Opinion ID: 329274
Heading Depth: 2
Heading Rank: 1

Heading: To sell any security except in accordance with the provisions of this Act;

Text: G. To obtain money or property through the sale of securities 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;   . Ill.Rev.Stat.1973, ch. 1211/2, § 137.12 (in pertinent part). A private cause of action for the violations specified in § 12 is provided in § 13 of the Illinois Act, Ill.Rev.Stat.1973, ch. 1211/2, § 137.13. 4 The amount of attorney's fees has not, as yet, been determined. This does not affect, however, the appealability of the district court's judgment. Swanson v. American Consumer Industries, Inc., 517 F.2d 555 (7th Cir. 1975) 5 Ill.Rev.Stat.1973, ch. 1211/2, § 137.5. The district court found that the shares were not exempt from registration under § 4 of the Illinois Act, Ill.Rev.Stat.1973, ch. 1211/2, § 137.4. The sale without prior registration was a violation of § 12, subd. A of the Illinois Act. See n. 3, supra 6 The letter provided, in pertinent part: During the past several months, we have evaluated several real estate investments, and we have discussed the financing thereof with our attorneys and accountants and with various mortgage bankers and lending institutions. We now believe that the immediate objective of IDI can be achieved with equity capital of approximately $175,000 to $200,000. At the time we reached the above conclusion, various investors, including you, had executed Subscription Agreements for more than 6,000 shares ($150,000). Since we have already invested $40,000, we did not and have not actively solicited additional investors, but have concentrated our efforts on possible investments. We are confident that $175,000 to $200,000 will be sufficient to commence operations. Our attorneys have advised us, however, that your consent must be obtained to the elimination of the condition contained in the Subscription Agreement to the effect that such Subscription Agreements do not become binding obligations unless investors have subscribed for an aggregate of 20,000 shares prior to September 30, 1971. Accordingly, we solicit your consent to the elimination of the aforesaid condition and, as soon as we have received consents from investors subscribing for not less than 6,000 shares, we will forthwith accept all Subscription Agreements then on hand and will thereafter accept additional Subscription Agreements to and until September 30, 1971. 7 The fact that Donald Rosenbloom knew of the demands being made by Dougherty at the time of the statements to the Hidells distinguishes this case from Abrahams v. Aptman, 1972-1973 CCH Fed.Sec.Law Rep. P 93,818 (S.D.N.Y.1973), where statements, accurate when made, were subsequently rendered inaccurate by changed events. Similarly, the particular circumstances involved in Fenstermacher v. Philadelphia National Bank, 351 F.Supp. 1015 (E.D.Pa.1972), aff'd, 493 F.2d 333 (3d Cir. 1974), where the defendant was conducting private negotiations to sell shares while at the same time advertising for public bids, are quite different than those here, especially since in that case the court found that the plaintiff, an unsuccessful public bidder, knew that his bid could be rejected outright, and that the bank had not given anyone the impression that, by bidding, they would necessarily be awarded the right to purchase the shares. 351 F.Supp. at 1022. On appeal, the Third Circuit acknowledged that the bank might well have had a duty to disclose the ongoing negotiations, but denied Fenstermacher relief on other grounds. 493 F.2d 340 8 As the Second Circuit held in S.E.C. v. Manor Nursing Centers, Inc., 458 F.2d 1082, 1095 (2d Cir. 1972), in the related context of a registration statement made misleading by subsequent developments: That these developments occurred after the effective date of the registration statement did not provide a license to appellants to ignore them. Post-effective developments which materially alter the picture presented in the registration statement must be brought to the attention of public investors. 9 Sprayregen v. Livingston Oil Co., 295 F.Supp. 1376, 1378 (S.D.N.Y.1968) 10 The record is clear that the repurchase was made with an I.D.I. check and the shares became treasury stock, not assets of the Rosenblooms. Tr. 424-425 11 Defendants argue that the repurchase benefitted the plaintiffs by substantially increasing their proportionate interest in the corporation. Defendants' Brief at 20. Surely, however, a reasonable man would recognize the increased risk as well as the increased opportunity provided by the repurchase of the shares. In any event, whether viewed as a benefit or as a detriment, the repurchase agreement was clearly material to a decision on the amendment to the subscription agreement 12 For this same reason, the fact that Dougherty was seeking a repurchase option which might not have been exercised did not render the information nonmaterial 13 Nor do we think defendants can avoid liability for their failure to disclose the repurchase agreement on the theory that, as persons owing a fiduciary duty to the corporation, they had a duty to prevent dissension among the prospective shareholders. And the fact that all of the investors may have been in the same position to bargain for corporate concessions did not, on the facts of this case, obviate the duty to disclose the existence of such demands 14 Both parties have assumed, and we agree, that § 12, subd. G of the Illinois Act should be interpreted identically with Rule 10b-5. See Parrent v. Midwest Rug Mills, Inc., 455 F.2d 123, 127 (7th Cir. 1972); Norville v. Alton Bigtop Restaurant, Inc., 