The opinion of the court was delivered by: GORBEY
On November 16, 1972, the plaintiff Howard L. Jenkins filed pro se, an 11 page complaint with 16 exhibits, on behalf of all stockholders of Lavender House, Inc., against The Fidelity Bank (the Bank), and each of its officers and directors, individually. The complaint alleged various acts of misconduct by the defendants directed toward Lavender House, Inc. Following a motion by the defendants, this court ordered the plaintiff to submit an amended complaint in compliance with the Federal Rules of Civil Procedure. The amended complaint which adds Lavender House, Inc. as a plaintiff (corporate plaintiff), and the law firm of Morgan, Lewis and Bockius; Gabriel F. Nagy, Esquire (Nagy); and Southeastern Pennsylvania Development Fund (the Fund), as defendants, sets forth some 15 counts in 129 numbered paragraphs. This complaint charges that the defendants participated in the preparation of an offering circular which contained several omissions and misrepresentations, made improper disbursements from the proceeds of the offering and performed other acts of misconduct. The amended complaint with its 17 exhibits was filed on a timely basis.
Count 1 charges that Gabriel F. Nagy, Esquire, participated in the preparation of a misleading offering circular, in connection with the public offering of the stock of Lavender House, Inc., in violation of the Securities Act of 1933. Specifically, it charges the offering circular failed to state that the net proceeds of the company's public stock offering would be assigned to the Bank until its loan was fully paid.
Defendant Nagy contends that the complaint fails to state a claim upon which relief can be granted, because the securities in question were exempt from registration under Section 3 of the Act (15 U.S.C. § 77c). In an action by a buyer of unregistered securities, it is well established that the defendant has the burden of proving exemption from registration requirements. See SEC v. Ralston Purina Co., 346 U.S. 119, 73 S. Ct. 981, 97 L. Ed. 1494 (1953). Raising this issue at this time is therefore premature.
Further, in evaluating a claim under Fed. R. Civ. P. 12(b)(6), we are guided by the admonishment in 2A Moore's Federal Practice, § 1208 that "A complaint should not be dismissed for insufficiency unless it appears to a certainty that the plaintiff is entitled to no relief under any state of facts which could be proved in support of the claim. The pleadings are to be liberally construed." Section 12(2) of the Act (15 U.S.C. § 77(l)(2)) provides: "Any person who -- . . . offers . . . a security [whether or not exempted by the provisions of section 77c of this title] . . . by means of a prospectus . . . which . . . omits to state a material fact necessary in order to make the statements, . . . not misleading . . . shall be liable to the person purchasing such security . . ." Accordingly, the contention that the complaint should be dismissed for failure to state a claim appears to be without merit.
Next, the defendant contends that the amended complaint fails to state a cause of action because the plaintiff has failed to plead the facts in support of jurisdiction. Specifically, the failure of the plaintiff to aver:
(1) the use of instrumentalities of interstate commerce; (2) the materiality of the actions complained of; and (3) the causation between the defendant's actions and the injuries of the plaintiff; requires that the complaint be dismissed.
Fed. R. Civ. P. 8(f) provides that: "All pleadings shall be so construed as to do substantial justice." Cases are generally to be tried on proofs, rather than pleadings. [Rule 8(f)] excludes requiring technical exactness, or the making of refined inferences against the pleader, and requires an effort fairly to understand what he attempts to set forth. Expensive trials of meritless claims are sought to be avoided in the main by pretrial and summary judgment procedures." De Loach v. Crowley's, Inc., 128 F.2d 378 (5th Cir. 1942). Dismissal under Fed. R. Civ. P. 12 for failure to make these allegations is not appropriate.
Next, the defendants move for dismissal because the plaintiff has failed to comply with Fed. R. Civ. P. 23.1 concerning derivative actions. The plaintiff states that this action is not a derivative action, therefor the defendants' claim must be rejected. The plaintiff, however, states that his amended complaint has joined Lavender House, Inc., as a plaintiff, and Lavender House, Inc. has filed with this court an "Approval as Joinder Plaintiff", indicating the consent of its Board of Directors to join it as a plaintiff and its intention to retain counsel
in this case. Fed. R. Civ. P. 20 provides that "All persons may join in one action as plaintiffs if they assert any right to relief jointly, severally, or in the alternative in respect of or arising out of the same transaction, occurrence, or series of transactions or occurrences and if any question of law or fact common to all these persons will arise in the action."
