# Appendix — Nimmo v. Grainger

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URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385005_0574%3A2

## Record

- **Collection:** Supreme Court brief
- **Document type:** Appendix
- **Published:** January 1, 1978
- **Citation:** 436 U.S. 932

## Text

A-l

PRINCIPAL STATUTES AND RULES INVOLVED
Section 2(1) of the 1933 Act (15 U.S.C. 77b(1)) —

“Sec. 2. When used in this title, unless the context other-
wise requires —

(1) The term ‘security’ means any note, stock, treasury
stock, bond, debenture, evidence of indebtedness, certificate
of interest or participation in any profit-sharing agreement,
collateral-trust certificate, preorganization certificate or
subscription, transferable share, investment contract, vot-
ing-trust certificate, certificate of deposit for a security,
fractional undivided interest in oil, gas, or other mineral
rights, or, in general, any interest or instrument commonly
known as a ‘security,’ or any certificate of interest or par-
ticipation in, temporary or interim certificate for, receipt
for, guarantee of, or warrant or right to subscribe to or pur-
chase, any of the foregoing.”

Section 3 (a) (8) of the 1988 Act (15 U.S.C. 77c (a) (8)) —

“Sec. 3(a) Except as hereinafter expressly provided, the
provisions of this title shall not apply to any of the follow-
ing classes of securities:

* *

(8) Any insurance or endowment policy or annuity con-
tract or optional annuity contract, issued by a corporation
subject to the supervision of the insurance commissioner,
bank commissioner, or any agency or officer performing
like functions, of any State or Territory of the United States
or the District of Columbia;”

Section 3 (a) (10) of the 1934 Act (15 U.S.C. 78c (a) (10) ) —
“Sec. 3(a) When used in this title, unless the context
otherwise requires —

A-2

(10) The term ‘security’ means any note, stock, treasury
stock, bond, debenture, certificate of interest or participa-
tion in any profit-sharing agreement or in any oil, gas, or
other mineral royalty or lease, any collateral-trust certifi-
cate, preorganization certificate or subscription, transfer-
able share, investment contract, voting-trust certificate,
certificate of deposit, for a security, or in general, any in-
strument commonly known as a ‘security’; or any certificate
of interest or participation in, temporary or interim certifi-
cate for, receipt for, or warrant or right to subscribe to or
purchase, any of the foregoing; but shall not include cur-
rency or any note, draft, bill of exchange, or banker's ac-
ceptance which has a maturity at the time of issuance of not
exceeding nine months, exclusive of days of grace, or any
renewal thereof the maturity of which is likewise limited.”

Section 10(b) of the 1984 Act, 15 U.S.C. 78j(b) —

“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 or employ, in connection with the purchase
or sale of any security registered on a national securities ex-
change or any security not so registered, any manipulative
or deceptive device or contrivance in contravention of such
rules and regulations as the Commission may prescribe as
necessary or appropriate in the public interest or for the
protection of investors.”

Rule 10b-5 of the Securities and Exchange Commission —

“Reg. §240.10b-5. It shall be unlawful for any person,
directly or indirectly, by the use of any means or instru-

A-3

mentality of interstate commerce, or of the mails, or of any
facility of any national securities exchange —

(a) to employ any device, scheme, or artifice to defraud,
“(b) 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

“(c) 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.” [Adopted in Release No. 34-3230, May 21, 1942,
13 F.R. 8177.]

McCarran-Ferguson Act, 15 U.S.C. 1012 —

“(a) The business of insurance, and every person en-
gaged therein, shall be subject to the laws of the several
States which relate to the regulation or taxation of such
business.

“(b) No Act of Congress shall be construed to invali-
date, impair, or supersede any law enacted by any State for
the purpose of regulating the business of insurance, or
which imposes a fee or tax upon such business, unless such
Act specifically relates to the business of insurance: Pro-
vided, That after June 30, 1948, the Act of July 2, 1890, as
amended, known as the Sherman Act, ai. the Act of Octo-
ber 15, 1944, as amended, known as the Clayton Act, and
the Act of September 26, 1914, known as the Federal Trade
Commission Act, as amended, shall be applicable to the
business of insurance to the extent that such business is not
regulated by State law.”

Illinois Revised Statutes, Sec. 845 of Insurance Code —

“After the calendar year during which this code becomes
effective, no Life company authorized to do business in this

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State shall issue both participating and non-participating
policies unless at least 90 percentum of the profits on its
participating policies shall inure to the benefit of the par-
ticipating policy-holders. Any company having in force
both participating and non-participating policies shall keep
a separate accounting for each class of business and shall
make and include in the annual statement to be filed with
the Director each year, a separate statement showing the
gains, losses, and expenses properly attributable to each of
such classes and also showing the manner in which any gen-
eral outlay of expense of the company has been apportioned
to each except that this provision shall not apply to any
company in which 90 percentum or more of the business in
force is either participating or non-participating. This sec-
tion shall not apply to business done by such Life company
outside this State, nor to paid-up, or temporary insurance
or pure endowment benefits issued or granted pursuant to
the non-forfeiture provision prescribed in Clause (g) of
Sub-Section (1) ‘of Section 2241 nor to annuities or poli-
cies of re-insurance.”” As amended by Act approved June
13, 1957.

A-5

UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT

No. 75-3061

D. C. Docket No. CA 69-452

CHARLES L. GRAINGER, ET AL.,
Plaintiffs-A ppellants,
versus
STATE SECURITY LIFE INSURANCE
COMPANY, ET AL..,
Defendants-A ppellees.

Appeal from the United States District Court for the
Northern District of Alabama

Before GODBOLD, McCREE* and TJOFLAT,
Circuit Judges.

JUDGMENT

This cause came on to be heard on the transcript of the
record from the United States District Court for the North-
ern District of Alabama, and was argued by counsel;

ON CONSIDERATION WHEREOF, It is now here
ordered and adjudged by this Court that the judgment of
the said District Court in this cause be, and the same is
hereby, reversed in part and vacated in part, and that this
cause be and the same is hereby remanded to the said Dis-
trict Court for further proceedings in accordance with the
opinion of this Court;

It is further ordered that defendants-appellees pay to
plaintiffs-appellants, the costs on appeal to be taxed by the
Clerk of this Court.

February 18, 1977
Issued as Mandate:

*Of the Sixth Circuit, sitting by designation.

A-6

CORRECTED

Charles S. GRAINGER et al., on behalf of themselves and
all other similarly situated Purchasers of ‘Variable In-
vestment Plan’’ Contracts Issued and Sold by Great States
Life Insurance Company, Plaintiffs-Appellants,

v.
STATE SECURITY LIFE INSURANCE
COMPANY et al.,
Defendants-Appellees.

No. 75-3061.
United States Court of Appeals, Fifth Circuit.
Feb. 18, 1977.

Appeal from the United States District Court for the
Northern District of Alabama.

Before GODBOLD, McCREE,* and TJOFLAT, Circuit
Judges.

GODBOLD, Circuit Judge:

This case involves the issue of whether contracts sold by
an insurance company are “‘securities” for purposes of the
Securities Acts of 1933 and 1934." The district court held
that as a matter of law the contracts were insurance and not
securities and therefore were not within the purview of the
Securities Acts, and entered a Rule 54(b) judgment for
defendants. Also the court denied the request of plaintiffs
to certify a class consisting of all purchasers of the contracts.
We reverse the judgment for defendants dnd vacate the re-
fusal to certify the class."

*Of the Sixth Circuit, sitting by designation.

115 U.S.C. §§ 77a-78kk.

18This is a companion case to Hilgeman v. National Insurance Company

of America, (CA5, 1977) No. 75-1724, slip opinion p. ., . F.2d ___,
decided this date.

A-7

In the early 1960's Great States Insurance Company was
marketing what it termed “Variable Investment Plan” con-
tracts (“VIP contracts’). These contracts were, at least in
form, similar to participating coupon policies.» The VIP
contracts sold to plaintiffs allegedly incory »rated as part of
their terms a section of the Illinois insurance laws which
required companies offering both participating and non-
participating policies to keep separate accounts and to allo-
cate 90% of their “profits” on their participating policies
to the benefit of their participating policyholders.

Each named plaintiff purchased one or more VIP con-
tracts. Later Great States adopted a drastically reduced
scale of dividends on its VIP contracts. Plaintiffs brought a
class action against State Security Life Insurance Company
(the successor to Great States through a statutory merger) ,
and L. M. Nimmo and Nimmo and Associates, Inc., as con-
trolling persons of Great States, alleging: (a) violations of
§ 5 of the 1933 Act by the failure to register the VIP con-
tracts; (b) violations of § 17 of the 1933 Act, and § 10 (b)
of the 1934 Act and Rule 10b-5 thereunder, 17 C.F.R.

~ 9A participating policy is aiuiain aetiie tea ee en
holders based upon company earnings, so that net cost is determined by

deducting the amount of such dividends from the gross premiums.” 1 J.
Appleman & J. Appleman, Insurance Law and Practice, § 9 (1965).

The authors of this treatise go on to describe coupon policies in the fol-
lowing terms:

“Coupon policies are usually considered to be nonparticipating in
form, but, with the legal incidents usually attached thereto, they would
seem properly to belong in the class of participating contracts. The rate
is usually the same as for the latter group. The contract has inserted in
Sn Oe ene ee

is paid. This may be sent to the company together with a remittance
for the balance of the premium. The coupons often are graduated in
amount, increasing in the same degree that ordinary dividends would
increase, and interest is figured thereon at the company’s regular rate.

“Thus, it is usually considered that if the insured fails to clip such a
coupon and instead sends the full amount of the premium to the com-
pany, he has elected to permit it to remain at interest, and no further
action on his part is usually required.”

Id. at § 10.

A-8

240.10b-5 (1976), in mailing material misrepresentations
to buyers in connection with the sale of the VIP contracts;
(c) common law fraud in connection with the sale of the
VIP contracts; (d) breach of the VIP contract; and (e) vio-
lations of the anti-fraud and proxy provisions and rules of
the 1934 Act and common law fraud, in connection with
the 1968 merger between State Security and Great States.*

[1] Defendants filed motions to dismiss, to quash service
of process and to block discovery. The court overruled the
motion of State Security to dismiss the common law fraud
and breach of contract claims against it. It also overruled all
motions of defendants concerning the claims relating to the
1968 merger. The court granted the motions of Nimmo and
Nimmo and Associates to dismiss the common law fraud and
breach of contract claims stemming from the sale of the VIP
contracts. None of these rulings have been appealed. Two
rulings which the court made are now before us. First, it
dismissed all federal Securities Act claims arising out of the
sale of the VIP contracts against all three defendants on the
ground that the contracts were not covered by the Acts be-
cause they were insurance contracts, and thus the plaintiffs
had failed to state a claim upon which relief could be
granted. The court, under Rule 54 (b), directed entry of
judgment for the defendants on these federal Securities Acts
claims. The court also denied plaintiffs’ motion to certify
a class consisting of VIP contract holders.‘

[2] Generally, conventional life insurance policies are
not securities for purposes of the federal Securities Acts.
This view is supported by the legislative history of the 1933

8At least one of the plaintiffs was also a shareholder of Great States.

