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LEWIS v. LING

January 10, 1973

Harry LEWIS, Plaintiff,
v.
James J. LING et al., Defendants


MacMahon, District Judge.


The opinion of the court was delivered by: MACMAHON

MacMAHON, District Judge.

This civil action, tried without jury, was brought derivatively by plaintiff on behalf of Ling-Temco-Vought, Inc. ("LTV") against James O. Weldon, W. P. Thayer, and James J. Ling, all past or present directors or officers of LTV. *fn1" Plaintiff seeks damages for sales of stock from LTV to defendants pursuant to an option plan. He alleges that the sales were fraudulent and in violation of (1) the option plan, (2) defendants' fiduciary duty to LTV, and (3) Sections 10(b) and 14(a) of the Securities Exchange Act and rules promulgated thereunder. Defendants deny any fraud or violation of law and assert several affirmative defenses. *fn2"

 It is undisputed that under a stock option plan adopted by LTV in January 1957, options to purchase stock were granted to Ling, Thayer and Weldon, among others. All three exercised their options in 1965 and 1966, and nine, sixteen and twenty-four months thereafter Ling, Thayer and Weldon, respectively, sold some of their option shares.

 All six of plaintiff's claims rest upon the single premise that the option stock was not acquired for investment. *fn3" All the claims must fail, therefore, if defendants did acquire their option stock for investment. The relevant language in the option agreement referring to acquisition for investment is:

 
"I hereby represent and warrant to . . . [LTV] that I am acquiring the shares for my own account for investment. . . . I have no present intention of selling or otherwise disposing of such shares. . . . I do not now intend to sell or otherwise dispose of . . . said shares . . . until I determine . . . that changed circumstances not now contemplated make such . . . disposition advisable. . . ." (Hereafter referred to collectively as "acquisition for investment.") *fn4"

 Plaintiff would interpret acquisition for investment as an intent to hold stock for at least two years and perhaps much longer. He assumes that the controlling law is the Securities and Exchange Commission's ("SEC") interpretation of investment intent as applied to exemption from registration of a private offering of securities under the Securities Act of 1933, 15 U.S.C. § 77d(2). We need not decide that question for we find that defendants did buy their option stock for investment whether we apply the teaching of the SEC or the language of the stock option agreement.

 The SEC's interpretation of investment intent during the relevant period -- August 1964 to March 1967 -- as published in a Securities Act release was as follows:

 
"An important factor to be considered is whether the securities offered have come to rest in the hands of the initial informed group or whether the purchasers are merely conduits for a wider distribution. Persons who act in this capacity, whether or not engaged in the securities business, are deemed to be 'underwriters' within the meaning of Section 2(11) of the Act. . . . [A] statement by the initial purchaser, at the time of his acquisition, that the securities are taken for investment and not for distribution is necessarily self-serving and not conclusive to his actual intent. . . . The nature of the purchaser's past investment and trading practices or the character and scope of his business may be inconsistent with the purchase of large blocks of securities for investment. In particular, purchases by persons engaged in the business of buying and selling securities require careful scrutiny for the purpose of determining whether such person may be acting as an underwriter for the issuer." *fn5"

 As the release shows, there are no hornbook rules for determining a bona fide investment intent in a given case; *fn6" rather, the key to whether stock is purchased for investment lies in consideration of the totality of circumstances in light of the object and purposes of the Securities Act.

 The Act sets forth a comprehensive plan for the purpose of protecting the investing public. It, therefore, requires that before any security is offered to the public, the corporation issuing the security must file a registration statement making a full and accurate disclosure of material facts relating to the corporation's properties, its business, its management, its principal stockholders, its financial condition, and the amount and types of stock outstanding. The registration statement must be supported by certified balance sheets and profit and loss statements.

 The law requires a full disclosure of material facts in order to give the public access to information essential to making a realistic appraisal of the merits of the securities offered for sale and thus exercise an informed judgment in deciding whether to buy them.

 A private offering is an issue of stock to a limited number of persons who acquire the stock for investment in an arm's length transaction with the corporation issuing the stock. Such buyers are able to fend for themselves in ascertaining the basic material facts about the issuer that a registration statement would otherwise reveal. Therefore, if the buyers intend to acquire the stock for investment without a present intention to redistribute the stock to the uninformed public, private offerings are exempt from registration. *fn7"

 Almost any investor buys stock with an intent to sell it at some point in time if the price is high enough. Thus, "the fact that a buyer does resell is not conclusive that he so intended when he bought." *fn8" There must be some indicia that the motivation of the original sale was to evade the requirement for registration. *fn9"

 In ascertaining an investment intent, therefore, the proper questions to be asked are not so much what the buyer said, but what he did. Is the avowed intention to take the stock for investment a mere guise for distribution of the stock to an uninformed public? Is the purchaser a mere conduit for public ...


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