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NEUWIRTH INV. FUND v. SWANTON

November 17, 1975

Neuwirth Investment Fund, Ltd., et al., Plaintiffs
v.
Norman Swanton, et al., Defendants



The opinion of the court was delivered by: MOTLEY

OPINION ON MOTION FOR SUMMARY JUDGMENT

 MOTLEY, District Judge:

 Plaintiffs, two foreign investment companies, commenced this action on January 20, 1972, seeking rescission relief under Section 12(1) of the Securities Act of 1933 (15 U.S.C. § 77 l (1)) ("Securities Act"). Their claim is that stock sold to them by defendants was not registered pursuant to Section 5 of the Securities Act (15 U.S.C. § 77 e), and that, accordingly, they are entitled to redeliver the stock to defendants and have their money returned. On December 2, 1972, this court granted leave to plaintiffs to serve and file an amended complaint which added two additional counts based on theories of misrepresentation, alleging violations of Section 12(2) of the Securities Act (15 U.S.C. § 77 l (2)) and Section 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. § 78 j (b)) together with SEC Rule 10b-5.

 Plaintiffs have now moved pursuant to Rule 56 of the Federal Rules of Civil Procedure for partial summary judgment limited to count I of the Amended Complaint, seeking rescission relief under Section 12(1) of the Securities Act. Defendants in turn have cross-moved for summary judgment on this same count. Both sides maintain that there exists no genuine issue as to any material fact with regards to count I and that the question is ripe for summary judgment. This court concurs, and accordingly denies plaintiffs' motion for partial summary judgment as to the same count. While the material facts set out below are undisputed, the court has resolved any ambiguities and has drawn all reasonable inferences in favor of the plaintiffs, against whom summary judgment is granted. See Heyman v. Commerce and Industry Insurance Company, 524 F.2d 1317 (2d Cir. 1975).

 Thus, the following material facts, described in greater detail below, are found to be undisputed: 1) Defendant Dempsey-Tegeler ("Dempsey") acquired the involved shares, which were not registered for resale and which included a restrictive clause, as underwriting compensation and with the right to require registration of such shares by the issuer on demand. 2) The issuer of such shares never registered these shares, though asked to do so, and Dempsey continued to hold such shares in its investment account. 3) Dempsey eventually went into liquidation and a liquidator appointed by the New York Stock Exchange ("NYSE") took control of its assets. 4) Said liquidator attempted to have the shares registered or alternatively to have a no-action letter issued by the Securities and Exchange Commission ("SEC") regarding them, but failed on both counts. 5) Finally, the liquidator agreed to sell the restricted unregistered shares to plaintiffs with the understanding that defendants would exert their best efforts on the issuer to get the shares registered, and that plaintiffs did not intend to sell the shares until such registration. 6) Such registration never took place and plaintiffs continue to hold such shares. For purposes of this motion, this court also draws the inference that both defendants and plaintiffs sought registration of the involved shares with the intent of making a public offering of such shares after such registration. This is in accord with plaintiffs' contentions. This court also accepts for purposes of this motion plaintiffs' contention that the sale to plaintiffs involved two offerees rather than one.

 Statement of Facts

 The transaction which plaintiffs seek to have rescinded involved the sale to plaintiffs in January 1971 of an aggregate of 18,000 shares of the capital stock of a New York corporation known as American Bioculture, Inc. ("ABI"). Plaintiffs paid a total of $252,000 for the stock. At the time of sale, these shares were restricted unregistered shares from the investment account of the defendant Dempsey. They were not freely marketable, and the certificates for said shares bore the following legend:

 
"The shares represented by this certificate have been registered under the Securities Act of 1933 solely for sale to the holder of a Common Stock Purchase Warrant who may be deemed to be an underwriter of such shares within the provisions and for purposes only of the Securities Act of 1933. Unless the issuer of these shares agrees to a transfer of these shares, or any part thereof, any such transfer is null and void. The issuer will agree to such a transfer only if 1) a revised prospectus setting forth the terms of the offer has been filed as part of a post-effective amendment to the Registration Statement under which these shares are registered or as part of another Registration Statement and such post-effective amendment or other Registration Statement has become effective, or 2) it is reasonably satisfied that no such post-effective amendment or other registration is required."

