Slavin v. Germantown Fire Ins. Co.

174 F.2d 799, 1949 U.S. App. LEXIS 2281

• Court: Court of Appeals for the Third Circuit
• Decided: April 1, 1949
• Docket: 9568, 9570
• Status: Published

Opinions

KALODNER, Circuit Judge.

This is a shareholders’ derivative action based upon Section 10(b) ¹ of the Securities Exchange Act of 1934, 15 U.S.C.A. § 78j(b), and Rule X-10B-5,² C.F.R. (Cum. Supp.) Title 17, Section 24O.10b-5, promulgated pursuant thereto by the Securities and Exchange Commission, jurisdiction being conferred upon the district courts by Section 27 cf the Act, 15 U.S.C.A. § 78aa.

The Germantown Fire Insurance Company (“Germantown”), a stock company organized under the insurance laws of Pennsylvania, became, on or about January 2, 1946, the capitalized successor to the Mutual Fire Insurance Company of Germantown (“Mutual”), a mutual company which, for over a century, had operated under the Pennsylvania insurance laws. The instant controversy arises out of the conversion of the mutual company to the stock company. The force of the plaintiffs’ case is chiefly directed against the conduct of one Arthur O. Rosenlund, an independent insurance broker, and the manner in which he became the owner of approximately 17,500 shares of stock in Germantown. It is the contention of the plaintiffs that Rosenlund, together with one E. M. Cushmore, an officer and director of Mutual, conspired to take advantage of an existing approximate $3,000,000 surplus, by bringing about the conversion; that they succeeded in their design; that when it became apparent to the other officers and directors of Mutual that Rosen-lund was in a dominant position, they “went along”, making an agreement with him whereby he was to become the senior officer of the new corporation with a salary of $25,000 per annum and a share in the profits; that the aforesaid conduct was in contravention of the specific statutes referred to inasmuch as the designated purpose of the conversion and the methods of bringing it about, as stated in the registration statement filed with the Securities and Exchange Commission and the prospectus mailed to the policyholders of Mutual, were circumvented and fal'sified; and that the end result constituted a fraud upon Germantown in the sale and purchase of its securities.

The complaint originally included a prayer for the appointment of a receiver for Germantown, but that being withdrawn, the primary relief now sought is cancellation of the stock holdings of Rosenlund and disestablishment of a voting trust containing voluntary stock deposits and deposits required of those who purchased through the stock issue underwriter.³ Section 29(b) ⁴ of the Securities Exchange Act of 1934, 15 U.S.C.A. § 78cc (b), is relied upon, as well as general principles of equity. No monetary damage is claimed.

Upon the conclusion of the presentation of evidence by all parties,⁵ the Court below dismissed the complaint for want of jurisdiction. It found neither use of the mails within the meaning of the applicable statute and Rule, nor diversity of citizenship to sustain the complaint upon independent grounds in the local law. D.C., 74 F.Supp. 876. It did not give express consideration to the authority of Hurn v. Oursler, 1933, 289 U.S. 238, 53 S.Ct. 586, 77 L.Ed. 1148, and cases of like import.

To reach the stated result, the District Court made extensive findings of fact wherein the individual defendants other that Rosenlund were absolved of offenses under the Act; the conversion per se was separated from the activities of Rosen-lund; and Rosenlund’s conduct was found to be outside the Act for want of use of the mails by him in what was assumed, arguendo, to have been a scheme on his part to acquire large holdings in German-town. The Court, however, expressed the view that Rosenlund had, contrary to good morals, concealed his activities from the officers and directors of Mutual in acquiring such holdings.

On this appeal, the defendants have conceded such a use of the mails as would bring the allegations of the complaint within Section 10(b) of the Securities Exchange Act of 1934, and the Commission’s rule X-10B-5. Moreover, they do not take issue over the failure of the Act to explicitly permit civil suits by private persons, nor the failure of the plaintiffs to seek money damages. They do assert, however, that Germantown is not the proper party to sue under the Act. In addition, they contend that no wrong has been done to Germantown, and that, in general, no actionable fraud or deceit has been committed.

The evidence in the case is voluminous, and a fair summary of all of it would overreach the bounds o-f necessity. For the purposes of orientation, a basic outline of the framework of the case may be set forth.

