United States District Court, Northern District of Illinois, E.D
December 22, 1964
CHARLES J. ROGERS, SR., PLAINTIFF,
CROWN STOVE WORKS ET AL., DEFENDANTS.
The opinion of the court was delivered by: Campbell, Chief Judge.
Plaintiff, the owner of some 25% of the stock in the defendant
corporation, is before the court seeking to enjoin the defendant
corporation from selling the plaintiff's stock to discharge an
indebtedness secured by a pledge of the stock in question.
The last five Counts of the Complaint do not allege an
independent basis for predicating federal jurisdiction. They are,
to the extent that they allege any claim against the defendant,
dependent upon the first two Counts and an "ancillary
The first two Counts attempt to bottom jurisdiction on the
Securities Act of 1933 (15 U.S.C.A. at § 77a) and following,
and/or the Securities Exchange Act of 1934 (15 U.S.C.A. § 78a)
Count I alleges that the Corporation's intended pledgee sale of
the stock will violate Section 5 of the Securities Act
(15 U.S.C.A. § 77e). Although not specifically spelled out in the
Complaint, assumingly the alleged violation is the failure to
file the Section's required registration statement and
Count II alleges a violation by the Corporation of Section 10
of the Securities Exchange Act, entitled "Regulation of the Use
of Manipulative and Deceptive Devices." (15 U.S.C.A. § 78j (b)).
The Regulation more specifically alleged to have been violated,
Regulation 240, 10 b-5, and is quoted in the Complaint as
"It shall be unlawful for any person directly or
indirectly, by use of any means or instrumentality of
interstate commerce, or of the mails, or of any
facility of any national securities exchange,
"(a) to employ any device, scheme, or artifice to
"(b) to make any untrue statement of a material
fact or to omit to state a material fact necessary in
order to make the statements made, in the light of
the circumstances under which they were made, not
"(c) to engage in any act, practice, or course of
business which operates or would operate as a fraud
or deceit upon any person, in connection with the
purchase or sale of any security."
The right of a private party affected by violations of the
Securities and Exchange Acts, or the Securities Exchange Act to
maintain an action premised upon such violations can no longer be
questioned. J.I. Case Company v. Borak, 377 U.S. 426
, 84 S.Ct.
1555, 12 L.Ed.2d 423.
However, to properly invoke federal jurisdiction under the
Securities Acts the complaint must be one,
"* * * brought to enforce any liability or duty
created by * *" the appropriate Act (§§ 77v(a) and
78aa of Title 15.)
The applicability of the Acts, said the Supreme Court in
speaking about the § 77d exemptions to the Securities Act,
"* * * should turn on whether the particular class
of persons affected needs the protection of the Act."
S.E.C. v. Ralston Purina Company, 346 U.S. 119,
reading from page 125, 73 S.Ct. 981, page 984, 97
To maintain a Securities Act action and properly invoke federal
jurisdiction absent diversity of citizenship, the plaintiff must
be within that category of persons sought to be protected by the
provisions of the Act; one who sustained or could sustain damages
directly resulting from violations sought to be proscribed by the
Assuming without deciding the existence of the violation
alleged in Count I of the instant Complaint, the plaintiff can
hardly be said to be affected by such a violation. Admittedly he
may be adversely affected by the proposed sale, should the
sellers realize less than the stock's actual value, however, the
violations upon which jurisdiction is totally dependent could in
no way cause or in any way relate to the adverse effect plaintiff
seeks to avoid. For that matter, Count V of plaintiff's Complaint
alleges the value of his stock to be "* * * in excess of
Count IV, in commenting on the pledge agreement makes reference
to plaintiff's "* * * alleged indebtedness of $30,000."
Accepting the in-excess of $200,000 value ascribed by
plaintiff's Complaint, it becomes obvious that the Securities Act
would not be violated unless the sale price of the stock to an
uninformed investor exceeded such an amount. Parenthetically I
might observe that such a sale would certainly be to plaintiff's
benefit and not his detriment.
The acknowledged purpose of the Securities Act and even more
specifically its § 77e registration requirement,
"* * * is to protect investors by promoting full
disclosure of information thought necessary to
informed investment decisions,"
and I am citing S.E.C. v. Ralston Purina, 346 U.S. 119
, and I am
reading from page 124, 73 S.Ct. 981, page 984.
Plaintiff is the owner of the stock to be sold and not an
investor. Moreover, even assuming a dual involvement by the
plaintiff which could be brought about by his bidding at the
auction sale, he would still be an investor possessed "of
information thought necessary to informed investment decisions."
It is apparent that plaintiff is not, and for that matter can
not, under the circumstances pleaded in the Complaint, be a party
adversely affected by the alleged Act violation. I cite Textron
Incorporated v. American Woolen Company, D.C., 122 F. Supp. 305,
one of the many authorities which neither party has referred to
in their brief, so-called.
The Securities Exchange Act also has as its purpose the
protection of investors by the prevention of fiduciary
relationship abuses involving sharp practices and fraudulent
schemes by owners, directors or officers of a corporation in the
taking of short term profits. Peoples Securities Company v.
S.E.C., 5 Cir., 289 F.2d 268.
Not only is the plaintiff not an investor intended to be
protected by the Act, but the Complaint's Count II allegation
that the Notice of Public Sale failed to promulgate financial and
other sundry information about the corporation hardly amounts to
a claim under the Act that any of the corporate officers,
directors or shareholders breached a fiduciary duty and in so
doing realized a personal short term profit.
There being no allegation of fraud alleged against individual
defendants and no showing of any damages to the plaintiff, and
more importantly there being no alleged violation, in my opinion,
of the Securities Exchange Act, the Count fails in its attempt to
properly plead federal jurisdiction. I cite Donovan, Inc. v.
Taylor, D.C., 136 F. Supp. 552; Beury v. Beury, D.C., 127 F. Supp. 786.
I conclude therefore that the statutes pleaded afford no
protection to the plaintiff
under the facts set out in his Complaint. I do not, however,
preclude or prejudice the right of the Securities Exchange
Commission or any affected party, should such a right arise, to
bring an appropriate action alleging the sale in question to be
violative of the Securities or Securities Exchange Act.
Having determined that the plaintiff does not have the right to
invoke the jurisdiction of this court under the pleaded
provisions of Title 15, I need not and do not reach or consider
the issues raised by defendant, including its Claimed § 77d
The temporary restraining order heretofore entered is
accordingly vacated and dissolved, and the Complaint is hereby
dismissed for want of jurisdiction.
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