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United States District Court, Northern District of Illinois, E.D

September 15, 1967


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


Plaintiff Drake complains that he purchased Thor stock through the facilities of the New York Stock Exchange at a time when the assets and profits of Defendant Thor were being fictitiously reported in its financial statements and thereupon promulgated to the public as well as to Thor's stockholders, and that when the true financial condition became known the price of Thor shares as then traded on the New York and Midwest Stock Exchanges dropped precipitously. Thor is charged with falsification of its inventory and sales figures and issuing financial statements reflecting such false figures. Peat, Marwick, Mitchell & Co., Thor's independent accounting firm, is charged with applying inappropriate accounting procedures with respect to the Thor audits and uttering untrue certifications of Thor's false financial statements. The cause is a class action on behalf of certain persons similar to plaintiff who had bought and subsequently sold their shares. In another action, Greenwald et al. v. Lind et al., 65 C 1928, a complaint was filed by persons who are still stockholders as a class action. The two suits have been consolidated.

A Rule 10b-5 claim is alleged as well as claims under § 18 and § 14 of the Securities Exchange Act of 1934, and a common law claim against Peat, Marwick.

The Defendant, Peat, Marwick, has filed a motion to dismiss the action, but the points raised in its motion had been ruled upon by Judge Hoffman in Greenwald and are controlling. However, Defendant also urges that this Court's recent decision in Jordan Building Corp. v. Doyle, O'Connor & Co., 282 F. Supp. 87, N.D.Ill., July 18, 1967, is controlling with regard to the right to sue under Section 10b-5. This memorandum is devoted to an elaboration of the holding in Jordan as the present case is found to be distinguishable.

In Jordan, this Court had granted the defendants' motion to dismiss plaintiff's complaint, which alleged a claim under 10b-5 that plaintiff had purchased debentures which were an original issue in a private sale and relied upon the representations in a prospectus of the defendant and representations of underwriters that the defendant company was in a sound financial condition when in fact the company was on the verge of economic collapse. The holding was based upon a careful consideration of the current state of the law regarding 10(b)-5.

Section 10(b) of the 1934 Act, 15 U.S.C. § 78j, 48 Stat. 891, 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 —

    (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

Rule 10b-5 C.F.R. § 240.10b-5, as promulgated by the Securities and Exchange Commission, 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 —

    (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 statement made, in the light of the
  circumstances under which they were made, not
  misleading, or

    (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.

Whether Congress intended that an implied private civil remedy exists with reference to 10(b), 15 U.S.C. § 78j, and Rule 10b-5 is questionable. Ruder, Civil Liability Under Rule 10(b)-5: Judicial Revision of Legislative Intent, 57 Nw.U.L.Rev. 627 (1963). Nevertheless, beginning with Judge Kirkpatrick's opinion in Kardon v. National Gypsum Co., 73 F. Supp. 798 (E.D.Pa. 1947), the courts have consistently found that Section 10(b) and Rule 10b-5 imply a remedy for private relief. The issue is no longer raised in litigation. Klein, The Extension of A Private Remedy To Defrauded Securities Investors Under SEC Rule 10B-5, 20 U. of Miami L.Rev. 81 (1965), and cases cited therein. Jennings and Marsh, Securities Regulation: Cases and Materials, at 777 (1963); Fratt v. Robinson, 203 F.2d 627, 37 A.L.R.2d 636 (9th Cir. 1953); Robinson v. Difford, 92 F. Supp. 145 (E.D.Pa. 1950); Speed v. Transamerica Corp. (D.C.Del. 1951) 99 F. Supp. 808; Birnbaum v. Newport Steel Corp., 193 F.2d 461 (2d Cir. 1952); Fischman v. Raytheon Mfg. Co., 188 F.2d 783 (2d Cir. 1951); A.T. Brod & Co. v. Perlow, 375 F.2d 393 (2d Cir. 1967); Vine v. Beneficial Finance Company, 374 F.2d 627 (2d Cir. 1967). This civil remedy has been recognized in the Seventh Circuit as well. James Blackstone Memorial Library Ass'n v. Gulf, M.& O.R.R., 264 F.2d 445 (7th Cir. 1959) cert. den. 361 U.S. 815, 80 S.Ct. 56, 4 L.Ed.2d 62 (1959); Dasho et al. v. The Susquehanna Corp. et al., 380 F.2d 262 (7th Cir., June 26, 1967); Kohler v. Kohler Co., 280 F. Supp. 808 (E.D.Wis. 1962); Northern Trust Co. v. Essaness Theater Corp., 103 F. Supp. 954 (N.D.Ill. 1952).