Mutual, during its century of existence, had accumulated the $3,000,000 surplus previously mentioned, which was undistributable under the laws of Pennsylvania.⁶ On June 21, 1944, Mutual’s policyholders authorized conversion to a stock company pursuant to section 534, P.L. 682, May 17, 1921, 40 P.S. § 674, and further authorized the officers and directors of Mutual to take the necessary steps to accomplish that result. The plan contained in the Resolution approved by the policyholders contemplated that the converted company would have a capital of $1,000,000 consisting of 50.000 common shares of a par value of $20, pre-emptive rights to which were to be allotted to policyholders of Mutual of record on May 11, 1944, on the basis of one-tenth of one share for each full dollar of premium paid by term policyholders, and one-tenth of one share for each full ten dollars of perpetual deposit by perpetual policyholders. The 100th annual statement of Mutual’s condition, which the policy holders had before them, disclosed assets to the extent of £3,952,043.42, liabilities of $513,235.18, and a surplus of $3,438,808.-24.⁷ Thus, it was apparent that with the addition of the proposed $1,000,000 capital to be derived from the sale of stock, the 50,000 shares would have a book value somewhat in excess of $87 per share. It may be noted here that in addition to the proscription in the local law against distribution of the surplus of a mutual company, the surplus, on conversion, was required to remain intact as the surplus of the stock company.⁸

Prior to the action of the policyholders in authorizing the conversion, the officers and directors of Mutual had, in April, 1943, concluded an agreement with Bioren & Co., to underwrite the stock issue for a fee of $30,000, in return for which that firm was to take up, at par, all the stock remaining after the exercise by policyholders of their pre-emptive rights, to deposit such stock in a voting trust, and to resell, at par, voting trust certificates therefor. On June 22, 1944, the voting trust arrangement was completed, with the National Bank of Germantown and Trust Co. as depositary, and with W. H. Emhardt, president and director of Mutual, and A. W. Jones and C. E. Dearnley, directors of Mutual, as trustees. The voting trust was authorized to hold the total issue of stock, but, of course, the number of certificates to be issued depended upon the number of shares deposited.

Although it had been contemplated that the plan would be ready and the warrants distributed shortly after June, 1944, various factors irrelevant here delayed the approval of the State Insurance Department. It was not until about July 5, 1945, that the prospectuses announcing the sale of stock were mailed to policyholders, and about July 9, 1945, that the warrants representing pre-emptive subscription rights were mailed to them. The warrants were effective until September 11, 1945.

The final plan for conversion, as stated in the prospectus, included (1) a regulation adopted by the Board of Directors to the effect that no policyholder would be issued pre-emptive rights entitling him, after proration, to subscribe to more than 1,000 shares of stock; (2) an oral agreement with Bioren & Co.; and (3) a ten-year voting trust.

As revealed in the prospectus, the written underwriting contract with Bioren & Co. did not govern the manner in which it would distribute the voting trust certificates to be issued for the shares it was bound to take up. There was, however, an oral understanding between the Board of Directors and Bioren & Co. that:

“(a) Insofar as appears to the underwriter to be practicable, preference will be given to those policyholders who at the time of exercising their rights have indicated a desire, if possible, to subscribe for additional shares;

“(b) Insofar as the underwriter can control the situation, certificates will not be sold to persons or firms having a substantial interest in competing companies or whose interests are otherwise likely to be adverse to the company; and

“(c) The underwriter will not knowingly distribute certificates in such a way as to make it possible for any individual or firm to obtain control of more than 1000 shares whether or not all or any part of the same shall be represented by voting trust certificates.”

With respect ro the voting trust, in addition to the details already given, the prospectus stated that under the terms thereof the trustees were prohibited from voting for or approving the dissolution or merger of the company or the sale of all or substantially all of its assets without the unanimous written consent of the certificate-holders. It further stated that the voting trustees “Who are three of the present directors of Mutual Fire Insurance Company of Germantown, including the president of that company and who will occupy similar offices with the new company”, intended to use the voting rights to continue the present management of the company for the term of the voting trust agreement. The prospectus also disclosed that Emhardt proposed to acquire, in his own right, voting trust certificates representing 1000 shares of stock, and Jones and Dearnley proposed to acquire 500 shares each, by the exercise of rights which they would receive as policyholders, the purchase of rights or stock on the open market, or the purchase of unsubscribed stock from the underwriter. It further recited that Mutual had never paid any officer a salary in excess of $12,000 per annum, and that under present conditions no substantial change in that policy was contemplated; that the only person who, during the fiscal period ended December 31, 1944, received aggregate remuneration in excess of $20,-000 was Rosenlund, who had received $30,-265.81 in commissions; that the total payments to all of the officers and the directors, including committee fees, “are proposed to be a maximum of $38,500.00 for the first year after reorganization”; and that “No person other than officers or directors will receive compensation from the Company in excess of $12,000 per year” unless earned by way of commissions on insurance placed with the Company.

