complaint. We will examine each count and the objections to its seriatim.
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."