The courts have used Rule 10b-5 to expand the range of liability in the realm of securities transactions, thereby creating a Federal common law which is in a state of flux. King, Recent Developments Concerning the 1933 Securities Act, and 1934 Securities Exchange Act, 20 U. of Miami L.Rev. 919 (1966); Note, 52 Mich.L.Rev. 893. A recognized authority on the law of securities has expressed his reaction to this development:

  * * * What has happened to Rule 10b-5, the great
  Freeman rule, always reminds me of a cartoon of
  the time showing Mussolini dictating to his
  secretary, and the caption was, "Miss
  Baccigalupi, take a law."

    Whenever I try to explain to a foreign lawyer,
  as I have on a number of occasions, how we have
  developed in this country a scheme for grappling
  with the problems of insider preferences and so
  on, more and more I become increasingly ashamed,
  and that is the only word I can use at this sort
  of jurisprudence. It is awfully hard, really, to
  explain with a straight face, how it is that this
  came about in this great country of ours. It is a
  development that, needless to say, I applaud. It
  was long overdue. But do we have to go on
  indefinitely basing this whole revolutionary
  change on a section of the Exchange Act that says
  it shall be unlawful for any person in the
  purchase or sale of any security to engage in any
  act or practice that the S.E.C. prescribes as
  manipulative or deceptive? How big a house of
  cards can we continue to build on that? This is
  backdoor jurisprudence with a vengeance. Loss,
  History of S.E.C. Legislative Programs And
  Suggestions for A Code, 22 Bus.Lawyer 795, 796

The use of 10b-5, as encouraged by the Securities and Exchange Commission, has lead to the emergence of a Federal law of corporations. Matter of Cady Roberts & Co., CCH Fed.Sec.L.Rep. p. 76803 (1961); Ruder, Pitfalls In the Development of A Federal Law of Corporations By Implication Through Rule 10b-5, 59 Nw.U.L.Rev. 185 (1964-65).

Though the investor and the general public are entitled to legal protection, the development of law in this area requires a consideration of a myriad of complex factors involving corporate and business factors, as well as possible effects upon the national economy. The courts, taking a case by case approach, are not equipped to deal with these problems. Ruder, supra. The law is in a state of confusion and needs codification. Somers, Rule 10b-5: Notes for Legislation, 17 West.Res.L.Rev. 1029 (1966).

One writer, in pointing up the confused and chaotic nature of securities law, refers to an example similar to the fact situation in Jordan, though involving a public offering and sale of a registered security by a public utilities holding company. The complaint, in alleging misrepresentation of a material fact regarding the debentures, alleges violations of § 11, § 12(2), § 17(a) of the Securities Act and § 9(e), § 10(b) and Rule 10b-5, § 15(c)(1) and Rule 15cl-2, and § 18(a) of the Securities Exchange Act. The sections cited reveal differences not only in their substantive content, but also in the allocation among the parties of the burden of proof with respect to substantive matters. The sections differ regarding materiality, reliance and causation, exercise of care, measure of damages, jurisdiction, and costs and attorneys' fees. The writer then concludes:

    The result of the foregoing discrepancies is,
  of course, that the plaintiff will carefully pick
  and choose both the substantive provision and the
  procedural avenue best suited to him.
  Consequently specific safeguards relating to
  burden of proof, defenses, statutes of
  limitations and other conditions to recovery
  which were thought appropriate by the Congress
  when it enacted the specific civil liability
  provisions are entirely avoided. The result is
  that the issues, the underwriter, the
  broker-dealer and others have been denied the
  protection of the safeguards which many people
  thought existed and have been placed with
  increasing frequency in the position of having to
  defend actions, which, only a short time ago,
  were not even contemplated by persons expert in
  the securities law field.

