Gannett Co., Inc. v. Register Pub. Co.

RULING ON AVAILABILITY OF RESCISSION

On October 20, 1976, the Hartford Times ceased publication. Its obituary notice stated that the paper had been “strangled by litigation.” The controversy has not ended with its demise. The issue now pending *822 concerns whether Gannett Co., Inc. (“Gannett”) or The Register Publishing Company (“the Register”) owns what remains of the paper. In lawyer’s language, the question is whether the Register is entitled to rescind the contract by which it agreed to purchase from Gannett more than 99% of the shares of The Hartford Times, Inc.

I. INTRODUCTION

Prior to September 30, 1973, and for many years before that date, the Hartford Times had been owned and operated 1 by Gannett Co., Inc., a major publisher of newspapers in many cities across the country. After negotiations culminating in a closing on October 10, 1973, Gannett entered into a Purchase Agreement for the sale of the Times to The Register Publishing Company, which publishes two newspapers in New Haven, Connecticut. The Purchase Agreement provided that Gannett would sell its shares of the common stock of The Hartford Times, Inc. together with all outstanding stock of Community Offset, Inc. to the Register for an aggregate purchase price of $7,000,000, with appropriate adjustments in the purchase price to be made based on the difference between current assets and liabilities as reflected on the consolidated balance sheet to be prepared for the Times.

Shortly after the closing the Register became aware of discrepancies in the circulation statistics and financial statements of the Times as provided by Gannett. It learned of overvaluation of assets and of a series of devices that had been used for several years to conceal the reporting of inflated circulation figures. Consequently the Register decided not to pay Gannett the amount due under the net current asset adjustment provisions of the Purchase Agreement. Audits conducted over the next several weeks confirmed the Register’s suspicions that the information supplied to it by Gannett prior to the execution of the Purchase Agreement had been false and misleading in many respects.

Settlement negotiations began in December of 1973 and continued for some months with a view toward a resolution of the dispute between the Register and Gannett short of litigation. When these efforts fell through, Gannett filed this federal court action against the Register on April 15, 1974, for failure to pay the amount due under the net current asset adjustment provision. On June 12, 1974, the Register filed its counterclaim, alleging breach of contract, common law fraud, and securities law violations. In its counterclaim the Register sought compensatory and exemplary damages, or in the alternative, rescission of the Purchase Agreement and restitution of all benefits conferred by it on Gannett.

The present issue concerns the affirmative defenses Gannett has raised to the claim for rescission. Gannett has admitted for the limited purpose of obtaining a ruling on its affirmative defenses that:

On October 10, 1973 facts and circumstances existed which both under the common law and under the provisions of the Securities Exchange Act of 1934 and S.E.C. Rule 10b-5 entitled The Register Publishing Company to rescind the Purchase Agreement between the parties dated October 10, 1973.

In effect, Gannett has demurred to the counterclaim and seeks an adjudication of its defenses to the rescission claim. The essence of the affirmative defenses is that regardless of the existence or extent of frauds rendering the contract voidable at the option of the Register, the Register’s conduct since October 10, 1973, and the changes it has made in the operation of the Times bar the Register from seeking rescission. The Court held a severed trial on the affirmative defenses to rescission, and received extensive evidence on the disputed factual issues. 2 The parties have thorough *823 ly briefed the legal issues bearing on the sufficiency of the affirmative defenses and the availability of rescission. After full and careful consideration, it is the conclusion of the Court that rescission is unavailable.

Prior to discussion of the controlling legal standards and the application of the facts to them, a pending motion should be considered. On May 21, 1976, almost two years after the filing of the counterclaim, the Register moved to amend its counterclaim to add claims under §§ 12(2) and 17 of the Securities Act of 1933, 15 U.S.C.A. §§ 777 (2) and 77q, and the Connecticut Securities Act, Conn.Gen.Stat. §§ 36-338 and 36-346. The original counterclaim had pleaded only breach of contract, common law fraud, and violation of § 10b of the Securities Exchange Act of 1934 and Rule 10b-5 of the Securities and Exchange Commission. Gannett has vigorously resisted the motion to amend on the grounds that the amendment would enlarge the Register’s substantive rights to Gannett’s prejudice at a time when the right to rescission granted by these statutes would ordinarily have terminated by virtue of the statute of limitations, and that the amendment would prejudicially inject vast new issues into the case and result in a waste of the efforts to date to narrow the trial issues.

