Petition for Writ of Certiorari — Shields v. United States

1 7 U, . .

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IN THE .cuens |

Supreme Court of the iuikS anes

OCTOBER. TERM, 1971 oes

- ~1 ore

GAF ‘Corporation,

_ Conditional Cross-Petitioner,

v. :

Pau Mitstrern, SeyMour ‘Minster, Giorta MILsTEIN

~ FrLanzer and Morris Mirstern, |

Respondents..

CONDITIONAL CROSS-PETITION FOR A WRIT OF

CERTIORARI TO THE UNITED STATES COURT OF

APPEALS FOR THE SECOND CIRCUIT

‘Epwrs: J. WESELY, -

Attorney for Conditional Cross-

Petitioner GAF Corporation, .

40 Wall Street,

‘ New York, New. York 10005.

Of Counsel.

Ricuarp A. Horean,

‘WINTHROP, STmMson, Pormiz & Ronerts.

»

BY, TABLE OF CONTENTS

Lo BRED Rete Ovens BERCBOn 26 Cop caine alent bee Ale a me

ne NE Oe sacesnanernieadeceain ,

RR eo Sl ANS Gum aeer e oin

QUESTION PRESENTED ~...............2------- Be Reo See eee

STATUTES AND REGULATIONS INVOLVED <...-...----.--c-000--0-c00-+-

STATEMENT OF THE CASH 2.c._..2....-o-ccencccnccecceessteccneecsneveseeeess

A.. Basis for Federal Jurisdiction ............................

B.

The Proceedings Below ............. “RY We OA OS

C. The Facts ERE in Dia ceeds dasusden tacos ieee

Reasons For GRANTING THE Writ to Review THE RULE

10b-5 QuEsTION IF THE CourT DeteRMINES TO REVIEW

THE SECTION. 13(d) QUESTION ~.......-..------------eo-ee-eeoee-- rh

.

- This Court should not resolve questions of inter

pretation of, one section of the 1934 Act without

deciding the applicability of other sections trig-

gered by the same circumstances .-............. rae sti |

Unlike the Section 13(d) issue, there is a sub-

stantial conflict among the Courts of Appeals: on

the Rule 10b-5 question. -......-...--.---------------. Naan

Unlike the Section 13(d) issue which is limited

to control situations, the Rule 10b-5 issue is more

generally applicable, affecting all types of fraud-

ulent transactions involving the issuer’s ; secu-

A RT nO RE ec SE a NRE Se RIOR SEEN EOE se

‘Unlike the interlocutory nature of the order in-

volving the Section 13(d) claim, the Court of

Appeals judgment on the Rule 10b-5 issue may

well be final unless reviewed by this Court ..........

Barring the issuer from enjoining violations of -

Rule 10b-5 affecting its own stock frustrates the

enforcement of Section 10(b) because the issuer

is the most logical and knowledgeable plaintiff

and has the resources to prevent the violations

ConcLusIoN | a ee SBE feot cs RG ie Bs

b bo oe

10

10

PD PP wo

oie

14

15

16

i

CITATIONS |

Cases:

‘Allied Artists Pictures Corp. v. D. Kaliman é Co.

Inc., 283 ¥. Supp: 763 (S.D.N.Y. WEP Sek

yp aeer nee Construction Co. v. Jacksonville, ‘hs =

PAGE

Es She Meme aot RC TERAN sia

Bath Industries, Ine. . Blot, ste F. 2d 97 (7th Cir.

[ee ee ntronteconine ie cksopactatibaaiaciort semaoapiaceacieactadiees wesc sesencesdaian

| Birnbawn y..-Newport Steel Corp., 193 ¥. 2d 461 (2d ;

Cir. 1952), cert. denied, 343 U.S. 956 (1952) —......... roe

Bownd Brook Water Co. v. Jaffe, 284 F. Supp. 702. -

(D.N.J. 1968), amended complaint dismissed, [1967-

' 1969 Transfer Binder] CCH Fe d. See. L.. Rep...

Re A. BEE ettcenceenoe Cote 13

Brotherhood of Locomotive ri iremen v. Bangor & \

' Aroostook R. R., 389 U.S. 327 (1967) -... 15

Butler Aviatyon inh Inc. v. Comprehensive’ De- |

signers, Tné., 307 F. Supp. 910 (S.D.N.Y. 1969), aff'd ~ - |

on other grounds, 429 F.2d 842 (2d Cir. 1970)-........ 13

Cherokee Intermarriage Cases, 203 U:S. 76 (1906) ae 8 |

Cobbledick v. United States, 309 U.S. 323 (1940) ‘15

Dodge Mfg. Corp,.v. Emerson Elec. Co., [1966-1967

Transfer Binder| CCH Fed. See. I. sei ices

Be ee renee nanrinn aeaed Ss rel eA ateD 13

_ Duplan Corp. v. Lraquois Indus., Inc., [1967- 1969

Transfer Binder] CCH Fed. See. L. Rep. 7 92,318

AP Ba + eee seeds te alen vom Um ed Sinverc asliBE 13

Electronic Specialty Co. vy. International Controls:

Corp., 409 F.2d 937 (2d Cir. 1969) __.20200....- Sa Albarn 19-20

Franklin Realty vy. United Nat'l.Corp., 70 Civ. 3366

(E.D. Pa. February 18, 1971) isle pe gern ets - 13

General Time Corp. v. American Investors Fund,

Inc., 283 F. Supp. 400 (S.D.N.Y. 1968), aff’d on other.

grounds sub nom., General Time Corp: v. Talley

Indus., Inc., 403 F.2d 159 (2d Cir. 1968), cert. de-

nied, 393 U. S. 1026 ne itioreapubces sateen deceemanatciees “iB

General Time Corp. vy. Talley Indus., Inc., 403 F.2d

159 (2d Cir. 1968), cert. denied, 393 U.S. 1026 (1969)- , 17

— Hambros Bank, Ltd. v. Me serole, 287 F. ee. 69

(S.D.N.Y. 1968) ............. ie Res Aranden Saucony Mare! ROO oe

Hamilton. Brown Shoe Co. v. “Wolf Bros. 4 Co., 240

eee SD Ge ola a ae 15

Hanover Shoe,-Inc. ve United Shoe Makita ory — .

