Petition — Mason v. City Investing Co.

oom,

Soe eee

IN THE

Supreme Court of the United States ,

No. 96-1537

IRVING MASON, on behalf of himself and all others similarly

situated, and derivatively on behalf of C.l. REALTY INVESTORS,

Petitioner,

vs.

CITY INVESTING COMPANY, C.l. REALTY INVESTORS, C.L.

PLANNING CORPORATION, WILLIAM POLK CAREY, JOHN

L. GIBBONS, PETER C.R. HUANG, JAMES V. TOMAI, JR.,

ROBERT M. MORGAN, WILLIAM S. RENCHARD, FRED R.

SULLIVAN, JAMES R. WEBB and

REYNOLDS SECURITIES INC.,

Respondents.

Petrrion ror A Warr or CERTIORARI TO THE

Unrrep States Court or APPEALS FOR THE SECOND Crrncurr

PETITION FOR WRIT OF CERTIORARI

RICHARD D. GREENFIELD

STERLING H. SCHOEN, JR.

PHILIP STEPHEN FUOCO

Attorneys for Petitioner

Ricnarp D. Creenriecp, P.C.,

17 St. Asaphs Road,

Bala Cynwyd, Pennsylvania 19004

(215) 667-1700

Of Counsel

N.J. Appellate Printing Co. Inc., South Plainfield, New Jersey (20!) 753-0200

i

TABLE OF CONTENTS

Ne iu sest ness cupeasacercuas l

a aD ee eeecdeens 2

Es i cece cehckbecsaseneecees 2

Statutes and Rules Involved ...................... 3

EE ee me 3

REASONS FOR GRANTING THE Writ:

1.

The decision below is in direct conflict with the

decision of this court in J !. Case v. Borak, 377 U.S.

426 (1964) ............ AU RR 7

There exists a conflict in the law of the Circuits re-

garding the important issue raised herein ........ 7

State corporate law which conflicts with the over-

riding federal interest in the protection of the in-

vesting public cannot control litigation under the

RINE ccécuccnddcnvcnsucscopetecceses 13

This court should decide the question of whether

the rationale underlying Van Dusen v. Barrack, 376

U.S. 612 (1964) determines the interpretation of

federal law which the transferor district would

GET heccdecccocenccatccscstscaevecesetense 16

Cases Crrep:

Affiliated Ute Citizens of Utah v. United States,

Me PEO nn coi cvncc ce ccccsccs 14

Berry Petroleum Co. v. Adams & Peck,

518 F.2d 402 (2d Cir. 1975) ................ 17

TABLE OF CONTENTS

Cases CIrep:

Brody v. Chemical Bank,

482 F.2d Ill. (2d Cir.), cert. denied

RE ee en eudoteeues

Champion Home Builders Co. v. Jeffress,

490 F.2d 611 (6th Cir. 1974), cert. denied

416 US. 986 (1974) .... 6... eee eee cccccceeeee

Clement A. Evans & Co. v. McAlpine,

434 F.2d 100 (5th Cir. 1970), cert. denied

402 U.S. 988 (1971) ............... ie Poe

Columbia General Investing Corp. v. S.E.C.,

265 F.2d 559 (Sth Cir. 1959) ................

Crane v. Westin Air Brake Co.,

419 F.2d 787 (2d Cir. 1969). cert. denied

ee a i ck weade

David Steinberg, et al. v. William Polk Carey, et al.,

Pe TD a cenciceaWhecdesneies ses

Dopp v. American Electronics,

55 F.R.D. 151 (S.D. N.Y. 1972) ............ 8,

Drachman v. Harvey,

453 F.2d 722 (2d Cir. 1971), aff'd in part, rev'd in

part on other grounds, 453 F.2d :

Se Ce GD ce cawecwcs 8, 12,

Fielding v. Allen,

181 F.2d 163 (2d Cir. ), cert. denied sub nom..,

Ogden Corp. v. Fielding, 340 U.S. 817 (1950) 15,

Fields v. Fidelity Gen. Ins. Co.,

454 F.2d 682 (7th Cir. 1971)

Gilson v. Chock Full O’Nuts Corp.,

331 F.2d 107 (2d Cir. 1964)

PBSeeaeeedan8dé6e6ea3 8 a

oe eee ee eeeeeeeee ee @

16

16

16

ee

iii

TABLE OF CONTENTS

Cases CIrep:

Globus Inc. v. Law Research Service, Inc.,

318 F. Supp. 955 (S.D. N.Y. 1970) aff'd 442 F.2d

1346 (2d Cir.), cert. denied

hE oe cvcace peau bes enaecees 13

Hall v. American Cone & Pretzel Co.,

71 F. Supp. 266 (E.D. Pa. 1947) ............ 13

Halprin v. Babbitt,

303 PBe 198 (het Cir. 10GB) ...... 2.2 e eee: i)

Hawes v. City of Oakland,

104 U.S. 450 (1882) ........... ee eee ee eee 15

H. L. Green Co. v. MacMahon,

312 F.2d 650 (2d Cir. 1962), cert. denied

eo ce cae eeeees codecs 17

In re Air Crash Disaster at Boston Mass,

399 F. Supp. 1106 (D. Mass. 1975) .......... 17

In re Four Seasons Sec. Lit.,

370 F. Supp. 219 (W.D. i Ge er 17

In re Plumbing Fixtures Lit.,

342 F. Supp. 756 (JPML 1972) .............. 17

Jannes v. Microwave Communications,

57 F.R.D. 18 (N.D. Ill. 1972) ...... 8, ll, 15, 16

J. I. Case v. Borak,

te ED 5 sc ceksccesessscet 7, 10, 14

Jones v. The Equitable Life Assurance Society,

409 F. Supp. 370 (S.D. N.Y. 1975) .......... 8

Levitt v. Johnson,

334 F.2d 815 ( 1st Cir. 1964), cert. denied

CE cove cacbeecues bese. 8, 9, 16

iv

TABLE OF CONTENTS

Cases CITED:

