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FERRAIOLI v. CANTOR

June 15, 1966

Ferraioli, Plaintiff
v.
Cantor, et al., Defendants


Levet, District Judge.


The opinion of the court was delivered by: LEVET

LEVET, District Judge.

This is a class action brought by a former shareholder of the General Baking Company (hereinafter "the Company") on behalf of himself and other persons similarly situated to recover an alleged premium which was paid to the defendant Denison Mines Ltd. (hereinafter "Denison") on the sale by Denison of its controlling interest in the Company to defendant Goldfield Corp. (hereinafter "Goldfield"). The amended complaint purports to assert that the sale and the actions associated with it constitute a violation of Section 10(b) of the Securities Exchange Act of 1934, 15 USC § 78j(b), *fn1" and of Rule 10b-5, 17 CFR § 240.10b-5, promulgated thereunder. *fn2"

 Denison now moves pursuant to Fed. R. Civ. P. 12(b) for dismissal of the amended complaint upon the following grounds:

 1. That this court lacks jurisdiction over the subject matter;

 2. That venue is improper in the Southern District of New York; and

 3. That service of process was improper on the ground that service of process outside the United States is invalid and that at the time of service Denison was a foreign corporation not doing business in the State of New York.

 SUBJECT MATTER JURISDICTION

 The amended complaint alleges that the Company is one of the largest companies in the bread baking industry in the United States, is incorporated under laws of the State of New York, and maintains its executive offices in the Borough of Manhattan, City and State of New York. It further alleges that in April, 1963 Denison, a Canadian corporation with its principal office in Toronto, Province of Ontario, Canada, began to acquire the common stock of the Company and by April, 1965 had acquired 33% of such stock which represented a controlling interest in the Company. In connection with the possession of control, Denison is alleged to have had its nominees elected to the Board of Directors and placed in particular offices, to have maintained control over the affairs of the Company through use of the United States mails and other means of interstate commerce, and to have designated proxies to vote its controlling block of stock at stockholders' meetings in New York through use of the mails and other means of interstate commerce. None of the above statements alleges in and of itself a violation of the Securities Exchange Act of 1934.

 The purported violation by Denison is alleged in paragraphs Thirteenth, Seventeenth and Nineteenth of the amended complaint, which read as follows:

 
" THIRTEENTH: Between February 1, 1965 and May 17, 1965 defendants Denison and Goldfield, acting in concert, began to make use of knowledge and information of material facts known to them by reason of their relationship to the Company, which information and knowledge was not known to the general investing public, and, acting in concert, began to employ devices, schemes and artifices to defraud and engaged in acts, practices and a course of conduct which was intended to and did operate as a fraud upon the Company and its shareholders through the use of the mails and other means or instrumentalities of interstate commerce in connection with the purchase and sale of stock of the Company then owned by Denison and certain persons associated with Denison. As part of the aforesaid, Denison agreed to and did transfer the power to control the business, management, financial policies, affairs and activities of the Company with its substantial operations and assets within the United States to defendant Goldfield. To accomplish the aforesaid, Denison agreed to and did cause its designees who were serving and acting as officers and directors of the Company within the United States to resign their respective offices in order that designees of Goldfield could be selected in their place and stead, through the use of the mails and other means or instrumentalities of interstate commerce. As part of the aforesaid, Goldfield agreed to and did acquire the shares of the Company owned by Denison at a price substantially in excess of the current market price then prevailing in order to induce Denison to cause control to be transferred to Goldfield."
 
" SEVENTEENTH: Defendant Denison failed to inform the plaintiff and other public shareholders of the Company of the existence of the offer, in violation of its specific and fiduciary duties to the Corporation and the shareholders thereof and as part of a device, scheme, and artifice to defraud and engaged in acts, practices and a course of conduct which was intended to operate as a fraud upon the Company and its shareholders in connection with the purchase and sale of the common stock of the Company."
 
" NINETEENTH : Defendant Denison failed to obtain said equal opportunity for the plaintiff and other public shareholders of the Company, in violation of its specific and fiduciary duties to the Company and its shareholders and as part of a device, scheme and artifice to defraud and engaged in acts, practices and a course of conduct which was intended to and did operate as a fraud upon the Company and its shareholders in connection with the purchase and sale of the common stock of the Company."

 The substance of the alleged violation is the sale by Denison of its controlling interest in the Company to Goldfield at a price allegedly in excess of the market price without disclosing to the other shareholders the existence of the Goldfield offer or obtaining such offer for the other shareholders. The plaintiff alleges that he sold his stock in the Company on the New York Stock Exchange at the time of the negotiations prior to the Denison sale and that he would not have done so if all the facts had been disclosed.

 Subject matter jurisdiction of the United States Courts as well as venue and service of process as to actions arising under the Securities Exchange Act of 1934 is governed by Section 27 thereof, ...


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