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September 14, 1977


The opinion of the court was delivered by: BRIEANT


Brieant, J/.

After exhaustive pre-trial discovery, upon a mound of papers submitted by both sides exceeding in volume those usually resulting from a plenary trial, defendants have now moved for summary judgment pursuant to Rule 56, F.R.Civ.P. If it appears clear that an essential element of plaintiff's claim cannot be proved at trial, for want of evidence it is appropriate to grant the motion. Summary judgment is a remedy which must be applied when the Court is convinced as a matter of law that the suit can have only one possible outcome.See Epoch Producing Corporation v. Killiam Shows, Inc., 522 F.2d 737, 742-43 (2d Cir. 1975); Applegate v. Top Associates, Inc., 425 F.2d 92, 96 (2d Cir. 1970). Indeed, as the recent cases of Hotchner v. Castillo-Puche, 551 F.2d 910 (2d Cir. 1977), Edwards v. National Audubon Society, Inc., 556 F.2d 113 (2d Cir. 1977) and Meeropol v. Nizer, 560 F.2d 1061 (2d Cir. 1977) all demonstrate, the level of clear and convincing proof required now in this Circuit to show "actual malice" in a defamation case is almost insuperable. It is abundantly clear that this plaintiff cannot surmount the barrier.

 Plaintiff, Reliance Insurance Company, filed its complaint on September 14, 1976, requesting compensatory damages of $7,500,000.00, general damages of $10,000,000.00, special damages of $10,000,000.00 and punitive damages of $10,000,000.00, arising out of an article written by the defendant Dr. Abraham J. Briloff and subsequently published by the defendant Barron's in its July 19, 1976 issue entitled "Whose 'Deep Pocket'? At Reliance Group, the Slogan is 'Dig We Must'."

 Reliance charges, in its complaint, that Briloff and Barron's violated § 10(b) of the Securities Exchange Act of 1934, as well as Rule 10b-5 promulgated thereunder, and the laws of the State of New York relating to libel and defamation, negligence and intentional tort.


 Plaintiff Reliance Insuance Company (hereinafter sometimes "Insurance") is engaged in the property and casualty insurance and life insurance business. Of the common stock of Insurance, 96.9% is owned by Reliance Financial Services Corporation ("Financial"), the common stock of which in turn is wholly owned by Reliance Group, Incorporated ("Group") Reliance Group was formerly known as Leasco Data Processing Equipment Corporation. Group acquired control of Insurance in 1968.

 On June 11, 1976 Insurance filed an S-1 registration statement pursuant to the Securities Act of 1933 and circulated a preliminary prospectus to the investment community with the intention of offering at public sale, two million shares of its Series A Cumulative Preferred Stock. This sale was scheduled for July 20, 1976.

 The corporate defendant (hereinafter "Barron's") is the proprietor of a well known financial magazine published weekly in New York City. Because of the continuing interest in Group on the part of the financial community, editors of Barron's requested and received a copy of this preliminary prospectus sometime between June 11 and June 18, 1976. After studying the prospectus, the editors determined that several interesting financial questions were raised which might warrant treatment in an article in Barron's. The editors therefore asked defendant Dr. Abraham J. Briloff to review the prospectus with a view toward possibly writing an article. Dr. Briloff was sent a copy of the prospectus, as well as Group's 1975 Annual Report and Form 10-K and Financial's Form 10-K. Dr. Briloff holds the Emanuel Saxe Chair of Distinguished Professor of Accountancy at Baruch College of the City University of New York. In addition to teaching and lecturing in the field of accounting, Briloff has also published widely on this subject, writing articles on financial and accounting matters directed to nontechnical readers, including memgers of the investing public. He may be regarded, for our purposes, as a journalist or reporter, and is the Cassandra of the Accountants.

 Three weeks later, sometime around July 4, 1976, Dr. Briloff delivered a first draft of an article to Barron's. According to Dr. Briloff's deposition testimony, he basedhis article on a review of the preliminary prospectus and other public documents, and research conducted at the Securities and Exchange Commission in New York, American Stock Exchange and New York Stock Exchange. Once received, the article was reviewed and edited at Barron's by Mr. Steven S. ANREDER, one of three News Editors employed by Barron's. Finally, the article was reviewed by Mr. Alan Abelson, Managing Editor of Barron's and Mr. Robert M. BLEIBERG, Editor [in Chief] of the publication since 1955.

 The Briloff article was published under the author's by-line, in the July 19, 1976 issue of Barron's of which there were more than 225,000 copies, reaching a wide readership in the financial community.

