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Barnes v. Osofsky

United States Court of Appeals for the Second Circuit

January 5, 1967, Argued ; February 1, 1967, Decided

Nos. 306, 107, 308, Dockets Nos. 30867, 30868, 30869


 [*270]  FRIENDLY, Circuit Judge.

Aileen, Inc. is engaged in the design, manufacture and sale of popular priced sports wear for girls and women. Prior to the fall of 1963 it had outstanding 1,019,574 common shares; 205,966 of these, most of them covered by a 1961 registration statement, were traded on the American Stock Exchange, and the balance, 813,608, were owned, in approximately equal proportions, by two officers and directors, Osofsky and Oberlin. Pursuant to a registration statement effective September 10, 1963, a group of underwriters offered at $23.375 per share, substantially the then market price, another 200,000 shares, also to be listed on the American Exchange; 100,000 of these were an original issue, 50,000 were Osofsky's and 50,000 were Oberlin's. The prospectus reported that "Sales volume has grown from $2,120,394 in 1956 to $15,045,826 in 1962 and reached $9,826,655 for the first six months of 1963."

A press release on October 7, 1963, and a supplement to the prospectus on the following day, announced a rift in the lute. Third quarter sales had been little [**2]  more than in 1962 and the volume of orders for an important spring line had not come up to expectations. The price of the stock, which had been gradually declining since late September, declined some more, reaching $15.75 by the end of October, $14.25 at the year-end, and still lower figures thereafter.

Three class actions by purchasers against the corporation, Osofsky, Oberlin, the principal underwriters and, in one instance, other officers and directors, were brought in the District Court for the Southern District of New York on November 13 and 19, 1963 and August 17, 1964, and were subsequently consolidated. The complaints in all three set forth a claim under § 11 of the Securities Act of 1933 that the registration statement and prospectus contained material misstatements and omissions, primarily in failing to disclose danger signals of which the management was aware prior to the date when the registration statement took effect. One complaint also contained a claim based on § 10(b) of the Securities Exchange Act of 1934, Rule 10b-5 and common law fraud, but this was later withdrawn. After discovery and negotiations, a settlement was agreed upon, which the District Court approved [**3]  after notice and hearing, 254 F. Supp. 721 (S.D.N.Y.1966). This provided for the deposit of a fund of $775,000, 50% of which was contributed by the corporation and the remainder by the two selling stockholders in equal amounts. After payment of approved allowances, the fund was to be distributed among persons "who beneficially acquired (in his own name or otherwise) any part of the 200,000 shares * * * which was the subject of the public offering of September 10, 1963 between September 10, 1963 and August 17, 1964" and who made timely application for participation therein. Seventy-five percent of the fund, called Fund A, was to reimburse such persons for losses suffered prior to November 13, 1963; twenty-five percent, Fund B, was to reimburse them for losses thereafter. The measure of damages for Fund A was the difference between actual cost, not exceeding $23.375 per share, and the sales price for those who had sold the stock or $16.25 per share, the closing market price on November 13, for those who continued to hold it. The measure of damages for Fund B was the difference between actual cost, not exceeding $16.25 per share, and the actual sales price or $8.875 (the [**4]  closing market price on August 17, 1964), whichever was higher.  [*271]  The judgment contained a clause barring all actions by purchasers of the 200,000 shares "founded or in any way based upon the subject matter of the pleadings of the above actions, or any of them, including any claim or claims alleged or asserted or which could have been alleged or asserted in said pleadings by virtue of the facts alleged therein."

The sole objectors to the settlement were the appellants Attilio Occhi who bought 100 shares on November 22, 1963 at about $15 per share, and Fred Zilker who bought 25 shares on September 12, 1963 for $23.375 and 50 shares on December 23 for $13.50 per share. Their objection went to the provision limiting the benefits of the settlement to persons who could establish that they purchased securities issued under the 1963 registration statement, which thus eliminated those who purchased after the issuance of the allegedly incomplete prospectus but could not so trace their purchases. Although the issue has not yet been passed upon by the special master whom Judge Ryan appointed, it appears likely that Occhi will be able to trace 50 shares which were bought on the open [**5]  market and Zilker can trace 25 which were bought from an underwriter, but not the balance -- all purchased on the market.

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373 F.2d 269 *; 1967 U.S. App. LEXIS 7577 **; 1 A.L.R. Fed. 1011

Arthur BARNES, Plaintiff-Appellee, v. Meyer OSOFSKY et al., Defendants-Appellees. Alfred N. GREENBERG et al., Plaintiffs-Appellees, v. AILEEN, INC., et al., Defendants-Appellees. Reginald SMITH et al., Plaintiffs-Appellees, v. AILEEN, INC., et al., Defendants-Appellees

Disposition:  [**1]   Affirmed.


shares, registration statement, purchasers, registered, prospectus, traded, per share, acquiring, stock, trace, appellants', bought

Securities Law, Express Liabilities, Misleading Statements, General Overview, Statute of Limitations, Initial Offerings, False Statements, Initial Offerings of Securities, Definitions, Registration of Securities, False Registration Statements, Blue Sky Laws, Offers & Sales, Business & Corporate Compliance, Filing Requirements