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November 15, 1962

W. Kent COCHRAN, on behalf of himself and other stockholders of Agricultural Insurance Company, Plaintiff,
CHANNING CORPORATION, Kenneth S. Van Strum, George Carleton, Jr. and John K. Colgate, Defendants

The opinion of the court was delivered by: DAWSON

This is a motion by defendant Channing Corporation (Channing) and three of its directors named as individual defendants to dismiss the complaint for failure to state a claim upon which relief can be granted. Rule 12(b)(6) of the Federal Rules of Civil Procedure.

Plaintiff Cochran, suing on his behalf and on behalf of other stockholders of Agricultural Insurance Company (Agricultural), alleges two causes of action. The first is based upon a violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by the Securities and Exchange Commission. *fn1" The second cause of action realleges the same operative facts and claims a violation of New York State law.

For the purposes of this motion the factual allegations of the complaint are to be taken as true and the motion must be denied unless it is clear from the complaint that the plaintiff would not be entitled to any relief. Arfons v. E. I. DuPont de Nemours & Company, 261 F.2d 434 (2d Cir.1958); Dioquardi v. Durning, 139 F.2d 774 (2d Cir.1944); 2 Moore, Federal Practice P12:08, pp. 2244-45 (2d ed. 1961).

 The facts alleged by plaintiff and accepted as true for the purposes of this motion are as follows:

 The complaint is purportedly brought under Section 10(b) of the Securities Exchange Act of 1934 (par. 1), by plaintiff, a stockholder of Agricultural Insurance Company since November of 1958, allegedly suing in behalf of himself and others similarly situated (pars. 2, 3). Defendant Channing Corporation is a company which is claimed to have dominated the policies of Agricultural since January 1961 (pars. 4, 7). The individual defendants are alleged to be directors of both Channing and Agricultural, two of the three having been such throughout the time covered by the complaint (pars. 5, 7).

 In substance, it is claimed that since 1960 Channing and the individual defendants have engaged in a scheme aimed at acquiring for Channing ownership of Agricultural's shares at the lowest possible price, and at utilizing its control for the purpose of (1) realizing on an equity in excess of prevailing market prices for Agricultural's shares, and (2) causing Agricultural's insurance agents to engage, in behalf of a Channing wholly-owned sales subsidiary, in the retail sale of shares of mutual funds managed by Channing (par. 8).

 It is further alleged that to effectuate this scheme Channing carried out a program of purchase of Agricultural's shares, withholding from the public any disclosure of its identity or of its program, and that after it had become the dominant stockholder of Agricultural, it caused the formation of a new company, Exchequer, Incorporated (herein 'Exchequer') and caused Agricultural's directors to recommend to the latter's stockholders the exchange of their shares for shares of Exchequer, although the directors knew that if the proposal were accepted by holders of approximately 15%, defendants would thereby acquire majority control of Agricultural, while Exchequer would continue under the domination and control of the individual defendants and other persons associated with them in control of Channing (pars. 9, 15).

 The complaint further alleges that as a result of its undisclosed purchasing program, Channing acquired as of March, 1961, in excess of 50,000 shares of Agricultural's stock (par. 10); that Agricultural's directors, dominated by defendants, reduced the quarterly dividend of Agricultural on March 9, 1961, the defendants desiring that reduction in order to facilitate Channing's purchasing program and their alleged plan (pars. 11-12); and that as a result Channing acquired further shares at depressed prices (pars. 13-14).

 It is then alleged that because of the dividend reduction and lack of information as to Channing's program of purchases, plaintiff in or about the first week of April, 1961, sold some 500 shares of Agricultural's stock which he would not otherwise have sold, at a price reflecting the depressing effect of the dividend reduction, and a price below what he (and other stockholders) could have obtained later after disclosure of Channing's purchasing program and the contemplated exchange with Exchequer (pars. 16-19). There are allegations that the acts and course of business of the defendants involved the use of the mails and instrumentalities of interstate commerce (par. 20) and that they were in violation of Section 10(b) of the Securities Exchange Act and Rule 10b-5 (par. 21); that plaintiff did not know of the course of conduct until shortly prior to the institution of the action (par. 23) and that plaintiff has been damaged in the sum of $ 8,000 (par. 24).

 The second count of the complaint (pars. 25, 26) substantially repeats the allegations of the first count, except that it omits those relating to violation of Section 10(b) and Rule 10b-5 and instead alleges that the various acts set forth were violations of the fiduciary duties owed by Channing as dominant stockholder and the individual defendants as directors.

 Defendant attacks the first cause of action on two grounds: (1) that Section 10(b) and Rule 10b-5 require privity of contract and the plaintiff has not alleged that the shares he sold were purchased by the defendants, and (2) that even if privity had been alleged, the acts of defendants do not constitute a violation of the Securities Exchange Act because there were no verbal misrepresentations made by defendants to plaintiff.

 Assuming, arguendo, that privity is not necessary, does the conduct of defendants amount to a violation of Rule 10b-5? The rule is addressed to any person and not merely to insiders. However, since its construction has imposed special burdens upon insiders, it is necessary to determine the status of these defendants. There can be no question that the three directors of Agricultural were insiders as to the affairs of the corporation. Moreover it must be taken as true, as asserted in the complaint, that defendant Channing was in a position to, and in fact did, dominate the policies of Agricultural and must therefore be deemed an insider.

 There have been very few suits against corporate insiders but what little authority there is supports the position that a controlling shareholder is to be treated similarly to a director or officer. Speed v. Transamerica Corp., 71 F.Supp. 457 (D.C.Del.1947) (on motion for summary judgment), 99 F.Supp. 808 (D.C.D.el.1951) (on the merits); James Blackstone Memorial Library Assn. v. Gulf, Mobile & Ohio R.R. Co., 264 F.2d 445 (7th Cir.1959), cert. denied, 361 U.S. 815, 80 S. Ct. 56, 4 L. Ed. 2d 62; Loss, Securities Regulation (2d ed. 1961) at p. 1450.

 If the allegation of plaintiff were merely that defendant Channing did not disclose its identity and its insider position in the purchase of the securities, this Court would be obliged to rule upon a question that has long intrigued commentators and ...

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