Petition — O'Hara v. Kovens

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Supreme Court, U.S.

FILED

8 0 - a 80 OCT iv 1980

MICHAEL RODAK, JR., CLERK

In THE

Supreme Court of the United States

OcToBeR TERM, 1980

JAMES FRANCIS O’HARA, III

MICHAEL PATRICK O’HARA,

INDIVIDUALLY AND AS GUARDIANS OF THE PROPERTY OF

JOSEPHINE M. O’HARA,

Petitioners,

IRVIN KOVENS,

MARVIN MANDEL,

W. DALE HESS,

HARRY W. RODGERS, III, WILLIAM A. RODGERS,

ERNEST N. CORY, JR.,

EUGENE B. CASEY,

IRVING T. SCHWARTZ,

Respondents.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

WILLIAM A. SNYDER, JR.

JAMES B. WIELAND

OF COUNSEL: 1600 Maryland National

Bank Building

JOHN T. WarRD Baltimore, Maryland 21202

Oser, Grimes & SHRI"/ER Attorneys of Record for

1600 Maryland National Petitioners

Bank Building (301) 685-1120

Baltimore, Maryland 21202

(301) 685-1120

October 10, 1980

The Daily Record Co., Baltimore, MD 21202 oS by

QUESTIONS PRESENTED FOR REVIEW

The first question presented for review is whether the

United States District Court for the District of Maryland

erred in dismissing this securities fraud case on the basis

of limitations. In particular, did the district court err in

borrowing the one year period of limitations associated

with the Maryland blue sky law rather than the three

year period of limitations associated with common law

fraud where:

(a) This Court held, in Ernst & Ernst v. Hochfelder, 425

U.S. 185 (1976), that an action under § 10(b) of the

Securities Exchange Act of 1934 requires an intent to

defraud;

(b) The Maryland blue sky law, unlike § 10(b) or the

Maryland common law tort of fraud, does not require an

intent to defraud; and

private remedy to individuals situated as the O’Haras

were here, that is, to defrauded sellers of securities, as of

November 24, 1975, the earliest date upon which the

O’Haras’ cause of action may be deemed to have accrued?

The second question presented for review is whether the

district court erred in determining that any statute of

limitations whatsoever ran against Josephine M. O’Hara,

who at all times on and after November 24, 1975, the

earliest date upon which a cause of action may be deemed

to have accrued in her favor, was totally mentally

incompetent.

TABLE OF CONTENTS

PAGE

QUESTIONS PRESENTED FOR REVIEW .........ssseeseeeeeeeees i

i sapninaniesninevenaci 1

i 2s La sc cecitisvonensunasensesos 2

CoNSTITUTIONAL Provisions, TREATIES, STATUTES,

ORDINANCES AND REGULATIONS INVOLVED .......... 2

STATEMENT OF THE CASE ........cccssssssssssssssssscossseeseecens 2

REASONS FOR GRANTING THE WRIT ...........:c00eeeeeeeeeees 8

I. Review is necessary to resolve a conflict

between federal circuits and to estab-

lish uniform guidelines in a vital area

of federal securities law ............ccccceeeeees 8

Il. This case invokes two strong remedial

purposes — those of federal securities

law and those protecting mental incom-

petents. Neither of these purposes was

adequately served by the courts below 15

III. The decision be'ow is erroneous in the

light of this Court’s decision in Ernst 18

TER TREE eo 21

TABLE OF CITATIONS

Cases

Blue Chip Stamps v. Manor Drug Stores, 421

itl ccnsebibdunkentbhacaveneccese 8

Board of Regents v. Tomiano, ___ U.S. ___., 48

U.S.L.W. 4556 (May 19, 1980) ..........cccccceeseees 15

Cook v. Avien, Inc., 573 F.2d 685 (1st Cir. 1978) 10

Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976) 1,6, 7,

8-9, 13, 18, 19

iii

Eubanks v. Clarke, 434 F. Supp. 1022 (E.D. Pa.

1977) .cccccccccccosssrssssescrrarcccsccsecscrerosscssscccoveosscesseess 16, 17

First Federal Savings and Loan Association of

Miami v. Mortgage Corporation of the South,

467 F. Supp. 943 (N.D. Ala. 1979)... 14

Forrestal Village, Inc. v. Graham, 551 F.2d 411

(D.C. Cir. 1977) .ccccccsssrscssssccscccscssovensereseeosscesooss 9,12

Fox v. Kane-Miller Corporation, 542 F2d 915

(Ath Cir. 1976) .......csccccccsssssscccssscsccsseseressssseessoes 7-12

Funk v. Wingert, 134 Md. 523 (1919) ........+00+ 17

Gilman Brothers Inc. v. Peat, Marwick, Mitchell

& Company, 486 F. Supp. 785 (S.D.N.Y.

SOO Fo | Fa a cs abepnanncdgubeaveenieondannneidynininaseetatie 20

Holmberg v. Armbrecht, 327 U.S. 392 (1946) .... 6

Hudak v. Economic Research Analysts, Inc., 499

F.2d 996 (5th Cir. 1975) ........ccccccsccseceeessereeeees 14

International Union v. Hoosier Cardinal Cor-

poration, 383 U.S. 696 (1966) .......ereees 9

Johnson v. Railway Express Agency, 421 U.S.

QD CITED on ceccusiskenssesntescncnevensnasstabenscessenkeusantiens 15-16, 17

McBride v. Gulbro, 247 Md. 747 (1967) ..........06 17

McDonald v. Boslow, 363 F. Supp. 493 (D.Md.

SOFIA: 2... cccoscdniicsacvatasiassddcianditeiienbencmstadivtehansees 17

McNeal v. Paine,Webber, Jackson & Curtis, Inc.,

598 F.2d 888 (5th Cir. 1979) rev’g 429 F.

Supp. 359 (N.D. Ga. 1977) ...cccsccsssessererererseneees 10, 11

Mitchell v. Texas Gulf Sulphur Company, 446

F.2d 90 (10th Cir. 1971), cert. denied 404 U.S.

BOOK CAT) <ccccesscicsnisvcsesescincsigssntonesseprectscresnceaee 10

Mullins v. Thorne, 254 Md. 434 (1969) ..........0 17

Nickels v. Koehler Management Corp., 541 F.2d

611 (6th Cir. 1976), cert. denied 429 U.S.

1074 (1DTE) rccrcrecsccsessccccssccccccscccccscesosssesecesscrsces 10, 13, 14

rs PAGE

O’Hara v. Kovens, 473 F. Supp. 1161 (D. Md.

1979), 625 F.2d 15 (4th Cir. 1980) .............. 1-2

Parrent v. Midwest Rug Mills, Inc., 455 F.2d 123

CP TE itidsckaden dictate dics cdsenccieeepeacenceaaiieen 9

Posner v. Merrill, Lynch, Pierce, Fenner &

Smith, 469 F. Supp. 972 (S.D.N.Y. 1979) ..... 13

Roberts v. Magnetic Metals Company, 611 F.2d

450 (3rd Cir. 1979), rev’g 463 F. Supp. 934

CR ai, MII sincebitrt Bide. sons venaneusiabastempanentin 10, 11-12, 15

Stull v. Bayard, 561 F.2d 429 (2nd Cir. 1977),

cert. denied 434 U.S. 1035 (1977) ......cccceceees 10

United California Bank v. Salik, 481 F.2d 1012

TO hcesca acensnnicapaisvnasisnnibedinedoevedidesenny 10

U.S. v. Mandel, 591 F.2d 1347, reh. en banc 602

F.2d 653 (4th Cir. 1979); cert. denied ——

U.S. __., 48 U.S.L.W. 3662 (1980) ............... 3

Vanderboom v. Sexton, 422 F.2d 1233 (8th Cir.

ALERT AS RAUB EER DI 5 MIR Re ET 9,13

Statutes end Regulations

a els Sere RIN ohio asch nsenlensncsmbarensinainennessnabcoiies 2

Securities Act of 1933, 15 U.S.C 8 77v_ ...... eee 6

Securities Exchange Act of 1934, 15 U.S.C § 78aa 6,8

Mp. Cope Cope., Corp. and Assoc. Art.:

kA C RT ee tare ae wre ee oe 6,9

Mp. Cope Ann., Corp. and Assoc. Art.

I Nie Eo i ceacidsinasandnnes 6,9

IEE Sedilkinc «ctassdunloctsincacsactaccanidennibiiecaadies 16

WO itis c tink tesCuepbudvientuvaintewntiddniseesniteien 17

Securities and Exchange Commission Rule 10b-

62 Gs SRD cimctienntniliinaun 8

No.

In THE

Supreme Court of the United States

Ocroser TERM, 1980

JAMES FRANCIS O’HARA, Ii

MICHAEL PATRICK O’HARA,

INDIVIDUALLY AND AS GUARDIANS OF THE PROPERTY OF

JOSEPHINE M. O’HARA,

Petitioners,

Vv.

IRVIN KOVENS,

MARVIN MANDEL,

W. DALE HESS,

HARRY W. RODGERS, III, WILLIAM A. RODGERS,

ERNEST N. CORY, JR.,

EUGENE B. CASEY,

IRVING T. SCHWARTZ,

Respondents.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

James Francis O’Hara, III and Michael Patrick O’Hara,

individually and as guardians of the property of Josephine

M. O’Hara, pray that a writ of certiorari issue to review

the judgment of the United States Court of Appeals for the

Fourth Circuit entered in this case on July 16, 1980.

OPINIONS BELOW

The opinion of the district court is reported at 473 F.

Supp. 1161 (D. Md. 1979).

The opinion of the United States Court of Appeals for

the Fourth Circuit is reported at 625 F.2d 15 (4th Cir.

1980).

JURISDICTION

An opinion and order dismissing the O’Haras’ complaint

in this matter was handed down by the United States

District Court for the District of Maryland (Joseph H.

Young, J.) on July 12, 1979. A judgment of dismissal

thereon was entered on July 16, 1979. On August 15, 1979

the district court denied petitioners’ motion to vacate the

judgment of dismissal and for reconsideration and revision

of the rulings upon which the judgment was based.

On July 16, 1980 the United States Court of Appeals for

the Fourth Circuit affirmed the judgment below. No

rehearing was requested nor was an extension of time

within which to petition for certiorari sought.

The jurisdiction of this Court is invoked under 28 U.S. C.

§ 1254(1).

CONSTITUTIONAL PROVISIONS, TREATIES,

STATUTES, ORDINANCES, AND

REGULATIONS INVOLVED

This case involves the Securities Exchange Act of 1934,

15 U.S.C. § 78a et seq.; Securities and Exchange Commis-

sion Rule 10b-5, 17 C.F.R. 240.10b-5; the Maryland

Securities Act, MD. CODE ANN., Corp. and Asso. Art.

