The opinion of the court was delivered by: CANNELLA
Motion by defendants, for summary judgment on Claims I and II of the complaint for failure to state a claim under the federal securities laws, is granted. Fed.R.Civ.P. 12(b)(6), 56.
Motion by defendants, to dismiss the remaining state law claims for lack of jurisdiction over the subject matter, is denied. Fed.R.Civ.P. 12(b)(1).
Motion by defendants, for summary judgment on Claim VI for failure to state a claim under state law, is denied. Fed.R.Civ.P. 12(b)(6), 56.
Motion by defendant Robert Zimring, for summary judgment, is denied. Fed.R.Civ.P. 56.
Motion by plaintiff, for an Order certifying this action as a class action, is granted. Fed.R.Civ.P. 23.
Jurisdiction is based on the federal securities laws, 15 U.S.C. §§ 77v, 78aa, diversity of citizenship, 28 U.S.C. § 1332(a), and the doctrine of pendent jurisdiction.
Most of the pertinent facts have been related in an earlier opinion in this case, See 425 F. Supp. 440 (S.D.N.Y.1976); nevertheless, a recitation will be useful here. For the purposes of these motions, the Court has treated the facts alleged in the complaint as true, and drawn all reasonable inferences from the complaint, as well as from any uncontroverted evidence, in favor of the plaintiff. See, e.g., Conley v. Gibson, 355 U.S. 41, 45-46, 78 S. Ct. 99, 2 L. Ed. 2d 80 (1957).
In 1953, the A. Sandler Company ("Sandler") executed an "Agreement" which created the "Sandler of Boston Profit Sharing Retirement Plan and Trust" ("the Trust"), a non-contributory pension plan intended by Sandler to qualify for tax exemption under section 165(a) of the Internal Revenue Code of 1939.
The Agreement provided for a committee of three persons ("the Committee"), at least one of whom had to be a beneficiary, to administer the retirement plan and make investment decisions for the Trust.
Sandler retained the power to appoint and remove Committee members, with or without cause, and the Agreement expressly permitted the Committee to invest the assets of the Trust in Sandler stock.
In addition, the Agreement required the Committee to furnish each beneficiary with an annual statement of the value of his or her interest, and it gave each beneficiary the right to inspect a copy of the Agreement and all later amendments, as well as annual reports concerning investment transactions of the Trust fund.
In the event of a merger, consolidation, or sale of the assets of Sandler, the Agreement permitted Sandler's successor either to allow the Plan to terminate, in which case the Committee would distribute the Trust assets, or, to adopt and continue the Plan, in which case it would assume all the powers and duties of Sandler under the Agreement. Sandler, or any successor that adopted the Plan, had the power to amend the Agreement, as well as the power to terminate the Plan and Trust at any time, in its sole discretion.
The plaintiff in this action, Louis Klamberg, became an employee of Sandler in 1945 and a member of the Plan at its inception in 1953. He subsequently received annual statements of his interest in the Trust assets as well as announcements of amendments to the Plan that had been adopted by Sandler. By early 1969, the total value of the Trust assets was approximately $ 1 million, and the total value of Klamberg's interest, approximately $ 100,000.
On April 1, 1969, defendant Kayser-Roth Corporation ("Kayser-Roth") acquired all of the stock of Sandler. Shortly thereafter, although it continued to operate Sandler as a separate entity, Kayser-Roth had the Committee members removed and replaced by the individual defendants Jackson, Zimring, and Roth, who were at the time "control persons," or "insiders" of Kayser-Roth. The Committee then invested $ 724,000, or about 70%, of the Trust assets in Kayser-Roth stock. The complaint does not state precisely when the Committee made these purchases.
None of the defendants ever told the beneficiaries: (1) that the former Committee members had been removed, or that they had been replaced by Kayser-Roth insiders; (2) that $ 724,000 (or, for that matter, any amount) of the Trust's assets had been invested in Kayser-Roth stock; or (3) any other information in their possession concerning Kayser-Roth stock. Each beneficiary continued to receive from the Committee one-sentence annual statements of the value of his or her interest.
On February 13, 1970, the defendants Glasser, Jackson, Roth and Slaner met as the Sandler Board of Directors, of which they constituted a quorum. At that meeting they amended the Plan to freeze membership and discontinue company contributions as of November 1, 1968. Simultaneously, they provided for the participation of Sandler employees in the Kayser-Roth Employee Retirement Plan as of November 1, 1968. On May 29, 1970, each Sandler employee received a letter from the company stating, Inter alia :
We are pleased to announce that, effective as of November 1, 1968, each of you who was a member of . . . (the Sandler Plan) on October 31, 1968, will become a member of the Kayser-Roth Corporation Employees' Retirement Plan, provided that you are still employed by the Company. . . .
The (Sandler Plan) is to continue in existence but membership is to be frozen as of October 31, 1968 and no further contributions are to be made to the Plan. Your interest, if any, in the Plan will be fully-vested and distribution will be made to you at the time you attain your normal retirement date. The assets of the Plan are to be invested by the Trustees appointed by the Board of Directors of the Company and your interest will increase or decrease according to investment success with no guarantee of performance.
