Court Opinion

ID: 8879914
Source: CourtListenerOpinion
Date Created: 2022-11-26 20:15:41.003318+00
Date Added: 2024-06-11T17:06:35.366326
License: Public Domain

HAYS, Circuit Judge
(concurring in part and dissenting in part):
I concur in Judge Lumbard’s distinguished opinion on the issue of jurisdiction.
I am constrained to dissent on the point of the applicability to the facts of this case of the provisions of Section 10(b) and, more particularly, Rule 10b-5.
Defendants are alleged to have caused Banff to sell treasury shares at a price far below the fair price of such shares. In doing so defendants took advantage of their special relationship to Banff by reason of which they knew of Banff’s discovery of extremely valuable oil reserves, — information which was clearly material to the purchase of the securities.
The complaint alleges a scheme to defraud the corporation by transferring corporate property to the corporation’s majority stockholder and to an affiliate of the majority stockholder for a vastly inadequate consideration. My brothers do not absolve the defendants of fraud by calling their action a breach of fiduciary duty. There is no reason for making that distinction since such a breach of fiduciary duty as is here alleged clearly constitutes fraud.
The majority “do not see how Banff’s directors * * * can properly be characterized as participating in a ‘manipulative or deceptive device or contrivance’ in connection with a sale so as to fit within § 10(b) merely because some shareholders now consider the sale price too low.” This statement completely disregards allegations of the complaint which are based upon matters of record and which establish that the treasury stock was sold at a price which did not reflect in any way the value of the recently discovered oil reserves. Whatever reason there may be for denying plaintiffs’ recovery in this case it certainly cannot be because their complaint is deficient in its allegation that Banff was bilked of some millions of dollars by the transactions in question.
Rule 10b-51 makes it unlawful for any person
“(1) to employ any device, scheme, or artifice to defraud” or
“(3) to engage in any act, practice, or course of business which operates * * * as a fraud * * * upon any person, in connection with the purchase or sale of any security.”
The acts in which defendants are alleged to have engaged clearly fall within the literal language of both of these subdivisions of Rule 10b-5.
The purpose of Section 10(b) and Rule 10b-5 is apparent from their language. That purpose is simply to prevent in interstate commerce the perpetration of fraud in connection with the sale of securities.
“Quite obviously the broad purpose of this legislation was to keep the channels of interstate commerce, the mail, and national security exchanges pure from fraudulent schemes, tricks, devices, and all forms of manipulation.” Hooper v. Mountain States Securities Corporation, 282 F.2d 195, 202 (5th Cir. 1960), cert. denied, 365 U.S. 814, 81 S.Ct. 695, 5 L.Ed. 2d 693 (1961).
Reluctance to see the federal courts involved in this broad field cannot justify rejection of a case that comes so clearly within the ambit of the statute as does the case which we are now considering.
The majority believe that the complaint fails to “state a cause of action under § 10(b) because it does not show that the corporation was deceived” since the directors “who were authorized to act on behalf of the corporation in these transactions, were all concededly in full *215possession of the material information” and the knowledge of the directors is to be “imputed to the corporation.”
Endowing a corporation with a fictitious “personality,” so that, for example, it has “knowledge,” is a useful device for the analysis of many problems. But it can also constitute a trap for the unwary when they ascribe reality to the fictions. What the majority is actually saying is that since the directors were the corporation for the purposes of the questioned transactions the corporation must have known what the directors knew, or, in other words, the directors knew what the directors knew. There is, of course, no justification for interposing the corporate fiction between the directors and the minority stockholders who were the victims of the directors’ fraudulent actions. In order to establish fraud it is surely not necessary to show that the directors deceived themselves. It must be enough to show that they deceived the shareholders, the real owners of the property with which the directors were dealing. Deception of the shareholders (with the exception of the majority stockholder which was a party to the transactions) is established by showing that the directors withheld from them information that would have revealed the true value of the treasury stock.
The directors cannot take refuge behind the law permitting the information as to the discovery of the reserves to be withheld for one year. Such a law does not constitute a license to the directors to deal with the property as if no such discovery had been made. To argue to the contrary would be to argue that the directors could give the oil reserves away, as they in fact did in part, by selling the treasury stock at a price which did not reflect the value of the reserves.
What we have here then is a scheme by which the directors of Banff gave to the controlling stockholder2 and an affiliated corporation some millions of dollars worth of the corporation’s property. A plainer case of fraud would be hard to find.
“No one who knows anything about the conduct of corporate enterprise considers that the major stockholder’s withdrawal from the room when a vote is taken amounts to anything more than an empty ceremonial.”

. See Note 8 supra.

. The abstention of the “Aquitaine directors” on the vote for the sale to Aquitaine is hardly worthy of mention. As I said in my dissenting opinion in Alleghany Corporation v. Kirby, 344 F.2d 571 (2d Cir. 1965), cert. dismissed as improvidently granted, 384 U.S. 28, 86 S.Ct. 1250, 16 L.Ed.2d 33f (1966):