Schillner v. H. Vaughan Clarke & Co., 182.

• Decision Date: 02 April 1943
• Docket Number: No. 182.,182.
• Citation: 134 F.2d 875
• Parties: SCHILLNER et al. v. H. VAUGHAN CLARKE & CO. et al.
• Court: U.S. Court of Appeals — Second Circuit

134 F.2d 875 (1943)

SCHILLNER et al. v. H. VAUGHAN CLARKE & CO. et al.

No. 182.

Circuit Court of Appeals, Second Circuit.

April 2, 1943.

Miller, Hubbell & Evans, of Utica, N. Y. (Henry L. Schimpf, Jr., of Philadelphia, Pa., of counsel), for appellants.

Leonard W. Ferris, of Utica, for appellees.

Before SWAN, AUGUSTUS N. HAND, and CLARK, Circuit Judges.

SWAN, Circuit Judge.

This action is based upon the provisions of section 12 of the Securities Act of 1933, 15 U.S.C.A. § 77l which is printed in the margin¹ with immaterial omissions. The plaintiffs are a widow and her daughter, both well advanced in years and lacking experience in financial matters, to whom H. Vaughan Clarke & Company, a stock brokerage house whose main office was in Philadelphia, sold two blocks of common stock, each for 100 shares, in Kinsey Distilling Company. The sales were made at Rome, N. Y., in September 1936 and May 1937, respectively, and for each block of stock the plaintiffs paid $700. They were induced to make the purchases by Mr. Adams, an employee of the corporate defendant, who called at their home and made oral representations concerning the distilling company, its officers, one of whom was Mr. H. Vaughan Clarke, and the desirability of purchasing the stock. For several years Mr. Adams, while in the employ of a different brokerage house, had been accustomed to advise the plaintiffs concerning their investments. They had confidence in him, relied upon his statements and made no attempt to investigate the merits of the distillery stock. It was paid for by turning over to Mr. Adams certain securities which he converted into cash. Certificates for the distillery stock were sent from the broker's Philadelphia office by mail addressed to the plaintiffs at their home and there delivered. In 1939 after learning that the distilling company was in bankruptcy, they tendered the stock certificates to H. Vaughan Clarke & Company and then brought the present action to recover from the defendants the purchase price of the stock with interest thereon, no dividend having ever been paid on the stock. The individual defendant controls the corporate defendant, being its sole stockholder, and his liability is based on section 15 of the Act, 15 U.S.C.A. § 77o. The case was tried to a jury which returned a verdict for the plaintiffs.

The appellants' first contention is that the district court lacked jurisdiction of the subject matter of the action because the plaintiffs failed to prove a cause of action under section 12(2). The argument assumes that this section requires the false or misleading statement which gives rise to the liability to be transmitted by mail or by use of an interstate instrumentality of transportation or communication. We do not think that this is the inevitable, or even the most natural, meaning of the statutory language. Liability to repay the consideration received is imposed upon any person who "sells a security * * * by the use of any means or instruments of transportation or communication in interstate commerce or of the mails, by means of a prospectus or oral communication" of the untrue or misleading character described in the section. To accept appellant's construction would render the phrase "oral communication" of most limited application because the section would then reach only interstate telephone calls or conversations where the parties might be talking across a state line. It would seem much more likely that Congress intended to make the statute applicable if one sells a security by use of the mails, even though the seller's untrue or misleading statement is communicated orally and intrastate. In the case at bar the contract of sale was concluded orally and the stock was paid for by the buyers without any use of the mails, but the mails were used for delivery of the stock certificate to the buyers. In our opinion such a transaction falls within both the letter and the purpose of the statute. Section 2(3) of the Act, 15 U.S.C.A. § 77b (3) provides that "unless the context otherwise requires" the term "sale" or "sell" "shall include every contract of sale or disposition of * * * a security or interest in a security, for value." Delivery of the stock certificate pursuant to a contract of sale would seem to be a "disposition of * * * a security" within this definition; consequently the seller who mails the certificate² to the buyer "sells a security * * * by the use * * * of the mails."

It must be conceded, however, that such expressions of judicial opinion as we have been able to find are not in accord with this view. In Gross v. Independence Shares Corp., D.C.E.D.Pa., 36 F.Supp. 541, at page 543, Judge Bard stated flatly that delivery of a security by mail after sale did not bring section 12(2) into play. Siebenthaler v. Aircraft Accessories Corp.,^2½ W. D.Mo., is to the same effect.³ The opinion in the Gross case advances the argument that since Congress specifically provided in section 5 of the Act, 15 U.S.C.A. § 77e, that delivery by mail after sale should be unlawful in the case of unregistered securities, a failure to be similarly specific in section 12(2) indicated an absence of congressional intention to create civil liability for the mere delivery by mail when the misrepresentations were oral and intrastate. Section 5 reads in part as follows:

"(a) Unless a registration statement is in effect as to a security, it shall be unlawful for any person, directly or indirectly —

"(1) to make use of any means or instruments of transportation or communication in interstate commerce or of the mails to sell or offer to buy such security through the use or medium of any prospectus or otherwise; or

"(2) to carry or cause to be carried through the mails or in interstate commerce, by any means or instruments of transportation, any such security for the purpose of sale or for delivery after sale."

It is true that the word "sell" in the phrase "to make use of * * * the mails to sell," as used in subdivision (a) (1) of section 5 cannot be given a meaning broad enough to include delivery of the stock certificate after sale without making purposeless the phrase in subdivision (a) (2) "for delivery after sale." But the word "sell" may have a narrower meaning in section 5 than it has in section 12. The broad definition set out in section 2 is to be accorded "unless the context otherwise requires." In section 5 where the draftsman differentiated between use of the mails to sell and use of the mails for delivery after sale, the context requires a narrower definition of the term "sell," but there is nothing in section 12 to require the definition to to be so narrowed. Indeed, if the word "sell" in section 12(1) is given a meaning so narrow as to exclude a transaction where the mails are used for delivery of a security after sale, then civil liability will be imposed on one who violates section 5(a) (1) but not on one who violates section 5(a) (2), although in either case the act is unlawful and the violator may be punished criminally under § 24, 15 U.S.C.A. § 77x. To our minds it is inconceivable that Congress intended any such distinction. In declaring unlawful the transactions described in section 5 Congress meant to exert its power to the full constitutional extent permitted by the commerce clause and the postal clause.⁴ In imposing by section 12(1) civil liability upon "any person who * * * sells a security in violation of section 5" we cannot doubt that the liability was intended to embrace all transactions made unlawful by section 5. This was accomplished by using the word "sell" in the broad sense stated in the definition, 15 U.S. C.A. § 77b. Clearly the word has the same meaning in subdivision (2) as in subdivision (1) of section 12. Consequently we hold that the use of the mails for delivery of the certificate to the buyers was enough to bring the transaction within the section. And since section 22(a), 15 U.S.C.A. § 77v (a), confers upon the district court in the district where the sale took place, jurisdiction of actions at law brought to enforce any liability or duty created by this subchapter, the appellant's first contention cannot be sustained.

It is next contended that the evidence failed to prove a cause of action under section 12(2). As Mr. Adams did not testify there was no contradiction of the statements ascribed to him by the plaintiffs. Whether his statements were untrue or misleading by reason of omitted material facts was a question for the...