HOLT v. ALLEGHANY CORP.
Legal provision: Writ Improvidently Granted
Argument of Stuart N. Updike
Chief Justice Earl Warren: Number 131, Margaret L. Holt, et al., Petitioners, versus Alleghany Corporation, et al.
Yes, and Number 132, Margaret L. Holt, et al., Petitioners, versus Allen P. Kirby, et al.
Mr. Stuart N. Updike: Mr. Chief Justice, may it please the Court.
Since I have two petitions to argue here, I would like subject to the approval of the Court to argue the basic case first, and the intervention problem second, because I think it will economize on my time and the Court's time.
Chief Justice Earl Warren: You may proceed in your own manner, Mr. Updike.
Mr. Stuart N. Updike: Thank you sir.
This action was begun to set aside for fraud the settlement of prior derivative actions.
The same relief here is sought that was demanded in those actions, that is the return to Alleghany Corporation of stock, as we say, illegally taken from its portfolio or damages measured by the value of that stock.
The prior actions were pending in the District Court for the Southern District of New York and the New York County Supreme Court.
They claimed among other things that the principal defendant here, Allen Kirby and three other officer, directors of Alleghany Corporation, acquired 48,000 shares of a Class A stock of investors diversified services from Alleghany's portfolio.
The stock was alleged in both the state court and the federal court to have been acquired by means of false and misleading proxy material in violation of Section 14 (a) of the Securities Exchange Act of 1934.
It was successful in gaining shareholder approval.
The prior actions also alleged that the same facts gave rise to a common law liability.
All of these actions were settled with judicial approval of the state court in December 1959.
Justice John M. Harlan: The basic action for both -- there was an action of the stockholders suit in the federal court and the stockholders suit in the state court?
Mr. Stuart N. Updike: Yes, Your Honor.
Justice John M. Harlan: And the ultimate settlement was made in the state court, (Voice Overlap)?
Mr. Stuart N. Updike: In the state court only, yes sir.
For convenience and speed in getting through fairly lengthy facts, I would like to divide my fact presentation into three-time groups.
One, the period of 1949-1950, when the self-dealing transaction took place; two, the period from 1954 through 1957 when these litigations were proceeding and discovery and in the direction of settlement; and finally, 1959 when the case was settled with New York State Court approval following which this action was brought.
And while this action was pending, it was brought on behalf of Alleghany by Murchison Brothers of Dallas, Texas and a man named Fossland (ph) in Chicago seeking to set aside these settlements on the grounds that I have stated but while this action was pending and in the course of a proxy contest, a -- the slate of Murchison Brothers succeeded in ousting Mr. Kirby's management and as a consequence of that, certain of what we call, the concealed material which we think was crucial to the determination of the liability involved that is when it was found.
Now, the self-dealing transaction came about like this.
In 1949, Alleghany Corporation after a good deal of careful study and on the recommendation of Mr. Kirby, and Mr. Robert O. Young, who was the Chairman of the Board of Alleghany Corporation, they acquired 85% of the voting stock of IDS.
IDS is the investment advisor of the largest mutual fund complex in the United States.
And in 1949-1950 it was also a highly leveraged investment company on its own.
IDS had in addition to its voting stock, Class A stock, the only difference being that the Class A stock had no vote.
And while control of the voting stock was being acquired, authorization was given by the Board to acquire some Class A stock as a long term investment for Alleghany.
In that manner, 48,000 shares were acquired at an average cost to Alleghany of $8.15 per share.
Upon acquiring control in April of 1949, Alleghany sent a man named Robert Purcell who was Vice-Chairman of its board and a Securities Analyst named Shipman to IDS and those men found at IDS that there was a regular year in, year out, month in, month out program of forecasting the income, forecasting the expense and finally forecasting the net earnings of the corporation.
As a result of those trips to Minneapolis where IDS had its base, one of the forecast that was found was a five-year forecast dealing with the years 1949 through 1953 and whereas the stock had earned a $1.25 in 1948, that was the year before it, Alleghany bought in the prognosis by ideas for its earnings was $4.59 for 1949, $5.67 for 1950, almost $8 a share in 1951 and over $10 a share in 1952.
With this information at hand, and on the 6th of December, 1949, a board of seven directors met, there were 10 directors of Alleghany but only seven were present.
And of that seven, four, well, Mr. Young, the Chairman of the Board; Mr. Kirby, the president; Mr. Purcell, the Vice-Chairman; and Mr. Anzalone, the Secretary.
All four of them of course were directors and they were needed for a forum and they formed a majority of the board at the meeting.
At the suggestion of Mr. Young, it was resolved that Alleghany offer to the officer, directors, the opportunity to acquire 48,000 shares of this stock at the average price to Alleghany in exchange for turning in Alleghany preferred stock at market value.
After that meeting -- oh, this was made subject to stockholder approval at the stockholders annual meeting on May 3rd, 1950.
But between the date when this stock opportunity was voted and the date of the shareholders meeting, additional projections were prepared, additional projections came to the attention of Mr. Purcell, Mr. Shipman and as we contend to Mr. Young.
In some respects, we know from the court below that some of them came to Mr. Kirby.
Those projections indicated that for 1950 itself, these shares being offered to these directors for $8.15 as a whole purchase price, these shares were expected to earn over $20 per share and that in the five-year period of which 1950 was the first year, in no year would be the earnings be less than $13 per share and the average earnings were almost $18 per share.
Now that, if the Court please, is the posture with respect to the so-called inside information as we charge, and of course, none of these information was ever disclosed in the proxy material.
That is the transaction that all of the judges of the Court of Appeals held was illegal because it violated fundamental principles against self-dealing.
They all concluded that the proxy material was false and it was misleading especially in its omissions.
In 1954, more than 20 derivative actions were brought against the insiders on Alleghany's behalf.
Some eight different cause of action were alleged in the New York cases, one of which was one based on this transaction, and that's the only transaction that we bring before this Court.
It was the insider's fraud as we claim in achieving a settlement of those actions that this case derives.
Ten of those actions were instituted in New York State and they were consolidated under the caption Zenn against Anzalone.
Ten parallel actions in the Southern District of New York likewise were consolidated under the same caption and Abraham Pomerantz who perhaps is the best-known man in the field of derivative stockholder litigation was named as general counsel for all of the plaintiffs in both the state court and the federal court in the consolidated action.
Mr. Kirby was a citizen of New Jersey and he was named as a defendant but he was not served in the state court action.
The plaintiffs here holds however, were able to bring him into the federal court action, as we call it, Zenn federal by saving him extra territorially under the Federal Securities Acts, he appeared in the federal case, was represented there by counsel and that case is still pending in the Southern District Court, not dismissed.
Both the complaints in the state court and the federal courts specifically referred to Section 14 (a) of the Securities Exchange Act in alleging that they had -- that the shareholder vote had been achieved by the use of force and misleading proxy statements.
The Pomerantz led group commenced discovery in Zenn federal and as part of that discovery, Pomerantz demanded any and all forecasts and projections of IDS earnings prepared by or for the use of Alleghany or IDS and although those -- such projections did exist, and at least three out of the four insider defendants knew it, none were produced among the thousands of papers.
Thousands of papers were produced for Mr. Pomerantz's firm and for the other plaintiffs' lawyers in these cases, but none of these were produced, and Mr. Pomerantz so testified in the court below.
His proceeding -- discovery proceedings were interrupted by an offer of settlement from the defendants.
And unaware of the existence of these projections, Pomerantz reached a settlement of this and of other causes of action for an aggregate sum of $700,000.
I will deal more fully with this in a few moments but at page 1359 of the record is a replica of a longhand letter.
Justice Byron R. White: What volume is that?
Mr. Stuart N. Updike: This is in Volume 4 sir, page 1359.
It's a replica of the letter and I draw attention to its date, July 27, 1954, this is some months after the commencement of the derivative litigation that I've just referred to.
It's a letter from Mr. Purcell to Mr. Robert Young.
And he transmits with this letter in completion of Mr. Young's talking with Mr. Pomerantz, the counsel for the plaintiffs in these shareholder cases, he transmits to Mr. Young one of the projections which had it been shown would have demonstrated that the stock would -- was believed in 1950, in January or February of 1950, was believed to be about to earn $20 a share and that is the subject -- thank you -- that is the subject of this letter and I shall deal with it more fully in a few moments.
Although the discovery had been conducted in Zenn federal, the settlement was taken to the New York State Court for submission and for approval.
Now, about this time, a competing group of Alleghany shareholders led by a man named Randolph Phillips and a lawyer named Graubard instituted an overlapping derivative action in the Southern District which was captioned Breswick against Briggs.
They obtained an order in the Breswick case which stayed the use of the Pomerantz settlement by the defendants in these Pomerantz -- in the Zenn cases.
They stayed the use of any settlement negotiated with Pomerantz with which excluded negotiations with the Breswick plaintiffs and their counsel.
And Judge Dimock later was to refer to that order, that state order, as creating a veto in the Breswick plaintiffs over the Zenn settlements.
Now, this Graubard-Phillips group appeared in the state court to oppose the settlement negotiated by Pomerantz and the state court referred the matter to a Referee to hear and report on its fairness.
In this posture, the state court Referee hearings began after the fairness of the settlement.
The Pomerantz of course, claiming that it was fair; Graubard claiming that it was unfair.
But both of them were proceeding in ignorance of what we now know to have been extensive forecast and projections of income that were available to the insiders.
The issue before the Referee was stated by him, thus, was there substance to the shareholder claim that the upward surge of IDS earnings was foreseen to or foreseeable by the insiders.
Was there substance to the claim that the proxy material was false and was misleading?
Now, Mr. Graubard pursued these issues relentlessly and unsuccessfully over 35 hearing days extending over some three months, he repeatedly reiterated Mr. Pomerantz's demand for forecasts, for projections, for earnings, for financial records in either of those categories but he never got to see the projections that are before this Court and in this record.
In Volume 3, at page 1104 appears the five-year forecast beginning in 1949 and running through 1953.
I referred to earlier, this was sitting in the files over time and it shows in 1953, I've given the Court the other figures that by 1953 these shares were expected to earn over $12 a share.
That by turning in the same volume to page 1121 -- we have, I'm sorry to say the reproduction is not very clear.
But it still can be figured out.
We have the five-year period beginning 1950 and running through 1954, and there as the Court will see for the year 1950 the projected income is $7,100,000 which is over $20 a share and almost $300,000 shares outstanding.
And for the next year, it's $18 then $13 and then $15 and then $18 again.
In addition to these projections, the records showed that actuarial studies had been made with a view to determining whether IDS was going to be able to meet its obligations on time, studies of cash flow and again, each one of those actuarial studies was related to the forecast to which I've just drawn the Court's attention.
In addition to these great --
Unknown Speaker: Excuse me, may I?
Mr. Stuart N. Updike: In addition to these five-year projections, I'd like to draw the Court's attention to page 1136 which is a one-year projection and it's done my months.
