MUTUAL SHARES CORPORATION, Spingarn Heine & Co., and Norte & Co., Plaintiffs-Appellants v. GENESCO, INC., and W. Maxey Jarman, Defendants-Appellees
No. 405, Docket 31123
United States Court of Appeals Second Circuit
Decided Aug. 14, 1967
384 F.2d 540
Argued April 13, 1967.
As I understand the majority opinion, there was sufficient evidence here to convince the trial judge that there was a scheme to defraud and that the mail was used to further that scheme. This case is controlled by the rule in United States v. Press, 2 Cir., 336 F.2d 1003. Press held that where members of an alleged conspiracy had received knowledge that customers were being misled by solicitation literature and there was general dissatisfaction with the manner in which defendants were conducting their affairs, continued operation despite this knowledge showed the existence of a scheme to defraud. The court there said (p. 1011):
“But evidence that there had been complaints which were called to appellants’ attention was relevant on the issue of appellants’ intent and good faith. The inference might readily be drawn that, since appellants knew that members were being misled by solicitation literature and that there was general dissatisfaction with the manner in which * * * conducted its affairs, continued operation despite this knowledge showed the existence of a scheme to defraud.”
The effect of the majority opinion in the instant case is to refute the Press doctrine. There was sufficient evidence before the trial court to support the inference of knowing participation of appellant to bring him within the Press rule.
Furthermore, the fact that appellant may not have been personally involved with the details of the scheme, although it is more than evident that he was, is not a defense to the charge of conspiracy. See Silkworth v. United States, 2 Cir., 10 F.2d 711, 717: “One man may form and accomplish it, with or without assistance; but all who with criminal intent join themselves even slightly to the principal schemer are subject to the statute, although they may know nothing but their own share in the aggregate wrongdoing.” (Emphasis added.) See also Blue v. United States, 6 Cir., 138 F.2d 351, 359.
In reversing a conviction after trial without a jury, we must apply the test of “whether reasonable minds could find that the evidence excludes every hypothesis but that of guilty” and we must view the evidence in the light most favorable to the government. Figueroa v. United States, 9 Cir., 352 F.2d 587, 589. I cannot justify the conclusion that a man who was as involved in the organization and administration of a scheme such as this could not have held the necessary criminal intent essential to the crime of mail fraud.
I would affirm the judgment and conviction of the district court.
William Klein, II, New York City (Julius J. Rosen, New York City, on the brief), for plaintiffs-appellants.
Breck P. McAllister, New York City (Donovan, Leisure, Newton & Irvine, James R. Withrow, Jr., Richard L. Bond, Sanford M. Litvack, New York City, on the brief), for defendants-appellees.
Philip A. Loomis, Jr., Gen. Counsel, David Ferber, Sol., Edward B. Wagner, Sp. Counsel, Martin D. Newman, Atty., Washington, D. C., for Securities and Exchange Commission as amicus curiae.
Before MOORE, SMITH and FEINBERG, Circuit Judges.
FEINBERG, Circuit Judge:
We are again faced here with a claim that alleged misconduct affecting holders of publicly-owned securities violated the
I
According to the complaint or undisputed matters of record, the relevant facts are as follows: Mutual is a publicly-held, open-end investment company; Spingarn Heine & Co. is a brokerage firm with a partner who is a vice president, director and stockholder of Mutual; and Norte & Co. is the registered nominee of Mutual‘s investment adviser. For diversity purposes all plaintiffs are citizens of New York. Defendant Genesco, Inc. is a large manufacturing and retailing concern, and Jarman is its chairman and principal stockholder. Both defendants are citizens of Tennessee for diversity purposes. Not named as a party, but at the center of the suit, is S. H. Kress and Company, a New York corporation which operates more than 250 variety stores in many states throughout the country.2
Between July and October 1963, Genesco acquired 94.1 per cent of the outstanding stock of Kress, 43 per cent by purchase from the Kress Foundation, and the rest from the public through tender offers. By the time the amended complaint was filed in November 1966, Genesco had increased its holdings to 94.6 per cent of Kress. The complaint alleges that the stock was obtained pursuant to “a fraudulent conspiracy” to acquire control of Kress, use Kress‘s own property to finance the acquisition and then manage Kress and appropriate its assets for Genesco‘s sole benefit. Appellants claim that defendants euchred them into buying 16,608 shares of Kress stock, which they still own and have continued the fraud by operating Kress against its corporate interest to the minority shareholders’ detriment.
