Court Opinion

ID: 9450118
Source: CourtListenerOpinion
Date Created: 2023-08-04 16:35:46.994698+00
Date Added: 2024-06-11T17:32:09.415735
License: Public Domain

FRIENDLY, Circuit Judge
(dissenting) :
I can perceive no principle that would eliminate or even lessen the fiduciary obligations of directors who wish to settle a derivative action wherein they are charged with self-dealing. At least I cannot when, as here, they remain in control of the corporation, its officers, and its files relevant to the merits of the claim and consequently to the providence of the settlement. When they seek to extinguish the corporation’s claim, they are dealing with the entity whose interests have been entrusted to them just as much as in the earlier transaction; I see no reason why their obligation of fair dealing and full disclosure to a court passing on the settlement should be a whit less than their previous duty to disinterested co-directors and to stockholders.
I agree nevertheless that a director thus sued is not bound actively to ferret out information that will promote the case against him or show the improvidence of a settlement to which he has persuaded a stockholder’s lawyer to agree; and that insofar as the plaintiff’s case here hinged upon establishing personal dereliction by Kirby with respect to the settlement hearings, this was not made out. But although the trial was largely conducted on one or the other of these theories, the complaint did not so limit the plaintiff, and on at least one occasion its counsel articulated another course which, in my view, it was entitled to pursue and which might well lead it to victory.
In examining Purcell and seeking to obtain admission of the evidence discussed below, counsel argued that “if Mr. Kirby entrusts the responsibility to some extent of his being a director of Alleghany, if he entrusts some of that responsibility to Mr. Young, then Mr. Kirby cannot avoid accepting the consequences of whatever Mr. Young may have done * * When one of a group of fiduciaries accused of illegal self-dealing conceals from a court facts which pertain to the liability of his associates as well as himself, a settlement so procured is voidable as to all. A partner for whose benefit the facts were concealed can no more preserve a settlement thus obtained than the one who was on the front line. If, as the evidence shows, Young, Kirby and Purcell conspired to make an unlawful appropriation of Alleghany’s investment in IDS Class A stock, which was then challenged by suit, they remained bound to the end. Kirby recognized this rather pointedly when, late in 1959, he sent Young’s widow a copy of counsel’s letter advising him of his enormous potential individual and even more enormous potential joint liability, which Young shared, and implored that she “fully realize how important it is to you and me that there should not be the *339slightest indication of disharmony in our ranks and that absolutely nothing should be done at this time to indicate anything like that.” Kirby had hardly heal’d of Mr. Justice Brandéis’ opinion in Jackson v. Smith, 254 U.S. 586, 41 S.Ct. 200, 65 L.Ed. 418 (1921), but his instinct was sound.
That the diversion of the IDS Class A shares from Alleghany’s treasury was a joint enterprise of Young and Kirby, in which Purcell, like them a director of Al-leghany, joined before its consummation — if indeed he had not been a party to it from its inception — will appear from what is said below. All three were named as defendants in the state court action, Zenn v. Anzalone, wherein stockholders sought damages or rescission; although Kirby had not been served in that action, he had been in a similar action by Zenn in the federal court. All three had an interest in promoting the settlement here attacked. Young and Purcell, but not Kirby, testified at the hearings before the Referee. There was evidence, here excluded, which showed, at minimum, that Young and Purcell permitted the Referee to pass upon the settlement when they should have been aware that crucial and damaging evidence, eagerly sought by an objector and well known to them, was not before him. If the settlement was voidable on that account against these members of the conspiracy, it is no less so against one who chose to remain secluded m Morristown, New Jersey, while his partners carried the heat of the battle in JNew York.
Plaintiff’s discovery in this action found in Alleghany’s files a handwritten letter by Purcell to Young on July 27, 1954, at a time when, as the letter shows, Young was engaged in'Settlement discussions with Pomerantz, general counsel for the plaintiff stockholders in Zenn. Purcell, one of Alleghany’s nominees on the board of IDS, had resigned as a director of Alleghany in March, 1953, to become president and later chairman of IDS, a post which he retained until tfae summer of 1955. With this Purce^ sen^ a letter dated July 26, 1954, from Waag, Vice President and Controller of IDS, to him; Waag’s letter enclosed three schedules. Purcell suggested that Young “note among other things on page 2 of the income account attached to the ‘Comments on Operations’ for December 1950 that Income from Operations, i. e., before taxes or capital transactions, had been projected at $5,-992,168, but turned out to be $8,600,444. This may not be too helpful as Income from Operations in 1949 was only $1,515,-401.” (Emphasis supplied.) One of the schedules reproduced this forecast.
