International Controls Corp. v. Vesco

MULLIGAN, Circuit Judge

(concurring in part and dissenting in part):

This dissent is limited to the Fairfield Group Appeal covered in Part II of the majority opinion, and in particular to that section thereof which holds that the “purchase or sale” requirement of the Act has been satisfied in this case.

The crucial question here is whether or not some deceptive device or scheme was employed by Vesco and his group “in connection with the purchase or sale of any security” within the meaning of § 10(b) and Rule 10b-5. The theory of plaintiff International Controls Corp. (ICC) is that Vesco, a corporate buccaneer, was intent upon securing for his personal use a Boeing 707, which was owned by Skyways Leasing Corp. and leased to ICC on terms which were distinctly disadvantageous to ICC. In addition it had been redesigned and refurbished at great expense to ICC to satis *1357 fy Vesco’s sybaritic tastes rather than to accomplish the legitimate corporate purposes of ICC. Vesco, who was a major shareholder in ICC and at various times a holder of important corporate positions in the company, is alleged to have wasted corporate assets and generally to have deceived the ICC board of directors. Unquestionably, as the Fair-field Group admits, a complaint of corporate mismanagement in a stockholder derivative action would lie here. Although Mr. Justice Douglas did announce in Superintendent of Ins. v. Bankers Life & Cas. Co., 404 U.S. 6, 12 , 92 S.Ct. 165, 169 , 30 L.Ed.2d 128 (1971), that “Congress by § 10(b) did not seek to regulate transactions which constitute no more than internal corporate mismanagement”, it seems reasonably clear that the existence of internal corporate mismanagement does not insulate fraudulent practices which are induced by a controlling influence to the detriment and loss of a corporation, provided, of course, that the transaction is otherwise within the purview of § 10(b) and Rule 10b-5. See Sehoenbaum v. Firstbrook, 405 F.2d 215 (2d Cir. 1968) (en banc), cert, denied, 395 U.S. 906 , 89 S.Ct. 1747 , 23 L.Ed.2d 219 (1969); Ruc-kle v. Roto American Corp., 339 F.2d 24 (2d Cir. 1964).

The first question is whether or not the fraud practiced was “in connection with” the sale or purchase of securities. The pattern of misbehavior urged is novel and no precedent is adduced to support the proposition that it is connected to a security sale. However, I agree that the statute is to be construed liberally, and not restrictively, where its terms permit flexibility. Superintendent of Ins. v. Bankers Life & Cas. Co., supra, 404 U.S. at 12 , 92 S.Ct. 165 .

Vesco had originally secured the Boeing 707 through Skyways, the wholly-owned subsidiary of Fairfield Aviation Corp. Fairfield Aviation, in turn, was totally owned by ICC. The negotiation of the lease and the transformation of the commercial plane into a luxury air carrier were achieved by Vesco without any sale or purchase of securities. The theory of the complaint here is that, because Vesco, not otherwise a worrisome type, was concerned that the theretofore complacent and amenable board of ICC might prove troublesome, he engineered a series of devious moves to ensure his continuing use of a corporate asset for private pleasure. Fairfield General Corp. was therefore created, and all of the shares of Fairfield Aviation, were transferred to it. A dividend of Fairfield General shares to the stockholders of ICC was then declared by the board of ICC. As a result of these activities, Skyways and the plane came under the control of Vesco and three associates, who made up the board of directors of Fairfield General.

Obviously, the manipulation charged is indeed intricate, and separating the flim from the flam may well prove to be difficult. In any event, whether there exists between the fraud allegedly practiced upon ICC and the spin-off a nexus sufficient to satisfy the “in connection with” requirement of the statute (see Note, The Controlling Influence Standard in Rule 10b-5 Corporate Mismanagement Cases, 86 Harv.L.Rev. 1007, 1010-15 (1973)) presents a question we need not now determine definitively. Since this is an appeal from a preliminary injunction which merely maintains the status quo, with the balance of hardships tipping sharply in ICC’s favor and serious litigable issues presented, there is enough to sustain the injunction without determining the question with finality. See Exxon Corp. v. City of New York, 480 F.2d 460, 464 (2d Cir. 1973) ; Gulf & Western Indus., Inc. v. Great Atlantic & Pacific Tea Co., 476 F.2d 687 (2d Cir. 1973); A. H. Bull Steamship Co. v. National Marine Engineers’ Beneficial Ass’n, 250 F.2d 332, 337 (2d Cir. 1957); American Federation of Musicians v. Stein, 213 F.2d 679 (6th Cir.), cert, denied, 348 U.S. 873 , 75 S.Ct. 108 , 99 L.Ed. 687 (1954); 601 West 26 Corp. v. Solitron Devices, Inc., 291 F.Supp. *1358 882 (S.D.N.Y.1968), aff’d, 420 F.2d 293 (2d Cir. 1969); Garland v. Ruskin, 249 F.Supp. 977, 980 (S.D.N.Y.1965).

