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United States District Court, Northern District of Illinois, E.D

July 19, 1974


The opinion of the court was delivered by: Bauer, District Judge.


This cause comes on the defendant's motion for judgment on the pleadings pursuant to Rule 12(c) of the Federal Rules of Civil Procedure.

The plaintiff in the instant action seeks to redress alleged violations of the Securities Act of 1933, the Securities Exchange Act of 1934, and the rules and regulations of the Securities and Exchange Commission promulgated thereunder.

The plaintiff, Hill Blackett, has been employed in the advertising business and since approximately September 1954 has served as an employee, officer or director of defendant, Clinton E. Frank, Inc. ("CEF"), starting in the capacity of accountant executive and ultimately being elected as Chairman of the Board of Directors of CEF, in which capacity he served until approximately February 17, 1971.

The defendant CEF is a corporation organized in 1949 pursuant to the laws of the State of Delaware and maintains its corporate offices in Chicago, Illinois. CEF allegedly has been engaged in operating an advertising agency and in 1970 was reported by a trade journal to be ranked by value of gross billings as the 26th largest such agency. As of April 30, 1971 CEF has allegedly 722,650 shares of common stock as its sole authorized, issued and outstanding stock; these shares were allegedly being held by approximately 63 stockholders.

The defendant, Clinton E. Frank ("Frank"), who serves CEF in the capacity of Chairman of the Executive Committee, Chief Executive Officer and Director of CEF, as of May 31, 1971 beneficially owned 312,000 shares of common stock of CEF representing 43.2% of the outstanding shares of CEF.

The plaintiff in the instant complaint alleges, inter alia, the following facts:

  1. The defendant Frank's stock ownership constitutes
     a working control of CEF and since 1953 by virtue
     of such stock position Frank dominated and
     controlled the business affairs of CEF. The
     plaintiff has been a director and Chairman of the
     Board of Directors of CEF continuously from 1964
     to February 17, 1971 at which time he was
     summarily and illegally removed from said office
     by Frank without cause or justification. Plaintiff
     was most recently so elected in 1970 to hold such
     position for a term as provided by the by-laws of
     CEF, i.e., until the next annual meeting of the
     stockholders of CEF or until his successor shall
     have been elected and qualified.

  2. As of February 17, 1971 plaintiff was the
     beneficial and record owner of 24,225 common
     shares of CEF. Said shares were purchased

     and acquired by plaintiff prior to a two for one
     split. On February 24, 1971, Frank caused the
     purchase by CEF of plaintiff's CEF shares at book
     value for a total price of $356,592. Said purchase
     by CEF and sale by plaintiff was pursuant to a
     plan conceived and carried to consummation by
     Frank and those under his domination and control
     (including officers and directors of CEF and CEF
     itself). The actions, statements and documents
     taken and made in pursuance thereof were false and
     misleading and relied on by plaintiff and
     constituted a deceptive device in that there was
     failure of the defendants to disclose to

     a. that there was to be a public offering through
     use of the United States mails and facilities of
     interstate commerce of a large amount of the
     common shares of CEF then owned by Frank and the
     stockholders of CEF, and that there were
     negotiations for and firm agreements made in
     connection with said public offering, the selling
     price to the public being approximately double the
     price per share received by plaintiff for his CEF

     b. that CEF was to commence for the first time the
     payment of cash dividends on its common stock and
     that such dividend would be paid on or about April
     30, 1971. That dividend was in the amount of 7 1/2
     cents per share;

     c. that a two for one stock split of CEF shares
     was to be declared and subsequently was declared
     on April 23, 1971;

     d. that plaintiff's removal as a Director and
     Chairman of the Board of Directors of CEF was
     unlawful; and

     e. that the CEF shares, prior to the sale by
     plaintiff to CEF, should have been registered
     pursuant to the provisions of the Securities Act
     of 1933 (15 U.S.C. § 77a et seq.).

  3. The omission to state the material facts alleged
     above which facts were necessary to be stated in
     connection with the sale and purchase of
     plaintiff's CEF shares above set forth,
     constitutes a violation by defendants of §
     10(b) of the Securities Exchange Act of 1934 and
     of Rule 10b-5 of the Rules and Regulations
     promulgated pursuant to said Act.