    It is difficult for me to believe that the
  draftsmen of the federal securities laws would
  have taken the trouble to prescribe the
  limitations and defenses applicable to actions
  brought under the various sections which
  specifically provide for civil liabilities if, at
  the same time, they had contemplated that similar
  actions without such limitations and defenses
  could be brought under various other sections
  which specifically provide for civil liabilities.
  In any event, I feel that it would be in the
  public interest to strive for some semblance of
  order and consistency in this area. In my view
  10(b)5 should be a primary target. Henkel,
  Codification-Civil Liability Under The Federal
  Securities Laws, 22 Bus.Lawyer 866, 871

The contradiction and confusion is partly attributable to statutory wording, particularly as to § 10(b) and Rule 10b-5, but the courts must bear some of the blame as civil liability has expanded as a result of loose wording of judicial opinions. A tighter differentiation is needed as to the distinction between purchase and sale. A reconsideration of some of the decisions is needed.

Following the decision in Kardon, supra, the question arose as to whether 10b-5 applied only to sellers, or to both sellers and buyers. The 1933 Act was drafted for the protection of buyers while the 1934 Act extended protection to sellers. To permit the buyer to sue under 10b-5 would nullify the effect of a wall of restrictions imposed upon him under Sections 10 and 11 of the 1933 Act, thus nullifying the intent of Congress.

In Montague v. Electric Corporation, 76 F. Supp. 933 (S.D.N.Y. 1948), the plaintiffs, former and present stockholders of defendant corporation, brought action for damages for alleged untrue statements of material facts and omissions of material facts in a Registration Statement filed with the Securities and Exchange Commission in connection with the public offering of shares of preferred and common stock. The defendants were the corporation, the principal officers and directors, the accountant who certified the financial statements, and seven underwriters. The plaintiffs' original complaint alleged that both Section 11 of the Securities Act and Section 10(b) of the Exchange Act had been violated. When the defendants moved to dismiss or, in the alternative, to require the plaintiffs to furnish an undertaking for costs pursuant to Section 11, the plaintiffs amended their complaint to allege a single cause of action under Section 10(b). The Court noted that:

    The amended complaints plainly state good
  claims under Section 11 of the Securities Act of
  1933. The plaintiffs are persons who acquired
  electronic securities covered by the Registration
  Statement; the defendants are the persons
  specified in Section 11 as the persons who may be
  sued; the claims are based solely on untrue
  statements and omissions in the Registration
  Statement, and the damages are those specified in
  the section. The actions are therefore
  maintainable under Section 11 despite the
  allegations in both amended complaints that the
  actions are under Section 10(b) of the 1934 Act
  and Rule X-10b-5. * * * 76 F. Supp. 933, 935.

The Court then dismissed the complaint:

    The plaintiffs contend, however, that the
  actions may nevertheless be maintained under
  Section 10(b) of the 1934 Act and Rule X-10B-5.
  The purpose of plaintiff in seeking to bring the
  actions under that section and rule is obviously
  to avoid the provision of Section 11(e) of the
  1933 Act providing that in any suit under that
  section "the court may, in its discretion,
  require an undertaking for the payment of the
  costs of such suit, including reasonable
  attornies fees." I do not think that the actions
  can be maintained under that section and rule.

    Section 10(b) of the 1934 Act and Rule X-10B-5
  were clearly not intended to supplant Section 11
  of the 1933 Act. Section 11 of the 1933 Act is
  entitled "Civil liabilities on account of false
  registration statement". It relates to a limited
  special subject, and gives a new remedy to a
  purchaser of a security where the Registration
  Statement contains untrue statements or omissions
  of material facts. Section 10(b) of the 1934 Act
  is, on the other hand, in general language and
  prohibits the use in connection with any purchase
  or sale of a security of "any manipulative device
  or contrivance". These words have been given a
  broad interpretation * * * but they should not be
  construed so broadly as to make an action which
  is maintainable under Section 11 of the 1933 Act
  also maintainable under Section 10(b) of the 1934
  Act. The settled rule of statutory construction
  is that, where there is a special statutory
  provision affording a remedy for specific cases
  and where there is also a general provision which
  is comprehensive

  enough to include what is embraced in the former,
  the special provision will prevail over the
  general provision, and the latter will be held to
  apply only to such cases as are not within the
  former. * * *

