Respondents Brief — Holt v. Alleghany Corp.

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STaTuTEs INVOLVED

TABLE OF CONTENTS |

QUESTIONS PRESENTED ..................-.c-0-0000+

COUNTER-STATEMENT ........-----00-0-

~ (a) The Murchison: Complaint

II.

IIT.

The Proceedings Below

(b) The background of the Complaint ....

(d) The decisions below -....cc.s.cccsssccsseelecce:-

(ce) The present petitioners enter ....... a

(f) The scope of the present petition ......

weaeee

The Background of the 1949-50 Exchange ....

(a) Alleghany’s quest for fiscal stability

(b) The ten-year capitalization program

(ce) The exchange programs of 1949.........

Alleghany’s “Investment in IDS «0.00.02...

(a) The nature of IDS’ business piiceamnaediel

(b) The two camps at Alleghany .

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(a) Post-acquisition dev elopments at IDS .

(i) The favorable factors .2................

(ii): The unfavorable factors...

saree

(iii) The general outlook at Alleghany

(e) Alleghany hedges its” ‘Position in I

IE debicccciennoeindsaiiiinciicelieiidbiie anemeeee

PAGE

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IX.

(f) The necessity for a private offering ......

(g) The exchange is authorized :

(h) The market- in IDS—December 1949

through May 1950 .......

(i) The market: in IDS—June 1950 ‘through |

December 1964 .0...0..000....

Zenn v. Anzalone (Sup. Ct. N. Y. Co. Index

No. 7244/1954) sehianeineaicaieteiadicnibanisiiamailamiaaiails

(a) The first cause of action

(b) The second through eighth causes of action i

Zenn v. Anzalone (federal)

The Initial Settlement in Zenn

+ oe cseanioansicaiiedan

The Zenn Hearings

(a) The evidence before the Referee sueaanaain

(b) The Projection evidence before the’ Zenn

Referee .....

(i) exhibits before the Zenn Referee

(ii) testimony before the Zenn Referee

The Referee’s Report in Zenn

The New York Supreme Court Confirmation

of the Referee’s “Report and: Approval of the —

« Settlement

— (a) The submission to the New York Supreme

iii

| PAGE

X. Breswick v. Briggs (S. D.N.Y. Civil Action —

No. 86-371)... tia . 45

XI. The Breswick Injunction of October 27, 1955,

and its effect on the Zenn Proceeding = Shicinenen’ "45

XII. Judge . Dimock’s © Rejection of the. Special

Master’s Report in Breswick, the Negotiation

of Kirby’s Separate Zenn Settlement and Con- _¢ )

sent Vacatur of the Breswick Injunction ........ 47

‘(a) The order af Judge Dimock .... . «2.

(b) The negotiation of. Kirby’s “separate

settlement” 47

(d) The separate Kirby judgment -............ 50

XIII. The Issues Presented and Tried ‘Before the

District Court in the Present IE sciscintchiesinen 51

(a) Pre-Trial development of the issues ........ ” §2

XIV. The Findings and Conclusions of the Dis-

trict Court ..... | : 4)

XV.. The Decision of the Court of Appeals ill 57

(a) The majority opinion 58

(b) The concurring opinion ata

(ec) The dissenting opinion ....... a. , 60

XVI. The En Banc Decision of the Court of Appeals 61

SUMMARY OF » ARGUMENT . i | 62

ARGUMENT jotesinaleien 7 a? 2

Introduction .......... an : . eae ae

Pornt I—The record oy findings below are conclu-

- give that there was no failure on. Kirby’s part in

Zenn to adduce all material facts within his know-

ledge or possession. The questions raised by peti-

tioners are therefore not reached ..

(1) “The Waag Correspondence” ....ccsccscceneeeeeee

(2) “The Projections and Actuarial Studies” >... °

(3) “The Stiver Reports” catia siotihieieiepeailicadalapat

(4) “The Monthly Reports”

SR SST EE OT

Point Il—Petitioner’s assertion of a new claim

’ PAGE .

against Kirby based on alleged fraud by Young ©

and Purcell, which was neither alleged nor tried

below, i is precluded by the rule against raising new

issues on ‘appeal- and violates basic principles of

procedural fairness .....................

Pornt I1I—There is nothing to indicate any sort of

conspiracy or joint action among Young, Purcell

and Kirby in the Zenn settlement. The record is

all to the contrary. There is, therefore, no ground:

for vacating the Zenn judgment -as to Kirby on .

account of conduct of Young and Purcell -...............

A. Kirby had a right to rely upon the finality of

his separate judgment in Zenn. The “partner-

_ ship” theory has no basis in this record .......... |

B. Neither the record nor the law support a claim

based on conspiracy or joint action ...........:......

1.. There is no claim, proof or finding in this

_ record of any conspiracy or co-fiduciary

relationship among Young, Purcell and:

‘Kirby in the settlement of Zenn ..................

(a): There is no basis for asserting that

100

102

Young and Purcell were Kirby’s agents .

during the Zenn settlement proceed-

ings... : :

: . | PAGE

(b) There. is no basis for asserting that

aa : Young, Purcell and Kirby acted as co-

fiduciary for Alleghany in the Zenn

settlement proceedings 104.

independently in making the. men set-

tlement attacked here .................2..-..-.--- 105

2. There is no basis in law for vacating the

Zenn judgment as to Kirby. on account of

alleged fraud by Young and Pureell ............ 108

Porst IV—Since the “concealed” documents were

made available in Zenn by Young and Purcell and

were, in any event, cumulative, Petitioners’ ques-

tions.are not reached int 111

A. Evidence not mentioned by petitioners, and

“not discussed by the dissent, shows that

Young and Purcell, acting in good faith,

revealed their receipt of IDS projections in

1950 and made them available to Zenn counsel 113

B. The documents claimed to have been withheld .

by Young and Purcell were cumulative ............ 125

(1) “The Waag Correspondence” | 125

(2) “The Projections and Actuarial Studies” 129

(i) The Froggatt & Co. actuarial report,

Ex. 220 129 ,

| (ii) IDS 1949 income . projections, Exs.

243, 244 . 129

(iii) IDS° 1950 five-year income projec- . ,

‘tion, Ex. 245° id. 131°

(iv) IDS 1950 income projection by

months, Ex. 246 id. ) 134

(3) “The Stiver reports” om - -195 -

(4) “The monthly reports” ne > yl

_ (5) “Young’s and Pureell’s testimony” ............ 136

C. Summary -.. , | 137

Point V—No need is shown for a rule requiring a

defendant to search out’ and volunteer evidence,

PAGE

since (1) the case is based on déliberate deceit and -

(2) adequate remedies and sanctions are available

without such a rule. In such situations, this Court

‘normally remits the parties to their . remedies

under state law .....

A. If this case is based on wrosgtel intent, guilty

knowledge and deliberate concealment, a spe-

cial rule is not required ..

B.. New York’s liberal discovery rules ...........- co,

Cc. New York enforcement procedures |

D. ‘The New York court which approved the Zenn

settlement offers the more complete remedy

and the more appropriate forum for. peti-

tioners’ complaint

EK. The adequacy of Petitioners’ remedy requires

the dismissal of the writ. of certiorari —.2.....

Point VI—Without further legislation, Section 14(a)

of. the Securities Exchange Act does not measure

(a) Kirby’s burden of proffering evidence in Zenn

or (b) the standard for determining whether the

Zenn judgment can be‘collaterally attacked -...:.....

A. The question was not raised or passed upon

below and should not be considered

_ B. The bearing of section 14(a) of the Securities

- -Exchange Act was considered in Zenn. No

appeal from that judgment was pursued here.

The Zenn adjudication precludes consideration

‘of the issue now ......

C. Petitioners’ theory cannot be drawn frou the

--purpose, language: or history of the Securities

“Exchange Act .....................

(1) The petitioners’ attempt to apply Section

14(a) to the faets of this case 3

140

141

142

145 .

146

148

151

154

155

158

| (2) The plan of the federal securities laws

does not support petitioners

(3) Neither the text nor the legislative history

of Section 14(a) supports petitioners ........

D. Petitioners’ present rule would require amend-

: ment of the present statutory scheme ................

E. The arguments in Point I of. petitioners’. brief

-rest on a misconstruction of Zenn, and on

inapposite cases

(1) Petitioners’ characterization of Zenn ........

(2) Petitioners rely. on cases ‘involving direct

-appeals from decisions construing appli-

eable federal law. None deal with the

problem of this case

PAGE .

159

164

168

171

een

173

(3) Petitioners’ reliance on cases dealing with |

classic and aggravated instances of what

has come. to be called “extrinsie fraud” ....

F. Petitioners’ position ‘YTaises constitutional

doubts which should not be considered in. the

absence of clear congressional ERE

Port VII—Since this collateral attack is not gov- |

_ erned by the Securities Exchange Act, Erie R. R.

v. Tompkins requires that New York law be fol-

lowed in determining whether the New York judg- *

ment should be set aside for fraud. The attack

does not meet the requirements of New York law

‘A. The rule to be applied. should not be regarded

as one of pleading, practice or “housekeeping,”

179

but as going to the delineation of rights, and —

therefore within the policy of Erie RR v.

Tompkins

‘179

| PAGE

B. The policy of New York is to limit the avail- —

ability of collateral attack. Under the appli-

cable rules of New York law, and. equally

under the.federal authorities before Erie, peti-

tioners’ case for collateral attack fails ............ 188

- C. Where the construction of state law is in issue,

this Court normally defers to the construction

of the lower. courts .......... ae . 192

Point VITI_Petitioners’ einai feder al rule is

' unfair, impractical and would obstruct termination .

_ of costly and —— stockholder litigation ......... 192

Conclusion ne forte 9) igh oe eae ae 199

TABLE OF CASES

‘Adams v. Rockefeller, S.D.N.Y. Index No. E- 13-363, ;

Opinion No. 138, Dec..28, 1920 ............. 198

Aldrich v. Aldrich, 378 U. S. 540 (1964) 2. 183

Alexander v. Hillman, 296 U. S. 222, 23in. (1935) 35, 92

Alleghany Corp. Secs., 1.C.C. Fin. Docket No.. 17937

' (Nev. 20, 1952),. LC.C, Fin. Docket No. 18162 (July:

17, 1953), 1.C.C. Fin. Docket No. 18866 (May 26,

1955) seshiniinispiliplatulintis 10

Alleghany Corp. v.: Breswick &é Co., 353, U. S. 151,

- Sf een ijuipeeentt loeb deat hicmaaibeaadestibe cs siereatetads _ 10

_ Matter of Alleghany Corp.; 37 S.E.C. 424, 426 (1956) 10

Allied Freightways, Inc. v. Choflin, 325 Mass. 630,

Pk: Tile GUE Wy BE COD caret ciipesecete reece 110

American Air Export & Import Co. v. O’Neill, 221

. FP. 3a Gee, Sol CAC, Cir. 1956) —....................... 97

American Railway Express Co..v. Levee, 362 U. 8S.

aaa tins aeaaiactnaie deinen oe ncoasicciniechencenanies 182 .

American Surety Co. v. Baldwin, 51 F. 2d 596 (D. Ida.

1981), aff’d 287 U. S. 156 (1982) eeevnceene 154, 184, 190

PAGE

Anchor Wire Corp. v. Borst, 277 App. Div. 728,102 .

N.Y.S. 2 871 (1st Dep't 1951). cocccccccsccccrneeonc 190

Angel v. wianatiecenes 330 U. S. 183 (1947) Sei calaneniginsas 157 ©

In re Bancroft; 195 Mise. 208, 209, 88. N.Y.S. 2d 804,

’ 806 (Chautauqua Co. Ct. 1949), appeal dismissed,

276 App. Div. 485, 96 sila 2d 109 (4th we 7

Te set EER TREN NERC ET 148

Bell v. Tug Strike, 332 F. 2d 330 (4th Cir. 1964) ae 163°

_ Bernhardt v. Pol ygraphic Co., 350 U. S. 198 (1956) ... 171,

176, 178, 180, 185, 192 .

Bigelow v. Old Dominion Copper Mining & Smelting

5 Mg SI el I airnntrcstettetenicsccttrnnnneeespenmns 181

Blau v. Lehman, 368 U. 8S. 413 ID en, 268

In re re Board of Directors of Automatic Chain Co., —

'134 App: Div. 863,119 N. Y. Supp. 379 (4th Dep't”

1909), aff’d 198 N. os See CEE) 148

_ Boese v. King, 108 U. S. 379, 386 (1883) 2o..2.-eoeeeo--- 151

Bonnelle v. Follo, 84 N.Y.S. 2d 466 (Sup. Ct.. Kings °

Co. 1948), modified 90 N.Y.S. 2d 244 - ie Dep't’ ..

I edie cod Gadel act alates davtibei lA csbcaediieaineesnnchasseiasesabantnninncnin 148

; Bookbinder v. Chase Nat'l Bank,.N.Y.L.J. June 23,

I cil alte nile nisshenes . 3

. Bosworth v. Allen, 168 N. Y. 157, 165- 167, 61 N.E.

a i, 153

Breswick & Co. v. Briggs, 135 F. sail 397 (SDN. : #

Sanne REE OLS APO RN 105, 194

Breswick & Co. v. United stacuie 75 S. Ct. 912, 916,

RII) aie vensnsesnninsiemnpereadensenenonts 10

Breswick & Co. v. ‘United, States, 134 F. Supp.

132, 135-36- (S.D.N.Y. 1955); 138 F.. Supp. 123

(S. D. N.Y. 1956), rev’d sub nom. ‘Alleghany Corp. v.

Breswick & Co., 353 U. 8. 151, (1957) -..... 10 ©

-~ Breswick & Co. v. United States;'156 F. Supp. 227,

- ' (229 (S.D.N.Y. 1957), rev'd per curiam sub nom.

Alleghany Corp. v. Breswick : é Co., 355 U.S.

415 — aes nansenssannnnsossin

PAGE ~

Breswick & Co. v. United States, 160 F. Supp. 754

CO en. INNER. aceecisissdectansistenscabbsivisdlasipclinnpcginuniaakonbaeeadecs

. Briggs v. Spaulding, 141 U. S. 132, 147, 159 (1891) ..... 110

. Broderick’s Will, 21° Wall. 503 (1874) ........,.. 147

Burbrooke Mfg. Co. v. St. George Textile Corp.,

\. 283 App. Div. 640, 129 N.Y.S. 2d 588 (ist Dep’t

| SEEE coeecienendaane 190.

Byrd v. Blue Ridge Rural Electric Cooperative Inc.,

a U, S. 525 (1958) ........ seas 181

Capital Service Inc. v. National Labor Relations

ene: SURE UT. FS, GN CED snessiniinitonsesmponesnnipsantons 186 -

Caterpillar ‘Tractor -Go. v. ‘International Harvester

Co., 120 F. 2d 82, 85-86 (3rd Cir. 1941) 02... 182

Likeraer v. Transiton Electronic: Corp., 221 F. Supp.

48, 55 (D. Mass. 1963) ........... 198 .

Chenu v. Board of Trustees, 12 App. Div. 2d 422,

212 N.Y.S. 2d 818 (1st Dep’t 1961), aff’d 11 N. Y.

2d 688, 225 N.Y.S. 2d 760 (1962), cert. sani doce

370 U. S. 910 (1962) .. Jicnbaapdadiaehbiatiaaivisaiteliabaste 191

_Chicot Drainage District v. Baxter ‘State Bank, 308

aie See eres rote neccvesee 4, 185

Cities Service Oil Co. v. Dunlap, 308 U. S. 208 (1939) 182- os

Cochran v. M. & T. Transp. Co., ‘12 ¥. 2d 2A1 (ist .

Cir. 1940) seca aa

Coe v. Coe, 334 U. S. 378 (1948) Ss: panama. ~ 183

Cohen v. Beneficial Indus. Loan Corp., 337 U. S. 541 |

CIID scncninntebtacctincsonscunnacnainetenscaalebeiduaseiapubbehbrine 161, 181, 186

Colburn v. Grant, 181 U. S. 601 (1901) ceeeecceweeceeecee U1

Commercial Credit Corp. v. Sorgel, 274 F. 2d 449, ae

453 (5th Cir. 1960), cert.. dened, 364 U. S. 834

(1960) sie iadalaeldeleeeilceasvncadesaraiclid desis baetaiidicliigatteiaaets 81

Comstock v. Group of ‘Hastitutionnl Investors, 335.

U, S. 211, 214 (1948) ............... oie wae

Cooley v. Board of Wardens, 53 U. 8. 299 en = . 161,

PAGE

- Corash. v. Feons Corp.,; N. Y.LJ., Mar. 2, sie p. 830,

col. 6 (Sup. Ct., N. -Y. Co.) . ioe 153, 198.

-Craemer v. Washington, 168 U. S, 124 (1897) Rete 35, 92

Crouse v. McVickar, 207 N. » 4 213, 100 N. E. 697

(1912). ae ...-43, 150, 154, 191

Curb & Gutter Dist. No. 37 v. Parrish, 110 F.2d

902, 907-09 (8th Cir. 1940) - . 182

Dann v. Studebaker, Packard Corp., 288 F. 2d 201

(6th Cir. 1961) ... ) tn ee

Dayis v. Wechsler, 263 U. S. 22 (1993) 122

De. la Rama v.;:De la Rama, 241 U. S. 154, 157

. (Holmes, J. 1916) | co ae

DeSylva v. Ballentine; 351 U.S. 570 (1956) eeeecnwene 163

- Dice v. Akron C..d Y. R.R., 342 U. S. 359 (1952) ....173, 182

Duigan v. United States, 274 U. S. 195, 200 (1927) .. » 155 -

— Durfee v. Duke, 375. U. S. 106 (1963). revere 156, 157,168,

5 tek Sana a ae

Earll v. Picken, 113 F. 24 150 (D.C. Cir.1940) 192

Economy Filling Station v. Humble Oil & Refining |

Co., 3.S.W. 2d 832, 834 (Tex. Civ. App. 1928) .... 110

Erbe v. Lincoln Rochester Trust Co., 3 N. Y. 2d 321, |

(144 N.E. 2d 629 (1962), reversing .2 App. ‘Div. od”

- 242, 154 N.Y.S. 2d 179 (4th Dep’t 1956), which

aff'd 1 Mise. 2d 413, 145 N.YS.. 2d 788 (Sup. Ct.

Monroe Co. 1955) ~...:...........-.-... sid 192

Erie R.R, v. Tompkins, 304 U. S. (1938) ‘ada eibaiaiinal 5, 62,

' 70, 168, 169, 177, 178, 179, 180, 186, 190

_Errion v. Connell, 236 F: 2d 447, 454 (9th Cir. 1956) ° 163

_Etter.v. Early Foundry Co., 164 Mise. 88, 298 N. Y.

