Petition for Writ of Certiorari — Gulf/Mediterranean Ports Conference v. Federal Maritime Commission

i. WG See Office-Supreme Court, U.S.

: Likkary . + FILED

“OURT. U. S&L MAY 13 1963.

\

~

JOHN F: DAVIS, CLERK

. a THE

‘ei Court of the Buiter States

OCTOBER TERM, 19685

\ BB. / AS .

‘IN Tit Sakis

= Se ae

EDWARD LAMB, FRANK C. OSWALD, EDWARD LAMB

a INC. and AIR-WAY INDUSTRIES, INC.,

Pe titione rs,

against — .

ISADORE BLAU, a stockholder of AIR-WAY INDUSTRIES,

INC., suing on beh alf of himself and all other stockholders simu

larly situated and on behalf of and in. the right of AITK-WAY

INDUSTRIES, INC., ‘

Respondents.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

JEROME M,. STEMBER,

Attomey for Pettioners.

"11 Park Place,

New York, N.Y.

STEMBER AND Dersiiow!TZz,

J. EvGENE FARBER,

Of Counsel.

.

R,o *. = iaees SR,

Opirtions Below . La eMeNE RES so aee LAER eee

Jurisdiction SWkge aan ans aes ess RPE Peay Sp

Questions . Presented ..... unsaid eee ‘ :

Statates and Rules Involved ........ a connae boas -

Statement ‘ones ste eee PO. Leet ee ee eaes +eues Pave :

Reasons for Granting et. See ce ; Seve wae

Poixt + plaintiff ‘seeking to avail himself of the

cause of action created. by Section 16(b) of the -

Securities Exchange’ Act of 1934 has the burden

of establishing by a preponderance of the. evi-

dence his compliance with the conditions set by

‘the statute as a prerequisite to the commence-

~ ME OE OUD CEO soe ile ec chet es ces oi cess

ad

Porst U—The trial court eorrectly held that the

; ~~ plaintiff hae failed to sustain-his burden of prov-

ing that he was the-ewner of a security of the

“issuer at the time’ the’ action was. comme need by

Nee Pe er saree Pree ree ree pe ie.

Point J[—The findings by the trial court, liaving

been based upon oral testimony and the efedi-

Ge

-

-~

.

~'

bility of the witness were not so clearly errone- __

“Ous as to be rever sible PENT beach en eee tae

* NMR "gc k eaac rosa cee cata aes ere ere rer

Appendix A—Statutes and Rules Involved ....... .

‘Appendix B—Judgment of the. District Court .....

Appendix C—Findings, of Fact and Conclusions of

; Law in the District Court..... peut one enews es res

ii We -. | ANDEX

. Appendix D—Opinion of the t nited States Court of -

Appeals ee POET IEEE EET Te TUE TPES EET

Appendix E-—Deeree of the United States Court of

Appeals ........ 0. ees c cece e eee leans bod sea

List oF Crrations

Birmingham Post Company v. Brown, 217 F. 2d 127

Broadcast. Musie, Ine. v. Havana Madrid Restaurant

Corp., 175 F. , 2d 775, eRe aasbweaehas saaeees as

Clyde v. Broderick, 144 F).2d.348 ........0..0000. :

Daves v. Hawaiian Dredging Co., Ltd., H4 F. Supp.

| ey eee wre vee Pee rere eee Eee ey eee

PAGE -

21

10

i=)

Federal Security etree Comparty. v. Smith, 259

es tery cv i avnad oh eae sadkaneescicden

Gallup v. C aldwell, J ae ae ere

Haves v. First Nat. Bank of Fairbanks, 192 F. ”. 393 4

Hedger ‘v. _ Reynolds, 216 ¥. 2d 202 ..... haves cane

Hudspeth v, Esso Standard. Oil. C 0., 170 F. 2d 418 .

Lian Bros. v. United States, 123 F. Supp. 20, aff’d ?

2 costo! Es wlan, UE ee eee

McNutt. v. General Motors ‘eaicias Corp., 298

NT eee ei csians casos

- Nee v. Linwood Securities Co., 174 F. : SAMBA cs eee ses +s

Nuelsen v Sorensen, 203 F. 2d WS kas cadanes mn

Sais v. Rubens, 166.F. 2d 659 2 ...... OP oeey ey

Stubnitz-Greene Spring. Corporation v. Fort. Pitt

momar (0.,. 190 Fi, 2b WBS oe ccc anes

6

10

United States v., Ahuninum Co. of America, 148 F. a

kerr rer rr ere SE BEF were aahs oe

*-

eres

INDEX

Statutes anp Reuvies Cirep

Rule 9(a)

~ Rule 17(a)

Federal Rules of Civil Procedure: .

$4260 2. € OOF 6.299866 aD OOS O'S .2 6 8528228228 86.4 82:0. 6

iii

SSCS SWTASH CCHS EERSTE HSS DDD OO HOA DS. O'S OO SO OOO

J | ee ee iudatenkees ee es 3,4,9 .

.. Securities Exchange Act of 1934: *

Section: 16(b) .........,.<¢7% . Ue UG eed cane 34,5

a5 i hecasclieie Seer 5

ee . ° ear a :

. : MiscELLaNtous CiTaTion” , vA

. . : ‘ - - of a

* 2 Moore’s Federal Practice! 2d 1905-6 ../......0.. 6.