22 Ill.App.3d 273, 280, 317 N.E.2d 384, 388 (1974). Because the Hidells formally notified the defendants of their election to rescind the sale on May 26, 1972, within six months of learning of the existence of the repurchase agreement some time in April, 1972, they complied with the notice provision of § 13, subd. B of the Illinois Act, Ill.Rev.Stat.1973, ch. 1211/2, § 137.13, subd. B 15 Compare Burke v. Triple A Machine Shop, Inc., 438 F.2d 978, 979 (9th Cir. 1971); Arber v. Essex Wire Corp., 342 F.Supp. 1162, 1163-1164 (N.D.Ohio 1971); and Rosen v. Albern Color Research, Inc., 218 F.Supp. 473, 475-476 (E.D.Pa.1963), holding that local phone calls are inadequate, with Lawrence v. S.E.C., 398 F.2d 276, 279 n. 2 (1st Cir. 1968); Myzel v. Fields, 386 F.2d 718, 727 (8th Cir. 1967), cert. denied, 390 U.S. 951, 88 S.Ct. 1043, 19 L.Ed.2d 1143; Heyman v. Heyman, 356 F.Supp. 958, 969 (S.D.N.Y.1973); S.E.C. v. Crofters, Inc., 351 F.Supp. 236, 256 n. 20 (S.D.Ohio 1972); Reube v. Pharmacodynamics, Inc., 348 F.Supp. 900, 912 (E.D.Pa.1972); Levin v. Marder, 343 F.Supp. 1050, 1056 (W.D.Pa.1972); Ingraffia v. Belle Meade Hospital, Inc., 319 F.Supp. 537, 538 (E.D.La.1970); Bredehoeft v. Cornell, 260 F.Supp. 557, 558-559 (D.Ore.1966); Lennerth v. Mendenhall, 234 F.Supp. 59, 63 (N.D.Ohio 1964); and Nemitz v. Cunny, 221 F.Supp. 571, 574 (N.D.Ill.1963), holding such calls adequate to bring § 10(b) into play 16 Even if the district court had decided at the close of the taking of evidence that it did not have jurisdiction over Frieh's federal claims, because of the local nature of the telephone calls, consideration of his state claims would have been appropriate and is appropriate by us on pendent jurisdiction grounds. Parrent v. Midwest Rug Mills, Inc., 455 F.2d 123, 128-129 (7th Cir. 1972) 17 The provisions of Sections 5, 6 and 7 of this Act shall not apply to any of the following transactions, except where otherwise specified in this Section 4: M. The sale of subscriptions for, or shares of stock, of a corporation, prior to the incorporation thereof under the laws of the United States, or any state, territory or possession thereof, or of the District of Columbia, if no commission or other remuneration is paid or given directly or indirectly for or on account of such sale, and if the number of subscribers shall not exceed 25;    .on 18 That the courts will not ignore a common sense approach in applying the Illinois Securities Act was further demonstrated in Greenburg v. Wolf, 19 Ill.App.3d 905, 312 N.E.2d 396 (1974). There plaintiffs argued that § 4, subd. M's preincorporation sale registration exemption did not apply because the corporation was never actually formed, and, hence, no sales actually took place. The Illinois Appellate Court disagreed, stating, The language of section 4, subd. M stating the requirements for the exemption is plain, and we see nothing that would enable us to engraft the additional requirement sought by the plaintiffs. 312 N.E.2d at 398 In addition, the intent of the framers of the Illinois Act that the exemptions found in § 4 be strictly applied is further manifested in the requirement found in § 15, subd. A that the burden of proving such exemption shall be upon the party raising such defense. Ill.Rev.Stat.1973, ch. 1211/2, § 137.15, subd. A. Gowdy v. Richter, 20 Ill.App.3d 514, 519, 314 N.E.2d 549, 553 (1974). 19 Notice of any election provided for in subsection A of this Section shall be given by the purchaser, within 6 months after the purchaser shall have knowledge that the sale of the securities to him is voidable, to each person from whom recovery will be sought, by registered letter addressed to the person to be notified at his last known address with proper postage affixed, or by personal service(.) Ill.Rev.Stat.1973, ch. 1211/2, § 137.13, subd. B 20 Defendants note that Frieh admitted that he first became aware of the Dougherty repurchase agreement in April of 1972. One of Frieh's other claims, which we find it unnecessary to reach in this case, was that the Dougherty agreement voided his purchase, as well as the Hidells'. See Section I, supra. Defendants argue from that that Frieh had to give notice of his intent to rescind within six months of April, 1972, and that his failure to do so prevents any subsequent action under the Illinois Act. They interpret § 13, subd. B as mandating such notice within six months of a purchaser's first learning of any reason that might void the sale; the subsequent discovery of additional grounds for voiding the sale would not, in their reading of § 13, subd. B, permit the giving of additional six months' notices. As we find that Frieh did not have knowledge that the sale was voidable on any grounds until November, 1973, however, it is unnecessary for us to decide the question of the permissibility of multiple notices 21 See n. 4, supra 22 I.D.I. cannot rely upon the fact that Frieh was permitted to amend his complaint to conform to the proof after trial, pursuant to Fed.R.Civ.P. 15(b), since this amendment did not even arguably interject a new legal issue that was not fully explored at trial 23 Because we reach this conclusion, it is unnecessary for us to decide whether permissive counterclaims presented as setoffs are required to have independent jurisdictional bases. See 6 C. Wright & A. Miller, Federal Practice and Procedure: Civil § 1422, at 119 & n. 26 (1971); but see id. at 122 & n. 31. Here I.D.I. and Hidell are diverse, but, since only $3,400 is claimed as a setoff, the requisite jurisdictional amount does not exist. I.D.I. and Frieh are nondiverse. Neither counterclaim would present a federal question