The opinion of the court was delivered by: BICKS
The Central Foundry Company, a Maine corporation, (hereinafter referred to as the 'Company'), whose voting securities (with the relatively insignificant exception hereinafter noted) are listed and registered on the New York Stock Exchange, a national securities exchange, is enmeshed in a contest for control. Each of its oustanding 642,635 shares of stock is entitled to one vote, 639,130 thereof are common and the remaining 3,505, not listed or registered on any national securities exchange, are preferred. The former were held on April 14, 1958, the record date for the 1958 annual meeting of stockholders by 3,410
individuals and 153 brokers.
The contestants are the present members of the Board of Directors
a majority of whom have served the Company in that capacity for upwards of 20 years and an insurgent group self-denominated 'The Central Foundry Company Independent Stockholders' Protective Committee' (hereinafter referred to as the 'Committee') formed by Sidney Gondelman,
and to whom every one of the Committee's slate of candidates for director owes his nomination.
He has individually borne and paid all the expenses of the Committee -- to May 10, 1958, about $ 30,000 and proposes to continue to be the exclusive source of its funds without any understanding or agreement whatsoever that he will ultimately be reimbursed for a proportionate share or any share thereof from any of the other members of the group.
In soliciting proxies to be used at the annual meeting both sides have used the mails and other means or instrumentalities of interstate commerce.
The Securities Exchange Act of 1934 provides:
'It shall be unlawful for any person, by the use of the mails or by means or instrumentality of interstate commerce * * * to solicit or to permit the use of his name to solicit any proxy * * * 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.' Section 14(a) of the Act, 15 U.S.C.A. Section 78n.
Consistent with the authority thus conferred, the Securities & Exchange Commission duly promulgated Regulation X-14 (17 C.F.R. 240.14a), referred to as the proxy rules. The proxy rules provide in part:
'No solicitation * * * shall be made by means of any proxy statement * * * or other communication, written or oral, containing any statement which at the time and in the light of the circumstances under which it is made, is false or misleading with respect to any material fact, or which omits to state any material fact necessary in order to make the statements therein not false or misleading or necessary to correct any statement in any earlier communication with respect to the solicitation of a proxy for the same meeting which has become false or misleading.' Rule X-14 a-9, 17 C.F.R. 240.14 a-9.
The contest from the beginning has in large part been a personality fight. As viewed by the Management and urged by them upon the stockholders 'the real issue is whether you want to continue in office your present management, or whether you want to entrust your investment in the company to Mr. Sidney Gondelman and his associates.' The Committee on the other hand presented to the stockholders as 'the real issue of the proxy contest: (1) The stockholders' committee wants John J. Nolan, Jr. back as President. (2) Should directors be large stockholders?'
In urging upon the stockholders that it was not in their interest to entrust the management of the affairs of their company to a Board of Directors comprised of Sidney Gondelman and six individuals who owed their election to him, Management communicated to the stockholders that Mr. Gondelman had been twice disbarred by the courts of New York from practicing as an attorney-at-law because of improper conduct. On the occasion of his first disbarment which occurred in 1929 the Appellate Division of the Supreme Court of the State of New York for the Second Judicial Department, stated in part:
'Respondent (Gondelman) tried one or two cases in the Supreme Court, and really was a trader in negligence cases. His position before Mr. Justice Faber shows respondent to be unreliable and possessed of a wreckless disregard of truth. * * * His methods of practice in violation of law (Penal Law, 274, subd. 2) and the ethics of the bar, false testimony and concealment of his true financial affairs before Mr. Justice Faber, and his endeavors otherwise to thwart the investigation before that Justice, require that he be disbarred.' Matter of Gondelman, 2d Dept.1929, 22d App.Div. 462, 233 N.Y.S. 343, 347.
Gondelman made an application for reinstatement in the latter part of 1930 which was denied. In the middle of 1932 he instituted a further proceeding for reinstatement. The court granted the second application without opinion. 2d Dept.1932, 236 App.Div. 704, 257 N.Y.S. 1061.
