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JORDAN BUILDING CORPORATION v. DOYLE

June 28, 1967

JORDAN BUILDING CORPORATION ET AL., PLAINTIFFS,
v.
DOYLE, O'CONNOR & CO., INC., ET AL., DEFENDANTS.



The opinion of the court was delivered by: Parsons, District Judge.

MEMORANDUM OPINION AND ORDER

The motions in this case were originally ruled upon in Court several weeks ago. However, after having heard further argument of counsel which invoked certain reservations as to the propriety of my disposition of the matter, I vacated that ruling in order that I might reconsider. The motions on which I am ruling are taken on behalf of all the defendants. They are to dismiss Counts I and III of the complaint for failure to state a claim upon which relief can be granted.

This case grew out of the alleged purchase by the plaintiffs of debentures of International Photocopy Company, Inc. The plaintiffs allege that they were induced to purchase these grossly over-valued securities because of material misstatements made by the defendants. For purposes of clarity, it should be noted at the outset that this is not a stockholder's derivative litigation and the problems and controversies growing out of the decision in Case Co. v. Borak, 377 U.S. 426, 84 S.Ct. 1555, 12 L.Ed.2d 423, are not relevant here.

COUNT I

Count I bases recovery on the conclusion that there has been a violation of Rule 10b-5 of the rules promulgated by the Securities and Exchange Commission under Section 10(b) of the Securities Exchange Act of 1934. The defendants argue that to imply from Rule 10b-5 a buyer's right of action would be inconsistent with the carefully drawn statutory scheme established by the Securities Act of 1933 and the Securities Exchange Act of 1934.

Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), reads:

  It shall be unlawful for any person, directly or
  indirectly, by the use of any means or
  instrumentality of interstate commerce or of the
  mails, or of any facility of any national securities
  exchange * * * (b) to use or employ, in connection
  with the purchase or sale of any security registered
  on a national securities exchange or any security not
  so registered, any manipulative or deceptive device
  or contrivance in contravention of such rules and
  regulations as the Commission may prescribe as
  necessary or appropriate in the public interest or
  for the protection of investors.

Rule 10b-5 of the Rules and Regulations under the Securities Exchange Act of 1934, 17 C.F.R. § 240.10b-5, promulgated by the Securities and Exchange Commission under the authority of Section 10(b), provides:

  It shall be unlawful for any person, directly or
  indirectly, by the use of any means or
  instrumentality of interstate commerce, or of the
  mails, or of any facility of any national securities
  exchange, (1) to employ any device, scheme, or
  artifice to defraud, (2) 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 misleading, or (3) 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.

It is readily seen that Section 10(b) is not self-operative but after setting up a basic area of unlawful conduct causes itself to be applicable only to conduct which in the implementation of it is prohibited by the rules of the Securities Exchange Commission. Rule 10b-5 is the rule that sets out in detail that which in generalities is prohibited by Section 10(b)

It can also be noticed readily that Rule 10b-5 does not by its terms purport to create any private rights in either buyers or sellers. It simply describes in detail the certain action which "shall be unlawful". Sections 21 and 32 of the Act, 15 U.S.C. § 78u and 78ff, provide for public remedies against those who have engaged in actions made unlawful by the Act. I find no section of the Act which for the purposes here creates a private right of action. The plaintiffs, however, would argue that a private right of action should be implied into this rule, and that this right should be recognized by the Courts.

I am not unmindful that many Courts have taken the action which the plaintiffs in the instant case urge by their complaint. See: Stevens v. Vowell, 343 F.2d 374 (10th Cir. 1965); Boone v. Baugh, 308 F.2d 711 (8th Cir. 1962); Texas Continental Life Insurance Co. v. Dunne, 307 F.2d 242 (6th Cir. 1962); Ellis v. Carter, 291 F.2d 270 (9th Cir. 1961); McClure v. Borne Chemical Co., 292 F.2d 824 (3rd Cir. 1961); Hooper v. Mountain States Securities Corporation, 282 F.2d 195 (5th Cir. 1960); and Fischman v. Raytheon Mfg. Company, 188 F.2d 783 (2d Cir. 1951). However, a careful reading of these cases convinces me that all these decisions leave serious questions unanswered. I must seek to come to a conclusion which, in the case before me, I feel best solves the problem at hand, and best comports with the intention of the Congress which originally drafted Section 10(b) and the Commission which promulgated Rule 10b-5.

The Securities Act of 1933, 15 U.S.C. § 77a et seq., and the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq., are both designed to control and regulate the market in securities and should be read together. The 1933 Act regulates the distribution of securities and its emphasis is on the protection of buyers. Section 5 of that statute requires the registration with the SEC of any security offered or sold in interstate commerce, or by use of the mails, unless some exemption is available. The 1933 Act also provides, generally, in its Section 17(a), that it shall be unlawful to offer or sell securities, using interstate facilities or the mails, by any fraudulent means or misleading statements.

Congress provided public remedies for violations of Sections 5 and 17(a). Under Section 20(b) the SEC may sue in a District Court for an injunction, and a ...


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