Supp. 208 (Sup. Ct. Chemung Co. 1987) 149

Feldman v. Pennroad Corp., 155 F. 2d 773 (3rd |

Cir.), cert. denied, 329 U. S. 808 (1946) ............ 182, 185

Ferguson v.°Wachs, 96 F. 2d 910 7th Cir.

1938). .. 7 3 sasecneneoneneneinen ..175, 191

xii

con: . PAGE

Fidelity Storage Co. v. Urice, 12 F. 2d 143 (C.. AL.

BE TD. ereietesticncreectsnnvicicinccninmmnioncenninnianningageliaanmnan 191

. Fisher v. Graves, 80 Fed. 590 (S.D.NLY. 1897) anaes 110

_ Fiske v. Buder, 125 F. 2d 841 (8th Cir, 1942) ........ 175, 191

Flanson Realty Corp. v. Workers’ Unity House, 229

_ App. Div. 179, 241 N. Y. Supp. 335 (1st. Dep’t

GSD) raaserescovecsnvssccsssenseennsensesesccssceennncenneceancessonesn iciidaasiiin ~ ee

Fuhrmann v. Fanroth, 254 N.Y, 479 (1980)° ...2....... 191

Furman v. Furman, 153 N. Y. 309, 314 (1897) ...2..148, 149

- Garrett’ v. Moore-McCormack Co., 317 U. 8S. 239,

IID catericetinctaenssceycnveannnninnlaiianiniatinnitatncsiiditeninnnasiniininns 173, 174,182,

' Gerdes v. Reynolds, 28 N.Y.S: 2d 622, 662 (Sup. Ct.

oe 4: ) lol See 110

Gerdes v. Reynolds, 30 N.Y.S. 2d 755, 733 (S. Ct. oe

N. Y. Co. 1941) ...... 153

Giordanello v. United States, 357 U, S. 480 (1958) 96

’ Graham v. Boston H. & E. R.R., 118 U. S. 161 (1886) 146

Graver v. Faurot, 76 Fed. 257 (7th Cir. 1896) ............ 193

Graver Mfg. v. Linde Co., 336 U. S. 271, 275 (1949), ;

aff'd on rehearing, 339 U: S. 605 (1950) snetiinlaneneninnnn 112

Griffith v. Bank of New York, 147 F. 2d 899 (2d Cir.

_' 1945), cert. denied, 325 U. S. 874 (1945) ............ 179, 183

' Grubb v. Public Utilities Commission, 281 U. 8. 470

ERIE schscenicscaticnabesiassitnenionabaintidaesalies —

"Guaranty Trust Co. v. York, 326 U. S. 99 (1955) 180,

. 181, 182

Hablas v. Armour é Co., 270. F. 2d 71, Ms (8th Cir. ~

+ — EIR Sineneiahbcetteishibinmegiiaiaeimmeanich 81

In re Halstead, 44 Mise. 176, 185, 89 N. Y. Supp. 806,

811 (Surr. Ct. Dutchess Co. 1904), aff'd 184 N.Y.

es Sk es Ie CE Rerihtersitnterntninniniaticintinitteiginns 111

Hanna v. Plummer, 380 U. 8. 460, 471-72. (1965) 179,

| 180, 181

SORT SE Re PPT RR a ET eee TR YE AA ate Sh ONS: Snreiee RaN neinae ee

: .

xiii

| ! ' PAGE

Hanna Mining Co. v. District 2, M.E.B.A., —— U.S.

96°: Ct, BOG (195) a cacnnscreansrenneaeneeceeseneneee 163,169

Hatch: v. Central Nat'l Bank, 78 N. Y. 487 (1879) ..... 148

Hazel-Atlas Glass Co. v. Hartford Empire ‘Co., 322

Irving Trust Co. v. Deutsch, 73 F. 2d 121, 125 (2d.

Cire 1934), cert. denied 294 U. 8. 708, 708-709 (1935) . 110

Kalmanash v. Smith, N.Y.L.J., May 13, _— p. 1869,

col. 6 (Sup. Ct., N. Y. Co.) 153

Kauder v. United Board & Carton Corn. 199 F.

TE Te GN cite 189

Hewitt v. Hewitt, 17 F. 2d 716 (9th Cir. 1927) ........... 191

-. Hogan v. Supreme Court, 295 N. Y. 92, 96, 65 N.B.

Se OR, TE BEND seers ncinieaias 148

Holland v. Amer. Founders Life Ins. Co., 151 Colo.

69, 376 P. 2d 162, 165-66 (1962) -.--nn---eee-neeoons 110

Huszar v. Cincinnati Chemical Works, 172 F. 2d 6,

11 (6th Cir. 1949) ....... ansthasaiaanmaenmmniaaininid 81

- Jackson v. Smith, 254 U. S. 586, 589 (1921) nnn 110

Jacobowit: v. Herson, 268 N. Y. 130 (1935) iidibacliatal 190

Jersawit v. Kaltenbach, 253 App. Div. .265, 268, 1 |

N; Y. S. 24 756,759 (1st Dep't 1988) .cccscseeoee eon 110

~ J. I. Case Co. v. Borak, 377 U. S. 426 (1964) ........ 156, 157,

: 162, 164

' Johnson v. Muelberger, 340 U. S. 581 (1951) ............ 183

Kalb v. Feuerstein, 308 U. S. 433 (1940)... 161

Supp. 420, 421 (S.D.N.Y. 1961) 156

Klein v. Fairberg, 243 App. Div. 609, 276 N. Y. Supp. .

_ 347 (2d Dep’t 1935) = 148

Lackawanna Pants Mfg. Co. v. Wiseman, 133 F. 24

482 (6th Cir. 1943) ...... ae

Ladd v. Stevenson, 112 N. Y. 395, 332 (1889) sodiannni 148

Lawn v. United States, 355: U. S. 339, 362 n. 16

(1988) peeennnnnnnnnnnnnnen 1B

Xiv

PAGE

Lonsdale v. Speyer, 249 App. Div. 133, 141, 291

N. ¥. Supp. 495, 505 (Ist Dep’t 1986) .................. 110

_ Loonsk Bros. v. Mednick, 246 App. Div.. 464, 285 .

N. Y. Supp. 801 (4th Dep't SORTED: iscsnesiliiins 149 .

McCarthy v. Port of N.Y. Authority, 21 App. Div.

2d 125, 248 N.Y.S. 24.713 (1st Dep’t 1964) 2000... 149

McCullough v. Kammerer Corp., 323 U. 8S. 327

CRDUB) ncccinscicecesssisnipste aaaeosinclaiateigmanaatiae anne 154

Meinhard v. Salmon, 249 N. Y. 458, 164 N.E. 545

eRe Renee aie Sara s seosee..40, 153

Mercoid Corp. . Mid-Continent Investment Co.,

320 U. S. 661 (1944) siandianinitaain selbideieseadil 186

‘Momand v. Universal Film Exchange, 72 F. Supp.

469, 475 (D. Mass. 1947), aff'd, 172 F. 2d 37 (1st

Cir) 1948), cert. de nied, 336 U. 8. 967 (1949) ........ 109

ee Fire Ins. Co. v. Thompeon, 281 U. S. 331,

BOG CETIGD scinssntssmiincneene 35, 92

_ NERB vy. Truitt Mfg. Co., 351 U. S..149, 151 (1956) 96

Northern Securities Co. v. United States, 193 U. S.

BF * CTE D * snncsrnserinecietinnnoenaa —

Nougue-v. Clapp, 101 U.S. 551 (1879) Rs ‘147

O’Boyle v. Bevil, 259 F. 2d 506, 511- 12 (5th Cir.

DOG) acecseerssainssssspnessessssinnnnscnsssantiinininiouannelanaaseaienninanital 182

O'Neill v. Maytag, 339 F. 2d 764 (2d Cir. 1964) ........ 168

Oppenheimer v. Szekeres, 18 App. Div. 2d 627, 628,

235 N.Y.S. 2d 722° 724 (1st Dep’t 1962) -..........0...... 110

Ormiston v. Olcott, 84 N. Y. 339, 346 (1881) .............. ‘111

Otis & Co. v. Pennsylvania R. Co., 57 F. Supp. 680

‘(E. D. Ba. SOON sndencasttnidndcueien 194.

Palmer v. Hoffman, 318 U. S. 109, 116-17 (1943) ....... 182

Pan American Petroleum Corp. v. Superior Court,

366 U. S. 656 (1961) ...158, 170, 184

. Sf ew hed | ; en 6 | ei? a

edie HORE REI nr ioe ph inact tieaaegbeseabcuied Reena NKR! SAY Seen ANN: de eatidnatiges! ,

PAGE

Patent € Licensing Corp. v. serves 188 F. 2d. 522, |

Oe Ae ia 97

Pennsylvania v. Williams, 294 U. S. 176 (1935) .......... 148 -

People v. Equitable Life Assur. Soc’y, 124 App.

Div. 714, 71, 109 N. Y. Poe 453, 467 (ist Dep’t

SPD - “saccesinnctlbenletiiseeseadcieeiserialpdt Mei olathe ens ein 110

Perrine v. Penaread Corp., 28 Del.-Ch. 342, 43 A.

2d 721 (1945), aff'd 47 A. 2d 479 (Del. 1946),

cert. denied, 329 U. S.' 808 CO ei 198

Phillips Petroleum Co. v. Jenkins, 91 F. 2d 183, ,

"GN MI I I seisibinincattiet ce tk 191

Pick v. G.M. Corp., 299 U. S. 3 (1936) oc 79, 113

Pickens v. Merriam, 242 Fed. 363 (9th Cir: 1917) ...... 192

Posen v. Cowdin, N.Y.L.J., June 3, 1943, p. 2164,

UI accesieaeieisinpelboiesicmieininboegesisiliailiceaseds te laa ee! 153, 198

Potter v. United States, 107 U. S. 126, 131 (1882) ...... 97

Regents v. Carroll, 338 U. S. 586. (1950) once. 163

Reiter ‘v. Universal Marion Corp., 299 F. 2d 449

ties a, ene ee ...176, 182, 187

Rice v. Sante Fe Elevator Corp., 331 U.S. 218 (1947) 161

River Plate &. Brazil Conferences v. Pressed Steel

Car Co., 227 F. 2d 60, 63 (2d Cir. 1955) on. 97

Roche v. McDonald, 275 U. S. 449 (1928) .................. 183

Rogers v. Hill, 34 F. Supp. 358 (S.D.N.Y. 1940) .....194, 198

Sadler v. Trisan, 20 App. Div, 2d 857, 248 N.Y.S. 2d

163 (1st Dep't 1964) .. AYRE DED I SOE 190

Matter of Estate of Sakel, 9 App. Div. 2d 763,193 _

- N.Y.S. 2d 163 (1st Dep't 1959) a 149

fen Diego Building Trades Council v. ces 359

U. S. 236, 240, 244-46 (1959): 169

Sexton v. Sword S.S. Line, Inc., 118 F. 2d 708, 711

Ce hes Sn 110

SEC v. Capital Gains Research Bureau, 375 U. S.

180 =—

i) cere

Shahadi v. Commissioner of Internal Revenue, 266

F, 2d 495, 501 (3d Cir. 1959), “« denied, 361 U. S.

874 (1959) saael ssilsataisalaesniadecteediaisiilag caiabiidibslclisdahanieheepdaieniilbiis - Bl.

Shexrer v. Sherrer, 934 U. "343 CRED eentisessienanions 183

Simmons v. Saul, 138 U.S. "a ROE D cessnnctnspinnnnidaes 147

State Farm Mutual: Automobile Ins. Co. v. Petsch,

261, F. 2d 331, 334 (10th Cir. 1958) ............. 2c. 81

Stella v. Kaiser, 221 F. 2d 115 (2d Cir, Spent, .

dented, 35D U. &. BBB (UGGB) ances cesteecenne 187

Southern Development Go. v. Silva, 125 U. S. 247,

249-50 (1888) .............. Bisianinhisapnieebielilalsiaialeninsaalabaasiaiaaals +8i

Taxin v. Food Fair Stores, ray 287 F. 2d 448 (3d

Cir. 1961), cert. dented, 366 U. S. 930. (1961) ....108-109,

es 151

“Textike Workers Union v. Lincoln Mills, 353 U. S.

FO cn, ERE STS 168, 169, 170

Toledo Computing Scale Co. v. Computing Scale Co.,-

‘281. Fed. 488 (7th Cir. 1922), aff'd, 261 U. S. 399

CTIIITTD * axscsisasisiesssnsonpstsaihiamnmsahicassatiigitestataamihashiaialiatcia ...97, 189, 191

Treinies v. Sunshine Mining Corp., 308 U. S. had

(1939) ...... TAA I LEIA A H 185

Tomcezak v. Roetzer, 283° App. Div. 851, 128 N. Y. S.

. BR BED COG BRE BD diictetinmimnin 148

United: States v. Davis, 370 U. 8. 65, 74 n. 9'(1962) .. 96

3 United States v. New York Tel. Co., 326 U. S. 636, °

650-51 n. 18 (1946) -:........ hanenaiiatlasnaninicnte 96, 154

United States v: Standard Ou Co., 332 U: S. 301

RO LEER EI -— &

U nited States v. Throckmorton, 98 U. S. 61 (1878) .. 175,

186, 188

United Steel Weskins of America v. R. H. Bouligny,

34 U. S. L. Wk. 4019 (Nov. 23, 1965) 171, a

“United States v. Wunderlich, 342 U. S. 98, 100 (1951) .

-.Upson v. Otis, 155 F. 2d 606 sisal Cir. 1946) ....... ‘ae 1 a

‘PAGE *

’ ~ ; . et = > . : r oo Sant >

Se SRE RR AUS RAEN EAE oa RES PUI in Lenght irae enue SEAT RET

: ,

Xvil

feet. . PAGE

Van Huffel v. Harkelrode, 284 U. 8.225, 229 (1931) 96

Verplanck v. Van Buren, 76 N. Y. 247 (1879) ............ 190

Virginian Ry. v. Mullens, 271 U. S. 220, 227-28 . |

GIO UUEE ” xcicinricsiesissncotcedpieibeaeshiidiielsechiesislhinddetediiininetieac 97

In re Walsh’s Estate, 143 Mise. 223, 225, 256 N. Y.

Supp. 870, 872 "(Surr. Ct. Suffolk Co. ), aff'd,

_ 236 App. Div. 809, 259 N. Y. Supp. 975, appeal

. denied, 236 App. Div. 854, 260 N. Y. Roc 968 (2d os

Dep’t 1932) piabeaiiiicnnd 111.

Wechsler v. Bowman, 285.N. Y. 284, 291, 34 N.E. 2d

322, modified, 286 N. Y..582, 35 NE. od 930 (1941) 110

West Side Irrigating Co. v. United States, 269 Fed.

759 (9th Cir. 1921) PEL Oa RT 191 ©

Wohl v. Miller, 5 App. Div. 2d 126, 169 N.Y.S. 2d

233 (1st Dep't 1957) ceeccou.-. 153

Zenn v. Anzalone, 1 App. Div. 2d 662, 146 N.Y.S. Od

286 (1955); 1 App. Div. 2d 773, 149 N.Y.S. 2d 213 .

(1956), 10 ‘App: Div. 2d 912; i App. Div. 2d 748

— (1st Dep’t 1960) . 15, 172

-and ALLEGHANY CorPORATION,

—_

Supreme Court of the United States

OCTOBER TERM, 1965:

No. 132

Margaret L. Hour and KAraren -L. McManon, individu-

ally and on behalf of all other shareholders of ALLEGHANY

Corporation similarly situated, .

agains . re rs,

Auuan P. Kirsy, Cuartes T. on, + JR., sien M. —

Respondents.

ON WRIT OF CERTIORARI TO THE UNITED STATES COURT

OF APPEALS FOR THE SECOND CIRCUIT

BRIEF OF RESPONDENT ALLAN P. KIRBY

The first words of petitioners’ brief are: “This is an

action to set aside a fraudulent settlement of prior stock-

holder derivative actions charging a violation of §14(a)

of the Securities Exchange Act of 1934.” The statement |

is incorrect. The present action* (“Murchison”) is one

‘to set aside a contested judgment (the “Zenn”: judg-

ment),** approving a settlement-of stockholder litigation

as “fair, reasonable, and adequate”: under the standards

of New York’s code for the protective regulation of stock-

holders’ rights. It is a true collateral attack ‘on a judg- :

_ .* Murchison, et al. v. Kirby, et al., U. S. Dist. Ct., S.D.N.Y.,’

i Civ. 3511 (R. 166).

tye a fioss “2 Anzalone, et al., Sup. Ct. N. Y. Co., Index No.

244/1954 (R: 701). ' {pecie & ‘ !

ment. of the New York Supreme Court and not an equita-

ble bill to enjoin the enforcement of.a-state court judg- .

ment for alleged fraud. Appeals were taken from the

lower court’s judgment in Zenn to state courts of review,

‘ but not to this Court. The presence of an issue under

the Securities Exchange Act was dealt with as a minor ~

facet of that wide-ranging sto¢kholders’ suit.* .

Petitioners’ first sentence is also incorrect in stating

that the Zenn action was one charging a violation of

Section 14(a) of the Securities Exchange Act of 1934, +7 .

an erroneous statement repeated through their brief. The

New York court, on the contrary, found the action to be

one of common law fraud (Ex. K-137, R. 1640-41),*** and

not one to enforce duties or liabilities under Section 14(a).

. Statutes. Involved | |

The statutes and rules involved, set forth in full in

Appendix A, p. 1 et seq., coca] with — related |

thereto, are the following:

- Securities Exchange Act §28, 48 Stat. 903 (1934),

15 U.S.C. §78bb (1963) ;

Fed. R. Civ. P. 52(a);

N. Y. Bus. Corp. L. §626(d) (McKinney 1963) ;

N.Y.C.P.L.R. 2221, 5015(a) (McKinney 1963) ;

N.Y.C.P.A. $§294, 296, 298, 301-02;

N.Y.R. Civ. P! 128, 130, 132;

27A Minn. Stats. Ann. Rules 26.01, 26.02, 26.04,

28.01, 29, 30.01, 31.01, 37.01, 37.02, 45.02, 45.06;

38 Mina. Stats. “Ann. $697 18.

* Ex. K-137, R. 1640-41.

** 48 Stat. 895 (1934), 15 U.S.C.A. 6780 (1963) (since amended)

by 78 Stat. 569, §5 (1964), 15 U.S.C.A. §78n (Supp. 1965)..