982 VK. 481 (1968), reh. denied, 393 US: 901 ...... 15

J.1. Case Co. v. Borak, 377-U. 8, 426 (1964)

Kahan v. Rosenstiel, 424 F. 2d 161 (3d Cir. 1970),

cert. deitied sub nom., Glen Alden Corp. v. Kahan,

eae ee ice een * Ey.

. Labor Board vy. Liou Oil Co., 352 U. S. 282 (1957) 10

Meréer v. Theriot, 377 US. 152 ans reh. denied,

WOM 8 ee wb

Moore v. Greatamerica Corp., O74 F. Supp. 490 (N.D. » ate

MB. peeeecaarat cnn anne eae ees romaine acaitnars Len Wat erent 13”

Pacific Ins. Co. ‘a N. Y. v. Blot, 267 F. Supp. 956 .

(S.D.N.Y. 1967) et Mee Ie a eras 13

Panama Refining Co. v. Ryan, 293 U. S..388 (1935) .. 11

Richards v. United States, 369 U.S: 1 (1962) 20 itl

Ruckle v. Roto American bit 339 F. 2d 24 (2d Cir.

1964)

'” SEC vy. Joiner Corp., 320 U.S. 44 (943): CO

SEC v. National Securities, Inc., 393 U.S. 453 (1969) 10,11 _

Studebaker Corp. v. Allied Products Corp., 256 F.

ae 1a CD. Bre. 3906) =. 18

Studebaker) Corp. v. Gittlin, 360 F. 2d ome {2d Cir.

1966) pipinadctadconvasecnagacanttetes 18, 20.

Superintendent of - Insurance v. Bankers Life and

Casualty Co., 404 U.S. 6 (1971) -*....--.-.---- 14

Toledo Scale Co. v. Computing Scale Co., 261 U.S. 399

f_| I ania iain tore nena shanty masta ee WAN CloaR ie Mckla 16

Youngstown Sheet & Dube Co. v. Sawyer, 343 U.S. 579

(1982) erente in insles trace spenineeniniacsineontpirahonomdad anaes geieitdies 15

a \

PAGE

STATUTES:

Securities Exchange Act pi 1934:

PION TD wien esrestcsstcnin riccubheante eames passim .

Section 13(d) pee TS let Rete OAK RIS aR: passim

Section 14 00.000... AE DALIT RISES eo ESN 18, 19

Pie IE ccs poate inet? Sener ean 4

« Ruies: |

Pursuant to the Securities Exchange Act of, 1934: .

ne ARES Eee Re ee "passim

BN Be ieee Shee sci tdci epuaatis a 2,3

_ SECONDARY SOURCE:

Note, Private Enforeement under Rule 10b-5: An

Injunction for the Corporate Issuer? 115 U. Pa.’

i, Bev. Gis (1967) —..........: i alae eesti ns naagdaaiagi 17

ce

IN THE

Supreme Cowt of the United States

OCTOBER TERM, 1971

No. -- oe

GAF coed

C EE ese Y Cross- Petitioner,

| u. }

Pavut Minstern, SryMour MILstetn,. Guorta MILSTEIN

Fianzer and Morris Minster, |

| Respondents.

s

CONDITIONAL CROSS-PETITION FOR A WRIT OF ° |

‘CERTIORARI TO THE UNITED STATES COURT OF

APPEALS FOR THE SECOND CIRCUIT

The conditional cross-petitioner GAF Corporation

» (“GAF”) respectfully prays that a writ of certiorari issue

to review that portion of the judgment and opinion of the

United States Court of Appeals for the Second Circuit

entered in this proceeding on December 13, 1971 encom-

- passed within the question presented below, the writ to

issue only in the event this Court should grant the peti- —

tion for a writ of certiorari in No. 71-1144, filed this erm

(the “principal petition”).

—

OPINIONS BELOW

The opinion of the Court of Appeals for the Second Cir-

- ent, not yet reported, is SeReTe as Appendix A to the.

———————o eC OCU.

.

9

“

principal petition and the opinion of the United States

Distric Court for the Southern District of New York,

réported at 324 F: Supp. 1062 (S.D.N.Y. tay is annexed

ser” such: petition -as Appendix B.! |

*

J URISDICTION

\ The judgment of the Court of Appeals for the Second °

Circuit was entered on December 13, 1971, and this condi-

tional cross-petition for certiorari will be filed within 90 .

days of that date. This Court’s eens is invoked

under 28 U.S.C. § 1254(1). ;