McClure v. Borne Chemical,

292 F.2d 824 (3rd Cir.), cert. denied

368 U.S. 939 (1961) ................ 11, 15, 16

Myzel v. Fields,

386 F.2d 718 (8th Cir. 1967), cert .denied

390 U.S. 951 (1968)... 0... cece cee ee eeees 12-13

Ogden Corp. v. Fielding,

96D US. O87 (IUUDD ....cccceccsennchieeeee 15

Philadelphia Housing Auth v. American Radiator &

Standard Sanitary Corp.,

309 F. Supp. 1053 (E.D. Pa. 1969) .......... 17

Phillips v. Bradford,

62 F.R.D. 681 (S.D. N.Y. 1974) ............ 16

Pittsburgh & Lake Erie R.R. Co. Sec. &

Antit. Lit., In re,

543 F.2d 1058 (3rd Cir. 1976) ...... 8, 10, 16, 17

Rodgers v. American Can Co.,

305 F.2d 297 (3rd Cir. 1962) ................ BI

Scheinbart v. Certain-Teed Products Corp.,

367 F. Supp. 707 (S.D. N.Y. 1973) .......... 17

S.E.C. v. Capital Gains Research Bureau,

303 F.2d 214 (2d Cir. 1068) ................ 13

S.E.C. v. Capital Gains Research Bureau,

See US. GED (ORR) .. ccc cccesvensenemeneen 14

Tcherepnin v. Knight,

389 U.S. 332 (1067) ................ 7-8, 13, 14

Van Dusen v. Barrack,

See UD. GER CHRO) . vccccccesseneeuene 3, 16

TABLE OF CONTENTS

Cases Crrep:

Weiss v. Sunasco Inc.,

316 F. Supp. 1197 (E.D. Pa. 1970) ............ ll

Wolf v. Frank,

477 F.2d 467 (5th Cir. 1973), cert. denied

nd. ccc ccrcescerecess 12

Autuonties Crrep:

Bloomenthal, Securities & Federal Corporate Law,

EE ciceeoseseccsccececccce: 10

Bromberg, Fraud-SEC R. 10b-5, Sec. 11.7 (1975) .... 10

Carey, Cases on Corporation, 4th Ed. at 341 (1969) . 10

Loss, Securities Regulation, Vol. Il at 951 (1961) as

supplemented, Vol. V at 2920 (1969) .......

Note, 530 Va. L. Rev. 365 (1964) .................. 10

7A Wright & Miller, Federal Practice and Procedure:

Civil Sec. 1832 (1972) ..............455. 10, 15

78 Harv. L. Rev. 1476 (1965) ................... 10

13 Fletcher Cye. Corp. Sec. 5970 at 385 ( 1970

Revised Ed.) ..... i ies dee 10

Fepernat Statutes Crrep:

ee cecccccccccecces &

28 U.S.C. §§1404(a) & 1407 .......... 6... 4, 16

Securities Exchange Act of 1934,

§§10(b) & 14(a) ............ 2,3, 4,5, 11, 15

ere cee ccccccececescccss: . 8

Securities AND ExCHANGE COMMISSION

Rures [17 CFR §240.0-1 et seq.) Crrep:

Rule 10b-5 & 14a-9 ............. newes 66eeas 3, 4, 12

Se NEE. ‘savvesachedbuchisnsdneascscuetinaud 7

APPENDIX

Appendix — and Judgment of the Second

ED cecccnncndvausdsvebus tenstacentdiaeks la

Appendix B—Order and Final Judgment of the Dis-

Bee QE oc cncgcecncacchubbbuceiuedscvoes 3a

Appendix C—Statutes and Rules Involved .......... 5a

Appendix D—Order of the Second Circuit

SGI ncn. . Kbncvtcsceciavscesees 8a

IN THE

SUPREME COURT OF UNITED STATES

Ocroser Term, 1977

No.

IRVING MASON, on behalf of himself and all others

similarly situated, and derivatively on behalf of

C.l. REALTY INVESTORS,

Petitioner,

CITY INVESTING COMPANY, C.1. REALTY

INVESTORS, C.I. PLANNING CORPORATION,

WILLIAM POLK CAREY, JOHN L. GIBBONS, PETER

C.R. HUANG, JAMES V. TOMAI, JR., ROBERT M.

MORGAN, WILLIAM S. RENCHARD, FRED R.

SULLIVAN, JAMES R. WEBB and

REYNOLDS SECURITIES, INC.,

2 Questions Presented

JURISDICTION

The opinion and judgment of the Second Circuit were

filed on November 9, 1976. A timely petition for rehearing

was denied by order of February 18, 1977 ( Appendix D).

Jurisdiction of this Court is invoked pursuant to 28

U.S.C. section 1254(1).