The warrants as finally issued to thi policyholders contained the statement on their face that they were transferable and divisible; that subscriptions to fractions of shares would not be accepted; and that “Warrants to subscribe to fractions of shares must be presented with sufficient additional warrants to make up the number of whole shares subscribed for”. On the reverse side of the warrants was an assignment form. In addition, there was a provision, effective unless deleted by the subscriber, authorizing the deposit of the shares subscribed for in the voting trust and the issuance of voting trust certificates in lieu thereof. There was a statement that the organizer of Germantown was Mutual ; that the subscription was for stock in a total issue of 50,000 shares having a par value of $20, all of which would be sold at a price not less than par; and that stock unsubscribed by policyholders would be offered to the general public at par.

On the face of each warrant there was the rubber-stamp legend, “Void unless rider entitled 'Important Amendment’ is attached”. That “rider” carried, among other things, a “Notice” stating “The right represented by this stock purchase warrant has value. If you do not want to use this warrant for the purpose of subscribing for stock, we suggest that you consult any reputable stock broker”. Again, on the reverse side of thé warrant, there was another rider calling specific attention to the provision for depositing the stock in the voting trust.

Approximately two days before the expiration date of the warrants, Bioren & Co. received warrants which had been assigned by policyholders to Rosenlund entitling him to subscribe to a total of about 17,000 shares of stock.

Following, the completion of the conversion and the effectuation of Germantown, its officers and directors, who had served the same-function for Mutual, entered into an agreement with Rosenlund in February, 1946. Pursuant to this agreement, Rosen-lund was to become a director and chairman of the Board at a salary of $25,000 per year, plus a share in the profits of the insurance business. He was to manage the production end of the insurance business, and while he was permitted to maintain his independent brokerage business, he was not to receive any commission whatsoever. This contract, which was subject to the action of the stockholders, was read and approved by them at the annual stockholders’ meeting in April, 1946, although no mention of it was made in the notice of the meeting. It may be noted, additionally, that in March, 1946, Emhardt had tendered his resignation, which, after conference with him, was accepted as of December 31, 1946, with leave of absence to that time. Upon the effective date of Emhardt’s resignation, the Board appointed Rosenlund to fill the position of president without additional compensation until the next stockholders’ meeting in April, 1947.

To clarify Rosenlund’s relation to Mutual, it should be noted that at no time was he an officer or director of that company. However, commencing with 1942, he was Mutual’s largest business producer, and represented its largest policyholders. For this reason, he was able to account for a substantial number of the proxies necessary to the approval of the conversion at the policyholders’ meeting in June, 1944.

In view of the allegations of the complaint, the activity of Rosenlund and the manner in which he obtained assignments to so many shares deserve particular attention.

In January, 1943, the insurance committee of Mutual’s Board of Directors was considering the matter of the conversion. In connection with the distribution of preemptive subscription rights to policyholders, a problem arose with respect to the handling of relatively new assureds who had paid substantial advance premiums.. The assured which the committee had in mind was Janney Cylinder Co., Mutual’s largest policyholder and Rosenlund’s customer. Horace Schell, a member of the Board and the committee, and Mutual’s legal counsel, believed that the matter would come within the power granted by statute to the directors to make equitable regulations.⁹ Nevertheless, he deemed it so highly desirable that Janney Cylinder agree in advance to waive whatever pre-emptive rights it might have in excess of an amount later to be determined as fair and equitable to all policyholders, that he indicated to management he would not undertake to discuss the conversion with the State Insurance Department unless such waiver were first obtained. He further suggested, inasmuch as it was the custom to deal with policyholders only through their broker, that Janney Cylinder’s broker be asked to obtain the waiver. The tentative plans for conversion were accordingly explained to Rosenlund, as well as the reason for the waiver, and he was asked to see whether Janney Cylinder would agree. Rosen-lund did obtain such a waiver in January, 1943, and on similar requests, obtained specific waivers, limiting pre-emptive rights to 1000, from two or three of his customers in April, 1943, and April, 1944.