‘QUESTION PRESENTED

Does an issuer claiming violation of Section 10(b) of the

Securities Exchange Act of 1934 and Rule 10b-5 promul-

gated thereunder have standing. to seek injunctive relief

sigainst purchasers of more than $2.5 million of its securi-

ties who, in furtherance of a secret agreement to attempt

’ to acquire control of the issuer, filed Schedules 13D pur-—

suant to Section 13(d) of the Securities Exchange Act of

1934 (the “1934 Act”) and Rule 13d-2 promulgated” there-

under with the issuer, the Securities and Exchange Com- °

mission (thé “Commission”), and the exchanges on which

‘the issuer’s shares aré traded falsely disclaimiag any inten-

tion to acquire additional seenrities of the issuer and other-

Schedules 13D not misleading? ae

wise making untrue statements of material fact and omit- ©

ting to state material facts which would have made such

“1. References to the opinion of the Court of ‘paged below are

. to pages of A ix A to the principal petition and appear, for

example, as (PP App. A-7a). References to the District Court

opinigp are to pages of A ix B to the principal — and

ask for example, as (PP App. B 7b). :

STATUTES AN D REGULATIONS INVOLVED

The ‘underlying action is for injunctive relief based on

- violations of Sections 10(b) and 13(d) of the 1934 Act,

___48 Stat: 891-and-82-Stat454,-15- U.S.C. $9 78)(b) and

5

78m(d), and of Rules 10b-5 and 13d promulgated there-

_under by the Commission, 17 CFR. §§ 240.10b-5 and .

240.13d. Portions of Section 13(d) are set forth as Appen- —

dix C. to the principal. petition and Section 10(b) and —_

10b-5 are set forth in full below:

.)

Section 10(b):

“Jt shall be unlawful for any person, directly or.

indirectly, by the uge of apy. means or instru-

mentality 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 exchange or aby security not so

registered, any manipulative or deceptive device or

eoritrivance in contrayention of such rules and regu-

tatfons as the Commission may prescribe ‘as neees- |

sary or appropriate in the public interest or for the.

protection of investors.”

Bs

/ Rule 10b-5:

_ “Tt shall be unlawful for any person, directly or

indirectly, by ‘the use of any means or instru-

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 mate-

rial fact or to omit to state a material fact neces-

sary in order to make the statements made, in the

light of the cireumstances: under which they were

made, not misleading, or

PI i

rn

mal

d eee ad tad Soe taal aah | verre

~~

WPF od eee por gue -@

See eM.

4

“(e) 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.” -

| ‘STATEMENT OF THE CASE |

A. Basis for Federal Jurisdiction. |

Federal jurisdiction i in the District Court is based on Sec-

tion 27 of the 1934 Act, 68 Stat. 107, 15 U.S. C.§ ) 7Saa, which

states in relevant part:

“The district courts of the United States ... shall -

have exclusive jurisdiction of violations.of this chap-

ter or the rules and -regulations thereunder,-and all

suits in equity and actions at law brought to enforce

any liability or duty created by this chapter or the

rules and regulations thereunder.”

B. The Proceedings Below.

GAF, the ‘plaintiff below, i is a publicly owned corporation

organized under the laws of the State of Delaware [6a]

whose shares are traded on the New York and other stock

exchanges and owned by more than 125,000 persons’ The

respondents, defendants below, are four stockholders, Paul

- Milstein, his brother Seymour Milstein, his sister Gloria .

Milstein Flanzer and his father Morris Milstein (the “Mil-

steins”) [6a].

On December 16, 1970 GAF filed its complaint in this

action in the District Court for the Southern District of

~ New York charging that the Milsteins violated Section

13(d) of the 1934 Act (1) by failing to make a timely Sched-

ule 13D filing after secretly forming a group whose mem-

2. References, as for exaniple [6a], ane to pages te the Jelat- Ao

pendix filed in the Court of — for the Second Circuit.

a PR CTE GOT Sr CE Be 2

' §

bers owned more than 10% of GAF’s preferred stock and

whose purpose was to acquire control of GAF and (2) by

later filing Schedules 13D which were untimely, false, mis-

-leading, and contained serious and substantial omissions. of |

material facts [7a-13a]. The complaint also charged that

the Milsteins violated-Section 10(b) of the 1934 Act (1) by __-

concealing their takeover group and its plans by means of

untimely, false, and misleading 13D filings, (2) by depress-

ing the price of G:AF securities, and (3) by concurrently

purchasing $2.5 million of GAF common stock [13a-15a].

The complaint sought solely injunctive relief preventing the

Milsteiris from acquiring any additional GAF “securities,

soliciting any proxies to vote GAF securities, voting any

‘GAF securities acquired pursuant to their takeover scheme,

and otherwise acting in serGhnenase of that scheme [15a-

16a]. '

' On January 19, 1971 the Milsteins moved to dismiss the

complaint for failure to state a claim or, in the alternative,

- for summary judgment. On March 22, 1971 District Judge

Milton Pollack dismissed: the complaint on the grounds that

GAF failed to state a claim for relief under Section 13(d)

and that GAF lacked standing:to seek injunctive relief for

violations of Section 10(b) and Rule 10b-5. GAF appealed

and on December 13, 1971 the Court of Appeals for the See:

ond Cireuit reversed the District Court’s dismissal of

GAF’s 13(d) claims and affirmed the District Court’s hold-

ing that GAF lacked standing to assert that the Milsteins

violated Section 10(b) and Rule 10b-5.

We believe the decision of the Court of hieeahe with re-

spect to the application of Section 13(d) is eminently sound.

However, the Milsteins have applied to this Court for a writ

of certiorari to review the 13(d) determination. We believe .

that the writ should not issue and will elaborate our reasons

in response. to the petitioner’s application. However, should

this Court grant the Milsteins’ application, GAF requests

Perey gee n> -

Genes SLA LES OBE ASE SINAN M CET LAAN De Ci BEE i RIN RS Ea

-§

_.___that the entire decision below be reviewed and that this con-

ditional cross-petition be granted. If, as we helieve to be

} appropriate, the Milsteins’ application is denied, GAF does

not seek any further review and will pursue its remedies in

the District Court in accordance with the decision of the

Court of Appeals.