It's for the year 1950 and in the lower right hand corner appears the date, April 14, 1950, that's three weeks before the shareholders' meeting was due to take place and two weeks before the supplementary proxy material required by the Securities and Exchange Commission was sent out.
Justice Byron R. White: Was this (Inaudible) this was never disclosed?
Mr. Stuart N. Updike: Never disclosed sir.
Justice Byron R. White: And there was no mention (Inaudible)?
Mr. Stuart N. Updike: No sir.
I know my adversaries will contend, not these were present for that one -- an ingenious lawyer might have been able to put together some of these conclusions but I will deal with that too sir, if I may, in a few moments.
Mr. Graubard testified below that he had (Inaudible) -- he had seen all of the Alleghany files.
Well quite obviously, what he necessarily meant was that he believed he'd been given the opportunity to see all of the Alleghany files because he couldn't know what's fact, that he'd seen them all.
So when I showed him these five-year projections, and he saw that stock being bought at $8.15 was due to earn $20, $18, $15 over the next ensuing years, he said, “Had I seen anything like those earnings so high, I would have introduced it had I known.”
Now, it is our claim that one cannot believe on this record that these documents were ever made available to men of the ability and background of Mr. Pomerantz and his partners, Mr. Graubard and his partners, there were 20 sets of lawyers who went over these papers to whom they were made available.
Justice Byron R. White: (Inaudible)
Mr. Stuart N. Updike: I beg your pardon, sir?
Justice Byron R. White: And not made available to the judge.
Mr. Stuart N. Updike: And not made available to the judge or the Referee.
And one of the best proofs of this in my judgment is that Mr. Graubard kept asking for these forecasts and not once over a period of several months, not once did any lawyer representing the defendant say, “Why Mr. Graubard, we gave you those.
Mr. Graubard, don't you remember that you had those?”
They never were given.
Now, if the Court please, in addition to this and I will only touch it very lightly.
Justice Byron R. White: Well what did the --
Mr. Stuart N. Updike: Mr. --
Justice Byron R. White: What did the District Court or the Court of Appeals (Inaudible)?
Mr. Stuart N. Updike: They -- the District Court took the view that many, many papers had been given as to whether these particular ones had been put before them.
He made no specific finding.
Now the Court of Appeals took the view that not reaching that question that these documents were not material in the sense that they would not -- applying the rule of ordering a new trial on the basis of newly discovered evidence.
They would not probably have changed the result in the mind of the Referees.
Now, in our view, a -- an examination of them clearly indicates that had these been before the Referee, he would have.
He couldn't possibly have found the way he did which was to approve the fairness of the settlement at $700,000 but even if I'm wrong about that, we argue to this Court that the proper test is not the test for ordering a new trial on the basis of newly discovered evidence where probably would change the result as to usual tests.
We urge here the test that was suggested by Judge Friendly in his dissent, is there any fair basis for believing that these might have changed the result and by that test of course we fairly think that they would have changed that result.
Justice William J. Brennan: Well, Mr. Updike.
Mr. Stuart N. Updike: Yes sir.
Justice William J. Brennan: If the test were -- would follow this change in the result, what scope of their review that that judgment in the Court of Appeals assuming the test they applied was (Inaudible)?
Mr. Stuart N. Updike: Well, if the Court please, I think it's a question of law for this Court to decide whether the proper test was applied because --
Justice William J. Brennan: I'm assuming if I may for a moment --
Mr. Stuart N. Updike: Yes sir.
Justice William J. Brennan: -- without intimating at all -- I mean, disagreeing with you about it.
They did apply the test, would probably change the result.
Mr. Stuart N. Updike: Yes sir.
Justice William J. Brennan: And my question is, when they apply the judgment in this record that it would not probably change the result.
Now, my question is, if that were the correct tests, what scope of our review was that judgment?
Mr. Stuart N. Updike: I think the scope of your review on the judgment is as to whether their being a federal cause of action, being subject to the settlement that this Court has the power to determine the criteria by which that settlement shall be either set aside for fraud or not set aside for fraud and that --
Justice William J. Brennan: Or that -- was that -- are we then to do -- hold again the job that the Court of Appeals did?
Mr. Stuart N. Updike: Well, I think that this Court can review again the criteria that were applied by the majority in that case.
Justice Byron R. White: Yes, but what is -- what if the criteria were correct?
And what if the rules they applied were really correct?
And Mr. Justice Brennan asked, why should we second guess the Court of Appeals in reviewing this essentially questions of -- out of the evidence?
Mr. Stuart N. Updike: Well, they -- it -- if I get the Court's question, and perhaps I don't get it clearly, but this Court is sitting in review of a determination by the Court of Appeals where the Court of Appeals did not seek to apply what I called federal criteria --
Justice Byron R. White: Well, I didn't --
Mr. Stuart N. Updike: -- to this issue.
Justice William J. Brennan: Oh, the question Mr. Updike, is suppose we disagreed with you on that point --
Mr. Stuart N. Updike: Yes.
Justice William J. Brennan: -- and suppose we conclude that the Court of Appeals did indeed apply the correct criteria, and my question is, how far do we review their application of those correct criteria?
Mr. Stuart N. Updike: Well, I -- it seems to me that if this Court can conclude that this was fairly erroneous that it should so rule.
Justice Byron R. White: Well, now, where -- did the Court of Appeals say what the origin was of the rule that was applied?
Did it say it was federal law or state law or was it wholly silent?
Mr. Stuart N. Updike: It was wholly silent.
It did not --
Justice Byron R. White: And the -- what do you -- do you suggest that the Court of Appeals was applying state law rather than federal law?
Mr. Stuart N. Updike: No.
I suggest that the Court of Appeals, the majority of the Court of Appeals was applying what might be called federal common law according to which views but not the lower -- the policy of which has been determined by this Court with reference to the federal securities statutes.
Justice Byron R. White: Let -- aside from the federal securities law, would you say this would be a federal question or a matter of state law?
Mr. Stuart N. Updike: I think that this would be a matter of state law aside from the federal question, unless one can agree that there is --
Justice Byron R. White: (Voice Overlap)
Mr. Stuart N. Updike: -- such a thing as a federal common law then it would be a matter of state law.
Justice Byron R. White: But aside -- you say that this is the federal statute, the federal securities laws --
Mr. Stuart N. Updike: Yes sir.
Justice Byron R. White: -- which make this a federal question rather than a state law question.
Mr. Stuart N. Updike: Because a federal cause of action was the subject of the settlement and this Court has repeatedly held that where a cause of action federal in nature is being settled, the criteria for the settlement are to be derived from federal considerations and not based on state considerations.
Justice Byron R. White: And so the federal standard of disclosure should apply.
Mr. Stuart N. Updike: Yes sir.
In other words what we say --
Justice Byron R. White: And is it the same standard for disclosure in the settled -- in the process of settlement as it is in the process of buying the stock?
Mr. Stuart N. Updike: That's precisely our argument.
That is the disclosure which should have been made to the shareholders in the first instance.
It's precisely the disclosure that should have been made to the Referee and indeed to the federal court in New York when the federal court was asked to lift its injunction and I would ask if I may to get the Court to turn to that --
Justice Byron R. White: Yes, but, well on the sense, may I get it?
You're saying the Court of Appeals has simply applied a wrong standard to (Voice Overlap) --
Mr. Stuart N. Updike: Yes sir.
Justice Byron R. White: -- to this question, namely that the -- that (Inaudible) -- the question of actuality rather than probability.
Mr. Stuart N. Updike: The state court deferred -- I mean the District Court deferred to the state rules.
The Court of Appeals did not do that.
Justice Byron R. White: Did the District Court did?
Mr. Stuart N. Updike: The District Court turned to the state for its guidance.
It went to this -- New York state cases with respect to the so-called in -- extrinsic-intrinsic fact rule in determining whether or not one could set aside the judgment for fraud.
But on appeal, the Court of Appeals --
Justice Byron R. White: Didn't say which --
Mr. Stuart N. Updike: -- did not do that.
Justice Byron R. White: It didn't say which it was applying, did it?
Mr. Stuart N. Updike: No.
It did state -- Judge Kaufman stated that principles of comity and institutional maintenance I think is what he called it, the idea of being but one shouldn't idly and easily disturb a New York State Court judicial determination.
So he -- in that sense, he vowed as a matter of comity to the state court but he did not go out and apply New York state law to the issues.
Justice Byron R. White: What makes you -- what makes you think the federal rule is the rule you -- the federal rule is as you announced it?
Mr. Stuart N. Updike: Well, the federal rule as I announced it, I derived from the cases that this Court has decided in construing Section 14 (a) and in construing other aspects of the Federal Securities Act.
Justice Byron R. White: So you say essentially the stockholders action, the original stockholders action is a suit under 14 (a)?
Mr. Stuart N. Updike: Yes sir.
It's right in the complaint and both in the state court and in the federal court.
Now, in the state court, when the matter came up for settlement, and Mr. Graubard and Mr. Phillips opposed confirmation in part on the ground that the federal court had exclusive jurisdiction of the cause of action under Section 14 (a) but at that point, the New York State Court was asked to and it did construe the allegations identifying 14 (a) in a state case as being a mere X questions and could be disregarded in connection with the approval of the settlement.
But the 14 (a) identification is clear in the Zenn federal case and that case of course is still pending --
Justice Byron R. White: What's the -- what (Voice Overlap) --
Mr. Stuart N. Updike: -- in the District Court.
Justice Byron R. White: What case gives the stockholders the right to private actions under 14 (a)?
Mr. Stuart N. Updike: Case against Borak, isn't it?
Justice Byron R. White: Is that a 14 (a) case?
Mr. Stuart N. Updike: Yes sir.
It held squarely that it gave rise to a derivative right and a private right and the shareholder.
Now, returning briefly to the picture before the Referee, the -- Young and Purcell testified, Mr. Kirby did not.
When Mr. Young and Mr. Purcell testified, they testified in terms of what oblique future ideas had in the spring of 1950.
They testified that it was underwater, that it was a dog, they used all of the deprecating words that man skilled in finance can used with respect to a corporation.
And all of the time, as we contend, they had in their back pockets the information that we say should have been before the Referee and I now return if I may to that letter.
Unknown Speaker: The 1359?
Mr. Stuart N. Updike: Yes sir, 1359.
Letter from Mr. Purcell to Mr. Young, “The enclosed, dear (Inaudible) -- the enclosed letter from Mr. Waag.
Now, Mr.Waag is the Vice President and Comptroller of IDS, the man in charge of its fiscal records.
“The enclosed letter to Mr. Waag with accompanying material is information relating to 1949 versus 1950 income.
That is folded in line with our talk following your meeting with Pomerantz.
I suggest that you note among other things on page 2 of the income account attached to the comments on operations for December 1950.
That income from operations, i.e., before taxes or capital transactions had been projected at $5,992,000.