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IN THE

—. Court of the Bnited States

Tae. OCTOBER TERM, 1962,

IN THE MATTER

of

Epwarp Lamp, Frank C. Oswatp, Eowarp Lame

Enterprises, Inc. and Ate-Way Ixpvsrrigs, INc.,

. Petitioners,

against — _

.IsaporE Buav, a stockholder of Am-Way Inpcstnies, Inc...

- suing on ‘behalf of himself and all other stockholders

similarly situated and on behalf of ‘and in the right of. ~

Arm-Way Inpvsrries, Ivc., .

iii ~ Respondents.

oy

— . +>

oz

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

' FOR THE-SECOND CIRCUIT

To THE Honorasie Cuier Justice aXp Associate Jv STICES

OF THE SUPREME Court OF THE Ly NITED. STATES:

“The above named petitioners pray that a writ of cer-

tiorari issue to review .the- decree of the United States |

Court of Appeals for the Second Circuit entered March %;

1963, which reversed the judgment of the Cnited States

District Court for the Southern District of New York

entered after trial. - Sg ae

~

ne Opinions Below

The judgment’ of the United States District Court for

the Southern District of New York-was entered on July 6,

1961. There was no written opinion. The judgment | is set

forth in Appendix B hereto. The findings of fact and con:

clusions -of law of the said United States District Court

for the Southern District of New York were not officially |

reported and are set forth in “Appendix C hereto. The

opinion of the United States Court of Appeals for ‘the.

Second Circuit, rendered March 8, 1963, is reported in 314_-

IK. 2d 618 and is reproduced in Appendix D hereto and the °

decree of the Court of Appeals for the Second Circuit is

reproduced in Appendix E. \ )

. Jurisdiction

+The appeal to the Court ofQ\ppeals for the Second Cir-- -

--euit was decided on March 8, 1963. The mandate thereon

issued to the United States District Court for the Southern

' District of New York on March 25, 1963, and was there-

after recalled by the said Court of Appeals for the Second

Cireuit on -April 16, 1963, pending determination of this

-writ. The jurisdiction of this Court is invoked under 28

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

oe “idea Presented

1. Under the provisions of Section’ 16(b) of the Securi-

ties Exchange Act of 1934 (15 U.S.C.A. Seet. 78(b)), must

a plaintiff prove his ownership of a security of the issuer

as a prerequisite to the commencement of an action | brought

arena to said statute? .

2. If so, does such-a plaintiff have the burden of estab-

lishing by a: preponderance of the evidence his complianee-

with this prerequisite?

v

_ 3.” May the .findings of fact and the judgment founded

thereon by-the Trial Court be reversed by. the. Appellate

Court if said findings and judgment were based upon oral

testimony and the credibility of the Witness and are not

clearly erroneous? ‘ PIG :

a

Statutes and Rules Involved

1. Section 16(b) of the Securities Exchange Act of Los.

‘” UB.C.A A. Sect. 78(b)).- - ey

2

2. Rule 9(a) of the Rules: of Federal Civil * Tae wg

3. Rule 17(a) of the Federal Rules of Civ I Procedure:

4. Rule 52(a) of the ilies: Rules. of & wil ~ rocedure.

The above statutes ond rules are printed in Appe ndix a

infra, pages | 12 2-13. = 3

.

‘Statement : mg

Isadore Blau, alleging himself to be a stockholdet ’o1

-Air-Way Industries, Inc. ‘(hereinafter referred to as ‘* Air

Way mr brought this action under the provisions.of Neetion

“16(b) of the- Securities Exchange Act of 1934, to recover

‘‘short-swing’’ profits he alleged had been realized by the’

defendants as ‘‘insiders’’ of Air-Way. The case was tried —

without a jury on April 3 and 4, 1961, in the United States

District Court for the Southern District of New York, :

where, at the conclusion of plaintiff” s presentation of evi

dence to prova his ownership of a’security of Air-Way at‘

the time this aXtion was commenced, petitioners’ motions

‘to dismiss the coMplaint and for judgment upon the ground °

that plaintiff had fMled to meet his burden of proving that

he was such a security owner were granted. The Court’

of Appeals reversed this decision dnd remanded the action °

for trial, the Court holding that the afore ‘said plaintiff had

4

- sufficient indiciarys ownership to satisfy the statate despite

the ‘Trial. Court’s specific findings that he was not ‘the

owner of any ®ecurity of Air-Way at the time this action

was instituted and that dre was, at most,‘a nominee for

someone else. _"

- »

.

a

Reasons for —— the Writ

» This case presents in & manner ripe for resolution a

ae nr anestion involving the interpretation of a pro-

vision of Section, 16(b) of the Securities’ Exchange Act.

of 1934, which has never hefore been passed: pon by this

Court? Must a person who seeks to avail himself of the

cause of action eréated by Section 16(b) of the Securities -

Iexchange Act .of- 1934 prove by a preponderance of the

evidence that he was ‘‘the owner’? of a-Seeurity of ‘the

issuer at the time the action thereunder is commenced

and, further, is.such proof a jurisdictidnal prerdquisite

“to the commencement of such action? The Court of Ap-

peals has held that although such g plaintiff must prove

ownership, such, proof is needed merely to satisfy the

provisions ot 17(a) of the Federal Rules of. cae

Procedure, the real-party-in- interest Rule.

