(dissenting).
The court below dismissed the complaint upon the ground that there was no basis for federal jurisdiction. See D.C., 74 F. Supp. 876, 883. There is ample uncontra-dicted evidence, however, to support the conclusion-that notices of the meeting of the policyholders, proxy forms, prospectuses and subscription warrants were distributed through the United States mails.
Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C.A. § 78j(b), makes it unlawful for any person, directly or indirectly, by use of the mails to employ “ * * * any manipulative or deceptive device or contrivance * * * ” in contravention of such regulations as the Commission may prescribe as necessary in the public interest.1 *Rule X-10B-5, adopted by the Commission under Section 10(b), C.F.R. (Cum.Supp.J Title 17, § 240.10b-5, makes it unlawful for any person to employ any scheme to defraud or to make any untrue statement of a material fact or omit to state a material fact, in order not to mislead, or to engage in any course which would operate as a fraud on any person in connection with the purchase or sale of any security.2
The record demonstrates the following. The Mutual Fire Insurance Company of Germantown (Mutual) had achieved a surplus amounting to about $3,400,000. The directors decided to convert Mutual into a stock company and thought it desirable, lest some rival company or group should seize control and effect liquidation or not continue the successful policies of the organization, that there should be a wide distribution of the stock and that no person or small group of persons should be permitted to gain control cf the new company. The directors decided that they would effect this while giving policyholders pre-emptive subscription rights in proportions to the premiums paid by them,3 by obtaining from large policyholders, Rosenlund's clients, waivers of their rights to subscribe to more than 1,000 shares each. Obtaining such waivers was deemed by the directors of Mutual to be a condition precedent to properly effecting the conversion.4 That it was such is demonstrated by the fact that the prospectus of the new company, Germantown Fire Insurance Company, filed with the Securities and Exchange Commission on May 29, 1944 pursuant to the Securities Act of 1933, 15 U. *811S.C.A. § 77a et seq., stated that “The three largest policyholders of the Mutual Fire Insurance Company of Germantown [Mutual] have entered into an agreement with the Board of Directors of that Company that they will not exercise their pre-emptive rights to subscribe to the extent of more than 1,000 shares each * * * ”5 and is proven also by the fact that the stock purchase warrants issued to large policyholders on July 9, 1945 had stamped upon them at the top the legend, “By special agreement the rights represented by this certificate are limited to not more than 1,000 shares after proration.” 6
Rosenlund was aware of the condition precedent decided upon by the directors as an essential element of the plan of Mutual and was fully conversant with what the directors of Mutual hoped to achieve by the conversion.7 While the plan of conversion was still in the discussion stage among Mutual’s directors, as far back as January 1943, three years before the conversion was consummated and over a year before Mutual’s directors on March 14, 1944 voted the resolution proposing the conversion, Rosenlund already had entered into a written agreement with one of his clients for an assignment of that policyholder’s right to subscribe for stock. From August, 1943, until April 26, 1944, Rosenlund procured from various policyholders assignments of stock rights amounting altogether to more than 15,000 shares. Of these over 12,000 were assigned to him prior to April, 4944 8,9,10
Rosenlund was requested by Mutual’s directors some time prior to April, 1944, to procure waivers from his large clients of their pre-emptive rights to subscribe to stock in excess of 1,000 shares each. In April, 1944, though on dates not clear from the record, Rosenlund reported that he had procured waivers from his respective large clients, waivers which necessarily had to be procured if the condition precedent of limited stock ownership laid down by the directors was to be achieved. He informed Mutual’s directors that he had procured the waivers but he failed to tell them then of his acquisition of the assignments. The directors, unaware of this cogent circumstance, proceeded to put into motion the machinery for effecting the conversion, Proxies were mailed to the policyholders in April, 1944. The prospectus was filed with the Commission, as stated, on May 29, 1944. A resolution approving the conversion was adopted by two-thirds of the policyholders as required by law on June 21, 1944. Copies of the prospectus were mailed to policyholders on July 5, 1945 and stock purchase warrants were mailed to policyholders on July 9, 1945, the rights to subscribe expiring (by subsequent authorized amendment) on September 11, 1945. On September 9, 1945, two days before the expiration date of the warrants, Rosen-lund informed Mutual’s directors that he had procured assignments of the warrants which, as we have stated, gave him the ownership of about 17,000 shares of the 50,000 shares of stock of the new company to be created by the conversion. The directors, “shocked” and “disappointed” by the failure of their plan to avoid large concentrations of the stock of the new company but advised by counsel that the warrants had been legally obtained by Rosen-lund, decided to consummate the plan of conversion and did so.11
Throughout the critical period from July 9, 1945 until the end of the first week *812of the following September Rosenlund was in almost daily contact with E. M. Cushmore, a director of Mutual, who was in the confidential position of manager of Mutual, as to the progress of the steps leading to the conversion and the financial condition of the company. E. M. Cush-more was the brother of C. L. -Cushmore, hereinbefore referred to.. It is unnecessary to relate in full the part which Bioren & Co:, the underwriter, dismissed as a party defendant, played in the conversion. It is sufficient to state that- Bioren & Co. acquired about 5,200 shares of stock of which it allotted approximately 190.0 to directors of Mutual, several hundred more to partners or associates and the remainder to certain interested parties, including 500 to Rosenlund. The latter allotment was made with the approval of the officers and directors of Mutual after they were aware of Rosenlund’s earlier acquisitions.12 When the conversion had been completed Rosenlund had acquired stock which was worth about one million dollars more than he had paid for it and the working control of the new company, and was elected its president at a salary of $25,000 a year plus a percentage . of the underwriting profits.13 As indicated some of the directors of Mutual had also profited to some extent by the acquisition of the stock of the new company.