§ 11-703; the MD. CODE ANN., Cts. and Jud. Pro. Art.

§§ 5-101, 5-201, and 5-203.

Pertinent portions are reproduced in appendix A.

STATEMENT OF THE CASE

James Francis O’Hara, III and Michael Patrick O’Hara,

individually and as guardians of their mother Josephine

M. O’Hara, filed a complaint in the United States District

Court for the District of Maryland on November 22, 1978.

The O’Haras sought compensatory and punitive damages

against Irvin Kovens, Marvin Mandel, and certain of their

associates for injuries arising out of the sale of the

O’Haras’ stock in the Marlboro Race Track on December

31, 1971. The complaint contains three counts of fraud,

grounded respectively on federal securities law, state

securities laws, and state common law. The case is the

civil analog of criminal proceedings that were commenced

against all of the respondents in this matter except

Eugene B. Casey and Irving T. Schwartz in the United

States District Court for the District of Maryland. The

defendants in the criminal matter were found guilty and

their convictions were affirmed on appeal. U.S. v. Mandel,

et al., 591 F.2d 1347, reh. en banc 602 F.2d 653 (4th Cir.

1979), cert. denied __ U.S. __, 48 U.S.L.W. 3662 (1980).

The O’Haras are some of the defrauded former owners of

Marlboro Race Track stock, the victims of the swindle

which lay at the core of the criminal proceedings.

The details of the conspiracy among Kovens, Mandel,

and their associates are as follows:

In the spring of 1971 a bill was introduced into the

Maryland House of Delegates for the permanent transfer

of 18 racing days from Hagerstown Race Track to

Marlboro Race Track. Such a transfer would greatly

increase the value of Marlboro Race Track stock. On May

28, 1971 Marvin Mandel, then governor of Maryland,

vetoed the bill in order to depress the value of the stock of

Marlboro Race Track and deceive the O’Haras and other

owners of the stock as to the price they could expect to

obtain for the stock on the open market.

On or about June 1, 1971 Irving T. (Tubby) Schwartz

purported to buy 15,000 shares of Marlboro Race Track, at

$7.00 per share. On two subsequent occasions Schwartz

again purported to purchase 2,000 additional shares. On

all of these occasions Schwartz acted to conceal the fact

that he had no beneficial interest in the stock he

purchased and that the true beneficial owner was Irvin

Kovens.

Through the use of the name of Ernest N. Cory, Jr.,

individually and “as attorney”, the conspirators concealed

the fact that they were, during 1971, seeking to acquire

the O’Haras’ and the other stockholders’ financial in-

terests in Marlboro Race Track. In December 1971 they

purchased the controlling interest in Marlboro Race Track

in such a way as to conceal their true identities. There-

after, Mandel and his associates also used the name of

Schwartz to conceal the true beneficial ownership of the

additional financial interests in Marlboro Race Track

acquired from the O’Haras and other sellers on December

31, 1971.

The conspirators arranged for Eugene B. Casey falsely

to represent himself, on and after January 1, 1972, as the

“new owner” of Marlboro Race Track, with the intention of

concealing the financial interests of Kovens and the other

conspirators in the race track from the O’Haras, from

members of the state legislature, from the Maryland

Racing Commission, and from the public.

Having laid the groundwork by first depressing the

value of Marlboro stock, then secretly acquiring it at the

lower price, the conspirators culminated their scheme in

early 1972.

On or about January 7, 1972, Casey wrote to each

member of the General Assembly of Maryland, to induce

the members of that body to override Governor Mandel’s

veto of House Bill 1128, thereby increasing the value of

the stock of Marlboro Race Track by virtue of the 18

additional racing days.

The fulcrum upon which the conspiracy rested was this:

Marvin Mandel, by virtue of his office as governor of the

State of Maryland, would himself and through his agents

act to induce the legislature to override his own veto of the

transfer bill. As a result of Mandel’s actions and the

actions of his co-conspirators the legislature did indeed

override the veto on January 12, 1972, thereby per-

manently transferring to Marlboro Race Track the 18

racing days which formerly had been run at Hagerstown

Race Track, and thereby greatly increasing the value of

the Marlboro stock owned by the conspirators.

During parts of 1972 and thereafter, the conspirators

used the services of Ernest Cory to conceal that fact that

Kovens, Hess, Harry Rodgers, and William Rodgers, had

beneficial ownership interests in Marlboro Race Track.

The conspirators also used the names of approximately

seven of their friends and family members in such a way

as to conceal the identities of the true beneficial owners of

Marlboro Race Track.

As the crowning touch of the conspiracy, Marvin

Mandel, as governor, and other conspirators, used their

efforts to induce the General Assembly of Maryland to

pass a race track consolidation bill which would further

increase the value of the Marlboro Race Track stock.

This too was successful. In December 1972 the Marlboro

Race Track was merged with Bowie Race Track, thereby

further increasing the value of the Marlboro stock thereto-

fore fraudulently acquired from the O’Haras and others.

It was not until November 24, 1975, when a federal

grand jury handed down indictments against Marvin

Mandel, Irvin Kovens, W. Dale Hess, Harry W. Rodgers

III, William A. Rodgers, and Ernest N. Cory, Jr. that the

O’Haras began to realize that an intricate fraud had been

practiced upon them. They filed suit in November 1978,

demanding compensatory and punitive damages for the

wrongs done to them by the Kovens and Mandel group.

Federal jurisdiction over the O’Haras’ federal securities

law claims was based upon Section 22 of the Securities Act

of 1933 (15 U.S.C. §77v) and upon Section 27 of the

Securities Exchange Act of 1934 (15 U.S.C. § 78aa).

Federal jurisdiction over the O’Haras’ state securities law

claims and their common law fraud claims was based on

the doctrine of pendent jurisdiction.

It is significant that on November 24, 1975, the date of

the indictments, Josephine M. O’Hara, who was a plaintiff

below through her two guardians, was, and for some time

previously had been, totally mentally incompetent. It is

also significant that, on November 24, 1975, defrauded

sellers such as the O’Haras had no right of action under

the Maryland blue sky law.

The various motions filed against the complaint all

asserted, in essence, that the federal securities law count

was barred by limitations. Since federal law provides no

limitations period for the implied right of action under

§ 10(b) of the 1934 Act, a federal court sitting in such an

action will apply the most analogous state statute of

limitations. Holmberg v. Armbrecht, 327 U.S. 392 (1946),

Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976). The

choice in Maryland is quite clearly between the one year

period of limitations established under the Maryland

Securities Act (Mp. Cope Ann., Corp. and Assoc. Art.

§ 11-703), and the three year period of limitations applic-

able under the Maryland statute of limitations for fraud,

(Mp. Cope Ann., Cts. and Jud. Pro. Art. § 5-101).

Despite this Court’s decision in Ernst and Ernst v.

Hochfelder, the district court held that the Maryland blue

sky law was more analogous to the federal securities

action implied under § 10(b) of the 1934 act than Maryland

common law fraud. Accordingly, it imposed a one year

statute of limitations on the plaintiffs’ federal cause of

action.

As to Josephine O’Hara, the district court held that her

undisputed mental incompetence did not toll the running

of the statute of limitations against her.

Accordingly, the district court dismissed the O’Haras’

federal securities action on the ground of limitations. The

district court further held that this deprived the federal

court of pendent jurisdiction over the state securities count

and the state common law fraud count. They were likewise

dismissed.

Following oral argument, the United States Court of

Appeals for the Fourth Circuit requested that the parties

file supplemental briefs on certain questions: what the

appropriate statute of limitations was_on that date of

accrual; whether the subsequent broadening of the Mary-

land blue sky law to confer a right of action upon

defrauded sellers was intended to be and could in fact be

retroactively applied; and whether state or federal law

governed questions of accrual when a period of limitations

was borrowed from state law for a federal statute.

On July 16, 1980 the court of appeals affirmed the

dismissal, although for reasons different from those stated

in the district court’s opinion. Relying on its decision in

Fox v. Kane-Miller Corporation, 542 F.2d 915 (4th Cir.

1976), a decision which did not consider this Court's

holding in Ernst & Ernst v. Hochfelder, the court held that

the one-year period of limitations under Maryland blue

sky law was applicable to the O’Haras’ cause of action. On

the issue of the tolling effect of Mrs. O’Hara’s mental

incompetence, the court of appeals, unlike the district

court, held that this was a matter governed by state law

but that state law had no provision for tolling on the

y*%

7’.

grounds of incompetence which was applicable to Mrs.

O’Hara.

REASONS FOR GRANTING THE WRIT

REVIEW IS NECESSARY TO RESOLVE A CONFLICT BETWEEN

FEDERAL CIRCUITS AND TO ESTABLISH UNIFORM GUIDELINES IN

A VITAL AREA OF FEDERAL SECURITIES LAW.

The O’Haras’ federal claims are based, in main part, on

the so-called implied private right of action under § 10(b)

of the Securities Exchange Act of 1934 and Rule 10b-5 of

the Securities Exchange Commission. Although neither

the section nor the rule by its terms creates an express

private remedy for its violation, the existence of an

implied private right of action is now well established. See

Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723

(1975).

Those sections of the Securities Act of 1933 and the

Securities Exchange Act of 1934 creating express civil

remedies are governed bv an express statute of limitation

(one year from the time the violation was or should have

been discovered, but not longer than three years from the

time of the offer or sale). It is settled law, however, that

the limitat’ ms period governing these express civil re-

medies does not govern the right of action implied under

Section 10(b) of the 1934 Act. In Ernst & Ernst v.

Hochfelder, supra, this Court adverted to the rule direct-

ing federal courts to look to or “borrow” the law of

limitations of the forum state, saying:

Since no statute of limitation is provided for civil

actions under § 10(b), the law of limitations of the

forum State is followed as in other cases of judicially

implied remedies. .. Although it is not always

certain which state statute of limitations should be

followed, such statutes of limitations are usually

longer than the period provided [for the express civil

remedies].

425 U.S. at 210 note 29 (citations omitted).

When this Court noted in Ernst that “it is not always

certain which state statute of limitation should be fol-

lowed”, it understated, at least in retrospect, the magni-

tude of the problem. There is now a raging conflict among

the federal circuits, a conflict of which this case is a part,

as to which state statute of limitations must be borrowed.

