Dack 39;s Duplicate

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Peppin Kishore

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Aug 3, 2024, 5:32:14 PM8/3/24

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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.

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):

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):

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.

Later, with reference to "deception", the court said that it "need not be deception in any restricted common law *325 sense" but that "there must be allegation of facts amounting to deception in one form or another" (339 F.2d at 768). The emphasis on the word "deception" seems to indicate a view that innocent or negligent misrepresentations would not give rise to a cause of action under Rule 10b-5; "deception" has a meaning similar to "cheating" or "hoodwinking" (Webster's Third New International Dictionary, p. 585).

But were I free to do so, I would not follow Ellis v. Carter which, with great deference, seems to me (on the specific point under discussion) to be in error. The 1933 and 1934 Acts are closely related, were adopted close together in point of time, and were part of the same legislative program. The first Act dealt primarily with the distribution of securities; the second Act dealt primarily with securities transactions after initial distribution had been made. To give a private remedy under Rule 10b-5 and Section 17(a) is simply to duplicate (without their restrictions) the express liabilities created by Sections 11 and 12 of the 1933 Act unless the remedy under Section 17(a) and Rule 10b-5 be made different. The Fischman decision at least recognized this aspect and did something about it. The Fischman decision says that if you rely solely on innocent or negligent misstatements, your sole remedy is under Sections 11 and 12 of the 1933 Act with the short statute of limitations and other procedures laid down by Congress. If you wish to avoid those limiting procedures, you must allege and prove real fraud, that is, scienter. Such an analysis seems far more reasonable to me than the broad generality of Ellis v. Carter.

This count is directed against defendants Flannery (a movant), Shoehan, Lomasney and Myron A. Lomasney & Co. It is substantially the same as the first count and for the same reason fails to state a claim upon which relief can be granted.

This count is based on the common law rather than a federal statute. It charges that all defendants conspired to sell stock of CMP and pursuant thereto did sell such stock to plaintiffs by means of the untrue statements, etc. specified in paragraphs 7, 8, 13 and 14 of the complaint.

The suggestion that the Fourth Count should be dismissed as "redundant" is without merit. There is no reason why plaintiffs should not join a common law claim with their claims under federal statutes.

The motion is granted to the extent that the First, Second and Third Counts *326 of the complaint are dismissed for failure to state a claim upon which relief can be granted, with leave to plaintiffs to serve an amended complaint, if they be so advised, on or before June 11, 1965. The motion is otherwise denied.