The opinion of the court was delivered by: TENNEY
This is an action brought under Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 for alleged fraud in the sale of industrial revenue bonds issued by defendant Barnwell County, South Carolina ("Barnwell County"). Four motions are currently before this Court. First, Barnwell County and several other defendants have moved for a transfer of venue to the United States District Court for the District of South Carolina. Second, the plaintiffs have moved for leave to take depositions which they consider necessary to their opposition to the transfer motion. Third, the plaintiffs have moved for certification of the class they seek to represent. Finally, the defendants have moved for a stay of the class action determination pending decision on the transfer motion. For the reasons stated below, the motion for a transfer of venue is granted, and, accordingly, the motion for leave to take depositions is denied. No action is taken on the motion for class action certification -- that decision is left to the transferee court. The motion for a stay of the class action determination pending decision on the transfer motion is now moot.
Plaintiffs in this action are seven individuals who purchased Barnwell County First Mortgage Industrial Revenue Bonds, Series 1973 ("Barnwell County Bonds") either in the original issue in 1973 or in the over-the-counter bond market between 1973 and 1975. They seek to represent the class of all such purchasers of Barnwell County Bonds, estimated to exceed 250 in number. Defendants currently served with process in the action number 13: five corporate entities and eight individuals who were officers or directors of two additional corporate entities now adjudged bankrupts. Defendant Barnwell County was the issuer of the bonds under authority granted by Act 103 of the Acts of the General Assembly of South Carolina for 1967. Defendant Sinkler, Gibbs, Simons & Guerard ("Sinkler, Gibbs"), a South Carolina law firm, acted as bond counsel in connection with the issuance of the Barnwell County Bonds. Defendant Brown, Jefferies & Boulware ("Brown, Jefferies"), another South Carolina law firm, acted as counsel to Barnwell County at the time of the issuance of the Barnwell County Bonds. Defendant Elliott, Davis & Company ("Elliott, Davis"), a South Carolina accounting firm, conducted, in connection with the offering of the Barnwell County Bonds, an audit of Anchorage Carolina Corporation ("Anchorage"), the company whose plant construction the sale of the bonds was meant to finance. Defendants Rothkopf, Daiber, Silverman, Perces and Wellbrock were all directors of Anchorage. All but Wellbrock held executive positions with Anchorage or with its wholly-owned subsidiary, Entree Knits, Inc. ("Entree"). On March 13, 1975, both Anchorage and Entree were adjudged bankrupts in the course of Chapter XI proceedings in this District (74 B 1723, S.D.N.Y.). Defendants Weisman, Margolin and Pineles were directors and officers of Paragon Securities Company ("Paragon"), the under-writer for the Barnwell County Bond offering. Paragon was adjudicated a bankrupt on August 28, 1973, in an as-yet-unconcluded bankruptcy proceeding in the United States District Court for the District of New Jersey. (B-1010-73/6181, D.N.J.). Defendant Municicorp of California ("Municicorp") was the successor (by change of name only) to Paragon Securities Inc. of California, which, with Paragon, acted as an underwriter for the bond offering in California.
Briefly stated, the facts alleged by the complaint are these. On April 1, 1973, defendant Barnwell County, through its County Board, entered into a lease agreement with Anchorage, a Delaware corporation which produced, manufactured and sold fabrics, for a "project" whose construction and equipment were to be financed by the proceeds of the Barnwell County Bonds. The completed plant was to be used by Anchorage in the manufacture of double-knit fabrics. Local accountants, Elliott, Davis, were employed to examine the financial statements of Anchorage for its previous fiscal year. The local law firm of Sinkler, Gibbs were employed as bond counsel. The underwriter was Paragon Securities Co., a New Jersey corporation, which had subsidiaries in New York, Florida and California.
On April 30, 1973 the Official Statement concerning the Barnwell County Bonds was issued. The plaintiffs allege that this Official Statement falsely stated or omitted to state at least 21 material facts. The plaintiffs also allege that the South Carolina statute authorizing Barnwell County to issue industrial revenue bonds, as well as the "custom and practice of the market for industrial revenue bonds of the type represented by the Barnwell Bonds" (Complaint para. 27(d)), required the County Board to make a study of the feasibility of the project to be financed by the bonds but that this study was not performed, despite the County Board's representations to the State Budget and Control Board and to its counsel that it had done so.
Further, the plaintiffs maintain that the opinion letters issued by Sinkler, Gibbs and Brown, Jefferies representing that Barnwell County had "lawful authority for the issuance and sale of the Bonds" and that the county was in compliance with the South Carolina statute were rendered with knowledge that such statements were false or with such reckless disregard of the facts as to amount to a fraud. Finally, the plaintiffs allege that the defendants, by the use of the Official Statement and "other deceptive practices," obtained a favorable rating from the Fitch Investment Service, which was "materially false and misleading" and was relied upon by the plaintiffs in their purchases of the bonds. (Complaint paras. 28-30).