The issue is important because most states have at least

two possible periods of limitation. Maryland is typical —

there is a three year period (specified in Mp. Cope Anw.,

Cts. and Jud. Pro. Art. § 5-101) which is applicable to

actions for fraud or deceit, and there is a one year period

(set forth in the Mp. Cope Ann., Corp. and Assoc. Art.

§ 11-703) applicable to actions under the Maryland blue

sky law.

Which period should be applied? Superficially, the

choice is simple. When a federal court must “borrow” a

state period of limitations to apply to a federal cause of

action, the federal court is to select the state statute which

(1) is substantively closest to the federal statute and (2)

best effectuates the policies behind the federal statute.

International Union v. Hoosier Cardinal Corporation, 383

US. 696 (1966). In reality, the difficulties inherent in this

choice have plunged the circuits into a morass of inconsist-

ent and irreconcilable decisions.

The Fourth Circuit, in the decision below and in other,

pre-Ernst decisions, together with the Seventh Circuit,’

the Eighth Circuit,’ and the District of Columbia Circuit’

' Parrent v. Midwest Rug Mills, Inc., 455 F.2d 123 (7th Cir.

1972).

2 Vanderboom v. Sexton, 422 F.2d 1233 (8th Cir. 1970).

’ Forrestal Village, Inc. v. Graham, 551 F.2d 411 (D.C. Cir.

1977).

continue to take the position that the period of limitations

governing a state’s blue sky law, rather than that

governing its common law fraud actions, is the period

which should be borrowed. On the other hand, the First,*

Second,’ Sixth,® Ninth’ and Tenth* circuits have almost

uniformly applied the period of limitations governing state

common law fraud actions rather than state securities law

actions. The Fifth Circuit is in a state of flux, although its

most recent pronouncement seems to be edging toward the

O’Haras’ point of view.* The Third Circuit has recently

joined the O’Haras’ camp, at least in cases such as this

where the state’s blue sky law did not give defrauded

sellers a right of action when the defrauded sellers’ claim

matured.’

These different results arise not from differences in state

law but rather from inconsistent interpretations by differ-

ent federal courts of the same body of federal law.

Certain circuits, including the one in which this case

arises, have held that Ernst had little or no effect on

borrowing statutes of limitations for federal securities

laws. Others, such as the Court of Appeals for the Fifth

‘ With little discussion, the First Circuit has applied the

Massachusetts statute of limitations governing actions based on

tort, rather than the period of limitations governing actions

under that state’s securities act. Cook v. Avien, Inc., 573 F.2d

685 (1st Cir. 1978).

’ Stull v. Bayard, 561 F.2d 429 (2nd Cir. 1977), cert. denied

434 U.S. 1035 (1977).

® Nickels v. Koehler Management Corp., 541 F.2d 611 (6th Cir.

1976), cert. denied. 429 U.S. 1074 (1976).

* United California Bank v. Salik, 481 F.2d 1012, (9th Cir.

1973).

* Mitchell v. Texas Gulf Sulphur Company 446 F.2d 90 (10th

Cir. 1971), cert. denied 404 U.S. 1004 (1971).

® McNeal v. Paine, Webber, Jackson & Curtis, Inc., 598 F.2d

888 (5th Cir. 1979), rev’g. 429 F. Supp. 359 (N.D. Ga. 1977).

Roberts v. Magnetic Metals Company, 611 F.2d 450 (3rd Cir.

1979), rev’g. 463 F. Supp. 934 (D.N.J. 1978).

Circuit in McNeal v. Paine, Webber, Jackson & Curtis Inc.,

598 F.2d 888 (5th Cir. 1979) have held that Ernst

necessitated a change in the federal law of borrowing.

They cannot both be correct.

In the proceedings below, Messrs Kovens, Mandel, and

their fellow conspirators had relied heavily upon the

district court’s opinion in McNeal v. Paine, Webber,

Jackson & Curtis, Inc., 429 F. Supp. 359 (N.D. Ga. 1977).

In reversing, the Fifth Circuit concluded “. . . the cause of

action available under the general fraud statute more

closely resembles McNeal’s cause of action under section

10(b) than that available under the Georgia Securities Act

of 1957. Therefore, the four-year statute of limitations

applicable to actions under the fraud statute is applicable

to the section 10(b) claim asserted here.” McNeal, 598 F.2d

at 894.

Significantly, and perhaps as a warning to the bar

generally that it’s pre-Ernst Hudak decision should no

longer be relied upon, the Fifth Circuit said: “to the extent

that the result in Hudak (i.e., reference to Florida’s

securities law rather to its general fraud law) depends on

the relaxed scienter requirement, that result has been

undermined by Hochfelder.” McNeal, 598 F.2d at 895 note

18 (emphasis supplied).

In Roberts v. Magnetic Metals Company, 611 F.2d 450

(3rd Cir. 1979), rev’g. 463 F. Supp. 934 (D.N.J. 1978), yet

another decision relied upon below was reversed. The

circuit court’s opinion, written by Judge Gibbons, adopts

in toto the O’Haras’ theory of borrowing the state common

law fraud limitations period. The case is also significant,

however, because it deals with another aspect of the-

controversy of which this case is a part.

The Roberts case dealt with a defrauded seller, who had

no right of action under the New Jersey blue sky law. Both

the majority opinion and the concurring opinion by Judge

Sloviter emphasize the significance of this fact. In essence,

both opinions reason that a state statute (New Jersey blue

sky law) under which the injured party had no right of

action could not, under any reasonable construction, be

deemed more analogous to a federal securities fraud action

than a state action (common law fraud) under which the

injured party might have sued."

There is no dispute that, at the time their cause of

action may be deemed to have accrued, the O’Haras, like

the plaintiffs in Roberts, had no right of action as

defrauded sellers under the Maryland blue sky law. This

point was stressed below, but the court of appeals found it

to be without significance. This follows the pattern that

the Fourth Circuit had adopted in Fox v. Kane-Miller

Corp., 542 F.2d 915 (4th Cir. 1976), a decision that court

expressly reaffirmed below.

Commenting on this very point, the Roberts court found

the Fox reasoning “unpersuasive, if for no other reason

than its failure even to make note of the fact that the

statute relied upon did not provide a cause of action for

any one other than a buyer.” 611 F.2d at 455.”

'' Judge Gibbons discussed the point thus:

“.. . since the New Jersey Uniform Securities Act is

wholly inapplicable to the transaction alleged in the

Complaint, the analogy escapes us. Indeed, because the

facts alleged in the Complaint are actionable under both

the 1934 Act and under New Jersey common law the

closest analogy is the one rejected by the District Court.

611 F.2d at 454.

Tt seems likely that the District of Columbia Circuit would

go along with the Third Circuit and the O’Haras on this point.

In Forrestal Village, Inc., v. Graham, 551 F.2d 441 (D.C. Cir.

1977), the court stated:

Admittedly, there are some differences between the re-

levant federal and local statutes. Under Section 10(b) both

buyers and sellers have a claim, whereas the D.C. Act

provides a cause of action to buyers only. Because the

Some courts, such as the court below, have held that

long statutes of limitation are not favored in federal

securities law. Others, such as the Sixth Circuit in Nickels

v. Koehler Management Corporation, 541 F.2d 611 (6th

Cir. 1976), cert. denied 429 U.S. 1074 (1976), have held

that the broad remedial purposes of the federal securities

laws are best served by a longer — not a shorter — statute

of limitations. These decisions deal with an important

policy aspect of federal securities law, an aspect clearly

implicated in the instant case. Yet they, like a number of

the cases just discussed, cannot be reconciled.

This Court in Ernst & Ernst v. Hochfelder undertook a

fundamental re-examination of the implied private right

of action under section 10(b) of the 1934 Act. This

re-appraisal led the Court to the conclusion that scienter is

a crucial element of a violation of that law. The holding in

Ernst must be a paramount element of any attempt by a

lower federal court to draw analogies between § 10(b) and

similar causes of action under state law.

Many courts have taken Ernst to heart and have used it

as the basis for determining which state statute is the

most analogous for borrowing purposes. These courts have

adopted the limitations period of common law fraud,

rather than the limitations period of state securities law.”

instant case is a suit by a buyer, however, this difference is

not material.

551 F.2d at 414.

The negative implication is strong that had the suit been

brought by a defrauded seller (such as the O’Haras) the

difference between the federal and local statutes would have

been material.

‘8 The district court below relied in its opinion on Vander-

boom v. Sexton, 422 F.2d 1233 (8th Cir. 1970). Interestingly, in

Posner v. Merrill, Lynch, Pierce, Fenner & Smith, Inc., 469 F.

Supp. 972 (S.D.N.Y. 1979), Judge Haight, applying Arkansas

and Eighth Circuit law, found that Ernst compelled a reassess-

ment of the Vanderboom decision and had undermined its ratio

decidendi: “With the requirement of scienter the . . . action

Other jurisdictions have relied upon superfical similarities

in wording and a perceived commonality of purpose,

ignoring or specifically rejecting the rationale of Ernst,

and have held that state blue sky laws are most analogous

for borrowing purposes. Only this Court can say which

approach is correct and can put an end to the present

conflict between jurisdictions.

As Judge McCree, former circuit judge and now the

Solicitor General of the United States, said in Nickels v.

Koehler Management Corporation, supra:

Although a uniform federal period of limitations

would prevent the anomaly of applying different

limitations periods to plaintiffs who purchased or sold

the same security but resided in different states a

single circuit cannot impose a pattern on the entire

nation. Each circuit that has considered the question

to date has applied a state period of limitation.

Accordingly, at this late hour only Congress or the

Supreme Court can impose uniformity. Neither has

promulgated a federal limitation period, and the

Supreme Court recently observed that “since no

statute of limitations is provided under § 10(b), the

law of the forum state is followed as in other cases of

judicially implied remedies.” [Citation omitted]

541 F.2d at 614.

most closely analogous to actions brought under Rule 10b-5 is

that for common law fraud.” 469 F. Supp. at 982.

Another decision relied upon by the district court below,

Hudak v. Economic Research Analysts, Inc., 499 F.2d 996 (5th

Cir. 1975) was recently pronounced to be “of dubious authority”

in First Federal Savings and Loan Association of Miami v.

Mortgage Corporation of the South, 467 F. Supp. 943 (N.D. Ala.

1979).

“The Supreme Court has put this matter to rest in Ernst

_... There the court expressly held that Rule 10b-5

incorporates a scienter requirement — an intent to deceive,

manipulate or defraud. Negligence as a ground for recovery

was rejected. The Hudak court’s choice of a statute of

limitations was based on . . . reasoning which has been

rejected by the Supreme Court. It must appear then that

Hudak may be dubious authority.”