For reasons that will become apparent after consideration of the causes of action the Register seeks to plead by this amended counterclaim, Gannett’s fears are unwarranted. The defenses Gannett seeks to prove to prevent the Register from obtaining rescission are available under the new statutory sections as well. Thus the argument of prejudice evaporates. Further, the essential elements of the Register’s cause of action under the new claims have all been in the case from the beginning. S.E.C. Rule 10b-5, pleaded in the original counterclaim, makes it unlawful in connection with the sale of any security

(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

(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person .

The wording of § 17 of the 1933 Act and § 36-338(a) of the Connecticut Act is substantially similar, and § 12(2) of the 1933 Act creates civil liability where a prospectus or oral communication in connection with the sale of a security “includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading.” Clearly the allegations of the original counterclaim, which repeatedly refer to material falsifications and misleading statements and omissions, set forth a state of facts that can support the new causes of action as well. 3 No new transaction is involved, and no new discovery is necessary. Further, though Gannett argues that the amendment lacks the allegations necessary to supply jurisdiction under either the 1933 Act or the Connecticut Act, these jurisdictional prerequisites are implicit from a fair reading of the original counterclaim taken as a whole. 4 Accordingly, the motion to amend is granted. 5

*824 II. LEGAL STANDARDS

A number of legal questions bear on the availability of rescission. These questions are analyzed in this Part prior to a full discussion of the facts in order to illuminate the significance of the facts adduced. The sections in this Part deal with the legal claims in turn, beginning with the breach of contract and common law fraud causes of action and proceeding to the causes of action derived from the federal and state securities regulation statutes. Then Part III will apply the legal principles to the facts as they have been developed at trial.

A. Breach of Contract and Common Law Fraud Claims

Since jurisdiction over the common law contract and fraud claims is based on diversity of citizenship, this Court must apply to those claims the choice of law rules of the forum state, Connecticut. Klaxon Co. v. Stentor Electric Mfg. Co., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941). Connecticut law will give effect to a good-faith stipulation of the parties to a contract selecting the substantive law to govern the interpretation and enforcement of their agreement. Pollak v. Danbury Mfg. Co., 103 Conn. 553, 131 A. 426 (1925); Fairfield Lease Corp. v. Pratt, 6 Conn.Cir. 537, 278 A.2d 154 (1971); Vending Credit Corp. v. Trudy Toys Co., 5 Conn.Cir. 629, 260 A.2d 135 (1969). The parties made such a stipulation in § 15(c) of the Purchase Agreement, which provides that “this Agreement shall be construed and governed by the Laws of the State of New York.” By virtue of this provision, the substantive law of the State of New York governs the contract claims. 6

New York law, like the law of most states, gives an injured party the option to rescind a contract induced by fraud. But the right does not persist indefinitely. New York law is very clear that the right to rescind for fraud must be exercised within a reasonable time after the injured party learns of the wrong. 7 If the injured party neglects to notify the other party promptly of his intention to rescind, or if he accepts benefits under the contract and thereby affirms it, he loses his right to rescind. New York Tel. Co. v. Jamestown Tel. Corp., 282 N.Y. 365, 26 N.E.2d 295 (1940); Richard v. Credit Suisse, 242 N.Y. 346, 152 N.E. 110 (1926); Gravenhorst v. Zimmerman, 236 N.Y. 22, 139 N.E. 766 (1923); Soviero Bros. Contracting Corp. v. City of New York, 286 App.Div. 435, 142 N.Y.S.2d 508 (1st Dept. 1955); McNaught v. Equitable Life Assurance Soc’y, 136 App.Div. 774, 121 N.Y.S. 447 (2d Dept. 1910); Big Top Stores, Inc. v. Ardsley Toy Shoppe, Ltd., 64 Misc.2d 894, 315 N.Y.S.2d 897 (S.Ct. N.Y. Co. 1962); Flamm v. Noble, 43 N.Y.S.2d 922 (S.Ct. N.Y. Co. 1943), aff’d, 266 App.Div. 1001, 45 *825 N.Y.S.2d 413 (1st Dept. 1943). Restatement, Contracts, §§ 349, 480, 482, 483, 484.

