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STARCK v. DEWANE

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


September 12, 1973

P.A. STARCK AND JANE STARCK, PLAINTIFFS,
v.
DONALD E. DEWANE AND WAYNE BROWN, DEFENDANTS.

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

MEMORANDUM OPINION AND ORDER

This cause comes on the defendants' motion to dismiss the complaint for lack of jurisdiction.

This is an action to redress an alleged violation of Section 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. § 78j(b)), and Rule 10b-5 promulgated thereunder (17 C.F.R. § 240.10b-5). More specifically, the plaintiff alleges in Count I of the complaint that the defendants made false and misleading representations in the offer and sale of a security. Jurisdiction is based on Section 27 of the Securities Exchange Act of 1934 (15 U.S.C. § 78aa). The plaintiffs, in Counts II and III of the complaint also claim respectively that the defendants committed a common law tort of fraud and violated the Illinois Consumer Fraud Act, Chapter 121 1/2, § 262A of the Illinois Revised Statutes.

The defendants in support of their motion to dismiss for lack of jurisdiction contend:

  1.  Neither defendant Donald E. Dewane or Wayne
      Brown used the mails and/or other means of
      interstate commerce in regard to any of the
      allegations of Count I of the plaintiff's
      complaint and thereby this Court lacks
      jurisdiction under Section 27 of the
      Securities Act of 1934 (15 U.S.C. § 78aa).

  2.  There is no pendent jurisdiction before this
      Court as alleged in both Counts II and III of
      plaintiff's complaint as the Court lacks
      jurisdiction over any federal question or
      matter herein.

The plaintiffs in opposition to the instant motion contend that Donald E. Dewane used the telephone to arrange meetings with the plaintiffs regarding the sale of the House of Health, Inc. common shares; and also that the collection of the checks used to purchase the shares involved the use of the mails. In support of this contention the plaintiffs have submitted the affidavits of P.A. Starck, Jane Starck and Karen Wascher.

Plaintiff P.A. Starck, in his affidavit, states, in relevant part:

    2. That on or about September 3, 1971, he had a
  meeting with Donald E. Dewane, one of the
  defendants in the above entitled case; that the
  meeting took place at the affiant's home located
  at 8909 McConnell Road, Woodstock, Illinois; that
  the only other person at the meeting was
  affiant's wife, Jane Starck; and that at the
  meeting he purchased stock in a business known as
  the House of Health, Inc. from Donald E. Dewane,
  the President of the Corporation.

    3. That the date for the meeting on or about
  September 3, 1971, was set by Donald E. Dewane
  during a telephone call affiant had received from
  the said Dewane on or about August 29, 1971.

    4. That during the period of on or about March
  10, 1971 to on or about September 3, 1971,
  several other telephone calls were received by
  affiant from Donald E. Dewane concerning the
  purchase of stock in House of Health, Inc.

    5. During the meeting of on or about September
  3, 1971 the affiant delivered to Donald E. Dewane
  a check dated September 3, 1971 for $15,000
  payable to House of Health, Inc. for the purchase
  of 100 shares of House of Health, Inc. common
  stock.

    6. That the check attached to this affidavit
  and marked as Exhibit A is a true and correct
  copy of the check he delivered to Donald E.
  Dewane on September 3, 1971. The check when he
  received it back in the mails with his bank
  statement was in the same condition as when he
  gave it to Donald E. Dewane except the front side
  had a paid stamp on it and the reverse side of
  the check bore the written endorsements of House
  of Health, Inc., Donald E. Dewane as well as
  various stamped endorsements including

  one "Pay Continental Ill. Nat. Bk. & Trust Co. of
  Chgo. 75-17343 for Deposit Only 75-17343 Marengo
  Federal Savings & Loan Association."

Plaintiff Jane Starck in her affidavit states, in relevant part:

    2. That on or about September 3, 1971 she had a
  meeting with Donald E. Dewane, one of the
  defendants in the above entitled case; that the
  meeting took place at the affiant's home located
  at 8909 McConnell Road, Woodstock, Illinois; that
  the only other person at the meeting was
  affiant's husband, P.A. Starck; and that at the
  meeting she purchased stock in a business known
  as the House of Health, Inc. from Donald E.
  Dewane, the President of the Corporation.