Count 1 charges defendant Nagy with participating with the issuer in the preparation of a misleading offering circular. The anti-fraud provisions of the Securities Acts permit recovery by purchasers in this situation. These facts do not establish the right of the issuing corporation to obtain any relief in these circumstances. Accordingly, Lavender House, Inc. will be dropped as a party from Count 1 in accordance with Fed. R. Civ. P. 21 which provides: "Parties may be dropped . . . by order of the court on . . . its own initiative at any stage of the action . . ."
The next reason upon which the defendant urges dismissal of the complaint is that the complaint fails to clearly define the class which the plaintiff purports to represent. We recognize that no action may proceed as a class action unless the class is defined and the plaintiff is a member of the class. Basch v. Talley Industries, Inc., 53 F.R.D. 14 (S.D.N.Y. 1971). Such considerations have relevance to a motion to determine whether a class action is to be maintained, not to a motion under Fed. R. Civ. P. 12, therefore the claim will not be dismissed for that reason.
Nor can we agree with the defendant's next contention that the complaint fails to contain a short plain statement of the claim in accordance with Fed. R. Civ. P. 8. On the contrary, reading Count 1, in light of Rule 8(f), it alleges that defendant Nagy participated in the preparation of a misleading offering circular which failed to disclose that the proceeds of the stock offering were assigned to the bank pending full payment of its loan. This is sufficiently clear to meet the requirements of Fed. R. Civ. P. 8.
Lastly, the defendant contends that the complaint violates Fed. R. Civ. P. 9(b) which provides, inter alia, that "The circumstances constituting fraud . . . shall be stated with particularity." Specifically, they object to plaintiff's paragraph 16 which states:
"The statements and omissions in the offering circular was a fraud on the plaintiff and a detriment to the company in that the offering circular could not be used further to raise badly needed working capital or other funds for company, with the result being general, direct, and consequential loss to the company and the plaintiff stockholders."
It has been recognized that violations of the anti-fraud provisions of the Securities Act (15 U.S.C. § 77q) may occur when persons offering a security for sale omit material facts from a prospectus. Globus v. Law Research Service, Inc., 418 F.2d 1276 (2d Cir. 1969). Accordingly, we cannot say that the allegation that the plaintiff stockholder was defrauded by specific omissions from an offering circular fails to state a claim of fraud with particularity. Defendant's motion to dismiss the complaint as to Count 1 is therefore denied.
Count 2 alleges that defendant Peter M. Green, Assistant Treasurer of The Fidelity Bank, participated in the preparation of an offering circular which failed to disclose that the proceeds of the public offering were assigned to the Bank, pending full payment of its loan. Defendant Green, like defendant Nagy, in Count 1 contends that the complaint is fatally defective for its failure to plead the use of an instrumentality or means of interstate commerce. We reject such contentions for the reasons set forth in Count 1.
Next, defendant contends that the failure to specify the provisions of the federal securities laws which were allegedly violated requires dismissal of the complaint. It is well established that a pleading must contain a short and plain statement of the claim showing that the pleader is entitled to relief. It is not necessary to set out a legal theory on which the claim is based. Siegelman v. Cunard White Star, 221 F.2d 189 (C.A.2d Cir. 1955). A complaint is not to be dismissed because the plaintiff has misconceived the proper legal theory of the claim. But it is sufficient if it shows that the plaintiff is entitled to any relief which the court can grant, regardless of whether it asks for the proper relief. Dotschay v. National Mutual Insurance Co., 246 F.2d 221 (5th Cir. 1957). The plaintiff has alleged that defendant Green's participation in the preparation of a misleading offering circular is a violation of Section 10 of the Securities Exchange Act of 1934 (15 U.S.C. § 78j). Rule 10(b)(5)(b) makes it unlawful for any person to use an instrumentality of interstate commerce to make an untrue ...