Manor Drug Stores v. Blue Chip Stamps
| Citation | 492 F.2d 136 |
| Decision Date | 01 April 1974 |
| Docket Number | No. 71-2223.,71-2223. |
| Parties | MANOR DRUG STORES and all other users of Blue Chips Stamps who were entitled but failed to purchase stock of Blue Chip Stamps, on behalf of themselves and all other persons similarly situated, Plaintiffs-Appellants, v. BLUE CHIP STAMPS, a corporation, et al., Defndants-Appellees. |
| Court | United States Courts of Appeals. United States Court of Appeals (9th Circuit) |
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J. J. Brandlin (argued), James E. Ryan (argued), Ray E. McAllister (argued), Los Angeles, Cal., for defendants-appellants.
Thomas J. Ready (argued), Allyn O. Kreps, Michael D. Zimmerman, of O'Melveny & Myers, G. Richard Doty (argued), Peter W. James, David T. Peterson, of McCutchen, Black, Verleger & Shea, Los Angeles, Cal., for plaintiffs-appellants.
G. Bradford Cook, Gen. Counsel, David Ferber, Solicitor, Richard E. Nathan, Asst. Gen. Counsel, Jerry W. Markham, Securities and Exchange Commn., Washington, D. C., for the amicus curiae.
Before BROWNING, HUFSTEDLER, and CHOY, Circuit Judges.
As Modified on Denial of Rehearing and Rehearing En Banc April 1, 1974.
The district court, 339 F.Supp. 35, dismissed appellants' complaint under section 10(b) of the Securities Exchange Act of 1934,1 15 U.S.C. § 78j(b), and Securities and Exchange Commission Rule 10b-5,2 claiming damages for alleged fraud in connection with an offering of stock of appellee Blue Chip Stamps to appellant and the class it seeks to represent. The court held that because appellant and other members of the class did not purchase the stock they lacked standing to sue under the rule announced in Birnbaum v. Newport Steel Corp., 193 F.2d 461 (2d Cir. 1952).3 We conclude that it does not appear "beyond doubt" that appellant "can prove no set of facts in support of its claim which would entitle it to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 78 S. Ct. 99, 2 L.Ed.2d 80 (1957). We therefore reverse.
The alleged facts are as follows.4
In 1963 the United States filed a complaint charging Blue Chip Stamp Company, Thrifty Drug Stores Co., Inc., and eight grocery chains with conspiracy to restrain trade and monopolization in the trading stamp business in California, in violation of the Sherman Act. This litigation was settled in 1967 by entry of a consent decree. See United States v. Blue Chip Stamp Co., 272 F. Supp. 432 (C.D.Cal.1967).
The defendants in the antitrust suit, other than Blue Chip Stamp Company, were major California retail merchandisers who used Blue Chip stamps to stimulate patronage in their businesses. They owned 90 per cent of Blue Chip Stamp Company's stock.
Other retailers who used Blue Chip stamps in their business but owned no stock in Blue Chip Stamp Company (a group that includes appellant and others in the class it seeks to represent) appear before the court in the antitrust proceeding as amicus curiae. They contended that Blue Chip Stamp Company was to have been a non-profit venture on behalf of all users of Blue Chip stamps, and that they (the non-stockholding users) in fact owned an equitable interest in Blue Chip Stamp Company and in the $20,000,000 in profits it had accumulated. They asked that this interest be recognized in the decree.
These claims and contentions on behalf of the non-stockholding retail users of Blue Chip stamps "prompted the provisions" of the consent decree requiring the reorganization of Blue Chip Stamp Company. Under the reorganization plan eventually approved, Blue Chip Stamp Company was to be merged into a new company — Blue Chip Stamps. The defendant stockholder-users were to be cent of the common stock of the new in the enterprise. This was to be accomplished by issuing to others 55 per company; 621,600 shares of the common stock of the new company were to be offered to the retail users of Blue Chip Stamps who were not stockholders of the old company. The shares were to be offered on a pro-rata basis determined by the quantity of stamps issued to each of these non-stockholding users during a designated period. The offering was to be made in units consisting of three shares of common stock and a $100 debenture for a cash payment of $101. Any of the 621,600 shares not purchased by the non-stockholding users were to be divested of 55 per cent of their interest sold on the open market.
The offer of debentures and stock to non-stockholding users was intended by the court and government to be, and was, a bargain. Each unit offered to the non-stockholding user for $101 had a reasonable market value of $315, as defendant-appellees knew.