That figure had been projected at.
That figure is over $20 a share.
But it turned out to be $8,600,000 which is over $25 a share.
I draw the Court's attention to the following observation by Mr. Purcell.
This may not be too helpful.
Now, this is in contemplation of a talk between Young and the plaintiff's counsel.
This may not be too helpful especially since the income for the proceeding here was a $1.5 million which is a little bit over $4 a share.
Now, if the Court please, Mr. Waag had sent three enclosures in his letter to Mr. Purcell.
Mr. Purcell sends Waag's letter and those three enclosures with this longhand letter that I just read to the Court.
Two of the three enclosures that came from Mr. Waag to Mr. Purcell were innocuous.
They contained information that was generally available and those two enclosures were produced.
They were given to the plaintiff's counsel.
They were introduced in evidence before the Referee.
But the piece of paper that contained the projection of $5,900,000 never found its way in that case at all.
The state court proceeded to confirm the Referee's report subject to the state that the Breswick plaintiffs had.
In September 22, 1959, Judge Dimock handed down a decision in which he declined to vacate the stay.
He had been asked to do so in order to pave the way for the approval of the state court settlement.
He declined to do so in stating that the adequacy of the settlement in his view had not been completely probed.
Following that, the defendant Ireland who had been working for the New York Central informed Mr. Kirby that he was going to be called as the first witness on the new hearings that had been ordered by Judge Dimock.
He also told Mr. Kirby that Mr. Young had figured himself in the state court proceedings, the settlement hearings and that this would undoubtedly be brought out on the new hearings.
Mr. Kirby immediately turned to his lawyers.
They also represented Alleghany incidentally.
He turned to his lawyers and asked them for their opinion as to his maximum outside liability if everything went wrong.
And they advised him that his potential personal liability arising out of this transaction totaled $62 million.
Now, spurred by that advice, Mr. Kirby authorized the commencement of new settlement negotiations which he carried on through Mr. Ireland who by this time had become an officer of Alleghany Corporation and Mr. Ireland negotiated with Mr. Phillips who was a representative of the plaintiff's counsel.
And as a consequence of their negotiations before the end of 1959, a separate settlement from Mr. Kirby had been worked out by his paying an additional $1,100,000 beyond the $125,000 which was his share of the prior $700,000 figure.
Now, in connection with the presentation of this, Mr. Kirby retained new counsel.
His former counsel were representing the Estate of Robert R. Young and the Robert R. Young Estate was not settling so Mr. Kirby retained new counsel.
And at the same time, it developed -- there was a need to have counsel for Alleghany and at that point, Mr. Ireland, a lawyer, became Alleghany's counsel in presenting this settlement to the United States District Court for the Southern District.
Now, he is the man who negotiated the settlement on behalf of Mr. Kirby and in that connection, the testimony below was -- there was testimony below that Mr. Ireland with the approval of Mr. Kirby offered $45,000 a year for 10 years and a position to Mr. Phillips to induce him to take the settlement offer.
The District Judge however found that Mr. Phillips rejected the bribe offer.
Mr. Ireland representing Alleghany, the Graubard plaintiffs having now become satisfied with the new offer, they will join hands as Judge Friendly said at his dissent below and went before the Court and Judge Dimock left it to stay.
They went to the state court and the state court made its settlement -- its order approving the settlement final.
Nothing was done then and nothing has been done since to remove Zenn federal from the row in the United States District Court for the Southern District and in that connection, there may be a technical problem.
First, if the Court please, we think that Mr. Kirby would like to have the benefits of this settlement without accepting the responsibilities for the concealments that made it possible.
Now, I have been charged as having abandoned any claim against these defendants in the -- or at least against Mr. Kirby and against Young and Purcell in connection with the trial of this case in the District Court, because I did say I didn't know who did it.
I didn't know who was responsible for these concealments but I didn't abandon the fact that they were the concealments or that Mr. Purcell and Mr. Young testified with respect to areas where they obviously had to have knowledge such as indicated by this letter and where they -- never made the disclosures.
So this was argued to the District Court, it was argued in the post trial brief to the District Court and of course it was argued in the court below.
Justice Byron R. White: Did Pomerantz testify?
Mr. Stuart N. Updike: Yes he had testified in this case and he said he had never laid eyes on these documents that I've -- I have identified to this Court as being what we call the crucial documents.
Justice Byron R. White: (Inaudible)
Mr. Stuart N. Updike: The question was not asked.
Unknown Speaker: (Inaudible)
Mr. Stuart N. Updike: Beg pardon?
Unknown Speaker: (Inaudible)
Mr. Stuart N. Updike: No, it was received in evidence at least -- the testimony was received by the Court but as to whether he was asked whether it would make any difference, we have the best testimony of all, it was Mr. Graubard who said, “Had I seen these, had I known these ratios, I would have put it in, had I known.”
Justice Byron R. White: (Inaudible)
Mr. Stuart N. Updike: That question was not asked.
Justice Byron R. White: (Inaudible)
Mr. Stuart N. Updike: Or Mr. Pomerantz either.
In our view, these documents are so shocking that we have to ask ourselves whether the shocking character of it -- of them does not in itself persuade that the same result could not have been achieved.
As a matter of fact, if the Court please, bringing your attention back to the -- just the one year projection.
Yes, I have it right here.
It's at page 1137 of the record.
I asked this Court if you had been Judge Dimock and you were being asked to lift a stay and that after you had made a decision requiring them to go back and have more hearings, and you come in with a new settlement -- they come in with a new settlement proposal and you are sitting there being asked to lift to stay and somebody quietly gave you this exhibit which showed that in 1950, it was projected that this company would earn $20 a share.
I'm sure that no judge on this bench and no lawyer in this courtroom would have allowed this case to go through on the basis that it did.
The earnings alone are three times the purchase price of the stock.
Justice Byron R. White: The Court of Appeals did, (Inaudible)?
Mr. Stuart N. Updike: I beg your pardon.
Justice Byron R. White: (Inaudible)
Mr. Stuart N. Updike: No, the Court of Appeals in my view having found that it was illegal and having found that it was false and misleading as far as the information was concerned the Court of Appeals then went on to say, “Well, we don't think that all of these documents would really have probably changed the result.”
And in so doing, the Court of Appeals felt in my judgment into the error of looking for example at the exhibit that when it was concealed when the material from Young's letter was supposed to be put into the case, the two innocuous exhibits are put in.
The one important one contained actual figures for 1950.
They also contained the projection for 1950.
And because actual figures for 1950 were in the document, Judge Moore says, “Well, this was obviously prepared after 1950.”
And in consequence, he bypassed the significance of the projection for 1950.
Now, I have urged the Court that this is a case requiring disclosure and that the same standards for disclosure should follow through litigation and follow through settlement because -- it's time for recess.
Chief Justice Earl Warren: (Inaudible) your sentence.
Mr. Stuart N. Updike: Thanks.
Chief Justice Earl Warren: Just finish your sentence.
Mr. Stuart N. Updike: It should follow through settlement because if, as the District Court held, a director who was engaged in self-dealing suddenly loses his obligation to make disclosure because a litigation has been commenced against him, that we think is an invitation to reward oneself by nondisclosure.
We think it's a very serious loophole in the law if that continues to be the rule.
Chief Justice Earl Warren: We'll recess now.
Mr. Updike, you may continue your argument.
Mr. Stuart N. Updike: Thank you Mr. Chief Justice.
At the opening -- in the beginning of the recess, I was dealing with the duty of disclosure as we conceived it to be and indeed we think that that is where the Court of Appeals did go wrong in holding as it did that a -- as soon as a self-dealing director is sued by a shareholder, his duty of disclosure ceases.
He becomes an ordinary adversary in litigation.
This is true even where the subject of the cause of action is a charge of a violation of Section 14 (a) of the 1934 Act.
Justice William J. Brennan: Mr. Updike, --
Mr. Stuart N. Updike: Yes sir.
Justice William J. Brennan: -- frankly what is the definition of the federal being (Inaudible).
Mr. Stuart N. Updike: Well, I would define it with reference to a self-dealing transaction.
Now, I realize we're in a broad area here where directors perhaps could be sending out proxy material with respect to a subject matter where later on the charge instead of being self-dealing might be ways of mismanagement or some just charges that.
But where self-dealing is involved, in my judgment the disclosure that must be made to the Referee and the courts is measured by the amount of the disclosure that was necessarily to be made under the statute to -- in the first instance, when seeking the shareholder approval and that means in this instance that all of the inside knowledge that these directors had with respect to future earnings should have been disclosed or they shan't be able to keep the stock that they took.
Justice Byron R. White: Well not all of the courts said -- all the courts apparently agree with you that there was not adequate disclosure.
Mr. Stuart N. Updike: Yes sir.
Justice Byron R. White: In the original proxy material.
Mr. Stuart N. Updike: That is correct.
Justice Byron R. White: And if you were -- and if they had it -- had agreed with you that the same standard applied before the Referee and in the settlement, do you claim that there must be a reversal here?
Mr. Stuart N. Updike: Yes sir.
And I claim that it was clearly erroneous on the part of the Court of Appeals to have found the way they did with respect --
Justice Byron R. White: But they didn't even -- but you must -- you claim that they didn't even apply the right standards?
Mr. Stuart N. Updike: I think that also was true --
Justice Byron R. White: They didn't apply it --
Mr. Stuart N. Updike: -- with respect to disclosure.
As Judge Friendly said that when Mr. Kirby is dealing with his own corporation in settlement in 1959, he's just as much on the opposite ends of a self-dealing transaction as he was in 1949 when he helped to vote himself to stock.
And indeed, it is interesting to note that Judge Kaufman agreed with Judge Friendly in the court below with respect to whether Mr. Kirby can escape liability for the return of these shares by reason of his not having directly imputed to him the knowledge of the specific contents of all of these documents because Judge Kaufman said in terms of its reliability as a fair and genuine adjudication of the adequacy of the settlement.
The Referee's approval would seem to stand on no firmer grounds merely because the fraud which kept material documents from the attention of the Zenn plaintiffs may not be directly imputed to Kirby.
Judge Friendly in handling this question of disclosure said, “When a self-dealing director seeks to extinguish the corporation's claim against him, he is dealing with the entity who's interest had been entrusted to him just as much as in the earlier transaction that I see no reason why their obligation of fair dealing and full disclosure to a court passing on the settlement should be one with less than their previous duty to disinterested co-directors and to the stockholders.
Chief Justice Earl Warren: Mr. Updike, may I ask what your answer is to the footnote of Judge Kaufman to the fact that if the applicants are aggrieved by any possible wrongdoing of the Board of Directors in deciding to terminate the litigation, the District Court's denial of intervention does not preclude a derivative suit based on such crimes.
Mr. Stuart N. Updike: That is in the intervention side of my argument.
And I haven't quite gotten there sir.