‘In ‘addition to the interpre tation of Rertioan 16(b) and

the $foresaid Rule, an interpretation of Rule 52(a) of the -

Federal Rules of Civil Procedure is also required. “The

Trial Court; based upon its findings as to the lack of

credibility of the witness, found that the plaintiff’s claim’

of ownership was false, perjurious, incredible and unwor-

thy of belief. The record itself amply demonstrates. the

justification for such findings by the Trial Court. Although

not ‘‘clearly erroneous’’ within the meaning of. tne afore-

sid. Rule 52(a) of the Federal Rules of Civil Procedure,

the Court of Appeals has determined that the Trial Court’s

‘view that Blau (the plaintiff) was actinfor some nomi-

nee has no support whatsoeyer in the Aw ‘idence; at best,

it is only a guess, however shrewd a ghess it may be.”’

s*

If permitted to stand, this decision by the Court of

Appeals reversing the decision of the Trial Court will

have the effect of causing to these petitioners tremendous

costs, despite the fact that the Trial Court based upon the

evidence before it has specifically found that the plaintiff

is hot a person contemplated -by the statute to be entitled

to.maintain this action. In addition, this decision by tae

Court of Appeals, if ‘permitted to stand, would encourage

the acqiisition of securities Of an issuer, long past the

time when a complained-of act or °occurrence took place.”

Such acquisition could be made’in the name of nominees,

rather than in the names of the actual owners.of the stock,

thus putting a premium on. champerty and maintenance.

Suéh result is contrary to public poliey and should: not

be permitted to stand, élse the Courts: will be flaoded with

lawsuits of this nature.

,

ek : a POINT I

A plaintiff seeking to avail himself of the cause of

action created by Section 16(b) of the Securities Ex-

change Act of 1934 has thé burden of establishing by

a preponderance of the evidence his compliance with

the conditions set- by the statute as a prerequisite to

the cane sianer of such action. |

PJ

In the case of a violation of the -previsions of Section

16(b) of the Securities Exchange Act of 1954, the statute

perMits an action to recover wrongful profits thereunder

to be brought in the name of th®xsuing corporation. Fail-

ing such action by the issuing corporation, the right is

given by the statute only ‘to’ the owner of:a security oof the

issuing corporafion to bring such an action. This s statute

creates a new cause of action and under the pgovisions of

Section. 27 of the Securities Exchange Act of -1934 (1D

US.C.A. T8aa). exclusive «jurisdiction of sueh cause of

-action created by the statute is given to,the United States

District Courts. Sines this statute provides the sole basix

6.

for. the jurisdiction of the Federal Court, it follows that

all ‘of the’ conditions: of. the statute must be satisfied by

a plaintiff desiring to bring suit under its provisions.

McNutt v. General Motors Acceptance Corp., 298 U.S..178,

56S. Ct. WY, 40 L. Fed, 155: Birmingham Post Co. v. Brown

(3 C. A), 217 Fs 2d 127. Thus, a plaintiff other than the

issuing corporation, under this statute, must allege and

prove his compliance with the conditions set forth by the

statute. Birmingham Post Co. v. Brown (5 C..A.), supra; °

Daves vy. Hawaiian Dredging Co. (D. C. Hawaii), 114 F.

Supp. 648; Clyde v. Broderick (10 C. A.), 144 FY 2d 348;

dian Bros. v. United States (D.C.S.D.N.Y.), 123 F. Supp. —

20, aff’d (2 C. A.), 220 F. 2d 351: The failure of a plaintiff

to allege the required elements necessary tv bring the case.

within the provisions of a statute conferring jurisdiction

upon the Court is jurisdictional, it is not waivable, need

not be pleaded as an affirmative defense and need not -be

ral before trial. It hus also been uniformly held that

a plaintiff who is required to allege his compliance with

all of the conditions set forth by a Federal Statute creating”

a right of action also has the burden of proving his. com-

pliance with all of said conditions. Birmingham Post Co.

v. Brown (5 COA.), supra; Daves v. v. Haw avian Lrredqing Co.

*(D. C. Hawaii). supra; Clyde v. Broderick (10 C, A.),

supra; Lian Bros. v. United States (D.C.S.D.N.Y.), aff'd

(2 C., A.), supra; 2 Moore’s Federal Practice 2d 1905-6.

The party invoking the District Court’s original jurisdic-

tion, has the duty of affirmatively alleging jurisdiction;

and, if his aliegations are controverted, the ,Lurden ‘of

establishing jurisdiction. McNutt. v. General Motors Ac-

ceptance Corp., supra; Birmingham Post Co. vy. Brown

ia C. A.) supra. ; ;

~]

-POINT. II

The Trial Court correctly held that the plaintiff had

failed to sustain his burden of: proving that he was the

- owner of a security of the issuer at the time the action

was commenced by him. —

It is clear that the Trial Court gave complete considera-

tion to the documentary exhibits (App. 226a). [ All refer-

ences to ‘App.’ ”? are to. the Appendix in the Court of

Appeals.} - It is also clear that the Trial Court's findings |

were predicated upon the failure of the plaintiff to sustain

his burden of proving that he was the owner of any stock

of the issuer at the time this action was instituted ( App.

227a). All that the documentary exhibits disclosed was

that, at the time of the institution of the action, a margin

account was maintained in the plaintiff's name with a stock

broker; that in the account there were listed some: stares

‘of the issuer’s common stock. The Trial Court was justi-

fied in permitting the introduction of evidence in order

‘to go behind these documents to, prove or disprove owner-

> ship. The Circuit Court of Appeals for the Third Circuit

in Gallup v. Caldwell, 120 F. 24 90, so held. In this case.

although the account at the broker was carried’ in the name

of another (the daughter of the plaintiff) the Court found

that this was ‘*‘for reasons of convenience’? and that the

stock in that account. was actually owned by the plaintiff. .

