Dolgow v. Anderson

Citation438 F.2d 825
Decision Date02 September 1970
Docket NumberDocket 33719.,No. 711,711
PartiesMildred DOLGOW, Benjamin Dolgow, Sarah Fischer and Reuben Isaacson, Plaintiffs-Appellants, v. Dillon ANDERSON et al., Defendants, and Monsanto Company, Edward A. O'Neal, Edward J. Bock, John L. Gillis, Robert K. Mueller, Charles H. Sommer, H. Harold Bible, Patrick J. Dowd, John R. Eck, Arthur W. Lucas, Edwin J. Putzell, Jr., Robert R. Rumer, J. Russell Wilson, Earl J. Wipfler, Mercantile Trust Company National Association, in its Capacity as Executor of the Estate of Defendant Edgar M. Queeny, Deceased, and Edwin J. Putzell, Jr., in his Capacity as Executor of the Estate of Defendant John L. Christian, Deceased, Defendant-Appellees.
CourtUnited States Courts of Appeals. United States Court of Appeals (2nd Circuit)

Avrom S. Fischer, Brooklyn, N. Y., for plaintiffs-appellants.

John A. Wilson, New York City (Shearman & Sterling, New York City, Michael J. DeSantis and John S. Williams, New York City, of counsel), for defendant-appellee Monsanto Co.

Roy H. Steyer, New York City (Sullivan & Cromwell, David W. Peck and

James W. Bowers, New York City, of counsel), for individual defendants-appellees.

John L. Davidson, Jr., St. Louis, Mo., of counsel, for defendant-appellee Mercantile Trust Co. National Association, as Executor.

Before MOORE and SMITH, Circuit Judges, and WEINFELD, District Judge.*

J. JOSEPH SMITH, Circuit Judge:

This is an appeal from the order of Judge Weinstein of the United States District Court for the Eastern District of New York, April 7, 1969, granting defendants' motion for summary judgment on the merits and ordering that the action be disallowed as a class action.

The named plaintiffs in this purported class action bought and sold between December, 1964 and October, 1966, small amounts of common stock1 in the defendant Monsanto Company, a major diversified chemical producer whose stock is traded on the New York Stock Exchange. The individual defendants were officers and directors of the defendant company during the relevant period.

Plaintiffs brought this action under section 22(a) of the Securities Act of 1933, 15 U.S.C. § 77v(a), and under section 27 of the Securities Exchange Act of 1934, 15 U.S.C. § 78aa, for alleged violations by the defendants of sections 5, 12, and 17 of the the Securities Act of 1933, 15 U.S.C. §§ 77e (selling securities without a registration statement being in effect), 77l (selling securities "by means of a prospectus or oral communication, which contains an untrue statement of material fact"), and 77q (scheme to defraud in the sale of securities), of sections 9, 10(b), 16, 18 and 29 of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78i (manipulating securities prices), 78j (using manipulative and deceptive devices in connection with the purchase or sale of securities), 78p (directors and officers must file a monthly report indicating any change in their holdings in their own companies), 78r (liability for misleading statements), and 78cc (invalidity of any contract made in violation of any provision in this chapter), of Rules 10b-5 and 16a-1 of the Securities and Exchange Commission, 17 C.F.R. §§ 240.10b-5 (employing manipulative and deceptive devices and making an untrue statement of material fact or omitting to state a material fact), and 240.16a-1 (filing of statements by officers, directors, and principal shareholders), and of unspecified sections of the rules of the New York Stock Exchange.

The essence of plaintiffs' allegations is that the defendants engaged in a scheme to inflate the selling price of Monsanto stock from late 1964 until late 1966 by making false or misleading statements and by omitting to release material, accurate information as to the actual and forecast market performance of Monsanto. During this period, the individual defendants, officers and directors of Monsanto who had access to the correct data, were selling large numbers of shares from their own personal holdings in Monsanto.2

The parties made cross-motions under Rule 23(c) (1) of the Federal Rules of Civil Procedure as to whether the action could be maintained as a class action. After submission of a brief amicus by the Securities and Exchange Commission and a hearing, Judge Weinstein ruled, in an extensive opinion, that he would postpone the decision on the motions pending a two-stage preliminary evidentiary hearing, with "controlled discovery," which would reveal the plaintiffs' chances of ultimate success. Dolgow v. Anderson, 43 F.R.D. 472 (E.D.N.Y.1968). In the first stage plaintiffs were to show that predictions by defendants of Monsanto's future economic performance did not come true. In the second stage plaintiffs were to show that defendants' estimates and predictions were unreasonable and that their transactions in Monsanto shares were suspicious or unusual.

The two stages were in reality confounded into one at the evidentiary hearing which took place December 18-20, 1968. At the conclusion of the hearing, Judge Weinstein asked the defendants to move for summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure, which they did on February 24, 1969. The defendants also renewed their motion to disallow the class action. Upon conclusion of the argument on the motions, March 17, 1969, Judge Weinstein, from the bench granted the motions for summary judgment and disallowed the class action.

Judge Weinstein stated that all of the relevant facts had been developed, that further discovery or hearings would be cumulative, and that construing all evidence most favorably to the plaintiffs, there was no evidence to support their charges, and no reasonable jury or court could find that their rights had been violated. No written opinion was filed.

