Opposition — Price v. Pittsburgh Terminal Corp.

CLERK

Supreme Court of the United States

October Term, 1982

No. 82-620

W. JAMES PRICE, ALONZO G. DECKER, JR., JAMES

PARKER NOLAN, FREDERICK DEANE, JR., JAMES L.

ALEXANDER STEVAS.

O'KEEFE, GREGORY S. DEVINE, FAY A. LeFEVRE, JOHN .

K. STEVENSON, HAYS T. WATKINS and HOWARD E. SIMP-

? SON, et al,

Petitioners,

vs.

PITTSBURGH TERMINAL CORPORATION,

: ae Respondent,

W. JAMES PRICE, et al,

2

Petitioners,

vs.

MONROE GUTTMANN, LORETTA GUTTMANN,

JANET REES and EVELYN BITTNER,

Respondents.

(Additional Actions inside front cover.)

RESPONSE TO WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR

THE THIRD CIRCUIT

MICHAEL P. MALAKOFF

BERGER, KAPETAN, MALAKOFF & MEYERS, PC.

508 Law & Finance Building

Pittsburgh, Pennsylvania 15219

Attorneys for Respondents

—EE———EEEOEOEOEOeEEEEEEE~E~S~ETEE_

Betavis Times Publishing Co ee

+ Pittsburgh. Pa. (412) 681-7463

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No. 82-622

THE BALTIMORE and OHIO RAILROAD COMPANY,

THE CHESAPEAKE and OHIO RAILWAY COMPANY

and CHESSIE SYSTEM, INC.,

Petitioners.

vs.

PITTSBURGH TERMINAL CORPORATION,

Respondent.

THE BALTIMORE and OHIO RAILROAD COMPANY,

THE CHESAPEAKE and OHIO RAILWAY COMPANY

and CHESSIE SYSTEM, INC.,

Petitioners.

vs.

MONROE GUTTMANN, LORETTA GUTTMANN,

JANET REES and EVELYN BITTNER,

Respondents.

Counter Statement of the Questions Presented

I. Whether, under $10(b} of the Exchange Act and

Rule 10b-5:

A. A defense of advice of counsel mav rest on un-

written opinions of Defendants’ in-house lawyers

who never considered those provisions?

B. Alleged reliance on advice of counsel is a

defense negating scienter?

II. Whether Defendant issuing corporation and its

majority shareholders and directors breached a duty to

convertible debentureholders by depriving them of a

meaningful opportunity to exercise their conversion

rights through concealment of the impending MAC divi-

dend?

A. Whether an Indenture notice clause referring

to “any dividend on [tue issuer's} common stock

payable in stock” required advance notice to

convertible debentureholders of a dividend on the

issuer’s stock, payable in stock of a subsidiary of

the issuing company?

B. Whether, for purposes of Rule 10b-5, Rule

10b-17 entitles holders of publicly traded debentures

to advance notice of dividends on the issuer’s stock?

III. Whether this Court’s opinion in Blue Chip Stamp

v. Manor Drug Stores (holding that the owner of a con-

tractual right to purchase has standing to sue under

$10(b) and Rule 10b-5) was correctly applied?

TABLE OF CONTENTS.

Page

Counter Statement of he Questions Presented...... i

Table of Contents ..... 2... ccc cece cece eeee iii

Counter Statement of the Case................... 2

A. Background Facts.....................45. a

B. Procedural History ....................55. 4

Reasons for Denying the Writ ................... 5

Summary of Argument ..................... 5

J. Defendants’ acquisition of the MAC

stock by concealment and in a manner designed

to exclude the minority securityholders violate

$10(b) of the Exchange Act ............++4+:

A. Defendants’ intentionally deceptive

conduct is not excused by their claimed

reliance on their in-house counsel who never

considered §10(b) of the Exchange Act and

B. Claimed reliance on advice of counsel

II. Defendant issuing corporation and its

majority shareholders and directors breached a

duty to convertible debentureholders by de-

priving them of a meaningful opportunity to ex-

ercise their conversion rights through conceal-

ment of the impending MAC dividend ........

iv.

Page

A. An indenture notice clause referring to

“any dividend on [the issuer's] common

stock payable in stock” requires advance

notice to the convertible debentureholders of

a dividend on the issuer's stock, payable in

stock of a subsidiary of the issuing company. 13

B. For purposes of Rule 10b-5, Rule 10b-

17 entitles holders of publicly traded deben-

tures to advance notice of dividends on the

GUE STE chino 6 bn 446 0.0 0 UR 00 cob eceste 15

An analysis of Rule 10b-17........... 17

Ill. This Court’s opinion in Blue Chip

Stamp v. Manor Drug Stores (holding that the

owner of a contractual right to purchase is a

Page

TABLE OF CITATIONS.