Indeed it would not have been “too helpful.” The projected 1950 income before taxes or capital transactions amounted t0 $20 for each IDS share Young and Kirby acquired for $8.15 from Alleghany jn the exchange transaction.1 Yet their defense to the stockholders’ claim hinged largely on a contention that the jump in IDg. earnings was not foreseeable when they acquired the shares in mid-May, 1950. Waag-S letter stated the 1950 projection “was most likely completed in January of 1950 which would indicate that we anticipated a considerable improvement in our mortgage operations.” 2 In his testimony in this case Purcell admitted having seen the full 1950 projections “early in the year” although not before his return from Europe *340around April 12. .In any event, Purcell’s request to Crabb, President of IDS, on May 10, five days before the exchange took place, for additional copies of the IDS projections showed that at least by this date, copies were in his possession. Since during April Purcell was endeavoring to acquire for himself $125,000 worth of IDS Class A stock in connection with the simultaneous acquisition by Young and Kirby, the likelihood that he paid close attention to the projections as soon as they became available is overwhelming. Purcell’s letter of February 11 to Young and Kirby informing them of the improved earnings projected for the mortgage department showed that Purcell was attentive to whatever predictions were available. Projections were of unusual importance at IDS during this period because of the company’s heavy cash commitments to redeem maturing investment certificates in the next two or three years. As Kirby testified in this case, had the earnings been insufficient to finance their redemption, IDS could have encountered serious financial difficulty. On the other hand, as is invariably true of highly “leveraged” debt-heavy structures, once a sufficient flow of cash was assured to cover these commitments any further increases in operating profits, such as this projection foretold, would predictably cause a dramatic increase in net earnings. The IDS files also yielded a projection using the same figure for 1950 (with a handwritten notation that the estimate of underwriting income was “very conservative”) and showing that for the years 1951-54 consolidated income before capital transactions and income taxes would range from $3,860,300 to $5,265,750. Since Purcell must have been in communication with Young during April and early May, 1950, as to being cut in on the exchange, it would be hard for a trier of the facts to resist the inference that he told the good news to his associate; no one so brilliant and experienced as Young would fail to recognize five years later what advantage would accrue to astute counsel armed with Purcell’s handwritten note and its enclosures.
What happened to Purcell’s note and the enclosures cannot be precisely determined on this record. Two of the schedules attached to Waag’s letter, a retrospective quarterly analysis of income for 1949 and 1950, and a list of the larger items included in commissions and participation project fees for 1950 by quarters, were offered in the Zenn settlement hearings by Pomerantz’s colleague, Haudek, who was advocating the settlement; apparently he had obtained them by inspection of Alleghany’s files. These were in no way damaging to the defendants or the proponents of the settlement since by their very nature they could not have come into existence until after the end of 1950 and the information they divulged could not have been known before that time; indeed, by showing that the greatest jumps in income were in the last three quarters and the most spectacular one in the fourth, they lent some support to the argument that the huge 1950 earnings were manna of whose prospective descent Kirby, Young and Purcell could hardly have been aware. But the seriously damaging schedule, containing the projection of 1950 income, which Waag’s letter said had been prepared in January and surely was available by mid-April, did not find its way into evidence in Zenn.