QUESTIONS PRESENTED

This petition arises from an order by Judge Wyatt of

the United States District Court for the Southern District

of New York, dismissing two counts of petitioner's com-

plaint which alleged, inter alia, violations of Sections 10(b )

and 14(a) of the Securities Exchange Act of 1934, deriva-

tively on behalf of C.1. Realty Investors. These derivative

—_ pap pr the we age eptheyrnd s- wly

on of the trust as Mas-

sachusetts law. ——

The broad issue raised here is the proper relationship

of state corporation law vis-a-vis the congressional policy

the federal securities laws. we

underlying

Whether the Courts below ened tn holding thet «

shareholder of a Massachusetts corporation or busi-

ness trust must first make a demand on all of the cor-

poration’s shareholders before being permitted to

assert derivative claims on behalf of the corporation

where:

(1) The derivative claims are grounded on the Se-

curities Exchange Act of 1934;

(2) Such a requirement would be

AS Se SAD GENS SE SSS Gey

Statement of the Case 3

(3) The law of the transferor forum, which must

be applied pursuant to Van Dusen v. Barrack, 376

et Agr yer le psd eye panan

i eaieduad corporation as a con-

precedent to bringing a derivative suit.

STATUTES AND RULES INVOLVED

The statutes and rules involved are:

Sections 10-b and 14-a of the Securities Exchange Act

of 0006 end Bakes DS end 1600 Gone on

Rule 23.1 Fed. R. Civ. P.

They are set forth in Appendix C.

STATEMENT OF THE CASE

13, 1972, public offering, C.1. Realty In-

approximately $65,000,000 by selling 2,600,

san Gate dl Ga Dah naman Go on 0 AS

per Unit. Each Unit contained one share of beneficial in-

terest in the Trust and one warrant to purchase an addi-

tional share at $25.00. On April 13, 1972, petitioner Irving

Mason purchased 1,000 units of the Trust for $25,000. The

market value of each of the Trust's shares has since declined

$5.63 per share. The warrants are generally regarded as

being worthless at this time.

On February 25, 1975, petitioner Mason filed a six

count derivative and class action complaint in the United

States District Court for the Eastern District of Pennsyl-

vania alleging violations of various provisions of the federal

_ BEST COPY AVAILABLE

'

4 Statement of the Case

securities laws, as well as pendent state law claims. On

March 20, 1975, the action was transferred by consent to

the Southern District of New York pursuant to 28 U.S.C.

Section 1404(a).

Respondent C.1. Realty Investors is a Rea! Estate In-

vestment Trust organized pursuant to Massachusetts law

under a declaration of trust dated November 10, 1971, as

amended on April 3, 1972. The shares of the Trust are

registered with the Securities and Exchange Commission

pursuant to Section 12 of the Exchange Act. The Trust's

shares have been traded on the over-the-counter market

and, since December 12, 1973, on the New York:Stoek Ex-

change.

The Amendment Complaint

Petitioner filed an amended complaint on November

19, 1975. The defendants named in the amended com-

plaint, in addition to the Trust, are: City Investing Com-

pany, a corporation that controls the Trust and the Trust's

advisor; C.1. Planning Corporation, an indirectly wholly

owned subsidiary of City Investing Company which served

as advisor to the Trust; eight individual trustees of the

Trust; and Reynolds Securities, Inc., one of the two man-

aging underwriters of the Trust's public offering of April

13, 1972.

Counts I, II and ILI of the amended complaint allege

class action claims for violations by the ts of Sec-

tions 10(b) and 13(a) of the Exchange Act and Rules 10b-

5, 13e-i, 13a-11, and 13a-13 promulgated thereunder, as

well as Sections 12(2) and 17(a) of the Securities Act of

1933 (“Securities Act”) in connection with the preparation

of the registration statement and issuance of the

for the public offering of the Trust's shares commencing

April 13, 1972. Count VI alleges class action claims for

Statement of the Case 5

violations of state law against all defendants except the

Trust and Reynolds Securities, ‘nc. Counts I, II, III and

VI are collectively referred to as the class action counts.

Count IV alleges violations of Sections 10(b) and

14(a) of the Exchange Act and Rules 10b-5 and 14a-9

promulgated t , derivatively on behalf of the

Trust against all of the defendants except Reynolds Secur-

ities, Inc. Count V alleged violations of the state fraud,

self-dealing, conflict of interest and breach of fiduciary duty

laws derivatively on behalf of the Trust against all of the

defendants except Reynolds Securities, Inc.

The Motions Below

On December 12, 1975, defendants moved to stay the

class action counts on the ground that they were duplicative

of those in David Steinberg, et al. v. William Polk Carey,

et al., 75 Civ. 1695 (IBW), a related action which was also

being actively litigated. Defendants also moved to dismiss

the derivative counts on the grounds that plaintiff had

failed to make demand upon the Trust's shareholders as

required by Massachusetts law and that plaintiff could not

rly maintain a derivative suit on behalf of the Trust

at the same time he was prosecuting a class action against

the Trust.

The District Court's Order

On May 3, 1976, the District Court issued an order

staying the class action counts pending a final determina-

tion of the Steinberg action, and dismissing the derivative

causes of action on the ground that petitioner had failed

to make a demand on the shareholders of the Trust as re-

quired by applicable Massachusetts law. The District Court

declined to hold that it was obligated to apply the law of

the Eastern District of Pennsylvania, the transferor court,

6 Statement of the Case

on this issue. The District Court also made an express de-

termination that there was no just reason for delay and

pursuant to Fed. R. Civ. P. Rule 54(b) entered final judg-

ment in favor of the defendants (Appendix B).

On May 27, 1976, petitioner filed a timely notice of

appeal to the Second Circuit from the District Court's

judgment.

_ me ~~

7

REASONS FOR GRANTING THE WRIT

l. The decision below is in direct conflict with the

decision of this Court in J.J. Case v. Borak, 377 US.

426 (1964).

