386 F.2d 718 (8th Cir. 1967), 18341, Myzel v. Fields

Docket Nº:18341-18344.
Citation:386 F.2d 718
Party Name:Benjamin (Benn) MYZEL et al., Appellants, v. Harry FIELDS, Appellee. Benjamin (Benn) MYZEL et al., Appellants, v. Samuel H. KING, Appellee. Benjamin (Benn) MYZEL et al., Appellants, v. Rita VERTELNEY, Special Administratrix, etc., Appellee. Benjamin (Benn) MYZEL et al., Appellants, v. Gordon M. COHEN, Appellee.
Case Date:October 12, 1967
Court:United States Courts of Appeals, Court of Appeals for the Eighth Circuit
 
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Page 718

386 F.2d 718 (8th Cir. 1967)

Benjamin (Benn) MYZEL et al., Appellants,

v.

Harry FIELDS, Appellee.

Benjamin (Benn) MYZEL et al., Appellants,

v.

Samuel H. KING, Appellee.

Benjamin (Benn) MYZEL et al., Appellants,

v.

Rita VERTELNEY, Special Administratrix, etc., Appellee.

Benjamin (Benn) MYZEL et al., Appellants,

v.

Gordon M. COHEN, Appellee.

Nos. 18341-18344.

United States Court of Appeals, Eighth Circuit.

October 12, 1967

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Conrad M. Fredin, R. B. Reavill and John J. Killen, Jr., Duluth, Minn., for appellants, Arthur Karger, New York City, Daniel R. Kaplan, New York City, of counsel.

Lindquist, Magnuson & Glennon, Edward M. Glennon, William B. Stukas, Minneapolis, Minn., Leonard A. Wilson, Jr., Cloquet, Minn., for appellees.

Before MATTHES, MEHAFFY and LAY, Circuit Judges.

LAY, Circuit Judge.

The four cases here considered are actions brought under Securities and Exchange Commission Rule 10b-5, 17 C.F.R. § 240.10b-5 (hereinafter Rule 10b-5), which implements Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq., arising out of the sale of stock of a closed corporation. Trial was held before a jury and jury verdicts totaling $411,000 were returned in favor

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of the plaintiffs. 1 Honorable Earl Larson, the trial judge, overruled the defendants' motion for new trial and judgment notwithstanding the verdict. The defendants have appealed. We affirm the verdicts and judgment below.

The basic issues are: (1) jurisdiction over intrastate sales, (2) sufficiency of the evidence to support the verdicts, (3) the liability of 'controlling' persons and (4) the proper measure of damage.

I. JURISDICTION. Both Section 10 of the Act (15 U.S.C. § 78j(b)) and Rule 10b-5 require as a jurisdictional basis 'the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange.'

The evidence is undisputed that the telephone was used only on an intrastate basis in the solicitation or purchase of each of the appellees' stook. Appellees claim that federal jurisdiction exists because the telephone is an 'instrumentality of interstate commerce' and, therefore, the cases fall within the prohibition of the statute. Despite reasoning to the contrary, 2 we are convinced that Congress, in the interest of fairly regulating interstate commerce, intended to supervise those intrastate activities in violation of Rule 10b-5 which are 'inimical to the welfare and public policy of the country as a whole.' Nemitz v. Cunny, 221 F.Supp. 571, 574 (N.D.Ill.1963). We hold, consequently, that intrastate use of the telephone comes within prohibition of the Act. See also Bredehoeft v. Cornell, 260 F.Supp. 577 (D.Ore.1966); Lennerth v. Mendenhall, 234 F.Supp. 59 (N.D.Ohio 1964). In interpreting other grants of federal power, it has long been acknowledged that Congress may regulate intrastate activity if simultaneously it is an integral part of or constitutes an instrumentality of interstate commerce. Alstate Constr. Co. v. Durkin, 345 U.S. 13, 73 S.Ct. 565, 97 L.Ed. 745 (1953); Overstreet v. North Shore Corp., 318 U.S. 125, 63 S.Ct. 494, 87 L.Ed. 656 (1943); Pedersen v. Delaware, L. & W.R.R. Co., 229 U.S. 146, 33 S.Ct. 648, 57 L.Ed. 1125 (1913) .

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Thus, in order to protect interstate commerce, intrastate telephonic messages have been placed under the statutory prohibition pertaining to unauthorized publication or use of communications under 47 U.S.C. § 605. Weiss v. United States, 308 U.S. 321, 60 S.Ct. 269, 84 L.Ed. 298 (1939). We recognize that the telephone system and its voice transmission by wire is an integrated system of both intrastate and interstate commerce. Cf. Lipinski v. United States, 251 F.2d 53 (10 Cir. 1958). As such, proof of the interstate telephonic message is not a prerequisite to jurisdiction over a Section 10(b) action. As long as the instrumentality itself is an integral part of an interstate system, nothing in the Constitution requires Congress to exclude intrastate activities from its regulatory control. See Weiss v. United States, supra.