After being thus reinstated he was again disbarred in 1940 -- this time for subornation of perjury. The Court in its opinion stated:
'There were facts and circumstances which, coupled with respondent's failure to produce important documents to sustain his claim justified the official referee in his decision that Mazzola, as a material witness at the Supreme Court Trial, was the creation of respondent. The learned Official Referee has had extensive and various experience as lawyer and Justice of the Supreme Court at Trial Term and in the Appellate Division. He has had the opportunity of observing the witnesses and determining the value of their testimony. His views are entitled to serious consideration.
After careful reading and analysis of this record the court is constrained to confirm the recommendation of the Official Referee and to direct that respondent be disbarred.' Matter of Gondelman, 2d Dept. 1940, 258 App.Div. 1085, 18 N.Y.S.2d 52, 53.
The preliminary draft of Management's first proposed letter to stockholders was delivered to the Securities & Exchange Commission on February 24, 1958. More than the usual time elapsed before the Commission made its final comments thereon, due undoubtedly to the serious import of the information contained therein. Pursuant to an order of the Commission to conduct a private investigation, Sidney Gondelman was examined on February 28, 1958, by Mr. Harry Heller, Assistant Director, Division of Corporation Finance. Relying on the information supplied by Mr. Gondelman, the Commission informed Management that if reference to Gondelman's 1940 disbarment was to be retained in its proxy material it would require Management to include the following statement:
'The Company has been informed that since 1954 proceedings have been held on Mr. Gondelman's application for exoneration with respect to the 1940 disbarment, that pursuant to recommendation of a referee the Court ordered a new hearing on the basis of which a referee has reported that in his opinion it must be held that newly discovered evidence should absolve Mr. Gondelman for blame for the charges upon which he was disbarred in 1940, and that the matter is presently pending before the Appellate Division.'
At the insistence of the Commission, Management, was obliged to and did incorporate said statement in its letter to stockholders dated April 10, the first one dealing with Gondelman's disbarments.
Obviously if an official referee appointed by the Appellate Division of the Supreme Court reported that in his opinion it must be held that newly discovered evidence should absolve Gondelman for blame for the charges upon which he was disbarred in 1940, the thrust of the 1940 disbarment and the charge of subornation of perjury upon which it was predicated was measurably diluted as a reflection upon Gondelman's character and background. The further statement 'that the matter is presently pending before the Appellate Division' did not diminish the ameliorating effect of what preceded.
Quite understandably the Committee was not disposed to treat with Gondelman's disbarment any more than the circumstances compelled.
In a letter over Gondelman's signature dated April 16, 1958, to the stockholders, he expressed a trust in their fairness and stated that the present posture of his efforts to obtain exoneration was accurately stated in Management's letter of April 10, and further, that a fairly lengthy statement in pamphlet form concerning his disbarments and subsequent reinstatement proceedings is being prepared and a copy will be sent upon written, telegraphic or collect telephonic communication.
Again in the so-called 'flyer' of which more will be said shortly, the Committee stated that Management had correctly informed the stockholders that
'these proceedings [referring to the so-called exoneration proceedings relating to the 1940 disbarment] were pending before the Appellate Division, after two Official Referees of that Court had reported that substantial newly discovered evidence required that Mr. Gondelman be absolved from blame from the charges which led to his disbarment in 1940.'
The 'flyer' bears no date and was enclosed with a letter to stockholders, also undated, captioned 'Do Stockholders Want Personal Attacks or Constructive Programs for the Company?' This loose 'flyer' but for the words 'Important Information' appearing at the top thereof is in type smaller and less arresting or attention provoking than the bulk of the letter with which it was enclosed. The last three sentences thereof set forth information which in the context of this case was highly significant. After weeks of extensive oral and written communications with stockholders, they are informed well nigh at the end of the campaign and almost upon the eve of the meeting, for the first time that the so-called reinstatement or exoneration proceedings were withdrawn on April 22, 1958.
The omission to disclose that fact to the stockholders prior to May 7 made the statements in the earlier communications that the exoneration proceedings were pending before the Court, false and misleading.
Immediately following the foregoing disclosure the 'flyer' goes on to state:
'Mr. Gondelman had no suggestion from anyone connected with the Court or otherwise and no indication direct or indirect as to what the decision would be and of course did not withdraw the motion because of any concern over the outcome. The reasons he withdrew the motion are the unfavorable comments indulged in recently by management, which cast aspersions upon him and which resulted in unfavorable publicity quite harmful to his family.'
