Morris v. Stifel, Nicolaus & Co., Inc.

• Decision Date: 07 June 1979
• Docket Number: 78-1160,Nos. 78-1110,s. 78-1110
• Citation: 600 F.2d 139
• Parties: Fed. Sec. L. Rep. P 96,895 Margaret MORRIS, Appellant, v. STIFEL, NICOLAUS & CO., INC., and Kingsley O. Wright, Sr., Appellees. Mary A. BRAUN, Appellant, v. STIFEL, NICOLAUS & CO., INC., Kingsley O. Wright, and Theodore Menas, Appellees.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 139

600 F.2d 139

Fed. Sec. L. Rep. P 96,895

Margaret MORRIS, Appellant, v. STIFEL, NICOLAUS & CO., INC., and Kingsley O. Wright, Sr.,

Appellees.

Mary A. BRAUN, Appellant, v. STIFEL, NICOLAUS & CO., INC., Kingsley O. Wright, and Theodore Menas, Appellees.

Nos. 78-1110, 78-1160.

United States Court of Appeals,

Eighth Circuit.

Submitted Sept. 14, 1978.

Decided June 7, 1979.

William Stix, St. Louis, Mo., for appellants.

John R. Musgrave (on brief), of Coburn, Croft, Shepherd, Herzog & Putzell, St. Louis, Mo., argued, for appellees; Richard B. Specter and Adrian L. Steel, Jr., St. Louis, Mo., on brief.

Before HEANEY and STEPHENSON, Circuit Judges, and HANSON, ^* Senior District Judge.

HANSON, Senior District Judge.

This is a consolidated appeal from summary judgment against appellant Margaret Morris in Morris v. Stifel, Nicolaus & Co Inc. ¹ and against appellant Braun in Braun v. Stifel, Nicolaus & Co., Inc. ² Count I of Morris' two-count complaint alleged violations of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) and Rule 10b-5 promulgated thereunder. ³ Braun's six-count complaint similarly charged violations of Section 10(b) and Rule 10b-5 (Count I), and also violations of the "suitability rule" of the National Association of Securities Dealers (NASD) (Count III). ⁴ See 15 U.S.C. § 78O.

The district court ⁵ held that the appellants' claims were barred by the two-year statute of limitations provided by the Missouri blue sky statute, ⁶ Mo.Rev.Stat. § 409.411(e) (1969) and rejected the contention that the statute of limitations in Mo.Rev.Stat. § 516.120 (1969) governing common law fraud applied. It was undisputed that under the federal tolling doctrine ⁷ Braun's cause of action began to run in September 1974, but that she delayed the filing of her action until December 1976. Similarly, Morris brought her action in July 1977, although her cause of action commenced to run in July 1974. The only issue presented on appeal is whether the district court properly applied the two-year blue sky limitations period contained in section 409.411 to appellants' federal securities claims, or whether the court should have instead applied the five-year period provided in section 516.120 for common law fraud. We note that a motion for summary judgment is an appropriate method for raising a statute of limitations defense, Kern v. Tri-State Ins. Co., 386 F.2d 754, 756-57 (8th Cir. 1968), and that the moving party (Stifel) bears the burden to establish that there is no genuine issue of material fact. Rule 56(c), F.R.Civ.P.

I.

The technique of looking to state law to determine the timeliness of a federal cause of action has been uniformly and consistently employed by the federal judiciary in the context of securities actions when no federal limitations period is provided. See, e. g., Gaudin v. KDI Corp., 576 F.2d 708, 711 (6th Cir. 1978); Nortek, Inc. v. Alexander Grant & Co., 532 F.2d 1013, 1015 (5th Cir.), Cert. denied, 429 U.S. 1042, 97 S.Ct. 742, 50 L.Ed.2d 754 (1976); Newman v. Prior, 518 F.2d 97, 99 (4th Cir. 1975); Berry Petroleum Co. v. Adams & Peck, 518 F.2d 402, 406 (2d Cir. 1975); Schaefer v. First National Bank of Lincolnwood, 509 F.2d 1287, 1294, (7th Cir. 1975), Cert. denied, 425 U.S. 943, 96 S.Ct. 1682, 48 L.Ed.2d 186 (1976); Douglass v. Glenn E. Hinton Investments Inc., 440 F.2d 912, 914 (9th Cir. 1971); Vanderboom v. Sexton, 422 F.2d 1233, 1236-37 (8th Cir. 1970), Cert. denied, 400 U.S. 852, 91 S.Ct. 47, 27 L.Ed.2d 90 (1970); See Note, The Defective Private Offering: A Comparison of Purchasers' Remedies, 62 Iowa L.Rev. 236, 265-66 (1976). In Vanderboom v. Sexton, supra, this Court adopted the standard set forth in Charney v. Thomas, 372 F.2d 97, 100 (6th Cir. 1967) for determining which of the various local periods of limitation to utilize for Rule 10b-5 actions. We stated that the appropriate statute should be the "one which best effectuates the federal policy at issue." Vanderboom v. Sexton, 422 F.2d at 1237; See Hudak v. Economic Research Analysts, Inc.,499 F.2d 996, 999 (5th Cir.), Cert. denied, 419 U.S. 1122, 95 S.Ct. 805, 42 L.Ed.2d 821 (1974); Parrent v. Midwest Rug Mills, Inc., 455 F.2d 123, 125 (7th Cir. 1972). In the cases on appeal there are two competing local statutes of limitations, each of which arguably "best effectuates the federal policy at issue." One is section 516.120, ⁸ which governs, Inter alia, common law fraud and provides for a five-year period of limitations; the other is section 409.411 of the Missouri blue sky statute, providing for a two-year limitations period. To the extent resolution of the issue involves questions of local law, we have given the district court's views the weight they are entitled to. In re Alodex Corporation Securities Litigation, 533 F.2d 372, 374 (8th Cir. 1976).