467 F. Supp. 952.

Judge Gibbons agrees: “Much can be said, perhaps, for a

different rule [than borrowing] in a different context

directing a Federal court to statutes of limitations gov-

erning analogous Federal causes of action. But the rule

has been otherwise for many years, and an inferior federal

court is not free to change it.” Roberts v. Magnetic Metals

Co., supra, 611 F.2d at 454.

Since borrowing is the rule, it is imperative that this

Court clarify the standards to be applied and end the

confusion that has arisen in the wake of the decision in

Ernst.

THIS CASE INVOKES TWO STRONG REMEDIAL PURPOSES —

THOSE OF FEDERAL SECURITIES LAW AND THOSE PROTECTING

MENTAL INCOMPETENTS. NEITHER OF THESE PURPOSES WAS

ADEQUATELY SERVED BY THE COURTS BELOW.

The district court held that the matter of tolling the

statute of limitations by reason of Mrs. O’Hara’s mental

incompetency was clearly governed by state law. The court

of appeals in effect overruled the lower court but reached

the same result on different grounds. Specifically, the

court of appeals was guided, perhaps properly so far as it

went, by Johnson v. Railway Express Agency, Inc., 421

bu.§. 454 (1975). Both Johnson and the recent case of

Board of Regents v. Tomiano, —— U.S. __., 48 U.S.L.W.

4556 (May 19, 1980) show that where state law is

borrowed for a limitations period, state law should also

furnish the ground to be searched for tolling and other

ancillary provisions of limitations. The perfunctory,

mechanistic approach taken by the courts below is not

only at odds with the clear teaching of Johnson but clearly

thwarts the remedial purposes of the federal securities

law.

As this Court stated in Johnson:

Although state law is our primary guide in this area,

it is not, to be sure, our exclusive guide. As the court

noted in Auto Workers v. Hoosier Corp. . . . [citation

omitted] . .. considerations of state law may be

displaced where their application would be inconsis-

tent with the federal policy underlying the cause of

action under consideration.

421 U.S. at 464-465.

As was more strongly stated by Chief Judge Lord in

Eubanks v. Clarke, 424 F. Supp. 1022 (E.D. Pa. 1977):

We glean from Burnett, Hoosier Cardinal Corp.,

Holmberg, and Moviecolor Limited that federal courts

should utilize equitable principles and fashion their

own tolling provisions in those infrequent situations

where state statutes of limitations effectively deny

rights or impede policies created by federal law... .

Where a federal cause of action may effectively be

defeated, a federal court may have the duty to fashion

a tolling provision.

434 F. Supp. at 1031 and 1032.

The remedial purposes of federal securities regulation

are too well known to require restating. Equally clear is

the paternalistic and protective policy of the state of

Maryland towards mental incompetents. It manifests itself

in at least three respects: (1) limitations do not begin to

run against a mental incompetent until the disability is

removed (something which will never happen in Josephine

O’Hara’s case);'* (2) Maryland follows the “discovery rule”

in dealing with ignorance of a cause of action induced by

fraud, and provides that the cause of action “accrues”

Courts and Judicial Proceedings Article § 5-201(a) states:

“When aon subject to a limitation under Sub-title 1 accrues

in favor of a minor or mental incompetent, that person

shall file his action within the lesser of three years or the

applicable period of limitations after the date the disability

is removed. (emphasis supplied).

when the party discovers or by the exercise of ordinary

diligence should have discovered the fraud;’® and (3) the

Court of Appeals of Maryland has repeatedly held that

even the appointment of a guardian for the mental

incompetent will not commence or resume the running of

the period of limitations. Funk v. Wingert, 134 Md. 523

(1919); McBride v. Gulbro, 247 Md. 747 (1967); and

Mullins v. Thorne, 254 Md. 434 (1969)."*

Under even the most basic reading of Johnson, the

policies of the State of Maryland with regard to mental

incompetents must be incorporated into federal law along

with the gross computational aspects of any Maryland

period of limitations. A close reading of Johnson and such

cases as Eubanks v. Clarke, supra, shows that even if

Maryland policies were not as clear as they are, a federal

court would have an affirmative duty to fashion its own

tolling provisions. The alternative constitutes an effective

denial of an important federal rights to mental incompe-

tents, a class of individuals particularly in need of

protection.

i’ Gourt and Judicial Proceedings Article § 5-203 deals with

ignorance of a cause of action induced by fraud and provides:

If a party is kept in ignorance of a cause uf ection by the

fraud of an adverse party, the cause of action shall be

deemed to accrue at the time when the party discovered, or

by the exercise of ordinary diligence should have disco-

vered the fraud. (emphasis supplied).

‘6 In this context, the opinion in McDonald v. Boslow, 363 F.

Supp. 493 (D. Md. 1973) is worth noting. There, the district

court found that the three year general limitation period of the

Maryland code also governed actions under 42 U.S.C. § 1983.

The court dealt at length with the plaintiff's contention that the

limitations period “has even today not yet begin to run against

him in connection with any wrongs alleged by him in this case”

because, as a “defective delinquent”, he was within the ambit of

the exception provided for mental incompetence. The Court

ultimately found that a defective delinquent was not a mental

incompetent within the meaning of the statute. However, the

tenor of the opinion clearly indicates had the plaintiff been

found non compos mentis, such disability would have tolled

limitations for the federal cause of action.

The courts below charged an admitted mental incompe-

tent with the affirmative burden of discovering a highly

sophisticated and virtually unique fraud scheme within a

very brief period of time. The court of appeals, in

particular, seized upon what common sense can only view

as an oversight in drafting (or a drafting decision that no

reiteration was necessary) — the fact that the general

provision which provides for tolling under Maryland law

was not expressly made applicable to the special provi-

sions of Maryland securities law.

In effect, the court of appeals declined to extend tolling

protection to Mrs. O’Hara because the court was unable to

find a provision in Maryland law which compelled it to do

so. This goes against both the teaching and the sense of

the law and thwarts important federal and state policies.

Il.

THE DECISION BELOW IS ERRONEOUS IN

THE LIGHT OF THIS COURT’S

DECISION IN ERNST.

The Court in Ernst converted § 10(b) of the Securities

Exchange Act of 1934 from a negligence-and-fraud statute

into a fraud-only statute. This change is so fundamental

that it is virtually dispositive of the search for an

analogous state law. The choices are the Maryland

Securities Act, which is a negligence-and-fraud statute,

and the commun law tort of fraud and deceit, which

embraces only fraudulent conduct. After Ernst, the state

analog to a §10(b) action is common law fraud. It is not

the blue sky law of Maryland or of any other state which

allows actions thereunder to be predicated on negligence.

The fact that Maryland blue sky law did not even grant

a private remedy to defrauded sellers such as the O’Haras

at the time their cause of action accrued furnishes a

separate, independent reason for this result.

For these reasons, recognized and applied by the First,

Second, Third, Fifth, Sixth, Ninth, and Tenth circuits, the

lower courts’ decision in this case should be reversed.

Petitioners also believe that this Court in Ernst by clear

implication rejected the application of a one-year period of

limitations to actions under § 10(b) and Rule 10b-5. The

Court was considering whether a cause of action under

§10(b) could be premised on negligent wrongdoing. A

crucial point in the Court’s analysis seemed clearly to be

that actions under the 1933 Act, which could be premised

on negligent wrongdoing, were subject to what the Court

characterized as “significant procedural restrictions not

applicable under § 10(b)”. 425 U.S. at 209. The procedural

restriction dealt with at most length by the Court was a

one-year statute of limitations. The Court said nothing

about any alleged federal preference for short limitations

periods in securities actions. This is because there is no

such federal policy. Rather, the Court indicated that a

one-year statute of limitations, as an absolute matter, was

too short to apply to an action under § 10(b) — an action

which requires scienter. In a footnote to a sentence which

summarized the significance of the absence of procedural

restrictions such as a one-year statute of limitations in an

action under §10(b), the Court spoke to the borrowing

issue:

Since no statute of limitations is provided for civil

actions under § 10(b), the law of limitations of the

forurn State is followed. . . Although it is not always

certain which state statute of limitation should be

followed, such statutes of limitations are usually

longer than the period provided under § 13 [a one year

period] 425 U.S. 210, fn. 29 (citations omitted)

The opinion in Ernst, against the background of the

federal policies upon which it is based, justifies an

out-of-hand rejection of the one-year limitations period as

being too short to impose upon a cause of action under

§ 10(b)."”

" The highly respected District Judge Edward Weinfeld, from

the Southern District of New York, in a very recent decision,

appears to agree with petitioners that the Ernst case (and

specifically footnote 29) in and of itself compels the borrowing of

a state period of limitations for actions based on common law

fraud. In Gilman Brother v. Peat, Marwick, Mitchell & Company,

486 F. Supp. 785, 786 note 5, (S.D.N.Y. 1980) the court said:

Federal law, in the absence of a limitation period in the

securities statute upon which a plaintiff's claim is based,

applies state statutes of limitations for actions based upon

common law fraud. See Ernst & Ernst v. Hochfelder, 425

U.S. 185, 210 n. 29, 96 S. Ct. 1375, 1389 n. 10, 47 L. Ed. 2d

668 (1976); Phillips v. Levie, 593 ".2d 459, 462, (2d Cir.

1979); Stull v. Bayard, 561 F.2d 429, 431 (2d Cir. 1977),

cert. denied, 434 U.S. 1035, 98 S. Ct. 769, 54 L. Ed. 2d 783

(1978); Arneil v. Ramsey, 550 F.2d 774, 779 (2d Cir. 1977).

The stock purchase was consumated in Massachusetts, the

state of plaintiff's residence.

CONCLUSION

As long as state statutes of limitations must be bor-

rowed for federal securities actions, there can be no

national uniformity as to the time period of limitations.

There can and should, however, be uniformity as to the

generic type of state limitations period to be borrowed and

applied in federal securities actions. Only this Court can

establish the standard which will bring about the de sired

consistency of results. Almost all federal circuits have now

addressed the problem and the results are irreconcilable.

The issue is ripe for resolution by this Court.

Whether limitations against a plaintiff in a federal

securities action should be tolled where the plaintiff is

mentally incompetent is a question which likewise impli-

cates important federal policies, and it, too, is ripe for

decision by this Court.

For these reasons, petitioners respectfully request that

their petition for writ of certiorari be granted.

WituiaM A. SNYDER, JR.

James B. WIELAND

OF COUNSEL: 1600 Maryland National

Bank Building

Joun T. WARD Baltimore, Maryland 21202

Oser, Grimes & SHRIVER Attorneys of Record for

1600 Maryland National Petitioners

Bank Building (301) 685-1120

Baltimore, Maryland 21202

(301) 685-1120

October 10, 1980

APPENDIX

In The United States District Court

for the District of Maryland

Civil No. Y-78-2329

James Francis O’Hara, III, et al.

