Philbosian v. First Financial Securities Corp.

• Decision Date: 08 October 1982
• Docket Number: No. 82-K-773.,82-K-773.
• Parties: Philip PHILBOSIAN, Plaintiff, v. FIRST FINANCIAL SECURITIES CORPORATION, a Delaware corporation; Norman McKinney; William O. Klepinger; and Sanford B. Hertz, Defendants.
• Court: U.S. District Court — District of Colorado

550 F. Supp. 61

Philip PHILBOSIAN, Plaintiff, v. FIRST FINANCIAL SECURITIES CORPORATION, a Delaware corporation; Norman McKinney; William O. Klepinger; and Sanford B. Hertz, Defendants.

No. 82-K-773.

United States District Court, D. Colorado.

October 8, 1982.

Michael H. Berger, Waldbaum, Corn & Koff, P.C., Denver, Colo., for plaintiff.

Marc N. Geman, Fishman, Geman, Gersh & Bursiek, P.C., Denver, Colo., for First Financial and Klepinger.

Richard F. Mauro, Kenneth R. Fimberg, Morrison & Foerster, Denver, Colo., for McKinney.

MEMORANDUM OPINION AND ORDER

KANE, District Judge.

This action is brought under the Securities Act of 1933, the Securities Exchange Act of 1934, Rule 10b-5, the Colorado Securities Act of 1981, and the common law. Three defendants have filed motions to dismiss some or all of the claims for relief enumerated in the complaint. Defendants First Financial and Klepinger seek dismissal of plaintiff's third claim, and defendant McKinney moves for dismissal of the entire complaint.¹ For the reasons set forth below, the motions to dismiss are granted in part and denied in part.

Plaintiff recounts a series of transactions in his complaint and charges the defendants with various acts of fraud, misrepresentation, negligence, breach of fiduciary duty and civil conspiracy. In 1979, plaintiff and others promoted and formed Energy Capital Development Corporation. In 1980, ECDC was merged with Harris Energy Corporation and the corporation continued business under the ECDC name. In February, 1981, the ECDC Board of Directors requested the resignation of plaintiff from his position as officer and director. Plaintiff alleges that certain representations were made to him by ECDC officers including defendants McKinney, ECDC's president, and Hertz, counsel for ECDC. These representations related to the salability of plaintiff's stock holdings in ECDC. Plaintiff claims that at the time these representations were made, these defendants knew that the statements were false. Plaintiff relied on these representations and resigned his position.

When plaintiff tried to sell some of his ECDC common stock in February 1981, he was told by the transfer agent that the trade could not proceed without an opinion of ECDC's counsel approving the transfer. According to plaintiff, when defendant Hertz was contacted for an opinion, Hertz said he would not write an opinion letter without an advance fee payment of $500. Plaintiff paid the fee, but alleges that Hertz delayed writing the letter until the stock had significantly dropped, and when he finally did write the letter, stated that the sale could not proceed because the shares to be sold exceeded the volume limitations established in Rule 145. This letter was amended on July 1, 1981, and Hertz then said the sale of the entire 46,284 shares could proceed. Both letters were sent through the U.S. mails.

On August 1, 1981, defendant Klepinger advised plaintiff that First Financial had a buyer for a large block of plaintiff's stock but at a price one-half of the current market share.² Klepinger promised to take care of any problems relating to the sale. Even after plaintiff requested to know the identity of the purchaser(s), Klepinger refused to disclose the information on the claim that it was confidential. Based on Klepinger's representations and other beliefs, plaintiff sold all 246,292 shares of his ECDC stock at the low price. Plaintiff charges that at least one of the buyers was defendant Hertz, and that defendant First Financial knew Hertz was a buyer.

DEFENDANTS KLEPINGER AND FIRST FINANCIAL'S MOTION TO DISMISS

Defendants Klepinger and First Financial move to dismiss plaintiff's third claim for relief under Rule 12 F.R.Civ.P. on two grounds: first, because this claim is grounded on an implied right of action under Section 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a) and there is no implied right of action under § 17(a); and, second, even if there is an implied right of action, only purchasers have standing to sue for § 17(a) violations and plaintiff was not a purchaser.³ Plaintiff requests that I defer ruling on the question of the existence of a private right of action as I did in Sterling Recreation Organization Co. v. Segal, et al., 537 F.Supp. 1024 (1982).

In Sterling Recreation I found that there was a split in the circuits on the issue of an implied right of action and there was no controlling precedent. I held that "the existence of a private right of action under section 17(a) of the 1933 Act is therefore only relevant if there is conduct that has damaged a plaintiff that is prohibited by Section 17(a) and not by the regulations promulgated under section 10(b) of the 1934 Act." (footnotes omitted).

The situation in this case is little different. It is unclear in the instant case whether the plaintiff is alleging that any of the defendants' conduct violated section 17(a) and not rule 10b-5. The four-part test of Cort v. Ash, 422 U.S. 66, 78, 95 S.Ct. 2080, 2087, 45 L.Ed.2d 26 (1975) for determining whether a federal statute has an implied right of action has not been applied here. I make no ruling on the private right of action question until the parties have been allowed sufficient opportunity to conduct discovery. An appropriate motion for partial summary judgment may be filed at some future time.

DEFENDANT McKINNEY'S MOTION TO DISMISS

Defendant McKinney has filed a motion to dismiss under F.R.Civ.P. 12(b)(6) and 9(b) for failure to state a claim upon which relief can be granted and failure to plead fraud with requisite particularity. This defendant makes a similar argument that defendants First Financial and Klepinger made as to a private cause of action under § 17. My ruling on this aspect of McKinney's motion to dismiss is the same. Movant also argues that there is no private cause of action under C.R.S. 1973 § 11-51-123 or under C.R.S. 1973 § 11-51-125(1), nor is there a separate cause of action for civil conspiracy per se.

Defendant McKinney charges that the complaint fails to state with particularity the representations allegedly made by him, the time, place and manner in which they were made, the facts constituting scienter, and in what manner, if any, plaintiff justifiably relied on McKinney's representations. Plaintiff responds that he has plead with particularity as is required by F.R.Civ.P. 8(a) and 9(b).

While on the district court bench, Judge Doyle in Trussell v. United Underwriters, Ltd., 228 F.Supp. 757 (D.Colo.1964) held:

"Rule 9(b) does not, however, require the pleading of detailed evidentiary matter nor does it require any particularity in connection with an averment of intent, knowledge, or condition of mind. It only requires identification of the circumstances constituting fraud or mistake. That requirement means, in the instant case, that individual plaintiffs should identify particular defendants with whom they dealt directly, and from whom they purchased stock; that individual plaintiffs should designate the occasions on which affirmative misstatements were allegedly made to them — and by whom; and that individual plaintiffs should designate what affirmative misstatements or half truths were directed to them and how."⁴

Plaintiff has provided the necessary identification and has satisfied the Trussell requirements. The motion to dismiss is denied on this ground.

Movant also charges a failure adequately to allege scienter, materiality, reliance, causal connection and failure to state a claim upon which relief can be granted. Plaintiff counters that his complaint does contain adequate specificity as to this defendant.

In Conley v. Gibson, 355 U.S. 41, 78 S.Ct. 99, 2 L.Ed.2d 80, (1957), the Supreme Court outlined the standard to be used in measuring a complaint for failure to state a claim:

"A complaint should not be dismissed for failure to state a claim unless it appears beyond a doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief."⁵

Plaintiff's complaint states charges that go beyond suggestions of mere negligence and contemplate a...