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Kubik v. Goldfield

May 30, 1973

CHESTER KUBIK AND MANUEL S. MARQUEZ AND EDITH MARQUEZ, APPELLANTS
v.
MORTON GOLDFIELD AND ALBERT TELLER & CO., INC., APPELLEES



(D.C. Civil Action No. 68-2036) APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA

Author: Fisher

Before SEITZ, Chief Judge, ALDISERT, Circuit Judge, and FISHER, District Judge

Opinion OF THE COURT

FISHER, District Judge.

The issue presented by this appeal is whether a motion for summary judgment brought by appellees and granted by the district court was appropriate under Rule 56 of the Federal Rules of Civil Procedure which provides that summary judgment be granted only when there is "no genuine issue as to any material fact."

This is an action by purchasers of securities against a securities dealer and one of its registered representatives to recover the purchase price of the stock and other damages. On May 8, 1967 appellants Marquez purchased 500 shares of Interamerican Industries, Ltd., a Canadian company, from appellee Albert Teller Company, Inc. through its salesman-representative appellee Goldfield. On the same date, appellant Kubik bought 300 shares of Interamerican Industries, Ltd. from these same appellees.

Interamerican Industries, Ltd. stock was first offered to the public in the United States by the issuer or by or through an underwriter in July, 1966. Lustgarten v. Albert Teller & Co., 304 F. Supp. 771, 772 (E.D. Pa. 1969). On May 18, 1967 the Securities and Exchange Commission ordered the suspension of over-the-counter trading of this stock because no registration statement was effective as required by Section 5 of the Securities Act of 1933.*fn1

Appellants' suit consisted of two claims against the appellees: (1) the sale to appellants of unregistered securities (Interamerican Industries, Ltd. stock) by the appellees in violation of Section 5 of the Securities Act of 1933, and (2) failure of appellees to disclose that such securities were unregistered and other facts to the appellants in violation of the fraud provisions of the Securities Act of 1933 (Sections 12(2) and 17(a))*fn2 and of the Securities and Exchange Act of 1934 (Section 10(b)).*fn3 The court below granted summary judgment on its finding that the sales by the appellees were within the dealer's exemption provided by Section 4(3) of the Securities Act of 1933. However, as to the alleged violation of the fraud provisions, the court below did not discuss this claim in its opinion and order which granted summary judgment for the appellees.

VIOLATION OF SECTION 5

Appellees admitted that they sold shares of Interamerican Industries, Ltd. stock to the appellants and that this stock had no effective registration statement as required by Section 5. Although the stock was unregistered in violation of Section 5 requirements, the appellees raised the statutory defense of a dealer's exemption provided by Section 4(3) of the Securities Act of 1933.*fn4 Appellees claimed to be exempt from the registration requirements of Section 5 because they took the position that they were "dealers" as defined by Section 2(12),*fn5 and because the transactions complained of occurred subsequent to the expiration of forty days after the first date upon which the security was bona fide offered to the public by the issuer or by or through an underwriter. Lustgarten, supra.

Appellants, however, argued that no "bona fide" offer to the public had occurred even though the Interamerican Industries stock had been quoted since July 1966 in the National Daily Quotation Service, commonly known as the "pink sheets," because the Interamerican Industries stock was "unlawfully" distributed (i.e., without effective registration statement and without satisfying a security exclusion or a transaction exemption).

The court below properly held that the appellees were entitled to the dealer's exemption under Section 4(3) of the Securities Act of 1933 because they were "dealers" as defined by that Act and because there had been a "bona fide" offering of the stock to the public for more than forty days prior to the disputed transaction since the stock had been quoted in the "pink sheets" since July, 1966. The district court correctly ruled that for the purposes of determining a dealer exemption under Section 4(3) of the Securities Act of 1933, a "bona fide" offer to the public may occur when a stock first appears in the "pink sheets," even though the stock may be "illegally" unregistered. Securities and Exchange Commission v. North American Research & Development Corp., 280 F. Supp. 106, 125 (S.D. N.Y. 1968), aff'd in part, vacated in part, 424 F.2d 63, 81 n. 14 (2nd Cir. 1970); H.R. REP. NO. 1542, 83d Cong., 2d Sess. (1954), reported in U.S. Code Cong. & Adm. News 2973, 2995 (ยง 6, 2) (1954).

North American Research, supra, involved a scheme by several confederates to acquire the stock of a shell corporation and vest that corporate shell with the kind of "assets" that would entice investors in speculative securities, thereby creating a market for this stock. When the Securities and Exchange Commission sought to enjoin these fraudulent activities, several defendant brokerdealers claimed Section 4(3) dealer transaction exemptions. North American Research, supra, 280 F. Supp. at 124. These claims were denied.

The stock was first quoted in the "pink sheets" on June 27, 1967. The collaborators had arranged for the quotations to appear and a block of 25,000 shares to be traded to one of their wives on that same day, June 27, 1967. However, prior to the expiration of forty days from that date, the S.E.C. suspended trading in the stock on July 20, 1967. Even though the opinion refers to a Section 4(3) "bona fide" offer occurring on the date that "trading commenced," a close analysis of the facts reveals that, as the district court found, a "bona fide" offer occurs when the stock is first quoted in the "pink sheets." Compare North American Research, supra, 424 F.2d at 81 n. 14 with North American Research, supra, 280 F. Supp. at 125. The court did not dispute the district court's suggestion that ...


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