In re Penn Central Securities Litigation

• Decision Date: 07 August 1972
• Docket Number: 70-2505,71-265 to 71-268,70-2137,71-971.,71-278,71-476,M.D.L. Docket No. 56. Civ. A. No. 70-2005,70-2010,70-2596,70-2696,70-2933,70-2818,70-2320,71-277,71-280
• Citation: 347 F. Supp. 1327
• Parties: In re PENN CENTRAL SECURITIES LITIGATION.
• Court: U.S. District Court — Eastern District of Pennsylvania

347 F. Supp. 1327

In re PENN CENTRAL SECURITIES LITIGATION.

M.D.L. Docket No. 56. Civ. A. Nos. 70-2005, 70-2010, 70-2137, 70-2320, 70-2505, 70-2596, 70-2696, 70-2818, 70-2933, 71-265 to 71-268, 71-277, 71-278, 71-280, 71-476, 71-971.

United States District Court, E. D. Pennsylvania.

August 7, 1972.

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David Berger, Gerald J. Rodos, Philadelphia, Pa., Alfred S. Julien, Stanley Nemser, New York City, for plaintiffs.

Lewis H. Van Dusen, Jr., Raymond K. Denworth, Jr., Joseph W. Swain, Jr., John S. Estey, Henry T. Reath, and Thomas Raeburn White, Jr., Philadelphia, Pa., for defendants.

Mahlon F. Perkins, Jr., Donovan, Leisure, Newton & Irvine, New York City, for defendants Rabe, Routh and Taylor.

Edwin P. Rome, Morris L. Weisberg, Norman L. Holmes, Philip C. Patterson, Blank, Rome, Klaus & Comisky, and Robert W. Blanchette, Philadelphia, Pa., for Trustees of Property of Penn Cent. Transp. Co.

OPINION AND ORDER

JOSEPH S. LORD, III, Chief Judge.

Plaintiffs, present and former shareholders of Penn Central Company, move pursuant to F.R.Civ.P. 23 for an order declaring that the eighteen above-captioned actions may be maintained as class actions. Defendants¹ cross-petition for partial summary judgment in fourteen of the actions on the grounds that (1) the proposed class includes persons who have no cause of action under the federal securities law and (2) plaintiffs have failed to state a claim upon which relief can be granted.

Plaintiffs' complaints assert both derivative and direct claims against Penn Central companies, their present and former directors and officers, accounting firms, brokerage houses and others. We have previously dismissed plaintiffs as parties with respect to all derivative claims on behalf of Penn Central Co. in all cases on M.D.L. Docket No. 56 and with respect to all derivative claims on behalf of Penn Central Transportation Co. ("Transportation Co.") in thirteen actions. In Re Penn Central Securities Litigation, 335 FSupp. 1026 (E.D.Pa.1971). Therefore we will consider plaintiffs' and defendants' motions with reference only to those complaints or portions of complaints which allege direct claims by shareholders against defendants.²

Plaintiffs' complaints basically assert the following direct claims:³ During the period between February 1, 1968 and June 21, 1970,⁴ defendants prepared and filed materials with the Securities and Exchange Commission and the New York Stock Exchange and released information to shareholders and the public concerning the financial condition and operations of Penn Central Companies⁵ which were materially false and misleading. The various reports, statements, documents and press releases were intended to and did inflate the market price of Penn Central Co. stock and affect plaintiffs and the investing public in their decisions to purchase, sell and hold Penn Central Co. stock. Plaintiffs further allege that during the period between January, 1969 and May, 1970, various individual defendants who had knowledge of confidential material information concerning the deteriorating financial condition of the Penn Central companies sold substantial numbers of shares of stock without disclosing this information to the public. Finally, plaintiffs allege that during this period defendants issued certain false and misleading proxy statements which were intended to and did induce plaintiffs to vote in favor of management proposals. Defendants' actions are alleged to violate various provisions of the federal securities law including §§ 5, 11, and 17(a) of the Securities Act of 1933 ("Securities Act") 15 U.S.C.A. §§ 77e, 77k, and 77q(a) and §§ 9, 10 (b), 13(a), 14, and 18(a) of the Securities Exchange Act of 1934 ("Exchange Act") 15 U.S.C.A. §§ 78i, 78j(b), 78m (a), 78n, and 78r(a).

Plaintiffs include individuals who purchased and/or sold Penn Central Co. stock in the open market during the period of defendants' alleged illegal acts and individuals who acquired their shares before and held them throughout this period ("holders"). Plaintiffs have proposed several definitions of the class which include holders as members. In their consolidated motion, defendants move for partial summary judgment on the ground that §§ 11(a) and 17(a) of the Securities Act and §§ 9 (a) and 10 (b) of the Exchange Act provide causes of action only for purchasers and sellers and therefore holders have not alleged a cause of action against defendants who are entitled to judgment as a matter of law. Defendants also maintain that § 13 (a) of the Exchange Act does not provide a private right of action and therefore no plaintiff has a cause of action under this section. Finally, in their supplemental motions, defendants contend that plaintiffs have failed to state a cause of action under § 14(a) of the Exchange Act.

