Cherner v. Transitron Electronic Corporation

• Decision Date: 28 January 1963
• Docket Number: Civ. A. No. 61-857-W.
• Citation: 221 F. Supp. 48
• Parties: Marvin CHERNER et al. v. TRANSITRON ELECTRONIC CORPORATION, et al.
• Court: U.S. District Court — District of Massachusetts

221 F. Supp. 48

Marvin CHERNER et al. v. TRANSITRON ELECTRONIC CORPORATION, et al.

Civ. A. No. 61-857-W.

United States District Court D. Massachusetts.

January 24, 1963.

Supplemental Memorandum January 28, 1963.

James D. St. Clair, Hale & Dorr, Boston, Mass., Louis Loss, Cambridge, Mass., Jacob Green, Boston, Mass., Marvin Cherner, Birmingham, Ala., for plaintiffs.

Harold M. Willcox, and Robert E. Sullivan, Herrick, Smith, Donald, Farley & Ketchum, Brooks Potter, and James C. Heigham, Choate, Hall & Stewart, Boston, Mass., for defendants.

Milton Pollack, New York City, William Berger and Lawrence Milberg, New York City, for intervenors.

WYZANSKI, District Judge.

On December 26, 1962 this Court entered an order directed to all persons who prior to February 21, 1962 had purchased shares of Transitron Electronic Corporation to show cause why this Court should not approve an Agreement of Compromise and Settlement between plaintiffs and defendants in the following five lawsuits:

1. United States District Court for the District of Massachusetts, Cherner, et al. v. Transitron Electronic Corporation, et al., 201 F.Supp. 934;

2. United States District Court for the District of Massachusetts, C.A. No. 62-247-J-W, Financial Industrial Fund, Inc. v. Transitron Electronic Corporation, et al.;

3. Superior Court, New Castle County, State of Delaware, C.A. No. 398, Diversified Growth Stock Fund, Inc. v. Transitron Electronic Corporation, et al.;

4. Superior Court, New Castle County, State of Delaware, C.A. No. 406; One William Street Fund, Inc. v. Transitron Electronic Corporation, et al.;

5. Superior Court, New Castle County, State of Delaware, C.A. No. 407, Wellington Fund, Inc. and Wellington Equity Fund, Inc. v. Transitron Electronic Corporation, et al.

This Court has jurisdiction of only the first two of the five cases just cited. Moreover, only the first of these cases, the Cherner case, purports to be in any aspect a class suit; and, therefore, it is only in connection with the Cherner case that this Court is called upon to consider whether to give approval to the proposed compromise. F.R.Civ.Proc., Rule 23(c).

In Cherner the action was initially filed on November 8, 1961, and an amended complaint was filed as a matter of course on November 20, 1961. The amended complaint pleaded in the alternative under §§ 11 and 12(2) of the Securities Act of 1933, 15 U.S.C. § 77k, 77l(2), the § 12(2) claim being limited to the defendant Merrill Lynch, Pierce, Fenner & Smith, Inc. Because the complaint pleaded in the alternative under both sections, and each section was the subject of both an individual count and a class action under Rule 23(a) (3), there were four counts altogether. But the amended complaint rested entirely on a single substantive allegation: that the prospectuses which were the basic parts of two registration statements of the defendant Transitron, which became effective, respectively, on December 9, 1959, and November 17, 1960, in order to authorize secondary distributions, respectively, of 1,000,000 shares at $36 and 1,250,000 at $35 by the defendants David and Leo Bakalar (or members of their immediate families or family trusts), were materially false in stating that Transitron "holds no patent licenses from others requiring the payment of royalties and knows of no patent rights of other which might interfere with the conduct of its business."

After considerable discussions which counsel for Diversified Growth Stock Fund, Inc. had initiated with Cherner's counsel with a view to the possibility of intervening in the class action, in April 1962 that company and three other investment companies which had purchased a total of 250,000 shares filed three separate actions in the Delaware Superior Court. Those actions were similar to this action, except that (1) they were apparently based on § 11 alone, (2) they did not seek to hold Merrill Lynch, the principal underwriter, and (3) they alleged, in addition to the patent matter, certain misstatements and omissions with respect to valuation of inventory and non-disclosure of prior deterioration in prices.

