Wolfson v. Baker, 70-1036-Civ-J-T.
| Decision Date | 20 January 1978 |
| Docket Number | No. 70-1036-Civ-J-T.,70-1036-Civ-J-T. |
| Citation | 444 F. Supp. 1124 |
| Parties | Louis E. WOLFSON, Plaintiff, v. John D. BAKER, Jr., et al., Defendants. |
| Court | U.S. District Court — Middle District of Florida |
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William H. Maness, Jacksonville, Fla., Roy Cohn, Saxe, Bacon & Bolan, P. A., New York City, for plaintiff.
Thomas M. Baumer, Mahoney, Hadlow & Adams, Jacksonville, Fla., for defendants.
This is a case which began on December 17, 1970, with the filing of a one-count complaint purporting to state an implied, private claim under the federal securities laws. To date, no answer has been filed on behalf of the defendants. Instead, the defendants have moved several times to dismiss the complaint, to obtain a more definite statement of the plaintiff's allegations, or for summary judgment on the merits. As a result, the cause is presently before the Court on the plaintiff's third amended complaint, filed on February 14, 1975, and the defendants' responsive motion to dismiss or, in the alternative, for summary judgment. By prior order of this Court, discovery to date has been limited to matters germane to these threshold proceedings. For the reasons set forth below, this Court has concluded that the defendants' motion is well taken, and accordingly the Court will grant their motion — in some respects through a dismissal with prejudice, and in other respects through a summary judgment on the merits.
The plaintiff's third amended complaint sets forth four counts. Although it alleges a plethora of named defendants, there are only two real defendants in this case: (1) Reynolds & Company (hereinafter "Reynolds"), a New York partnership which engages in the securities brokerage business, and (2) the estate of John Morley, who prior to his death acted as the plaintiff's stockbroker for a number of years.1 Essentially, it is the actions of John Morley which underlie all of the plaintiff's claims.
Count I of the third amended complaint purports to state a private, implied right-of-action arising under the Securities Exchange Act of 1934 and certain rules and regulations of the Securities and Exchange Commission (hereinafter "SEC"). This count alleges in pertinent part that (1) beginning in 1943, John Morley acted as the stockbroker for the plaintiff Wolfson and his business associates; (2) that prior to June 1963 Morley was employed by the brokerage firm of A. M. Kidder & Company (hereinafter "Kidder"); (3) that after June of 1963 Morley was employed by the defendant Reynolds; (4) that at all times during their broker/customer relationship Morley (and, vicariously, the defendant Reynolds) owed the plaintiff a duty of care by virtue of (a) a series of signed agreements known as "broker/customer" agreements, setting forth certain terms and conditions of the relationship, and (b) Rule 405 of the New York Stock Exchange, the terms of which are fully set forth hereinafter; (5) that in connection with certain sales by the plaintiff of his capital stock in Continental Enterprises, Inc. (hereinafter "Continental"), the duty of care enumerated in item (4) supra was "recklessly disregarded"; (6) that as a proximate result of (5) the plaintiff was indicted and convicted in the United States District Court for the Southern District of New York on September 29, 1967, for violating section 5 of the Securities Act of 1933 15 U.S.C. § 77e (1970); (7) that as a further proximate result of (5) the plaintiff has been joined as a party defendant in four civil suits brought in Kentucky and New York by shareholders of Continental claiming damages in excess of two million dollars; and (8) that the plaintiff has, as a result of his criminal conviction, sustained certain specified damages. Count I admits that prior to June of 1963 the defendant Morley was employed not by the defendant Reynolds but by Kidder, but this count also alleges that Reynolds succeeded to the liabilities of Kidder when it acquired certain of Kidder's assets in 1963.
Count II also purports to state an implied private claim under the Securities Exchange Act of 1934. It realleges much of Count I verbatim, but by its terms is limited to the transactions in Continental stock occurring after June of 1963 — the date when Reynolds bought out Kidder's Jacksonville office and employed John Morley — and seeks to recover for those transactions in Continental stock for which Reynolds is liable as the direct employer of Morley, i. e., independent from whatever liabilities Reynolds might have succeeded to when it acquired Kidder's Jacksonville assets.
