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ROTSTEIN v. REYNOLDS & CO.

May 30, 1973

DAVID ROTSTEIN, ON BEHALF OF HIMSELF AND ALL OTHERS SIMILARLY SITUATED, PLAINTIFF,
v.
REYNOLDS & CO., A PARTNERSHIP, ET AL., DEFENDANTS.



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

  MEMORANDUM OPINION AND ORDER

In this case plaintiff seeks damages under state and federal securities laws from two broker-dealer defendants and two issurers of securities, Automated Marketing Systems, Inc. ("Automated") and Monterey Life Systems, Inc. ("Monterey"). The broker-dealer defendants have filed a motion to dismiss certain portions of the complaint for failure to state a claim. To the extent and for the reasons indicated below, that motion to dismiss shall be granted and plaintiff is given leave to file an amended complaint in accordance with the provisions of this opinion within twenty days.

I. The Sale of Unregistered Securities

Paragraph 6 of both Count I and Count II allege that these securities were sold at a time when they were not the subject of an effective registration statement, as required by § 5 of the `33 Act.*fn1 The defendant broker-dealers*fn2 assert that the exclusive remedy for a violation of § 5 is an action under § 12(1) of the Act, which is governed by the one-year limitations period of § 13. Since plaintiff's purchases occurred more than one year prior to the filing of this suit, they claim that the sale of an unregistered security no longer is actionable. In reply, plaintiff asserts that the sale of an unregistered security also violates the antifraud provisions of § 10(b) of the '34 Act and Rule 10b-5, 17 C.F.R. § 240.10b-5, which is governed by a three-year statute of limitations in this circuit. Parrent v. Midwest Rug Mills, Inc., 455 F.2d 123 (7th Cir. 1972). He claims that the remedies afforded by each Act are cumulative and not mutually exclusive and that therefore the sale of an unregistered security is actionable under either statute. Jordan Building Corp. v. Doyle, O'Connor & Co., 401 F.2d 47 (7th Cir. 1968); Schaefer v. First National Bank of Lincolnwood, 326 F. Supp. 1186 (N.D.Ill. 1970).

That the remedies afforded by each Act are cumulative cannot be denied. Jordan and Schaefer stand for the general principle that if conduct is found subject to the more general as well as the specific prohibitions of the securities laws, the fact that the statute of limitations has run on one theory of liability does not preclude plaintiff's recovery on the other. In particular, the Jordan case held that a securities action based on false oral and written statements may be brought under either § 12(2) of the '33 Act or § 10(b) and Rule 10b-5 of the '34 Act. Schaefer followed the Jordan opinion and found that an action alleging market manipulation is not limited to the provisions of § 12(2) of the '33 Act and § 9 of the '34 Act, but may also be brought pursuant to § 17 of the '33 Act and §§ 10 and 15(c) of the '34 Act.*fn3 The effect of these decisions was to extend the time for filing a suit to the longer of the limitation of action provisions applicable to either statute, which is precisely what plaintiff seeks to do here. Thus, the question in this case is whether the sale of unregistered stock is conduct falling within the broad antifraud provisions of § 10(b) and Rule 10b-5 of the '34 Act, for it is clear that the statute of limitations has run on plaintiff's rights under § 12(1) of the '33 Act.

In considering whether the sale of unregistered stock is actionable under § 10(b) of the '34 Act, it must be remembered that this is not a case where plaintiff asks the court to imply a private right of action for the breach of a statutory duty.*fn4 Here, the remedy is clearly defined in the statute itself. Nor do Paragraphs 6 of each Count allege a right to recovery based upon the wrongful concealment of the issuer's failure to register the stock*fn5 or upon the broker-dealer's recommendation of a stock without an adequate basis for the recommendation or, alternatively, upon his failure to disclose the absence of reliable information about the issuer.*fn6 Rather, plaintiff asserts that the mere sale of unregistered stock itself falls within the antifraud provisions of the '34 Act. With this I cannot agree.

