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LIVINGSTON v. WEIS

December 20, 1968

Livingston, et al., Plaintiffs
v.
Weis, Voisin, Cannon, Inc., et al., Defendants


Coolahan, District Judge.


The opinion of the court was delivered by: COOLAHAN

This is a tort action arising out of certain stock transactions between plaintiffs and defendants. The defendant Philips, Appel & Walden (hereinafter referred to as PAW) is a stock brokerage firm with its principal place of business in New York City. Defendants James J. Philips, Barry Appel, and James A. Walden are sued individually as partners in that firm. The defendant Weis, Voisin, Cannon, Inc. (hereinafter referred to as WVC) is a Delaware Corporation having a principal place of business in New York City and an office in Englewood, New Jersey. It is engaged in the clearing brokerage business, purchasing and selling stock and maintaining books and records for stock brokerage firms such as defendant PAW.

 Counts 1 and 2 of plaintiffs' four-Count Complaint charge that defendant PAW, through its individual partners, induced the plaintiffs to open a discretionary account with PAW for the purpose of trade in convertible bonds, and that defendant PAW traded in plaintiffs' account in violation of Section 7 of the Securities Exchange Act of 1934 (hereinafter referred to as the "Securities Exchange Act, " or the "Act"), 15 U.S.C. § 78g, and Regulation T enacted thereunder, 12 C.F.R. § 220, by illegally extending credit to plaintiffs in order to purchase securities for plaintiffs' account which were registered on a national securities exchange. Counts 1 and 2 allege that defendant WVC participated in these illegal transactions by serving as "clearing brokers," for the account, performing bookkeeping functions with regard thereto, and mailing to plaintiffs reports of the transactions ordered by PAW. This court is asserted to have jurisdiction by virtue of Section 27 of the Securities Exchange Act, 15 U.S.C. § 78aa. Count 3 of the Complaint apparently asserts this court's pendant jurisdiction, and alleges that defendants bought and sold securities for plaintiffs' account in a careless and negligent manner. Count 4, also apparently asserting pendant jurisdiction, charges that defendants unjustly enriched themselves by rapid buying and selling of securities on plaintiffs' behalf for the purpose of generating commissions ("churning").

 The case is before the court at the present time on motions to dismiss by all defendants. Basically, the defendants' contentions are: 1) that plaintiffs' cause of action is time barred by the statute of limitations contained in Section 29(b) of the Securities Exchange Act, 15 U.S.C. § 78cc(b); 2) that Section 7 of the Act, 15 U.S.C. § 78g, the basis for plaintiffs' Counts 1 and 2, does not grant a right of action to a private investor for violation of margin requirements; 3) that, as far as defendant PAW and its co-defendant partners are concerned, venue was improperly laid in this district, according to the rules laid out in Section 27 of the Act, 15 U.S.C. § 78aa; 4) that, as far as defendant WVC is concerned, Counts 3 and 4 fail to state a claim, as WVC was in no way connected with the alleged activities claimed in these counts, but instead merely acted as the clearing broker for PAW, plaintiff's broker. The court will consider the various arguments in the order listed above.

 STATUTE OF LIMITATIONS QUESTION

 As has been adverted to earlier, defendants' basic position on the limitations question is that the action is time barred by the one-year limitations provision of Section 29(b) of the Act, 15 U.S.C. § 78cc(b). That section provides that "every contract made in violation of any provision of this chapter or any rule or regulation thereunder . . . shall be void . . ." It further provides that

 Defendants contend that plaintiffs became (or should have become) aware of any margin violations by defendants as early as March or April of 1966, and certainly by September of 1966, and hence that the filing of the Complaint in the present case on October 27, 1967 was simply too late. Plaintiffs challenge the applicability of the statute of limitations contained in Section 29(b) on two grounds, and further argue that, even if Section 29(b) is applicable plaintiffs did not discover, and could not have reasonably discovered defendants' margin violations until within one year of the filing of the Complaint in the present case. Because it is the court's view that Section 29(b) is inapplicable to the present case there will be no need to reach plaintiffs' contentions with respect to the time that they reasonably discovered defendants' violations.

 Plaintiffs challenge the applicability of Section 29(b) on two grounds: 1) This is a tort action, and not a contract action provided for by Section 29(b); 2) In any event, this is not a suit for a violation of Section 15(c) (1) of the Act, 15 U.S.C. § 78 o (c) (1), the only type of suit to which the limitations provision of Section 29(b) would be applicable. Although the court disagrees with plaintiffs' position with respect to the importance to be attached to plaintiffs' having chosen to sue defendants in tort rather than in contract, see Maher v. J.R. Williston & Beane, Inc., 280 F. Supp. 133, 137-39 (S.D.N.Y. 1967), and cases cited therein it does agree with plaintiffs that the limitations provision of Section 29(b) of the Act applies only to suits for violations of Section 15(c) (1) of the Act, 15 U.S.C. § 78 o (c) (1), and not to suits, such as the present one, for violations of the margin requirements provided for in Section 7 of the Act, 15 U.S.C. § 78g.

