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IN RE PENN CENT. SECS. LITIG.

May 30, 1975

IN RE: PENN CENTRAL SECURITIES LITIGATION, GEORGE P. BAKER, et al.
v.
DAVID C. BEVAN, et al.



The opinion of the court was delivered by: LORD, III

 JOSEPH S. LORD, III, CH. J.

 Plaintiffs, trustees of the bankrupt Penn Central Transportation Company ("PCTC"), allege that defendants conspired and acted in violation of the Securities Act of 1933 ('33 Act), 15 U.S.C. § 77a et seq., the Securities Exchange Act of 1934 ('34 Act), 15 U.S.C. § 78a et seq., and the Investment Advisors Act of 1940, 15 U.S.C. § 80b-1 et seq. Defendant Penphil has moved, pursuant to F.R. Civ. P. 12(b)(1), to dismiss for lack of subject matter jurisdiction, contending that plaintiffs' allegations set forth no more than corporate mismanagement, cognizable only in the state courts. We disagree.

 Section 27 of the '34 Act, 15 U.S.C. § 78aa states:

 
"The district courts of the United States * * * shall have exclusive jurisdiction of * * * all suits in equity and actions at law brought to enforce any liability or duty created by this chapter or the rules and regulations promulgated thereunder."

 In essence, Penphil's contention is that plaintiffs have failed to allege any "liability or duty created by [the '34 Act] or the rules and regulations promulgated thereunder," but rather that the sole source of the claimed liability is state law. Thus, we must determine whether plaintiffs' complaint sets forth allegations of liability under the substantive sections of the '34 Act or the pertinent rules and regulations.

 Section 10(b) of the '34 Act, 15 U.S.C. § 78j(b), prohibits the use of manipulative or deceptive devices in connection with the purchase or sale of a security. Rule 10b-5 of the Securities and Exchange Commission, 17 C.F.R. § 240.10b-5 provides:

 
"It shall be unlawful for any person * * *
 
"(1) to employ any device, scheme or artifice to defraud,
 
"(2) to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading or
 
"(3) to engage in any act, practice or course of business which operates or would operate as a fraud or deceit upon any person,
 
"in connection with the purchase or sale of any security."

 Plaintiffs' complaint clearly alleges liability under these provisions. Paragraph 15 of the complaint alleges that Penphil and the other defendants were members of a conspiracy. The complaint states that in furtherance of this conspiracy, defendants Bevan and Gerstnecker, former officers of PCTC, and defendant Hodge, a former investment advisor of PCTC, created Penphil Co., "* * * and thereafter covertly utilized and manipulated all of the resources of Penn Central over which they had control not for the best interests of Penn ...


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