Straub v. Vaisman & Co., Inc.

• Decision Date: 15 June 1976
• Docket Number: 75-2018,Nos. 75-1704,s. 75-1704
• Citation: 540 F.2d 591
• Parties: Fed. Sec. L. Rep. P 95,623 Eckart R. STRAUB et al., Plaintiffs-Appellees, v. VAISMAN AND COMPANY, INC., a New Jersey Corporation, et al., Defendants-Appellants.
• Court: U.S. Court of Appeals — Third Circuit

Page 591

540 F.2d 591

Fed. Sec. L. Rep. P 95,623

Eckart R. STRAUB et al., Plaintiffs-Appellees, v. VAISMAN AND COMPANY, INC., a New Jersey Corporation, et al.,

Defendants-Appellants.

Nos. 75-1704, 75-2018.

United States Court of Appeals, Third Circuit.

Argued March 9, 1976.

Decided June 15, 1976.

Jay D. Fischer, Fischer & Kagan, Clifton, N.J., for defendants-appellants.

Melvin Greenberg, Lowenstein, Sandler, Brochin, Kohl & Fisher, Newark, N.J., for plaintiffs-appellees; Cahill & Kaswell, Washington, D.C., of counsel.

OPINION OF THE COURT

Before VAN DUSEN, KALODNER and WEIS, Circuit Judges.

WEIS, Circuit Judge.

A sale of securities accomplished by the seller's flagrantly fraudulent conduct forms the basis of this suit under the Securities Act of 1933 and the Securities Exchange Act of 1934. We reject a contention that, under the circumstances presented, the purchasers are barred from recovery because they failed to make an independent investigation and, instead, relied upon the integrity Vaisman and Company (VaisCo) was a registered securities broker-dealer in New Jersey, controlled by the individual defendant William Vaisman, its president and sole stockholder. In 1972, VaisCo hired Charles Erb as an employee and a "consultant" primarily to obtain orders from clients outside the United States. Erb had a number of contacts in Europe, including plaintiff Straub, to whom he had recommended securities purchases since 1970. Straub was a principal and the managing director of Success Portfolio Management Company, a firm in Stuttgart, West Germany, engaged in the management of discretionary securities accounts.

of the seller. However, finding no authority to permit the assessment of counsel fees, we reverse that part of the judgment making such an award.

Vaisman and VaisCo allowed Erb to act as their representative and held him out as its director of international operations. On several occasions Straub purchased securities through VaisCo on Erb's advice. Knowing that Straub was interested in new issues, in December, 1972 Erb recommended the purchase of 10,000 shares of Loren Industries. On either December 26 or December 28, 1972, Straub received the following telex in Stuttgart:

"sold for account 1000 patent centers at 91/4. change loren to mark-1 for new issue situation same will break 1/2/73 will come at dollars 4.00 you have been allotted 5000 for bankhauser ott and 5000 for private bank trust corp will not settle until after first of year per discussion bill vaisman has recommended this issue in preference to the other. vaisman and co"

In reliance on the telex, as well as prior conversations with Vaisman and Erb, Straub authorized the purchase of 10,000 shares of Mark I Offset. ¹ On January 3, 1973, VaisCo purchased the stock for plaintiffs at a price of $4 per share. Straub acquired 7,000 shares and the other plaintiffs acquired 3,000 shares. Less than a month later, Mark I Offset filed a Chapter XI bankruptcy proceeding. The plaintiff banks later sold their shares at $.375 per share, but Straub retained his stock.

Plaintiffs filed their complaint in the district court of New Jersey alleging violations of Section 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a), Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), Sections 15(c)(1) and 15(c)(2) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78o (c)(1), 78o (c)(2), and S.E.C. Rules 10b-3, 10b-5, 15c1-1, 15c1-2, and 15c1-4, respectively, 17 C.F.R. §§ 240.10b-3, 240.10b-5, 240.15c1-1, 240.15c1-2, and 240.15c1-4.

At the conclusion of the trial, the district judge found Vaisman's conduct "shocking to the conscience of this court." Although the evidence demonstrated that the Mark I stock was not a new issue as the telex implied, the court elected to base its decision on failures to disclose, rather than misrepresentation.

Testimony established that VaisCo was a financial consultant to Mark I Offset and had inside information about the imminence of bankruptcy. Moreover, the shares were purchased from Atlas Interfund, a company in which Vaisman not only held a controlling interest but also was an officer and adviser on securities transactions. ² In addition, VaisCo was a market maker in Mark I Offset, and the current price was less than $4 per share. None of this important information was revealed to Straub before the purchase.

