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MARSHALL ASSOCS. v. LITE-TRONICS

April 3, 1974

MARSHALL ASSOCIATES, INC.
v.
LITE-TRONICS, INC.


Gourley, District Judge.


The opinion of the court was delivered by: GOURLEY

GOURLEY, District Judge.

In this civil non-jury proceeding, diversity jurisdiction and the required jurisdictional amount are present as well as jurisdiction premised on § 27 of the Securities Exchange Act of 1934, 15 U.S.C.A. § 78aa. Plaintiff, asserting fraud and misrepresentation by defendant, seeks rescission of a contract which it entered with defendant and the return of 2,500 shares of common stock of Rite-Lite Corporation sold to defendant. The Court has afforded the parties a full and complete trial and has considered the briefs and argument of counsel.

 The facts may be briefly stated. Plaintiff, which is a holding company for the interests of Mr. J. Raymond Marshall, owned 50% of the stock of Rite-Lite Corporation, a manufacturer of incandescent decorative light bulbs made in the shape of candle flames. Defendant, through its representatives, first contacted plaintiff in connection with another business proposition. Although this matter did not materialize, it did lead to a series of meetings and negotiations regarding the possibility of plaintiff selling its 50% interest in Rite-Lite Corporation to defendant. This possibility became reality with an agreement executed by plaintiff and defendant on September 1, 1972, whereby Marshall sold its 2,500 shares of Rite-Lite in exchange for $25,000 cash and 37,500 shares of Lite-Tronics stock. This contract was accomplished as stipulated by the parties through the use, either directly or indirectly, of instrumentalities of interstate commerce.

 Plaintiff contends that the representatives of defendant, throughout the negotiations leading to the contract, made statements which were false or misleading in violation of the Securities Act of 1934. The statements relate primarily to the value of the defendant's stock given as partial payment for the 2,500 shares of Rite-Lite Corporation.

 Unquestionably, a most substantial dispute exists between the parties regarding the representations made by defendant's representatives to plaintiff's president. While Mr. Marshall is indeed an individual with exceptional experience in the area of creating and selling closely held corporations, the conclusion which the Court must reach is that various misrepresentations were made in violation of § 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. *fn2" Specifically, these misrepresentations included the following statements:

 
1. That there had been a substantial commitment for all or most of the 300,000 shares of defendant's stock to be sold as a Pennsylvania intrastate offering pursuant to the July, 1972, prospectus;
 
2. That there were well conceived plans for selling the balance of the stock and that defendant's representatives were dealing with various stock brokerage firms in Pittsburgh. (In fact, there was only one such firm which sold only 100 shares of stock);
 
3. That the defendant would raise one million dollars from the sale of this stock;
 
4. That the shares of stock plaintiff received were worth $4 per share.

 Under the circumstances, the Court believes that the $4 per share figure was represented as the stock's value, not merely its price. While the prospectus for the Pennsylvania intrastate sale clearly states that $4 per share was an arbitrary price, that statement must be coupled with the assertion that there was a substantial commitment for most of the shares being sold thereby. As a matter of fact, as stipulated by counsel, only 11,735 shares of Lite-Tronic Stock were sold through March, 1973. Thus there was no market for these shares, plans for selling them were certainly far from well formulated, and in effect, the shares of Lite-Tronics, Inc., sold to plaintiff were known by defendant to be virtually worthless.

 The conclusion seems inescapable that had these statements regarding the value of Lite-Tronics stock not been made, the plaintiff would not have sold its interest in Rite-Lite Corporation. Although a drastic remedy, it is the considered judgment of the Court that rescission of the contract is the only appropriate relief under the circumstances here. The action for rescission is timely and has not been waived through any inaction by plaintiff. Adelman v. CGS Scientific Corporation, 332 F. Supp. 137 (E.D. Pa. 1971); Baumel v. Rosen, 412 F.2d 571 (4th Cir. 1969).

 Findings of fact and conclusions of law have not been separately stated but are included in the body of the foregoing opinion as specifically authorized by Rule ...


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