~

Cc. The Facts.

Since. May, 1967 the Milsteins have beneficially owned not

less than 10.25% of GAF’s preferred stock which they ac-

quired when ‘ithe Ruberoid Company (“Ruberoid”), in -

~ which they had substantial holdings, was merged into GAF

-[20a-21a, 23a]. Thereafter the Milsteins determined to act

together as a group to attempt to acquire control of GAF

and engaged in a variety of activities in furtherance of their

takeover plan [7a-15a]. During 1968, 1969 and 1970 the

Milsteins in furtherance of their takeover plan sought senior

management and board positions at GAF for Seymour Mil-

stein, withdrew huge amounts of business normally placed

with GAF by companies whose operations they controlled

(causing GAF to lose approximately three-quarters of a _

~tniltion dollars in profits), souglit access to information con-

_cerning GAF not lawfully available to them, sought to enlist

the support of third parties in their effort to seize control

of GAF, obtained confidential information and documents

concerning GAF’s internal affairs from present and former

~ employees of G-AF, unfairly disparaged the management of

GAF, depressed the market price of GAF stock to facilitate

the acquisition of additional shares, and comnienced a pur-

~ ported derivative action, Milstein v. Werner, et al., 70 Civ.

. 2178 MP (S.D.N.Y.}, and a companion action in the Supreme

Court of the State of New York, New York County, Index

No. 19158/70 to further disparage GAF’s management and

depress the price of GAF stock [8a-9a].

- fut lis De

47

Although the Musteins’ takeover group was formed after 7

the enactment of the Williams bill (which became Section

13(d) of the 1934 Act), they made no attempt to comply

with the Act until September 24, 1970. when they filed the

first of their so-called Schedules 13D. In the meantime,’

"between April 13:and June 9, 1970, respondents Paul and

Seymour Milstein’ had secretly purchased 61,100 and 64 000

-shares of GAF common stock, respectively, from unsuspect-

ing GAF'shareholders who had no notice whatever of their

takeover group and its plans [164a, 170a]. ;

The September 24 Schedule 13D made the iibiieing false,

evasive, and misleading statements concealing the Milsteins’

true intentions:

“The members of the Milstein family have no pres- | -

ent intention as to whether or not any additional

securities of GAF may be aequired by them in the

future and, accordingly, can have no present inten-

tion as to whether such purchase; if made, would be

made with their personal funds or with funds or

other consideration borrowed or otherwise obtained

for the purpose of acquiring such securities.”

* « * $8

“Depending on the course of corporate affairs of

GAF, including this litigation [referring to Milstein

v. Werner, supra], the [Milsteins] at some future

‘time may determine to attempt to acquire control of

GAF, whether through a tender offer, the solicitation

of proxies, or otherwise.”

and

“{The Milsteins} fd it impossible at this time to

state more specifically whether they may attempt to

acquire control in the future or, in the event they

might acquire control in the future, what their plans

would be.” [20a, 2ta-22a]

| ee oe ee IER Mere

8

The Milsteins thereafter filed with GAF, the Commission,

and various exchanges on which GAF’s shares are traded, -

a second Schedule 13D dated November 10, 1970 and a third

dated January 27; 1971. In the November 10 filing the

above quoted statements were reiterated verbatim [28a,

__ 30a] and in the January 27 filing the first-such_statement— md

. respecting the absence of any intention on their part to .

acquire additional GAF securities was stated again ver-

batim [142a]. |

Although each of these public filings disclaimed any .in-

tention to acquire additional GAF securities, the first and

third filings were quickly followed by massive purchases of

Schedule 13D dated

2/23/71, at 3, 57 and the second Schedule 13D was certified

by the Milsteins on the very day that both Paul and Sey-

mour Milstein purchased additional GAF siock [164a,

t 170a}. Less than one month after the first statement was.

3 filed, before any correction or amendment was filed, and

while the false Schedule 13D was in the public domain, Paul

and Seymour Milstein continued their secret purchases of

_ _ GAF securities by each purchasing 41,650 shares of GAF

: common sto¢k at a cost of more than $840,000 in identical

quantities through the same broker at identical prices on

the same four days, October 21, 27 and 29 and November 10,

1970 [164a,170a]. Less than two weeks after the third fil-

ing and before any correction or amendment was filed, Paul

Milstein made the following purchases of GAF-common

stock: on February 8, 1971 he purchased: 100 shares; on

February 12, 9,800 shares; on February 16, 1,400 shares;

on February 17, 16,000 shares; and on February 19, 1,000

shares. These February purchases came to light when the

Milsteins filed Amendment No. 1 to. Schedule 13D, dated. |

February 23, 1971.

Further, notwithstanding the above-quoted disclaimers

-of intention to seek control of GAF contained in the Sehed-

9

ules 13D dated September 24, 1970 and November 10, 1970, |

the Milsteins.continued their secret takeover efforts until

January 26, 1971 when Seymour Milstein served GAF with

a demand for the inspection of GAF’s list of stockholders, .

which demand finally admitted his “intention... to solicit

__ proxies fron-stockholders_:-in- order te elect-a- new Board—

of Directors .. . at the next meeting of stockholders. .. .”

‘The.same admission was made by Paul Milstein on January

28, 1971 [131a, 137a]. Concurrently with the demand for |

inspection, the Milsteins filed their third Schedule 13D

under. date of January 27, 1971 and Schedules 14B which

set forth their plans to wage a proxy contest at GAF’s

annual meeting in April [138a, 143a, 162a-173a].