A party has a right to rescind a contract, where he was induced to enter into it by fraud; but he must do so promptly upon the discovery of the fraud, and cannot speculate as to whether it would be more profitable to affirm the contract or rescind it.

Sarantides v. William's, Belmont & Co., Inc., 180 N.Y.S. 741, 743 (S.Ct. App.Term 1920). In determining whether the injured party has lost the power to avoid the contract by delaying unreasonably in manifesting to the other party his intention to avoid the transaction, the speculative character of the contract is an influential factor. Restatement, Contracts, § 483. Comment (a) to this section of the Restatement states:

But the injured party delays giving information of his intention at his peril. He cannot lie by and delay choosing whether avoidance or affirmance will be more profitable, especially if the contract relates to a speculative transaction.

It is somewhat misleading to think of the choice an injured party has to make between avoiding and affirming a contract in “election of remedies” terms. 8 The Register argues that under Rule 8 of the Federal Rules of Civil Procedure it is permitted to use alternative pleadings, and that there is nothing improper about its prayer in the alternative for damages or rescission in the counterclaim. 9 As a matter of pleading, this is true. But the real issue is not one of pleading but of substantive contract law. Professor Moore has distinguished “election of inconsistent remedies” from “instances where a choice, afforded by substantive law, terminated rights upon which the remedy invoked was dependent:”

One fraudulently induced into a contract, for instance, may, as a matter of substantive law, either affirm or disaffirm the agreement. An election of the substantive right to affirm extinguishes the substantive right to disaffirm. And so an attempt to invoke the remedy of rescission after an action on the contract may fail, not because of election of inconsistent remedies, but because the plaintiff no longer has the substantive right to disaffirm. [emphasis added].

IB Moore’s Federal Practice ¶ 0.405[7]. 10 It is the substantive law of contracts that extinguishes the right, and not any doctrine of pleading.

Similarly, the use of “waiver” terminology only obscures whether affirmance or avoidance has taken place. The Register argues that unless it “waived” its rescission remedy in writing, rescission is available as a matter of law by virtue of § 15(d) of the Purchase Agreement, which reads:

No waiver of any provision of this Agreement shall be effective unless in writing and similarly signed, nor shall any failure of any party to enforce any right or remedy hereunder be deemed a waiver of such right or remedy for the future in the same or any situation.

But if the Register affirmed the contract, then its right to rescind terminated by operation of law, regardless of whether it “waived” the right in writing. 11

The right to terminate in the face of a breach is only an option to declare the contract at an end; if the contract is continued, the party doing so has not, *826 strictly speaking, “waived” his right but has executed it .in favor of continued contractual relations.

Apex Pool Equipment Corp. v. Lee, 419 F.2d 556, 562 (2d Cir. 1969).

For similar reasons the “laches” language used by the parties tends to obscure the real issue. When the Register argues that the doctrine of laches is inapplicable because the action is one at law rather than in equity, its attack on the use of a technical word may be abstractly correct; but when it implies that the remedy of rescission continues to be available as long as suit is filed within the statute of limitations, it is simply in error. 12 The right itself, and not just the remedy, is extinguished unless the injured party perfects the right by promptly taking the affirmative steps required by the law of contracts. 13 In the language of § 480 of the Restatement of Contracts, the power to avoid the transaction is conditional on an offer made promptly after acquiring knowledge of the fraud. Sections 483 and 484 provide that the power of avoidance is lost if the injured party unreasonably delays manifesting his intention to avoid to the other party, or if he manifests an intention to affirm, or if he exercises dominion over the object of the contract. The emphasized words are substantive and not procedural concepts.

