Stella v. Kaiser

• Decision Date: 04 April 1949
• Citation: 83 F. Supp. 431
• Parties: STELLA v. KAISER et al.
• Court: U.S. District Court — Southern District of New York

83 F. Supp. 431

STELLA v. KAISER et al.

United States District Court S. D. New York.

April 4, 1949.

Lewis M. Dabney, Jr., and Anderson & Carew, all of New York City (Lewis M. Dabney, Jr., John A. Anderson and Isadore H. Cohen, all of New York City, of counsel), for plaintiff.

Willkie, Owen, Farr, Gallagher & Walton, of New York City, for defendant Kaiser-Frazer Corporation.

Corbin, Bennett & Delehanty, of New York City (Harold H. Corbin, Mark F. Hughes and Francis B. Delehanty, Jr., all of New York City, of counsel), for defendants Henry J. Kaiser, Edgar F. Kaiser, G. G. Sherwood, E. E. Trefethen, Jr., Clay P. Bedford, W. A. MacDonald, O. B. Motter, Hickman Price, Jr., and Walston S. Brown.

KAUFMAN, District Judge.

Defendants move for security pursuant to Section 9(e) of the Securities Exchange Act of 1934, 15 U.S.C.A. § 78i(e). This subdivision, insofar as here pertinent, reads: "Any person who willfully participates in any act or transaction in violation of subsection (a), (b), or (c) of this section shall be liable to any person who shall purchase or sell any security at a price which was affected by such act or transaction, and the person so injured may sue in law or in equity in any court of competent jurisdiction to recover the damages sustained as a result of any such act or transaction. In any such suit the court may, in its discretion, require an undertaking for the payment of the costs of such suit, and assess reasonable costs, including reasonable attorneys' fees, against either party litigant."

In a case to which the foregoing section is applicable, the test-question is: Is the action brought in good faith and on a meritorious claim? The burden is on the moving defendants to satisfy the court that the test-question should be answered in the negative. Acker v. Schulte, D.C., 74 F. Supp. 683, 689.

The gravamen of the action is the individual defendants' alleged manipulation of the stock market so as to bolster the price of defendant Kaiser-Frazer Corporation's stock on the eve of a public offering by the corporation of an additional large block of its stock — the acts complained of consisting of allegedly misleading press releases relating to the affairs of the corporation and the expenditure by the corporation of $2,500,000 of its funds in the purchase of its own stock.

These acts, it is alleged, violated Sections 9(a) (2) and 10(b) of the Securities Exchange Act of 1934 and Rule X-10B-5 of the Rules and Regulations under that Act, as well as Section 17(a) (1) and (3) of the Securities Act of 1933, 15 U.S.C.A. § 77q(a) (1, 3) — the so-called anti-manipulation and anti-fraud provisions of these statutes — and also constituted, it is alleged, a deliberate and negligent waste of the corporation's assets by the individual defendants in violation of their duties as directors of the corporation.

The sufficiency of the complaint has been sustained. Stella v. Kaiser, D.C., 82 F. Supp. 301. No pre-trial depositions have been submitted; all that is before the court on this motion are the pleadings and the affidavits submitted on behalf of the parties.

Defendants' affidavits are four in number; two by members of the firm who appear herein as attorneys for defendant corporation, one by the Comptroller of the corporation, and one by an individual defendant, who is an attorney and, at the time of the acts complained of, was secretary and a director of the corporation. The Comptroller's affidavit gives the corporate earnings and the value of the corporation's stock, according to the books.

The affidavits of the attorneys give their version of the facts, from which they argue (1) that ...