During his discussions with his customers, Rosenlund learned that many were not interested in acquiring insurance company stock. He suggested that they give their rights to him. Between August, 1943, and April 1944, he accumulated agreements from his customers to assign rights when issued. These agreements represented a total of approximately 14,000 shares.

Just prior to the issuance of the warrants, Rosenlund presented to Mutual letters from about 100 of his customers asking that the warrants be delivered to Ros-enlund for delivery to them. These requests were complied with,¹⁰ and, in addition, E. M. Cushmore, who was vice-president and general manager of Mutual, as well as in charge of the details of distribution of the warrants, asked Rosenlund to personally delivery warrants to three of the largest policyholders, also Rosenlund’s customers.¹¹

When the warrants were finally issued, in July, 1943, Rosenlund visited his customers and obtained from them actual assignments of the warrants which, in total, entitled him to subscribe to approximately 17,000 shares. The rights, admittedly acquired gratis by Rosenlund, had a market value ranging from $7 per share, shortly after the issuance, to $15, at the expiration date. He obtained an additional 500 shares in the form of voting trust certificates by purchase at par from Bioren & Co., this number being allotted to him by that firm out of the total of approximately 5,250 shares which were not pre-empted by policyholders and which it therefore took up pursuant to its underwriting contract.

As already stated, the defendants do not dispute the failure of the Act to specifically permit private civil litigation for violation of Section 10(b). Logic, and such authority as is available, seem to favor such action despite the absence of enabling legislation.¹² We are content to rest with this observation, for we do not think the ultimate disposition of this controversy necessarily rests upon this point. And if there was a scheme which actually culminated in harm to the corporation and which was effectuated in violation of the provisions of Section 10(b) of the Securities Exchange Act,¹³ we have no doubt that the corporation could prosecute the action for redress; or that in the proper case, a derivative suit may be brought on its behalf.

The allegations of the complaint charge that the conversion was a plot engendered by Rosenlund. and Cushmore in which the officers and directors of Mutual joined. It is contended that the charges are established by the evidence that Rosenlund, in the summer of 1942, gave Mutual business, ,which exceeded its total premiums from all other sources; that he then cut off that business, and forced the management of Mutual to employ Cushmore, who rapidly advanced from general manager to member of the- Board and vice president-general manager, because of Rosenlund’s business; that on being placed in charge of the details of the conversion, Cushmore cooperated with Rosenlund for their mutual benefit, and in furtherance of the design procured the employment of his brother, an attorney, to represent Mutual.

The Court below found against these inferences, and we are of the opinion that the evidence would permit no other conclusion. The insurance business of Mutual was confined to the writing of smaller policies on dwellings and small shops in the Germantown area. Its chief source of revenue, and profit came from investment of its huge surplus, but with business stagnating, Mutual was developing into a “dry” trust, since the surplus was undistributable. The officers and directors were keenly aware of this situation, and at least as early as the beginning of 1941, had submitted to Schell, its counsel, the problem of benefiting policyholders through distribution of dividends. Having embarked upon an exploration of this problem, the Board considered various possibilities until, upon the advice and insistence of its counsel, it determined that the outstanding solution was to take advantage of the. local -statute permitting conversion to a stock ' company.¹⁴ Having made this decision, the

Board also authorized Schell to employ associate counsel, specifying the law firm it desired, a member of which was Cush-more’s brother.

The record discloses that Mutual first learned of E. M. Cushmore through Rosen-lund, although it does not definitely appear that he was employed, in the fall of 1941, solely through Rosenlund’s recommendation. The uncontradicted evidence is that in the summer of 1941, Rosenlund, who represented industrial concerns in chief, gave Mutual some of his business at the behest of a special agent of the company. After about two months he discovered that Mutual was not properly equipped to handle his type of business and therefore he placed it as he had previously done. The company, however, was desirous of retaining its new business, and asked Rosenlund to suggest someone it might employ. Rosen-lund suggested Cushmore, with whom he came in contact in the course of placing his business with the Pearl Assurance Co. Following his employment by Mutual, Cushmore sought Rosenlund’s business, and obtained it.

The officers and directors of Mutual were clear in their testimony that Rosenlund exercised no influence or control over them in their decision to convert, or in their effectuation of that decision, and there is nothing in the record to justify an inference to the contrary.

