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July 28, 1970


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


This is an action brought by purchasers of the stock of Hercules Galion Products, Inc. to recover damages for defendants' alleged conspiracy to manipulate the market for such stock. The complaint names stockbrokerage firms, their employees, and certain other individuals and corporations, alleging a detailed scheme whereby defendants are said to have created an artificially active market for Hercules Galion stock in order to raise its price so that certain defendants could sell their holdings at a profit. The complaint, brought as a class action, contains counts based on the securities laws, the anti-trust laws, and the doctrine of common law fraud.

A number of motions to dismiss have been filed. Those of general applicability will be considered first; then those relating to specific defendants or plaintiffs will be discussed.

Count 1 — The Securities Acts

Count 1 of the complaint states that defendants have violated sections 9, 10 and 15(c) of the Securities Exchange Act of 1934 and sections 12(2) and 17 of the Securities Act of 1933. Section 9 of the 1934 Act and section 12(2) of the 1933 Act have their own express limitations periods, while the other cited sections have none. Actions brought pursuant to section 9 must be commenced "within one year after discovery of the facts constituting the violation and within three years after such violation," (§ 9(e)). Actions pursuant to section 12(2) must be brought within one year after discovery of the untrue statement or omission, or after it should have been discovered, and within three years after the sale. (§ 13 of the 1933 Act.) The five year Illinois statute of limitations for fraud (83 Ill.Rev.Stat. § 16) applies, however, to actions brought under § 17 of the 1933 Act and § 10(b) of the 1934 Act. Morgan v. Koch, 419 F.2d 993 (7th Cir. 1969); Northern Trust Company v. Essaness Theaters Corporation, 103 F. Supp. 954 (N.D.Ill. 1952); Fischman v. Raytheon Mfg. Co., 188 F.2d 783 (2d Cir. 1951).*fn1

Many of the defendants in this cause were indicted for their alleged activity by a federal grand jury in New York in August, 1967. Because the complaint in this action was not filed until February, 1969, defendants contend that the action was commenced more than one year after discovery of the violation. They further argue that, since the alleged scheme falls within the prohibitions of § 9 and § 12(2), the other provisions of the Acts should not apply and therefore the one year time bar applicable to § 9 and § 12(2) requires dismissal of count 1.

Defendants' argument is logically persuasive. There is no dispute about their claim that the market rigging scheme alleged in the complaint is completely encompassed within the proscriptions of section 9 of the 1934 Act. To hold that the more expansive provisions of section 10(b) or section 17 apply, with their longer statutes of limitations, is to ignore the express limitations incorporated in the Act. And it assumes that the carefully inserted time limitation in section 9(e) was repealed, sub silentio, by passage of section 10(b) of the same Act, or was rendered meaningless ab initio by prior passage of the 1933 Act. Furthermore, it ignores the rationale of implied remedies under the Securities Acts enunciated in J.I. Case Co. v. Borak, 377 U.S. 426, 84 S.Ct. 1555, 12 L.Ed.2d 423 (1964), where the Court made it clear that remedies were to be created when "necessary to make effective the congressional purpose." 377 U.S. at 433, 84 S.Ct. at 1560. When the congressional purpose has been congressionally implemented by statutory creation of remedies, as it was in §§ 9 and 12(2), the need for judicial implementation of its purpose is certainly diminished.

Despite these misgivings, however, I am constrained to hold that plaintiffs may maintain this action pursuant to section 10(b), Rule 10b-5, and section 17. Such a holding is dictated by the decision of this Circuit's Court of Appeals in Jordan Building Corporation v. Doyle, O'Connor & Co., 401 F.2d 47 (7th Cir. 1968). The plaintiffs in that action sued brokerage houses, their employees, and the issuing corporation claiming that defendants fraudulently induced them to purchase certain debentures. The District Court dismissed count 1, which was premised on a violation of Rule 10b-5, because of its conclusion that the allegations of the complaint fell squarely within the prohibitions of § 12(2) of the 1933 Act. On appeal, the defendants also argued that § 15(c)(1) of the 1934 Act controlled and barred suit under Rule 10b-5. In its reversal, the Court of Appeals rejected these arguments, concluding that "the remedies supplied by and under these acts are cumulative and not mutually exclusive." 401 F.2d. at 51.

No meaningful distinction appears between the Jordan case and the instant action. The broad and virtually unlimited role which the Court there assigned to Rule 10b-5 has equal applicability here. Accordingly, plaintiffs are not limited to the provisions of § 9 or § 12(2), but may also bring this action pursuant to § 17 of the 1933 Act and §§ 10 and 15(c) of the 1934 Act. The motions to dismiss count 1 in its entirety because of the short statutes of limitations applicable to §§ 9 and 12(2) must therefore be denied. See also Klein v. Spear, Leeds, Kellogg, et al. (S.D.N.Y. 1969), 306 F. Supp. 743; Osborne v. Mallory, 86 F. Supp. 869 (S.D.N.Y. 1949); Acker v. Schulte, 74 F. Supp. 683 (S.D.N.Y. 1947).

Nor can this court conclude on the record before it that references to §§ 9 and 12(2) must be stricken from the complaint as barred by the short statutes of limitations. Defendants have filed extracts from the depositions of certain plaintiffs which indicate that they had knowledge of the criminal indictment soon after it was returned, and more than one year before the complaint was filed. These are, of course, not properly before the court on motions to dismiss. And plaintiffs should have a chance to rebut them by submitting evidentiary material. Defendants' motions to dismiss directed to this aspect of count 1 are therefore denied without prejudice to reassertion of the same issue by motion for summary judgment.

Count 2 — The Sherman Act

In count 2 of the complaint plaintiffs reallege most of the allegations of count 1 and claim that defendants have violated section 1 of the Sherman Act, 15 U.S.C. § 1. No cases have been found which discuss the applicability of the anti-trust laws to securities market rigging schemes. For reasons to be stated, I have concluded that count 2 fails to state a cause of action.

As previously noted, section 9 of the 1934 Act expressly prohibits the type of stock market manipulation here alleged. The Sherman Act's prohibition, on the other hand, is addressed more generally to contracts, combinations and conspiracies "in restraint of trade or commerce." As stated in Montague v. Electronic Corporation of America, 76 F. Supp. 933, 936 (S.D.N Y 1948), involving an apparent overlap of remedies under section 11 of the 1933 Act and 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 particular 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. United States v. Chase, 135 U.S. 255, 260, 10
  S.Ct. 756, 34 L.Ed. 117; Ex Parte United States,
  226 U.S. 420, 424, 33 S.Ct. 170, 57 L.Ed. 281; Kepner v.
  United States, 19 ...

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