*The class determination is appealable under the general rule that “in-
terlocutory orders from which no appeal lies are merged into the final
judgment and open to review on appeal from that judgment.” Monarch
Asphalt Sales Co., Inc. v. Wilshire Oil Co., 511 F.2d 1078, 1077 (CA10,
1975); 7A Wright & Miller, Federal Practice & Procedure § 1802 at 270

(1972) .

A-9

Act,® by the leading commentators in the securities law
field, L. Loss, Securities Regulation, 496-501 (1961); 2 A.
Bromberg, Securities Law: Fraud § 6.5(1) n. 92 at 134
(1968) ; and by dictum in the Supreme Court’s decision in
Tcherepnin v. Knight, 389 U.S. 332, 88 S.Ct. 548, 19 L.Ed.
2d 564 (1967) .°

However, as Professor Loss has noted, the concept of in-
surance is really a continuum ranging from one year term
insurance, which is clearly pure insurance, through variable
annuities to mutual fund shares and common stocks, which
are equally clearly securities. L. Loss, Securities Regulation
2534 (1969 Supp.) . Thus, various items which have usually
been denominated “insurance” have been found to be “‘se-
curities” for purposes of the federal Securities Acts. For
example, in S.E.C. v. United Benefit Life Insurance Com-
pany, 387 U.S. 202, 87 S.Ct. 1557, 18 L.Ed.2d 673 (1967),
and S.E.C. v. Variable Annuity Life Insurance Company,
359 U.S. 65, 79 S.Ct. 618, 3 L.Ed.2d 640 (1959), the Su-
preme Court held that flexible fund or variable annuities
are securities and are therefore subject to the provisions of
the Securities Acts.”

5In the House Report on the 1933 Act it was clearly stated that “. . . in-
surance policies are not to be regarded as securities subject to the provi-
sions of the act.” HR Rep. No. 85, 73rd Cong., Ist Sess. 15 (1933).

*In Tcherepnin the Court pointed out that Congress had specifically
stated that “ ‘insurance policies are not to be regarded as securities subject
to the provisions of the act . . and the exemption from registration for
insurance policies was clearly supererogation.’” 389 U.S. at 342-43, n. 30,
88 S.Ct. at 556, 19 L.Ed.2d at 572-73, n. 30 [cites omitted].

Justice Brennan, in his concurring opinion in S.£.C. v. Variable Annuity
Life Ins. Co., 359 U.S. 65, 79 S.Ct. 618, 3 L.Ed.2d 640 (1959), made vir-
tually the same point when he said that “[ujnder the Securities Act, it
would appear that in the case of the ordinary insurance policy, the ex-
emption would be just comfirmatory of the policy's noncoverage under
the definition of security.” 359 U.S. at 74, n. 4, 79 S.Ct. at 623, $8 L.Ed.2d
at 646, n. 4 [cites omitted].

™More recently the Securities and Exchange Commission has ruled that
variable death benefit life insurance policies are also “securities.” Securi-
ties Act Release No. 33-5360 Fed.Sec.L.Rep. [1972-73 Decisions] ¢ 79,207.

A-10

[3] The court below compared the VIP contracts with
the policies involved in Variable Annuity and United Ben-
efit and found the VIP contracts different because they
provided for what the court termed a “significant” fixed
death benefit of $10,000. The comparison of policies was
proper, but the court could not stop at this point. In mak-
ing a determination of what exactly was being offered by the
Great States salesmen it was required to consider the meth-
ods used in selling the contracts.

In S.E.C. v. Joiner Leasing Corp., 320 U.S. 344, 64 S.Ct.
120, 88 L.Ed. 88 (1943) the Court held that in determining
if an instrument is an investment contract, and therefore a
security, “the terms of offer, the plan of distribution and
the economic inducements held out to the prospect’”’ were
all relevant factors to be considered. 320 U.S. at 353, 64
S.Ct. at 124, 88 L.Ed. at 94. The Court went on to say that
“fijn the enforcement of an Act such as [the 1933 Act] it
is not inappropriate that promoters’ offerings be judged as
being what they were represented to be.” Id. [emphasis
added]. Numerous lower courts have correctly interpreted
this language from Joiner as justifying a consideration of
advertising and promotional efforts in ascertaining that
items which intuitively would not seem to be securities are,
in reality, securities within the meaning of the federal Acts,
e. g., Miller v. Central Chinchilla Group, Inc., 494 F.2d
414, 417 (CA8, 1974) (chinchillas); Glen-Arden Com-
modities, Inc. v. Costantino, 493 F.2d 1027, 1034-35 (CA2,
1974) (Scotch whisky receipts); S.£.C. v. Brigadoon
Scotch Distributors, Ltd., 388 F.Supp. 1288, 1290 (S.D.
N.Y., 1975) (rare coins) ; S.£.C. v. Haffenden-Rimar, 362
F.Supp. 323, 325 (E.D.Va., 1973), aff'd 496 F.2d 1192
(CA4, 1974) (Scotch whisky). Indeed, the Supreme Court
itself in United Benefit examined the advertising used to
sell the “policies” at issue in making its determination that

A-11

the appellee was selling investment contracts and not in-
surance.®

[4] While the district court recognized the authority of
Joiner and the subsequent “‘advertising”’ cases, it attempted
to limit their scope by formulating a rule that advertising
and promotional efforts can be used to determine the char-
acter of an instrument only where that instrument is not
clear on its face. In essence, the district court read into the
Securities Acts a parol evidence rule. We think that inter-
pretation cannot be sustained. First, neither Joiner nor any
of the lower court “advertising” cases (with one possible
exception) make use of the parol evidence rule in deter-
mining whether an item is a security.? More important,
however, use of a parol evidence rule leads a court to focus
on the wrong question. The proper question before the
district court was not “what is the correct interpretation of
the VIP contracts?” but “what were defendants purporting
to sell to plaintiffs?’""* The parol evidence rule may have
some application to the former question. It is not relevant
to the latter question." Therefore, the district court must

8Speaking for a unanimous Court Justice Harlan noted that,

“United's primary advertisement for the ‘Flexible Fund’ was headed
‘New Opportunity for Financial Growth.’ United's sales aid kit included
displays emphasizing the possibility of investment return and the ex-
perience of United’s management in professional investing.”

387 U.S. at 211, n. 15, 87 S.Ct. at 1562, 18 L.Ed. at 679, n. 15.

*The district court cited Chapman v. Rudd Paint & Varnish, 409 F.2d
635 (CA9, 1969), as authority for its use of the parol evidence rule. How-
ever, the language in Chapman concerning the consideration of promo-
tional advertising is dicta, for the Ninth Circuit did in fact examine the
relevant advertising material in making a determination that a franchise
arrangement was not a security.

Cf. Goodman v. H. Hentz & Co., 265 F.Supp. 440, 444 (N.D.IIL, 1967)
where sale of nonexistent securities was held to violate Rule 10b-5.

11Even if we were to hold that the parol evidence rule applied in the
case before us, it still by its own terms would not operate to bar evidence
of the oral representations made by Great States salesmen. First, plaintiffs’
10b-5 cause of action is a fraud-based cause of action. Cf. Ernst and Ernst
v. Hochfelder, 425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976). Tradi-

A-12

in making a determination of whether the VIP contracts
were securities take into account all the circumstances at-
tending the sale of the VIP contracts, including the provi-
sion of Illinois law allegedly incorporated into the contract.

[5] We also have substantial doubts about the signifi-
cance which the district court attributed to the death bene-
fit on the VIP contracts. The mere presence of a death
benefit of $10,000, or for that matter any given dollar
amount, cannot conclusively establish that the insurance
features of a particular contract are not simply window
dressing on what is essentially an investment contract. Con-
sideration must be given not only to the amount of the
death benefit but also to the relationship between the size
of the death benefit and the size of ‘“‘premium’’ payments.
A showing that the “premiums” were disproportionately
high (in terms of insurance industry norms) in relation to
the amount of the death benefit would be persuasive evi-
dence that the VIP contracts were not being bought and
sold for their insurance features, i. ¢., as insurance policies,
but for their future “dividends,” i. ¢., as investment con-
tracts.”

[6] The district court held that class action was not ap-
propriate on the VIP contract fraud claims because the
claims depended upon the particularized representations
made to each class member. It is true that a class action is

tionally, the parol evidence rule will not operate to exclude parol evidence
introduced to show fraud. Restatement of Contracts § 238(b), (1932).
Moreover, many of the words in the VIP contracts such as “dividend” and
“investment” possess a variety of meanings, and, generally speaking, parol
evidence is admissible for the purpose of interpreting ambiguous language
in contracts. Id. at § 233.

12Data on premium/death benefit ratios in participating life policies can
be found. For example, such data was gathered by the SEC in formulating
its now-rescinded Rule 3c-4 and incorporated therein in the form of a
minimum multiple scale. We do not express any view on the substance of
that no longer operational rule. We mention it merely to point out the
availability of relevant data.

A-13

usually inappropriate in a securities fraud case where oral
misrepresentations are involved. As we said in Simon v.
Merrill Lynch, Pierce, Fenner and Smith, 482 F.2d 880 at
882 (CA5, 1973) :

If there is any material variation in the representations
made or in the of reliance thereupon, a fraud
case may be unsuited for treatment as a class action.
See Rule 23. Advisory Committee’s Official Note, 39
F.R.D. 98, 107 (1966). Thus, courts usually hold that
an action based substantially, as here, on oral rather
than written misrepresentations cannot be maintained
as a Class action.

However, as this quote indicates, the key concept in deter-
mining the propriety of class action treatment is the exis-
tence or nonexistence of material variations in the alleged
misrepresentations. It is possible, although unlikely, that
oral misrepresentations can be uniform, ¢. g., through use
of a standardized sales pitch by all the company’s salesmen.
Plaintiffs in the present case should be given the opportu-
nity to demonstrate the existence and use of such a device.
If plaintiffs cannot do this, then the district court may quite
properly refuse to certify a class on the grounds that com-
mon questions of law or fact do not predominate.

We therefore vacate the denial of class status to VIP con-
tract holders.

REVERSED in part, VACATED in part, and RE-
MANDED for further proceedings.

A-14

Charles $. GRAINGER et al.,
Plaintiffs-Appellants,
v.
STATE SECURITY LIFE INSURANCE
COMPANY et al.,
Defendants-Appellees.

No. 75-3061.

United States Court of Appeals, Fifth Circuit.
Nov. 17, 1977.

Appeal from the United States District Court for the
Northern District of Alabama.