Irvin Kovens, et al.

Filed: July 12, 1979

William A. Snyder, Jr., Esquire, Baltimore, Maryland,

John T. Ward, Esquire, Baltimore, Maryland, and James

B. Wieland, Esquire, Baltimore, Maryland, counsel for the

plaintiffs.

William F. Gately, Esquire, Baltimore, Maryland, counsel

for Irvin Kovens. Arnold M. Weiner, Esquire, Baltimore,

Maryland, M. Albert Figinski, Esquire, Baltimore, Mary-

land, and Ira C. Cooke, Esquire, Baltimore, Maryland,

counsel for Marvin Mandel. William G. Hundley, Esquire,

Washington, D.C., counsel for W. Dale Hess. Thomas C.

Green, Esquire, Washington, D.C., counsel for Harry W.

Rodgers, II]. H. Russell Smouse, Esquire, Baltimore,

Maryland, counsel for Irving T. Schwartz. Gary M.

Anderson, Esquire, Laurel, Maryland, counsel for Ernest

N. Cory, Jr. Michael E. Marr, Esquire, Baltimore, Mary-

land, counsel for William A. Rodgers. Charles W. Bills,

Esquire, Gaithersburg, Maryland, counsel for Eugene B.

Casey.

Younc, United States District Judge

The plaintiffs, James, Michael, and Josephine M.

O’Hara, seek compensatory and punitive damages against

the defendants as the result of the sale of their stock in the

Marlboro Race Track to the defendants on December 31,

1971. The complaint alleges three counts of fraud based

upon state and federal law. Count I states a federal cause

of action alleging that defendants’ conduct violated Rule

10b-5,! 17 C.F.R. § 240.10b-5 (1978), promulgated by the

Securities and Exchange Commission pursuant to the

Securities Exchange Act of 1934, 15 U.S. C. § 78} (1976).

Count II asserts a violation of the Maryland Securities

Act, MD. CORP. & ASS’NS CODE ANN. § 11-101 et seq.

Count III alleges that defendants’ acts constituted common

law fraud. Since Counts II and III are state causes of

action, federal jurisdiction is asserted under the doctrine of

pendent jurisdiction.

This lawsuit is based on facts developed when a federal

grand jury handed down indictments on November 24,

1975 against former Maryland Governor Marvin Mandel

and certain associates who were alleged to have engaged

in certain illegal activities in connection with the stock of

the Marlboro Race Track, now known as the Bowie Race

Track. Plaintiffs claim that the defendants conspired to

' Rule 10b-5 states:

It shall be unlawful for any person, directly or indirectly,

by the use of any mean or instrumentality of interstate

commerce, or of the mails, or of any facility of any national

securities exchange,

(a) To employ any device, scheme, or artifice to

defraud,

(b) To make any untrue statement of a material

fact or to omit 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

business which operates or would operate as a fraud

or deceit upon any person, in connection with the

purchase or sale of any security.

acquire the controlling interest in the Marlboro Race

Track without disclosing their intentions to plaintiff

shareholders, the Maryland legislature, the Maryland

Racing Commission, and the general public.

The conspirators allegedly acted between January 7,

1969 and May 28, 1971 to depress the value of plaintiff's

stock. This purported manipulation was supposedly accom-

plished by Governor Mandel’s veto of House Bill 1128

which would have effectuated a permanent transfer of

eighteen racing days from Hagerstown Race Track to

Marlboro Race Track. After the veto, with the stock

commanding a lower price, it is alleged the defendants

began acquiring a controlling interest through several

different routes.

Stock purchases continued throughout 1971, and one of

the defendants, Eugene B. Casey, wrote to each member of

the Maryland General Assembly on or about January 7,

1972 purportedly to induce the legislators to override the

Mandel veto of House Bill 1128. Such an override would

increase the value of Marlboro Race Track stock by virtue

of alloting it the additional eighteen racing days. The

legislature did in fact override the Governor’s veto on

January 12, 1972, and the plaintiffs maintain that

Governor Mandel himself acted directly and through his

agents with the intent to have his own veto overriden. The

stock value was further boosted by passage of the 1972

race track consolidation bill which was supported by

Governor Mandel and the other defendants.

Having become aware of the allegedly fraudulent prac-

tices engaged in by defendants, plaintiffs filed this suit on

November 22, 1978, almost exactly three years after the

first indictments were brought. They seek compensatory

and punitive damages totaling $15,000 [$15,000,000] plus

interest, costs, and fees as well as the appointment of a ©

receiver for the Bowie Race Track stock and such addition-

al relief as may be necessary.

At this juncture, defendants Kovens and William Rod-

gers have moved for judgment on the pleadings pursuant

to Fed. R. Civ. Proc. Rule 12(c). Defendants Mandel, Hess,

Harry Rodgers, Cory, and Schwartz have moved to dismiss

for failure to state a cause of action upon which relief can

be granted. Fed. R. Civ. Proc. Rule 12(b) (6). Defendant

Casey has filed an Answer in which he prays for dismissal

of the complaint. After reviewing the case and the legal

memoranda filed therein, the Court will grant defendants’

motions pursuant to Rule 12.

Defendants’ motion to dismiss raises one straightfor-

ward legal issue, namely, whether the appropriate statute

of limitations period for this 10b-5 action is the one-year

period established by the Maryland Securities Act, MD.

CORP. & ASS’NS CODE ANN. §11-703(f) (2), or the

three-year period applicable under the Maryland statute of

limitations for fraud actions, MD. CTS. & JUD. PROC.

CODE ANN. §5-101.? Since there is no period of limita-

tions prescribed in the statute for actions brought under

section 10(b), courts have adopted the most “analogous”

State statute of limitations. Once courts began implying

civil remedies under rule 10b-5, Kardon v. National

Gypsum Co., 69 F. Supp. 512 (E.D. Pa. 1946), it might

have been expected that they would have borrowed the

limitations periods which accompany those sections of the

Securities Act of 1933 or the Securities Exchange Act of

1934 which set forth their own express liability clauses

and limitations periods.’

? Section 11-703(f) (2) provides that “[a] person may not sue

under this section. . . one year after the discovery of the untrue

statement or omission, or after the discovery should have been

made by the exercise of reasonable diligence.”

Section 5-101 provides that “[a] civil action at law shall be

filed within three years from the date it accrues unless another

provision of the Code provides a different period of time within

which an action shall be commenced.”

? In the 1933 Act, liability sections having their own limita-

tions periods include sections 11, 12 and 15 which are governed

by section 13. 15 U.S.C. §§ 77k, 771, 77m and 770. Sections 9%e),

18, and 29(b) of the 1934 Act, 15 U.S.C. §§ 78i(e), 78r, and 78cc,

contain their own limitations periods.

Instead, courts followed the well-settled principle of

Holmberg v. Armbrecht, 327 U.S. 392 (1946), that “the

timeliness of an action under the federal securities laws is

to be determined by reference to the appropriate State

statute of limitations.” Fox v. Kane-Miller Corp., 542 F.2d

915, 917 (4th Cir. 1976). In Holmberg, Justice Frankfurter

had explained that “(t]he implied absorption of State

statutes of limitations within the interstices of the federal

enactments is a phase of fashioning remedial details

where Congress has not spoken but left matters for

judicial determination within the general framework of

familiar legal principles.” 327 U.S. at 395.

The first cases to apply the Holmberg reasoning held

that the controlling limitations provision was the State

statute of limitations for fraud actions;‘ however, more

recent cases have shown a trend toward adopting the

statute of limitations in a State’s Blue Sky Laws.’ Two

commentators have explained the effects of choosing one

theory over the other:

If the “fraud” statute of limitations is adopted, then it

typically will not begin to run until “discovery” of the

fraud. However, if the Blue Sky statute of limitations

is applied and contains no such tolling provision the

cases have uniformly held that the general Federal

‘*. See, e.g., Errion v. Connell, 236 F.2d 447 (9th Cir. 1956);

Fischman v. Raytheon Mfg. Co., 188 F.2d 783 (2d Cir. 1951);

Chiodo v. General Waterworks Corp., 380 F.2d 860 (10th Cir.)

cert. denied, 389 U.S. 1004 (1967); Azalea Meats, Inc. v. Muscat,

386 F.2d (5th Cir. 1967); Klein v. Auchincloss, Parker &

Redpath, 436 F.2d 339 (2d Cir. 1971); Sackett v. Beaman, 399

F.2d 884 (9th Cir. 1968).

® See, e.g., Hudak v. Economic Research Analysts, Inc., 499

F.2d 996 (5th Cir.), cert. denied, 419 U.S. 1122 (1974); Parrent v.

Midwest Rug Mills, Inc., 455 F.2d 123 (7th Cir. 1972); Vander-

boom v. Sexton, 422 F.2d 1233 (8th Cir.), cert. denied, 400 U.S.

852 (1970); Nickels v. Koehler Management Corp., 392 F. Supp.

804 (N.D. Ohio 1975), cert. denied, 429 U.S. 1074 (1977); Kramer

v. Loewi & Co., Inc., 357 F. Supp. 83 (E.D. Wis. 1973); overruled

on other grounds, 454 F. Supp. 899, 911 n. 4 (E.D. Wis. 1978);

Corey v. Bache & Co., Inc., 355 F. Supp. 1123 (S.D. W. Va. 1973).

equitable doctrine relating to concealment of a

“fraud” will apply (even though they have just stated

that a Rule 10b-5 violation is not necessarily “fraud”

as the reason for applying the Blue Sky statute.)

R. Jennincs & H. Marsu, Securities REGULATION 859 (4th

ed. 1977).

Vanderboom v. Sexton, 422 F.2d 1233 (8th Cir.), cert.

denied, 400 U.S. 852 (1970), was the first court to apply

the Blue Sky limitations period rather than the common

law fraud period. Its reasoning was based on the fact that

rule 10b-5 and the Arkansas Blue Sky law were both

specifically aimed at securities fraud and shared a “com-

monality of purpose” making the application of a “re-

semblance test” a more reasonable ground for choosing the

securities-related statute of limitations.°

The Vanderboom court distinguished the Sixth Circuit's

ruling in Charney v. Thomas, 372 F.2d 97 (6th Cir. 1967),

which had held that neither the Michigan Blue Sky law

nor the common law fraud statute were closely analogous

to Rule 10b-5. Nevertheless the Charney court continued

to apply the common law fraud limitation.