The rulings below require the petitioner to make

demand upon the shareholders prior to instituting suit

in federal court to redress violations of federal securi-

ties laws. By imposing a burdensome and futile state pro-

cedural requirement as a prerequisite to this suit, the de-

cision conflicts with J.1. Case v. Borak, 377 U.S. 426, 434-35

(1964). This Court there discussed the relationship of

state corporation law vis-a-vis federally protected rights:

[W]e believe that the overriding federal law applica-

ble here would, where the facts required, control the

appropriateness of the redress despite the provisions

of state corporation law, for it “is not uncommon

for federal courts to tashion federal law where federal

rights are concerned.”

And if the law of the State happened to attach no

responsibility to the use of misleading proxy state-

ments, the whole purpose of the section might be

frustrated. Furthermore, the hurdles that the victim

might face (such as separate suits, as contemplated

by Dann v. Studebaker-Packard Corp., supra, security

for expenses statutes, bringing in all parties necessary

for complete relief, etc.) might well prove insuper-

able to effective relief. (emphasis added )

Here there can be no doubt that the shareholder de-

mand requirement will “prove insuperable” to a derivative

suit to redress violations of federal securities laws. Fed-

eral law, not state law, must govern the enforcement of

federal rights. See Tcherepnin v. Knight, 389 U.S. 332,

337-38 (1967); In re Pittsburgh & Lake Erie R.R. Co. Sec.

8 Reasons for Granting the Writ

& Antitr. Lit., 543 F.2d 1058, 1064-67 (3rd Cir. 1976);

Drachman v. Harvey, 453 F.2d 722, 727-30 (2d Cir. 1971)

aff d in part, rev'd in part on other grounds, 453 F.2d 736

(1972) (en banc); Levitt v. Johnson, 334 F.2d 815 ( Ist Cir.

1964), cert. denied 379 U.S. 961 (1965); Jannes v. Micro-

wave Communications, 57 F.R.D. 18 (N.D. Ill. 1972); Dopp

v. American Electronics, 55 F.R.D. 151, 155 (S.D.NLY.

1972).

2. There exists a conflict in the Law of the Circuits

regarding the important issue raised herein.

This petition raises the sensitive issue of the

role of state corporation regulations in the remedial scheme

of the federal securities laws. In the instant case, the de-

cision below requires a plaintiff, prior to filing suit in fed-

eral court to enforce a right conferred upon him solely by

the federal securities laws and exclusively lodged in the

federal courts, to abide by a state law requiring a demand

upon shareholders. This, no matter how burdensome or

futile the procedure may be.

In dismissing the derivative counts of petitioner's com-

plaint, the courts below relied on Brody v. Chemical Bank,

482 F.2d 1111 (2d Cir.), cert. den. 414 U.S. 1104 (1973)

and Jones v. The Equitable Life Assurance Society, 409

F. Supp. 370 (S.D.N.Y. 1975). These cases hold that

where, as here, a derivative action is instituted pursuant to

Federal Rule of Civil Procedure 23.1, the federal courts will

look to state law to determine whether a demand on stock-

holders is necessary. Brody, supra, at 1114; Jones, supra at

374.

A decision directly in conflict with these decisions was

rendered by the First Circuit Court of Appeals. There the

court which encompasses the Commonwealth of Massachu-

setts was presented with the identical issue of whether

Reasons for Granting the Writ )

plaintiffs in a derivative lawsuit were required, under Rule

23.1 of the Federal Rules of Civil Procedure, to make a

demand on the shareholders of a Massachusetts corporation

before bringing suit under the federal securities laws. The

court held that such demand was not required despite the

provisions of Massachusetts law. Levitt v. Johnson, 334

F.2d 815 (1st Cir. 1964), cert. denied 379 U.S. 961 (1965).

The Court in Levitt distinguishes its earlier decision of

Halprin v. Babbitt, 303 F.2d 138 (1st Cir. 1962) (holding

that the minority must demand upon the majority ), as fol-

lows: “In Halprin . . . 92% of the company’s stock was held

by one stockholder. We were not, in other words, speak-

ing in the context of 48,000 stockholders, or as to when

such a circumstance might constitute an excuse.” 334 F.2d

at 817. Most importantly, the court further stated that:

“Nor does Halprin, which was a diversity case, answer the

question of what law presently governs.” 334 F.2d at 817.

The court specifically disapproved of the lower court's

holding that state law applies “even if the claim which the

corporation has against the alleged wrongdoers is based on

a federal statute.” Indeed, the First Circuit in Levitt spe-

cifically held that Massachusetts state law was irrelevant:

“We need not pursue the inquiry of whether the

Massachusetts law is otherwise, because if it is, it

should not, in our opinion, be applied.” 384 F.2d at

819.

Recognizing the important congressional policy underly-

ing the securities laws, the Levitt court held that it could

“not see how it can be gainsaid that any substantial stiffen-

ing of the conditions precedent to the bringing of stock-

holders’ suits above normal requirements wou'!d conflict

with this broad declaration (of national policy ).” 334 F.2d

at 819. As the court continued:

10 Reasons for Granting the Writ

“The district court's reasoning that since the stock-

holder’s right is a derivative one, his right to bring

suit must be controlled by the local law of the state

of incorporation in the absence of an explicit congres-

sional direction to the contrary negates the intend-

ment of the act and underestimates the role to be

played by the federal courts in the implementation

of national regulatory legislation. See Note, 50 Va.

L. Rev. 365 (1964).” 334 F.2d at 819.

In so holding, the Levitt court relied on this Court's deci-

sion in J.1, Case Co. v. Borak, supra.

The law of the First Circuit then, is that a state law

requiring a shareholder demand does not control in deriv-

ative suits grounded on the federal securities laws. The

Levitt decision has received widespread acceptance by the

commentators.’