 In the article, Dr. Briloff analyzed the proposed public offering of Insurance, and the accounting of Group. He concluded that the purpose of the public offering was to sever the interests and needs of Group rather than Insurance. The article charged that the proceeds of the sale were to flow upstream to Group, the parent, to the detriment of Insurance and its policy-holders and minority shareholders. The article also implied, inter alia, that Group was employing certain "creative accounting" concepts, and engaging in improprieties, bad business judgment and breach of fiduciary duties, all of which led to its decision to market the proposed Series A issue.

 The article consisted of 38 paragraphs covering approximately four pages of the July 19th issue. A full copy is attached hereto as Appendix A.

 The Court regards the subject article as clearly defamatory of plaintiff, and probably also of Reliance Group.It also criticizes practices of Touche Ross & Co., the prestigious accounting firm serving the Reliance companies. For the most part, the article is opinion only. That Dr. Briloff sincerely holds the opinions expressed, and reached the conclusions uttered, after a professional consideration of public documents cannot be disputed. This is not the first time Briloff had publicly criticized the financial and accounting practices of the Reliance Group, and its corporate predecessor, Leasco. His criticisms appear to have brought about substantial revisions in the wording of the final prospectus. That a reasonably prudent investor could purchase the issue, first reading the offending article, and believing it, defies imagination.

 Strong public policies exist in favor of the right to publish such critiques as those contained in Dr. Briloff's article. Our federal securities laws are based on the theory that full disclosure will protect the integrity of the market place. The disclosure has tended to become so "full" in some situations, as to bury in legalese, in the interests of total accuracy, facts and possibilities flowing therefrom which should be simply stated in plain English and their possible consequences made known to potential investors. These defendants thought they were exposing to the public in plain language that which was either implicit in the circumstances surrounding the offering, or buried in the prospectus and other public filings of the Reliance companies. To do so is an important function of a free financial press, which should not be inhibited by judgments for damages of the sort sought here.

 Plaintiff charges, in answers to defendants' first set of interrogatories that the article contained at least 37 false or misleading statements. Barron's denies that it made any false statements, with the exception of one error at paragraph 4 of the article in which there appeared a misquotation from the preliminary prospectus. This sentence reads as follows:

 "Initially, according to the plan, 'the $47 million of net proceeds will serve to increase Reliance Insurance's Statutory Policyholders' Surplus, thereby momentarily increasing its underwriting capacity.'" (Emphasis added).

 The word "momentarily" did not appear in the preliminary prospectus. When this error was brought to Barron's attention, a correction was made in the following week's edition.

 The word "momentarily" adds little to the thrust of the sentence. A moment is an indefinitely short space of time. "Momentarily" in this context means "at any moment: momentarily liable to occur." See American College Dictionary, Random House, New York 1970 ed. p. 784. Implicit in the preliminary prospectus is the suggestion that the dividend paying ability of Insurance would be improved, and that availability of funds for dividends would in fact occur momentarily, after completion of the offering. But the word did not belong in quotes.

 In addition to this single misquotation, plaintiff alleges various false or misleading statements which result in defamation by implying in the broadest terms that Insurance, in its official filings, has falsified the purposes of its public offering.

 These various statements can be divided into several categories. Plaintiff alleges that the article (a) falsely implied that the amount of the prospective common stock dividends was misstated in the prospectus; (b) falsely stated that the preferred offering was detrimental to Insurance and beneficial only to Group; (c) falsely stated that Insurance's "earnings power" had "sharply diminished" thereby impugning Insurance's ability to service the preferred offering while paying common stock dividends; (d) falsely or at least incorrectly described Provident's interest in Commonwealth, thereby accusing Insurance of accepting a worthless pledge; (e) erroneously implied by the use of the term "artificial respiration" that Insurance was financially "near death"; (f) was written with omissions and innuendo which falsely substantiated the claim that Insurance was financially unstable and that Group's "accounting gimmickry" might force Insurance into an uneconomic stock offering; and (g) contains false and misleading statements as to Group's financial stability which falsely substantiate the theme that the preferred offering was improperly induced by Group to Insurance's detriment.

 After publication of the article, Insurance revised its preliminary prospectus and filed a final prospectus with the SEC. On August 17, 1976 the registration statement relating to the offering of the preferred stock became effective. On August 24, 1976, Insurance sold the two million shares of preferred to the public at a dividend rate of 10.72%. Plaintiff charges, and we accept as true for the motion, that this is approximately one percentage point more than the rate would have been had the article not been published. The resulting cost to Insurance over the 25 year life of the preferred issue was approximately $7,500,000.00.

 On August 31, 1976, counsel for Group and Insurance wrote to Barron's and Dr. Briloff to demand a retraction of the various allegedly false and misleading statements in the article. No such retraction was published, ...

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