The suit at bar has some of the characteristics of a stockholders’ derivative action to recover for the corporation- the stock which Rosenlund acquired and it is this fact which I feel has misled the majority. On the record it is clear that Rosenlund was acting as an agent for Mutual to procure the waivers by the large policyholders of their preemptive rights to subscribe to stock in excess of 1,000 shares each. Rosenlund was false to his trust and captured the new company with the acquiescence of at least a majority of the directors of Mutual but this is beside the point. The majority of this court are of the opinion that no recovery is possible by the new corporation because Rosenlund paid to it the full cash price at which its stock was offered to the policyholders and to the public; in other words, that the new corporation cannot recover because it has received the full dollar value to which it was entitled. The majority are also of the view that the policyholders received all the right9 to which they were entitled and therefore they can claim no damage. I am of the opinion that the cause of action stated in the complaint and the proof will sustain a stockholders’ derivative suit based on the well known equitable principle of breach of trust by an agent and that it is not necessary to rely on the Securities and Exchange Act of 1934 for jurisdiction, even though diversity is absent. See Hurn v. Oursler, 289 U.S. 238, 245-246, 53 S.Ct. 586, 77 L.Ed. 1148. The majority of this court obviously entertain the contrary view and this particular aspect of the case need not be discussed further in this dissenting *813opinion. It is clear that the right of the new corporation, Germantown, qua corporation as distinguished from its stockholders, to maintain a suit such as that at bar does not stand or fall on the issue of whether or not there was some breach of fiduciary duty by Rosenlund. The right of the corporation to maintain a suit such as that at bar arises under the statute and the rule of the Commission. If Rosenlund’s course of conduct was prohibited by the statute and the rule, the corporation could maintain the suit at bar. We must turn therefore to the statute and to the rule in order to determine Rosenlund’s liability.
Rosenlund’s conduct falls within' the prohibitions of subparagraphs (a), (b) and (c) of Rule X-10B-5. But whether or not subparagraphs (a) or (c) be employed to test his actions it is clear that both what he did and failed to do is within the purview of subparagraph (b). Rosenlund knew that it was the express intention of Mutual and of its directors to obtain waivers of subscription rights from his large clients. Rosenlund was aware that it was a condition precedent to the promotion of the conversion and an integral part thereof as conceived by the directors of Mutual and by its policyholders (see the provisions of the prospectus and the legend upon the stock purchase warrants, notes 6 and 7, supra) that there should be no large concentrations of stock. This was a part of the plan of conversion despite the fact that the desideratum of the proposed limitation of ownership was not achieved due to Rosenlund’s deceitful course of conduct. The limitation of stock ownership was a matter of great concern to the directors and to the policyholders and it cannot be doubted that it was an element of importance which influenced the decisions of the directors and the policyholders to proceed with the plan. It cannot be doubted therefore that che limitation was “material” 14 to the plan. When Rosenlund reported that he had procured the waivers the directors and the policyholders then proceeded with the promotion of the conversion. After the stock purchase warrants and the copies of the prospectus had been mailed it would have been difficult to have withdrawn the plan of conversion. When the directors discovered, two days prior to the expiration date of the stock purchase warrants, that Rosenlund had procured the assignments of. stock in his favor it would have been impossible to have withdrawn the plan of conversion, at least without the intervention of a court of equity.