Venderboom distinguished Charney in light of the fact

that the Sixth Circuit required scienter for a 10b-5 action

whereas the Eighth Circuit permitted 10b-5 recoveries

where there had been negligent as well as intentional

misrepresentation. Since scienter was absent from the

Michigan Blue Sky law, application of the common law

fraud limitations was the best means of effectuating

federal policy. See Note, A Cry for Help: The Ninth Circuit

and the Statute of Limitations in Rule 1 0b-5 Actions, 22

UCLA L. REV. 947, 954-55 (1975).

(D.C. Cir. 1977); Fox v. Kane-Miller Corp., 542 F.2d 915 (4th Cir.

1976); Newman v. Prior, 518 F.2d 97, 100 (4th Cir. 1975)

(federal policy best served by applying state blue sky law’s

two-year statute of limitations to suit involving fraudulent sale

of securities); Sasso v. Koehler, 445 F. Supp. 762 (D. Md. 1978);

Maine v. Leonard, 365 F. Supp. 1277 (W.D. Va. 1973).

Although the Supreme Court has recently held that

scienter is required for implied causes of action pursuant

to Rule 10b-5, Ernst & Ernst v. Hochfelder, 425 U.S. 185,

reh. denied, 425 U.S. 986 (1976), this new requirement

would not undermine the validity of Vanderboom’s re-

semblance test. Although scienter is now required as an

element of a 10b-5 offense, it is only partially relevant to

picking the appropriate limitations period. The presence or

absence of negligence as a permissible element in an

offense seems unrelated to the limitations question in a

situation where there is a State statute clearly resembling

the federal policy and containing a limitation’s period

which, on the basis of this resemblance, is thereby more

compelling.

Plaintiffs read Ernst as mandating application of the

state common law fraud limitation:

The plaintiffs believe that the Ernst case is crucial

because it converted §10(b) from a negligence-and-

fraud statute into a fraud statute only. As plaintiffs

will seek to demonstrate, § 11-703 of the state secur-

ities act is a negligence-and-fraud statute—not a

fraud statute only. Thus, the state analog to Rule

10b-5, after Ernst, is common law fraud, not § 11-703.

Plaintiffs’) Memorandum in Opposition to Defendants’

Motions to Dismiss and Motions for Judgment on the

Pleadings at 9.

In light of what has been said thus far, plaintiffs’

argument is unconvincing. Plaintiffs extrapolate too much

from Ernst which mentioned the statute of limitations

issue only in passing. 425 U.S. at 210, n.29. Holmberg is

still good law, and the goal which it prescribes is

fashioning a limitations based on State law which shall

blend with “the interstices of the federal enactments” on

which the cause of action is based. Even if one conceded

plaintiffs’ argument that section 11-703(f) was a negli-

gence-and-fraud statute, this Court would have to be

literally blind to overlook the substantial similarities

between those provisions and Rule 10b-5. Accordingly,

Ernst does not preclude this Court from continued reliance

on the limitations period of section 11-703(f) as the

appropriate limitations period in this 10b-5 action.’

Having concluded this, it is necessary to determine

whether, and to what extent, the federal equitable tolling

doctrine should be applied in this case. As one court has

explained,

the statute of limitations in a § 10(b) action may be

tolled by the “equitable doctrine” of fraudulent con-

cealment. In order to invoke this doctrine, however,

the plaintiff must have remained ignorant of the

fraud “without any fault or want of diligence or care

on his part.” Bailey v. Glover, 88 U.S. (21 Wall) 342,

348 (1871). It is well established that a plaintiff may

not merely rely on his own unawareness of the facts

or law to toll the statute. * * * The plaintiff, rather,

has the burden of showing that he “exercised reason-

7 This result obviously imposes a shorter limitations period,

absent any equitable tolling, than would apply in the case of

common law fraud. But as one authority has noted, “(sJhort

statutes of limitations with an outside cut-off date are particu-

larly appropriate in the case of securities or other fungibles of

fluctuating value.” Martin, Statutes of Limitation in 10b-5

Actions: Which State Statute is Applicable? 29 BUS. LAW. 443

(1974). Although writing prior to the Supreme Court’s Ernst

decision, Martin notes that the presence or absence of scienter is

essentially irrelevant to the nature of the limitations question:

Despite differing approaches among the courts to such

questions as scienter and reliance, it is universally true

that in order to establish the civil liability which has been

implied under section 10(b) and rule 10b-5, it is not

necessary to allege and prove the classic elements of

common law fraud. All such statutes are therefore extraor-

dinary in their scope and do not require the lengthy periods

of limitations applicable to common law fraud to effectuate

their purposes.

Id. at 457. See also Newman v. Prior, 518 F.2d 97, 100 n.4 (4th

Cir. 1975). Martin’s conclusions have been reinforced by two

post-Ernst cases. See, e.g., Forrestal Village, Inc. v. Graham. 551

F.2d 411, 414 (D.C. Cir. 1977) (similarities outweigh dif-

ferences); Dupuy v. Dupuy, 551 F.2d 1005, 1024 n.31 (5th Cir.),

reh. denied, 554 F.2d 1065 (5th Cir. 1977) (Blue Sky laws still

closer to 10b-5).

able care and diligence in seeking to learn the facts

which would disclose fraud.” * * * The statutory

period “[does] not wait appellant’s leisurely discovery

of the full details of the alleged scheme.”

Hupp v. Gray, 500 F.2d 993, 996 (7th Cir. 1974) (footnotes

omitted). See also Schaefer v. First National Bank of

Lincolnwood, 509 F.2d 1287, 1295-98 (7th Cir. 1975), cert.

denied, 425 U.S. 943 (1976); Hochfelder v. Midwest Stock

Exchange, 503 F.2d 364 (7th Cir.), cert. denied, 419 U.S.

875 (1974).®

Although the period of limitations will be borrowed from

state law whenever equitable tolling is applied, the

question of when that limitations period begins is a matter

of federal law. Batchelor v. Legg & Co., 52 F.R.D. 553, 558

(D. Md. 1971). As Holmberg stated emphatically:

This equitable doctrine is read into every federal

statute of limitation... . It would be too incongruous

to confine a federal right within the bare terms of a

State statute of limitation unrelieved by the settled

® One commentator has traced the origins of the federal

equitable tolling doctrine:

Federal law has long held that where fraud is involved in

an action, at law or in equity, the federal statute of

limitations is tolled. . . . Holmberg v. Armbecht extended

this doctrine to toll state statutes of limitations in equit-

able actions. Moviecolor [Ltd. v. Eastman Kodak Co., 288

F.2d 80 (2d Cir.), cert. denied, 368 U.S. 821 (1961)] further

extended the concept to apply to state statutes of limita-

tions where the cause of action is federally created and

cognizable only in federal courts whether the action was at

law or in equity. Consequently, more courts are applying

the federal tolling doctrine to 10b-5 actions. This, along

with the adoption of the state statute of limitations has

resulted in inconsistent periods of limitations for 10b-5

actions among the circuits.

Bateman & Keith, Statutes of Limitations Applicable to Private

Actions Under SEC Rule 10b-5: Complexity in Need of Reform,

39 MO. L. REV. 165, 177 (1974). See also A. BROMBERG,

SECURITIES LAW FRAUD — SEC RULE 1i0b-5 $8.4 (653)

(1975). The introduction of the federal equitable tolling doctrine

has been criticized in Note, 22 UCLA L. REV., supra, at 961-62.

10a

federal equitable doctrine as to fraud, when even a

federal statute in the same terms would be given the

mitigating construction required by that doctrine.

327 U.S. at 397. The accrual date, therefore, is governed

by federal law, and limitations will begin to run “on the

date that the illegal action is or should have been

discovered.” 52 F.R.D. at 558.’

In the present case, plaintiffs have acknowledged that

they first learned of the alleged fraud on November 24,

1975, the date on which the defendants were indicted by

the federal grand jury. In such circumstances, the cause of

action may be deemed to have accrued no later than this

date. Although the sale of stock occurred in 1971,

application of the equitable tolling doctrine in this case of

an alleged fraud means that the statute of limitations was

tolled until November 24, 1975.

Were a three-year fraud limitations to apply, plaintiffs

would have had until November 24, 1978 to file this

lawsuit. The case was actually filed on November 22,

1978. Yet plaintiffs contend for the first time in their

Memorandum opposing dismissal and judgment on the

pleadings that regardless of whether state or federal law

controls the limitations period, limitations could not begin

to run until such time as Josephine O’Hara learned or

should have learned of the fraud. Pointing out that Mrs.

O’Hara was totally mentally incompetent’® on November

24, 1975 and has remained so ever since, plaintiffs aver

* See also Sargeant v. Genesco, Inc., 492 F.2d 750 (5th Cir.

1974); Maine v. Leonard, 365 F. Supp. 1277 (W.D. Va. 1973);

Kramer v. Loewi, 357 F. Supp. 83 (E.D. Wis. 1973), overruled on

other grounds, 454 F. Supp. 899, 911 n.4 (E.D. Wis. 1978);

Sieffer v. Topsy’s Intern., Inc., 64 F.R.D. 714 (D. Kan. 1974),

appeal dismissed, 520 F.2d 795 (10th Cir. 1975), cert. denied,

423 U.S. 1051 (1976).

” Plaintiffs point out that on November 24, 1975, Josephine

M. O’Hara was totally mentally incompetent and that her

disability is irreversible and permanent. Her two sons, Michael

and James, were appointed guardians of her property by an

equity court in November, 1976.

lla

that the limitations period has net and never will run

against her.

Plaintiffs’ argument on this point, however, is totally at

odds with settled federal case law. “It is a matter of federal

law as to the circumstances that will toll a state statute

applied to private actions under the securities law.”

deHass v. Empire Petroleum Company, 435 F.2d 1223,

1226 (10th Cir. 1970), quoting Esplin v. Hirschi, 402 F.2d

94, 103 (10th Cir. 1968) cert. denied, 394 U.S. 928 (1969).

As defendants have properly explained, federal law does

not allow limitations periods to be tolled by mental

incompetence. “Insanity does not prevent a federal statute

of limitations from running.” Accardi v. United States, 435

F.2d 1239, 1241 n.2 (3d Cir. 1970)." Plaintiffs have cited

no federal authority to the contrary. Although they have

attempted to base their tolling argument on state statu-

tory analysis, Mp. Crs. & Jup. Proc. Cope Ann. §§ 5-201(a)

and 5-203, these provisions are applicable to the general

statute of limitations only and not to the limitations

applicable in this 10b-5 action. To accept plaintiffs’

argument would mean that both the period of limitations

and its commencement date would be matters of state law

in direct contravention of deHass, supra. Accordingly, the

Court rejects plaintiffs’ arguments that a three-year

limitations is applicable and that such limitations have

not run due to Josephine O’Hara’s continuing mental

incompetency. Count I shall therefore be dismissed.