 A first consideration is the clear language of Section 29(b) itself. That section provides, as has been recited earlier, that suits against brokers for violations of "paragraph (1) of subsection (c) of section 78 o of this title" must be brought within one year after discovery of the violation. In contrast to the general language of Section 29(b), which renders "every contract" made in violation of the Act void, the limitations section applies only to suits for violations of Section 15(c) (1) of the Act, 15 U.S.C. § 78 o (c) (1). Nor is this the type of suit where it could be argued that plaintiff could and should have sued for a violation of Section 15(c) (1) and hence must be saddled with all the accoutrements of that section, including the limitations provision of Section 29(b). *fn1" Whereas Section 15(c) (1) of the Act provides that "No broker or dealer shall make use of the mails . . . to effect any transaction in . . . any security . . . otherwise than on a national securities exchange, by means of any manipulative, deceptive, or other fraudulent device or contrivance", the present action, even assuming that an imaginative eye could find it to be one charging defendants with having perpetrated a "manipulative, deceptive, or other fraudulent device," is clearly not one for the employment of such a device in the case of securities sold "otherwise than on a national securities exchange," as plaintiffs' Complaint clearly charges defendants with having purchased the stock in question on the New York Stock Exchange. Plaintiffs certainly cannot be bound by the limitations provisions of a statute on which they most clearly could not have based their suit.

 Defendants' sole reliance is on a most mystifying case, Goldenberg v. Bache and Company, 270 F.2d 675 (5th Cir. 1959), where it was stated:

 
This action could be looked on either as an action ex contractu, based on the contract between stockbroker and customer as affected by the federal statute and regulations, or as an action ex delicto, based upon "federal canon law torts [sic]". Whichever may be the better theory, Mrs. Goldenberg seeks to hold Bache and Company responsible for [a] "manipulative, deceptive, or otherwise fraudulent device or contrivance" as defined by the statute, Title 15 U.S.C.A. § 78 o (c) (1), and Regulation T, see footnote 2, supra. Granted that violations of the Act or Regulation entered into the sales or purchases of which she complains, yet, before such contracts are "deemed to be void," Mrs. Goldenberg's action must have been brought both within three years after the violation and within one year after its discovery. 15 U.S.C.A. § 78cc(b) . . .

 To begin with, this sole recitation of the nature of plaintiff's case in Goldenberg leaves unclear whether defendant Bache's alleged violation of Regulation T was pleaded as constituting part of its alleged "manipulative, deceptive, or otherwise fraudulent device or contrivance," in violation of Section 15(c) (1) of the Act, 15 U.S.C. § 78 o (c) (1), or whether, on the other hand, a separate basis for plaintiff's action was, as in the present case, an alleged violation by defendant of Section 7 of the Act, 15 U.S.C. § 78g. If the violation of Regulation T was alleged to be part of the challenged device or contrivance the Goldenberg decision would undoubtedly constitute a correct interpretation of the Securities Exchange Act, as a Section 15(c) (1) suit would be directly subject to Section 29(c). On the other hand, if the alleged violation of Regulation T was pleaded separately as the basis for an action based directly on Section 7 of the Act, 15 U.S.C. § 78g, then it would have to be concluded that the Goldenberg decision incorrectly interpreted the Act, since there can be no doubt that the limitations provision in Section 29(b) of the Act applies only to actions pursuant to Section 15(c) (1) of the Act, 15 U.S.C. § 78 o (c) (1), or at the very most to actions which might have been brought under Section 15. *fn2"

 In view of the fact that Section 29(b) of the Act is inapplicable to the present case, it becomes clear that recourse must be had to the law of New Jersey to determine the applicable period of limitations. See Campbell v. Haverhill, 155 U.S. 610, 39 L. Ed. 280, 15 S. Ct. 217 (1895); Charney v. Thomas, 372 F.2d 97 (6th Cir. 1967); Janigan v. Taylor, 344 F.2d 781 (1st Cir. 1965); cf. Conard v. Stitzel, 225 F. Supp. 244 (E.D. Pa. 1963). Although there might be some dispute in a different set of circumstances as to whether N.J.S. 2A:14-1, providing for a six-year limitations period, or N.J.S. 2A:14-2, providing for a two-year period, is the applicable New Jersey rule, a conclusion in the present case that the two-year statute is applicable (which is very doubtful) would not bar plaintiffs' action here, since defendants apparently concede that the very earliest that plaintiffs knew or had reason to know of any margin violations by defendants was March of 1966, and ...


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