_ GAF’s complaint and the corroborating evidence pre-

sented to the District Court demonstrated that the Sched-

ules 13D filed by the Milsteins under dates of September

24, 1970, November 10, 1970 and January 27, 1971 were false

and misleading in that they asserted that the Milsteins had

no intention to acquite additional GAF securities, omitted

material statements of the names and activities of others

with’ whom the Milsteins were.working and the sources and

amounts of funds or other financial arrangements used and.

to be used by the Milsteins in acquiring GAF securities,

- and the September 24 and November 10 filings were false

and misleading (as well as untimely) in that they failed to

admit that: the Milsteins had long before decided to try to

acquire control of GAF [10a-12a]. Moreover, itis an un-

_ disputed fact of record that Paul’ and Seymour Milstein

purchased 69,850 and 41,650 shares of GAF’s common stock

[164a, 170a, Amdimt. 1 to Schedule 13D dated 2/23/71],

respectively, from shareholders who, in the absence of any

correction or amendment, were entitled to rely upon the

Milsteins’ public statements disclaiming any intention to

-aequire any additional securities of GAF and any intention

to attempt to acquire control of GAF.

| ae a ool PRINS IE TO;

10

2

REASONS FOR GRANTING THE WRIT TO REVIEW THE

RULE 10b-5 QUESTION IF THE COURT DETERMINES

‘TO REVIEW THE SECTION 13(d) QUESTION.

This Court should not resolve ‘questions of inter-

pretation of one section of the 1934 Act without ss

~ deciding the applicability of other sections trig- ;

gered by the same circumstances.

If this Court determines to review the judgment below.

as.to Section 13(d), it should review the entire case. Apart

from the issue of standing, the facts alleged in this pro-

ceeding trigger both Sections 13(d) and 10(b), and one

section should not be interpreted without consideration of

———_the other. “ff the interdependence of the various sections

of the securities laws is certainly a factor in any interpreta-

‘ tion of the language Congress \hds chosen... .” SEC v.

National Securities, Inc., 393 U.S. 453, 466 (1969). -

This Court has long recognizdd as a canon of statutory

construction that the interpretation and applicability of

individual sections must be considered in the context of the

whole Act:

_ “We believe it fundamental that a section of a

statute should not be read in isolation from the

context of the whole’ Act, and that in fulfilling our

responsibility in interpreting legislation, we must

not be guided by a single sentence or member of a -

sentence, but [should] look to the. provisions of the

whole law, and to’ its objects and policy.”- Richards

v. United States, 369 U.S. 1, 11 (1962) (footnotes

omitted) (quoting from Mastro Plastics Corp. v.

Labor Board, 350 U.S. 270, 285 (1956), reh. denied,

301 U.S. 980 (1956) and United States v. Boisdoré’s

Heirs, 8 How. 113,122 (1850)).

In ‘accord are SEC v. National Securities, Inc., supra;

Labor Board v. Lion Oil Co., 352 U.S. 282, 288 (1957) ;

i

SEC vy. Joiner Corp., 320 U.S. 344, 350 (1943); Panama

Refining Co. v. Ryan, 293 U.S.. 388, 439 (1935) ; Cherokee

Intermarrtage Cases, 203 U.S. 76, 89 (1906).

Meaningful decision ‘as to the interpretation of one sec-

tion of the 1934 Act arising in the context of a struggle

for corporate control cannot_ ‘be _made_in- the -absenece—ef——

determining the role played by other complementary pro-

visions of that Act. Standing under other sections of the

1934 Act should not preclude standing under Rule 10b-5

particularly where this Court has held that the fact-that

the conduct complained of is actionable under another sec-

tion of the 1934 Act does not preclude the application of

Section 10b and Rule 10b-5. SEC v. National Securities,

Inc., supra at 468-69. Accordingly, GAF respectfully urges

that this Court review the 10b-5 question presented by the

same facts as the 13(d) question, if it decides that the 13(d) .

question he reviewed at all.

2. . Unlike the Section 13(d) issue, there is a substan- |

tial conflict among the Courts of Appeals on the

Rule 10b-5 question.

Contrary to what the Milsteins ree have this Court

believe, no Court of Appeals has interpreted Section 13(d)

in a manner that would require a contrary result in the

. ease at har. As.GAF will demonstrate in its briefin opposi-

tion to the principal petition, the-interpretation of Seation

- 13(d) adopted by the Court of Appeals-for the Second Cir-

_cuit.is entirely consistent with the interpretation of See-

tion 13(d) adopted by the Court of Appeals for the Seventh

Cireuit in Bath Industries, Inc: v. Blot, 427 F.2d 97 (7th

Cir, 1970), insofar as the present case is concerned.

However, the 10b-5 question presented by this conditional

_ eross-petition has generated substantial conflict amonz the

Courts of Appeals. In upholding an action for injunctive

relief under Rule 10b-5 where the plaintiff was neither a

12

purchaser nor a seller, the Court of Appeals for the Third

- Circuit in Kahan v. Rosenstiel, 424 F.2d 161, 173 (3d Cir.

