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Biggans v. Bache Halsey Stuart Shields Inc.

decided: December 31, 1980.

ROBERT P. BIGGANS, APPELLANT
v.
BACHE HALSEY STUART SHIELDS, INC., F/T/A BACHE HALSEY STUART, INC.



ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA (D.C. Civil No. 79-758)

Before Gibbons, Weis and Sloviter, Circuit Judges.

Author: Sloviter

Opinion OF THE COURT

The issue on appeal is whether a suit claiming damages from a brokerage house for "churning", or excessive trading of a customer's account, in violation of the federal securities laws is governed by the statute of limitations applicable to actions brought under the Pennsylvania Securities Act or applicable to common law fraud actions. We hold that the limitations period applied to fraud actions is controlling.

I.

Robert P. Biggans, appellant, opened a discretionary trading account with Bache Halsey Stuart Shields, Inc. (Bache) in June 1975. Accepting his version of the facts, since we must give him the benefits of all reasonable inferences in reviewing a summary judgment against him, he entrusted $6,500 to defendant Bache to invest and manage. During the 17 month period from June 1975 to October 1976, defendant, through its agent, made approximately 300 purchases and sales of call options; purchases during that period were over $250,000 and sales were close to that amount. Plaintiff lost $5,905.37 while defendant's commission from the activity was $23,355.30. Plaintiff claims that this excessive trading by his account executive was done only to create commissions for the defendant in violation of a duty to act in plaintiff's best interest. He claims that this activity constituted churning, which occurs when a broker abuses a customer's trust and confidence for personal gain by inducing transactions in the customer's account that are excessive in size or frequency in view of the financial resources and character of the account, and that it violated section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (1976), Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5 (1979), and § 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a) (1976). The last transaction in question occurred on October 31, 1976. The complaint was filed on February 28, 1979.

Defendant moved for summary judgment on the ground that the action was time-barred. The district court recognized that the absence of a federal statute expressly providing a period of limitations for private actions based on section 10(b) of the Securities Exchange Act required selection of an appropriate limitations period from the law of Pennsylvania, the forum state. The court considered two options: the one-year statute of limitations governing civil actions brought pursuant to section 501 of the Pennsylvania Securities Act, Pa.Stat.Ann. tit. 70, § 1-501 (Purdon Supp.1980),*fn1 or the longer statute applicable to actions for common law fraud and breach of fiduciary duty.*fn2 Reasoning that the Pennsylvania Securities Act rather than Pennsylvania's common law provided a cause of action more closely analogous to a cause of action based on section 10(b), the court held that the one-year statute was the proper choice. The court found as a matter of law that Biggans filed his suit more than one year after he knew, or exercising reasonable diligence should have known, of the alleged fraud, and granted Bache's motion for summary judgment.*fn3 Biggans v. Bache Halsey Stuart Shields, Inc., 487 F. Supp. 829 (E.D.Pa.1980).

On appeal, appellant argues that the district court's choice of statute of limitations is inconsistent with our recent decision in Roberts v. Magnetic Metals Co., 611 F.2d 450 (3d Cir. 1979). We agree.

In Roberts, this court faced for the first time the issue of the appropriate state statute of limitations to apply in federal securities suits, an issue which has divided the circuits.*fn4 The suit, which was brought by a selling shareholder against the corporation, its merger partner, and their broker agent, alleged defendants violated sections 10(b) and 14(a) of the Securities Exchange Act by making material misrepresentations and omissions in connection with the solicitation of shareholder approval of a merger. The court held, with one dissent, that the suit was governed by the six-year statute of limitations which New Jersey applied to actions for common law fraud, and not by the two-year statute provided in New Jersey's version of the Uniform Securities Act. Judge Gibbons and I, comprising the majority, wrote separate opinions. Judge Gibbons stated that the absence of a federal statute of limitations required that in federal securities litigation, we give deference to the policy of repose of the forum state. If the state court would entertain an action for the relief sought, no state policy of repose was implicated. The relevant inquiry under his analysis was whether the lawsuit would be time- barred if brought in state court. My approach differed in that I stressed the need to identify the state statute of limitations which best comports with the federal substantive policy advanced by the federal cause of action. We need not here speculate as to whether the divergence in our approach might, in some factual situation, lead us to different results. Indeed, Judge Gibbons expressly noted that he did not disagree with my approach. Id. at 456. Chief Judge Seitz, writing in dissent, also agreed that the court must choose the state statute of limitations which best effectuated federal policy, id. at 460-61, although he disagreed with our selection.