_*** “R” as_used herein, follqawed by a number, refers to the page of

the ttanscript of record.

referg to exhibits before the 5 ag ict Court, ; Ww, i ot 4

or indexed on ‘the first pages of Vol..1 of the T ranscript 0

- Questions Presented °

The record of this case does not raise, and cannot be

‘stretched to reach; Questions: 1 and 2 stated by peti- :

tioners* (Petition for Writ of Certiorari, p. 3).

The issue alleged and tried was whether respondent

_ Allan P. Kirby (“Kirby”) defrauded the New York court

. in obtaining a judgment approving his separate settlement

_. of a contested stockholders’ derivative suit (R. 174-75,

336, 344). The. District Court found, after trial, that

_ the plaintiffs had failed to prove any fraud by Kirby (R.

_ 2325, - 2327). Upon appeal; the Court of Appeals unani- -

mously affirmed, with respect, to’ that, issue, ‘ the District

Court’s finding as to Kirby** (R. 2346). On this record

the only- question that could properly be presented by |

petitioners is whether these concurrent findings of fact

of the courts below were “clearly erroneous” (Rule 52(a),

Fed. R. Civ. P.). Petitionem™ present no such question

and make no claim that these@indings are erroneous.

‘The dissent in the Court of Appeals was based on the

suggestion, made for the first time on appeal, that two

other individuals (Robert R. Young and Robert W. Pur-

cell) concealed or failed to proffer certain documents,

* Question 4 is dealt with in respondent Ireland’s Brief. Question

5 has not been briefed in the form presented in the Petition for

_Certiorari, but its substance is presented in petitioners’ discussion

_ of Questions 1 and 2. It is difficult to determine whether Question »

3 is argued in petitioners’ brief; we conclude that it is not.

** The questions now presented by petitioners, i.e.” (1) whether

Kirby was obligated under §14(a) of the Securities Exchange

Act of 1934 to search out and volunteer 12 documents as evidence

in Zenn, and (2) whether the failure of the Zenn court to enforce

such a rule justifies collateral attack against its judgment, were

not raised before the District Court or the Court . Appeals.

Gs:

thereby committing a fraud upon the New York Supreme

Court, for which Kirby could be held responsible (R.

2351). No such claim was alleged, suggested or tried

before thé District Court. On the contrary, petitioners’

counsel there specifically disclaimed any such‘ wrongdoing

on the part of: Young and Purcell, or any claim that Kirby

was jointly responsible with them (See pp. 94-96 infra,

including a quotation-.from plaintiff’s post-trial brief,

p. 45).* Evidence which was not brouglit to the atten- |

tion of the dissenting judge shows that Kirby, Young

and Purcell did not act jointly in the settlement ‘of the

stockholders’ suit (Point III, pp.-102-07, infra), and that»

_ there was no fraud on the part of Young and Purcell in

“any case. Both the District Court and the Court of

-no=claim that these findings are erroneous, and present 1 no —

Appeals found the documents allegedly “concealed” to be

cumulative of evidence in Zenn. Again, petitioners make

question on this issue.

In view of the limited issue tried below, the unanimous

findings as to that: issue, and the findings of cumulative-

ness as to the evidence claimed to support the new issue

suggested for the first time on appeal, we submit that the

petition ‘for certiorari should be dismissed as improvi-

- dently granted, since it raises only a question of fact.

‘pp. 79 to 151) independently shows reasons why peti-

' Each of Points I through V of our. Argument (infra,

tioners’ Questions 1, 2 and 5;are not reached on this

record. ‘These questions necessarily present constitutional

doubts and problems of statutory interpretation concerning .

. the respective scope of the- Securities Exchange Act and

the authority of the states in the field of corporation law |

* The dissenting jadge based his view that Kirby might be respon-

sible for the conduct of Young or Purcell on a statement. by peti-

tioners’ counsel at trial, which the dissent truncated (R. 2351). The

|complete statement was a disc laim¢r of any! such ;charge, but the

truncated portion quoted by th dissent gives the opposite ~

pee eb =| Tera ae

ye ook \ ang) | | ef iy

ir |

in the light of Erie R. R.. v. Tompkins: 304 U. S$. 64 ;

(1938). Our argument with respect to. them is found in

Points VI through . VIII, seecusaia of this brief eens .

pp. 151 et ~~.

COUNTER.STATEMENT

Petitioners’ “Statement” is incomplete and misleading.

In some instances, it contains misrepresentations® as to

_ the facts and issues before the District Court, the Court

of Appeals, and this Court. We have attempted, there-

fore, to provide a more adequate statement of the essential

facts. :

I. The Proceedings Below.

(a) The Mugchison Complaint:

On September 8, 1960, the suit from which the petitions

in No. 131 and No. 132 derive was instituted in the United

States District Court for the Southern District of New

York by John D. Murchison and Clint W, Murchison, Jr.,

‘doing business as Murchison, Brothers, of Dallas, Texas,

Corporation, ggainst that Corporation and all nine mem-

bers of its .

respondents. ‘Allan Pp. Kirby, Fred M. Kirby, and Charles

and one mi Fossland, as stockholders of Alleghany

T. Ireland, Jr. In addition, the complaint named one

Randolph Phillips as ‘a defendant (R. 88, 97, 166).

Murchison collaterally attacked, as to Allan P. Kirby

ard of Directors at the time, including.

alone, a judgment, entered three months earlier by the .

New York State Supreme ‘Court (R. 2273), approving the

' settlement of Zenn, a derivative action brought in: that

-Court (R. 2278-83). The complaint in Zenn was based

on eight causes of a¢tion’ charging fraud An a number of

* We have set forth in Appendix B a list of some » of the factual

misstatements made by the petitioners, together with a statement

as to — the record facts are.) |

corporate transactions involving stock or control of the

- New York Central Railroad, the Chesapeake & Ohio Ry.

Co., and Investors Diversified Services 8 ee") (Ex. 1,

OR, 701- 27).

The Murchisons had -been dciendanta in Zenn and had

secured a release and judgment soon after Kirby’s judg-

ment was entered (Ex. K-156H, R. 1733; Ex. I-42, R. 2278).

(b) ‘The background of the Complaint:

As the District Court noted, Murchison was ‘a move

in a campaign of-corporate warfare then being waged by ~

the Murchisons (R. 2288). Having surrendered control.

of IDS to Alleghany in their own settlement of Zenn,

which became final upon the New York Supreme Court’s |

entry on June 21, 1960 of its final judgment approving °

the Zenn settlements . (Ex. I-42, R. 2273, 2281), the

Murchisons began a proxy fight to wrest control of Alle-

ghany itself (and, of course, IDS) from Kirby, its chief

-. executive officer after the death of Young on January 25,

1958. Simultaneously, they started this derivative suit.

‘(c) The Amended Murchison Complaint:

The Murchison proxy contest culminated in their

acquisition of ‘control of Alleghany on May 23, 1961, a

- control which they continued to exercise until December 4,

1963 (R. 2382). On June 26, 1962, while thé Murchisons |

were thus in control, the complaint was amended by them

to substitute Alleghany as party-plaintiff and to discon-

tinue the action as to all Alleghany directors except those

who had been their principal opponents in the ‘Alleghany

proxy battle, ze., Allan P. Kirby, Fred M. Kirby and

Charles a Ireland, Jr. (R. 2289).* Counsel who had

_* Alleghany directors Charles T. Hill, Alfred E. Perlman, William

G. Rabe, Joseph M. ‘Fitzsimmons and Anthony Smith were

- dropped as defendants.

°. : 7

originally represented the Murchisons vontinued to prose-

cute the action as counsel for Alleghany.

The Murchison complaint, as amended in 1962, sought

to set aside as to Kirby alone (1) the New York court

orders and judgments approving Kirby’s settlement and.

dismissing Zenn on its merits and: (2) an order vacating

a prior injunction of the United States District Court

for the Southern District of New York entered on Decem-

ber’ 24, 1959, in another derivative action entitled Bres-

wick & Co., et al. v. Briggs, et al., Civ. Act. No. 98-371

_ (“Breswick”)* (R. .187- -88). The ‘Merdiieas . complaint

also sought leave to reassert against: Kirby one of the

eight’claims asserted in. the state court Zenn action (R.

. 188). This relief was sought on two grounds:

(a) that in the. fall of 1959 Kirby and Ireland.

procured the dismissal of Zenn through a “cor-

rupt bargain” involving a reward to Randolph

’ Phillips, a eénsultant to the objectant stockholder’s

- counsel (R. 1%6- 77; R. 2289) ;** :

_(b) that Kirby- -had induced the Zenn Referee

and Court to approve settlement of this claim by

fraudulently failing to. disclose during hearings in

1955 and 1956 material facts known to him early in

1950 about the financial prospects of ‘IDS (Par.

39, R. 174-75). °

The jes which the Murchisons sought leave to revive

against Kirby had been the first. cause of action (out of

_* Although petitioners’ brief is replete with references to Breswick

(cf. p. 17, “Consummation of the Settlement”), all courts below,

including the dissenting judge in the Court of Appeals, agreed that

the proceedings in Breswick were “unrelated to the claim here at

issue” (R, 2368). The Breswick ‘proceedings are described at

pp. 45 through 50, infra.

**This claim comprised the original cause of action in the M urchison

complaint, before amendment in 1962. No appeal was taken from

its dismissal.

eight) in Zenn (Ex. 1, R. 701-28). This cause of action

had ‘attacked a transaction between Alleghany and cer- |

tain of its directors, . commenced in 1949 and completed

in 1950 (the “1949-50 exchange”), whereby those directors -

had tendered to Alleghany shares of its preferred stock

in exchange for its transfer to them ag IDS Class A (non-

voting) common Shares.

(d) The decisions below:

The pre-trial phases of this case were marked by exten-

Sive interrogatories and over 20,000 pages of deposition

testimony from 25 witnesses, including a thorough

examination of Kirby (R. 2288, 2289). On June 3, 1963,

after a trial lasting from April 1 to April 19, 1963, the

complaint was dismissed by the United States District

Court for the Southern District of New York,-Dawson,—J.

(R. 2328). That dismissal was affirmed by a 2-1 decision”

of a panel of the Court-of Appeals for the Second Circuit

on May 19, 1964 (R. 2370). Alleghany’s Board, including

‘Kirby, then voted unanimously, on the recommendation

of petitioners’ counsel (R. 19),* to authorize a petition

for rehearing en bane (R. 2382); on January\12, 1965

the Court of Appeals, sitting en bane, affirmed the Dis-

trict Court by a 4-4 deeision (R. 2375-77).

(e) The present petitioners enter:

After almost eleven years of litigation with respect to

_ the subject matter of this- action, the independent direc-

tors of Alleghany voted unanimously, one director abstain-

ing, not to continue the prosecution of the suit (R.-

* At the time, petitioners’ eounsel represented Alleghany, having been |

retained after the eenpereten was substituted for the Murchisons as

plaintiff. :

9 ; se

2382-83), and so informed the Murshisois? attorneys, who

represented, Alleghany (R. 20).

Those attorneys thén reappeared as counsel for: the

present petitioners and sought leave to intervene

on their behalf (R. 55-56). :

(f) The scope of the present petition: s

_ No appeal has ever been taken ‘from the trial court’s

‘dismissal of the‘“corrupt bargain”. theory (Pet. Br., p.

19*), as to which Judge Dawson found that “the evidence

was .all completely to the contrary” (R. 2317). However,

an appeal was taken, and is now sought to be continued,

from Judge Dawson’s dismissal of the claim that Kirby

defrauded the Zenn Referee and the New York State

Supreme Court by not offering ‘in evidence certain docu-

ments bearing on IDS’ prospects. in 1949 and 1950

Petitioners’ counsel have relied on different documents ~

at different stages of the case. At present, petitioners

point to 12 as being crucial (Pet. Br., pp. 9-14). ‘They

were selected during discovery proceedings in this ease,

from the thousands of documents available for discovery

in Zenn.

Because the Zenn suit was settled,. the legality of the

1949-50 exchange and of the Alleghany proxy material

used to obtain approval of it was not finally determined

in Zenn (Ex. K-137, R. 1654). Nor has that question been

tried in the instant case (R. 165-66). In appraising the

fairness, reasonableness and adequacy of the settlement,

however, the Zenn Referee took extensive testimony on

the circumstanees of that transaction (Ex. K-137, R. 1595).

After a full review, he concluded that the complaint would

_be dismissed if tried on the merits (Ex. K-137, R. 1654).

* “Pet, Br.” as used herein refers to “Brief for Petitioners.”

II. The: Background of the 1949-50 Exchange.

(a) Alleghany’s quest for fiscal stability:

Alleghany was organized and’ conducted as a railroad

_+ holding company in 1929 (See Alleghany Corp. v. Breswick °

€ Co., 353 U. 8, 151, 155 -(1957)). When Young and Kirby

purchased control in 1937, Alleghany was all but hopelessly

insolvent, with a total indebtedness of over $78 million,

and a growing accumulation of dividend arrears on its pre-

ferred stock (Ex. 195, R: 1015). By 1946 Alleghany had

substantially reduced the debt, and turned to the finan-

cial problem represented by huge dividend arrearages on

its preferred stock (Ex. 195, R. 1014).

(b) The ten-year recapitalization program:

_. To recapitalize and eliminate these arrearages, inaheay

undertook a program of acquisition of its 6wn outstand-

ing preferred. This required more than ten years to .

accomplish. (See Breswick & Co. v. United States, 75S. Ct.

912, 916 (1955). The program was carried out through

. open-market - ‘purchases of preferred, and exchanges of

preferred stock’ for. portfolio securities or issues s of new —_—

preferred. The several stages-of this program have been ,

— review ved and described by the ICC, the SEC and the

federal. courts.*

The transaction whose validity was at issue in the Zenn

‘ proceedings was 8 step in Alleghany’s recapitaliza-

* Breswick & Co. v. United States, 134 F.. Supp. 132, 135-36

(S.D.N.Y. 1955) ; 138 F. Supp. 123 (S.D.N.Y. 1955) ; rev'd sub

nom. Alleghany Corp. v. Breswick & Co., 353 U. S. 151 (1957) ;

Breswick & Co. v. United States, 156 F. Supp. 227, 229 (S.D.N. Y.

1957), rev'd per curiam sub nom. Alleghany Corp. v. Breswick .&

an 355 U. S. 415 (1958) ; Breswick & Co. v. United States, 160 F.

p. 754 (S.D.N.Y. 1958) ; Alleghany Corp. Secs.; I.C.C. Fin.

Docket No. 17937 (Nov. 20, 1952), I.C.C. Fin. Docket No. 18162

(July 17, 1953), I.C.C. Fin. Docket No. 18866 (May 26, 1955) ;

Matter of Alleghany Corp., 37 S.E.C. 424, 426 (1956). —-

11 .

tion program. It involved 4,840 of the 774,539 shares

of Alleghany preferred stock ultimately brought into the

company’s treasury.

By early 1949 Alleghany’s market purchases of its own

preferred had reduced dividend arrearages by over $31

million (Ex. 195, R. 1013, 1015). In April 1949, the pro-

gram was broadened through the initiation of a series of

seven offers by Alleghany to retire its outstanding pre-

ferred by exchanging various securities in its ‘portfolio for

that preferred. Such offers were made in May and ea

tember, 1949 (Ex. 195, R. 1014; Ex. 199, R. 1035). -

: December 1949,’ a. further list of portfolio securities “4

be exchanged was prepared which included several stocks

recently acquired by Alleghany, such as shares of North

American Company, Long Island Lighting, American .

Power & Light, Wheeling. & Lake Erie’ R.R., and New

York, Chicago & St. Louis R.R.. (Ex. 199, R. 1034-1035).

Also on this December 1949 list for exchange were’

48,225.61 Class A (non-voting) shares of IDS (Ex. 199,

R. 1037).* It was the exchange of these securities with

Alleghany directors in'1950 that formed the basis of the

first cause of action in’ the Zenn litigation. The exchange

was. attacked for a number of reasons, including an

‘alleged. difference between the market: price of the Alle-

ghany and IDS shares on the date of contract perform-.

ance, OV erreaching, défects in voting procedure, and con-

cealment of the directors’ knowledge of an improvement -

in IDS’ earnings during the early part of 1950, reflecting

a “trend” that was not revealed to Alleghany. stockholders

(Ex. 1,. R. 704-05).

* Pet. Br., p. 5 = ay ay this item was not on the agenda of the

meeting: But Item 6 on the agenda dealt generally with exchange

offers, and Purcell testified that this was not the first time the

matter had been discussed (R. aid ).

‘~*~ *

e \

an ee ane |

-12-

Il. Alleghany’ 's Investment: in IDS.

Alleghany’s investment in IDS, amiade during April 1949,

was one of its: first_purchiases of non- scat securities

= -195, R. 1016, 1018). -

4 1948, brokers. had. pererer Young er Kirby as

‘prospective purchasers, of the IDS stock (R. 416, Ex.

_K- 137, R. 1634). ' 2 -

(a) The nature of IDs’ rar aay

IDS, a Minnesota corporation, had been chiefly engaged

since 189% in the sale of face-amount savings c certificates,

which entitled the investor to payment jof a stated sum

on a future maturity date. The proceeds of the investors’

payments to IDS were placed in investments intended to

earn enough to enable IDS to pay ‘off the certificates as

they fell due ard also-carn a profit for its stockholders

' (Kix. K-294, R. 1933-34). After 1940, IDS also became an

investment advisor, providing sales and financial services

to a number of mutual funds which it caused to be estab-

lished (Ex. K-294, R. 1937).

(b) The two camps at Alleghany:

The proposed investment was a controversial one. IDS’

assets and liabilities were enormous in contrast to the

relatively modest amount of capital invested by. its stock-

holders, and it depended heavily upon its own investment

program to meet its certificate commitments before it could

earn any profit for its stockholders (Ex. K-294, R. 1933-

34).. This had the effect of giving the stock great lever-

age, which could result in ‘sharply increased earnings (an

event that later. occurred) or, under the influence © of

"unfavorable factors, heavy losses (Ex..K-137, R. 1638-39).

s > - -

es Saf at a ek eae RR RE ES pros Mla RST eA RoR EL tat GS TES a, Cetera Tikit

. - . «

13 oe

One group vf ‘Alleghany- officials questioned the advis- ‘a

ability of the ‘investment, pointing to factors indicating

that the IDS venture was risky (Ex. 300, R.. 1155;

Ex. ‘K-187,, R. 1851; Kx. K-221, A. 1868). In 1949. the

face amount of IDS’. outstanding certificates, most of.

which would fall due in the early 1950’s, was in excess of

$400 million (Ex. K-137, R. 1638; Ex. K-294, R. 1933-34;

Ex. K-295, R. 1960). The company had not. shown a large .

operating profit at any time (Ex. K-293, R. 1912), and in

recent years it had faced difficulties because a substantial

residue of old certificate contracts had been written at

high interest rates in a period:of generally declining

interest'rates (Ex. K-294, R. 1933-34; Ex. K-295, R. 1955-

57). By 1948, for instance, IDS’ invéstment retutn aver-

aged 4.039% while the average cost of its certificate . -

chligations was 4.452% (Ex. K-295, R..1955). Because of

the amounts involved, this deficiency would have‘a poten- -

tially adverse effect upon the value of ‘the IDS stock

unless it were checked or balaneed by favorable factors.

