Pharo v. Smith
| Decision Date | 09 July 1980 |
| Docket Number | No. 77-1273,77-1273 |
| Citation | 621 F.2d 656 |
| Parties | Fed. Sec. L. Rep. P 97,567 Edmond G. PHARO et al., Plaintiffs-Appellants, v. W. L. SMITH et al., Defendants-Appellees. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Morris K. Sirote, Birmingham, Ala., for plaintiffs-appellants.
James O. Spencer, Jr., Birmingham, Ala., for Deltec International Limited.
Appeal from the United States District Court for the Northern District of Alabama.
Before SIMPSON, TJOFLAT and HILL, Circuit Judges.
This is a securities fraud case. In the proceedings below, the district court granted the motion for summary judgment of one of the defendants, Deltec International, Ltd. (Deltec), on all claims, and entered final judgment pursuant to Fed.R.Civ.P. 54(b). In this appeal from that judgment, we find no merit in plaintiffs' federal securities laws claims against Deltec and affirm.
All of the plaintiffs' claims in this case arise out of their purchases of common stock in Smith's Pride Foods, Inc. (Smith's Pride), a Delaware corporation with headquarters in Birmingham, Alabama. The plaintiffs purchased the stock over an eight month period, from mid-September 1968 to April 1969, as Smith's Pride was preparing to "go public" in the over-the-counter market. Each of the plaintiffs purchased his stock anticipating that his shares would be registered with the issue to be offered to the public and that he would make a sizeable profit in the market when the offering was eventually released. Unfortunately for the plaintiffs, the over-the-counter stock market collapsed before the Smith's Pride underwriting could be registered with the Securities and Exchange Commission (SEC) and the stock sold. Without the additional capital from the registered underwriting, Smith's Pride's fortunes soon took a turn for the worse, and plaintiffs commenced this action in an effort to recoup their losses.
Smith's Pride was formed under Alabama law in February 1968 by two brothers, W. L. and A. J. Smith, and W. L.'s son, G. L. Smith. The Smiths were prominent in the poultry business, having maintained an integrated operation growing, slaughtering, processing, and selling in the Birmingham area for many years. W. L. and A. J. Smith were also in the meat brokerage business, operating under the name W. L. Smith Poultry Company. That company was liquidated shortly before the incorporation of Smith's Pride, and most of its assets, along with other business assets held by the family, were transferred to Smith's Pride in exchange for stock. W. L. Smith became chairman of the board of directors and president of the new company, and appears to have been the unofficial spokesman for the family's interests involved in this litigation.
Smith's Pride's business outlook was encouraging from the moment the company was organized. By the conclusion of the first six months of operations, the Smiths considered going public and discussed the idea with a local representative of Andresen and Company (Andresen), a Wall Street underwriter. Andresen was sufficiently impressed with Smith's Pride's business potential to pursue the matter, and promptly introduced W. L. Smith to Frederick R. Addler, a New York lawyer specializing in corporate finance. Addler concluded that the company had great potential, but that it was too early to go forward with an underwriting. He promised to give the matter further consideration after reviewing Smith's Pride's operations in nine months. Addler advised Smith to take two steps in the meantime to facilitate a future registration of Smith's Pride stock with the SEC: (1) the reincorporation of Smith's Pride under Delaware law and (2) the employment of a national certified public accounting firm to perform the audit work and to prepare the financial statements necessary to effect the registration. This advice was followed; on September 16, 1968, Smith's Pride Foods, Inc., was chartered in Delaware, and Peat, Marwick, Mitchell & Company was employed to do the auditing and financial work. On September 27, Smith's Pride of Alabama was merged into its Delaware counterpart. After the merger, W. L. Smith and A. J. Smith owned approximately one million shares, about 90 percent of the issued and outstanding shares of the company's stock.
W. L. Smith was eager to share the future of his company with some of his good customers. On August 16, 1968, Smith sold 20,000 of his shares, at $5.00 per share, to Tine Davis, a principal officer of Winn-Dixie Stores, Inc., which had done considerable business with the Smiths over the years. Smith informed W. M. Wright, Smith's Pride's vice-president for sales, of his willingness to sell some shares to his good customers, but cautioned Wright that the securities laws required that the sales be made only to Alabama residents and to no more than 25 persons.
