Ross v. Licht, 62 Civ. 1428.
| Citation | 263 F. Supp. 395 |
| Decision Date | 06 February 1967 |
| Docket Number | No. 62 Civ. 1428.,62 Civ. 1428. |
| Parties | Bernice Frank ROSS and Lawrence H. Frank, Plaintiffs, v. Charles S. LICHT, Samuel Bernstein, Michael J. Coviello, Leonard Bluestone, Edward Grapel, William V. Licht, National Hospital Supply Co., Inc., Henry Licht, Seymour M. Friedman and Sidney E. Licht, Defendants. |
| Court | U.S. District Court — Southern District of New York |
COPYRIGHT MATERIAL OMITTED
COPYRIGHT MATERIAL OMITTED
Jackson, Nash, Brophy, Barringer & Brooks, New York City, for plaintiffs, Sherman J. Saxl, New York City, of counsel.
Irwin L. Germaise, Millard & Greene, New York City, for defendants, Myron J. Greene, New York City, of counsel.
This is an action for damages under the Securities Exchange Act of 1934 (). Jurisdiction is conferred on this Court by 15 U.S.C. § 78aa. It is conceded by all parties that there was a use of the mails in connection with the transaction in suit (Pretrial order, p. 2).
There is one cause of action in the complaint based on a sale by plaintiffs to defendants in 1961 of 62½ shares of Class A common stock, par value $100 per share, of National Hospital Supply Co., Inc. (National), a New York Corporation, whose offices were at 38 Park Row in the Borough of Manhattan.
The action was tried to the Court without a jury, no party having demanded a jury (Fed.R.Civ.P. 38(d)).
The 1934 Act (15 U.S.C. § 78j) makes it unlawful to employ in the purchase as well as in the sale of any security any "manipulative or deceptive device or contrivance" in contravention of any rule of the Securities and Exchange Commission (the SEC or Commission). The Commission has promulgated Rule 10b-5 (17 C.F.R. § 240.10b-5) which in effect made applicable under the Act the general antifraud provisions of Section 17 (a) of the Securities Act of 1933 (15 U.S.C. § 77q(a); the "1933 Act").
It is well settled that there is a private action for damages for violation of Rule 10b-5. Fischman v. Raytheon Mfg. Co., 188 F.2d 783, 787 (2d Cir. 1951); see Colonial Realty Corp. v. Bache & Co., 358 F.2d 178, 181 (2d Cir. 1966). There is a contention in the pretrial order that plaintiffs also claim common law fraud but, assuming this to be so, it does not alter the dimensions of the problem.
National was incorporated in 1945 but apparently began business somewhat later.
Defendants Charles, William, Sidney and Henry Licht are brothers.
At all relevant times, Charles was president and director of National, William was vice-president and a director, defendant Bernstein was secretary-treasurer and a director, defendant Coviello (Director of Sales) and defendant Friedman (General Manager) were employees and familiar with the affairs of National, Sidney was a dentist and familiar with the affairs of National, and defendants Bluestone and Grapel were dentists, close friends of the Licht family and familiar with the affairs of National. Except that he was an original Class B stockholder, nothing appears as to any connection of Henry with National.
There were originally issued 600 shares of National, 250 of which were Class A, 250 of which were Class B, and 100 of which were Class C. The Class A and Class B stock each could elect two directors while the Class C stock could elect one director. The shares on original issue were sold for $100 each (Ex. C).
There was an agreement (Ex. C) among all stockholders, binding on heirs etc., which required that before any stock could be sold it had to be offered at "book value" to the "remaining stockholders of all classes" and to the corporation.
On October 23, 1951, Alexander Gould, an original holder of 62½ Class A shares transferred his 62½ shares to Jack Urdang. The sale price is not known.
On November 5, 1952, Bertha Schultz, an original holder of 24 Class B shares, transferred her 24 shares to defendant Charles. The sale price is not known.
Solomon Raduns, an original holder of Class A shares, sold his 62½ shares on November 20, 1956 to the following in the amounts indicated:
Esther Bernstein (wife of
defendant Bernstein) 10
Sabina Licht (wife of
defendant Charles) 10
Defendant Coviello 42½
The sale price is not shown but whatever the amount, presumably it was "book value".
