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Ross v. Licht, 263 F.Supp. 395

Facts

The plaintiffs, Bernice Frank and Lawrence Frank, sold 62.5 shares of Class A common stock of National Hospital Supply Co., Inc. to the defendants for $120 per share. At the time of the sale, the defendants, who were corporate insiders, were aware of a forthcoming public offering that would sell shares at $600 each and a private offering at $300 each. The plaintiffs were not informed of these plans, and the sale was executed without their knowledge of the true value of their shares.

The action was tried to the Court without a jury, no party having demanded a jury ( Fed.R.Civ.P. 38(d)).

Issue

Did the corporate insiders have a duty to disclose material facts regarding the proposed public and private offerings of stock to the plaintiffs before the sale of their shares?

Did the corporate insiders have a duty to disclose material facts regarding the proposed public and private offerings of stock to the plaintiffs before the sale of their shares?

Rule

Under the Securities Exchange Act of 1934 and Rule 10b-5, corporate insiders are required to disclose material information that could affect the decision of shareholders when buying or selling stock.

The 1934 Act ( 15 U.S.C. § 78j ) makes it unlawful to employ in the purchase as well as in the sale of any security any ‘manipulative or deceptive device or contrivance’ in contravention of any rule of the Securities and Exchange Commission (the SEC or Commission).

Analysis

The court found that the defendants, as corporate insiders, were aware of the proposed public and private offerings that would significantly increase the value of the stock. They failed to disclose this information to the plaintiffs, who sold their shares at a much lower price. The court determined that the defendants' actions constituted a violation of their duty to disclose material facts under the Securities Exchange Act.

The court found that the defendants, as corporate insiders, were aware of the proposed public and private offerings that would significantly increase the value of the stock.

Conclusion

The court ruled in favor of the plaintiffs, concluding that the defendants' failure to disclose the material facts regarding the stock offerings constituted fraud under the Securities Exchange Act.

Judgment accordingly.

Who won?

The plaintiffs, Bernice Frank and Lawrence Frank, prevailed in the case because the court found that the defendants had a duty to disclose material facts and failed to do so, resulting in damages to the plaintiffs.

The plaintiffs, Bernice Frank and Lawrence Frank, prevailed in the case because the court found that the defendants had a duty to disclose material facts and failed to do so, resulting in damages to the plaintiffs.

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