The record also affords no basis for inferring that the officers and directors of Mutual entered into an arrangement with Rosenlund to permit him to subscribe to shares so that together they would have control, and to make him head of German-town. The evidence is that upon learning of the exercise by Rosenlund of rights assigned to him by policyholders, Mutual’s Board, “shocked” or “surprised”, investigated not merely the manner in which he obtained the assignments, but also the assignments themselves to determine their validity. A full disclosure of the circumstances surrounding his acquisition was made by Rosenlund to the Board’s committee and reported by the committee to the Board on October 5, 1945. On the advice of counsel, the Board concluded that he had acted within his rights. The management contract to which we have referred, relating exclusively to the production phase of the business, was arranged as a result of bargaining, both parties being represented by counsel; the Board, through its executive committee took the initiative as part of its desire to revitalize and expand its insurance business.

While the salary was larger than that indicated as the intention of Mutual in the prospectus,¹⁵ nevertheless Germantown’s officers and directors considered it appropriate in view of the fact that between March 1, 1942, and March 1, 1946, Rosenlund’s commissions for insurance placed with Mutual averaged approximately $27,-000 per year net. The Board took into consideration that Rosenlund was the company’s largest business producer, and it desired to have the advantage of his ability in this respect as well as his experience. For the purposes of this case, it is enough to hold that there was no connection between the negotiation of the employment agreement and any deceitful conduct of Rosenlund in the acquisition of stock, and, accordingly, there is no occasion to consider the rights, if any, conferred on the corporation under Section 10(b) of the Act of 1934, and Rule X-10B-5.

Dominating the plaintiffs’ general argument are references to fraud committed by Rosenlund upon his assignors, and the creation, by Rosenlund, of a situation making statements in the prospectus false. With respect to the former, obviously the right of redress, if any, belongs to the assignors,¹⁶ and not to the corporation. With respect to the latter, similarly, the right of redress, if any, would seem to belong to those who purchased the securities.¹⁷

The conclusions reached considerably narrow the scope of the complaint against Rosenlund. At this point, plaintiffs’ position is that in accumulating pre-emptive subscription rights Rosenlund frustrated the aim of the conversion to benefit the policyholders, and in the concealment thereof prevented the officers and directors of Mutual from taking steps to' revise the plan to assure a more equitable distribution of stock among Mutual’s policyholders and a wide distribution of the stock in general; and that Rosenlund, by the device of concealment, was enabled to make a secret profit and unjustly enrich himself at the expense of Germantown. It is contended that the claim comes within Section 10(b) of the Act of 1934 and Rule X-10B-5 because Rosenlund violated his fiduciary obligations as an agent.¹⁸

Leaving aside the conclusion that much of the complaint alleges causes of action enforceable by others than the corporation, and assuming that Rosenlund was a stranger to the conversion, it is difficult to see that his conduct caused harm to the corporation.

The prospectus did suggest that there was a fair distribution of subscription rights to policyholders entitled to them; to assure such a distribution, and to prevent large policyholders from becoming entitled to subscribe to large blocks of stock,¹⁹ a regulation had been adopted limiting to 1000 the rights to be issued to any single policyholder. This, however, relates to the rights to which policyholders were automatically .entitled by virtue of their policies, and cannot be construed as a limitation upon the number of rights which a policyholder, or a stranger, might otherwise acquire on the market. No other inference is possible in the face of statements in the prospectus that the warrants were transferable and that the company could not know who the subscribers would be; that no stock was to be issued in fractional amounts, and that holders of fractional warrants should secure additional rights on the market.²⁰

The statements in the prospectus relating to the oral agreement with Bioren & Co. and to the voting trust merely indicate that the officers and directors of Mutual had given consideration to the possibility that stock might be accumulated, and that they had taken what steps they could to diminish the possibility while affording the policyholders an opportunity, in the form of the voting trust, to counter-balance any such accumulation.

The argument that the aim of the conversion, to benefit the policyholders, was frustrated by Rosenlund, fails to meet the answer that all the policyholders received the rights to which they were entitled. The fact that some did not want to avail themselves of those rights and chose instead to exercise their alternative right to sell them, or give them away, does not mean that they were not benefited,²¹ or that others did not receive their fair share. There was no statement in the prospectus limiting the right of any person to subscribe to 1000 shares, and, accordingly, the corporation is not in a position to assert that the issuance of stock in excess of 1000 shares was invalid.