Whatever the difference in perspectives used by Judge Gibbons and me, we examined the same factors in reaching agreement that the limitations period of the state securities statute was inapplicable. Chief among those factors was that New Jersey's securities statute, like the Uniform Securities Act, did not provide a civil remedy for sellers against fraudulent buyers. The federal plaintiff, if relegated to his state cause of action, would therefore have been limited to a suit for common law fraud, an action which could have been maintained within the time in question. For Judge Gibbons, the absence of state statutory protection to sellers or tenderers of securities meant that the state statute could hardly be considered the analogous reference point. I agreed with the importance of that factor, also concluding that the state securities law intended to supplement the body of common law permitting sellers to sue fraudulent buyers.

The district court in this case recognized that both of the opinions constituting the majority in the Roberts case emphasized the fact that the New Jersey Blue Sky law provided no cause of action for sellers, relegating sellers to common law fraud actions. The court held, however, that Roberts was distinguishable because, "(unlike) the limited New Jersey statute, the Pennsylvania Securities Act is broadly written to prohibit the type of actions complained of here. The Pennsylvania law covers a scope of activities analogous to those covered by 10b-5. See 70 Pa.Cons.Stat.Ann. §§ 1-403, 1-404, 1-401." 487 F. Supp. at 830.

The Pennsylvania statutory provisions cited by the district court appear to encompass churning within the activities proscribed. Section 401, Pa.Stat.Ann. tit. 70, § 1-401 (Purdon Supp.1980), which is modeled on Rule 10b-5, makes it unlawful for any person to employ, inter alia, any device, scheme or artifice to defraud. Section 403 makes it unlawful for a broker-dealer to "effect any transaction in, or induce or attempt to induce the purchase or sale of, any security ... by means of any manipulative, deceptive or other fraudulent scheme ...." Id., § 1-403. Section 404 makes it unlawful for any investment adviser "(t)o employ any device, scheme, or artifice to defraud any client or prospective client." Id., § 1-404.

There are no Pennsylvania cases which have had occasion to consider whether churning falls within these provisions,*fn5 but the Pennsylvania Securities Commission, pursuant to section 609 of the Act, id., § 1-609, has promulgated regulations which interpret section 403 as outlawing churning. See 64 Pa.Code § 403.010(d) (1980). This comports with the action of the Securities Exchange Commission which has interpreted the language "manipulative, deceptive, or other fraudulent device or contrivance" as used in section 15(c) of the Securities Exchange Act of 1934, 15 U.S.C. § 78o(c) (1976) to include churning. 17 C.F.R. § 240.15c1-7 (1979). There is substantial federal case authority that churning is illegal as a deceptive device under section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5. See, e. g., Newburger, Loeb & Co., Inc. v. Gross, 563 F.2d 1057, 1069 (2d Cir. 1977), cert. denied, 434 U.S. 1035, 98 S. Ct. 769, 54 L. Ed. 2d 782 (1978) (and cases cited therein).

Bache argues that because the claims asserted by Biggans would be encompassed within the Pennsylvania Securities Act, the statute of limitations provided in that Act governs. That is apparently the reasoning adopted by the district court. The difficulty with Bache's argument is that it neglects the significant fact that the Pennsylvania Securities Act provides no cause of action for damages to Biggans or to an investor in his situation. Assuming the Pennsylvania statute proscribes churning, such activity can be the subject of an injunction action brought by the Pennsylvania Securities Commission, Pa.Stat.Ann. tit. 70, § ...


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