Users who were stockholders in the old company (including the defendant-appellees in this case)5 did not want the non-stockholding users to exercise their right to purchase stock in the new company. To accomplish their purpose they caused to be prepared and circulated a prospectus "calculated to mislead and dissuade users not knowledgeable of the true value of said shares from purchasing said shares." The prospectus repeatedly emphasized certain "Items of Special Interest" as having an adverse effect upon the value of the offered stock.6 "Constant reference to said items was intended to, and did cause plaintiffs to be misled as to the true value of said shares." When defendant-appellees offered "their own" shares to the public a year later,7 the prospectus then issued made no reference to any of these "Items of Special Interest," although they were as relevant (or irrelevant) on the date of the second prospectus as they had been on the date of the first.
Defendant-appellees, by these and other means, intended to and did mislead plaintiff-appellant and other user-offerees as to value of the stock. Plaintiff-appellant and others in the class it represents, relying upon these representations, "were induced and did, in fact, not accept said offer and purchase said Units," and were thereby damaged in the amount of the difference between the offering price of the units and their fair market value.
We are not satisfied that these allegations establish on their face that appellant is barred from maintaining the action by the judicially created "purchaser-seller" prerequisite to standing to sue for damages under section 10(b) and Rule 10b-5.
The complaint alleges the use of a fraudulent scheme involving untrue statements and omissions in offering securities of Blue Chip Stamps for sale.
The statute and rule were intended to protect the purity of stock transactions from just such manipulative and deceptive practices that deprive potential investors of a reasonable opportunity to make informed and intelligent investment decisions.8 It is obviously irrelevant to this purpose that the object of the deceptive practices was to prevent purchases rather than to induce them.9 And Congress and the Commission cannot have intended to prohibit such fraudulent practices if they failed but not if they succeeded. The language of the statute and rule does not require such a bizarre result. The statute and rule are not confined in terms to consummated purchases or sales. They have often been applied where, as here, "plaintiffs alleged that they had sought to enter a securities transaction as purchasers or sellers, but that the transaction was aborted as a result of the fraud of the defendants." Mount Clemens Industries, Inc. v. Bell, 464 F.2d 339, 345 (9th Cir. 1972), citing Opper v. Hancock Securities Corp., 367 F.2d 157 (2d Cir.), affirming 250 F. Supp. 668 (S.D.N.Y.1966); Commerce Reporting Co. v. Puretec, Inc., 290 F. Supp. 715 (S.D.N.Y.1968); Goodman v. Hentz & Co., 265 F.Supp. 440 (N.D.Ill. 1967); and Stockwell v. Reynolds & Co., 252 F.Supp. 215 (S.D.N.Y.1965). See also Walling v. Beverly Enterprises, 476 F.2d 393 (9th Cir. 1973).
It can hardly be doubted, therefore, that the Securities and Exchange Commission, or a private person having a sufficient interest,10 could have obtained prophylactic injunctive relief against the defendants in a timely suit.
Thus the question is not whether the complaint alleges a violation of the statute and rule, but rather whether appellant is barred from suing for damages because it succumbed to the fraud and did not purchase the offered stock.
Like the provisions of the statute and rule relating to coverage,11 the Birnbaum "purchaser-seller" standing requirement is to be construed to accomplish Congress' purpose. Herpich v. Wallace, 430 F.2d 792, 806-807 (5th Cir. 1970), and cases there cited. If this were the sole consideration, standing would be allowed to any person whose investment decision was affected by fraud, whether the fraud caused him to buy or prevented him from doing so. In either case the fraud would frustrate Congress' purpose, as we have said; and, in either case, allowing the private remedy would serve to vindicate that purpose.12
The standing requirement rests in part upon other considerations, however.13
Cases allowing private suits for injunctive relief make it clear that the "purchaser-seller" prerequisite to standing to sue for damages rests largely on the assumption that if plaintiff does not allege that he purchased or sold the stock involved in the fraud it is evident at the outset that his claim must fail "both on proof of loss and the causal connection with the alleged violation of the Rule." Mutual Shares Corp. v. Genesco, Inc., 384 F.2d 540, 547 (2d Cir. 1967). See also Britt v. Cyril Bath Co., 417 F.2d 433, 435-436 (6th Cir. 1969); cf. Rekant v. Desser, 425 F.2d 872, 881 (5th Cir. 1970); Boone & McGowan, Standing to Sue under SEC Rule 10b-5, 49 Texas L.Rev. 617, 646 (1971); Kellogg, The Inability to Obtain Analytical Precision Where Standing to Sue under Rule 10b-5 Is Involved, 20 Buffalo L. Rev. 93, 114-116 (1970).
This assumption is usually justified. Ordinarily there will be little proof (other than the non-purchaser's own opinion, after the loss) that the non-purchaser would in fact have purchased but...
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