    3. That during the period of on or about March
  10, 1971 to on or about September 3, 1971 several
  telephone calls were received by affiant from
  Donald E. Dewane concerning the purchase of stock
  in House of Health, Inc.

    4. During the meeting of on or about September
  3, 1971 the affiant delivered a check to Donald
  E. Dewane dated September 3, 1971 for $35,000
  payable to House of Health, Inc. for the purchase
  of 233 shares of House of Health, Inc. stock.

    5. That the check attached to this affidavit
  and marked as Exhibit A is a true and correct
  copy of the check she delivered to Donald E.
  Dewane on September 3, 1971. The check when she
  received it back in the mails with her bank
  statement was in the same condition as when she
  gave it to Donald E. Dewane except the front side
  had a paid stamp on it and the reverse side of
  the check bore the written endorsements House of
  Health, Inc., and Donald E. Dewane as well as
  various stamped endorsements including one "Pay
  Continental Ill. Nat. Bk. & Trust Co. of Chgo.
  75-17343 For Deposit Only 75-17343 Marengo
  Federal Savings & Loan Association."

Karen Wascher, in her affidavit, states in relevant part:

    1. That she is the head cashier of Marengo
  Federal Savings and Loan Association, which is
  located at 200 East Grant Highway, Marengo,
  Illinois.

    2. That she has been the Head Cashier for about
  the last thirteen (13) years.

    3. That she has acquired personal knowledge in
  the course of her duties as Head Cashier that the
  processing of checks deposited in Marengo Federal
  Savings and Loan Association but drawn on other
  banking institutions involves the use of the
  mails and more particularly such deposited checks
  are sent and were sent during the month of
  September, 1971, by Marengo Federal Savings and
  Loan Association by mail to Continental Illinois
  National Bank and Trust Company of Chicago for
  collection; that prior to the mailing to
  Continental Illinois National Bank and Trust
  Company of Chicago, Marengo Federal Savings and
  Loan places the following stamped endorsement on
  such checks:

    Pay Continental Ill. Nat. Bk. & Trust Co. of
    Chgo.

75-17343   For Deposit Only   75-17343

Marengo Federal Savings & Loan Assn.

    4. That the checks dated September 3, 1971 for
  $15,000 payable to House of Health, Inc. attached
  to this affidavit and marked Exhibit A-1 and the
  check dated September 3, 1971 for $35,000 payable
  to House of Health, Inc. attached to this
  affidavit and marked Exhibit A-2 contain the
  stamped endorsement of Marengo Federal Savings
  and Loan Association and accordingly were sent
  for collection by mail to Continental Illinois
  National Bank and Trust Company of Chicago.

The defendants have failed to submit any affidavits or memoranda in opposition to the plaintiffs' affidavits.

It is well settled that the use of telephones only on interstate basis in solicitation of the purchase of stock is sufficient to give a federal district court jurisdiction over an action for the violation of the federal securities laws and regulations. Myzel v. Fields, 386 F.2d 718 (8th Cir. 1967); cert. denied 390 U.S. 951, 88 S.Ct. 1043, 19 L.Ed.2d 1143. Further, even though misrepresentations or words of fraud are not uttered over the telephone, Section 78j of 15 U.S.C. prohibiting any person, directly or indirectly from using any instrumentality of interstate commerce in connection with the purchase of securities by manipulative or deceptive device is violated if a telephone is used "indirectly" to cause a meeting to be held for purpose of effectuating a fraud. Nemitz v. Cunny, 221 F. Supp. 571 (N.D.Ill. 1963). Thus it is the opinion of this Court that the defendants' motion to dismiss should be denied at this time. However, this ruling should not be interpreted as a bar to any additional pre-trial motion of the defendants which is adequately supported in law and fact and directed at the jurisdiction of this Court. See Burke v. Triple A Mach. Shop, Inc., 438 F.2d 978 (9th Cir. 1971).

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