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WALNER v. FRIEDMAN

October 6, 1975

Walner, et al., Plaintiffs
v.
Friedman, et al., Defendants


Brieant, District Judge.


The opinion of the court was delivered by: BRIEANT

BRIEANT, District Judge: On reading and filing the affidavit of Jack B. Friedman, Esq., sworn to October 2, 1975, the Memorandum Decision dated September 30, 1975 and filed herein is withdrawn, and the following substituted therefor.

All defendants but one in this shareholders derivative action move for an order dismissing the complaint pursuant to Rules 12(b)(6) or 12(b)(1) or 9(b) and 11, F.R. Civ. P., or alternatively, for a stay against further prosecution of the action, and for costs.

 Plaintiffs are shareholders of Solitron Devices, Inc. ("Solitron"), a New York corporation, the stock of which is publicly traded. Defendants are the corporation itself, two accounting firms and persons now or formerly members of Solitron's management, directors and officers.

 The underlying facts as developed at the hearing held on this motion, or appearing of record, may be summarized briefly. On March 19, 1975, the Securities and Exchange Commission ("SEC") filed an action against Solitron in the District Court for the District of Columbia. This action was terminated on April 17, 1975 by a stipulation and order pursuant to which Solitron undertook to conduct an inquiry to determine the extent to which certain financial filings with the SEC previously made by Solitron should be re-stated and corrected.

 Solitron was the only party to that litigation. The complaint there alleged that Solitron had violated various provisions of the federal securities laws by reporting false and misleading financial information.

 Thereafter, a number of class actions were filed in this Court by persons who claimed that they had purchased or sold Solitron securities in reliance on financial statements of Solitron claimed to be false. These cases have been consolidated pursuant to my Order filed June 11, 1975 in Sirota v. Solitron Devices, Inc., 75 Civ. 1369, and that litigation is hereafter referred to for convenience as the "Consolidated Class Action."

 A consolidated amended complaint has been filed in that action. Price Waterhouse & Co., one of the movants here, is not, and probably will not be, named as a defendant in the consolidated class action.

 The pleading in this action, filed April 21, 1975, is entitled "Verified Complaint in Derivative Action." It shows on its face (para. 2) "plaintiff brings this claim for relief derivatively, in the right and for the benefit of Solitron." The claim pleaded is based upon "violations of Sections 10, 14, 18 and 20 of the Securities Exchange Act of 1934, 15 U.S.C. § 78a and rules thereunder, and applicable principles of common law." (Complaint, para. 1). Subject matter jurisdiction is based upon Section 27 of the Exchange Act, and "principles of pendent jurisdiction." (Complaint, para. 3).

 Plaintiffs own 1,000 common shares of Solitron out of approximately 4,600,000 such shares outstanding. Their Complaint asserts that Solitron's management and its accountants:

 
"caused Solitron to prepare and file false and misleading financial statements and reports to the Securities and Exchange Commission and shareholders, and filed such false and misleading reports with the Securities and Exchange Commission and distributed some to shareholders in false and misleading proxy statements and annual reports." (Complaint, para. 16).

 As damage resulting to Solitron, in whose capacity this action is brought, plaintiffs allege:

 
"Time and effort of the officers and directors and funds of the Company have been expended in defending against allegations of the [SEC] and will be further expended in connection with stockholder class action law suits alleging damages arising out of such transactions. As a result of defendants' actions, the reputation and public image of Solitron has been tarnished, and such has and will result in damage to Solitron and its business." (Complaint, para. 19).

 Plaintiffs plead that defendants' conduct amounts to "gross negligence," and "breach of fiduciary duties and obligations to Solitron and its shareholders."

 The Complaint contains the usual boiler plate allegation relied upon to evade compliance with Rule 23.1, F.R. Civ. P. and § 626, ...


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