Members." The Agreement defines those words to mean, so far as pertinent, "members of the Class" of Bank of New York shareholders "who (i) acquired the Securities in exchange for their [Irving Bank] shares in connection with the [Bank of New York-Irving Bank] Acquisition, [and] (ii) sold the Securities at a price below $ 34 1/2 per share prior to January 15, 1992." Paragraph II.A.3.
The Class Administrator's Claims Report approved eight claims of persons who, sometime after November 29, 1988, received Bank of New York shares "in exchange" for their Irving Bank shares "in connection with" the acquisition, but did not sell those specific shares "before January 15, 1992". In 1988 before receiving those shares those claimants had sold "short" Bank of New York stock.
These claimants argue that they complied with the terms of the Agreement because they (i) acquired stock of the Bank of New York in the acquisition transaction and (ii) sold "their" Bank of New York stock at a price below $ 34 1/2 a share before January 15, 1992. In other words, they say the short sales made before they received shares in the acquisition transaction constituted sales before January 15, 1992 of "the Securities."
To state the argument is to show its utter lack of merit. First, it misstates the literal language of the Agreement. The Agreement explicitly considers "the Securities" to be the shares of the Bank of New York acquired "pursuant to prospectuses" (Agreement paragraph, I.A.). Moreover, the definition of "Qualified Class Members" quoted above requires the Bank of New York shares that a member has sold prior to January 15, 1992 to be not any shares issued at any time by that bank, but "the Securities" "acquired" by the class members in the acquisition transaction.
It is incorrect and misleading for the claimants to say they sold "their" shares of Bank of New York stock. It was not "their" shares that were involved in the claimants' short sales. See 17 C.F.R. § 240.3b-3 (describing a short sale). In a short sale one does not sell shares one owns. One enters into agreement to sell shares owned by someone else and borrowed generally from a broker. To make a profit the short sellers expects later to buy shares on the market after the price has declined, and then to deliver those shares to the broker to replace the shares borrowed.
The interpretation of the Agreement urged by claimants is not only inconsistent with the wording of the Agreement but would defeat its basic purpose. The manifest end of the Agreement in making available to a claimant for purchase discounted shares of Bank of New York stock was to compensate a claimant who suffered a loss and was presumably misled to his detriment by the prospectuses. A short seller was not so misled. He expected the value of Bank of New York stock to go down.
When the short seller received Bank of New York shares in exchange for his Irving Bank stock, it would have made no sense for him to "cover" his short sale by forthwith delivering those shares to the broker. There would have been no profit in doing so if the "cover" was made promptly after issuance of the shares. The short seller had in effect bought those shares at the then the market value, a value he considered inflated.
But even if the short seller did "cover" at any time by delivering those shares to his broker, he would not have sold them. He would simply have complied with his agreement to return some shares to the broker. As Class Counsel admits, a "cover" is not a "sale".
The short seller could have made a profit if he had waited to "cover", bought shares of Bank of New York stock after the price declined but before January 15, 1992 when the price had recovered, and delivered to the broker the shares purchased at the lower price.
The Agreement was not designed to compensate a clever short seller who could make a profit from the decline in price. Its plain purpose was to compensate those who sold at a loss shares obtained in the bank acquisition transaction. If they sold after January 15, 1992, the date after which the Bank of New York stock consistently sold in excess of $ 34 1/2 a share, they would not have had a loss and would not be a "Qualifying" class member.
Bank of New York also objects to the allowances of another three claims, numbers 10,024, 10,026, and 10,029. The proofs of claim for these claims were postmarked after November 5, 1996, the date fixed in the court's amended order for notice and hearing. The reason given for the Class Administrator's recommendation that the court accept these claims was that the beneficial owners of the shares did not get notice until after November 5, 1996. In its discretion the court will allow the three claims. See In re Crazy Eddie Securities Litigation, 906 F. Supp. 840, 846 (E.D.N.Y. 1995).
The motion of Class Counsel to confirm the claims report is denied as to claims 649, 700, 764, 768, 769, 864, 1067, and 10,006, on the ground that these claims were not made by "Qualifying Class Members". The claims report is otherwise approved.
Dated: Brooklyn, New York
December 17, 1997
Eugene H. Nickerson, U.S.D.J.
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