GTA from bringing this suit because it was not the purchaser of securities from defendants. I believe that this reads too much into Blue Chip, however. Blue Chip and Birnbaum both dealt with the distinction between real purchasers and sellers and potential purchasers and sellers. In limiting the class of potential plaintiffs in § 10(b) actions to actual purchasers or sellers, the court recognized that to do otherwise would make anyone a potential plaintiff. Id. at 739-40. The Court desired to prevent a wave of vexatious litigation brought by speculators and others who could allege that their decision to purchase or sell was in some way affected, to their detriment, by the defendant's fraud. The court feared that these suits would be too easy to bring, would not be amenable to disposition before trial and would therefore result in large unwarranted settlements which would eventually harm the shareholders. Id. at 742-43. These principles really refer, not to the identity of the parties but to their nature. That is, the controlling factor under Blue Chip was not a lack of formal privity, but rather the court's concern with the policy implications of removing the barriers against litigation by persons who did not have the "proof" of injury demonstrated by their status as a real purchaser or seller.
The "in connection with" requirements present a more difficult question. Defendants appear to argue that unless the fraud was committed by them at the time of the sale to GTA, the partnership would not have the standing to bring this suit. Basically, defendants would have me equate "in connection with" with a requirement that the plaintiff and defendant be in some form of privity (presumably privity of contract).
In the instant case, GTA is a subsequent buyer who allegedly suffered injury at the hands of defendants. Defendants and GTA are separated by a set of intervening parties: plaintiffs. The question before me is whether GTA as a subsequent, injured buyer not in privity can maintain an action against defendants. GTA and the defendants are clearly not in any kind of privity.
The parties have not provided me with any cases which involve the same type of situation as is presented in this case. Indeed, I have found no case which squarely addresses the status of a would-be plaintiff who is a subsequent buyer.
Although some early decisions in this area seem to require at least "some semblance of privity", Joseph v. Farnsworth Radio & Television Corp., 99 F. Supp. 701, 706 (S.D.N.Y. 1951), aff'd., 198 F.2d 883 (2d Cir. 1952), the more recent cases take a much more relaxed view of the privity requirement. 3 A.R. Bromberg & L.D. Lowenfels, Securities Fraud & Commodities Fraud § 8.5(511), p. 207 (1984).
Perhaps the most compelling line of cases are those involving § 10(b) actions brought by open-market purchasers against issuers, insiders, or other nontrading parties. See, e.g., Fischer v. Kletz, 266 F. Sup. 180, 193 (S.D.N.Y. 1967); Brennan v. Midwestern United Life Ins Co., 259 F. Supp. 673 (N.D. Ind. 1966); Drake v. Thor Power Tool Co., 282 F. Supp. 94 (N.D.Ill. 1967); Miller v. Bargain City, U.S.A., Inc., 229 F. Sup. 33, 37 (E.D. Pa. 1964). These cases demonstrate that there is no requirement that a plaintiff be in privity with a defendant as long as the "in connection with" requirement is met. If a plaintiff is a purchaser or seller of a security, the question is then whether the fraud committed was in connection with that purchase or sale.
In the present case, plaintiffs allege that the fraud was committed at the time that the original sale between themselves and defendants was consummated. The fraud was not discovered, however, until the stock had passed into the hands of GTA. Although I have located no cases directly on point, I have concluded that GTA had sufficient standing to bring an action against defendants.
There are compelling policy arguments in favor of this conclusion. If a subsequent buyer could not bring suit against a fraudulent seller "once removed" for damages suffered as a result of that fraud, the remedial purposes of the act would be compromised. See Texas Continental Life Ins. Co. v. Dunne, 307 F.2d 242, 249 (6th Cir. 1962). Fraudulent sellers could insulate themselves from liability by concealing a fraud and then ensuring that the purchasers transferred the securities to another party. Where, as here, a plaintiff is within the class of purchasers or sellers, the fraud was committed in connection with that sale or purchase of securities, and the plaintiff has been damaged by the fraud, a claim under § 10(b) or Rule 10b-5 has been stated.
In the instant case, I believe that defendant has failed to show that these elements are lacking as a matter of law or that there exists no genuine issue of material fact.
Based on the foregoing, I will deny defendants' motions for summary judgment. An appropriate order follows.
AND NOW, this 17th day of April 1985, upon consideration of defendants' motions for summary judgment, the responses thereto, memoranda of law submitted by the parties, and for the reasons set forth in the accompanying memorandum,
IT IS ORDERED that defendants' motions for summary judgment are DENIED.
BY THE COURT:
DANIEL H. HUYETT, 3rd