Smith v. Murchison

• Decision Date: 24 March 1970
• Docket Number: No. 68 Civ. 3791.,68 Civ. 3791.
• Citation: 310 F. Supp. 1079
• Parties: Morris SMITH, Plaintiff, v. John D. MURCHISON and Clint W. Murchison, Jr., individually and as partners d/b/a Murchison Brothers; Donald D. Harrington, Dan A. Kimball, Frank E. McKinney, Edgar T. Rigg and Alleghany Corporation, Defendants.
• Court: U.S. District Court — Southern District of New York

310 F. Supp. 1079

Morris SMITH, Plaintiff, v. John D. MURCHISON and Clint W. Murchison, Jr., individually and as partners d/b/a Murchison Brothers; Donald D. Harrington, Dan A. Kimball, Frank E. McKinney, Edgar T. Rigg and Alleghany Corporation, Defendants.

No. 68 Civ. 3791.

United States District Court, S. D. New York.

March 24, 1970.

COPYRIGHT MATERIAL OMITTED

Robert L. Bobrick, New York City, for plaintiff.

Debevoise, Plimpton, Lyons & Gates, New York City, for defendants John D. Murchison, Clint W. Murchison, Jr., and Murchison Bros., J. Asa Rountree, Hugh Rowland, Jr., New York City, of counsel.

Cahill, Gordon, Sonnett, Reindel & Ohl, New York City, for defendant Donald D. Harrington, Paul W. Williams, Raymond L. Falls, Jr., Abraham P. Ordover, New York City, of counsel.

OPINION

FREDERICK van PELT BRYAN, District Judge:

A stockholder of Alleghany Corporation (Alleghany) brings this action individually, and derivatively and representatively on behalf of Alleghany and of stockholders similarly situated. Defendants are former officers and directors of Alleghany and the Corporation is a nominal defendant.

The complaint claims assorted alleged violations by the defendants of the Securities Exchange Act of 1934 and of the duties imposed upon corporate directors under state law. Jurisdiction is founded on Section 27 of the Exchange Act, 15 U.S.C. § 78aa, and diversity of citizenship.

The only defendants who have been served with process are John D. Murchison, Clint W. Murchison, Jr., Murchison Bros. and Harrington. These defendants moved pursuant to Rule 12(b), Fed.R.Civ.P. to dismiss the complaint for want of jurisdiction over the person, improper venue and, in the alternative, pursuant to 28 U.S.C. § 1404(a), to transfer the action to the Northern District of Texas. The moving defendants were all served in Texas where they reside. Defendant John D. Murchison, however, was personally served in this District after these motions were made, and now limits the relief which he seeks to dismissal for improper venue or, in the alternative, for transfer of the action.

This is another chapter in the "flood of litigation that must be unparalleled in American corporation law" which has arisen out of the affairs of Alleghany Corporation. Willheim v. Murchison, 342 F.2d 33, 35 (2d Cir. 1965). The flood continues.

The present action, to a substantial degree, parallels a proceeding brought by Randolph Phillips before the Securities and Exchange Commission arising out of transactions between the Murchisons and Gamble-Skogmo, Inc. relating to Alleghany stock. In the proceeding before the S.E.C., Phillips sought a determination that these transactions had the effect of transferring control of Alleghany from the Murchisons to Gamble-Skogmo. After a lengthy hearing, the S.E.C. determined, among other things, that the Murchisons had not transferred control of Alleghany to Gamble-Skogmo and that a premium was not paid for transfer of control. These findings were affirmed by the Court of Appeals for this circuit in Phillips v. S.E.C., 388 F.2d 964 (2d Cir. 1968).

Thereafter, the present action dealing with substantially the same transactions was brought by the plaintiff Smith for whose attorney Randolph Phillips is acting as "consultant".

The Allegations of the Complaint

The complaint in this action is a prolix and confused document which attempts to lump in a single claim for relief claims for alleged violations of Section 10(b), 13(a), 14(a) and 16(a) of the Securities Exchange Act and the Rules and Regulations promulgated thereunder, as well as claims for alleged breach of fiduciary duty by defendant directors in violation of state law. Jurisdiction is predicated both on Section 27 of the Securities Exchange Act and on diversity of citizenship.

The basic transactions under attack are those which were involved in Phillips v. S. E. C., supra, whereby the Murchisons, acting for themselves and for others, sold to Gamble-Skogmo 1.5 million shares of Alleghany Common Stock and Gamble-Skogmo was granted a "call" and the Murchisons a "put" with respect to an additional 1.5 to 2 million shares of Alleghany Common.

