Steinberg v. Carey

Decision Date03 November 1977
Docket NumberNo. 75 Civil 1695.,75 Civil 1695.
Citation439 F. Supp. 1233
PartiesDavid and Dorothy STEINBERG, on behalf of themselves and all others similarly situated, Plaintiffs, v. William Polk CAREY, John L. Gibbons, 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.
CourtU.S. District Court — Southern District of New York

Richard D. Greenfield, Sterling H. Schoen, Jr., Philip Stephen Fuoco, Bala Cynwyd, Pa., Rembar, Wolf & Curtis, New York City, for plaintiffs.

Skadden, Arps, Slate, Meagher & Flom, New York City, for defendants William Polk Carey, William S. Renchard, Fred R. Sullivan and James R. Webb; Kurt Koegler, Gage Andretta, New York City, of counsel.

Davis, Polk & Wardwell, New York City, for defendants C. I. Realty Investors, City Investing Co., C. I. Planning Corp., Peter C. R. Huang, James V. Tomai, Jr., John L. Gibbons; S. Hazard Gillespie, Mark L. Austrian, James L. Kerr, of counsel.

Dewey, Ballantine, Bushby, Palmer & Wood, New York City, for defendants Reynolds Securities Inc. and duPont Glore Forgan Inc.; Hugh N. Fryer, Weaver H. Gaines, Jr., M. Pat Adamski, John J. Langhauser, New York City, of counsel.

OPINION

EDWARD WEINFELD, District Judge.

C. I. Realty Investors ("CIRI" or the "Trust") is a real estate investment trust organized under Massachusetts law for the purpose of investing as an equity owner and as a long term mortgage lender with equity participations in income producing properties such as apartment buildings, shopping centers, office buildings, industrial parks, warehouses and hotels. CIRI made its only public offering on April 13, 1972 pursuant to a prospectus and registration statement which became effective that day and continued for a ninety-day period. In all, 2,600,000 units were sold (each unit consisting of one share of beneficial interest and one warrant to purchase one share for $25) at a price of $25 per unit. Upon the public sale of the securities, CIRI realized approximately $65,000,000, which was available and used for its investment purposes.

Plaintiffs, representing a class defined as all purchasers of CIRI securities between April 13, 1972 and July 12, 1972 (the ninety-day effective period), allege, as set forth hereafter, that the prospectus contained certain untrue statements of material fact and omitted to state others, in violation of section 10(b) of the Securities Exchange Act of 19341 and Rule 10b-52 promulgated thereunder, and that plaintiffs were damaged thereby. Among other things, the amended complaint alleges a conspiracy among all the defendants with respect to the claimed omissions and misrepresentations in the prospectus.

In addition to CIRI, the corporate defendants include: (a) the CIRI related entities, City Investing Corporation ("City"), which allegedly controlled CIRI and indirectly wholly owned co-defendant C. I. Planning Corporation ("Planning"), CIRI's investment advisor pursuant to written agreement, and (b) the underwriter's representatives, duPont Glore Forgan, Incorporated ("duPont"), and Reynolds Securities, Inc. Individual defendants are the officers and trustees of CIRI, some of whom were also officers or directors of City or Planning, and others referred to as the "outside" trustees, who had no other relationship to CIRI or its related companies or affiliates.

The matter is now before the Court on a motion by the outside trustees, William Polk Carey, William S. Renchard, Fred R. Sullivan and James S. Webb, for summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure on the ground that there is no genuine issue as to a material fact relating to their intent to deceive plaintiffs and therefore as a matter of law plaintiffs' cause of action is insufficient. The motion is made after plaintiffs have had extensive discovery by way of oral depositions, voluminous interrogatories and document discovery: more than sixty witnesses have been deposed, thousands of pages of testimony have been transcribed, and many thousands of documents have been produced for inspection.

At the time of the CIRI offering, Carey was employed by defendant duPont as its Director of Corporate Finance. He served on CIRI's Board of Trustees in part as duPont's representative and was coordinator of the offering on behalf of duPont, which participated in analyzing CIRI and in verifying the statements made in the prospectus. He also participated in negotiating CIRI's advisory agreement with Planning. Renchard's only contact with the Trust was as trustee; he was, at the time of the offering, Chairman of Chemical Bank's board and a director of several public companies. Sullivan, also only a trustee, was and is Chairman of the Board and President of Walter Kidde & Co., and also served as a director of several public companies. Webb was similarly a director of a number of companies as well as being Vice President-Finance, a director and member of the executive committee of F. W. Woolworth Co., in addition to his CIRI trusteeship. Each of the outside trustees affirms that prior to accepting the offer to become a CIRI trustee, he satisfied himself as to those persons and entities connected with CIRI (e. g., management, counsel, accountants, etc.), and that the personnel appeared competent and in no way prompted suspicion or gave reason to believe that any of their duties would not be discharged as required by law.