Responsive to Judge Dawson’s rulings that he would not admit the handwritten note and that he would admit Waag’s letter and the schedules only on proof that these were in the Alleghany files at the time of the settlement hearings, plaintiff’s counsel argued (1) that the discovery of the projection in Alleghany’s files, where Haudek had earlier found the two schedules which had accompanied it, warranted the inference that the entire group of papers had been in Alleghany’s possession at the time of the Zenn hearings, and (2) that the non-production of Purcell’s note, Waag’s letter and the damaging schedule either by Haudek or by Graubard, counsel opposing the settlement, warranted an inference that Al-*341leghany had not included them in the files made available for inspection. The argument seems sound enough. As to the first branch, we have called attention in recent opinions dealing with the tardy discovery of documents to “the evidentiary principle that the subsequent existence of a fact supports the inference of its earlier existence, when the subsequent condition is one which ordinarily would not exist unless it had also existed at the earlier time,” United States v. Consolidated Laundries Corp., 291 F.2d 563, 569 (1961) ; Kyle v. United States, 297 F.2d 507, 511 (1961); this, particularly when reinforced by the earlier finding of two of the schedules in the Alleghany files, was .at least enough to transfer the burden of showing how the missing documents had since come into Alleghany’s possession if they were not there in 1955. The only •other likely possibility would seem to be that they had remained with Young, but that would not have helped since Grau-bard had asked for and supposedly received all such papers in Young’s possession. The second branch of the argument was supported by Pomerantz’s testimony that he had reviewed the available files “very closely,” and that his “best recollection is that we were shown no .statements which contained estimates in futuro,” by Graubard’s testimony thab he could not recall ever having seen a projection for 1950 and that “The probabilities are that I did not see anything which would indicate that the earnings would be so many times the sale of the stock. If I had, I would have introduced it in evidence, had I known,” and by the inherent improbability that a lawyer so able and diligent would have failed to appreciate the significance of the schedule, especially when this was flagged for him by Purcell’s handwritten note and it would have filled the very gap in his proof of which he was acutely aware.
However, I find it unnecessary to decide whether we could properly upset Judge Dawson’s ruling that plaintiff had not sufficiently discharged the burden of showing that at the time of the settlement hearings the portion of the Waag file not offered by Haudek was in the possession of Alleghany or Young and was withheld from the documents made available for inspection. For even that view leaves Young and Purcell knowing or chargeable with knowing that the Referee was deciding without the benefit of evidence which they knew to exist — a full official projection showing the enormous 1950 earnings reliably expected for IDS, which had been known to Purcell and almost certainly to Young before the consummation of the exchange, the importance of which Purcell had sharply brought to Young’s attention before the settlement negotiations, and which they and their counsel, who were also acting for Alleghany, knew to be precisely what the attorneys for the stockholders — Pom-erantz before the settlement and Grau-bard thereafter — had been searching for without result.
Preparatory to the taking of the depositions of Young and of Wallace, Al-leghany’s secretary, in December, 1954, Pomerantz had made a demand for the production of documents from Alleghany, including “(35) All forecasts or budgets concerning IDS and its subsidiaries, prepared by or for the use of Alleghany or IDS and their officers and directors, during the year 1949, the first six months of 1950 and the last six months of 1953,” and Haudek made this demand still more general when the depositions were taken. The quest for projections was continued by Graubard at the hearing before the Referee. He said he wanted “anything bearing upon the earnings of I. D. S. and, therefore, the value of its stock, at the end of 1949, during the Fall of 1949, and the Spring of 1950.” In examining Wallace, he repeated the request, made during the depositions, for “any kind of forecast, both as to the nature of earnings from mortgage operations, as well as any other aspects of the business of I. D. S.” and was told “There are no such documents in Alleghany Corporation’s files, unless we find those various reports we are looking for.” Complaining “that the poor Alleghany files are emaciated, they have been deprived of nourishment with regard to this 1949, 1950 transaction,” Graubard asked for Young’s personal rec*342ords, which as he later stated, counsel for Young made available. Apparently sensing that something was missing, Grau-bard noted in examining Young that he had “had some difficulty in finding the files and reports of Alleghany Corporation in regard to I. D. S. affairs for the period in question, 1949-1950”; this led to a chorus of objections by Pomerantz and Young’s counsel and a ruling by the Referee striking out the offending remark. Later Young assured Graubard that his policy was never to destroy or remove or countenance the destruction or removal of files because he “felt that the first consideration of management was to conduct itself so that it never had anything to destroy . . .” This lofty concept of an officer’s responsibility scarcely comports with permitting the Referee to approve a settlement for a few hundred thousand dollars of a liability for self-dealing ranging into the many millions without the benefit of evidence, which Young knew to be not “too helpful,” relating to a vital element in the case. Of course, Graubard knew IDS had made projections; the point is that he had been given reason to think the record before the Referee contained everything Young and Purcell knew in the spring of 1950, whereas they knew it did not. As proponents of a transaction whereby they would purchase from Alleghany its cause of action against them, Young and Purcell had a duty to see that the Referee had that evidence; court approval of an advantageous bargain granted in ignorance of documents, known to Young and Purcell, showing that they had this optimistic projection in early 1950, no more finally settles the liability of themselves and Kirby than did the stockholders’ approval of the underlying bargain in 1950, similarly procured without disclosure of the projection. Cf. ALI, Restatement of Torts 2d (Tent.Draft No. 10), § 551(2) (a).