The Third Circuit, too, has taken a position in conflict

with the Courts below. In discussing the standing of a

trustee of bondholders to object to a settlement of a class

and derivative settlement, the Circuit stated:

We conclude that standing in a Rule 23.1 case to

assert a derivative claim based on federal law is a

federal law question, and that for the same reasons

standing to object to the settlement of such a claim

is a federal law question.

In re Pittsburgh & Lake Erie R.R. Co. Sec. & Antitr. Lit.,

supra, at 1067 (emphasis added).

1. E.g., Note, 78 Harv. L. Rev. 1476 (1965); Note, 50 Va. L. Rev. 365

(1964) (criticizing the lower court decision in Levitt since overturned by

the First Circuit). See also, Bromberg, Fraud-SEC Rule 10b-5 Section 11.7

(1975). Bloomenthal, Securities and Federal ate Law, Section 11.20(2)

(1974), 7A Wright & Miller, Federal Practice and Procedure: Civil Section

1832 (1972), 13 Fletcher Cye. Corp. Section 5970 at 385 (1370 Revised

Ed.); Loss, Securities Regulation, Vol. II at 951 (1961), as su ed,

Vol. ¥ at 2920 (1969), Carey, Cases on Corporations, 4th Ed. at 341 (1969)

~~ =-

_

Reasons for Granting the Writ 11

Such a position is in complete accord with that asserted by

petitioner. In a derivative suit asserting violations of the

federal securities laws, the Court should look to federal law

in determining the necessity for a demand on stockholders.

In a closely analogous situation, the Third Circuit has

held that a plaintiff in a derivative suit alleging violations

of Section 10(b) of the Securities Exchange Act of 1934,

15 U.S.C. Section 78j(b) did not have to comply with state

security for costs statutes. McClure v. Borne Chemical,

292 F.2d 824 (3d Cir.), cert. denied 368 U.S. 939 (1961).

Indeed, the Third Circuit in Rodgers v. American Can Co.,

305 F.2d 297 (3rd Cir. 1962) in perhaps the most exhaus-

tive analysis of the issue presented in this petition, held

that even though the shareholders of a ration had

refused to authorize a lawsuit after demand upon them,

such refusal could not stop a derivative plaintiff in his at-

tempt to correct violations of federal law. Clearly the

Third Circuit would not require a party to pursue a mean-

ingless formality prior to suit. See Weiss v. Sunasco, Inc.,

316 F. Supp. 1197 (E.D. Pa. 1970).

The prevailing view from a District Court in the

Seventh Circuit too, is in conflict with the rulings below.

Senior Judge Robson (then Chief Judge), was presented

with the same issue in Jannes v. Microwave Communica-

tions, Inc., 57 F.R.D. 18 (N.D, Ill. 1972). In Jannes the

parties disagreed as to whether Illinois law required a de-

mand on shareholders. The court refused to even consider

Illinois law, holding:

“The parties discuss at some length whether Illinois

law would require a demand on the shareholders

under the circumstances of this suit, but this court

is of the opinion that federal common law controls.

Although speaking of whether a federal cause of ac-

tion was created by violation of Section 14(a) of

12 Reasons for Granting the Writ

the Securities Exchange Act, the comment of the Su-

preme Court is that ‘. . . the overriding federal law

applicable here would, where the facts required, con-

trol the appropriateness of redress despite the provi-

sions of state corporation law, for it “is not uncommon

for federal courts to fashion federal law where fed-

eral rights are concerned.”’ J.J. Case Co. v. Borak,

377 U.S. 426, 434, 84 S. Ct. 1555, 1561, 12 L. Ed. 2d

423 (1964). Furthermore, one reason that federal

jurisdiction is necessary in order to effectuate the

Securities Exchange Act is to avoid state law hurdles

which ‘might well prove insuperable to effective re-

lief.” Id. at 435, 84 S. Ct. at 1561. In connection

with Sec. 14(a) there is authority that whether a

shareholder demand is necessary is ‘clearly’ a matter

of federal law. 2 Loss, Securities Regulation 951

(1961). This court can discern no reason why Sec-

tion 10(b) should be interpreted differently from

Section 14(a) of the same act.” 57 F.R.D. at 22

(emphasis added).

In addition to state shareholder demand requirements and

security for expenses laws, the federal courts have held

other provisions of state law to be inapplicable or irrelevant

to actions grounded on the federal securities statutes. Wolf

v. Frank, 477 F.2d 467 (5th Cir. 1973), cert. denied 414

U.S. 975 (1973) (allowance of prejudgment interest with

10b-5 damage award ); Fields v, Fidelity Gen. Ins. Co., 454

F.2d 682 (7th Cir. 1971) (dictum that a derivative 10b-5

action may be maintained despite the lack of authority to

sue from state court supervising corporate liquidation);

Drachman v. Harvey, 453 F.2d 722 (2d Cir. 1971), affd

in part and rev'd in part on other grounds, 453 F.2d 736

(1972) (en banc) (standing of an equitable stockholder

to bring a derivative LOb-5 action); Clement A. Evans &

Co. v. McAlpine, 434 F.2d 100 (5th Cir. 1970), cert. denied

402 U.S, 988 (1971) (10-b civil action does not require the

application of state substantive law of fraud); Myzel v.

Reasons for Granting the Writ 13

Fields, 386 F 2d 718 (8th Cir. 1967), aert. denied 390 U.S.

951 (1968) (election of remedies doctrine); Gilson v.