Cases:

Affiliated Ute Citizens v. United States, 406 U.S.

Bae GUUE St ob a bbe vc cc dats ebbebedccdscvdect 6,12

Arthur Lipper Corp. v. Securities and Exchange

Commission, 547 F.2d 171 (2d Cir. 1976)

cert. denied 434 U.S. 1004 (1978)............... 7,8,9

Blue Chip Stamp v. Manor Drug Stores, 421 U.S.

RD PR CRA EERE eI ars i,5,21,22

Broad v. Rockwell, 642 F.2d 929 (5th Cir.

1981) (en banc) cert. denied 454 U.S. 965

SENS onk Cetdcaap cha vba cbiubsdlowes 11,12,13,14,15

Camp v. Genesco, [1976-77] Fed.Sec.L.Rep. (CCH)

Para. 95,473 and Para. 95,679 (S.D.N.Y. 1976) ... 22

Chiarella v. United States, 445 U.S. 222

GRU ed Wa’ oc dob Soced so cbbns 06h so sBbas 5,11,17,18,20

Commonality Frat. Trad. Comm'n v. Co. Petro

Marketing, 680 F.2d 573 (9th Cir. 1982)......... 19

Ernst & Ernst v. Hocl/ elder, 425 U.S. 185 (1976) .... 5,10

Fogel v. Chestnut, 533 F.2d 731 (2d Cir. 1975) cert.

denied 429 U.S. 824 (1976)... . 1... cece ee eeee 8

Laidlaw v. Organ, 15 U.S. (2 Wheat) 177 (1817)..... 12

Miley v. Oppenheimer Co., 637 F.2d 318 (9th Cir.

Rah hs abe Babb as c ocd beGebecdsbbebcatsceds 19

O’Connor & Assoc. v. Dean Witter Reynolds, Inc.,

529 F.Supp. 1179 (S.D.N.Y. 1961).............. 19

Peacock v. Oppenheimer & Co., 198) Fed.Sec.L.Rep.

(CCH) 998,212 (N.D. Til. 1981) ................. 19

Securities and Exchange Commission v. Falstaff

Brewing Corp., 629 F.2d 62 (D.C.Cir. 1980) cert.

denied 449 U.S. 1012 (1980)... .. 2.2... . cee ee 9,10

vi.

Page

Securities and Exchange Commission v. Manor Nur-

sing Homes Inc., 458 F.2d 1082 (2d Cir. 1972)....

Securities and Exchange Commission v. Savoy In-

dustries, Inc., 665 F.2d 1310 (D.D.C. 1981) ......

Singleton v. Wulff, 428 U.S. 106 (1976)............

Sonesta Int'l Hotels Corp. v. Wellington Associates,

483 F.2d 247 (2d Cir. 1973)... . 2.6.66 cece ewes

State v. Gaddy, 184 N.E.2d 689 (Ohio Com. Pi.

BE GLUD « cca Phkorebaeld cane th oovquentelhebie

State Teachers Retirement Bd. v. Fluor Corp., 654

F.2d 843 (2d Cir. 1981)... 6.6. cee eee ce eee

Stephenson v. Calpine Conifers II, Lid., 652 F.2d

AEs GOD odie ys cvocescnetocyccwin

Superintendent of Insurance v. Bankers Life &

Casualty Co., 404 U.S. 6 (1971)... . 6... cece ene

Touche Ross & Co. v. Redington, 442 U.S. 560

Transamerican Mortgage Advisors Inc. v. Lewis,

GOS Ws BE GD 0b eh Ui che hdr codccccancces

TSC Industries, Inc. v. Northway, Inc., 426 U.S.

SE via cab U8 s vidv véncddbnacceptemtdesecs

United States v. United States Gypsum Co., 438

i MINS Sinead dus Oko rie occ iggeccsceved

Universal Athletic Sales v. American Gypsum, 546

F.2d 630 (3d Cir. 1976)... 1... cece cece cee ete

Van Gemert v. Boeing Co. 520 F.2d 1373

(2d Cir. 1975) cert. denied 423 U.S.

7

CET CBDIE) cing. cic ctngeccccrecccccovensdecs 14,15,20

Page

Statutes:

Exchange Act, §3(a), 15 U.S.C. §78(cMa13)........ 22

Exchange Act, §10(b)......... i,5,6,7,9,12,13,17,18,19,21

BON NR Cac bonny wonders cehersscccepene 14

Securities Exchange Act Rel. No. 9076, 36 Fed. Reg.

