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P. Stolz Family P'ship L.P. v. Daum

P. Stolz Family P'ship L.P. v. Daum

United States Court of Appeals for the Second Circuit

March 4, 2003, Argued ; January 12, 2004, Decided

Docket No. 02-7680

Opinion

 [*95]  CUDAHY, Circuit Judge.

Smart World Technologies (Smart World) was one of [**2]  many technology companies that did not survive the bursting of the technology bubble during 2000. Its business was free Internet access. At some point during its existence, Smart World began offering and selling "membership interests" in the company through a written prospectus. The P. Stolz Family Partnership (Stolz) purchased 31,250 of these membership units for a total of $ 250,000 with a Subscription Agreement signed on February 17, 2000. The sale was effective with the issuance of a certificate of membership to Stolz on April 28, 2000. Thereafter, Smart World's business collapsed, and it filed for bankruptcy in June of 2000. 2

Stolz filed its original complaint against Smart World and three of its officers (collectively, also, Smart World) in this [**3]  putative class action in February 2001 and its Amended Complaint on June 5, 2001. Stolz alleged that the offer and sale of the membership interests violated the Securities Act of 1933, 15 U.S.C. §77a et seq. (Securities Act or Act). The Amended Complaint contained two counts. Count I alleged a violation of § 12(a)(1) of the Securities Act, 15 U.S.C. § 77l(a)(1), claiming that Smart World and three of its officers made a public offering of unregistered securities in violation of § 5 of the Securities Act, 15 U.S.C. § 77e. Count II of the Amended Complaint alleged that the defendants made material misrepresentations in connection with a prospectus for the public offering of securities in violation of § 12(a)(2) of the Securities Act, 15 U.S.C. § 77l(a)(2).

On a motion to dismiss by Smart World, the district court dismissed Count II in its entirety and dismissed Count I as to Philip Spies, the Smart World CFO. Stolz I, 166 F. Supp. 2d at 875. Count II was dismissed under the "bespeaks caution" doctrine. The court found that the prospectus of Smart World contained sufficient cautionary [**4]  language concerning possible risks that an investor could not be misled by the alleged misrepresentations. As to Count I, the court dismissed the claim against Spies because Spies was not a "control person" under § 15 of the Securities Act, 15 U.S.C. § 77o.

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355 F.3d 92 *; 2004 U.S. App. LEXIS 338 **; Fed. Sec. L. Rep. (CCH) P92,657; 57 Fed. R. Serv. 3d (Callaghan) 1188

P. STOLZ FAMILY PARTNERSHIP L.P., ON BEHALF OF ITSELF AND OTHERS SIMILARLY SITUATED, Plaintiff-Counter-Defendant-Appellant, v. STEVEN B. DAUM, PAULA B. DAUM, PHILIP SPIES, AND SMART WORLD TECHNOLOGIES, LLC, Defendant-Counter-Claimant-Appellee.

Subsequent History: As Amended February 4, 2004.

Prior History:  [**1]  The P. Stolz Family Partnership appeals the dismissal of its claims under the Securities Act of 1933. Even under the plaintiff's own version of the facts, the securities at issue in this case were bona fide offered to the public more than three years before the complaint was filed. Therefore, the P. Stolz Family Partnership's § 12(a)(1) claim was properly dismissed because the three year statute of repose had expired. However, reading the complaint in the light most favorable to the plaintiff means that part of Count II, under § 12(a)(2), was improperly dismissed under the "bespeaks caution" doctrine.

P. Stolz Family P'ship, L.P. v. Daum, 204 F. Supp. 2d 693, 2002 U.S. Dist. LEXIS 9494 (S.D.N.Y., 2002)

Disposition: Affirmed in part and reversed in part.

CORE TERMS

repose, bona fide, first-offered, offering, three year, three-year, unregistered, amended complaint, statute of repose, caution, public offering, bespeaks, investor, registration statement, cautionary language, cause of action, prospectus, financing, district court, Securities Act, membership, registered, courts, misrepresentations, registration, purchaser, genuine, statute of limitations, securities regulation, bona fide offer

Civil Procedure, Appeals, Standards of Review, De Novo Review, Defenses, Demurrers & Objections, Motions to Dismiss, Failure to State Claim, Judgments, Relief From Judgments, Altering & Amending Judgments, Reviewability of Lower Court Decisions, Preservation for Review, Securities Law, Civil Liability Considerations, Disclosures, Bespeaks Caution Doctrine, Initial Offerings of Securities, Prospectuses, General Overview, Securities Act Actions, Civil Liability, Express Liabilities, Misleading Statements, Governments, Legislation, Statute of Repose, Statute of Limitations, Time Limitations, Torts, Procedural Matters, Statute of Repose, Tolling of Statutory Period, Tolling of Statute of Limitations, Discovery Rule, Products Liability, Products Liability, Theories of Liability, Strict Liability, Investment Companies, Distributions, Redemptions & Repurchases