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September 28, 1970

Harry LEWIS, David Olin, on behalf of himself and all others similarly situated, and Mortimer M. Lerner, Plaintiffs,
SPIRAL METAL COMPANY, Inc., Van Alstyne, Noel & Co., David Van Alstyne, Jr., James A. Russell, Melvin Solomon, William J. Butler, Jr., Dominick A. Fitzpatrick, Jack Kaplan, Edward Tietz, Frederick Fahrendorf, Milton S. Cohn, H. Struve Hensel and Vanco Metals Corporation, Defendants

Frederick van Pelt Bryan, District Judge.

The opinion of the court was delivered by: BRYAN

FREDERICK van PELT BRYAN, District Judge:

Several of the defendants in this stockholder's derivative action move to dismiss the second consolidated amended complaint pursuant to Rule 12(b), Fed. R. Civ. P., on the ground that it fails to state a claim under the federal securities laws upon which relief can be granted.

 The action is laid under Sections 10(b) and 15(c)(1) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78 o (c)(1), and Rules 10b-5 and 15cl-2 promulgated thereunder.

 Plaintiffs are shareholders of Spiral Metal Company, Inc. (Spiral), a New Jersey corporation engaged principally in the business of refining and fabricating silver and silver products and trading in precious metals.

 The motion is made by the following defendants: Van Alstyne, Noel & Company (Van Alstyne), a partnership registered with the S.E.C. as a broker-dealer; David Van Alstyne, Jr. (Alstyne, Jr.) and James A. Russell (Russell), *fn1" respectively, the senior and managing partners of Van Alstyne; Melvin Solomon (Solomon), William J. Butler, Jr. (Butler) and Dominick A. Fitzpatrick (Fitzpatrick), at relevant times registered representatives and securities salesmen employed by Van Alstyne *fn2" ; and Vanco Metals Corporation (Vanco), a wholly owned subsidiary of Van Alstyne.

 The complaint under attack alleges that Van Alstyne, acting as the confidential and trusted financial and economic adviser of Spiral, advised Spiral in 1967 to increase substantially its producing facilities. To finance the increase, a public offering of $3,000,000 of Spiral's common stock was proposed with the arrangement to be underwritten by Van Alstyne. When the underwriting was delayed, Van Alstyne advised Spiral to raise capital by the private placement of $1,000,000 face amount of subordinated debentures convertible into Spiral common stock at $8.50 per share. Before placing the debentures Van Alstyne awaited a report on Spiral's current financial position and prospects then being prepared by an independent engineering firm retained and paid by Spiral.

 On March 19, 1968, Van Alstyne through Russell received an oral report and on March 21, 1968 a preliminary report in writing which indicated that earnings for the fiscal year ended March 31, 1968 would be up sharply from those of the year before and that the prospects for the future were even more encouraging. *fn3" None of this information was available to the public, though apparently fully available to Spiral's Board of Directors. The latest financial figures published by Spiral were those for the fiscal year ended March 31, 1967.

 On April 8, 1968 Van Alstyne placed $700,000 of the convertible debentures with Vanco, its subsidiary, and the remaining $300,000 with nine customers and associates. On April 8, 1968 the bid price for Spiral's stock in the over-the-counter market was 11 3/8 per share. In approving the debenture purchase agreement, the directors of Spiral relied on Van Alstyne's advice that the terms were fair to Spiral. The advice is alleged to have been "false and misleadingly incomplete in that it failed to reveal the facts, of which Van Alstyne had knowledge or notice, that in light of Spiral's improved financial condition, earnings and prospects, the debenture terms were unfair to Spiral; that the price at which the debentures were sold was grossly inadequate, that the market price of Spiral's stock on and before April 8, 1968 was adversely affected by the non-disclosure to the public of Spiral's improved earnings and prospects, and that debentures providing for terms substantially more advantageous to Spiral could be placed with other lenders upon disclosure to them of such information."

 It is not alleged that Spiral's directors were not fully advised of Spiral's improved financial condition and it is charged that in selling the debentures to Van Alstyne the directors acted "in reckless disregard of their duties to Spiral equivalent to fraud."

 Spiral's improved financial condition was not disclosed to the public until June 7, 1968, the date Spiral's registration statement was filed.

 On October 4, 1968 the bid price of Spiral's common stock was $35 per share. It is not alleged that Van Alstyne, or any of the others who received the debentures, converted on October 4 or any other day. However, plaintiffs measure defendants' profits by the price of the Spiral common stock that would have been received had defendants converted and sold on October 4.

 In addition to the debenture transaction, the single count complaint alleges that defendants Van Alstyne, Alstyne, Jr., Russell, Solomon, Butler and Fitzpatrick, knowing that Spiral's true position had not been disclosed to the public, purchased Spiral shares either for their own accounts or for the accounts of their customers and that as of October 4, 1968 profits in excess of $600,000 had accrued on these shares. These purchases, it is alleged, were made pursuant to a conspiracy to profit from the private use of inside information belonging to Spiral. These transactions are alleged to have operated as a fraud or deceit upon Spiral and the relief requested is recovery of the profits for the benefit of Spiral.

 The Debenture Transaction

 With respect to the debenture transaction, it is not alleged that the directors of Spiral were not fully aware of the facts concerning the improved financial condition of the Company when they ...

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