Opinion ID: 316528
Heading Depth: 1
Heading Rank: 3

Heading: the vesco & co. appeal

Text: 60 The circumstances surrounding appellant Vesco & Co.'s alleged role in the purported scheme to defraud ICC are, in the context of this sprawling and labyrinthine lawsuit, remarkably straightforward. Indeed, our knowledge of the details relating to Vesco & Co. derives principally from an affidavit submitted by Milton Stern, counsel for Vesco & Co., in support of its unsuccessful motion to dismiss the complaint. Vesco & Co., it appears, was incorporated in Delaware on July 12, 1972 as an estate planning device for Robert Vesco. At that time, Vesco exchanged 800,000 shares of ICC common stock for all of the preferred stock of Vesco & Co. The common stock of Vesco & Co. is owned by Patricia Vesco, Vesco's wife, as custodian for Vesco's children. The sole asset of Vesco & Co. is the block of ICC common stock which, through the additional contributions of Vesco's children, totals 846,380 shares. Furthermore, we have been advised that the officers of Vesco & Co. are Mrs. Vesco and defendant Shirley Bailey, Vesco's personal secretary. 61 On facts such as these, which can hardly be characterized as common, routine or without the semblance of taint, ICC moved for and was granted a preliminary injunction enjoining Vesco & Co. from disposing of the 846,380 shares of ICC common stock pendente lite. Judge Stewart found 20 that Vesco & Co. was merely Vesco's alter ego and, as such, would be equally liable should ICC sustain its claim of a 10(b) violation against Vesco. The district court also granted ICC's motion for preliminary relief restraining Vesco & Co. from prosecuting a pending state court action, finding such injunctive relief necessary to protect and effectuate its judgment, entered with the consent of ICC, in SEC v. Vesco et al., supra.
62 In attacking the preliminary injunction, Vesco & Co. contends-- as did the Fairfield Group-- that the district court lacked subject matter jurisdiction under the 1934 Act. It adds that this jurisdictional basis is essential here because in personam jurisdiction over Vesco & Co., a Delaware corporation doing no business in New York, can only be sustained under the nationwide service of process authorized by the 1934 Act, 15 U.S.C. 78aa-- an issue raised also in the Fairfield Group appeal. The district court denied this claim holding that, as a court of equity, it could pierce the corporate veil and treat Vesco & Co. as the equivalent of its dominant shareholder, Vesco. Thus, since ICC had unquestionably stated a claim under 10(b) against Vesco, the court had jurisdiction as well over Vesco & Co. We agree. 21 63 Although we need not labor the principle that the law will ordinarily treat the corporation as an entity distinct from its shareholders, it is equally well-established that 'whenever it is necessary to relieve or to protect from frauds, the corporation may be disregarded as against the responsible parties.' 1 Fletcher Cyc. Corp., Perm.Ed. 44; Cf. In re Gibraltor Amusements, Ltd., 291 F.2d 22 (2d Cir.), cert. denied, 368 U.S. 925, 82 S.Ct. 360, 7 L.Ed.2d 190 (1961). In this case, we note that ICC's detailed allegations of fraud against Vesco, personally, have now ripened into a default judgment. 22 Moreover, the virtual identity of interest between Vesco and Vesco & Co. is uncontroverted, as is the fact that Vesco actually transferred his ICC common stock to Vesco & Co. at a time when he was actively engaged in his allegedly fraudulent scheme. Finally, we have sustained 1934 Act jurisdiction over a corporation that participated in the fraudulent scheme solely as transferee for the illicit fruits. SEC v. Manor Nursing Centers, Inc., supra (jurisdiction over defendant Capital Cities Nursing Centers, Inc.). Thus, although ICC does not claim that the ICC common stock itself represents the fruits of Vesco's fraudulent conduct, nevertheless, we believe that the district court had ample power, as a court of equity, to reach those assets under the jurisdictional purview of the 1934 Act. 64 Vesco & Co. also contends that the complaint was defective in failing to state a valid claim against it. Admittedly, the solitary reference to Vesco & Co. in P5(r) of the complaint-- 'a Delaware corporation to which defendant Vesco and his children have transferred certain of their assets'-- is not replete with detail. Yet, the 'notice pleading' mandated by Rule 8(a) of the Federal Rules of Civil Procedure requires that the complaint be construed liberally, Conley v. Gibson, 355 U.S. 41, 79 S.Ct. 99, 2 L.Ed.2d 80 (1957); Dioguardi v. Durning, 139 F.2d 774 (2d Cir. 1944); and 'jurisdiction . . . is not defeated . . . by the possibility that the averments might fail to state a cause of action on which . . . (the pleader) could actually recover.' Bell v. Hood, 327 U.S. 678, 682, 66 S.Ct. 773, 776, 90 L.Ed. 939 (1946). See A. T. Brod & Co. v. Perlow, 375 F.2d 393, 398 (2d Cir. 1967). Accordingly, in view of the more than adequate allegations of fraud against Vesco, the allegation that he transferred certain assets to Vesco & Co. was sufficient to suggest that ICC would urge a piercing of the corporate veil as the basis for judgment against Vesco & Co. 23 Moreover, in light of the allegations in the affidavits accompanying the applications for the preliminary injunctions, the interstices of the complaint have been filled in. We would be acting contrary to the spirit of the Federal Rules if we did not recognize the ease with which the complaint may be amended under these Rules to supply any additional allegations required to make the complaint more informative.
