a business from escaping liability by insulating the parent company from the questionable activities by use of subsidiary corporations, or other amenable agents or straw parties. The provision is similar to those of the Interstate Commerce Act regarding "control" of carriers [ 49 U.S.C. § 5(2)], or those of the Public Utility Holding Company Act [ 15 U.S.C. § 79b(a)(7)(B)] in the utilities field. It contemplates "penetrating the corporate veil" in appropriate cases, when demanded by the public interest.
The cases relied upon by plaintiff will be found to involve situations where the defrauded or complaining party has had dealings with the corporation, in the ordinary course of its business, and employees of the corporation have taken advantage of the relationship for their own private gain. In the Ute case, for example, which plaintiff cites as an authority under Section 20, though the Supreme Court does not cite that section (see 406 U.S. at 152-54, 92 S. Ct. 1456, 31 L. Ed. 2d 741), the bank was a recognized agency playing a part in the statutory scheme for distributing tribal Indian property, and held all the stock certificates and defendants were under a fiduciary duty towards the Indians; in spite of which they undertook to make a market for and encourage sales of stock, rather than discouraging it and calling attention to the mandatory legend on the certificates warning the beneficiaries that the value of the stock was uncertain and that it was of a distinctive character and not ordinary stock in a business corporation. (406 U.S. at 138, 92 S. Ct. 1456, 31 L. Ed. 2d 741). It seems quite proper that the Court should conclude, under the circumstances of the Ute case, that "The liability of the bank, of course, is coextensive with that of Gale and Haslem." (406 U.S. at 154, 92 S. Ct. at 1472). The acts violative of 10b-5 were "acts performed when they were obligated to act on behalf of the mixed-blood sellers" (406 U.S. at 154, 92 S. Ct. at 1472).
In the case at bar, however, MS&R as a corporate entity entered into no relationship with plaintiff. The stock transaction in connection with which a violation of 10b-5 occurred was res inter alios acta insofar as MS&R was concerned. It did not own or sell its own stock. It did not issue any shares of its own stock as in a "take-over" of another corporation.
The deal was purely one between plaintiff and defendant as individual stockholders.
Likewise in cases involving relationships between investors and stockbrokers or investment counsel, it seems clear that "control" in the Section 20 sense is appropriately found to exist there. SEC v. First Securities Co., 463 F.2d 981, 987 (C.A.7, 1972). But again, the dealings between the investor and the firm involve a relationship which did not exist in the case at bar. Plaintiff, himself a shrewd and successful businessman, did not seek any investment advice from the corporation in which he owned a 50 percent interest.
Plaintiff seeks to make much of the fact that Rhoades required MS&R mail to be opened by MS&R employees, and not by plaintiff's employees. This seems to be a normal consequence of the separation of the affairs of the two companies which took place in 1967 (See 353 F. Supp. at 799). In SEC v. First Securities Co., 463 F.2d 981, 985 (C.A. 7, 1972), the fraudulent president of the company had forbidden anyone else "to open mail addressed to him, . . . even if it was addressed to First Securities for his attention." In that case, there was a specific duty of supervision of the firm's officers and employees imposed by Rule 27 of the N.A.S.D. which was violated by the mail secrecy. (ibid., at 988). No such rule exists which plaintiff may invoke in the case at bar.
Accordingly, after consideration of plaintiff's new theories of liability, we conclude that no case has been proved establishing liability on the part of MS&R.
This opinion shall be deemed to constitute the Court's findings of fact and conclusions of law. In addition we have made such acceptable findings as counsel for MS&R have submitted as desirable and constituting in their opinion an adequate basis (under the Court of Appeals opinion) for supporting this Court's conclusion with respect to MS&R.
And now, this 25th day of September, 1974, for the reasons set forth in the foregoing opinion,
It is ordered, adjudged, decreed, and finally determined, that judgment be and it hereby is entered in favor of plaintiff Rochez Bros. Inc., and against defendant Charles R. Rhoades, in the amount of $3,125,000.00 with interest from July 23, 1968;
And it is further ordered, that the above-styled action be and it hereby is dismissed as against the corporate defendant MS&R.