Before BROWN, Chief Judge, and THORNBERRY,
COLEMAN, GOLDBERG, AINSWORTH, GODBOLD,
MORGAN, CLARK, RONEY, GEE, TJOFLAT, HILL
and FAY, Circuit Judges.

BY THE COURT:

IT IS ORDERED by the court that the order entered on
May 25, 1977, 5 Cir., 553 F.2d 1008, for a rehearing of this
case en banc is hereby vacated, and the case is remanded to
the panel.

JAMES C. HILL, Circuit Judge, dissenting.

ON PETITION FOR REHEARING
Before GODBOLD and TJOFLAT, Circuit Judges.*

PER CURIAM:

In their petition for rehearing appellees L. W. Nimmo
and Nimmo & Associates, Inc., protest that our decision
means that an endowment insurance policy containing what
they describe as “a commonly used provision” for the pol-

*Former Circuit Judge McCree, a member of the original panel, did not
participate in this decision.

A-15

icyholder’s participating in surplus can be found to be a
security by reason of methods used in its sale. This charac-
terization of our decision is not correct. We did not hold
that participating life insurance policies in general are se-
curities or even that the particular contracts in this case are
securities. What we have held is that the district court must
consider, along with the provisions of the VIP contracts
themselves, the totality of the circumstances surrounding
their sale, including any oral representations made, in deter-
mining whether defendants were selling securities.

“Endowment policies” vary in their terms and provisions,
and participation clauses differ also. In this instance, as
pointed out in our opinion the contract in issue is named
‘Variable Investment Plan” (emphasis added) . It purports
to guarantee the purchaser “90%, of divisible surplus earn-
ings.”” Attached coupons physically resemble coupons often
attached to bonds. Also, without indicating any views on
the relationship between the size of the death benefit and
the size of premium payments in the VIP contracts, we
pointed out that this relationship is a proper factor for con-
sideration by the district court (as opposed to the substan-
tiality of the death benefit, considered in isolation) in de-
termining whether the facial characteristics of the contracts
plus the circumstances of their sale caused them to be se-
curities.

The petition for rehearing is DENIED.

A-16

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT

No. 75-3061

CHARLES S. GRAINGER, ET AL.,
Plaintiffs-A ppellants,
versus
STATE SECURITY LIFE INSURANCE
COMPANY, ET AL.,
Defendants-A ppellees.

Appeal from the United States District Court for the
Northern District of Alabama

(Filed December 12, 1977)

Before BROWN, Chief Judge and THORNBERRY,

COLEMAN, GOLDBERG, AINSWORTH, GODBOLD,

MORGAN, CLARK, RONEY, GEE, TJOFLAT, HILL,
and FAY, Circuit Judges.

BY THE COURT:

IT IS ORDERED that the petition for reconsideration
of vacation of rehearing en banc filed by appellees, Leslie
W. Nimmo and Nimmo and Associates, Inc., is DENIED.

ENTERED FOR THE COURT:
/s/ Joun C. GopBoLp
UNITED STATES CIRCUIT JUDGE

A-17

In the United States District Court for the Northern
District of Alabama, Southern Division

Charles S. Grainger, et al.,

)
Plaintiffs.)
)
vs. ) Civil Action
) No. 69-452
State Security Life Insurance Com- )
pany, et al., )

Defendants. )
)

ORDER
(Filed June 20, 1972)

The above-styled cause is presently under submission on
the following motions filed in behalf of the respective par-
ties hereto: (1) motion of defendant, State Security Life
Insurance Co., to dismiss the complaint; (2) motions of
defendants, L. W. Nimmo and Nimmo & Associates, Inc.,
to quash service of process or in the alternative to dismiss
the complaint; (3) motion of defendant, State Security Life
‘nsurance Co., to require plaintiffs to post security for costs;
(4) motion of plaintiffs for an order determining that this
suit may be maintained as a class action; and (5) motion
of plaintiffs for an order requiring production of docu-
ments by defendants.

In the exercise of its discretion, the Court elects to treat
the motion to dismiss filed in behalf of each defendant as a
motion for summary judgment and to allow all parties 20
days from the date of this order within which to submit
any affidavits or other documentary evidence which they
may deem relevant to the disposition of the following issue:

A-18

whether the “Variable Investment Plan” contracts is-
sued to plaintiffs by Great States Life Insurance Co. or
its successor in interest, State Security Life Insurance
Co., constitute “securities” within the ambit of § 2 (1)
of the Securities Act of 1938, 15 U.S.C.A. § 77 (b) (1)
(1971) or § 3(10) of the Securities Exchange Act of
1934, 15 U.S.C.A. § 78(c) (10) (1971).

All motions other than defendants’ motions to dismiss will
remain under submission pending resolution of the ques-
tion raised on motion for summary judgment.

It is so ordered.

Done this 20th day of June, 1972.

SEYBOURN H. LYNNE
Chief Judge

ORDER*
(Filed June 5, 1975)

This cause has been before this Court on motions to dis-
miss, to quash, and for summary judgment. The Court has
had the benefit of extensive briefs and learned oral argu-
ments from counsel.

Company, successor to Great States by a merger and which plain-
tiffs’ claim was controlled by Mr. Nimmo. The District Court ound
that Mr. Nimmo was not in control of State Security nor was he a

icipant in any securities law violation (A-52-3); but it held
that the claim of plaintiffs based on an alleged conspiracy was not
subject to motion to dismiss. No final judgment was entered nor
appeal taken from the order on these latter counts, which are dis-
cussed in Parts I1B and VB of the following memorandum opinion.
Consequently, that of the action was not before the Fifth Cir-
cuit and would not be brought before this Court for review.)

A-19

Upon consideration of the analyses of counsel, the Court
is of the opinion that the attached memorandum prepared
by its law clerk, E. Mabry Rogers, correctly states both the
law and the facts on this complex action, and the Court
wholly adopts it as its opinion. In conformity with such
memorandum, which the Court deems to be of obviously
superior quality in its exhaustive and analytical discussion
of subtle issues advanced by ingenious counsel,

It is Ordered, Adjudged and Decreed by the Court that

(a) Plaintiffs’ claims against all defendants based upon
the theory that the “V.I.P.” contracts are “securities”
(Counts 1, 2, and 3 of the complaint) , be and the same are
hereby dismissed for failure to state a claim under the Se-
curities Exchange Act of 1934, the Securities Act of 1933,
or the Securities Act of Alabama. There is no just reason
for delay in entering a final judgment as to this claim, so
that the Clerk is hereby Ordered to enter final judgment
hereon pursuant to F.R.Civ.P. 54 (b) ;

(b) Defendant State Security's motion to dismiss the
breach of contract and common law fraud claims (Counts
4, 5, and 6 of the complaint), is overruled insofar as the
simple failure to state a claim is involved;

(c) The motions of defendants Nimmo and Nimmo and
Associates, Inc., to dismiss the common law fraud and
breach of contract claims as to the “V.I.P.” contracts are
granted for failure to state a claim as to these defendants;

(d) The motions of all defendants to dismiss the counts
alleging fraud, both of the common law and of the federal
statutory varieties as to the 1968 merger, are overruled;

(e) The motions of defendants Nimmo and Nimmo and
Associates, Inc., to quash as to the counts concerning the
1968 merger are overruled; and

(f) The motion of plaintiffs to certify a class as to the
“V.LP.” contracts is overruled, since the common questions

A-20

of law do not predominate over the questions affecting in-
dividual members only. The Court reserves a ruling on the
class allegations regarding the 1968 merger and requests
counsel to develop the issue in due course.

Done this 5th day of June, 1975.

SEYBOURN H. LYNNE
Senior Judge

MEMORANDUM
(Filed June 5, 1975)

TO: Judge Seybourn H. Lynne
FROM: E. Mabry Rogers, Law Clerk

RE: Grainger v. State Security Life Insurance Co., Civil
Action No. 69-452, Pending Motions

I. PROCEEDINGS TO DATE.

On July 15, 1969, plaintiffs instituted this action on be-
half of themselves and of the classes they purported to rep-
resent. In their complaint, they allege five basic causes of
action:*

(1) That defendant State Security Life Insurance
Company (‘State Security”) conspired with defen-
dants L. W. Nimmo (“Nimmo”) and his corporation,
Nimmo & Associates, Inc. (“Nimmo Inc.”) , to defraud
Great States Life Insurance Co. (“Great States”) and
its public, minority shareholders by a scheme and con-
spiracy whereby Nimmo agreed to sell his stock, and

e stock held by Nimmo, Inc., of Great States at a
price far in excess of its market value (or book value)

to State Security on the understanding that State Se-
'This characterization of the complaint is taken from the brief filed

herein by plaintiffs on November 4, 1969.

A-21

curity would then be caused to merge with Great
States. Thereby Great States and its es share-
holders would be obligated to assume the debt in-
curred to buy out Nimmo and Nimmo Inc. The cause
of action here is predicated upon the Securities Ex-
change Act of 1934 (“1934 Act”) and on Rule 10b-5
thereunder;

(2) Misrepresentations were made to purchasers of
“V.I.P.” contracts issued by Great States (and there-
after assumed by State Security pursuant to the merg-
er) , each of which contracts was a “security” as defined
by federal law, either on its face or because of repre-
sentations made to the buyers. This cause of action is
predicated upon § 17 (a) of the Securities Act of 1933
(“1933 Act’), § 10(b) of the 1934 Act, Rule 10b-5
thereunder, and upon the Alabama Securities Act, Tit.
53 §§ 28, 45, Code of Alabama 1940 (Recomp. 1958)
(1973 Cum. Supp.) ;

(3) The “V.I.P.” contracts were not registered with
the SEC prior to being offered to the public, as re-
quired by the 1933 Act;

(4) Assets of Great States were allegedly unlawfully
diverted to Nimmo for his private benefit, to the dam-
age of Great States stockholders and to the holders of
Great States ““V.I.P.”’ contracts, a common law cause
of action; and

(5) The defendants have breached the terms of the
“V.LP.” contracts held by plaintiffs and are due to ac-
count for same.

Service of the complaint was accomplished upon State
Security through the Superintendent of Insurance for Ala-
bama. Service upon Nimmo and upon Nimmo, Inc., was
accomplished by the United States Marshal in Springfield,
Illinois.

On September 5, 1969, State Security filed two motions,
a motion to dismiss, based upon 57 grounds, and a motion
to require plaintiffs to post security for costs.

A-22

On September 29, 1969, Nimmo moved to dismiss or,
alternatively, to quash service. Nimmo, Inc., filed a similar
motion on the same date.

On September 30, 1969, plaintiffs filed a motion seeking
production of various documents by the defendants.

On January 15, 1970, plaintiffs filed a motion for deter-
mination of both classes and for notice to the classes so de-
termined.