Stripped of its pejoratives and redundancies, the complaint alleges fraudulent activities falling essentially into two time periods—before and after plaintiffs acquired their stock. The fraud attributed to defendants in the period before plaintiffs became Kress stockholders—November 15, 1963 for Mutual, November 20, 1963 for Norte, and August 1964 for Spingarn—may be summarized as follows: In their tender offer for the stock of Kress, defendants failed to disclose (1) that Kress‘s real estate was worth substantially more than its financial statements indicated, and (2) their intention, after gaining control of Kress, to sell this real estate to Genesco‘s pension fund for an inadequate consideration, thereby raising the funds necessary to pay for the Kress stock acquisition, and otherwise to manage Kress for the sole benefit of Genesco. The fraud attributed to defendants after the dates when plaintiffs became Kress stockholders is that defendants financed their acquisition of Kress stock with Kress‘s own assets, have dominated Kress and run it in the interest of Genesco rather than Kress, including diversion of assets to Genesco, and have manipulated the market price of Kress stock, in part by keeping the Kress dividends to a minimum, in order to acquire shares of Kress‘s minority stockholders at less than the true value.
II
The complaint bases the federal claims on section 10(b) of the Act and Rule 10b-5 thereunder3 and section 14(a) of the Act and Rule 14a-9;4 the latter, which deal with proxy statements, will be discussed hereafter.5 Section 10 of the Act provides:
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—
* * * * *
(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 manipulative 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.
Rule 10b-5 of the Commission provides:
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
(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,
in connection with the purchase or sale of any security.
Section 10(b) and Rule 10b-5 have been the focal point for a spectacular growth in the law governing civil liability for transactions in securities.6 This has been all the more remarkable because the Act does not explicitly provide a private civil remedy for violations of the section and Rule, and the Supreme Court has never held that one exists, although J. I. Case Co. v. Borak, 377 U.S. 426 (1964), impliedly suggests that it does. Nevertheless, it is now common ground that an injured investor does have a private cause of action under Rule 10b-5, e. g., Fischman v. Raytheon Mfg. Co., 188 F.2d 783 (2d Cir. 1951). However, various concepts have been utilized to limit liability under the sweeping language of the Rule, although none is specifically required by it. 3 L. Loss, Securities Regulation 1763-67 (2d ed. 1961). Thus, a requirement of privity was at first suggested, see Joseph v.
In the face of the broad language of Rule 10b-5 and the measured judicial treatment of it, it is most important to ascertain precisely the theory upon which plaintiffs sue. In this court, appellants’ principal claim under Rule 10b-5 is that defendants “deceived [them] into buying Kress shares which they would not have bought had they known the facts,” and that this fraud arose “in connection with Genesco‘s purchase of Kress shares.” The alleged deceit was defendants’ silence as to their true fraudulent intentions and the actual value of Kress‘s real estate. In other words, appellants claim that the maker of a tender offer to purchase the stock of a corporation can by silence violate a duty under the Act to plaintiffs even though he and they are both strangers to the corporation.
