Court Opinion

ID: 8885786
Source: CourtListenerOpinion
Date Created: 2022-11-26 21:48:08.180236+00
Date Added: 2024-06-11T17:06:54.510648
License: Public Domain

GODBOLD, Circuit Judge
(concurring in part and dissenting in part).
I agree that the amended complaint, liberally but fairly read, states a 10b-5 claim on behalf of the corporation, as-sertible by the trustee, because it suffi*1249ciently charges a continuing scheme which, from the beginning, was intended to and in fact did operate in the future to deceive and damage the corporation itself and others who predictably would rely, and did rely, upon the bona fides of the issuance of stock to Colonial.
I reach that conclusion by what seems to me the proper approach of trying to discern the extent to which the complaint describes fraudulent and deceptive devices of the type that 10b-5 is designed to reach. This approach appears to me preferable to a conceptualistie conclusion that since all those interested in the corporation had knowledge the corporation was not deceived, and therefore it could have no claim. Equally as unsatisfactory is the opposite approach in which the corporation is considered to be an entity fully independent of its shareholders and directors, and, with the corporate veil not pierced to any extent, the entity is viewed as the victim of deception on February 6, 1964, but with no one around to assert its rights.
In my opinion a 10b-5 claim on behalf of the corporation matured when, and only when, the scheme became effective in the sense that there occurred sales of stock to public shareholders who were deceived by the acts that had occurred on February 6, 1964, or when the corporation incurred obligations to subsequent creditors who relied on the bona fides of the stock issuance. The corporation became a “purchaser” of securities within the meaning of 10b-5 on February 6, 1964, Hooper v. Mountain States, 282 F.2d 195 (5th Cir. 1960). But its status as a purchaser does not alone require the conclusion that it was at that time the victim of a deception in the 10b-5 sense.
The majority opinion is susceptible of the interpretation that a 10b-5 claim of the corporation could arise prior to, indeed regardless of, any deceptive impact of the scheme upon the general public. If that is what is meant, I am not able to agree. As the majority state, the gravamen of a 10b-5 cause of action is deception. And, although generally proscribed by state law, the exchange of overvalued assets for stock of a closely held company, with the consent of all those interested in the company, is a transaction which does not deceive those participants, may never affect anyone other than them, and may not affect even them adversely. In the instant case, however, the continuing scheme, intended to deceive and damage others, is the connecting link to 10b-5, but only when the wrong of February 6, 1964, is changed in character from something that may be either abstract or private into a deceptive device operating upon the public. It is this class of persons, after all, that § 10(b) and Rule 10b-5 were promulgated to protect. See, e. g., Herpich v. Wallace, 430 F.2d 792, 806 (5th Cir. 1970); SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 847-848 (2d Cir. 1968). Arguably, impact upon the public — X and Y, public shareholders, and Z, a relying creditor — is irrelevant to whether the corporate entity is a victim of deception. Nonetheless, I think the contrary conclusion is warranted. See Pettit v. American Stock Exchange, 217 F.Supp. 21, 27-28 (S.D.N.Y. 1963). The significance of the scheme’s public impact is not that the corporation is for the first time deceived but that the continuing misstatements of value which have appeared at all times on its books have changed in character from something significant only to insiders into a deceptive device effectively unleashed upon the public. The risk imposed originally upon the corporation that it might become exposed to the fraud claims of public shareholders and relying creditors becomes the reality of exposure. The inapplicability of 10b-5 prior to this public deception is what requires the majority to pretermit the situations described in its footnote 10.1
*1250Though not without misgivings, I can accept the conclusion that 10b-5 is implicated when outside shareholders are brought in, or subsequent creditors caused to rely, but I must reject any idea that American Southern’s 10b-5 claim was matured by the potentiality on February 6, 1964, or the actuality thereafter, of liability for taxes. What appears to be a very small and innocent nose is a size-able camel, and already in the tent. Every corporation becomes liable for taxes. Corporate tax liability seems to me substantially unrelated to deception in the securities field. To suggest that American Southern’s tax liabilities are relevant for determining if it has a 10b-5 claim invites a general.conclusion that a corporation’s issuance of securities plus fraudulent misstatements plus the in-currence of tax liabilities generates a 10b-5 cause of action on behalf of -the corporation for the misstatements. So significant an expansion in the federal courts’ role in the regulation of corporate mismanagement does not seem to me an objective contemplated by the drafters of the statute and the regulation.

. It seems to me that necessarily they must pretermit also the situation in which the scheme is abandoned the day after the stock is issued and no stock is ever placed in the bands of anyone other than the original promoter group and no subsequent creditors are deceived.