Chief Justice Earl Warren: Well, you're almost finished (Voice Overlap) --
Mr. Stuart N. Updike: I (Voice Overlap) --
Chief Justice Earl Warren: -- that's the reason I asked you.
Mr. Stuart N. Updike: Well, the clerk had told me that I had 16 minutes --
Chief Justice Earl Warren: Well, I think that's right.
Mr. Stuart N. Updike: And I'm -- I will pass if I may.
Chief Justice Earl Warren: Well, I don't -- do it your own way Mr. Updike.
Mr. Stuart N. Updike: I will answer it sir.
Chief Justice Earl Warren: Okay.
Mr. Stuart N. Updike: One argument that has been made at great length here and which impressed the court below, is that no director should be under a duty to ferret out information against him and that phrase ferret out is used over and over again in the District Court's discussion as well as in the majority of the Court of Appeals but we're not confronted with that here because Mr. Kirby was not served as I pointed out in the state court action although he was a proponent of the settlement, he wants to get the benefit of that settlement.
He wasn't served.
But he was served in the federal action.
And in the federal action was where the demand was made on his attorney that called for the production of these documents.
So the issue as to Mr. Kirby is a not a realistic one.
He was required by legal process to come up with such documents as he could control.
Now, if I may, I will turn to the intervention point.
And this as I point out, the suit began in September of 1960.
There came a time, a year and a half later when Alleghany itself took over the litigation.
That state of affairs continued through the trial and a decision after the dismissal in the District Court was taken to appeal to the Court of Appeals from so much of the decision as was predicated on a dismissal of the complaint based on this concealment charge.
When we came to argue that in the Court of Appeals, Mr. Kirby's counsel applied for a day certain for argument, early in December of 1963 for the reason that he had acquired by purchase control of Alleghany Corporation but that control had not been formalized at any shareholders meeting and in order to have the posture as he thought it correct, he said to the Court, we'd like to have a day certain for argument because on 4th of December, at a special meeting of shareholders at Alleghany, control of Alleghany will pass directly into the hands of the plaintiff-appellee, Kirby.
Now, the case was argued.
It was decided about five months later, 2 to 1 with Judge Friendly dissenting.
At the conclusion of Judge Friendly's dissent -- at the conclusion of Judge Friendly's dissent, the last sentence reads, “Since Kirby has regained control of Alleghany Corporation, I would instruct the judge to make provision for the continued prosecution of the action free from any control by the present directors.
In that posture of the case, with Mr. Kirby at -- by this time, in fact in control, I apply to the Court of Appeals for instructions to me and to my framers, officers of the Court in the circumstances they are presented.”
While that application for guidance was being considered, Alleghany itself asked our views, we gave them, they authorized us to make an application for rehearing en banc.
That rehearing en banc was granted 4 to 3 and we were authorized to proceed to rebrief the case.
That was 4 to 3 because as this Court will recall, it's a nine-judge court but Judge Lombard disqualified himself and Judge Clark had died earlier that year.
While the case was being briefed, the person appointed Judge Anderson to fill the vacancy period by the Deputy Judge Clark.
The case -- the briefs were submitted.
The Court took it under advisement on the 12th of January of last year.
The Court came down with a 4 to 4 split.
At that time, again, we were asked for our views this time to write a letter to Alleghany.
We gave our views urging that an application be made to this Court for certiorari.
The Alleghany in addition to asking our views took the views of Mr. Hughes' firm will be far as to independent guidance and that firm did not take any position with respect to the merits but advised the directors that whether they voted for or against the authority to my firm, they would not be personally liable.
Accordingly, the directors voted with Mr. Kirby and his sons I believe absenting themselves and one director abstaining and they declined to authorize us to proceed.
That was not a publicized decision of the Board of Directors.
Some two months later, just shortly before our time to do anything about it would have run out, the interveners here, Mrs. Holt and Ms. McMahon learned of the development of the refusal of the Alleghany Board to go forward with an application for certiorari and they authorized us three or four days later to bring this application.
The record shows that they own an aggregate of about $60,000 market value of Alleghany stock.
The District Court declined the application under the rule and the rule itself just set forth at page 3 of my brief says, “Intervention as a right upon timely application anyone shall be permitted to intervene in an action when the representation of the applicant's interest by existing parties is or maybe inadequate and the applicant is or maybe bound by a judgment in the action.
Now, I don't think there's any dispute here that had -- that had the -- excuse me -- yes, okay.
I don't think there's any dispute here that had the application of this Court not been made, these intervener's rights would have been bound by the result of the case.
That is the resulting action from the Board of Directors not authorizing the application.
Next, intervention of right upon timely application, we think that the application clearly was timely because they took their action within three or four days following their learning of the non-action, if you will, by the Board of Directors.
We don't think that timeliness is due to start at the point where Mr. Kirby came back into literal stockholder control or as long as this litigation was being pressed forward, the -- these intervener's rights were being represented in the litigation.
And when the election was made not to go forward, their representation ceased so far as the litigation is concerned and if representation here means representation by the Board of Directors, then we submit that every member of this Board of Directors owed his presence on that board to the suffrage of the majority stockholder of Alleghany Corporation and the principal defendant responsible if we're right with respect to this action.
Justice Hugo L. Black: May I ask, if your argument is based on the theory that there is fraud here and that you do not have to begin a suit for fraud, if you've been -- if it's been concealed from you until a reasonable time after the fact is discovered.
Mr. Stuart N. Updike: That would -- that's the normal rule with respect to fraud but in this instance, we don't have any statute of limitations problem here.
I don't believe because these --
Justice Hugo L. Black: You were just saying though that it was timely in giving the reasons.
Mr. Stuart N. Updike: Yes sir.
Justice Hugo L. Black: I thought that was the reason you were giving.
Mr. Stuart N. Updike: No.
Justice Hugo L. Black: Maybe I misunderstood you.
Mr. Stuart N. Updike: In -- with respect to the intervention sir?
Justice Hugo L. Black: Yes, timeliness.
Mr. Stuart N. Updike: Was far as timeliness is concerned, in our view, it is timely where no intervening rights have been prejudiced by the passage of time and whether we take the time when Mr. Kirby came back into control of Alleghany or the time when the ladies first learned about it or at the time when the board declined to take action and none of those intervals was there any prejudice to any rights of Alleghany or to the rights of any litigant in that case, and in that sense, the application clearly was timely.
Justice Hugo L. Black: Suppose there had been prejudice and you -- yet you charged that the -- you kept from doing it earlier because of fraud and you didn't discover it until then, what would say then?
Mr. Stuart N. Updike: Well, I think that the usual rule with respect to fraud is that the time starts to run when the fraud is discovered.That would certainly be the normal rule.
Chief Justice Earl Warren: Is there any question of fraud in the case?
Mr. Stuart N. Updike: In what sense?
We claim that the failure --
Chief Justice Earl Warren: Did you -- did you --
Mr. Stuart N. Updike: I beg your pardon, sir.
Chief Justice Earl Warren: Did you allege fraud?
Mr. Stuart N. Updike: Yes sir.
It is our claim that the failure to produce documentation when under a duty to do so is a nondisclosure and nondisclosure where there is a duty to disclose is one well-known form of fraud.
Justice Potter Stewart: But on the -- on this branch of the case, Mr. Updike, on this decision not to petition for certiorari, you don't claim any fraud (Voice Overlap) --
Mr. Stuart N. Updike: No we do not, no sir.
Justice Potter Stewart: -- in that decision, do you?
Mr. Stuart N. Updike: We do not claim any fraud on the part of the Board of Directors in acting as it did --
Justice Hugo L. Black: I understood you were reading letters however with the purpose of claiming if they had told you that they concealed from you the facts which you had known you would apply due action, or you would have proceeded quicker, was that right --
Mr. Stuart N. Updike: (Voice Overlap)
Justice Hugo L. Black: -- or wrong?
Mr. Stuart N. Updike: No, those letters had they been known would have resulted in a different result in the case back in my judgment --
Justice Hugo L. Black: (Voice Overlap)
Mr. Stuart N. Updike: -- the 1954 and 1955.
The intervention aspect of this only arises because Alleghany took over the litigation itself.
Having been started derivatively Alleghany took over the litigation then there came a time when Mr. Kirby resumed literal actual control and at that point, we say, when it's controlled by a Board of Directors selected by, nominated by and voted in by him, that is a sufficient showing of lack of representation where he is the principal defendant in the action.
That is a sufficient showing of inadequacy of representation to bring us within the rule.
Chief Justice Earl Warren: Well, at any place, did you allege fraud as such?
Mr. Stuart N. Updike: We alleged fraud?
Not in relation to the intervention, no sir.
We alleged fraud in the main case, the one that I argued this morning, yes sir, it's a charge of fraud on the part of the defendants as to how they got this stock.
Justice Byron R. White: Well, isn't the -- why shouldn't your obligation to intervene or why shouldn't the notice to you that representation might be inadequate?
Why shouldn't that notice date from the time Kirby took over Alleghany again?
Mr. Stuart N. Updike: Well --
Justice Byron R. White: Instead of -- because you waited 16 months after that, didn't you or some period of time?
Mr. Stuart N. Updike: Well --
Justice Byron R. White: How long was it between the time that Kirby took over the company again and that there was a decision not to apply for certiorari?
Mr. Stuart N. Updike: About a year, I would say, a little more than a year.
He took over control on the 4th of December of 1963.
The case was under consideration by the Court of Appeals until about May of 1964.
Justice Byron R. White: (Inaudible)
Mr. Stuart N. Updike: He authorized the continuation of the suit.
He and the rest of his directors authorized the continuation of the suit as far as the application for rehearing en banc was concerned.
Justice Byron R. White: Oh, I see.
Mr. Stuart N. Updike: But when that was granted, 4 to 3 in our favor is when there was a change of heart and the -- a new judge having then appointed that the actual final vote was 4 to 4 and that's where the split took place.
Justice Byron R. White: So Alleghany -- and Alleghany Control Board took it to the Court of Appeals, did it?
Mr. Stuart N. Updike: Yes sir -- no.
Justice Byron R. White: No?
Mr. Stuart N. Updike: It --
Justice Byron R. White: But it could apply (Voice Overlap) --
Mr. Stuart N. Updike: It -- and Alleghany Control Board came in two days, I mean a Kirby Control Board, came in two days after the oral argument in the Court of Appeals (Voice Overlap) our argument.
Justice Byron R. White: And that Kirby Control Board applied for rehearing.
Mr. Stuart N. Updike: They authorized us to apply for rehearing after the board -- the Court of Appeals since split 2 to 1.
Justice Byron R. White: After -- and after a decision in favor of the settlement.
Mr. Stuart N. Updike: Yes.
Well, Judge Kaufman's footnote that Your Honor asked about, conceivably that procedure would be available but we have here the principal defendant, we have here the charges.
We were only allowed by the District Court to explore whether Alleghany had the right to go back and try the original cause of action on its merits.
