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LORENZ v. WATSON

September 20, 1966

Lorenz, Plaintiff,
v.
Watson, et al, Defendants.


Lord, Jr., District Judge.


The opinion of the court was delivered by: LORD, JR.

LORD, JR., District Judge:

This action for damages is brought under the Securities Exchange Act of 1934 (15 U.S.C.A. § 78a et seq.). The matter is presently before the Court on the motions of the Exchange, Bioren, John C. Korn and John F. Bunn, Jr., for dismissal, and on the motion of the defendants Bioren, Korn and Bunn for summary judgment in their favor.

 It should be noted that the defendant J. Donald Watson is not presently represented before the Court, and that a default judgment was entered against him on March 17, 1966 for failure to appear, to plead or otherwise defend the action.

 Facts

 It is alleged that through improper handling of their account by the defendant Watson, all but $700.00 was lost within the brief period mentioned above. The improprieties complained of included, inter alia, inappropriate investment maneuvers, margining the account without authority, extensive trading and churning disproportionate to the size and character of the account, and acting primarily for the purpose of creating commissions, rather than on behalf of, or in the interest of, the plaintiffs. It is further asserted that the defendant Watson, in violation of the provisions of the constitution and the rules of the Exchange, falsely represented to the plaintiffs that he had the qualifications and authority to trade their account in a discretionary fashion.

 Bioren, Korn, Bunn and the Exchange are said to be responsible and liable for the damages thus accruing on the theory that they failed to properly supervise the activities of the defendant Watson, and because they did not carefully investigate his background before placing him in a position whereby he could effect the improprieties now alleged. In support of this argument the plaintiffs present two alternate theories. First, that all of the above defendants are rendered liable for the misfeasance of Watson by virtue of Section 20 of the Act which deals with the liability of controlling persons. Second, that their conduct constituted a violation of the constitution and rules of the Exchange from which a civil action for damages ensues.

 Finally, it is asserted that all of the defendants presently before the Court were negligent in their supervision of the defendant Watson, and that this Court has pendent jurisdiction of these common law claims.

 Discussion

 The defendants Bioren, Korn and Bunn challenge this Court's jurisdiction on substantive grounds, asserting that none of the facts alleged in the complaint give rise to liability under the Act. The defendant, Exchange, has made a timely objection to venue in this District.

 Sur the Motion of the Exchange

 The charges against the Exchange are that it failed to (1) carefully investigate the background of the defendant, Watson, and (2) that it failed to properly supervise his activities. In the Court's judgment, neither of these claims, individually or jointly, are sufficient to establish the Eastern District of Pennsylvania as the proper venue.

 Under Section 27 of the Act an action may be brought under Section 10(b) and Rule 10b-5 - the section and rule chosen by the plaintiffs in this action - in the district (1) where any act or transaction constituting the violation occurred, (2) wherein the defendant is found, (3) where the defendant is an inhabitant, and (4) where it transacts business. See e.g. New Park Mining Company v. Cranmer, 225 F. Supp. 261, 267 (S.D.N.Y. 1963). The plaintiffs do not maintain that the Exchange is "found" within the Eastern District of Pennsylvania, or that it "transacts business" here, or, finally, that it is an inhabitant hereof. Indeed, it would be difficult for them to so argue in view of the abundance of authorities to the contrary. See Sperry Products v. Association of American R.R., 132 F.2d 408 (2nd Cir. 1942), cert. denied 319 U.S. 744, 63 S. Ct. 1031, 87 L. Ed. 1700 (1943); Noerr Motor Freight, Inc. v. Eastern R.R. Presidents Con., 113 F. Supp. 737 (E.D. Pa. 1953); Midwest Fur Producers Assn. v. Mutation Mink Breeders Assn., 102 F. Supp. 649 (D. Minn. 1951) and authorities contained therein; 1 Moore, Federal Practice P 0.142 (2 ed. Supp. 1964); see especially the excellent opinion of my colleague, Judge Davis, in Stern Fish Co. v. Century Seafoods, Inc., 254 F. Supp. 151 (E.D. Pa. 1966).

 However, the plaintiffs do maintain that the Exchange comes within the first category; that is, that it committed an act or engaged in a transaction within the Eastern District of Pennsylvania so as to render it vulnerable to suit therein. The Court disagrees.

 The Court will assume, for purposes of deciding the motion, that the Exchange had the responsibility of investigating the defendant, Watson's, background, and of supervising his activities. It will also concede that inaction or non-action, when there is a duty to act, will give rise to civil liability as readily as will affirmative conduct. However, it is one thing to interpret inaction as constituting a valid basis for liability where there is a duty to act, and quite another to use it for purposes of establishing venue. Cf. Platt Corp. v. Platt, 17 N.Y. 2d 234, 217 N.E. 2d 134, 270 N.Y.S.2d 408 (1966); Feathers v. McLucas, 15 N.Y. 2d 443, 209 N.E. 2d 68, 261 N.Y.S.2d 8 (1965); Rufo v. Bastian-Blessing Co., 405 Pa. 12, 173 A. 2d 123 (1961).

 Section 27 of the Act is a special venue provision, and venue is to be established only in compliance with its terms. In the view this Court takes, any omission on the part of the Exchange took place in New York where it conducts its affairs. There is nothing in the way of legislative history which suggests that Congress intended so broad an interpretation of this provision, nor is such an interpretation necessary to attain the basic objective of adequately protecting the investing public.

 The motion of the Exchange to dismiss will, therefore, be granted. This, of course, makes it unnecessary to discuss the common law claims. There being no jurisdiction as to the Exchange under the Act, there is nothing to which the common law claims could append.

 Sur the Motion of Bioren, Korn and Bunn

 The plaintiffs have brought their action under Section 10(b) of the Exchange Act (48 Stat. 891 (1934), as amended, 15 U.S.C.A. § 78j (1964)) and Rule 10b-5 promulgated thereunder. (17 C.F.R. § 240.10b-5 (1964)). Section 10(b) provides:

 
"It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange --,
 
. . .
 
"(b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [Securities and Exchange] Commission may prescribe as ...

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