The uneasiness of some high Alleghany officials was a

reflection’ of the. country’s economy at the time, and the

prevailingly pessimistic expectations about its future. The

United States was experiencing its first post-war recession,

long feared and predicted. The extraordinary expansion

of the American economy over the next decade was gen-

erally unforeseen.*

* The unforeseen growth of the economy dreve the Gross National

1 billion in 1954 ‘and -

Product from $258.1 billion in 1949 to

$628.7 billion in 1964, and increased personal savings from $8.5

billion in 1949 to $18.9 billion in 1954 and $268 billion. in 1964.

- In the. same period, retained earnings of corporgtions rose from

$27.6 billion in 1949 to $35.5. billion in 1954 an $57.9 billion in

1964 (Annual Reports of the Council of Economic Advi isors and

Dep’t of. Commerce Survey vf Current Business).

It was this prodigious rise in savings (unforeseeable i in 1949 and

early 1950) ‘which allowed IDS, and other successful institutions

through which savings are invested, to grow at least tenfold in

this same =

14°

As against the -pessimists on Alleghany’s Board, there

wére two staff members (Purcell and Shipman) who were

convinced advocates of the investment.. They persuaded

Alleghany’s Robert R. Young -to their view (Ex. K-222, .

R. 1870). Kirby- reluctantly accepted their recommenda-

tion (R. 416).° |

In April 1949, Alleghany purchased voting control of

IDS from Bertin Gamble, the company’s president, and

one of his associates, paying $20 a share for 85,666 voting

shares, a total of $1, 715,000 (Ex. K-37, R.. 1634-35).

Alleghany also bought 48,225.61 non-voting: shares of IDS

- Class-A Common on the open market, at. a total. cost of

$392,811.45, an average price of $8.15 ‘per share _ ~

- K-187, R. 1634-35, Ex. 195, R. 1019).

(d) Post-acquisition developments at IDS: -

“After Alleghany made its inv estment in IDS, skeptioians

and uncertainty continued on the part of some Alleghany

officials, including Kirhy (Ex.. K-353, R. 2008). Before

- the consummation of the 1949-50 exchange, further re-’.

_ ports (which were in evidence and noted by the Zenn _

Referee) confirmed the speculativeness of the vengure

> (Ex. K-295, R. 1951). | ,

@ the favorable factors:

On the plus, or bullish, side the amount of IDS’ high |

interest-bearing certificates was decreasing, and _ its

.Mortgage Department éxpected to realize substantial

“windfall” earnings from favorable investments in con-

- struction and mortgage loans (Ex. K-295, R. 1954, 1958).

Furthermore, there were increases in IDS’ income from

15 e

fees charged for management of the: investment accounts oe

of its subsidiaries: and affiliates, including its mutual

funds, and from selling and servicing mortgages (Ex.

_K-295, R. 1953). If no -downward turn developed in‘the |

_ general economy and if IDS did not suffer.any ‘of several .

-. possible misfortunes: (described below), it would meet its

contract requirements over the years and realize a steadily

-increasing profit as the adverse: balance in its investment

' aecount decreased (Ex. « K-295, R. 1958). In the latter

part of 1949 and early 1950, for, instance, the earnings of ©

the company’s Mortgage Department were sharply increas-

: ing and would apparently result in substantial increases

in IDS’ earnings (Ex. 345, R. 1189). All of this was

_ brought to the attertion of the Zenn Court (Ex. K-41, R.

1511). '

a ii) the unfavorable factors:

As against these favorable factors, there were- ates.

able contingencies which could reduce, or even wipe out, .

the value .of IDS stock (Ex. K-137, R. 1645-46). Some °

of these were summarized by the Zenn Referee (Ex. K-137, — F

R. 1638-39) as follows:

(1) IDS .in 1949 had. $40,000,000 in_ certificate

maturities imminently due, and inadeqnate income

and reserves to meet them.

(2) IDS had a long history. of difficulties with ©

the SEC over its selling techniques.

(3) The, SEC’ was insistent on changes in IDS

accounts with respect to -the rate of accrual of

- eértificate reserves and a change of its reserye

accumulations to an ‘accrual basis rather than on

an annual basis.

(4) There was a possibiiey that the ihilecs of

- $15,000,000 to $25,000,000 worth of certificates would

_ elect to rescind their purchases.

(5) The National Association of Securities

' Administrators was investigating IDS and had the

power to put the company out of business. °

(6) IDS was selling mortgages to its subsidiary

‘at a premium and improperly taking the premium

' into its income account while the subsidiary capital- ©

ized it over the life of the mortgage; thus IDS

books did not properly reflect its true earnings. ©

. (7) There was a eontroversy between IDS and

the Minnesota Banking Commission on the interpre-

tation of :the language in certificates relating _td

types and amounts of assets required to be main-

tained by IDS. Adoption of th® Commission’s view

might well have left IDS open to receivership. °

(8):The SEC was contending that IDS should.

carry its preferred stock portfolio at current market

prices rather than cost. This would have eliminated

the company’s capital and surplus. :

(9) The real estate operations of IDS were -

unsound and -profits therefrom illusory.

(10) The IDS stock was not a stable security

for collateral under Alleghany’s bank loans.

(iii) the general outlook at Alleghany:

_ This, then, was the picture of IDS’ future confronting

Alleghany in the latter part of 1949. An adverse develop-

ment on any front could seriously depress the value of

IDS. Kirby remained in the camp of pessimists (R.

466-67). Kirby, however, was not alone in his appraisal

of the economy. The President of Brookings Institution,

for instance, made the following summary, published in

the Commercial and Financial Chronicle, Dec. 15, 1949,

Vol. 170, p. 2385: ae aaa

“The striking fact about business forecasting has

been the continuous expectation of an early business

recession. At the end of the war, the pessimism was

wide-spread and deep seated. At the end of 1945

and again in 1947, some observers conceded the

possibility of a year or more of good business; but

still the keynote was usually one of confidence that

a depressioh was overdue. At the beginning of

1949 the view became widespread that the long

overdue depression was at last at. hand.” (Moulton,

“EKeonomic Factors Make a Severe Depression Un-.

_likely.”)*

. (e) Alleghany hedges its position in IDS stock:

* In view of the speculative nature of its IDS investment,

Alleghany’s management believed that the non-voting

Class A shares should be used as one of the securities

in its portfolio to be offered in the course of its program

for the retirement of its preferred; its non-voting IDS

shares were particularly suitable for such use because

‘their instability greatly reduced their acceptability as

collateral for loans (Ex. K-137, R. 1639) and be-

cause Alleghany’s disposal of them -would not ° affect

its control of IDS through its ownership of IDS voting

‘shares (Ex. 195, R. 1018-19). Accordingly the Board in

December, 1949, placed Alleghany’s 48,225 Class A (non-

voting) IDS shares on the exchange list, alsng with the

various other recently-acquired portfolio securities to be

offered (Ex. 215, R. 1044).

* See also Shields, “Be Ready For The Second — of Post War

Readjustment,” op. cit. supra, Oct. 27, 1949, Vol. 170, p. 1654;

Davidson, “Factors in the Approaching Depression,” Op. cit. supra,

. March 23, 1950, Vol. 171, p. 1203; ig A See, A Slight Bust

Coming,” Business Week, June 10; 1950 p

(f) The necessity for a private offering:

Having: decided to offer IDS shares for exchange,

Alleghany’s Board was faced with the fact that these

shares (unlike the others to be used in the program)

could not be offered for exchange to Alleghany’s stock-

holders without the filing of a Registration Statement

under the Securities Act of 1933 (Ex. 199, R. 1036).

Counsel advised that such a registration would be com-

plex and would involve such delay and expense in relation

to the then market value of the IDS shares involved as

to make registration impracticable (Ex. 206, R. 1039;

Ex. 215, R. 1044). The Board resolved, therefore, to limit

the exchange to a number of persons’ small enough to

render the exchange a private offering under the Securi-

ties Act. The only group which owned sufficient Alleghany

preferred shares to enable the exchange to be made, and

was also small enough to meet the SEC requirement, was

Alleghany’s own management, Kirby and Young being.

among the largest holders of preferred (Ex. 199, » .°

1031-32). :

(g) The exchange is authorized:

On December 6, 1949, the Board approved the exchange

offer and, in addition, adopted a-resolution offering to

exchange Alleghany’s non-voting IDS shares for Alleghany

preferred shares owned by officers of Alleghany at a

‘ ratio to be based. on the market price of the Alleghany :

preferred shares téndered for “exchange and.upon the

higher of cost or market of the IDS shares, such exchange

to be subject to ratification by the stockholders of Alle-

ghany (Ex. 206, R. 1039, 1041). At the same time, Kirby

and Young committed themselves to exchange Alleghany

preferred for whatever IDS shares were not: aeceaaes

tr ee

for sii preferred by other Anghans officers =

K-137, R. 1651; Ex. ‘K-254, R. 1891).

Pursuant to: the offer, J: J. Anzalone, a iin:

exchanged 10 shares of Alleghany preferred for 100 shares —

of IDS. Young exchanged 2,420 shares of Alleghany pre-—

ferred for 24,063 shares of IDS. - Kirby exchanged 2,420

shares of Alleghany preferred for 24,062 shares of IDS

(Ex. K-215, R. 1864).* Young and Kirby immediately

thereafter each sold at cost to Robert W. Purcell, then an ©

officer of Alleghany and a director of IDS, 6,336 shares of

the IDS received by them. in the exchange. The sale

‘to Purcell was in fulfillment of an agreement, previously

' disclosed to the Alleghany stockholders, between Purcell

. and Alleghany (Ex. 198, R. 1029). By the terms of that

agreement, Purcell was to acquire, by purchase, $125,000

' of IDS stock, so that he, as Alleghany’s representative at

IDS, would have a direct interest in assuring its effective

management (Ex. 199, R. 1033-34). As protection, in the

event he left Alleghany or IDS, Purcell was gixen the

right to put his stock to Alleghany, at his- cost, for a

period of five years (Ex. 198, R. 1029). |

Mr. Kirby’s view of the entire transaction is expressed

in his testimony (R. 466-67) in the present action:

“Q. If you didn’t have confidence in it, why did

you make that exchange of stock? A. It was only

one of many exchanges that I made, sir. Mr.

Young and I had set a policy of reducing A'le-

ghany’s debt as far as we could, and by making

these exchanges | of: not only IDS but many other

* Kirby and a personal holding company controlled by him also

exchanged 2,000 shares of prior preferred and 13,800. shares of

series A preferred for shares of North Américan Co. and American

. Pawer Co., two of the other stocks made available as part of the

December exchange program (Ex. 199, R. 1034-35).

20.

securities that were in the portfolio we were able

to. reduce it.

Q. You were able to reduce— -A. The capitali-

zation. It was wiping out preferred stock.

Q: You were exchanging ‘stock of Alleghany for ©

stock of IDS? : A. Yes, sir, preferred stock. .

- Q. You did that because you wanted to reduce

the capitalization of Alleghany? A. Yes. We knew

‘we would probably never ‘benefit from Alleghany

until we got the preferred stock down substantially.

We even had to put out an issue of preferred stock

to take care of the dividends that had accumulated.

on a prior issue of cacuenienes stock. So you can

see—

Q. So you had some of this preferred : stock? 2

A. Yes. ee

--Q. You exchanged it for IDS? A. Yes.

Q. Although you thought IDS wasn’t very good?

A. That’s right. I did not think Alleghany _ was

very good either. I thought it was very poor, it

was one of many things we wefe trying to work out.

I couldn’t see where I was hurting myself any or

probably not benefiting myself any, by making

these exchanges. I was only accomplishing what

we set out to accomplish, and that Was to reduce

the debt of Alleghany in Whatever way we might

be ‘able to do hg

(h) The purer in IDS—December 1949

through May 1950: i

On December 6, 1949, when Alleghany’s Board author-

ized the exchange, the market price of IDS Class A

was $5.50 per share (Ex. 206, R. 1039, i040). The 1949

Annual Report of Alleghany, dated March 15, 1950.

(Ex. 195, R. 1010-28), was mailed to the stockholders on—

March 24th (Ex. 199, R. 1031). It stated, concerning

the investment in. IDS, that “The outlook for eventual °

profits is considered to be unusually promising” (Ex. 195,

R. 1018). ) a . :

By March 31, 1950, the price of IDS had risen to

$9.00 bid and $9.75 asked, a fact that was included in

the same paragraph of the April 6, 1950 proxy state-

ment which reported that Messrs. Kirby, Young and Anza-

lone had committed themselves to tender their preferred

for IDS Class A.on the basis of a cost of $8.1453 per IDS ©

share (Ex. 199, R. 1037). By May 3, 1950, the date of *.

the stockholders’ meeting approving the exchange, the

price was $11.00 bid, $12.00 asked (Ex. K-137, R. 1637).

——

(i) The market in IDS—June-1950° Ct ng

~~ through December 1964: .

In the years following ‘the 1949-50 exchange, IDS’

_ management successfully resolved its problems with the

_ regulatory authorities and took energetic advantage oi

-. the. opportunity offered to it and to other savings

institutions by’ the long surge of economic expansion fol-

lowing the outbreak of hostilities in Korea in June, 1950

(see fn., p. 13; supra). d

IDS’ actual earnings for the year. 1949 had amounted to

$1,365,485 or $4.70 per share (Ex: K-358, R. 2121, 2123).

Its earnings for the six months ending June 30, 1950,

amounted to $2,831,559 or $9.74 per share (Ex. K-173, R.

1807, 1809). Even after this increase in IDS’ actual earn- ©

ings (as distinguished from forecasts) became publicly

known in the summer of 1950, the market price of IDS’

stock rose to only $14.75 bid, $15.75 asked.* (See Appen-

* Petitioners repeatedly refer to the exchange as one whereby Young, .

Kirby and Purcell got IDS stock “worth $60,000,000.” Pet. for

Cert., p. 5. This is apparently based on market quotations for |

« IDS’ stock in the 1960’s. It overlooks several important facts:

(1) the market value of IDS’ shares continued to remain

below $30 per share throughout 1950,.even after thé ‘sharp

increase in 1950 earnings, allegedly concealed from Alleghany

dix EK for a.complete chart of [DS Class A prices during

the period June 1950-December 1954.)

The investing public’s unwillingness to pay a. price

for IDS stock commensurate with its sharply increased —~

earnings was shared by IDS’ dwn management, “which |

possessed detailed inside: knowledge of its earnings pros-

pects. Qn July 24, 1950, E. E. Crabb, the President of

IDS (who was aware of. the allegedly “concealed”, “cru-

cial” earnings projections that had been prepared by his

company, and of the actual increase in earnings to $9.74 .

per share for the first six’ months ‘of 1950) called on

Alleghany to fulfill a prior- commitment to purchase 3,034

IDS: shares at $20 per share (Ex. 399, R. 1385).

. The IDS Annual Report for 1950, dated April 30, 1951

-.and made public on May 23, 1951, disclosed that net

_ after-tax income for the year had been $6,454,411, or

$22.20 per share (Ex. K-359, R» 2135, 2145, 2146-47). Yet,

by December 7, 1951, the market price of IDS stogk was

only $36 bid, $37.50 asked, a decline from a high of

. $39 bid and $41 asked on October 5, 1951 (App. KE, p. 54).

_. The far greater increases in the market price of IDS ..

stock, one of the factors ,which led to the institution in

1954 of the Zenn derivative stockholders’ action, took

place long after the information claimed to have. been

concealed in 1950 had become public (See App. E, pp. 51-

59). It was not until the resolution of IDS’ controversies

stockholders, had become well known (Appendix (“‘App.”), —

Epp 51-52).

(2). sharp increases in market price of maf other market- |

able securities (including some used by Alleghany in the ‘

exchange program) occurred later in the 1950’s. For example,

_ the =< -«t price of Xerox on Jan. 1, 1965 was 295. times its

price © 2, 1, 1950.

(3) oc 5, the total assets under IDS management are in

excess of $5. billion, as compared with about $500 million in

1949 and 1950.

‘ with the SEC in 1952 (Ex. K-362, R. 2181) and the gen-

éral rise-in the popularity of mutual funds, that the period

of IDS prosperity actually ‘began. From 1952 to 1954,

the market price of IDS stock rose from $39 per share to

over $200 per share (App. E, pp. 54-59), and by the end

of 1964, it had risen to over $1,262 per share.* ©

_ IV. Zenn v. Anzalone (Sup. Ct :

. _N. Y. Co. Index No. 7244/1954)

In 1954 various derivative stockholder actions were

_ instituted in. the New York Supreme Court against

Alleghany directors, reflecting a number of controversies

about the management of the company, nearly all of which

had nothing to do with the 1949-50 exchange (Ex. 1, R.

705-26). The Zenn action, a consolidation of these suits,

named all of the then directors of Alleghany (including

Young and Kirby), Murchison. Brothers, Clint W. Murchi- ©

son, Jr., Robert W. Purcell and others (Ex. K-137, R. °

1595-96). The firm of Pomerantz, Levy & Haudek was

designated as plaintiffs’ general counsel (R. 635-36) to

prosecute the ‘eight causes of action set forth in a con-

solidated amendéd complaint filed in July 1955 (Ex. 1,

R. 701-28). aa |

Kirby, although named as. a defendant, was not

served and did not appear generally in the Zenn action

(Ex. K-292, R. 1899). ;

(a) The first cause of action:

The first cause of action in Zenn alleged that at the

.time of the consummation, of the 1949-50 exchange the

* IDS stock, Class A, was split 5 for 1 on April 23, 1954, and again

on May 6, 1964, in connection with a recapitalization of both classes

of IDS stock. Prices given for dates subsequent to either split are

for the Class A stock, and are adjusted accordingly.

a |

market price of the IDS shares exceeded by $290,502:44

the market price of the’ Alleghany preferred surrendered

by Young and Kirby, and that the proxy statement for

the annual meeting at which the exchange transaction was

ratified was fraudulent in misstating facts and omitting

to state material facts relating to improved earnings of

IDS and to the prospective favorable developments in IDS

“foreseeable to and foreseen by” the Alleghany directors

(x. 1, R. 704), and was, in additjon, defective under the

Securities Exchange Act and the proxy rules of the

' Securities and Exchange Commission (Ex. 1, R. 705).

