Appeal from judgment of the United States District Court for the Southern District of New York, Lloyd F. MacMahon, J., dismissing the first claim of plaintiff's complaint, alleging violation of proxy rules. Reversed and remanded.
Before Kaufman, Chief Judge, Smith and Feinberg, Circuit Judges.
Joan Weisberg appeals from a judgment of the United States District Court for the Southern District of New York, Lloyd F. MacMahon, J., dismissing the first claim for relief in her complaint against Coastal States Gas Corporation and its directors and Selman Holdings, Ltd., and its principals, all described more fully below. The basis of plaintiff's claim is that proxy statements used to solicit proxies for the election of defendant directors violated section 14(a) of the Securities Exchange Act of 1934 by failing to disclose that Coastal had paid over $8 million in alleged bribes to Selman Holdings and that the directors thereafter allegedly concealed this wrongful activity. The principal relief plaintiff seeks is an order setting aside the election of Coastal's directors and appointing a receiver pending a new election. For reasons indicated below, we hold that the district court erred in dismissing as a matter of law this portion of plaintiff's complaint.
Since plaintiff appeals from a dismissal, we must assume that plaintiff's allegations are true in order to test whether, as the district court found, the complaint was legally insufficient. Briefly summarized, the complaint alleges substantially the following. Defendant Coastal, which is primarily engaged in the production of petroleum products, is a publicly traded company whose stock is listed on the New York Stock Exchange. Defendant Selman Holdings is a Bermuda corporation owned jointly by defendants Leonardo Moleiro and Julio Iglesias. At relevant times: Defendant Moleiro was both a director of International Marketing for Corporacion Venezolana del Petroleo (CVP), the government-owned oil company of Venezuela, and an officer of Ven-Fuel Inc., a corporation jointly owned by CVP and International Systems Control Corp. (ISC), an American corporation. Defendant Julio Iglesias, the co-owner of Selman, was a director of Ven-Fuel and of Fuelco Ltd., another corporation jointly owned by CVP and ISC. Defendant Robert Iglesias, son of Julio Iglesias, was an employee of Coastal and an officer of Selman. The remaining named defendants were directors of Coastal elected during the years 1974 to 1978.
The complaint further alleges that between 1973 and 1974, Coastal paid over $8 million to Selman Holdings, ostensibly as brokerage commissions. These payments were the subject of hearings in October 1978 before the Subcommittee on Oversight and Investigation of the Committee on Interstate and Foreign Commerce of the House of Representatives. The record of the hearings, upon which appellant relies, indicates that Coastal made the payments in connection with purchases of oil from Ven-Fuel or Fuelco, that Moleiro and Julio Iglesias were the representatives of CVP and ISC respectively at Ven-Fuel and Fuelco, that there was no apparent justification for additional, separate payments to be made to Selman Holdings, and that the payments were far above normal commission payments on the purchase of oil. The complaint alleges that the payments were in fact bribes that were made with the knowledge of Coastal's directors. The complaint further alleges that in 1976 Coastal reported to the Securities and Exchange Commission (SEC) that Coastal had voluntarily investigated the "sensitive" payments to Selman through an Audit Committee, which had concluded, in essence, that the payments were not suspicious or unusual and that no further investigation was required. According to plaintiff, the Audit Committee report constituted a cover-up.
Following the October 1978 Congressional hearings, plaintiff filed her class action complaint in December 1978. Her first claim asserted that the proxy solicitation materials for the election of Coastal's board of directors in the years 1974-1978, inclusive, were misleading under section 14(a) of the Securities Exchange Act of 1934 because stockholders were not told of management's complicity in the payment of the so-called bribes and the subsequent cover-up by the Audit Committee. Plaintiff sought equitable relief only: setting aside of the elections, appointment of a receiver, and new elections.
In February 1979, defendant Coastal moved to dismiss plaintiff's first claim for relief. By memorandum endorsement, dated March 21, 1979, the district judge granted the motion because the claim did not "satisfy the transaction causation requirement" set forth in Mills v. Electric Auto-Lite Co., 396 U.S. 375, 385, 90 S. Ct. 616, 24 L. Ed. 2d 593 (1970) and other cited cases.*fn1 After plaintiff moved for reargument, the judge by memorandum endorsement dated May 2, 1979, adhered to his earlier decision, this time on the ground that
Plaintiff makes no allegation that the bribes alleged in her first claim resulted in any kickbacks to the directors of Coastal . . . and thus, the decision in United States v. Fields (592 F.2d 638 (2d Cir. 1978)) is distinguishable.
The court entered final judgment under Rule 54(b), Fed.R.Civ.P., and this appeal followed.
In 1964, the Supreme Court held that there is an implied private right of action for violation of section 14(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78n(a). J. I. Case Co. v. Borak, 377 U.S. 426, 12 L. Ed. 2d 423, 84 S. Ct. 1555 (1964). That section declares it "unlawful" to solicit proxies in contravention of the rules of the SEC, and rule 14a-9 prohibits solicitations "containing any statement which . . . is false or misleading with respect to any material fact, or which omits to state any material fact necessary in order to make the statements therein not false or misleading."
Subsequently, in Mills v. Electric Auto-Lite Co., 396 U.S. 375, 90 S. Ct. 616, 24 L. Ed. 2d 593 (1970), the Court further defined the elements of a section 14(a) violation. Plaintiffs, who were shareholders of Auto-Lite, alleged that the corporation's directors had violated the statute by soliciting proxies for approval of a merger with Mergenthaler Linotype Co. without disclosing in the proxy materials that they were all nominees of, and controlled by, Mergenthaler. The Seventh Circuit Court of Appeals agreed that the proxy solicitation was misleading but nonetheless concluded that plaintiffs would not be entitled to relief under section 14(a) if defendants could show on remand "that the merger would have received a sufficient vote even if the proxy statement had not been misleading." 403 F.2d 429, 436.
The Supreme Court reversed on this issue of causation, stressing that section 14(a) embodied the legislative intention "to promote "the full exercise of the voting rights of stockholders' by ensuring that proxies would be solicited "with explanation to the stockholders of the real nature of the questions for which authority to cast his vote is sought.' " 396 U.S. at 381, 90 S. Ct. at 620, citing H.R.Rep.No. 1383, 73rd ...