The opinion of the court was delivered by: BECHTLE
Plaintiffs, two Philadelphia lawyers, allege in their complaint that on January 6, 1969, they purchased, as joint tenants, 50 shares of stock of Scientific Control Corp. ("Scientific"),
in the Eastern District of Pennsylvania, in reliance on a prospectus considered acceptable for filing and use by the Securities Exchange Commission ("SEC"), as well as upon financial reports and other data of Scientific regarding the corporation's financial condition, which deceived them of the true worth of the stock. They sold the stock one month later for a loss of approximately $400. Eighteen months and three days later, claiming to represent a class of more than 3,000 holders of Scientific stock purchased during the thirteen-month period between October 31, 1968 (the effective date of registration and original offering of the stock), and November 21, 1969, the day it filed a petition for an arrangement under Chapter XI, of the Bankruptcy Act,
they filed their complaint on August 9, 1971, for damages pursuant to certain sections of the Securities Act of 1933
and the Securities Exchange Act of 1934,
the rules and regulations thereunder,
and commonlaw fraud principles against fourteen defendants.
Three months later, plaintiffs filed an amended complaint dropping nine defendants and adding fifteen others, making a total of twenty. The defendants are Scientific; H. L. Federman & Co.; Kleiner, Bell & Co., Inc., the principal underwriters of the issuance of 400,000 shares of Scientific common stock;
Arthur Andersen & Co., the accountant for Scientific; and, sixteen individuals who acted as officers and/or directors of Scientific during the relevant time period specified in the complaint.
Fourteen of the defendants have filed motions to dimiss the complaint on various grounds or to quash service of process.
Plaintiffs bring this action to enforce a liability created by the Federal securities anti-fraud acts,
SEC Rule 10b-5 and common-law fraud principles. Their claim is a substantial one. This Court has jurisdiction over the subject matter of this action. See, e. g., Rosen v. Albern Color Research, Inc., 218 F. Supp. 473, 474-475 (E.D.Pa.1963). It also has pendent jurisdiction over the state common-law claim. United Mine Workers of America v. Gibbs, 383 U.S. 715, 725, 86 S. Ct. 1130, 16 L. Ed. 2d 218 (1966); Puma v. Marriott, 294 F. Supp. 1116 (D.Del.1969); Emerson v. Falcon Manufacturing, Inc., 333 F. Supp. 888 (S.D.Texas, 1971); 8 A.L.R. Fed. 533-538.
Regarding venue, § 22(a) of the 1933 Act provides: "Any such suit or action may be brought in the district wherein the defendant is found or is an inhabitant or transacts business, or in the district where the offer or sale took place, if the defendant participated therein." Section 27 of the 1934 Act states: ". . . Any suit or action to enforce any liability or duty created by this chapter or rules and regulations thereunder . . . may be brought . . . (1) in the district wherein any act or transaction constituting the violation occurred or in the district wherein the defendant is found or is an inhabitant or transacts business, and process . . . may be served in any other district of which the defendant is an inhabitant . . .."
Defendants William C. Weatherford and Van Calvin Ellis contend they did not participate in the offer to sell or the sale itself for two reasons: (1) They were "outside" directors of Scientific and their only participation in the events was the signing of the Registration Statement and the prospectus; and, (2) plaintiffs purchased their stock in the "aftermarket" and not in the original offering. The meaning of the words "if the defendant participated therein" in § 22(a) of the 1933 Act should not be confused with defenses which a particular defendant may raise and prove at trial. For purposes of this section, a director who signs the Registration Statement participated in the offer or sale of the securities involved, even though the sale occurred after the original offering. See, Rosenberg v. Globe Aircraft Corporation, 80 F. Supp. 123, 125 (E.D.Pa.1948); Lester v. Preco Industries, Inc., 282 F. Supp. 459 (S.D.N.Y.1965).
There is a more liberal view, contra to that expressed in the Rosenberg case, supra, 80 F. Supp., at 125, that a defrauded buyer, in suing under § 10(b) of the 1934 Act and SEC Rule 10b-5, is free of the restrictions of the 1933 Act. See, e. g., Dauphin Corporation v. Redwall Corporation, 201 F. Supp. 466 (D.Del.1962). Under this view, the requirement of the venue provision of § 22(a) of the 1933 Act as to the district where the offer or sale took place, "if the defendant participated therein," need not be met. Inasmuch as the defendants objecting to venue are parties alleged to be, or who may be deemed, participants in the sale of stock, the more liberal view need not be followed here in deciding the venue question.
With the exception of Jagger's motion, which will be denied at this time without prejudice, the motions to dismiss for ...