All of the proceedings in the District Court in this case were designed to search out whether the defense of res judicata or the defense of using the settlement as a bar could be set aside so that on a rediscovering, there could be a reevaluation of the liability of these defendants.
Justice Potter Stewart: You said that Judge Kaufman to the suggestion in the footnote by Judge Kaufman's opinion would be available.
How could you prove damages if any in that kind of a primitive action?
How could you --
Mr. Stuart N. Updike: It would be most difficult to do so --
Justice Potter Stewart: It would (Voice Overlap) --
Mr. Stuart N. Updike: -- I agree.
Justice Potter Stewart: -- highly speculating.
Mr. Stuart N. Updike: Most difficult to do so.
The true measure of the damages here and the true issue before this Court here we think is whether Mr. Kirby and these others on this showing can keep that which they took in the circumstances that the record in this case shows.
I thank the Court for its attention.
Chief Justice Earl Warren: Mr. Hughes.
Argument of Mark F. Hughes
Mr. Mark F. Hughes: May it please Your Honors.
By arrangement between Mr. Mansfield and me, I shall take 10 minutes.
I will confine myself exclusively to the intervention appeal and Mr. Mansfield will deal with the underlying appeal.
I'd like first quickly to answer some questions that were propounded by certain of Your Honors during the argument.
Mr. Justice White, it was 16 months after Mr. Kirby acquired voting control which is a totally different thing from domination of a board when he acquired voting control, it was 16 months thereafter when this application to intervene was applied for.
And Mr. Chief Justice, there would be a remedy against these present directors who took the action which was to not proceed with this litigation any further.
There's been no question that there would be a right of action against them if they were actuated either by fraud or banally or subserviently or in any way except according to the dictates of their consciences.
Justice Potter Stewart: What would the remedy be?
Mr. Mark F. Hughes: The remedy would be to -- it would be an action against them for fraudulently if it was fraud or banally or subserviently permitting the expiration of the right to apply to this Court for a writ of certiorari to expire.
Justice Potter Stewart: How could anybody measure the amount of damages?
Mr. Mark F. Hughes: Well, I -- one of the things I would like to know is how the -- the measure of damages is going to be measured in the underlying case because if you can measure it in the underlying case, you can measure in the action against these directors.
It would be the same measure of damages.
Justice Potter Stewart: Well, no.
Because no, the damages here would depend upon what this Court did, first with respect to the petition for certiorari and then one can go on and hypothesize that that would've been granted them then with respect to the --
Mr. Mark F. Hughes: Well, what I --
Justice Potter Stewart: -- merit of the case.
Mr. Mark F. Hughes: What I mean to say is that if as a result of the -- their action, a right was lost and it was transparently clear that this Court would reverse and it was equally transparently clear thereafter that they were liable in damages.
It would be the same measure of damages as existed in the underlying litigation.
Now, my time is short and I want to move along.
There is this threshold question and if we are right on the threshold question, that's the end of this litigation and Your Honors are spared the necessity of deciding this deep clash that you must be aware of just by reading these briefs as to what the facts are and what the areas of dispute are.
Now, I say that the record in this case and what we must go upon is a very, very clear record is that after the 4 to 4 affirmance here and undominated honest Board of Directors met, took the benefit of legal advice, not only from Mr. Updike's firm but from ours and came to the conclusion that they would not apply for a writ of certiorari.
And that I say that that action was taken by a group of men, nine of them who represented $2 million shares of stock of this corporation which is approximately 20% of the entire outstanding voting shares and a group who with these fantastic figures of $60 million have any virtue in them at all would have stood to increase their equity by approximately $10 million.
Now, it's that group of men who met and decided that they would not proceed with this litigation and what the petitioners are now attempting to do is to set their will against that deliberate action of this Board of Directors and that we say is something which they may not do as long as it is clear that this Board acted independently and did this according to their honest judgment and conscious consciences, that is the end of it and the stockholder may not intervene for the purpose of setting his or her will against the wishes of the directors.
Justice Byron R. White: Mr. Hughes.
Mr. Mark F. Hughes: Of course the --
Justice Byron R. White: Did the Board of Directors act on the petition for rehearing in the Court of Appeals?
Mr. Mark F. Hughes: Yes, they did.
Justice Byron R. White: They authorized that.
Mr. Mark F. Hughes: They did.
Justice Byron R. White: The same people?
Mr. Mark F. Hughes: The same people.
In addition to which Mr. Kirby himself at that time voted for the rehearing.
Justice Byron R. White: What if the -- did the board articulate any change of conditions which prompted the -- not seeking cert or --?
Mr. Mark F. Hughes: Well, yes, I will come to that --
Justice Byron R. White: Well, (Voice Overlap) --
Mr. Mark F. Hughes: I'll come to it now -- if you'd like me to.
Justice Byron R. White: Well, go ahead.
Mr. Mark F. Hughes: The -- I do want to stress that this -- that the Board was an independent board and it's conceded that it was an independent board.
And then I will come to the question but I'd like to develop this in order.
Now, the law is very clear that management of a corporation is in the Board of Directors.
That's been decided time and again not only by this Court but by every court that's ever had occasion to consider the matter and it's also clear that that control of the affairs of the corporation also goes to the control of litigation involving the corporation and we say the leading case on that is Swanson against Traer which is cited in our brief which discusses all the cases including the cases in this Court and also was the rule in New York with the cases on pages 8 and 9 of our brief discuss it.
Now, I want to stress independence here and to stress the fact that on this record, the petitioners concede the integrity of these directors.
At page 79, they say that as far as adequacy of the board's decision is concerned, we don't question the integrity of the men involved.
Well now, if you don't question the integrity of the men involved, you mean, you're certainly saying that they're honest, that they're not banal, that they're not pliant, that they're not subservient and that they're acting according to their own honest consciences.
Justice Hugo L. Black: Page 79 of what?
Mr. Mark F. Hughes: Page 79 of Volume 1 of the record before you, Mr. Justice Black.
Justice Tom C. Clark: How many shares, what percentage of shares does Mr. Kirby had?
Mr. Mark F. Hughes: Mr. Kirby had approximately 40%.I think subject to correction but it was not an absolute control.
It was less than absolute control.0
Now, there was more to this question of whether these people were independent in the Court of Appeals and that's highlighted by the footnote that appears in Judge Kaufman's opinion at page 2385 where he says that the applicant's counsel expressly refused to characterize the board as dominated by the Kirby group.
Now, that came about in this way, that as Mr. Updike was making his argument before the Court of Appeals, he started to talk about the bruiting presence of Mr. Kirby whereupon Judge Kaufman said, “Well, Mr. Updike, are you charging that Mr. Kirby dominates this Board of Directors?”
He was invited, he was invited to say that and he expressly refused to say -- to characterize them as being dominated.
So you have a record in the District Court before Judge Ryan, supplemented by this concession that these were independent directors.
Justice Byron R. White: Well, they could be independent and all the words you applied to them still be quite wrong, couldn't they?
Mr. Mark F. Hughes: Of cou -- oh, of course.
If -- of course, just as the court could be wrong but it's a question of business judgment at that point, Your Honor.
It's a question as to whether having brought to bear --
Justice Byron R. White: You mean that's suppose -- that's going to measure a question of inter -- of the right to intervene?
Mr. Mark F. Hughes: No.
It's going to measure whether their decision to drop this litigation --
Justice Byron R. White: That's on the merits.
Mr. Mark F. Hughes: No.
No, it's going to measure whether their decision to drop this litigation was taken in good faith because if it was taken in good faith, then their representation of all of the stockholders was adequate.
And that is -- we submit, is the proper rule of law because once you have adequate representation, you can't have minority stockholders sounding off and doing whatever they choose contrary to the wishes of those who are entrusted with the management with the affairs of the corporation.
Now beyond all that, and I want to come to this because Your Honor raised the question, what actuated the -- this Board?
Well, it's very simple what actuated them.
They were confronted with the fact that this corporation had been in litigation between the Kirby group and this Murchison group for over ten years, that there had been no success from any of that litigation except that they had that settlement of three-and-a-half -- $3,300,000 in cash and they had also acquired from the Murchisons the voting control of IDS which Mr. Updike did not referred to and which has been variously estimated as having a value of $5 million to $15 million.
Now, that they knew they had.
I see my time is up but --
Chief Justice Earl Warren: Well, you can share your time.
Mr. Mark F. Hughes: Well, I just -- just let me finish my thought.
Chief Justice Earl Warren: You can share your time any way --
Mr. Mark F. Hughes: Now --
Chief Justice Earl Warren: -- you want with your co-counsel.
It -- this will take two minutes.
They were aware of that.
They were aware of the fact that if this Court took this case on certiorari and reversed that that wouldn't be the end of this litigation.
It would be just another merry-go-round for probably ten more years because this would have to go back to the District Court for a retrial.
Eventually, there would have to be some proceedings in the state court.
You can be sure that Mr. Kirby would fight this every inch of the way.
You can be sure that he tried to bring the Murchisons back into this litigation.
There's a real chance that the Murchisons would take the position that if this litigation, this settlement was fraud and should be set aside, that they would want to get back a voting control that they gave up in connection with the settlement.
So there was a -- there's a grave risk that if this ever goes back and is ultimately tried on the merits, we'll wind up with nothing and these directors Your Honors are simply fed up with this litigation.
They want this corporation to get out of the courts and those reasons singly and collectively prompted them to drop the litigation.
I see my time is up.
Chief Justice Earl Warren: Mr. Mansfield.
Argument of Walter R. Mansfield
Mr. Walter R. Mansfield: Mr. Chief Justice, may it please the Court.
The case presented here by the petitioners is in our opinion only a superficial resemblance to the case that was tried below.
The reason is that they disregard facts and findings which in our opinion call for dismissal of this appeal before getting to the questions that they presented for review.
I'd like first to -- just to state some of these main facts and findings.
First, there's the fact that the courts below unanimously found that the proof did not show that Allan P. Kirby was guilty of any fraud or failure to volunteer evidence in the Zenn proceedings.
No question has been presented here challenging that this finding is erroneous under Rule 52.
Yet the petitioner's main brief just like the pleadings and like this Rule 16 statement of issue -- issues before the District Court repeatedly states that Kirby was guilty of deceit and that he knowingly joined in a fraud on the part of others on the Referee.
The unchallenged findings in the record are to the contrary.
There was a complete failure of proof on this basic issue in this case.
Secondly, there are the findings of the courts below that the documents allegedly concealed were cumulative or irrelevant.
These findings took into consideration not only the IDS projections that was received in evidence in this case, but also those that were excluded.
No question has been presented to this Court here challenging these findings.
Yet petitioners repeatedly say that this evidence was in their words crucial and would have destroyed the Zenn defense.
Now, we have analyzed each one of these 12 documents that were allegedly concealed and compared them with those that were before the Referee in point -- we've done that in points one and four of our brief, main brief.
