Securities Regulation-SEC Rule 10b-5-Recovery by Corporation Induced by Fraud of Insider to Issue Shares

Trustees in reorganization of a corporation brought suit on its behalf to recover damages under section 10(b) of the Securities Exchange Act of 1934 and rule 10b-5 of the Securities and Exchange Commission, alleging that the corporation had been fraudulently induced by defendant, its comptroller, to issue stock for inadequate consideration. Also named as defendants were the American Stock Exchange and several banks and brokers, whose alleged complicity in the improper public distribution of the shares made them parties to the scheme to defraud the corporation. On a motion by all defendants but the comptroller to dismiss the complaint for failure to state a cause of action, based upon the assertion that the corporation had no rights under rule 10b-5 where corporate mismanagement was at issue, held, motion to dismiss denied. An issuing corporation’s right to recover under rule 10b-5 against those participating in a scheme to defraud it of its stock is not precluded by the fact that the fraud was perpetrated by a corporate insider. Pettit v. American Stock Exch., 217 F. Supp. 21 (S.D.N.Y. 1963).