Officers of a corporation found in violation of securities law are not entitled to a jury trial when the same charges are brought in a separate suit by private parties, the Supreme Court ruled in an 8-1 decision yesterday.
As Justice William Rehnquist noted in a strong dissent, the court's action is likely to enhance the power of such regulatory agencies as the Securities and Exchange Commission by encouraging companies to agree to consent orders halting alleged violations "in order to preserve their right to jury trial in the private actions."
Because the case also involved a move by a publicly traded firm to become private again, yesterday's decision also is seen as significant in beefing up SEC powers to protect investors in such events.
At issue before the court was a conflict between two doctrines rooted deep in common law - the Seventh Amendment right to a trial by jury and a doctrine called "collateral estoppel," basically preventing litigation anew of a factual issue already the subject of an earlier court decision.
The case involved Parklane Hosiery Co. Inc. and a dozen of its officers, directors and stockholders who were accused by minority shareholders of issuing a false and misleading annual meeting proxy statement in 1974 prior to a vote on a merger and the subsequent return of Parklane to a privately held company after public stockholders were bought out.
After a stockholder accused the New Hyde Park, N.Y., women's clothing firm of making fraudulent statements that led to the merger, the SEC accused Parklane of securities law violations. A federal court found in a nonjury trial that Parklane made both misstatements and omissions from the proxy statement as charged.
In a class action on behalf of all shareowners, stockholder Leo Shore then moved for partial summary judgmen based on the finding in the SEC case. The practical effect of Shore's motion was to establish Parkland's liability and leave open only the amount of damages.
Parklane sought a jury trial in the Shore case but the U.S. Court of Appeals for the Second Circuit ruled that the right to jury trial was outweighed by the need to prevent new litigation of he same issue.
There is no constitutional requirement that "a party who has had issues of fact determined against it after a full and fair opportunity to litigate them in a nonjury trial of an action against it may, in a different suit against it by another person, obtain a jury trial of the same issues of fact arising out of the same transaction," the appeals court found.
Yesterday, the Supreme Court held that decision, and a lower court now must decide the extent of damages that should be awarded former minority owners of Parklane stock.
Parklane President Herbert Somekh, one of the individuals named in the suit, was not in his office yesterday, and a secretary said no one else could speak for the company on the Supreme Court action.
Shore's suit contended that the Parklane proxy statement deliberately concealed the intent of the proposed merger, after which each owner received $2 a share. Parklane did not disclose that salary increases were planned, that a plan to "go private" was designed to meet personal debts of the president, or that ongoing negotiations could result in financial benefits to the firm, the suit alleged.
The SEC also charged that Parklane - with annual sales of some $30 million - arranged for the sale of Somekh's real estate holdings to the firm for $1 million. It was the first enforcement action brought by the SEC against insiders, who allegedly were aiming to cause stockholders to sell out at depressed prices.