Rose. See, fn. 10. Defendants specifically admit that no disclosure of any of these facts was made to plaintiffs even though the agreement was made prior to their purchase of shares in Pharmaco. The deposition of Funfer at pp. 46-48 provides:
"Q. Okay. And what did you do when you took the subscription to the stock?
A. What did I do?
Q. Did you go to the people's homes or meet them someplace, and what did you say?
A. Oh, I told them that the doctor had a good product that was going to make money.
Q. What did you tell them about the drug?
A. Well, it was effective.
Q. You told them that the drug was effective?
Q. Did you tell them that there was a patent on it or you assumed there would be a patent on it?
A. I told them there was a patent pending.
Q. A patent pending.
What did you tell them about the effectiveness of the drug?
A. Well, it stopped the pain of arthritis, and it removed -- removed all symptoms of arthritis -- swelling, pain --
Q. Did you tell them --
A. -- stiffness.
Q. -- Pharmacodynamics, Incorporated had agreed to pay Dr. Rose $100,000.00 for research?
Q. Did you tell them that Dr. Rose was going to have the controlling stock interest in Pharmacodynamics?
Q. Did you tell them any details about the corporate arrangements of Pharmacodynamics between yourself, Dr. Rose, and Mr. Bitting?
A. Yes. I --
Q. What did you tell them?
A. -- told them who the officers were.
Q. Did you tell them anything else other than who the officers were?
A. (No response)
Q. Did you tell them what the salaries of the officers were?
The deposition of Rose at pp. 92-97 provides:
"Q. When Reube bought or before he bought, did you show him any of the papers for the corporation, the agreements, and so forth?
Q. All right. Did you explain to him anything about the set-up of the corporation and how much it was going to pay for the patent and all that?
A. He didn't ask.
Q. All right. I guess, then, no prospectus was issued in connection with the sale, with the offering?
A. Oh, no. We weren't at any prospectus stage. It was just a private offering.
Q. All right.
A. I mean, we were not ready to offer anything to the public.
Q. Was there any registration with either the Securities and Exchange Commission or the Pennsylvania Securities Commission?
A. No. This was strictly private.
Q. Has there been any?
A. Not that I know of.
Q. Would it come to your knowledge if there were any?
A. I am sure it would --
Q. All right.
A. -- But this was on a very private offering.
Q. So is it fair to say that when Mr. Nitta and Mr. Reube bought their stock, you had not taken any action to make them aware of the terms of your agreement with Mr. Funfer and Mr. Bitting and all that kind of thing?
A. Nothing like that had been asked.
Q. And you had not volunteered it?
Q. So, basically, what they were told was that you had this invention and that the company was going to exploit it and that they could buy stock?
A. Mr. Reube was enthused about the stock he was getting. He sold Mr. Nitta. I never heard of Mr. Nitta until here comes the check.
Q. Before they bought their stock, did you discuss with them the fact that you had a patent? Did you say you had a patent?
A. They asked me if I had applied for a patent.
I certainly have, as I said.
Q. Did they --
A. They asked to see the patent number, which I showed them.
Q. That was the application"?
A. Yes. That satisfied them.
Q. By "them", you mean John Nitta and William Reube?
Q. Did you tell them that the patent had been granted --
A. Oh, no.
Q. -- or did you say it was just an application?
I said it had been applied for. This seemed to satisfy them.
Q. All right.
A. They did ask if it had been researched through the Library of Congress, and I showed them that it had.
Q. What did you say, if anything, to John Nitta and Mr. Reube regarding what the money was to be used for from the sale of stock?
Did you get into that, or --
A. We didn't get into it.
We were really going to found the company with it.
Q. But at that time, the company was already in existence. Isn't that right? The company came into existence, as I understand it, the preceding month, in June?
A. Yes. Well, we were forming the company, yes.
Q. And the agreements with Bitting and Funfer had already been worked out?
A. They had already been worked out, yes, and we were just going to go from there.
Q. Did the same thing happen with the monies as you have described to me so far with respect to the other shareholders who eventually put in the rest of the money --
Q. -- up to $29,400.00?
A. Yes. There was a risk element, but it was one that the people were willing to take because they felt that the drug merited a very wide usage --
Q. All right.
A. -- and that we were going to see wide usage of it, and I believe personally that it will rewrite a section of the textbook on inflammation.