    The application of this rule of construction
  permits both Section 11 of the 1933 Act and
  Section 10(b) of the 1934 Act to stand together
  in the same statutory scheme, Section 11 being
  confined to the particular situations specified
  in that section, and Section 10(b) being
  applicable to other situations. * * * 76 F. Supp. 935.

Clearly, the holding of Montague was that a purchaser may not invoke 10b-5 where he has a specific remedy under the provisions of the 1933 Act.

During the same year in which Montague was decided, Judge Kirkpatrick, who had found an implied right for the seller to sue in Kardon, supra, denied the existence of a corresponding right in the buyer in Rosenberg v. Globe Aircraft Corp., 80 F. Supp. 123 (E.D.Pa. 1948). Rosenberg was a suit by plaintiffs who had incurred losses in acquiring defendant corporation's stock shortly after public distribution as resulting from false statements in the registration statement and prospectus. The complaint alleged violations under Rule 10b-5. Judge Kirkpatrick, in dismissing the action, held:

    It is obvious that the cause of action arises
  exclusively from conduct and acts which, whether
  or not they violate the Securities Exchange Act
  of 1934 * * *, unquestionably constitute
  violations of the Securities Act of 1933 * * *.
  In this aspect the complaint states a claim upon
  which relief can be granted and the fact that the
  pleader referred to another statute, the Act of
  1934, is immaterial. * * *

He then found that plaintiffs may not evade the venue provisions of Sections 11 and 12 of the 1933 Act.

  A year later, the Court, in Osborne v. Mallory, 86 F. Supp. 869
 (S.D.N.Y. 1949) permitted a plaintiff purchaser to sue to
recover under 10b-5 from defendant sellers who had allegedly
sold stocks in violation of the 1933 and 1934 Acts without
citing Montague or Rosenberg. Though a cause of action was
alleged under Sections 11 and 12 of the 1933 Act, there was
also an allegation for recovery under Section 15 of the 1934
Act. The Kardon case, involving an action by a defrauded
seller, was cited. The Court in Osborne apparently did not
consider the issues raised in Montague and Rosenberg.

The most important case in this period was the Second Circuit's decision in Fischman v. Raytheon Mfg. Co., 188 F.2d 783 (2d Cir. 1951), which reversed a lower court decision based on Rosenberg and Montague. In Fischman preferred and common stockholders sued to recover for injury sustained because of certain false and misleading statements contained in a registration statement covering defendant's preferred stock. The common stockholders had no cause of action under Section 11 of the Securities Act, since a suit pursuant to that section may be maintained only by one who purchases securities that are the direct subject of a prospectus and registration statement. The trial judge had reasoned that Congress did not intend to afford the common shareholders a remedy under the 1934 Act for the very conduct not actionable under the Securities Act of 1933. In reversing the trial court Judge Frank found that in exchange for his freedom from the restrictions imposed by the Securities Act the purchaser suing under the Exchange Act had the burden of proving fraud, a requirement not present in the 1933 Act. Thus, the two acts did not provide concurrent remedies for identical wrongful conduct. Clearly Judge Frank conceived two separate remedies for two distinct types of wrongdoing. Klein, The Extension of A Private Remedy To Defrauded Securities Investors Under SEC Rule 10B-5, 20 U. of Miami L.Rev. 81, 94-6 (1965).

