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KERBER v. KAKOS

June 19, 1974

MARTHA JUNE KERBER ET AL., PLAINTIFFS,
v.
STEPHAN J. KAKOS ET AL., DEFENDANTS.



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

MEMORANDUM OPINION

Plaintiffs, purchasers of Lynn Products, Inc. (Lynn) securities, bring this action to remedy alleged violations of Section 12(g) and 10 of the Securities Exchange Act of 1934, 15 U.S.C. § 78l(g), 78j, and Rule 10b-5 of the Securities and Exchange Commission, 17 C.F.R. § 240.10b-5. Jurisdiction is predicated on Section 27 of the Act, 15 U.S.C. § 78aa, and Section 1331 of the Judicial Code, 28 U.S.C. § 1331. In an unpublished memorandum order, dated March 5, 1974, I struck plaintiffs' Section 10 and Rule 10b-5 allegations for failure to make the appropriate jurisdictional averments. The cause is now before me on defendants' motion to dismiss the complaint for failure to state a claim upon which relief can be granted.

Plaintiffs' complaint is simple. Kerber alleges that plaintiffs purchased Lynn stock, that pursuant to Section 12(g) Lynn should have filed with the SEC a registration statement disclosing its financial condition, but failed to do so, and that this failure to register the securities proximately caused plaintiffs' injury in that they would not have purchased the stock had they known Lynn's true financial condition. Joined as party defendants with Lynn are various officers and directors of the corporation.

Defendants move to dismiss for failure to state a claim arguing, in essence, that Section 12(g) does not support an implied private right of action. The argument proceeds along two distinct lines: (1) the language employed in Section 12(g), by implication, negatives any implied civil action, and (2) the remedy expressly supplied by Section 18(a), 15 U.S.C. § 78r(a), is the exclusive remedy for Section 12 violations. These contentions will be discussed in the order stated.

First, defendants assert that Section 12(g) renders only non-registration unlawful.*fn1 Unlike Section 12(a), for example, which expressly makes it unlawful for members, brokers, or dealers to effect any transaction in any security on a national securities exchange unless a registration is in effect as to that security, Section 12(g) only requires registering certain over-the-counter securities and does not proscribe the sale of unregistered securities. The sale did not contravene any provision of the 1934 Act and hence there is no liability to purchasers of the stock. The obligations created by Section 12(g) are filing obligations directed primarily to the SEC and enforcible only by the SEC.

The argument turns on semantics, fails to perceive the consequences of the alleged violation, and in a sense ignores the role of proximate cause in securities litigation. Plaintiffs allege that defendants violated Section 12(g) and that the violation of this legislative enactment proximately caused their injury. In Kardon v. National Gypsum Co., 69 F. Supp. 512, 513 (E.D.Pa. 1946), the court observed:

  The violation of a legislative enactment by doing a
  prohibited act, or by failing to do a required act,
  makes the actor liable for an invasion of an interest
  of another if; (a) the intent of the enactment is
  exclusively or in part to protect an interest of the
  other as an individual; and (b) the interest invaded
  is one which the enactment is intended to protect. .
  . . This rule is more than merely a canon of
  statutory interpretation. The disregard of the
  command of a statute is a wrongful act and a tort.

The cause of action is implied by the common law and not from the language of the statute. The phraseology and proscription of the enactment are important only as they relate to the status of the injured party vis-a-vis the violated enactment. So long as plaintiffs are members of the class for whose protection the statutory duty was created, a failure to register may give rise to a cause of action to the same degree as would the violation of a statute which prohibited sale of unregistered securities. Of course, the legislature may withhold from injured parties the right to recover damages arising from the violation of a statute, but the right is so fundamental and deeply ingrained in the law that where it is not expressly denied, the intention to withhold it should appear very clearly and plainly. Kardon v. National Gypsum Co., supra, at 514. Contrary to defendants' position, the language of Section 12 alone does not manifest a clear congressional intent to preclude a private civil action under Section 12(g). My inquiry then turns to the intent of the enactment as evidenced by legislative history.

Consistent with this obligation to the public, the disclosure provisions of the Act are intended to function so as (1) to prevent fraudulent transactions by turning on the "white light of publicity;" and (2) to afford investors an opportunity for a fair appraisal of the worth of a security by requiring issuers to reveal all material facts about it. The importance of the disclosure requirements of the Act is emphasized by H.R.Rep. No. 1383, 73d Cong., 2d Sess. (1934), at 78 Cong.Rec. 7704-05:

    No investor, no speculator, can safely buy and sell
  securities upon the exchanges without having an
  intelligent basis for forming his judgment as to the
  value of the securities he buys or sells. The idea of
  a free and open public market is built upon the
  theory that competing judgments of buyers and sellers
  as to the fair price of a security brings about a
  situation where the market price reflects as nearly
  as possible a just price. Just as artificial
  manipulation tends to upset the true function of an
  open market, so the hiding and secreting of important
  information obstruct the operation of the markets as
  indices of real value. There cannot be honest markets
  without honest publicity. Manipulation and dishonest
  practices of the marketplace thrive upon mystery and
  secrecy. The disclosure of information materially
  important to investors may not instantaneously be
  reflected in market value, but despite the
  intricacies of security values, truth does find
  relatively quick acceptance on the market. That is
  why in many cases it is so carefully guarded.

See also 78 Cong.Rec. 8163 (1934) (remarks of Senator Fletcher).

Pursuant to the Congressional belief that disclosure is essential to complete and effective investor protection, the Securities Exchange Act of 1934 establishes procedures by which the investing public can obtain the information needed to make intelligent investment decisions. Section 12 is the cornerstone in this system. In registering its securities the issuer must disclose all information which may affect the investment decision. This information then is kept current by annual and periodic filings under Section 13. Section 13 reports, however, need be submitted only if a security has been registered pursuant to Section 12. Similarly, the proxy protections of Section 14 and the insider disclosures of Section 16 also are keyed expressly to a Section 12 registration. A threshold violation of Section 12 may well strip an investor of many of the protections Congress intended that he have. It would be anomalous to echo the protections afforded an investor by the Act's reporting requirements and then hold that an investor has no remedy when he has been injured by the abridgement of those protections. The essential objective of securities legislation is investor protection. This implies the availability of judicial relief where necessary to achieve that result. J.I. Case Co. v. Borak, 377 U.S. 426, 84 S.Ct. 1555, 12 L.Ed.2d 423 (1964). Any holding by this court which permits the circumvention of basic protections of the Act would "leave such legislation little ...


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