Robinson v. Difford

• Citation: 92 F. Supp. 145
• Decision Date: 14 July 1950
• Docket Number: Civ. No. 10322.
• Parties: ROBINSON et al. v. DIFFORD et al.
• Court: U.S. District Court — Eastern District of Pennsylvania

92 F. Supp. 145

ROBINSON et al. v. DIFFORD et al.

Civ. No. 10322.

United States District Court E. D. Pennsylvania.

July 14, 1950.

Edwin P. Rome (of Gray, Anderson, Schaffer & Rome), of Philadelphia, Pa., for plaintiffs.

David F. Maxwell (of Edmonds, Obermayer & Rebmann), of Philadelphia, Pa., for defendants.

Alexander Cohen, Washington, D. C., special counsel for Securities & Exchange Commission, amicus curiae.

GRIM, District Judge.

This is an action by former owners of a minority of the stock of the Robinson Manufacturing Company (hereinafter referred to as the Company), a corporation engaged in the lumber business in the state of Washington. The action is against (1) the Company, (2) the owners of a majority of its stock, who were also its officers and directors, and (3) their alleged agents. The plaintiffs claim damages in the sum of $1,791,875 and other relief by reason of alleged misrepresentations by the defendants which, according to the complaint, caused the plaintiffs to sell their stock in the Company to the majority shareholders at substantially less than its "true actual value".

Plaintiffs have expressly and solely grounded their action on section 10(b)¹ of the Securities Exchange Act of 1934 and rule X-10B-5² promulgated thereunder by the Securities Exchange Commission.

The defendants have filed a motion to dismiss the complaint under rule 12(b) of the Federal Rules of Civil Procedure, 28 U.S. C.A. Their contentions can be summarized as follows:

1. The court lacks jurisdiction of the subject matter because, contrary to the requirements of the Securities Exchange Act, the transactions complained of did not involve securities traded on a securities exchange or in the over-the-counter market.

2. The court lacks jurisdiction of the subject matter because the Securities Exchange Act does not provide a civil right of action for the type of transaction described in the complaint.

3. The court lacks jurisdiction of the persons of the defendants because they were not served with process in the state of Pennsylvania, they having been served in the state of Washington, where they all are residents.

4. The venue in this court is not properly laid as to plaintiffs Isabella V. Zimmerman and Floyd S. Zimmerman, because there are no allegations that any of the fraudulent acts, which induced them to sell their stock, occurred within the state of Pennsylvania.

A summary of the facts as they are set forth in the complaint is:

The Robinson Manufacturing Company was incorporated under the laws of the state of Washington in 1901. By charter amendment, effective November 17, 1948, the name of the corporation was changed to Robinson Plywood and Timber Company. It is under this name that it is listed as a defendant.

At the time of the transactions set forth in the complaint, the Company had an authorized capitalization of 7500 shares of common stock, all of which were then outstanding. The plaintiffs as a group owned 2500 shares. The other 5000 shares were owned by defendants John R. Robinson, Laura R. McLeod, Ted R. Robinson, A. W. V. Ford and J. S. Robinson. These defendants constituted a control group, actively managing the Company as officers, directors and majority shareholders. Because of the close family relationship and the long personal association between the plaintiffs and the members of the "control group", plaintiffs placed their complete trust and confidence in the latter's management and judgment. Between March 14, 1948 and November 17, 1948, however, the control group betrayed that trust and confidence and, through agents and by their own acts, purchased the shares of the plaintiffs at grossly inadequate prices. The defendants used the mails and instrumentalities of interstate commerce in making their fraudulent misrepresentations. The shares were not registered on an exchange nor traded in the over-the-counter market, and no security dealer or broker was used in effecting the purchases.

Defendants' first argument for the dismissal of the complaint is that the Securities Exchange Act does not apply where, as in the present case, the securities in question were neither registered on a national exchange nor traded in the over-the-counter market. Clearly this argument is without foundation. The Act says, Sec. 10(b), 15 U.S.C. Sec. 78j(b), 15 U.S.C.A. § 78j(b): "It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange * * * to use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors."

Rule X-10B-5 of the Commission, which was "prescribed" by the Commission pursuant to the power given to it by this section of the Act is:

"It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails, or of any facility of any national securities exchange:

"(1) To employ any device, scheme, or artifice to defraud,

"(2) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statement made, in the light of the circumstances under which they were made, not misleading, or

"(3) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security."

The Act applies both to securities registered on a national securities exchange and to "any security not so registered". Rule X-10B-5 clearly makes the acts set forth in the complaint unlawful. Consequently, the Act applies to the present case even though the securities involved were not registered on a securities exchange and were never traded in the over-the-counter market.³ This is so clear from the language of section 10(b) itself that no other proper interpretation is possible. However, defendants vigorously contend that the limited purpose of the Act was to regulate only transactions in securities registered on a national exchange or traded in the over-the-counter market, and not to regulate private transactions. In support of this contention they point to the preamble statement (section 2, 15 U.S.C.A. § 78b) of the general purpose of the Act and to statements made by members of Congress when the Act was under consideration therein. Without deciding that these statements do show such a limited purpose as is contended by defendants, this court must reject defendants' contention, because section 10(b) itself, under which the present action was brought, is unambiguous. Reliance on the preamble statement of section 2 in order to alter the plain and unambiguous provisions of section 10(b) would violate a basic canon of statutory construction that statements in a preamble may be referred to only for the purpose of clarifying an ambiguity in a statutory provision.⁴ Likewise, the legislative history of an act may not properly be considered in construing an unambiguous statutory provision⁵ such as section 10(b). There are no other sections of the Act which indicate that Congress intended to limit the application of the Act to transactions involving either registered securities or unregistered securities traded in the over-the-counter market.

Defendants also contend that the Act does not create a civil right of action in people who may have been injured by a violation thereof. This argument,...