Neither the directors nor the policyholders knew at any of the points of time designated in the preceding paragraph that Rosenlund had procured assignments of warrants from his clients which enabled him, subsequently, to circumvent the important feature of limited stock ownership. Rosenlund’s failure to inform the directors and policyholders that he had procured the assignments was “material” to his statement that he had procured the waivers from his clients for both directors and policyholders would have considered15 most carefully the question as to whether or not the plan of conversion should be proceeded with when a large concentration of stock in the hands of one man, Rosenlund, had become inevitable. Perhaps they would have concluded nonetheless to proceed with the conversion, though this is to be doubted, but surely they would have deemed a timely revelation by Rosenlund that he had circumvented the design of limited stock ownership as highly relevant to the course which Mutual should pursue in respect to the conversion.
Therefore, I cannot doubt but that Ros-enlund’s course of conduct was within the prohibitions of subparagraph (b) of Rule X-10B-5, if he be deemed a “person” within the purview of the Act. Rosen-lund was a “person” under the definition of Section 3(a) (9), 15 U.S.C.A. § 78c(a) *814(9). To repeat to some extent, perhaps needlessly, the right of the corporation to maintain a suit such as that at bar against Rosenlund is not to be based upon any agency or fiduciary relationship between Rosenlund and Mutual, though such relationships existed. The Act has eliminated agency or fiduciary relationship, so necessary for the maintenance of the ordinary stockholders’ derivative suit, as a basis foi the kind of action at bar. The statute and the rule of the Commission create a new offense, hitherto unknown to the law and set the standard of conduct required of those who are connected with the sale or purchase of securities, assuming arguendo that the use of the mails was such as to be within the purview, of Section 10(b) of the Act.
That the United States mails were used in connection with the execution of the plan of conversion is not open to doubt,16 albeit Rosenlund himself, insofar as the record shows, made no use of the mails. But this is not necessary to sustain jurisdiction in the court below and to constitute the offense. The use of the mails by Mutual, its officers and agents, was enough to bring Rosenlund into a position where he is hit by the statute and the rule. A persuasive analogy is supplied by the application of the Mail Fraud Statute, Section 338 of Title 18 U.S.C. 1940 ed., now Section 1341 of revised Title 18 U.S.C.A. The mailing of stock certificates has been held to be sufficient use of the mails to bring a defendant within the purview of the criminal statute, Landay v. United States, 6 Cir., 108 F.2d 698, 701 17 and the mailing by an innocent third party, as a natural and probable consequence of the acts of a defendant, suffices to lay the crime at the door of the latter, United States v. Kenofskey, 243 U.S. 440, 443, 37 S.Ct. 438, 61 L.Ed. 836. A fortiori the mailing of the material referred to in the twelfth finding of fact (see note 16, supra) was sufficient to corifer jurisdiction of the suit at bar on the court below. See Section 27 of the Securities and Exchange Act of 1934, 15 U.S.C.A. § 78aa.
The remedy in the instant case is supplied by Section 29(b) of the Act, 15 U.S. C. A. § 78cc(b), which provides that any contract made in violation of the Act or of the rules of the Commission promulgated thereunder shall be void. The warrants which Rosenlund procured and by which he obtained his stock in the new company fall within the ambit of this section though the warrant contracts have been executed. Rosenlund should not be permitted to retain the benefit of his illegal contracts. His stock should be cancelled. Section 29 does not expressly give a remedy to a private person injured by a violation of Section 10(b) of the Act. But as was well stated by Judge Kirkpatrick in Kardon v. National Gypsum Co., D.C.E.D.Pa., 69 F. Supp. 512, 513, under circumstances analogous to those at bar,18 while “It is * * true that there is no provision in Sec. 10 or elsewhere expressly allowing civil suits by persons injured as a result of violation of Sec. 10 or of * * * [Rule X-10B-5], However, ‘The violation of a legislative enactment by doing a prohibited act, or by failing to do a required act, makes the actor liable for an invasion of an interest of another if; (a) the intent of the enactment is exclusively or in part to protect an interest of the other as an individual; and (b) the interest invaded is one which the enactment is intended to protect * * *’ Restatement, Torts, Vol. 2, Sec. 286. This rule is more than merely a canon of statutory interpretation. The disregard of the command of a statute is a wrongful act and a tort. As was said in Texas & Pacific R. Co. v. Rigsby, 241 U.S. 33, 39, 36 S.Ct. 482, 484, 60 L.Ed. 874, ‘This is but an application of the maxim, Ubi jus ibi remedium.’ ” See also the same case on final hearing at D.C., 73 F.Supp. 798. The same principle was invoked in Remar v. Clayton Securities Corporation, D. C.D.Mass., 81 F.Supp. 1014. Cf. Downing v. Howard, 3 Cir., 162 F.2d 654, 658. *815Cf. note 11 cited to the text in United States v. Silliman, 3 Cir., 167 F.2d 607, 611. See Baird v. Franklin, 2 Cir., 141 F. 2d 238, 244-246; Goldstein v. Groesbeck, 2 Cir., 142 F.2d 422, 426-427, 154 A.L.R. 1285. See 61 Harvard Law Review 858, 865-6. The remedy supplied by Section 29(b), like the other remedies supplied by the Act, is federal in origin, and, in view of the foregoing authorities, must be construed broadly so that it may be availed of by an injured private person. It follows that if a cause of action, as I think to he the case, is set up by the complaint the court below has power to grant the relief sought.
