The opinion of the court was delivered by: GAWTHROP
Before the court is Defendant's Motion for Summary Judgement in this securities action. Plaintiffs allege that Defendant misrepresented the value of a family-owned corporation and thus was able to obtain their shares at a price below their true value. By these acts, Plaintiffs maintain, Defendant violated federal and Pennsylvania securities laws, engaged in fraud and fraudulent misrepresentation, and breached his fiduciary duty to disclose. Defendant counters that they cannot prove the elements of their securities and fraud claims, and that he had no fiduciary duty to Plaintiffs. Upon the following reasoning, I shall grant Defendant's motion in part and deny it in part.
In the fall of 1994, Pottstown Trap Rock Quarries, Inc. ("the quarry corporation") had 210 outstanding shares of common stock. Defendant James Florig, the quarry corporation's President and Chief Executive Officer, owned 160 shares, while his father, Adolph Florig, owned the remainder. In October, 1994, Adolph Florig gave 10 shares to each of his five daughters, the plaintiffs. However, he placed restrictions on these shares, giving his son James an option to buy the stock for $ 625,000. The plaintiffs signed escrow agreements and assignment forms to effectuate these restrictions. James Florig and his sisters did not participate in developing the gifts' structure, and they had no choice in the gifts' terms.
The plaintiffs allege that their father undervalued the shares he gave them because of their brother's misrepresentations and omissions. They contend that James Florig gave his father an appraisal, valuing the 50 shares at $ 432,000, which was faulty, because James had not divulged all relevant information to the appraiser. In 1994, when Adolph Florig was deciding the terms of his gifts, James Florig did not disclose appraisals of the quarry corporation tendered during his 1988 divorce proceedings, valuing the corporation's real estate at $ 3,528,250, and estimating the corporation's total worth at $ 9,700,00 to $ 11,300,000. James Florig also did not reveal his attempt to relocate a public road, which could extend the quarry's life and thus increase the quarry corporation's value.
In March, 1996, James Florig exercised his options and paid each of his sisters $ 125,00 for their shares. He then sold the quarry corporation for approximately $ 5 million. His sisters filed this suit.
Summary judgment is proper "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c). Unless evidence in the record would permit a jury to return a verdict for the non-moving party, there are no issues for trial, and summary judgment becomes appropriate. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 91 L. Ed. 2d 202, 106 S. Ct. 2505 (1986). In considering a motion for summary judgment, a court does not resolve factual disputes or make credibility determinations, and must view facts and inferences in the light most favorable to the party opposing the motion. Siegel Transfer, Inc. v. Carrier Express, Inc., 54 F.3d 1125, 1127 (3d Cir. 1995). The party opposing the summary judgment motion must come forward with sufficient facts to show that there is a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 91 L. Ed. 2d 265, 106 S. Ct. 2548 (1986).
Defendant maintains that Plaintiffs cannot prove the elements of their securities fraud claims. Both federal and Pennsylvania securities laws prohibit the misrepresentation or omission of material facts in connection with the purchase or sale of securities. See Securities Exchange Act of 1934 § 10(b), 15 U.S.C. § 78j(b);
Securities Exchange Commission Rule 10b-5, 17 C.F.R. § 240.10b-5;
Pennsylvania Securities Act of 1972, 70 Pa. Stat. Ann. §§ 1-401, 1-501.
Because the anti-fraud provisions of the Pennsylvania Securities Act and the 1934 Securities Exchange Act are functionally identical, they may be analyzed together. See Raykhman v. Digital Elevator Co., 1993 U.S. Dist. LEXIS 13112, No. 93-1347, 1993 WL 370988 at *3 (E.D. Pa. Aug. 30, 1993). Under both laws, the plaintiff must prove that (1) in connection with a security's purchase or sale by the plaintiff, (2) the defendant, with scienter, (3) made material misstatements or omissions, (4) upon which plaintiff relied, and that (5) the plaintiff suffered an economic loss because of the defendant's actions. See Scattergood v. Perelman, 945 F.2d 618, 622 (3d Cir. 1991).
1. In Connection with Securities' Purchase or Sale
Defendant first argues that the plaintiffs were neither purchasers nor sellers of securities. Only actual purchasers or sellers may bring a securities fraud claim. See Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 731, 44 L. Ed. 2d 539, 95 S. Ct. 1917 (1975). Holders of securities received as gifts are neither sellers nor purchasers. See Rose v. Arkansas Valley Env. & Util. Auth., 562 F. Supp. 1180, 1188 (W.D. Mo. 1983). However, persons who are contractually obligated to sell securities have been recognized as "sellers." See Blue Chip Stamps, 421 U.S. at 751. Here, the plaintiffs received their shares as gifts, but simultaneously signed an Escrow Agreement under which they were obligated to tender their shares to James Florig if he paid each of them $ 125,000. When James Florig exercised his options, his sisters were "sellers" under federal and state securities laws.
The "in connection with" requirement also must be read "flexibly, not technically and restrictively." Superintendent of Insurance v. Bankers Life & Cas. Co., 404 U.S. 6, 12, 30 L. Ed. 2d 128, 92 S. Ct. 165 (1971). The plaintiffs must show that they have "suffered an injury as a result of deceptive practices touching [the purchase or] sale of securities . . . ." Id. 404 U.S. at 12-13. The Third Circuit "has construed the 'touching' requirement as mandating that there be some 'causal connection between the alleged fraud and the purchase or sale' of a security." Angelastro v. Prudential-Bache Securities, Inc., 764 F.2d 939, 943 (3d Cir.), cert. denied, 474 U.S. 935, 88 L. Ed. 2d 274, 106 S. Ct. 267 (1985) (quoting Tully v. Mott Supermarkets, Inc., 540 F.2d 187, 194 (3d Cir. 1976)). The requisite causal nexus exists when the alleged misrepresentation relates to the particular security's merits or value. 764 F.2d at 942-43. Despite the temporal discontinuity between the alleged misrepresentations in 1994, when Adolph Florig gave the shares to his daughters, and the actual sale in 1996, when James Florig exercised his option, I ...