The opinion of the court was delivered by: RYAN
This is an application pursuant to Rule 23(c) F.R.Civ.P. for judicial approval of a stipulation and agreement of compromise and settlement. A hearing on notice to all parties, the Securities and Exchange Commission and to all persons who were shareholders of defendant, Aileen, Inc. between September 10, 1965 and December 17, 1965, was held on February 15, 1966, at which all present were given an opportunity to be heard or object to the proposed settlement.
All of these actions have been maintained under Section 11 of the Securities Act of 1933. Originally, the complaint in Greenberg et al. v. Aileen, Inc., et al. (hereinafter called the Greenberg action) alleged additional counts under Section 10(b) of the Securities and Exchange Act of 1934, in common law fraud and for punitive damages, but these three counts were eliminated in an amended complaint. The complaint in Barnes v. Osofsky et al. (hereinafter called the Barnes action), the second amended complaint in the Greenberg action and the amended complaint in Smith et al. v. Aileen, Inc., et al. (hereinafter called the Smith action) are in all material respects identical. All three actions were consolidated for all purposes by orders of this Court dated January 28, 1964 and September 28, 1964.
The complaints herein assert claims by stockholders of Aileen, Inc. on behalf of themselves and other present and former stockholders similarly situated, to recover damages for certain alleged misstatements or misleading omissions in a prospectus and registration statement of Aileen, Inc. dated September 10, 1963 and a supplement to that prospectus dated October 8, 1963 pursuant to which 200,000 shares of stock of that company were offered to the investing public at a price of $23.375 per share. In addition to Aileen, Inc., the following defendants were named in the complaints: Goodbody & Co. (the representative of the underwriting group); Samuel Kolatsh, Paul M. Schlem, Richard L. Gilbert, and Howard S. Shulman (directors of Aileen, Inc.); Meyer Osofsky and Abe Oberlin (the principal officers of Aileen, Inc. and owners of 100,000 of the 200,000 shares which were sold pursuant to the registration). Of these defendants only Aileen, Inc., Meyer Osofsky and Abe Oberlin are to contribute under the terms of the proposed settlement herein, to the settlement fund.
The principal contentions of plaintiffs upon which they allege liability in these cases, are:
1. That the Consolidated Statement of Earnings and Retained Earnings appearing on page 3 of the prospectus was false and misleading in that it failed to show that the figures for the first six months of 1962 were not truly comparable with those for the first six months of 1963;
2. That defendants failed to disclose that the business of Aileen, Inc., began to decline after July 1, 1963 and failed to disclose that the bookings of one of its seasonal lines before September 10, 1963 were less than those for the same line during the same period in the previous year.
3. That the prospectus omitted material facts respecting overproduction necessitating the disposal of a large quantity of unsold inventory at substantial discounts.
These contentions and their claimed significance have been vigorously contested by the parties.
Extensive depositions before trial were had and several sets of interrogatories answered in addition to examination and audit of books, records and documents of defendant, Aileen, Inc. and of its auditors, Ernst & Ernst, by plaintiffs and plaintiffs' accountants. Plaintiffs sought and obtained orders of this Court permitting additional stockholders and former stockholders to intervene as party plaintiffs in these actions.
In December, 1964 three named defendants in the Barnes action sought and obtained an order of this Court dismissing said action as to them for failure of the complaint to state a claim against them.
Immediately prior to the commencement of negotiations which culminated in the Agreement which is now before the Court, defendants noticed the examinations before trial of several of the plaintiffs. Plaintiffs moved this Court pursuant to Rule 30(b) of the Federal Rules of Civil Procedure, for an Order directing that such examinations be dispensed with, or alternatively, be had only upon written interrogatories. This motion has been adjourned pending the outcome of this hearing and no other proceedings in these actions have been had or are presently pending.
In September, 1965 counsel for the parties commenced long and protracted settlement negotiations resulting in the Agreement of Compromise and Settlement (hereinafter called the "Agreement") dated December 16, 1965. We have the assurance of counsel that the settlement was reached as a result of armslength dealings and negotiations, and that there are no undisclosed arrangements or agreements. Copies of the Agreement, together with copies of a Notice to stockholders of this hearing and the Order of this Court to show cause why the Agreement should not be judicially approved, were mailed to all persons who were stockholders of record of Aileen, Inc. at any time between September 10, 1963 and December 17, 1965 and to the New York Regional Office of the Securities and Exchange Commission. In addition, the aforementioned Notice and Order were published in the New York Times and the Wall Street Journal.
The Agreement proposes "to dispose of and settle all claims of every nature and description which have been asserted or which could have been asserted in each of the . . . lawsuits or otherwise by virtue of the facts alleged in the pleadings as filed" and it contemplates an order forever barring such claims hereafter by any person. It provides for the deposit of the sum of $775,000 (hereinafter called the "Fund") to the credit of the lawsuits herein, with the Irving Trust Company, subject to withdrawal only by order of the Court, of which sum 50 per cent was to ...