And we submit that that shows that they add nothing to what was already before the Zenn Referee.
And at pages 34 and 35 of our brief, we list the projections and other documents forecasting income that were before the Zenn Referee.
Justice Byron R. White: Well, Mr. Mansfield, I take it then on this point, it wouldn't make any difference what standard the court -- either the District Court or the Court of Appeals was applying.
The documents really wouldn't make any difference say, in any event no matter what standards you apply, that's --
Mr. Walter R. Mansfield: Mr. Justice White, that is our view that even if you apply, the might have or the would have standards, the documents when you set them down opposite what was before the Zenn Referee showed that they add nothing of any significance --
Justice Byron R. White: Well, what if the court --
Mr. Walter R. Mansfield: -- to the facts before him.
Justice Byron R. White: What if the court disagreed with you on that?
And then -- and the question really was whether they made enough difference or not.
What's your view of the applicable rule to be applied in a situation like this?
Is it the state law?
Did you look at the state law or the federal law?
Mr. Walter R. Mansfield: Our view Mr. Justice White is that it's the state law that should be applied since we are dealing here with what amounts to a standard of proof in a state court proceeding, that is the Zenn proceeding and therefore one should abide by the state law because of course, it could have a very substantial effect on the outcome of the litigation.
Justice Byron R. White: You don't think this was a 14 (a) suit originally at all?
Mr. Walter R. Mansfield: I submit Justice White that that was not a 14 (a) proceeding for the reason that it was adjudicated by the state court itself not once but repeatedly to be a cause of action rooted in common law in which the allegations with respect to Section 14 (a) were incidental or as I think was set by the Referee and then affirmed by the New York Supreme Court and expresses.
Justice Byron R. White: Have you -- you're answering here on the basis that is res judicata in that respect (Voice Overlap).
Mr. Walter R. Mansfield: That's right Your Honor.
Justice Byron R. White: Now what -- what if the Court -- what if -- as an original matter, was that a 14 (a) suit or not?
Mr. Walter R. Mansfield: As an original matter, it was in our opinion a common law cause of action in the state court.
The mention of Section 14 (a) was merely incidental.
I think that the pleader, the complainant had a choice.
He could have pleaded it as common law cause of action or as a violation of Section 14 (a).He chose to plead it as a common law cause of action.
He pursued it all through the courts twice having it adjudicated on appeal within the state courts and he never sought review here of the question of whether it was a 14 (a) cause of action.
Our position is therefore that he is bound under the doctrine of this Court's recent decision in Durfee against Goo -- Duke by the adjudication of the state court.
Justice Byron R. White: Well, of course if by some standard or rather there was fraud and then the case ought to be set aside, it would be set aside on that point too, I suppose.
Mr. Walter R. Mansfield: Your Honor, Mr. Justice White, I believe that there are other bases besides the -- that or other hurdles which must be jumped before one would set aside this appeal and I was coming to them if I may.
Justice Byron R. White: You go right ahead.
Mr. Walter R. Mansfield: I'm afraid I didn't hear you sir.
Justice Byron R. White: I -- you go right ahead.
Mr. Walter R. Mansfield: Well, the third fact of significance to us and I think perhaps follows just what Justice White was pursuing is that except for the so-called corrupt bargain claim below in this action, dismissal of which after trial was never appealed, the sole issue alleged presented under Rule 16 and tried before the District Court was whether or not Kirby had defrauded the Zenn Referee, not Young, not Purcell but solely Kirby.
There was no claim below of fraud in the part of Young and Purcell and no claim against Kirby based on any fraud by them.
No such issue was tried.
Petitioner's counsel expressly disclaimed any such charge.
The complaint was limited to Kirby's conduct and after 20,000 pages of depositions, and a series of Rule 16 pretrial conferences, the statement of issues was limited to Kirby's conduct it read, did Kirby procured by fraud certain judgment.
Young and Purcell were never involved either in the corrupt bargain claim which was dismissed in every appeal.
Yet the petitioners for the first time on appeal inject the charge that Young and Purcell committed a fraud upon the Zenn Referee.
Judge Friendly accepted that charge as the cornerstone of his dissent and the only basis found in the record was a statement of petitioner's counsel made as he was examining Purcell which Judge Friendly quoted as follows, Mr. Updike, “Well, it seems to me sir that Mr. Kirby entrust the responsibility to some extent of his being a director of Alleghany that he entrust some of that responsibility to Mr. Young that Mr. Kirby cannot avoid accepting the consequences of whatever Mr. Young may have done.”
Judge Friendly stopped there but what Judge Friendly did not quote was the balance of the same sentence in which Mr. Updike continued right on to say, “And I do not say that it was Mr. Young and I do not say for a moment that it was Mr. Purcell and I do not know who is responsible.”
The completed statement without truncation which the only reference Judge Friendly could find is a disclaimer, and Kirby's counsel, we submit, was entitled to rely upon it and on the pretrial statement of issues and the pleadings in conducting his defense and in cross-examining the very witness on the stand, Mr. Purcell.
And we submit that a theory based on Young and Purcell's conduct is not now open to the petitioners, that they're barred by their pleadings, their statement of issues, their statements at trial.
Now, although petitioners' brief, reply brief points to counsel statements in the District Court made after trial on the issue presented to the effect that Kirby could not escape responsibility by delegating to others the duty to search out and volunteer records.
Not one of these statements ever claims fraud on the part of Young and Purcell.
The first time that was claimed was on appeal.
The next fact that I think is very significant is that the attack here is not upon some joint settlement made in Zenn by Young, Kirby and Purcell.
It is on Kirby's separate settlement approving what the complaint specifies in this action, 22 times as Kirby's “separate settlement”.
There was never any issue, proof or finding of any joint action between Young, Kirby and Purcell in the conduct of the Zenn settlement hearings.
Kirby was neither subpoenaed nor served in the Zenn action.
The record shows that he negotiated a separate settlement, separately approved by a separate judgment over the strenuous objections of the Murchisons and the disapproval of the Young Estate.
He was not called, although he was served in Zenn federal, that case was never pursued.
It has been dormant since the action was begun and he was not called to testify there nor was he called, subpoenaed to produce any records there.
Yet petitioners in the dissent predicate their position here entirely on the existence of some kind of a conspiracy or joint action between Kirby, Young and Purcell.
Next, there is the fact that the legality of the underlying 1949-1950 exchange, stock exchange transaction and of the proxy material used to obtain its approval was not an issue below.
It was expressly excluded as an issue.
It has never been tried except to the extent, the Zenn Referee and the Zenn court considered it when they were passing on the fairness of the Zenn settlement and they concluded that the transaction on the proxy material would be upheld after a trial.
The record shows in this case that the District Court in one of a series Rule 16 pretrial conferences said, and I quote, “What we are not going to try are the merits of the 1950 transaction itself.
The trial will not go into the issue as to whether the 1950 transaction was a bad transaction or not.
It will not go into the quest.
It will go into the question of whether certain facts were concealed from the court.
Is that understood by everybody?”
To which Mr. Updike replied, “Yes.”
And at a later point, Judge Dawson said, “I am not going into the question of whether the Zenn-Anzelone case was a good case or not, yet the petitioners here assume the illegality of the basic 1949-1950 exchange as the whole predicate of this appeal and they do so on the strength of an assumption made by the Court of Appeals in this case without benefit of any issue, any trial or any findings.
And the fact that the Court of Appeals was making an assumption is evidenced by the statement of the majority opinion at page 2344 of the record in which it was said after the assumption and I quote, “But the bona fides of the 1950 stock exchange were not the issue for determination by the District Court here.
The issue was whether there was a sufficient basis for a federal court to nullify a settlement in a case involving fraud which had been judicially approved in the state court.
Next, there is the fact that the said action was adjudicated by the New York Supreme Court and the appellate division as I pointed out earlier as one for common law fraud in which Section 14 (a) allegations were incidental.
No attempt has been made by the petitioner's representatives there to seek review, we submit that under Durfee v. Duke, they're bound and yet the appeal here, and the questions presented here are based entirely on the assumption that Zenn was to quote their brief, “A Section 14 (a) action.”
Lastly, I'd like to point out that the legality of the 1949-1950 exchange transaction was neither alleged nor involved in the Breswick suit in the dis -- Federal District Court below.
The one in which the injunction was issued by Judge Dimock.
Breswick and Zenn had other claims in common which involved American citizens but not the claim based on the 1949-1950 transaction.
The Breswick court, Judge Dimock, never approved the Zenn settlement.
The -- its injunction arose out of other claims before it not the legality of the said 1949-1950 exchange.
Yet the petitioners erroneously in our opinion asserted here that the alleged fraud related to a claim before the Federal District Court in Breswick.
Now, petitioner's counsel here has (Inaudible) referred it to the claim that Ireland offered a bribe to Phillips and said that the District Court dismissed it finding that Phillips had rejected it.
I would like to point out in view of that statement that the District Court had that claim before it analyzed it thoroughly and concluded on the District Court's own words that the evidence was all to the contrary.
It found not just any rejection but it found that the so-called bribe was to be part of a settlement that would be presented to the Court whereby Mr. Phillips' services might be retained for the -- as a representative of the opposition in the corporation if the settlement went through now and that did not go through.
And the Court -- no appeal was taken from that so I think it's improper at this point to refer to any bribe which has been thoroughly passed over and found unsupported.
Reference has also been made to some statement made to Mr. Kirby about Mr. Young having committed perjury.
I -- we have treated that in our brief.
I shall not go into detail.
I would like to point out just this.
The statement was a hear -- triple hearsay statement made on the basis of an opinion of a non-lawyer with respect to another case, Young against Ebbett involving a matter that was not an issue here, a transaction between the Murchisons and Alleghany for the part of certain stock.
It had nothing to do with this underlying transaction, the stock exchange in this case.
Now, one or two other background facts I think are important.
The present case relates to only one out of eight claims in the Zenn suit.
It started 1954 and that charge that in 1950, Alleghany's directors had obtained stockholder approval of the so-called 1949-1950 exchange by concealing favorable current earnings, current earnings, and by concealing earning prospects and the claim was that the defendants could foresee that from this evidence that the market price of IDS stock would enjoy the spectacular increase that began some years later.
At the protracted negotiations and pretrial depositions, a settlement was proposed in 1955 in the New York State Court, not the federal court.
That case lay dormant and has ever since and it was referred to a Referee.
The hearings before that Referee developed into a hotly contested proceeding in which 22 law firms appeared, some for, some opposed the settlement.
4600 of pages of testimony were taken from 18 witnesses, and 480 exhibits were introduced.
The objections by their own later testimony examined voluminous documentary material including 28 Alleghany file drawers containing documents relating to IDS and the personal files of Young relating to IDS.
IDS had its main offices and its principal office in Minneapolis and it was then under the control of the Murchisons, not Young, Kirby or Alleghany and the mass of proof before that Referee included both optimistic and pessimistic forecasts.