Similarly, we think nothing is gained by the assertion that Rosenlund acquired the stock at a price lower than the book value, or its market value, particularly in view of the failure of the evidence to establish that he had anything to do with the fixing of the price at which the stock was to be sold. The quarrel, in reality, is not with the price Rosenlund and others paid, but with the price fixed in the conversion plan.²² Since Rosenlund paid for the stock the full cash price at which it was offered to both policyholders and the public, no wrong to the corporation is made out on that score. In this respect, the cases²³ discussing secret profits realized by the promoters, agents, officers and directors in their dealings with the corporate entity are inapposite.

With the contention that Rosenlund was an agent, plaintiffs introduce a substantially different approach to the case. On settled principles of agency, there is no necessity to make out a wrong, or loss, to the principal. Restatement of the Law of Agency, Section 388; and see Pennsylvania Annotations thereto. And it is immaterial that the agent’s services were gratuitous. Restatement, Section 387, Comment c. The agency relationship, in this case, between Rosenlund and Mutual is based primarily upon the evidence that Rosenlund was asked to procure waivers from his customers. Reference is also had to his activity with respect to the proxies in connection with the policyholders’ meeting in June, 1944. And it is claimed that his duties as an agent were violated in failing to inform the directors that his customers were not interested in purchasing stock and in failing to inform them of the fact that he obtained agreements to assign the warrants if issued.

In September, 1945, the officers and directors of Mutual became aware, as it was inevitable they would, of the total amount of Rosenlund’s subscription. And in October, 1945, they were fully apprised by Rosenlund of the circumstances under which he secured the right to make the subscription in that amount. Thus, any deceit, concealment, or breach of duty was known to the officers and directors of Mutual, prior to, and in sufficient time, to prevent the fruition of Rosenlund’s alleged scheme.²⁴ It is to state the obvious to say that there is no deceit where all the relevant facts are known before the acts in completion of the deceit are executed. Similarly, where the agent discloses all relevant facts before completion of the transaction complained of, he has satisfied his duty. See Restatement of the Law of Agency, Section 392. Finally, the officers and directors, acting in good faith, investigated the circumstances surrounding Rosenlund’s acquisition of rights to subscribe, and, on the advice of counsel, concluded that he had violated no duty.

The instant case is not similar to Bailey v. Jacobs, 1937, 325 Pa. 187, 189 A. 320, where a director made use of corporate assets for his own profit, a matter which the officers and directors could not ratify, and the latter were held to have become parties to the illegal transaction, especially' since they attempted to ratify and in doing so made an entry on the corporate books in such form as to constitute a concealment. It more nearly approaches Chambers v. Chambers & McKee Glass Co., 1898, 185 Pa. 105, 39 A. 822, in which a stockholder was held bound by the action of the Board in the absence of fraud and intentional disregard of the interests of the stockholders, despite the fact that the action was detrimental to the corporation.

For the reasons stated we are of the opinion that the plaintiffs failed to establish a cause of action against the defendants and that the latter were entitled to judgment by the Court below. Inasmuch as the Court below erroneously dismissed the action for want of jurisdiction its order will be reversed and the cause remanded with direction to enter judgment for the defendants in accordance with this opinion.

1 Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C.A. § 78j (b), provides:

“It shall be unlawful for any person, directly or indirectly, by the usé of any means or instrumentality 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 any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the . protection of investors.”

2 Rule X-10B-5, C.F.R. (Oum.Supp.), Title 17, Section 240.10b-5, provides:

“It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails * * *

“(1) to employe any device, scheme or artifice to defraud,

“(2) to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or

“ (3) 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.”

3 This latter relief is pressed chiefly by the intervening plaintiffs.

4 Section 29(b), 15 U.S.C.A. § 78cc (b) provides:

“Every contract made in violation of any provision of this chapter or of any rule or regulation thereunder, and every contract * * * heretofore or hereafter made, the performance of which involves the violation of, or the continuance of any relationship or practice in violation of, any provision of this chapter or any rule or regulation thereunder, shall be void (1) as regards the rights of any person who, in violation of any such provision, rule, or regulation, shall have made or engaged in the performance of any shch contract, and (2) as regards the rights of any person who, not being a party to such contract, shall have acquired any right thereunder with actual knowledge of the facts by reason of which the making or performance of such contract was in violation of any such provision, rule, or regulation * *

5 Initially the case was heard on motion for preliminary injunction, but during the course of the trial it was agreed that the scope of the inquiry should bo broadened to include the whole case and heard as on final bearing.