The complaint alleges that these transactions were part of a plan whereby the Murchisons and the other defendant officers and directors of Alleghany (1) used their positions to obtain a price for their Alleghany stock above what was available in the open market to the other Alleghany shareholders; (2) sold their positions as officers and directors for their personal profit; (3) obtained the protection of a "put" agreement with respect to Alleghany common stock and stock of Investors Diversified Services, Inc. (I.D.S.), Alleghany's chief subsidiary, without making this available to other shareholders; (4) used the resources of Alleghany to bolster the price of its shares in aid of the plan; (5) misled other stockholders as to the use of such resources; and (6) concealed these transactions from the other shareholders.

In the course of these transactions it is alleged, among other things, that the Murchisons (1) resigned as officers and directors of Alleghany and induced the other defendants to resign, by arranging for the purchase of their stock at a premium, so that officers and directors designated by Gamble-Skogmo could replace them; (2) induced Alleghany to spend $2 million to support a depressed market in Alleghany, IDS and New York Central stock, and concealed the reason for the use of such funds from the stockholders; (3) issued a proxy statement which failed to disclose that defendant Harrington, a nominee for director, intended to resign before the end of his one-year term in consideration for the purchase of his stock at a premium; (4) failed to disclose these transactions in reports and letters sent to stockholders; and (4) concealed them from their fellow directors.

As a result, the Murchisons are alleged to have received for their Alleghany stock from Gamble-Skogmo in excess of $7 million above the prevailing market price and the other defendants amounts above the market price ranging from $340,000 to $1,800. These amounts are alleged to be "premiums" secured by defendants from the "sale" of their corporate offices.

Defendants' acts and omissions are alleged to have constituted "manipulative and deceptive devices and contrivances" and to have "operated as a fraud and deceit upon plaintiff and other shareholders of Alleghany" in violation of Sections 10(b), 13(a), 14(a) and 16(a) of the Securities Exchange Act and the Rules and Regulations thereunder. It is also alleged that these acts constituted "a violation of the fiduciary duties of said defendants to plaintiff and the other shareholders of Alleghany Corporation similarly situated under the common law and the General Corporate Law of Maryland."

Plaintiff seeks an accounting by defendants for the profits from the sale of their Alleghany stock and to recover such profits for the benefit of Alleghany and other stockholders, together with damages, and also counsel fees from Alleghany.

In moving to dismiss for want of personal jurisdiction and improper venue, the defendants' position can be summarized as follows:

The complaint fails to allege any claims under the Securities Exchange Act of 1934 on which relief can be granted. Thus, there is no federal subject matter jurisdiction under Section 27 of the Act. Plaintiff therefore was not authorized to serve defendants in Texas under Section 27 permitting service of process in any District "of which the defendant is an inhabitant or where the defendant may be found." Nor can venue be laid in this District under the liberal venue provisions of Section 27.

Thus, in the absence of any basis for federal question jurisdiction, whether or not there is in personam jurisdiction and proper venue must be resolved on the basis of the diversity claim based on state law. Defendants concede that, for the limited purposes of these motions, the complaint states a diversity claim for relief. They urge, however, that the requirements for service of process and for venue in a diversity case have not been met here and that the action must be dismissed for these reasons.

Jurisdiction under the Securities Exchange Act

Section 27 of the Securities Exchange Act of 1934, 15 U.S.C. § 78aa, gives the District Courts

"* * * exclusive jurisdiction of violations of this chapter or the rules and regulations thereunder, and of all suits in equity and actions at law brought to enforce any liability or duty created by this chapter or the rules and regulations thereunder."

Only if the complaint states a claim on which relief can be granted under the Securities and Exchange Act can service be properly effected and venue properly laid under § 27. Since the complaint charges violations of §§ 10(b), 13(a), 14(a) and 16(a) of the Act and the relevant Rules and Regulations, it is necessary to determine whether any claim for relief has been stated under any of these sections.

Section 10(b) and Rule 10b-5

It is plain that Section 10(b) and Rule 10b-5, 17 C.F.R. § 240.10b-5, which implements that Section, do not reach every breach of fiduciary duty by a corporate director. O'Neill v. Maytag, 339 F.2d 764 (2d Cir. 1964). Section 10(b) expressly requires that the acts complained of must be "in connection with the purchase or sale, or any security". While this phrase has been interpreted liberally by the Court of Appeals of this Circuit, S. E. C. v. Texas Gulf Sulphur Co., 401 F.2d 833 (2d Cir. 1968) (en banc), cert. denied, 394 U.S. 976, 89 S.Ct. 1454, 22 L.Ed.2d 756 (1969)¹ it has long been and still is the rule that 10b-5 extends "protection only to a defrauded purchaser or seller." Birnbaum v. Newport Steel Corp., 193 F.2d 461, 464 (2d Cir. 1952). Any doubts as to the continuing validity of this standing requirement, see Lowenfels, The Demise of the Birnbaum Doctrine, 54 Va.L.Rev. 268 (1968), were laid to rest in Greenstein v. Paul, ...