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BIRDMAN v. ELECTRO-CATHETER CORP.

January 19, 1973

Harvey BIRDMAN
v.
ELECTRO-CATHETER CORPORATION


Newcomer, District Judge.


The opinion of the court was delivered by: NEWCOMER

NEWCOMER, District Judge.

 This action, as alleged in plaintiff's complaint, is based upon violations by the defendant, Electro-Catheter Corporation (hereinafter called "ECC") of Sections 11(a) of the Securities Act of 1933, 15 U.S.C. § 77k, Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j, and Rule 10b-5, 17 C.F.R. 240.10b-5, promulgated thereunder.

 Plaintiff herein purchased some 7,642 shares of common stock of defendant, ECC, on or about October 7, 1970, approximately one month after the effective date of the registration statement and prospectus involved in this case. The offering was for 60,000 shares of common stock of ECC. However, the greater part of defendant's outstanding shares, some 412,000 were held by various individuals and certain of these shares were exempt from registration under Section 4 of the Securities Act of 1933, 15 U.S.C. § 77d.

 On or about May 11, 1970, Mr. Philip Holzer and Mrs. Ruth Dvorak, two individual shareholders of defendant, ECC, requested an opinion from defendant's general counsel relating to the registration vel non of their 15,920 shares of common stock under the 1933 Act because they allegedly intended to offer it for sale. Defendant, through its general counsel, responded on May 18, 1970, with a letter advising them in general terms as to the nature of the restrictions upon the transfer of unregistered shares under the Securities Act of 1933. On June 22, 1970, the same shareholders formally requested general counsel of ECC to render an opinion as to "whether those shares may be sold without registration." That letter further stated in part: "We are furnishing you with the following information regarding our intention of selling our shares of [ECC] . . . ." ECC's registration statement and prospectus with regard to the 60,000 shares of common stock of ECC became effective September 1, 1970. On September 21, 1970, Mr. Bernard Bressler responded to the Holzer-Dvorak letter of June 22, 1970, stating that it was the firm's opinion as general counsel for ECC, that they were free to sell their shares of common stock without having registered them under the 1933 Act. At the time this transaction took place, Mr. Bressler was an officer and director of ECC as well as a member of ECC's general counsel. Thereafter, the 15,920 shares were "transferred" to J. W. Gould & Co. for sale in the open market after having first obtained a "no action" letter regarding these shares from the Securities Exchange Commission.

 Plaintiff alleges that after he read the ECC Prospectus covering the 60,000 shares offered and supplied to him by his broker in Philadelphia, Pennsylvania, he purchased 7,642 shares of ECC common stock at varying prices in the Over-the-Counter market in reliance on the aforesaid Prospectus. Plaintiff further alleges that the Prospectus which he read failed to mention the probability that the shareholders, Holzer and Dvorak, intended to sell their unregistered shares of common stock which fact, had plaintiff known of such intention, would have influenced his decision to invest in ECC stock. Plaintiff avers that ECC knew, through communications with the individual shareholders, ECC's general counsel and Bernard Bressler who was then a director of ECC, that Holzer and Dvorak were probably about to sell their shares of stock in the near future and that such fact should have been disclosed in the Prospectus. The unregistered shares represented over 25% of the total number of shares offered in the Prospectus.

 Defendant has now moved to dismiss the action on grounds of improper venue, lack of jurisdiction over the person and failure of plaintiff to state a claim for which relief can be granted.

 VENUE UNDER THE 1933 and 1934 ACTS

 Both the Securities Act of 1933 and the Securities Exchange Act of 1934 contain separate venue statutes, Section 22(a) of the Securities Act of 1933, 15 U.S.C. § 77v(a) *fn1" and Section 27 of the Securities Exchange Act of 1934, 15 U.S.C. § 78aa. *fn2" Both the 1933 and 1934 Acts place venue in any district wherein defendant "transacts business." In order for a defendant to be "transacting business" in a given district, its activities (therein) must constitute a substantial part of its ordinary business and must be continuous and of some duration. See United Industrial Corp. v. Nuclear Corp. of America, 237 F. Supp. 971 (D.Del., 1964). ECC concedes that it engaged in the following dollar volume of business in the Eastern District of Pennsylvania and throughout the nation:

 
(1) From February, 1971 -- August, 1971 -- average sales $2,000.00 per month.
 
(2) For fiscal year September 1, 1971 -- August 31, 1972 -- average sales $3,000.00 per month.
 
(3) Total sales in Pennsylvania for fiscal year ending August 31, 1972 -- $21,500.00.
 
(4) Total sales nationwide for fiscal year ending August 31, 1971 -- $750,000.00.
 
(5) Total sales nationwide for fiscal year ending August 31, 1972 ...

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