Having dismissed plaintiffs’ federal claims at this stage,

the Court must also decline to hear their state claims since

grounds for maintaining pendent jurisdiction are now

lacking. “Certainly, if the federal claims are dismissed

before trial, even though not insubstantial in a jurisdic-

tional sense, the state claims should be dismissed as well.”

United Mine Workers v. Gibbs, 383 U.S. 715, 726 (1966).

i’ See also Casias v. United States, 532 F.2d 1339 (10th Cir.

1976); Williams v. United States, 228 F.2d 129, 132 (4th Cir.

1955); Jackson v. United States, 254 F. Supp. 586, 587 (E.D. S.C.

1964); Kalil v. United States, 107 F. Supp. 966 (E.D. N.Y. 1952).

12a

See also Shuman v. Sherman, 356 F. Supp. 911 (D. Md.

1973).

Defendants Kovens and Williams A. Rodgers have

adopted the arguments advanced by defendants Mandel, et

al. in support of their motion for judgment on the

pleadings. As a result, all counts shall also be dismissed as

against these defendants as well as defendant Casey.

Accordingly, it is this 12th day of july, 1979, by the

United States District Court for the District of Maryland,

Orperep: that plaintiffs’ complaint be, and the same is,

hereby D '

wii ie Joseph H. Young,

United States District Judge

13a

United States Court of Appeals

For The Fourth Circuit

No. 79-1524

James Francis O’Hara, III, Michael Patrick O'Hara, indi-

vidually and as guardians of the property of Josephine M.

O’Hara,

Appellants,

versus

Irvin Kovens, Marvin Mandel, W. Dale Hess, Harry W.

Rodgers, III, William A. Rodgers, Ernest N. Cory, dr.,

Eugene B. Casey, Irving T. Schwartz,

Appellees.

Appeal from the United States District Court for the

District of Maryland, at Baltimore. Joseph H. Young,

District Judge

Argued May 5, 1980 Decided July 16, 1980

Before HAYNSWORTH, Chief Judge, RUTZNER and

PHILLIPS, Circuit Judges

James B. Wieland, William A. Snyder, Jr. (John T. Ward,

Ober, Grimes & Shriver on brief) for Appellants; Gerrard

Martin (Arnold M. Weiner; William F. Gately; William G.

Hundley; Thomas C. Green; Gary M. Anderson; Charles

W. Bills; H. Russell Smouse on Brief) for Appellees.

l4a

HAYNSWORTi:, Chief Judge:

Presented on this appeal is the civil counterpart to

United States v. Mandel, 602 F.2d 653 (4th Cir.) (en banc),

modifying and rev’g, 591 F.2d 1347 (4th Cir. 1979).

Plaintiffs claim to be defrauded sellers of stock in the

Marlboro Race Track. Suit is brought under the Securities

Exchange Act of 1934 § 10(b), 15 U.S.C. § 78) (b), and rule

10b-5, 17 C.F.R. § 240.10b-5. Also charged is a violation of

Maryland’s blue sky law, Md. Corps. & Ass’ns Code Ann.

§ 11-703 (a)(2) (Supp. 1979), as well as common law fraud.

The defendants, with two additions, are the same indi-

viduals who were indicted in the criminal proceeding.

The district court held that the bar of statute of

limitations required dismissal of the § 10(b) claims. Since

the federal claims were dismissed prior to trial, the

pendent state claims were dismissed as well. See United

Mine Workers v. Gibbs, 383 U.S. 715, 726 (1966). Plaintiffs

contend that the district court relied upon the wrong

stetute of limitations and that, in any event, the incom-

petency of one of the plaintiffs tolled the running of the

statute.

We affirm for reasons slightly different from those

stated in the district court opinion. O’Hara v. Kovens, 473

F. Supp. 1161 (D. Md. 1979).

Since a private right of action under § 10(b) is implied,

the timeliness of a suit filed under that section is

determined by reference to the forum state’s law of

limitations. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 210

n.29 (1976); Holmberg v. Armbrecht, 327 U.S. 392, 395

(1946). Private actions under Maryland’s blue sky law

must be commenced within one year of a reasonable daie

of discovery. Md. Corp. & Ass’ns Code Ann. § 11-703(f).

The district court relied upon this statute in dismissing

the suit. The plaintiffs contend that the court should have

looked to Maryland’s three year statute of limitations

l5a

which is applicable to civil actions without specified time

limitations and, as a consequence, applicable to common

law fraud. Md. Cts. & Jud. Proc. §5-101. Under this

section, suit would have been timely filed.'

The thrust of plaintiffs’ argument is that this sellers’

suit is more closely analogous to common law fraud than it

is to any cause of action which was available under

Maryland’s blue sky law as of the date this cause of action

accrued. Two differences between the state’s blue sky law

and the federal scheme are suggested. First, there appears

to be no requirement of scienter under Maryland’s blue

sky statute, while Ernst & Ernst, supra, has established

scienter as a requirement in private actions under § 10(b)

and rule 10b-5. We agree with the district court that this

distinction does not warrant an adoption of the comimon

law fraud statute of limitations. 473 F. Supp. at 1165. The

federal and state securities laws both promote the same

policy of full disclosure in stock transactions. This com-

monality of purpose overrides lesser distinctions which

may arise in the implementation of the regulatory

schemes. Morris v. Stifel, Nicolaus & Co., Inc., 600 F.2d

139, 142-46 (8th Cir. 1979); Dupuy v. Dupuy, 551 F.2d

1005, 1023-24 n.31 (5th Cir. 1977); see also Fox uv.

Kane-Miller Corp., 542 F.2d 915, 918 (4th Cir. 1976);

Newman v. Prior, 518 F.2d 97, 100 (4th Cir. 195);

Vanderboom v. Sexton, 422 F.2d 1233, 1236-41 (8th Cir.

1970). Second, plaintiffs note that prior to July 1, 1976,

Maryland’s blue sky law did not prive a civil remedy for

defrauded sellers. See Goodman v. Poland, 395 F. Supp.

660 (D. Md. 1975). Thus, when this cause of action

accrued, under state law, a defrauded seller of securities

could proceed with a private action only for common law

fraud. Plaintiffs argue that this lack of a securities fraud

private remedy under state law, precludes application of

the blue sky statute of limitations to plaintiffs’ § 10(b)

claims. We do not agree.

‘The district court assumed that this cause of action had

accrued on November 24, 1975, the date upon which the Mandel

indictments issued. Suit was filed on November 22, 1978.

16a

Although Maryland’s blue sky law did not establish a

private remedy for defrauded sellers until after July 1,

1976, the blue sky law did proscribe the specific behavior

challenged in this suit under § 10(b) and rule 10b-5. It

provided criminal sanctions to support a seller’s right. Md.

Corps. & Ass’ns Code Ann. §§ 11-301, 11-417.2 We think

this latter factor is more significant, for present purposes,

than is Maryland’s former lack of a seller’s private right of

action. The fact that one statutory scheme permits a seller

to sue, while the other does not, in no way undermines the

simple truth that the federal and state statutes at issue

here were designed to achieve similar ends. Both were

designed to protect the securities market from manipula-

tive and deceptive practices by buyers and sellers.

When borrowing a state statute of limitations for federal

purposes, a court should look to the statute which most

clearly addresses the same or similar policy considerations

as are addressed by the federal right being asserted. It is

not necessary that the state statute operate in the same

fashion as the federal scheme, nor is it necessary that the

state statute describe a cause of action identical to the

federal cause at issue. Morris v. Stifel, Nicolaus & Co.,

Inc., supra, 600 F.2d at 142-146; Dupuy v. Dupuy, supra,

551 F.2d at 1023-24 n.31. There simply must be a

commonality of purpose between the federal right and the

state statutory scheme so that it is reasonable to subject

the federal implied right to the statute of limitations

provided by state law. By comparison, the shared purposes

? Section 11-301 provides:

It is unlawful for any person, in connection with the offer,

sale, or purchase of any security, directly or indirectly to:

(1) Employ any device, scheme, or artifice to de-

fraud;

(2) Make any untrue statement of a material fact

or omit to state a material fact necessary in order to

make the statements made, in the light of the

circumstances under which they are made, not mis-

leading; or

(3) Engage in any act, private, or course of business

which operates or would operate as a fraud or deceit

on any person.

17a

between § 10(b) and common law fraud are generalized at

best. In Fox v. Kane-Miller Corp., 542 F.2d 915, 918 (4th

Cir. 1976), we held that the statute of limitations found in

Maryland’s blue sky law, Md. Corp. & Ass’ns Code Ann.

§ 11-703(f), would be applicable to implied actions arising

under §10(b). We see no reason to stray from that

holding.’

Il.

Plaintiffs further claim that the running of the statute

of limitations should have been tolled by the incompetency

of one of the plaintiffs.‘ In Johnson v. Railway Express

Agency, 421 U.S. 454 (1975), the Court stated

Any period of limitation . . . is understood fully

only in the context of the various circumstances that

suspend it from running against a particular cause of

action. Although any statute of limitations is neces-

sarily arbitrary, the length of the period allowed for

instituting suit inevitably reflects a value judgment

concerning the point at which the interest in favor of

protecting valid claims are outweighed by the in-

terests in prohibiting the prosecution of stale ones. In

virtually all statutes of limitations the chronological

length of the limitation period is interrelated with

provisions regarding tolling, revival, and questions of

application. In borrowing a state period of limitation

for application to a federal cause of action, a federal

* In Roberts v. Magnetic Metals Co., 611 F.2d 450 (3d Cir.

1979), a split panel of the Third Circuit found that in a seller’s

suit, the lack of a seliler’s remedy under state law required the

court to rely upon a common law fraud statute of limitations.

However, the state securities law at issue in Roberts provided

“no protection to sellers or tenderers of securities.” Jd. at 453. As

discussed in the text, Maryland’s securities law did provide

protection for sellers. Thus, the problem faced in Roberts is not

presented here, i.e., whether a court should apply a blue sky

statute of limitations when the blue sky law does not regulate

the behavior being challenged. See also McNeal v. Paine, Weber,

Jackson & Curtis, 598 F.2d 888 (5th Cir. 1979).

*‘ Josephine O’Hara was incompetent when this cause of

action accrued. However, her sons, also named plaintiffs, have

been her guardians since November of 1976.

tas

18a

court is relying on the State’s wisdom in setting a

limit, and exceptions thereto, on the prosecution of a

closely analogous claim.