Since in such complicated litigation some relevant documents will inevitably be overlooked, the undesirability of reopening judgments demands that judicial approval be final unless the undisclosed evidence is of real importance and not merely cumulative of other evidence that was received. Kirby argues, and my brothers seem to agree, that the whole-matter of the complete IDS projection of 1950 earnings is a tempest in a teapot because the record before the Referee did contain a partial projection of which Young and Kirby admitted knowledge. This was in a letter to them dated February 11, 1950, in which Purcell, before-leaving for a vacation in Europe, gave “a brief report on the present situation in-Investors Diversified Services, Inc. and the accomplishments of the nine months since our acquisition.” The letter included a statement that reported 1949 income would reflect a large accounting adjustment to cure a deficiency in the certificate reserve account accumulated in prior years — one of the serious problems confronting IDS so featured before the Referee — and that “During 1950 the Mortgage Department forecasts, conservatively, $8,315,000 gross income from mortgage operations (not including interest),, with a net, before home office expenses, of $5,720,000.” Kirby then points out that Graubard, in his memorandum opposing confirmation of the Referee’s report by Mr. Justice McGivern, argued that Purcell’s letter “completely explodes the tortured analysis by which the Referee convinced himself that, although defendants, had reason for cautious optimism, they did not foresee the ‘spectacular’ IDS earnings for the year 1950.”
Graubard surely did the best he could with what he had, and one may indeed wonder whether anything short of proof that Young and Kirby had received a gold plated guarantee of IDS’ 1950 earnings would have swayed the Referee, who went out of his way to compliment them on their presentation to the Alleghany stockholders, as to which more below, and concluded that a trial court would give judgment in their favor.3 But there was an enormous difference between a paragraph *343in a general letter, commenting on the prospects of one department of IDS, a paragraph not even noted in the Referee’s report, and proof that shortly before making the settlement, Young and Purcell had been reminded of the existence of an official company forecast in early 1950, covering all departments, which negated any fear that the anticipated quadrupling of income from mortgage operations would be cancelled out and showed instead that this would be enhanced by other divisions.4 There was at least a much greater chance that such evidence, developed as Graubard would have developed it, might have made some impression upon the Referee (who, because of the federal court litigations, did not file his^ report, dealing with a variety of claims of malfeasance, for three years after the hearings), or, if it did not, upon the Supreme Court justice who had appointed him, or, if it did not, that such evidence might have encouraged the objectors to go on to the Appellate Division, or that it might have led Judge Dimock to refuse to lift the federal court injunction that had blocked the settlement.
j cannot agree that when judicial approval of a settlement by a fiduciary has been procured by culpable nondisclosure 0f evidence by a confederate, the test 0f materiality applicable on motiong for a new trial on the ground of newly discovered evidence has any relevance. indeed) in the very deeision cited by tbe majorityj Judge Kaufman carefully distinguished between newly discovered evidence sim/pliciter and the reeantation of a witness, 131 F.Supp. at 120. The ^eg^. sbou]d be more nearly that applied by us in United States v. Consolidated Laundries, supra, 291 F.2d 563,5 or by the New York courts in Matter of Lautz, 128 Misc. 710, 220 N.Y.S. 782 (Surr.Ct., *344Erie Co. 1927); and Boston & Maine R. R. v. Delaware & Hudson Co., 238 App. Div. 191, 196, 264 N.Y.S. 470, 477 (3d Dept.1933) — whether there is any fair basis for thinking the undisclosed evidence might have changed the result. Here the evidence could well have done that.
