Petitioners Reply Brief — Pappalardo v. Shore

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: e Court, U.S.

FILED

In The SEP 17 ét

Supreme Court of the Anited

DER L. STEVAS.

October Term, 1980 CLERK

No. 80-2142

ANGELO C. PAPPALARDO, et al.,

Petitioners,

—against—

LEO M. SHORE,

Respondent,

—against—

PARKLANE HOSIERY COMPANY, INC., and

HERBERT N. SOMEKH,

Respondents.

On Petition for a Writ of Certiorari to the United States

Court of Appeals for the Second Circuit

———$_—

REPLY BRIEF FOR PETITIONERS

—_—__—_—_—

—-——

ARTHUR M. WISEHART

Attorney for Petitioners

Bar Building

36 West 44th Street

New York, New York 10036

(212) 730-0044

Of Counsel:

WISEHART, FRIOU & KOCH

CUCCIA & OSTER

Printinghouse Press — Bar Ass'n Steno Sve. (Appeals Section) 212-840-1891

In The

Supreme Court of the United States

October Term, 1980

No. 80-2142

ANGELO C. PAPPALARDO, et al.,

Petitioners,

- against -

LEO M. SHORE,

Respondent,

- against -

PARKLANE HOSIERY COMPANY, INC., and

HERBERT N. SOMEKH,

Respondents.

On Petition for a Writ of Certiorari

To the United States Court of

Appeals For the Second Circuit

REPLY BRIEF FOR PETITIONERS ~

TABLE OF CONTENTS

Table of ContentsS..ccccoccccces

Table of Authorities......seoe-

Cases @eeeeoeeoeaeoeoeeeeoea ee eeees

Articles and Treatises .....

I Cocccesceeseseeeeeseeeseeseeee

II e@eeeeeveoeeeeeeeeeeeeeeeeeeeeee@

III @eeeeeseeeoe eee eee eeeeeeeeeee

CONCLUSION @eeeeeeveoene eae eeneeeee ee

TABLE OF AUTHORITIES

Cases

coopers & sibrane v. Livesay,

o = - 78) @eeeeseoeeaeees¢

General Motors Co ration

Engine Interchange tigation

551 F-2d Tide (eh Cir, 1578)~

certiorari denied, 444 U.S.

870 @eeeeeoeoeoeeseea ee eee ee eeee eens

Parklane Hosie Co., Inc. V.

Shore, 439 oe 322 (1979) wecee

Per tway v. American Cast Iron

pe Co., 576 F.2d 1157 (4th

Yr. 8), rehearing den.,

581 F.2d 267, certiorari

denied, 439 U.S. 1115 (1979)...

SEC v. Parklane Hosie Co., Inc.,

“W2 F.Supp. 477, 462, 43- 3

(S.D.N.Y. 1976) aff'd, 558

F.2d 1083 (2d Cir. 1977)

Page

12, 13

8, 9

iii

Page

Articles and Treatises

Brudney and Chirelstein, "A Restate-

ment of Corporate Freezeouts,"

87 Yale L.J. 1354, 1366-8... .ccee 13

Respondents mis-state the

issue posed by this petition when they

contend that, through an oral communica-

tion with the Clerk of this Court, on an

unspecified date, it was ascertained that

the prior negotiation of the proposed

settlement did not make moot the writ

of certiorari previously granted.

The issue is not mootness; the

issue instead is the value of the case.

The respondents do not deny that the

settlement was negotiated prior to

this Court's review of the collateral

estoppel issue in Parklane Hosiery Co.,

Inc. v. Shore, 439 U.S. 322 (1979).

The liability of the defendants for

securities fraud established by that

determination obviously created a

vastly different situation as to the

settlement value of the case -- but that

value was not translated into any mean-

ingful benefit to the members of the

class. As far as they were concerned,

the painstaking review by this Court in

a precedent-setting decision was treated

by class counsel as a nullity for settle-

ment purposes.

