Jacobs v. Tenney, Civ. A. No. 3795.

Decision Date14 August 1970
Docket NumberCiv. A. No. 3795.
Citation316 F. Supp. 151
PartiesTheodore F. JACOBS, Plaintiff, v. Jerry M. TENNEY et al., Defendants.
CourtU.S. District Court — District of Delaware

COPYRIGHT MATERIAL OMITTED

Russell J. Willard, of Hastings, Taylor & Willard, Wilmington, Del., Lewis M. Dabney, Jr., Herbert Robinson and Liebman, Eulau, Robinson & Pearlman, New York City, of counsel, for plaintiff.

Joseph A. Rosenthal of Cohen, Morris & Rosenthal, Wilmington, Del., Michael Lesch and Ira Postel of Shea, Gallop, Climenko & Gould, New York City, of counsel, for defendants Omega Equities Corp., Jerry M. Tenney, Shirley Tenney, Richard S. Hull, Jack Morganstern, Abraham Traub, Leonard Kingstone and Irving Schuyler.

Thomas S. Lodge of Connolly, Bove & Lodge, Wilmington, Del., and John E. Halpin, New York City, of counsel, for defendant Pennsylvania Mutual Fund, Inc.

David A. Drexler and Richard S. Paul of Morris, Nichols, Arsht & Tunnell, Wilmington, Del., for defendants Mates Investment Fund, Inc. and Ocean Technology Fund, Inc.

John Mulford of Theisen, Lank & Kelleher, Wilmington, Del., and Richard M. Meyer of Pomerantz, Levy, Haudek & Block, New York City, of counsel, for defendant Kleiner-Bell & Co., Inc.

Ralph F. Keil, of Keil & Keil, Wilmington, Del., for defendants Arthur Jarwood, Phillip Kasenove and Nathan Shapiro.

Max S. Bell, of Richards, Layton & Finger, Wilmington, Del., and Robert L. Beerman of Morrison, Paul & Beiley, New York City, of counsel, for defendant Theodore M. Lakos.

Henry M. Canby and Richard F. Balotti, of Richards, Layton & Finger, Wilmington, Del., for defendant Meyerson & Co., Inc.

Max S. Bell of Richards, Layton & Finger, Wilmington, Del., and Burton H. Brody of Jezer, Slade & Weiss, New York City, of counsel, for defendants Erwin Bernstein and Leonard Cohen.

OPINION

LATCHUM, District Judge.

This stockholder's derivative action, instituted by Theodore F. Jacobs on behalf of and for the benefit of Omega Equities Corporation ("Omega"),1 seeks the recovery of damages and equitable relief for wrongs allegedly sustained by Omega as a result of Omega's expansion between April and December, 1968 in acquiring various enterprises and interests, financed through the sale and exchange of Omega's unregistered letter stock. The complaint identifies four principal categories of defendants: (1) eight officers and directors who served Omega during the period in question (the "officer-director defendants");2 six brokers and dealers in securities who assisted in selling Omega letter stock and also allegedly purchased letter stock for their own account (the "broker-dealer defendants");3 five open-end mutual fund investment companies, registered with the Securities and Exchange Commission, who purchased letter stock of Omega (the "mutual fund defendants");4 and (4) twenty-nine others who are alleged to have sold property and assets to Omega at unconscionably high prices, in constructive fraud of Omega (the "vendor defendants").5 The complaint generally alleges that the various wrongs complained of "were effected pursuant to scheme and conspiracy between the officer-director defendants and the broker-dealer and mutual fund defendants." The allegations of the complaint may be summarized as follows:

Omega, a Delaware corporation, was until April, 1968 engaged primarily in the purchase, sale and management of real estate. According to the allegations of the complaint, in April, 1968, the officer-director defendants, dominated and controlled by Jerry M. Tenney, planned to convert Omega into a conglomerate with holdings in various fields. In May, 1968 a public relations firm was retained to disseminate publicity regarding Omega's acquisition program and its development into a conglomerate corporation. The complaint further charges that in April, 1968 the officer-director defendants, the mutual fund defendants and the broker-dealer defendants entered into a conspiracy to buy and sell Class A shares of Omega which were not registered with the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933 (the "'33 Act"), 15 U.S.C. § 77a et seq. Such unregistered shares were issued by Omega as letter stock, i. e. the purchaser would sign a letter stating the stock was purchased only for investment and not for public distribution and the certificates of stock carried a legend restricting the sale of the stock pending registration with the Commission. It is further charged that as a primary inducement to the purchase of this stock, the officer-director defendants caused Omega to make commitments for the sale thereof at prices 50% below the then current retail price for Omega stock in the over-the-counter market. Sale commitments were made between six weeks to two months before the sales were consummated and on many dates of the sale, the letter stock prices frequently were as low as 20 to 25% of the quoted over-the-counter market prices for registered shares. Between May 15 and December 20, 1968, Omega letter stock was sold at prices ranging from $3 to $10 per share. In all, over 3 million shares of Omega were sold for which Omega received gross proceeds of over 12 million dollars.

