In re King Resources Company Securities Litigation

• Decision Date: 01 May 1972
• Docket Number: Docket No. 79.
• Parties: In re KING RESOURCES COMPANY SECURITIES LITIGATION.
• Court: Judicial Panel on Multidistrict Litigation

342 F. Supp. 1179

In re KING RESOURCES COMPANY SECURITIES LITIGATION.

Docket No. 79.

Judicial Panel on Multidistrict Litigation.

May 1, 1972.

Before ALFRED P. MURRAH^* Chairman, and JOHN MINOR WISDOM, EDWARD WEINFELD^*, EDWIN A. ROBSON^*, WILLIAM H. BECKER, JOSEPH S. LORD, III, and STANLEY A. WEIGEL, Judges of the Panel.

OPINION AND ORDER

PER CURIAM.

King Resources Company originally requested transfer of nine actions¹ in which it is named defendant to the District of Colorado for coordinated or consolidated pretrial proceedings pursuant to 28 U.S.C. § 1407. Subsequently, another common defendant in this litigation, Timothy G. Lowry, moved for the inclusion of an additional action, Joseph N. Morell v. John M. King, N.D.Ohio, Civil Action No. C-71-805, in any transfer. And, finally, Orders to Show Cause were entered in three additional actions, William D. Neary v. Investors Overseas Service, Ltd., D.N.J., Civil Action No. 235-71, Securities and Exchange Commission v. Crofters, Inc., S.D.Ohio, Civil Action No. 70-351, and Dietrich Corporation v. King Resources Co., D.Colo., Civil Action No. C-3424.

Since the filing of its motion, King Resources has been placed in Chapter X reorganization by its creditors and that proceeding, commenced in the Northern District of Texas, is now pending in the District of Colorado. The reorganization trustee has adopted the motion for transfer and has indicated that he believes only nine of the twelve actions now before the Panel should be transferred to Colorado for pretrial proceedings.² After extensive briefing by the parties and two hearings on the question of transfer, we order four actions brought by stock and debenture holders of King Resources transferred to Colorado,³ deny as unwarranted the transfer of two actions brought by the Securities and Exchange Commission and two actions pending in the District of Oregon,⁴ and deny transfer of the remaining four actions without prejudice to later applications for transfer.⁵

I. The Stockholder Actions

In January of 1971, the SEC filed a complaint against King Resources, John M. King, and two other officers and directors of King Resources,⁶ alleging violations of the Securities Act of 1933, 15 U.S.C. §§ 77e(a), 77e(c) and 77q(a), and the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78m and Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5. Four actions,⁷ which closely followed the allegations of the SEC complaint, were then brought by holders of the stock and debentures of King Resources. The central allegations of both the SEC complaint and the private complaints are that King Resources made false and misleading statements in 1970 concerning its general operations, transactions entered into with Investors Overseas Services, Ltd., and other transactions with trusts created for the benefit of the families of certain of its officers and directors.⁸

The SEC action is now far advanced. A final judgment of permanent injunction has been obtained against King Resources, its officers, directors and employees and the action is apparently continuing only against the individual defendants. Substantial discovery has apparently been completed, as well as an investigation by special counsel appointed to determine the existence of possible causes of action on behalf of King Resources.

Three of the four stockholder complaints seek to represent classes of King Resources securities holders and although there is great variety in the definitions of the proposed classes, the conflict between them is obvious. The Gross action seeks to represent several different classes of stock and convertible debenture holders.⁹ The Morell action alleges a class of all King Resources stockholders similarly situated, while Dietrich proposes two classes—one composed of purchasers of King Resources common stock within a specified period and the other of purchasers of King Resources debentures during a different period. The Licker action, although brought by a King Resources stockholder, contains no class allegations.

It should also be noted that two of these four actions name as defendants the brokerage firms which secured the King Resources stock and debentures for the plaintiffs. Plaintiff Gross has named as defendants Blyth & Co. and several of its individual executives and has alleged their oral statement of untrue facts in connection with the sales. Similar allegations are made by plaintiff Licker against San Francisco Investment Corp. and its individual executives.