6 See 40 P.S. § 677: “The surplus of any domestic mutual fire insurance companies issuing policies in accordance with the provisions of section one or two of this act (40 P.S. §§ 675 and 676) shall be held as a reserve for the payment of losses and expenses; and,, in the event of dissolution of the company, shall be divided pro rata among the policyholders whose policies are in force at the time of dissolution, but no policyholder, other than loss claimants, shall receive more than the amount of the unearned cash premium last paid to the company for the current term of such policy. Any balance remaining shall escheat to the Commonweath of Pennsylvania.” And see Mutual Fire Ins. Co. of Germantown v. United States, D.C., 50 F.Supp. 665, aifirmed 3 Cir., 1944, 142 F.2d 344, certiorari denied 323 U.S. 729, 65 S.Ct. 65, 89 L.Ed. 585.

7 The statement of resources disclosed holdings of bonds having par value of $2,-234,101, and market value of $2,332,986.-01; stocks having par value of $192,901, and market value of $211,013; first mortgages valued at $784,748.42; and cash in the amount of $279,387.73. The balance was made Up of real estate, real estate investments, deposit notes, agents’ balances, accounts receivable, accrued interest receivable, and perpetual insurance deposits on home office buildings.

8 40 P.S. § 674: “ * * * The policyholders of said company shall have the first right to subscribe to said stock, subject to such equitable regulations as the directors or trustees may prescribe, and the surplus of the mutual company shall not be distributed, but shall remain intact as the surplus of the stock company. * * * ”

9 See note 8, supra.

10 Prior to delivering these letters, Rosenlund had written to Mutual advising that he held them. Mutual referred the matter for decision to its legal counsel. Rosenlund testified that he obtained assignments from some who had not given him such letters, and that he did not obtain assignments from others who had given him authorization to personally deliver the warrants.

11 The reason, as testified by Cushmore, was that the warrants were made out to the full number of rights to which these policyholders were entitled, but that they carried the rubber-stamp legend noting that the rights in excess of 1000 could not be exercised, assigned, or otherwise utilized. This, of course, was consistent with the prior waiver, and the regulation which the Board had adopted. Cushmore wanted Rosenlund to explain this to his customers.

12 Cf. Baird v. Franklin, 2 Cir., 1944, 141 F.2d 238, 244-245 (wherein the Court agreed Section 6(b) of the Securities Exchange Act of 1934, 15 U.S.C.A. § 78£(b), created a duty enforceable in private litigation, but the majority held that on the facts, no damage was traceable to the breach) ; Speed v. Transamerica Corp., D. C.D.Del.1947, 71 F.Supp. 457; Kardon v. National Gypsum Co., D.C.E.D.Pa.1946, 69 F.Supp. 512; see Notes, Implied Liability Under The Securities Exchange Act, (1948) 61 Ilarv.L.Rev. 858 (noting the absence of legislative history); New Civil Liabilities Under Securities and Exchange Act Rules, 14 U. of Chi.L.Rev. 471 (1947) ; and see 14 Minn.L.Rev. 531 (1948) .

13 “Warrants” and “rights to subscribe or purchase” fall within the definition of a “security” in Section 3(a) (10) of the Act, 15 U.S.C.A. § 78c(a) (10). It is interesting to note that under Pennsylvania decisions, a subscription for stock in a corporation to be formed is not a “purchase” or “sale”, but a subscription for stock in an existing corporation is: Bole v. Fulton, 1912, 233 Pa. 609, 82 A. 947; Schwartz v. Manufacturers’ Casualty Ins. Co., 1939, 335 Pa. 130, 6 A.2d 299, 122 A.L.R. 1045.

14 A report submitted by Schell suggested the alternative of participating policies or conversion. From the beginning, Schell opposed the former; but in early 1942, the Board decided upon it. Upon the further advice of Schell, in the fall of 1942, it rescinded the Resolution to submit the issuance of participating policies to its policyholders and authorized exploration of the matter of conversion. In April, 1943, the Board did authorize proceeding with the conversion.

15 See footnote 17, infra.

16 In Norris Tool & Machino Co. v. Rosenlund, 3947, 355 Pa. 560, 50 A.2d 273, one of Rosenlund’s assignors unsuccessfully sought to recover from Rosenlund on grounds of local law.

