Superintendent of Insurance of State of New York v. Bankers Life and Casualty Company 8212 60

• Decision Date: 08 November 1971
• Docket Number: No. 70,70
• Citation: 30 L.Ed.2d 128,92 S.Ct. 165,404 U.S. 6
• Parties: SUPERINTENDENT OF INSURANCE OF the STATE OF NEW YORK, as Liquidator of Manhattan Casualty Company, Petitioner, v. BANKERS LIFE AND CASUALTY COMPANY et al. —60
• Court: U.S. Supreme Court

404 U.S. 6

92 S.Ct. 165

30 L.Ed.2d 128

SUPERINTENDENT OF INSURANCE OF the STATE OF NEW YORK, as Liquidator of Manhattan Casualty Company, Petitioner,

v BANKERS LIFE AND CASUALTY COMPANY et al.

No. 70—60.

Argued Oct. 13, 1971.

Decided Nov. 8, 1971.

Arnold Bauman, New York City, for petitioner.

Walter P. North, Washington, D.C., for the Securities and Exchange Comm., as amicus curiae, by special leave of Court.

William Warren Karatz, New York City, for respondent Irving Trust Co.

Irving Parker, New York City, for respondent Bankers Life and Cas. Co.

Mr. Justice DOUGLAS delivered the opinion of the Court.

Manhattan Casualty Co., now represented by petitioner, New York's Superintendent of Insurance, was, it is alleged, defrauded in the sale of certain securities in violation of § 17(a) the Securities Act of 1933, 48 Stat. 84, 15 U.S.C. § 77q(a), and of § 10(b) of the Securities Exchange Act of 1934, 48 Stat. 891, 15 U.S.C. § 78j(b). The District Court dismissed the complaint, 300 F.Supp. 1083, and the Court of Appeals affirmed, by a divided bench. 2 Cir., 430 F.2d 355. The case is here on a petition for a writ of certiorari which we granted, 401 U.S. 973, 91 S.Ct. 1191, 28 L.Ed.2d 321.

It seems that Bankers Life & Casualty Co., one of the respondents, agreed to sell all of Manhattan's stock to one Begole for $5,000,000. It is alleged that Begole conspired with one Bourne and others to pay for this stock, not out of their own funds, but with Manhattan's assets. They were alleged to have arranged, through Garvin Bantel & Co.—a note brokerage firm—to obtain a $5,000,000 check from respondent Irving Trust Co., although they had no funds on deposit there at the time. On the same day they purchased all the stock of Manhattan from Bankers Life for $5,000,000 and as stockholders and directors, installed one Sweeny as president of Manhattan.

Manhattan then sold its United States Treasury bonds for $4,854,552.67.¹ That amount, plus enough cash to bring the total to $5,000,000, was credited to an account of Manhattan at Irving Trust and the $5,000,000 Irving Trust check was charged against it. As a result, Begole owned all the stock of Manhattan, having used $5,000,000 of Manhattan's assets to purchase it.

To complete the fraudulent scheme, Irving Trust issued a second $5,000,000 check to Manhattan which Sweeny, Manhattan's new president, tendered to Belgian-American Bank & Trust Co. which issued a $5,000,000 certificate of deposit in the name of Manhattan. Sweeny endorsed the certificate of deposit over to New England Note Corp., a company alleged to be controlled by Bourne. Bourne endorsed the certificate over to Belgian-American Banking Corp.² as collateral for a $5,000,000 loan from Belgian-American Banking to New England. Its proceeds were paid to Irving Trust to cover the latter's second $5,000,000 check.

Though Manhattan's assets had been depleted, its books reflected only the sale of its Government bonds and the purchase of the certificate of deposit and did not show that its assets had been used by Begole to pay for his purchase of Manhattan's shares or that the certificate of deposit had been assigned to New England and then pledged to Belgian-American Banking.

Manhattan was the seller of Treasury bonds and, it seems to us, clearly protected by § 10(b), 15 U.S.C. § 78j(b), of the Securities Exchange Act,³ which makes it unlawful to use 'in connection with the purchase or sale' of any security 'any manipulative or deceptive device or contrivance' in contravention of the rules and regulations of the Securities and Exchange Commission.⁴

There certainly was an 'act' or 'practice' within the meaning of Rule 10b—5 ⁵ which operated as 'a fraud or deceit' on Manhattan, the seller of the Government bonds. To be sure, the full market price was paid for those bonds; but the seller was duped into believing that it, the seller, would receive the proceeds. We cannot agree with the Court of Appeals that 'no investor (was) injured' and that the 'purity of the security transaction and the purity of the trading process were unsullied.' 430 F.2d, at 361.

