Steinberg v. Carey
| Decision Date | 20 April 1979 |
| Docket Number | 75 Civ. 1695,75 Civ. 1811. |
| Parties | David and Dorothy STEINBERG, on behalf of themselves and all others similarly situated, Plaintiffs, v. William Polk CAREY, John L. Gibbons, Estate of Robert M. Morgan, William S. Renchard, Fred R. Sullivan, James R. Webb, Peter C. R. Huang, James V. Tomai, Jr., C. I. Realty Investors, City Investing Company, C. I. Planning Corporation, Reynolds Securities Inc., and duPont Glore Forgan Incorporated, Defendants. Irving MASON, on behalf of himself and all others similarly situated, and derivatively on behalf of C. I. Realty Investors, Plaintiff, v. CITY INVESTING COMPANY, C. I. Realty Investors, C. I. Planning Corporation, William Polk Carey, John L. Gibbons, Peter C. R. Huang, James V. Tomai, Jr., Estate of Robert M. Morgan, William S. Renchard, Fred R. Sullivan, James R. Webb and Reynolds Securities Inc., Defendants. |
| Court | U.S. District Court — Southern District of New York |
Greenfield & Schoen, Bala Cynwyd, Pa. (Richard D. Greenfield, Sterling H. Schoen, Jr., Robert P. Frutkin, Gilbert F. Ashley, Bala Cynwyd, Pa., of counsel), Norwick, Raggio, Jaffe & Kayser, New York City, for plaintiffs.
Kissam, Halpin & Genovese, New York City (Leo T. Kissam, James G. Simms, Peter J. Dranginis, Jr., New York City, of counsel), for defendant C. I. Realty Investors.
Davis Polk & Wardwell, New York City (S. Hazard Gillespie, Mark L. Austrian, James L. Kerr, Andrew C. Jacobs, New York City, of counsel), for defendants City Investing Company, C. I. Planning Corp., John L. Gibbons, James V. Tomai, Jr., and Peter C. R. Huang.
Dewey, Ballantine, Bushby, Palmer & Wood, New York City (Hugh N. Fryer, M. Pat Adamski, John J. Langhauser, New York City, of counsel), for defendants Dean Witter Reynolds Inc. and duPont Glore Forgan Inc.
Skadden, Arps, Slate, Meagher & Flom, New York City (Kurt Koegler, Anthony J. Siano, New York City, of counsel), for defendants Fred R. Sullivan, James R. Webb, William S. Renchard, William Polk Carey and the Estate of Robert M. Morgan.
This is a motion made upon published and direct mail notice to all beneficial owners on and before February 1, 1975 of the shares and warrants of C. I. Realty Investors (the "Trust"), a real estate investment trust, ("REIT"), for approval of a proposed class action settlement entered into between plaintiffs and defendants. The gross amount of the settlement is $925,000 subject to deductions noted hereafter. Upon the return of the motion no class member opposed or questioned the settlement and all parties to the litigation and their counsel urge approval of its terms. Since the affidavits and memoranda submitted in support of the settlement review in detail the history and scope of the litigation, familiarity with the issues involved and the contentions of the parties is assumed.
The proposed settlement encompasses two actions instituted by shareholders of the Trust. The first, Steinberg v. Carey, was filed on January 6, 1975 in the Eastern District of Pennsylvania, and sought damages pursuant to section 10(b) of the Securities and Exchange Act of 1934 ("Exchange Act")1 and Rule 10b-5 promulgated thereunder,2 on behalf of all those who purchased units, shares or warrants of the Trust from April 13, 1972 to and including July 12, 1972 (the ninety-day effective period) in reliance on the Trust's Registration Statement and Prospectus. The second, Mason v. City Investing Co., was filed in the same district as a combined class and derivative action on February 25, 1975. It asserts claims on behalf of the Trust and its shareholders pursuant to sections 12 and 17 of the Securities Act of 1933 ("Securities Act")3 and sections 10(b), 13(a) and 14(a) of the Exchange Act.4 The Mason class includes those who purchased the Trust's shares during the period encompassed by the Steinberg action and beyond — that is, up to and including February 1, 1975. Both cases were transferred on consent to this district pursuant to 28 U.S.C., section 1404(a). On May 3, 1976, Judge Wyatt dismissed the derivative claims in Mason for failure to make a demand upon the Trust's shareholders prior to bringing suit,5 and stayed all discovery on the class claims pending final determination in Steinberg; on August 5, 1976, the Steinberg suit was certified as a class action.6
The principal charges in Steinberg centered about the Registration Statement and Prospectus for the Trust's April 13, 1972 offering of 2,600,000 units which were sold to the public for a total of approximately $65,000,000. Twenty-five dollars was the purchase price for each unit, which consisted of one share of beneficial interest and one warrant to purchase one share at a price of $25. The net proceeds of the offering were to be invested in apartment buildings, shopping centers and office buildings and in short- and intermediate-term construction, development and land mortgage loans. Pending such investments, the proceeds were to be temporarily invested in government debt securities, mortgage-backed securities guaranteed by the Government National Mortgage Association ("GNMA") and certificates of deposit.
