UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA
January 14, 1969
Phillips, et al.
Reynolds & Co., et al.
Wood, District Judge.
The opinion of the court was delivered by: WOOD
WOOD, District Judge:
Plaintiffs in this action sought to recover damages for common law fraud and for violations of Section 17 of the Securities Act of 1933 and Section 10 of the Securities Exchange Act of 1934 in the purchase and sale of securities. We find in favor of the defendants on all counts, and make the following findings of fact and conclusions of law.
FINDINGS OF FACT
1. Lawrence S. Warren, the individual defendant in this case, is a registered representative with Reynolds & Co., also a defendant. (N.T. 36)
2. Reynolds & Co. is a partnership of shareholders, being members of the New York Stock Exchange and the American Stock Exchange; they are authorized to deal in over-the-counter securities. (N.T. 29)
3. At the time of the transactions concerned in this case, Mr. Warren was a duly authorized agent of Reynolds & Co. (N.T. 27)
4. Mr. Warren first became aware of Strategic Materials Corporation, the stock later purchased by plaintiffs through him, when he read an article about the corporation in the April 7, 1961 issue of TIME Magazine. (N.T. 258-9)
5. The TIME article, entitled "New Era for Steel?" reported that Strategic had initiated the "first commercial operation of a new era for the steel industry." This process was designed, it was stated, to make possible the production of steel from low-grade ores, which had previously not been commercially feasible for use in the open-hearth method of steel manufacture. The article explained that this process had been developed by a metallurgist named Marvin J. Udy, and that a Mr. John C. Udd had formed Strategic Materials Corporation to exploit Udy's process.
The article further explained that "when all the bugs are worked out" the output of the first commercial plant employing this process to produce ferrochrome,
would be purchased by Universal Cyclops Steel Corp. The article then reviewed a number of other pending projects for the use of the new process in the United States and various foreign countries. It stated that other metals such as chrome, copper, zinc, and manganese could be produced by use of this process. It was stated that further development of the process "could lead to the quick building of a steel industry in underdeveloped countries," and cited several pilot projects of this nature.
The article concluded that "thus far, more than $12 million has been poured into Strategic Materials without a cent of profit, but by the end of this year Chambers [Strategic's President] hopes to start breaking even and by next year to show some earnings." (P. 94, Ex. D-W-1)
6. The consolidated income statement for Strategic Materials Corporation and its subsidiaries for the year ended December 31, 1960 showed the following:
Net loss for the year $1,214,065
Deficit at beginning of year 7,825,281
Deficit at end of year $9,039,346
(Ex. P-1, p. 10;
see also, Ex. P-2)
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