69 F. Supp. 512 (E.D. Pa. 1946)
The Kardons filed a complaint in the United States District Court for the Eastern District of Pennsylvania against the Slavins and National Gypsum Company.1 The complaint charged that the defendants had participated in a conspiracy involving fraudulent misrepresentations and suppressions of the truth.2 This induced the plaintiffs to sell their stock in two corporations to the Slavins for far less than its true value.3
None of the three defendants were served with process in the Eastern District of Pennsylvania.4 The Slavins were served in the Western District of Michigan.5 National Gypsum, although registered as a foreign corporation in Pennsylvania, was served at its main office in the Western District of New York.6 The Slavins moved to dismiss on the ground that the service upon them was invalid and that the court lacked jurisdiction over their persons.7 National Gypsum moved to dismiss on the same jurisdictional ground and on the additional ground that the complaint failed to state a valid cause of action against it.8 National also asserted that the action could not proceed against it because the Slavins were indispensable parties who had not been and could not be brought into court.9
The complaint set forth conduct by the Slavins directly involving false representations to the plaintiffs that no negotiations were pending for the sale of the assets of the corporation.10 It alleged an agreement with National Gypsum during the pendency of the conspiracy and prior to its consummation to sell the assets of the company to National.11 The complaint further alleged that during the pendency of the conspiracy the Slavins and National conspired by engaging in acts which operated and were intended to operate as a fraud and deceit upon the plaintiffs.1213 National by devices and other means induced the Kardons to part with their stock.14
The plaintiffs based jurisdiction on the Securities Exchange Act of 1934.15 Section 27 authorizes extraterritorial service of process in suits to enforce any liability or duty created by the Act.16 The complaint also referenced Section 29(b) of the Act, which provides that contracts in violation of any provision of the Act shall be void.17 The allegations against National included claims of conspiracy beyond mere nondisclosure, though they lacked the particularity required by Federal Rule of Civil Procedure 9 in averments of fraud.18
Whether the Securities Exchange Act of 1934 authorizes extraterritorial service of process upon the defendants in this action?19
Section 27 of the Securities Exchange Act of 1934 authorizes extraterritorial service of process in suits to enforce any liability or duty created by this title or rules and regulations thereunder.20
Yes. This Court has jurisdiction over the individual defendants only if the Securities Exchange Act of 1934 is applicable.21 The complaint sets forth conduct on the part of the Slavins directly in violation of the provisions of Sec. 10(b) of the Act and of Rule X-10B-5.22 Therefore the Act applies and the service is authorized under Sec. 27.23
The Securities Exchange Act of 1934 authorizes extraterritorial service of process upon the defendants in this action.24
Whether a private civil action may be maintained for conduct violating Section 10(b) of the Securities Exchange Act of 1934 and Rule X-10B-5?25
The violation of a legislative enactment by doing a prohibited act, or by failing to do a required act, makes the actor liable for an invasion of an interest of another.26 This applies if the intent of the enactment is exclusively or in part to protect an interest of the other as an individual.27 It also applies if the interest invaded is one which the enactment is intended to protect.28 This is but an application of the maxim ubi jus ibi remedium.29
Yes. The complaint sets forth conduct on the part of the Slavins directly in violation of the provisions of Sec. 10(b) of the Act and of Rule X-10B-5 which implements it.30 The whole statute discloses a broad purpose to regulate securities transactions of all kinds and the specific section provides for the elimination of all manipulative or deceptive methods in such transactions.31
The mere omission of an express provision for civil liability is not sufficient to negative what the general law implies.32
A private civil action may be maintained for conduct violating Section 10(b) of the Securities Exchange Act of 1934 and Rule X-10B-5.33
Whether the plaintiffs qualify as investors protected by Section 10(b) of the Securities Exchange Act of 1934?34
Section 10 prohibits deceptive devices in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.35
Yes. The complaint set forth conduct by the Slavins directly involving false representations to the plaintiffs that no negotiations were pending for the sale of the assets of the corporation.36 The plaintiffs were induced to sell their stock in two corporations to the Slavins for far less than its true value.37 Investors is not limited to persons who are about to invest in a security.38
Two men who have acquired ownership of the stock of a corporation are investors merely because they own half of the total issue.39
The plaintiffs qualify as investors protected by Section 10(b) of the Securities Exchange Act of 1934.40
Whether Section 29(b) of the Securities Exchange Act of 1934 provides a statutory basis for civil relief in this case?41
Yes. The complaint referenced Section 29(b) of the Act which provides that contracts in violation of any provision of the Act shall be void.44 The 1938 amendment which deals in part with actions maintained in reliance upon this subsection clearly contemplates that Congress meant the original statute to be interpreted as providing for civil suits under it.45 Such suits would include not only actions for rescission but also for money damages.46
Section 29(b) of the Securities Exchange Act of 1934 provides a statutory basis for civil relief in this case.47
Whether the complaint states a valid cause of action against National Gypsum Company?48
The complaint must allege more than mere nondisclosure on the part of National and must state a cause of action under the Act or under the common law where there is diversity of citizenship.49
Yes. The complaint alleged a conspiracy between the Slavins to defraud the plaintiffs by making untrue statements of material facts.50 It alleged acts by the Slavins in pursuance of the conspiracy consisting of falsely representing to the plaintiffs that no negotiations were pending for the sale of the assets of the corporation.51 It alleged an agreement with National during the pendency of the conspiracy and prior to its consummation to sell the assets of the company to National.52
The complaint further alleged that during the pendency of the conspiracy the Slavins and National conspired by engaging in acts which operated and were intended to operate as a fraud and deceit upon the plaintiffs. National by devices and other means induced the Kardons to part with their stock. These allegations do allege more than mere nondisclosure on the part of National.53
The complaint states a valid cause of action against National Gypsum Company.54