The opinion of the court was delivered by: GURFEIN
A motion for reargument is made by the plaintiff under Rule 9(m) of the General Rules. The motion is granted and the briefs and letters submitted will be treated as the reargument.
Plaintiff moves, upon reargument, for summary judgment on two grounds: (1) that the recent decision of the Supreme Court in Supt. of Insurance v. Bankers Life, 404 U.S. 6, 92 S. Ct. 165, 30 L. Ed. 2d 128, 1971, requires holding valid the federal claims previously dismissed by Judge Bryan and myself;
and (2) that the Court misinterpreted the stipulation of the parties and failed to consider evidence before the SEC favorable to the plaintiff.
1. The Bankers Life case.
The original first cause of action herein charged a sale of "control" of the Alleghany Corporation by the defendants to Gamble-Skogmo (Gamble) under circumstances allegedly constituting fraud under Section 10(b) and Rule 10b-5 of the 1934 Act, as well as antecedent fraud in a proxy statement in violation of Sections 13(a), 14(a) and 16(a) of that Act. Judge Bryan dismissed the claim. He held that (1) the transaction complained of was not "in connection with the purchase or sale of any security [by the corporation]" under Birnbaum v. Newport Steel Corp., 193 F.2d 461, 463 (2 Cir. 1952) and Greenstein v. Paul, 400 F.2d 580 (2 Cir. 1968); and that (2) there was no allegation of loss to the corporation flowing directly from the purchase and sale under 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. v. Bankers Life, 300 F. Supp. 1083 (S.D.N.Y. 1969), aff'd, 430 F.2d 355 (2 Cir. 1970). [The latter case has now been reversed.]
In the cross-motions for summary judgment that came before me the plaintiff did not seek a reargument of Judge Bryan's decision on the non-existence of a federal claim but merely sought to sustain the first count under Maryland law. In fairness to the present position of the plaintiff with respect to the recent Bankers Life decision of the Supreme Court, however, I shall treat the motion as directed to Judge Bryan's original opinion and my own concurrence with it.
The Bankers Life decision does not affect the prior decisions of this Court that there is not a Section 10(b) case here. In the present case, the allegation is that the defendants sold stock in the Alleghany Corporation to a third party. Alleghany was not a party to the sale. In the Bankers Life case, while it is true that Bankers Life sold the shares in the Manhattan Casualty Company (Manhattan) to one Begole, the similarity to our case ends there. For the essence of the Section 10(b) fraud was the compelled sale by Manhattan of five million dollars worth of U.S. Treasury Bonds for which it did not receive the proceeds and which were converted to the use of Begole. The Supreme Court held that Manhattan was a seller of the Treasury Bonds -- which it surely was -- and hence could be defrauded "in connection with the purchase or sale of a security." Mr. Justice Douglas wrote: "The crux of the present case is that Manhattan suffered an injury as a result of deceptive practices touching its sale of securities as an investor" (Slip. Op. p. 6). If the "crux of the case" was injury to Manhattan there is no allegation, in this derivative suit, of comparable injury to Alleghany, the real plaintiff.
To make it clear that all the Court was deciding was the Section 10(b) claim relating to Manhattan's sale of the Treasury Bonds and nothing else, Mr. Justice Douglas wrote in footnote 10:
"Petitioner's complaint bases his single claim for recovery alternatively on three different transactions alleged to confer jurisdiction under § 10(b); Manhattan's sale of the Treasury bonds; the sale of Manhattan stock by Banker's Life to Bourne and Begole; and the transactions involving the certificates of deposit. We only hold that the alleged fraud is cognizable under § 10(b) and Rule 10b-5 in the bond sale and we express no opinion as to Manhattan's standing under § 10(b) and Rule 10b-5 on other phases of the complaint. See Kellogg, The Inability to Obtain Analytical Precision Where Standing to Sue under Rule 10b-5 is Involved, 20 Buff. L. Rev. 93 (1970); Lowenfels, The Demise of the Birnbaum Doctrine: A New Era For Rule 10b-5, 54 Va. L. Rev. 268 (1968)."
Accordingly, Birnbaum is left where it was. As to the earlier requirement of direct loss to the corporation, as exemplified in Hoover v. Allen, supra, the Supreme Court may have made the requirement less rigid. Indirect loss may now be enough to found federal jurisdiction under Section 10(b) but loss there must be to the plaintiff corporation in any event. Here there is no allegation that Alleghany itself lost any money.
Rosenfeld v. Black involved neither the question of who is a purchaser or seller under the 1934 Act nor the question of direct loss to one who was not a seller. It has no special application to the facts of this case.
The stipulation, freely entered into by the parties, came about in the following way.
At the oral argument of the cross-motions for summary judgment it was suggested that the Court could read the testimony taken before the SEC in the Investors Mutual proceeding. When I came to read the papers I wanted to make certain that the parties were agreed upon what the stipulation embraced. I, accordingly, asked for a written stipulation, in no way suggesting what it should be. There resulted a signed stipulation which is the first paragraph set out in the ...