3431 (February 17, 1971)..... 6... 666 cc cceenens 17

Securities Exchange Act No. 9192, 36 Fed. Reg.

SP Vo NE coe cacwebaceced descupccae 18

Rules:

FTES Pe sope a i,7,9,10,15,19,20,22

DEEGEE so 0 b.0 60 ccbidodee'es Cus i,14,15,16,17,18,19,20

Miscellaneous:

Hawes & Sherrard, Reliance on Advice of Counsel as

a Defense in Corporate and Securities Cases, 62

is Mee Us By RP ERDUOD ccc decd decdbedpecccccse 8

W. LaFave & A. Scott, Criminal Law 196 (1972).... 10

L.Loss, 3 Securities Regulations, §1483 (2d Ed.

ESS Th bad 6 50 WEES vse Wines ee obs Mhcntei sn ce ll

Supreme Court of the United States

October Term, 1982

No. 82-620

W. JAMES PRICE, ALONZO G. DECKER, JR., JAMES

PARKER NOLAN, FREDERICK DEANE, JR., JAMES L.

O'KEEFE, GREGORY S. DEVINE, FAY A. LeFEVRE, JOHN

K. STEVENSON, HAYS T. WATKINS and HOWARD E. SIMP-

SON, et al,

Petitioners,

vs.

PITTSBURGH TERMINAL CORPORATION,

Respondent,

and

W. JAMES PRICE, et al,

Petitioners,

vs.

MONROE GUT "MANN, LORETTA GUTTMANN,

JANET REES and EVELYN BITTNER,

; Respondents.

No. 82-622

THE BALTIMORE and OHIO RAILROAD COMPANY,

THE CHESAPEAKE and OHIO RAILWAY COMPANY

and CHESSIE SYSTEM, INC..,

Petitioners,

vs.

PITTSBURGH TERMINAL CORPORATION,

Respondent.

THE BALTIMORE and OHIO RAILROAD COMPANY,

THE CHESAPEAKE and OHIO RAILWAY COMPANY

and CHESSIE SYSTEM, INC.,

Petitioners,

vs.

MONROE GUTTMANN, LORETTA GUTTMANN,

JANET REES and EVELYN BITTNER,

Respondents.

RESPONSE TO WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR

THE THIRD CIRCUIT

Counter Statement of the Case

A. Background Facts

This action, asserting in part violations of the

Securities Exchange Act of 1934, arose from the

December 1977 declaration of a dividend payable in the

stock of Mid-Allegheny Corporation [‘‘MAC’’] to common

shareholders of Defendant, The Baltimore and Ohio

Railroad (“B&O”). The dividend was declared without

prior notice to Plaintiffs, holders of certain B&O convert-

3

ible debentures, so as to deprive them of the opportunity

to exercise their conversion rights and thereby to share

in the MAC stock dividend. The Defendants include the

B&O; its controlling shareholders, the Chesapeake &

Ohio Railroad Company [C&O”] and the Chessie

System, Inc. [‘‘Chessie’’]; and fourteen Directors of the

B&O.

Plaintiffs own B&O 4-1/2% debentures, which are con-

vertible into 10 shares of B&O common stock for each

$1,000 debenture.

Simultaneous with the declaration of the MAC divi-

dend, the B&O transferred substantially all of ite non-rail

assets to MAC, a wholly owned subsidiary.' In declaring

the dividend, the Defendant Directors of the B&O set

the record date as the date of declaration. The possibility

of Plaintiffs converting so as to receive the dividend, and

thereby participate in the development of the non-rail

assets of the B&O, was thus foreclosed. Concealment of

the impending declaration of the MAC dividend enabled

the B&O’s parent and grandparent, the C&O and the

Chessie, to upstream those extremely valuezble assets,

beyond the reach of the convertible debentureholders.

4

B. Procedural History

On December 28, 1977, Plaintiff, Pittsburgh Terminal

Corporation [“PTC”] commenced an individual action

against the Defendant B&O and others to enjoin the pay-

ment of the December 1977 MAC dividend. On March 7,

1978, the Trial Court granted Plaintiff PTC a preliminary

injunction. See 466 F.Supp. 656 (W.D.Pa. 1978). That in-

junction was subsequently reversed by the Court of Ap-

peals on July 5, 1978, because Defendant B&O offered to

put aside sufficient shares of MAC stock to satisfy Piain-

tiff’s claim. See 578 F.2d 1375 (3d Cir. 1978). On remand,

Plaintiff PTC, on February 15, 1979 filed an amended

complaint expanding its causes of action and adding a

claim for monetary damages. The amended complaint

was similar to the complaint filed by PTC's President

Monroe Guttmann and others on January 22, 1979.

