193 F.2d 461 (2nd Cir. 1952), 107, Birnbaum v. Newport Steel Corp.

Docket Nº:107, 22172.
Citation:193 F.2d 461
Party Name:BIRNBAUM et al. v. NEWPORT STEEL CORP. et al.
Case Date:January 10, 1952
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit

Page 461

193 F.2d 461 (2nd Cir. 1952)




Nos. 107, 22172.

United States Court of Appeals, Second Circuit.

January 10, 1952

Argued Dec. 6, 1951.

Nathan B. Kogan, New York City, for plaintiffs-appellants; Irving Constant, New York City, counsel.

Cahill, Gordon, Zachry & Reindel, New York City, for defendant-appellee Newport Steel Corp.; Frederick P. Warne, New York City, counsel.

Milbank, Tweed, Hope & Hadley, New York City, for defendant-appellee Wilport Co.; A. Donald MacKinnon and Eugene H. Nickerson, New York City, counsel.

Page 462

Sullivan & Cromwell, New York City, for defendant-appellee, C. Russell Feldmann; Arthur H. Dean, Howard T. Milman and Henry N. Ess, III, New York City, counsel.

Before SWAN, Chief Judge, and L. HAND and AUGUSTUS N. HAND, Circuit judges.

AUGUSTUS N. HAND, Circuit Judge.

The appellants are stockholders of the Newport Steel Corporation who brought suit on behalf of that corporation and as the representatives of all similarly situated stockholders. The complaint alleges a violation of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C.A. § 78j(b), and Rule X-10B-5 of the Securities and Exchange Commission, 17 C.F.R. § 240.10b-5 (1949), in that use of the United States mails was resorted to by the several defendants in order to defraud the stockholders of Newport and the Corporation in the sale of certain stock owned by the defendant Feldmann to the defendant Wilport Company. The defendants, Newport Steel Corporation, Wilport Company, and C. Russell Feldmann, moved in the court below to dismiss the complaint for failure to state a cause of action. That court granted the motion and directed judgment accordingly. Jurisdiction of the district court was invoked solely under Section 27 of the Securities Exchange Act, 15 U.S.C.A. §§ 78aa.

The allegations of the complaint pertinent for mention may be summarized as follows: Prior to the sale in controversy, the Newport Steel Corporation manufactured steel which it sold to manufacturers of finished steel products. The defendant Feldmann owned approximately forty per cent of the common stock of Newport, which was sufficient for voting control, and was its president and chairman of its board of directors; the remaining stock of Newport was publicly held and scattered among thousands of small investors. The defendants Stamm, Aheim, Rohr, Lorenzen, Sheaffer and Ballantyne were directors of Newport from June to August 1950 and were controlled by Feldmann. During this period Follansbee Steel Corporation and Newport were negotiating for a merger of the two corporations, which merger, on the terms offered by Follansbee, would have been highly profitable to all the stockholders of Newport. However, in August of 1950, Feldmann, acting in his official capacity as president of Newport, rejected the Follansbee offer, and on August 31, 1950, sold his stock to the defendant Wilport Company at a price of approximately $22. per share which was twice the then market value of the stock. The Wilport Company had been formed by ten manufacturers, each of whom used substantial quantities of steel in its business, for the purpose of purchasing control of Newport and using its steel productive capacity as a 'captive' source of supply during the market shortage of steel. That accounted for the premium price paid by Wilport to Feldmann for the latter's stock since the purchase gave Wilport voting control. Immediately following the sale, Feldmann and the other directors of Newport resigned and the defendants Gibson, Mericka, Mitchell, Cobourn, and Paxton, all of whom were officers and directors of...

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