Exercise of acts of ownership over the subject matter of the contract will validate the transaction and terminate the power of avoidance, regardless of whether the other party has suffered any prejudice. Restatement, Contracts, §§ 482, 484. The injured party must offer to restore the status quo ante by tendering what he has received in substantially as good condition as when it was transferred to him. Restatement, Contracts, §§ 349, 480. But the status quo ante requirement is not inflexible. Mere depreciation in market value will not prevent rescission, and other factors may make the equitable remedy of rescission available even though the property cannot be returned in the same condition. Restatement, Contracts, § 349, comment (b); 17 Am.Jur.2d, Contracts, § 514; Lipsky v. Commonwealth United Corporation, 551 F.2d 887 (2d Cir. 1976, applying New York law). If the wrongful acts of the defrauding party are what make restoration of the status quo impossible, rescission is not foreclosed. Restatement, Contracts, § 349(2)(b).

Of course, the factual issues in determining whether an injured party has exercised acts of ownership over the property and whether changes in the property render rescission inequitable are substantially more difficult where the property is a multi-million dollar business rather than a car or a cow or a country estate. The newspaper business poses particularly intractable problems since someone — whether plaintiff or defendant-must make daily decisions to keep the paper running in order to preserve subscription and advertising revenues which are highly sensitive to a variety of circumstances. The cases that have dealt with rescission of a contract for the sale of a business have evolved a rule that the injured party need not ignore the business and allow it to fail if the other party refuses to take it back upon a timely demand for rescission. 14 Rather, as long as the injured party’s actions can be fairly viewed as necessary steps to preserve the value of the business for the one ultimately determined *827 to be the owner, rescission is still available. 15

A few cases illustrate the foregoing principles, in the context of relatively clearcut factual situations. In Caruso v. Moy, 164 Neb. 68, 81 N.W.2d 826 (1957), the plaintiff bought a prosperous Chinese-American restaurant, changed the bill of fare to Italian-American, and tried to rescind the contract of sale on the ground of fraud when business fell off. The court found that he had continued to operate the business for too long a period of time after learning of the fraud before seeking rescission and that he had thereby made the business his own. He changed the restaurant substantially so that business fell off to less than half what it had been previously, possibly due in part to his own mismanagement. 16 On these facts, he was not entitled to rescission.

In Sy-Jo Luncheonette, Inc. v. Marsav Distributors, Inc., 279 App.Div. 715, 108 N.Y.S.2d 349 (1st Dept. 1951), the plaintiffs discovered the alleged fraud within the first week after the purchase of the business. Yet they continued to operate the business for more than two months before sending a notice of election to rescind. Further, they inaugurated new pricing policies and changed the method of operating the business, causing a decline in gross receipts. Rescission was held to be unavailable. See also Gargotto v. Sherman, 297 Ky. 597, 180 S.W.2d 565 (1944); Meyers v. Hoops, 140 N.E.2d 65 (Ct.App. Ohio 1955); Hampton v. Suter, 330 S.W.2d 402 (Ct.App. Ky. 1959).

But other cases have granted rescission even though the injured party has continued to operate the business. Espedally where the property may depreciate materially if abandoned, as where a large part of its value stems from the fact that it is a going concern, the injured party may take such steps as are reasonably necessary to conserve the value of the business for the one ultimately determined to be the owner. 17 The duty of care of a defrauded party who continues to operate a business for the benefit of the other party after sending a timely rescission notice and tendering the property back is that of a gratuitous bailee. Widmer v. Leffelman, 187 Or. 476, 212 P.2d 737 (1949), later appeal, 196 Or. 401, 249 P.2d 476 (1952).

