The opinion of the court was delivered by: ROBERT F. PECKHAM
This matter comes before the court on Defendants' Gino and Marie Marinelli's motion for summary judgment. Defendant Gino Marinelli seeks summary judgment on Plaintiffs' claims for violation of Sections 12(1) and 12(2) of the Securities Act of 1933 ("the 1933 Act"), Section 10b and Rule 10b-5 of the Securities Exchange Act of 1934 ("the 1934 Act") and breach of contract. Defendant Marie Marinelli claims as a complete defense to all Plaintiffs' charges that she did not own any of the stock and should not, therefore, be a party to this case. Defendant Gino Marinelli further seeks summary judgment on his counterclaim for $ 60,000 owed from Plaintiff Gendel for stock which Gendel purchased from him.
This dispute concerns a sale of stock by Defendant Gino Marinelli to Plaintiffs Hedden and Gendel in 1990. Marinelli sold Plaintiffs stock which he acquired in the American Confectionery Corporation ("ACC") where he served as executive vice-president.
Sometime in 1990, Marinelli offered his stock in ACC for sale. Plaintiffs Hedden and Gendel were approached by ACC representative, Kirscher, and told that Marinelli wanted to distribute his large block of ACC stock. Marinelli claims he wanted to sell his ACC stock because he was resigning from all management positions with ACC. Plaintiffs, on the other hand, contend that at the time the stock transaction occurred, Marinelli still held all of the key management positions listed above and that it was not until later, on advice of counsel, that he "purported" to resign from his various positions. Plaintiffs further maintain that the resignations, when they occurred, were nothing more than "window dressing" since Marinelli retained control of the manufacturing operations of the corporation until the following year.
Letter agreements were entered into by Marinelli and Plaintiffs. The agreements recited that the stock sale was intended to conform with SEC Rule 144 which provides a safe harbor under certain conditions, exempting sellers from the registration requirements imposed by the 1933 Act. Forms 10-K and 10-Q containing financial data for ACC, were shown to Plaintiffs before the purchase. Plaintiffs were also shown pro forma financials containing financial projections for ACC which projected second quarter revenues for 1990 of over $ 1,000,000.
Plaintiffs Hedden and Gendel agreed to purchase the ACC stock. Plaintiff Hedden purchased 450,000 shares and Plaintiff Gendel bought 150,000 shares. It appears that Plaintiff Gendel was the CEO of ACC at the time he agreed to purchase the stock and Plaintiff Hedden was appointed to the board of directors of ACC sometime after the stock transfer. The financial projections contained in the pro formas were never achieved and, in fact, ACC experienced a revenue loss of $ 200,000 for the second quarter of 1990. Additionally, the value of ACC stock dropped and ACC filed for protection under Chapter 11 of the bankruptcy laws. ACC stock is apparently worthless at present.
After the plunge in ACC stock value, Plaintiffs filed the instant action against Gino and Marie Marinelli pursuant to Sections 12(1) and 12(2) of the 1933 Act and Section 10(b) of the 1934 Act. Plaintiffs seek rescission of the stock sale under Section 12 and compensatory damages under 10b-5.
Defendant Gino Marinelli has counterclaimed against Plaintiff Gendel for $ 60,000 owed pursuant to a document signed by Mr. Gendel in favor of Mr. Marinelli for the stock sold by Marinelli to Gendel. This document does not contain a demand date and Gendel claims that, although he signed it, the parties never worked out the final terms of the note.
Marie Marinelli did not own any of the ACC stock sold to Plaintiffs. Additionally she held no position at ACC. She has been named as a Defendant in this suit because Gino Marinelli, her husband, directed Plaintiff Hedden make his payment for the securities by wire to her account.
1. Liability Under the 1933 Act :
a. Application of the 1933 Act Beyond Issuer Transactions:
Defendant Gino Marinelli asserts that Plaintiffs' claims pursuant to Section 12(1) and 12(2) of the 1933 Act must be dismissed because the transaction complained of in this case was not an initial offering of ACC stock and as such the 1933 Act do not apply.
Section 12(2) of the 1933 Act provides as follows:
There is a split of opinion regarding whether Section 12 should apply outside the context of initial offerings to cover secondary market transactions. Those courts holding that Section 12 should not be limited to the context of initial offerings reach this conclusion because there is no explicit restriction contained within the language of Section 12. Additionally, although Section 12 refers to misstatements in a "prospectus", suggesting an initial offering, the definition of "prospectus" in the 1933 ...