# Petition for Writ of Certiorari — Shields v. United States > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385606_0596%3A1 ## Record - **Collection:** Supreme Court brief - **Document type:** Petition for Writ of Certiorari - **Published:** January 1, 1972 - **Citation:** 406 U.S. 910 ## Text 1 7 U, . . etit 7 ‘ rubs ‘ e Supreme Court, U. $. pose rs , : a AAR. LO ste 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). . - “ iad Mies BE SRR a yn ” . be ia at acl Re Nh a Sa ee ee BA les hi ed ei es a ae . ’ reg yw we re Seer oor . henner ees error Te eae Pee oe ’ ” ' : . . ‘ — NTR AE Ty SBE ANB GE 9 nt . 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. ee I oa “he Been: j Be. ie © acl TIERS Sen een mes cnprecn ee a 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. » . Fey TANT eS ETE ROP ORIG I Srepeney Ni a a ey PK ORO LERE OL Porn EIB PERNA et HP patios set ia eta eI or ore ia eae fel teins Cue eats eee e BPR ne IT EON EU LONE A OY ONSEN, ROBIN IIIT HOARY i SRR A --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385606_0596%3A1. Public record. Not legal advice.