Siice plaintiff was unable to produce any credible evi-

dence whatsoever as to. the source of the fund» which he

claimed to have paid to the “brokers as a portion of the

purchase price for the issuer's stock, the Trial Court was

completely justified and correct in finding that he did not

pay for it and. was not the owner thereof. The Trial

- Court’s disregard of the plaintiff? x oral testimony as

‘*perjurious’’ and ‘tineredible’* is fully substantiated bs

the record. , Fa os

w 8

In his attempt to sustain his burden of proof as to

the ownership of the issuer’s stock at the time the-action

was commenced, the plaintiff, [Isadore Blau, was the sole

witness. His testimony was completely exploded as in,

‘credible and perjurious on every important and relevant

point and the Trial Court so held. His failure to prove.

. the source of the funds he claimed to have used for the

acquisition of the stock listed in the brokerage account,

together. with the absence of any otlier indicia gf owner-

@hip whatsoever, justified the Trial Court’s conclusion that.

he was not the owner of the stock in the account. _He

admitted that he was unable to produce any evidence to—

show the source of the funds he claimed to have used

(App. 208a-209a), his testimony as to the manner in which

he paid for the stock was inconsistent with his other

testimony-at the trial (App. I4la, 148a-l44a, 148a, 209a-.

210a, 217a), his testimony that he obtained the funds to

pay for.the stock from his savings bank account was. in-

consistent with his testitnony that he never had more than

$200 in the savings bank: account (App. 204a-205a). In

addition thereto, the balance of his testimony was. incon-

sistent, incredible and unworthy of belief (App. 141a,

1l57a). Plaintiff- = unable to (App. 208a-209a),. was un-

willing to (App: 224a),~and did not, substantiate any

portion of his oral testimony as to his ownership of the

stock (App. 195a). His demeanor on the witness stand

was observed by the Trial Judge (App. 225a), and helped

‘and aided the Trial Court to arrive at its determination

that paintiff was not in fact the owner of the. stock

(App. 225a-226a). :

The Trial Court correctly placed the burden of proving

such ownership on the plaintiff under the provisions of,

the statute involved (App. 152a).

”

9

POINT III.

The hadinns by the Trial Court, having been based

upon oral testimony and the credibility of the witness

were not so clearly erroneous as to be reversible.

T he Trial Court correctly found that in vie\ of the

demeanor of the plaintiff while testifying and the inerpdible

and perjurious nature of his testimony, as previously and

as hereinafter set forth, that he had failed to prove that .

he was an owner. of the issuer’s stock at the time this

action was commenced.

Despite every opportunity given to the plaintiff at the

trial (App. 148a, 150a, 18Sa-189a) to produce any evidence

whatsoever which would substantiate any portion of his

incredible téstimony, plaintiff was unable to do so” (App.

189a, 20S8a- 2092). His claim that all of ‘his business was

done in cash (App. 142a-143a, 155a), that he maintains no

records whatsoever for income tax or other purposes (App.

IS82a, 149a-150a), that he keeps his money ina shirt pocket

‘hanging in his closet or in a shirt. pocket.or his-person

(App. 1568-17, 165a), his testimony concerning his sav-

ings bank account (App. 204a-205a), his incredible testi-

mony as to his reason for purchasing ‘the issuer’s stock,

( App. 144a-145a, 147a-148a, 161a, 211a), and his ¢ emeanor

while ‘testifying, all justified - and ‘compe Hed the Trial

Court’s findings that it did not believe his ‘te stimeny and.

that the improbability of his claim as to the source of the

funds shows that he was not the true owner of the stock

« . 2 .

but that, at very most, he was a nominee for someone else

(App. 226a). oe

In reviewing findings ot a Trial Court under the provi-

sions of Rule 52(a) of the*Federal Rules of Civil Procedure

[Appendix A, infra, p. 13], it is clear that an Appellate

Court will not substitute its opinion for that of the Trial

Court if the facts on which the oymnion of the. Trial Court

10

were based are such that reasonablé men might differ as

to a conclusion. Federal Security Insurance Company v..

Smith (10 C.°A.), 259 F. 2d 294. When a District Court

has rejected the testimony of a witness and found it to be

incredible, the Appellate Court must also disregard such

testimony. Hayes v. First Nat. Bank of Fairbanks

(9 C. A.), 192 F. 2d 393; Nuelsen vy. Sorensen (9 C. A.),

293 IF. 2d 454. Thus, for an appeal to succeed on the

ground that the Trial Court’s findings were ‘‘clearly erro:

neous’’, the burden on an appellant to reverse such findings

is an extremely heavy one where, as here, the decision -

‘must turn largely on the credibility of witnesses the Trial

Judge saw and heard. Hedger v. Reynolds (2 C. A.), 216 -

KF. 2d 202. The Trial Court is the only place where the’

opportunity exists to view the witness, to examine his

demeanor and to hear his testimony directly, rather than

_to read it in a printed record. There is no doubt that

the result of this proceedure clearly vests the Trial Judge

with immense power. not: subject to correction, Broadcast -

Music v. Havana Madrid Restaurant Corp. (2 C. A.), 175

F. 2d 77, unless such certainty is present in the Appellate

Court that it does not feel able to accept the view that the

Trial Court accorded the proper effect to all of the cogent

facts, still giving due regard to the Trial Court’s appraisal -

of witness credibility! Nee>¥. Linwood Securities Co.