-" complaint sought rescission of the exchange trans-

action or, in the alternative, recovery of .the alleged

- difference in market price (Ex. 1, R. 724-26).

(b) The second through eighth causes of action: .

Substantially all of the other seven causes of action in

Zenn were based on transactions between Alleghany and the

Murchisons, and charged the Murchisons with being jointly

and severally liable with Young, Kirby, and other Alle-

_-ghany directors (Ex. 1, R. 705-26). These are summarized _

in the Referee’s Report in Zenn (Ex. K-137, R: 1599-1609).

V. Zenn v. Anzalone (federal):

The stockholder plaintiffs in Zenn filed a companion

. action in the federal District Court, which petitioners’ |

_ brief confuses with Breswick v. Briggs, filed in the federal

District Court by another group of. stockholders, and

discussed at pp. 45-50, infra. ‘Like the state court case,

federal Zenn was captioned Zenn, et, al. v. Anzalone,

et al. The depositions of Young, and of David Wallace,

the Secretary of Alleghany were taken in federal Zenn

% ”~

during 1954. and 1955 (Ex: 356A, R. 1313; Ex. K-17,

R. 1621). The deposition of Young ¢.; concluded on.

March 30, 1955 (Ex. K-137, R. 1621) and singe that date,

more than five months before the state court’s appoint-.

ment of the Zenn Referee (Ex. 3, R. 741), federal Zenn

has been dormant. The parties plaintiff chose the state

—eourt Zenn as the vehicle for their proceedings (Ex. K-137,

R. 1623). In view of the settlement of the state court

Zenn, and the vacatur of the injunction in Breswick (see

pp. 49-51, infra), there has been no occasion to, pursue

federal Zenn.

Petitioners in their brief frequently refer nierely to the

“federal court action”, without distinguishing between

Breswick and Zenn. , This practice can ‘mislead a reader

into thinking that some event in the history of Breswick v.

Briggs actually took place in the federal Zenn litigation.

The difference is important, since the Breswick litigation

did not: involve the 1949-50 exchange, and the Breswick

court would have had‘no interest in any evidence bearing

on that transaction. For instance, there appears at page —

18 of petitioners’ brief the following:

“The federal district court, like the plaintiffs,

was, still unaware of the inside information which

Kirby, Young and Purcell had possessed, nor was

_ it told of Young’s perjury[*] or that Ireland, who

was now representing Alleghany, had negotiated

Kirby’s settlement. It approved the settlement and

lifted the injunction [citations omitted]. .

“Defendants then went to the state court and

obtained the judgment under attack here. The

federal court action is still on the calendar [Zenn

v. Anzalone (S.D.N.Y. Civ. No. 92-205) ].°

* “Young’s perjury” is a charge so serious and so misleading as to .

warrant separate treatment. It is hed discussed’ at pp. 37-40,

infra.

eee

For present purposes, suffice it to note that the “federal

district court” referred to in the first paragraph quoted

above is the Breswick court not the ‘Zenn (federal) court;.

and that the District Court never “approved the settie-

ment,”: because the 1949-50 exchange was not involv ed in

Breswick (R. 495) and Zenn (federal) has been dormant.

For a statemerit of what the Breswick court did do, see

pp. 49-50, infra):

In any event, this is not an appeal fromthe judgment.

of a federal district court; the judgment under attack here

is a state court judgment and the attack onsthat judgment —

is a collateral attack in an independerit action. All refer-

ences hereafter made to “Zenn” in this brief, unless noted —

‘as “federal”, are to the proceedings in the New: York.

State Supreme Court.

VI. The ‘Initial Settlement of Zenn:

After the completion of the depositions of Young and

Wallace in federal Zenn a series of thirteen or fourteer .

settlement conferences resulted, on April 18, 1955, in a

stipulation of settlement covering all claims being asserted

in pending derivative actions and providing for the pay-

ment of $700,000 cash to Alleghany and for the amendment

of certain joint venture contracts between. Alleghany and

the Murchisons (Ex. K-137, R. 1622).

The settlement was embédied in a stipulation of settle-

ment dated July 25, 1955, which was presented for ap-

. proval to the New York State Supreme Court (Ex. 2, R.

729). David. Wallace executed this stipulation as attorney-

in-fact for eleven named defendants who had. not been .

served (Ex. 2, R.' 736). Kirby was one of these.’ Other

than.the execution of that document, Wallace at no time

during the Zenn proceedings had any authority in any way

. §

» 27 l

+f, to act for, speak for, or represent Kirby and the other |

unserved director-defendants, and at no time undertook

to do so (Ex.. K- 137, R. 1713-16; Ex.- K-353, ~ 1984-89).

(a) The submission to the New York Supreme Court:

With respect to the decision to present the settlement

to the state court for approval, the Referee made the

following observations (Ex. K-137, R. 1623) : .

_ “At no time up to and including April 18th, 1955

- was the procedural method of ‘carrying the settle-

ment into effect discussed.. Whether the settlement

r would be submitted to the State Court orto the .

) Federal Court, or whether any motions would sub-

sequently be made to aménd Complaints in cases

.then pending, so as to present a complete statement~

. of all derivative claims in one consolidated Amended

Complaint, was a matter left entirely for later

discussion between counsel .... m

e *: e ® ;

“There can be no question that the consolidated

Amended Complaint in the State Court action, in

July, 1955, was the most comprehensive ‘pleading

in either the Federal or State Court...Under the

circumstances, I find it altogether. reasonable that ~

application for ‘approval. of the settlement was made

to this Court rather than to. the Federal Court.” tis

(b) The sein ‘of - .a Referee:

In J uly, 1955 Alleghany (but not Kirby, Young or

Purcell) moved in the New York Supreme ‘Court for

ie approval of the proposed settlement (Ex. 3, R. 741). On.

August 18, 1955 the court appointed, the Hon. Robert J.

Fitzsimmons as Referee’ and directed\him “to inquire on

the merits into the fairness,! [Sires and adequacy —

of a stipulation of settlement dated July 25, 1955, and. to |

report as to whether or not.said proposed settlement,

- should be approved and confirmed” (Ex. 3, R. 742).

Notice of the terms of the proposed settlement was

mailed to all stockholders of record of Alleghany advising

them of the proposed settlement and notifying them of

their right to attend and be heard (Ex. 3, R. 742, 745).

Hearings on the settlement commenced on September 19,

-1955 (Ex.*K-137, R. 1593).

The hearings before the Referee were ames as

follows by the Court of Appeals:

“(T]here was vigorous opposition to the settle-

ment. Many of the arguments now advanced were

urged as reasons for rejecting the settlement.

Counsel (Seymour Graubard of Grauvard & Mos-

covitz) for one objectant (Rosen) in particular

worked in close association with counsel in Breswick.

The statistics as to the nature and duration of the

hearing are: revealing. Eighteen witnesses were

* ealled, some 480 exhibits introduced, over 4,600

pages of testimony were taken and twenty-two law

firms and attorneys appeared. The hearing on the

merits of the settlement was, in effect, a hearing on

the merits of the suits.” (R. 2333)

Vil. The Zenn Hearings.

(a) The evidence before the Referee:

With ‘respect to the one Zenn cause of action based on

~ the 1949-50 exchange, the Referee stated:

“The ‘principal attack is directed to defendants’

alleged failure to make adequate revelation to the

shareholders of Alleghany, in ‘the. proxy statement

soliciting their approval, as to the alleged sharp

upward turn in the profits of IDS and the further

improvement of future earnings which it is claimed

was foreseen by Young, ‘Kirby and Pureell.” (Ex.

mean, R. 1641)

On the issue as he had stated it, the Zenn Referee had

before him over 150 exhibits relating to the 1949-50 ex-

-change, including a complete and detailed financial history

of IDS’ operations and earnings for the six years 1948

through 1953 (Ex..195, R. 1011; Ex: K-162, R. 1739; Ex.

K-172, R. 1782; Ex. K-173, R. 1804; Ex. K-174, R. 1818;

Ex. K-175, R. 1832; Ex. K-176, R. 1833; Ex. K-179, R.

1834; Ex. K-182, R.. 1842; Ex. K-310, R. 1980; Ex. K-311,

. R. 1982; Ex. K-358, R. 2115; Ex. K-359, R. 2133; Ex. K-

361, R. 2156; Ex. K-362, R. 2178; Ex. K-363, R. 2204; Ex.

K-364, R. 2234; Ex. K-365, R. 2254).

Included in the foregoing list are annual and semi-

- annual reports of IDS in each of which the actuarial -

work being done for IDS by the New York actuarial firm

of Joseph. Froggatt & Co. is mentioned and described,

see Ex. K-162, R. 1747; Ex. K-358, R: 2125; Ex. K-359,.

R. 2148; Ex. K-361, R. 2171; Ex. K-172, R-.1789; Ex.

K-173, R. 1812; Ex. K-174, R. 1824. The work of Frog-

gatt was scarcely “concealed”, yet petitioners claim that

Ex. 220, R. 1053, a Froggatt report dated April .29, 1949

was one of the documents “concealed”.* ,

The Referee also had before him a report made ™

Charles Shipman, Alleghany’s analyst, .in anticipation of

Alleghany’s original acquisition of IDS (Ex. K-294, R.

.1933). Shipman forecast that assuming no improvement

in the return on IDS’ investment and no significant change

in its undérwriting fees, its consolidated net income would ‘

go from a deficit of $159,475 in 1947 to a profit of $5,090,850

in 1956, which would amount to more than $18 per IDS

share (Ex. K-294, R. 1944-45). In a later analysis, dated —

August 15, 1949 (also introduced in Zenn, Shipman con-

* We deal with this document in Point I; pp. 86-87, as to Kirby

and in Point IV, p. 129, as to Young and Pur--"l,

cluded, in a section entitled “The Favorable Side of the

Earnings Picture,” that: (1) earnings for 1949 would be

“in the neighborhood of $1,200,000 to $1,500,000 as com-

pared with consolidated earnings of less than $400,000 in

1948”; (2) because of the construction loan profits then

being realized, the forecast for 1950 earnings “seemed to

be up a good deal”; and (3) “there should be a substantial -

carryover of the extraordinary profits into 1951” (Ex.

K-295, R. 1957-58). Shipman: then stated:

“Looking further ahead, there is a distinctly

favorable factor to reckon upon. As the amount of

outstanding IDS certificates is reduced, the dollar

amount of the adverse balance in investment account

(cost of certificate money less income on invest-

ments) will. decrease. It will decrease substantially

year byfyear beginning with 1951. Fhis means

that there will be a progressively smaller drain

upon the profits from Management and Sales ac. -

tivitees. The effect upon net results will be dy-

namic. Management profits seem certain to con- °

_ tinue growing. Profits from selling activities are

bound to be large regardless of sales trends.” (Ex.

K-295, R. 1988) age in original. iz

_ The Referee was shown that wy February 1950, Purcell

had received IDS forecasts informing him that IDS’ net:

operating income in 1950 would jump to at least $20:00 a

share—(it actually turned out to be over #©.00 per share

(K-359, R. 2145, 2146)); and that, under date of February

11, 1950, Purcell furnished this information in a five-page

‘report to Young, Chairman of Alleghany, and to Kirby,

President of Alleghany (Ex. 345, R. 1186). Purcell him-

self was at this time Vice-Chairman of Alleghany and had

been put on IDS’ Board by Young ‘and Kirby and given

principal responsibility for keeping in close touch with

IDS’ affairs (R. 537, 540; Ex. 199, R.- 1023-34).

Purcell’s report of February 11, 1950 (Ex. 345, R. 1186)

reviewed “the major accomplishments during Alleghany’s

’ first nine months of control of IDS and then dealt with

the outlook for the coming year. After noting the neces- ~

sity for increasing IDS’ reserves by,$4,300,000 to correct

one aspect of the deficiency claimed by the SEC, it

acquainted Young and Kirby with the fact that a steady

‘upward surge was taking place in all of IDS’ depart-

ments.* He stated that IDS was conservatively forecast- °

ing that in 1950 the Mortgage Department alone would

realize a net income of $5,720,000. He pointed to the

favorable trend in IDS’ return on investments (Invest-

- ment and Certificate Servicing Department), which had

already increased from 4.336%: to 4.469%, or, if construec-

tion loans’ were included, from 4.361% to 4.629%. He

noted the increase in fund sales (Management Operations

Department and Distribution Operations Department)

from. $42 million to $52 million and vid “that we will see

a similar increase in certificate sales,” which would auto-—

matically increase IDS’ income from underwriting and

management fees.** Purcell wrote:

“Sales, both of certificates” a of fund: shares,

are running well ahead of last year. I think there

will be over $52,000,000 of fund sales compared

. to $42,000,000 last year, and that we will see a

similar increase in certificate sales.

“The Mortgage Department operations promise

to show continued substantial earnings. During >

1949 the department funded $153,000,000 of new

loans, of which $107,000,000 were sold to others.

* IDS’ four departments were: (1) Mortgage; (2) Investments

and Certificate Servicing ; (3) Management Operations, and (4)

Distribution Operations.

** This information, produced before the Referee, appears to have

_ been overlooked by Judge Friendly in his dissent. |

At year end $125,000,000 of new loans were com-

mitted to be funded in 1950. Gross income from

market operations was $4,487,000 (not ineluding

interest), leaving net income before home office

expense of $2,277,000. As a result of the trans-

actions the over-all interest rate on permanent

portfolio mortgages was increased from 4.336%

to 4.469%, and. if construction loans are included,

the over-all interest rate was increased from 4. 361%.

to 4.629%, resulting in - approximately $500,000

additional annual interest collected.

“During 1950 the Mortgage Department fore-

casts,* conservatively, $8,315,000 gross income from .

‘mortgage operations (not including interest), with

a net before home office expenses, of. $5,720,000. -1

am told that these are very conservative estimates

and take into account only business which is pres-

ently.on the books.” (Ex. 345, R. 1188-89)** |

None of the IDS forecasts or projections (including those

claimed by petitioners to. have been “concealed”) caleu-

lated projected earnings on a per share basis.t The |

* This was one of the several types of IDS earnings forecasts made

. known and available to the Zenn objectants.

ee Despite Purcell’s optimistic forecast there remained the risk of

course, that any one of the unfavorable factors noted above (pp.

15-16) might depress’ the value of IDS’ stock. Such business

forecasts, therefore, whether “bullish” or “béarish”, were of limited

value. They are sometimes described by economists as “economic

astrology”, an indication of their circumscribed utility (see e.g.,

N. Y. Times, March 28, 1950, p. 40, Col. 7, quoting economist

Q. Forrest Walker). The IDS Mortgage Department, as late as

April 25, 1950, made the following statement about the future: -

“Mortgage Division estimates income next three months of

$1,400,000. ‘Because there are so many governing factors the

estimate given cannot be considered as more than a } net : <a

351, R. 1208, 1211) (Emphasis added.) .

+ Petitioners’ brief (p. 12) gives thé errorieous impression that

“projected earnings per share” were shown on IDS’ projections,

‘whereas the figures per share actually represent calculations made

by them for this appeal, in which they have disregarded substan-

tial deductions (e.g., losses on sale of investments) before arriv-

ing at their inflated figures per share.

. figures disclosed- in Purcell’s report, divided by IDS’ .

issued shares, forecast IDS’ 1950 earnings at $19.61 ‘per -

‘ share from Mortgage Department income alone, plus the

additional income from the surge he reported for its other

three departments (Ex.: 345, R. 1186).

Both Purcell and Young were called and testified at

length before the Referee, beirig-questioned as to both

favorable and unfavorable factors at the time of the

1949-50 exchange. Young was Chairman of the Board

and chief executive officer of Alleghany (R. 479-80);

Purcell, a former officer and director: of Alleghany was;

at the time he testified, a director of IDS and former

Chairman of it Board: and President (R.. 578). Both

Pureell’s and Young’s files on IDS were produced and

made available to counsel for the objectants (Ex. K-353,

R. 2055 ; Ex. K-355, R. 2083).

(b) The projection evidence before the o

Zenn Referee:

The main thrust of petitioners’ case here is ‘eased on

the alleged concealment by Kirby (who was not served,

not asked to produce documents and who did not testify in

Zenn) of favorable IDS projections and of clues which

‘ would indicate the existence of such projections. Follow-

ing petitioners’ failure of proof before the District Court,

petitioners sought to change the theory of the case and

_ hold Kirby liable for ateged concealments by 7 and

Purcell.

~In’ Point I of our argument (pp. 79-93, infra), we

review in detail those documents which plaintiff in the

District Court claimed that Kirby “concealed”. In Point

IV (pp. 111-151, infra) we review those documents* which

* We shall not repeat here the detailed analyses there made or the

conclusions presented beyond stating that there is no evidence of

“concealment” by anyone and that the documents themselves are

irrelevant or cumulative or both.

petitioners, as part of the new. claim made for: the first

time on appeal, charge that Young and Purcell concealed.

We wish here merely to list and describe briefly the

substantial number of forecasts and clues as to the exist-

ence of foreeasts which were before -the Zenn Referee.

(i) exhibits befere the Penn Referee:

Ex. K-295, R. 1951:

This report, made-on August 15, 1949, was prepared

by Shipman after Alleghany had acquired control of IDS..

Under the heading “Karnings Prospect Versus Reserve

Requirements,” Shipman reported that “According to the

_ latest actuarial study by Joseph Froggatt & Company,

Inc., dated April 29, 1949,* tan earnings rate of 4.864%

would be required on the dollar amount of reserves:

maintained by the Company at December 31, 1948, to meet

its maturities and other contract requirements’ ” (R. 1958).

Under the heading “Projection ‘of Money Flow,” he ‘set

forth .in full “a presentation of the [IDS] accounting

department’s estimates of cash receipts and disbursements

by vears for 1950-1959 inclusive”. (R. 1960)

Ex. 345, R.. 1189:

This report -from Purcell, dated February 11, 1950, fore-

casts increased income in 1950 for each of the four

operating departments of IDS. It refers specifically to

a projection prepared by the Mortgage Department.

Ex. K.293, RB. 1906:. .

‘This report, by. the: Cleveland investment firm of

Saunders, Stiv rer & Co., refers to the fact that IDS first

* Thus, specifically referring by name and date to one of the docu-

ments whose existence petitioners say was “concealed” from the

Zenn court (Pet. Br., pp. 11- 2).