On June 20, 1972, following disposition of the case of
Hilgeman v. Nat'l Ins. Co. of America, 444 F.2d 446 (5th
Cir. 1971) , this Court entered an order treating the defen-
dants’ motions to dismiss as motions for summary judgment,
and requesting counsel to direct their submissions to the
disposition of the following issue:

Whether the “Variable Investment Plan” contracts is-
sued to plaintiffs by Great States Life Insurance Co. or
its successor in interest, State Security Life Insurance
Co., constitute “securities” within the ambit of § 2 (1)
of the Securities Act of 1933, 15 U.S.C.A. § 77 (b) (1)
(1971) or § 3(1) of the Securities Exchange Act of
1934, 15 U.S.C.A. § 78 (c) (10) (1971).

All other motions were held in abeyance pending resolution
of the issue above.

On September 5, 1974, the Court heard additional argu-
ments directed to this issue.

On September 23, 1974, plaintiffs filed a motion for sum-
mary judgment in their behalf as to Counts 1 through 6.
These counts encompass the claims as to fraud in the sale
of the “V.I.P.” contracts as securities and as to breach of the
“V.L.P.” contract itself.

In connection with the above proceedings, the Court has
received affidavits from L. W. Nimmo (October 23, 1969) ,

A-23

Richard V. Moore, President of State Security (July 27,
1972) , Lawrence A. Wadsworth, plaintiff (July 31, 1972),
Charles S. Grainger, plaintiff (July 31, 1972), and James
Williams Parsons, plaintift (August 3, 1972). In addition,
a transcript of the testimony of Marvin Henson, Jr., a plain-
tiff in this action who died on December 31, 1971, has been
received (August 3, 1972). Moreover, depositions and doc-
umentary evidence have been received.

The Court has also had the benefit of numerous briefs
of counsel in this case, the most recent of which include
plaintiffs’ brief of September 23, 1974, directed to the issue
outlined above, and the reply brief from Nimmo and
Nimmo Inc., of November 29, 1974.

Plaintiffs contend that because the “V.I.P.” contracts
were “securities” under the relevant federal securities pro-
visions, jurisdiction and venue are good as to all defendants
here. Additionally, they argue that because Nimmo and
Nimmo Inc. were “controlling persons” of Great States at
the time of its merger into State Security, jurisdiction as to
them is also good under the 1934 Act.

The defendants, Nimmo and his company, argue that
they were not “controlling persons” at the time of the
merger, so that jurisdiction under the 1934 Act does not
lie. Moreover, Nimmo and his company argue that the

“V.1.P.” contracts were not “securities” and that jurisdic-
tion under the 1933 and 1934 Acts is therefore likewise
defeated.

These matters are more appropriately resolved on mo-
tions for summary judgment rather than upon preliminary
motions, since the intertwining of the merits with the juris-
dictional issues warrants the consideration of more evidence
than is usually appropriate to motions to dismiss.

A-24

Il. UNDERLYING FACTS.?

A. The “V.I1.P.”’ Contracts.

In September, 1962, plaintiff Grainger was approached
by two agents who are presumed to have been employed by
Great States about purchasing a V.I.P. contract. They told
him that they were selling an investment, not insurance.
He was told that Great States would pay him and other
buyers 90 per cent of the profits from the company.
Grainger purchased, then and later, two and one-quarter
“units’’® from the salesmen.

Plaintiff Wadsworth bought his contract in October 1962.
He was told

that it was an “investment,” that it would send my son
through high school and college and pay all his ex-
penses, that after he finished college it would pay him
the income, that after the first few years the policy
would take care of itself, and in case of my son’s death,
it would also pay $10,000.00 plus everything I had paid
on it up to that point.

Plaintiff Henson, who is now deceased, was approached
in September, 1962, about buying the contracts. He was
specifically told that it was not insurance but was an invest-
ment on which he could make as much as 40 per cent
interest.

Plaintiff Parsons was contacted in early 1963 about the
parchase of an “investment policy” for his three-year-old
son. He was given much the same glowing account of the
dividend rate on his policy as were the other plaintiffs.

Each plaintiff received a similar “V.1.P.’’ contract, a copy
of which is in the record now before the Court.

2These facts have been garnered from all submissions by all parties to
date. Where relevant, differences in the submissions are noted.

3Grainger’s affidavit states that “$10,000.00 is one unit,” but this appar-
ently refers to the face value of the insurance contract, not to its purchase
price.

A-25

The contracts begin

Great States Life Insurance Company of Quincy, IIli-
nois, will pay the sum insured under the conditions
hereof to he insured on the maturity date, if then liv-
ing, provided all coupons hereon have been left with
the company to accumulate at interest. Etc.

Mr. Grainger’s contract shows a face-amount of $10,000.00,
premium amount of $401.52, payable for ten years, and a
maturity date of November 13, 1987. This kind of policy is
characterized by State Security as an “Ordinary Life Cou-
pon, Participating 25 Year Endowment Option with Cou-
pon, Reduced Premium After 25 Years” policy. Its provi-
sions will be developed more fully, infra.

Two particular features of the policy deserve mention
here, however: The 90 per cent participation feature and
the coupon feature,

As a part of the policy received by each plaintiff,* there
was an excerpt from Illinois law which provided that

No Life company . . . shall issue both participating and
non-participating policies unless at least 90 percentum
of the profits on its participating policies shall inure
to the benefit of the participating policy-holders. Any
company having in force both participating and non-
participating policies shall keep a es ay accounting
for each class of business. . . . [emphasis supplied, in
part].°

According to Charles E. Miller, Manager of Great States in
Alabama during the relevant period, this excerpt was in-
cluded in the sales presentation made in connection with

4Interestingly enough, neither of the “sample” policies tendered with
affidavits submitted by the defendants contained this excerpt from the
Illinois statutes.

5Although the law applied only to Illinois corporations, it was made a
part of the contract by language to the effect that “V.I.P.” policies in any
state would be governed by the section.

A-26

the offer and sale of ‘“V.I.P.”" contracts and was attached to
every such contract sold in Alabama.

Also attached to the policies were twenty-four “Guaran-
teed Premium Reduction Coupons.” ‘These coupons guar-
anteed payment of stated amounts of cash by Great States
to the insured upon surrender of the coupon. Provisions
were also made for other, more attractive benefits, if the
coupons were retained.

Additional evidence before the Court shows that Great
States adopted, on August 28, 1962,° a dividend schedule
which apparently approximated — very roughly’ — a pay-
out of 90 per cent of the company’s profits on these policies.
On July 1, 1966, a new dividend scale was proposed, and
apparently accepted by Great States, distributing “about 50
per cent” of the profits to “V.I.P.” contract holders. Rath-
bone Ltr., July 1, 1966. The actuary explained that this
dividend change occurred because “‘[d]ividends for the
early years were estimated rather high to attract new policy
owners. Now that experience and cost for this block of
business has been developed, a long-range dividend sched-
ule is possible.” Rathbone Ltr., March 16, 1967.

In a form letter sent to “V.I.P.” policyholders who in-
quired about the dividend reduction, Great States explained
that “[t]he reduction of this year’s dividends for this policy
series was recommended by our consulting actuaries and is

6This was just prior to the purchases made by the named plaintiffs in
this action.

7The evidence indicates that the Great States actuary constructed a divi-
dend schedule which utilized “practically all the profits that might be ex-
pected from this contract . . . [leaving] little, if anything, for the stock-
holders.” Tiffany Ltr., June 19, 1962. At the August 28, 1962, meeting of
the Great States Board of Directors, Nimmo moved that dividends be set
at the rate of 10 per cent below that suggested above. This may be viewed
as a rough attempt at complying with the Illinois law cited as a part of
the “V.I.P.” contract, but it certainly does not seem to be an attempt to
determine the 90 per cent payout by means of carefully segregated account-
ing entries, as required by that law.

A-27

due to an increased mortality experience along with the
ever increasing costs of operations.” The letter went on to
report that “\uc dividend scale will increase in the years
ahead.”

In addition, the minutes of the Great States Board meet-
ing of December 21, 1962, show a report “that the Alabama
Commissioner [of Insurance] had instructed us [i.e., Great
States] to cease selling the VIP policy in that state.” No
apparent action was taken on this instruction. On August
1, 1963, the Commissioner, in a letter to Great States, re-
quested that a representative from the company meet with
the Commissioner, since policies of “a profit-sharing or in-
vestment nature” had not been approved for sale in Ala-
bama. The results of this meeting do not appear.

It is apparent, however, from testimony taken in the case
of Henson v. State Security Life Ins. Co.,* that the Com-
missioner, as late as August of 1967, had done little or
nothing to contact holders of ‘‘V.I.P.” policies regarding any
action he had taken against Great States or its successor,
State Security.

At present, State Security maintains a statutory reserve
for the payment of benefits and obligations due under the
V.LP. policies. It does not, however, maintain separate ac-

counting entries which make readily available the amount
of profits derived from the V.I.P. contracts.°

B. The Merger.

From the time of its organization as an Illinois company
in 1959, until August 31, 1968, Nimmo was formally and

8Tt« trial court directed a verdict on statute of limitations grounds. He
was 7¢ ersed in part, 288 Ala. 497, 262 So. 2d 745 (1972).

*This information is taken from plaintiffs’ brief of September 23, 1974.
For some reason, the answers to interrogatories which would show this in-
formation have apparently not been filed with the Court. See F.R.Civ.P.
5 (d).

A-28

in fact active in the management of Great States. At all
times prior to its merger into State Security, Nimmo and
his company owned the controlling interest in Great States.

On June 13, 1967, Nimmo and Nimmo Inc., of which
Nimmo was a 90 per cent shareholder, agreed to sell their
controlling interest in Great States to State Security. The
sale was of 763,049 shares of the 1,150,000 outstanding
shares of Great States at a gross price of $2,098,384.75." In
return, Nimmo and his company agreed to deliver not only
their stock, but also the written resignations of those mem-
bers of the Great States Board of Directors requested by
State Security. Moreover, Nimmo and his company prom-
ised that “[t]he Board of Directors of Great States [and an-
other company not the subject of this lawsuit] prior to the
closing of [the] Agreement shall execute an agreement of
merger with Security and will further call a meeting of the
respective shareholders of Great States [and the other com-
pany] to be held for the purpose of approving said agree-
ment of merger.”

On July 20, 1967, State Security wrote to Nimmo pro-
posing to terminate the above agreement. Nimmo agreed
to the termination.

On November 6, 1967, State Security filed a lawsuit
against Nimmo and his company charging that the July 20,
1967, letter was a sham requested by Nimmo “to avoid ap-
pearing precommitted to a merger when dealing with the
boards of directors of the companies involved.’” The com-
plaint alleged that, despite the termination letter, Nimmo
had agreed to effectuate the June 13, 1967, agreement. The

The purchase price was broken down into separate components:
$270,000.00 for the 54,000 shares held by Nimmo Inc., or $5.00 per share;
$1,828,384.75 for the 709,049 shares held by Nimmo, or approximately
$2.60 per share.

