Securities Legislation - Limitations Upon the Scope of Rule X-10B-5

A syndicate attempted to acquire all of the outstanding stock in a bridge corporation pursuant to a plan to transfer the stock to a bridge commission and realize substantial returns. The price offered for the stock was well over the market price but the resale plan was not disclosed. After control of 80 percent of the stock was obtained, the syndicate's purchasing agents were installed as officers and directors. They continued to purchase the stock without revealing the plan and the anticipated profits.

Upon the completion of the plan, former stockholders in the corporation brought a class action against the syndicate members alleging a violation of rule X-10B-5 of the Securities and Exchange Commission because of the failure of the defendants to disclose the intention to resell. On defendants' motion for summary judgment, held, motion granted. The scheme was conceived and prosecuted by outsiders upon whom there was no duty of disclosure. Further, no such duty arose when defendants achieved control of the corporation since they gained no new information by virtue of achieving this position.

Mills v. Sarjem Corp., (D.C. N.J. 1955) 133 F. Supp. 753.