Following a trial, the Trial Court on March 10, 1981

entered judgment in favor of the Defendants. See 509

F.Supp. 1002 (W.D.Pa. 1981). On June 3, 1982 the Court

of Appeals, in a 2 to | decision, reversed and remanded

for determination of an appropriate remedy. See 680 F.2d

933 (3d Cir. 1982). Thereafter, on July 9, 1982 Defen-

dants’ petition for rehearing en banc was unanimously

denied.

The Corporate and Director Defendants filed separate

petitions for writ of certiorari. Because the issues raised

by all petitioners are substantially the same Plaintiffs

make this their response with respect to both petitions.

~~

“conflicting” decision of the Fifth Circuit is readily

distinguishable.

At most, Defendants’ petitions present yet another op

portunity for this Court to restate the scienter standard

of Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976), the

duty standard of Chiarcila v. United States, 445 U.S. 222

(1980) and the purchaser-seller standard of Blue Chip

Stamp v. Manor Drug Stores, 421 U.S. 723 (1975). This

been timely and adequately informed. The Appellate

Court held, on the facts as found by the Trial Court after

a five (5) day trial, that Defendants’ conduct “was a

manipulative or deceptive device or contrivance in viola-

tion of Section 10(b)”’ (22a). This ruling is fully supported

by Defendants’ admissions that:

vertible debentures in 1977 about the prospects of

dividend declaration by B&O on its common stock.

No was made by Defendants to inform the

blic of the debentures of the proposed

declaration of the MAC dividend prior to December

13, 1977.

In fact:

prospect of a MAC dividend] of importance in the mak-

ing of his feonversion] decision.” See Affiliated Ute

Citizens v. United States, 406 U.S. 128, 154-55 (1972).

Advance disclosure of the MAC dividend with sufficient

TSC industries, Inc. vs. Northway, Inc., 426 US. 438,

449 (1976).

In this Court Defendants seek to escane liability by

(2d Cir. 1976) cert. denied 434 U.S. 1004 (1978).

In an equitable or disciplinary proceeding, the defen-

dant has been required to satisfy at least five pre

requisites in order to establish the defense, including

that he (i) relied upon the advice of disinterested counsel;

(ii) made complete disclosure of all relevant facts to

counsel; (iii) requested counsel’s advice as to the legality

of the proposed conduct; (iv) received advice that such

conduct was lawfui; and (v) acted in accordance with

such advice after it was rendered. See Hawes & Sherrard,

Reliance on Advice of Counsel as a Defense in Corporate

and Securities Cases, 62 Va. L.Rev. 1, 19 (1976).

Courts have uniformly recognized that in-house

counsel are not “in a position to give ... wholly dis-

interested advice” Arthur Lipper Corp. v. Securities and

Exchange Commission, 547 F.2d 171, 182 (2d Cir. 1976)

cert. denied 494 U.S. 1004 (1978). The opinions of Defen-

dants’ inside counsel “must be discounted”. Universal

Athletic Sales v. American Gypsum, 546 F.2d 530, 539-

40 (3d Cir. 1976). “Reliance ... from a lawyer having a

ture, the listing agreement, Maryland law, and the New

York Stock Exchange Manual. Corporate Defendants’

Petition at p. 7.’

Therefore, Defendants’ attempt to raise an advice of

counsel defense is not supported by the record and is not

properly before this Court.

B. Claimed reliance on advice of counsel does not provide

proof of a lack of intent to defraud.

In private damage actions under §10(b) of the Ex-

change Act, all the Courts have uniformly rejected the

defense of advice of counsel. Quite simply, in this case,

as in Arthur Lipper Corp. v. Securities and Exchange

10

cert. denied 449 U.S. 1012 (1980) and Securities and Ex-

change Commission v. Savoy Industries, Inc., 665 F.2d

1310, 1314 n. 28 (D.D.C. 1981) (“Compliance with federal

securities laws cannot be avoided simply by retaining

outside counsel .. .’’).

Defendants herein raise the claim of reliance on advice

of counsel in an attempt to defeat a finding of the re-

quisite intent to deceive.

All parties agree that under Ernst & Ernst v. Hoch-

felder, 425 U.S. 185 (1976), a Court must consider the

definition of the words “intent” and “deceive” since Rule

10b-5 is limited “to knowing or intentional practices”

(footnote omitted). Id. at 197-98.

“Intent” is defined as “embracing either the specific

requirement of purpose or the more general one of

knowledge or awareness.” United States v. United States

Gypsum Co., 438 U.S. 422, 445 (1978) quoting W.

