This litigаtion centers around another internecine struggle over a valuable family estate. Ruth F. Howells Vincent and the other plaintiffs, individually and *432 derivatively on behalf of defendant Howells Livestock, Inc., seek private equitable relief under Section 10(b) of the Securities Exchange Act of 1934, 15 U. S.C. § 78j(b), and its implementing Rule 10b-5, 17 C.F.R. § 240.10b-5 (1964) for injuries сaused by defendants’ alleged scheme to defraud plaintiffs in connection with the purchase and sale of interests in certain family businesses. Section 10(b) and Rule 10b-5 provide in presently material part that it shall be unlawful for any person to use any instrumentality of interstate commerce to employ any scheme or device which would operate as a fraud or deceit upon any person “in connection with the purchase or sale of any security.” Jurisdiction is asserted under Section 27 of the Securities Exchange Act of 1934, 15 U. S.C. § 78aa, providing for the bringing of suits in equity or at law in federal court for enforcement of any liability or duty created by the Act or the rules and regulations promulgated thereunder.
The basic and operative facts are these. Howells Livestock, Inc. is a Utah corporation owning approximately 40,-000 acres of ranch land and additional related grazing and forest permits, which it leases to livestock operators. David P. Howells founded the company more than 50 years ago, and upon his death in 1952 left its ownership in equal shares to his three children, Paul S. Howells, Barbara Howells Moench, and Francis Howells West. The children and their spouses subsequently formed a partnership which they called Thousаnd Peaks Livestock Company, to operate a livestock business on lands owned or controlled by Howells Livestock, Inc. Under this arrangement each family owned a one-fourth interest in the operating partnership, with the parent corporation, Howells Livestock, Inc., owning the remaining one-fourth. In 1959 thе Paul S. Howells family and the Moench family purchased the West family’s one-fourth share of the operating partnership, and enough of the parent corporation’s share in the partnership to leave it only a 2%, but vital, interest. At the time of Paul S. Howells’ death in an airplane accident in 1961, then, the operating partnership was owned 49% by the Paul S. Howells family, 49% by the Moench family, and 2% by the parent corporation. At this juncture it is important to keep in mind that the parent corporation was owned one-third by the Paul S. Howells family, one-third by the Moench family and one-third by the West family, and whoever gained control of the рarent corporation also controlled its key 2% interest in the operating partnership.
The plaintiff Ruth F. Howells Vincent, recently remarried, is the widow of Paul S. Howells, the remaining individual plaintiffs are Paul S. Howells’ children, and Zions First National Bank is trustee of a trust created by Paul S. Howells’ last will and testament. Defendant Bаrbara Howells Moench was the sister of Paul S. Howells and is married to defendant Lorin L. Moench, who since 1961 has been the senior male relative of the individual plaintiffs and the dominant influence in both the operating partnership and the parent corporation.
Following Paul S. Howells’ death, Lor-in L. Moench purchased the West family’s one-third interest in the parent corporation, thereby obtaining control of that company and its controlling 2% share of the operating partnership. Shortly thereafter, Moench also purchased the Paul S. Howells family’s 49% interest in the operating partnership, thereby assuming undisputеd ascendency over both enterprises. The complaint alleges that Moench used instrumentalities of interstate commerce to implement a scheme to defraud the plaintiffs in connection with the latter transactions. The contention is that Moench’s purchase of parent company stock from the West family, who are not parties to this action, was part of a plan to “loot and plunder” that company, and that the consequence of Moench’s scheme has been to deprive plaintiffs of the benefits of the ownership of their one-third of the stock of the parent cоmpany. It is further alleged that Moench subsequent *433 ly used this newly acquired control of the parent company, and the attendant 2% controlling share of the operating partnership, to coerce Euth Howells Vincent to sell him her family’s 49% interest in the partnership. The plaintiffs joined additional pendant state сlaims alleging breaches of corporate fiduciary duties by the defendants.
Relying on Birnbaum v. Newport Steel Corp.,
The Securities Exchange Act was enacted following the excesses of the late 1920’s for the protection of the public against “predatory operations” of corporate insiders.
See, e.g.,
S.Rep. No. 1455, 73d Cong., 2d Sess. 68 (1934). The salient purpose of the Act is “. . . to give the investing public the opportunity to make knowing and intelligent decisions [in] the purchase or sale of securities.”
See
Kahan v. Rosenstiel,
Indeed, in their brief defendants recognize a relaxation of the
Birnbaum
requirements since it was decided in 1952. In
Vine
the parties assumed the vitality of
Birnbaum,
but, specificаlly leaving open the question in our ease, the Second Circuit liberally construed “purchase or sale” to hold that minority shareholders, who had not bought or
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sold securities but were faced with an unwanted merger, were forced sellers and were, therefore, entitled to maintain an action under the Act. In anоther case by the same court a few months later, Mutual Shares Corporation v. Genesco, Inc.,
Although
Birnbaum
has been both questioned
1
and supported,
2
the recent trend is undoubtedly toward the more liberal view. In
Bankers Life
the Court of Appeals had affirmed dismissal of a Section 10(b) complaint on grounds the plaintiff was not a buyer or seller of securities within the mеaning of the Act. The Supreme Court, however, reversed, taking the view that the Court of Appeals had read the Act too narrowly; “[s]ince there was a ‘sale’ oí a security and since fraud was used ‘m connection with’ it, there is redress under § 10(b), whatever might be available as a remedy under state law.”
