CORPORATIONS--SECTION 10b OF THE SECURITIES EXCHANGE ACT--RULE X-10B-5--DUTY OF DISCLOSURE IN PURCHASING SHARES

Plaintiffs (father and son) and defendants (two brothers) had owned all the capital stock of two corporations. The four constituted the entire board of directors. Defendants secretly entered into a contract with the National Gypsum Company agreeing to sell the latter the plant and equipment of one of the corporations and one third of the output of the other corporation over a three year period. Later the defendants purchased all of plaintiffs' stock in the two corporations.

At that time plaintiffs knew nothing about the negotiations between defendants and National Gypsum, nor did defendants make any disclosures relative thereto. At the meeting during which the stock was sold to defendants, plaintiffs' attorney asked one of the defendants whether he had made any agreement for the resale of the stock and received a negative answer. The defendants then proceeded to consummate their transaction with National Gypsum. Plaintiffs brought an action in the federal district court against defendants for an accounting of profits claiming violation of Rule X-10B-5 under section 10b of the Securities Exchange Act of 1934.

Held, for plaintiffs. Kardon v. National Gypsum Co., (D.C. Pa. 1947) 73 F. Supp. 798.