WASHINGTON — The Supreme Court on Tuesday made it significantly easier to use federal anti-fraud laws to police privately negotiated stock sales.
By an 8-1 vote, the court said anti-fraud provisions of federal securities laws may apply when ownership or control of a closely held business is transferred by the sale of stock.
The decision, reached in separate cases from New Jersey and the state of Washington, appeared to resolve a hot debate in federal appeals courts.
About half the federal courts of appeals had ruled that federal securities law does not apply when a private business is sold as a stock sale. Those courts invoked a "sale of business doctrine" that shielded such transactions from federal law.
Under the doctrine, disputes arising out of such stock sales had to be settled under state laws.
Writing for the court Tuesday, Justice Lewis F. Powell said even closely held stock represents a "security" under federal securities laws, and "the sale of business doctrine does not apply" when all such stock or enough to represent a controlling interest in a business is sold.
In the two cases decided Tuesday, two federal appeals courts had reached conflicting decisions.
In the New Jersey case, 50% of the stock of Continental Import and Export Inc., a liquor distributor in Springfield, was bought by Max A. Ruefenacht in 1980.
Ruefenacht agreed to pay $250,000 for the stock and also began taking part in the corporation's business affairs. But he remained a full-time employee of another company.
Ruefenacht later sued the other owners of Continental, charging that they misled him about the value of the corporation and the stock he bought.
The U.S. 3rd Circuit Court of Appeals, based in Philadelphia, ruled last year that the transaction was not exempt from the anti-fraud provisions of federal securities laws. The appeals court ordered a federal trial for Ruefenacht's charges. That ruling was upheld by the Supreme Court on Tuesday.
In the Washington state case, Ivan K. Landreth and his two sons sold their family-owned timber company in Tonasket to a small group of investors in 1977.
The investment group was headed by Samuel S. Dennis III, a Boston lawyer, and the late John Bolten, a retired businessman living in Florida.
Both men had no experience in the lumber industry, and said they relied largely on the Landreths in determining the timber company's value.
Within a year of the purchase, the investors sued for $2.5 million, charging the Landreths with misrepresenting the value of the business.
The suit said the cost of rebuilding the company sawmill, which was partly destroyed in a fire prior to the transaction, proved to be more than the Landreths had said.
The U.S. 9th Circuit Court of Appeals ruled last year that the purchase of 100% of the stock of a closely held corporation is exempt from federal securities laws. That decision was overturned by the Supreme Court on Tuesday.