A-29

suit was therefore predicated upon breach of the June
agreement and upon fraud in its July recission.”

On May 10, 1968)"State Security again contracted with
Nimmo and Nimmo, Inc., to buy the 763,049 shares of
Great States owned by them. The purchase price was now
enhanced to $2,348,200.00.% Nimmo’s 709,049 shares were
assigned a value of $2,078,200.00, or about $2.93 per share.
Nimmo, Inc.'s 54,000 shares were again assigned a value of
$270,000.00, or $5.00 per share. On May 10, 1968, the
market price of Great States, according to the plaintiffs, was
approximately $1.13 per share.”

As part of this agreement, State Security agreed to hire
Nimmo as a consultant for $30,000.00. Moreover, State
Security agreed to have its action against Nimmo dismissed
with prejudice, and the agreement recited that this was a
part of the consideration paid to obtain Nimmo’s accep-
tance of the agreement.

Paragraph five of this agreement required Nimmo to de-
liver “on or before August 28, 1968,” the resignations of
such members of the Great States Board of Directors as
State Security should direct.

This sale was financed through payment by State Security
of $992,657.02, apparently from its own assets. The addi-
tional $1,357,342.98 was apparently raised by sale of, or by
outright transfer to Nimmo of, assets belonging to Great

11In his deposition, Nimmo has testified that 90 per cent of the allega-
tions in this complaint were untrue.

12There was an additional $1,200.00 paid for 266 shares of the common
stock of Lincoln Life Ins. Co. of Arizona.

18The proxy statement sent out by Great States to its shareholders, in
preparation for a September 20, 1968, meeting, reported that the high bid
for Great States stock in 1968 was $2.50, while the low bid was $1.00.

According to plaintiffs, the book value of Great States stock was $.94
per share, and the adjusted book value was $2.09 per share.

A-30

States."* How the $992,657.02 in cash was to be raised is
unclear; it is inferable that the sales agreement required
only that by August 28, 1968, State Security would deliver
to Nimmo and his company $992,657.02. A subsequent
agreement reveals that State Security, jointly with Depend-
able Life Insurance Company, an Alabama insurance com-
pany,’* executed to Nimmo a note for $873,667.98. The im-
plication is that Nimmo and his company therefore received
$118,989.04 in cash on August 28, 1968."*

Following this agreement, Great States issued a Notice of
Meeting of Stockholders and a Proxy Statement, under date
of August 8, 1968. The notice was signed by Nimmo. It
reported that the meeting was called to elect directors and
transact other business. A natural inference from this no-
tice is that this election was related to Nimmo’s promise in
the sales agreement to deliver the resignations of the then-
governing Board of Great States.

There were seven men nominated for the seven available
Board positions. Of these, at least four were employees or
directors of State Security.’ The connection of nominees,
A. Lamar Reid, Charles Butz, and Everett W. McClure,
does not appear, although Mr. Reid’s law firm in Birming-
ham, Alabama, was serving “of counsel” for State Security
as of November 6, 1967.

The proxy statement revealed Nimmo’s controlling in-
terest and his sale of that interest effective on August 28,

14Paragraph 10 of the Sales Agreement. See also the Escrow Agreement,
tendered as Plaintiffs’ Exhibit 21 to the most recent briefs on summary
judgment. See also fn. 18, infra.

154 merger of Dependable (of Mobile, Alabama) into State Security
was approved by all involved shareholders as of August 12, 1968.

16The plaintiffs’ statement that only $25,000.00 in cash was paid to
Nimmo before August 28, 1968, seems to be in error. It is perhaps derived
from the aborted agreement of June 13, 1967.

17The proxy statement revealed the connections of three of them to

State Security. It did not show that nominee Wittenberg was a Director
of State Security.

A-31

1968. It also included the sales agreement and the escrow
agreement between State Security and Nimmo.

The statement directs its readers’ attention to the sales
agreement and states that it shows that

The net cash payment for control stock of [Great
States] will be approximately $1,500,000.00, which
[ State Security] has said it would borrow pending com-
pletion of a merger with [Great States].

It is difficult to discern how the sales agreement provides
any such thing.”

The statement also announces State Security's intention
to merge with Great States upon completion of the Nimmo
sale. It then states, “[n]either L. W. Nimmo or Nimmo
and Associates, Inc., is party to the proposed merger, nor has
either party participated in the planning of such merger.”

The notice established the meeting date as August 28,
1968, but it was not held until August 30, 1968, for un-

18See text accompanying Fn 14, supra.

This statement may be explained by combining the sale contract, the
escrow agreement and the August 8 proxy statement. Under the sales
agreement Nimmo was to have Great States sell, at stated minimum
prices, the Great States office property, bonds of Putnam Dye Co., stock
of the Horace Mann Life Ins. Co., and stock of the Life Assurance Co. of
the West. If the minimum disposition prices of these assets are added to
the amount State Security was to pay the escrow agent — $992,657.02 —
the total equals the sales price of $2,350,000.00. On page 5 of the August
8 proxy statement, it is reported that Great States had disposed of the
Horace Mann stock. If the contract minimum for this stock — $507,675.00
— is added to the amount State Security was to pay the escrow agent, the
total is “approximately $1,500,000.00.”

If this is the correct explanation of the transactions involved, it seems
clear that part of the consideration paid Nimmo reflected these proper-
ties; in a sense they were transferred to him at the stated values. Since the
values stated in the sales contract were inflated (Nimmo’s Deposition, p.
127), Nimmo actually received less for his shares than is reflected in the

for
of the explanation of the above figures, plaintiffs have not
about them nor do plaintiffs indicate how such figures may
relate to their alleged causes of action.

A-32

explained reasons.’* Immediately thereafter, the new Board
met and adopted an agreement of merger between Great
States and State Security, dated August 28, 1968.

Curiously enough, this agreement was signed for Great
States by A. Lamar Reid, as President, although he was not
elected President until August 30, 1968. In fact, on the
date of the agreement, Nimmo, according to his affidavit
filed herein, was still a director of Great States.

On August 28, 1968, A. Lamar Reid, as President of
Great States,” issued a notice of a special meeting of the
shareholders of Great States to be held on September 20,
1968. This meeting was called to vote upon the merger
agreement between Great States and State Security. The
proposed merger provided for an exchange of the stock of
Great States for that of State Security at a ratio of 1.5 to 1.
Great States management recommended, on page two, that
the merger be approved; on page one, it was stated that the
present Great States management “are persons nominated
by Security... .”

This merger was approved by the shareholders, and the
merger was consummated.

Plaintiffs contend that both the August 8 and the August
28 proxy statements were misleading. They also contend
that the net result of the sale by Nimmo and the subsequent
merger was Nimmo’s receipt of an unjustified premium for
his control of Great States and the minority shareholder’s
receipt of grossly devalued stock of State Security in return
for their stock in Great States.

19So long as the meeting was held on or after August 28, 1968, State
Security would vote Nimmo’s stock, pursuant to the proxy agreement in-
cluded in Paragraph 20 of the May 10, 1968, agreement.

2°This involves the same “curiosity” as that involved in his signature on
the agreement. These acts by Mr. Reid were ratified on behalf of Great
States by the newly-elected board on September 30, 1968.

A-33
Ill. ISSUES PRESENTED.

There are a number of complex issues involved in the
foregoing statement of facts. However, despite the numer-
ous allegations tossed around by the plaintiffs, defendants
are essentially correct in narrowing their focus to the issues
involving the propriety of the service obtained in this case.
This issue is particularly relevant to Nimmo and his com-
pany since they have been called before this Court under
the long-arm provisions of the national securities acts.

As the Court’s order of June 20, 1972, indicates, the ques-
tion whether the “V.I.P.”” contracts are “securities” is ap-
propriately addressed on more evidence than is normally
available upon motions .o quash. Since the merits of the
issue are so intertwined with the jurisdictional issues, sum-
mary judgment is a more appropriate vehicle for resolution
of the question. If, for example, it is found that the “V.L.P.”
contract is not a security, then, insofar as that issue is con-
cerned, Nimmo’s and his company’s motion to quash are
due to be granted, while State Security’s motion to dismiss
for failure to state a claim would also be due to be granted.

This memorandum, however, addresses the further issue
— not raised in the June 20, 1972, order, but briefed by the
parties — of the alleged fraud in regard to the 1968 sale of
Nimmo’s stock to State Security. The latter issue must be
reached if the Court is to explore all jurisdictional bases at
this time.

With the foregoing in mind, this memorandum considers
the following issues:

(1) Does this Court have jurisdiction over Nimmo un-
der the 1933 or 1934 Acts?

(a) On its face, is the “V.I.P.” contract a “security”
under either Act?

(b) If not, did the manner of sale of these contracts
transform them into securities?

A-34

(2) Are there any other jurisdictional bases upon which
this Court may hold Nimmo accountable with regard to
these contracts?

(3) Has a cause of action been stated as to the 1968
merger of Great States into State Security?

(4) Is jurisdiction over Nimmo and his company proper
as to the counts involving the 1968 merger?

(a) Was either defendant a “controlling” person of the
entities perpetrating the alleged frauds?

(b) May the defendants be held under a conspiracy
theory?

IV. CONCLUSIONS.

It is concluded herein that the “V.I.P.” contracts are in-
surance contracts, exempt from the 1933 and 1934 Acts. It
is further concluded that plaintiffs have stated a cause of
action against all defendants as to the 1968 merger, so that
the Court has personal jurisdiction over all defendants.

V. DISCUSSION.

As stated above, the plaintiffs contend that the “V.I.P.”
contract is a security under the 1933 and 1934 Acts, while
defendants say it is merely a contract of insurance.

If plaintiffs are correct, then this Court has jurisdiction —
both personal and subject matter — over the defendants
under the jurisdictional provisions of the 1933 and 1934
Acts. Section 22 (a) of the 1933 Act, 15 U.S.C. § 77v (a)
(1970) , provides:

The district courts of the United States . . . shall have
jurisdiction .. . of all . . . actions at law brough t to en-
force any nblity or Gay rented y h(t) Ay Any
such suit or action may be

where the offer or sale took place, eae he A ne

A-35

ticipated therein, and process in such cases may be
served in any other district of which the defendant is
an inhabitant or wherever the defendant may be found.

Section 27 of the 1934 Act, 15 U.S.C. § 78aa (1970), pro-
vides:

The district courts of the United States . . . shall have
exclusive jurisdiction . . . of all . . . actions at law
brought to enforce any liability or duty created by this
chapter or the rules and regulations thereunder. . . .
Any [such] action . . . may be brought in [the district
wherein any act or transaction constituting the viola-
tion occurred] or in the district wherein the defendant
is found or is an inhabitant or transacts business, and
process in such cases may be served in any other district
of which the defendant is an inhabitant or wherever
the defendant may be found.

