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WALSH v. BUTCHER & SHERRERD

June 2, 1978

KATHERINE C. WALSH
v.
BUTCHER & SHERRERD



The opinion of the court was delivered by: LORD

 JOSEPH S. LORD, III, CH. J.

 This detritus of the massive securities litigation which followed the bankruptcy of the Penn Central Transportation Company in 1970 is an action under the Securities Exchange Act of 1934 against a brokerage firm whose employee recommended to the plaintiff the purchase of Penn Central Company common stock in the fall of 1968. The plaintiff alleges that the defendant made omissions and misrepresentations as to material facts in connection with her purchase, in violation of § 10(b) of the Securities Exchange Act, 15 U.S.C. § 78j(b), and of Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5. The defendant has moved for summary judgment pursuant to F.R.Civ.P. 56 on various grounds, and the plaintiff has moved for leave to file a second amended complaint pursuant to F.R.Civ.P. 15(a) which would add pendent state law claims for negligence.

 I. Res Judicata Defense.

 We are surprised, and somewhat shocked, at the defendant's assertion that res judicata bars the plaintiff's Rule 10b-5 claim because she was a member of the plaintiff class in the court-approved settlement in Robinson v. Penn Central, C.A. No. 70-2010 (E.D. Pa.), in which the defendant also participated as a member of the defendant class. We do not intend to waste time considering this argument, other than to quote the following colloquy we had on November 3, 1976, with counsel for the plaintiff class in Robinson v. Penn Central :

 
"COUNSEL:
 
"One objection was from the firm of Lyman & Ash, which wished to be assured that if their client, a Miss Walsh, were to not opt out and were to participate in the distribution resulting from this settlement, that acceptance of that distribution would in no way constitute a release of plaintiff Walsh's claim in Walsh v. Butcher & Sherrerd as well as Jamison and Butcher & Sherrerd, which, as Your Honor knows, is before Your Honor, still pending. . . .
 
"So, we have discussed this with counsel, with Lyman & Ash. . . and they have advised me that if Your Honor would consider inserting into the record today a statement to the effect that these settlements and the releases filed by class members herein were not intended to and shall not have any effect upon and shall not be considered releases of those claims asserted in . . . Walsh against Butcher & Sherrerd, 72-2525, Eastern District of Pennsylvania. . . .
 
"If Your Honor would be willing to agree with that kind of statement and on the record, that would satisfy counsel. . . .
 
THE COURT:
 
"I adopt in toto and in ipsis verbis the statement that you have just made referring to the cases which you have mentioned by name."

 N.T. 41, 43, 44. Defendant's counsel was present and sat by in silent acquiescence. We will not lend ourselves to a sand-bagging eighteen months later. *fn1"

 II. Materiality of Defendant's Misrepresentations and/or Omissions.

 Plaintiff's theory of Rule 10b-5 liability revolves around the investment activity of Howard Butcher, III, the senior partner in the defendant partnership and owner of approximately a 65% interest of it. It is alleged that from 1959 through 1968 Butcher manifested a consistently bullish attitude concerning Penn Central (and, before the 1968 merger which created Penn Central, Pennsylvania Railroad) stock, of which he and his wife were large holders. *fn2" The defendant's securities sales personnel and the investing public believed in 1968, according to the amended complaint, that Butcher was the premier bull and touter of Penn Central, that Butcher had access to special information about Penn Central, that Butcher was an investment genius who was seldom or never wrong and that Butcher had never sold any of his holdings in Penn Central. Amended Complaint at para. 11. It is alleged that the price of Penn ...


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