Kennedy v. Nicastro

Citation503 F. Supp. 1116
Decision Date16 December 1980
Docket NumberNo. 80 C 2820.,80 C 2820.
PartiesEileen KENNEDY, etc. et al., Plaintiffs, v. Louis J. NICASTRO et al., Defendants.
CourtU.S. District Court — Northern District of Illinois

Abraham N. Goldman, Chicago, Ill., for plaintiffs.

Reuben L. Hedlund, Barbara F. Altman, Hedlund, Hunter & Lynch, Chicago, Ill., for defendants.

MEMORANDUM OPINION AND ORDER

SHADUR, District Judge.

Plaintiffs Eileen Kennedy and Frank Murphy1 filed this action as a claimed class action on behalf of the stockholders of Xcor International, Inc. ("Xcor")2 and as a claimed derivative action on behalf of Xcor.3 Defendants include Xcor, Seeburg,4 Consolidated Entertainment, Inc.,5 Xcor's officers, directors, attorneys and accountants and principal lender, and another alleged controlling person of Xcor, Gulf & Western Industries, Inc.

Various of the defendants have filed motions to dismiss the Amended Complaint, incorporating by reference substantial parts of their memoranda in support of like motions addressed to the original Complaint. There are a number of other pending motions in various stages of briefing, but because of the dispositive character of the motions to dismiss judicial economy dictates treating with such motions first.6 For the reasons stated in this memorandum opinion and order, the Amended Complaint is dismissed.

Plaintiffs' Amended Complaint

Because the Amended Complaint includes a melange of allegations with an indiscriminate shotgun invocation of virtually every operative section under the federal securities laws,7 the Court will not review the allegations in any detail at the outset. Instead it will follow the approach suggested by defendants' motions of reviewing the applicability of each of the statutes in turn, referring to the allegations of the Amended Complaint (cited "AC-") where necessary for that purpose.

In principal part the Amended Complaint's allegations revolve around the financial problems of a portion of Xcor's operations, its Seeburg Products Division (the "Products Division," comprising what AC 28 refers to as "three profitable operations, The Seeburg Music Library, Inc., Seeburg Security Systems, Inc., and post-mix vending machine operations, and the extremely unprofitable juke-box operations"). AC 29 charged that defendants caused Xcor to sell the Products Division to Nicastro and members of his family, who formed Seeburg to carry on the operation and to lease from Xcor the plant, machinery and equipment used by the Products Division. That sale transaction was for $250,000 in cash, a $750,000 7½ percent note, and preferred stock of Seeburg. AC 30 charges:

No independent review or evaluation of the sale of the Products Division to Nicastro and Seeburg was performed, and said sale was never presented to Xcor's shareholders for a vote. Similarly, no independent appraisal of the "market value" of the Seeburg note and preferred stock was made.
Section 11 of the 1933 Act

Section 11 of the 1933 Act of course relates only to newly-issued securities, which are admittedly not involved in this action. Having thrown a Section 11 claim in as part of the original Complaint's kitchen sink, and despite defendants' disclosure of the total inapplicability of that section in their brief, plaintiffs retained the allegations in the Amended Complaint. This necessitated another briefing by defendants, following which plaintiffs referred to inclusion of Section 11 as "purely a typographical error."

Section 12(2) of the 1933 Act

Section 12(2) of the 1933 Act creates liability of a seller of a security to its direct purchaser where the disclosure requirements of the Act have not been complied with (that is, there has been a misstatement or omission of a material fact by written or oral communication). Once again the original Complaint did not make plaintiffs' contention clear. It purported primarily to relate to the sale to plaintiff Kennedy of her Xcor securities, a transaction that clearly lacked the privity with defendants required by the cases. Only after defendants' extended briefing of that issue did it emerge in AC 79 that the Section 12(2) claim was solely derivative in nature on behalf of Xcor, the complained-of sale involving the securities delivered by Seeburg to Xcor in Seeburg's purchase of the Products Division. But the short answer to that claim is that plaintiffs stipulated on June 30, 1980 that they would seek no relief against Seeburg, which was the seller of the securities. As for the other defendants, plaintiffs assert that "The concept of seller in this context goes well beyond the person who actually sold the security to plaintiff"-but they cite no case authority to support the notion that the privity requirement (see Sanders v. John Nuveen & Co., 619 F.2d 1222 (7th Cir. 1980); McFarland v. Memorex Corp., 493 F.Supp. 631 (N.D.Cal.1980)) has been satisfied.8

Section 18 of the 1934 Act

Liability under Section 18 of the 1934 Act requires (1) defendants' false or misleading SEC filings (not known to be such by a plaintiff) that (2) plaintiff has read and relied upon in purchasing securities. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976). Here too AC 79 makes it plain that the only such claim is asserted as a derivative claim on behalf of Xcor. Xcor's only "purchase" of securities was that of the Seeburg stock. Seeburg of course engaged in no SEC filings at all.