(8 C. A.), 175 F. 2d 434. | ae

‘*The authorities all-agree upon the proposition that

*- ‘the findings of fact by the lower Court who saw and

heard the wifnesses and made a critical examination

of the exhibits are entitled to great weight and are

_to be taken as presumptively correct and, unless ob-

/ vious error has intervened ‘in applying some principle _

of law, or .some important mistake has occurred in

weighing the evidence, the decree will not be reversed.’’

Stubnitz-Greene Spring Corporation v. .Fort Pitt

Bedding.Co. (6 C. A.), 110 F. 2d 192, 196.

11

A finding of fact is not ‘‘eclearly erroneous’’ unless it

is without evidence to support it, Hudspeth v. Esso Stand-

ard Oil Co.,(8 C. A.), 170 F, 2d 418, and is reversible

only .if no rational view of the evidence reasonably sup-

ports it.. Shapiro v. Rubens (7 C. A.), 166 F. 2d 659.

‘-e © * whatever may be said in favor of ‘reversing a

trial judge’s findings when’ he has nof**een the wit-

nesses, when he has, and in so far as his findings.

depend upen whether they spoke the truth, the accepted

rule -is that. they must be treated as unassailable?

United States v. Aluminum Co. of America (2 OAD.

-148 F. 2d i. Al :

“4 Aaitiioaiien of the above Rules conclusively show that

the Cireuit Court of Appeals erred in its reyersal of

the Trial Court's secinion oe judgment.

CONCLUSION

te or the reasons stated, the petitioners respectfully

pray that ~~ writ of certiorari be granted.

Re ‘spectfully submitted, wa

JEROME M. STEMBER,

Attorney for Petitioners.

STEMRER.AND Dersnow1rz. .~@ | Q

J. Evepxre Farser,-

Of Counsel.. .

May 1963

12:

_ APPENDIX A

Statutes and Rulés Involved

Securities Exchange Act of 1934

15 U.S.C.A. Sec. 78(b)

Section 16(b) provides as follows:

. (Profits Realized from Purchase und Sales. within

~ Period of Less than Six Months) -

‘‘For the purpose of preventing the unfair use of

information which may have been obtained by such

_ beneficial owner, director, or officer by reason of his

‘relationship to the issuer, any profit. realized by him

from any purclgge and sale, or any sale and purchase,

of any equity security of such issuer (other. than an ~

‘exempted sécurity) within any period of less than, six

months, unless such security was acquired in good

fait’) in connection with a debt previously contracted,

shall inuré to and be recoverable by the issuer, irre-

spective-of any intention on the part of such beneficial

owner, director, or officer in’entering inté such trans-

action of holding the security purchased or of not

repurchasing the security sold for a period exceeding

six months. Suit to recover such profit may be insti-

tuted at law or in equity in any eoust of competent

jurisdiction by the issuer, or by the owner of any:

security of the issuer’ in the name and in behalf of the

issuer if‘the issuer’ shall fail-or refuse to’ bring such

‘suit within sixty days after request or shall fail dili-

gently to prosecute the same thereafter; but no such

suit shall be brought more than two years after the

date such profit was realized. This subsection shall

not. be construed to cover any transaction ‘where such

beneficial owner was not such both at the time of the

purchase and sale, or the sake and purchase, of the

‘security involved, or any transaction or transactions.

which the Commission by rules and regulations may

exempt as not comprehended within the —— of

this subsection.’’

“a:

%

1.

Appendix A

Federal Rules of Civil Procedure ‘

| Rule 9(a) so far as is applicable:

‘“(a) Capacity. It is not necessary to aver. the ca-

pacity of a party to sue or be. sued * * *-except to the

extent required to show the jurisdiction of the court.

When.a party desires to raise an issue as to the legal

existence of: any party or the capacity of any party:

to sue or be sued or the authority of a party to sue

’ or be’sued in a representative capacity, he shall do so

by specific negative averment, which shall include such

supporting particulars as are peculiarly within the _

pleader’s knowledge.”’

Rule 17(a) :

**17. (a) Rea Party 1x Iyterest. Every aghon

. Shall be prosecuted in the name of the réal party in

interest; but an executor, administrator, guardian,

trustee of an express trust, a party with whom of in

whose name a contract has been made for, the benefit

‘of another, or a party authorized by statye may sue

in his own name without joining with: him the party

authorized by statute may sue in his own name with-

out joining with him the party for whose benefit the

action is brought; and when a statute of the United

States so provides, an action for the use or-benefit of

another shall be brought’ in the name of the United |

States.’’

Rule 52(a) F.R.C.P., so fer as pertinent herei ‘in, prov ides

as follows:

ee Findings of fact shall not be set aside unless

clearly erroneous; and due regard shall be given to the

opportunity of the trial court to judge of the eredibility

of the witnesses. * * .*”’

=.

APPENDIX .B . .

Judgment of the District Court

UNITED STATES DISTRICT COURT “

Sovutuern District or New York

(Civ. 118-395

rs .

v

[saporE Biav, a stockholder of the Air-Way Industries,

Inc., suing on behalf of himself and all other stockhdélders

similarly situated and on behalf of and in the right of

Air-Way snmnatries, Ine.

, vs.

SDWARD Lamps, Frank C. Oswa cp, Epw ‘ARD as E/NTER-

PERISES, Inc. .. Epwarp Lams Fov NDATION, Ixc.. . and Atr-

Way INpustRIFs, Inc:

On July 6, 1961, findings of fact and conclusions of law

having been filed by the Honorable Lloyd F..MacMahon,

D.J., that the defendants are entitled to judgment aginst

the plaintiff, dismissing the complaint and that the plaintiff

pay the ‘costs and disbursements of this action, it is |

Apsupcep: That the defendants have judgment against

the plaintiff together with costs and disbursements of this

action.