II. Other Actions

The remaining actions are brought by a variety of plaintiffs and arise from a variety of different transactions in which King Resources are involved. Two of the actions,¹⁰ brought by plaintiffs Pyle and Staley, involve limited partnerships for oil and mineral exploration which apparently were not sold to the general public. The remaining three actions included in the original motion seem to have little in common. The complaint filed by Financial Data Relations in the Central District of California asserts two claims, the major one involving an alleged breach of contract between the plaintiff and King Resources to secure financing for the latter company. The secondary claim involves alleged violations of the federal securities laws in connection with sales of King Resources stock. One of the other two actions¹¹ apparently involves the question of ownership of certain shares of Investors Overseas Services, Ltd. and the other is brought on a note issued by King Resources to Delafield Capital Corp.¹²

Two additional actions in which King Resources was named a defendant were included in this litigation by orders to show cause. The first action, brought by the SEC in the Southern District of Ohio, involved an alleged scheme to defraud various agencies of the State of Ohio in connection with the sale of promissory notes of a number of different issuers. Among the many notes sold were two issued by King Resources. This action has been pending for more than a year and a substantial amount of discovery has been completed.

Finally, an order to show cause was entered in the Neary action, brought in the District of New Jersey by the trustee for the trade creditors of King Resources. The trustee seeks to recover, as assignee, on a note given to King Resources by Investors Overseas Services, Ltd. and to foreclose on the collateral given by Investors Overseas Services, Ltd. for that note. The collateral holder and other parties claiming an interest in the note and collateral are named as defendants and a series of cross-claims and counterclaims are asserted, as well as third-party claims against John M. King and others.

III. The Question of Transfer

In its original motion, King Resources summarily asserted that the central allegations of the SEC case pending in the District of Colorado against the King defendants were common to each of the other actions and that the depositions and other discovery taken in that action would be of importance in all cases. And it asserted that, in addition to the discovery already accomplished in Colorado, documents and witnesses that King Resources wished to use were located in Colorado, making it the appropriate transferee forum.

In further support of this position the trustee has filed with the Panel the Initial Report and Opinion of Special Counsel appointed by the Colorado court in the SEC proceeding against King Resources. Special Counsel was appointed by the court, prior to the commencement of the corporate reorganization, to ascertain whether any causes of action existed on behalf of King Resources against its officers and directors, and his report is said to demonstrate the common questions of fact present in the ten cases proposed for transfer. That report suggests that the transactions covered by the SEC complaint were part of a three-phase effort to take over management and control of Investors Overseas Services, Ltd., apparently one of King's largest customers. Each of the ten actions is alleged to arise out of one or more phases of this take-over effort, which proved unsuccessful.

We think transfer is appropriate, at this time, however, only in the four stockholder and debenture holder actions. Indeed, plaintiffs in the three actions seeking class representation have agreed to the transfer of their cases to Colorado for coordinated pretrial proceedings. We think the existence of common questions of fact concerning the alleged securities law violations of King Resources and its individual officers and directors has been clearly demonstrated by the manner in which the complaints track the allegations of the earlier SEC complaint concerning the specific omissions and misrepresentations of the King Resources defendants. Discovery in these actions will most certainly proceed along the same lines of inquiry and transfer of all cases to a single judge will be both for the convenience of the parties and witnesses and for the just and efficient conduct of the litigation.¹³ The District of Colorado, home of King Resources, John M. King and many of the defendant individuals and entities is the logical transferee district for these cases, especially since the Chapter X Reorganization is now pending there.

Some concern is expressed by plaintiff Gross that his cause of action against his broker, Blyth & Co., may become lost in the coordinated discovery proceedings and Gross requests that the transferee court be allowed to remand to Oregon any issues determined to be of a local nature. A substantially similar argument is advanced by parties to the Licker action. Section 1407(a) gives the power to remand transferred actions, claims, cross-claims and counterclaims to the Panel only. We have in the past entertained motions to remand, but our past experience with securities law actions involving both claims against the issuer of securities and against the broker participating in their sale to plaintiff indicates that it is generally preferable to...