  4. On or about October 15, 1971, Frank and the other
     shareholders of CEF sold 150,000 of their CEF
     shares through a public offering at a price
     approximately twice that which CEF had paid to
     plaintiff for the purchase of his shares. The
     negotiations leading to such offering and sale to
     the public and the actual offering and sale were
     through the use of the United States mails and
     other facilities of interstate commerce.

  5. Demand upon the defendants for return of his
     shares and for other relief was made by plaintiff
     in a letter dated July 15, 1971.

6. For the above violations the plaintiff seeks:

     a. that the sale of 24,225 shares of CEF common
     stock (prior to the two for one split) to CEF
     to be rescinded and held for naught;

     b. that, in the alternative, judgment for damages
     be awarded plaintiff and assessed against the
     defendants, jointly and severally; and

     c. that this Court grant such other and further
     relief as is deemed just in the premises and that
     the plaintiff have his costs expended herein.

The defendants, in support of their motion for judgment on the pleadings, contend that:

  1. The plaintiff Blackett has no claim under the
     Federal Securities Laws.

  2. Plaintiff Blackett's Stock Purchase Agreement was
     valid and binding and he has released any claim to
     the contrary.

The plaintiff, in opposition to the instant motion, contends that:

  1. The removal of the plaintiff as a Director of CEF
     was wrongful.

  2. The Stock Purchase Agreement of December 15, 1969
     is invalid.

  3. The 1971 sale of plaintiff's CEF stock is

It is the opinion of this Court after carefully examining the relevant pleadings that the defendant has failed to adequately state a cause of action over which this Court has jurisdiction.

This is an example of a trend of cases in which the invocation of federal securities laws is wholly inappropriate and wide of the Congressional mark. See Ryan v. J. Walter Thompson Company, 453 F.2d 444 (2nd Cir. 1971), cert. denied, 406 U.S. 907, 92 S.Ct. 1611, 31 L.Ed.2d 817 (1972). The vice of the instant complaint is that the plaintiff has engrafted upon a state cause of action a misplaced federal securities law claim which, but for that inappropriate federal gloss, would have been litigated in a local state court.

In appraising the propriety of the instant action it is important to be mindful of the following facts. The defendant CEF is a Delaware corporation engaged in the advertising business, with its corporate offices in Chicago, Illinois.*fn1 The defendant Frank is the Chairman of the Executive Committee and Chief Executive of CEF.*fn2 The plaintiff has not alleged any diversity of citizenship or other basis for federal jurisdiction except a putative violation of federal securities laws.

On December 15, 1969, Blackett and CEF, signed a written agreement applicable to all stock of CEF "now owned or hereafter acquired by Blackett" which provided in paragraph 2 thereof that:

    "If the Stockholder shall die while employed by the
  Company, or if for any other reason his employment
  with the Company shall terminate (whether such
  termination shall be voluntary or with or without
  cause), the Company shall be required to purchase the
  Shares from the Stockholder, or his personal
  representative, at the price prescribed in paragraph
  6, and the Stockholder, or his personal
  representatives, shall be required to sell the Shares
  to the Company at such price."*fn3

The price prescribed in paragraph 6 of that agreement was essentially the book value of the shares on the termination date. The agreement also referred to the contingency that CEF might go public but stated, in paragraph 10 thereof, that its provisions would continue to apply until such time as a registration statement became effective or CEF was listed on a stock exchange.*fn4

On February 17, 1971 the Board of Directors of CEF terminated Blackett's employment, by means of a resolution which stated as follows:

    "RESOLVED, that the employment of Hill Blackett,
  Jr., by the company and his position as Chairman of
  the Board and as a member of the Board of Directors
  of this company are hereby terminated effective
  February 28, 1971."*fn5

The by-laws of CEF have at all times provided that:

    "Any officer or agent chosen or appointed by the
  Board of Directors may be removed without cause by
  the affirmative vote of a majority of the Board of
  Directors whenever, in the judgment of the Board,
  such removal shall be in the best interest of the
  corporation, but such removal shall be

  without prejudice to any contractual right of the
  individual so removed."*fn6

On February 24, 1971 in accordance with the terms of the stock purchase agreement between Blackett and CEF the defendant CEF paid the plaintiff Blackett $356,592 for the 24,255 shares of CEF stock then owned by Blackett.*fn7 Blackett and CEF both signed a memorandum acknowledging satisfaction of each other's obligations under the stock purchase agreement and granting mutual releases, Blackett specifically releasing CEF from "all obligations to him as employee, officer, director and stockholder."*fn8