Dated:” New York, N. Y.

~ «July 6, 1961 - ; ; |

: S/ Herpert,A. Cuarvson

| Clerk |

e : J.J.

” 15.

_*.. APPENDIX C

. Findings of Fact and Conélusions of Law

UNITED STATES DISTRICT. COURT

* SovutHern District or New York

Civil Action No. 113-395. *

»™

v

Isapore Brau, a stockholder of Air-Way. Industries, Inc.,

suing on behalf of himself and all other stockholders

similarly situated and on behalf of and in the right of .

Air-Way Industries, Inc.,

is Plaintiff,

aaainst

Epwarp Lams, Frank ('. ‘Oswavp, Epwarp Laws Exter-

PRISES, INc., .Epwarp- Lams Founpation, Ixc., and Atr-

Way Inpvstries, Iwc., | :

‘Defendants.

+ Se

> r

‘The issues in this grey 2 been tried* before the

undersigned without a jury # a Trial Term of this Court,

Non Jury part, held in‘ard for the Southern District of

_ New York at the United States Distriet Court House, Bor-

’ ough of Manhattan, City of New York on the 3rd and. 4th

days of April, 1961 and:Morris J. Levy appearing as

‘attorney fog the plaintiff:and Jerome M. Steiber, Morris

Dershowitz and J Eugene Farber appéaring as attorneys

for the defendants, and the parties hereto having presented .

their respeétive proofs and the same having been duly

considered and due deliberation having been had, I find

and decide as follows:

i6 *

- Appendix C

7" FinprxeGs or Fact

| 1. That this action was eommenced on October 11, 1956.

2. That the plaintiff, Isadore Blau, was not the record

or beneficial owner of the common stock or any other secu-

rity of the defendant, Air- ~ ay Industries, Inc., on Oc-

tober 11, 1956.

3. That on May'9, 1958, plaintiff; Isadore Blau, became

the record owner of 105 shares. of, the common stock of

Air-Way: Industries, Ine.

4. That plaintiff, Isadore Blau, became the record owner

of a se curity of Air-Way Indmstries, Ine. for the first time

on May 9, 1958.

Pn | ae

That there was no evidence adduced to prove the

au ownership on October 11, 1958 of 100 shares of the

common stock of Air-Way Industries, Inc: Claimed to be

ewned by the plaintiff, Isadore Blan.

6. That plaintiff's testimony that he. became -the bene-

- ficial owner of 100-shares of the common stock of Air-Way

Industries, Ine. on May 1, 1956 is perjurious, unworthy of

belief, unsupported by any credible evidence and false.

1d SY : ‘ p

7. That thé testimony of the plaintiff, Isadore Blau, as .

_ to the manner in which he obtained funds to pay for 100

shares: of the.common stoek of Air-Way Industries, Inc.

on May 3, 1956 is perjurious, incredible, unworthy of be:

lief, unsupported by 3 any credible evidence and false.

8. That the prior ‘eae of plaintiff, Isadore Blau,

that he paid for said stock by means‘of a bank money order.

is-ineonsistent and false.: i j

-

*

sa

A ao C’.

. £

9. That the . prior sworn testimony of the plaintiff,

Isadore Blau, that he obtained the cash to pay for said

stock from his savings bank account is inconsistent, with

his testimony that he never: had more than $200.00 in the

bank in ten n years.

10. That the iviaanee of the plaintiff, inadobe Blau,

that he customarily paid for his stock in the form of a bank

money order ‘or out of funds. on “deposit with his broker

is inconsistent with his testimony as to the’ manner in

which he paid for the said ay stock. .

LL. “That the testimony of the plaintiff, ‘Isadore Blau,

that he went to hig attorney in- mid-July, 1956 because

the market price, of the ‘stock did. not rise is false and

' perjurious. oe & ae ,

12. That the testimony of the plaintiff, Isadore Blau,

that he went to his attorney to discuss Ford, Motor Co.

and Air-Way Industries, Inc. is inconsistent with his prior

: sw orn testimony.

13. That the.testimony of the /plaintiff,-Isadore Blau,

that he carried all liis cash in his shirt pocket is incredible,

unworthy of belief and false. © an

14. That the testimony ‘of the plaintiff, Isadore Blau,,.

that he kept all his cash in'a shirt pocket hanging in his

closet is incredible, unworthy of belief and faise.

15.) That the testimony of. the’ plaintiff, Isadore Blau,

/ as to his reason for buying 100 shares of the common stock

of Air-Way Industries, Inc: is inerediblé, unworthy ot

belief, contradicted by his own testimony, unsupported by

any ere eyidence and false.

?

18 ;

Appendix C

1G, That the demeanor of the plaintiff on the witness

stand; his inconsistent answers, his incredible testimony a:

to the source of the funds used to pay for 100 shares of

common stock of Air-Way tndustries, ‘Ine., his incredible

testimony as to his reasons for, purchasing the said 100,

‘shares of the common stock of Air-Way Industries, Ine?

on May 1, 1956, the absenge of any credible evidence what-

_sdever in support of his testimony, makes his entire testi-

mony unworthy of belief and perjurious.

That plaintiff, Isadore Blau, did not pay for any

poe of the common stock of defendant Air-Way Indus- |

tries, Inc. : ; . y

t

Is. That the testimony of plagptiff, Isadore Blau, thats

he paid cash funds belonging to him to Cohen, Sunonson

& Co. for sive! stock | ix Tals.