1970), cert. denied sub nom., Glen Alden Corp. vy. Kakan;—~—~—

398 U.S.,950 (1970), pointed out that:

“The present case represents the first timte- this ~~

Cireuit has addressed itself to the question whether

Section 10(b) may be enforced by a private party

who is neither a purchaser nor seller. T'he Circuits

which have jdecided the issue are divided. The

Seventh and Kighth Circuits require that plaintiffs

- be purchasers or sellers even where injunctive relief

is sought. Greater Iowa Corporation v. McLendon,

378 F.2d 783 (8th Ci. 1967) (following Birnbaum) ;

Jachimiee v. Schenley Industries, Ine. .) NO. 15024 (7th

Cir. 1965) cer . denied, 382 U.S. 841, 86 S.Ct. 46,15 —

L.F.d.2d 82 (1 65). The Second Cireuit has construed .

the statute wore broadly at léast where an injunction

is sought. {The Sixth Cireuit-has alsosindicated that

in a suit for injunctive relief the requirements may

be liberalized. In Britt v. Cyril Bath Co., 417 F.2d

433, 436 Jae Cir. 1969), that /ourt stated that in a

suit under § 10(b), the necessary causal connection

between the ‘Sram alleged and the resultant purchase

or sale of a security might be relaxed.” 424 F.2d at

173 (emphasis supplied).

In the case at bar, the Court of Appeals for the Second

Cireuit noted that it had “steadfastly refused to extend the

reach of [Rule] 10b-5 to give standing to an issuer” follow-

ing “the rule of Birnbaum v. Newport Steel Corp., 193 F.2d

461 (2d Cir. 1952), cert. denied $343 U.S. 956 (1952) [that]

13.

¢

only a. purchaser or seller of a security can maintain an z

action under [Section 10(b)].” .(PP App. A 21a). |

Here the issuer sought, to enjoin continuing fraudulent

purchases of its.securities by stockholders who engaged in’

various activities to depress the price of such securities,

publicly and Aalsely disclaimed any intention to acquire.

additional: securities of the issuer, and continued to pure

chase large blocks of. its securities from stockholders en-

titled. to rely-on the veracity and completeness of those fil-

ings. The issuer’s standing was disposed of on a ‘motion

to disiniss the complaint for failure to’state a claim.’ Ac-

cordingly, the Court, on this conditional cross-petition, is

preseated with a pure question of law, the ideal vehicle to’

‘develop and present its views, provide sorely needed

guidance in an important but troublesome area of the law,.

and, at the same time, resolve a substantial conflict among

the Courts of Appeals.

3. The District Courts are in even greater conflict on the ques-

tion of the issuer’s standing: to seek injunctive relief for violations

of Rule 10b-5. Decisions upholding such standing include Butler

Aviation Int'l, Inc. v. Comprehensive Designers, Inc., 307 F. Supp.

910 (S.D.N.Y. 1969), aff'd on other grounds, 425 F.2d-842 (2d Cir.

1970); Moore v. Greatamerica Corp., 274 F. Supp. 490 (N.D. Ohio

1967); Dodge Mfg. Corp. v. Emerson Elec. Co., {1966-1967 Transfer

Binder] CCH Fed. Sec. L. Rep. $91,692 (N.D. Ind. 1967); and

Franklin Realty v. United Nat'l C orp., 70 Civ. 3366 (E.D. Pa. Febru-

ary 18, 1971). District. court decisions. denying standing include

Studebaker Corp. v. Allied Products Corp., 256 F. Supp. 173, 179-80

(W.D, Mich. 1966); Pacific Ins. Co. of N.Y. v. Blot, 267 F. Supp.

956 (S.D.N.Y. 1967); Allied Artists Pictures Corp. v. D. Kaltman &

Co. Inc., 283 F. Supp. 763, 765 (S.D.N.Y. 1967); General Time

Corp. v. American Investors Fund, Inc., 283 F. Supp. 400 (S.D.N-Y.

1968), aff'd on other grounds sub nom., General Time Corp. v. Talley '

Indus., Ine., 403 F.2d 159 (2d Cir. 1968), cert. denied, 393 U.S.

1026 (1969); Bound Brook Water Co. v. Jaffe, 284 F. Supp. 702,

708 (D.N.J. 1968), amended complaint dismissed, [1967-1969 Trans-

fer Binder] CCH Fed. Sec: L. Rep..{] 92;243 at 97,141 (D.N.]J.

1968); Hambros Bank, Ltd. v. Meserole, 287 F. Supp. 69, 72

(S.D.N-Y. 1968); Duplan Corp. w: Iroquois Indus., Inc., [1967-1969

Transfer Binder] CCH Fed. Sec. L. Rep. $92,318 at 97,493

(W.D.N.Y. 1968). net :

a

14

3. Unlike the Section 13(d) issue which is limited to .

control situations, the Rule 10b-5 issue is more

generally applicable, affecting all types of fraudu-

lent transactions involving the issuer's securities.

The Section 13(d) question presented to the Court of Ap-

peals, namely, w hether a filing is required when individuals

collectiv ely owning beneficially more than 10% (now 5%)

of a class of securities agree to act “together, i is confined to

the relatively few situations where corporate control is actu-

ally. or potentially. affected. However, the- question- of

whether an issuer has standing under Section 10(b) and-

Rule 10b-5 to enjoin fraudulent purchases and sales of its

own securities is not limited to control situations but en-

compasses numerous types of fraudulent transactions. In

‘Superintendent of Insurance v. Bankers Life and Casualty

Co., 404 U.S. 6 (1971), this C ourt rece sntly emphasized

that “Section 10(b) eiitlaws the use ‘in connection with the

purchase and sale’ of any security of ‘any manipulative -

deceptive device or contrivance’ ... by ‘apy person,’ ”

whether conducted in the organized markets or face-to-face,

pointing out that “Section 10(b) must be read flexibly, not

technically and restrictively.” Bankers Life presented this

Court with its first oceasion to consider a private right of

action under Section 10(b) and Rule 10b-5 and the Court

- (n. 10) declined to decide whether an issuer had standing |

ander these provisions to complain of fraudulent transac-

tions involving its securities. That question pérsists, how- -

‘ever, as a substantial issue of great importance to the

investing public the 1934 Act is congeet to serve.