LaFave & A. Scott, Criminal Law 196 (1972) as follows:

that a who

‘gate let gue te ool bode 0 oak his act (or

to

his desire may be as to that result.’’ Id. at 446.

With reference to the meaning of the word “‘deceive”’:

“*... Webster's New International Dictionary (2d Ed.

1934) defines “‘deceive’’ as inter alia: “to cause to

believe the false, or disbelieve the truth.” “‘Decep-

tive’’ means “tending to deceive; having the power

11

to mislead; as, a deceptive appearance.” Id. “To

deceive,” en ee ee

observer; ‘deceptive’, on the other hand.

SS eosces tr daeaee. Baceoate tad ies Oe

nsity to deceive. ‘Pvotnote omitted) Klamberg

th, 473 F Supp. 544, 550 (S.D.N.Y. 1979).

Iv Suis case, Defendants intended to conceal the MAC

dividend from Plaintiffs and had knowledge that, if

Plaintiffe did not receive advance notice of the MAC

dividend, they would lose the opportunity to participate

in the development of the B&O’s non-rail assets. Defen-

dants had the requisite intent to deceive, and the claimed

reliance on the advice of counsel is patently irrelevant.

Il. Defendant issuing corporation and its majority

Defendants principally rely on the Fifth Circuit deci-

sion in Broad v. Rockwell, 642 F.2d 929 (5th Cir. 1981)

(en banc) cert. denied 454 U.S. 965 (1981) to support its

allegation that the Third Circuit failed to follow this

Court’s “duty” criteria in Chiarella v. United States, 445

12

Whether or not a duty to disclose exists under $10(b)

of the Exchange Act is only resolved by a careful con-

sideration of numerous factors. See, e.g., Stephenson v.

Calpine Conifers II, Ltd., 652 F.2d 808, 813 (9th Cir.

1981) wherein the Court recently held:

“ .. [TJhe scope of a defendant’s duty under Rule

10b-5 should be determined by considering five fac-

awareness by the defendant of the plaintiff's reliance

on him or her; and (5) the defendant’s activity in in-

itiating the securities transaction in question.” (foot-

note omitted) Jd. at 813.°

Corporate duties may even extend to creditors.

Superintendent of Insurance v. Bankers Life & Casualty

Co., 404 U.S. 6, 12 (1971).

“duty of good faith and fair dealing”. (Emphasis added)

Broad, 614 F.2d at 430, aff'd on this point 642 F.2d at

13

A. An indenture notice clause referring to “any dividend on

[the issuer's] common stock payable in stock” requires advance

notice to the convertible debentureholders of a dividend on the

issuer’s stock, payable in stock of a subsidiary of the issuing

company.

In Broad v. Rockwell, 642 F.2d 929 (5th Cir. 1981) (en

banc) cert. denied 454 U.S. 965 (1981) plaintiffs were

holders of convertible debentures issued by Collins Radio

Company. In 1973, after having acquired 75% of the out-

standing Collins common stock by a tender offer, Rock-

well affected a short-form merger upon the non-

tendering minority shareholders. In connection with the

merger of Collins into Rockwell, Rockwell assumed Col-

lins’ obligation to its debentureholders and entered into a

supplemental indenture ugreement with the indenture

trustee, providing that debentureholders would have the

right to convert into the same thing (cash) which holders

of Collins common stock received in the merger. The

debentureholders claimed, in part, that defendants’

failure to disclose a material fact (i.e., that in the event of

a merger, plaintiffs’ conversion rights would be the same

as that of shareholders) was a violation of §10(b) of the

Exchange Act. Id. at 960. The Court, in Broad, rejected

the plaintiffs’ legal position and found that the indenture

“unambiguously sets out the conversion rights of the

holders of the Debentures in the event of a merger...”

(p. 955) and that it. “was available to anyone who cared

to look at the indenture”. Jd. at 960. The Court in Broad

concluded that there was no fraud or deception, because

Defendants ‘merely carried out their contractual obliga-

tions”. Id. at 963.

In this case Plaintiffs have consistently maintained

that the B&O Indenture (Article V, Section 12) explicitly

14

required advance notice to the debentureholders of the

MAC dividend. While Defendants dispute this* and

neither of the prevailing opinions below addresses that

point, this state law issue could become a threshold ques-

tion should this Court undertake a review of the merits.