It was not long before Wright let several Smith's Pride customers know of the plan to take the company public. Wright told them that the business had been growing rapidly and that the future held great promise. They were also informed that Smith's Pride had a contract with the federal government to operate a training program for the hard-core unemployed and that the contract would prove to be very profitable. According to Wright, those who purchased Smith's Pride stock before the public offering stood an excellent chance of making a sizeable profit. Wright represented that the new stockholders could register their shares with the public issue, and that, when the issue reached the market, the stockholders could either recoup their entire investment by selling just one half of their holdings or realize an immediate profit by selling out altogether.
Plaintiff Sam Virciglio was the first to respond to Wright's touting. On September 10, 1968, he purchased 10,000 shares of Smith's Pride stock at $5.00 per share. He advised Wright that the stock was being purchased for himself and eight others, but Wright told him that because of the 25 shareholder limit, the sale would have to be treated as if it were being made to one person. Hence, the stock certificate was issued in Virciglio's name only. The next sale Wright arranged was on October 7, 1968, to plaintiff Edmond G. Pharo 15,000 shares at $5.00 per share. While Pharo, like Virciglio, bought for himself and others (two), the stock certificate was issued in Pharo's name only. On October 21, 1969, Wright negotiated a 5,000 share sale at the $5.00 price to plaintiff John Davis. On the following day he handled a sale of 13,000 shares, again at $5.00, to plaintiff J. F. Costa. Costa bought for himself and three others, but received the certificate in his name to avoid the possibility that the 25 purchaser limit might be exceeded. The last sale Wright arranged was on October 29, 1969, to plaintiff Daniel B. Haralson 5,000 shares at the $5.00 per share price.
In each of these transactions, the purchasers paid for the stock with personal checks payable to Smith's Pride. The stock, however, came from W. L. Smith, personally; on each occasion, he surrendered his own shares, and the company issued a new certificate in the name of the purchaser.
Smith's Pride's business continued to improve, and by January 1969, Addler was retained to take the company public. Addler also became a stockholder, acquiring 37,500 shares from W. L. Smith and a like number from A. J. Smith. Addler's law firm completed the preparation of a prospectus for a Smith's Pride stock offering shortly after Peat, Marwick, Mitchell and Company's financial statement of March 29, 1969 became available. On April 3, the final two stock transactions with plaintiffs took place. W. L. Smith sold 3,000 shares of his Smith's Pride stock to J. C. Weeks at $8.00 per share and 5,000 shares to Rex Hollis, who split the purchase with J. P. Lovoy, at.$9.00 per share, though the stock was issued to Hollis only.
Later in April, Addler met with Smith's Pride's board of directors to discuss the public offering. The board hoped the stock could go on the market at $8.00 per share. The over-the-counter market had gone into a sharp downturn, however, and Addler said that an $8.00 price was out of the question. He recommended, instead, a private placement at a price of $5.00-$6.00 per share. The board rejected the recommendation and instructed Addler to explore the possibility of arranging a long term loan to obtain the capital necessary to meet the company's expansion plans. When the stock market improved, the board said, a public stock offering would be reconsidered.
Addler thereafter obtained a tentative commitment from Massachusetts Mutual Life Insurance Company for a $1 million loan to Smith's Pride; but before a firm commitment could be made, the money market tightened, and Massachusetts Mutual's available funds became so scarce that Smith's Pride's application was rejected. Having been turned down by the insurance company, and seeing no real prospects for a public stock offering, Addler washed his hands of the whole affair.
This did not deter the Smiths and their small group of investors, however. By the end of 1969, Kohlmeyer and Company (Kohlmeyer) indicated an interest in underwriting a Smith's Pride stock issue at.$9.00 per share, and, by November 1970, was prepared to go forward with an SEC registration. The potential underwriting was killed, however, when a federal audit of Smith's Pride's training program indicated that the company was indebted to the Government for about $2 million.
At the company's annual stockholders meeting in December 1970, W. L. Smith offered to buy back the plaintiffs' stock at $5.00 per share or to exchange their shares for stock of Smith's Industries, Inc., a corporation to be formed to acquire ownership of several of Smith's companies, including Smith's Pride. The plaintiffs rejected Smith's offer, and on May 4, 1971, brought this suit against Smith's Pride, Smith's...
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