35°

began to use actuarial studies in 1943 (R. 1907) and that *

one of the functions of ‘the actuarial reports was to project

the “income rate of return” of IDS (R-1920, 1923).

Ex. K-294, R. 1933:

This report, dated April 7, 1949 was prepared by

Charles Shipman, Alleghany’s securities analyst. Under

the heading “Projection of Earnings,” Shipman sets forth

the amounts of. income projected for the ten-year period

1947-1956 (R. 1945). He states that this table of earnings

is taken from “the official projection as aecegeeed to the

SEC” (R. 1944).-

Ex. K-354, R. 2060:

_ This letter from the Comptroller of IDS, dated August

2, 1955, reports that in August 1949, Young received the -

Monthly Summary of Operations not only for IDS, but

for ‘two of its subsidiaries, ISA and ISC (R. 2060-2061).

Ex. 365 id, which the dissenting opinion in the Court of

Appeals found to be so crucial (R. 2352-54, 2359-60), had-

attached to it the Summary of Operations for. the year

1950.

Zenn Ex. 356 TTT:

This IDS document is a “Comparison of Actual Cash

Receipt and Disbursement Transactions to the Estimated _

- * Reprinted as Appendix D hereto. It was not introduced at the

trial, since there was nothing. to show that Kirby had ever received

IDS internal projections and since the receipt and “concealment” -

of those projections by Young and Purcell was.not an issue. This

_ Court, however, may judicially notice it as part of the record in

related proceedings. Craemer v. Washington, 168 U. S.°124, 129

(1897) ; National Fire Ins. Co. v. Thompsen, 281 U.S. 331, 336

(1930) ; Alexander v. Hillman, 296 U. S. 222, 231n. (1935).

36°

Cash Receipts and Disbursements from January 1,.1950

- through July 31, 1950.” -In physical appearance, it is

similar: to. Ex. 365 id., which Judge Friendly foundgto be

‘such a er ucial elue to the existence of projections.

. \

(ii) testimony haters the Zenn Referee: |

Both Young and Purcell testified before the Referee.

Prior to Young’s appearance, his deposition in federal

Zenn was marked as Ex. 4 befgre the state court Referee\

(Ex. 356, R. 1220). During that deposition, he had. testi-

fied as follows with respect to IDS ——— projections

and forecasts: :

“A. IT am sure that I ecnlonk: ‘projections, from |

time to time, of funds available for the meeting of _

the certificate reserves.

“Q.° I think you have referred to. those, Mr. Young,

and I would ask you to put that particular problem

aside for a minute, and to turn to the question of

earnings: forecasts, such as forecasts of, earnings

from mortgage operations.

“A. I think I received such forecasts as I did of.

_ sales and all-other activities of the company.

“Q. Do you have any recollection at what time

these forecasts were. made?

“A. I think they were made currently, as part of

the corporation’s regular routine.

“Q, When you say ‘currently’ would you say from

month-to-month?

“A. I would say. once a year that the company

would make a projection of the outlook over a

period of 5 years.

““Q. When you speak of a dhol of 5 years, you

are probably again referring now to maturities as.

they would be met?

“A. Maturities and income and sales and all the

activities of the company, a normal budgetary pro-

gram which most well-run a have.” (App.

C, pp. 42-44) .

: 37

When Purcell appeared before the Referee, he brought

with him “all of my files and reports and everything that =

I could, and I remember coming into the courtroom with

‘an enormous briefcase in one hand and a great enormous

red manila folder under my ‘other arm ... .” (R. 580).

At the outset of Purcell’s one day’s testimony, Graubard

(objectants’ counsel) examined these IDS reports for a:

“few minutes” (R.. 1989). Concerning them, Purcell testi-

fied below (R. 596) that: ' |

- “T know that Mr. Graubard. reviewed some of

the items which I brought and some others, a large

number of the other items I brought, and nobody

asked me about, although they were there and I had

tendered them to Mr. Graubard. There ‘were both

files and financial statements and projections and

reports and matters of that character.”

' The accuracy of Purcell’s recollection that it was his

‘practice “to keep those projections” (R. 598,° 600) is

attested to by the following statement made by him at the

- completion of his testimony before the Referee in Zenn:

“This company [IDS] produces a very large num-

ber of reports, many of which-I brought here

i that. nobody has asked me about.” (Ex. K-

353, R. 2055)

- ( c) The so-called Young ‘ ‘perjury:

The alleged “perjury” of Robert Young is referred -to

_- by petitioners in three places (Pet. Br., pp. 17, 39 and

' . 40, n. 44). For instance, at page 39, peltiteneirs state

that: re ae , :

“Neither Kirby nor Ireland disclosed that Ireland

now knew, and had informed Kirby, that Young —

had given perjured testimony 7 the earlier

hearings (R. 417).” os

* He testified “I am sure that I produced the 1955 projections, and

those projections were normally for five years in advance.” (R.

‘ 600) (Emphasis added. )

Perjury is.a.crime punishable in New York State,

by imprisonment for a period up to seven years and a fine

in the event financial gain has been realized: from the

felony (N. Y. Revised Penal Code §$$70(2)(d), 210.15).* .

Accusations that such a serious crime has been committed

should not be made lightly. . : :

Petitioners’ basis for the eharge is a deposition state-

ment by William Eppler that Kirby had been told by |

Ireland “that Mr. Young had perjured himself” (R..417). —

This assumes more than ordinary significance’ here because -

_ the reference to “perjury”: was quoted by Judge Friendly

in his dissent: (R. 2359-2360, fn. 3) in support of his con-

clusion that the Zenn Referee had been misled. The

record reveals, however,

(1) that, the Sepigey” had nothing to do with

the 1949-1950 Exchange but related to a “put”

agreement between Alleghany and the Murchisons,

which had been the subject of an examination of

Young, in a case called Young v. Ebbott, by Henry

J. Friendly, Esq., prior to his appointment to -the

¢ . Court of Appeals (See App. F, pp. 60-63); and

- (2) that Eppler was testifying here to what he ~

had-been told by Kirby and/or Ireland, that Ireland |

had been told by Phillips that, in Phillips’ opinion

and based on Phillips’ interpretation of Young’s _-

testimony in an earlier action, Phillips thought he

could prove that Young had perjured himself.**

* The Revised Penal Code, enacted in 1965, will not. become effec-

tive until September 1, 1967. The present law provides a penalty’

of up to five years imprisonment (N. Y. Penal Law $1633).

** Petitioners’ counsel, who now accepts Phillips as credible for the

purpose of claiming perjury against Young, signed the complaint ‘

in this action, which alleges (Par. 52, R. 183),

-“(a) that Phillips had been a chronic litigator and in the

course of several stich litigations had made wild, reckless

and defamatory charges against the or of numerous

corporations (including “Kirby himself) .

The ultimate basis for this charge was explained by

Phillips (R. 485) at the trial below: | |

“That was the evidence I referred to yesterday,

that when Mr. Young testified in Young v. Ebbott,

he had testified truthfully under examination by

then attorney Henry Friendly that there was an

unconditional put by Alleghany Corporation to

Clint Murchison, Sr. However, Mr.: Pomerantz

never discovered that: testimony and, when Mr.

~Young was deposed a .year later in Zenn v.°

Anzalone by Mr. Pomerantz, Mr. Young under oath

stated he had never seen the put agreement, that .

it was not unconditional—I am giving it in sub-

stance—and that the agreement was drawn up by

his green staff at that time. I had read that testi-

mony. I informed Mr. Graubard of both the

Young v. Ebbott testimony and the Zenn v.

Anzalone testimony. There came a time when

Mr. Young was put on the stand in Zenn v.

“Anzalone where he adhered to his later testimony .

and -was not confronted with the Young v Ebbott

testimony.” ;

' Neither Eppler nor Phillips was an attorney. However,

Thomas Daly, Young’s attorney in both Y oung v. Ebbott

and Zenn v. Axzalone, testified; under pre-trial examina- _

tion by petitioners’ counsel as follows:

“A. I remember a‘conversation with Mr. Ireland,

or maybe it was more than one, I don’t recall, and

I don’t recall the’ date of it, except it was sometime

in this period, in which he reported to me that

Phillips, if the hearings went on, would be able to

show that Mr. Young had perjured himself in his

testimony, I think it was in the Young against

Ebbott. suit, in connection with the put, and I told

Mr. Ireland that I knew all about that testimony,

there was nothing to worry about it, and it was just

‘some more of Mr. Phillips trying to scare him.

That is the. conversation .as-I remember it, the

substance of it.” (Dep., p. 52)

Daly, a lawyer, did not think the perjury charge had

any substance. His opinion was, moreover, based on a

first hand knowledge of the facts. The trancript of testi-

mony on the day when Young was éxamined in Young v.

Ebbott by Friendly shows that Daly was present.* Daly

was also present during the Zenn hearings. The contrast

is indeed sharp between the considered opinion of an

experienced trial attorney and’ petitioners’ only basis for

“this ‘serious charge, Eppler’s hearsay report of Phillips’

interpretation of Young’s testimony.

VIll.. The Referee’ s Report in Zenn:

On November 17, 1958, the Referee filed with : the

‘Supreme Court his 125-page report which, after reviewing

the ‘facts, gave an appraisal of the merits of each of the

eight causés of action asserted and.recommended approval

of the settlement (Ex. K-137, R. 1592-1716).

Proceeding to the first cause of action (which attacked |

the 1949-50 exchange), he considered at the. outset

‘objections to the jurisdiction of the New York Court

based on §27 of the Securities Exchange Act (Ex. K-137,

R. 1640-41). Based on his evaluation of the complaint and

of the testimony he had heard, the Referee described the

_ §27 claims as “a mere excrescenee or superfluity, tacked

on to what are otherwise sufficient allegations of a claim

for relief under New York Law” (Ex. K-137, R. 1641),

He noted, moreover, that the same objections had already

* See, for instance, the: exchange of counsel when Mr. Friendly

". attempted to go beyond the issues in Young v. Ebbott and to

‘interrogate Young with respect to the 1949 IDS desta

Ls areca F, pp. 60-63, infra.)

been presented to and rejected by both the New York

Supreme Court and the Appellate Division thereof, and

that no further appeal had been taken from those decisions

(Ex. K-137, R. 1640). |

On the merits of the allegations. made in the first

cause of action, two views were urged on the Referee.

According to one, a group of responsible directors of

Alleghany, acting well within the teaching of Meinhard v.

Salmon, 249 N. Y. 458, 164 N.E. 545 (1928), helped their

company.to reduce its burden, of preferred dividend

arrearages by surrendering some of their Alleghany

preferred for a number of Alleghany portfolio shares,

including the promising but still speculative IDS stock. -

That stock might go up or down in value, depending on

whether favorable or unfavorable events. later material-

ized. In the meantime, it could not be used by Alleghany’s

Treasurer as collateral for bank loans (Ex. K-137, R.

1639) and it could not be included in the ‘larger tender

to stockholders without a costly SEC Registration State-

ment, which would invelve difficulty and delay (Ex. 206,.

R. 1039; Ex, 215, R. 1044).

Disclosing their interest to the directors (Ex. 206, R.

1039; Ex. K-208, R. 1853), and their transaction to the

stockholders (Ex. 199, R. 1036; Ex. 198, R. 1029; Ex. 215,

R. 1046-47), they met all the tests of fiduciary responsibility

imposed by the laws’ of wras New York, and the

United States.

The other view is that so stnenety urged in Judge

Friendly’s later dissent: that members of Alleghany’s

Board, possessed of secret information about the future,

conspired to despoil it of some IDS stock they had just

helped Alleghany decide to buy, and that they concealed, or

failed to disclose, its recent earnings and. earnings pros-

pects on which they had relied:in making their decision.

~ eee Fer et eae we ate Dibba eras a Sete ee

42°

The Referee’s opinion, based on his analysis of 4,600.

pages of testimony given by eighteen witnesses observed

by him, together with some 480 exhibits is, however, :the

only opinion on the merits of the Zenn claim which rests

on the foundation of something like a trial: .

“The merits and demerits of the claims have been

- presented with a thoroughness worthy of a sharply

contested trial on the asian rather than a settle-

ment hearing.

“While I am not called upon to reach | a final and

definite conclusion as to the foreseeable success or

failure of the first cause of action, it is my consid-

ered opinion that the substantial defenses above

reviewed militate against the probability of success,

and warrant the conclusion that a trial-court would

give judgment to the defendants on the merits and

a fortiori, on the claim for rescission.” (Ex. K-137,

R. 1654) ©

In reaching this conclusion the Referee noted:

“Even if we assume that Young and Kirby in April

1950, had reason to take a very optimistic view of

the future earnings of IDS, this does not lead to a

finding that Young. and Kirby withheld material

information from the stockholders of Alleghany.

They did tell the stockholders in the annual re-

port for 1949.that the outlook for future earnings

was ‘unusually promising.’’ Any attempt at more

concrete prediction might well have been foolhardy.

It is a common experience that the hope for future

earnings improvements, however sound they may

appear .at the moment, is often disappointed by the

event.” (Ex. K-137, R. 1645)

“. .. We must further consider that any specific

predictions which Young .and Kirby might have

, made concerning the future earnings of IDS would

* be read not only by the stockholders of Alleghany

but w the public at large, and that in reliance on

such predictions many persons might have been

induced to invest large amounts of money in the

stocks of Alleghany and IDS. If the rosy predic-

tions of Young and Kirby should subsequently not

materalize, they and Alleghany might have been

exposed to a huge claim for damages by disap-

pointed investors. (See Sec. 18 of the Securities

Exchange Act).” (Ex. K-137, R. 1645-46)

“I find therefore that Young and Kirby went to”

the limit of permissible predictions of the future

‘when they stated in the annual report for 1949 that

the outlook for eventual profits in IDS was con-~

sidered to be’ unusually promising.

“Taking a broad view of the situation, it seems to

me that the.documentary record stating and even

overstating the recent prosperity. of IDS and the

frank expression of hope for an unusually promis-

ing future, negate the contention of general counsel

for plaintiffs and objectants that Young and Kirby

did not adequately inform the stockholders of

Alleghany of IDS future prospects.” (Ex. K-137,

R. 1646)

IX. New ‘York Supreme Court Confirmation ,

of the Referee’s Report and Approval

’ of the Settlement: |

The objectant Rosen filed exceptions to the report.

Thereafter, extensive briefs were filed with the New York

- Supreme Court in opposition to and in support of con-

firmation of the report .(Ex. K-41, R. 1495). Mr. Grau- »

bard, counsel for Rosen, argued to the state court that the

- record before tlie Referee clearly established that Young

and Kirby had inside information which was not revealed

to the stockholders:

RRA SRT ns SaeteeO LIRIK Fe eR Ee be ON Pe

> . :

“On February 11, 1950, Purcell wrote a_ letter

(Ex. 327)* to Young and Kirby. That letter set

forth in detail a summary of the substantial im-

provements in the operations of IDS which oc-.

curred during 1949. Specifically it reported that

enough mortgage business for 1950 had already

been booked in: 1949 to add an additional $5, 500,000

to IDS* earnings in 1950. ~

“Ia addition, Purcell reported a substantial in-

crease in IDS certificate and fund sales, an increase

in the overall net rate of interest IDS received, a

' substantial reduction of overhead expense, and the

organization of a new Canadian subsidiary to begin

operations in 1950. -He also reported that IDS

would soon be in a position to make proper accruals

for certificate reserves and thereby end its major

difficulties with the SEC.” (Ex. K-41, R. 1509-10)

“Did the defendants have reason to believe late in- ~

1949 or early in 1950 when they took the IDS Class

A stock that these substantial earnings would con-

tinue and in fact spectacularly increase?’ Exhibit 327

conclusively establishes that they did. It. is a per-

sonal letter from Purcell to Young and Kirby dated

February, 11, 1950.” (Ex. K-41, R. 1519)

On March 12, 1959 the Supreme Court ioned the

_Referee’s report, adopting it as the opinion ‘of the court.

The court noted that it was called on to weigh “the

benefits held forth by the agreement of settlement

against benefits dependent on the’. likelihood of re- _

covery . . . keeping in mind that agreements of com-

-promise are generally favored by the courts,” and that

it had had the benefit of a “lucid, painstaking and compre-

hensive. report of a Referee achieved after protracted

hearings which more nearly resembled a trial on the—

- merits .. .” (Ex: K-138, R. 1718, 1719).

* Ex. 345 herein, R. 1186. - | aka

The Supreme Court found that the stipulation of settle-

ment was fair and reasonable, was negotiated at arm’s.

- length, was free from fraud and collusion, and was in the

best interests of Alleghany and its stockholders (Ex. K-

138, R. 1720). The court pointed out, however, that an

injunction order which had earlier been entered in a

pending suit in the United States District Court for the

Southern District of New York, entitled Breswick dé Co. v.

Briggs, remained as an impediment to the conclusion of

any settlement in Zenn* and to the delivery of a general

release, and therefore directed-that ‘no order should. be

entered on its decision.until it was advised that the

Breswick injunction had been vacated = K-138, R.

- 1720).

X. anil v. Briggs (S.D.N.Y. .

Civil Action No. 98-371) :

On February 14, 1955, while the Zenn suit was pending

in the New York Supreme Court, the Breswick action

was commenced as an Alleghany stockholders’ derivative

suit against fourteen Alleghany directors’ (including Young

-and Kirby but not Purcell) and the Murchisons in the

' sel, Jr., of the firm of Rosston, Hort & Brussel. Randolph ° i

United States District Court for the Southern District of

New York. Although the complaint in that action was

later amended to incorporate some of the claims already

alleged .in. the consolidated amended complaint in Zenn, .

it did not at any stage include any claim with respect to

the 1949-50 exchange.

_ Counsel for the plaintiffs in Breswick was George Brus-

Phillips was a financial consultant to Brussel.

” Xi, ‘The Breswick injunction of October 27, 1955,

and its Effect on the Zenn Proceeding:

After the announcement on July 28, 1955 of the pro-

posed settlement of Zenn, the District Court, on October

Be nae is 46

27, 1955, granted a motion by the Breswick plaintiffs to

enjoin the Breswick defendants from “interposing in this

[Breswick] action any. defense based upon any judgment

entered in any action other than this action, pursuant to

_ any agreement not negotiated with the [Breswick] plain- —

tiffs or their attorneys .. .” on the ground that the

Breswick plaintiffs (whose complaint contained many of

the same causes of action as in Zenn) had been improperly

excluded from the Zenn settlement negotiations | which

would have disposed of those claims in Breswick that were

also asserted in Zenn (Ex. 20, R. 798)..

