Appeal by plaintiffs Robert Blackman, Joseph Lefrak, and Madison Consultants, a New York partnership, from a judgment of the District Court for the Southern District of New York, Mary Johnson Lowe, Judge, dismissing their claims of violations of Rule 10b-5 and § 10(b) of the Securities Exchange Act of 1934 by Emons Industries, Inc. and several individual defendants. Affirmed in part, reversed in part, and remanded. Judge Meskill dissents in a separate opinion.
Before: MANSFIELD, MESKILL and NEWMAN, Circuit Judges.
MANSFIELD, Circuit Judge:
This case presents us with a novel problem: whether a corporation violates Rule 10b-5 when, through false promises to a minority stockholder that it will not attempt to purchase his stock from a pledgee then holding the stock, it lulls the stockholder into refraining from pursuing various means of protecting his rights in the stock, and then purchases the stock at a price far below its market value.
Plaintiffs Robert Blackman and Joseph Lefrak, who owned a minority interest in Emons Industries, Inc. through their partnership, Madison Consultants, appeal from a judgment of the Southern District of New York, Mary Johnson Lowe, Judge, dismissing their complaint under § 10(b) of the Securities Act, 15 U.S.C. § 78j, and Rule 10b-5, 17 C.F.R. § 240.10b-5, against Emons Industries, its then-controlling officer and chief shareholder, Harold Grossman, Grossman's broker, Jack Skidell, and Skidell's brokerage firm, Blinder Robinson & Co., Inc. Because plaintiffs have stated a valid claim for relief under one of their theories of liability, we reverse the judgment of the district court in part, affirm the balance, and remand for further proceedings.
Plaintiffs have made the following allegations, the truth of which must be assumed on this appeal. In June 1970 plaintiffs bought stock in Amfre-Grant, Inc., which later changed its name to Emons Industries, Inc. ("Emons"). Because plaintiffs' stock was not registered with the Securities and Exchange Commission ("SEC"), it bore a restrictive legend which prevented its being freely sold in open market transactions; this legend could be removed only on an opinion from Emons' legal counsel. Plaintiffs financed the purchase by borrowing the full price of the stocks, $750,000, from the Franklin National Bank, and pledged the stocks to the Bank as collateral under a security agreement. As of August 1974, the outstanding balance on the loan was $547,129.38. Thereafter, plaintiffs made no further payments on the loan, and went into default in November 1975. During 1975, the Franklin National Bank was declared insolvent, and the Federal Deposit Insurance Corporation ("FDIC") was named as its receiver. In that capacity, the FDIC acquired the Bank's rights under the security agreement with plaintiffs.
Plaintiffs' pledged stock would have commanded between $800,000 and $1,000,000 in the market during the first half of 1976 if it could have been sold without the restrictive legend. During the first three months of 1976, both plaintiffs and Emons made offers to purchase the stock from the FDIC; however, no sale then took place. In April 1976 plaintiffs obtained an opinion from their counsel that Emons could properly remove the legend from plaintiffs' stock since the stock was freely saleable under an exception to the registration requirements of the securities laws, see Securities Act of 1933, § 4(1), 15 U.S.C. § 77d(1) ("transactions by any person other than an issuer, underwriter, or dealer"). On April 13, 1976, plaintiffs submitted this opinion to Emons, requesting that Emons remove the legend so that plaintiffs could arrange to have the FDIC sell enough of the shares to pay off the balance of plaintiffs' loan. By letter of April 21, 1976, Emons responded to this request, refusing to remove the legend until the plaintiffs provided Emons with a "no-action letter" from the SEC with respect to the applicable exemption from registration.*fn1 Plaintiffs assert that a former SEC Commissioner is prepared to testify that Emons' refusal to remove the legend was unjustified under applicable securities laws and regulations.
In April 1976 plaintiffs and Grossman allegedly entered into an oral agreement to reconcile their competing efforts to obtain the stock from the FDIC. Complaint PP55-59. As part of this agreement, Grossman, acting on behalf of Emons, allegedly represented and promised that he would take no steps to purchase or arrange for the purchase of plaintiffs' stock without first consulting with plaintiffs and giving them a chance to participate in the purchase. According to the complaint, these representations were misleading and "constituted an attempt to deceive and defraud Plaintiffs." Complaint P104. Plaintiffs did not, however, include this allegation of deceit in their contentions of fact in the pretrial order submitted to the district court. However, their complaint alleges that in reliance upon Grossman's fraudulent representations they abandoned their efforts to remove the restrictive legend from the stock or to raise capital to bid for the stock themselves. Complaint P58.