Indeed, the attorney who argued

the case in this Court, admitted as much

in an affidavit of May 15, 1980, sub-

sequently filed in the District Court.

In that affidavit, Samuel K. Rosen, Esq.,

stated that the settlement previously

agreed upon reflected "a substantial

discount" of the value of the case.

First among the reasons given for this

discount was "the uncertainties of any

possible appeal to the Supreme Court."

(SA 101)

Mr. Rosen's affidavit goes on

to say that, at the time the negotiation of

the settlement agreement had been com-

pleted, "it was my belief that the

defendants did not intend to expeditiously

file a petition for a writ of certiorari

to the Supreme Court." He then states

that the action of defendants' attorneys

in thereupon proceeding to file a

petition for a writ of certiorari was an

event "which to this day I do not fully

understand...." (Ibid.) Mr. Rosen then

concludes: "On several occasions I

raised with defendants’ then trial counsel

the possibility of delaying the filing

of the certiorari petition and the

reply filing dates, as the Supreme Court's

own rules permit, but was rebuffed in such

efforts." (SA 102)

In view of the foregoing, the

kindest thing that can be said about the

last paragraph on page 11 of class counsel's

brief herein is that it is grossly mis~

leading. The settlement proposed most

assuredly was arrived at prior to the

granting, or even filing, of a petition

for a writ of certiorari.

We are somewhat perplexed about

what to axe of the references to a dis-

cussion with the Clerk, in the briefs

submitted by the Respondents. They are

found at pages 11-12 of Respondent Shore's

brief, and at page 12 of the brief for

Respondents Parklane Hosiery Company and

Somekh. In the first, the assertion is

that the two attorneys spoke jointly with

the Clerk, "and were told that the pro-

posed settlement did not affect the status

or the scheculing of the appeal to this

Court."

The Parklane-Somekh brief goes

further and asserts that "We inquired

whether in these circumstances the Court

would be willing to postpone its hearing

of the case inasmuch as approval of the

settlement would make the appeal moot.

The Clerk advised us that no such post-

ponement was available and that the appeal

would be argued as scheduled."

Both briefs indicate that the

advice attributed to the Clerk was con-

sistent with Coopers & Lybrand v. Livesay,

437 U.S. 463 (1978).

Perhaps the most unusual aspect

of these communications with the Clerk

is the fact that not one word of the

settlement situation, apparently, was dis-

closed in the briefs of either of the

Respondents to this Court. The writ of

certiorari was granted after the pro-

posed settlement had been negotiated, and

the briefs were filed substantially there-

after. Yet, apart from an oral communica-

tion to the Clerk, the Respondents went

ahead and briefed and argued the appeal, so

far as we are told, leaving this Court

(except for the Clerk) entirely in the

dark.

The investment of time and

attention required to review an important

and difficult case, having a widespread

impact on the law throughout the United

States, justifies criticism of attorneys

who, because of a previously negotiated

settlement that has only been mentioned

orally to the Clerk, take the position that

the Court's decision on the merits in the

case reviewed is without practical

consequence -~ that a "win" ostensibly

on behalf of the class plaintiffs is to

benefit them not one whit, notwithstanding

the “substantial discount" reflected in the

proposed settlement previously negotiated

precisely because of the uncertainties

of the outcome of an appeal to this

Court.

II.

By a misleading reference to

the decision in the stockholder's appraisal

proceeding, utilizing figures unadjusted

for interest and costs, class counsel's

brief implies that not very much is at

stake in monetary terms (p. 16). Not

only are the figures used misleading,*

*It was not disputed at the argument before

the District Court that the net value of what was

offered was worth only about 70 cents per share as

of the date when the company went private. (cont'd.)

but they contain no element of profit to

defendant Somekh, for whose personal

benefit the fraudulent freezeout was

conducted.

