Birnbaum v. Newport Steel Corp.
| Decision Date | 10 January 1952 |
| Docket Number | No. 107,Docket 22172.,107 |
| Citation | 193 F.2d 461 |
| Parties | BIRNBAUM et al. v. NEWPORT STEEL CORP. et al. |
| Court | U.S. Court of Appeals — Second Circuit |
Nathan B. Kogan, New York City, for plaintiffs-appellants; Irving Constant, New York City, counsel.
Cahill, Gordon, Zachry & Reindel, New York City, for defendant-appellee Newport Steel Corp.; Frederick P. Warne, New York City, counsel.
Milbank, Tweed, Hope & Hadley, New York City, for defendant-appellee Wilport Co.; A. Donald MacKinnon and Eugene H. Nickerson, New York City, counsel.
Sullivan & Cromwell, New York City, for defendant-appellee, C. Russell Feldmann; Arthur H. Dean, Howard T. Milman and Henry N. Ess, III, New York City, counsel.
Before SWAN, Chief Judge, and L. HAND and AUGUSTUS N. HAND, Circuit Judges.
The appellants are stockholders of the Newport Steel Corporation who brought suit on behalf of that corporation and as the representatives of all similarly situated stockholders. The complaint alleges a violation of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C.A. § 78j (b), and Rule X-10B-5 of the Securities and Exchange Commission, 17 C.F.R. § 240.10b-5 (1949), in that use of the United States mails was resorted to by the several defendants in order to defraud the stockholders of Newport and the Corporation in the sale of certain stock owned by the defendant Feldmann to the defendant Wilport Company. The defendants, Newport Steel Corporation, Wilport Company, and C. Russell Feldmann, moved in the court below to dismiss the complaint for failure to state a cause of action. That court granted the motion and directed judgment accordingly. Jurisdiction of the district court was invoked solely under Section 27 of the Securities Exchange Act, 15 U.S.C.A. §§ 78aa.
The allegations of the complaint pertinent for mention may be summarized as follows: Prior to the sale in controversy, the Newport Steel Corporation manufactured steel which it sold to manufacturers of finished steel products. The defendant Feldmann owned approximately forty per cent of the common stock of Newport, which was sufficient for voting control, and was its president and chairman of its board of directors; the remaining stock of Newport was publicly held and scattered among thousands of small investors. The defendants Stamm, Aheim, Rohr, Lorenzen, Sheaffer and Ballantyne were directors of Newport from June to August 1950 and were controlled by Feldmann. During this period Follansbee Steel Corporation and Newport were negotiating for a merger of the two corporations, which merger, on the terms offered by Follansbee, would have been highly profitable to all the stockholders of Newport. However, in August of 1950, Feldmann, acting in his official capacity as president of Newport, rejected the Follansbee offer, and on August 31, 1950, sold his stock to the defendant Wilport Company at a price of approximately $22. per share which was twice the then market value of the stock. The Wilport Company had been formed by ten manufacturers, each of whom used substantial quantities of steel in its business, for the purpose of purchasing control of Newport and using its steel productive capacity as a "captive" source of supply during the market shortage of steel. That accounted for the premium price paid by Wilport to Feldmann for the latter's stock since the purchase gave Wilport voting control. Immediately following the sale, Feldmann and the other directors of Newport resigned and the defendants Gibson, Mericka, Mitchell, Cobourn, and Paxton, all of whom were officers and directors of Wilport, took their places. In addition to several allegations that Feldmann and the other defendants violated their fiduciary obligations to Newport and its stockholders, the complaint alleged specific acts of fraud in that the defendants made certain misrepresentations to the stockholders of Newport in letters sent to the stockholders at the time of the negotiations with Follansbee and again after the sale of Feldmann's stock. Thus, in a letter to the Newport stockholders on August 3, 1950, Feldmann stated that the negotiations with Follansbee had been suspended because of the "uncertain international situation." And in a letter dated September 14, 1950, Gibson, the new president of Newport, reported the sale of Feldmann's stock but failed to state the selling price or that Newport was to become a "captive" subsidiary of Wilport.
It is claimed by the appellants that these misrepresentations operated as a fraud upon the stockholders of Newport in connection with the sale of Feldmann's stock, and that SEC Rule X-10B-5 was thereby violated. The district court, however, viewed the Rule in question as aimed only at "a fraud perpetrated upon the purchaser or seller" of securities and as having no relation to breaches of fiduciary duty by corporate insiders resulting in fraud upon those who were not purchasers or sellers. We are in accord with the district court's interpretation of the Rule.
Section 10(b) of the Securities Exchange Act does not by its terms make unlawful any conduct or activity but confers rule-making power upon the SEC to condemn deceptive practices in the sale or purchase of securities. Rule X-10B-5, which was promulgated by the SEC pursuant to this authorization, provides as follows:
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