Q. Did you provide them or any of the other shareholders with copies of the articles of incorporation or any of the agreements with respect to Pharmacodynamics, Inc., before they bought into Pharmacodynamics, Inc.?
Q. Did you get into the salaries you and the other officers were to be paid?
Q. Did you get into the subject of how much money Pharmacodynamics was going to pay for the patent?
Q. Did you get into the subject of the $100,000.00 you were to be paid for research?
These are what we feel to be the more salient features of this case. Defendant Rose, however, relies solely on the general denial in his answer and on unsworn factual assertions in the brief submitted by his counsel in an attempt to raise factual issues and oppose plaintiffs' motion for summary judgment.
Fed. R. Civ. P. 56(e), 28 U.S.C., provides:
"When a motion for summary judgment is made and supported as provided in this rule, an adverse party may not rest upon the mere allegations or denials of his pleading, but his response, by affidavits or as otherwise provided in this rule, must set forth specific facts showing that there is a genuine issue for trial. If he does not so respond, summary judgment, if appropriate, shall be entered against him."
Fed. R. Civ. P. 56(c), 28 U.S.C., provides:
"The judgment sought shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law."
Defendants' unsworn assertions that specifically contradict sworn testimony submitted by plaintiffs must be disregarded. See, S.E.C. v. American Beryllium & Oil Corp., 303 F. Supp. 912 (S.D.N.Y. 1969); 6 Moore's Federal Practice, Para. 56.04 ; 56.11 -; 56.15 -. However, all facts presented have been gleaned from the exhibits identified by the defendants and the testimony of the defendants when their depositions were taken. With that admonition in mind we may now proceed to determine whether the court may render judgment for the party entitled thereto as a matter of law.
SECTION 10(b) OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, 15 U.S.C. § 78(j), AND S.E.C. RULE 10b-5, 17 C.F.R. § 240, 10b-5.
Section 10 of the Securities Exchange Act of 1934, 15 U.S.C. § 78j, makes it unlawful "for any person, directly or indirectly," to "employ, in connection with the purchase or sale of any security . . . any manipulative or deceptive device or contrivance in contravention" of any rule "the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors." One such rule so prescribed is Rule 10b-5. This declares that, in connection with the purchase or sale of any security, by the use of any means or instrumentality of interstate commerce, or of the mails, it shall be "unlawful for any person, directly or indirectly," (1) "To employ any device, scheme or artifice to defraud," (2) "To make any untrue statement of a material fact" or to omit to state a material fact so that the statements made "in the light of the circumstances", are not misleading, and (3) "To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person".
Use of the telephone in connection with the sale of a security constitutes the use of an instrumentality of interstate commerce which can form the basis of a suit under Rule 10b-5. 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 (1968); Nemitz v. Cunny, 221 F. Supp. 571 (D.C. Ill. 1963). Further, such a basis is established even if the telephone call made is intrastate rather than interstate. Myzel v. Fields, supra ; Nemitz v. Cunny, supra ; Lennerth v. Mendenhall, 234 F. Supp. 59 (N.D. Ohio 1964). Nor, is it necessary to show that the telephone was used to communicate actual fraudulent statements or misrepresentations, any use of the telephone in connection with the sale of a security suffices. Cf., Stevens v. Vowell, 343 F.2d 374 (10th Cir. 1965). Finally, regardless of what transpired by use of the telephone, defendant Rose admits using the mails to send plaintiffs their stock receipts and to send notes to plaintiffs soliciting more purchases. See, Stevens v. Vowell, supra.
A private right of action arises once facilities of the mail or interstate communications are used in connection with the sale or purchase of securities even though between the buyer and seller directly and not through a securities exchange or an organized over-the-counter market. Once jurisdiction attaches, the full requirements and regulations of the pertinent sections of the various Securities Acts are applicable. See, Hooper v. Mountain States Securities Corporation, 282 F.2d 195 (5th Cir. 1960), cert. denied, 365 U.S. 814, 81 S. Ct. 695, 5 L. Ed. 2d 693 (1961); Kardon v. National Gypsum Co., 69 F. Supp. 512 (E.D. Pa. 1946); McClure v. Borne Chemical Co., Inc., 292 F.2d 824 (3d Cir. 1961), cert. denied, 368 U.S. 939, 82 S. Ct. 382, 7 L. Ed. 2d 339 (1961); Affiliated Ute Citizens v. United States, 406 U.S. 128, 92 S. Ct. 1456, 31 L. Ed. 2d 741 (1972).
