Barnes v. Osofsky

• Decision Date: 01 February 1967
• Docket Number: Dockets 30867-30869.,No. 306-308,306-308
• Citation: 373 F.2d 269
• Parties: 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.
• Court: U.S. Court of Appeals — Second Circuit

373 F.2d 269 (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, Dockets 30867-30869.

United States Court of Appeals Second Circuit.

Argued January 5, 1967.

Decided February 1, 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

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 beneficially acquired (in his own name or otherwise) any part of the 200,000 shares * * * which was the subject of the public offering of September 10, 1963 between September 10, 1963 and August 17, 1964" and who made timely application for participation therein. Seventy-five percent of the fund, called Fund A, was to reimburse such persons for losses suffered prior to November 13, 1963; twenty-five percent, Fund B, was to reimburse them for losses thereafter. The measure of damages for Fund A was the difference between actual cost, not exceeding $23.375 per share, and the sales price for those who had sold the stock or $16.25 per share, the closing market price on November 13, for those who continued to hold it. The measure of damages for Fund B was the difference between actual cost, not exceeding $16.25 per share, and the actual sales price or $8.875 (the closing market price on August 17, 1964), whichever was higher. The judgment contained a clause barring all actions by purchasers of the 200,000 shares "founded or in any way based upon the subject matter of the pleadings of the above actions, or any of them, including any claim or claims alleged or asserted or which could have been alleged or asserted in said pleadings by virtue of the facts alleged therein."

The sole objectors to the settlement were the appellants Attilio Occhi who bought 100 shares on November 22, 1963 at about $15 per share, and Fred Zilker who bought 25 shares on September 12, 1963 for $23.375 and 50 shares on December 23 for $13.50 per share. Their objection went to the provision limiting the benefits of the settlement to persons who could establish that they purchased securities issued under the 1963 registration statement, which thus eliminated those who purchased after the issuance of the allegedly incomplete prospectus but could not so trace their purchases. Although the issue has not yet been passed upon by the special master whom Judge Ryan appointed, it appears likely that Occhi will be able to trace 50 shares which were bought on the open market and Zilker can trace 25 which were bought from an underwriter, but not the balance — all purchased on the market.

We need say little as to appellants' argument that even if § 11 of the Securities Act permits recovery only by purchasers of the issue covered by the defective registration statement as the district judge held, the court on a basis of equity should have provided for participation by others who, as a practical matter, may have suffered equally. Whether or not it would have been an abuse of discretion to have diluted a settlement so as to allow recovery by persons not legally entitled thereto, as we incline to think it would have been, surely there would be none in limiting participation to those who might have recovered had the suits been fought and won. The question thus is whether the district court was right in ruling that § 11 extends only to purchases of the newly registered shares.

Section 11(a) provides that:

"In case any part of the registration statement, when such part became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, any person acquiring such security (unless it is proved that at the time of such acquisition he knew of such untruth or omission) may, either at law or in equity, in any court of competent jurisdiction, sue"

five categories of persons therein named. The key phrase is "any person acquiring such security"; the difficulty, presented when as here the registration is of shares in addition to those already being traded, is that "such" has no referent. Although the narrower reading — "acquiring a security issued pursuant to the registration statement" — would be the more natural, a broader one — "acquiring a security of the same nature as that issued pursuant to the registration statement" — would not be such a violent departure from the words that a court could not properly adopt it if there were good reason for doing so. Appellants claim there is. Starting from the seemingly correct premise that an unduly optimistic prospectus will affect the price of shares already issued to almost the same extent as those of the same class about to be issued, they say it would therefore be unreasonable to distinguish newly registered shares from those previously traded. In addition, they contend that once it is agreed that § 11 is not limited to the original...