The opinion of the court was delivered by: GURFEIN
After the filing of an amended complaint, the Murchison defendants and defendant Harrington move for summary judgment. The plaintiff moves for summary judgment only against these defendants.
The original complaint in a single count was dismissed by Judge Bryan (Smith v. Murchison, 310 F. Supp. 1079 ) as stating no claim for relief over which this Court has jurisdiction under the Securities Exchange Act of 1934. He sustained jurisdiction on the same cause of action founded on diversity of citizenship which was assumed arguendo. Later, after a transfer had been ordered to the District Court for the Northern District of Texas, a New York resident plaintiff, Haberman, was substituted for Smith, the original plaintiff who was a New Jersey resident, and Judge Bryan vacated his order of transfer. The action is brought as a derivative action on behalf of Alleghany Corporation and of stockholders similarly situated.
The original complaint was filed on September 20, 1968.
With the substitution of Haberman as the nominal plaintiff the complaint was also amended to plead three counts, the first count remaining in haec verba, and the second and third counts being framed for the purpose of avoiding Judge Bryan's grounds for dismissal for lack of Federal jurisdiction. The plaintiff apparently does not seek to relitigate that question but contends that the first count still states a claim for relief under applicable Maryland law and that the plaintiff is entitled to summary judgment on that count and on the second and third counts as well. The defendants contend that the amended allegations in Counts II and III fail to meet the legal deficiencies found by Judge Bryan as to a claim under the 1934 Act and that none of the Counts states a claim for relief under State law. Finally, as to all Counts, the defendants claim that the statute of limitations has run and that, therefore, summary judgment must be granted.
JUDGE BRYAN'S HOLDING ON FEDERAL QUESTION JURISDICTION
The allegations of the original complaint are stated in 310 F. Supp. 1079 at 1082-1083. The transaction involved an interlude in the proxy battle between the Murchisons, who are defendants here, and Kirby who is not. It will be remembered that the Murchisons in April 1965 ousted Kirby from control of Alleghany, an investment company which controlled Investors Diversified Services, Inc. (IDS) and the New York Central Railroad Co. (Central). Kirby and his affiliates, though he was not on the board, owned the largest single block of Alleghany stock -- about 33% of the shares. The Murchisons and their affiliates held about 23.9% of the shares but the Murchisons controlled the board of directors without question.
On August 14, 1962, after preliminary conversations, the Murchisons entered into written contracts with Bertin C. Gamble acting on behalf of Gamble-Skogmo (Gamble) whereby the Murchisons acting for themselves and others, sold to Gamble 1.5 million shares of Alleghany common stock and Gamble was granted a "call" and the Murchisons a "put" with respect to an additional 1.5 to 2 million shares of Alleghany common stock. The claim of the original complaint was that the Murchisons received a premium of "$7 million above the prevailing market price and the other defendants amounts above the market price ranging from $340,000 to $1,800,000. These amounts are alleged to be 'premiums' secured by defendants from the 'sale' of their corporate offices" (310 F. Supp. at 1082-1083). It was also alleged that certain purchases by Alleghany of its own stock, of IDS stock and of Central stock were caused to be made by the defendants in order to bolster the price of their own shares in these companies in aid of the plan and that the motive was concealed from the shareholders (310 F. Supp. at 1082).
It was alleged that in the course of the transactions it was agreed that Gamble would get two out of ten seats on the board as part of a gradual takeover and would later become President and that this was concealed; that Harrington, a defendant, stood for election as a director in April 1962 although he did not intend to serve out his one year term, and that this was also concealed.
The essence of the first claim was that the defendants had sold their offices and obtained a premium they would not otherwise have received. As a gloss upon the claim the plaintiff charged that a misleading proxy statement had been filed in April 1962 (before the Gamble transaction) which contained material misstatements unrelated to the Gamble transaction, but for which misstatements and omissions, it is said, the Murchison group would not have been reelected and thus would have not had the directorships to sell at an alleged premium. The original complaint charged violations of Section 10(b) and Rule 10b-5 and Sections 13(a), 14(a) and 16(a) of the Securities Exchange Act of 1934 as well as the law of Maryland.
Judge Bryan disposed of the 10(b) and 10b-5 claim on two fundamental grounds: (1) that the transaction complained of was not "in connection with the purchase or sale, of any security" by the corporation under the familiar rule of Birnbaum v. Newport Steel Corp., 193 F.2d 461, 464 (2 Cir. 1952) and Greenstein v. Paul, 400 F.2d 580 (2 Cir. 1968); and (2) that there was no allegation of loss to the corporation flowing directly from the purchase or sale. See Hoover v. Allen, 241 F. Supp. 213 (S.D.N.Y. 1965); Cohen v. Colvin, 266 F. Supp. 677 (S.D.N.Y. 1967); Supt. of Ins. of State of New York v. Bankers Life, 300 F. Supp. 1083 (S.D.N.Y. 1969), affd., 430 F.2d 355 (2 Cir. 1970), cert. granted 401 U.S. 973, 91 S. Ct. 1191, 8 L. Ed. 2d 321 (1971). Judge Bryan also held that the purchase by Alleghany of its own stock "had no direct causal relationship to the allegedly unlawful premium" and, hence, the claim could only be one of breach of fiduciary duty under State law (Smith v. Murchison, 310 F. Supp. at 1084-1085).
Judge Bryan dismissed the claim for damages based on Section 14(a) and Rule 14a-9 on the ground that to sustain an action for violation of Section 14(a) damage as well as causal connection between the false proxy statement and the damage sustained must be alleged. See Barnett v. Anaconda Co., 238 F. Supp. 766 (S.D.N.Y. 1965); Eagle v. Horvath, 241 F. Supp. 345 (S.D.N.Y. 1965); Hoover v. Allen, supra. No damage to the corporation was alleged. See Vine v. Beneficial Finance Co., 374 F.2d 627, 637 (2 Cir. 1967); cf. Mills v. Electric Autolite Co., 396 U.S. 375, 90 S. Ct. 616, 24 L. Ed. 2d 593 (1970).
He dismissed the claims under Sections 13(a) and 16(a) because there was no showing of causative effect or damage to the corporation from false filing or late filing of reports required under those sections. For example, the allegation that Forms 4 were filed late for purposes of concealment could have effect only on discovery of the transaction by shareholders but could have inflicted no damage upon the corporation itself. We agree with all these rulings of Judge Bryan on the Federal claims in the first count for they are based on existing precedent.
The parties have agreed that the motions and cross-motions should be decided on the basis of the following signed stipulations:
"IT IS HEREBY STIPULATED AND AGREED, by and between the undersigned, that the transcript of the testimony in the SEC proceeding entitled Investors Mutual, Inc., File No. 812-1550, and the exhibits which were introduced in evidence therein, may be used for all purposes by the Court herein, in determining the pending motions and cross-motions for summary judgment, ...