Since liabilities and duties under both acts hinge upon
the presence of a “‘security,” it is clear that if the “V.I.P.”
contracts are not securities, then this Court does not have
subject-matter jurisdiction over this suit under the above
provisions. Moreover, service of process upon defendants
Nimmo and his company would not be proper under the
provisions.

Section 3 (a) of the 1933 Act, 15 U.S.C. § 77c (a) , makes
certain exemptions:

mage p as hereinafter expressly provided, the provi-
sions of this subchapter shall not apply to any of the
following classes of securities:

(8) Any insurance or endowment policy or annuity
contract or optional annuity contract, issued by a cor-
poration subject to the supervision of the insurance
commissioner, bank commissioner, or any agency or
officer performing like functions, of any State or Terri-
tory of the United States or the District of Colum-
bia [.] [emphasis supplied]

A-36

There is no similar exemption from the 1934 Act; more-
over, sections 12 (2) and 17 (c) of the 1933 Act, 15 U.S.C.
§§ 771(2), 77q(c) (1970), expressly provide that the ex-
emptions of section 3 do not apply to the anti-fraud provi-
sions of the 1933 Act.

Seizing upon these features of the two acts, plaintiffs con-
tend that the 1934 Act, especially Section 10(b) thereof,
15 U.S.C. § 78) (b) (1970), and the anti-fraud provisions
of the 1933 Act apply to insurance contracts. They argue
that Section 3, because of its reference to “the following
classes of securities,’ treats insurance contracts as securities.
It follows, therefore, that the above anti-fraud provisions
and the 1934 Act apply to insurance contracts because they
are ‘‘securities.”’

The plaintiff's argument is persuasive if only the lan-
guage of the two acts is considered. However, Professor
Loss provides the following explanation of the § 3 (a) (8)
exemption:

Section 3 (a) (8) of the Securities Act exempts ‘‘any in-
surance or endowment policy or annuity contract or
optional annuity contract, issued by a corporation sub-
ject to the supervision of the insurance commissioner,
bank commissioner, or any agency or officer perform-
ing like functions, of any State or Territory of the
United States or the District of Columbia.”’

This is a perfect example of how it sometimes does
not pay to be too cautious. Without this exemption,
and without any specific reference to insurance poli-
cies in ~ ne meg of “‘security,”’ and at a time when
Paul v. inia [8 Wall. 168 (U.S. 1869) ] was still
the law of | e tana, it is hardly conceivable that Con-
gress would have subjected insurance policies to fed-
eral control sub silentio, even control which was mere-
ly of the disclosure variety. As it is, § 3(a) (8) seems
on its face to create a negative implication that insur-
ance policies are securities, which may be exempt from

A-37

the registration requirements but are subject to the
antifraud provisions. Nevertheless, the Commission
has taken the position that insurance or endowment
policies or annuity contracts issued by regularly con-
stituted insurance companies were not intended to be
securities, and that in effect § 3 (a) (8) is supereroga-
tion. This undoubtedly carries out the legislative in-
tention; for the House report states that the purpose of
the exemption “makes clear what is already implied in
the act, namely, that insurance policies are not to be re-
garded as securities subject to the provisions of the
act.” 1 Loss, Securities Regulation 497 (2d ed. 1961)
(footnotes omitted) .

Professor Loss’s analysis has been cited with approval by
the Supreme Court in Tcherepnin v. Knight, 389 U.S. 332,
342 n. 30 (1967). The Court stated, moreover:

Congress specifically stated that “insurance policies are
not to be regarded as securities subject to the provi-
sions of the act,” and the exemption from registration
for insurance policies was clearly supererogation. /d.
[citations omitted ].*

Since the definition of “security” found in section 3 (a)
(10) of the 1934 Act, 15 U.S.C. § 78c (a) (10), is virtually
identical to that in section 2(1) of the 1933 Act, 15 U.S.C.
§ 77 (b) (1), it seems reasonable that Congress intended to
exclude insurance contracts from the 1934 Act as we have
seen it did with regard to the 1933 Act.™ Therefore, the

See also S.E.C. v. Variable Annuity Life Ins. Co., 359 U.S. 65, 98
(1959) (Harlan, J., dissenting).

Plaintiffs argue that S.E.C. v. National Securities, Inc., 398 U.S. 453
(1969) , supports their contention. That case, however, held that the fed-
eral securities acts applied to relationships between an insurance company
and its stockholders, while saying nothing about whether insurance poli-
cies are “securities.”

22Plaintiffs also argue that the § 3(a) (8) exemption be construed nar-
rowly to apply only to “pure ‘risk’ insurance contracts.” This argument
falls before the same legislative intent rehearsed above.

A-38

issue is whether the “V.1.P.”’ contract is an insurance policy
or some breed of security.

“Insurance” is a mercurial term, describing a myriad of
contractual relationships and constantly expanding as new
risks are created by the activities, and the changing percep-
tions of value attendant thereto, of men. Any attempt to
define the term strictly is certain to fail. Insurance often
entails an investment feature as well as an assumption of
risk feature; when the assumptive feature becomes second-
ary to the investment feature, the insurance assumes more
and more the attributes of a security. As Professor Loss has
indicated:

In the last analysis, there is no escaping the fact that
there is a continuous spectrum from a one-year term
life insurance policy, which is pure insurance, through
the various forms of straight life and endowment poli-
cies, to the annuities, both fixed and (in varying de-
grees) variable, to mutual fund shares and ultimately
common stock, which represent pure investment. 4
a Securities Regulation 2534 (1969 Supp. to 2d

The Supreme Court has twice attempted to provide
points for drawing the line between insurance contracts,
which are exempt from the federal securities acts, and se-
curities, which are not, in S.E.C. v. Variable Annuity Life
Ins. Co., 359 U.S. 65 (1959) [“WALIC”] and S.E.C. v.
United Benefit Life Ins. Co., 387 US. 202 (1967)
[“UBLIC”}.

In VALIC, the Court considered whether variable an-
nuity contracts, issued by insurance companies regulated
by the insurance commissioners of a number of states (in-
cluding Alabama), were exempt from the disclosure pro-
visions of the 1933 Act, 15 U.S.C. § 77a, and from complli-
ance with the Investment Company Act of 1940, 15 U.S.C.
§ 80a. The contracts in question included certain conven-

A-39

tional insurance features: declining term insurance for the
first five years of pay-in, disability waiver of premium, and,
most significantly, the assumption by the company of the
entire risk of longevity.* These provisions, however, were
deemed incidental to the primary form of the investment,
which called for participation by the insured on a per-unit
basis, in the entire portfolio of the company. The com-
pany’s obligation, then, was always stated in terms of the
present condition of its investment portfolio, not in terms
of dollars.

Finding no guarantee of fixed income, the Court con-
cluded that “the variable annuity places all the investment
risks on the annuitant, none on the company.” /d., at 71.
Concurring for himself and Justice Stewart, Justice Bren-
nan provided a more detailed analysis of the risks assumed
by the company during the pay-in period of the policy:

The contract uses insurance terminol through-
out and many of the common features of life insurance
and annuity policies are operative in regard to it at this
“pay-in” stage. There are “incontestability” and “sui-
cide” clauses (which mainly relate to the term insur-
ance); a “grace period” ene for the payment of
premiums; a provision for “policy loans” (the drawing
down of accumulated units in cash, subject to replace-
ment later to the extent that repayment of the amount
of money received will then permit, the transaction
bearing a resemblance to the liquidation by a common
stock investor of his holdings in anticipation of a “bear
market’) ; and provision for a “cash value” (that is,

This means that, upon reaching the maturity date, the insured’s in-

insured. Although the actual amount paid the insured would fluctua
every month with the value of the the

annuity units every month, regardless of how he lived. Thus, i
company had a “poor” longevity experience, compared to the actuarial
predictions, it stood to lose substantially.

!

A-40

for the cashing in of the accumulated units, subject to
a surrender charge in the early years). And very cer-
tainly the commitment of the company eventually to
disburse the accumulated values on a life annuity basis
once the pay-in period is over is present throughout
this period. But what the investor is participating in
during this period, despite its acknowledged “insur-
ance” features, is something quite similar to a conven-
tional open-end management investment company, un-
der a periodic investment plan. The investor's cash
(less a charge analogous to a loading charge, which is,
at least in the early years, very high, but which it
should be said, has to cover annuity premium taxes
and some quite conventional mortality risks) goes to
buy “units” in a portfolio managed by the persons in
control of the corporation. His “units” fluctuate with
the income and capital gain and loss experience of the
management of the portfolio. He may cash them in,
wholly or partially. e amount of his equity is sub-
jected to a charge, on asset value, of 1.8% per annum.
Except for the temporary term insurance and the
waiver of premium coverage, the entire nature of the
company’s obligation to its investor during this period
is not in dollars (though of course it will be converted
into them, just as a commodity transaction can be),
but solely in terms of the value of its portfolio. 359
U.S. at 84-5.

It may be seen then, that the insureds in VALIC were
buying into a fund, with the prospect of reaping the bene-
fits of profitable management of the fund. There was sim-
ply no fixed dollar risk on the insurer nor any basis for a
concommitant expectation by the insured. Under these con-
ditions, the Court held that the investment contracts were
not exempt from either the 1933 Act or the Investment
Company Act of 1940.

Eight years later, the Court addressed the question once
again in UBLIC, with Justice Harlan, a dissenter in
VALIC, writing for a unanimous Court. In UBLIC, an

A4!1

established, old-line insurance company offered an invest-
ment contract with bifurcated interests. The plan, called a
“Flexible Fund,” provided, during the pay-in period, for
the insured’s pro rata participation in a general investment
fund. At the same time, he was guaranteed a minimum
dollar amount, called the net premium guarantee. At ma-
turity, the insured could elect various conventional annuity
plans, none of which were dependent upon the value of the
pooled funds of all insureds, as was the case in VALIC.
Addressing only the first half of this scheme, the Court de-
termined that the guaranteed dollar value associated with
the pay-in period was “substantially less than that guaran-
teed by the same premiums in a conventional deferred an-
nuity plan,” 387 U.S. at 208. Thus, although there was
some slight shifting of risk from insured to insurer, the
basic framework of the pay-in period rested upon the same
kind of investment fund which the Court had faced in
VALIC. The Court thus held that the pay-in portion of the
“Flexible Fund” contracts were not exempt insurance con-
tracts and were therefore subject to the disclosure provi-
sions of the 1933 Act.

The insurance contract at issue in the present case does
not promise its holders that the amount of insurance they
are purchasing is contingent upon how well a general fund
is invested. Instead, the insureds are promised a fixed
amount of insurance each year, and fixed options at the end
of 10 years and 25 years. The insurance promised is not set
at the illusory levels held to be tantamount to no insurance
in UBLIC.

Plaintiffs also attack the following participating provi-
sion of the contracts: mn

The proportion of divisible surplus accruing upon this
policy shall be ascertained annually by the company.