There was evidence that the transaction when viewed as of the time it was made and without the benefit of the hindsight was not unfair to the stockholders and that the proxy material did not rep -- misrepresent the facts.
Now time does not permit analyzing all that evidence now.
We have reviewed it in pages 10 to 22 of our brief.
Just one or two facts I think are significant.
After the transaction was consummated back in 1950, IDS' earnings did rise sharply but after these, these earnings became public, the market price of IDS stock remained close to the same level it had -- exist -- it had enjoyed prior to that for quite a long time.
And in July 1950 for instance, IDS rose to $15 a share and IDS' president who had all of the allegedly concealed forecasts and projections required Alleghany to fulfill an earlier contract to buy 3034 shares at $20 a share, the market then being $15.
He certainly was not impressed by the forecasts.
By August of 1951, one year after the sharp earning's increase became public, IDS stock had risen to only $32 a share.
And then but only then it began its meteoric ascent to $200 a share in 1954 and that was what led to a flood of stockholders' actions.
Now, the Referee submitted a 125-page report and in viewing this transaction, weighed both the optimistic and the pessimistic factors and he noted that the directors had it by the stockholders to quote the phrase from the statement or proxy statement that “The outlook for future earnings was unusually promising”.
That they were dealing with hopes said the Referee as against reality and that if more specific rosy predictions were made but did not materialize, they would expose themselves to huge claims by disappointed stockholders.
Now, why is the proof claimed to have been concealed by Kirby?
On the eve of trial, the petitioner listed 86 documents, and at trial -- as trial revealed that most of them were already in the Zenn record, before the Referee, there were whittled down to 12 and the record shows that the plaintiffs below, in answer to interrogatories stated that they could not say whether any of these documents were seen or made available to the Zenn Referee, the Zenn parties and the Zenn court.
We think that's a striking admission in view of the claim that they were deliberately concealed by Mr. Kirby.
Petitioners divided them into four categories.
The first they called the Waag correspondents and that I think has been dwelled upon at length by Mr. Updike here.
That is dated more than four years after the transaction under attack in Zenn.
A proof of the record shows that Kirby was not a party to that correspondence.
He never knew about it.
He never had it.
Some of it was before the Referee but not the copies that were part of what was later turned -- produced in evidence in this proceeding but duplicates.
In other words, there were several copies of this around and two copies are part of it.
Not the same strikes as the one they introduced here were put in the evidence.
There's no basis for any charge that Kirby concealed it.
As for the second category, the so-called IDS projections, those documents came from the Minneapolis files of IDS.
Kirby could not have furnished them to the Zenn Referee because he didn't have them and he was neither an officer nor a director of IDS and at the time of the Zenn hearings, it was under the control of the Murchisons.
For two weeks, in 1949, six years before the Zenn hearings, Kirby's office had possession of one of those documents which was returned.
Kirby did not recall it.
But it was not a forecast of IDS earnings.
It was an evaluation of IDS certificates and income available for improvement of reserves.
Also, this document, this allegedly concealed document, was identified by author, by date and quoted from in another report before the Zenn Referee, the shipment report, exhibit 295 and referred to in annual IDS, annual reports that was before the referee.
Certainly, that doesn't show any concealment by Kirby.
Then the third category they've listed are the Stybel reports.
The claim there is that Kirby concealed one report, the second Stybel report dated March 15, 1949, over a year before the stock exchange that is the subject of attack on Zenn.
Stybel was a Cleveland investment firm.
That document was in the public files of the SEC which were examined by Mr. Pomerantz and his group in the Zenn stockholders action.
Kirby testified, “I don't remember ever seeing it before.”
He had no reason to conceal it because it updated -- it was updated and repeatedly referred to by title and date and incorporated by reference in another report by ref -- before the Referee, the shipment report of April 7, 1949 which took at least as favorable view of Alleghany's prospects as to that report.
Lastly, petitioners' category is the monthly reports.
Petitioner's statement that Kirby received these reports every month which they make in their petitioners' brief is incorrect.
The record shows Kirby had only one such report in his possession and that was not relied upon by the petitioners here because it postdated the transaction under attack.
That is the record as to Kirby, if Your Honors please, and we submit that it shows a complete failure of proof and the courts below recognized that.
The proof is equally clear that even if the petitioners' proposed special disclosure rule were adopted, Kirby did not conceal or withhold any evidence.
Now, turning to the new claim made for the first time on appeal that Young and Kirby concealed evidence, if the rule against raising new issues on appeal is to have any meaning, it certainly applies here.
Petitioners raised not just a new legal theory but a new issue of fact.
If their new claim had been asserted on the District Court, there would have been different interrogatories, different depositions, different pretrial statement, and different proof.
We would have certainly gone after Young and Purcell staff to just -- see just what they did have.
We would have gone after Pomerantz and Graubard staff to find out -- get all their notes as to just what they did see from these voluminous files.
Kirby would have joined Young and Purcell as third party defendants in the action if they committed fraud without his knowing it.
We would have offered additional evidence to confirm that the IDS records were passed over in Zenn because counsel there felt that they already have sufficient proof and didn't want to invite defense proof that those forecasts without benefit of hindsight amount to nothing more than economic astrology.
If Kirby who had not committed any fraud were told six years ago when this actions were commenced that Zenn was going to be resurrected because of alleged fraud by Young and Purcell, he would have marshaled all the evidence to show that the original exchange and proxy statement complied with the law.
Instead, he relied on his Zenn judgment approving his separate settlement as he had a right to do.
Six years later, much of that proof has undoubtedly evaporated.
It would be manifest -- be unfair, we submit, to ask him now to try to resurrect it.
Therefore, even if we were to assume arguendo and we say it's not the fact that Young and Purcell defrauded the Referee, it would be unjust now to set aside the Zenn settlement as to Kirby who was admittedly innocent.
Now, if there were proof of conspiracy, agency or some joint action in the conduct of those Zenn hearings, our basis might exist for holding Kirby responsible for the conduct of Young and Purcell but there is no such proof.
The claim below and the undisputed proof was that Kirby made a separate settlement opposed by Young's Estate and the others.
Now, since Young's conduct was not an issue in this case, it should be unnecessary to review such literal record evidence as there is on the subject but when we do review it, we find that Judge Friendly was in error when he inferred from the 1954 Waag correspondents that Young probably concealed 1950 IDS forecast from the Zenn Referee and let me explain if I may why.
There was other evidence in the Zenn record not known to the Zenn -- to Judge Friendly but known to the Zenn Referee which shows that Judge Friendly was wrong and that Young and Purcell both made a whole disclosure.
Judge Friendly inferred that Young probably withheld one 12-page enclosure in that Waag correspondence because two back pages showed that back four years earlier, in 1950, IDS had prepared a forecast of its 1950 earnings and that this clue would have acquainted the Zenn Referee with the existence of the forecast and led people to go trotting on out at Minneapolis to get them.
And Judge Friendly's inference is destroyed by the record of Young's deposition before the -- in the Zenn proceedings which was Zenn Exhibit 4, which Judge Friendly didn't see.
And it shows, we have attached it as appendix, Appendix C to our brief.
It shows that in the same March 29, 1955 deposition where the petitioners claimed that Young “sat mute”.
He testified in detail to the fact that IDS in Minneapolis routinely prepared earnings, forecasts and projections including a five-year projection prepared annually some of which he received and I quote his words, “from time to time”.
Justice William J. Brennan: Excuse me, Mr. Mansfield.
Mr. Walter R. Mansfield: Yes, Justice Brennan.
Justice William J. Brennan: It seems to me that you're arguing this, as if you are arguing before the Court of Appeals, the merits (Inaudible), is that your idea of what -- the way we have to look at this case on the merits?
Mr. Walter R. Mansfield: Mr. Justice Brennan, I submit that it is for the reason that one never gets to the questions that are presented here on this record because they are presented on the theory that Young -- that the evidence showed fraud on the part of Young and Purcell and that Young -- and that Kirby could be held responsible for that.
What I am trying to show here is that that record fails to show that.
Justice William J. Brennan: But you won in the Court of Appeals, didn't you?
Mr. Walter R. Mansfield: Yes, we did, Your Honor.
Justice William J. Brennan: Well that's what I was wondering.
Mr. Walter R. Mansfield: But what we are saying is --
Justice William J. Brennan: What are we supposed to do with that finding?
Mr. Walter R. Mansfield: I didn't hear --
Justice William J. Brennan: What's the limit of our review of what -- determination of the Court of Appeals
Mr. Walter R. Mansfield: Our view if Your Honor pleases is that the writ here was improvidently granted because the sole question that could've been presented on the record that was before the Court was the question of whether the evidence was -- or the findings were clearly erroneous and what I am trying to --
Justice William J. Brennan: What's the consequence of the 4 to 4 division on --
Mr. Walter R. Mansfield: I think Mr. Justice Brennan that the three judges who joined Judge Friendly were likewise unaware of record proof before the Zenn Referee showing that their inferences were unjustified.
Justice William J. Brennan: Well, of course what I'm getting at -- of course, I'm not anxious to do it, do I have to go all through this thing in order to (Voice Overlap) --
Mr. Walter R. Mansfield: Oh, we submit Your Honor that one does not have to go very far through it because on the first point raised that the issues, pleadings and everything else would direct it solely to fraud on the part of the -- the claim of fraud on the part of Kirby, that that ends the case.
There was a complete failure of proof there.
What I'm now saying is that even if you go further, Judge Friendly's inferences were incorrect because he didn't have all the record performed for the simple reason that that was not an issue before the District Court.
Justice William J. Brennan: Have you had any idea, what's the status of the panel decision in light of 4-4 division en banc?
Mr. Walter R. Mansfield: What is the status --
Justice William J. Brennan: What is the status of the panel decision in light of the 4-4 division en banc?
Mr. Walter R. Mansfield: Well, of course, we cannot -- it's difficult to speculate Mr. Justice Brennan as to just what the intracourt views of all eight members were.
One may infer that the four who were for reversal joined Judge Friendly but one may have had other reasons.
Justice Byron R. White: Well the -- it would be very easy here to say that, “Oh well, the Court of Appeals reviewed this record and decided that these documents wouldn't have made any difference anyway.
That's the factual finding.
We're not going to go behind.”
The trouble is that the people who said that are now submerged in a 4 to 4 split.
I mean the panel decision is no longer a -- the controlling decision of the Court of Appeals.
The Court of Appeals controlling the decision is in 4 to 4 split, an automatic affirmance.
And we have to sit like in a -- as a result of that, we have to sit as a Court of Appeals here?
I mean if we does -- if we do, why (Inaudible) --
Mr. Walter R. Mansfield: Mr. Justice --
Justice Byron R. White: -- we do have a lot of reading --
Mr. Walter R. Mansfield: Well, Justice White, I think that -- I think if I may be so full that the writ was granted (Inaudible) improvidently for the reason that the questions here which are -- whether there should be a duty of disclosure in a Section 14 (a) action comparable of what would've been required in disclosure to stockholders in a proxy statement are not presented by this record.