Klamberg and the other beneficiaries took no action with respect to the Trust's investment in Kayser-Roth stock. The complaint alleges that they were "induced" not to act by the defendants' nondisclosures, but fails to specify what they would have done had they known the material facts.
Klamberg retired in early 1974, at which time the value of his interest in the Trust was approximately $ 55,000; the value of all the Trust assets at that time was approximately $ 500,000. The decrease occurred primarily because the Kayser-Roth stock had declined in value from $ 724,000 in 1969 to $ 210,000 in 1974. Klamberg has brought this action individually and on behalf of all other persons who were beneficiaries of the Trust on April 1, 1969.
Of the six claims contained in the complaint, only two raise federal questions. Specifically, Claims I and II allege violations of section 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a), and of section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated by the Securities and Exchange Commission thereunder. Claims III, IV and V allege breaches of common law fiduciary duties by the individual defendants. Claim VI alleges that the defendants breached the Agreement when they retroactively amended the Plan without terminating it. Jurisdiction over the latter four claims is based on diversity of citizenship and the doctrine of pendent jurisdiction.
Klamberg has now moved, under Rule 23 of the Federal Rules of Civil Procedure, for an Order certifying this action as a class action. The individual defendants have collectively cross-moved for summary judgment on Claims I and II, for failure to state a cause of action under the federal securities laws, and on Claim VI, for failure to state a cause of action under state law. Also, the defendants contend that the Court lacks subject matter jurisdiction over the state law claims.
In a separate motion, the defendant Robert Zimring moves for summary judgment, claiming that he cannot be held legally liable because his duties with respect to the Trust were purely ministerial.
The claims under section 10(b)
and Rule 10b-5
must be dismissed for failure to allege conduct that was materially deceptive or manipulative. In Santa Fe Industries, Inc. v. Green, 430 U.S. 462, 97 S. Ct. 1292, 51 L. Ed. 2d 480 (1977), the Supreme Court ruled decisively that "deceptive" or "manipulative" conduct is a requisite of a Rule 10b-5 cause of action. The Court defined "manipulative" as a "term of art" that refers to various practices, none of which are involved here.
Although the Court did not elaborate on the meaning of "deceptive," it can be fairly inferred that no special term of art was intended. Webster's New International Dictionary (2d ed. 1934) defines "deceive" as, Inter alia : "to cause to believe the false, or disbelieve the truth."
"Deceptive" means "tending to deceive; having the power to mislead; as, a deceptive appearance." Id. "To deceive," then, refers to the Effect of conduct on the observer; "deceptive," on the other hand, refers more to a Quality of the conduct itself, to wit, its Propensity to deceive.
Of course, any estimation of that propensity requires some reference to an observer. We may label something "deceptive," meaning deceptive generally, if it would tend to deceive most any ordinary observer. Nevertheless, something that is not deceptive generally may yet be labelled "deceptive" if it would tend to deceive a particular person or class of persons.
This distinction is especially significant for appraising omissions failures to act or disclose for whereas false statements or partial disclosures may be deceptive generally, mere silence is deceptive only to persons with particular reasons to draw specific inferences from it.
In 10b-5 cases, whether conduct may "fairly be viewed as deceptive" will generally depend upon the circumstances of the particular person or class allegedly deceived, their knowledge and perceptive faculties. In other words, before the court can ask "Was the conduct deceptive?", it must first ascertain "To whom?" Since a 10b-5 action requires a causal connection between the defendant's violation and the plaintiff's loss,
the allegedly deceived observers will have to be persons who were in a position to make a decision that led to that loss. Such a decision will often be whether to purchase or sell securities, but may also include a proxy vote,
a decision to seek an injunction,
or even whether to retire from active employment.
In the instant case, the persons in positions to decide to purchase and sell securities on behalf of the Trust were the Committee members. But these are the very persons charged with perpetrating the fraud, and certainly, it makes no sense to require the plaintiff to show that they were deceptive to themselves. By way of analogy, in a stockholders derivative action
for a securities fraud perpetrated upon the corporation by outsiders, the plaintiff must ordinarily show conduct deceptive to the agents authorized to purchase or sell securities for the corporation, usually the officers or directors.
But where the plaintiff alleges fraud perpetrated by the directors themselves, "it is surely not necessary to show that the directors deceived themselves. It must be enough to show that they deceived the shareholders, the real owners of the property with which the directors were dealing."
Alternatively, it may be possible to show conduct that was deceptive to the corporation itself, albeit to none of the directors.
Of course, what is involved here is not a corporation, but a trust of sorts, and an uncritical grafting of concepts developed to apply to the relationship among a corporation, its directors and officers, and its shareholders, to a case involving the relationship among a trustee, the trust property, and the beneficiaries, is not likely to bear lasting fruit.
Deception of Beneficiaries
Although trust beneficiaries will rarely have to vote on anything, they can often have their trustees enjoined from engaging in disputed securities transactions. Since courts view trusts as "creatures of equity," they are less hesitant to enjoin trustees than they are to enjoin corporate directors.
Consequently, where a beneficiary is in a position to decide whether to seek to enjoin his trustee's impending purchase or sale of securities, it would ...