Court Opinion

ID: 9457708
Source: CourtListenerOpinion
Date Created: 2023-08-04 20:30:28.084189+00
Date Added: 2024-06-11T17:35:28.404669
License: Public Domain

*734SMITH, Circuit Judge,
dissenting:
I respectfully dissent.
The majority relies almost exclusively on the recent holding of this court in Superintendent of Insurance v. Bankers Life and Casualty Company, 430 F.2d 355 (2d Cir. 1970), cert, granted, 401 U.S. 973, 91 S.Ct. 1191, 28 L.Ed.2d 321 (1971), in holding that the appellants failed to set forth a prima facie violation of section 10(b) and Rule 10(b) (5). The distinction between that ease and the one at bar appears to me to be clear and obvious. In Bankers Life the Manhattan Casualty Company was a wholly owned subsidiary of Bankers Life and Casualty. Two individuals agreed to purchase all of Manhattan’s stock for $5 million. This stock was paid for with a loan in the same amount which the purchasers secured from the Irving Trust Company. The $5 million loan from Irving Trust was repaid on the same day with the proceeds from the sale of $5 million of U. S. Government Treasury Bills held in the Manhattan portfolio which the purchasers sold as soon as they acquired the stock of Manhattan. Through various transfers the books of Manhattan failed to show the decrease of $5 million in the company’s assets which resulted from the transactions. After the nature of the operation was discovered, the company was placed in liquidation, and the Insurance Commissioner brought a derivative action under the federal securities laws on behalf of Manhattan. This court held that while there was undoubtedly gross fraud involved, it did not constitute a violation of section 10(b) because it involved a misappropriation of company funds which was unrelated to the securities transactions.
The fraud which harmed the plaintiffs consisted of the failure of Swee-ny and his associates to account for the proceeds. There is a structural difference between the sale of the corporation’s bonds at a concededly fair price and the subsequent fraudulent misappropriation of the proceeds received. * * *
The fraud alleged in this case in no way affected either the securities or the investing public. No stockholders were defrauded, no investor injured. The purity of the security transaction and the purity of the trading process were unsullied. There was no danger that the securities sold would be overvalued on reaching the public markets. 430 F.2d at 360-361.
In the present case, on the other hand, the appellants claim that by repurchasing the securities it had originally issued in order to perpetuate Martin’s control position, the appellees depleted the assets of the corporation to the detriment of the company and the remaining shareholders. The bonds bore a rate of interest of 5y2%. At the time and subsequent to the transaction Harvey was concededly borrowing at rates as high as 9% thus clearly reducing the net worth of the company.
The factual setting of the present case is very similar to that presented to this court in Schoenbaum v. Firstbrook, en banc, 405 F.2d 215 (2d Cir. 1968), cert, denied, 395 U.S. 906, 89 S.Ct. 1747, 23 L.Ed.2d 219 (1969). That was a derivative action brought on behalf of the Banff Oil Company, Ltd. against the Aquitaine Corporation which had earlier acquired control of Banff through a tender offer and thereafter designated three of the eight members of Banff’s board of directors. Following the acquisition of the Banff stock by Aquitaine the two companies undertook joint explorations for oil which were soon successful. After the discovery of the oil deposits, but before their public announcement, Banff sold 500,000 shares of its stock to Aquitaine at the then prevailing market price of $1.35 per share. After the discovery became known, the price of the stock rose rapidly to as high as $18 per share. The plaintiffs contended that the sale of this stock to Aquitaine at the time when the success of the explorations was known to the directors of Banff, but not publicly, acted to defraud Banff, since the price was grossly inadequate, and constituted a vi*735olation of the federal securities laws. This court in reversing the district court’s granting of summary judgment for the defendants held that a prima facie violation of section 10(b) and Rule 10(b) (5) had been established. [See, e. g. Ruckle v. Roto American Corporation, 339 F.2d 24, 29 (2d Cir. 1964); Pappas v. Moss, 393 F.2d 865 (3rd Cir. 1964).]
The only distinction that I can see between the present case and Schoenbaum is that here the directors of Harvey, influenced by a conflict of interest and acting to support Martin’s controlling interest, caused the corporation to be a “forced purchaser” rather than a “forced seller.” In each case the corporation sustained damage — in Schoenbaum Banff received inadequate consideration for its stock, where as here Harvey was subjected to a loss of working capital and obliged to pay substantially higher interest rates. Following Schoenbaum, therefore, I would find that the appellants have successfully made out a section 10(b) claim.
Since I am of the view that a section 10(b) violation has been properly alleged, it is necessary to consider the question of whether there was a “purchase or sale” of a security within the meaning of section 10(b) and Rule 10(b) (5). Section 10(b) provides:
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange
(b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.
Rule 10(b) (5) provides:
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails, or of any facility of any national securities exchange,
(1) To employ any device, scheme, or artifice to defraud;
(2) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading or
(3) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.
This court has' consistently given a broad and liberal reading to section 10 (b). As we recently noted in Crane Co. v. Westinghouse Air Brake Company, 419 F.2d 787, 798 (1969), “[t]he purchase-sale requirement must be interpreted so that the broad design [of the statutes] * * * is not frustrated by the use of novel or atypical methods.” Appellees here rely on Judge Friendly’s opinion in S. E. C. v. Sterling Precision Corporation, 393 F.2d 214 (2d Cir. 1968) holding that a redemption of convertible debentures was not a “purchase” within the meaning of section 17(a) of the Investment Company Act of 1940, but rather merely the repayment of a preexisting debt. In reaching this conclusion, however, the court relied primarily on the fact that the 1940 Act used the words “purchase” and “redemption” separately and independently indicating the intent of Congress to define them differently, the legislative history of the Investment Company Act, and the court’s *736view that a contrary interpretation would be inconsistent with other provisions of that statute.
Under the Securities Exchange Act of 1934, however, an “equity security” is defined in section 3(a) (11) as “any stock or similar security; or any security convertible, with or without consideration, into such security. * * * ” This indicates a clear intention on the part of the drafters of the Act to include a convertible debenture within the broad definition of the term “security” as used throughout this statute, rather than considering it solely as a debt instrument. Such an interpretation is in accord with the common sense view of what the transaction in the present case was designed to accomplish. By “redeeming” the bonds here Harvey was buying back the bondholders’ rights to obtain common stock by conversion and thereby reducing the amount of its outstanding common stock in the same way as if it had entered the open market and purchased shares for its treasury. I would find, therefore, the redemption of convertible securities to be a “purchase” within the meaning of the Securities Act of 1934. Such a reading seems most consistent with the clear intent of Congress to give the Commission the broadest control over transactions capable of being abused to the detriment of the investing public. As the Seventh Circuit noted in discussing this question in Dasho v. Susquehanna Corporation, 380 F.2d 262, 266 (7 Cir. 1967):
Our attention is called to Sections 3(a) (13) and 3(a) (14) of the Exchange Act * * * which define the word “purchase” to “include any contract to buy, purchase, or otherwise acquire” and “sale” to “include any contract to sell or otherwise dispose of.” This broad language indicates an intention by Congress that the words “purchase” and “sale” are not limited to transactions ordinarily governed by the commercial law of sales. The purpose is evidently to make control of securities transactions reasonably complete and effective to accomplish the purpose of the legislation.
Before FRIENDLY, Chief Judge, and SMITH, KAUFMAN, HAYS, FEINBERG, MANSFIELD, MULLIGAN, OAKES and TIMBERS, Circuit Judges.*

 Circuit Judges Lumbard and Moore, who were on the original panel, elected not to participate in the consideration of this case in l)ane.