Rothenberg v. Silberman

• Decision Date: 10 January 1968
• Docket Number: No. 67 Civ. 3038.,67 Civ. 3038.
• Citation: 278 F. Supp. 116
• Parties: Rose ROTHENBERG, Plaintiff, v. Richard T. SILBERMAN et al., Defendants.
• Court: U.S. District Court — Southern District of New York

278 F. Supp. 116

Rose ROTHENBERG, Plaintiff, v. Richard T. SILBERMAN et al., Defendants.

No. 67 Civ. 3038.

United States District Court S. D. New York.

January 10, 1968.

Kaufman, Taylor, Kimmel & Miller, New York City, for plaintiff, Stanley L. Kaufman, and Shephard S. Miller, New York City, of counsel.

Chadbourne, Parke, Whiteside & Wolff, New York City, for defendants, Robert A. Howes, Edward C. McLean, Jr., and Howard S. Sussman, New York City, of counsel.

MANSFIELD, District Judge.

In this stockholders' suit pursuant to § 27 of the Securities Exchange Act of 1934 for recovery of "short-swing" profits allegedly realized by defendants through purchase and sale of 331,500 shares¹ of the stock of Foodmaker, Inc. ("Corporation" herein) within six months in violation of § 16(b)² (15 U.S.C. § 78p(b)), defendants move to dismiss the complaint pursuant to Rule 12(b) (2) and (3), F.R.Civ.P., on the ground that venue in the Southern District of New York is improper or, in the alternative, for transfer to the United States District Court for the Southern District of California pursuant to 28 U.S.C. § 1404(a). The motion is granted.

Plaintiff, a New York resident, is a stockholder of the Corporation, which is organized under Delaware law and has its principal place of business in San Diego, California. Although the Corporation, a nominal defendant, is qualified to do business in New York, it has no office and transacts no business in this District.

The other defendants are Foodmaker Company ("Partnership" herein), a California limited partnership located in San Diego, and nine individuals, all of whom are California residents and members of the Partnership, and some of whom are also officers and directors of the Corporation. All defendants were served with process in California.

The "purchase" of the 331,500 shares under attack took place entirely in California. This "purchase" consisted of the Partnership's acquisition from the Corporation on June 28, 1967 of 530,000 shares of the Corporation's common stock (including the 331,500 shares later sold) in exchange for 500,000 shares of stock of Foodmaker Commissary, Inc., a Delaware corporation having its principal place of business in San Diego, pursuant to an Agreement and Plan of Reorganization dated March 31, 1967. This Agreement was executed in California by the Corporation, Partnership and individual defendants and provided that it "is being delivered and is intended to be performed in the State of California and shall be construed and enforced in accordance with the laws of such state." In accordance with the Agreement, the 530,000 shares of the Corporation's stock were placed in escrow in California under an Escrow Agreement executed by the parties there, pending performance of certain conditions there, including the obtaining of necessary permits from different California State departments and commissions, and the approval of the holders of a majority of the Corporation's stockholders, which was given at a stockholders' meeting held in San Diego on May 24, 1967.

The "sale" of the 331,500 shares also took place entirely in California, pursuant to a plan (contemplated by the parties when the Agreement and Plan of Reorganization was executed on March 31, 1967) to sell 450,000 shares of the Corporation's stock (including the 331,500 shares) to a group of underwriters represented by Hayden, Stone, Inc., who purchased the shares with a view to distributing them to the public. Accordingly a registration statement was filed with the Securities and Exchange Commission, which became effective July 6, 1967, and on that date, in San Diego, the Corporation entered into and executed a "firm-commitment" type Underwriting Agreement with Hayden, Stone, Inc. as the representative of a group of underwriters, under which the underwriters obligated themselves to buy the 450,000 shares at an agreed price, $20.45 per share, regardless whether they would be successful in reselling the securities to the public.

Pursuant to the Underwriting Agreement the closing of the sale of the 450,000 shares to the underwriters took place in San Diego on July 16, 1967, at which time certificates for the stock were delivered to Hayden, Stone in exchange for its check, drawn on the United States National Bank of San Diego in the sum of $9,202,500.³ The Transfer Agent was the United States National Bank, and the Registrar was the First National Bank of San Diego, both of California.

Upon completion of the sale in California, the underwriters offered the stock publicly, with some of the shares being offered in New York, with the result that of the 450,000 shares offered by them, about 94,000 (presumably including shares purchased by plaintiff) were sold in New York and 145,000 in California. By that time, however, the alleged "short-swing" purchase and sale by the defendants had been consummated in California, and the underwriters were the unconditional owners of the securities sold by them to the public.

