports sent to shareholders generally) except for:

(i) a confirmation, numbered #10256, reflecting the sale to plaintiff of two thousand one hundred seventy eight (2,178) shares.

(ii) a form letter from the Fund, declining plaintiff's request to purchase additional shares of the Fund, for the stated reason that the Fund's shares were not registered for sale in the State of Missouri. Said statement by the Fund did not constitute an admission by the Fund that unsolicited orders from Missouri could not be accepted, since the Fund's position was that it could accept such orders as a matter of law. The letter was received by plaintiff on or about September 3, 1968.

(iii) an annual report designated "First Annual Report of the MATES INVESTMENT FUND" was received in May of 1969 prior to May 19, 1969.

The two thousand one hundred seventy eight (2,178) shares of the Fund originally purchased by plaintiff were mailed by defendants to plaintiff by deposit thereof in the United States Mail in New York, New York, addressed to a postal address within the State of Missouri.

The confirmation of said sale was also mailed by defendants to plaintiff at a postal address within the State of Missouri.

Plaintiff is presently the owner of three thousand one hundred thirty (3,130) shares of the Fund. Of the foregoing, nine hundred fifty two (952) shares are owned by virtue of a stock dividend credited by the Fund to plaintiff on July 3, 1969, out of capital gains, in lieu of a cash dividend, at the net asset value of Five Dollars and Forty Four Cents ($5.44) per share, or a total dividend in shares of Five Thousand One Hundred Seventy Eight Dollars and Eighty Eight Cents ($5,178.88).

Plaintiff demanded that the Fund rescind his purchase of Fund shares by letter dated May 19, 1969, which letter was deposited in the mail in the State of Missouri on or about such date and received by defendants in the regular course of the mails; the Fund refused to rescind the purchase. The reason plaintiff sought rescission was the form letter received by plaintiff on September 3, 1968, and footnotes contained in the May, 1969 annual report of the Fund which stated, in effect, that persons holding Fund shares in states where such shares were not qualified to be sold may have a right to rescind their purchases, but such rescission was unlikely in the opinion of management, because the price of the Fund shares on December 31, 1968, exceeded the price paid for all shares sold.

Plaintiff did not tender his shares to the Fund for redemption at any time prior to commencement to this action. "Redemption" refers to the repurchase by the Fund, in accordance with the prospectus received by plaintiff, of the Fund shares at a price equal to the net asset value of Fund shares on the date a redemption request is received by the Fund. "Redemption" does not refer to "rescission" which, refers to the legal right claimed by plaintiff to tender his shares to the Fund in return for his original purchase price (plus interest and attorneys' fees) regardless of the present net asset value of such shares.

Plaintiff has tendered the return of the shares of the Fund and has demanded the return of the purchase price plus interest and attorneys' fees within the provision of the Missouri Securities Act.

The facts as outlined above present issues of first impression under the Uniform Securities Act and the Missouri Securities Act, Chapter 409 RSMo 1969: a) the liability of the Fund with respect to the sale to plaintiff of the original 2,178 shares; b) the liability of the Fund with respect to the stock dividend of 952 shares; and c) the liability of Frederic S. Mates by reason of his being the controlling officer and director of the Fund.

Section 409.301 RSMo 1969 states:

"It is unlawful for any person to offer or sell any security in this state unless (1) it is registered under this act or (2) the security or transaction is exempted under section 409.402."

See generally, H. M. Bateman, "The Missouri Uniform Securities Act", 34 Mo. L.Rev. 463 (1969); J. C. Logan, "Blue Skyways and Byways of Missouri", 25-26 J. of Mo.Bar (September, 1969 through June 1970); L. R. Mills and G. A. Jensen, "Uniform Securities Act of Missouri", J. of Mo.Bar 60 (1968).

With respect to the original 2,178 Fund shares purchased by plaintiff, the threshold inquiry is whether or not the plaintiff's purchase of Fund shares is within the scope of the Missouri Securities Act.

It is stipulated that the Fund shares have never been registered under this Act. The applicability of the Act depends upon whether the Fund offered or sold the shares of the Fund in Missouri.

Section 409.415 sets out the scope of the Act's application, and defines precisely the terms "purchase" and "sale":

(a) Sections 409.101, 409.201(a), 409.405, and 409.411 apply to persons who sell or offer to sell when (1) an offer to sell is made in this state, or (2) an offer to buy is made and accepted in this state.

(b) Sections 409.101, 409.201(a), and 409.405 apply to persons who buy or offer to buy when (1) an offer to buy is made in this state, or (2) an offer to sell is made and accepted in this state.

(c) For the purpose of this

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