17 The issue of stock here involved was registered with the Securities and Exchange Commission pursuant to the requirements of the Securities Act of 3933, 35 U.S.C.A. § 77a ct seq. Aside from criminal penalties, Section 33 of the Act, 35 U.S.C.A. § 77k, affords a specific remedy for omissions, or untrue statements, of material facts in the registration statement to “any person acquiring such security” without knowledge of the untruth or omission. Section 30(a) of the Securities Act of 3933, 35 U.S.C.A. § 77j (a), requires the same statements in the prospectus as are required in the registration statement, with the exception of copies of certain documents. Section 7, 35 U.S.C.A. § 77g, requires that the registration statement include the information specified in Schedule A, 35 U.S. O.A. § 77aa. Section 32 of the Act, 35 U.S.C.A. § 771, provides a similar remedy to the purchaser against any person who sells a security, under certain conditions, by means of a prospectus or oral communication which includes an omission, or untrue statement, of material fact. Section 37(a), 35 U.S.C.A. § 77q (a> makes it unlawful to accomplish the sale1 of securities in such a manner as to operate as a deceit or fraud upon the purchaser. These provisions Undeniably give a right of action to the purchaser of such securities, and a “spurious” class suit is maintainable. Independence Shares Corp. v. Deekert, 3 Cir., 1939, 108 F.2d 51, reversed on other grounds 311 U.S. 282, 63 S.Ct. 229, 85 L.Ed. 189. But they afford no right of action to the corporation here inasmuch as it was not a purchaser.

18 See Note, SEC Action Against Fraudulent Purchasers of Securities, 59 Harv.L.Rav. 769 (1946).

19 The District Court adopted such a finding of fact upon the request of the defendants. (Defendant’s Request for Findings of Fact, No. 74.)

20 The plaintiff Slavin, according to the complaint, was entitled to rights to subscribe to % share of stock. She obtained 199% on the market. The plaintiff Talens, according to the complaint, purchased orí the market the rights to subscribe to 17 shares of stock. The intervening plaintiffs do not allege that they had been policyholders of Mutual.

21 Cf. Willock v. Dilworth, 1903, 204 Pa. 492, 54 A. 278. Where the issue of stock was illegal, and the right to preempt was not accorded stockholders, a cause of action might rest either in the stockholders as individuals, or in the corporation. See Shellenberger ,v. Patterson, 1895, 168 Pa. 30, 31 A. 943; Electric Co. v. Edison Electric Illuminating Co., 1901, 200 Pa. 516, 50 A. 164; Glenn v. Kittanning Brewing Co., 1918, 259 Pa. 510, 103 A. 340, L.R.A.1918D, 738, Ann.Cas.1918D, 769. In Shcllenberger v. Patterson it was also held that the stockholder cannot complain where it appears that no stockholder offered to take or was willing to take the stock at par, or that it would have sold for more.

22 The plaintiffs contended in the court below that the par value of the stock was fraudulently fixed at a price too high to permit policyholders to buy, yet low enough to permit the officers, directors, and Rosenlund, to afford large amounts, emphasis being placed on the local requirement that the capital of the new corporation could be fixed as low as $100,COO. 40 P.S. § 380(b). The explanation, however, is that, on advice of counsel, the capitalization was fixed at $1,000,000 on the basis of a local requirement that the expenses of the promotion, which here were approximately $80,000, could not exceed 10% of the capital. 40 P.S. Section 392.

The Securities and Exchange Commission, which has filed a brief as amicus, suggests that the officers and directors of Mutual were negligent in not preserving assets by prescribing a higher price for the securities to the public. But the availability of a better plan is no indication of fraud or- breach of fiduciary duty. United Milk Products Corp. v. Lovell, 6 Cir., 1935, 75 F.2d 923, 927, certiorari denied 295 U.S. 751, 55 S.Ct. 831, 79 L.Ed. 1696. The court is a harbor of refuge, not a repair shop. Even if it be assumed that the policyholders would not have approved the plan had they known of Rosenlund’s conduct, it was clearly not the price of the securities that caused the wrong. Moreover the suggestion, it may be observed, does not fit well on the particular plaintiffs in this case: see note 20, supra.

23 Fletcher on Corporations (Perm. Ed.) Sections 193, 194.

24 Cf. Berwick Hotel Co. v. Vaughn, 1938, 300 Pa. 389, at page 396, 150 A. 613, 71 A.L.R. 13-10, holding that the creation of a new corporation is inchoate until the articles of the corporation are filed.