The opinion of the court was delivered by: CAHN
Plaintiffs have sued defendants for damages resulting from the alleged violation of federal and state securities laws and state common law. Before me are defendants' motions to dismiss. For the reasons set forth below, the motions to dismiss will be granted in part.
These actions arise out of plaintiffs' participation in the Star Bright Holsteins (SBH) program, an investment plan involving the purchase, breeding, and maintenance of herds of Holstein cattle for the accounts of investors seeking tax shelters. For purposes of deciding defendants' motion to dismiss, plaintiffs' factual allegations will be taken as true. Conley v. Gibson, 355 U.S. 41, 45-6, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957).
According to the SBH prospectus that was attached as an exhibit to several of the complaints, defendants Thomas Ledbetter, David Paul, Sol Sardinsky, and Larry Yogel were the four principals in the Dairy Cattle Management Corporation ("DCMC"). DCMC was organized to purchase cattle, sell fractional shares of the herds to investors, and enter into contracts with investors for maintenance of the herds. Paul was responsible for actually maintaining the herd on his farm in Bath, Pennsylvania, and for managing the breeding program. Sardinsky was the accountant for the enterprise and Ledbetter and Yogel its lawyers. Sardinsky, Ledbetter, and Yogel also provided general management and monitoring services.
Plaintiffs claim that defendants induced them to enter into these transactions by using prospectuses and making other representations that were fraudulent and misleading. Plaintiffs allege, for example, that the prospectuses misrepresented the fair market value of the cattle, the revenues that could be expected from breeding, and, generally, the profit-making potential of the enterprise. They also allege that defendants engaged in a course of conduct to conceal the fraud they had perpetrated by sending plaintiffs untrue and misleading reports on their investments. Plaintiffs seek compensation for losses allegedly suffered as a result of defendants' actions under §§ 12(1) and 12(2) of the Securities Act of 1933 ("the Securities Act"), 15 U.S.C. § 77l(1), (2) (1983), §§ 10(b) and 15(a)(1) of the Securities Exchange Act of 1934 ("the Exchange Act"), 15 U.S.C. §§ 78j(b) and 78o(a)(1) (1983), §§ 501, and 502 of the Pennsylvania Securities Act of 1972 ("the Pennsylvania Securities Act"), Pa. Stat. Ann. tit. 70, §§ 1-501, and 1-502 (Purdon Supp. 1985), and the common law of agency, negligence, malpractice, contracts, fraud, and deceit.
Claims Under §§ 12(1) and 12(2) of the Securities Act
Defendants argue that claims brought under §§ 12(1) and 12(2) of the Securities Act are barred by the statute of limitations and should be dismissed. The limitations period applicable to these claims is set forth in 15 U.S.C. § 77m (1983):
No action shall be maintained to enforce any liability created under section [11 or 12(2)] of this title unless brought within one year after the discovery of the untrue statement or the omission, or after such discovery should have been made by the exercise of reasonable diligence, or, if the action is to enforce a liability created under section [12(1)] of this title, unless brought within one year after the violation upon which it is based. In no event shall any such action be brought to enforce a liability created under section [11 or 12(1)] of this title more than three years after the security was bona fide offered to the public, or under section [12(2)] of this title more than three years after the sale.
Defendants contend that plaintiffs claims should be dismissed because they were initiated more than three years after the offer or sale of the securities in question. With the exception of the transactions at issue in Gomberg v. American Bank and Trust Company, et al., 641 F. Supp. 62 (E.D.Pa. 1986), the complaints show that the sales in question took place between June, 1979, and January, 1981.
The complaints were filed in August and September, 1984, more than three years later.
Plaintiffs argue that the three year limitations period is not an absolute bar to suit but is subject to equitable tolling where there has been concealment of the fraud. I disagree. Section 77m unequivocally states that "in no event" shall an action under §§ 12(1) or 12(2) be brought more than three years after the transaction at issue. As noted in Engl v. Berg, 511 F. Supp. 1146, 1150 (E.D. Pa. 1981), the overwhelming weight of authority holds that the three year limitation set out in § 77m is absolute, equitable considerations notwithstanding. Moreover, in construing the similar provisions of § 9(e) of the Exchange Act, 15 U.S.C. § 78i(e) (1983), the court of appeals for the third circuit held that "application of a tolling theory based on discovery of the wrong clearly would do violence to a statute containing its own limited discovery rule." Walck v. American Stock Exchange, Inc., 687 F.2d 778, 792 (3d Cir. 1982), cert. denied, 461 U.S. 942, 77 L. Ed. 2d 1300, 103 S. Ct. 2118 (1983). See also, Alloy v. Miller, No. 83-4780, slip op. at 11 n.5 (E.D. Pa. February 8, 1984).