After careful consideration of the lengthy record in this case, we conclude that there are genuine issues of material fact raised in plaintiffs' complaint and supporting affidavits, and that plaintiffs have "set forth specific facts showing that there is a genuine issue for trial." Rule 56(e), Federal Rules of Civil Procedure; see First National Bank of Arizona v. Cities Service Co., 391 U.S. 253, 288-290, 88 S.Ct. 1575, 20 L.Ed.2d 569 (1968). We therefore reverse the judgment below and remand with instructions to reconsider the cross-motions as to whether the action may be maintained as a class action and to permit appropriate further discovery prior to trial.

The heart of plaintiffs' factual case consists of a compilation of statements made by several defendants, officers and directors of Monsanto, from late 1964 to early 1967, which predicated Monsanto's future performance in terms of such financial indicators as sales, net income or earnings, per share earnings, and capital expenditures. They compare these predictions to the company's actual performance, as revealed by the company's regular reports and by data obtained through discovery, and show that the predictions were often in error and overly optimistic. They also point to a schedule of the purchases and sales of the individual defendants from September, 1964 to February, 1967, and show that defendants indeed were selling large numbers of shares of Monsanto stock during the period as well as exercising their stock options years before the options were due to expire, and frequently selling the shares purchased on the options shortly after the six-month short-swing sales period had elapsed. Almost all of the sales by defendants occurred while Monsanto stock was at record high levels (above $80) and prior to its precipitous fall starting in February, 1966 down to $39.70 in November, 1966.

Defendants' response initially seems to have been to challenge plaintiffs' factual case on the merits, not to contend that there was no genuine issue of fact raised by the plaintiffs. Their response contains a detailed analysis with supporting data of all the allegedly inaccurate predictions made by the defendants. They correctly point out that several of the statements, primarily those dealing with expanding sales, when accurately read, are not overstatements of actual future performance.

As to other statements, defendants admit that predictions of future earnings, earnings per share, and capital expenditures, were not borne out by economic events. They argue however that the predictions made public were based on contemporary budgets and estimates within the company, based on the best data available at the time of the statements. The fact that the predictions failed to come true was allegedly due to unforeseeable business setbacks in the latter halves of 1965 and 1966 which were caused by general market conditions, increased domestic and foreign competition in certain product markets and the resulting "softness" in the price of those products. But as to several of the public predictions, the defendants candidly admit that the predictions exceeded even the contemporary intra-company estimates.3

Defendants further show that when the above-mentioned business fall-offs occurred and Monsanto's performance fell below its budget, the company revised down its public predictions to make them congruent with intra-company estimates.

Defendants also contend that the pattern of selling by defendants in the period is in line with their transactions in Monsanto stock in previous periods. However, the record contains the pre-1964 stock transactions of only four defendants. They contend further that the sales were not motivated by knowledge of inside information indicating imminent doom, but rather by innocent motives such as a desire to diversify their holdings, to obtain cash, to pay back loans which were taken to finance predeadline purchases under stock options, and to trade Monsanto holdings for other securities. These alleged innocent motives are not inconsistent with plaintiffs' allegations that they were selling on the basis of material inside...

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33 cases
  • Hendrix v. Faulkner
    • United States
    • U.S. District Court — Northern District of Indiana
    • October 21, 1981
    ...of a class which requires representation. Dolgow v. Anderson, 43 F.R.D. 472, 491 (E.D.N.Y. 1968), summary judgment rev'd, 438 F.2d 825 (2d Cir. 1971); Ridgeway v. International Brotherhood of Electrical Workers, 74 F.R.D. 597, 602 (D.Ill.1977). The class, as well as its members, must be cle......
  • Scott v. University of Delaware
    • United States
    • United States Courts of Appeals. United States Court of Appeals (3rd Circuit)
    • June 6, 1979
    ...Boston, Inc., 79 F.R.D. 246, 257-58 (N.D.Cal.1978); Dolgow v. Anderson, 43 F.R.D. 472, 494 (E.D.N.Y.1968), Rev'd on other grounds, 438 F.2d 825 (2d Cir. 1970). 19 Moreover, when notice to absentees is required, class members with divergent claims or strategies will be able to inform the cou......
  • Chubbs v. City of New York
    • United States
    • U.S. District Court — Eastern District of New York
    • January 15, 1971
    ...proof to avoid a full trial even though a recovery seems hopeless. As the Court of Appeals recently noted in Dolgow v. Anderson, 438 F.2d 825, p. 830 (2d Cir. 1970): Although a lengthy technical trial may seem fruitless when plaintiffs' prospect of ultimate success on the merits might be vi......
  • In re Securities Litigation Bmc Software, Inc.
    • United States
    • U.S. District Court — Southern District of Texas
    • October 1, 2001
    ...only a reduced expectancy of profit in the future. Retention of stock also does not preclude an inference of scienter. Dolgow v. Anderson, 438 F.2d 825, 828 (2d Cir.1970)(defendants' exercise of options to purchase and retain more stock than they sold does not preclude an inference of scien......
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1 books & journal articles
  • An historical analysis of the binding effect of class suits.
    • United States
    • University of Pennsylvania Law Review Vol. 146 No. 6, August 1998
    • August 1, 1998
    ...be competent, this presumption is not irrefutable and the court is entitled to examine evidence to the contrary), rev'd on other grounds, 438 F.2d 825 (2d Cir. 1970); Note, Collateral Attack on the Binding Effect of Class Action Judgments, 87 HARV. L. REV. 589, 603 (1974) (proposing that co......

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