Lanning v. Serwold

• Decision Date: 12 February 1973
• Docket Number: No. 71-1934.,71-1934.
• Citation: 474 F.2d 716
• Parties: Oliver LANNING, Plaintiff-Appellant, v. O. E. SERWOLD, Jr., et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

474 F.2d 716 (1973)

Oliver LANNING, Plaintiff-Appellant, v. O. E. SERWOLD, Jr., et al., Defendants-Appellees.

No. 71-1934.

United States Court of Appeals, Ninth Circuit.

February 12, 1973.

William D. Cameron (argued), of Williams, Lanza, Kastner & Gibbs, Seattle, Wash., for plaintiff-appellant.

J. Paul Coie (argued), John L. Weinberg, of Perkins, Coie, Stone, Olsen & Williams, Robert W. Thomas, of Lane, Powell, Moss & Miller, Seattle, Wash., for defendants-appellees.

Before CHOY and GOODWIN, Circuit Judges, and SOLOMON,^* District Judge.

CHOY, Circuit Judge:

The sole issue presented for our disposition is whether the district court properly concluded that the complaint¹ brought by Lanning should be dismissed pursuant to F.R.Civ.P. 12(b)(6) for failure to state a claim. We affirm in part and reverse in part, and remand for trial.

Lanning is seeking damages on four separate claims. The first claim is predicated on alleged violations of Section 10(b), Securities Exchange Act of 1934, 15 U.S.C. § 78j(b),² and SEC Rule 10 b-5, 17 C.F.R. § 240.10b-5.³ The remaining three claims are state pendent claims based on common law fraud, violations of Washington securities law, and tortious interference with a contractual relationship. Since there is no independent federal jurisdictional basis for the three state claims, these claims were dismissed when the federal claim was found wanting. We focus our attention on the federal claim.

Lanning's complaint asserts two separate Rule 10b-5 violations. First, his efforts to buy 500 unidentified shares of Poulsbo Rural Telephone Association (PRTA) stock for $15 a share from minority shareholders were wrongfully frustrated by a deceptive letter mailed by defendant Serwold, President of PRTA, to all PRTA stockholders. The letter falsely told of discussions with persons interested in the purchase of or merger with the company, and of the stock having a book value of $114.55 per share. Accordingly, Lanning alleges that his cost for the shares would be $300 to $600 per share instead of $15, so he demands judgment for $142,500 or an order requiring Serwold and PRTA to sell him 500 shares at $15 per share. Second, he purchased 136 shares of PRTA from two ladies at $15 per share and presented the certificates with the proper endorsements to PRTA so that they could register the transfer. Instead of registering the transfer Serwold falsely informed the ladies by telephone that the stock's book value was $115 per share, that two firms were negotiating to buy PRTA for at least $300 per share and that he hated to see old stockholders "lose out." He advised them that two attorneys, defendants Niemeier and Green, would help them defeat the sale and recover the 136 shares. Niemeier knowingly confirmed the misrepresentations and referred the ladies to a Seattle attorney who filed an action for the ladies to rescind the sale and to enjoin PRTA from transferring record ownership of the 136 shares to Lanning. Green falsely testified as to the fictitious negotiations. Lanning defeated this suit, but in doing so he incurred $3,897.64 in costs and expenses.

THE 500 SHARES CLAIM

We agree with the district court that Lanning lacked the requisite standing as to the 500 shares he claimed he could not buy at $15 per share because of Serwold's fraudulent misrepresentations. Since Lanning had no relationship with anyone either as a purchaser or seller of the securities involved with the alleged rule violation, no claim for relief cognizable under Section 10(b) was presented. Mt. Clemens Industries, Inc. v. Bell, 464 F.2d 339 (9th Cir.1972).

THE 136 SHARES CLAIM

We find here the requisite prior contractual relationship between Lanning and the two ladies who sold him the 136 shares. But appellees contend as the district court ruled, that any fraud occurred after the sale had been consummated and that the fraud did not impair the value of the securities purchased by Lanning so that the claim is outside the ambit of federal securities law. We do not agree.

Lanning was a purchaser of stocks and the wrong done to him was in connection with this purchase. "Section 10(b) must be read flexibly, not technically and restrictively. Since there was a `sale' of a security and since fraud was used `in connection with' it, there is redress under § 10(b), whatever might be available as a remedy under state law." Supt. of Insurance v. Bankers Life & Cas. Co., 404 U.S. 6, 12, 92 S.Ct. 165, 169, 30 L.Ed.2d 128 (1971). In Bankers Life, supra, the Supreme Court rejected the argument that the fraud must affect the investment value of the securities. Accord, A. T. Brod & Co. v. Perlow, 375 F.2d 393, 396-397 (2nd Cir.1967). Here, in essence, Lanning had to pay nearly $4,000 more for the 136 shares because of Serwold's misrepresentations.

There is no requirement in either the statute or the rule that the fraud must occur prior to the consummation of the sale. Both condemn fraud in connection with a sale. Here the fraud was directly related to the sale of the securities.

PENDENT CLAIMS

The district court should assume jurisdiction over the pendent state claims relating to the purchase of 136 shares.

However, any state claims relating to the attempted purchase of...