The opinion of the court was delivered by: DAWSON
In this action two motions have been presented.
1. The first is a motion by the defendants, made under § 11(e) of the Securities Act of 1933 (15 U.S.C.A. § 77k(e)) requiring the plaintiff to file an undertaking for payment of costs in this suit, including reasonable attorneys' fees.
2. The second is a motion by the plaintiff, pursuant to Rule 56(a) and 56(b) of the Rules of Civil Procedure, 28 U.S.C.A. for summary judgment in favor of the plaintiff, declaring that plaintiff, and those similarly situated, have a right to rescind the exchange of securities complained of in the action and granting such other and further relief as may be proper, but leaving for subsequent determination any damages that might be recovered.
The action is brought by plaintiff as a representative action on behalf of herself and all other preferred stockholders of Alleghany Corporation similarly situated. It appears that the plaintiff, who is represented in this action by her husband, as her attorney, was the beneficial owner and holder of five shares of cumulative preferred stock, Series A, of Alleghany Corporation, which was the subject of an exchange offer that is the subject of the litigation. On the exchange plaintiff received for such five shares of stock fifty shares of the 6% convertible preferred stock of Alleghany Corporation and is now the beneficial owner and holder of such stock. The suit is brought against the defendant Alleghany Corporation and certain persons who are or were officers or directors of Alleghany Corporation, and against the executrix of the estate of Robert R. Young, who was, at the time of the transactions complained of, Chairman of the Board of Alleghany Corporation.
The action challenges the legality of the exchange offer and exchange of these securities of Alleghany Corporation, which exchange has already been the subject of a lengthy litigation. See Breswick & Co. v. United States, D.C.1955, 134 F.Supp. 132; D.C.1956, 138 F.Supp. 123; reversed and remanded sub. nom. Alleghany Corp. v. Breswick & Co., 1957, 353 U.S. 151, 77 S. Ct. 763, 1 L. Ed. 2d 726, and 353 U.S. 989, 77 S. Ct. 1278, 1279, 1 L. Ed. 2d 1147, decision on remand D.C.1957, 156 F.Supp. 227, reversed and remanded 1958, 355 U.S. 415, 78 S. Ct. 421, 2 L. Ed. 2d 374, complaint dismissed D.C.S.D.N.Y.1958, 160 F.Supp. 754.
The complaint alleges that the acts and transactions complained of "were effected pursuant to a conspiracy between the Defendant-Directors to effect and bring about the exchange of stock" in violation of various federal statutes, and in breach of their fiduciary duty to the detriment of the stockholders. The complaint seeks a judgment of this Court declaring that the exchange of the new preferred stock for the old preferred stock "was and is void and voidable at the election of the holders of the new preferred" and granting "relief by way of recission and/or damages." It also seeks judgment that jurisdiction be reserved so that all persons similarly situated with the plaintiff may participate in the relief granted, and in addition, of course, asks judgment for the fees, expenses and costs of the plaintiff's attorney.
The complaint contains three counts. The first count alleges a violation of the anti-fraud provisions of the Securities Exchange Act of 1934 and of the Securities Act of 1933. 15 U.S.C.A. §§ 77q, 78j(b). The second count alleges violation of the registration provisions of the Investment Company Act of 1940, in that Alleghany used the amils in solicitation and exchange of stock without having registered under that act. 15 U.S.C.A. §§ 80a-7(a). The third count alleges a violation of the registration provisions of the Securities Act of 1933, in that Alleghany used the mails in interstate commerce to make its exchange offer and to deliver the new preferred stock without having registered under that act. 15 U.S.C.A. § 77e.
So far as the complaint reveals, the second and third causes of action seem to be predicated on the theory that the offer of exchange of stock required registration under the provisions of § 5(a) of the Securities Act of 1933, 15 U.S.C.A. § 77e(a), and that to make an offer of such exchange constituted a violation of § 7(a) (1) of the Investment Company Act of 1940, 15 U.S.C.A. § 80a-7(a) (1), since Alleghany Corporation was not registered as an investment company under that act.
Whether the offer required registration under the Securities Act of 1933 involves a determination as to whether the security was an "exempted security" under the provisions of § 3(a) (6) of that act, 15 U.S.C.A. § 77c(a) (6), which involves in turn the question as to whether Alleghany Corporation was a "common or contract carrier," the securities of which were subject to the provisions of § 20a(2)-(11) of the Interstate Commerce Act, 49 U.S.C.A. § 20a. See, also, 49 U.S.C.A. §§ 5(2) (a), (3), 314. If the securities were subject to the provisions of the Interstate Commerce Act they were exempt from the registration requirements of the Securities Act. It appears from the decisions of the Three-Judge Court in Breswick & Co. v. United States,
that the Interstate Commerce Commission, in connection with the issue of this very stock, granted an application of the Alleghany Corporation to be considered a carrier subject to the provisions of § 20a(2)-(11) of the Interstate Commerce Act. The validity of this action was one of the questions thereafter litigated in the Breswick case hereinabove referred to.
Whether the offer of exchange constitutes a violation of the Investment Company Act of 1940 also raises the question as to whether Alleghany Corporation was a company subject to regulation under the Interstate Commerce Act. If it was, it was not "an investment company" under the definition contained in § 3(c) (9) of the Investment Company Act of 1940. 15 U.S.C.A. § 80a-3(c) (9). Whether Alleghany Corporation was subject to regulation by the Interstate Commerce Commission at the time of the authorization of the exchange of securities was an issue which was litigated in the Breswick case. See 154 F.Supp. 132, at page 137; 353 U.S. 151, at page 174, 77 S. Ct. 763, at page 776.
Thus, both the second and third causes of action in the complaint seem to be predicated on the assumption that the offer of issuance and the exchange of the stock of Alleghany Corporation was not a matter which came within the jurisdiction of the Interstate Commerce Commission. If the issuance was a matter within the jurisdiction of the Interstate Commerce Commission, then the stock was an "exempted security" so far as the Securities Act of 1933 is concerned; and likewise, the company was not to be deemed an investment company with reference to those securities under the provisions of the Investment Company Act of 1940.
The first cause of action, on the other hand, is alleged to be based on the anti-fraud provisions of the Securities Act of 1933 and of the Securities Exchange Act of 1934, which provisions, of course, would be effective irrespective of the jurisdiction of the Interstate Commerce Commission. See 15 U.S.C.A. §§ 77l, 77q(c). However, the first fraud on which plaintiff relies, as stated in her brief, was that Alleghany Corporation had stated, in its listing application with the New York Stock Exchange, that the issue of the proposed stock was exempted from registration under the Securities Act of 1933, pursuant to § 3(a) (6) of that act. Of course, if the issuance of the securities was a matter subject to the jurisdiction of the Interstate Commerce Commission, that statement was not ...