Count III purports to state claims under both federal and state law, invoking the Court's pendent jurisdiction as to the latter claims. It alleges that while acting on behalf of Kidder and the defendant Reynolds, the defendant Morley willfully and fraudulently misrepresented to the plaintiff that he could engage in the purchase and sale of stock in Continental and three other corporations without running afoul of the prohibitions of any federal or state securities laws. Count III further alleges that the defendants' fraudulent misrepresentations proximately resulted in the criminal conviction and civil litigation previously recounted, and the damages incurred thereby.
Count IV alleges that, under state law, Wolfson is entitled to recover punitive damages for the transgressions alleged in the preceding three counts. This count is wholly dependent upon the Court's exercise of its pendent jurisdiction, since no claim is asserted under federal law.
From the foregoing, it should be apparent that the plaintiff relies heavily upon his criminal trial and conviction to support his cause of action. The criminal conviction comprises the cornerstone of his claim for damages; the only injuries alleged, aside from that conviction, are those incurred in defending the four civil suits instituted by Continental shareholders. In the Court's view, Wolfson's criminal trial and conviction are of critical importance here, not only as an essential element (i. e., actual injury) of Wolfson's cause of action, but also because the prior trial conclusively establishes certain facts for the purposes of this case through the operation of the collateral estoppel doctrine. In fact, the Court's analysis of this case hinges upon collateral estoppel principles, and the effects of those principles on the merits of this case.
In analyzing the possible collateral estoppel effects of Wolfson's 1967 criminal conviction, it has been necessary for the Court to review the record of that case in some detail. It is, of course, a fundamental precept of the collateral estoppel doctrine that that doctrine can operate only as to those facts which have been actually litigated and necessarily determined in a prior proceeding. See generally 1B J. Moore, Federal Practice § 0.441 (2d ed. 1974). For summary judgment purposes, the defendants have offered as an exhibit a certified copy of the record of Wolfson's criminal case, and the Court has examined this exhibit closely. Upon reflection, the Court is convinced that, by operation of the collateral estoppel doctrine, at least one crucial fact is conclusively established for the purposes of this case: the plaintiff Wolfson is estopped to deny that, at the time of the stock transactions alleged in the indictment upon which he was tried and convicted, he knew that the securities laws required that he file a registration statement before engaging in those transactions.
The Court will hereinafter examine the implications of this fact in the context of the instant case. Preliminarily, however, the Court should detail the reasons underlying its conclusion that collateral estoppel precludes Wolfson from denying that he knew of the illegality of the transactions which led to his criminal conviction.
The indictment upon which Wolfson was tried and convicted contained nineteen counts. Count One alleged that Wolfson had conspired with various other persons to violate sections 5 and 24 of the Securities Act of 1933, 15 U.S.C. §§ 77e and 77x (1970). Counts Two through Nineteen alleged substantive violations of the same statutes in connection with eighteen specified sales of large blocks of stock in Continental Enterprises, Inc., allegedly executed at Wolfson's direction between October 5, 1961, and January 9, 1962. Succinctly stated, the gravamen of the government's case was that Wolfson's (and his close associates') holdings in Continental stock2 were substantial enough to require the filing of a registration statement with the SEC as a condition precedent to Wolfson's sale of his Continental stock in such large quantities during such a short period of time. It was undisputed that the sales of stock in question were not accompanied by any registration statement. As a predicate for Wolfson's criminal liability, the terms of 15 U.S.C. § 77x (1970) required that the government prove — beyond a reasonable doubt, of course — that Wolfson's failure to file the requisite documents with the SEC was a willful act on Wolfson's part.
Much of the government's case against Wolfson rested on undisputed facts. No one denied that the alleged sales of Continental stock had been made. In fact, no one seriously challenged the government's assertion that the sales in question ran afoul of the securities laws due to the lack of an accompanying registration with the SEC. Wolfson's defense focused almost entirely upon the willfulness element of the crimes alleged — briefly put, Wolfson claimed ignorance. He maintained that while, perhaps, technical violations of the law had occurred, he had had no knowledge of any illegality in connection with the Continental stock sales.
The issue of whether Wolfson actually knew that his sales of Continental stock were legally deficient was, by far, the most hotly contested issue at Wolfson's trial. During its case-in-chief, the...
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