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Goldstandt v. Bear

decided: August 29, 1975.

WILLIAM E. GOLDSTANDT AND WILLIAM E. HENNER, INDIVIDUALLY AND D/B/A II WILLIAMS, PLAINTIFFS-APPELLANTS,
v.
BEAR, STEARNS & CO., AND NORMAN TURKISH, DEFENDANTS-APPELLEES



Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 74 C 1518 BERNARD M. DECKER, Judge.

Swygert and Sprecher, Circuit Judges and East, Senior District Judge.*fn*

Author: Swygert

SWYGERT, Circuit Judge.

The main question in this appeal is whether sufficient facts relating to plaintiffs' right to invoke the equitable tolling doctrine were alleged in the complaint to preclude the granting of defendants' motion to dismiss.

According to the allegations of the complaint, plaintiffs-appellants William E. Goldstandt and William E. Henner were partners in II Williams, a general partnership. II Williams was a broker-dealer registered with the Securities and Exchange Commission and a member of the National Association of Securities Dealers, but was never a member of any securities exchange registered pursuant to Section 6 of the Securities and Exchange Act of 1934. Defendant-appellee Bear, Stearns & Co., a Limited Partnership, was a broker and dealer conducting a retail securities business. Defendant-appellee Norman Turkish was a limited partner of Bear, Stearns & Co.

Since 1957 II Williams had provided services for Bear, Stearns on the floor of the Chicago Mercantile Exchange. In late 1967 Turkish suggested a method by which II Williams could earn profits by becoming a customer of Bear, Stearns for the purpose of engaging in a series of "short sales" which would be "covered" by securities which were the subject of pending registration statements at the Securities and Exchange Commission. On several occasions Henner and Goldstandt asked Turkish whether this arrangement was legal and were informed that Turkish had checked with the legal department of Bear, Stearns and that the practice was "proper." Between January 23, 1968 and late 1970 II Williams was involved in thirty trades employing this practice.

In June 1971 II Williams was served with a complaint of the National Association of Securities Dealers alleging, along with other claimed violations, a violation of the Rules of Fair Practice in connection with the above practice. Goldstandt telephoned Turkish who informed Goldstandt that the procedure was not legal and that Turkish at all times knew of this fact. On August 2, 1973, after a hearing, the National Association of Securities Dealers fined II Williams $100,000, expelled it from membership, and determined that the individual plaintiffs would never be permitted to associate with any member of the association.

The four-count complaint seeks damages from defendants on the grounds that their actions violated Section 10(b) of the Securities Act of 1934, 15 U.S.C. § 78j(b), Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b.5 and Section 17 of the Securities Act of 1933, 15 U.S.C. § 77a; constituted common law fraud; violated Rule 405 of the New York Stock Exchange, Inc., General Rules; and violated Section 1 of Article III of the Rules of Fair Practice of the National Association of Securities Dealers. Defendants filed a motion to dismiss on various grounds, including that the action was barred by the statute of limitations. The district court found that on the face of the complaint the three claims not based on common law fraud were outside the applicable statute of limitations. The court held that the equitable tolling doctrine of fraudulent concealment was not available since there were not sufficient allegations that plaintiffs had exercised due diligence to discover the fraud in light of the facts that "they were suspicious of the transactions" and "were not unsophisticated investors." Accordingly these three counts were dismissed as being untimely and the pendent jurisdiction common law fraud count was dismissed for lack of subject matter jurisdiction.

I

The initial question we must consider is whether plaintiffs' claims are on their face barred by the applicable statute of limitations. This issue was not originally briefed, but at oral argument we asked why the cause of action should not be deemed to accrue at the point at which the National Association of Securities Dealers took the action that is the main basis of plaintiffs' claim of damages.*fn1 (We have since received supplemental briefs addressed to this point.)

It is clear that the applicable statute of limitations in this case is the three-year provision of Ill. Rev. Stat. Ch. 121 1/2 § 137.13D. Parrent v. Midwest Rug Mills, Inc., 455 F.2d 123 (7th Cir. 1972). The language of this statute is plain:

No action shall be brought for relief under this Section or upon or because of any of the matters for which relief is granted by this Section after 3 years from the date of sale.

It is admitted that this action was not brought until more than three years after the last sale involved was consummated, even though some of the claimed damages were losses on the sales and had nothing to do with the National Association of Securities Dealers' action. In regard to the instant case, Section 137.13D itself indicates when the cause of action "accrued." The complaint was not filed within three years of ...


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