The Ninth Circuit, in Ellis v. Carter, 291 F.2d 270 (9th Cir. 1961) found that a buyer of fraudulently sold securities may maintain an action under 10b-5. The Court admitted that, read together, the 1934 and 1933 Acts present certain inescapable anomalies, no matter which of several constructions are placed on Section 10(b) and noted that four alternatives suggest themselves: (1) Permitting no civil remedy to either buyer or seller, but under such a construction defrauded sellers are given no remedy under either Act which appears to be inconsistent with the all embracing scope of the legislation and requires that an unexplained distinction be drawn between buyers and sellers; (2) permitting sellers but not buyers to sue under the rule, but this seems inconsistent with the fact that Section 10(b) and Rule 10b-5 are expressly applicable to buyers as well as sellers, and there seems to be no good reason why Congress would want to restrict buyers to the limited remedies in the 1933 Act while giving sellers an unrestricted remedy; (3) permitting buyers as well as sellers to sue under the 1934 Act, but to make buyers' actions thereon subject to the same restrictions as provided for them in the 1933 Act, which is the same as giving him no right under the 1933 Act, leaving an unexplained distinction between buyers and sellers; and (4) permitting buyers as well as sellers to sue under Section 10(b) without any distinction whatever, free of the restrictions imposed by the 1933 Act, though thereby nullifying the procedural restrictions of the 1933 Act. The Court chose the last alternative.

A casebook which presents these cases observes:

    The Fischman and Ellis cases both involved
  situations where the plaintiff buyers could have
  maintained an action under Section 12(2) of the
  Securities Act of 1933. (Judge Frank overlooks this
  section entirely when he says that in the absence
  of an action under Rule 10b-5 the plaintiffs "would
  have no redress whatever under the statute.")
  However, an action under that section would be
  subject to a defense of due care and would also be
  subject to a more stringent venue provision and to
  a shorter statute of limitations. If you assume as
  Judge Frank does, that proof of an intentional
  misstatement is required under Rule 10b-5, then it
  can be plausibly argued that if the plaintiff wants
  to assume this additional burden, he should
  reasonably be freed of the restrictions. On the
  other hand, if you assume, as does the Ellis case,
  that even due care is no defense to an action under
  Rule 10b-5, then the recognition of a private right
  of action in favor of buyers under the Rule will
  have completely abolished Section 12(2), since the
  former would always be more favorable to the
  plaintiff on all counts.

    Neither the Fischman nor the Ellis cases involved
  an action under Rule 10b-5 by a purchaser of
  registered securities who might have sued under
  Section 11 of the 1933 Act. In Fischman on appeal
  the preferred stockholders who had purchased
  registered securities abandoned their cause of
  action under the Rule and were "content to rest
  their claim on * * * Section 11 of the 1933 Act."
  Nevertheless, Judge Frank, in dictum asserts that a
  buyer can sue under the Rule "whether or not he
  could maintain a suit under § 11 of the 1933 Act".
  This result he justified on the basis of his theory
  that an action under the Rule requires proof of

    On the other hand, the only two cases actually
  involving suits under Rule 10b-5 by purchasers of
  registered securities both held that no such suit
  can be maintained [The Montague case], or that if
  it can it is subject to all of the defenses and
  qualifications of a suit under Section 11 [the
  Rosenberg case] (which is the same thing as saying
  it can't be maintained at all).

    The problem of reconciling a private right of
  action in favor of buyers under the Rule with
  Section 11 is essentially the same problem as
  that of reconciling it with Section 12(2).

  However, in the former case the incongruity is
  much more glaring because of the pages of
  restrictions which Congress surrounded an action
  under Section 11, all of which would be "causally
  nullified" by the recognition of an absolute
  liability (per Ellis) based upon Rule 10b-5.
  Jennings and Marsh, Securities Regulation: Cases
  and Materials 791-2 (1963).

In considering the framework of these cases, this Court had, accordingly, dismissed the plaintiff buyers' complaint in Jordan. The complaint in that case stated a cause of action which was governed by Sections 11 and 12 of the 1933 Act and therefore was governed by the holdings in Rosenberg and Montague.

This Court has chosen to reject the approach taken in Ellis, which results in a radical distortion of congressional intent. The Federal securities legislation was designed to protect the investor, maintain integrity and honesty in the securities market, and curb "unnecessary, unwise, and destructive speculation." H.R.Rep.No. 1383, 73rd Cong., 2d Sess. 2 (1934). Where Congress expressly created civil liabilities to implement these policies, two aims predominated: to compensate the innocent investor who had lost money on falsely valued securities and to deter the proscribed practices by effective civil sanctions which complemented injunctive and criminal remedies. But Congress was not unmindful of the necessity to avoid as far as possible any undue interference with honest business activity in the securities market.

