The opinion of the court was delivered by: LORD, III
This case is now before the court on defendants' motions under Rule 12 to dismiss both counts of plaintiffs' complaint. Plaintiffs allege that defendants violated Section 10(b) of the Securities Exchange Act of 1934, as amended (15 U.S.C. § 78j) (The Act),
and Rule 10b-5
(adopted by the Securities and Exchange Commission pursuant to authority granted by Congress in 10(b) and 23(a) of the Act (15 U.S.C. §§ 78j, 78w)). Plaintiffs base Count I of their action 'solely and exclusively' upon Sections 10(b) and 27
of the Act.
Plaintiffs are stockholders of Bargain City, U.S.A., Inc., (Bargain City) a Pennsylvania corporation, who own an aggregate 5100 shares of Bargain City stock. Between September 26, 1961, and March 22, 1962, plaintiff Howard Miller purchased for himself 4700 shares of Bargain City stock and 400 shares on behalf of the other three plaintiffs. These shares were bought at prices ranging from 12 1/2 to 7 1/8, at a total cost to plaintiffs of $ 54,542.75. Immediately before the commencement of this action Bargain City stock was quoted at 3/8 bid.
Although the specific allegations of defendants' misconduct take up eighteen paragraphs of the complaint, including numerous subdivisions and sub-subdivisions, they all relate to reports and statements filed with the Securities and Exchange Commission required by the Act or by rules and regulations of the Commission. Plaintiffs allege that the reports filed were inaccurate, false, untrue or misleading. Plaintiffs also claim in general terms, in the exact language of Rule 10b-5 that defendants did '(a) employ a device, scheme or artifice to defraud the plaintiffs; and/or (b) make an untrue statement of a material fact or omit to make the statements made, in the light of the circumstances under which they were made, not misleading; and/or (c) engage in an act, practice or course of business which operated or operates or would operate as a fraud or deceit upon the plaintiffs and each of them -- all of which was in connection with the purchase by the plaintiffs of 5100 shares of Bargain City's common stock.'
Paragraph 39 alleges that all defendants are liable to the plaintiffs '* * * by virtue of a conspiracy with respect to such violations' of Section 10(b) of the Act and Rule 10b-5.
Plaintiffs allege (paragraph 16) that in September, 1961, Miller got a tip from an unnamed broker on Bargain City; that he thereupon consulted Standard & Poor's most recent report on Bargain City from its 'Over-the-Counter and Regional Exchange Stock Reports'; and that he consulted more detailed financial statements on Bargain City in Standard & Poor's manual of corporation records. Thereafter, relying inter alia, upon these statements and reports, Miller purchased the stock over-the-counter.
Plaintiffs leave no doubt that their action is predicated solely on an alleged violation of Section 10(b) of the Act and of Rule 10b-5. Defendants argue that the action is improperly bottomed on Section 10(b) and Rule 10b-5 because: (1) defendants' alleged conduct is specifically covered by Section 18 of the Act, and cannot be brought within Section 10(b); (2) there is no showing that defendants were sellers or that any privity existed as between plaintiffs and defendants.
On a motion to dismiss, the complaint must be viewed in the light most favorable to plaintiff. Smith-Corona Marchant, Inc. v. American Photocopy Equipment Co., 214 F.Supp. 348 (S.D.N.Y., 1962). The motion should not be granted unless it appears to a certainty that plaintiff would not be entitled to relief under any state of facts which could be proved in support of his claim no matter how likely it may seem that the pleader will be unable to prove his case. Weinrich v. Retail Credit Co., 186 F.Supp. 392 (W.D.Pa., 1960). A motion to dismiss should be approached with caution. It should not be the vehicle for enunciating rules of law in the abstract. Rather, if the factual situation has not crystallized, a court should await the utilization by parties of the discovery tools furnished by the Rules, followed by a motion for summary judgment under Rule 56. If at that time, no genuine issue of a material fact exists, the law will be applied to existing facts and not to a speculative situation that may never arise. Cf. Philco Corporation, et al. v. Radio Corporation of America, et al., 34 F.Supp. 453.
Now is the time, however, to face defendants' second argument. The complaint shows on its face that plaintiffs bought their stock by over-the-counter purchases. This fact cannot be varied, and it is therefore immutably clear that defendants were not sellers and that there was no privity between the parties. Hence, if an action under Section 10(b) and Rule 10b-5 requires privity, or lies only against a seller, the complaint must be dismissed.
The notion of privity as a prerequisite to an action bottomed on Rule 10b-5 seems to spring from Joseph v. Farnsworth Radio and Television Corp., 99 F.Supp. 701 (S.D.N.Y., 1951), affirmed per curiam, 198 F.2d 883 (C.A.2, 1952). The language of the district court in that case was: '* * * A semblance of privity * * * seems to be requisite * * *.' I find it unnecessary to attempt a definition of this, at best, cloudy phrase, for if 'a semblance of privity' means 'privity' (like 'a little bit pregnant'), I reject it. The pattern of legislation in the securities field following 1933 was designed to give the broadest possible protection to investors. See Baird v. Franklin, 141 F.2d 238 (C.A.2, 1944); Wilko v. Sawn, 346 U.S. 427, 430-431, 74 S. Ct. 182, 98 L. Ed. 168 (1953); Prudential Insurance Co. of America v. Securities and Exchange Commission, 326 F.2d 383 (C.A. 3, 1964); Cooper v. North Jersey Trust Co., et al., 226 F.Supp. 972, (S.D.N.Y., 1964). Neither Section 10(b) nor Rule 10b-5 gives a private right of action. Rosenberg v. Globe Aircraft Corporation, 80 F.Supp. 123 (E.D.Pa., 1948). Rather, the right of action derives from common law tort principles which impose liability for the violation of a statute designed to prevent a particular type of harm. Kardon v. National Gypsum Co., 69 F.Supp. 512 (E.D.Pa., 1946); McClure v. Borne Chemical Company, 292 F.2d 824, 836 (C.A.3, 1961). In Kardon, recovery was allowed on the basis of the principle set forth in Rest., Torts, § 286. That section reads:
'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; and, '(c) where the enactment is intended to protect an interest from a particular hazard, the invasion of the interests results from that hazard; and, '(d) the violation is a legal cause of the invasion, and the other has not so conducted himself as to disable himself from maintaining an action.'
It will be seen that 'privity', as such, is not a prerequisite to a right of action under that Section. In my judgment, it would be an unwarranted constriction of the broad protection contemplated by the federal scheme of securities legislation to engraft upon that scheme a requirement that is neither a ...