15.

4. Unlike the interlocutory nature of the order

‘involving the Section 13(d) claim, the Court of

Appeals judgment on the Rule 10b-5 issue may

well be final unless reviewed by this Court.

The Court of Appeals reversal of the dismissal of the

Section 13(d) claim would, absent review by this Court,

result in that claim being remanded to the District Court

for further proceedings. As the Court of Appeals recog-

nized, “we emphasize that we are not yet called upon to

determine whether the Milsteins have in fact- violated sec-

tion 13(d) or, if they have, what relief would be appropri-

ate” (PP App. A 23a). However, the judgment of the

Court of Appeals affirming the dismissal of GAF’s Rule

-*“ 10b-5 claim may well be a final judgment unless no re-

viewed by this Court.

: This Court has repeatly stated that it will not-northally

‘review nonfinal judgments. Cohbledick v. United States,

309 U.S. 323, 324-25 (1940); Hamilton-Brown Shoe Co.-v.

‘Wolf Bros. € Co., 240 U.S. 251, 258 (1916) ; American Con-

_ struction Co. v. Jacksonville, T. é K.W. Ry., 148 U.S. 372, -

384 (1893); cf. Youngstown Sheet & Tubé Co. v. Sawyer,

343 U.S. 579, 584-85 (1952). Indeed, the Court has held that

the lack of finality of a judgment of the Court of Appeals

alone justifies the denial of certiorari. For example, in_

Brotherhood of Locomotive Firemen v. Bangor &.Aroostook ’.

R.R., 389 U.S. 327, 328 (1967) the Court said that “hecanse

the Court of Appeals remanded the ease, it is not yet ripe

for review by this Court.” Thus, denying the Milsteins’

' petition for certiorari at this time clearly does not preclude %

them from seeking to obtain review by this Court on the

13(d) question on a final judgment. Hanover. Shoe, Inc. v.

United Shoe Machinery Corp., 392 U.S. 481, 488, n.6

(1968), reh. denied, 393 U.S. 901; Mercer v. Theriot, 377

U.S. 152, 153-54 (1964), reh. denied, 377 U.S. 973; Hamilton-

Brown Shoe Co. v. Wolf Bros. & Co., supra. However,

16

GAF’s only opportunity for review by this Court may well —

_ be now, as the determination of the Court of Appeals below

dismissed GAF’s complaint insofar as its 10b-5 claims are

concerned. Toledo Scale Co. v. Computing Scale Co., 261

U.S. 399, 418 (1923).

Nevertheless, as previously noted, GAF. intends | to vig-

orously oppose the Milsteins’ application for certiorari.

_ And although the 10b-5 question presented herein is impor-

.tant-and worthy of consideration by this Court, GAF pre-

. fers to proceed in the District Court without further delay

to pursue its remedies under Section 15(d). Should this

Court, however, grant the Milsteins’ petition, then it should

grant this petition. Otherwise further review of the 10b-5

question may be preetaes.

5. Dicting Geo temmsr Gem enicleing Visieticnn of

Rule 10b-5 affecting its own stock frustrates the

enforcement of Section 10(b) because the issuer

_ The ease at bar vividly highlights the'many reasons which

require that the issuer have standing to enjoin violations —

of Rule 10b-5 affecting its own stock. The issuer is in-

finitely. better positioned than are its shareholders, the

Commission, or, for that matter, any other potential plain-

. tiff to protect its shareholders’ interests vis-A-vis manipula-

tions respecting its stock. The court below in the context

of Section 13(d) noted that “it-is fair to assume that [the

issuer] serutinizes carefully changes in its stock ownership”

(PP App. A 20a). The issuer ean he counted upon to

“promptly and effectively police” shareholder filings and

it alone has the “day-to-day familiarity with the facets which

would enable it to appraise accurately the statements” made

in such filing (/hid.). And it is undeniably true that the

eurrent knowledge the management has as to the value of

the company’s assets, its estimated future earnings, likely

corporate growth and other relevant economic factors, each

17 -

of which. bears significantly upon the market price of its

securities, enable the issuer to recognize unlawful mani-

pulations in its securities earlier than anyone’ else. Few,

if any, shareholders can approach the level of manage- -

ment’s current information respecting these matters and

most shareholders lack the f ‘acilities and resources to under-

take the task. As the court below. also noted, “Fs ]tock-

holders are generally unaware of the necessary background

information to judge the truth or falsity of the statements”

(PP App. A 21a). Moreover, absent the prospect of re-

covering substantial damages little incentive exists’ for a

shareholder to bring suit. . These: indisputable cireum-

stances, coupled with the fact that the issuer is almost al-

ways better able than an individual to afford the expenses

of litigation, make it clear that the interests of shareholders

and the investing publie are best served by permitting the

issuer to seek injunctive relief before substantial damage

is done to shareholders, prospective i investors, and the com-

pany itself.

Manipulations of its stock frequently cause extensive and

irreparable injury to the corporation: Where the unlawful

activities haye the effect of depressing the market price the |

issuer may be severely disadv antaged in negotiations look-

ing to acquisitions and mergers, in marketing its own secn-

- rities, and in certain types of borrowings. As Chief Judge

Friendly of the Court of Appeals for the Second Circuit

observed, there are “many practical advantages” support-

ing standing on the part of the issuer to seek injunctive

relief under Rule 10b-5. General Time Cerp. v. Talley .

Indus., Inc., 403 F.2d 159, 164 (2d Cir. 1968), cert. denied,

393 U.S. 1026 (1969); see Note, Private Enforcement under

Rule 10b-5: An Injunction for the Corporate Issuer? 115

U.Pa.L.Rev. 618, 628-29 (1967). .