According to plaintiffs, in June 1976 Grossman violated the April agreement by arranging with his broker Jack Skidell and others to purchase plaintiffs' shares from the FDIC without first advising plaintiffs. On or about September 2, 1976, plaintiffs first learned of Emons' plans to purchase their stock when they received a notice from the FDIC advising them that the FDIC intended to sell plaintiffs' shares at one or more private sales. Although the letter from the FDIC did not say so, plaintiffs assumed that Grossman was the intended purchaser of their stock, and this assumption was confirmed over the next few weeks in conversations with the FDIC's counsel and in a letter from Emons' counsel. On September 16, plaintiffs again asked Emons to remove the legend, providing Emons with an updated opinion letter from plaintiffs' counsel stating that the legend could legally be removed. On September 23, Emons responded, again refusing to remove the legends until plaintiffs supplied it with a no-action letter from the SEC. Plaintiffs then applied for a no-action letter, which was issued by the SEC at a date not revealed by the record.
Emons then purchased the stock in two stages, acquiring 85,000 shares on or about October 1, 1976, and the remaining 30,000 shares on or about December 2, 1976.The total purchase price was the exact amount due on plaintiffs' loan, $547,129.38. According to the plaintiffs, the pledged stock, which constituted about 9.8% of the total Emons stock outstanding, was then worth over $1,000,000 if it could have been sold without restriction.
On September 30, 1976, plaintiffs filed the present action for relief under the Securities Exchange Act of 1934 against the FDIC, Grossman, Emons, Skidell, Blinder Robinson, and First National City Bank. Shortly thereafter, plaintiffs moved for a preliminary injunction to halt further sales of their stock; on October 18, the motion was denied by Judge Griesa, to whom it had been referred for resolution. Later that month, plaintiffs voluntarily dismissed their claim against the First National City Bank, and in February 1979 Judge Lowe dismissed the complaint against the FDIC.
After an oral hearing Judge Lowe dismissed the remaining claims by a judgment dated October 25, 1982, finding that plaintiffs had not alleged that any fraud had taken place "in connection with the purchase or sale" of any stock, and that plaintiffs' claims amounted to no more than an allegation of breach of an oral contract. The district court held that under the doctrine of Santa Fe Industries, Inc. v. Green, 430 U.S. 462, 51 L. Ed. 2d 480, 97 S. Ct. 1292 (1977), plaintiffs could seek redress only in state court. Plaintiffs appeal only from that part of the judgment that dismissed their claims under § 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 against Grossman, Emons, Skidell, and Blinder Robinson.
Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j, forbids "manipulative" or "deceptive" conduct "in connection with the purchase or sale of any security," Santa Fe Industries, supra, 430 U.S. at 473-74. Rule 10b-5, promulgated in 1942 under § 10(b), prohibits, inter alia, the making of "any untrue statement of material fact" in connection with the purchase or sale of securities. 17 C.F.R. § 240.10b-5.*fn2
A threshold issue in this case is whether plaintiffs, being pledgors of stock sold at the direction of FDIC as pledgee, have standing to sue as "sellers" under the Rule's requirement that the defendant's wrongful conduct must be "in connection with the purchase or sale" of securities. See 5 A. Jacobs, Litigation and Practice Under Rule 10b-5, § 38.02[c], at 2-127 to 2-130 (1981). In the classic Rule 10b-5 case, the plaintiff himself decides to buy or sell stock in reliance on the prohibited conduct of the defendants. The present case varies from that setting in two ways. First, the decision to sell the stocks was made not by plaintiffs but by the FDIC. This Circuit has repeatedly held, however, that an owner of securities who is forced to sell them against his will has standing as a "seller" for purposes of Rule 10b-5. See Crane Co. v. Westinghouse Air Brake Co., 419 F.2d 787, 797 (2d Cir. 1969) (owner forced to sell by antitrust considerations), cert. denied, 400 U.S. 822, 27 L. Ed. 2d 50, 91 S. Ct. 41 (1970); Vine v. Beneficial Finance Co., 374 F.2d 627 (2d Cir.) (shareholders forced out in short-form merger), cert. denied, 389 U.S. 970, 19 L. Ed. 2d 460, 88 S. Ct. 463 (1967). Second, in the present case plaintiffs were not entitled to the full proceeds of the sale of their stock; their interest was limited to any excess over the amount still owing on their loan to the FDIC, see N.Y.U.C.C. § 9-504(2). Nevertheless, courts have recognized the standing of defaulting pledgors such as plaintiffs here, with only a partial right to the proceeds of the sale of their stock, to sue as "sellers" under Rule 10b-5 when their stock is sold to pay off the loan against which the stock was pledged. See Bosse v. Crowell Collier & MacMillan, 565 F.2d 602, 611 (9th Cir. 1977); Dopp v. Franklin National Bank, 374 F. Supp. 904, 907-09 (S.D.N.Y. 1974); Cambridge Capital Corp. v. Northwestern National Bank of Minneapolis, 350 F. Supp. 829, 833 (D. Minn. 1972) (dictum) (defaulting pledgor has standing). A contrary result would defeat the purpose of Rule 10b-5, which is to be read "not technically and restrictively, but flexibly to effectuate its remedial purposes." SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 195, 11 L. Ed. 2d 237, 84 S. Ct. 275 (1963). A ...