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May 3, 1966

Murray J. FOX, Dorothea Fox, Sol Fox and Sylvia Frost, on behalf of themselves and as representatives of all other persons similarly situated, Plaintiffs,
GLICKMAN CORPORATION, Louis Glickman, Louis A. Siegel, Aaron Katz, William M. Jennings, William G. Dillon, Bache & Co., Hirsch & Co., Incorporated, Hirsch & Co. and Morris Cohon & Company, Defendants. Arthur RUDNICK, Paul and Jean Carl, Helen Orsano, Florence Verdirame, Gabriel and Ruth Ascher, on behalf of themselves and all others similarly situated, Plaintiffs, v. FRANCHARD CORPORATION (formerly known as the Glickman Corporation), Louis J. Glickman, Louis A. Siegel, William M. Jennings, Seymour Young, Aaron Katz, Morris Cohon & Co., David Berdon & Co., Hirsch & Co., Bache & Co., and the Venada Corporation, Defendants. Morris LAZAR et al., Plaintiffs, v. FRANCHARD CORPORATION (formerly Glickman Corporation), Bache & Co., Hirsch & Co. Incorporated, Morris Cohon & Company, Louis J. Glickman, Louis A. Siegel, Aaron Katz and Seymour Young, Defendants

Metzner, District Judge.

The opinion of the court was delivered by: METZNER

METZNER, District Judge.

The parties have submitted an agreement of compromise and settlement for approval by the court, pursuant to Fed. R.Civ.P. 23(c).

 Three spurious class actions were instituted on March 18, 1963, June 17, 1963 and September 27, 1963, respectively, alleging violations of sections 11, 12 and 17(a) of the Securities Act of 1933 and section 10(b) of the Securities Exchange Act of 1934 and the rules promulgated thereunder by the Securities and Exchange Commission.

 Three registration statements dated October 12, 1960, October 2, 1961 and December 1, 1961 are involved in the litigation. The alleged misstatements and omissions contained in these registration statements concern themselves with the projected "cash flow" to be generated by the properties owned by the defendant Franchard Corporation, formerly Glickman Corporation (herein the Corporation), withdrawals and advances of corporate funds for the benefit of Venada Corporation, wholly owned by Louis Glickman personally, pledges of the Corporation stock owned by Glickman to secure loans made to him and his wholly owned corporations, Glickman's personal financial condition, and abdication by the board of directors of the Corporation of their duties and responsibilities.

 The pretrial proceedings were extensive, consisting of 28 days of depositions, in which some 4,000 pages of testimony were taken, the marking of some 400 exhibits, and numerous pretrial conferences. In addition, the record of the hearings, with its exhibits, before the Securities and Exchange Commission and the decisions of the hearing examiner and the Commission were before the court. The matter was set for drafting of the final pretrial order on March 23, 1965 and a trial date was fixed for May 4, 1965. While the parties were engaged in day-to-day conferences in drafting this final pretrial order, settlement negotiations were instituted, which culminated in the signing by all parties of the agreement of compromise and settlement dated June 25, 1965. On June 28, 1965 the court entered an order consolidating the three cases.

 Notice of the instant application was mailed to some 30,000 stockholders of the Corporation, and published in various newspapers throughout the country. The stockholders were also advised that applications for the fixing of attorneys' fees and allowances would be heard in conjunction with the hearing on the agreement of compromise and settlement. Three days of hearings ensued, at which all present were afforded an opportunity to be heard.

 The agreement provides for the payment by the defendants of the sum of $1,825,000 to settle all claims which have been asserted or could have been asserted under the complaints, as amended, and that the prosecution by any person of such claims be forever barred. Out of the sum of $1,825,000 there are to be paid all fees, allowances and disbursements fixed by the court in connection with the prosecution of the claims, and all expenses necessary to administer the settlement and disburse the fund.

 The attorneys for the various plaintiffs agreed that in no event should the amount allowed for attorneys' fees, disbursements and accountants' services exceed the sum of $425,000. The amount awarded on the applications for counsel fees is discussed below.