On March 30, 1962, Cherner's counsel had initiated a separate action in this Court on behalf of FIF (Civil No. 62-247) by filing a complaint which is identical with the amended complaint in this action except that it contained no class action counts and it demanded damages and rescission in respect of FIF's purchase of 50,000 shares from the defendant Merrill Lynch on November 18, 1960, at $35 per share. On April 16 the FIF complaint was amended as of course in order to add a third count which was directed to all the defendants other than Merrill Lynch, and which, on information and belief, alleged misstatements with respect to inventories, sales, prices and profits (hereinafter termed "the accounting allegations" for short) substantially along the lines of the similar allegations contained in the several Delaware complaints. However, since the complaint herein had already been once amended, a further amendment of this complaint along the same lines required an order of the Court, and a motion for such an order was denied on April 30, 1962, with leave to renew the motion after the Court's ruling on the defendants' pending motion for summary judgment on the patent question.

On August 6 the Court denied the defendants' motion for summary judgment, as well as their motion to strike the plaintiffs' jury claim. On September 25 the Court again denied the motion to amend the complaint, without prejudice to its later renewal. On the same day, in the FIF action, the Court denied the defendants' motion for partial summary judgment with respect to the third count (the one with the accounting allegations which had been added by amendment), as well as the motion which had been made in the alternative either to strike the third count or to suppress discovery concerning that count, although the Court sustained Transitron's written objections to FIF's interrogatories on Transitron's representation that it would submit much of the requested information in a different form (FIF reserving the right to resubmit interrogatories if it were not satisfied with the data submitted). And an October 19 the Court ordered in the present action that all issues as to whether there were misstatements or omissions in the registration statements with respect to the patent question be severed for separate trial prior to the resolution of any other issues.

At various times the Court has permitted 22 persons to intervene with claims in respect of 4,660 shares, and there are five pending motions to intervene on the part of purchasers of an additional 6,650 shares.

On December 26, the Court entered its Conditional Judgment and Order to Show Cause on an Agreement of Compromise and Settlement made by all the parties on both sides of the actions above mentioned — the present action and the FIF action in this Court together with the three actions pending in Delaware. The agreement provided (¶¶ 1-2) that counsel for the plaintiffs in the Delaware actions should be deemed to have appeared herein, and that the pending motion further to amend the complaint herein to add the accounting allegations should be allowed by consent (subject to its vacation in the event that the judgment of the Court approving the settlement should become ineffective). The Court accordingly allowed the amendment on the same day, December 26.

The first issue which faces this Court is whether Cherner is a class action which cannot be compromised without this Court's approval. Cherner has alleged that he represents

"All persons who have bought any shares of common stock of Transitron since December 8, 1959, either from any of the underwriters or dealers who participated in either of the distributions covered by the two registration statements herein referred to or in the open market, * * *." (Count 2)

and

"* * * all persons to whom defendant Merrill Lynch has sold any shares of Transitron since December 8, 1959, by the use of any means or instruments of transportation or communication in interstate commerce or of the mails, by means of either of the prospectuses herein referred to (the said persons not knowing of the alleged untruths or omissions) * * *" (Count 4)

Since the complaint was filed many persons have sought, and been granted, intervention on the theory that in each of the two classes alleged there are common questions of law and of fact affecting the several rights of numerous persons, and that, to some extent, common relief is sought. Thus, the Cherner case involves a class of plaintiffs including, at the least, all those who have voluntarily come in as interveners. Oppenheimer v. F. J. Young & Co., Inc., 2nd Cir., 144 F.2d 387, 390. See 3 Moore's Federal Practice § 23.11, p. 3465. Without at this point considering how much larger class may be involved, the presence of this small class makes it necessary for this Court to decide whether to approve the merits of the proposed compromise.

In considering the merits of the proposed compromise the Court has before it extensive briefs, transcripts of court hearings, and pre-trial discovery in both the Cherner and the FIF cases, as well as affidavits and other material presented in hearings on the show cause order.

This Court is mindful that the proposed settlement has the unanimous endorsement of all counsel and all parties who participated in any stage of the proceedings in this Court between the time the Cherner complaint was filed on November 8, 1961 and the time when this Court, on December 26, 1962 issued its order to show cause. Such unanimity has particular significance because the lawyers who evolved the compromise have special experience in litigation of this type and rightly enjoy high reputations for technical competence, financial judgment, and ethical standards.

Moreover, plaintiffs' counsel, who, unlike defendants' counsel, are called upon to...