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KENNEDY v. NICASTRO

December 16, 1980

EILEEN KENNEDY, ETC. ET AL., PLAINTIFFS,
v.
LOUIS J. NICASTRO ET AL., DEFENDANTS.



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

MEMORANDUM OPINION AND ORDER

Plaintiffs Eileen Kennedy and Frank Murphy*fn1 filed this action as a claimed class action on behalf of the stockholders of Xcor International, Inc. ("Xcor")*fn2 and as a claimed derivative action on behalf of Xcor.*fn3 Defendants include Xcor, Seeburg,*fn4 Consolidated Entertainment, Inc.,*fn5 Xcor's officers, directors, attorneys and accountants and principal lender, and another alleged controlling person of Xcor, Gulf & Western Industries, Inc.

Various of the defendants have filed motions to dismiss the Amended Complaint, incorporating by reference substantial parts of their memoranda in support of like motions addressed to the original Complaint. There are a number of other pending motions in various stages of briefing, but because of the dispositive character of the motions to dismiss judicial economy dictates treating with such motions first.*fn6 For the reasons stated in this memorandum opinion and order, the Amended Complaint is dismissed.

Plaintiffs' Amended Complaint

Because the Amended Complaint includes a melange of allegations with an indiscriminate shotgun invocation of virtually every operative section under the federal securities laws,*fn7 the Court will not review the allegations in any detail at the outset. Instead it will follow the approach suggested by defendants' motions of reviewing the applicability of each of the statutes in turn, referring to the allegations of the Amended Complaint (cited "AC-") where necessary for that purpose.

In principal part the Amended Complaint's allegations revolve around the financial problems of a portion of Xcor's operations, its Seeburg Products Division (the "Products Division," comprising what AC 28 refers to as "three profitable operations, The Seeburg Music Library, Inc., Seeburg Security Systems, Inc., and post-mix vending machine operations, and the extremely unprofitable juke-box operations"). AC 29 charged that defendants caused Xcor to sell the Products Division to Nicastro and members of his family, who formed Seeburg to carry on the operation and to lease from Xcor the plant, machinery and equipment used by the Products Division. That sale transaction was for $250,000 in cash, a $750,000 7 1/2 percent note, and preferred stock of Seeburg. AC 30 charges:

  No independent review or evaluation of the sale of
  the Products Division to Nicastro and Seeburg was
  performed, and said sale was never presented to
  Xcor's shareholders for a vote. Similarly, no

  independent appraisal of the "market value" of the
  Seeburg note and preferred stock was made.

Section 11 of the 1933 Act

Section 11 of the 1933 Act of course relates only to newly — issued securities, which are admittedly not involved in this action. Having thrown a Section 11 claim in as part of the original Complaint's kitchen sink, and despite defendants' disclosure of the total inapplicability of that section in their brief, plaintiffs retained the allegations in the Amended Complaint. This necessitated another briefing by defendants, following which plaintiffs referred to inclusion of Section 11 as "purely a typographical error."

Section 12(2) of the 1933 Act

Section 12(2) of the 1933 Act creates liability of a seller of a security to its direct purchaser where the disclosure requirements of the Act have not been complied with (that is, there has been a misstatement or omission of a material fact by written or oral communication). Once again the original Complaint did not make plaintiffs' contention clear. It purported primarily to relate to the sale to plaintiff Kennedy of her Xcor securities, a transaction that clearly lacked the privity with defendants required by the cases. Only after defendants' extended briefing of that issue did it emerge in AC 79 that the Section 12(2) claim was solely derivative in nature on behalf of Xcor, the complained — of sale involving the securities delivered by Seeburg to Xcor in Seeburg's purchase of the Products Division. But the short answer to that claim is that plaintiffs stipulated on June 30, 1980 that they would seek no relief against Seeburg, which was the seller of the securities. As for the other defendants, plaintiffs assert that "The concept of seller in this context goes well beyond the person who actually sold the security to plaintiff" — but they cite no case authority to support the notion that the privity requirement (see Sanders v. John Nuveen & Co., 619 F.2d 1222 (7th Cir. 1980); McFarland v. Memorex Corp., 493 F. Supp. 631 (N.D.Cal. 1980)) has been satisfied.*fn8

Section 18 of the 1934 Act

Liability under Section 18 of the 1934 Act requires (1) defendants' false or misleading SEC filings (not known to be such by a plaintiff) that (2) plaintiff has read and relied upon in purchasing securities. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976). Here too AC 79 makes it plain that the only such claim is asserted as a derivative claim on behalf of Xcor. Xcor's only "purchase" of securities was that of the Seeburg stock. Seeburg of course engaged in no SEC filings at all.

In a bizarre way plaintiffs argue that Xcor read and relied on its own allegedly misleading SEC filings in purchasing the Seeburg stock, without Xcor knowing ...


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