Pecora on Directors

If a stockholder had a case against his directors, a good court in which to bring suit would be Ferdinand Pecora's in Manhattan. That quick-witted, onetime inquisitor for the Senate Banking & Currency Committee could undoubtedly recall without recourse to the record at least one parallel case from his rich experience in Washington. Last week stockholders who were suing the directors of Industrial Finance Corp., parent of Morris Plan banks, did receive a decision from bushy-haired New York Supreme Court Justice Ferdinand Pecora. The issue to him was plain.

In the late 19205 a syndicate whose members included Founder Arthur J. Morris and four other directors bought 14,550 shares of Industrial Finance debenture stock held by the late Coalman John Markle. The syndicate paid $95 per share. It happened that the corporation was under obligation to repurchase that stock at $105 per share. So the syndicate sold the 14,550 shares to the corporation, making a profit of $145,500 on the transaction. The suit was to recover this sum for the stockholders with interest and dividends which brought total damages to $400,000. Held Justice Pecora:

". . . The stockholders were never informed either of the details of the transaction or of the fact that the members of the syndicate . . . included many of their own officers and directors. This joint and several liability dictates the conclusion that the entire profit of the syndicate . . . may be recovered from the defendants."

Enlarging upon the moral values involved, Justice Pecora then defined the duties of directors thus: ''These persons are the servants of the stockholders. More than that, they are wholly and unqualifiedly trustees. Inevitably it is the duty of the courts to enforce all the obligations implicit in that fiduciary relationship."

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