 Dempsey had been the holder of the Common Stock Purchase Warrant mentioned in this legend. It had been sold to Dempsey by ABI at the bargain price of $600 as additional underwriting compensation in connection with Dempsey's having acted as the principal and managing underwriter of a public offering of 140,600 shares of the capital stock of ABI under a Registration Statement filed with the SEC on September 17, 1968 and effective September 19, 1968. *fn1"

 The warrant provided that the stock certificates issued to Dempsey upon exercise of the warrant would bear the restrictive legend quoted above, *fn2" and, in addition, provided in Section 7:

 
"The Company agrees that it shall be reasonably satisfied that no post-effective amendment or other registration is required for the public sale of shares to be issued pursuant to the exercise of the Warrant, if it shall be presented with a letter from the staff of the Securities and Exchange Commission (the "Commission") stating in effect that the staff will not recommend any action to the Commission if such shares are offered and sold without delivery of a prospectus, and that, therefore, no post-effective amendment to the Registration Statement under which such shares are registered or other registration statement is required by said staff to be filed.
 
"Upon written request of Dempsey-Tegeler & Co., Inc., the Company shall prepare and file with the Commission (as a post-effective amendment or amendments to the Registration Statement) such amended or supplemented prospectus or other documents, as may be necessary in the opinion of counsel for the Company and counsel for Dempsey-Tegeler & Co., Inc. in order to comply with the provisions of the Securities Act of 1933 so as to permit the public offering and sale of the shares acquired by exercise of the Warrant, in whole or in part."

 Dempsey chose to exercise its Warrant on September 26, 1969, and received 18,000 shares of the capital stock of ABI at a total cost of $64,800. In December 1969, Dempsey requested ABI to file a Post-Effective Amendment to the Registration Statement effective September 19, 1968 for purposes of registering these 18,000 shares. The stock was then selling at approximately $36-$38 per share. In April 1970, a printer's proof of a proposed Post-Effective Amendment was prepared on behalf of ABI by its counsel, the New York law firm of Skadden, Arps, Slate, Meagher & Flom. However, this Amendment was never finalized or filed, and never became effective.

 The 18,000 shares were still unregistered in August 1970, when, as a result of a period of severe financial difficulties, Dempsey was forced to cease business. Dempsey, for several years prior to this time, had been a member of the National Association of Securities Dealers and a member firm of the defendant New York Stock Exchange, Inc. ("NYSE"). Accordingly, on August 7, 1970, following Dempsey's cessation of business, the directors of Dempsey and the NYSE entered into an agreement whereby the NYSE, pursuant to Article XIX of its Constitution, agreed to make substantial payments from its "Special Trust Fund" *fn3" for the benefit of Dempsey and its customers, and wherein the directors of Dempsey authorized the NYSE to appoint a Liquidator for Dempsey to "take control of the business and property of Dempsey" and to exercise all powers of the corporation in liquidating its affairs.

 On August 10, 1970, the NYSE appointed defendant Norman Swanton as Liquidator of Dempsey. *fn4" Swanton's duties were set forth in a letter dated August 24, 1970 from Robert M. Bishop, Vice President of the NYSE:

 
"This is to clarify your assignment as Liquidator of Dempsey-Tegeler & Co., Inc. Your duties and powers are spelled out in the Liquidation Agreement executed by the Directors of the corporation. The Exchange expects you to fulfill these responsibilities with efficiency and dispatch. In simple terms, you are the representative of the Special Trust Fund charged with the overall liquidation responsibilities. The firm personnel are all answerable to you, and your instructions to them are to be totally complied with. More specifically, your duties fall into the following four categories:
 
(1) to direct and supervise all expeditious steps to deliver out the remainder of the customer accounts,
 
(2) to husband the assets of the firm and of the Special Trust Fund,
 
(3) to pursue all feasible avenues to realize or recover receivables and possible claims of the corporation in order to increase its ability to meet its obligations to creditors. This includes possible claims against the Dempsey-Tegeler ...

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