Greater Iowa Corporation v. McLendon

• Citation: 378 F.2d 783
• Decision Date: 19 May 1967
• Docket Number: No. 18539,18688.,18539
• Parties: The GREATER IOWA CORPORATION et al., Appellants, v. Frank McLENDON et al., Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (8th Circuit)

378 F.2d 783 (1967)

The GREATER IOWA CORPORATION et al., Appellants, v. Frank McLENDON et al., Appellees.

Nos. 18539, 18688.

United States Court of Appeals Eighth Circuit.

May 19, 1967.

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Max Putnam, Des Moines, Iowa, for appellants, and filed brief with Richard E. Williams and Brian Williams, Des Moines, Iowa.

Upton B. Kepford, of Kennedy, Kepford, Kelsen & White, Waterloo, Iowa, for appellees and filed brief.

Before BLACKMUN, MEHAFFY and GIBSON, Circuit Judges.

FLOYD R. GIBSON, Circuit Judge.

These are appeals from the United States District Court for the Northern District of Iowa granting summary judgment to defendants¹ on a complaint alleging violation of various sections of the Federal Securities law. Plaintiffs sought injunctive relief, both temporary and permanent, and a declaratory judgment on their rights under the Federal Securities Acts. Plaintiffs filed timely appeals. Defendants did not appeal from an adverse judgment on their counterclaims.

The plaintiffs are the Greater Iowa Corporation, the directors of that corporation, and three non-director share-holders who purport to represent, as a class, all the shareholders of the Greater Iowa Corporation. The Greater Iowa Corporation was organized in 1960 and registered with the Securities and Exchange Commission in 1965. Its registered securities amount to more than five million shares of common stock held by approximately 12,000 shareholders, most, but not all, of whom live in the state of Iowa.

In, and prior to, 1965 there was some dissatisfaction with the management of the Greater Iowa Corporation among a number of the shareholders. This dissatisfaction apparently was caused by the poor earnings of the Corporation and the decline in the value of the Greater Iowa stock. Most of the defendants are among the dissatisfied Greater Iowa shareholders. In order to gain control or, at least, a voice in management of the Greater Iowa Corporation, they organized what purported to be a voting trust solely for the purpose of "controlling or influencing control of The Greater Iowa Corporation." This arrangement was initially denominated as the Iowa Trust.² Under the auspices of the Iowa Trust approximately forty shareholders of the Greater Iowa Corporation were asked to turn over their registered common stock in the Greater Iowa Corporation in return for "Evidence of Ownership" in the Iowa Trust. While admittedly a security under federal and state law, these so-called evidences of ownership were not registered with the Securities and Exchange Commission. About twenty-two Greater Iowa shareholders placed their stock in the Iowa Trust and received the Iowa Trust "Evidence of Ownership."

The solicitation was primarily through the circulation by salesmen (also joined as defendants) of two pamphlets, both entitled "The Iowa Trust". The pamphlets contained an introductory statement critical of the management of the Greater Iowa Corporation, followed by an explanation of the Iowa Trust and a form which any Greater Iowa shareholder could complete to transfer his shares to the Iowa Trust. In addition a flyer was circulated entitled "Why You Should Join the Iowa Trust." This flyer made certain representations as to the earnings of the Greater Iowa Corporation and urged all stockholders to become members of the Iowa Trust. None of the three documents circulated by the defendants was registered with the Securities and Exchange Commission. Though the primary solicitation was done on a person-to-person basis, the trial court found, and correctly so, that there was sufficient use of the mails and the telephone for federal jurisdiction to attach. Once jurisdiction attaches, the full requirements and regulations of the pertinent sections of the various Securities Acts are applicable. Creswell-Keith, Inc. v. Willingham, 264 F.2d 76 (8 Cir. 1959).

Prior to the institution of this suit defendants demanded a complete shareholders list from the Greater Iowa Corporation and began legal action in the state courts to compel a disclosure. Defendants' obvious purpose in obtaining the shareholders list was to enable them to systematically solicit additional memberships for the Iowa Trust and successor corporation in the hope of ultimately gaining managing control of the Greater Iowa Corporation, or at least a voice in management.