The complaint alleged that the Registration Statement and Prospectus were materially false and misleading in that they failed to disclose, inter alia: (1) that the Board of Trustees was a "sham," dominated by Trustees who were affiliated with entities related to the Trust, that is, City Investing Company ("C.I."), which allegedly controlled the Trust, and C.I.'s indirectly wholly-owned co-defendant, C.I. Planning Corp. ("Planning"), the Trust's investment advisor; (2) that the Trust's initial investment in a group of garden apartment complexes referred to as the "Multicon" apartments was made without independent appraisals or adequate on-site inspections, which inspections would have revealed that the apartments had an excessive turn-over rate, were poorly managed and required substantial capital expenditures in order to be maintained in competitive condition; (3) that certain risks were inherent in leverage financing, in construction, development and second mortgage loan investments, and in holding GNMA securities; and (4) that the relationship between C.I. and Planning and the extent of benefits inuring to them under the Advisory Agreement between Planning and the Trust would produce conflicts of interest with the Trust.
The Mason complaint largely repeated the above allegations but expanded the class to encompass all purchasers up to and including February 1, 1975 because the charged misstatements and omissions allegedly continued, and were not corrected, in reports filed with the Securities and Exchange Commission and the New York Stock Exchange and in statements accompanying proxy solicitations during that period. The impetus for both suits was the decline in the market value of the Trust's shares from $25 per share on April 13, 1972 to approximately $2 per share on December 31, 1974.
The defendants in each action included the Trust, its individual Trustees, Planning, C.I. and two of the managing underwriters for the public offering. The Mason litigation also included the Trust's certified public accountant, Peat, Marwick, Mitchell & Co., as a defendant. All defendants denied and continue to deny the charges levelled against them by plaintiffs.
The proposed settlement was reached after prolonged arms-length negotiations, following extensive and complete discovery by the contending parties, including voluminous interrogatories and document production and depositions of more than sixty witnesses. This case was ripe for trial and the parties were on seventy-two hours notice to proceed when agreement was finally achieved. In substance, the settlement provides for a Class Settlement Fund of $925,000, consisting of $466,667 contributed by the defendants other than the Trust, and $458,333 contributed by the Trust.7 From the Fund will be deducted the costs and expenses incurred in giving notice to the respective classes of the proposed settlement; the fees, costs and expenses of administration of the Fund; and attorneys' fees and disbursements in such amounts as are allowed by the Court. The net sum will be distributed to members of the class who have not requested exclusion and whose claims are allowed. There is no provision for refund to the defendants of unclaimed amounts; rather, unclaimed portions will be distributed pro rata to claiming class members.
The function of the Court in reviewing this application, 8
As to the first factor, the probability of success, a number of developments in the law and in the marketplace subsequent to the filing of the complaints herein present substantial obstacles to a successful prosecution of the action. In addition to the normal trial risks associated with complex securities cases, the Steinberg action, which was premised on section 10(b) of the Exchange Act, is further encumbered by the problem of proving scienter. The Supreme Court's decision in Ernst & Ernst v. Hochfelder,9 requiring proof of intent to deceive, manipulate or defraud, was handed down almost two years after the complaint was filed. Fully aware of the liberality accorded requests to amend pleadings, this Court nonetheless denied plaintiffs' motion to add claims under sections 11 and 12(2) of the Securities Act,10 made on the eve of the termination date of all discovery, in light of the substantial prejudice to defendants.11 Subsequently, a motion for summary judgment was made on behalf of the "outside" trustees, those who had no...
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