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HAMMERMAN v. PEACOCK

February 7, 1985

Robert Hammerman, Plaintiff and Counter-Defendant
v.
Thomas A. Peacock, Defendant and Counterclaimant v. SMITH BARNEY, Harris Upham & Company, Inc. Additional Defendant on Counterclaim


Johnson, District Judge.


The opinion of the court was delivered by: JOHNSON

Opinion of JOHNSON, District Judge.

 The pertinent facts giving rise to this suit are that on or about September 30, 1983, Peacock opened a discretionary stock account with Smith Barney. His account was put under the control of Hammerman, an account executive employed by Smith Barney. The account was opened with shares of stock valued at $70,500.00. Over the period ending July 27, 1984, the Peacock account suffered heavy losses estimated at $55,000.00. The counterclaim alleges that on various occasions, when Peacock inquired as to the status of his account, Hammerman assured Peacock that his account was profitable and that it was not suffering losses. When Peacock became aware of the extent of his losses, he allegedly went to the offices of Smith Barney and intentionally struck and battered Hammerman causing Hammerman to sustain serious physical and psychological injury. Plaintiff Hammerman thereafter commenced his action for assault and battery, and Peacock's counterclaim followed.

 As a basis for the motion to dismiss, Hammerman and Smith Barney contend that Peacock's claims under Section 17(a) of the Securities Act of 1933 should be dismissed since there is no private remedy under this provision; that the claim under Section 10(b) of the Securities Exchange Act of 1934 and his other fraud-based claims should be dismissed for failure to set forth any factual or legal basis for such claims; that the state law claims should be dismissed because either the court lacks pendent jurisdiction or the common law claims should be severed and referred to arbitration; and finally that punitive damages are not available under federal securities laws and that Peacock is not entitled to punitive damages at common law.

 The first issue to be decided in this case is whether section 17(a) of the Federal Securities Act of 1933, 15 U.S.C. § 77q(a), creates a private cause of action. Counts One and Four of defendant's counterclaim are based on section 17(a) which provides as follows:

 
(a) It shall be unlawful for any person in the offer or sale of any securities by the use of any means or instruments of transportation or communication in interstate commerce or by the use of the mails, directly or indirectly --
 
(1) to employ any device, scheme, or artifice to defraud, or
 
(2) to obtain money or property 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, or
 
(3) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser.

 Although the various courts are fragmented as to whether this section implies a private right of action, the weight of authority suggests, however, that an implied private right of action for damages is unavailable under section 17(a). Keys v. Wolfe, 709 F.2d 413, 416 (5th Cir. 1983); Landry v. All American Assurance Co., 688 F.2d 381, 384-91 (5th Cir. 1982); Summer v. Land & Leisure, Inc., 571 F. Supp. 380, 386-87 (S.D. Fla. 1983); Kimmel v. Peterson, 565 F. Supp. 476, 482-88 (E.D. Pa. 1983); Hill v. Der, 521 F. Supp. 1370, 1373-78 (D. Del. 1981); Woods v. Homes & Structures of Pittsburg, Kansas, 489 F. Supp. 1270, 1284-88 (D.Kan.1980).

 In Landry v. All American Assurance Co., supra, the Fifth Circuit, in a scholarly and persuasive opinion, held that no implied right of action exists under section 17(a) of the federal securities laws. In reaching this decision, the Court looked to the criteria set forth by the United States Supreme Court in Cort v. Ash, 422 U.S. 66, 45 L. Ed. 2d 26, 95 S. Ct. 2080 (1975), and subsequent cases in which the Supreme Court applied the Cort test to determine whether Congress intended to create a private cause of action under section 17(a). In Cort v. Ash, supra, the Supreme Court outlined four factors which must be considered in determining whether a private right of action is implicit in a statute not expressly providing one:

 
First, is the plaintiff "one of the class for whose especial benefit the statute was enacted," -- that is, does the statute create a federal right in favor of the plaintiff? Second, is there any indication of legislative intent, explicit or implicit, either to create such a remedy or to deny one? Third, is it consistent with the underlying purposes of the legislative scheme to imply such a remedy for the plaintiff? And finally, is the cause of action one traditionally relegated to state law, in an area basically the concern of the States, so that it would be inappropriate to infer a cause of action based solely on federal law.

 Id., at 78.

 The Landry court applied the four Cort factors to section ...


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