1M. That in 1956, plaintiff, Isadere Blau, had one sav-

ings bank- account in the National City Bank, Borough

Park I ranch, Brooklyn. s :

20. That on March ie 1956, there was-a balance of $6.71

in’said account.

- 2b, That between March 1, 1956 and May 6, 1956, plain-

tiff, Isadore Blan, deposited the sum of $11.85 into said

account. "

a

22. That befween Marel 1, 1956 and May 6, 1956, the

largest balance in said bank account was the sum of $18.56."

+

23. That-for the balance of tle year 1956, plaintiff,

Isadore Blan, deposited, the sum of $2.67 into said bank

ace ount. . =

rs

4 See ak 19 | |

Appendix C

24. That the only withdrawal of funds from said: bank

account was the sum of $63.00 on March 1,°1956 and the

sum of $19.00 on June 4, 1956.

25. That neither of said withdrawals on March 1, 1956

or June 4, 1956 represented the sum paid to Cohen, Simen-

son & Co. for the common stock-of Air-Way Industrics

on May 3, 1956. ;

26. That in 1956, the plaintiff, Isadore Blau, had 0

other bank accounts whatsoever,

27. Tha? the records maintained by the plaintiff, Lsa-

dore Blau, of his business transactions, did not reflect

the withdrawal by the plaintiff of any funds used to pay

for the 100 shares of Air-Way Industries common stock,

or ef any portion of said funds. . =

~ That plaintiff, Isadore Blau, was not possessed of

Pate funds of his own to buy or pay for the common,

_stoek of Air-Way intinsiries, Ine.

Seri plaintiff, bacdaks: Blau, did net use his own

funds to pay for the common stock sale Air- Way Industries,

Inc.

,

30. That if the plaintiff, fsadore Blau, did pay cash for

100 shares of Air-Way Industries stock-on May 3, 1956, he

made such payment as a nomimee for another per son and

not for his own benefit.

: : Ne

ConcLusions or Law

<

1. That an action to recover profits under the provisions

of Section 16(b) of ‘the Securities Exchange Agt of 1934

20

- «= Appendix C

can only be instituted-by the owner of a security if said

‘action Was not instituted by Air-Way Industries, Ine.

2. That no such action was instituted by Air-Way_

Industries, Ine. :

> -

3. That plaintiff was not the owner of: any security of

Air-Way Industries, Inc.

4. That plaintiff was not the real party in “interest.

5. That the de fendants are entitled to judgme nt against .

the plaintiff, dismissing the a ai

6. That the eer pay the costs and disbursements

_ of this action.

7 That judgment is directed in conformity with these

Findings.

- Dated: duly 6, 1961.

Luoyp F. Mac Manon = /s/

uu. Bd.

JIndgigent: Entered July 6, 1961

x 1

APPENDIX D

Opinion of the United States Court of peals.

UNITED s 7 ATES COUL? vy APP "EALS

For THE Secon» Circ be

No. 251—Oc tobe ‘r Term, 1962

‘dedaeld Mare ‘hi 7, 1963 Decided, March S, 1963)

Docket No. 272338 °

Isapore Buav, a stockholder of Air-Way Industries, Inc.,

suing on behalf of himse?f and all other stockholders

similarly situated and on behalf of and in the right of

Air-Way Industries, Inc., ‘

Plaintiff-A ppcliant,

v. = ,

Epwarp Lamp, Fraxk C. OswaLtp, Epwarp Lams

Enterprises, Ixc., and Air-Way [Npustries, INc.,

Dejendauts-Appellecs.

Before: ;

CLarK, WATERMAN anth Faurman, Circuit Judges.

Appeal from the United States District Court, for the

Southern District-‘of New York, Lloyd F. MacMahon,

Judge. i fn .

Plaintiff appe vals fram the summary diswissal of his

action to recover: **short swing’’ profits for the benefit of.

Air-Way Industries, Inc., from: defendants—officers, direc-

tors, or 10% stockholders of the corporation—under .the

99)

Appendix D

Securities Exchange Act: of 1934, §16(b), 15 U. S..C.

§78p(b). Reversed and remanded. . j

See also 20 F. R. D. 411: 163 F. Supp. 52 28; 191 F. Supp.

a. < j ; .

Morris J. Lev¥, New York City, for plaintiff-

; appellant.

Jerome M. Strember, of Stember & Dershowitz,

New York City-(Eugene Farber, Toledo, Ohio,

on the brief for defendant-appellee Air-Way

Industries, Ine.), for defendaits-appellees.

Peter A. Dammann, Gen. Counsel, David Ferber,

. . Assoc. Gen. Counsel, and John A. Dudley,

Atty., Securities and Exchange Commission,

W ashington, D. C., for Securities and Ex-

change } omission amicus curiae.

Ciark, Circuit Judge.