Chock Full O’Nuts Corp., 331 F.2d 107 (2d Cir. 1964)

(en banc) (award of attorney fees for merely prompting

to bring an action under Section 16(b) of the

Act); Globus, Inc. v. Law Research Service, Inc.,

318 F. Supp. 955, 958 n.2 (S.D.N.Y. 1970) (contribution

and indemnification for violations of federal securities

laws), aff d 442 F.2d 1346 (2d Cir.), cert. denied 404 U.S.

941 (1971); Hall v. American Cone & Pretzel Co., 71 F.

Supp. 266 (E.D. Pa. 1947) (non-interference with foreign

doctrine). Similarly, the courts have also held

that the definition of the various terms used in the federal

securities statutes are dependent on federal law and the

policy underlying these statutes and not on the contrary

of state law. E.g., Tcherepnin v. Knight, 389

U.S. 332 (1967); Champion Home Builders Co. v. Jeffress,

490 F.2d 611 (6th Cir. 1974), cert. denied 416 U.S. 986

(1974); S.E.C. w. Sterling Precision Corp., 393 F.2d 214

(2d Cir. 1968).

Not only is the decision below in direct conflict with

the law of the First and Third Circuits, but it also ignores

ene oe aaany ene punpese

of the federal

securities laws.

3. State corporate law which conflicts with the over-

riding federal interest in the protection of the in-

vesting public cannot control litigation under the Ex-

change Act.

In discussing the intent of Congress in passing the var-

ious federal securities laws including the Exchange Act,’

upon which Count IV of appellant's Complaint is grounded,

this Court noted:

2. 48 Stat S81, as amended, 15 U.S.C. Section 78a et seq.

14 Reasons for Granting the Writ

[“All of these statutes were] designed to eliminate

certain abuses in the securities industry, abuses

which were found to have contributed to the stock

market crash of 1929 and the depression of the

1930's A fundamental purpose, common to

these statutes, was to substitute a philosophy of full

disclosure for the philosophy of caveat emptor and

thus to achieve a high standard of business ethics

in the securities industry. As we recently said in a

related context, ‘it requires but little appreciation***

S.E.C. v. Capital Gains Research Bureau, 375 U.S. 180,

186-7 (1963) (citations omitted). Accord, Affiliated Ute

Citizens of Utah v. United States, 406 U.S. 128 (1972). It

is thus well settled that, as with all remedial

the Exchange Act is to be construed to effectuate its pur-

poses, central of which is the protection of the investing

public through disclosure, as well as strong civil and crim-

inal penalties to prevent and punish fraud. E.g., Affiliated

Ute, supra; Tcherepnin v. Knight, 389 U.S. 332 (1967);

Crane v. Westinghouse Air Brake Co., 419 F.2d 787 (2d

Cir. 1969), cert. denied 400 U.S. 822 (1970); Columbia

General Investing Corp. v. S.E.C., 265 F.2d 559 (5th Cir.

1959).

In light of this overriding Congressional concern with

the protection of the investing , the federal courts

ites wort emo to effectuate this Con-

a ie doko contrary provisions of state

Soh eae eo Go eliee of cua,

an J.1. Case Co. v. Borak, 377 U.S, 426 (1964). In

holding that the Exchange Act authorizes a federal cause

of action for rescission or damages, the Court in J.1. Case

Reasons for Granting the Writ 15

Co. expressly stated that if victims of deceptive proxy state-

ments were obliged to seek relief in the state courts, the

purpose of Section 14 of the Exchange Act would be frus-

trated if the state either attached no responsibility to the

These reservations would apply vith even more force

if these state procedural or substantive hurdles (such as

demand on the stockholders in all cases) were

held to under Rule 23.1 to derivative suits in federal

court the federal securities laws. Indeed, the special

Congressional would be of no avail to derivative

plaintiffs, as the District Court's order would

one state or group of states could frustrate the purpose of

these statutes by enacting burdensome conditions prece-

dent to the maintenance of derivative suits.

Furthermore, it is unrealistic to claim that since a

stockholder’s right to sue derivatively on behalf of his cor-

arises from state law, that the “necessity” under

Rule 23.1 * of a demand on the body of stockholders would

also depend on state law. Rather, it is just the opposite.

The stockholder’s derivative suit and the limitations upon

its use were initially developed by the federal courts as

part of their powers as courts of equity. Fielding v. Allen,

181 F.2d 163, 167-8 (2d Cir.), cert. denied sub nom Ogden

Corp. v. Fielding, 340 U.S, 817 (1950). Accord, McClure

v. Borne Chemical Co., 292 F.2d 824, 832-34 (3d Cir.),

cert. denied 368 U.S. 939 (1961); see Hawes v. City of

Oakland, 104 U.S. 450 (1882). Indeed, a shareholder's

This “i

quut to Ge cuistantive tow eyes uttsh Ge on & ts federal

law

Miller, Federal Practice and Procedure.

16 Reasons for Granting the Writ

right to “maintain a derivative action on a corporate right

federal in nature is federally conferred.” Fielding, supra;

McClure, supra. Mindful of the federal interest

in obtaining a high standard of business in the secur-

ities industry as well as the equitable origin of the deriva-

tive suit in federal court, the overwhelming number of

courts which have decided this issue have held that the

demand on the stockholders requirement embodied in state

law will not control where that law would harm the fed-

eral interests receiving expression in the derivative right

sought to be enforced. Levitt v. Johnson, 334 F.2d 815

(Ist Cir, 1964), cert. denied 379 U.S. 961 (1965); Phillips

v. Bradford, 62 F.R.D. 681 (S.D.N.Y. 1974); Jannes ov. Mi-

crowave Communications, Inc., 57 F.R.D. 18 (N.D. IIL

1972); Dopp v. American Electronic Lab's, Inc., 55 Fi&.D.