"The injunction in no way derived from any claim based

on the 1949-50 exchange, which was not asserted in Bres-- |

wick (R. 386; Ex. K-137, R. 1611). *Its sole purpose was —

to protect the bargaining position of the —— plain-

tiffs as to their causes of action.*

At the suggestion of the District Court in Breswick, the

defendants engaged: in scttlement conferences with the

Breswick plaintiffs: (Ex. 21, R. 814). The defendants

increased their cash offer from $700,000 to $1,000,000 and

the Murchisons offered to return to Alleghany control of

IDS (Ex. 22, R. 842-44), which they had acquired in 1954

and 1955 through an exchange of Alleghany’s voting stock

- of IDS for their non-voting stock of IDS (Ex. K-137, R.

1603). This became known as the “Basic Settlement.”

The Breswick defendants thereupon moved to vacate the -

injunction, and. the District Court appointed. Mr. Fitz-

‘sjmmons, the Zenn Referee, as Special Master in Breswick

(Ex. 20, R. 799).- Hearings were held by the Special

Master between October 30, 1956 and November 16, 1956. °

Some 675 pages of testimony were taken, relating pri-

marily to the good faith*of the settlement negotiations -

which had taken place between the defendants and Brussel

'-* Unreported opinion of Hon. John W. Clancy, U.S: “_ in Bres-

wick .v. Briggs, Cw. Act No. 98-37 1, S.D. NY. Nov. , 1955.

ae, areas

(counsel tor the Desamiik plaintiffs) during the preceding

spring and summer (Ex. 22, R. 841).

In June of 1958 the’ Referee, before submitting ‘his

report in.Zenn, held two further hearings in Zenn. in

which the terms of the Basic Settlement were incorporated

in the settlement offer for Zenn (R. 2337). °

XII. Judge Dimock’s Rejection of the ee

Master’s Report in Breswick, the Negotia-

tion of Kirby’s Separate Zenn Settlement and

_ Consent Vacatur of the Breswick Injunction:.

On November 17, 1958, the same day on which he sub- -

mitted his report in Zenn to the New York Supreme Court,

Fitzsimmons submitted his report as Special Master to

the District Court in Breswick, reporting that the Bres-

- wick defendants had negotiated in good faith with the

plaintiffs and recommending that the October 27, 1955

injunction be lifted (Ex. 22, R. 854).

( a) The order of Judge Dimock:

On September 22, 1959, Judge Dimock rejected the

Special Master’s report on the ground that the Special

Master, in addition to finding that the defendants. had

conducted good “faith negotiations leading to an: increase

in the offer, should have permitted the Breswick plaintiffs

to offer evidence to support their claim that the increase

was not substantial-in relation to the total value of all: the

Breswick claims (which did not include any claim based

on the 1949-50 exchange) and remitted the matter to the

Special Master for further hearings (Ex. 27, R. 873). |

(b) The negotiation of rome * ‘separate

settlement’’:

After Judge Dimock’s decision of September 22, 1959,

Kirby, in order to try to bring the lengthy and expehsive

litigations to a close, authorized Charles T. Ireland, Jr.

‘to explore through Phillips the possibility of a settlement

of the litigation (R. 359). Until the litigation was con- .

cluded, the normal business activities of Alleghany would

~ continue to be disrupted by the constant demands made

on the time and energy of Alleghany’s officers and on the

financial resources of ——, itself (Ex. K-138, R.

‘1719).* 2

When Daly advised that neither the Young Estate nor

the Murchisons were willing to contribute. more to the

Basic Settlement, Ireland turned to the possibility of what

_ the complaint points out was a “separate settlement” for.

Kirby (R. 370-71). At this point Daly-stated that his

firm’s. representation of the Young Estate, which was

against contributing more, prevented him from represent- —

ing Kirby in a separate settlement based on an increase

in the cash amount of the Basic Settlement (R. 2308).

On December 18, 1959, Donovan Leisure Newton &

Irvine was substituted for Lord, Day & Lord as counsel

for Kirby (R. 513-15).. At the same time Ireland was sub-

stituted for Lord, Day & Lord as counsel of record for

Alleghany both in Breswick and Zenn. Negotiations be-

tween David Teitelbaum of Donovan Leisure Newton &

Irvine, as counsel for Kirby, and Graubard and Brussel,

* At the trial below, Ireland described his feelings about the settle-

ment, as an officer of Alleghany, as follows:

“A. Well, if you want to use as the factual standard the thought

that for approximately five years Alleghany had not been able to

conduct any of its business, actually what it had been for five years

was sort of a retainership for law firms, it had practically no chance

to move forward whatsoever, and here came a settlement. which,

- among other things, produced three million dollars into the treasury

. of Alleghany, returned control of IDS from the Murchison brothers,

to whom it probably never should have gone in the first place, back

to Alleghany, and perhaps more importantly than all of these things

it allowed or/at least it would have allowed, if subsequent events -

had not come along, it allowed Alleghany once more to have the

opportunity of becoming a living, breathing corporation. And that

_is what mean, Mr. Carter, when I say the settlement was

— - (R. a

representing the Zenn objectant and. the Breswick plain-

tiffs, respectively, were conducted on December 19 and

20, 1959 (R. 2309). .

Ultimately, a separate - Supplemental Stipulation of

Settlement in the Zenn action was executed by Teitelbaum

as attorney-in-fact for Kirby and by Graubard for the

—objectant Rosen in Zenn (Ex.. 29, R. 887). It provided

‘for the immediate payment by Kirby of $1,100,000, and

for the payment of an additional $150,000 in lieu of

_Kirby’s obligation under the Basic Settlement if the Basic

Settlement ultimately should not be consummated {Ex. 7,

R. 755). By the terms of this Supplemental Stipulation

of Settlement and of the order of the New York court.

approving it, the Zenn action was to be severed and dis-

missed on the merits as to Kirby, while reserving: all

rights of Alleghany against the Young Estate, the Murchi-

sons, et al. (Ex. 7, R. 750, 755). It further provided that

in the event a judgment were later to be recovered against

the other Zenn defendants, the amount of any such judg-

ment was to be reduced by the pro rata share of Kirby’s

‘liability for his own part in the causes of action asserted

(R. 750-51, 755-56).

_ An order vacating the Breswick injunction as to Kirby,

- consented to by Brussel on behalf of the Breswick plain-

tiffs, was prepared. Pursuant to arrangements made with

the court by Brussel-and Teitelbaum, the consent order

was presented to Judge. Dimock. on December 22, 1959

(Ex. 30A, R. 889). Judge Dimock directed, however, that

notice of the application be given to the other parties

' (Ex. 30A, R. 904, 906).

The following day, the Marchisona” attorney appeared -

and vigorously opposed Kirby’s .application; the Young -

Estate also declined to join in the Kirby settlement (Ex.

30B, R. 913, 916). But finally, unwilling to be left out, the

Young Estate and the Murchisons reported to the court

on December 24 that they had agreed upon settlement of

their liability (Ex. 30C, R. 932-33)... Daly advised Judge

Dimock that the Young Estate had agreed with Graubard

to’contribute an additional $900,000 to the Basie Settle-

\ ment in Zenn (Ex. 31, R. 938) and Judge Dimock there-

\ upon signed the consent order dissolving the Breswick

eases ‘

\ (d) The separate Kirby heilainenss

\On “December 28, 1959, Justice McGivern in the New .

"York Supreme Court approved the Kirby Supplemental

Stipulation of Settlement and entered an order directing

that upon Kirby’s payment of the amounts agreed upon

“a judgment be entered herein severing and continuing _

this action as to all defendants other than Kirby, dis-

missing on the merits and with prejudice the consolidated

amended complaint herein as to tle defendant Allan .P.

. Kirby but reserving all rights of Alleghany Corporation

and its stockholders... . against all other defendants

named herein. .. .” (Ex. 7, R. 750).

Thereafter, on December 29, 1959. Justice McGiy

approved ‘and made a similar order concerning a Second

Supplemental Stipulation of Settlement presented to him

on behalf of the Young Estate and the Murchisons (Ex.

9, R. 762-765).

On February 4, 1960, there was entered a ‘dain

finally dismissing the Zenn complaint on the merits as to

Kirby, upon proof of Kirby’s performance of his obliga-

tions under his Supplemental Stipulation of Settlement

(Ex. 11, R. 772-775). ae

‘Separate orders of dismissal on the merits were there-

after entered as to the Young and Murchison defendants,

tad

Das

and after all defendants had performed all their obliga-

-tions under the settlement, a general release from all

claims asserted in Zenn was. delivered by Alleghany to

each of ten defendants in. the Zenn action _ 1-42,

_R. 2279-82). 3

On June 21,°1960, a final ‘iliac dismissing the action

on the merits.as to all persons named as defendants in

Zenn was duly entered (Ex. 1-42, R. 2273, 2282-83).

- XIII. The Issues Presented and Tried Before

ee the District Court in the Present Action:

_ The Murchison complaint made the “separate Kirby

“settlement” the subject of collateral attack in this action.

.- The crucial paragraphs of the Supplemental and Amended

Complaint, paragraphs 38 and 39, are precise in describ-

ing the boundaries and personal nature of Kirby’s alleged

fraud in terms of Kirby’s knowledge, eid s actions, and

Kirby’ S omissions:

“38. By reason of Kirby’s cite to Al-

leghany as director, officer and controlling share-

holder who had’ acquired Alleghany property in a

transaction with Alleghany, and by reason of his

position as a proponent .of the settlement aforesaid,

Kirby was, under duties to disclose or cause to be

disclosed to the Referee, to the Special Master, to

this Court and to the New York Supreme Court,

nll facts concerning the 1950 Exchange Transaction.

material to a determination by said official and

' said courts of Kirby’s liability to Alleghany on

‘the 1950 Exchange Transaction and the. fairness’

and adequacy of the proposed: settlement with re-

spect to said liability. . \

“39. Kirby failed to discharge the duties ‘ie.

' tofore alleged in —— 38 by failimg to adduce

RRND ATA RNiaERAUAR mlai Ae Ateneo pod: linear se mgr eaain oon ch baninn ena ny cere:

. .* . . :

- or cause to be adduced before the Referee, Special

Master, this Court or the New York Supreme Court

(a) facts which at the time of the 1950 Exchange

Transaction he knew or should have known concern- -

ing the financial condition, future earnings and

_ prospects of IDS and the ability of IDS to‘meet its

contractual requirements. * * *” =. 174-75, em-

phasis added.) emis tt ‘

Kirby’ s Answer poitited out that in focusing on Kirby’s

“separate, settlement,” the complaint had omitted any

mention of the other Zenn defendants, Young, Purcell, et

al indispensable parties if the relief sought were to be

granted (Fourth Affirmative Defense, R. 206).

Nevertheless, the District Court allowed the amended .

complaint to be filed, attacking only Kirby’s conduct and.

.Kirby’s. “separate settlement.” The District Court and

the parties agreed that ‘the legality or propriety of the

1949-50 exchange was not an issue to be tried (R.. 165).

On December 14, 1962 the District Court, referring to the |

_ impending trial, stated: .

- “Tt will not go into the issue as to whether the 1950

. transaction was a bad transaction or not; it will .go

_ into the question of whether certain facts were con-

. cealed from the Court. Is that understood by every-

body ”

‘The answer" of Mr. Updike, petitioners’ counsel, to.this

question was an unequivocal “Yes” (R. 165).

~ (a) Pre-Trial. Development of the Issues:

“The District Court, adopting the “Plaintiff's Proposed

Statement of Issues” (R. 336) after a “number of pre-

trial conferences . . . to define the issues in the’ action

(R. 2289) defined the issue to be tried as follows:

“1, Did Kirby procure by fraud an order of

this Court dated December 24, 1959,* vacating in-

sofar as Kirby was concerned, an order -of this

Court dated October 27; 1955; an order of the New ~ -

York County Supreme Court dated December 28,

1959 ;** a judgment of the New York County Su-

preme Court dated February 4, 1960;*** and

releases from plaintiff subsequent thereto by means

of:

“(b) A failure by Kirby to adduce or cause to

be adduced before the State Court or its Referee

or this Court ‘or its Special Master in the Zenn

(State) and Breswick litigations facts material to

an evaluation of Kirby’s liability on claims arising

out of the 1950 Exchange Transaction and the fair-

ness and adequacy of Kirby’s proposed settlement

in connection therewith?” (R. 336) (Emphasis

added.) . 4

Petitioners’ counsel conceded. at pre-trial that the

plaintiff had the burden of proving fraud by Kirby per-

sonally. For instance, during the course of a pre-trial con-

_ ference on March 25, 1963, in defining the issues to be tried,

petitioners’ counsel took this’ position :

“We would have the burden of convincing Your

Honor on that phase of it [the charge of “non-

* Order. by Judge Dimock vacating as to Kirby the Injunction

Order of Judge Walsh dated October 27, 1955 in Breswick &

Co. v. Briggs; S.D.N.Y. Civ. Action No. 98-371 (Ex. 31;

R. 938). ;

- ** Order by Justice McGivern dated December 28, 1959, approving

supplemental, stipulations of settlement with Allan P.. Kirby,

‘Zenn, et al. v. Ansalone, et al., Sup. .Ct..N. Y. Co., Index No.

7244/1954 (Ex. 7, R. 748). ;

*** Judgment of dismissal as to Defendant Allan P. Kirby, filed

’ February 4, 1960, Zenn, et al. v. Anzalone, et al., Sup. Ct. N. Y.

Co., Index No. 7244/1954 (Ex. 11, R. 773).

ee oe . | (a ee tty uh, , dle ay

adduction” of documents] ‘that there was a breach

in duty on Mr. Kirby's part in his failure to ad- .

duce. ” (R. 234) (Emphasis added)

The limitation of the issue to Kirby’s conduct was later

noted by the.Court of Appeals as follows:

“This appeal is further limited to the claim that

the settlement was obtained by defendant (appellee)

Allan P. Kirby, as a result of his fuilure voluntarily.

to disclose upon the settlement certain facts, essen-

tial to a proper adjudication of the fairness and

adequacy thereof, alleged to have been known to

him at that time. "The district court found adversely

to appemans. ” (R. 2330) -

- With the issue “thus carefully defined’ in the pleadings

and ‘pre- trial order, and the case prepared on this issue,*

it was tried before the District:Court (Hon. Archie O.

Dawson) for three weeks from April 1-19, 1963 (R. 2292).

Sixteen witnesses, including Kirby, Purcell, Ireland, and

the persons who had been the principal legal counsel in

Zenn (Graubard, Pomerantz and Daly) testified at length

(the transcript exceeds 2,400 pages) and more than, 220

exhibits were introduced (R. 2292).

Plaintiff had listed 86 documents as containing facts or”

‘circumstances within the scope of paragraph 39 of the

complaint which in its view Kirby should have adduced

before the Referee in Zenn (R. 222, 262-72; discussed at

R. 232-34, 245-49, 255-56). “Plaintiff cannot state,” it replied

to Interrogatory No. 5, “whether the documents were seen

or made available to” the objecting parties in Zenn and

their counsel or to the Referee (R. 288-89). (As the case

'* The pre-trial phases of the case were marked by extensive inter-

rogatories, lengthy discovery proceedings at IDS in Minneapolis,

and over 20,000 pages of deposition testimony from 25 witnesses,

including an exhaustive examination * Allan P. Kirby (R. 318-30,

2288).

’ hit ae | ne 4s ee

Tor ve - a ee |

I | ite a | \"

developed; the list of 86 dwindled to 30, and later, in

response to questions from Judgé Dawson and other

judges, to 23, to 12, or even to two or three (R. 2348).

For the most part, the so-called “non- adduced” documents:

consisted of financial ‘statements, managerial working

papers and memoranda, reports and forecasts obtained

from the files of IDS. and Alleghany, as distinguished

from Kirby’s files. Many, it turned out, were already in

the Zenn record (R. 436). As to some, plaintiff’s counsel

conceded that there was no proof of knowledge or posses-

- sion on Kirby’s part (R: 574, 694, 2335, 2346). As to

others, Mr. Kirby testified that he did not recall-ever hav-

ing seen them or having known of their contents (e.g.,

’R. 450). The trial judge admitted documents from Alle- -

ghany’s ‘files, on the theory that as an officer, Kirby could

have obtained them (R. 563). He refused to admit docu-

ments found in IDS’ files, as to which the contrary was

clear (R. 677).*

XIV. The Findings and Conclusions

of the District Court:

The District Court, on the issues as tendered and tried,

concluded that the “plaintiff completely and utterly failed

to establish the causes of action which it has asserted”

(R. 2327, bot.) finding that:

(a) “plaintiff has failed to establish that defend-—

ant Kirby committed a-fraud. upon the State Court

or its Referee in failing to produce documents at

the hearings before the Referee which were not

ealled for at the hearings and most of which were

* A detailed analysis of the evidence with respect to these documents

is set forth below in Point I of our Argument (pp. 84-93, infra)

insofar as they relate to Kirby, and in Point IV (pp. 125-37,

infra) insofar as the same claim was later made with respect to

iat and rorem.

not in his possession but i in the possession of IDS.”

(R. 2325)

_(b) The documents which plaintiff claimed Kirby

should have adduced were documents “[mJost of

[which] were produced from the files of IDS”

i -(R. 2324) and “were documents found in the course.

of discovery ‘proceedings in this action” (R. 2319)

(Emphasis supplied by court).

_opportunity to demand and require any papers

which they thought material in connection with this

hearing” (R. 2318-19), and “they took this obli-

gation seriously” (R. 2319). They had the full dis-

covery proceedings of the State Court at their dis-

‘posal in establishing their position (R. 2319).

(d) ‘The objectants “served a’ subpoena duces

tecum on Alleghany Corporation in response to

which more than 28 files of that corporation. were _

produced which Graubard, counsel for the objectant

- Rosen, and his staff examined for over 64 man-

hours. Graubard was satisfied that Alleghany had

produeed everything in its files called for by the |

subpoena.” (R. 2319)

(e) “Robert R. Young’s ’ files relating to IDS

were also produced and similarly examined. He

testified at ‘length before the Referee with_ respect

‘to the 1950 Exchange Transaction. “Robert ‘Purcell,

a director of IDS from the time of its acquisition

by Alleghany in 1949 and a former President and

then Chairman of the Board of IDS, responding to a

- subpoena duces -tecum served by Graubard, pro-

duced a ait number of documents. ‘He also testi-

fied at leng (R. 2319)

(f) The testimony. given in this case establishes

well known to tlie attorneys in the Z enn settlement

hearings” (R. 2324). . :

(g) The evidence which plaintiff claimed should

have been adduced, when considered together with

the evidence which was in fact adduced before the

Referee, was not “of such significance that it would

have caused the Referee to reach a different con-

clusion” (R. 2325).

