The opinion of the court was delivered by: HANNUM
The defendants, American Stock Exchange, Inc., (AMEX) and the New York Stock Exchange, Inc. (NYSE), have moved pursuant to Fed.R.Civ.P. 12(c) for judgment on the pleadings dismissing the first, third, fourth, fifth and sixth counts of the complaint. The defendants have also moved pursuant to Fed.R.Civ.P. 56(b) for summary judgment dismissing the second, third and fifth counts of the complaint. The rule 12(c) motion asserts that the first, third, fourth, fifth and sixth counts fail to state a claim upon which relief can be granted while the rule 56(b) motion on the second, third and fifth counts assert that they are time-barred by the applicable limitations period.
The motions raise interesting and significant questions concerning the judicial implication of a right of action against a national securities exchange under certain sections of the Securities Act of 1933
and the Securities Exchange Act of 1934.
Some of these questions have yet to be resolved by either the Third Circuit or the Supreme Court. The Court heard oral argument on February 3, 1981, a transcript of which was filed on February 27, 1981.
After careful consideration of the issues presented, the Court renders the following Memorandum and Order.
In 1953 the named plaintiff,
Lynn G. Walck, established a stock brokerage account with a New York brokerage firm -- "Edwards and Hanly." During the relevant time period Edwards and Hanly was registered with the Securities Exchange Commission as a broker-dealer under the Exchange Act and was also a member firm of AMEX and NYSE. In 1959, Walck opened a margin account with Edwards and Hanly. Prior to that time, from 1953 until 1959, Walck's account with Edwards and Hanly had consisted solely of cash. The margin account was established at the prompting of Edward J. Kelly, who was a representative of Edwards and Hanly.
Between 1959 and 1973, Walck made deposits into his margin account with Edward & Hanly totalling approximately $100,000.00. Between 1969 and 1973, again at the recommendations and urging of Edwards and Hanly, plaintiff liquidated all his security holdings in order to purchase on margin 32,300 shares of Trans-Lux Corporation common stock at prices ranging between $44.50 and $8.00 per share at a total cost of approximately $384,000.00. At no time, during this relevant period, did Kelly or Edwards and Hanly ever explain to the plaintiff what a margin account was or how it worked.
The price of the Trans-Lux stock from 1969 to 1973 fluctuated, however the general trend was downward. Due to this downward trend, plaintiff's account became undermargined and on May 21, 1973, Edwards and Hanly sent to the plaintiff a telegram informing him that his account was undermargined in the amount of $43,000.00 and that if plaintiff did not immediately deposit that amount into the account, Edwards and Hanly would liquidate some of his securities to cover the deficiency.
The plaintiff informed Edwards and Hanly that he did not have additional funds to deposit. Additional notices were sent to the plaintiff in June, August and September of 1973 that his account was undermargined. Finally, in January of 1974, Edwards and Hanly liquidated the plaintiff's account, selling the Trans-Lux stock at $2.00 per share in an attempt to meet the plaintiff's margin deficiency. After sale of the stock the deficiency in the plaintiff's account remained at approximately $108,000.00.
As a result of the foregoing, Walck sued Edwards and Hanly (and Kelly) in this Court -- Walck v. Edwards and Hanly and Edward Kelly, Civil Action No. 74-664.
The plaintiff alleged in that action that the defendants, in handling his account, had violated § 17(a) of the Securities Act and §§ 7, 10 and 15 of the Exchange Act, and the rules promulgated thereunder. The plaintiff also alleged a common law tort and breach of contract. The relief sought was $100,000.00 compensatory and $500,000.00 punitive damages, as well as a declaration that the plaintiff did not owe Edwards and Hanly the $108,000.00 deficiency.
On September 13, 1976, Edwards and Hanly filed a Chapter XI petition in bankruptcy. On September 15, 1976, the plaintiff's action against Edwards and Hanly was stayed indefinitely by the bankruptcy court. The present action against the two exchanges was instituted on January 13, 1977. A recitation of the circumstances leading up to the Edwards and Hanly action was prompted due to the similarity of operative facts between that case and the present one. The plaintiffs' claim against the defendant-Exchanges arises from the same circumstances. Basically, the present plaintiffs are alleging that the Exchanges "aided and abetted" Edwards and Hanly's alleged wrongdoing.
In the First Count of the Complaint (paras. 46-68) plaintiff alleges that the NYSE and AMEX are liable under § 6 of the Exchange Act
for violating NYSE rules 405 and 431 and AMEX rules 411 and 462 in connection with the brokerage accounts held by the plaintiff and the class members with Edwards and Hanly. The Second Count (paras. 69-74) alleges a violation of Exchange Act § 9(a)
in that plaintiff claims that Edwards and Hanly induced the plaintiff and others similarly situated to purchase large amounts of Trans-Lux stock in order to create the appearance of active trading in the stock and then prevented the liquidation of the plaintiff's and class members' margin accounts in order to artificially stabilize the market price of the Trans-Lux stock. Plaintiff alleges that the defendants were aware of this activity on the part of Edwards and Hanly and substantially assisted Edwards and Hanly in carrying out these illegal activities.
Count Three (paras. 75-79) alleges a violation of § 17(a)
of the Securities Act and § 10(b)
of the Exchange Act and rule 10b-5
promulgated thereunder. Plaintiff claims that the defendants knowingly withheld facts pertaining to the Trans-Lux stock transactions and that their actions constitute common law fraud and a violation of the aforementioned provisions. Count IV (paras. 80-82) alleges a violation of the margin requirements of § 7 of the Exchange Act
and Regulation T
promulgated thereunder. The Fifth Count (paras. 83-84) alleges the use of "manipulative, deceptive, fraudulent and fictitious devices to induce, and to attempt to induce, purchases and sales of stock traded 'over the counter'" in violation of Exchange Act § 15(c).