Section 10(b) of the '34 Act makes it unlawful to employ "any manipulative or deceptive device or contrivance" in connection with the sale of any security. Rule 10b-5 broadly defines three categories of abuse that come within the scope of § 10(b). The sale of an unregistered security does not fall within Rule 10b-5(a) or (c) because, unlike market rigging or manipulative practices, the sale itself defrauds or deceives no one. Nor do Paragraphs 6 of each Count predicate liability on defendants' failure to advise plaintiff that the securities were unregistered, which would clearly be an omission of a material fact within the scope of Rule 10b-5(b). Rather, plaintiff's position is tantamount to asserting not only that every violation of the securities laws gives rise to a private right of action, whether that right is expressly authorized by the statute or not, but also that every violation of the securities laws is actionable under the antifraud provisions of the '34 Act. Such a theory is supported neither by the statute or its rule nor by the cases interpreting them. See generally 2 CCH Fed.Sec.L.Rep. ¶ 22,781 (1970) and the cases cited therein. Therefore, to the extent that they purport to state a claim for relief under § 12(1) of the '33 Act or § 10(b) and Rule 10b-5 of the '34 Act, Paragraphs 6 of each Count are dismissed for failure to state a claim.

II. The Illinois Securities Law of 1953

Paragraphs 6 and 7 of Counts I and II allege that the subject securities were sold in violation of the Illinois Securities Law of 1953, the remedy for which is contained in Ill.Rev.Stat., Ch. 121 1/2, § 137.13 (Smith-Hurd Supp. 1972). Under that section, the prerequisites for recovery are (1) "tender to the seller or into court of the securities sold or, where the securities were not received, of any contract made in respect of such sale" and (2) notice of election to rescind. Not only has plaintiff failed to allege tender and notice, but he has also alleged that he sold all of the subject securities, thereby rendering impossible his compliance with the statutory prerequisites of recovery. Defendants properly point out that, unlike the federal rule, the exclusive remedy for a violation of the Illinois Securities Law is recision. Glen v. Dodson, 347 Ill. 473, 180 N.E. 393 (1932); Weisbrod v. Lowitz, 282 Ill. App. 252 (1935); Weber v. Rupp, 235 Ill. App. 132 (1932). Hence, they move to dismiss Paragraphs 6 and 7 of each Count for failure to state a claim under state law.

In reply, plaintiff first asks this court to imply a remedy for damages under the Illinois Securities Law of 1953 similar to that available under § 10(b) of the federal Securities Exchange Act of 1934 and then argues that the above-cited authorities to the contrary are obsolete because they predate the 1953 Law. Neither argument is convincing. Illinois has had a blue sky law since 1917 and not once in all those years have the courts of Illinois ever implied the type of remedy which plaintiff seeks in this case. Rather, they have interpreted the recision remedy of the predecessors of § 137.13 as exclusive and have denied relief absent the requisite notice and tender. Glen v. Dodson, supra. Therefore, Paragraphs 6 and 7 of each Count are dismissed to the extent that they purport to state a claim under the Illinois Securities Law of 1953.

III.  The Claim That Certain Allegations Constitute
        Puffing and Are Not Actionable

Defendants assert that certain of the allegations contained in Paragraphs 7 of each Count are mere puffing and not actionable under § 12 of the '33 Act and Rule 10b-5 of the '34 Act. Bowman v. Hartig, 334 F. Supp. 1323, 1328 (S.D.N.Y. 1971). The court agrees that the statements that the stock of defendant Monterey was a red hot stock and plaintiff could not lose on an investment in Monterey, that plaintiff would make a bundle of money on the stock of defendant Automated, and that it was impossible to lose money in an investment in Automated are mere puffing and are not actionable under either the federal or state securities laws. However, the statements that the stock of defendant Automated would go up and that it would reach $30 per share are actionable to the extent that they were unfounded representations or predictions of future performance, for which the broker-dealer defendants lacked reliable information. Sec. Release No. 34-9239 and 33-5168, July 1, 1971; Sec. Release No. 34-6721 and 33-443, February 2, 1962.

IV. Failure to Deliver a Prospectus

Paragraphs 7 of Counts I and II allege that the broker-dealer defendants violated § 12(2) of the '33 Act, Rule 10b-5 of the '34 Act, and § 12 of the Illinois Securities Act of 1953 because they failed to deliver a prospectus in connection with the subject transactions. Plaintiff's theory here is similar to that asserted in connection with his allegation that the sale of an unregistered security alone is sufficient to state a claim under the antifraud provisions of the '34 Act and of § 12 of the Illinois Securities Law of 1953. See Part I, supra. Similarly, the court finds that the failure to deliver a prospectus is not actionable under Illinois law because it is impossible for plaintiff to comply with the notice and tender requirements of that statute. Nor does the failure to deliver a prospectus in itself state a cause of action under Rule 10b-5 of the '34 Act or § 12(2) of the '33 Act because such conduct is not inherently fraudulent or deceitful. It is only when ...


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