  To effectuate the intent of Congress, Rule 10b-5 must be
interpreted within the context of congressional policy. A
particular source of such policy is Section 12(2) of the
Securities Act of 1933, 15 U.S.C. § 771(2), which contains
language similar to Rule 10b-5, while creating a civil right of
action only in favor of purchasers with carefully delineated
substantive and procedural elements. Rule 10b-5, however, fails
to specify the substantive and procedural elements of an action
thereunder. To follow the approach suggested by Ellis would
nullify the effect of Section 12 as well as Section 11 and
thereby thwart the intent of Congress. An effort must be made
to keep the two statutes logically consistent. Comment,
Negligent Misrepresentation Under Rule 10b-5, 32 U. of Chi.L.
Rev. 834 (1965); Trussel v. United Underwriters Limited,
228 F. Supp. 757 (D.Colo. 1964); Weber v. C.M.P. Corp., 242 F. Supp. 321
 (S.D.N.Y. 1965); O'Neill v. Maytag, 339 F.2d 764 (10th Cir.

The decision in A.T. Brod & Co. v. Perlow, 375 F.2d 393 (2d Cir. 1967), which was recently handed down by Judge Kaufman, is distinguishable from Jordan. That case involved a broker who had purchased securities for the defendant's account and the defendant refused to pay for them, causing the broker to incur a loss. Though Judge Kaufman refers at one point to the plaintiff as a purchaser, Ft. Nt. 3 at 397, it had not purchased the securities from the defendant nor the defendant's agent, as was the situation in Jordan. He could not have a cause of action under the 1933 Act. The holding was that Section 10(b) and Rule 10b-5 are not limited to the protection of investors. The case fell, rather, within the trading provisions of the 1934 Act and did not involve securities distribution. This decision does, however, support this Court's holding in the present case.

The case of Dasho et al. v. The Susquehanna Corporation, 380 F.2d 262 (7th Cir. 1967) is not in point. The Court of Appeals did not decide, nor did it find it necessary to decide, whether a buyer has an implied right of action under Rule 10b-5. In Dasho, the plaintiffs were shareholders suing derivatively on behalf of the Susquehanna Corporation alleging violations of Rule 10b-5 and Section 17(a) of the Securities Act of 1933 in regard to a statutory merger involving an exchange of stock with another corporation. In determining whether the complaint stated any claim for relief under Rule 10b-5 or Section 17(a), the Court of Appeals for the Seventh Circuit was primarily faced with the issue of whether there was a purchase or sale by Susquehanna. Both the opinion of Judge Schnackenberg for the Court and of Judge Fairchild, concurred in by Judge Cummings, were devoted to historical and analytical discussion of this issue, and neither opinion purported to analyze or discuss the issues involved in Jordan. In holding that the exchange of securities involved purchases and sales, the Court clearly indicated that the particular transactions in question could be analyzed as either sales or purchases by Susquehanna. Unlike Jordan, it is unlikely that the plaintiff in Dasho could have had a cause of action under the 1933 Act. The fact situation involved trading and insider dealings of a corporation with elements of both purchase and sale. Therefore, any implication which may be drawn from this decision as to the right of a purchaser to sue is not relevant to this Court's decision in Jordan. Similarly, any implication which may be derived from Vine v. Beneficial Finance Company, 374 F.2d 627 (2d Cir. 1967), which also involved a merger, is not relevant. But these decisions, in indicating the residual nature of Rule 10b-5, do support this Court's holding in the present case.

The present case before the Court is distinguishable from Jordan. In that case, the plaintiffs complained that they had purchased debentures as occasioned by means of an untrue prospectus, and sued the issuer of these securities from whom they had purchased them, and the underwriter for damages or rescission of the purchases of the debentures. The complaint alleged that the plaintiffs were victims of an alleged distribution fraud and there was privity between the plaintiffs and the defendants. Clearly, the complaint alleged a cause of action maintainable under Section 12 of the 1933 Act. The complaint therefore could not involve the 1934 Act and Rule 10b-5 which provides a remedy for the rights of buyers.