In a bizarre way plaintiffs argue that Xcor read and relied on its own allegedly misleading SEC filings in purchasing the Seeburg stock, without Xcor knowing that the statements were false (Pl.Br.20):

Xcor itself can be seen as having read and relied upon the many false documents filed with the SEC.... For the reasons stated in the immediately preceding section, knowledge of the falsity cannot be imputed to Xcor, and the Sec. 18 claim must stand.

It is difficult to characterize the absurdity of that position, except to state that it is untenable and supported neither by the language of Section 18 nor by any authority.

Section 14(a) of the 1934 Act

Section 14(a) of the 1934 Act and its related Rule 14a-9 deal with proxy solicitation violations. Here plaintiffs purport to ground a derivative action on behalf of Xcor (AC 79) and a class action against all defendants except Seeburg, the accounting defendants and Chase Manhattan (AC 71).

As for the first of these claims, it suffers from the same vice discussed in the preceding section. There was no proxy solicited from Xcor in connection with any of its transactions. Indeed plaintiffs' own memorandum does not even refer to the inclusion of a Section 14 charge in the Fourth Claim (the derivative claim). Apparently this must have been another of plaintiffs' "typographical errors."

Plaintiffs' proxy solicitation class action claim involves a different, but equally fatal, defect. Even if (as is necessary in a Fed.R. Civ.P. 12(b)(6) motion) the well-pleaded Amended Complaint allegations are accepted as true, Section 14 liability requires that the false or misleading proxy statement had been related to a solicitation for an identifiable transaction. Cohen v. Ayers, 596 F.2d 733 (7th Cir. 1979); Mills v. Electric Autolight Corp., 552 F.2d 1239 (7th Cir. 1976), cert. denied, 434 U.S. 922, 98 S.Ct. 398, 54 L.Ed.2d 279 (1977). But the Amended Complaint fails to identify the transaction for which plaintiffs' votes were allegedly solicited by the use of the allegedly false proxies. Plaintiffs claim only that the stockholder class was "defrauded" (AC 71), causing millions of dollars in alleged financial injury (AC 73), and "deprived ... of ... valuable rights of informed corporate suffrage" (id.). Such generalized allegations do not suffice. Election of directors cannot be challenged under Section 14(a) on such grounds. See for example Weisberg v. Coastal States Gas Corp., 609 F.2d 650, 654 (2d Cir. 1979), contrasting the situation presented here.

Section 16(b) of the 1934 Act

In light of the preceding discussion, it is difficult to perceive plaintiffs as having outdone themselves in the assertion of groundless claims. That characterization, however, fits their Section 16(b) insider profits derivative claim (AC 82-83). It refers to no transactions by Xcor's officers, directors or stockholders, is stated on information and belief and purports to cover "all six-month periods since 1974." Given the requirement of mandatory public filings under Section 16(a), the absence of any claim of defendants' non-compliance with those requirements and plaintiffs' total failure to allege compliance with the condition precedent of a request to prosecute Section 16(b) claims, no valid claim under that Section has been stated in the Amended Complaint.

Section 12 of the 1934 Act

Plaintiffs persist, at AC 1, in including Section 12 of the 1934 Act as an alleged ground of jurisdiction (and two sentences of their 54-page brief purport to support that "ground"), even though there is no allegation anywhere in plaintiffs' four numbered "claims" that refers in any respect to Section 12. Suffice it to say that Section 12 relates only to the registration and reporting of securities under the 1934 Act, that there are no allegations whatever as to non-compliance by any defendant with the statutory requirements and that current case law denies the implication of a private remedy under that Section. See Touche Ross & Co. v. Reddington, 442 U.S. 560, 99 S.Ct. 2479, 61 L.Ed.2d 82 (1979), and Transamerica Mortgage Investors v. Lewis, 444 U.S. 11, 100 S.Ct. 242, 62 L.Ed.2d 146 (1979) sharply restricting the implication of private actions under the federal securities laws.

Sections 10(b) of the 1934 Act and 17 of the 1933 Act

Once more the Amended Complaint purports to state both a derivative claim (AC 79) and class action claims (AC 52 and 67) under the general "securities fraud" sections of the 1933 and 1934 Acts. As for any derivative claim on behalf of Xcor, plaintiffs' brief...

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