The court held that plaintiffs proved nondisclosure of material facts and awarded the bank plaintiffs $10,875.00 (consideration paid less resale price), and Straub $28,000.00 (conditioned upon return of the stock to defendants). The opinion stated that punitive

damages were precluded by § 28(a) of the Securities Exchange Act, 15 U.S.C. § 78bb(a), and denied recovery on that claim. However, because "Vaisman's fraud was willful, wanton and reprehensible," the court allowed counsel fees under the "bad faith" exception to the American rule and fixed the amount at $47,808.42.

I. JURISDICTION

The first inquiry is directed to jurisdiction. Since the plaintiffs are nonresident foreign nationals, the question posed is whether they may invoke the jurisdictional sections of the federal securities laws or are restricted to diversity jurisdiction. The limitation of federal jurisdiction in such circumstances has been discussed in two recent opinions of the Court of Appeals for the Second Circuit: Bersch v. Drexel Firestone, Inc., 519 F.2d 974 (2d Cir.), cert. denied, 423 U.S. 1018, 96 S.Ct. 453, 46 L.Ed.2d 389, 44 U.S.L.W. 3344 (1975), and IIT v. Vencap, Ltd., 519 F.2d 1001 (2d Cir. 1975). See also, Note, American Adjudication of Transnational Securities Fraud, 89 Harv.L.Rev. 553 (1976). The Second Circuit would apply the anti-fraud provisions of federal securities laws to:

1. resident Americans whether or not any acts or culpable omissions of material importance occurred in the United States;

2. Americans resident abroad only for acts or culpable omissions within the United States which significantly contributed to the loss; and

3. foreigners outside the United States only if the proscribed conduct within this country directly caused the loss.

Bersch v. Drexel Firestone, Inc., 519 F.2d at 993.

Unlike the cases in the Second Circuit, we are not here faced with a predominantly foreign transaction. Because the difficulties inherent in any attenuation of jurisdiction ³ are not seriously implicated in the circumstances of this case, we do not believe it desirable to discuss at length the transnational scope of the federal securities laws. Conduct within the United States is alone sufficient from a jurisdictional standpoint to apply the federal statutes, Restatement (Second) of Foreign Relations Law of the United States § 17 (1965), and the question may simply be whether, on policy grounds, we should apply the securities legislation. Leasco Data Processing Equipment Corp. v. Maxwell, 468 F.2d 1326, 1334-1335 (2d Cir. 1972).

Wherever the jurisdictional line is to be drawn, see IIT v. Vencap, Ltd., 519 F.2d at 1018, we entertain no doubt that application of federal law is proper, in this instance, under either the Second Circuit's formulation or that of the ALI Proposed Federal Securities Code § 1604. Cf. Securities and Exchange Commission v. Kasser, 391 F.Supp. 1167 (D.N.J.1975). The fraudulent scheme was conceived in the United States by American citizens, involved stock in an American corporation traded on American over-the-counter exchange, and an American securities broker from his office in New Jersey was responsible for the wrongful omissions. Moreover, on policy grounds the interest of the United States in regulating the conduct of its broker-dealers in this country and enhancing world confidence in its securities market is ample justification for applying the securities laws. We conclude that federal jurisdiction was properly invoked.

II. CORPORATE LIABILITY

Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), ⁴ prohibits The plaintiff must prove knowledge by the defendant, intent to defraud, failure to disclose or misrepresentation, materiality of the information and, in some instances, reliance by the plaintiff. Thomas v. Duralite Company, Inc., 524 F.2d 577 (3d Cir. 1975); Rochez Bros., Inc. v. Rhoades I, 491 F.2d 402 (3d Cir. 1974).

the use of fraudulent schemes or devices in connection with the purchase or sale of securities. To implement the statute, the Commission enacted Rule 10b-5, ⁵ violation of which gives rise to a private cause of action. Ernst & Ernst v. Hochfelder, --- U.S. ----, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976); Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975).

The district court found a specific intent to defraud which satisfies the scienter requirement discussed in Ernst & Ernst v. Hochfelder, supra. The remaining requisites for liability under § 10(b) and Rule 10b-5 are established in the record. VaisCo was held liable both under § 20(a) of the Securities Exchange Act, 15 U.S.C. § 78t(a), as a "controlling person" and under the common law doctrine of respondeat superior.

The company's active participation in the scheme, its receipt of the benefits, and its status as a broker-dealer fully justify imposition of liability. It is clear that VaisCo's role was not merely that of a facade for fraud, but rather one of a culpable confederate. Cf. Rochez Bros., Inc. v. Rhoades II, 527 F.2d 880 (3d Cir. 1975); Thomas v. Duralite Company, Inc., 524 F.2d at 586. Although the defendants seek to avoid liability by claiming that Erb was acting on behalf of Straub rather than VaisCo or that Erb was a dual agent, the record justifies the district court's contrary finding.

III. DUE DILIGENCE

Defendants argue that plaintiffs should be barred from recovery because Straub did not exercise due diligence before purchasing the securities. They emphasize that he neither demanded a prospectus nor initiated any investigation into...