151, 155 and n.10 (S.D.N.Y. 1972); see In re Pittsburgh &

Lake Erie R.R. Co. Sec. & Antitr. Lit., supra; Drachman

v. Harvey, supra; McClure v. Borne Chemical Co., 292

F.2d 824 (3rd Cir. 1961).

In the instant situation, federal law should determine

the necessity for shareholder demand.

4. This court should decide the question of whether

the rationale underlying Van Dusen v. Barrack, 376

U.S. 612 (1964) determines the interpretation of fed-

eral |aw which the transferor district would apply.

It is well settled that if a case is transferred

to 28 U.S.C. Section 1404(a), the state law of the trans-

feror forum, not the transferee forum, must apply. Van

Dusen v. Barrack, 376 U.S. 612, 639 (1964):

“We conclude. . . that in cases such as the present

where the defendants seek transfer, the transferee

district court must be obligated to apply the state

Reasons for Granting the Writ 17

law that would have been applicd if there had been

no change of venue. A change of venue under Sec-

tion 1404(a) generally should be, with respect to

state law, but a change of courtrooms.”

The question raised by this petition, however, is

whether this same rationale should apply to mandate that

the interpretation of federal law which exists in the trans-

feror forum, should be binding on the transferee court.

Compare, Berry Petroleum Co. v. Adams & Peck, 518 F 2d

402, 408 and n.7 (2d Cir. 1975); In re Air Crash Disaster

at Boston, Mass., 399 F. Supp. 1106, 1108 (D. Mass. 1975);

In re Four Seasons Sec. Lit., 370 F. Supp. 219 (W.D. Oke.

1974); In re Plumbing Fixtures Lit., 342 F. Supp. 756

(JPML 1972); Philadelphia Housing Auth. v. American

Radiator & Standard Sanitary Corp., 309 F. Supp. 1053

(E.D. Pa. 1969) with Scheinbart v. Certain-Teed Products

Corp., 367 F. Supp. 707, 711 (S.D.N.Y. 1973); H.L. Green

Co. v. MacMahon, 312 F.2d 650 (2d Cir. 1962), cert. de-

nied 372 U.S. 928 (1963).

With the widespread practice of transfers under Sec-

tions 1404 and 1407 and the increased frequency of invol-

untary consolidations and transfers by the Judicial Panel on

Multidistrict Litigation, this Court should decide this issue.

See In re Pittsburgh & Lake Erie R.R. Co. Sec. & Antitr.

Lit., 543 F.2d 1058, 1065, n.19 (3rd Cir. 1976).

APPENDIX A

UNITED STATES COURT OF APPEALS

18

CONCLUSION | for the

For the reasons set forth above, Petitioner respectfully Second Circuit

prays that this Court issue its Writ of Certiorari so as to 76-7258

bring before it for briefing and argument the questions of

federal law presented.

IRVING MASON, on behalf of himself and all others

me. = similarly situated, and derivatively on behalf of

/s/ Richard D. Greenfield C. I. Realty Investors,

RICHARD D. GREENFIELD Plaintiffs-Appellants,

STERLING H. SCHOEN, Jr.

PHILIP STEPHEN FUOCO ™

PT Coe CITY INVESTING COMPANY, et al.,

Of Counsel: Defendants-Appellees.

Ricnarp D. Greenriecp, P.C.

17 St. Asaphs Road

Bele Cyuwye, Fenneytvenia 18006 APPEAL FROM THE UNITED STATES

aaey Soares DISTRICT COURT OF THE

SOUTHERN DISTRICT OF NEW YORK

(Filed November 9, 1976)

This cause came on to be heard on the transcript of

record from the United States District Court for the South-

ern District of New York, and was argued by counsel.

. ON CONSIDERATION WHEREOF, it is now hereby

ordered, adjudged, and decreed that the order of said Dis-

trict Court be and it hereby is affirmed on the ground that

plaintiff has failed to make a demand pursuant to Fed. R.

Civ. P. 23.1 upon the shareholders of defendant C.1. Realty

Investors as required by Massachusetts law. See Brody v.

la

2a Appendix A

Chemical Bank, 482 F.2d 1111 (2d Cir. 1973); Jones v.

Equitable Life Assurance Society, 409 F. Supp. 370 (S.D.

N.Y. 1975).

/s/ Paul R. Hays

PAUL R. HAYS

/s/ Robert P. Anderson

ROBERT P. ANDERSON

/s/ William H. Timbers

WILLIAM H. TIMBERS

Circuit Judges

3a

APPENDIX B

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK

75 Civ 1811 (IBW)

IRVING MASON, on behalf of himself and all others

similarly situated, and derivatively on behalf of

C.l. REALTY INVESTORS,

Plaintiff,

vs.

CITY INVESTING COMPANY, et al.,

Defendants.

ORDER AND FINAL JUDGMENT

(Filed May 3, 1976)

Defendants City Investing Company, C.1. Realty Inves-

tors, C.I. Planning Corporation, John L. Gibbons, Peter C.