Even accepting, however, the Defendants’ position

that the Indenture is silent on that subject, Broad still

does not support Defendants’ position in this case. Broad

held that the defendants’ conduct was mandated by the

indenture. Defendants here can point to no such man-

date. Moreover, in this case the Indenture, if read as not

substantial right “inherent in the investment’’ to obtain

only cash upon a merger, as opposed to an “unsatisfac-

tory notice procedure”. Broad, 642 F.2d at 957-58

quoting Van Gemert v. Boeing Co., 520 F.2d 1373, 1385

15

(2d Cir. 1975) cert. denied 423 U.S. 947 (1975).* In this

case, unlike Broad, but like Van Gemert, the plaintiffs

are concerned about an “unsatisfactory notice pro-

cedure.”

There is no conflict between the Fifth Circuit’s decision

in Broad and this case. In this case, as in Broad, cer-

tiorari should be denied.

B. For purposes of Rule 10b-5, Rule 10b-17 entitles holders

of publicly traded debentures to advance notice of dividends on

the issuer’s stock.

Defendants’ view of their advance notice duty is

myopic.

Plaintiffs argued in the Courts below that there were

at least four independent sources of duty that the Defen-

dants violated when they failed to give them advance

1. Defendants’ indenture;

2. Defendants’ listing agreement;

3. Pel ay statutory law; and

4. Section 10(b) of the Exchange Act.

Plaintiffs contended, inter alia, that under Rule 10b-17,

Defendants had a duty to speak, and that the breach of

that duty was fraudulent under Rule 10b-5.

failure to convert, as here, is not from a risk inherent in his

investment but rather from unsatisfactory notice procedures.”

Broad, 642 F.2d at 957-58 quoting Van Gemert, 520 F.2d at

1385.

And “inadequate notice .. . to debentureholders may render valueless

the investors’ interest” (footnote omitted) State Teachers Retirement

Bd. v. Fluor Corp., 654 F.2d 843, 854 (2d Cir. 1981).

c

16

Judge Gibbons, announcing the judgment of the Court,

held that Defendants had a “duty to speak” under “[1]

Rule 10b-17, [2] the Maryland law of fiduciary obliga-

tions and [3] the New York law of contracts [indentures]”

(19a).° Judge Garth, concurring in part, held that he

would “predicate [Defendants’] duty to disclose the

[MAC] dividend solely on the provisions of Rule 10b-

17...” (23a) and therefore did not find it necessary to

decide whether a duty to disclose arose from other

sources. "*

Defendants request this Court to grant certiorari and

hold that Defendants had no duty to disclose under Rule

10b-17. Plaintiffs respectfully submit that since Defen-

dants’ duty under Rule 10b-17 is clear, further considera-

tion by this Court or the Court of Appeals on whether a

duty under the indenture, listing agreement, or the law

of Maryland exists is unwarranted.

the duty owed to Plaintiffs. (19a)

17

An analysis of Rule 106-17

Rule 10b-17, entitled ‘Untimely announcements of rec-

ord dates”, provides that notice must be given to the Ex-

change ten days prior to the declaration of a dividend

relating to any publicly traded security."' The failure to

provide this notice constitutes a “manipulative or decep-

tive device” within the prohibitions of Section 10(b). Rule

10b-17 provides inter alia:

(a) It shall constitute a “manipulative or

tive device or contrivance” as used in section 1

of the Act for any issuer of a class of securities

publicly traded by the use of any means or in-

strumentality of interstate commerce or of the mails

or of any facility of any national securities exchange

to fail to give notice in accordance with paragraph

(b) of this section of the following actions relating to

such class of securities:

(1) A dividend or other distribution in cash or

in kind, except an ordinary interest payment on a

debt security, but including a dividend or distribu-

tion of any security of the same or another issuer;

The Commission releases issued when Rule 10b-17 was

proposed indicate that the notice requirement was to pro-

tect purchasers (like Plaintiffs) and sellers of all publicly

traded securities. See Securities Exchange Act Rel. No.

9076, 36 Fed. Reg. 3431 (February 17, 1971) (Purpose of

Rule 10b-17 was “to require companies whose securities

are publicly traded to furnish public investors with time-

ly advance notice of the right to receive dividend and

'"' This Court, in finding no duty in Chiarella, attributed significance

to the fact that neither Congress nor the Commission had ever pro-

mulgated a general “parity of information rule”, 445' U.S. at 233.

Here, the Commission has promulgated a rule (Rule 10b-17) govern-

ing the exact situation presented bv this case.

Defendants contend that Rule 10b-17 is not applicable

to this case for at least four reasons:

First: Since the MAC dividend was declared on the

non-publicly traded B&O common stock, Rule 10b-17 is

Answer: The convertible debentures are publicly trad-

ed securities. The MAC dividend was “relating to” the

publicly traded convertible debentures of the B&O."