A-42

Beginning at the end of the second policy year, and on
each anniversary thereafter, such surplus as shall have
been apportioned by the company to this policy shall
be available under any of the following options, upon
written request by the person having control of this
policy: (1) applied toward payment of renewal pre-
miums; or (2) applied to purchase participating paid-
up additional insurance payable under the same terms
and conditions as this policy; or (3) left with the com-
pany to accumulate at interest at a rate of not less than
244% per annum compounded annually; or (4) paid
in cash. Outstanding dividend accumulations may be
withdrawn in cash or shall be payable at the maturity
of this policy to the person or persons entitled to its
proceeds. If no option is selected, such divisible sur-
plus will be paid in cash.

This provision is unlike the fund created in UBLIC, which,
as has been noted, created insurance as a non-guaranteed
portion of an investment fund. In the Great States con-
tract, on the other hand, the participating feature is in
addition to a bona fide insurance scheme and may be
viewed as a reduction of premium. VALIC, 359 U.S. at 90
(Brennan, J., concurring) .

Similar participating features are common in the insur-
ance industry, 43 Am. Jur. 2d, Insurance § 120, pp. 177-8
(1969) ; 44 C.J.S., Insurance § 103, pp. 639-41 (1945); 1
Appleman, Insurance Law and Practice § 9 (Rev. ed.
1965), and they reflect the investment experience of the
company, mortality savings, and savings in administrative
costs. In the Great States policy, the participating feature
is denominated as a “dividend,” not as a “security” or as an
ascertainable share of an investment fund. This feature,
then, is not separable from the indisputably insurance as-
pects of the contract, and it is not a “‘security.” Thus, it
does not remove the ‘‘V.I.P.”’ contract from the insurance

A-43

exemptions of the 1933 and 1934 Acts.* Cf. Olpin v. Ideal
National Ins. Co., 419 F.2d 1250 (10th Cir. 1969) .

Plaintiffs argue that the coupons attached to the “V.I.P.”
policy are additional evidence that the policy is a “security”
and not an insurance contract. This contention is unper-
suasive.

The coupons provide:

Subject to the provisions of [this] policy . . . and upon
the payment of 2nd annual premium in full and not
otherwise, Great States Life Insurance Company will
pay to the order of the insured under said policy [a
stated sum] or upon written request of the insured
within thirty-one days after said date will apply said
sum to the purchase of a paid-up life addition of [a
stated sum].

The sum to be paid to the insured under the sample policy
($249.30) remains the same every year, while the amount
of additional insurance which may be purchased declines
by $30.00 each year. Various inducements are offered to the
insured to refrain from cashing in his coupons, and each of
them is plainly stated in the initial page of the contract.
Such coupon policies are not widely used, but they are a
standard form of insurance. 1 Appleman, supra, § 10. In
effect the coupons are a guaranteed dividend, or rebate of
premium. They are not premised upon a share in an in-
vestment pool and in no way represent a “security.”

Their presence on an insurance policy, of course, may
lend themselves to abuse, since the coupons might be com-
pared to those on a bond, for example. The Insurance

This conclusion is reinforced by Judge McFadden’s similar conclusion
in Hilgeman v. National Insurance Co. of America, 1970 CCH Fed. Sec.
L.Rep. ¢ 92,647 (N.D. Ala., April 22, 1970), rev'd 444 F.2d 446 (5th Cir.
1971). However, because of the confusing aspects and the ambiguous lan-
guage of the Fifth Circuit in that case, no reliance is explicitly placed
upon it.

A-44

Commissioner of Alabama apparently objected to the poli-
cies on this basis, as have other state commissioners. 1 Ap-
pleman, id. However, this fact does not change the exempt
status of these insurance policies; rather it confirms the
Congressional choice, embodied in the insurance exemp-
tion, to leave the regulation of insurance and its sale to the
states. Cf. VALIC, 359 U.S. at 75 (Brennan, J., concur-
ring) .

The plaintiffs argue furthermore that these policies are
transformed into “securities’’ because of the inclusion in
each policy of a statutory provision drawn from Illinois law.
The provision, as it appeared in the policy, is included in
the statement of facts of this memorandum. While it is cer-
tain that this provision, like the coupons, may lend itself
to abuse in the hands of unscrupulous salesmen, it does not
change the character of the contract from one of insurance
to an investment contract which is not exempt from the
1933 and 1934 Acts. The excerpt provides that at least 90
percent of the profits derived from participating policies
shall inure to the benefit of the participants. To facilitate
enforcement of this provision, a company issuing both par-
ticipating and non-participating policies is enjoined to keep
a separate accounting of the profits derived from the differ-
ent types of policies. It is undisputed that Great States (and
State Security) failed to keep this separate accounting. It is
further undisputed that Great States lowered its dividends
to its participating policy-holders in 1967. None of these
facts changes the character of the risk assumed by the in-
surance company nor the kind of contract which the in-
sured bought. The “V.I.P.” contract is still insurance.

Plaintiffs also present a welter of information regarding
the sales pitch given each plaintiff regarding the “V.I.P.”’
contracts. The plaintiffs argue that these facts should be
considered in determining whether the “V.I.P.” contracts

A-45

were securities. They rely upon the Supreme Court's lan-
guage in its seminal decision of S.E.C. v. Joiner Corp., 320
U.S. 344, 351 (1943) :

In the Securities Act the term “security” was defined
to include by name or description many documents in
which there is common trading or speculation or in-
vestment. Some, such as notes, bonds, and stocks, are
pretty much standardized and the name alone carries
well-settled meaning. Others are of more variable
character and were necessarily designated by more de-
scriptive terms, such as “transferable share,” “‘invest-
ment contract,” and “‘in general any interest or instru-
ment commonly known as a security.”” We cannot read
out of the statute these general descriptive designations
merely because more specific ones have been used to
reach some kinds of documents. Instruments may be
included within any of these definitions, as a matter
of law, if on their face they answer to the name or de-
scription. Hoy ever, the reach of the Act does not stop
with the obvious and commonplace. Novel, uncom-

uon, or irregular devices, whatever they appear to be,
are also reached if it be proved as matter of fact that
they were widely offered or dealt in under terms or
courses of dealing which established their character in
commerce as “investment contracts,” or as “any in-
terest or instrument commonly known as a ‘security.’ ”
The proof here seems clear that these defendants’ offers
brought their instruments within these terms.

The Court concluded its opinion by noting that in order to
prove a document a “security,” it might be necessary, as was
done in Joiner to “go outside the instrument itself... .”
Id., at 355.

Joiner, however, involved the sale by defendant of lease-
holds in small parcels of land in Texas to purchasers scat-
tered around the nation. The evidence aside from the
leases themselves indicated that woven into the sale of the
leasehold was an assurance that the seller would under-

A-46

take to drill a well which might enhance the value of all
the nearby leaseholds. Thus, the additional evidence there
indicated that the buyers were purchasing not a leasehold
but an agreement to drill a well. The proof showed that
the buyers were investing in the efforts of another with an
expectation of profit from the other’s efforts.

On the other hand, none of the evidence brought forth
by plaintiffs here remotely suggests such a relationship. At
most, plaintiffs indicate that the salesmen treated the
“V.LP.” insurance contract as if it were a “security.”™
These facts would tend to show common law fraud in the
sale of the insurance contract, but they would not transform
the nature of the contract itself. The insurance nature of
this contract is plain and substantial on the face of the docu-
ment, and the plaintiff has failed to show how the evidence
outside the document would change its essential nature.
See Chapman v. Rudd Paint & Varnish Co., 409 F.2d 635,
640-1 and n. 5 (9th Cir. 1969) ; cf. S.E.C. v. W. J. Howey
Co., 328 U.S. 293 (1946) .*

At this point, it is clear that there is no personal juris-
diction over Nimmo or his company on this claim under
the securities act long-arm statutes. Service as to them
should therefore be quashed as to all counts relying upon
the “V.I.P.” contracts. The Court should, in light of the
second part of this memorandum, also dismiss as to this
count for failure to state a cause of action against these two
defendants.

*5Plaintiffs underscore the use of the word “investment” in the contract
and in the sales pitch. Although this term is subject to muci abuse, it
seems indisputable that insurance is usually a form of “investment.” See
VALIC, supra, 359 U.S. at 75 (Brennan, J., concurring). Use of this term
hardly warrants a finding that the contract here in issue was a “security.”

26The same conclusion must be reached as to a cause of action under
the Alabama Securities Act, Tit. 53 §§ 28, 45, Code of Alabama 1940
(Recomp. 1958) (1973 Cum. Supp.), since that act likewise does not en-
compass causes of action based upon bona fide insurance contracts.

A-47

The situation is different as to State Security. It was
served through the Superintendent of Insurance of Ala-
bama. Personal jurisdiction is therefore established. Sub-
ject matter jurisdiction is predicated not only upon the
Securities Acts, but also upon diversity of citizenship.
Therefore, the quashing of service as to the Nimmo group
does not require similar treatment of State Security, assum-
ing there are causes of action alleged aside from those deal-
ing with breaches of the securities acts.

Plaintiffs have alleged causes of action sounding in com-
mon law fraud and breach of contract. As to the former,
the affidavits filed by the plaintiffs indicate that there are
material and substantial factual contentions upon which a
cause of action in fraud may be grounded. The admission
of all defendants that the profits from the participating
policies were never kept separate indicates a substantial
breach of contract claim and may entitle plaintiffs to an
accounting from State Security.”

Note, however, that neither Nimmo nor Nimmo Inc., as
officers or shareholders of Great States, are personally liable
for the fraud or breach of contract claims. Neither is al-
leged to have participated in the sales pitches given to the
individual plaintiff-buyers. And the corporate structure
shields them from the alleged breach of contract. There-
fore, these claims, likewise, must be dismissed as to them
for failure to state a cause of action.

This disposition, however, likewise precludes a class ac-
tion as to either of these claims. The fraud claims each de-
pend upon the particularized representations made to each
plaintiff. The contract claim depends upon whether the

27This is a conclusion only as to whether a cause of action has been
stated. It is not intended to preclude the defendant's taising defenses,
such as statute of limitations, by way of answer or motion for summary
judgment. Nor is this intended to establish that State Security must an-
swer for torts allegedly committed by Great States or its agents.

A-48

excerpt from Illinois law was included in each plaintiff's
insurance contract; since there is evidence in Mr. Nimmo’s
deposition that it was not the company’s practice to include
the excerpt in the policies, it would be inappropriate to as-
sume that every class member received it as a part of his
contract.

Under these circumstances, a class action may not be
maintained as to the two claims on the “V.I.P.” contract.
F.R.Civ.P. 23 (b) (1) (A) is not satisfied because, as to the
two remaining claims, there are no “standards of conduct”
sought to be imposed upon the defendant. R. 23 (b) (1) (B)
is likewise unsatisfied because adjudications of the indi-
vidual claims will not be dispositive of the interests of other
members not parties to this suit, since the individual claims
each depend upon facts peculiar to that individual. For the
same reason, R. 23 (b) (3) is not satisfied since the questions
of fact peculiar to each plaintiff outweigh any common
questions involved.