Counsel appearing for Gondelman and the committee was first advised of the withdrawal of the exoneration proceedings on May 5
and immediately communicated that intelligence to the Commission. It was then incorporated in the 'flyer'.
On May 8, 1958, promptly after learning of this unanticipated development, the Company and the Management Proxy Committee of the Company instituted suit against the members of the insurgent group individually and as members of the Committee to enjoin them against voting any of the proxies they had obtained and simultaneously brought on an application by order to show cause for a temporary restraining order. The complaint and the moving papers allege that the Committee in its proxy solicitation had violated the proxy rules of the Commission in numerous respects. Since the annual meeting was scheduled to be held on May 13, a hearing on the application for relief pendente lite was set for Saturday May 10. After hearing argument throughout almost the entire day this court dictated its decision on the record, to wit: That (i) the holding of the annual meeting be adjourned to June 2, (ii) Gondelman submit to examination -- to commence promptly and continue until terminated -- confined to the truth or falsity of the statements contained in the second paragraph of the 'flyer', the circumstances of the withdrawal and the reasons for the delay in advising stockholders thereof, and (iii) neither side shall continue with proxy solicitation of any kind until further order of the Court.
Still another 'surprise' came to light -- this one on the very day the stockholders meeting, but for the Court's restraining order would have been held. Counsel for Gondelman and the committee in this proceeding, examining Judge O'Neill with respect to a telephone conversation on May 5, 1958, put the following questions to him and received the following answers:
'Q. And what did I ask you? A. You asked me, What about this withdrawal of Gondelman's reinstatement application?
'Q. I asked you whether it had been done, didn't I? A. Yes.
'Q. And I told you, did I not, that I had just learned it a few minutes before? A. You did.
'Q. And I couldn't believe it? A. Yes.'
Later during the week of May 5, Judge O'Neill at the request of the Committee's counsel agreed to come to New York City for a conference on May 12. With respect thereto Judge O'Neill testified:
'Q. And how long did that conference go on, Judge O'Neill? A. Several hours.
'Q. And did you happen to mention the Adel supplemental report during the course of that conference? A. Yes.
'Q. And did we ask you whether it had materially changed the position taken by Judge Adel in the original report? A. Yes.
'Q. What did you tell us, sir? A. I said, no.'
When Committee counsel was told of the Supplemental Report 'They blinked. They said, Supplemental report -- what?', and requested a copy. It was received Tuesday, May 13th. Judge O'Neill was phoned on the same day and asked whether he could go down to Washington and confer with the Commission on the following day. He agreed and while there was examined under oath before members of the Staff of the Commission. The transcript of that testimony discloses the following colloquy between Mr. Heller of the Commission and Gondelman's counsel:
'Mr. Heller: Does the report [the Supplemental Report] derogate from his original report?
'Mr. Wells: Judge O'Neill thinks not but it might and for that reason we wanted to bring you a copy and to have you have an opportunity to talk to Judge O'Neill about it and also Mr. Gondelman, if you wish.
'Mr. Heller: May I see the report?
'Mr. Heller: On, brother.'
In the course of that examination Judge O'Neill characterized the reports of Mr. Justice Adel as 'weasel reports' * * * 'what he says in his supplemental report is to my mind a fantastic thing.' He thrice expressed the opinion that the two reports made by Judge Adel, combined, exonerated Mr. Gondelman.
Interrogated as to whether he informed his client at any time of the contents of Judge Adel's first report, he responded:
'I informed him of the first report that Judge Adel had held, he said that he ought to be exonerated but he didn't make a recommendation.'
and then with respect to the supplemental report:
'I informed him that Judge Adel said that everything that came from Diggins had to be treated with suspicion but he didn't make any recommendation, that is all.'
When the Commission insisted that management include in its proxy material the statement set out in the text at note 8, supra, it had before it Gondelman's testimony which viewed against the facts which subsequently came to light clearly and unmistakably reflects knowledge on his part that Judge Adel had handed down two reports.
In Judge Adel's first report, which bears date January 14, 1957, he stated:
'I have been hesitant to make the conclusion which I have arrived at as stated in the preceding paragraph, recognizing that this respondent from the time that he was disbarred the first time has followed what I believe is the wearing down technique so frequently invoked. Yet, with some reluctance I have come to the conclusion that with all of the evidence in the case now before this ...