Riskin v. National Computer Analysts, Inc.

• Decision Date: 10 March 1970
• Citation: 62 Misc.2d 605,308 N.Y.S.2d 985
• Parties: , Fed. Sec. L. Rep. P 92,609 Bernard N. RISKIN, Plaintiff, v. NATIONAL COMPUTER ANALYSTS, INC. et ano., Defendants.
• Court: New York Supreme Court

Page 985

308 N.Y.S.2d 985

62 Misc.2d 605, Fed. Sec. L. Rep. P 92,609

Bernard N. RISKIN, Plaintiff, v. NATIONAL COMPUTER ANALYSTS, INC. et ano., Defendants.

Supreme Court, Trial Term, New York County, Part XXII.

March 10, 1970.

Demov, Morris, Levin & Shein, New York City (Irving Bizar, New York City, of counsel), for plaintiff.

McKenzie, Cabell, Martin & Greene, New York City (Benjamin F. Borden, New York City), of counsel, for defendants.

SAMUEL M. GOLD, Justice.

In this action plaintiff seeks to compel defendant National Computer Analysts, Inc. ('NCA') to transfer 34,960 shares of his approximately 55,000 shares of its stock by removing the restrictive legend thereon, and damages as well as reasonable counsel fees because of NCA's unreasonable refusal to transfer said stock.

Plaintiff became connected with NCA in July 1962 and acquired in 1962 and 1963 the shares, which as a result of subsequent recapitalizations and stock splits, make up the subject shares. He left the employ of NCA on December 31, 1968 to join a newly formed company.

NCA is now a public company, its stock being traded in the 'over-the-counter' market. Plaintiff's shares were investment or restricted stock, bearing the following legend:

'The shares represented in this certificate have no been registered under the Securities Act of 1933. The shares have been acquired for investment and may not be pledged or hypothecated, and may not be sold or transferred in the absence of an effective registration statement for the shares under the Securities Act of 1933, or an opinion of counsel to the company that registration is not required under said Act.'

Both parties concurred in the court's view that NCA's counsel could not 'unreasonably withhold' his opinion approving transfer of a shareholder's restricted stock.

In accordance with the established practice in this field plaintiff applied on March 26, 1969 to the Securities and Exchange Commission for what is known as a 'no action' letter. This is a staff advisory letter by the Commission's Division of Corporate Finance to the effect that under a described state of facts the staff would recommend that the Commission take 'no action' if the transaction took place without the filing of a registration statement. While a 'no action' letter merely represents a recommendation and is not a formal administrative act of the Commission, NCA's counsel and the expert witnesses for both sides all agreed that they knew of no instance in the entire record of the Commission of action, whether injunctive or criminal, being taken after issuance of a 'no action' letter or of any issuer corporation being subjected to civil liability by others, such as a purchaser of the securities involved, as a result of transferring shares in reliance on a 'no action' letter.

Plaintiff obtained a 'no action' letter on May 28, 1969. The court finds that plaintiff's statement of the facts and circumstances in his application to the Commission is true and that there was no valid basis for NCA's subsequent and repeated attempts to raise such question for reconsideration by the Commission.

On June 6, 1969, plaintiff, enclosing copies of the 'no action' letter, requested NCA and its transfer agent to issue certificates for the 34,960 shares without the restrictive legend. NCA and its transfer agent referred the matter to NCA's counsel. While, in view of the statement in the 'no action' letter that the 'matter is not free from doubt', there may have been some justification for NCA's counsel initially seeking clarification from the Commission, there was none for the subsequent attempts up to and even during the trial to obtain actually a rescinding of the 'no action' letter.

There was no reasonable basis for NCA's counsel withholding his opinion approving transfer of plaintiff's shares. The 'no action' letter was confirmed in each of the Commission's responses to his various communications.

The only cases cited by the parties which appear to have dealt with this question have held that corporations are required to transfer shares when a 'no action' letter is submitted along with the restricted shares (Kanton v. United States Plastics, Inc., 248 F.Supp. 353; Friedman v. Chemical Bank New York Trust Company, NYLJ, April 13, 1965, p. 14; Donlon Ventures, Inc. v. Avien, Inc., NYLJ, July 10, 1967, p. 10).

There is no substance to NCA's wholly unsupported contention that, even after obtaining confirmation of the 'no action' letter, it was obliged to take reasonable steps to satisfy itself that it was not participating in a criminal act in permitting a transfer of shares not registered under the Securities Act. The cited decisions clearly indicate that under these circumstances there is no provision of the Act that would make NCA liable to criminal or civil action, plaintiff being the only party subject to such future liability if found to be warranted. With respect to the penalties prescribed for willful violation in section 24 of the Act, there is no possibility of such action against NCA by the Commission in view of the 'no action' letter and its confirmation to NCA in response to NCA's request for clarification. With respect to the civil...