Class counsel then contends

that "petitioners introduced no evidence

that Somekh made a profit." (p. 21)

However, the fact of profitability

is established by the District Court's

findings in the SEC action, where it

clearly appears that the undisclosed but

“overriding purpose" of the freezeout was

for Somekh to avail himself of nearly

$1 million of corporate funds to reduce

his personal indebtedness. SEC v.

d. from previous page)

Tr. 6/27/80, SA 345. Moreover, this amount is

based on the fact that proofs of claim to parti-

cipate in the settlement fund were filed for only

about half of the shares in the class, If more

participated, of course, the pro rata recovery

would be substantially reduced.

Parklane Hosiery Co., Inc., 422 F.Supp.

477, 482, 483-5 (S.D.N.Y. 1976), aff'd,

558 F.2d 1083 (2d Cir. 1977).

The purpose was purely personal -~-

Somekh's indebtedness arising from a :

personal investment in a massive real

estate development in Tulsa, Oklahoma.

Somekh's total profits are not known.*

But that is only because class counsel did

not do his job, and admittedly conducted

no discovery on the issue.**

Thus on known facts alone, under

the proposed settlement, the corporation

(not Somekh) would have to pay only

$285,000 (in 1981 dollars) for a securities

———¥ihe economic boom in Tulsa, Okla., is com

mented upon in a feature item in the New York

Times for June 3, 1978, p. 8.

**Tr, 6/27/80, SA 331.

fraud engineered to enable Somekh to use

$1,000,000 in corporate funds (in 1974

dollars) to pay for his Tulsa real estate

speculation. A by-product benefit of the

transaction to Somekh was access to the

corporate treasury to finance Somekh's

personal litigation costs, which have been

estimated to have exceeded another

$1,000,000.

Moreover, class counsel did

admit that inclusion of Somekh's liability

for his profits would mean a “quantum

jump" in the measure of damages (Tr.

6/27/80, SA 423) -- a “quantum jump" that

concededly was not factored into the

proposed settlement.

In view of the foregoing, the

assertion of class counsel that there was

no evidence that Somekh made a profit is

‘ludicrous.

Iit.

The brief submitted on behalf

of Parklane and Somekh asserts that “so

far as our research shows, this Court

has never reversed nor entertained

appeals" from proposed settlements in class

action litigations (p. 3).

If that assertion is indeed

true, it is respectfully submitted that

the pro forma review on appeal by the

Second Circuit below, contrasted with

the much stricter standard of the Seventh

Circuit in the General Motors Corporation

Engine Interchange Litigation, 594 F.2d

1126 (7th Cir. 1979), certiorari denied,

444 U.S. 870, brings into focus issues

that warrant the attention of this Court,

based upon the following considerations:

‘ (a) the fact that the proposed

settlement constitutes an incentive for

rather than a deterrent of securities

fraud. This is shown by the analysis above

of known benefits received by defendant

Somekh -- a result that certainly was not

within the contemplation of this Court when

it decided Parklane Hosiery Company, Inc. v.

Shore, 439 U.S. 322 (1979);

(b) The fact that only this Court

can provide authoritative guidance in

response to the rising crescendo of ques-

tions from throughout the country regarding

the proper duties and responsibilities of

Class action counsel in a settlement

situation -- in addition to the General

Motors Engine Interchange case by the

Seventh Circuit, supra, see Pettway v.

American Cast Iron Pipe Co., 576 F.2d

1157 (4th Cir. 1978), rehearing den., 581

F.2d 267, certiorari denied, 439 U.S.

1115 (1979); and

with due process dimensions, of attaining

fairness to the public stockholders in

corporate freezeouts -- see Brudney and

Chirelstein, "A Restatement of Corporate

Freezeouts," 87 Yale L.J. 1354, 1366-8 (con-

cluding that in a freezeout situation, be-

cause of the control exercised by

entrenched managements, like Somekh's,

"the problem of implementing a fairness

standard comes close to being insurmountable.").

CONCLUSION

The petition for certiorari

should be granted.

Respectfully submitted,