A key jurisdictional question remains. Was there a “purchase or sale” of securities here under § 10(b) and Rule 10b-5? The majority, while finding no “purchase or sale” in the exchange of securities between Fairfield Aviation and Fairfield General, finds the spinoff, the stock dividend of Fairfield General shares to the stockholders of ICC, to be such a “purchase or sale” within the 1934 Act and Rule. It is at this point that I respectfully but firmly part company with the majority.

Chief Judge Kaufman candidly admits that there is no precedent for the holding in this case, and, it should be added, the technique adopted by the majority was not even suggested by the appellee or by the SEC in its amicus brief. The majority simply equates purchase and sale with acquisition and disposition of securities, even though no consideration or value or price is involved in the transaction. This is not only unprecedented, but is contrary to the holding of the court in Shaw v. Dreyfus, 172 F.2d 140 (2d Cir.), cert, denied, 337 U.S. 907 , 69 S.Ct. 1048 , 93 L.Ed. 1719 (1949). The question before the court there was whether the receipt of stock rights eon-eededly tantamount to a stock dividend was within the “purchase or sale” definition of the 1934 Act, § 3(a) (13) & (14), 15 U.S.C. § 78c(a)(13) & (14), which is precisely the definitional section involved here. While § 16(b), rather than § 10(b), was the provision allegedly violated in Shaw , the court there, in applying the definition of “purchase or sale,” stated: “The popular or accepted import of words furnishes the general rule for the interpretation of statutes.” Id. at 142 (footnote omitted). The court found that “purchase or sale” means that some price or consideration must be involved in the transaction in shares. Since the popular and accepted meaning of “purchase or sale” still imports consideration, and since there is admittedly no precedent for any § 10(b) construction which would eliminate consideration, I fail to see any basis for a differing interpretation. In fact, it is not so much an interpretation as it is an evisceration. Surely the use of “purchase or sale” was an indication that Congress intended to place certain limitations upon the scope of § 10(b). Congress did not declare that § 10(b) was to apply to all “transactions involving securities” or all “dispositions of securities.” Instead, it chose terms which have had, and still retain, a conceptual significance now abandoned. In effect, the majority is construing “purchase or sale” to include no purchase and no sale. If another definition of the coverage of the Act is to be provided, it must be provided by Congress and certainly not by a panel of this court.

Section 3(a)(13) & (14) of the Act defines “purchase or sale” to include a contract to acquire or dispose of securities. There was here no contract to dispose of or to acquire securities, and there was no sale by ICC or purchase by ICC stockholders. The corporation received nothing in exchange for the dividend and the stockholders paid nothing. If a corporate spin-off of a “portfolio subsidiary” is a purchase or sale simply because it involves a stock transaction or the disposition of securities by a corporation, then a normal corporate stock dividend, a gift of shares or a distribution of securities by a fiduciary can also be found to be a purchase or sale. The majority states that the scope of protection under § 10(b) extends to “those who engage in transactions eventuating in the acquisition or disposition of securities.” If there is to be any limitation upon the cases to which this broad definition may be applied in the future, the majority opinion gives no indication of what the guidelines may be, thus opening the door to future litigation which will require continuing appellate interpretation.

The majority emphasizes that the misbehavior here is the type meant to be proscribed by § 10(b) and that the stat *1359 ute must be read flexibly. 1 Logically, this can only mean that the manipulative and deceptive devices or contrivances referred to in § 10(b) and the further refinement of them in subsections (a), (b) and (c) of Rule 10b-5 should be construed broadly to encompass the myriad schemes of the malevolent and the greedy. See SEC v. Capital Gains Research Bureau, 375 U.S. 180, 195 , 84 S.Ct. 275 , 11 L.Ed.2d 237 (1963). While the Act and the Rule have this substantive fluidity, the fraud alleged must be in connection with a “sale or purchase.” A flexible approach does not permit a court to extend the terms of a statute beyond their fair import.