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18

In JA. Case Co..v. Borak, 377 U.S. 426,.433 (1964) this

Court emphasized the practical difficulties the Commission

faces in trying to uncover and prosecute violators of the

1934 Act and stressed the necessity of providing effective

private -enforcement:. '

. [I]t is the duty of the ne: to be alert to pro- ©

Vv aii such remedies as are necessary to make effective

the congressional purpose ... [and] ‘to adjust their

remedies so as’to grant the necessary relief’ ‘where

federally secured rights are invaded.”

In Borak the Court created an implied right of action on be-

half of a stockholder to challenge the accuracy of a proxy

statement disseminated by an issuer because: |

“[p]rivate enforcement of the proxy rules provides

a-necessary supplement to Commission action. As in

the anti-trust treble damage litigation, the possibility

of civil damages or injunctive relief serves as a most..

effective w eapon in thé enforcement of the proxy:

requirements.”

. The Court of Apeesle for the Second Cireuit followed

Borak in Studebaker Corp. v. Gittlin, 360 F.2d 692, 698. (2d

- Cir. 1966) where the target corporation was granted the

same standing as the Commission to enjoin proxy viola-

tions. The line of reasoning by which Borak and Gittlin

found that equitable relief to enforce Section 14(a) was

proper is equally applicable to Section 10(b). Both see-

tions proseribe unfair and undesirable practices in securi-.

\ ties-transactions and, if a private party may assist the .

\Commission to police one, it should be permitted to help

‘police the other.

\ The Court of Appeals for the Second Cireuit in’ Ruckle

_ y. Roto American Corp., 339 F.2d 24, 28 (2d Cir. 1964), also

recognized the desirability of a corporate right of action in

_ a derivative suit to enjoin the issuance of securities, even

AP AEE Rc Oe ORE TE Tae aad

19

though the damage sought to be prevented would have been

_ to the shareholders:

“Barring suit by a corporation defrauded under

those circumstances would, as a legal and practical -

matter, destroy any remedy against the perpetrator

of the fraud. Suits by individual shareholders would

either run afoul of priv ity requirements or result in

smaller recoveries based on loss to individual invest-

ments, which would also be difficult to compute.”

(citation omitted). ,

And in its. decision below, the Court of pene em-

phasized the importance‘of supplementing Commission ac-

tion with private enforcement, at least insofar as Section.

13(d) is concerned, specifically noting:

_ “An already overburdened Commission ‘staff, taxed

_ with reviewing increased filings under the securities.

acts, should welcome ‘a necessary apne, to its

action.” (PP App. A 20a)

The tenor of the 1934 Act is prophylactic and its intent

is to prevent securities frauds. Injunctions are surely an —

appropriate remedy to maintain fair and honest securities

markets and are the only method | of preventing injury to —

‘innocent investors.

The fact that this proceeding arose in connection a with a

control contest and that the GAF management may not be

a “disinterested” party, relied upon by the District Court

(PP App. B 20b-21b), should not cloud the importance of the -

issue presented for this Court’s consideration. The Court

of Appeals for the Second Circuit, in at least two opinions,

has ruled that the standing of a corporation to seek injunc-

tive relief under Section 14 is not precluded ‘by reason of

the management’s potential or actual self-interest in defend-

ing against a takeover attempt. Electronic Specialty Co. v.

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Be. ie © acl TIERS Sen een mes cnprecn

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International Controls Corp., ., 409 F. 2d 937 (2d Cir. 1969) 5 :

Studebaker Corp. v. Gittlin, supra. -

In matters affecting the securities markets rarely i is self-

interest not involved.- The Court of Appeals in this case

specifically acknowledged that the issuer’s self-interest was

a substantial factor militating in favor of granting it stand-

ing to seek injunctive relief under Section 13(d) (PP App.

A l7a-18a). As noted above, among all potential plaintiffs,

it is the issuer which is ideally situated to recognize 10b-5

violations affecting its own stock and has the resources to

_ prevent and redress those violations. If tlie vidlations oc-

cur as a prelude to or during a control contest, nisi prius

courts may be directed to examine management’s 10b-5

- elaims with special scrutiny. But it disserves shareholders

and the investing public to completely close the Court House

to the presentation of those claims sengly because the man-

agement has an interest.

The Court of Appeals carefully declined to entirely fore-

elose the matter of the issuer’s standing under 10b-5 (PP _

App. A 22a-23a). It concluded that since it had found that

GAF had standing under Section 13(d), there was “no com-

pelling reason” to grant standing under Rule 10b-5 (PP

App. A 22a). We do not quarrel with that conclusion and,

as noted earlier, GAF wants to pursue its remedies in the

District Court without further delay in accordance with the

decision of the Court. of ‘Appeals. It is only if this Court

should grant the principal petition that we request that,

for all of the reasons set forth above, the writ issue to re-

view the issuer’s standing to seek injunetive relief under

Rule 10b-5.

eather | Oi FQOAS Os

21

CONCLUSION

. For the foregoing reasons, it is respectfully cil.

mitted that in the event the Court should grant the

petition for a writ of certiorari in No. 71-1144, this

conditional cross-petition for a writ of certiorari should

likewise be granted. -

Respectfully submitted,

Epwin J. WESELY, ©

40 Wall Street,

. New York, New York 10005,

Attorney for Conditional Cross-

Petitioner GAF Corporation.

Oj Counsel: : ier

Ricuarp A. HorGan,

Wintaprop, Stimson, Putnam & Roserts.

March 9, 1972.

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