Use of a tender offer by an outsider to obtain control of a publicly-held corporation is a fairly recent development. This means of corporate takeover has become increasingly popular,15 and has led to demands for legislative regulation to prevent abuses. Bills have been introduced in Congress designed to achieve this end.16 While not conclusive, this legislative activity at least indicates the conviction of many that existing statutes do not adequately cover the field. Indeed, the chairman of the Commission has stated, albeit not in his official capacity, that “the bills now pending before Congress would fill a hiatus.”17
It is against this background that we must consider appellants’ claim that Rule 10b-5 now affords them a remedy on the facts they have alleged. Significantly,
Under all of these circumstances, we refuse to hold that these plaintiffs have a right to sue under Rule 10b-5 for the alleged fraud in connection with their purchase of Kress stock; we express no general view as to the rights of stockholders to whom an outsider makes a tender offer. In their reply brief, plaintiffs rely heavily on Vine v. Beneficial Fin. Co., 374 F.2d 627 (2d Cir. 1967), decided well after they brought their suit in the district court. But that case is far different from this. For example, the offer to stockholders there was made by insiders; plaintiff Vine was a member of the class to whom the offer was specifically addressed;19 and the issue decided was whether Vine was an involuntary “seller” because the corporation in which he owned stock had been dissolved, leaving him only with shares which had been converted into a claim for cash. Plaintiffs also tangentially refer to the alleged continued “deception” by defendants after they became insiders, implying that this contributed to plaintiffs’ decision to purchase stock. The tender offers, which had been made from July 1963, ended a few days after defendants took control of Kress in October. That for this very brief period the offer was technically continued by insiders is not
III
We turn now to the period after plaintiffs became Kress stockholders; the fraudulent activities then alleged are primarily corporate abuse and diversion, claims cognizable under state law but not under the Act.20 However, the complaint does charge that in this later period defendants manipulated the market price of Kress stock, keeping Kress dividends to a minimum, in order to force minority stockholders to sell out to Genesco at depressed values. While not highlighted in this court,21 the contention that this states a claim under Rule 10b-5 is substantial. Controlling stockholders have a duty not to take advantage of the minority in purchasing the latter‘s shares. See Speed v. Transamerica Corp., 99 F.Supp. 808, 828-829 (D.Del. 1951). In Cochran v. Channing Corp., 211 F.Supp. 239 (S.D.N.Y. 1962), it was held that manipulation of market price and purposeful reduction of dividends in order to buy out minority stockholders cheaply was actionable under Rule 10b-5, at least under subdivisions (1) and (3) thereof.22 Moreover, this court referred approvingly to that holding in O‘Neill v. Maytag, 339 F.2d 764, 768 (2d Cir. 1964), stating that:
In addition, deception may take the form of nonverbal acts: In Cochran v. Channing Corp., 211 F.Supp. 239 (S.D.N.Y. 1962), it consisted of reducing dividends in order to drive down the price of the corporation‘s stock. And it need not be deception in any restricted common law sense; one of the central purposes of federal securities legislation would otherwise be seriously vitiated.
See also Hoover v. Allen, 241 F.Supp. 213, 227 (S.D.N.Y. 1965). It is true that the plaintiff in Cochran had sold his shares at an alleged loss, while plaintiffs here still own theirs, so that it may be said, as defendants do, that plaintiffs have as yet sustained no monetary injury.23 Moreover, plaintiffs’ claim must, of course, find justification in the language of Rule 10b-5, which requires that any alleged damages be “in connection with the purchase or sale of any security.” On this aspect of the case, the only transactions in securities that plaintiffs could refer to would be defendants’ purchases of stock from other Kress stockholders at depressed prices; as the Commission brief points out, the causal connection between these and any alleged existing damage to plaintiffs is slim indeed.
But we do not regard the fact that plaintiffs have not sold their stock as controlling on the claim for injunctive relief. The complaint alleges a manipulative scheme which is still continuing. While doubtless the Commission could
Moreover, the remaining alleged federal claims for damage were similarly disposed of properly. As indicated above,27 the argument that
Since we hold that a federal question exists, we express no opinion on whether Kress is an indispensable party, which would destroy diversity jurisdiction. It will be more appropriate for the district court on remand first to consider, on the
MOORE, Circuit Judge (dissenting in part):
A glance at the amended complaint reveals that plaintiffs, namely, a corporation and two partnerships, are owners of common stock of S. H. Kress and Company (the shares of which were traded on the New York Stock Exchange). Their shares were acquired between November 15, 1963 and August 17, 1964. This is not a class action. Plaintiffs do not purport to represent or to champion other stockholders than themselves.
