Schneider v. Sears

Citation265 F. Supp. 257
Decision Date14 March 1967
Docket Numberand 3540.,3183,2839,2937,2945,66 Civ. 2823,3075,3165,2898,2971
PartiesDaniel E. SCHNEIDER, Plaintiff, v. H. A. SEARS et al., Defendants, [and nine other related actions].
CourtU.S. District Court — Southern District of New York

Lehrich and Lehrich, New York City, for plaintiff in Schneider 66 Civ. 2823, Hyman D. Lehrich, New York City, of counsel.

Carro, Spanbock & Londin, New York City, for plaintiff in Leber 66 Civ. 2839, Jerome J. Londin, New York City, of counsel.

Mordecai Rosenfeld, New York City, for plaintiff in Elster 66 Civ. 2898.

Stull & Stull, New York City, for plaintiff in Curtis 66 Civ. 2937.

Milberg & Levy, New York City, for plaintiff in Lattman 66 Civ. 2945.

Bennett Frankel, New York City, for plaintiff in Nagelberg 66 Civ. 2971.

Kramer, Bandler & Labaton, New York City, for plaintiff in Siegel 66 Civ. 3075, Sidney Kramer, Edward Labaton, New York City, of counsel.

Israel Beckhardt, New York City, for plaintiff in Miller 66 Civ. 3165.

Solomon D. Monshine, New York City, for plaintiff in Weingarten 66 Civ. 3183.

Ira Jay Sands, New York City, for plaintiffs in Messinger, Orlinsky, Bernstein and Harrison 66 Civ. 3540.

Kronish, Lieb, Shainswit, Weiner & Hellman, New York City, Reynolds, White, Allen & Cook, Houston, Tex., for defendant-movant Hall, Seymour Shainswit, New York City, Grant Cook, Houston, Tex., Peter J. Mansbach, New York City, of counsel.

Simpson Thacher & Bartlett, New York City, for trustee of defendant Westec Corp., John A. Guzzetta, New York City, of counsel.

Carter, Ledyard & Milburn, New York City, for defendant Francis I. duPont & Co.

Davis, Polk, Wardwell, Sunderland & Kiendl, New York City, for defendant Ernst & Ernst.

Roth, Carlson, Kwit & Spengler, New York City, for defendants Moore, Charrin, Wolf, Beeman, Gamel, Bock, Roedel, Stevens, Leigh and Belcher, Schneider, Bernet & Hickman, Inc., Robert S. Carlson, New York City, of counsel.

Shea, Gallop, Climenko & Gould, New York City, for defendant Williams.

I. Arnold Ross, New York City, for defendant Shirra.

Marshall, Bratter, Green, Allison & Tucker, New York City, Hogan & Hartson, Washington, D. C., for defendant Bull, David N. Webster, Washington, D. C., of counsel.

Silver, Saperstein, Barnett & Solomon, New York City, for defendant G. C. Haas & Co., David Saperstein, Isaac M. Barnett, Milton D. Solomon, New York City, of counsel.

Jacobs, Persinger & Parker, New York City, for defendant Ince, Irving Parker, Jay N. Feldman, New York City, of counsel.

Shearman & Sterling, New York City, for defendant Evans.

Beekman & Bogue, New York City, for defendant Paine, Webber, Jackson & Curtis.

Alexander & Green, New York City, for defendant A. G. Edwards & Son.

Debevoise, Plimpton, Lyons & Gates, New York City, for defendant Law.

Townley, Updike, Carter & Rodgers, New York City, for defendant Whitnell.

OPINION

WEINFELD, District Judge.

These are motions under section 1404 (a) of Title 28 for a transfer to the Southern District of Texas, Houston Division, of ten separate actions commenced in this district1 involving the affairs or transactions in the stock of the Westec Corporation, a Nevada corporation with its principal place of business in Houston, Texas, and now in a Chapter X Reorganization proceeding in the Southern District of Texas, Houston Division.

Ernest M. Hall, Westec's former president, a defendant in all actions, and whose activities in the stock of Westec are a principal subject of the various suits, moves for the transfer, which is opposed by some codefendants, but supported by others.

All ten actions are brought by stockholders of Westec and allege representative claims on behalf of other Westec holders similarly situated. Three of the complaints additionally alleged derivative claims on behalf of Westec. The gist of all the actions is that Hall and others in the highest levels of management, acting in concert with each other and with others, engaged in a fraudulent scheme to inflate artificially the price and value of Westec stock.

