373 F.2d 269 (2nd Cir. 1967), 306-308, Barnes v. Osofsky

Docket Nº:306-308, 30867-30869.
Citation:373 F.2d 269
Party Name:Arthur BARNES, Plaintiff-Appellee, v. Meyer OSOFSKY et al., Defendants-Appellees. Alfred N. GREENBERG et al., Plaintiffs-Appellees, v. AILEEN, INC., et al., Defendants-Appellees. Reginald SMITH et al., Plaintiffs-Appellees, v. AILEEN, INC., et al., Defendants-Appellees.
Case Date:February 01, 1967
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit
 
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Page 269

373 F.2d 269 (2nd Cir. 1967)

Arthur BARNES, Plaintiff-Appellee,

v.

Meyer OSOFSKY et al., Defendants-Appellees.

Alfred N. GREENBERG et al., Plaintiffs-Appellees,

v.

AILEEN, INC., et al., Defendants-Appellees.

Reginald SMITH et al., Plaintiffs-Appellees,

v.

AILEEN, INC., et al., Defendants-Appellees.

Nos. 306-308, 30867-30869.

United States Court of Appeals, Second Circuit.

February 1, 1967

Argued Jan. 5, 1967.

Milton S. Zeiberg, New York City, for objectants-appellants Fred Zilker and Attilio Occhi.

A. Edward Grashof, New York City (Winthrop, Stimson, Putnam & Roberts, William C. Chanler, New York City, of counsel), for defendants-appellees other than Goodbody & Co.

Frank Weinstein, Weinstein & Levinson, and Richard B. Dannenberg, Lipper, Shinn, Keeley & Dannenberg, New York

Page 270

City (Aaron Lipper, Irving Steinman, Samuel Weinstein, New York City, of counsel), for plaintiffs-appellees.

Philip A. Loomis, Jr., Gen. Counsel, David Ferber, Sol., Richard H. Phillips, Asst. Gen. Counsel, Roy Nerenberg, Washington, D.C., for Securities and Exchange Commission, amicus curiae.

Before LUMBARD, Chief Judge, and FRIENDLY and HAYS, Circuit Judges.

FRIENDLY, Circuit Judge.

Aileen, Inc. is engaged in the design, manufacture and sale of popular priced sports wear for girls and women. Prior to the fall of 1963 it had outstanding 1,019,574 common shares; 205,966 of these, most of them covered by a 1961 registration statement, were traded on the American Stock Exchange, and the balance, 813,608, were owned, in approximately equal proportions, by two officers and directors, Osofsky and Oberlin. Pursuant to a registration statement effective September 10, 1963, a group of underwriters offered at $23.375 per share, substantially the then market price, another 200,000 shares, also to be listed on the American Exchange; 100,000 of these were an original issue, 50,000 were Osofsky's and 50,000 were Oberlin's. The prospectus reported that 'Sales volume has grown from $2,120,394 in 1956 to $15,045,826 in 1962 and reached $9,826,655 for the first six months of 1963.'

A press release on October 7, 1963, and a supplement to the prospectus on the following day, announced a rift in the lute. Third quarter sales had been little more than in 1962 and the volume of orders for an important spring line had not come up to expectations. The price of the stock, which had been gradually declining since late September, declined some more, reaching $15.75 by the end of October, $14.25 at the year-end, and still lower figures thereafter.

Three class actions by purchasers against the corporation, Osofsky, Oberlin, the principal underwriters and, in one instance, other officers and directors, were brought in the District Court for the Southern District of New York on November 13 and 19, 1963 and August 17, 1964, and were subsequently consolidated. The complaints in all three set forth a claim under 11 of the Securities Act of 1933 that the registration statement and prospectus contained material misstatements and omissions, primarily in failing to disclose danger signals of which the management was aware prior to the date when the registration statement took effect. One complaint also contained a claim based on § 10(b) of the Securities Exchange Act of 1934, Rule 10b-5 and common law fraud, but this was later withdrawn. After discovery and negotiations, a settlement was agreed upon, which the District Court approved after notice and hearing, 254 F.Supp. 721 (S.D.N.Y.1966). This provided for the deposit of a fund of $775,000, 50% of which was contributed by the corporation and the remainder by the two selling stockholders in equal amounts. After payment of approved allowances, the fund was to be distributed among persons 'who...

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