Greenstein v. Paul, 31965.

• Decision Date: 30 August 1968
• Docket Number: No. 31965.,31965.
• Citation: 400 F.2d 580
• Parties: Max GREENSTEIN, Plaintiff-Appellant, v. Mildred P. PAUL, Harry Lebensfeld, Jack Koenig, Joseph A. Dancewicz, United Industrial Syndicate, Inc., and Sagamore Manufacturing Company, Defendants-Appellees.
• Court: U.S. Court of Appeals — Second Circuit

400 F.2d 580 (1968)

Max GREENSTEIN, Plaintiff-Appellant, v. Mildred P. PAUL, Harry Lebensfeld, Jack Koenig, Joseph A. Dancewicz, United Industrial Syndicate, Inc., and Sagamore Manufacturing Company, Defendants-Appellees.

No. 31965.

United States Court of Appeals Second Circuit.

Argued April 4, 1968.

Decided August 30, 1968.

Louis C. Fieland, New York City, for plaintiff-appellant.

Edward Brodsky, New York City, Goldstein, Judd & Gurfein, Appel & Goldman, William M. Guttman and Ronald Appel, New York City, of counsel, for defendants-appellees.

Before MOORE, WOODBURY^* and SMITH, Circuit Judges.

WOODBURY, Senior Circuit Judge:

The plaintiff brought this action individually, and as the representative of all other stockholders of Sagamore Manufacturing Company similarly situated, for an accounting, damages and other appropriate relief, charging the defendants with violating § 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. § 78j (b)) and Rule 10b-5 of the Securities and Exchange Commission thereunder as well as their fiduciary obligations under common law. Jurisdiction of the district court is invoked solely under § 27 of the above Act. 15 U.S.C. § 78aa.

The individual defendants are alleged to be the stockholders and the officers and directors of the defendant United Industrial Syndicate, Inc., a New York corporation alleged to own at the time the complaint was filed 80% or more of the stock of the defendant Sagamore, a Massachusetts corporation. The individual defendants are alleged to be also the directors and officers of Sagamore. They are charged in the complaint with conspiring with one another to syphon the assets and income of Sagamore into Syndicate for its use, depressing the market value of Sagamore's stock below its fair value on the over-the-counter market where the stock was traded, so as to purchase shares of the minority stockholders at depressed prices and effectuate their "freeze-out."

The court below granted the defendants' motion for summary judgment on the ground that the complaint failed to allege, and indeed an undisputed affidavit established that the plaintiff had not sold any of his Sagamore stock during the time when the defendants committed the alleged wrongs but in fact acquired his stock prior to the acts of the defendants of which he complains and had never parted with any of it. The question then is whether there must be a sale of stock by a plaintiff before he can invoke the implied civil remedy afforded by the Act and Rule cited hereinabove. See Mutual Shares Corp. v. Genesco, Inc., 384 F.2d 540, 543 (C.A. 2, 1967), citing J. I. Case Co. v. Borak, 377 U.S. 426, 84 S.Ct. 1555, 12 L.Ed.2d 423 (1964).

It has long been the rule in this circuit that to maintain an action under § 10(b) of the Act and Rule 10b-5 of the Securities and Exchange Commission the plaintiff must have been a seller of the stock involved. Birnbaum v. Newport Steel Corp., 193 F.2d 461 (C.A. 2, 1952), cert. denied 343 U.S. 956, 72 S.Ct. 1051, 96 L. Ed. 1356 (1952). Although criticized, Entel v. Allen, 270 F.Supp. 60, 70 (S.D.N. Y., 1967), it is still the rule at least insofar as actions for damages are concerned. Mutual Shares Corp v. Genesco, Inc., supra.

Vine v. Beneficial Finance Co., 374 F. 2d 627 (C.A. 2, 1967), cert. denied 389 U.S. 970, 88 S.Ct. 463, 19 L.Ed.2d 460 (1967), upon which the plaintiff heavily relies, does not hold the contrary....