The representative claims alleged in all complaints are substantially similar. Two core claims, integral to the alleged scheme, are common to most of the actions. The first, alleged in all complaints, is that Hall, directly and through dummies, purchased, and lent his credit for the purchase of, large amounts of Westec stock, although without sufficient funds to pay therefor, for the purpose of creating the false appearance of legitimate market activity and artificially inflating the price of Westec stock on the American Stock Exchange (hereafter AMEX); that Hall concealed these purchases and failed to report them to AMEX or the SEC; that Hall's conduct was known to and participated or acquiesced in by the other individual defendants; that when this conduct became known or suspected there followed a flood of sell orders, in consequence of which trading in Westec stock on AMEX was suspended and the stock now has little or no value. Eight complaints allege the complicity of at least one stock brokerage firm, G. C. Haas & Co., in this program, and two of these draw in other brokerage firms, one complaint specifying seven such firms. The conduct of the various defendants in the alleged scheme is charged to violate the Securities Acts of 1933 and 1934, chiefly section 10(b) of the latter2 and SEC Rule 10(b) (5) thereunder,3 as a "manipulative or deceptive device or contrivance" employed in connection with the sale of stock on a national stock exchange, and section 9(a) (2) of the same Act,4 as a "series of transactions in any security * * * creating actual or apparent active trading * * * for the purpose of inducing the purchase * * * of such security by others."

The second core claim, related to the first and alleged in nine of the complaints, is that Westec, with the knowledge and/or participation of the individual director and officer defendants, issued false and misleading financial reports, principally its annual report for 1965, which made it appear that the corporation's financial position and future prospects were better than in fact they were. Six of the complaints claim that Ernst & Ernst, the accounting firm which serviced Westec and certified the 1965 annual report, participated in this alleged fraud. And six complaints allege that Westec, with the knowledge or participation of the individual director and officer defendants, issued false and misleading news releases similarly distorting the financial status and potentiality of the corporation. The purpose of the dissemination of the false reports and press releases allegedly was to induce the purchase and inflate the price of Westec stock; and the conduct of the various defendants involved in the preparation and dissemination of this information is alleged to have violated provisions of the Securities Acts of 1933 and 1934, chiefly section 10(b) of the latter, and Rule 10(b) (5) thereunder.

In addition to the ten actions in this district, three proceedings are pending in the Southern District of Texas, Houston Division, involving the same general subject matter, or centering about the affairs and property of Westec. On September 13, 1966, Westec filed an action for declaratory judgment against Hall and James W. Williams, former chairman of its Board, seeking an adjudication whether they violated any provisions of the Securities Acts of 1933 and 1934, and also an accounting under Texas law. Westec also filed a petition for reorganization under Chapter X of the Bankruptcy Act, which was approved by the District Court on September 27, 1966, and a Trustee was appointed. Later, on October 7, 1966, one Rasansky, a Westec stockholder, filed a representative action against Hall, Westec, and twenty-one other defendants, which in substance asserts the claims alleged in the actions pending in this district.

As already noted, three of the actions in this district allege derivative as well as representative claims. The derivative claims are Westec assets, and although the actions were commenced before the appointment of the Chapter X trustee, their enforcement rests with the trustee.5 Whether he will seek substitution in the pending actions6 or allow them to proceed but seek their transfer (which he does), or commence an independent suit against alleged recreant directors and officers, rests in his discretion subject to Reorganization Court approval.7 Obviously it would be more convenient to the Texas trustee and afford him greater flexibility if these actions proceeded in Texas. While the derivative claims have some bearing upon the transfer motions and the trustee's interest is a factor which weighs in favor of the transfer, it is not of controlling significance.

Far more important for the resolution of these section 1404(a) motions are the representative claims viewed in terms of the purposes of the statute. Section 1404(a) provides that:

"For the convenience of parties and witnesses, in the interest of justice, a district court may transfer any civil action to any other district or division where it might have been brought."

Two basic issues are presented by a motion under this section: first, whether the actions sought to be transferred "might have been brought" in the proposed transferee forum;8 and second, whether the convenience of parties and witnesses and the interest of justice would be best served by the transfer.

WHERE THE ACTIONS MIGHT HAVE BEEN BROUGHT

Suits under the Securities Act of 19349 may be brought, as provided in section 27 of the Act,10 in any district "wherein any act * * * constituting the violation" of the Act or any rule or regulation occurred. Under this section, it is sufficient to support the proposed transfer if any act in furtherance of the alleged scheme to induce the purchase and inflate the price of Westec stock occurred in Houston.11

None of the papers submitted on behalf of the various parties opposed to transfer asserts with respect to...

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