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February 10, 1977

David Goldberg, suing derivatively in the right and for the benefit of Universal Gas & Oil, Plaintiff
Yaacov Meridor, et al., Defendants

Lasker, District Judge.

The opinion of the court was delivered by: LASKER

LASKER, District Judge:

David Goldberg sues derivatively on behalf of Universal Gas & Oil Co., Inc. (UGO), charging UGO's officers and directors and its two parent corporations with corporate mismanagement and breach of fiduciary duty. Specifically, Goldberg challenges a transaction between UGO and Maritimecor, S.A., whereby UGO issued 4,200,000 shares of its stock to Maritimecor in return for all of the latter's assets and liabilities. Prior to the transaction Maritimecor owned 78% of UGO, and was in turn wholly owned by the defendant Maritime Fruit Carriers Co., Ltd. (MFCC). Goldberg alleges that the terms of this transaction were grossly "unfair" to the minority shareholders of UGO and that the transaction itself constituted a violation of § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) and Rule 10b-5, 40 C.F.R. 240.10b-5. *fn1"

 According to the Amended Verified Complaint, the defendants conspired to enrich Maritimecor and MFCC at the expense of UGO. The plan was effected by raising funds from the public and using the proceeds for the benefit of the two corporate defendants. (para. 10) (Numbers in parentheses refer to the paragraphs of the Amended Verified Complaint) In furtherance of this scheme the following events took place:

 1) In May, 1972 UGO sold stock and debentures in a public offering for the stated purpose of raising funds to finance the construction and purchase of three ships to transport liquefied gas; (para. 11)

 2) In 1974 two of the ship construction contracts were sold for a $14 million profit; (para. 12)

 3) In 1974 and 1975 the defendants caused loans to be made by UGO to Maritimecor so that by August, 1975 Maritimecor owed UGO $7 million; (para. 13)

 4) In August, 1975 UGO agreed to issue 4,200,000 shares of its stock to Maritimecor in exchange for all of the latters' assets (excluding 2,800,000 shares of UGO already held by Maritimecor) and liabilities. (para. 14)

 The purchase of Maritimecor's assets and liabilities, which Goldberg believes has been effected, (para. 15), was "fraudulent and unfair" in that the net value of Maritimecor's assets was far less than the value of the UGO shares exchanged, and "the purpose and intent of said transaction was to cause the dissipation of the substantial assets of UGO for benefit of the defendants Maritimecor and [MFCC]." (para. 16) The defendants were fully aware that the transaction had no business purpose, had no benefit for UGO, was not an arm's length transaction and represented self-dealing and breach of fiduciary duty. (para. 18)

 Although these allegations clearly constitute a valid state law claim, their sufficiency in federal law is open to serious question. Conspicuously absent is any allegation of deceit, misrepresentation or falsehood with regard to the events which transpired. Urging that the lack of any claimed deception is fatal to a cause of action under Rule 10b-5, many of the defendants move to dismiss for failure to state a claim. Fed. R. Civ. P. 12(b)(6). *fn2"

 Until fairly recently there was little room for doubt that the defendants' position is correct. The element of deception has always been a central component of a 10b-5 violation. See, e.g., O'Neill v. Maytag, 339 F.2d 764 (2d Cir. 1964). Although decisions like Drachman v. Harvey, 453 F.2d 722 (2d Cir. 1972) (en banc) and Schoenbaum v. Firstbrook, 405 F.2d 215 (2d Cir. 1968) (en banc), cert. denied, 395 U.S. 906, 89 S. Ct. 1747, 23 L. Ed. 2d 219 (1969) significantly expanded the scope of the Rule, finding claims to be stated where the essence of the allegations involved corporate self-dealing in relation to securities transactions, the element of deceit remained present, albeit somewhat less central to the challenged behavior. In Popkin v. Bishop, 464 F.2d 714 (2d Cir. 1972), the court reaffirmed that deception is an indispensible element of a 10b-5 claim. The Popkin court analyzed the more expansive prior decisions and concluded that their focus on improper self-dealing "did not eliminate non-disclosure as a key issue in Rule 10b-5 cases." 464 F.2d at 719.

 Goldberg argues that all of this has been changed by two recent landmark decisions in this Circuit. In Marshel v. AFW Fabric Corp., 533 F.2d 1277 (2d Cir.), vacated and remanded for consideration of mootness, 429 U.S. 881, 97 S. Ct. 228, 50 L. Ed. 2d 162, 45 U.S.L.W. 3279 (1976) and Green v. Santa Fe Industries, Inc., 533 F.2d 1283 (2d Cir.), cert. granted, 429 U.S. 814, 97 S. Ct. 54, 50 L. Ed. 2d 74, 45 U.S.L.W. 3249 (1976), the court held that it is not necessary to plead or prove deception in the context of a challenge under Rule 10b-5 to a merger effectuated for the purpose of "going private." Goldberg contends that this case is governed by Marshel and Green because here, as in those cases, "the transaction itself is attacked as a fraud on UGO." (Memorandum in Opposition at 7) The defendants argue that Popkin controls. We agree.

 Popkin was a derivative action brought by a shareholder in Bell Intercontinental Corp. to enjoin a proposed merger of Bell and two of its subsidiaries into the Equity Corporation, which was the controlling entity of the other three corporations. The plaintiff alleged that the terms of the deal were grossly inadequate to the shareholders of Bell and that the officers and directors of the corporation breached a variety of fiduciary duties in advocating the transaction. Nevertheless, despite its recognition that Drachman and Schoenbaum had significantly extended the reach of 10b-5 to include claims of corporate mismanagement and self-dealing in connection with securities transactions, the court upheld the lower court's dismissal of the complaint for failure to state a claim. The fatal defect was the absence of an "allegation or hint of any misrepresentation by defendants or of a failure on their part to disclose any material fact in connection with the merger proposal." 464 F.2d at 718.

 Marshel was a derivative suit brought by minority shareholders in Concord Fabrics Inc., who sought to enjoin a merger between Concord and AFW Fabrics Corp., an entity created and wholly owned by the majority shareholders of Concord for the sole and express purpose of "going private." The merger was to be effectuated under the New York corporation law which requires approval by shareholder vote, but the result was a foregone conclusion because the majority interests held enough shares to determine the outcome. The plaintiffs conceded that the terms, purpose and effect of the proposed merger had been fully disclosed. The court, however, viewed the merger as a

"scheme by [the majority], having previously taken advantage of public financing, to appropriate for their personal benefit the entire stock ownership of Concord at a price determined by them and paid out of the corporate ...

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