I do not think that the right or the remedy should be cramped into a narrow concept of fraud or deceit. See Stewart v. Wyoming Cattle Ranche Co., 128 U.S. 383, 388, 9 S.Ct. 101, 32 L.Ed. 439. Cf. Berle, “Stock Market Manipulation”, 38 Columbia Law Review 393, 398. Restrictive interpretation of the Act has been rejected. See Speed v. Transamerica Corp., D.C.Del., 71 F.Supp. 457, 458, and Charles Hughes & Co. v. Securities and Exchange Commission, 2 Cir., 139 F.2d 434, 437. Both the right and remedy created by the federal statute are new. I conclude therefore that the application of subparagraph (b) of Rule X-10B-5 should not be limited in the instant case by the test of whether or not Rosenlund’s course of conduct would sustain a common law action of fraud or deceit. As already stated I do not doubt but that the new company would he entitled to maintain a suit against Rosenlund of the nature of the action at bar.
The instant suit, however, was brought by two stockholders, Slavin and Talens. Slavin was a policyholder of Mutual and as such purchased prior to September 9, 1945 from Germantown under a stock purchase warrant sent to her by the company % share of stock. She also acquired 199 shares of stock by purchase of stock purchase warrants in the open market but the date of this purchase does not appear from the complaint, the answer thereto, from any findings of fact made by the court below, and I have found nothing in the voluminous record which would aid in ascertaining the date.19 Talens is the owner of 17 shares of stock which he acquired by purchase of stock purchase warrants between July 9, 1945 and September 9, 1945,20 and by the purchase of 8/10 of a share of stock in the open market. The date of the last purchase cannot be found in the record.
The court below held that only Slavin was qualified as a party plaintiff under Rule 23(b), Federal Rules of Civil Procedure, 28 U.S.C.A. to maintain the action,21 finding as a conclusion of law that “Charles Talens is not entitled to complain of any matter or thing occurring prior to September 9, 1945.” It is clear that Slavin has the right to maintain the suit but I think that the court below was in error in concluding that Talens is not also entitled to sustain the action. The theory of the court below apparently was that Talens bought his way into the litigation after the occurrence of the acts complained of. But Rosenlund never made disclosure of his conduct until September 9, 1945, two days before the expiration of the stock purchase warrants. Rosenlund’s course of conduct must be construed as a continuing one and on September 9 it had not been completed. Rosenlund’s plans did not come to fruition until he had acquired the stock of Germantown and actual control of the company, all of which came to pass after September 9, 1945. But viewing the circumstances most narrowly, any purchaser of stock purchase warrants should be entitled to maintain the suit if he made his purchase prior to September 9, 1945 without knowledge of Rosenlund’s prior conduct. Rule 23(b) should not be construed narrowly where the wrong alleged and *816proved is a continuing one, extending over a long period, and has not been consummated at the time of the purchase.
Though I can find no case directly in point which sustains the use of the device of the stockholders’ derivative suit brought to assert a cause of action arising under the Securities Exchange Act of 1934 under circumstances identical with those at bar, nonetheless the decision of the Court of Appeals for the Second Circuit in Gold-stein v. Groesbeck, supra, supplies a helpful analogy. There is no logical reason where, as here, the corporation will not pursue 22 the cause of action granted to it by a federal statute, stockholders may not maintain a suit for rhe-benefit of the corporation in the timedionored way. It is necessary, at most, only to fit the right and remedy created by the Act into the framework of a stockholder’s secondary suit. The status of the plaintiffs qua stockholders must of course be determined by the law of Pennsylvania since both Mutual and the new corporation were created under the law of that State. Under that law the plaintiffs are stockholders. ' The law of Pennsylvania does not run beyond this point in the instant case.
