Weber v. CMP CORPORATION
Decision Date | 02 June 1965 |
Citation | 242 F. Supp. 321 |
Parties | Shirley WEBER, Lena Lermsider, Ira Schrager, Seymour Zaldin and Harriet Zaldin, Plaintiffs, v. C.M.P. CORPORATION, Fred M. Stewart, Joseph J. Flannery, James B. Staley, Joseph E. Sheehan, Myron A. Lomasney and Myron A. Lomasney & Co., Defendants. |
Court | U.S. District Court — Southern District of New York |
Poletti, Freidin, Prashker, Feldman & Gartner, New York City, for plaintiffs. Lawrence H. Reilly, Paul R. Frank, New York City, of counsel.
Leonard E. Russack, New York City, Stephen L. Bernstein, New York City, of counsel, for defendants C. M. P. Corp., Joseph J. Flannery and James B. Staley.
This is a motion by defendants C. M. P. Corporation (CMP), Flannery and Staley for orders granting the following relief:
The action is by purchasers on or about March 14, 1962 of capital stock of CMP. The action was commenced on April 24, 1964.
This avers that two of the defendants sold capital stock of CMP to plaintiffs, that all defendants (except Myron A. Lomasney & Co.) made specific untrue statements of material facts, that all defendants (except Myron A. Lomasney & Co.) omitted to state specific material facts, that plaintiffs relied on the untrue statements, and that all defendants (except Myron A. Lomasney & Co.) in such manner violated Section 17(a) of the Securities Act of 1933 (15 U.S.C. § 77q (a); the "1933 Act"). Section 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. § 78j(b); the "1934 Act") and Rule 10b-5 of the Rules and Regulations of the Securities and Exchange Commission (17 CFR 240.10b-5). It will be noted that there is no averment that defendants had any knowledge of the falsity of their statements. So far as the claim is concerned, defendants may have made innocently or negligently untrue statements. The claim is not based on fraud.
Sections 11 and 12 of the 1933 Act (15 U.S.C. §§ 77k and 77l) specifically provide for civil liabilities for untrue statements or misleading omissions. These liabilities are subject to a one year statute of limitations (15 U.S.C. § 77m). Thus these sections could not have been invoked by plaintiffs at the time the case at bar was commenced.
May a civil suit be maintained by a buyer of securities as a private remedy under Section 17(a) of the 1933 Act and under Rule 10b-5 promulgated under the 1934 Act?
There are persuasive reasons for a negative answer. In the 1933 Act, Congress specifically provided for civil liability in Sections 11 and 12 (15 U.S.C. §§ 77k and 77l) and in so doing imposed certain specific rules: (a) the one year statute of limitations, (b) the discretion in the Court to require a bond of plaintiffs, and (c) the placing on defendants of the burden of proof that they reasonably believed their statements to have been true, etc. To imply a civil liability under Section 17(a) which would be free of these restrictions seems illogical. See Loss, Securities Regulation (2d ed.) 1784-1787. As for the 1934 Act and Rule 10b-5, the same reasoning is applicable because the two acts are closely related and there seems no reason why the buyer of securities given a private remedy, with restrictions, in Sections 11 and 12 of the 1933 Act should be given an additional remedy without restrictions under Rule 10b-5. This reasoning was early adopted in Rosenberg v. Globe Aircraft Corp., 80 F.Supp. 123 (E.D.Pa.1948) where the court said (at 124):
See also Montague v. Electronic Corp. of America, 76 F.Supp. 933 (S.D.N.Y. 1948). Professor Loss agrees with this reasoning. Loss, above cited, at 1787.
But then came Fischman v. Raytheon Mfg. Co., 188 F.2d 783 (2d Cir. 1951). Our Court of Appeals there held that a civil liability to a buyer of securities could be implied under Rule 10b-5 if fraud (meaning, knowledge of the falsity of the alleged untrue statements) was alleged and proved. In other words, the liability was not the same as that under Sections 11 and 12 of the 1933 Act; it was different because the additional ingredient of fraud was required as a part of the case for a plaintiff. The court stated (188 F.2d at 786-787; emphasis supplied):
And at the same time the court said (byway of dictum) that there was an implied civil liability under Section 17 of the 1933 Act, again with the necessary proviso that real fraud (scienter) be present. (188 F.2d at 787 n. 2):
It must be emphasized that the reasoning of the Second Circuit requires the presence of scienter in some form — something more than mere misstatements which might be innocent or negligent. If innocent or negligent misstatements were actionable under Section 17(a) of the 1933 Act or Section 10(b) of the 1934 Act (and Rule 10b-5), then such a remedy would be simply duplicative of that provided by Sections 11 and 12 of the 1933 Act and would nullify the restrictions made applicable by Congress to those sections. Judge Irving Kaufman made this clear in Thiele v. Shields, 131 F.Supp. 416, 419 (S.D.N.Y.1955):
In other actions in this Court in which a private remedy under Rule 10b-5 was sustained, there were averments that the false statements were known to defendants to be false. Baron v. Shields, 131 F.Supp. 370 (S.D.N.Y.1954); Greenwich Savings Bank v. Shields, 131 F.Supp. 368 (S.D.N.Y.1955).
Professor Loss believes that some element of scienter, even if "watered-down", must be required for a private remedy under Rule 10b-5 or that Rule would be in excess of the powers of the Commission. Loss, above cited, at 1766.
Ellis v. Carter, 291 F.2d 270 (9th Cir. 1961), without citing Fischman on this point, reaches a contrary result.
Judge McLean has recently followed Ellis v. Carter and ruled that in a private action under Section 17(a) of the 1933 Act there need be no averment of scienter. Dack v. Shanman, 227 F.Supp. 26 (S.D.N.Y.1964).
Since Fischman has been neither overruled nor disapproved by our Court of Appeals, I do not feel that I am at liberty to follow Ellis v. Carter. O'Neill v. Maytag, 339 F.2d 764 (2d Cir. 1964) and List v. Fashion Park, Inc., 340 F.2d 457 (2d Cir. 1965) do not cite Fischman and do not seem to affect its validity. For example, O'Neill dealt with breach of a fiduciary obligation. The court said (339 F.2d at 767-768):
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