The power of a district court to transfer a case when venue is properly laid in the transferor court is governed by 28 U.S.C. § 1404(a) which provides:
"For the convenience of parties and witnesses, in the interest of justice, a district court may transfer any civil action to any other district or division where it might have been brought."
No party has challenged the correctness of venue either in this district or in the District of South Carolina, the proposed transferee district.
Thus, the Court's attention need focus only on the appropriateness of transfer to South Carolina. Judge Weinfeld of this district has offered the following exegesis of the statute's terse transfer criteria:
"The court's discretion under section 1404(a) is broader than under the forum non conveniens doctrine, but the criteria applicable under the statute are substantially those developed under the older doctrine. These include: (1) the convenience to parties; (2) the convenience of witnesses; (3) the relative ease of access to sources of proof; (4) the availability of process to compel attendance of unwilling witnesses; (5) the cost of obtaining willing witnesses; (6) the practical problems indicating where the case can be tried more expeditiously and inexpensively; and (7) the interests of justice, a term broad enough to cover the particular circumstances of each case, which in sum indicate that the administration of justice will be advanced by a transfer." Schneider v. Sears, 265 F. Supp. 257, 263 (S.D.N.Y.1967) (footnotes deleted).
The balance of the convenience to the parties in the present case tips towards transfer. The current plaintiffs are seven individuals, all of whom live in New York or New Jersey, who seek to represent a class of at least 249 purchasers of Barnwell County Bonds, some 76% of whom are alleged to live in Connecticut, New York, New Jersey and Pennsylvania. It is further alleged that no bondholders reside in South Carolina. Several factors reduce the significance of the plaintiffs' residence, however. First, the participation of the plaintiffs in the trial will be minimal; if they give testimony it will probably be "no more than a recitation of the circumstances under which they purchased their stock." Saminsky v. Occidental Petroleum Corp., 373 F. Supp. 257, 259 (S.D.N.Y.1974); Litwin v. Feldman, [1970-1971 Transfer Binder] CCH Fed.Sec.L.Rep. P 92,857, at 90,201 (S.D.N.Y.1970); Schneider v. Sears, supra, 265 F. Supp. at 263. The plaintiffs claim that their convenience should be given increased weight since their presence will be required to testify in response to the defendants' affirmative defenses. Insofar as they concern the plaintiffs directly, however, these defenses go to the question of damages and thus the plaintiffs' convenience must be subordinated to the convenience of those parties who will testify on the question of liability. See Shulof v. Westinghouse Electric Corp., 402 F. Supp. 1262, 1264 (S.D.N.Y.1975). Second, as the court stated in Blender v. Sibley, 396 F. Supp. 300, 304 (E.D.Pa.1975), "an argument premised on geographical distribution of shareholders who will not actively take part in the trial is make-weight, and is far outweighed by the needs of the active participants in this litigation." Finally, there is authority that the residence of the plaintiffs is accorded less weight in a shareholder class action. E.g., Shulof v. Westinghouse Electric Corp., supra, 402 F. Supp. at 1263, citing Koster v. (American) Lumbermens Mutual Co., 330 U.S. 518, 524, 67 S. Ct. 828, 91 L. Ed. 1067 (1947).
The majority of party testimony on the question of liability will come from the defendants, particularly those located in South Carolina. These defendants are Barnwell County, the public entity which issued the bonds; Sinkler, Gibbs, the bond counsel; Brown, Jefferies, counsel to Barnwell County; Elliott, Davis, the accountants; and Hermann Daiber, former President of Anchorage and the person who was in charge of Anchorage's plant operations in South Carolina. Members of each of these entities will be required to testify as to their activities in connection with the bond issue. Since they are charged with fraud, their presence before the trier of fact will be particularly important, for demeanor "may well mean the difference between acceptance and rejection of crucial testimony." Saminsky v. Occidental Petroleum Corp., supra, 373 F. Supp. at 260, quoting Oil & Gas Ventures -- First 1958 Fund, Ltd. v. Kung, 250 F. Supp. 744, 756 (S.D.N.Y.1966). Moreover, since their presence at trial will be continually required, forcing them to come to New York for the trial could seriously disrupt the practices of the law firms and accountants and interfere with the government of Barnwell County. See Shulof v. Westinghouse Electric Corp., supra, 402 F. Supp. at 1264-65.
Five of the individual defendants have opposed the transfer; defendant Municicorp, a California resident, states that it is "content to have the case proceed where it is pending." (Mirabelli Affidavit para. 5). All of the individuals opposing transfer were directors or officers of Anchorage, Entree, or Paragon, now bankrupt; all reside in New York or New Jersey. Transferring this action to South Carolina will impose a hardship on these individuals. Their presence in this district should not be persuasive, however, when the focus of the concern of this case is South Carolina. Stanley v. Carret, [1970-1971 Transfer Binder] CCH Fed.Sec.L.Rep. P 92,952, at 90,506 (S.D.N.Y.1971). On balance the hardship on the many members of the South Carolina corporate entities who are alleged to be ...