Joseph v. Farnsworth Radio & Television Corp.
| Decision Date | 25 July 1951 |
| Citation | 99 F. Supp. 701 |
| Parties | JOSEPH et al. v. FARNSWORTH RADIO & TELEVISION CORP. et al. |
| Court | U.S. District Court — Southern District of New York |
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Barney Rosenstein and Leo Praeger, New York City (Bernard S. Kanton, New York City, of counsel), for plaintiffs.
Davis, Polk, Wardwell, Sunderland & Kiendl, New York City (S. Hazard Gillespie, Jr., and Francis W. Phillips, both of New York City, of counsel), for defendants Paul H. Hartman, Philo T. Farnsworth, George Everson, Jesse B. McCargar and F. A. R. Liquidating Corp., sued herein as "Farnsworth Radio and Television Corp."
Paul, Weiss, Rifkind, Wharton & Garrison, New York City, for defendant Lloyd S. Gilmour.
Barnet Joseph and Max Felshin, "on behalf of themselves and in a representative capacity on behalf of all former and present stockholders of the defendant, Farnsworth Radio and Television Corp.", commenced an action in this Court against Farnsworth Radio and Television Corp., Jesse B. McCargar, Edwin M. Martin, Lloyd S. Gilmour, Philo T. Farnsworth, George Everson and Paul H. Hartman.
As I read the complaint, it alleges, all upon information and belief except the first paragraph, that:
1st. — The action is brought under 15 U. S.C.A. § 78j(b) and Rule X-10(b) (5) of the Securities and Exchange Commission;
2nd. — At the times involved, the individual defendants were directors and/or officers of the corporate defendant;
3rd. — The corporate defendant is a Delaware corporation; with its principal place of business in this district;
4th. — The individual defendants, for themselves and others, between March 19th, 1948 and October 30th, 1948, sold certain enumerated shares of the stock of the corporate defendant;
5th. — The plaintiff, Felshin, on November 12, 1948 bought 100 shares of the corporate defendant's stock at 5 5/8 and the plaintiff, Joseph, on December 13, 1948 bought 700 shares of the corporate defendant's stock at 7 7/8 ;
6th. — The individual defendants, in connection with their sales (emphasis supplied) of stock enumerated in paragraph 4th, using interstate commerce and the mails, made false statements of material facts and omitted to state material facts necessary to make the statements made not misleading and employed devices, schemes and artifices to defraud and engaged in acts, practices and courses of business which were a fraud and deceit upon Joseph and Felshin and "all others of said class in connection with the purchase and sale of the common stock of" the corporate defendant in that:
(a) (1) False statements were made as to the corporate defendant's inventory value, financial condition and net losses; (2) Statements of material fact were omitted that the corporate defendant had suffered substantial losses during the six month period ending October 31, 1948 and that its inventory had become obsolete and substantially less valuable;
(b) All defendants, on November 12th, 1948, issued a financial statement of the corporate defendant falsely reflecting the latter's financial condition as of October 31, 1948 and earnings for the six month period prior thereto;
(c) The individual defendants knew or could have ascertained and should have known that the statement of the corporate defendant's condition as of October 31, 1948 was materially false and misleading;
(d) The defendants, in publishing the said financial statement, knew that "persons such as the plaintiffs and others similarly situated" would rely upon the truth and accuracy thereof, in purchasing the corporate defendant's stock;
(e) The individual defendants, as insiders, with full realization prior to the first sale by them of the corporate defendant's stock, obtained and used information as to the real condition of the corporate defendant to sell their stock in it, at prices in excess of that which would have been obtainable had the true financial condition of the corporate defendant been disclosed and in excess of prices that were obtainable when those facts were ultimately revealed;
7th. — Joseph and Felshin did not know of the facts set forth in paragraph "Seventh" sic — "Sixth" when they purchased their stock;
8th. — Joseph and Felshin could have and first learned of the true state of corporate defendant's affairs on January 12, 1949 at which time their stock in corporate defendant had dropped to a market value of 4½;
9th. — (a) Joseph sold his 700 shares on January 14, 1949 at 5.
(b) Felshin exchanged his 100 shares for 12 shares of International Telephone and Telegraph Corp.;
10th. — Joseph claims $2,187.08 and Felshin claims $473 damages;
11th. — Joseph and Felshin sue as representatives of a class consisting of all persons who acquired the common stock of the corporate defendant between March 1, 1948 and January 14, 1949, which class exceeds 500 persons, all of whom are jointly and commonly interested in this action and whose rights and those of Joseph and Felshin are identical and involve common questions of law and fact;
12th. — Joseph and Felshin, in addition to their damages alleged in paragraph 10th, seek "exemplary damages in such amounts" as the Court may award.
The complaint concludes with a prayer by Joseph and Felshin for judgment (a) against all defendants for the damages set forth in paragraph 10th and "exemplary damages" under paragraph 12th; (b) against all defendants for the damages established by any intervenor of the class; (c) costs, expenses and attorneys' fees.
Service of the summons and complaint having been effected upon all defendants except Edwin M. Martin, a threefold attack is launched upon the complaint by (1) the corporate defendant, (2) the individual defendant Lloyd S. Gilmour and (3) the remaining four individual defendants who were served. The movants severally contend that the complaint fails to state a claim upon which relief can be granted and thus should be dismissed under F.R. Civ.P. 12(b), subd. (6), 28 U.S.C.A.
On motions such as these, the allegations of the complaint must be taken as true and the complaint must be construed in the light most favorable to the plaintiffs. Abel v. Munro, 2 Cir., 1940, 110 F.2d 647. Furthermore the complaint need but state a claim upon which relief can be granted and if it does so, even absent the statement of facts sufficient to constitute a cause of action, it will survive a motion to dismiss under F.R. Civ. P. 12(b) (6). Dioguardi v. Durning, 2 Cir., 1944, 139 F.2d 774. Nor should a complaint fall before such an assault unless it appears to a certainty that plaintiffs are entitled to no relief under any state of facts that might be proven in support of their claims. Mullen v. Fitz Simons & Connell Dredge & Dock Co., 7 Cir., 1948, 172 F.2d 601, certiorari denied 337 U.S. 959, 69 S.Ct. 1534, 93 L.Ed. 1758.
Appraised in the light of these proscriptions, I am persuaded that the instant complaint fails to state a claim upon which relief can be granted.
Prefatorily, attention is focused on the "class" aspect of the complaint. The plaintiffs set up a class composed of all who purchased stock of the corporate defendant between March 1, 1948 and January 14, 1949. From the face of the complaint there are obviously groupings of such purchasers within that period who do not share with Joseph and Felshin the common questions of law or fact required by F.R.Civ.P. 23(a) (3). What was said on this question in Speed v. Transamerica Corporation, D.C.Del. 1945, 5 F.R.D. 56 is here apposite. It remains then, under the Speed case, to test this complaint as one solely of Joseph and Felshin against the defendants named.
Obviously, the jurisdictional amount lacking, this suit must stand or fall on the ascribed basis of 15 U.S.C.A. § 78(j) (b) and Securities and Exchange Commission Rule X-10(b) (5). The former provides:
"(b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative * * * device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors."
The latter provides:
(17 CFR)
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