Section 10(b) outlaws the use 'in connection with the purchase or sale' of any security⁶ of 'any manipulative or deceptive device or contrivance.' The Act protects corporations as well as individuals who are sellers of a security. Manhattan was injured as an investor through a deceptive device which deprived it of any compensation for the sale of its valuable block of securities.

The fact that the fraud was perpetrated by an officer of Manhattan and his outside collaborators is irrelevant to our problem. For § 10(b) bans the use of any deceptive device in the 'sale' of any security by 'any person.' And the fact that the transaction is not conducted through a securities exchange or an organized over-the-counter market is irrelevant to the coverage of § 10(b). Hooper v. Mountain States Securities Corp., 5 Cir., 282 F.2d 195, 201. Likewise irrelevant is the fact that the proceeds of the sale that were due the seller were misappropriated.⁷ As the Court of Appeals for the Fifth Circuit said in the Hooper case, 'Considering the purpose of this legislation, it would be unrealistic to say that a corporation having the capacity to acquire $700,000 worth of assets for its 700,000 shares of stock has suffered no loss if what it gave up was $700,000 but what it got was zero.' 282 F.2d, at 203.

The Congress made clear that 'disregard of trust relationships by those whom the law should regard as fiduciaries, are all a single seamless web' along with manipulation, investor's ignorance, and the like. H.R.Rep.No. 1383, 73d Cong., 2d Sess., 6. Since practices 'constantly vary and where practices legitimate for some purposes may be turned to illegitimate and fraudulent means, broad discretionary powers' in the regulatory agency 'have been found practically essential.' Id., at 7. Hence we do not read § 10(b) as narrowly as the Court of Appeals; it is not 'limited to preserving the integrity of the securities markets' (430 F.2d, at 361), though that purpose is included. Section 10(b) must be read flexibly, not technically and restrictively. Since there was a 'sale' of a security and since fraud was used 'in connection with' it, there is redress under § 10(b), whatever might be available as a remedy under state law.

We agree that Congress by § 10(b) did not seek to regulate transactions which constitute no more than internal corporate mismanagement. But we read § 10(b) to mean that Congress meant to bar deceptive devices and contrivances in the purchase or sale of securities whether conducted in the organized markets or face to face. And the fact that creditors⁸ of the defrauded corporate buyer or seller of securities may be the ultimate victims does not warrant disregard of the corporate entity. The controlling stockholder owes the corporation a fiduciary obligation—one 'designed for the protection of the entire community of interests in the corporation—creditors as well as stockholders.' Pepper v. Litton, 308 U.S. 295, 307, 60 S.Ct. 238, 245, 84 L.Ed. 281.

The crux of the present case is that Manhattan suffered an injury as a result of deceptive practices touch- ing its sale of securities an an investor. As stated in Shell v. Hensley, 5 Cir., 430 F.2d 819, 827:

'When a person who is dealing with a corporation in a securities transaction denies the corporation's directors access to material information known to him, the corporation is disabled from availing itself of an informed judgment on the part of its board regarding the merits of the transaction. In this situation the private right of action recognized under Rule 10b—5⁹ is available as a remedy for the corporate disability.'

The case was before the lower courts on a motion to dismiss.

Bankers Life urges that the complaint did not allege, and discovery failed to disclose, any connection between it and the fraud and that, therefore, the dismissal of the complaint as to it was correct and should be affirmed. We make no ruling on this point.

The case must be remanded for trial. We intimate no opinion on the merits, as we have dealt only with allegations and with the question of law whether a cause of action as respects the sale by Manhattan of its Treasury bonds has been charged under § 10(b).¹⁰ We think it has been so charged and accordingly we reverse and remand for proceedings consistent with this opinion.

All defenses except our ruling on § 10 (b) will be open on remand.

Reversed.

1 Manhattan's Board of Directors was allegedly deceived into authorizing this sale by the misrepresentation that the proceeds would be exchanged for a certificate of deposit of equal value.

2 Belgian-American Banking at the same time made a loan to New England Note in the amount of $250,000 which was distributed in part as follows: Belgian-American American Banking $100,000, Bourne $50,000, Begole $50,000, and Garvin, Bantel $25,000.

3 Section 10(b) provides:

'It shall be unlawful for any person . . . (t)o use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.'

4 Rule 10b—5,...