I say this because, with full appreciation of the dangers of reliance on hindsight, Graubard’s objections were so strong that almost anything more might have sufficed to tip the scales. Although my brothers seem to concede the inequity of the exchange transaction, this scarcely conveys the picture. Alleghany had decided to go into IDS in the spring of 1949, after a most thorough investigation. It picked up 48,225.61 shares of the non-voting Class A stock on the market for $8.15 per share; at the same time it bought some 17,745 shares of the voting stock for around $11. The control block of 85,660 shares of voting common was bought for $20. These prices were paid after a year, 1948, in which IDS had earned $374,355 or little over $1.25 per share. As 1949 wore on, Young and Kirby could not help but realize that Alleghany had made a fine investment, even though they could hardly have foreseen just how fine. By mid-August one of the consultants who had initially surveyed IDS for Al-leghany accurately predicted IDS’ 1949 income would amount to some $1,200,000 to $1,500,000, or more than $5 per share.
This was the background when seven of Alleghany’s ten directors — including four officers, Kirby, Young, Purcell and Anzalone — assembled for a scheduled meeting on December 6, 1949. The agenda had not mentioned that any action with respect to the IDS stock in Alleg-hany’s portfolio was contemplated.6 The minutes recited that the Chairman, Young, “stated that among the securities which had been considered as available to be offered to stockholders in exchange for the Corporation’s outstanding preferred stocks was the company’s holding of 48,225.61 shares of Investors Diversified Services, Inc. Class A Common Stock” but that counsel had advised that no offer of these shares to all stockholders “could be made without registration with the Securities & Exchange Commission which, in view of the size of the holding and the costs and delays incident to registration, would not be worthwhile.” He therefore recommended, in addition to an exchange offer not involving the IDS shares which was being made to all preferred stockholders, a further offer which would give “the officers” of Alleghany the right to exchange holdings of Alleghany preferred stock for the holdings of IDS Class A. His recommendation was that the exchange ratio should “be not less favorable to the Corporation in relation to the respective market prices of the Alleghany Preferred stocks received and the Investors Diversified Services, Inc., stock delivered than the exchange ratios which are accepted by the company pui'suant to the public offer.” Discussion developed some concern over the fact that the current “market” price of the IDS Class A shares had dropped to $5.50 per share — in fact there was no market, as the Referee found; the directors, watchful for Alleghany’s interests to the extent of thinking it might indeed seem peculiar to allow officers to acquire the IDS shares for an amount approximating current earnings, thought Alleghany should at least recover its cost. The resolution accepted Young’s recommendation with the sole change that Alleghany was to get the higher of its cost or the market price of the IDS shares at the time of exchange.
Although it is understandable why registration problems made it impracticable to offer the IDS Class A shares, representing a relatively small investment, to all stockholders of Alleghany, that in no way explains why they had to be offered to anyone. Alleghany had scarcely acquired them after prolonged study, that very year, just in order to have something “available” to exchange for its own px'efex'red stock at the better of cost or the *345■price on a market that was so thin as to he meaningless; its portfolio contained many securities, having a readily ascertainable market value which could be and were used to that end. The company’s ■program of reacquisition of preferred stock had indeed been advantageous to the common stockholders and to preferred stockholders who did not exchange, but there was no crisis demanding that it immediately reacquire 2420 shares of Preferred Series A from Kirby, the same amount from Young, and 10 shares from Anzalone. The non-voting character of these IDS shares was no obstacle to their retention when Alleghany held 90% voting control. It must have been apparent that these shares were peculiarly unsuitable for an exchange offer to preferred .stockholders, particularly to insiders. If IDS had the bright prospects that had led Alleghany to make its investment, all the stockholders should benefit; on the •other hand, if the problems confronting IDS were as serious as Young and Purcell were later to testify, it was scarcely right that the officers of Alleghany, including such an inconspicuous one as Anzalone, •should bear a disproportionate share of the burden. Evidently some such considerations occurred to the draftsman of the resolution, who inserted another reason for the offer, namely, that “it would give the officers who accept the Class A stock of Investors a further incentive to make successful the operations of that company in which Alleghany will continue to hold its large controlling interest.” ■One might suppose that Young’s holdings ■of 10,083 shares of Alleghany Preferred Series