Section 27⁴ provides that a suit to enforce liability for violation of § 16(b) may be brought in any federal district "wherein the defendant is found or is an inhabitant or transacts business" or "wherein any act or transaction constituting the violation occurred". Defendants are neither found in, nor inhabitants of, nor transact business in, this District. Venue therefore must depend on whether any act or transaction constituting the violation occurred here. Since the violation of § 16(b) consists of the insider's purchase and sale of securities of the issuer within the prohibited period, venue on this basis would exist only if some part of the acts, conduct or transactions constituting the purchase or sale under attack took place in the Southern District of New York. Gratz v. Claughton, 187 F.2d 46, 49 (2d Cir. 1950), cert. denied, 341 U.S. 920, 71 S.Ct. 741, 95 L.Ed. 1353 (1951); Peyser v. Meehan Fund, Inc., 264 F.Supp. 1 (S.D.N.Y.1966); Blau v. Lamb, 20 F.R. D. 411, 414 (S.D.N.Y.1957) (dictum).

The terms "purchase" and "sale", as those terms are used in § 16 (b), embrace such operative acts as the making and transmittal of an offer or order to purchase or sell the securities, the acceptance of the offer, the confirmation, the record transfer of the security, the delivery of certificates, payment, and the execution by the parties of the purchase and sale instruments. If any part of any of these operative acts takes place within the forum district, a basis exists for venue under § 27. It is unnecessary to show that all of a series of purchases and sales took place in the district, Blau v. Lamb, supra, or that both the purchase and the sale occurred there, Peyser v. Meehan Fund, Inc., supra. It is sufficient to show that some act constituting a part of one purchase, or of one sale, took place within the district, Blau v. Lamb, supra, even though the order to purchase or sell might emanate from elsewhere. Grossman v. Young, 70 F. Supp. 970 (S.D.N.Y.1947). Compliance with § 27, however, requires that some act forming part of the purchase or sale occur in the forum district. Otherwise the venue provision would become a dead letter. Thus in Blau v. Lamb, supra, it was said that:

"If it should there appear with respect to any defendant that he had indulged in no short swing transaction within this district the claim with respect to him would have to be denied even though it were proved that he profited from short swing transactions elsewhere." 20 F.R.D. at 414.

Faced with the fact that the acts or transactions constituting the purchase and sale in the present case took place entirely in California, plaintiff contends that since the underwriters, in their purchase of the securities in California, were acting with a view to distributing the securities in New York, and later did sell some of the securities in New York, their conduct amounted to "an act or transaction constituting the violation". If Hayden, Stone had agreed to act as agents for any of the defendants in selling the stock in New York, In re Hackett, Hoff & Thiermann, Inc., 70 F.2d 815, 819 (7th Cir. 1934); SEC v. Investment Bankers of America, Inc., 181 F.Supp. 346, 348 (D.D.C.1960); Rennie v. Pentagon Ref. Co., 280 Mich. 1, 273 N.W. 325, 327 (1937), plaintiff's contention might have some merit, since there would then at least be some conduct, or act or transaction, constituting a part of the violation in this District. The underwriters, however, including Hayden, Stone, gave a firm commitment to purchase all of the 331,500 shares in California, and the sale was completed when the securities passed and the price was paid there. The underwriters thus became the outright buyers of the stock in California, and their purchase was not contingent in any way on the success of their later distribution or upon the securities being resold in New York. See Dale v. Rosenfeld, 229 F.2d 855, 857 (2d Cir. 1956); In re Danville Hotel Co., 38 F.2d 10, 18 (7th Cir. 1930); I Loss, Securities Regulations, pp. 163-172 (1961). Having made a firm commitment to purchase the stock, followed by payment and delivery of certificates in the names of the underwriters in California to Hayden, Stone as representative of all of the underwriters, the latter were free to do as they pleased with the stock, without any requirement that they sell it in New York.

Plaintiff next contends that the Corporation's retention of New York legal counsel to advise it in connection with the California transactions, together with telephone communications, correspondence and visits to New York is sufficient to establish venue. It appears that New York counsel was retained by the Corporation and furnished it and the underwriters with legal opinions on various aspects of the underlying agreements, including the validity of the Agreement and Plan of Reorganization, the legal existence and authorized capital of the Corporation, the legal validity of the issuance of the shares to...