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MGM v. ROSS

July 23, 1973;

METRO-GOLDWYN-MAYER INC., Plaintiff,
v.
Jerry ROSS and Arthur B. Ross, Defendants. HERITAGE RECORDS, INC., et al., Plaintiffs, v. METRO-GOLDWYN-MAYER INC., et al., Defendants


Stewart, District Judge.


The opinion of the court was delivered by: STEWART

STEWART, District Judge:

MGM, Inc., the plaintiff in the first captioned action is engaged among other things in the phonograph record and music publishing business. The defendants, Jerry and Arthur Ross were, prior to April 21, 1970, sole stockholders of Colossus Records and Heritage Records (phonograph record companies), Legacy Music and Collage Music (publishing companies) and Colossus Promotions. These companies will be referred to as the Ross Companies. The individual defendant remaining in the second action at the time of trial, Mr. Curb, was the President of MGM Records, a subsidiary of MGM. Claims against two other defendants who were served in the second action, Mr. Melniker and Mr. Weinstein, were dismissed with prejudice at the commencement of the trial.

 The suit by MGM is to rescind a series of four contracts entered into by the parties on April 21, 1970 on the basis of alleged violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities and Exchange Act and common law fraud and misrepresentation. The Ross Companies counterclaimed and brought suit for breach of contract and for alleged violations by MGM of the federal securities laws. These actions were consolidated and tried before this Court without a jury.

 The four contracts entered into by the parties are described in detail in a 56-page statement of facts stipulated to by the parties. They include an Exchange agreement, Loan agreement, Employment agreement and a Motion Picture Scoring agreement. Generally, these agreements pertain to the sale of the Ross Companies stock to MGM *fn1" and the acquisition by MGM of the services of Jerry Ross *fn2" in exchange for shares of MGM stock and a commitment by MGM to finance the operations of the Ross Companies. *fn3" The Exchange agreement provided for various warranties and representations by Jerry and Arthur Ross pertaining to the sale of the Ross Companies, which will be referred to throughout this opinion. Additionally, the Exchange agreement provided that MGM had rights to investigate the assets and business of the Ross Companies and that MGM, in case of a specified net loss, could terminate the agreements which would result in Jerry and Arthur Ross being able to retain or obtain from MGM, MGM stock valued at $500,000.

 The Motion Picture Scoring agreement gave to Jerry Ross the opportunity to compose or score at least one motion picture or television special selected by MGM in return for payment by MGM of $10,000. The $10,000 was guaranteed to Ross regardless of whether he actually scored a motion picture or T.V. series. This agreement was primarily an inducement to the Ross brothers to enter into the four agreements.

 These agreements were closed on October 8, 1970 and certain modifications were agreed upon at the closing. Among these was the receipt by the Rosses of 4,167 additional shares of MGM common stock. This was to assure that Jerry and Arthur Ross would receive the full value of the 8,333 shares as the price of the stock had diminished since April 21. Tied into this arrangement was an option on the part of MGM to purchase these additional shares for $5,000 exercisable up to three years from the date of the closing.

 Other modifications included the cancellation of the Motion Picture Scoring agreement, saving MGM $10,000 and certain deletions in the Loan agreement. *fn4"

 MGM claims that various statements, representations and warranties made by Jerry and Arthur Ross in the agreements were not true as of the closing date and therefore Securities Exchange Act Rule 10b-5 and principles of equity well established in New York require that the acquisition transaction be set aside. MGM also seeks consequential damages and money already paid by it pursuant to the agreements.

 Jerry and Arthur Ross claim that they disclosed all facts that they were obliged to disclose and that after the closing MGM breached the contracts as modified by failing to fulfill its obligation to finance the operations of the Ross Companies. They further claim that as the situation of the Ross Companies grew more tenuous MGM coerced Jerry Ross into entering into a new funding agreement [the December 8 agreement] under which MGM was no longer obligated to advance $500,000 to the Ross Companies in each of two fiscal years, but instead was obligated to advance $30,000 per month and not to exceed $360,000 per year. It is the thrust of the Rosses' contention that MGM contrived to rescind the agreements, to recover the MGM stock already paid and to avoid paying the additional shares all totaling $500,000.

 This Court has jurisdiction of these actions under Section 22 of the Securities Act of 1933, as amended, 15 U.S.C. § 77v and under Section 27 of The Securities Exchange Act of 1934, as amended, 15 U.S.C. § 78aa in that the transactions in issue constituted an offer and sale of securities by use of the means and instrumentalities of interstate commerce. This Court also has jurisdiction under 28 U.S.C. § 1332 in that the parties are of diverse citizenship and the amount in controversy exceeds $10,000 exclusive of interests and costs.

 Before turning to the merits, MGM has raised the initial question of standing of the Ross Companies and Jerry Ross Productions, Inc. to bring their claims under Rule 10b-5 in that these companies are not purchasers or sellers of securities.

 Rule 10b-5 provides in pertinent part:

 
"It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any ...

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