A and Kirby’s of 27,858 such shares plus 516,500 common shares would have given a fair degree of incentive, and if Kirby or Anzalone made any contribution to the success of IDS in the years .after the exchange, this does not seem to have been called to the attention of the many tribunals that have been concerned. The Alleghany officer who was truly active in IDS was Purcell, who had brought it to Alleghany’s attention, kept a careful watch over it from the outset, and later became its president and moved his office to its headquarters in Minneapolis. Since Purcell owned no Alleghany preferred, his reward was to come in a different manner. On January 30, 1950, Alle-ghany authorized him to buy $125,000 worth of IDS common stock for his own account at not to exceed $10 per share, and guaranteed him against loss on such purchases. By the date of the Alleghany proxy statement, April 6, 1950, he had picked up 3,828 Class A shares at an average cost of $5,562. Since these purchases had driven the price of IDS Class A from 5 nearly to 10, Alleghany, on April 26, 1950, a week before the stockholders’ meeting, sent out additional proxy material announcing that if Purcell was unable to complete this program for personal participation in Alleghany’s corporate opportunity, Kirby and Young would supply him with the necessary IDS shares, at cost, out of those coming to them under the exchange offer. On May 9, Purcell wrote Young and Kirby, noting that if he “were now to enter the market the price of the stock would probably be driven very high,” a result which “I believe we all agree * * * is undesirable”; he wished to purchase 6,366 shares from each of them at $8.1453 per share, as he subsequently did.
Although at the very least the situation demanded maximum endeavor to insure that Alleghany’s stockholders understood exactly what was afoot,7 the effort was unsuccessful. The Alleghany proxy statement, which sought approval of the exchange, gave no financial information about IDS as a company. With respect to the IDS stock it told that the shares to be offered the officers had cost $8.1453 per share, had a market price of $5.50 at the time of the resolution of December 6, 1949, and had a current market price of $9 bid, $9.75 asked, whereas the voting *346common had been acquired at an average cost of $18.25 per share. Another portion of the proxy statement revealed the arrangement with Purcell and what he had done under it. On this basis, to the uninformed and unalerted stockholders, an exchange of IDS Class A shares that would give Alleghany the higher of cost or market would seem not unattractive, and the whole matter, involving an investment of $400,000, could hardly have appeared momentous. Only the stockholder who might wonder about the unusual disparity in cost between the voting and the non-voting stock would see cause for inquiry. For further information about IDS he would have to turn to Alle-ghany’s Annual Report, mailed to him a fortnight before. If this had escaped the treatment usually given such reports, he would not have learned much. Although he was told that IDS’ 1949 net income was “approximately $1,631,000, compared with $374,335 for 1948,” no attempt was made to translate these totals into per share figures. A stockholder wishing to determine that would either have had to go to a financial manual to learn IDS’ capital structure, or, if he returned to the Alleghany proxy statement, arrive at this figure by converting Alle-ghany’s holdings into the total by first dividing the shares of each class which Alleghany owned by the percentage of its ownership and then adding the quotients — this to be followed by dividing the earnings by the sum so obtained. Granted that this computation is well within the power of the ordinary human mind, one may wonder how many Alleghany stockholders bothered to perform it. How simple it would have been for Alleghany’s management to relieve the stockholders of this necessity by saying that IDS’ 1949 earnings of $1,631,000 were more than $5 per share! And what illumination this would have shed on the succeeding comment that Alleghany regarded its interest in IDS “as a long-term investment,” as to which, because of IDS’ cash requirements, it did not “expect any return on our investment in IDS for a number of years” but considered the “outlook for eventual profits * * * to be unusually promising.” The eventual might have seemed to Alleghany stockholders to be now, at least with respect to the stock acquired at $8.15 per share which the proxy statement, but not the annual report, told them would be exchanged with insiders. And that impression would have been considerably accentuated if Alleghany’s management had vouchsafed the information, available when the additional proxy material was sent out on April 26, that although IDS had lost $223,000 in the first quarter of 1949, its pretax income from recurring operations in the first quarter of 1950 exceeded $1,000,000 and that continuation of that trend would produce 1950 earnings exceeding $15 per share! If all this had been supplemented by proof to the Referee that at the time of the exchange Purcell and Young knew IDS was forecasting even higher earnings, could any rational mind have predicted that a court would decide for the defendants ?