B. Securities Legislation Claims

The counterclaim as amended alleges violations of four statutory sections, § 10b of the Securities Exchange Act of 1934 (with the S.E.C.’s implementing Rule 10b — 5); 18 §§ 12(2) and 17 of the Securities Act of 1933; 19 and Conn.Gen.Stat. § 36-338. 20 The legal standards to be applied in determining whether an injured party is entitled to rescission for violation of these anti-fraud provisions are essentially the same as the standards developed in common law fraud cases.

In Rule 10b-5 cases the law is well established that rescission must be demanded promptly after discovery of the fraud, or the right to rescission will be lost.

Rescission is a radical move, and the law exacts the election of that course to be asserted without wait. The demand is that advice of the determination be given within a reasonable time after discovery of the ground for rescission.

*828 This principle is stringently administered. Reasonable time is inceptive from the receipt by the rescinder of work putting him on notice. It is then incumbent upon him to pick up the scent and nose to the source, [citations omitted]. If the quest confirms the suspicion, then he must make decision with reasonable dispatch. Failing this, entitlement to rescission disappears.

Baumel v. Rosen, 412 F.2d 571, 574 (4th Cir. 1969), cert. denied, 396 U.S. 1037, 90 S.Ct. 681, 24 L.Ed.2d 681 (1970).

The logic of this rule is particularly compelling when the property in dispute consists of stocks or fungibles of fluctuating value. A party could otherwise sit back without notification to the wrongdoer and, within the allowable period to' sue, watch the market go up or down, thereby speculating on the success or value at the total risk of the wrongdoer. Although the law does not favor a wrongdoer, neither does it promote speculative damages at his expense.

Myzel v. Fields, 386 F.2d 718, 740-41 n.15 (8th Cir. 1967), cert. denied, 390 U.S. 951, 88 S.Ct. 1043, 19 L.Ed.2d 1143 (1968). “The securities laws contemplate no such, in vestment guarantee.” Hickman v. Groesbeck, 389 F.Supp. 769, 780 (D.Utah 1974). Prejudice inevitably flows from delay where there is a precipitous decline in the value of the stock the defrauded buyer now seeks to return. “Further rationale for the requirement of immediacy is that every day’s lapse renders more difficult the very aim of rescission: to return the parties to statu quo ante.” Baumel v. Rosen, supra at 575. The cases upholding these principles in Rule 10b-5 actions are legion, 21 and the same rules have consistently been applied in actions under §§12 and 17 of the 1933 Act as well. 22

Whether the Connecticut Act requires comparable promptness is a more troublesome question, since no Connecticut cases or cases interpreting the corresponding provision of the Uniform Securities Act in any other jurisdiction 23 have dealt with the point. The Connecticut Act contains the following provision not found in either of the federal acts: 24

§ 36-346(e). No person may sue under this section more than two years after the contract of sale. No person may sue under this section (1) 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 six per cent per annum from the date of payment, less the amount of any income received on the security, and he failed to accept the offer within thirty days of its receipt, or (2) if the buyer received such an offer before suit and at a time when he did not own the security, unless he rejected the offer in writing within thirty days of its receipt.

The. Register claims that this section abrogates the common law rule requiring promptness in notifying of intention to re *829 scind. It argues that this section gives a defrauding seller all the protection it needs against the risk that a buyer will speculate before deciding to rescind. According to the Register, all Gannett needed to do to cut short the period of its exposure to a rescission claim was to make its own offer of rescission in the manner prescribed by the statute. Having failed to do so, it cannot later complain that the Register brought suit some eight months after the transaction but well within the two-year limitation period.

