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

Heading: The Frieh Claim

Text: 19 The district court found that defendants had made numerous material misrepresentations to Frieh in connection with his purchase of I.D.I. stock, in violation of § 10(b) of the 1934 Act, Rule 10b-5, and § 12 of the Illinois Securities Act. In addition, the court found that defendants violated § 12 of the Illinois Act by failing to register the shares sold Frieh, as required by § 5 of the Act. 20 Defendants argue that the provisions of § 10(b) of the Securities Exchange Act and Rule 10b-5 cannot apply to this transaction because defendants did not make use of any means or instrumentality of interstate commerce in selling these shares to Frieh. The record discloses that the entire course of negotiations between Rosenbloom and Frieh was conducted either in personal meetings in Illinois or by local telephone calls. This circuit has not yet decided whether purely local telephone calls satisfy the jurisdictional requirements of § 10(b). We need not choose between the competing authorities 15 here, however, for we conclude that Frieh was entitled to relief on at least one of his Illinois Securities Act claims. 16 21 Section 5 of the Illinois Securities Act, Ill.Rev.Stat.1973, ch. 1211/2, § 137.5, requires, in pertinent part, that all securities shall be registered with the Illinois Secretary of State prior to sale in Illinois, unless exempt under § 4 of the Act. Defendants rely on § 4, subd. M, 17 the exemption for preincorporation sales, in this case. They contend that the sale of shares to Frieh took place prior to the January 18, 1971, incorporation of I.D.I. 22 The record discloses, however, that although Frieh's agreement to purchase the shares took place prior to incorporation, the sale cannot be characterized as preincorporation within the meaning of § 4, subd. M. Frieh's oral agreement to purchase 6,000 shares occurred on December 20, 1970, and on January 13, 1971, his initial payment of $2,500 was made. When the articles of incorporation were filed in Delaware on January 18, however, they authorized the issuance of only 56,000 shares of stock, the shares earmarked for the Rosenblooms. It was not until the articles were amended on January 25 and this amendment was filed in Delaware on February 22 that the 6,000 shares Frieh was purchasing were even authorized to be issued. The $2,500 check given the Rosenblooms on January 13 was not deposited until February 12, and on February 13 Frieh paid the balance of $27,500. The shares were issued to him on February 22. 23 Under Illinois law, a preincorporation subscription is deemed to be an offer, irrevocable for six months, to purchase shares. The offer is normally accepted by the filing of the articles of incorporation. Ill.Rev.Stat.1973, ch. 32, § 157.16. But, a subscription for shares which are not authorized by the articles is not binding on either the subscriber or the corporation. Great Western Tel. Co. v. Loewenthal, 51 Ill.App. 447, 448 (1893), aff'd, 154 Ill. 261, 40 N.E. 318 (1894). Consequently, in this case Frieh's offer was accepted by the corporation, and the sale of the shares took place some time after the corporation was incorporated. The literal terms of § 4M's exemption do not apply to this transaction. 24 The defendants argue, however, that the definition of the term sale in § 2-5 of the Illinois Act includes a contract to sell, an exchange, an attempt or an offer to sell. Ill.Rev.Stat.1973, ch. 1211/2, § 137.2-5. They note that in applying the protective provisions of the Act, the courts have liberally applied the sale definition, holding that a single installment payment (Silverman v. Chicago Ramada Inn, Inc., 63 Ill.App.2d 96, 211 N.E.2d 596 (1965)), and a solicitation (Green v. Weis, Voisin, Cannon, Inc.,479 F.2d 462, 465 (7th Cir. 1973)) are sales. Thus, they conclude that a sale took place when Donald Rosenbloom solicited the purchase of I.D.I. shares by Frieh in December, 1970, and when Frieh tendered his $2,500 check in partial payment on January 13, 1971. Since both of these sales took place prior to the incorporation on January 18, they contend that § 4, subd. M applies. 25 We cannot subscribe to this reading of the Act. For such an interpretation would mean that any preincorporation contact between an incorporator and a potential purchaser of a corporation's shares would immunize from § 5's registration requirement any subsequent sale of stock to that purchaser, regardless of when the sale actually takes place. 26 The Illinois courts have admonished that the provisions of the Illinois Securities Act should be liberally construed to protect the investing public from fraud and deceit in the sales of securities. Norville v. Alton Bigtop Restaurant, Inc., 22 Ill.App.3d 273, 284, 317 N.E.2d 384, 391 (1974), and cases cited therein. It was in this spirit that the court in Silverman held that, although the solicitation and first two payments for an unregistered security fell outside the Act's three-year statute of limitations, the last payment, made within the three-year period, was by itself a sale. Similarly, we broadly construed the term sale in Green to encompass mere solicitations within the state, where all of the other activities occurred elsewhere, because of the paternalistic purpose of the Illinois Act. 479 F.2d at 465. 27 Thus, in both these cases, expanded definitions of the concept of a sale were adopted for purposes of including certain transactions within the protections of the Act. We hardly think that defendants are entitled to rely on such a broadened definition for purposes of excluding transactions, especially when their conclusion as to when the sale to Frieh took place is so at odds with traditional state corporate law notions of the concept of a preincorporation subscription. 18 As we find that defendants violated § 12A of the Illinois Act in this regard, it is unnecessary for us to consider Frieh's other claims. 28 Defendants finally argue that Frieh did not comply with the requirement of § 13, subd. B of the Illinois Act that notice of the intention to rescind the sale be given within six months after the purchaser shall have knowledge that the sale of the securities to him is voidable. 19 Frieh sent defendants his registered notice on December 27, 1973. They argue that this was clearly more than six months after he first learned of the fact that the sale was voidable. 20 29 Frieh testified, however, that he did not learn that his purchase of I.D.I. stock was voidable for any reason until he consulted with his present attorney in November, 1973. Tr. 282. The Illinois courts have held that even though an investor might know of facts that would void his security purchase, it is only when he learns, possibly from his attorney, that those facts might have such a legal consequence that the statutory six months period begins to run. Gowdy v. Richter, 20 Ill.App.3d 514, 523, 314 N.E.2d 549, 556 (1974); Curtis v. Johnson, 92 Ill.App.2d 141, 155, 234 N.E.2d 566, 574 (1968). As the court explained in Curtis, 234 N.E.2d at 574: 30 Knowledge that the sale is voidable is a mixed question of fact and law on which a layman is entitled to acquire his first knowledge from an attorney. 31 Consequently, we conclude that Frieh timely notified the defendants as required by § 13, subd. B, and that the district court's judgment in his favor must be affirmed.