Wolfson v. Baker

• Decision Date: 14 August 1980
• Docket Number: No. 78-2072,78-2072
• Parties: Fed. Sec. L. Rep. P 97,607 Louis E. WOLFSON, Plaintiff-Appellant, v. John D. BAKER, Jr., et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1074

623 F.2d 1074

Fed. Sec. L. Rep. P 97,607

Louis E. WOLFSON, Plaintiff-Appellant, v. John D. BAKER, Jr., et al., Defendants-Appellees.

No. 78-2072.

United States Court of Appeals Fifth Circuit.

Aug. 14, 1980.

William H. Maness, Jacksonville, Fla., Saxe, Bacon & Bolan, Roy M. Cohn, New York City, for plaintiff-appellant.

Mahoney, Hadlow & Adams, Thomas M. Baumer, Jacksonville, Fla., for defendants-appellees.

Appeal from the United States District Court for the Middle District of Florida.

Before MORGAN, ANDERSON and RANDALL, Circuit Judges.

RANDALL, Circuit Judge:

In 1967, Appellant Louis E. Wolfson was convicted following a jury trial in the Southern District of New York on nineteen counts of an indictment charging him with violating and conspiring to violate sections 5 and 24 of the Securities Act of 1933, 15 U.S.C. §§ 77e and 77x, in connection with the sale of unregistered stock of Continental Enterprises, Inc. (Continental). Wolfson was sentenced to concurrent prison terms of one year on each count and was fined $100,000. The conviction was affirmed on appeal. United States v. Wolfson, 405 F.2d 779 (2d Cir. 1968), cert. denied, 394 U.S. 946, 89 S.Ct. 1275, 22 L.Ed.2d 479 (1969). A motion for a new trial on the basis of newly discovered evidence was denied following an extended evidentiary hearing, United States v. Wolfson, 297 F.Supp. 881 (S.D.N.Y.1968), and the denial of the motion was affirmed on appeal, United States v. Wolfson, 413 F.2d 804 (2d Cir. 1969).

In 1970, Wolfson filed a civil suit in the Middle District of Florida against the Appellees. The one-count complaint purported to state an implied, private cause of action under the federal securities laws. As a result of a series of motions by the Appellees, Wolfson filed his third amended complaint, which the district court described as follows:

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. 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), the duty of care enumerated in item (4) supra was "recklessly disregard(ed)"; (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.

Wolfson v. Baker, 444 F.Supp. 1124, 1126-27 (M.D.Fla.1978) (footnote omitted). ¹ Appellees moved to dismiss or, in the alternative, for summary judgment. The district court denied recovery to Wolfson on all four counts of the complaint; it granted summary judgment with respect to Counts I and II, and dismissed Counts III and IV with prejudice under Fed. R. Civ. P. 12(b)(6).

With respect to Counts I and II, after carefully reviewing the record of Wolfson's criminal trial and the issues litigated therein, the district court applied the doctrine of nonmutual collateral estoppel to prevent Wolfson from denying "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." 444 F.Supp. at 1128. The trial court determined that Wolfson had a full and fair opportunity to litigate the issue of his knowledge, that the issue of his knowledge had been directly determined in the criminal trial, and that no injustice would result from the application of collateral estoppel in this case. After treating the threshold issue of the applicability of nonmutual collateral estoppel, the district court turned to the effect of its application of collateral estoppel on the merits of Wolfson's case. It denied Appellees' motion to dismiss Counts I and II under Rule 12(b)(6), holding that an implied private right of action exists under NYSE Rule 405, and that "reckless disregard of the duty imposed by Rule 405 is sufficient to sustain a cause of action for a breach of that rule." Id. at 1134. The district court, however, granted summary judgment for Appellees on Counts I and II on the basis that Wolfson's knowledge that a registration statement was required for his transactions in Continental stock precluded recovery on two alternative grounds. First, noting that a critical factor in determining whether a private right of action exists is whether the plaintiff is a member of the class which the laws in question were designed to protect, the district court held that Rule 405 protects innocent investors and that Wolfson was unable to bring himself within that class. Second, the court held that the Appellees had a meritorious in pari delicto defense to the Rule 405 claim. With respect to Count III, which asserted both federal and state claims based on fraudulent misrepresentations which allegedly induced Wolfson to sell his stock in Continental and three other corporations, the district court granted the Appellees' motion to dismiss under Rule 12(b)(6) on the basis that the complaint alleged no actual injury directly related to the sale of stock in corporations other than Continental. As an alternative ground for the dismissal of the state claim in Count III, the district court noted its discretionary power to dismiss the entirely pendant state claim in the absence of a surviving federal claim. With respect to Count IV of the complaint, which relied wholly on pendant jurisdiction, the district court granted the motion to dismiss.

Wolfson asserts four points of error on appeal: (1) the district court erred in applying the doctrine of nonmutual collateral estoppel to establish Wolfson's knowledge of the illegality of his sales of Continental stock; (2) the district court erred in holding that Wolfson's claim was barred by the doctrine of in pari delicto; (3) the district court erred in dismissing Count III of the complaint; and (4) the district court erred in denying discovery to Wolfson.

After a careful consideration of the issues raised on appeal, we affirm the judgment of the district court.

Collateral Estoppel

The threshold question in this case is whether the district court properly invoked the doctrine of nonmutual collateral estoppel to establish Wolfson's knowledge that a registration statement was required for his sales of Continental stock. Wolfson argues that the district judge erred in applying collateral estoppel because (1) a criminal conviction cannot...