This is a conceivable reading of the statutory language, but not a persuasive one. On its face the provision only sets up a two-year statute of limitations and provides a way for the seller to cut short the limitations period by offering to return the consideration paid to the buyer. 25 The rule requiring promptness in demanding rescission has consistently been applied apart from the statute of limitations, 26 and serves significantly different purposes. A statute of limitations, as a statute of repose, enables a potential defendant to close the books on transactions in the past after a certain length of time has passed. It bars all claims for any form of relief. It also protects to some degree against failing memories and loss of evidence due to lapse of time. But the promptness rule limits only the time in which the remedy of rescission is available. Although it obviously overlaps in function with the statute of limitations, it serves the particular purpose of promoting early resolution of whether the seller or the buyer will be required to take responsibility for a property the sale of which was induced by fraud at a time when it is reasonably likely that the property returned resembles the property sold. Promptness is required not only for the reasons promoted by a statute of limitations, but also because of the strong policy against forcing return of the property on the seller when lapse of time — or actions taken by the buyer during that time — have changed the property. Even when the magnitude of the fraud is grave, as is alleged in this case, the law has never allowed the defrauded party to experiment with the property or speculate on its value for as long as he likes within the statute of limitations and then force the wrongdoer to take back a changed item.

Placing the burden on the seller to make the rescission offer, as the Register suggests is proper under this statute, would be a drastic change in the law and could often result in considerable unfairness. In many cases the seller may believe that no securities violation occurred, even though the buyer and ultimately a court disagree with him. Until the buyer notifies him of the buyer’s belief that the transaction is tainted and the buyer’s desire to return the property, a seller has no reason to think he needs to make a rescission offer. The Register’s construction of the statute would require a seller to keep track of securities he has sold for two years after the sale, staying vigilantly on the lookout for potential declines in value that might signal a need to make a rescission offer to protect himself. This approach would inject a high degree of needless uncertainty into securities transactions, for no apparent reason other than giving buyers time to speculate. No court appears to have ever given the Register’s construction to this provision. If the legislature intended to abrogate the otherwise universally applied promptness rule, it could surely have found a less oblique way of doing so.

The Register next argues that the anti-waiver provisions of the securities laws entitle it to rescission as a matter of law. These provisions, which are essentially the same in the 1933 and 1934 Acts and in the Connecticut Act, 27 declare that any condi *830 tion, stipulation, or provision binding any person acquiring a security to waive compliance with the securities legislation is void. Like the anti-waiver provision of the Purchase Agreement, these statutory sections do riot abrogate the rule of law that an injured party must take prompt action to notify the other party' of his intention to rescind in order to preserve his rescission right. Nor do they relieve him of his obligation to refrain from treating the property as his own if he expects the other party to take it back. Several federal cases have held that the anti-waiver provisions of the federal laws apply only to purported prior waivers made in connection with the contract of sale and not to conduct after the termination of the transaction. 28 They have held that subsequent conduct evidencing affirmance of the conduct after full knowledge of the fraud extinguishes the substantive right to disaffirm notwithstanding the anti-waiver provisions of the statute. Eyman v. Marsha Development Corp., 301 F.Supp. 931 (E.D.Mo.1969); Junker v. Midterra Associates, Inc., 49 F.R.D. 310 (S.D.N.Y.1970), and cases cited therein. There are apparently no Connecticut cases construing the comparable state law provision, but it is reasonable to assume that the Connecticut courts would interpret it in accordance with the rule evolved by the federal courts in construing identical language.

. The Register further argues that because Gannett violated federal and state securities legislation by perpetrating the frauds, the contract is illegal and thus void as a matter of law without the necessity of notification by the Register of intent to avoid. The argument has two aspects. First, there is a statutory argument based on § 29(b) of the 1934 Act, 15 U.S.C.A. § 78cc(b). That section, which has no counterpart in the 1933 Act or the Connecticut Securities Act, 29 reads in part:

Every contract made in violation of any provision of this chapter or of any rule or regulation thereunder, and every contract . heretofore or hereafter made, the performance of which involves the violation of, or the continuance of any relationship or practice in violation of, any provision of this chapter or any rule or regulation thereunder, shall be void (1) as regards the rights of any person who, in violation of any such provision, rule, or regulation, shall have made or engaged in the performance of any such contract

The Register asserts that by virtue of this statutory provision its contract with Gannett is wholly void. The second aspect of the argument is that under general principles of contract law, apart from the effect of § 29(b), the agreement is void for illegality because Gannett violated state and federal laws.