And that's what I am arguing, Your Honor.
The action was adjudicated between these parties not to be a Section 14 (a) action.
The proof shows that even if you were to adopt the proposed disclosure standard urged by the other side, Kirby was not guilty of violating it because the evidence was all of the contrary.
So I fail to see how taking up of the questions presented by our review here would make any difference in the result.
Justice Hugo L. Black: What about Judge Friendly's statement, the evidence was improperly excluded and that therefore he wants -- what he wants to do is to send it back and let them consider the case, the issue you talked about on the basis of the evidence that was improperly excluded?
Mr. Walter R. Mansfield: Well, I -- but the majority opinion did consider it Justice Black and concluded that it was cumulative.
The District Judge in excluding the evidence rule that it was not tied in any way to Kirby on this charge of fraud against Kirby alone and that it was cumulative in that -- already the Referee had before him evidence of the favorable prospects for IDS.
So that I do not feel that sending it back to the District Court would make any difference at all.
Justice Hugo L. Black: But they seem to have disagreed 4 to 4 on the facts.
Mr. Walter R. Mansfield: That they did and I think they disagreed on the facts because Justice Black, they were unaware of certain things in the Zenn record.
And the reason they are unaware of those things in the Zenn record was that the issue as to the conduct of Young and Purcell had never been presented as an issue in the case.
Justice Hugo L. Black: If it's all that's the case, why isn't it reasonable?
But I'm not saying it is that it has to be done.
Why is it reasonable?
Except the fact that they disagreed 4 and 4, they don't know what the facts are and the -- that is unless we accept one side or the other and let them come back and try it out that issue which you say Judge Friendly was wrong on.
Mr. Walter R. Mansfield: Judge Black -- Justice Black, this case begun in 1960.
If we had known --
Justice Hugo L. Black: I understand the delay, it's a good argument, but is that the only argument?
Mr. Walter R. Mansfield: Well, the other argument it seems to me is that if we were to allege -- if you were to allege wrongdoing on the part of Young and Purcell, we of course would have possibly considered pleading over against them in the action.
What it amounts to is that on the basis of bits and pieces and the evidence with respect to a matter not an issue, it's being suggested that we go back, have a new complaint based on a new theory, new pretrial issues and a new trial.
And I submit that at this late day that would be very unfair to Mr. Kirby.
Justice Hugo L. Black: Well, if you consider the delay, wouldn't it be far more delaying to dismiss this on the theory that they can file a new suit and start over from the very beginning and offer a great deal of this evidence that's here and other evidence that you could offer more.
Wouldn't that be the way to delay it intermittently?
Mr. Walter R. Mansfield: Well, we --
Justice Hugo L. Black: And I also having doubts (Voice Overlap) --
Mr. Walter R. Mansfield: (Inaudible)
Justice Hugo L. Black: -- also wondering about how they could ever prove damages because you couldn't predict what the Courts would do on the new hearing.
Mr. Walter R. Mansfield: Well, our position on that Justice Black would be that this is the kind of a case that should not in any event be brought in the federal court because what it seeks to do is to set aside a fraud, a state court settlement which the state court referee and that court reviewed the evidence at great length and the availability of a clear and open remedy in the state court in which all the parties would be before the state court as valid basis for dismissing this appeal.
Under the New York law where there is no statute of limitations, a litigant, any party may move to reopen and set aside a judgment for fraud, for newly discovered evidence or for misconduct short of fraud.
In that proceeding, the Court would have all the parties before it, including Young's Estate and Purcell.
It could --
Justice Hugo L. Black: Could they not have them here?
Mr. Walter R. Mansfield: No, Your Honor.
This is the most startling part about this case.
Justice Hugo L. Black: Who do they not have?
Mr. Walter R. Mansfield: They seek -- they do not have Young, they do not have Purcell.
They zeroed in solely on Kirby because at the time when the action was commenced, it was simultaneously with the commencement of Murchison proxy by -- for control of Alleghany.
They seek only to set aside the Zenn judgment as to Kirby only and not --
Justice Hugo L. Black: But they could -- other parties could be added if the issue had been denied then they could file a new suit because (Voice Overlap) --
Mr. Walter R. Mansfield: I don't know whether they could've explained --
Justice Hugo L. Black: Following the pages of evidence again.
Mr. Walter R. Mansfield: But Your Honor, at that instant, the state court has is this, it had all the evidence before it.
It is in a far better position having lived with the case to decide whether it was defrauded than the federal court.
The state --
Justice Hugo L. Black: Well, are you -- are you saying (Voice Overlap) --
Mr. Walter R. Mansfield: -- the rule in New York --
Justice Hugo L. Black: -- the federal court doesn't have jurisdiction?
Mr. Walter R. Mansfield: What I am saying Your Honor is that a collateral attack of this sort should be dismissed on the ground that the best remedy and the utmost -- most equitable and adequate remedy is on the state court and that this is the kind of a case which should be pursued as it would under state law before the very judge, the state court rules provided that it's reassigned to the very judge who had before him and that he's in a much better position to decide whether he was defrauded after having lived with the evidence in the case, then a new judge to whom it's exposed for the first time and I might also --
Justice Hugo L. Black: You mean, apart of these thousands and thousands of pages of evidence have to be reintroduced in a state court suit?
Mr. Walter R. Mansfield: I don't think they would because, if Your Honor pleases, the state court, the Zenn Referee had before him 480 exhibits and that's already in the state court filed before the judge who is still serving and the Referee, they're both in service.
They would simply pick up where they left off and see whether or not the evidence would have made any difference to them.
But now, we would be asked to go back and I might add parenthetically that the District Judge before whom this was tried, Judge Dawson since deceased would have to go back and start a trial all over again before a judge who never lived with it, and would have to second guess whether he thinks this evidence would have made any difference to it.
Justice Hugo L. Black: In your judgment does this -- would the federal court have jurisdiction of this suit?Does it have it?
Mr. Walter R. Mansfield: In my judgment Your Honor on the proof that is now --
Justice Hugo L. Black: I'm not talking about where -- what -- I'm not talking about whether it should be exercised.
Does it have jurisdiction?
Mr. Walter R. Mansfield: I think that the federal court has jurisdiction to collateral -- to entertain a collateral attack upon a state court judgment for -- in New York for what is called extrinsic fraud and that the proof in this record shows that the fraud was not of the type which under New York state law would permit collateral attack and therefore it would be dismissed on the record for lack of jurisdiction.
Justice Hugo L. Black: Well, then you think it could not -- the suits should not be filed?
Mr. Walter R. Mansfield: On the proof?
That's now on the record, I would say that is correct, Justice Black.
I would like to point out one very important piece of evidence which I think has been wholly left untouched by petitioners and that is the fact that on February 11, 1950, the objectant's counsel had before him and introduced into evidence in the Zenn proceedings a report by Mr. Purcell, one of the defendants to Young and Kirby, the other two defendants, Zenn, forecasting $19.61 of income per IDS share, from IDS' mortgage department alone for 1950 plus increased revenue from all other departments.
Now, we submit that that forecast which is at 1186 of the record.
Certainly, a plaintiff, the Zenn Referee with the essential facts as to what was being forecast at that time, the value of forecast is a different matter.
It's also been -- that the witnesses testified that such forecasts of course have very limited value in view of the many other pessimistic factors that were in existence in 1949 and 1950 but were taken into consideration.
Now, it's also been suggested that there was a concealment of IDS forecasts.
I pointed out that Young testified that he had the -- he from time to time received IDS forecasts.
He testified again in December 1955 before the Zenn Referee and by that time, it was clear to everybody that Purcell had taken back with him from Alleghany to IDS in Minneapolis these forecasts that Alleghany had received when Purcell went there to become president in 1953 and that he would bring them back with him when he came to testify.
And in January of 1956, he did come to testify.He testified for a full day and he brought with him as he testified and I quote, “An enormous briefcase in one hand, an enormous manila folder into my other arm containing IDS financial projections and records and IDS projections.
Now, Young had no motive therefore to conceal.
He knew that Purcell was coming along with the IDS projections and the record shows, this is the Zenn record, that Purcell appeared with the ID -- that when he appeared with these records, they were examined for only a few minutes, that's what the record shows by the Zenn objectant's.
And that at end of a full days testimony of a 130 transcript pages, Purcell announced to the 15 lawyers present and this is Purcell's testimony, “This company, referring to IDS, produces a large number of reports, many of which I brought here today that nobody has asked me about.”
Now, he was inviting everybody to interrogate him about the IDS records but the objectant's counsel Graubard shows not to because he had the Purcell report between the very principles involved that was far more valuable to him than anything else he could possibly had.
So he decided to let -- well enough alone and we submit the proof of -- there's no proof in this record of fraud on the part of Young and Purcell.
Now, there's some testimony that -- or statement here that Graubard said later that he would have by (Inaudible) offered a certain exhibit in the evidence or a certain forecast.
If that record is read, it shows that he could not recall whether he had seen this exhibit and he could not recall when other IDS forecast was shown to him, whether he had seen them because he said he had a team of people going through thousands of records and many of which were examined by others and not by him.
Pomerantz testified to the same effect.
He had a team and he test -- he examined part of the records, Mr. Clinger, an accountant examined part of them and Mr. Haudek examined the -- another.
Now, we had analyzed these documents in detailed in our brief and we submit that they add nothing.
Justice Hugo L. Black: May I ask you just one question?
Mr. Walter R. Mansfield: Yes Justice Black.
Justice Hugo L. Black: You said there's no proof of fraud on the part of Purcell and Young.
Suppose there had been, suppose all eight had determined there was fraud, what would be the situation then?
Mr. Walter R. Mansfield: In -- on the basis of this record, Your Honor, first of all, the issue was never raised below and we say that it would be unfair now to charge us on the basis of evidence that did not relate to an issue to set aside the judgment below.
But even if there had been an issue, as the District Court noted, the failure to adduce evidence in a proceeding before the state court under state law is not ground for collateral attack.
It is ground for going back to the judge and trying to find out whether that judge considered that the evidence would have changed his mind and that's what we say should have been done here.
Justice Hugo L. Black: It didn't amount as to practically to say there's no jurisdiction, doesn't it, in the federal courts?
Mr. Walter R. Mansfield: There is no jurisdiction for collateral attack on the basis of the kind of evidence that has since been brought out in this case, Justice Black.
Now, what we also point out -- want to point out is that the whole -- the questions presented here are based entirely on one fundamental concept that this is a Section 14 (a) action and we submit that it is not a Section 14 (a) action, that Section 14 (a), the legislative history language shows, there was never any intent to relate to production of proof by a director in litigation.
Chief Justice Earl Warren: Thank you.