The district court summarily dismissed the plaintiff's

action to recover-**short swing’’'prefits under the Securi-

ties Exchange Act of 1934, § 16(b), 15 U.S. C. 9 78p(b),

for the benefit of Air-Way Industries, Inc., because it held

him not to be the bona.fide oavner of securities of the cor- ~

“poration at the time the action was brought, and lence not

the real-party in interest. It was sot disputed that some

time before the action was instituted, the plainitff had

bought 100 shares on his margin account with a broker, that.

the broker asked for increase of margin of $470, which

plaintiff paid, and that the broker then credited Blau as the.

owner in the statements issued monthly, and also credited

him with a stock dividend paid by the corporation and with

cash dividends as they were received. The sto¢k remained

in the broker's name, or in ‘*street name’ as it is called,

until transferred to Blau before the trial on settlement of

Pe ore |

Appendix D-

the account. During ali-this time the broker accepted Blau

as owner, and it is not questioned that this he was legally

obliged to do. The court, however, sought to determine

the beneficial ownership of: the stock and held unbelievable

Blau’s own testimony that he had cash funds adequate to

pay the account, noting the lack of any bank accounts or

signs of wealth beyond Blau’s own statement. ‘So it con-

cluded that Blau was actually holding the stock ‘as nominee

for someone undisclosed, and hence was not the real — ga

im interest. :

We think the court ook an unduly technical view of the - _

requirement of ownership, thus defeating the remedial pur-——___

poses of the statute which have been stressed ever since

the leading case of Smolowe x. De lend ‘Corp. » 2 Cit. 196 -

F. 2d 231, 148 A. L. R. 300, cert. denied Delendo Corp. v.

Smoiowe, 320 U. S. Tol. It is well settled that, since

recovery is for the corporation, it is the real party in

interest and the stockholder plaintiff is but ‘‘the mere -

vehicle of reeovery.’’ Magidg v. Continental Can Co., 2

Cir., 231 F. 2d 843, 848, cert. denied Continental Can Ca.

v. Magida, 351 U.S. 972. The statute provides that suit to

recover such profit may be brought ‘‘by the issuer, or by

* the owner of any security of the issuer in the name and in

behalf of the issuer’’ if the latter fails to sue within 60

days after request (as it had here). See. 16(b) supra.

This. inclusive language is to be contrasted with the refer-

ence made in subd. (a) to ‘‘the beneficial owner of more

than 10 per centuin of any class of any equity security’

who is one of those held liable to pay such profits to the cor-

poration (the others being the officers or directors). The

inference that here ‘‘owner™’ is not limited to ** beneficial”

owner seems clear. Sinée *‘owner”’ is a word having a

variety of meanings, with its significance varying accord-

- ing to the coritext and the subject inatter with which it is

used. cf. Blumenfeld v. Unite Statese8 Cir. 306 F.2d S92,

$99, 900, the broader meaning here ix better <uit “ld to earr y

Appendix D |

out the remedial purpose of the statute and to enforce the

fiduciary nature of the plaintiff’s position as to the corpo

ration. Thus we agree with the view taken by the Securi-

ties 3 and -Exchange. Comunission-in its- -helpfal brief-amicus 5 ganar

curiae.

It is to be noted that this inte ‘pretation not only. fur-

thers the statutory purpose, but is also the one usual, in

defining the real party in interest. A defendant who raises

this defense (and it is a-matter of defense to be raised only

by affirmative allegation, Clark, Code Pleading 208, 2d Ed.

1947) is entitled only to show that the plaintiff has not such

right as to afford the protection of res judicata when the

suit is terminated. Thus a defendant is not a vicarious

defender for the entire world, but must rest on his own

right. ‘*Since-the claim is owned and may be ‘sued upon by

someone, all a defendant tiay-properly ask is such a party

plaintiff as will render the judgment final and res adjudi-

cata of the right sued upon.’’? Rosenblum v. Dingfelder,

2 Cir, TLD F. 2d 406, 407. This of course is even more in

point when the corporation,is the real party in interest and

its right continues, whatever the vicissitudes affecting its

‘temporary protagonist. The court’s view that Blau was

acting for some nominee has no support.whatsoever in the

evidence; at best it is only a guess, however shrewd a guess

it may be. But that fact. if true, would have no bearing.

here, since Blau obviously had sufficient indicia of owner-

ship to protect his right tinder the statute and the usual

‘construction of F. R. 17(a), the real-party-in-interest .rule.

See Clark, Code I Pleading 158-161 (2d Ed. 1947).

‘ The decision must therefore be reversed and the action”:

‘remanded for a trial on the merits.

>

~~ 3 APPENDIX E

-Decree

UNITED ST ATES COURT OF APPEALS

Vv

igh ome re 5 _ For THE Seconp Cirevir

os \ #0 + eee,

ie he

At a Stated Term of the United States C ourt t of: Appe als,

in and for the Second Circuit, held at the United States ~

Courthouse in the C ity of New York, on the eighth day of -

Mareh, one thousand nine hundred and sixty-three,

Present: Hon. Cuartes BK. Ciark,

Hos. Srerry R. Watrenman,

How. Irving R. Kavrmay,

Circuit Judges.

- ———_—-- -— -- —— - e— - ~

-Isapore Biav, a stockholder of Air-Way Industries, Ine.,

suing on behalf of himself and all other stockholders

_ similarly situated and on behalf of and in the right of:

Air-Way Industries. Ine..

Epwarp amp, Frask ©. Oswarp, Eowarp Laue

Enterprises, Isc. and Aim Way IsNpustrirs.

Defendants- Appellees,

Epwarp Laws Founpation, Isc.

* Defendant.

o — ain oo of - — — : .

Appeal from ‘the United States District Court for the

Southern District of New York.

Plainti ff Appellant,

a=

26

Appendix E

This cause came on to be heard on the transcript of

record from the United States District Court for the South-

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

Ox ConsiperaTION WHEREOF, it is now hereby ordered,

adjudged and decreed that the judgment of said District

‘Court be and it hereby is reversed and that the action be

and it hereby is remanded for a trial on the merits in

accordance with*the vpinion of this Court; with costs to

the appellant.

A. Dante. Fusaro

Clerk