It likewise is inappropriate to grant plaintiffs’ motion for
summary judgment as to Counts One through Six, filed
September 23, 1974, even as to breach of the provision re-
garding the separate accounts. While plaintiffs have pre-
sented strong evidence as to this breach, defendant State
Security has not been heard from on this issue as of this
time.

B. Remaining for resolution are the issues surrounding
the merger of Great States into State Security:in 1968. For
the purposes of this memorandum, the issues treated will
be those necessary to dispose of Nimmo’s and his company’s
motions to quash or dismiss. These matters are not treated
as motions for summary judgment on the merits. Consider-
ation of affidavits and other evidence upon motions to
quash does not thereby transform the motions into sum-

AA49

mary judgment adjudications. See 5 Wright and Miller,
Federal Practice and Procedure § 1351, at 565 (1969).

Naturally, we look first to determine whether a cause of
action has been stated as to any defendant. In assessing this
issue, the complaint is weighed heavily in plaintiffs’ favor.
Conley v. Gibson, 355 U.S. 41 (1957). Moreover, to ac-
complish the broad anti-fraud objectives of the securities
acts, the statutes upon which plaintiffs rest their case must
be construed “flexibly, not technically and restrictively.”
Superintendent of Insurance v. Bankers Life & Casualty
Co., 404 U.S. 6, 12 (1971); see Herpich v. Wallace, 430
F.2d 792, 802 (5th Cir. 1970) .

Under these principles, whether plaintiffs have stated a
cause of action is nevertheless problematical. In essence, it
is alleged that Nimmo and his company contrived to sell
their stock in Great States to State Security at a premium,
with a resultant dilution of the value of Great States’ stock
in the hands of minority shareholders, including plaintiff
Grainger. This was accomplished, as seen in the statement
of facts, through the sale of stock to State Security and the
subsequent merger of Great States into State Security. Un-
der the wide umbrella of this transaction, plaintiffs also
charge violations of the proxy rules.

Plaintiffs sue on their own behalf and on behalf of Great
States. Therefore, they have two analytical bases upon
which to premise compliance with the doctrine of Birn-
baum v. Newport Steel Corp., 193 F.2d 461 (2d Cir.) , cert.
denied, 343 U.S. 956 (1952) , to the effect that standing to
seek redress for violations of Rule 10b-5 requires a “pur-
chase” or a “sale.”

In their latest brief, plaintiffs assert that the facts alleged
show that Great States’ assets were used to purchase Great
States’ stock. This telescopes the allegations, for the actual
facts show that Nimmo sold to State Security. State Security

A-50

borrowed funds from a third party to make the purchase.
Then Great States was merged into State Security. The
only sense in which Great States purchased its securities
from Nimmo is that, subsequent to the merger, Great States’
assets were subject to the loan obtained to buy Nimmo’s
stock. However, there is no allegation that the loan was
obtained on the strength of the proposed merger, nor is
there an allegation that the Great States’ assets were sub-
jected to the terms of the loan. Nevertheless, the facts al-
leged are sufficient to establish a kind of “purchase” by
Great States sufficient to warrant a derivative action on its
behalf. Herpich v. Wallace, 430 F.2d 792, 807-10 (5th Cir.
1970) ; cf. Dasho v. Susquehanna Corp., 380 F.2d 262, 267
(7th Cir. 1967), cert. denied sub non, Bard v. Dasho, 389
U.S. 977 (1967) [“Dasho I]. The proof as to the cause of
action must be directed to whether the scheme complained
of was carried on to defraud Great States and whether Great
States has been proximately injured thereby. Herpich,
supra, at 810.

As to the individual plaintiffs, the Graingers, their stand-
ing must rest upon their exchange of Great States’ stock for
State Security’s stock. In S.E.C. v. National Securities, Inc.,
393 U.S. 453, 467 (1969) , the Supreme Court held that an
exchange of stock in a merger context was a “purchase.”
The Court made it clear, however, that its holding was de-
terminative only as to a suit by the S.E.C., and it explicitly
declined to address the question for purposes of a private
action like the present one. Nevertheless, the extension is
a natural one, for by exchanging their shares in Great States
for shares in State Security, the plaintiffs have converted
their investment from one company to another, precisely
the type of situation sought to be covered by the 1934 Act.
Moreover, the exchange was the final step in the alleged
fraud. Thus, it seems clear that plaintiffs are “purchasers”

A-51

within the meaning of the 1934 Act. 15 U.S.C. § 78c (13) ;
see Whitaker, The Birnbaum Doctrine: An Assessment, 23
Ala. L. Rev. 543, 555 n. 57 (1971).

Once the “purchase” requirement is met, the facts state
a cause of action for violation of Rule 10b-5. Herpich v.
Wallace, supra; Dasho I, supra.™ It is well to point out that
plaintiffs’ allegations of fraud in the overall transaction
merit full development upon motions for summary judg-
ment. Herpich and Dasho I are both distinguishable. Both
cases involved a similar scheme, but in both the defrauded
corporation was the final purchaser of its own over-valued
stock; the merger brought into the complaining corporation
both the loan and the stock. In this case the merger brought
in nothing but assets which might be charged with the loan
which was already held by the surviving corporation. How-
ever, this distinction does not vitiate the plaintiffs’ claim
since they assert that the net effect was to pay Nimmo and
his company a premium,” at the expense of his fellow Great
States shareholders. This allegation raises fraud regardless
of how the sale and merger were structured, so long as ma-
terial facts were withheld from the plaintiffs. While there
may be no fiduciary duty on the part of a majority stock-
holder to report every offer he gets to his fellow share-
holders, there is a duty of disclosure where those sharehold-
ers may be charged with the burden of the premium price
paid. Dasho v. Susquehanna Corp., 461 F.2d 11, 26 (7th
Cir.), cert. denied, 408 U.S. 925 (1972) (“Dasho II").
The failure to make such a report may constitute a portion
of a larger scheme to defraud the shareholders, regardless

28]t needs emphasis that this memorandum addresses only the allega-
tions and whether they state a cause of action. No attempt has been made
to deal with the statute of limitations or any other issues.

**Whether a premium was in fact paid is unclear from the evidence
now before the Court, especially in light of Nimmo

assets he was required to buy from Great States, in order to consummate
the sale, were over-valued in the contract of sale. See fn 18, supra.

E
e

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of the right of a majority shareholder to receive a premium
for his shares. Cf. Dasho II, supra, at 33.

This disposition requires the Court to reach Nimmo’s
motion to quash.” He is correct in arguing that his sale of
the Great States stock precludes this Court’s assertion of
personal jurisdiction over him solely on the basis of the
August 28, 1968, proxy statement. Gould v. Tricon, 272
F. Supp. 385 (S.D. N.Y. 1967). That he was still techni-
cally a member of the board of Great States on August 28,
1968 (since his replacement was not formally chosen until
August 30, 1968) , does not change the result, since his prior
sale of his stock precluded his having any direct hand in the
preparation of that proxy statement. Thus, the allegedly
false and misleading statements made therein — on which
plaintiffs rely heavily — will not support personal jurisdic-
tion over Nimmo.

Nor may this Court hold Nimmo as a “controlling per-
son” under 15 U.S.C. § 770. Plaintiffs argue strenuously
that his receipt of $30,000.00 from State Security as a con-
sultant in the year following the merger and his retention
of the power to approve every check issued by Great States
in excess of $1,000.00 make him liable for the fraudulent
acts of State Security following the sale. To find control,
the securities laws require:

. . . [t]he possession, direct or indirect, of the power

to direct or cause the direction of thy management and

policies of a person, whether through the ownership of

voting securities, by contract, or otherwise. Rule 405,
- 1933 Act; Rule 12b-2, 1934 Act.

Neither of the above contractual terms gave Nimmo control
over Great States for purposes of the August 28, 1968, proxy
statement, particularly in light of the undisputed evidence

For the desirability of the Court's treating documents outside the
pleadings, see text at pp. 26-7, supra.

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that he asked, but was never allowed, to exercise his check
approval authority. See Ayers v. Wilfinbarger, 491 F.2d 8
(5th Cir. 1974) ; United States v. Sherwood, 175 F. Supp.
480-3 (S.D. N.Y. 1959) .

However, Nimmo and his corporation may be required
to answer to this Court under plaintiffs’ conspiracy count.
As it is now before this Court," plaintiffs argue that the
August 8, 1968, proxy statement was misleading in that it
did not adequately disclose the premium which Nimmo
and his company received for sale of control, and that it did
not adequately disclose the fact that the ensuing merger
would have the effect of charging the Great States minority
shareholders with the premium price. While the August
8, 1968, statement does disclose, at page 3, the basic facts
from which the above conclusions could be drawn, a ques-
tion for further development is presented as to whether this
disclosure was adequate.

Given this substantial link between the May 10 sales
agreement and the September 20 merger, it cannot be said
that there is no evidence of a conspiracy here, by which
Nimmo agreed to sell his stock in Great States to State Se-
curity, with z subsequent merger so that the majority share-
holders of Great States would be charged, at least in part,
with the burden of paying for the control premium. That
Nimmo and his company may have been a part of this con-
spiracy is sufficiently raised by plaintiffs’ documentary evi-
dence regarding the aborted sale and the subsequent law-
suit. Certainly the two defendants may be charged with
knowledge of the scheme even if they did not originate it,

31Plaintiffs’ complaint makes no mention of the August 8, 1968, proxy
statement in its substantive allegations; there is a veiled reference to it in
the “venue” portion of the complaint. Beginning with their brief of De-
cember 30, 1969, however, this proxy statement has assumed added im-
portance until, in their latest brief, plaintiffs aver that the August 8, 1968,

proxy statement is materially misleading and in furtherance of the con-
spiracy. The conspiracy itself is clearly alleged in the complaint.

ae

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especially in light of the benefits they derived from it.
Herpich v. Wallace, 430 F.2d 818, 819 (5th Cir. 1970) .”

Jurisdiction over Nimmo then may be had under the
conspiracy count. Wyndham Assoc. v. Bintliff, 398 F.2d
614, 620 (2d Cir. 1968). Commission of any act in further-
ance of the conspiracy here likewise makes venue appro-
priate in the Northern District of Alabama. Int’! Controls
Corp. v. Vesco, 490 F.2d 1334, 1347 (2d Cir. 1974).

This conclusion makes it unnecessary to reach other con-
tentions raised by the parties.

%2Defendants stress the dismissal of the suits against three defendants,
situated similarly to Nimmo, in Dasho II, supra, at 33. This dismissal must
be viewed in light of the plaintiffs’ abandonment there of their conspiracy
counts. Jd., at 16.

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385005_0574%3A2. Public record. Not legal advice.