Second: The Rule 10b-17 duty to speak issue was not

raised before the Trial Court.

19

Answer: The Rule 10b-17 duty issue was raised before

trial [Plaintiffs’ Brief In Support Of Motion For Sum-

mary Judgment, p. 13] as well as immediately after trial

in Plaintiffs’ Proposed Conclusions of Law, p. 9. The

Rule 10b-17 duty was fully, completely and forcefully

presented to the Trial Court."*

Third: Rule 10b-17 does not create any duty owed to

Plaintiffs, but only to the Exchange.

Answer: Duties owed to the Exchange are relevant in

determining standards of disclosure under §10(b) and

Rule 10b-5. Peacock v. Oppenheimer & Co., 1981

Fed.Sec.L.Rep. (CCH) {498,212 (N.D. Ill. 1981) citing

Miley v. Oppenheimer Co., 637 F.2d 318, 333 (9th Cir.

1981) and numerous other cases. See also O'Connor &

Assoc. v. Dean Witter Reynolds, Inc., 529 F.Supp. 1179

(S.D.N.Y. 1981) “[U}nder the Newmann [664 F.2d 12 (2d

Cir. 1981)] rationale, because their trading .. . breached

fiduciary duties owed to other parties, the alleged con-

duct constituted a fraudulent practice within the mean-

ing of the securities laws." Jd. at 1185),

Fourth: Rule 10b-17 does not create a private cause

of action.

Answer: Plaintiffs have never claimed that Rule 10b-17

creates a private cause of action. Plaintiffs claim only

that Rule 10b-17 sets forth a standard upon which to judge

Defendants’ conduct under Rule 10b-5. Therefore this

Court’s private right of action cases like Transamerican

Mortgage Advisors Inc. v. Lewis, 444 U.S. 11 (1979) and

“ Moreover, at the discretion of the Court of Appeals a purely lega!

issue may be considered for the first time on appeal. Singleton v.

Wulff, 428 U.S. 106, 121 (1976) and Commonality Frat. Trad. Comm'n

v. Co. Petro Marketing, 680 F.2d 573, 581 (9th Cir. 1982).

Touche Ross & Co. v. Redington, 442 U.S. 560 (1979) are

inapplicable. As noted by the Court of Appeals “we do

not look to...Rule 10b-17, the Maryland law of

fiduciary obligations and the New York law of contracts

as sources of independent causes of action .. . we look to

them as sources of a duty to speak. . .” (19a). This is con-

sistent with the analysis in Chiarella where this Court

looked to common law fiduciary principles, not as an in-

dependent cause of action, but as the source of a duty to

speak, breach of which could lead to Rule 10b-5 liability.

Plaintiffs had the right to rely on “the protection of

certain Exchange requirements.” Sonesta Int'l Hotels

Cir. 1973). Or as stated by the Court in Van Gemert v.

Boeing Co., 520 F.2d 1373, 1381 (2d Cir.) cert. denied

423 U.S. 947 (1975):

Rule 10b-17), which notice would then have been

disseminated to the public.“ Defendants’ violation of

Rule 10b-17 was fraudulent under Rule 10b-©.

“ As succinctly stated by the Court of Appeals in Van Gemert v. Boe-

ing Co., supra, 5620 F.2d at 1383:

What one buys when purchasing a convertible debenture in ad-

dition to the debt obligation of the company incurred thereby is

(Footnote continued on following page)

21

III. This Court's opinion in Blue Chip Stamp vo. Manor

Drug Stores (.olding that the owner of a contractual

right to purchase is a statutory purchaser) was correctly

applied.

In Blue Chip Stamps v. Manor Drug Stores, 421 U.S.

723 (1975), this Court emphasized that “the wording’ of

$10(b), making fraud in connection with the purchase or

sale of a security a violation of the Act, is surely strained

when construed to provide a cause of action, not to pur-

chasers or sellers of securities, but to the world at large.”

(Emphasis added) Jd. at 733, n. 5. But this Court went

on to recognize that a party with a contractual right to

purchase has standing as well as an actual purchaser:

or sell securities are not excluded by the Birnbaum:

rule. (Emphasis added) Id. at 749.

This Court explicitly commented on the difference,

under §10(b), between a person with and a person

without a contractual right to purchase: :

A contract to purchase or sell securities is expressly

defined by §3(a) of the 1934 Act, 15 U.S.C. §78cla)

[15 U.S.C. $78cla13)] as a purchase or sale of

(Footnote continued from preceding page)

the expectation that the stock will increase suffi-

(Emphasis added) (Footnote omitted) Jd. at 750-51.

