# Respondents Brief — Holt v. Alleghany Corp. > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385001_0764%3A18 ## Record - **Collection:** Supreme Court brief - **Document type:** Respondents Brief - **Published:** January 1, 1966 - **Citation:** 384 U.S. 28 ## Text STaTuTEs INVOLVED TABLE OF CONTENTS | QUESTIONS PRESENTED ..................-.c-0-0000+ COUNTER-STATEMENT ........-----00-0- I. ~ (a) The Murchison: Complaint II. IIT. The Proceedings Below (b) The background of the Complaint .... (c) The Amended Murchison aeaniars a (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 . seeeee (c) The acquisition Oi I ciinincahensauialiadal . (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 DS IE debicccciennoeindsaiiiinciicelieiidbiie anemeeee a PAGE CHODRA Ana a w w 10 —_~ — ~~’ & & _ bo 12 tee ee am . f VIL ‘VIL. VOL IX. il (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 (c) The so-called Young “Perjury” ................ 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 | 27 43 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 (c) The hearing nti Judge Dimock «........... 49 (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 iv 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 99 100 102 102 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. (c) The record shows that Kirby. acted 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 vi 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 . 146 148 151 154 155 158 158 | (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! , xv 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 : , e e 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 i 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 & ‘ ! 2 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. . at 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 i? A ' 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 | % ee 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.) | 6 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. 8 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.” 10 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. (c) The exchange programs of . 1949: 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).° | (c) The acquisition is made: 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. 16 (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 17 “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 0 18 (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 e tr ee 19 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 ° 21 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). ee —— (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 22 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 = 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. | 32 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 : . : 44 “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 45 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 3 ' 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. 48 ‘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 49 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 x (R. 750-51, 755-56). (c) The hearing before Judge Dimock: _ 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. 50 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 Ps Das 51 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: . .* . . : 62 - 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: 53 “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 54 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 | \" 55 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. 56 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). (c) “The objeetants to the settlement had a full _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 that “the fact that there were such projections. was © well known to tlie attorneys in the Z enn settlement hearings” (R. 2324). . : 57 (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 . | had had an affirmative duty to ferret out documents © 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; . ee (c) the District Court’s finding that the additional 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). (c) The evidence which ‘appellant claimed Kirby 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 59 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 ; (c) The dissenting opinion: 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. 61 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 Ee * 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- quate. But in the New York courts, which has continuing © 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 = a 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 64 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 65 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 66 _ 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 67 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- 68 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 related questions of law would emerge: 69 (1) Was Kirby under a legal duty to search out © - and volunteer this material at the hearing before the Referee? and (2) Would his brenah of stich a duty, if found, also constitute a fraud on the New York court justifying collateral attack in a federal court? We deal with these questions in Poirftts VI and VII of our argument (pp. 161-193, infra). : There is no substance in petitioners’ claim that s14(a) ‘of the Securities Exchange Act is the ‘source of a new | _ federal standard, defining the burden of enquiry and © proof Kirby should have sustained in Zenn, and justify- ing collateral attack because of his failure to comply with ‘ such a standard. . _ The question was not raised below. And the possible bearing of the Securities Exchange Act on Zenn was decided twi ice by the New York courts which held that the . Zenn action. was rootéd in common. law, not §14(a).. No appeal was taken to this Ceurt. . 