SUMMARY JUDGMENT MOTIONS

I. Purchaser-Seller Requirement of § 10(b)

Section 10(b) and Rule 10b-5, 17 C.F.R. § 240-10b-5, make unlawful the use of manipulative and deceptive devices "in connection with the purchase or sale of any security." In Birnbaum v. Newport Steel Corp., 193 F.2d 461, 464 (C.A. 2, 1952), cert. denied, 343 U.S. 956, 72 S.Ct. 1051, 96 L.Ed. 1356 (1952), the Second Circuit held that § 10(b) "was directed solely at that type of misrepresentation or fraudulent practice usually associated with the sale or purchase of securities rather than at fraudulent mismanagement of corporate affairs" and that Rule 10b-5 "extended protection only to the defrauded purchaser or seller." The developing case law on § 10(b) has not restricted the type of fraud prohibited to "practices usually associated with the sale or purchase of securities" but has expanded the Birnbaum definition to include "all fraudulent schemes in connection with the purchase or sale of securities, whether the artifices employed involve a garden type variety of fraud, or present a unique form of deception." A. T. Brod & Co. v. Perlow, 375 F.2d 393, 397 (C.A.2, 1967); Superintendent of Insurance of State of N. Y. v. Bankers Life & Casualty Co., 404 U.S. 6, 92 S.Ct. 165, 30 L.Ed.2d 128 (1971). Similarly the courts have given a liberal construction to what constitutes a purchase or sale for purposes of § 10(b). For example, an exchange of shares in connection with a merger or sale of assets has been held to be "in connection with the purchase or sale," SEC v. National Securities, Inc., 393 U.S. 453, 89 S.Ct. 564, 21 L.Ed.2d 668 (1969), Dasho v. Susquehanna Corp., 380 F.2d 262 (C.A. 7, 1967), cert. denied, sub nom. Bard v. Dasho, 389 U.S. 977, 88 S.Ct. 480, 19 L.Ed.2d 470 (1967); the issuance by a corporation of its own shares has been held to be a "sale" to which § 10(b) applies, Hooper v. Mountain States Securities Corp., 282 F.2d 195 (C.A.5, 1960), cert. denied 365 U.S. 814, 81 S.Ct. 695, 5 L.Ed.2d 693 (1961), Ruckle v. Roto American Corp., 339 F.2d 24 (C.A.2, 1964); a minority shareholder in a company which underwent a short form merger has been held to be a forced seller even though he had not accepted defendant's tender offer or surrendered his stock, Vine v. Beneficial Finance Co., 374 F.2d 627 (C.A.2, 1967), cert denied, 389 U.S. 970, 88 S.Ct. 463, 19 L.Ed.2d 460 (1967); a seller who was fraudulently induced to postpone his sale has been held to have a cause of action under § 10 (b), Stockwell v. Reynolds & Co., 252 F.Supp. 215 (S.D.N.Y.1965); and § 10 (b) has been held to permit recovery for fraud in connection with contracts to purchase or sell securities even though the contracts are never consummated by actual purchases or sales, Commerce Reporting Co. v. Puretec, Inc., 290 F.Supp. 715 (S.D.N.Y.1968).

The courts, however, have refused repeated requests to ignore the language of § 10(b) and discard the purchaser-seller requirement altogether. See Supt. of Insurance of State of N. Y. v. Bankers Life, supra; contra Tully v. Mott Supermarkets, Inc., 337 F.Supp. 834 (D.N.J. 1972).

"The courts have repeatedly held that one who retains his stock cannot bring himself under the provisions of Section 10(b); he must be a defrauded purchaser or `seller' to qualify." Morrow v. Schapiro, 334 F.Supp. 399, 401 (E.D.Mo.1971).

We conclude that a plaintiff seeking to recover damages⁶ pursuant to § 10(b) and Rule 10b-5 must establish that under the expanded definitions of purchase, sale and fraud he has suffered injury as a result of deceptive practices in connection with his purchase or sale of securities. See Simmons v. Wolfson, 428 F.2d 455 (C.A.6, 1970), cert. denied, 400 U.S. 999, 91 S.Ct. 459, 27 L.Ed.2d 450 (1971); Iroquois Industries, Inc. v. Syracuse China Corp., 417 F.2d 963 (C.A.2, 1969), cert. denied, 399 U.S. 909, 90 S.Ct. 2199, 26 L.Ed.2d 561 (1970); Greenstein v. Paul, 400 F.2d 580 (C.A. 2, 1968); Edelman v. Decker, 337 F. Supp. 582 (E.D.Pa.1972).

Plaintiffs in a number of actions before us acquired stock in a Penn Central company before and held it throughout the period of the defendants' alleged illegal activity. Defendants argue that these plaintiffs ("holders") do not have a cause of action under § 10(b) or Rule 10b-5 because they are not defrauded purchasers or sellers of any security. Holders maintain that they do qualify as purchasers and sellers because they exchanged their stock during the period in question in connection with two mergers; the February 1, 1968 merger of the Pennsylvania and New York Central Railroads ("1968 merger") and the October 1, 1969 "upwards merger" which resulted in the present corporate structure of Penn Central Co. and Transportation Co. ("1969 reorganization"). See In re Penn Central Securities Litigation, supra.

The exchange of shares pursuant to a merger has been held to constitute a purchase of new securities and a sale of the surrendered securities within the meaning of § 10(b). SEC v. National Securities, Inc., supra; Mader v. Armel, 402 F.2d 158 (C.A.6, 1968), cert. denied sub nom. Young...