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June 14, 1976


The opinion of the court was delivered by: BECHTLE

 Victor Vacca ("Victor") and Dominic Vacca are brothers. Victor was the active participant in the transactions which form the subject matter of this lawsuit. Victor and Senior have been close friends all of their adult lives and Victor has known Junior, who is now 28 years old, all of the latter's life. Victor is the godfather of Junior's brother.

 In June of 1969, Junior was approached by Cappello, who was a cousin of Junior's wife, about the formation of a new company which would be involved primarily in the sale of stocks. This was M.B.A. Junior, who was interested, introduced Cappello to various family members and friends who were encouraged to make an investment in the new corporation. Cappello spoke at a meeting attended by many members of the DiSalvio family in an effort to persuade them to invest. Among others, Senior invested in M.B.A.

 During this same month of June, 1969, Victor visited the grocery store run by Senior while Senior and Junior were both present. Junior asked Victor if he would be interested in buying M.B.A. stock at 80 cents per share. Senior informed Victor that he had purchased the stock and was enthusiastic about it. Victor, who had never purchased stock in a corporation before, neither asked for, nor received, any documentation about M.B.A. He was simply told that it was in the brokerage business. However, relying upon the word and judgment of the DiSalvios, Victor made two separate $800 cash payments to Junior to purchase a total of 2,000 shares of M.B.A. stock. Junior placed this money in his account and made a check payable to M.B.A. for $1,600. Subsequently, Victor received a certificate for 2,000 shares of M.B.A. stock dated July 2, 1969. At the time of these transactions, Junior was neither a registered securities dealer, salesman, investment adviser nor solicitor under Pennsylvania law. See 70 P.S. § 33. He became a registered salesman by December of 1969 and remained so registered at least through all of 1970.

 In June of 1970, Junior and Cappello met with Victor in order to sell him stock in I.F.C. Cappello delivered the sales "pitch" at the meeting. Victor gave Junior $5,000 in cash in order to purchase 4,000 shares of I.F.C. for himself and 1,000 shares for his brother, Dominic, at one dollar per share. Once again, Victor received no written information about the corporation in which he was investing.

 Plaintiffs now seek rescission and the return of their investment. Passing over the question of whether this suit was brought with the dispatch necessary to entitle plaintiffs to that "radical" remedy, see Johns Hopkins University v. Hutton, 488 F.2d 912 (4th Cir. 1973), cert. denied, 416 U.S. 916, 40 L. Ed. 2d 118, 94 S. Ct. 1622, 94 S. Ct. 1623 (1974); Baumel v. Rosen, 412 F.2d 571 (4th Cir. 1969), cert. denied, 396 U.S. 1037, 90 S. Ct. 681, 24 L. Ed. 2d 681 (1970), the Court believes that the evidence presented fails to establish any intent to deceive, manipulate or defraud on the part of the DiSalvios. In Ernst & Ernst v. Hochfelder, supra, the Supreme Court held that such an intent, or "scienter," is an essential element in an action for damages under Section 10(b) of the 1934 Act and Rule 10b-5. While the Supreme Court left open the question of whether scienter is a necessary element in an action for injunctive relief under those provisions, 96 S. Ct. at 1381 n.12, we believe that the Ernst & Ernst v. Hochfelder holding applies equally to both equitable actions for rescission and actions at law for money damages. Cf. Ash v. LFE Corp., 525 F.2d 215, 220 (3d Cir. 1975); Myzel v. Fields, 386 F.2d 718, 740-742 (8th Cir. 1967), cert. denied, 390 U.S. 951, 19 L. Ed. 2d 1143, 88 S. Ct. 1043 (1968).

 It is undisputed that several members of the DiSalvio family, including Senior, purchased stock in M.B.A., I.F.C. and Intra-Management. In addition, Junior's testimony is uncontested that he was never an officer of any of the corporations involved in this case and, in fact, while employed by M.B.A., that he was paid his sales commissions in that corporation's stock. In light of these facts, and in view of the long-standing, close personal relationship between these parties, the Court simply does not believe that the requisite intent to defraud existed. In light of this finding, plaintiffs cannot recover their investment from the DiSalvios under Section 10(b) of the 1934 Act or Rule 10b-5.

 It is currently an open question whether a private cause of action exists under Section 17(a) of the 1933 Act. Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 734 n.6, 44 L. Ed. 2d 539, 95 S. Ct. 1917 (1975); Schultz v. Cally, 528 F.2d 470, 475 n.11 (3d Cir. 1975). Assuming, arguendo, that such a cause of action is available, we believe that recovery under that section is also precluded by the rule laid down in Ernst & Ernst v. Hochfelder, supra. The "courts have endeavored to treat the '33 and '34 Acts in pari materia and to construe them as a single comprehensive scheme of regulation." Globus v. Law Research Service, Inc., 418 F.2d 1276, 1286 (2d Cir. 1969), cert. denied, 397 U.S. 913, 25 L. Ed. 2d 93, 90 S. Ct. 913 (1970); accord, De Haas v. Empire Petroleum Co., 435 F.2d 1223, 1229 n.4 (10th Cir. 1970). We believe that, in the absence of proof of scienter, a finding of civil liability is as inappropriate under Section 17(a) of the 1933 Act as it is under Section 10(b) of the 1934 Act and Rule 10b-5. Thompson v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 401 F. Supp. 111, 114 (W.D. Okl. 1975); Larson v. Tony's Investments, Inc., 46 F.R.D. 612, 615 (M.D.Ala. 1969). This conclusion clearly follows from the fact that the language of Rule 10b-5 was derived in significant part from Section 17(a) of the 1933 Act. Ernst & Ernst v. Hochfelder, supra, 96 S. Ct. at 1390 n.32; Blue Chip Stamps v. Manor Drug Stores, supra, 421 U.S. at 767 (Blackmun, J., dissenting).

 Since plaintiffs have failed to prove all of the elements necessary to make out a successful claim under the sections of the federal securities statutes upon which they rely, we are left finally to decide whether the activities of the DiSalvios constituted common law fraud. The Supreme Court of Pennsylvania has stated:

The essence of fraud is deceit intentionally and successfully practiced to induce another to part with property or with some legal right. Fraud is practiced when deception of another to his damage is brought about by a misrepresentation of fact or by silence when good faith required expression. In re Thorne's Estate, 344 Pa. 503, 25 A.2d 811, 816 (1942) (emphasis added).

 Once again, intent to defraud is an essential element of the claim made by plaintiffs. As we have ruled that there is no evidence of such an intent on the part of the DiSalvios, we decline to find them liable for common law fraud.

 Our decision in this case should not be interpreted as condoning the actions of the DiSalvios. The Court is sensitive to the plight of plaintiffs. However, investment in securities is an inherently risky activity and the law does not provide a remedy for every mistake in judgment made by investors. Plaintiffs were novices in this field and made the mistake of acting on the advice of personal friends, the DiSalvios, who were hardly more experienced. They may all have been equally misled by Cappello. We simply hold that, whether or not the DiSalvios were negligent in ...

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