Finally, in the Sixth Count (paras. 85-87), plaintiff alleges a common law breach of contract.
Count two of the complaint is brought pursuant to § 9(a) of the Exchange Act. Section 9 contains its own statute of limitation set forth in subsection (e):
No action shall be maintained to enforce any liability created under this section, unless brought within one year after the discovery of the facts constituting the violation and within three years after such violation.
Defendants point to January 9, 1974, as the date of the last securities transaction involving plaintiff's account -- the date on which Edwards and Hanly liquidated the account.
Since this action was commenced on January 13, 1977, defendants contend that the § 9(a) claim contained in Count Two is time-barred. Plaintiff responds to defendants' position that this claim is untimely by arguing that the limitation period discussed above is subject to federal equitable tolling principles.
Plaintiff's position raises two questions: First, is the federal equitable tolling doctrine applicable? Second, if it is applicable, then are there disputed factual issues pertaining to when the plaintiff knew or, in the exercise of reasonable diligence, should have known of defendants' fraudulent activities thus precluding summary judgment?
In resolving the first question, the Court rejects defendants' contention that equitable tolling is inappropriate as to § 9(a) due to the "built-in" tolling provision of § 9(e) which "was intended to impose an absolute bar to claims more than three years old."
Federal limitations periods, whether built-in to a statute providing for substantive liability or not, are subject to equitable tolling. American Pipe & Construction Co. v. Utah, 414 U.S. 538, 559, 94 S. Ct. 756, 769, 38 L. Ed. 2d 713 (1974), reh. denied, 415 U.S. 952, 94 S. Ct. 1477, 39 L. Ed. 2d 568 (1974); see also Glus v. Brooklyn Eastern District Terminal, 359 U.S. 231, 79 S. Ct. 760, 3 L. Ed. 2d 770 (1959). Concluding that the doctrine applies, however, does not end the inquiry as to the timeliness of the claim contained in the second count. The second question is whether the actual application of the doctrine to the facts of this case results in a tolling of the limitations periods; and concomitantly, whether that question is even capable of resolution at this stage of the proceedings in the context of a summary judgment motion.
Under the equitable tolling doctrine, when fraud is concealed the limitations period is tolled until the plaintiff becomes aware of the fraud, or should have become aware of it. Hochfelder v. Midwest Stock Exchange, 503 F.2d 364, 375 (7th Cir.), cert. denied, 419 U.S. 875, 95 S. Ct. 137, 42 L. Ed. 2d 114 (1974); see also Holmberg v. Armbrecht, 327 U.S. 392, 66 S. Ct. 582, 90 L. Ed. 743 (1946). Where active concealment is present then the statute is tolled until actual discovery. Tomera v. Galt, 511 F.2d 504, 510 (7th Cir.1975). In paragraph 45 of the complaint plaintiff alleges:
All of the aforementioned facts and circumstances were actively concealed by Defendants and Edwards & Hanly from Plaintiff and others similarly situated who could not, as a result, have discovered same. Only as a result of discovery proceeding by subpoena in the action entitled Walck v. Edwards & Hanly, E.D. Pa., Civil Action No. 74-664, were these facts and circumstances able to be discovered.
Plaintiff contends that the invocation of the federal equitable tolling doctrine via the allegation contained in paragraph 45, supra, raises a genuine issue of material fact as to when the defendants' involvement in the fraud perpetrated against the plaintiff and the class members was discoverable. See note 21, supra.
As the moving parties, the defendants herein have the burden of convincing this court that there is no genuine issue of material fact with regard to when the wrongdoing on the part of the Exchanges was discoverable, and that they are entitled to judgment as a matter of law. Robertson v. Seidman & Seidman, 609 F.2d 583, 591 (2d Cir.1979). Defendants argue that there are no factual allegations supporting the claim of active concealment other than the "conclusory, self-serving allegation"
contained in paragraph 45 of the complaint, quoted above. Furthermore, defendants assert that the circumstances leading up to the Edwards and Hanly action, commenced on March 19, 1974, put the plaintiff on "inquiry notice" as to the Exchanges' potential involvement.
Plaintiff and his counsel must have known by March 19, 1974 (1) the alleged facts which the Exchanges allegedly did not disclose to plaintiff, and (2) the facts which the Exchanges allegedly had a duty to disclose to plaintiff. Thus, even if the Exchanges had wanted to fraudulently conceal from plaintiff their alleged omissions and nondisclosures, plaintiff and his counsel nevertheless knew or should have known what they were by March 19, 1974.
The above points argued by defendants concern factual issues and the Court is in agreement with the plaintiff's contention that they "are not susceptible to the drawing of one and only one factual inference,"
i.e., that plaintiff knew or, in the exercise of reasonable diligence, should have known of the Exchanges' involvement prior to March, 1976.
Defendants have not convinced this Court that this case is an exception to the general rule that "limitations issues ordinarily require factual determinations and are best left to trial for resolution." Kroungold v. Triester, 407 F. Supp. 414, 419 (E.D.Pa.1975), citing Tomera, supra at 510-511. Accordingly, defendants' motion for summary judgment on Count Two of the complaint will be denied.
Defendants have also moved for judgment on the pleadings dismissing counts one, three, four, five and six of the complaint. The Court will now address that motion.
In the first count of the complaint plaintiff has sued the Exchanges under § 6 of the Exchange Act for failing to enforce NYSE Rules 405 and 431 and AMEX Rules 411 and 462 which the defendants "knew or in the exercise of reasonable care should have known"
were being violated by Edwards and Hanly. Defendants have moved for judgment on the pleadings on this count contending ...