On December 13, 1956, Urdang sold his 62½ shares of Class A stock, on an offer to National and to other then stockholders. National itself bought 27½ shares as treasury stock and the other 35 shares were bought as follows:
Sabina Licht 5
Defendant William 10
Defendant Coviello 20
The purchase price paid was $159.09 per share which was presumably "book value".
Emanuel Frank, an original holder of 62½ Class A shares and a director, died on April 15, 1958. His 62½ shares were inherited by his daughter, plaintiff Bernice, married to Robert Ross, and by his son, plaintiff Lawrence. There was delay in issuing new certificates to plaintiffs because the original certificate had apparently been lost.
Arthur Licht, one of the brothers and an original holder of 24 Class B shares, died and on September 15, 1959 his shares were transferred to defendant Charles and a new certificate issued in the name of Charles. The financial basis for the transfer is not known.
On September 15, 1959, a certificate for 31¼ Class A shares was issued in the name of each plaintiff. By September 15, 1959, the other 187½ Class A shares were held as follows:
Defendant Friedman 62½
Defendant Coviello 62½
Defendant William 10
Esther Bernstein 10
Sabina Licht 15
In National treasury 27½
______
187½
By September 15, 1959, the 250 Class B shares were held as follows:
Defendant Charles 152
Defendant William 50
Defendant Sidney 24
Defendant Henry 24
___
250
By September 15, 1959, the 100 Class C shares were all held by defendant Bernstein.
There were no transfers of stock between September 15, 1959 and May 4, 1961.
After the death of Frank on April 15, 1958, there were no directors elected by the Class A stock. Until at least May 4, 1961, there were three directors: Charles and William (representing Class B stock) and Bernstein (representing Class C stock).
Between September 15, 1959 and May 4, 1961, there were—in addition to plaintiffs—only nine stockholders of National, of whom 5 were members of the Licht family, 2 were members of the Bernstein family, and the other two were Coviello and Friedman.
It seems clear that at all relevant times the Licht family controlled National, but there was harmony between them and the other insiders.
At all relevant times, Ross—husband of plaintiff Bernice—acted on behalf of both plaintiffs.
In June 1960, Ross offered the shares of plaintiffs for sale to the other Class A stockholders—defendant William, defendant Friedman, defendant Coviello, Sabina Licht and Esther Bernstein. The price asked was $12,797.50 in the aggregate, or $204.76 per share, said to have been "book value" (Ex. 8). Technically, this was not a compliance with the stockholders' agreement, under which the offer should have been to the holders of Class B and C stock also. In August 1960, plaintiffs offered their stock to the corporation for the same price (Ex. 9).
There were no replies to the offers to sell.
The more significant events then took place in 1961 and in recounting them here the month and the day will be given (in some instances only the month); it will be understood that the year referred to is 1961.
On Tuesday, January 3, Ross had lunch near the offices with Charles. Ross said that plaintiffs wanted to sell their stock. Charles asked what price they wanted. Ross said $10,000 (or $160 per share). Charles said he "thought he could get a buyer for $5000" (SM 47; SM refers to pages of the stenographic minutes), or $80 per share. They then "settled on the figure of $7,500" (SM 25) which is $120 per share for the 62½ shares, meaning "It was left that he Charles would try and get somebody to buy the stock at $7500 and that I Ross would hear from him or his lawyer" (SM 25). Ross did not hear from Charles after January 3 nor did Ross and Charles ever have any other talk.
The findings as to the conversation between Ross and Charles on January 3 are based on the testimony of Ross, which is accepted as truthful and accurate, as well as on a stipulation of fact in the pretrial order (p. 2). The testimony of defendants is in many respects incredible and inconsistent and to the extent that it differs from that of Ross as to the January 3 conversation it cannot be accepted, nor may it be accepted as to much which followed.
It is entirely clear that there was no agreement in fact on January 3 or at any other time prior to May 4 for the purchase of the stock of plaintiffs. This is because there was no agreement in fact by Charles or by anyone else to buy the stock; Charles testified that he was not interested in buying the stock and "didn't know anybody" who was (SM 395). All Charles undertook to do on January 3 was, as Ross testified, to "try and get somebody to buy the stock at $7500" (SM 25). It is thus unnecessary to decide the hypothetical question, much discussed in the memoranda, whether an agreement in fact would have been void in law because of the statute of frauds.
The minute book of National contains minutes of a meeting purporting to have been held on January 3 (Ex. 15), in which minutes the following statements appear:
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