Included in the 3 million shares sold during this period were 513,000 shares of letter stock sold to the mutual fund defendants6 and 1,793,100 shares sold to 186 purchasers by or through the broker-dealer defendants.7 The officer-director defendants authorized Omega to pay a share commission or finders fee of 25¢ for each share sold by the broker-dealer defendants. The complaint charges that the broker-dealer defendants, during the period from May 15, 1968 through December 20, 1968, while engaged in underwriting and distribution of the Class A Omega stock, "bid for and effected transactions in such stock and recommended and effected transactions in the stock for their customers and others." In addition, the broker-dealer defendants are charged with purchasing and selling on their own account in the over-the-counter market substantial blocks of Omega stock, in violation of § 10(b) of the Securities Exchange Act of 1934 (the "'34 Act"), 15 U.S.C. § 78j(b) and Rules 10(b)-6, 15(c)-1 & 2 and 15(c)1-6 promulgated pursuant to § 15(c) of the '34 Act, 15 U.S.C. § 78o(c).

The second count of the complaint charges that in the conduct of the acquisition program between April and December, 1968, the officer-director defendants violated both their fiduciary duties under Delaware law and various provisions of the Federal securities laws. The acquisition program involved total cash expenditures of $5,500,000 and also the exchange of Class A shares of Omega in return for the properties acquired. The second count specifically charges that the prices paid to the vendor defendants during this period were unconscionably high and that the assets acquired were of little or no value. For example, Omega acquired the outstanding stock of Raleigh Manufacturers, Inc. for $6,333,000, of which $1,600,000 was paid in cash, with the commitment to pay $4,400,000 of the remaining balance in cash, and deliver to each of the three vendor defendants8 of Raleigh stock 100,000 shares of Class A Omega stock valued at $1 per share. The assets of Raleigh acquired for $6,300,000 included $5,300,000 of good will and intangibles. The net profit of Raleigh for the fiscal year ending May 31, 1968 was $65,000.

As another example of the eclectic expansion program of Omega's management during the period in question, in October, 1968, Omega acquired from Alice Arm Mining, Ltd. and "Dr." Vernon E. Shelton an alleged underwater robot for 120,000 shares of its Class A stock. It was represented that the robot was able to work underwater to a depth of 1000 feet and that the robot had been developed by the Hughes Aircraft Corporation at a cost of over $1,000,000. Contrary to this representation the complaint alleges that Vernon E. Shelton (who was not a doctor) had acquired the robot as scrap from the salvage department of the Hughes Aircraft Corporation for about $1,500 and the vellum drawings of the device for $250. It was alleged that the robot "was and is essentially worthless." The count states that the acquisition of the various business enterprises was not motivated by usual business judgment but was motivated by a desire to build up as rapidly as possible a public image of Omega as an "emerging conglomerate" without regard to prices paid or value received.

The third count alleges that on December 20, 1968, the Securities and Exchange Commission issued an order suspending trading in the securities of Omega in the over-the-counter market because of the sales of such letter stock. The suspension in trading continued until after April 10, 1969. On April 10, 1969, the Commission filed a complaint in the United States District Court for the Central District of California predicated on the acts and practices related to the sale of the letter stock, and other acts and practices, all of which were alleged to be in violation of Rule 10(b)-5 of the '34 Act and of the registration and anti-fraud provisions of the '33 Act. Included as defendants were Omega and the officers and directors of Omega named as defendants in the present action.

On April 10, 1969, Omega and the officer-director defendants entered their appearance in the California suit and agreed to a consent judgment enjoining Omega and such officer-director defendants from further acts in violation of the Securities Acts. The defendants further agreed, for 120 days after the entry of the judgment, not to issue additional securities, solicit or receive public funds or acquire new properties. In addition, Omega was precluded after the 120 day period from issuing further stock, unless a registration was in effect covering such shares. No registration is now, or has been, effective. The third count prays that the officer-director defendants indemnify Omega against the expenses of...

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    ...the plaintiffs' claim. 24 24. 10 Del.C. § 366; Hanson v. Denckla, 357 U.S. 235, 78 S.Ct. 1228, 2 L.Ed.2d 1283 (1958); cf. Jacobs v. Tenney, 316 F.Supp. 151 (D.Del.1970); Restatement of Judgments, § 34 comment f (1942). 348 F.Supp. 1004, 1019-20 (D.Del.1972). We are persuaded that the crypti......
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    ...as here, the original plaintiff has already amended his complaint once with the approval of the court. See also Jacobs v. Tenney, 316 F.Supp. 151, 163-165 (D.Del.1970) (conspiracy to violate the securities laws); Eisman v. Pan American World Airlines, 336 F. Supp. 543, 553 (E.D.Pa.1971) (co......
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