My brothers rightly shrink from a precedent that would make every settlement of a stockholder’s suit the prelude to another in which the proceedings for approval of the settlement would be reexamined at great expense and eífort. I too would regret that although, for reasons sketched below, it might be better if more such suits were tried and fewer settled so long as the procedures with respect to the approval of settlements remain as unsatisfactory as they are. But we would make no such precedent by a reversal in this case. Here we have an unusual situation. After litigation had begun, two of the principal architects and beneficiaries of the self-dealing and the subsequent settlement had their attention dramatically called to the exist-sence of a report, clearly known to one of them and arguably to the other before the exchange, and nevertheless allowed the Referee to proceed to approval, knowing, on the most innocent construction, that this report, although eagerly sought by the objector’s counsel, had not been found by him. Such cases will hopefully be rare; the instances in *347which the corporation or a large stockholder will seek to prosecute them will be rarer still; and the chances of success and consequent reward will not be such as to tempt the typical stockholder plaintiff save in occasional cases where it is as well to have him tempted.
I cannot at all agree with the implication in my brother MOORE’s opinion that standard procedures for the approval of settlements afford sufficient safeguards in the “big” case, or that they did in this one. The plaintiff stockholders or, more realistically, their attorneys have every incentive to accept a settlement that runs into high six figures or more regardless of how strong the claims for much larger amounts may be. The percentage allowance in stockholders’ actions is “reduced as the amount of recovery passes the million dollar mark,” 2 Hornstein, Corporation Law and Practice 253 (1959), see also Hornstein, Legal Therapeutics: The “Salvage” Factor in Counsel Fee Awards, 69 Harv. L.Rev. 658, 657-68 (1956); the income tax also plays a role; and a juicy bird in the hand is worth more than the vision of a much larger one in the bush, attainable only after years of effort not currently compensated and possibly a mirage. Once a settlement is agreed, the attorneys for the plaintiff stockholders link arms with their former adversaries to defend the joint handiwork — as is vividly shown here where the stockholders’ general counsel sometimes opposed Graubard’s efforts to gain information, although the settlement so vigorously defended before the Referee would have produced less than a quarter as much cash for Alleghany, $700,000, as the $3,000,000 ultimately secured through the efforts of the attorneys for the plaintiffs in the federal court litigation, unrelated to the claim here at issue, and Judge Dimoek’s initial refusal to lift the federal injunction. To say that “Through its .representatives, it [Alleghany] elected to settle” is sheer fiction. Most of the independent Alleghany stockholders had no voice in the selection of their “representatives” or ability to evaluate the settlement these “representatives” had accepted for them. I cannot see how the attorneys proposing the settlement were any more “representative” than the attorney opposing it; the stockholders’ true representative was the court, which was allowed to proceed in ignorance of vital information. Alleghany as a corporation never elected to do anything until the very end of 1959, when a directors’ meeting presided over by Kirby approved the settlement. Indeed, the directors did not even provide Alleghany with independent counsel, whose supervision of the file search might have avoided the problem here presented.
This very fact, that directors accused of malfeasance have so much control over the evidence, both documentary and non-documentary, relating to their misdeed, makes it vital for a court of equity to insist upon a high standard with respect to disclosure at settlement hearings and to subject arguments that a breach was not consequential to a most icy scrutiny. All the dynamics conduce to judicial approval of such settlements. Even when there is objection, the changes are rung on the small proportion of the stock owned by the objector whereas a curtain falls on the equally small percentage owned by the plaintiffs, who quietly annex the stock controlled by the directors and that of the inert mass. Perhaps the ultimate solution may be the appointment of government inspectors to investigate and prosecute, as is authorized in England under the Companies Act, 1948, 11 & 12 George 6, c. 38, §§ 164, 165(b) (ii), 168, 169(4), see Gower, Some Contrasts between British and American Corporation Law, 69 Harv.L.Rev. 1369, 1387-88 (1956), or, in the case of corporations trading in whose securities is subject to the Securities and Exchange Act, assignment to the SEC of an advisory role similar to that conferred by Chapter X of the Bankruptcy Act, §§ 172, 173, 222, 247. In the meanwhile, courts should enforce the most exacting standards of good faith on fiduciaries desiring to settle such serious claims of self-dealing as were here alleged. Appellant is right in re*348minding us of Judge Cardozo’s great words, “Uncompromising rigidity has been the attitude of courts of equity when petitioned to undermine the rule of undivided loyalty by the ‘disintegrating erosion’ of particular exceptions.” Meinhard v. Salmon, 249 N.Y. 458, 464, 164 N.E. 545, 62 A.L.R. 1 (1928). I do not believe this teaching is dead in the New York courts; and we have not hitherto demanded a state decision directly in point before enforcing that salutary principle. See Perlman v. Feldmann, 219 F.2d 173, 50 A.L.R.2d 1134 (2 Cir.), cert. denied, 349 U.S. 952, 75 S.Ct. 880, 99 L.Ed. 1277 (1955).