In keeping with this precedent, I find that, in all of these cases except for Civil Action No. 84-4197, the claims brought under §§ 12(1) and 12(2) of the Securities Act are barred by the statute of limitations and will be dismissed.
Claims Under § 15(a)(1) of the Exchange Act
Defendants assert that plaintiffs' claims under § 15(a)(1) of the Exchange Act should be dismissed because there is no private right of action for violations of that section.
First, they argue that there is nothing in the language or legislative history of this section that creates or implies such a right. Second, they point to two recent cases, S.E.C. v. Seaboard Corp., 677 F.2d 1301, 1313-14 (9th Cir. 1982), and Walck v. American Stock Exchange, Inc., 565 F. Supp. 1051, 1059 (E.D. Pa. 1981), aff'd on other grounds, 687 F.2d 778 (3d Cir. 1982), cert. denied, 461 U.S. 942, 77 L. Ed. 2d 1300, 103 S. Ct. 2118 (1983) which hold that there is no private cause of action under § 15 of the Exchange Act. Third, defendants cite by analogy Touche, Ross & Co. v. Redington, 442 U.S. 560, 61 L. Ed. 2d 82, 99 S. Ct. 2479 (1979), and Walck v. American Stock Exchange, Inc., 687 F.2d 778 (3d Cir. 1982). In Touche, Ross & Co., the Supreme Court held that there was no private cause of action under § 17(a) of the Exchange Act. The court specifically stated that "§ 17(a) is flanked by provisions of the 1934 Act that explicitly grant private causes of action . . . . Obviously, then, when Congress wished to provide a private damages remedy, it knew how to do so and did so expressly." 442 U.S. at 571-2. Similarly, in Walck, the court of appeals held that there is no private right of action under § 6 of the Exchange Act and stated that "the express provision of private remedies has been treated in numerous decisions as strong evidence of congressional intent not to create additional private remedies by implication." 687 F.2d at 784.
I am persuaded by defendants' arguments and by the case law in this area. I hold that there is no implied private right of action under § 15 of the Exchange Act. Accordingly, plaintiffs' claims brought under that section will be dismissed.
Claims Under § 10(b) of the Exchange Act
Because there is no explicit statute of limitations for § 10(b) claims, a federal court must look to state law to determine the appropriate period of limitations for such claims. Ernst & Ernst v. Hochfelder, 425 U.S. 185 210, 47 L. Ed. 2d 668, 96 S. Ct. 1375, n.29 (1976). Recent opinions by the court of appeals for this circuit teach that, where state securities legislation provides plaintiff with a cause of action for the relief requested under § 10(b) of the Exchange Act, the limitations period established by the state securities laws will apply to the federal claim. See Sharp v. Coopers & Lybrand, 649 F.2d 175 (3d Cir. 1981), cert. denied, 455 U.S. 938, 71 L. Ed. 2d 648, 102 S. Ct. 1427 (1982); Biggans v. Bache Halsey Stuart Shields, Inc., 638 F.2d 605 (3d Cir. 1980); Roberts v. Magnetic Metals Company, 611 F.2d 450 (3d Cir. 1979).
In this case, plaintiffs' § 10(b) claims appear to be encompassed by provisions of the Pennsylvania Securities Act that prohibit fraud in connection with securities transactions. Specifically, § 401, which is modeled after Rule 10b-5 of the federal securities laws, prohibits fraud in connection with the offer, sale, or purchase of any security. Pa. Stat. Ann. tit. 70, § 1-401 (Purdon Supp. 1985). Plaintiffs' claims against certain defendants might also be encompassed within §§ 403 and 404 of the Pennsylvania Securities Act, Pa. Stat. Ann. tit. 70, §§ 1-403 and 1-404 (Purdon Supp. 1985). Section 403 makes it unlawful for a broker-dealer or agent to use fraud in effecting a securities transaction or in inducing or attempting to induce the purchase or sale of a security. Section 404, among other things, makes it unlawful for investment advisers to engage in fraudulent practices.
The Pennsylvania Securities Act also appears to provide plaintiffs with a cause of action for damages against defendants. The basis of civil liability for violations of §§ 401, 403 or 404 is found in § 501, Pa. Stat. Ann. tit. 70, § 1-501 ...