Rousseff v. Dean Witter & Co., Inc.

• Decision Date: 20 June 1978
• Docket Number: Civ. No. F 75-128.
• Citation: 453 F. Supp. 774
• Parties: Christ ROUSSEFF, Plaintiff, v. DEAN WITTER & CO., INC., Defendant.
• Court: U.S. District Court — Northern District of Indiana

453 F. Supp. 774

Christ ROUSSEFF, Plaintiff, v. DEAN WITTER & CO., INC., Defendant.

Civ. No. F 75-128.

United States District Court, N. D. Indiana, Fort Wayne Division.

June 20, 1978.

COPYRIGHT MATERIAL OMITTED

Martin T. Fletcher, David Travelstead, Fort Wayne, Ind., for plaintiff.

Thomas W. Yoder, Edward L. Murphy, Jr., Fort Wayne, Ind., for defendant.

MEMORANDUM OF DECISION AND JUDGMENT ORDER

ESCHBACH, Chief Judge.

On February 27-28, 1978, this securities action was tried to a jury, by special interrogatories, on three counts. Each count represented a claim based upon a separate legal theory: (1) federal securities law, i. e. 15 U.S.C. § 78j(b) Section 10 of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder; (2) Indiana "Blue Sky" law, i. e. Ind.Code § 23-2-1-19; and (3) common law fraud. The action is now before the court for entry of judgment based upon the jury's answers to the special interrogatories and the court's determination regarding defendant's pretrial motion to dismiss those claims based upon Indiana "Blue Sky" law.¹ For the reasons set forth below and based upon the jury's answers to the special interrogatories, the court will enter judgment for defendant and against plaintiff on the federal securities law and common law fraud claims. The court will deny defendant's motion to dismiss the state securities law claim and will enter judgment for plaintiff and against defendant on that claim.

Plaintiff is an individual residing in Fort Wayne, Indiana. Defendant is a securities broker-dealer registered under both federal and Indiana securities laws. The factual occurrences underlying the instant action involve a 1973 stock transaction handled for plaintiff by certain employees of defendant. These employees were located in defendant's Sarasota, Florida, and New York offices.

In late summer 1973, plaintiff owned 7,000 shares of the real estate investment trust U.S.F. Investors, Inc. (USF).² Plaintiff had purchased these shares in an over-the-counter market transaction earlier in 1973 for $27.50 per share. That transaction was handled for plaintiff by Aaron Fleck, who was then an employee of Walston & Co., another registered securities broker-dealer. As the over-the-counter market price of USF declined in late summer 1973, plaintiff became concerned about his investment and began to consider the possibility of effecting a "wash sale" to realize his paper loss in USF for the tax year ending December 31, 1973. By late September 1973, USF's price had declined to about $21.00 per share, giving plaintiff a paper loss of approximately $45,000.00.

It was under these circumstances that plaintiff called Aaron Fleck in late September 1973 to inquire about the condition of USF. By the time of this telephone call, Aaron Fleck had left the employ of Walston & Co. and had joined defendant, in charge of defendant's then newly opened Sarasota, Florida, office. It was to this Florida office that plaintiff made his telephone inquiry. Fleck's response to plaintiff's questions was that he did not have the information but would obtain it from defendant's stock analyst for the real estate investment trust industry, a Mr. Kearns located in defendant's New York office. After contacting Kearns, Fleck telephoned plaintiff in Fort Wayne, Indiana, and advised him that, according to Kearns, USF was a good, sound company; that USF's market price decline would not continue; that USF would continue to pay dividends; and that plaintiff could safely purchase it to effect his "wash sale" transaction. Fleck did not tell plaintiff that defendant, through its analyst Kearns, had in fact classified USF as a "grade 3 weak hold," nor did Fleck explain the significance of this classification.³

On October 4, 1973, plaintiff purchased, through Fleck, 7,000 additional shares of USF capital stock. He purchased these shares for $22.25 per share. Subsequent to this purchase, USF failed to pay any dividends and its market price continued to decline. Finally, approximately two years later, on December 15, 1975, plaintiff disposed of all of his USF shares for fifty-five cents ($.55) per share. He seeks, by this action, to recover the loss he sustained as to the 7,000 USF shares purchased in October 1973.