The prime focus of attention is a meeting held on April 3, 1972, at which the outside trustees were formally elected and during which they and the other trustees, among other things, discussed and approved a draft prospectus which, with minor changes, became the effective prospectus about which plaintiffs' claims center. The lengthy prospectus in its opening pages contains a warning that the securities were subject to a number of "risk factors" described in a section by that name; attention is also directed to possible conflicts of interest among CIRI, Planning and City. Other sections describe "benefits to founders," CIRI's general investment policies, the management and transactions with related parties, the agreement between CIRI and its advisor, Planning, and a summary of the Declaration of Trust. One other section describes the Trust's proposed initial investments and includes audited financial statements concerning the properties in which CIRI proposed to invest.

Plaintiffs contend, however, that the outside trustees did not legitimately perform their duties relative to the prospectus and other matters at the April 3, 1972 meeting, the only one attended by them prior to the Trust's public offering. Thus, in resisting this motion for summary judgment, plaintiffs urge that issues of fact exist as to whether the outside trustees' membership on the Board of Trustees was a sham and whether that fact was disclosed in the prospectus; whether they, as members of the board, considered or adequately considered the initial investments referred to in the prospectus; whether the risk of leveraging was adequately disclosed; whether the outside trustees made any reasonable effort to investigate the Trust's initial equity investments or their manager, Multicon Properties, Inc.; whether defendant Carey had actual knowledge that an inadequate investigation had been made; and whether defendants adequately disclosed the risks inherent in holding Government National Mortgage Association ("GNMA") securities.3

The basic material facts are not in dispute. The April 3, 1972 meeting was admittedly not a long one — it lasted several hours — and an agenda of thirty-one items — including the prospectus and all its contents — was covered in that time. While some of these items (e. g., changing the Trust's name, approval of the form of corporate seal) are without much import, others (e. g., approval of the Planning/CIRI advisory agreement, approval of the SEC registration statement, approval of the initial investments and their description in the prospectus) are of considerably more substance. From the duration of the meeting, plaintiffs conclude that no meaningful discussions by the trustees could have taken place within that time, infer that the Board of Trustees was a "sham" and a "rubber stamp for management," and accordingly claim a Rule 10b-5 violation because this was not disclosed in the prospectus. The moving defendants argue that the duration of the meeting is irrelevant; that questions were asked by the trustees concerning those matters contained in the draft prospectus (a copy of which each trustee had received prior to the meeting) which in their judgment warranted questions. For purposes of this motion only these outside trustees do not dispute plaintiffs' claim that the CIRI prospectus contained material misrepresentations and omissions, but swear that at no time prior to the dissemination of the prospectus or during the ninety-day period when it was effective did they have any knowledge of any of the alleged misrepresentations or omissions nor were they apprised of any facts which should have put them on notice with respect thereto. They argue that they properly and in good faith relied upon CIRI's management and counsel, Davis Polk and Wardwell, for the preparation, accuracy and completeness of the prospectus and upon the certified public accountants, Peat, Marwick, Mitchell & Co.; Haskins and Sells; Lybrand, Ross Bros. & Montgomery and Ernst & Ernst, for the accuracy and completeness of the financial statements included therein, and that there is no evidence, direct or circumstantial, of intentional wrongdoing by the moving defendants. Moreover, these defendants argue that there is neither evidence of knowledge by them of any wrongdoing by other defendants nor, given their justifiable reliance upon CIRI's management and supporting entities, did they have...

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6 cases
  • Steinberg v. Carey
    • United States
    • U.S. District Court — Southern District of New York
    • April 20, 1979
    ...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 Exchang......
  • Securities and Exchange Com'n v. Hasho, 90 Civ. 7953.
    • United States
    • U.S. District Court — Southern District of New York
    • February 13, 1992
    ...98. Any inference "to be drawn by a fact finder must be based on common experience and be logical and reasonable." Steinberg v. Carey, 439 F.Supp. 1233, 1237 (S.D.N.Y.1977). Here, the defendants held themselves out as registered representatives. Securities dealers owe a special duty of fair......
  • DuPont v. Brady
    • United States
    • U.S. District Court — Southern District of New York
    • November 3, 1986
    ...given that recklessness standards of varying strictness have been applied in this Circuit. See cases cited in Steinberg v. Carey, 439 F.Supp. 1233, 1238-39 (S.D.N.Y. 1977); Greene v. Emersons, Ltd., 86 F.R.D. 66, 71-73 (S.D.N.Y.1980), aff'd sub nom., Kenneth Leventhal & Co. v. Joyner Wholes......
  • Wilson-Rich v. Don Aux Associates, Inc.
    • United States
    • U.S. District Court — Southern District of New York
    • October 29, 1981
    ...Insurance Co., supra, 524 F.2d at 1320. "Rule 56, however, is not a dead letter" in the Second Circuit. Steinberg v. Carey, 439 F.Supp. 1233, 1241 (S.D.N.Y.1977) (Weinfeld, J.); see SEC v. Research Automation Corp., supra; Mutual Marine Office Inc. v. Atwell, Vogel & Sterling, Inc., 485 F.S......
  • Request a trial to view additional results

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