R. Huang, James V. Tomai, Jr., William S. Renchard, Fred

R. Sullivan and Reynolds Securities Inc. having moved

this court for an order staying Counts I, II, III and VI of

the Amended Complaint on the grounds that the prosecu-

tion of the instant case concurrently with that of Steinberg

v. Carey 75 Civ 1695(IBW) results in needless expenditure

of the resources and time of defendants and the Court since

both actions are virtually identical and dismissing Counts

IV and V of the Amended Complaint on the grounds that

Plaintiff has failed to make upon the security holders of

defendant C.I. Realty Investors as required by Massa-

chusetts law and on the grounds that Plaintiff cannot prop-

4a Appendix B

erly maintain a suit derivatively on behalf of defendant

C.1. Realty Investors at the same time he is prosecuting

direct claims against such defendant, and oral argument on

these motions having been heard, IT IS HEREBY

ORDERED, Adjudged and Decreed:

A. That all proceedings and in connection

with Counts I, II, III and VI of the Amended Complaint

herein (the direct claims) are stayed until final determina-

tion of the related case of Steinberg v. Carey, 75 Civ 1695

(IBW) and

B. That Counts IV and V of the amended complaint

herein (the derivative claims) are dismissed on the grounds

that Plaintiff has failed to make demand upon the share

holders of defendant C.1. Realty Investors as required by

Massachusetts law.

The Court having made an express determination that

there is no just reason for delay, IT IS FURTHER

ORDERED that pursuant to Rule 54(b) of the Federal

Rules of Civil Procedure entry of a final judgment in favor

of defendants is hereby expressly directed as to Counts

IV and V (the derivative claims).

/s/ Inzer B. Wyatt

INZER B. WYATT, U.S.D_J.

DATED: New York, N.Y.

May, 3, 1976

~~¢ te

Se Ree oe

—

oa

APPENDIX C

STATUTES AND RULES INVOLVED

FEDERAL RULES OF CIVIL PROCEDURE

Rule 23.1

DERIVATIVE ACTIONS BY SHAREHOLDERS

In a derivative action brought by one or more share-

holders or members to enforce a right of a corporation or

of an unincorporated association, the corporation or asso-

ciation having failed to enforce a right which may properly

be asserted by it, the complaint shall be verified and shall

allege (1) that the plaintiff was a shareholder or member

at the time of the transaction of which he com or

that his share or membership thereafter devolved on him

by operation of law, and (2) that the action is not a

collusive one to confer j on a court of the United

States which it would not otherwise have. The complaint

shall also allege with particularity the efforts, if any, made

by the plaintiff to obtain the action he desires from the

directors or comparable authority and, if necessary, from

the shareholders or members, and the reasons for his failure

to obtain the action or for not making the effort. The

derivative action may not be maintained if it appears that

the plaintiff does not fairly and adequately represent the

interests of the shareholders or members similarly situated

in enforcing the right of the tion or association. The

action shall not be dismissed or com without the

approval of the court, and notice of the proposed dismissal

or compromise shall be given to shareholders or members in

such manner as the court directs.

6a Appendix C

SECURITIES EXCHANGE ACT OF 1934

15 USC Secs, 78a-78jj as amended

REGULATION OF THE USE OF MANIPULATIVE

AND DECEPTIVE DEVICES

Sec. 10. It shall be unlawful for any person, directly

or indirectly, by the use of any means or instrumentality

of interstate commerce or of the mails, or of any facility

of any national securities exchange—

(b) To use oh employ, in connection with the purchase

or sale of any security registered on a national securities

exchange or any security not so registered, any manipula-

tive or deceptive device or contrivance in contravention of

such rules and regulations as the Commission may pre-

scribe as necessary or appropriate in the public interest

or for the protection of investors.

15 USC Sec. 78).

PROXIES

Sec. 14. (a) It shall be unlawful for any person, by

the use of the mails or by any means or instrumentali

of interstate commerce or of any facility of a national

securities exchange or otherwise, in contravention of such

rules and regulations as the Commission may prescribe as

necessary or appropriate in the public interest or for the

protection of investors, to solicit or to permit the use of his

name to solicit any proxy or consent or authorization in

respect of any security (other than an exempted security )

registered pursuant to section 12 of this title.

15 USC Sec. 78n.

Appendix C Ta

SECURITIES AND EXCHANGE COMMISSION

Rules under the Securities Exchange Act of 1934

Rule 10b-5

Employment of Manipulative and Deceptive Devices

It shall be unlawful for any person, directly or indirectly,

by the use of any means or instrumentality of interstate

commerce, or of the mails, or of any facility of any national

securities exchange,

(1) to employ any device, scheme, or artifice to defraud,

(2) to make any untrue statement of a material fact or

to omit to state a material fact necessary in order to make

the statements made, in the light of the circumstances

under which they were made, not misleading, or

(3) to engage in any act, practice, or course of business

which operates or would operate as a fraud or deceit upon

any person, in connection with the purchase or sale of any

security.

17 CFR §240.10b-5

Rule 14a-9

False or Misleading Statements

(a) No solicitation subject to this regulation shall be

made by means of any proxy statement, form of proxy,

notice of meeting or other communication, written or oral,

containing any statement which, at the time and in the

light of the circumstances under which it is made, is false

or misleading with respect to any material fact, or which

omits to state any material fact necessary in order to make

the statements therein not false or misleading or necessary

to correct any statement in any earlier communication with

respect to the solicitation of a proxy for the same meeting

or subject matter which has become false or misleading.

17 CFR §240.14a-9

8a

APPENDIX D

UNITED STATES COURT OF APPEALS

for the

Second Circuit

77-7258

IRVING MASON, on behalf of himself and all others

similarly situated, and derivatively on behalf of

C. I. Realty Investors,

Plaintiff-Appellants,

vs.

CITY INVESTING COMPANY, et al.,

Defendants-Appellees.

A petition for a rehearing having been filed herein by

counsel for the PLAINTIFF-APPELLANT,

Upon consideration thereof, it is

Ordered that said petition be and hereby is denied.

/s/ A. Daniel Fusaro

Clerk

(Filed February 18, 1977)