Plaintiffs alleged that defendants had violated the Securities Act of 1933 and Securities Exchange Act of 1934, the Investment Company Act of 1940, and the security laws of the State of Iowa; and asked for injunctive and declaratory relief. Specifically, plaintiffs alleged that the issuance by the Iowa Trust of "Evidence of Ownership" without prior registration with the Commission violated § 5(a) of the 1933 Act (15 U. S.C. § 77e(a)), that the statements in defendants' solicitation material were fraudulent and thus violated both § 17 (a) of the 1933 Act (15 U.S.C. § 77q(a)) and § 10(b) of the 1934 Act (15 U.S.C. § 78j(b)) as implemented by Rule 10b-5 (17 C.F.R. 240.10b-5), that defendants' solicitations were requests for a "proxy or consent or authorization" under § 14(a) of the Exchange Act of 1934 (15 U.S.C. § 78n) and the Commission rules governing these matters were not followed as set forth C.F.R. § 240.14a-1-11, in violation of § 14(a) of the 1934 Act (15 U.S.C. § 78n), that the Iowa Trust and successor corporation were investment companies and thus subject to the regulations of § 7 of the 1940 Act (15 U.S.C. § 80a-7), and finally that the trial court had pendent jurisdiction to litigate various alleged violations of the Iowa State securities law.

Upon request of plaintiffs, the trial court granted a preliminary restraining order enjoining solicitation by defendants pending further hearing. On August 30, 1966, after hearing, the preliminary restraining order was dissolved and plaintiffs' request for a temporary injunction was denied. Plaintiffs duly filed an appeal from that order and it was docketed by this Court with the number 18539. Before this appeal could be heard, however, the trial court on cross-motions for summary judgment found that plaintiffs had no jurisdictional standing to seek enforcement of the registration requirements and anti-fraud provisions of § 5(a), § 17(a), of the 1933 Act and § 10(b) of the 1934 Act (15 U.S.C. § 77e, 77q and 78j(b)), because plaintiffs were neither buyers or sellers of defendants' security. Though the trial court found that private parties have standing to enforce the proxy registration requirements of the Commission, the court found that defendants' solicitation of membership in the voting trust arrangement was not the solicitation of a "proxy or consent or authorization" within the contemplation of § 14(a) of the Exchange Act of 1934, 15 U.S.C. § 78n(a). Further relying on a decision of this Court, Brouk v. Managed Funds, Inc., 286 F.2d 901 (8 Cir. 1961), the trial court held that private parties have no standing to enforce the provisions of the Investment Company Act of 1940 (15 U.S.C. § 80-1 et seq.). Finally, the trial court, as an act of discretion, dismissed the allegations of state law violations on the basis that the federal court was not the proper forum for the resolution of state security law problems when all of the federal questions which give rise to federal jurisdiction have been summarily disposed of.

Plaintiffs appeal this dismissal (No. 18688), and since common questions of law are presented with plaintiffs' appeal from the denial of the temporary injunctive relief (No. 18539), the two appeals were consolidated for hearing and opinion.

VIOLATIONS OF SECTIONS 5(a) AND 17(a) OF THE 1933 ACT

Section 5(a) of the 1933 Act (15 U.S. C. § 77e(a)) makes it unlawful to sell through communications or transportations in interstate commerce or by use of the mails any security that is not registered with the Securities and Exchange Commission. Section 17(a) (15 U.S.C. § 77q) makes it unlawful for any person engaged in the interstate sale of securities to practice deception or fraud.³ To some extent defendants used interstate communication and the mails to sell their shares in the Iowa Trust and these shares were not registered with the Commission. Furthermore, plaintiffs allege that the documents circulated by defendants entitled "The Iowa Trust" and "Why You Should Join the Iowa Trust" were misleading, untrue, and fraudulent within the meaning of the statutes. The question before us on this appeal is, do plaintiffs have standing to enforce these provisions of the law?

No civil enforcement is provided in the particular sections of the Act allegedly violated. However, § 12 of the Act (15 U.S.C. § 77l) provides a limited right of recovery to private litigants. This section of the Act generally provides that any person who sells through interstate commerce or by use of the mails any security not registered or makes untrue or misleading statements in the sale of a security "shall be liable to the person purchasing such security from him * * *."⁴

None of the plaintiffs has purchased any of the Iowa Trust certificates from the defendants. Since 15 U.S.C. § 77l only provides relief to "purchasers" it is clear that this section cannot provide plaintiffs with a basis upon which to seek recovery. Furthermore, we do not believe that plaintiffs have standing as a class to represent the shareholders of Greater Iowa Corporation who did join the Iowa Trust. Plaintiffs interests are not typical or representative of the interests of the individuals who purchased defendants' securities. The positions of the individual plaintiffs present questions of law that are not common to the members of the class they are seeking to represent. Thus, under Rule 23, Fed.R.Civ.P. they are not entitled to maintain a class action on behalf of the Greater Iowa shareholders who are members of the Iowa Trust.

Plaintiffs argue that the actions of defendants are clearly...