Also see Camp v. Genesco, [1976-77] Fed.Sec.L.Rep.

(CCH) Para. 95,473 and Para. 95,679 (S.D.N.Y. 1976).

As holders of convertible debentures Plaintiffs have a

contractual right to acquire B&O common stock, and are

therefore granted the status of “purchasers” for the pur-

poses of Rule 10b-5 by the definitional provisions of the

Act of 1934. The fact that Plaintiffs have not yet

redeemed or sold their debentures does not affect their

protection under Rule 10b-5 as thwarted purchasers.

Moreover, Defendants’ conduct, which deprived Pilain-

B&O

case—substituting the statutory definition of “purchase”

contained in §3(a) of the Exchange Act, 15 U.S.C.

§$78(cMa}\13)—the issue may be stated as follows:

Whether the acts or omissions of Defendants operated as

a fraud upon Plaintiffs “in connection” with a “‘contract

to buy, purchase, or otherwise acquire” an equity securi-

ty.

This Court’s opinion in Blue Chip Stamp & Manor

Drug Stores was correctly applied.

Conclusion

There is no conflict between this case and any other

appellate court decision. The Court’s standards for deter-

BERGER, KAPETAN, MALAKOFF

& MEYERS, P.C.

By Micnak. P. MALAKOFF

508 Law & Finance Building

Pittsburgh, Pennsylvania 15219

Attorneys for Respondents,

Pittsburgh Terminal Corporation,

Monroe Guttmann, Loretta Guttmann,

Janet Rees and Evelyn Bittner

(Seal) BASES A

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

January 24, 1982

Sally Mrvos, Clerk

United States Court of Appeals

for the Third Circuit

21400 United States Courthouse

Independence Mall West

601 Market Street

Philadelphia, PA 19106

Re: Pittsburgh Terminal Corp., et al v. The

Baltimore & Ohio Railroad Co., et al, Nos.

81-1674, 81-1675, 81-1976

Dear Ms. Mrvos:

Pursuant to Rule 28(j) of the Federal Rules of Ap-

pellate Procedure, the Securities and Exchange Commis-

sion, which filed an amicus curiae brief in this case, sub-

mits this letter in response to a letter of January 18,

1982 submitted by the appellees. Enclosed with the ap-

peliees’ letter was a copy of a speech given on December

4, 1981 by Securities and Exchange Commissioner

Bevis Longstreth, as reprinted in the CCH Federal

Securities Law Reporter at { 83,063. The appellees’ letter

states that in his speech Commissioner Longstreth

“disavowed the position expounded by counsel for the

SEC in its Amicus Brief.”

26

Exhibit A—Letter Dated January 24, 1982.

Contrary to the suggestion implicit in appellees’ ref-

erence to “the position expounded by counsel for the

SEC,” the views expressed in the Commission's amicus —

curiae brief are those of the Commission itself, which

determined to participate amicus curiae in this case and

In addition, Commissioner Longstreth’s speech dealt

with only one of the issues addressed in the Commis-

sion’s brief—reliance on advice of counsel. And even with

respect to that issue, it is clear from his speech—and he

has authorized us to state—that his views differ from

those in the Commission’s brief only with respect to

whether reliance on advice of counsel is relevant in an

omissions case where the advice goes to the existence of

a legal duty to disclose. Commissioner Longstreth has

also authorized us to state that he agrees with the posi-

tion in the Commission’s brief that a reliance-on-counsel

defense is unavailable where counsel's advice was not

disinterested or was incomplete, and that he agrees with

the brief’s ultimate conclusion that, under the cir-

cumstances of this case as found by the district court,

the defendants’ reliance on advice of counsel is not a

defense to violations of Section 10(b) and Rule 10b-5.

Finally, Commissioner Longstreth has asked us to

point out that his speech, as printed in the official Com-

mission News release (a copy of which is enclosed), con-

tains the rollowing qualification in a footnote on the first

27

Exhibit A—Letter Dated January 24, 1982.

“The views expressed in this paper are my own and

do not necessarily represent those of the Commis-

sion, my fellow Commissioners, or the staff.”

CCH failed to include that qualification in its reprint of

the speech.

I am enclosing three additional copies of this letter and

of the Commission News release containing Commis-

sioner Longstreth’s speech.

Sincerely.

JACOB H. STILLMAN

Jacob H. Stillman

Associate General Counsel

Enclosures

cc (w/encl.):

Richard T. Wentley, Esq.

Robert B. Block, Esq.

John J. Repcheck, Esq.

Leonard M. Mendelson, Esq.

Michael P. Malakoff, Esq.