The 1934 Act applies to securities trading as contrasted to securities distribution, and, in this context, the anti-fraud provisions, including Section 10(b) and Rule 10b-5, applies equally to fraudulent sellers and buyers. The fraud alleged in Jordan, however, involved the distribution rather than trading aspects of the statutory pattern. Therefore, the plaintiffs in Jordan could not seek relief under 10b-5. Rosenberg v. Globe Aircraft, 80 F. Supp. 123 (E.D.Pa. 1948); Montague v. Electronic Corporation, 76 F. Supp. 933 (S.D.N.Y. 1948).

In the present case, however, the allegations refer to both the buying and selling of securities. Clearly, there is trading. The plaintiffs could not obtain relief under any of the specific private remedies under Section 12 of the 1933 Act, since no privity is alleged between the class of plaintiffs and the defendants as required by the provisions of that Act.

Neither congressional intent nor the statutory scheme will be distorted by granting the plaintiffs a remedy under Rule 10b-5. The Rule functions as a reservoir in an interstate economy with transactions occurring all over the country in situations where there simply would not be a remedy without it. Rule 10b-5 is particularly applicable to this case. Jennings, Discussion, 22 Bus.Lawyer 866 (1967); A.T. Brod & Co. v. Perlow, 375 F.2d 393 (2d Cir. 1967).

The defendant has argued that because the complaint states a cause of action which is assertable under Section 18 of the 1934 Act, plaintiff is precluded from asserting Section 10(b) and Rule 10b-5. This contention is disposed of by Judge Lord's decision in Miller v. Bargain City, U.S.A., 229 F. Supp. 33, 37 (E.D.Penn. 1964):

    * * * [I]t is true that the specific conduct
  alleged in the complaint would appear to amount
  to the type of fraud which is covered by Section
  18. However, it is also true that the complaint
  alleges that defendants employed "a device,
  scheme, or artifice to defraud" and that they
  engaged in an "act, practice or course of
  business" which operated as a fraud or deceit.
  These allegations

  are certainly broad enough to permit evidence of
  conduct violative of Rule 10b-5. Discovery may
  reveal that plaintiffs have evidence of conduct
  that transcends the specific conduct embraced in
  Section 18. If so, defendants' first argument
  will be moot. If not, there will be time to
  decide the issue, not now.

Likewise, in the present case, though the complaint alleges conduct which would be covered by Section 18, the complaint also alleges that defendants' officers "devised a plan, scheme and artifice to artificially increase the assets net worth and the net profit of Thor for the years 1961, 1962, 1963 and 1964." The complaint also alleges that Defendant Peat, Marwick "failed to exercise the proper or appropriate auditing procedures," which implies an allegation of negligence which may also transcend the privity requirement of Section 18.

The plaintiffs need not assert privity under Rule 10b-5. Privity as an element of Rule 10b-5 has been rejected in most recent decisions. Cooper v. North Jersey Trust Company, 226 F. Supp. 972, 978 (S.D.N.Y. 1964); Texas Continental Life Insurance Co. v. Dunne, 307 F.2d 242 (6th Cir. 1962); Pettit v. American Stock Exchange, 217 F. Supp. 21 (S.D.N.Y. 1963); Cochran v. Channing Corp., 211 F. Supp. 239 (S.D.N.Y. 1962); Bucholtz v. Renard, 188 F. Supp. 33, 37-38 (E.D.Pa. 1964); Comment, Civil Liability Under Section 10B and Rule 10B-5: A Suggestion for Replacing the Doctrine of Privity, 74 Yale L.J. 658 (1965).

