Dеfendants’ motion pursuant to Rule 12(b), F.R.Civ.P., to dismiss the complaint on the grounds that the Court lacks jurisdiction over the subject matter and the complaint fails to state a cause of action is granted, with leave to file an amended complaint.
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The complaint contains two claims for rеlief, invoking federal question jurisdiction, 28 U.S.C. §§ 1331, 1337, based on § 22 of the Securities Act of 1933, § 27 of the Securities Exchange Act of 1934, and claiming implied rights under § 17(a) of the 1933 Act, 15 U.S.C. § 77q(a), § 10(b) of the 1934 Act, 15 U.S.C. § 78j(b), and SEC Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5. See Fischman v. Raytheon Mfg. Co.,
Plaintiff, Commerce Reporting Co., Inc. (“Commerce”) is a New York corporation having its principal place of business here. Plaintiff Edward Grant (“Grant”), a New York citizen, is its principal stockholder and chief executive officer. Defendant Purеtec is a “fictitious name for and is composed of” defendant Ronald Purer, Inc. (“Purer”), a California corporation doing business in New York, of which the principal stockholder and alter ego is defendant Philip Purer (“Philip”). Defendants Ronald Purer (“Ronald”) and David Jordan (“Jordan”) are Califоrnia citizens, and defendant VTR, Inc. is a New York corporation, of which defendant Frederic H. Gould (“Gould”) is principal executive officer.
The complaint alleges that after Philip and Ronald in December 1967 decided to sell all of the stock or assets of Purer, including its Puretec “businеss,” Purer, Ronald and Philip, on January 22, 1968, entered into an agreement with plaintiffs or their assigns to sell all of Purer’s capital stock and the business of Puretec for $1.58 million or equivalent in stock and appointed plaintiffs as their agent to effectuate the sale to an assignee. On January 24, 1968, plaintiffs, acting as principal and agent, agreed to assign the aforementioned purchase right to Granite Equipment Leasing Co. (“Granite”) in exchange for 5,000 shares of Granite’s stock. On the same date Purer, Philip and Ronald agreed to accept the Granite common stock in сonsideration of its acquisition of the stock of Purer, which was confirmed by the said defendants who also agreed with Granite that the acquisition would be publicly announced on February 20,1968 at a meeting of the New York Society of Security Analysts.
It is next alleged that sometime between January 1, 1968 and March 19, 1968 the defendants Purer and Philip entered into secret negotiations with VTR, Inc. and Gould who were introduced to the said defendants by defendant Jordan, with all parties having full knowledge of plaintiffs’ rights and of the aforementioned agreements, resulting in the announcement on March 19, 1968 that VTR, Inc. and Gould had agreed to acquire the capital stock of Purer and “business’ of Puretec from Philip and Ronald for 250,000 shares of VTR, Inc.
By reference to allegations found in the Second Claim for Relief, it may reasonably be inferred, although it is not expressly alleged in the First Claim, that in entering into the agreement of January 22, 1968 with plaintiffs, the defendants Purer, Philip and Ronald were acting pursuant to a fraudulent scheme between them designed to promote the highest possible price for sale of the stock of Purer and business of Puretec by inducing plaintiffs to enter into the agreement without any intent on defendants’ part of consummating it if they could find other purchasers, such as VTR and Gould, who would pay more for the stock than that agreed to under the contract with plaintiffs.
The Second Claim for Relief alleges that beginning on December 1, 1967 and continuing up to and including the dаte of the complaint the defendants combined and conspired to defraud the plaintiffs in the following way:
*718 Philip and Ronald agreed with Jordan to independently approach and interest a number of people who might possibly agree to buy the stock of Purer, including plaintiffs, in ordеr to obtain offers which they did not intend to accept and which they would fraudulently use to induce higher or additional offers from others; that as part of the scheme the defendants fraudulently led each possible purchaser to believe that no other negotiation was or was tо be conducted in good faith; and that defendants did not intend to fulfill, or be bound by, such agreements. It is further alleged that as part of the scheme the defendants agreed to make certain fraudulent representations to prospective purchasers with respect to the business аnd contracts of a company called Tokyo Electric Company, Ltd.
Plaintiffs seek compensatory damages under both claims, plus punitive damages under the second.
Defendants’ motion is founded almost entirely on the contention that the complaint fails to meet the duаl requirements of § 10(b) and SEC Rule 10b-5 of the Exchange Act that the alleged fraud be (1) “in connection with” (2) “the sale or purchase” of any security (for full texts of § 10(b) of the Exchange Act, SEC Rule 10b-5,’ and § 17(a) of the Securities Act, see Appendix), since the alleged fraudulent agreement was never consummаted and therefore amounted to no more than an aborted agreement to sell stock of Purer, as distinguished from a “sale or purchase.”