The question of whether Missouri's blue sky or fraud period of limitations should apply to Rule 10b-5 actions commenced in Missouri federal courts has not previously been resolved by this Court. ⁹ However, twice past we have been presented with similar issues and contentions regarding the timeliness of an action brought under Rule 10b-5. In the first case, Vanderboom v. Sexton, supra, the Court set forth the test by which to determine which state statute best effectuates the policy of section 10(b). The Vanderboom court concluded that it was appropriate to look to the law of the forum state "which bears the Closest resemblance to the federal statute involved." (Emphasis added.) 422 F.2d at 1237-38. This inquiry, in turn, focused on an examination of two factors: (1) the extent to which the state statute shares a common purpose with the federal statute; and (2) whether the state statute permits the assertion of substantially the same defenses available under the federal statute. Id.; See In re Alodex Corporation Securities Litigation, 533 F.2d at 373. After examining the competing Arkansas statutes in issue one governing common law fraud and the other pertaining to actions based on the state's blue sky law the Court held that the Arkansas blue sky statute bore the closest resemblance to section 10(b). In so holding, the Court found a distinct commonality of purpose lacking between section 10(b) and Arkansas common law fraud; and similarly, the Court found that section 10(b) and common law fraud did not have a congruence of substantially the same defenses. Id. at 1238-39.

Subsequently, in In re Alodex Corporation Securities Litigation, supra, this Court was faced with the Vanderboom issue in the context of Iowa law. On the basis of the analysis articulated in Vanderboom, we affirmed the district court's judgment dismissing a Rule 10b-5 action because the timeliness of the action was controlled by the two-year period governing actions brought under the Iowa Securities Act. In rejecting the contention that the Iowa statute of limitations for common law fraud governed the timeliness of the plaintiff's action, we concluded:

(T)here is a commonality of purpose between the Iowa Blue Sky statute and Rule 10b-5. In Vanderboom v. Sexton, supra, at 1237, this court's decision to apply the period of limitations specified in the Arkansas Blue Sky Law was motivated by the fact that the Blue Sky statute, like Rule 10b-5, "deals expressly with the sale of securities."

As to the second prong of the Vanderboom case, it is necessary to examine what defenses are allowed in the state cause of action relied upon by the various parties as establishing the appropriate statute of limitations. If there is a manifest minimization of assertible defenses available in a particular state cause of action which is analogous to Rule 10b-5, the statute of limitations for that cause of action should be applied since it would more closely approximate the federal policy and proof requirements of Rule 10b-5. . . . This inquiry and conclusion are compelled because this court has held that scienter need not be proved in a Rule 10b-5 case to establish liability. Myzel v. Fields, 386 F.2d 718, 734-35 (8th Cir. 1967), Cert. denied, 390 U.S. 951, 88 S.Ct. 1043, 19 L.Ed.2d 1043 (1968). (Emphasis added.)

Id. at 373.

A significant change in the federal securities law occurred four days after the Alodex decision. In Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976), the United States Supreme Court held that scienter was a Sine qua non for liability in a private action for damages brought under Rule 10b-5. In other words, such action cannot lie "in the absence of any allegation of 'scienter' intent to deceive, manipulate, or defraud." Id. at 193, 96 S.Ct. at 1381. The effect of the Ernst & Ernst holding was to abrogate this Court's view that negligent as well as intentional misrepresentations were sufficient to establish liability under Rule 10b-5. The Vanderboom resemblance test survives the Ernst & Ernst decision, Dirksen v. Hynes & Howes Insurance Counselors, Inc., 423 F.Supp. 1290, 1292 (S.D.Iowa 1976); Bailey v. Piper, Jaffray & Hopwood, Inc., 414 F.Supp. 475, 479 (D.Minn.1976), and is appropriately applied to determine the effect of Ernst & Ernst on the selection of a state limitations period. In this regard, our task is to examine the congruence of purpose and defenses as between Rule 10b-5 actions on the one hand, and Missouri blue sky law and common law fraud on the other in the light of Rule 10b-5's newly articulated scienter requirement.

II.

A. Commonality of Purpose

Modeled after Section 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a), Rule 10b-5 was promulgated by the Securities and Exchange Commission "in the public interest or for the protection of investors." 15 U.S.C. § 78j(a). Rule 10b-5 defines and has been held to afford a remedy for fraudulent misrepresentations or omissions of material fact in connection with the purchase or sale of securities. See St. Louis Union Trust Co. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 562 F.2d 1040, 1048 (...