Based upon evidence establishing the foregoing factual background, which was essentially undisputed by the parties, and other evidence presented in the trial of this cause, the jury returned its answers to the special interrogatories presented to it by the court. Based upon the answers to these special interrogatories, the jury found:⁴

That defendant made a material misleading omission regarding its opinion of the condition or value of USF Special Interrogatories 1, 2, 3, and 4;

That plaintiff reasonably relied upon defendant's misleading omission in purchasing the 7,000 shares in October 1973 Special Interrogatory 4;

That defendant did not act knowingly or recklessly in making the misleading omission Special Interrogatories 7, 8, 9, and 10;

That defendant did act negligently in making the misleading omission Special Interrogatory 11;

That plaintiff unreasonably failed to mitigate his damages by not disposing of the USF shares prior to December 15, 1975 Special Interrogatory 12; and

That had plaintiff reasonably mitigated his damages, he would have disposed of the USF shares on November 12, 1973 Special Interrogatory 13.⁵

The jury's answers to the special interrogatories clearly establish the legal inadequacy of the plaintiff's federal securities law and common law fraud claims. Both of these claims require an element of scienter not proven by plaintiff. Plaintiff has established only that defendant was negligent in making the misleading omission. Special Interrogatories 7-11. The federal securities law claim, i. e. the claim based upon 15 U.S.C. § 78j(b) and Rule 10b-5 promulgated thereunder, cannot be established on a mere finding of negligence. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976); Sundstrand Corp. v. Sun Chemical Corp., 553 F.2d 1033 (7th Cir. 1977). The common law fraud claim also requires an element of scienter and cannot be based on mere negligence. See, e. g., Soft Water Utilities, Inc. v. LeFevre, 159 Ind.App. 529, 308 N.E.2d 395 (1974); Physicians Mutual Ins. Co. v. Savage, 156 Ind.App. 283, 296 N.E.2d 165 (1973). Therefore, judgment will be entered for the defendant and against the plaintiff on the federal securities law and the common law fraud claims.⁶

If plaintiff is to recover in this action, the recovery must be based upon his state "Blue Sky" law claim, i. e. the claim asserted under Ind.Code § 23-2-1-19. It is toward this claim that defendant has directed its motion to dismiss. Defendant contends (1) that Indiana securities law does not provide a private action for negligent misrepresentation; (2) that to the extent Indiana securities law does provide a private action for negligent misrepresentation, such law is pre-empted by the federal securities law; and (3) that even if such state securities law is not pre-empted by federal securities law, it is invalid, as here applied, as an unconstitutional burden on interstate commerce. The court has considered, and rejects, each of these arguments. Therefore, judgment will be entered for plaintiff and against defendant on the state securities law claim.

APPLICATION OF THE STATE SECURITIES LAW

Before turning to defendant's federal law challenges, the court must determine what version of the state securities law applies to this action and what result that version of the law effects.⁷ Plaintiff's cause of action arose from conduct occurring in late 1973. This action was not commenced until November 1975. Between these two dates, the Indiana securities law was substantially amended. See Indiana Acts 1975, P.L. 261, p. 1402 codified at Ind.Code § 23-2-1-1 et seq. (Burns Supp. 1977). While it is not clear that the amendments substantively altered the existing securities law, the court finds it unnecessary to determine what substantive changes, if any, were effected by these amendments.

Indiana law provides that substantive amendatory acts are to be construed only prospectively unless retroactive application is specifically provided by the legislature. See, e. g., State ex rel. Mental Health Com'r v. Estate of Lotts, Ind.App., 332 N.E.2d 234 (1975); Slater v. Stoffel, 140 Ind.App. 131, 221 N.E.2d 688 (1966). More specifically, it is recognized under Indiana law that "an amendatory act which changes prior law must by necessary implication repeal the prior law insofar as they are in conflict." State ex rel. Mental Health Com'r v. Estate of Lotts, Ind.App., 332 N.E.2d 234, 238 (1975). The effect of such a repeal is governed by Ind.Code § 1-1-5-1, which provides in part:

The repeal of any statute shall not have the effect to release or extinguish any . . . liability incurred under such statute, unless the repealing act shall so expressly provide, and such statute shall be treated as still remaining in force for the purposes of sustaining any proper action . . . for the enforcement of such . . . liability. . . .

Since the 1975 amendments contained no provision extinguishing liabilities arising under the former law, this court will apply the substantive securities law of Indiana as it existed when this action arose in 1973. Under these same Indiana rules of law, however, procedural changes contained in an amendatory act are applied to actions pending at the time of, or brought subsequent to, their enactment. See, e. g., Slater v. Stoffel, 140 Ind.App. 131, 221 N.E.2d 688 (1966). Thus, plaintiff is entitled to the new three-year statute of limitations, as well as the increased rate of interest which is to be applied to damage awards as a result of the 1975 amendments. See Ind. Code § 23-2-1-19 (Burns Supp.1977).

In 1973, the civil liability provision of the Indiana securities law provided:

Any person who . . . offers

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