The protection of the statute and the Rule is extended only to a “seller or purchaser.” This has been the law of this circuit and other circuits 2 since it was announced by Judge Augustus N. Hand of this court in Birnbaum v. Newport Steel Corp., 193 F.2d 461 , cert, denied, 343 U.S. 956 , 72 S.Ct. 1051 , 96 L.Ed. 1356 (1952). This principle was recently reaffirmed in GAF Corp. v. Milstein, 453 F.2d 709, 721 (2d Cir. 1971), cert, denied, 406 U.S. 910 , 92 S.Ct. 1610 , 31 L.Ed.2d 821 (1972), wherein Judge Kaufman noted that this court has steadfastly refused to extend the reach of 10b-5 to give standing to an issuer. While the question of standing has not specifically been raised here, 3 I fear that the decision of the majority may portend the demise of the Birry-baum rule. We found in Birnbaum that Congress has determined that the umbrella of protection is to be extended only to purchasers and sellers in connection with a purchase or sale of securities. Although this rule has been criticized, 4 it serves the salutary purpose of foreclosing limitless liability under § 10(b). See Bradford, Rule 10b-5: The Search for a Limiting Doctrine, 19 Buffalo L.Rev. 205 (1970).

Although Veseo is at best an unsympathetic figure, and his hegira, whether to the Bahamas, Costa Rica or even to Glubbdubdrib, hardly inspires confidence in his character, this is not adequate cause for a panel of this court to rewrite the statute and ignore precedent. “[W]e are not free to adopt a construction that not only strains, but flatly contradicts, the words of the statute.” Reliance Electric Co. v. Emerson Electric Co., 404 U.S. 418, 427 , 92 S.Ct. 596, 601 , 30 L.Ed.2d 575 (1972).

I respectfully dissent.

. It should be noted that in Bankers Life, supra, relied upon by the majority as support for a flexible approach to the Act, there clearly was a sale of securities, since Manhattan Casualty Co., the complaining seller there, sold almost $5,000,000 in bonds. 404 U.S. at 9, 92 S.Ct. 165 .

. See, e. g., Mount Clemens Indus., Inc. v. Bell, 464 F.2d 339 (9th Cir. 1972) ; Herpich v. Wallace, 430 F.2d 792 (5th Cir. 1970) ; Simmons v. Wolfson, 428 F.2d 455 (6th Cir. 1970), cert, denied, 400 U.S. 999 , 91 S.Ct. 459 , 27 L.Ed.2d 450 (1971) ; Kalian v. Rosenstiel, 424 F.2d 161 (3d Cir.), cert, denied, 398 U.S. 950 , 90 S.Ct. 1870 , 26 L.Ed.2d 290 (1970) ; City Nat’l Bank v. Vanderboom, 422 F.2d 221 (8th Cir.), cert, denied, 399 U.S. 905 , 90 S.Ct. 2196 , 26 L.Ed.2d 560 (1970) ; Jensen v. Voyles, 393 F.2d 131 (10th Cir. 1968) ; Dasho v. Susquehanna Corp., 380 F.2d 262 (7th Cir.), cert, denied, 389 U.S. 977 , 88 S.Ct. 480 , 19 L.Ed.2d 470 (1967).

. In this area of the law, the distinction is not always made between the definition of “purchase or sale” for the purpose of determining the coverage of the statute, and the definition of “purchaser or seller” for the purpose of ascertaining who has standing to sue. See SEC v. National Securities, Inc., 393 U.S. 453 , 467 n. 9, 89 S.Ct. 564 , 21 L.Ed .2d 668 (1969) ; Note, SEC, Rule 10b-5 —“In Connection With the Purchase or Sale of Any Security” Restriction: Need for Analytical Precision, 5 Colum. J. of L. & Soc. Prob. 28 (Aug. 1969). Although the decision here relates to the coverage of § 10(b), it may also have implications for the standing doctrine as well.

. See, e. g., Boone & McGowan, Standing to Sue Under SEC Rule 10b-5, 49 Texas L. Rev. 617 (1971) ; Comment, The Purchaser-Seller Rule: An Archaic Tool for Determining Standing Under Rule 10b-5, 56 Geo. L.J. 1177 (1968) ; Comment, The Purchaser-Seller Requirement of Rule 10b-5 Reevaluated, 44 U.CoIo.L.Rev. 151 (1972) ; Comment, The Decline of the Purchaser-Seller Requirement of Rule 10b-5, 14 Vill.L.Rev. 499 (1969).