The relief sought, however, asks that (a) the defendants, Genesco and its Board Chairman, Jarman, pay to plaintiffs “and the other minority stockholders of S. H. Kress and Company the fair value of their pro rata share of the uses of the business, assets and credit of S. H. Kress and Company wrongfully made by defendants.” (Kress, the assets of which plaintiffs would distribute pro rata to other stockholders whether they desired to be recipients or not, is not even a party to the action); (b) defendants distribute to plaintiff and the minority stockholders their pro rata share of the assets of Kress—in other words liquidate Kress at their behest regardless of the wishes or welfare of the other stockholders; and (c) while awaiting such dismemberment that defendants be enjoined from (i) purchasing Kress stock, (ii) issuing any public report or statement except along the lines conceived by plaintiffs, (iii) using an alleged sum of $72,000,000 for the acquisition of an “other firm or corporation“, and (iv) deriving any benefit from the assets of Kress; and (d) fees to plaintiffs’ attorneys.
In short, plaintiffs, as owners of 16,608 shares of Kress out of 2,322,738 outstanding (April 18, 1966), ask the court by affirmative injunction, in effect, to usurp managerial powers and override the votes of 2,306,130 shares.
The extremes to which plaintiffs go in allegations and argument are the best refutations to their asserted positions. Were there any fraud practiced on stockholders who had tendered their stock, the Securities and Exchange Commission in its amicus brief has a succinct answer: “Here plaintiffs were not injured by any fraud allegedly practiced on the Kress stockholders who accepted the tender offer; plaintiffs were not even Kress stockholders at the time of that alleged fraud” (p. 7).
I agree with the law as stated in Cochran v. Channing Corp., 211 F.Supp. 239 (S.D.N.Y., 1962) that manipulation of security prices whether by purposeful depression of dividends or by unlawful market maneuvers is actionable but plaintiffs do not allege that they sold their shares or suffered any loss as a result of such practices, even assuming they occurred. As the Commission (in its brief) stated “in respect to these activities [market depression] plaintiffs are neither buyers nor sellers of securities,” and since “the only transactions in securities which plaintiffs refer to in this connection are the defendants’ possible purchases of Kress shares from other Kress shareholders at depressed prices,” plaintiffs in this suit by injunction or otherwise have no right or standing to dictate to other stockholders what they should do with their stock. If such stockholders choose to sell and thereby should sustain damages, they still retain the right to sue, if they believe that they have been defrauded, or to stay out of the law courts if their peace of mind is best maintained by such abstention. The Commission recognizes that “such purchases have no
In stating that plaintiffs have a claim for injunctive relief, the majority are forced to turn this action, in effect, into a class or derivative action, which it is not, to “cure harm suffered by continuing stockholders.” Were this so, Kress would appear to be an indispensable party. If plaintiffs have been made the victims of “[d]eceitful manipulation of the market price,” they should pursue their claim for damages, if any. But it is scarcely appropriate for the judiciary by mandatory injunctive decree to decide at the behest of three stockholders what the corporate dividend policy of Kress should be or that a stockholder other than themselves should be deprived of his supposedly constitutional right to sell his stock to Genesco if his judgment so dictates. Courts should stand ready to redress wrongs suffered by plaintiffs who allege and prove that they have been damaged thereby but not, by the device of an exercise of injunctive powers to go beyond this role.
I would affirm the judgment in its entirety.
Nelson H. WURZ, Appellant, v. ABE POLLIN, INC., Miller & Long Co., Inc., and W. T. & C. Corporation, Appellees.
No. 11263.
United States Court of Appeals Fourth Circuit.
Decided Sept. 29, 1967.
Argued June 23, 1967.