Section 10(b) and Rule 10b-5 are aimed at prohibiting fraudulent schemes in trading in securities and were designed in protecting both investors and the public interest. A.T. Brod & Co. v. Perlow, 375 F.2d 393 (2d Cir. 1967). Within this context, notions of privity cannot apply. Hooper v. Mountain States Securities Corp., 282 F.2d 195 (5th Cir. 1960), cert. den. 365 U.S. 814, 81 S.Ct. 695, 5 L.Ed.2d 693 (1961).

Heit v. Weitzen, 260 F. Supp. 598 (S.D.N.Y. 1966) and Howard v. Levine, 262 F. Supp. 643 (S.D.N.Y. 1965) are not applicable. In these cases, the complaint was dismissed because plaintiff's allegations failed to state a claim for fraud "in connection with the purchase or sale of any security." The complaint alleged that the defendant's financial report which was filed with the Securities and Exchange Commission contained false and misleading statements of material facts in overstating assets and income as based in large part upon earnings, income and assets resulting from substantial overcharges to the United States Government in connection with contracts between the defendant and the Government. The intended purpose of the misstatements was to defraud the Government rather than the investing public. But, in the present case, the alleged misstatements were intended for public information and to induce the public to buy securities. The defendant, in certifying financial statements, directed its activities toward investors. Fischer et al. v. Kletz et al., 266 F. Supp. 180 (S.D.N.Y. 1967). The decision in these cases is questionable. The purpose of the financial statements is to inform the man on the street and the underlying policy of the Securities and Exchange Acts and of Rule 10b-5 is to assure that he can have truthful information in buying securities, regardless of the intended victim of the fraud. Moreover, the defendants have set themselves up to be independent certified public auditors. As such, they have assumed a peculiar relationship with the investing public. As accountants, the defendant clearly cannot be immunized from suit. H.L. Green Company v. Lewie F. Childree, 185 F. Supp. 95 (S.D.N.Y. 1960).

  Defendant Peat, Marwick, in independently auditing Thor's
financial statement, remains liable regardless of whether it
had benefited from the supposedly

inflated market price. The position of an independent auditor
is different from that of other corporate insiders. Judge
Bonsal's holding in SEC v. Texas Gulf Sulphur Co., 258 F. Supp. 262
 (S.D.N.Y. 1966) does not apply to this situation. The
issuance of a financial statement by an independent auditing
firm is not the same as the issuing of a press release.

In Fischer et al. v. Kletz et al., 266 F. Supp. 180 (S.D.N Y 1967), which also involved the Defendant Peat, Marwick in an allegation that it failed to disclose that financial statements which it certified contained false and misleading figures and that interim statements were false and misleading. Judge Tyler refused to dismiss a common law fraud allegation and also found the defendant liable under Rule 10b-5. The Court clearly placed no weight on the absence of any allegation of gain.

The complaint asserts a cause of action which is independent of the provisions of Sections 11 and 12 of the 1933 Act. Fischman v. Raytheon Mfg. Co., 188 F.2d 783 (2d Cir. 1951); Trussel v. United Underwriters Limited, 228 F. Supp. 757 (D.Colo. 1964); Weber v. C.M.P. Corp., 242 F. Supp. 321 (S.D.N.Y. 1965). O'Neill v. Maytag, 339 F.2d 764 (2nd Cir. 1964). The allegations may be sustained as either an intentional misrepresentation or as a negligent misrepresentation. There was reliance upon the alleged misstatements. Note, 63 Mich.L.Rev. 1070 (1965); Comment, supra, 74 Yale L.J. 658 (1965); Comment, Negligent Misrepresentation Under Rule 10b-5, 32 U. of Chi.L.Rev.; Thiele v. Shields, 131 F. Supp. 416 (S.D.N.Y. 1955); Baron v. Shields, 131 F. Supp. 370 (S.D.N.Y. 1954); Greenwich Sav. Bank v. Shields, 131 F. Supp. 368 (S.D.N.Y. 1954); Stevens v. Vowell, 343 F.2d 374 (10th Cir. 1965); List v. Fashion Park, Inc., 340 F.2d 457 (2d Cir. 1965), cert. den. 382 U.S. 811, 86 S.Ct. 23, 15 L.Ed.2d 60 (1965).

The Court denies Defendant's Motion to Dismiss.

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