On July 15, 1971 Blackett by his attorney sent a letter to CEF and to Frank requesting that Blackett's sale of stock to CEF be rescinded on the ground that Blackett had made the sale without knowledge that CEF was preparing for a public sale of its stock, was intending to declare a regular dividend on its stock, and was intending to split its stock on a two for one basis.*fn9 CEF did declare a dividend on its stock on April 30, 1971 and had split its stock on a two for one basis on April 23, 1971.*fn10 No shares of CEF had been offered to the public as of July 15, 1971 nor had they been listed on a stock exchange or made subject to an effective registration statement, but such shares were subsequently offered to the public on or about October 15, 1971.*fn11 Blackett knew on February 17, 1971 that the possibility of a public offering had been discussed in the past, and as previously noted, his stock purchase agreement specifically referred to this contingency.*fn12


The plaintiff in his complaint alleges that the defendants violated Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) and Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder.

Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), makes it unlawful:

  ". . . for any person, directly or indirectly, by the
  use of any means or instrumentality of interstate
  commerce or of the mails, or of any facility of any
  national securities exchange —

  (b) To use or employ, in connection with the purchase
  or sale of any security registered on a national
  securities exchange or any security not so
  registered, any manipulative or deceptive device or
  contrivance in contravention of such rules and
  regulations as the Commission may prescribe as
  necessary or appropriate in the public interest or
  for the protection of investors."

Rule 10b-5, 17 C.F.R. § 240.10b-5, makes it unlawful for any person, directly or indirectly, by use of any of the jurisdictional means set forth in Section 10(b):

  "(a) To employ any device, scheme or artifice to

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

  (c) To engage in any act, practice, or course of
  business which operates or would operate as a fraud
  or deceit upon any person, in connection with the
  purchase or sale of any security."

The keystone of the entire legislative scheme of the securities laws is disclosure.*fn13 The emphasis on disclosure rests on two considerations. One relates to the proper function of federal government in regulating investment matters. Apart from the prevention of fraud and manipulation, the draftsmen of the 1933 and 1934 Acts viewed that responsibility as being primarily one of seeing to it that investors and speculators had access to enough information to enable them to arrive at their own rational decisions. The other, less direct, rests on the belief that appropriate publicity tends to deter questionable practices and to elevate standards of business conduct. The fundamental purpose of federal security legislation was to substitute a philosophy of full disclosure for the philosophy of caveat emptor and thus to achieve a high standard of business ethics in the securities industry. SEC v. Capital Gains Research Bureau, 375 U.S. 180, 84 S.Ct. 275, 11 L.Ed.2d 237 (1963). The focus on disclosure reflects the insight gained by experience that without complete, accurate and intelligible information about a transaction investors cannot make intelligent investment decisions.

The spirit of disclosure as required by Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 of the General Rules and Regulations promulgated thereunder and Section 17 of the Securities Act of 1933 is flexible and the antifraud sections are remedial in nature, prophylactic in scope and should be liberally construed to encompass devices that are alien to the climate of fair dealings and full and adequate disclosure. Tcherepnin v. Knight, 389 U.S. 332, 88 S.Ct. 548, 19 L.Ed.2d 564 (1967); SEC v. Capital Gains Research Bureau, supra; Herpich v. Wallace, 430 F.2d 792 (5th Cir. 1970). These antifraud provisions have been liberally interpreted by the Courts in order to determine under all factual situations whether a material misrepresentation was made or omitted in connection with the sale of a security, and what might constitute such a material fact.

The coverage of the antifraud sections is not limited to those devices or contrivances that were known at the time of enactment, but rather the sections are meant to reach parties employed in connection with purchase or sale of securities contrary to public interest or interest of investors. Herpich v. Wallace, supra. The antifraud sections prohibit all fraudulent schemes in connection with the purchase or sale of securities whether or not the artifice employed involves a garden-type variety of fraud or is a unique or subtle form of deception. Carroll v. First National Bank of Lincolnwood, 413 F.2d 353 (7th Cir. 1969), cert. denied, 396 U.S. 1003, 90 S.Ct. 552, 24 L.Ed.2d 494 (1969); Ferraioli v. Canter, 281 F. Supp. 354 (S.D.N.Y. 1967); Opper v. Hancock Securities Corp., D.C., 250 F. Supp. 668, aff'd, 367 F.2d 157 (2nd Cir. 1966).