But there exists additional grounds to sustain jurisdiction. It is the rule that where any interstate use is made to perpetuate the original fraudulent concealment or transaction, even though not part of the original solicitation or inducement of sale involved, that nevertheless the subsequent use of interstate facilities in furthering the scheme is sufficient to establish federal jurisdiction. 3 Creswell-Keith, Inc. v. Willingham, 264 F.2d 76, 80, 82 (8 Cir. 1959); see also Thomas v. United States, 227 F.2d 667, 670 (9 Cir. 1955) (use of automobile); Ellis v. Carter, 291 F.2d 270, 274 (9 Cir. 1961) (use of plane); cf. Boone v. Baugh, 308 F.2d 711 (8 Cir. 1962).

Appellees contended that they were fraudulently induced to sell their stock to the appellants, that the purchases were made by parties (the Myzels) other than the true buyers (the Levines) and that an Illinois corporation owned by some of the appellants was used as a conduit of concealment. The transfers of the stock to the Illinois corporation, although occurring several months and even years later, involved the delivery of checks written by the Illinois corporation on Chicago, Illinois banks to a Minnesota citizen. Cf. Little v. United States, 331 F.2d 287 (8 Cir. 1964). Thus, under appellees' theory, there was also sufficient evidence of interstate transactions to sustain jurisdiction.

II. SUFFICIENCY OF EVIDENCE. By reason of the jury verdict, and in view of defendants' motion for judgment notwithstanding the verdict, we set forth from the conflicting evidence, the facts in the light most beneficial to the appellees. See, e.g. Breeding v. Massey, 378 F.2d 171 (8 Cir. 1967).

Lakeside Plastics and Engraving Co., hereinafter called 'LPE,' was organized in 1946 in Duluth, Minnesota, by cousins, Zelman and Clarence Levine. The company was organized as a small plastics corporation to make advertising signs. Upon its original issue there were 1,140 shares of common stock issued to some 17 persons, at a par value of $50 per share. Among the original Purchasers were the appellee-plaintiffs, Harry Fields (30 shares), Joseph S. Vertelney (100 shares), Samuel H. King (30 shares), and Gordon M. Cohen (40 shares). In 1948, a sales agency, independent of LPE and entitled Lakeside Plastics Sales Co., hereinafter called 'LPS,' was organized in the State of Illinois by Orrin and William Levine, who were also original stockholders and directors of LPE from its inception. Both Orrin and William were brothers of Clarence Levine. From 1953 to sometime in 1957, the stock of LPE became totally vested in the hands of the four Levines and the Illinois corporation, LPS. By 1958, 640 shares of LPE were owned by LPS. At about that time, for a nominal consideration ($600 each), a one-fourth interest in LPS was sold to

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each of the Minnesota Levines. Then, in December 1961, the 640 shares of LPE were re-acquired by LPE as treasury stock, pursuant to a merger with LPS's wholly owned subsidiary, Lakeside Properties, Inc., hereinafter called 'LPI,' which had received the shares from LPS in July 1959. LPE then retired the 640 shares. The remaining 500 shares of LPE stock, then owned one-quarter each by the Levines, was in turn exchanged for 500,000 shares of a newly formed corporation called Lakeside Industries, Inc., hereinafter called 'LII.' In 1962, 150,000 shares of LII were offered to the public at $9 per share. The appellant-defendants herein are each of the four Levines, Benjamin Myzel, Philip Myzel and LII.

Philip (Phil) and Benjamin (Benn) Myzel, brothers and first cousins of Zelman Levine, were living in Duluth, Minnesota. The evidence shows that Benn Myzel was a close friend to each of the appellees. Benn was an early director of LPE, going off the board in 1949 and again assuming a directorship in 1954. According to the appellees, Benn Myzel originally solicited each of them to purchase stock in LPE, portraying it as an opportunity 'to get in on the ground floor.' Upon Benn's advice, each of the appellees made his purchase in 1946 of the shares in question at $50 par value.

For some time thereafter the growth of LPE was somewhat typical of any small, closely held corporation. From 1946 to 1951, the evidence showed a struggle for sales, a very marginal profit picture and a total lack of return to the appellee stockholders on their investment. Appellees, as well as other stockholders, expressed continued concern throughout this period as to the ultimate soundness of the investment involved. At the 1949 stockholders' meeting, appellee Fields even moved to dissolve the company in order to salvage a pro rata share of everyone's investment. LPE had an accumulated deficit in earned surplus at the end of 1951 of some $51,000. Sales in that year were $94,000. In 1952, the gross sales rose to some $249,000. This level had been reached before, in 1948. At the end of 1952, the profit was only $7,500 for the year, whereas the earned surplus deficit was still some $43,000. This 1952 financial picture was fully disclosed at a stockholders' meeting attended by some of the appellees in June of 1953. It was also known that in 1951 a large new contract was made with the Blatz Brewing Company for advertising signs. Each of the appellees, as well as the other stockholders, in order to secure a bank loan needed for the accomplishment of this contract...

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