 Authorized claimants to the fund are limited to those who purchased stock of the Corporation between October 12, 1960 and April 12, 1963. Purchasers of the stock are divided into (a) those who purchased the stock between the dates referred to above, and (b) those who exchanged units they owned in syndications of parcels of real estate for stock of the Corporation pursuant to the first registration statement of October 12, 1960. All together, some 4,800,000 shares of stock of the Corporation were distributed under the various registration statements.

 The fixing of the cutoff date of April 12, 1963 is approved because by that time all of Glickman's financial problems were well known and, more import, the Corporation had issued and distributed to its stockholders an annual financial report on April 5, 1963, covering the year ending December 31, 1962, furnishing an accurate picture of the Corporation's financial condition. The existence of such report was advertised in New York newspapers on April 11, 1963. Section 11(a) of the Securities Act of 1933 provides that the right of recovery, therein provided, shall be conditioned on proof that a purchaser subsequent to the date of such financial statement relied nevertheless on a previous registration statement in purchasing the stock.

 The agreement provides that for those persons purchasing between October 12, 1960 and October 1, 1961 the maximum allowable purchase price of $10 per share is established. This is within the limits fixed by section 11(e) of the Securities Act of 1933. The so-called exchange offerees also acquired their shares pursuant to the registration statement of October 12, 1960. They, however, are not allowed the price of $10 a share. There was no readily available market for these units prior to October 12, 1960. A formula for determining value had to be devised.

 The exchange value per share was computed separately for each of the companies whose capital units were exchanged for common stock of the Corporation. First, it was determined to take the appraised value of each of the properties as close to October 12, 1960 as possible, and substitute this appraised value for the book value carried on the balance sheets of the respective syndicates. The net appraised asset value was then divided by the total number of shares offered by the Corporation in the exchange offer to obtain a per share figure. The out-of-pocket cost basis of each unit to the various syndicate members was then determined. The amount per share and the cost basis were averaged for each syndicate and the resulting figure became the exchange value per share of the Corporation stock to each exchange offeree. This exchange value is the maximum allowable purchase price for such claimants. I find this formula fair and reasonable under all the circumstances.

 The maximum of $11.125 per share has been set for persons purchasing the stock between October 2, 1961 and April 12, 1963. The stock issued under the second registration of October 2, 1961 was at a price of $12.50 a share. By June 29, 1962, the date of the first public awareness concerning Glickman's difficulties, the stock had fallen to the price of $11.125. This drop cannot be attributed to the alleged misrepresentations and omissions in the registration statement, but rather to other market conditions which may not be taken into consideration in fixing damages under section 11(e). Consequently, the price of $11.125 for this group is proper.

 For the purpose of fixing damages, the agreement also sets a minimum valuation of $4 per share. This was the value of the stock on April 12, 1963, the cutoff date, at which time the 12-months' earnings statement was available. I find this figure is reasonable, especially in view of the market's reactions to Glickman's problems. In November and early December of 1962, publicity regarding the Corporation and Glickman's ouster from control resulted in a drop of the stock from $9 a share to $5.50 a share. It might have been proper to have used this figure as the minimum valuation, but to give full effect to all of the claimed deficiencies, the cutoff date appears to be more equitable. Certainly any decline after April 12, 1963 could not be traced to the alleged deficiencies in the registration statements.

 The dividends paid by the Corporation up to January 1963 are to be subtracted from any damages claimed by a shareholder. These distributions were a return of capital and not taxable to the stockholders. Therefore the deduction is proper.

 The agreement provides that shareholders holding as pledgees from Glickman or his affiliates are not to be considered as authorized claimants. The exclusionary provisions were inserted on the assumption that anyone who came within their terms must have had knowledge of the matters complained of in the complaints. Objections to this provision were presented by a group of banks which held the stock as collateral for loans.

 It was agreed by counsel for the plaintiffs and for the defendants that the Meadow Brook National Bank was not foreclosed by the terms of the agreement of compromise and settlement from presenting a claim under the settlement agreement. The amount of the claim to be allowed would be for determination by the special ...

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