There are sufficient undisputed facts in the record to support federal jurisdiction in that the use of an interstate instrumentality and the mails provided the means to effectuate the transactions in question.
This case involves primarily a failure to disclose to plaintiffs certain agreements between the incorporators of Pharmaco. That this information was material is beyond question. See, Mills v. Electric Auto-Lite Co., 396 U.S. 375, 384, 90 S. Ct. 616, 24 L. Ed. 2d 593 (1970); Securities & Exchange Commission v. Texas Gulf Sulphur Co., 401 F.2d 833, 849 (2d Cir. 1968), cert. denied, Coates v. Securities and Exchange Commission, 394 U.S. 976, 89 S. Ct. 1454, 22 L. Ed. 2d 756 (1969); Affiliated Ute Citizens v. United States, supra.
The defendants actively encouraged the sale of Pharmaco securities. They personally solicited purchasers of the stock.
Under such circumstances it was incumbent upon them to disclose all material information. Affiliated Ute Citizens v. United States, supra ; Stevens v. Vowell, supra. These omissions coupled with positive representations extolling the virtues of Pharmaco and the defendants' conduct disclose a "course of business" or a "device, scheme or artifice" that operated as a fraud upon the purchasers of Pharmaco stock. The defendants failed to disclose material facts that reasonably could be expected to influence the decision to invest in Pharmaco.
It appears that the patent application had, at best, doubtful economic worth.
If at all, the defendant Rose knew that the alleged invention could not be economically exploited for a long time.
At the same time the defendants made predictions as to the likelihood of appreciation in value of the stock without adequate basis for such predictions.
It has been repeatedly stated that the fundamental purpose of the 1934 Act is to substitute a philosophy of full disclosure for the philosophy of caveat emptor and thus to achieve a high standard of business ethics in the securities industry. Securities & Exchange Commission v. Capital Gains Research Bureau, 375 U.S. 180, 186, 84 S. Ct. 275, 11 L. Ed. 2d 237 (1963). This fundamental purpose is equally applicable to a purely private securities transaction. Congress intended securities legislation enacted for the purpose of avoiding frauds to be construed "not technically and restrictively, but flexibly to effectuate its remedial purposes." Id., at 195, 84 S. Ct. at 285. For the foregoing reasons, it is the view of this Court that summary judgment is appropriate in this case.
And now, this 28th day of June, 1972 it is hereby ordered that:
1. On the issue of liability summary judgment is granted.
2. The defendants' motion to intervene and dissolve the attachment is denied.
The Court reserves ruling on the damage aspect of this case pending receipt of briefs on that issue.
SUPPLEMENTAL MEMORANDUM AND ORDER (September 12, 1972)
On June 28, 1972, Summary Judgment was granted against the defendant for violations of the anti-fraud provisions of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) and Rule X-10B-5 promulgated under that Act, 17 C.F.R. § 240.10b-5. The only remaining issue is the question of damages. The Court permitted the submission of supplemental affidavits and briefs on this issue. Defense counsel was unable to reach his client and failed to submit any affidavits or brief in opposition to plaintiff's. There being no substantial dispute on the question of damages, judgment shall be entered in favor of plaintiff.
PLAINTIFFS ARE ENTITLED TO RECOVER THE PURCHASE PRICE OF THEIR STOCK, WITH INTEREST.
Plaintiffs are entitled to recover the amount of money paid for their stock, plus simple interest at a rate of 6% from the date of their purchase. n1 The amounts paid by each of the plaintiffs and the dates of their purchases are as follows:
William Reube $ 3,500 (July 2 and 7, 1970)
S. John Nitta $ 7,500 (July 10 and 16, 1970)
David Nitta $ 1,500 (July 10 and 16, 1970)
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