Although it has been suggested that an action under § 10(b) of the Exchange Act and SEC Rule 10b-5 may not be founded upon an aborted agreement to buy or sell securities, see Keers & Co. v. American Steel & Pump Corp.,
“The words ‘in cоnnection with the purchase or sale of any security’ contained in Section 10(b) and in Rule 10b-5 do not require that the purchase or sale immediately follow the alleged fraud. The words have been construed more liberally in order to carry out the intent of the Act, which is designed to prоtect investors against fraud. Cooper v. North Jersey Trust Co.,226 F.Supp. 972 (S.D.N.Y.1964); New York Mining Co. v. Cranmer,225 F.Supp. 261 (S.D.N.Y.1963); Pettit v. American Stock Exchange,217 F.Supp. 21 (S.D.N.Y.1963).” Stockwell v. Reynolds & Co.,252 F.Supp. at 219 .
Having in mind that since Congress’ purpose in enacting § 10(b) of the Exchange Act was to protect the public by broadly prohibiting
“all
fraudulent schemes in connection with the purchase or sale of securities” the terms of the statute must be liberally construed, A. T. Brod & Co. v. Perlow,
The complaint’s allegation of the sale and assignment to Granite of the plaintiffs’ contract with Purer provides an additional basis for invoking federal jurisdiction based on § 10(b) of the Exchange Act. Section 3(10) of the Exchange Act defines a “security” to include an investment contract, which would encompass an agreement to purchase securities. Section 3(13), in turn, defines the term “purchase” to “include any contract to buy, purchase or otherwise acquire,” and § 3(14) defines the term “sale” to “include any contract to sell or otherwise dispоse of”.
The defendants’ fraud is alleged to have been in connection with the plaintiffs’ contract to sell to Granite their rights under their agreement with the defendants, which constituted a security within the meaning of the Exchange Act. Decisions of the Second Circuit cited by defendants in support of their motion are easily distinguishable and have no application to the facts alleged here. Birnbaum v. Newport Steel Corp.,
Although the two claims alleged in the present complaint, when read together, appear to state facts requiring this Court to assume jurisdiction under the Exchange Act, the complaint is woefully deficient as to form. For instance, the essential element of the first claim, purportedly based on § 10(b), is the allegation that at the time when the Purers confirmed the agreement of January 22, 1968 with plaintiffs and their agreement of January 24, 1968 to accept Granitе shares in consideration for the issuance of the capital stock of Purer under the agreement of January 22,1968, the defendants Purer, Philip and Ronald did not intend to fulfill these agreements if they should be successful in negotiations with others, such as VTR, Inc. and Gould for the sale of the Purer stock at а higher price or on more advantageous terms and conditions. Although such allegations are found in plaintiffs’ second claim for relief (see Par. 30(c), (d) and (e)), the sole allegation with respect to the first claim for relief is the general charge in Par. 11 that the defendants *720 made untruе and fraudulent statements in connection with the purchase and sale of securities. Even in this age of “notice” pleading, this is too skimpy to suffice. Unless the plaintiffs allege fraudulent intent on the part of. the defendants at the time of the aforementioned agreements with defendants, thаt the plaintiffs entered into the agreements in reliance upon such fraudulent representations and suffered damages as a result thereof, the complaint would be insufficient as a matter of law.
“Where representations are promissory in nature, as here, the promiseе may not recover unless there is proof that at the time the promises were made the promisor had no intention of keeping them. The lack of intention to perform is what constitutes the fraud.” Keers & Co. v. American Steel and Pump Corp.,234 F.Supp. at 203 .
Since the deficiency, in view of the allegations contained in the second claim for relief, appears to be attributable to counsel’s oversight rather than to his lack of belief in the existence of a factual basis, the complaint will be dismissed, with leave to serve an amended complaint within 20 days from the date hereof.
So ordered.
APPENDIX
Section 10(b), Securities Exchange Act of 193b
“Manipulative and deceptive devices
“It shall be unlawful for any pеrson, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange—
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“(b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance 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.”
SEC Rule 10b-5
“It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,
“(a) To employ any device, scheme, or artifice to defraud,
“(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
“(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.”
Section 17(a), Securities Act of 1933 “Fraudulent interstate transactions
“It shall be unlawful for any person in the offer or sale of any securities by the use of any means or instruments of transрortation or communication in interstate commerce or by the use of the mails, directly or indirectly—
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“(2) to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or *