Id. at 453-64. Under this reasoning we must apply the

tolling provisions provided by Maryland law. See also

Board of Regents v. Tomanio, — Us 68 Uae:

4556, 4558-59 (May 20, 1980). Section 11-703(f) makes no

provision for tolling on grounds of incompetency. We are

not empowered to engraft such a provision onto the

Maryland Code, and the facts of this case do not warrant

an application of federal equitable relief. See Tomanio,

supra, __ U.S. at —, 48 U.S.L.W. at 4559-60; Johnson,

supra, 421 U.S. at 465.

Affirmed.

19a

Securities Exchange Act of 1934, § 10

15 U.S.C. § 78

Manipulative and deceptive devices

It shall be unlawful for any person, directly or indirect-

ly, by the use of any means or instrumentality of

interstate commerce or of the mails, or of any facility of

any national securities exchange—

(a) To effect a short sale, or to use or employ any

stop-loss order in connection with the purchase or sale, of

any security registered on a national securities exchange,

in contravention of such rules and regulations as the

Commission may prescribe as necessary or appropriate in

the public interest or for the protection of investors.

(b) To use or employ, in connection with the purchase or

sale of any security registered on a national securities

exchange or any security not so registered, any manipula-

tive or deceptive device or contrivance in contravention of

such rules and regulations as the Commission may

prescribe as necessary or appropriate in the public interest

or for the protection of investors.

Securities Exchange Commission Rule 10b-5

17 C.F.R. § 240.10b-5

Employment of manipulative and deceptive devices

It shall be unlawful for any person directly or indirectly,

by the use of any means or instrumentality of interstate

commerce, or of the mails or of any facility of any national

securities exchange,

(a) To employ any device, scheme, or artifice to defraud,

(b) To make any untrue statement of a material fact or

to omit 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

20a

which operates or would operate as a fraud or deceit upon

any person, in connection with the purchase or sale of any

security.

Maryland Securities Act Md. Code Ann.,

Corp. and Assoc. Art. § 11-703

(as enacted Ann. Code

of Md. 1957, art.

32A, § 34; 1975, ch 311, § 2)

Civil liabilities.

(a) When seller is liable. — A person is civilly liable to

the person buying a security from him if he:

(1) Offers or sells the security in violation of $$ 11-

304(b), 11-401, or 11-501 of this title, or of any rule or

order under $11-205 of this title which requires the

affirmative approval of sales literature before it is used; or

(2) Offers or sells the security 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

are made not misleading, the buyer not knowing of the

untruth or omission, and if he does not sustain the burden

of proof that he did not know, and in the exercise of

reasonable care could not have known, of the untruth or

omission.

(b) Extent of liability. — (1) A buyer may sue either at

law or in equity:

(i) On tender of the security, to recover the considera-

tion paid for the security, together with interest at 6

percent per year from the date of payment, costs, and

reasonable attorneys’ fees, less the amount of any income

received on the security; or

(ii) If he no longer owns the security, for damages.

2la

(2) Damages are the amount that would be recoverable

on a tender less the value of the security when the buyer

disposed of it and interest at 6 percent per year from the

date of disposition.

Every person who directly or indirectly controls a seller

liable under subsection (a) of this section, every partner,

officer, or director of the seller, every person occupying a

similar status or performing similar functions, every

employee of the seller who materially aids in the sale, and

every broker-dealer or agent who materially aids in the

sale are also liable jointly and severally with and to the

same extent as the seller, unless the nonseller who is so

liable sustains the burden of proof that he did not know,

and in exercise of reasonable care could not have known,

of the existence of the facts by reason of which the liability

is alleged to exist.

(2) There is contribution as in cases of contract among

the several persons so liable.

(d) Time of making tender. — Any tender specified in

this section may be made at any time before entry of

judgment.

(e) Survival of cause of action. — Every cause of action

under this statute survives the death of any person who

might have been a plaintiff or defendant.

(f) Limitation of actions; effect of offer of refund. — (1)

Except as provided in paragraph (2) of this subsection, a

person may not sue under this section more than three

years after the contract of sale.

(2) An action may not be maintained:

(i) To enforce any liability created under subsection (a)

(1) of this section, unless brought within one year after the

violation on which it is based; or

22a

(ii) To enforce any liability created under subsection (a)

(2) of this section, unless brought within one year after the

discovery of the untrue statement or omission, or after the

discovery should have been made by the exercise of

reasonable diligence.

(3) A person may not sue under this section:

(i) If the buyer received a written offer, before suit and

at a time when he owned the security, to refund the

consideration paid together with interest at 6 percent per

year from the date of payment, less the amount of any

income received on the security, and he failed to accept the

offer within 30 days of its receipt; or

(ii) If the buyer received the offer before suit and at a

time when he did not own the security, unless he rejected

the offer in writing within 30 days of its receipt.

(g) Effect of making or performing contract with know-

ledge of facts. — A person may not base any suit on any

contract if he:

(1) Has made or engaged in the performance of the

contract in violation of any provision of this title or any

rule or order under this title: or

- (2) Has acquired any purported right under the contract

with knowledge of the facts by reason of which its making

or performance was in violation.

(h) Provision for waiver of compliance with section void.

— Any condition, stipulation, or provision binding any

person acquiring any security to waive compliance with

any provision of this title or any rule or order under this

title is void.

(i) Rights and remedies additional to others. — The

rights and remedies provided by this title are in addition

to any other rights or remedies that may exist at law or in

equity, but this title does not create any cause of action

not specified in this section or § 11-410 of this title.

23a

(as amended Ann. Code of Md. 1976,

Ch. 615 § 1)

Civil liabilities.

(a) When seller or purchaser is liable. — (1) A person is

civilly liable to the person buying a security from him if

he:

(i) Offers or sells the security in violation of §§ 11-304

(b), 11-401, or 11-501 of this title, or of any rule or order

under § 11-205 of this title which requires the affirmative

approval of sales literature before it is used; or

(ii) Offers or sells the security 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

are made, not misleading, the buyer not knowing of the

untruth or omission, and if he does not sustain the burden

of proof that he did not know, and in the exercise of

reasonable care could not have known, of the untruth or

omission.

(2) A person is civilly liable to the person selling a

security to him if he:

(i) Offers to purchase or purchases the security in

violation of §§ 11-902, 11-903, 11-904, or 11-905 of this

title, or

(ii) Offers to purchase or purchases the security 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 light of the circumstances

under which they are made, not misleading, the seller not

knowing of the untruth or omission, and if he does not

sustain the burden of proof that he did not know, and in

the exercise of reasonable care could not have known, of

the untruth or omission.

(b) Extent of liability. — (1) A buyer may sue either at

law or in equity:

24a

(i) On tender of the security, to recover the considera-

tion paid for the security, together with interest at 6

percent per year from the date of payment, costs, and

reasonable attorneys’ fees, less the amount of any income

received on the security; or

(ii) If he no longer owns the security, for damages.

(2) A seller may sue either at law or in equity:

(i) On tender of the consideration paid for the security,

to recover the security, together with the amount of any

income received on the security, costs, and reasonable

attorneys’ fees; or

(ii) If the buyer no longer owns the security, for

damages.

(3) For the purposes of subsection (b) (1) (ii) of this

section, damages are the amount that would be recover-

able on a tender less the value of the security when the

buyer disposed of it and interest at 6 percent per year from

the date of disposition.

purchaser. — (1) Every person who directly or indirectly

controls a person liable under subsection (a) of this section,

every partner, officer, or director of the person liable,

every person occupying a similar status or performing

similar functions, every employee of the person liable who

materially aids in the sale or purchase, and every

broker-dealer or agent who materially aids in the sale or

purchase are also liable jointly and severally with and to

the same extent as the person liable, unless the nonseller

or nonbuyer who is so liable sustains the burden of proof

that he did not know, and in exercise of reasonable care

could not have known, of_the existence of the facts by

reason of which the liability is alleged to exist.

(2) There is contribution as in cases of contract among

the several persons so liable.

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25a

(f) Limitation of actions; effect of offer of refund. — (1) A

person may not sue under this section after the earlier to

occur of three years after the contract of sale or purchase

or the time specified in paragraph (2) of this subsection.

(2) An action may not be maintained:

(1) To enforce any liability created under subsections (a)

(1) (i) or (a) (2) (i) of this section, unless brought within

one year after the violation on which it is based; or

(ii) To enforce any liability created under subsections

(a) (1) (ii) or (a) (2) (ii) of this section, unless brought with-

in one year after the discovery of the untrue statement or

omission, or after the discovery should have been made by

the exercise of reasonable diligence.

(3) A person may not sue under this section:

(i) If the buyer received a written offer, before suit and

at a time when he owned the security, to refund the

consideration paid together with interest at 6 percent per

year from the date of payment, less the amount of any

income received on the security, and he failed to accept the

offer within 30 days of its receipt;

(ii) If the buyer received the offer before suit and at a

time when he did not own the security, unless he rejected

the offer in writing within 30 days of its receipt; or

(iii) If the seller received a written offer from the buyer,

before suit, to return the security, together with the

amount of any income received on the security, less

interest at 6 percent per year from the date of payment,

and he failed to accept the offer within 30 days of its

receipt.

(i) Rights and remedies additional to others. — The

rights and remedies provided by this title are in addition

to any other rights or remedies that may exist at law or in

equity, but this title does not create any cause of action

26a

not specified in this section or §§ 11-410 or 11-906 of this

title.

Maryland Code Annotated

CourTs AND JUDICIAL PROCEEDINGS

Tite 5.

LIMITATIONS AND PROHIBITED ACTIONS.

Subtitle 1. Limitations.

§ 5-101. Three-year limitation in general.

A civil action at law shall be filed within three years

from the date it accrues unless another provision of the

Code provides a different period of time within which an

action shall be commenced.

Subtitle 2. Computing Time.

§ 5-201. Persons under a disability.

(a) Extension of time. — When a cause of action subject

to a limitation under Subtitle 1 accrues in favor of a minor

or mental incompetent, that person shall file his action

within the lesser of three years or the applicable period of

limitations after the date the disability is removed.

(b) Exception. — This section does not apply if the

statute of limitations has more than three years to run

when the disability is removed.

from the State, or marriage are not disabilities which

extend the statute of limitations.

§ 5-203. Ignorance of cause of action

induced by fraud.

If a party is kept in ignorance of a cause of action by the

fraud of an adverse party, the cause of action shall be

deemed to accrue at the time when the party discovered, or

by the exercise of ordinary diligence should have discov-

ered the fraud.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.