The plaintiffs take comfort from the quoted language as an indication that a fraudulent “sale” of a security is the only requirement for Section 10(b) jurisdiction. Taken out of context, this language may favor standing in a case such as ours, where the plaintiffs are neither parties nor privy to the sale. The question in that case, however, was whether a creditor of a corporation, suing derivatively on behalf of the corporation, could invoke the protection of Section 10(b) for misappropriations by corporate insiders of funds received from the sale of the corporation’s securities — a far different situаtion than we have here. In that case the corporation, on whose behalf the suit was brought, was unquestionably “the seller of Treasury Bonds” (
From our point of view, and with the benefit of this trend, we think Section 10(b)’s language outlawing de
*435
ception or manipulation “in connection with the purchase or sale of any security” must be construed as meaning that in a suit for equitable relief any person showing a “сausal connection” between the fraudulent sale of a security and injury to himself may invoke federal jurisdiction.
See, e.g.,
Crane Company v. Westinghouse Air Brake Co.,
In all the cases we have seen where the “causal connection” theory has been embraced and applied, the fraudulent sale has been directly, hence causally associated with the injury to the plaintiffs. The most that can be said for our ease is that the sale was in furtherance of a preconceived, but as yet uneffectuated scheme to defraud. Thus, in Tully, insiders on the Board of Directors secretly and fraudulently conspired to vote to sell themselves the corporation’s treasury stock, giving themselves control to the injury of the outsider plaintiffs, who claimed they should have had a right to purchase the stock. As the court said, there was an unbroken chain “. . . linking together defendants’ alleged fraud, the stock transaction and plaintiffs’ loss.” In that case, as in ours, the defendants were the purchasers of securities. But, unlike our case, it was the actual purchase of the stock which worked the fraud and caused the plaintiffs’ injury.
Under the well-pleaded facts, Moench devised a scheme to defraud the plaintiffs. In furtherance of the scheme, he deceptively purchased securities from a third party. The plaintiffs were not a party or privy to this transaction, but they claim to have been injured as a result of the effectuation of the scheme. In the final analysis, we have a scheme, a sale, and an injury, but this does not necessarily spell jurisdiction. The question is whether there is a causal connection between the deceptive sale and the injury to the plaintiffs. Although the deceptive purchase was, to be sure, a link in the chain of causation, the plaintiffs’ injury was the direct result of corporate mismanagement, not of the deceptive purchase. There was, therefore, no requisite causal connection between the deceptive purchase and the plaintiffs’ injury. The trial court correctly dismissed the complaint as to Moench’s purchase of stock from the West family.
This brings us to the final question whether the interest in the operating partnership which Moench actually purchased from plaintiffs can be said to be a security within the meaning of Section 10(b), as that term is defined in Section 3(a) (10) of the Securities Exchange Act, 15 U.S.C. § 78e(a)(10). In their verified complaint the plaintiffs contend that the interest in the operating partnership which they sold to defendants constituted a. security within the meaning of the Act, and they allege deception by defendants in connection with that sale.
The definition of a security in Section 3(a)(10) is broad and comprehensive, and is intended to embrace a wide variety of investment interests. Generally speaking, it means any transaction or scheme in which a person “. . . invests his money in а common enterprise and is led to expect profits solely from the efforts of ... a third party . . .,” it being unimportant whether the interest bought or sold is represented by formal certificates or by undivided interests in the physical assets of the business.
See
S.E.C. v. Howey Co.,
It is uncontested that prior to the death of Paul S. Howells the operating
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business was treated as a .partnership by all parties concerned, and that the death оf Paul S. Howells dissolved the partnership. But Moench continued to operate the business as a common enterprise, and the actual nature of the plaintiffs’ relationship to the enterprise and to Moench becomes important to the ultimate question whether the interest sold was a security. If the rеsulting relationship was a continuing common enterprise in which the plaintiffs had no control or right of control, and their expectation of profits was dependent solely upon the management efforts of Moench, then the interest sold or purchased was a security within the contemplation of Section 10(b). This is the theory on which the plaintiffs’ case is made to rest. But the trial court did not agree with this characterization, and it is important to note that much of the caselaw from which this theory is derived involves schemes of one kind or another in which a promoter sells undivided interests in a common enterprise to thе public generally, retaining sole management and control of the affairs of the enterprise.
See, e.g.,
S.E.C. v. Joiner Corp.,
supra;
S.E.C. v. Howey Co.,
supra;
Continental Marketing Corp. v. Securities & Exchange Com’n.,
supra;
Gilbert v. Nixon,
As the trial court saw it, this situation was simply a family partnership, in a state of dissolution as a result of the death of one of the partners. During the period of dissolution, one partner sold her family’s interest to anothеr family partner, and the interest sold was not a security within the meaning of Section 10(b). We agree with the trial court that it would not be compatible with economic realities to say that in these circumstances the interest sold or purchased was a security within the meaning of the Act. We do not think that federal jurisdiction under Section 10(b) can or should be extended to encompass situations of this kind.
The judgment is affirmed.
Notes
.
See, e. g.,
Kahan v. Rosenstiel,
.
See, e. g.,
Kremer v. Selheimer,