1% a But petitioners’ contention has no merit for ‘the addi- ma tional reason that the general plan of federal securities | legislation, unlike federal statutes in the field of patents, copyrights, antitrust or labor law, is that the requiremients of federal’ law be superimposed on those of state law. _Congress’’ purpose, expressed in §28 of the Securities Exchange Act, was that consistent state law shall remain in effect. Section 14(a) deals only’ with corporate voting. It does not, therefore, preempt or supersede, nor is it inéonsistént with state law defining the’ fiduciary obli-- gation of corporate - directors, or state procedural law governing the conduct of stockholders’ derivative suits. Nor, @ fortiori, does it authorize ‘a federal court to - treat a state court final judgment as a nullity on the ground that the state judge misinterpreted. the Securi- ties Exchange Act 1 ‘in the course of the state ‘prossedings. a | Tere, © oie, . _ : . . , Without legislation, §14(a) should not. be- interpreted as petitioners -propose. The legislative history and admin- istrative construction_ of “the Securities xchange Act: negate petitioners’ “assertion. - It finds no support either in case law, or-in the dissent below, and raises’ constitu- ‘tional.and statutory doubts of ‘the kind Which it is the | rule (of. this Court to avoid. (Point - vi... If a federal standard for collateral attack on state court judgments for fraud cannot be drawn from the. Securities ‘Exchange -Act, the question is necessarily one of New York law under Frie R.R. vy. Tompkins. Under Erie, all questions. concerning the delineation of rights are referred to the law governing substanco—in this case, state law,-as the court held in Zenn. -The two lower courts are agreed that the application of New York standards to the testimony and exhibits | requires the conclusion that petitioner s have failed to make their case against . Kirby. Petitioners’ counsel concede that counsel in Zenn may well thave seen the documents they now say were “concealed” from that court by Kirby or . in his behalf (R. 288-290).*. They cannot therefore claim that these documents were knowingly withheld, nor indeed © that they were not “adduced”. Their claim is thus reduced on analysis to the proposition that Kirby’s federally defined burden in state court litigation—a burden on which the very subject matter jurisdiction of the state court de- - pended, according to petitioners—required him to search out and offer in evidence a dozen, documents counsel -in Zenn may have overlooked, or decided not to use. Under New York law, and equally under the pre-Frie and post-Erie federal cases, petitioners have not made.a ‘ease justifying collateral attack. We do not stress the supposed distinctions among the various competing rules * See also R. 399, 600. » witnesses and the 480 exhibits in Zenn,/to which twenty-six ‘. attorneys. addressed ‘full briefs and extensive oral argu- ‘ments over a period of many weeks (R. 1595; 1495: 1590; - 1717-20). Thoge experienced judicial officers were ‘and. : still are the persons in the best position to determine whether the “non-disclosed” documents on which peti- tioners now rely “might have” or “would acted or “could have” affected their decision in Zenn. ; These New York jurists are still in service. Under New ‘York - practice (C.P.L.R. 2221), such a motion would. undoubtedly have been referred to them. New York law has at all times here involved given the New York Supreme : Court full power to determine whether there was fraud in - the procurement of the judgment i in Zenn, and to set aside and modify the judgment “apon such. acral as may be just” (C.P.L.R. 5015(a)*). ; In such a praceeding under New York law, the New . York Supreme Court may set aside ‘or modify its own judgment for fraud, extrinsic or intrinsic; or because newly ~ discovered evidence .i is offered; or for any othér reason in the interests’ of substantial justice. ‘Crouse v. McVickar, fs Reprinted i in Appendix A, p. 4, infra. — 74 207 N. Y. 213, 219.(1912). A motion before the New York court would have avoided the manifestly inequitable result sought in this collateral attack, namely, that the Zenn settlement be set aside as to Kirby alone, who was unani- mously found innocent of fraud,* while continuing in effect as to Young and Purcell. : Such a New York motion is not barred wy any statutory time limit. . But the adequate New York : senile was avoided by the Murchisons, since it would have risked reopening the judgment as to all Zenn defendants, including themselves, and would have made it impossible to concentrate their fire on Kirby alone. In the federal court, despite the hazards of full faith and credit, comity, and res judicata, . the Murchisons could and did take the position that their case was exclusively against Kirby, that it related solely to Kirby’s “separate settlement” in Zenn, and that it did not involve actions by Young, Purcell, the Murchisons -them-. selves or others, or seek in any way to hold Kirby respon- sible for the acts or omissions of others. (See pp.. 95-99 infra). . Having failed to prove fraud on the part of Kirby, petitioners would now have this Court, sixteen years after the 1949-50 exchange, and almost six years after com- mencement of the present suit, remand the entire proceed- ing for another round to determine whether the federal court should set aside the New York judgment as to Kirby through evidence aimed at showing fraud by Young and - Purcell, while at the same time ree: that judgment as to them. * R. 2325, 2346, 2347-2348, 2350, 2351. 7 What Judge Moore below ealied “the subconscious advantage of hindsight” (R. 2346)* thas exerted an. -. “hydraulic effect”** on the judicial process in this case. The spectacular increase in the market value of IDS stock since 1952 makes it difficult, even for men of experience, to resist the inference that something must have been amiss in a transaction between a corporation and_ its chief executive officers which turned out so well for its officers. The legality ‘of that transaction—the IDS ex- ‘change of 1949-50—is not’ in issue here. This is a col- ' lateral attack for fraud -alleged to. have been committed in 1955 and 1956 upon the Zenn Referee, not an appeal from the order approving:his Report.*** | It has not been an easy matter to maintain the discipline of this -distinction between the legality of the 1949-50- exchange at the heart of these ‘tortuous proceedings— its legality, 6f course, as of the time it occurred—and . the issue in this proceeding. Drawn on by the hydraulic . pressure of hindsight, judges of th [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385001_0764%3A18. Public record. Not legal advice.