The District Court further concluded that as a matter

of law the action must be dismissed for the reasons that

“A federal court sitting in a diversity of citizenship case

is obligated to adhere to state substantive law” (R. 2321) —

and under New York law the failure to produce documents

or to testify would not constitute extrinsic fraud permitting

a federal court collaterally to attack a’ New York judg-

ment (R. 2323). The District Court concluded that like

newly discovered evidence, such failure to produce “may

be ihe basis for seeking a new trial before the court: that

rendered the, Zenn judgment, but is not a basis for col-

laterally attacking a judgment rendered after trial” o-

- 2325).

” XV. The Decision of the Court of Appeals:

On appeal, plaintiff for the first time advanced the claim

that Young and Purcell withheld documents for which

’ Kirby should be held ‘responsible, and asserted as: error

(a) the District Court’s rejection of evidence as

to which -plaintiff was unable to show knowledge f

Kirby;

(b) the District Court’s rejection of plaintiffs

legal theory that during the Zenn hearings Kirby . |

which might have aided the objectants in their op-

position to the settlement, even though he did not

have possession, control, or knowledge of their

existence; .

evidence which plaintiff claimed Kirby should have

ferreted out was merely cumulative of the evidence

which had been introduced and would not have

eaused the Zenn Referee or the Supreme Court to

have reached a different result;

(d) the District Court’s conclusion of law that an

‘judgment of a New York court may not be vacated

by another court in the absence of proof of actual |

fraud in a matter extrinsic to the litigation, and

-that a failure to volunteer evidence would not con-

stitute such fraud.

(a) The majority opinion:

The majority opinion by Judge Moore found that:

(a) “In the light of the concession by_ plaintiff’s _

counsel that he could not tie the financial projec-

tions sought to be introduced to Kirby’s personal

_knowledge, the district court’s refusal to speculate

_ or infer that Kirby must have seen them cannot be

characterized as ‘clearly erroneous’ ¥ (R. 2346).

(b) . There ‘was no merit to appellant’s “legal

proposition that Kirby was under an affirmative

duty to present facts which might aid his adver-

saries in establishing his liability” (R. 2343).

failed to adduce or cause to be adduced ‘before the:

Referee in Zenn was merely cumulatiye of the evi- .

dence which was introduced. “By a fortiori anal-

ogy; the evidence said to have been ‘non-disclosed’

or concealed should at least be of the character re-

quired for a new trial, namely, would it ‘probably

have produced a different result’” (R. (2342).

In the ight of these conclusions the majority opinion

found it unnecessary to express any opinion as to the

‘| aes Shad et |

ae ies eer hen

Mea kW

District Court’s. holding with respect to the New York

“extrinsic fraud” rule (R. 2346-47).

‘Although (in accordance with the District Court’s ex-

press. pre-trial direttions, pp. 52-55, supra) the legality of

the 1949-50 exchange had neither been presented nor tried

as an issue in the case, and Kirby had therefore refrained

from offering evidence as to the propriety of that trans-

action, Judge Moore expressed the view that for purposes

of considering the appeal “There can be no question that

the exchange .. . violated fundamental legal principles

against self-dealing” and that the proxy statement used in

‘connection with, it “was misleading, both in its statements

and particularly in its omissions” (R. 2341). Since these

_ matters had been expressly excluded ‘as issues below, the

- court’s statement could have represented only an assump-

' tion, or obiter dictum, made for the’ purpose of considering

~ the questions that were before it in a light most favorable

to the appellants.

(b) The concurring opinion:

‘Judge Kaufman declared in, his concurring opinion that —

since the additional evidence which plaintiff sought to

offer was cumulative and would not have altered the —

result in the Zenn action, it was unnecessary for him, in

view of the adversary nature of the Zenn proceedings,

to. express an opinion with respect.-to whether a defend-

ant in a derivative action had any greater duty ‘to

come forward with evidence ‘than any other litigant

(R. 2347). The concurring opinion further held as to the

claimed non-disclosure by Young and Purcell, upon which

the dissenting judge based his opinion, that he was

“unable to agree that.the conduct of Purcell and Young

was such as to warrant overturning the Song as

eaaasite — ene ;

The’ dissenting opinion concurred with the other -

opinions insofar as plaintiff’s claim of fraud on the part

of Kirby was concerned and stated that:

“{T]nsofar as the plaintiff’s case here hinged upon .

establishing personal dereliction by Kirby with

respect to the settlement hearings, this was not

made out.” (R.- 2351) _

All three members of the appeal panel of the Court of —

Appeals also concurred in the District Court’s rejection

of plaintiff’s legal thesis with respect to Kirby’s burden of

proof in Zenn. The dissenting opinion stated: |

“I agree. nevertheless that a director thus ‘sued

is not bound actively to ferret out information that-

will promote the cage against him or show the.

improvidence of a settlement to which he has per-

suaded a stockholder’s oe to agree... .” (R.-

2351) :

The dissent went on to state, however, as the basis for

its dissent: 3 .

~ “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 occa-

sion 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 whatey er Mr.- Young may have

Ps: 2351),

The dis sent omitted, however, the bile of the state-

ment -by petitioners’ counsel:

“.. and I do not say that it was Mr. — and

I do not say, for a moment that it was Mr. Purcell,

and I do not know who was ,responsible.” (R. 606)

This disclaimer i petitioners’ counsel is especially signifi-

cant because it wag made during the examination of Pur-

cell, one of the two men charged for the first time on

appeal with deceit and deliberate suppression of evidence.

Pursuing his theory of vicarious liability, the dissenting

judge expressed the view that theré was basis in the record

from which to infer that certain documents (Exhibits 362

id. through 366 id.) which were known to Purcell and

Young in 1954, had been jnowingly withheld from the

Referee by Young and Puygell; that since the introduc- -

tion of such documents during the Zenn hearings might |

have produced a different -result. their exclusion in- this

case was error. On such basis lie would remand the case

for further -trial on the new theory of alleged fraud by

Young and Purcell (R. 2369).

XVI.. The En Banc Decision of .

: The Court of Appeals:

“The. Court of Appeals, sitting en bane,, affirmed the

decision of its panel on January 12, 1965, by a vote of

_ four-to-four. It took cognizance in a footnote of the only

federal question which had been*raised by the appellant,

stating that:

“Tn its. reply on rehearing m bane ny

points out for thd first timé |that sinc the claim .

inthe state court suit relat g to - exchange of

ee , if es

* oJ Tie perth eee rt ao ee enn ste! iit ae Paik

. ° 7 c “i

“ . . .

Fs e ; ar 62

‘stock was grounded in part on an allegedly false

and misleading proxy statement, see §14(a) of the

Sceurities Mxchange Act of 1934, 15 U.S.C. §78n(a)

and SEC Rule X-14A-9, federal juriadiction existed,

see J. 1. Case Co. v. .Borak, 877 U.S. 426 (1964),

and argues that §27 of the 1934 Aet, 15° U.S.C.

§7Saa, made such jurisdiction “exclusive: and: ren

dered the state court judgment void. We find it

‘unnecessary to rule on the argument. For, apart

from any other factors, the issue of jurisdiction was

raised in and decided by the New York courts, 1

“App. Div. 2d G62, 146 .N, YS. 2d 286 (1955), motions

for reargument and. for leave to nppeal to the Court

of Appeals denied, 1 App. Dive 2d 773, 149 N.Y.S

2d S86 (1956); and no attempt to secure review hy:

- the Supreme Court of the United States was made.

See Trethes ve Sunshine Mining Co., 308 U.S. 66,

78 (1989). .On this the court is unanimous.” (R.

2376) a

Summary of Argument

Two. facts—not unrelated—tineture the whole of. this

“ease. It is a skirmish in a eonporate war between the

Murchisons and Kirby. And the stock of TDS" has risen

steadily since 1952 to a very high figure. :

The influence of the hostility between the Murchisons

‘and Kirby is manifest in the Murchisons’ decision to bring

this suit as a collateral attack on Zenn in the federal

court, rather than move to reopen in the New York

court. The course they chose bristled with obstacles—

res judicata, full faith and credit, Erie R. R. v. Tomp- |

kins, extrinsic fraud, and dthers as well. The course they -

rejected would have been far more appropriate and ade-

jurisdiction over all the parties to its prior judgment (Ex.

‘T-42, R. 2283), the Murchisons could not, have : eke fhei r

fire to a cates of fraud by Kirby alone.

= = Sit | ‘ |

ae ! ot ea

Zs =

Sy,

Under thé impact of financial hindsight, two Court of .

Appeals judges below commented obiter on the legality of

tht IDS exe hange - transaction of 1949-50 (RR. 2341, 2351).

That question is not an issue in this proceeding (See pp.

51-55, supra).. ; |

Without these twin forces, the ¢ case would present only

the status of concurrent findings - fact below, = peti-

tioners do not challenge. |

In 1959, Kirby took the. initiative in settling Zenn,

undertaking’ separate negotiations through separate coun-

sel, and.reaching a separate agreement against the wishes

of his co-defendants (Rt 359, 370-71; Ex. 7, R. 750, 755;

Kix. 380B, R. 913, 916), the Murchisons and the. Young

z state, who later_settled,: the Murchisons agreeing to. re- °

turn to Alleghany the control of IDS they had received |

~ from Alleghang i in. 1954, in one of the transactions at-

tacked in Zenn. *

This led to the present suit, a few months after the

judgment in Zenn, as the opening round of ‘the Murchi-

sons’ proxy contest to oust Kirby. from control of Alle-

ghany. 3

Murchison §ecks to set aside the Zenn judgment only as

to Kirby’s fort settlement, and then only as to the one

cause of acti€n in which the Murchisons were not named

as co-defendants. -That cause of action concerned an ex-

change in 1949-50 of Alleghany preferred stock owned by

Kirby and Young for IDS stock owned by Alleghany, and

charged that Kirby and Young entered into the trans-

action in reliance on undisclosed inside information about

the favorable prospects of IDS. :

The case now presented by petitioners is not the case

_ tried in the District Court. The issue presented and tried

in the District Court was whether Kirby, defrauded the

Zenh court by ‘Ceorlcedling” | r not “a ducing” material —

documents he was under a d y to proffer as to the fair-

ness a his. eparate ao settlement (R. aa 344. Having

\! | | een | | is ao

| *

‘ eb

failed on the trial and the appeal of that issue, petitioners

now grasp at a suggestion in Judge Friendly’s dissent,

made for the first time on appeal, to the effect that the

_ ease might be reopened on the theory that Young and

~ Pureell committed fraud fer which Kirby, although admit-

tedly innocent, might be held responsible (R. 2351).

The dissent sought retroactively te inject such a theory .

into ‘the trial below by bob-tailing a statement made by

.petitioners’ counsel, during his examination of Purcell, in

such a way as to give the impression, that he was claiming

liability based on the conduct of Young-and Purcell (R.

2351),, whereas the completed statement was a disclaimer

of such a theory (R. 606). Throughout the trial, petition-

ers’ counsel took the view that such a charge was incom-

patible with the complaint and statement of issues he had

drafted. (R. 234; see p. 96, infra).

Under either theory the questions raised by this appeal ~

would be reached only if this Court should be willing to

override as “clearly erroneous” under Rule 52, Fed. R. Civ.

P., concurrent and-unchallenged find'ngs of fact of the two.

lower courts. Under. the theory on which the case was

tried, the issue of fact was whether the plaintiff could

prove ‘the existence of any significant facts .about the

financial prospects of IDS which Kirby knew or should

have known in 1949-50, and which he concealed from or .

failed to volunteer to the- New York court in Zenn (R. 174-

75). Both courts below found that there was no fraud or

wrongful failure to adduce evidence on Kirby’s part.

Under the theory suggested for the first time on appeal, -

the issue of fact now is whether petitioners have shown any

material evidence connected with Young or Purcell. Here

again both courts below found that the documents upon . .

which ‘petitioners rely, taken all together, “were not -of

such signifiance that they would warrant the Court

upsetting the decision of the State court in any “event.”

These unchallengéd findings destroy the factual pre-

dicate of petitioners’ appeal. Without a showing of evi-

. dence not already in substance before the court in Zenn,

there ‘is nothing here: to which their legal theories can be

applied.

Thé main difference. between Zenn and Murchison is

that. petitioners’ counsel has come up with 12 documents

which counsel in Zenn either missed; or, more probably,

decided not to use (Point IV, pp. 125-36, infra). ‘These

documents are detailed managerial memoranda of various

kinds, particularly income projections ‘routinely prepared .

by IDS (See, pp. 129,36, infra) of which Kirby was never

an officer\or director. They,are the factual base of peti-

tioners’ case here. Petitioners. now claim alternatively

(1) that Kirby “concealed” thése documents, although there

is no claim that he ever saw or could have seen most of

them ‘(Point I, pp. 84-93 infra) ; (2) that he should be held

liable for their alleged concealment by Young and Purcell,

' even though that. claim was never alleged or tried below

(Points IT and ITT, pp. 94-110, infra); (3) that he ehould

(i searched them out and offered them in evidence in

Zenn, even though they were made available to adverse

counsel who did not do so (Point IV, pp. 113-22, infra).

~ From the existence of these documents they argue that

the Court in Zenn was deprived of the possibility of

exercising its judicial. discretion as to the issue before

it—the fairness, reasonableness and adequacy of Kirby’s

separate settlement in Zenn.

The courts below gave a short answer to this “eonten-

tion. The 12 documents, they found, were at most

cumulative of evidence already before the Referee in

_ Zenn. In view of that finding, the entire edifice of in- .

ference spun from the existence of the 12 documents col-,

lapses (R. 2324-25; 2342)... .

‘So far-as Kirby is concerned (Point I, pp. $4.99, infra),

Kirby was shown to have had possession of only two. of

petitioners’ 12 documents (p: 84, infra). Both were cumu-

lative (pp.. 86-90, infra). Five were at IDS (of which

Kirby was neither an officer nora director) in Minnea-

polis under the control of the Murchisons (p. 84, infra).

The record does not show any failure on Kirby’s part: to

adduee much less fraudulent concealment of, any material -

or significant evidence not already in substance before. the

New York court in Zenn. : a.

For the first time on appeal,. petitioners’ simnnel claimed.

fraud by Young and Purcell as a ground for setting aside

the separate settlement of Zenux ‘by Kirby. The rule

against raising new issues on appeal applies here, where

the issue.sought to be. presented, a serious claim of fraud,

necessarily involves issues of fact never tried. Kirby,

unanimously acknowledged to be innocent of fraud, had

a right, in reliance on the Zenn judgment, to abandon .

the marshalling of evidence in defense of the legality of

_ . the 1949-50 exchange. It would be unjust to foree Kirby

now to attempt to resurrect proof ten years after the:

Zenn hearings were concluded, and six years after the

entry of the Zenn judgment, because of a new: claim of

fraud on the part of Young and Purcell (Point II. pp.

98-99, infra; Point ITI, p. 100, infra).

There is, moreover, no showing of conspiracy or joint

action. between Young, Purcell and Kirby in the conduct —

_ of Zenn. (Point Il, infra, pp. 102-04) The record is

all to the contrary. It shows that Kirby acted independ- .

ently in- making his separate settlement of the Zenn

action attacked here pp. 105-07, infra). Petitioners

have proved no agency or co-fiduciary or conspiratorial

relatioaship between the thiee men, or any knowledge

| by Kirby of any wrongdoing hy Young and Purcell such

_as might support application of tiie law as to the liabilities

- of co-conspirators or co-fiduciaries. The dissent below

would infer a continuing’ conspiracy among Young, Pur- -

cell and Kirby on the assumption that the 1949-50 ex-

change was illegal—an issue not befere the court. This

is no more than adding inference | to. dictum. In any

event, the theory of the dissent on this point is con-

tradicted by facts of record (Point III, pp. 99-107, infra).

Since fraud on the part of Young and Purcell was

neither. alleged nor .proved, the dissent was apparently

unaware of clear proof inthe Zenn record that Young and

his counsel had made the Referee and all parties in the

Zenn proceedings well aware of the ‘existence of IDS earn-

ings pro, jections and their: receipt by him at Alleghany,

and that Young produced his personal files _(Ex.399, R. .

1454) and more than 28 files of documents relating. to IDS

which’ were examined by counsel for the objectants in

Zenn for four days (Ex. 399, R. 1451; Ex. K-355, R. 2077,

2080). Purcell appeared and probaced all lis IDS files

and reports, which included IDS projections he had taken

with him when he went from: Alleghany to IDS (R. 580,

59G- 98, 600). Counsel for objectants examined the mass

of IDS records produced by Purcell for only “a few min-

utes.” (R. 1989) Although Purcell invited interrogation

by Zenn counsel about these reports, counsel did not do

so (R. 2055). Since some of the docunients would have

been harmful to the objectants’ position, and at best cumu-

lative, the strategy .of their counsel is clear (pp, 131-33,

infra).

Petitioners’ case is based on passed-over and entsiiiaiies

documents that furnish no support for their extravagant

charges of conspiracy to defraud, nor, equally for the

more limited claim that petitioners have produced evi-

dence Kirby ought to have sought out and offered to the

. Referee in Zenn. Since everything on which petitioners

rely was found as a fact to have been before the court in —

Zenn, Or_clearly indicated .to it, and since Zenn. and

Murchison are baSed on substantially the same allegations

of fraud by the concealment of certain “inside informa-

tion,” Zenn must be treated in- Murchison as res judicata.

not only on the jurisdiction of the New York court; but

_ on tha merits of Murchisons as well (Point IV, pp. 111-140,

infra).

Petitioners’ case claims “fraud, ” “deceit,” - “evasion,”

“dishonesty,”-ete. by Kirby and also by Young and Purcell

in relation to Zenn. No new federal standard under the

Securities Exchange Act is required to protect against

such conduct. Adequate remedies under New York law~

are available to- deter-and punish fraudulent abuse of the

- eourts’ processes and to insure.the production of evidence.

New York law imposes high standards through pre-trial

and other procedures that were extensively used in Zenn.

The New York cov-ts offer petitioners ‘far more complete

“and adequate relief by way of a motion to set aside the

Zenn judgment than a federal court may offer by way of

collateral attack. _ The New York courts have the. inherent °

——power, now: codified in C.P.L.R. 5015, to set aside or

_modify their own judgments for fraud, intrinsic or extrin-

_ sie. Such‘a motion would be referred to the Zenn judge

(McGivern) who still functions and is best able to deter-

mine whether he was defrauded a ¥; pp. 141-151, |

infra). !

For the foregoing reasons the controversial a doubt-

ful questions of law raised by the Petition are not reached.

If, however, this Court should overrule the unchallenged

findings of the lower courts with regard to the case against

Kirby, and the cumulativeness of the documents, two