I would therefore reverse the judgment dismissing the complaint and, as defendants should have an opportunity to meet the evidence that was erroneously excluded, remand for further hearing. Since Kirby has regained control of Alleghany, I would instruct the judge to make provision for the continued prosecution of the action free from any control by the present directors.

. Apparently because of the nature of IDS’ business, taxes took a much smaller bite than in the case of the usual corporation. Thus, in 1950, when pre-tax income amounted to $8,628,745, income taxes were only $2,592,000, leaving net income of $6,036,745 — slightly over $20 per share.

. Appellee argues that Waag erred as to the date, since the projection found in the IDS files was dated April 14, 1950. The latter seems to be a somewhat differently organized projection in which the corresponding item for earnings before taxes and non-recurring transactions was $5,641,150, but the addition of earnings of subsidiaries produced a total of $7,-140,850. In any event the Alleghany’s stockholders’ meeting was not held until May 3 and the exchange was not consummated until May 15, 1950.

. It should be remembered that the Referee approved a settlement under which the total cash payment to Alleghany was $1,000,000, $300,000 of which had been *343added to the proposal that Pomerantz had accepted as a result of the efforts of counsel for plaintiffs in the federal court action, Breswick v. Briggs. Although the state court accepted the Referee’s report, Judge Dimock rejected it for failure by the Referee to hear the Breswick plaintiffs “on the question of the settlement value of the whole case and its relation to the value of the additional offers,” and directed further hearings. Kirby, who had not previously testified in any of the proceedings, was scheduled to be the first witness at the reopened hearings; an associate testified that Kirby “looked upon his appearance as a witness with somewhat — with more or less horror, because he had been told by Ireland that Mr. Young had perjured himself in his testimony * * After receiving an opinion from counsel that his potential personal liability on the IDS exchange transaction approximated $22,800,000 and his potential joint liability an additional $39,-350.000, computed on a price of $1,000 per share for tire stock acquired for $8.-15, plus over $70,000,000 for other items, he added to the settlement another $1,-100.000, which he estimated would cost him only $99,000 after taxes; Young’s estate contributed another $900,000. One of the objectors having died and the others being tired out, this was accepted without the further hearing ever being held.

. The directors’ answering memorandum before Mr. Justice McGivern minimized the Purcell letter of February 11 as merely reporting “favorable trends in certain aspects of IDS activity” and touching “only a few of the multitude of problems and activities of the Company.”

. Although the decision in Consolidated Laundries was based upon our duty to insure the fair administration of criminal justice in the federal courts, there are enough similarities between a prosecution and a derivative suit against self-dealing fiduciaries to make the test of materiality in that decision highly pertinent. Both the prosecutor and the director-defendant are charged with the duty of assuring that their adversaries are honestly and fairly treated. Just as a criminal court is entrusted with the protection of defendants from overzealous prosecution, a court passing on the settlement of a derivative action is charged with the protection of the absent shareholders, whose interests may be represented inadequately or not at all by the time a settlement has been negotiated. Where deliberate dereliction on a director’s part has prevented the court from safeguarding the interests entrusted to it, a reasonable possibility that the undisclosed evidence might have led to disapproval or to a substantial increase in a settlement should suffice for reopening.

. The absentees included two lawyers and an investment banker.

. In addition to the fact that the exchange was extremely advantageous to the officers on facts admittedly known, it is exceedingly doubtful whether the resolution (passed by the directors had any legal status under the quorum requirements in Alleghany’s certificate of incorporation; hence only action by the stockholders could give the exchange even formal validity.