Court Opinion

ID: 9457709
Source: CourtListenerOpinion
Date Created: 2023-08-04 20:30:28.086857+00
Date Added: 2024-06-11T17:35:28.406557
License: Public Domain

ON REHEARING IN BANC
J. JOSEPH SMITH, Circuit Judge:
Plaintiffs, shareholders in Harvey Aluminum, Inc., brought in the United States District Court for the Eastern District of New York a derivative action seeking damages on behalf of the corporation for losses allegedly suffered when, as a result of a conspiracy between Martin Marietta and the controlling shareholders in Harvey Aluminum, Lawrence A. and Homer M. Harvey, the Harveys sold out their controlling interest to Martin Marietta at a premium but remained on the board of directors and caused an improvident redemption of convertible debentures in order to prevent their conversion and consequent dilution of Martin Marietta’s voting control.1 Plaintiffs seek to recover for the corporation both the alleged “premium bribe” and damages caused by the allegedly improvident redemption. The court, Anthony J. Trav-ia, Judge, dismissed the action holding section 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5 not applicable. A divided panel of this court affirmed (453 F.2d 722, July 21, 1971), relying largely on Superintendent of Insurance v. Bankers Life & Casualty Co. et al., 430 F.2d 355 (2d Cir. 1970), since reversed, 404 U.S. 6, 92 S.Ct. 165, 30 *737L.Ed.2d 128, (1971). On rehearing in banc we find error in the dismissal of the action and reverse and remand to the district court for further proceedings.
For the reasons stated in the panel opinion we agree that appellants have standing to sue. We hold, however, that section 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5 apply and that a sufficient claim is stated of fraud against the corporation in connection with the redemption of the debentures, a “purchase” within the meaning of the statute and rule.2 This plainly follows from the opinion of the Supreme Court in reversing this court’s decision in Superintendent of Insurance v. Bankers Life & Casualty Co., et al., supra.
There the Court held that a good case was stated of fraud under the Act when the seller of bonds was duped into believing that it, the seller, would receive the proceeds of an otherwise legitimate sale.3 It was held sufficient that the seller “suffered an injury as a result of deceptive practices touching its sale of securities as an investor.” See also, Schoenbaum v. Firstbrook, 405 F.2d 215 (2d Cir. 1968) (en banc), cert, denied sub nom. Manley v. Schoenbaum, 395 U.S. 906, 89 S.Ct. 1747, 23 L.Ed.2d 219 (1969); Hooper v. Mountain States Securities Corp., 282 F.2d 195 (5th Cir. 1960), cert, denied, 365 U.S. 814, 81 S.Ct. 695, 5 L.Ed.2d 693 (1961).
Since the plaintiffs have standing under section 10(b) of the Act to assert on behalf of the corporation rights against the defendants arising from one aspect of an alleged scheme, the debenture *738redemption, the court may exercise pendent jurisdiction over other claims on behalf of the corporation against the same defendants arising from other aspects of the same transaction.4 The doctrine of pendent jurisdiction is operative if those additional claims arise under state law; there would be no question of the propriety of this court’s hearing them if they arose under federal law. We need therefore determine neither whether the claimed “premium bribe” taken separately is, as the SEC in its amicus brief contends, another ground for 10(b) jurisdiction nor whether plaintiffs would have standing to assert such a claim divorced from the present action.
The Commission urges us to take this opportunity to review and repudiate the purchaser-seller requirement for 10b-5 actions which we enunciated in Birn-baum v. Newport Steel Corp., 193 F.2d 461 (2d Cir.), cert, denied, 343 U.S. 956, 72 S.Ct. 1051, 96 L.Ed. 1356 (1952), an invitation we declined as recently as our decisions in Levine v. Seilon, Inc., 439 F.2d 328 (2d Cir. 1971) and GAF Corporation v. Milstein, 453 F.2d 721, 722 (2d Cir. 1971). See also, Iroquois Industries, Inc. v. Syracuse China Corp., 417 F.2d 963 (2d Cir. 1969), cert, denied, 399 U.S. 909, 90 S.Ct. 2199, 26 L.Ed.2d 561 (1970). At this stage of the case we see no pressing need for such consideration. We need not at this time, pending full development of the facts on trial, review here either the present limits of Birnbaum or Schoenbaum or the nature or extent of relief which the facts as developed may require. We are satisfied that the case was properly before the district court, that dismissal was error and that remand for further proceedings is required.

. For a more complete statement of the claims see the panel opinion, 453 F.2d 722 (1971).

. Reliance by the defendants on SEC v. Sterling Precision Corp., 393 F.2d 214 (2d Cir. 1968) in contending that there is no purchase here is misplaced. At issue there was the definition of “purchase” within the meaning of § 17(a) (2) of the Investment Company Act of 1940. We have indicated that a broader meaning may be given to the term as used in section 10(b) of the Securities Exchange Act, see, e. g., Levine v. Seilon, Inc., 439 F.2d 328, at 332 (2d Cir. 1971). Rule 10b-5 makes it unlawful “by the use of any means or instrumentality of interstate commerce, or of the mails, or of any facility of any national securities exchange, to engage in any act . which operates- ... as a fraud or deceit upon any person, in connection with the purchase or sale of any security.”
An “equity security” is defined in the Act as “any stock or similar security; or any security convertible, with or without consideration, into such security. . ” A convertible debenture is such a security and by redeeming the debentures here Harvey was acquiring the bondholders’ rights to obtain common stock by conversion and thereby reducing the outstanding rights to interests in the equity securities of the corporation to the same extent as though it had purchased common shares on the open market.

. “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., p. 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 restrietively. 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 comprise 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.”
[Superintendent of Insurance v. Bankers Life & Casualty Co., 404 U.S. 6, at 10, 92 S.Ct. 165, at 168, 30 L.Ed.2d 128.]

. The decision on whether to hear claims under pendent jurisdiction involves two questions: whether the court has “power” to hear the state claims and whether, in its discretion, it ought to do so. The derivation of all claims in this case from the same operative facts makes this an instance in which the court can exercise pendent jurisdiction, under the standard of United Mine Workers v. Gibbs, 383 U.S. 715, 86 S.Ct. 1130, 16 L.Ed.2d 218 (1966). And considerations of judicial economy, fairness to the parties, and convenience, which influence the exercise of discretion, compel the conclusion that all claims ought to be heard in one proceeding. See Leather’s Best, Inc. v. S. S. Mormaclynx, 451 F.2d 800, 809-811 (2d Cir. 1971); Ryan v. J. Walter Thompson Co., 453 F.2d 444, 446 (2d Cir. 1971).