However, where a claim is made that is clearly beyond the scope of these statutes which are aimed at protecting stock investors from being fraudulently deceived by material misrepresentations*fn14 in the sale or purchase of stock, even the most flexible reading will not legitimate that claim. See, e.g., Lanza v. Drexel & Co., 479 F.2d 1277 (2nd Cir. 1973).


The essence of the plaintiff's claim is that at the time the defendants forced the plaintiff to sell his CEF stock pursuant to the 1969 Stock Purchase Agreement the defendants failed to properly disclose that the CEF shares should have been registered prior to the sale by plaintiff to CEF and there was going to be some time in the future a public offering of the stock, a dividend, and a stock split.*fn15 However, the sale of his stock by the plaintiff was in no way induced or caused by any alleged misrepresentations on the part of the defendants. The 1971 sale by the plaintiff was required by the provisions of the Stock Purchase Agreement which plaintiff admittedly signed on December 15, 1969. The sale provision of the Stock Purchase Agreement was triggered not by the plaintiff voluntarily being induced into selling his stock but by the fact that the plaintiff was terminated on February 17, 1971 as a corporate executive of CEF.

The plaintiff in the instant complaint has failed to adequately allege that the 1969 Stock Purchase Agreement was invalid and thus inoperative.*fn16

The 1969 Stock Purchase Agreement appears to be valid on its face. Such agreements are apparently authorized by statute in Delaware, the state in which CEF is incorporated. See Delaware Corporation Law § 202 (1969). Numerous courts have recognized the validity of such agreements. Clayton v. James B. Clow & Sons, 327 F.2d 382 (7th Cir. 1964); Ryan v. J. Walter Thompson Company, 322 F. Supp. 307 (S.D.N.Y. 1971), aff'd supra; Gifford v. Rich, 58 Ill. App.2d 405, 208 N.E.2d 47 (1965); Arentsen v. Sherman Towell Service Corp., 352 Ill. 327, 185 N.E. 822 (1933). Thus, presumably, the 1969 Stock Purchase Agreement between the plaintiff and the defendant CEF is valid.

Since the plaintiff was obligated by the 1969 Stock Purchase Agreement to sell his shares of CEF at the time of his termination, whatever he knew or did not know regarding CEF's plans to go public, issue a dividend and have a stock split was irrelevant. Clearly the plaintiff has not properly alleged, nor do the relevant pleadings support a conclusion, that the plaintiff was fraudulently induced into selling his shares of CEF by the material misrepresentation made by the defendants. In fact, the plaintiff apparently had no choice in the matter; he was obligated to sell his stock pursuant to the provision of the 1969 Stock Purchase Agreement as soon as his employer CEF had terminated his services.

The plaintiff may have a proper cause of action against the defendants for his wrongful termination and the damages he suffered pursuant to that termination such as loss of employment and the forced sale of his CEF stock.

However, the plaintiff is not the average uninformed investor, but rather an officer of the corporation from which the disputed stock was issued. Further, it is clear that the instant dispute does not really arise out of any misrepresentation made in the sale or purchase of CEF stock but rather arises out of the termination of a corporate executive and the subsequent "involuntary contractual sale" of the corporate officer's stock.

Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5 clearly were not intended nor can they be liberally interpreted to cover the instant dispute in which services of a corporate officer were terminated and subsequent thereto he was contractually forced to sell his stock to the corporation. If there is a legitimate dispute between the parties it essentially involves the contractual relationship between a corporation and its officer which is not a matter within the exclusive or primary jurisdiction of federal courts.*fn17

The plaintiff has not alleged any other basis for federal jurisdiction, except the improper invocation of a putative violation of the federal securities law.

The plaintiff in the instant complaint has engrafted this misplaced federal securities law claim upon an apparent state cause of action which but for that inappropriate federal gloss, would have been litigated in a local state court. See Ryan v. J. Walter Thompson Company, supra. The instant action as it is presently framed cannot proceed in this Court because the plaintiff has failed to present this Court with a controversy over which it has jurisdiction.

Accordingly, it is hereby ordered that the defendants' motion is granted and the cause is dismissed.

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