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HOFF v. SPRAYREGEN

November 5, 1971

Albert HOFF and Karen L. Hoff, Plaintiffs,
v.
Gerald SPRAYREGEN et al., Defendants


Tenney, District Judge.


The opinion of the court was delivered by: TENNEY

MEMORANDUM (November 5, 1971)

TENNEY, District Judge.

 This is a motion pursuant to Rules 12(b)(1) and 12(b)(6) of the Federal Rules of Civil Procedure to dismiss the complaint herein for lack of jurisdiction over the subject matter and for failure to state a claim upon which relief can be granted.

 The action is a derivative one, brought by plaintiffs as stockholders on behalf of the nominal defendant, Technical Tape, Inc. (hereinafter referred to as "Tech Tape") and the movants are defendants Sprayregen & Co., Inc. (hereinafter referred to as "Sprayregen"), Gerald Sprayregen and Lawrence N. Hurwitz, who are joined by defendants Edward T. Chappell, Charles Erdman, Stephen Fuller and Charles Katz. The said defendants argue that the complaint should be dismissed because it does not state any federal claim and there is no subject matter jurisdiction over the action.

 In support of such argument, defendants assert that rather than stating, as alleged, a claim under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (1971) and the Rules enacted thereunder, 17 C.F.R. § 240.10b-5 (hereinafter referred to as "Rule 10b-5"), the complaint sets forth at best a garden variety type claim for an alleged breach of corporate fiduciary duty. *fn1"

 In brief, *fn2" the complaint alleges that the individual defendants dominated and controlled Tech Tape and caused Tech Tape to enter into certain agreements resulting in the issuance by Tech Tape of shares of its preferred stock to SMC Investment Corporation (hereinafter referred to as "SMC") and in connection therewith the payment of grossly excessive fees to Sprayregen (including the issuance of warrants for common stock of Tech Tape), all in violation of Section 10(b) of the Securities Exchange Act and Rule 10b-5 promulgated thereunder.

 It is further alleged that plaintiffs, as contemporaneous shareholders, bring this derivative action in the right and for the benefit of Tech Tape, basing jurisdiction upon Section 27 of the Securities Exchange Act of 1934, as amended, 15 U.S.C. § 78aa, the principles of pendent jurisdiction and diversity of citizenship.

 More particularly, it is alleged that defendants Sprayregen (an investment banking firm), Gerald Sprayregen and Hurwitz (both stockholders and Chairman of the Board and President of Sprayregen, respectively) were directors of Tech Tape at the time of the transactions complained of herein; that defendant Sprayregen purchased control of Tech Tape and at the time of the transactions complained of herein and continuing, dominated and controlled the Board of Directors of Tech Tape and dominated and controlled the business policies and decisions of Tech Tape by virtue of its ownership and control of Tech Tape stock and its domination and control of the Board of Directors of Tech Tape.

 It is further alleged that while in the conflicting position of control, defendants Sprayregen, Gerald Sprayregen and Hurwitz caused Tech Tape to enter into an agreement with Sprayregen whereby Tech Tape agreed to pay Sprayregen fees (including the issuance of warrants to purchase 20,000 shares of Tech Tape below the then-market value) in the event that at any time in the future Sprayregen obtained financing from SMC for Tech Tape by private placement of Tech Tape notes or securities with SMC; that thereafter Sprayregen obtained such financing in the amount of $5,000,000 from SMC resulting in the issuance of $5,000,000 worth of preferred stock of Tech Tape to SMC; *fn3" that in connection with the issuance of said $5,000,000 of preferred shares to SMC, Tech Tape was obligated to pay Sprayregen fees in excess of $550,000 (consisting in part as the difference between the warrant and market price of 20,000 shares of common stock of Tech Tape) which amount was in excess of 11 per cent of the purchase price of the preferred stock issued, was substantially in excess of the customary fees paid for such services, and was so grossly excessive as to constitute a fraud upon Tech Tape in connection with the issuance of said securities.

 Paragraph 16 alleges:

 
"The defendants other than Technical Tape singly and in concert have violated Section 10(b) of the Act and Rule 10b-5 promulgated thereunder in that by the use of the mails and instrumentalities of Interstate commerce and in connection with the sale of the aforesaid shares of Preferred Stock by Technical Tape to SMC and the sale of the aforesaid warrants by Technical Tape to Sprayregan & Co., said defendants employed devices, schemes and artifices to defraud; made untrue statements of material facts or omitted to state material facts necessary in order to make statements made in the light of circumstances under which they were made not misleading and engaged in acts, practices and a course of conduct which was intended to and did operate as a fraud upon Technical Tape."

 Paragraph 17 alleges:

 
"As part of the aforesaid acts and transactions referred to in Paragraph 16 above, defendant Sprayregan & Co. and defendants Sprayregan & Hurwitz failed to disclose to other directors of Technical Tape that the compensation to be paid to Sprayregan & Co. pursuant to the aforementioned agreement between Technical Tape and Sprayregan & Co. was in excess of 11% of the purchase price of the notes or securities to be sold to SMC and was substantially in excess of the customary fees paid for ...

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