65 Turning to the propriety of the injunctive relief fashioned by the district court, we find, for the reasons substantially set forth in Part II, that the district judge was well within his discretion in enjoining the disposition of the 846,380 shares of ICC common stock. With Vesco now well beyond the reach of ICC and the United States, this large and perhaps controlling block of ICC common stock is indeed a critical asset should ICC prevail on the merits against Vesco & Co. Sale of the stock would only aggravate the alleged fraud. Indeed the Vesco family, as sole shareholders, are unlikely to evidence concern over improper disposal of this asset. Moreover, as a holding company, Vesco & Co. will hardly experience any disruption in operations-- an element to be considered by the district court in evaluating the appropriateness of an asset freeze. See SEC v. Manor Nursing Centers, Inc., supra, 458 F.2d at 1106. Accordingly, the balance of hardships once abain tilts in ICC's direction. 66 The other half of the preliminary injunction equation set forth by Hamilton Watch and its progeny-- the existence of serious questions establishing a fair ground for further litigation-- has also been satisfied by ICC in its claim abainst Vesco & Co. That Vesco, himself, is responsible to ICC because of his fraudulent scheming, has now been established by the default judgment. The only question which remains, therefore, is whether ICC may pierce the corporate shell and reach the assets contained within it. As we have already made clear, both the timing of incorporation and the precise identity between the stockholders and officers of Vesco & Co. and Vesco, his family, and personal secretary are more than sufficient to provide fertile ground for 'more deliberate investigation.' 67
68 That portion of the preliminary injunction restraining Vesco & Co. from prosecuting its pending state court action still remains for our consideration. The state suit, filed in the Chancery Division of the Superior Court of New Jersey, is based on a complaint containing four counts in a derivative action filed by Vesco & Co. on behalf of ICC. Counts one and two seek compensatory and punitive damages against Laurence Richardson, a former director, and Gary Benjamin, a former officer of ICC for alleged breach of their fiduciary obligations to the company. Count three charges that ICC 'has paid, or is contemplating payment of, the personal legal fees and expenses' for three former directors, Richardson, Frank Beatty, and Wilbert Snipes, incurred in their defense of actions against them for mismanagement. Vesco & Co. prays for an injunction against future payments, and the return of any such reimbursements to date. Finally, count four of the complaint alleges that the former board of directors of ICC 'abdicated their responsibilities as directors' by consenting to the 'Final Judgment of Permanent Infunction and Appointment of Special Counsel and Directors' which terminated ICC's involvement in SEC v. Vesco et al., supra. As relief, Vesco & Co. seeks, inter alia, to enjoin the court-appointed board of directors from exercising their duties. 69 In granting ICC's request to enjoin this lawsuit, Judge Stewart relied on the exception in 2283 which authorizes a federal court to stay a state court proceeding 'to protect or effectuate its judgments.' Although Atlantic Coast Railroad teaches that this exception must be narrowly construed, it clearly supports injunctive relief restraining count four of Vesco & Co.'s New Jersey action. This count represents a direct assault on the Final Judgment entered by Judge Stewart in SEC v. Vesco et al., supra, and constitutes an attempt to frustrate the courths order appointing a new board of directors for ICC by seeking to enjoin the functioning of the board. Accordingly, we have little difficulty in sustaining the preliminary injunction restraining Vesco & Co. from proceeding with count four of its complaint. 70 We reach a contrary conclusion, however, with respect to the remaining counts of this state suit. We do not find in these counts the kind of real or potential conflict with the Final Judgment in SEC v. Vesco et al., supra, which we believe is required to justify the disfavored intervention into the orderly proceedings of a state court. Although the Final Judgment vests Special Counsel with the power to prosecute claims on behalf of ICC, the court's order does not purport to override the traditional right of a stockholder to sue on the corporation's behalf. See 13 Fletcher Cyc. Corp., Perm.Ed. 5940. Even were we to accept ICC's contention that appointment of Special counsel and a new board of directors was equivalent to the appointment of a receiver, it is well-settled that a derivative suit could be instituted, provided a proper demand had been made and refused by the receiver. Lucking v. Delano, 129 F.2d 283, 286 (6th Cir. 1942); 13 Fletcher Cyc. Corp., Perm.Ed. 5966. Accordingly, we vacate so much of the preliminary injunction which restrains Vesco & Co. from prosecuting counts one-three of its pending state court action, without prejudice to renewal of the application upon a showing that prosecution of these counts has interfered or threatens to interfere with the district court's jurisdiction or a judgment issued by it.