Neither aspect of the illegality argument finds support in the case law. Section 29(b) has been consistently construed to make contracts in violation of the 1934 Act voidable, not void:

Though § 29(b) speaks in terms of “void” and the guilty party is clearly precluded from enforcing the contract against an unwilling innocent party, just as clearly the innocent party is left free to enforce the contract if he so desires. This being true the contract cannot possibly be considered absolutely and totally void. It is a contract “voidable” at the option of the innocent party. If this contract is “void *831 able,” or void only at the option of the innocent party, the contract must be considered valid until voided by the party having the right of rescission, [emphasis added].

Greater Iowa Corp. v. McLendon, 378 F.2d 783, 792 (8th Cir. 1967); Occidental Life Ins. Co. v. Pat Ryan & Associates, Inc., 496 F.2d 1255 (4th Cir. 1974), cert. denied, 419 U.S. 1023, 95 S.Ct. 499, 42 L.Ed.2d 297 (1974); Reserve Life Ins. Co. v. Provident Life Ins. Co., 499 F.2d 715 (8th Cir. 1974), cert. denied, 419 U.S. 1107, 95 S.Ct. 778, 42 L.Ed.2d 803 (1975); see also Mills v. Electric Auto-Lite Co., 396 U.S. 375, 90 S.Ct. 616, 24 L.Ed.2d 593 (1970); Pearlstein v. Scudder & German, 429 F.2d 1136, 1149 (2d Cir. 1970) (Friendly, J., dissenting). These cases hold that § 29(b) codified the common law principles of illegal bargains. Under these principles, an agreement induced by fraud in violation of the securities acts is not ipso facto void, neither under § 29(b) nor by virtue of the “illegalities” in the formation of the contract. 30 Since such a contract may be either affirmed or avoided by the innocent party, that party faces the same choice under the securities acts when he learns of the fraud as he faces under the common law. If he wishes to avoid the contract, the steps he must take to preserve his rescission remedy are the same as at common law. Similarly, conduct that affirms a fraudulently induced contract under general contract law principles, such as acceptance of benefits under the contract or exercise of acts of ownership over the property, will terminate the injured party’s power to avoid the contract on illegality grounds, where the only illegality is violation of the antifraud provisions of the securities laws.

There is no reason to think the result should be any different under Conn.Gen. Stat. § 36-346. 31 While apparently some states construe their blue sky laws to make contracts void rather than voidable, at least where registration requirements are violated, see 69 Am.Jur.2d Securities Regulation — State § 97, Connecticut does not have any statutory language hinting that this was what the legislature intended for fraud violations. The most the Connecticut statute does is preclude the violator from basing a suit on the contract. See 3 Loss, Securities Regulation 1669-71 (1961). Without a considerably more explicit statutory directive, it would not be appropriate to declare a contract of this type wholly ineffective, with a consequent availability of rescission without regard to promptness of demand.

Finally, the Register argues that regardless of the changes that have taken place in the Times since the time of original transaction, rescission is available because return of the stock certificates restores the status quo to the full extent to which Gannett is entitled.- For this curious proposition the Register cites one securities law case, Occidental Life Ins. Co. v. Pat Ryan & Associates, supra, and a hundred-year-old Supreme Court case, Neblett v. MacFarland, 92 U.S. 101, 104, 23 L.Ed. 471 (1875), for the proposition that “[i]t is no objection to a restoration of property received on a fraudulent sale that it has fallen in value since the date of the transaction.” 32

*832 The Occidental Life case provides no support for the Register’s claim that the possibility of return of the stock certificates preserves the entitlement to rescission. 33 The argument made in that case was that although the transaction involved “securities” in the literal sense, the securities were merely a mechanism for effecting the sale of the assets of a business. The theory was that the stock was not an investment and that its sale was beyond the coverage of the 1934 Act. The Court properly rejected this argument and held the 1934 Act applicable. Gannett has never questioned the applicability of the 1934 Act. Moreover, Occidental Life itself held that rescission was unavailable under both the 1933 and 1934 Acts because of undue delay. The case in no way stands for the proposition