The federal act here sub judice is a remedial one. It is entitled to a broad construction. The precise aspects of it now before this court present novel questions not heretofore presented, insofar as I am aware, to any court of appeals. For this reason the instant litigation is of great importance in the effective administration of the Securities Exchange Act of 1934. The construction put upon the statute by the majority seems to me to defeat the purpose of the statute and to render it ineffective. I would reverse the court below, reinstate the complaint, and order the cancellation of Rosenlund’s stock, voiding the employment contract between him and German-town. I would also declare the voting trust a nullity to the end that Germantown’s stockholders might be reenfranchised and Rosenlund’s control of the corporation dpne away with.,
Section 10 of the Securities Exchange Act provides in pertinent part:
“It shall be 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 X-10B-5 of the Securities and Exchange Commission provides in pertinent part;
“It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails,
# * * * * *
“(a) To employ any device, scheme, or artifice to defraud,
“(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.”
See 40 P.S.Pa. §§ 674, 677.
See finding of fact No. 2.
Subject to an exception not bere pertinent. See Plaintiffs’ Exhibit 17.
See Plaintiffs’ Exhibit 16, the subscription blank issued to Reliance Bronze & Aluminum Foundry, Inc., one of the largest policyholders and Rosenlund’s client.
See finding of fact No. 8.
See Plaintiff’s Exhibit No. 42, at pp. 1888-4 of the transcript.
In this connection it is interesting to note that the form for the assignment was prepared for Rosenlund in January of 1943 by O. L. Cushmore, whose brother was vice-president and general manager of Mutual.
See finding of fact No. 3.
A time table of the events which transpired follows:
January, 1943. Rosenlund, assisted by C. L. Cushmore, had prepared and had printed forms for the assignment of stock of the new company which was to be created by the conversion.
January, 1943. Rosenlund procured his first written assignment of stock.
August, 1843, to April 1944. Rosen-lund procured assignments for approxi*812mately 14,000 shares of the stock óf the new company.
March 14, '1944. The plan of conversion was approved by , resolution of Mutual’s board of directors.
April, 1944. Rosenlund was given duty of procuring waivers from his large clients of pre-emptive rights in excess of 1,000 shares each.
April, 1944. Rosenlund informed the directors on divers dates that he had procured waivers of his large clients’ preemptive rights and failed to inform the directors that he had procured assignments of the stock in his own favor.
April, 1944. Proxies were mailed to the policyholders and Rosenlund was entrusted with the task of seeing that they were executed.
May 29,1944. The prospectus was filed with the Commission.
June 21, 1944. Policyholders approved the plan of conversion by a two-thirds vote.
July 5, 1945. Copies of the prospectus were mailed to policyholders.
July 9, 1945. Stock purchase warrants were mailed to policyholders, the rights to subscribe expiring on September 11, 1945.
September 9, 1945. Rosenlund informed the directors that he had procured assignments of stock from policyholders including his own clients.
January 2, 1946. Conversion consummated.
March, 1946. Rosenlund was elected a director, chairman of the board of directors of Germantown and its president.
See finding of fact No. 15.
The stock which Rosenlund acquired at $20 a share had a hook value of about $80 a share.
The word “materiality” may be defined as: “The property of substantia] importance or influence, especially as distinguished from formal requirement.” See 2 Bouv. ’Law Diet., Rawle’s Third Revision, p. 2121.
In support of this statement it should be pointed out that some of the directors, upon later discovery of Rosenlund’s acquisition of rights to subscribe to more than 17,000 shares of stock, consulted counsel to find some way to avoid his stock ownership. See finding of fact No. 9.
See finding of fact No. 12.
See also Kopald-Quinn & Co. v. United States, 5 Cir., 101 F.2d 628, 632-633.
In the cited case certain defendants were accused of violating the provisions of Section 10(b) of the Act and of Rule X-10B-5, in conspiring to induce the plaintiffs to sell their stock in two corporations for less than its true value.
See paragraph 4 of the complaint, paragraph 4 of the answer, and defendant Germantown’s request for finding No. 184, found by the court below.
See paragraph 5 of the complaint, paragraph 5 of the answer and defendant Germantown’s request for finding No. 185, found by the court below.
See defendant Germantown’s requests for conclusions of law Nos. 1 and 2, found by the court below.
Germantown actively opposes the relief set by the plaintiffs. See its brief filed in this court on April 6, 1948 and observe its position in the court below.